Public Storage — FY2019 Form 10-K
Business context and reporting period. This is the annual report for the year ended December 31, 2019, not a standalone fourth-quarter filing. Public Storage is a Maryland REIT focused on self-storage. It owned 2,483 facilities in 38 U.S. states, totaling about 169 million net rentable square feet, and held 42% of PS Business Parks and approximately 35% of European operator Shurgard. It also operated tenant reinsurance, merchandise sales, and third-party facility management businesses.
Key financial metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $2.847 billion | $2.754 billion |
| Net income | $1.526 billion | $1.717 billion |
| Net income allocable to common shareholders | $1.273 billion; diluted EPS $7.29 | $1.489 billion; diluted EPS $8.54 |
| Self-storage net operating income (NOI) | $1.932 billion, up 1.6% | $1.902 billion |
| Operating cash flow | $2.068 billion | $2.064 billion |
| Cash used in investing activities | $897 million | $516 million |
| Cash used in financing activities | $1.121 billion | $1.620 billion |
| Cash and equivalents at year-end | $410 million | $361 million |
| Total assets / debt | $11.365 billion / $1.902 billion | $10.928 billion / $1.412 billion |
| Common distributions per share | $8.00 | $8.00 |
Self-storage NOI was approximately 71.9% of self-storage revenue. Same-store facilities, representing about 82% of the U.S. portfolio by area, had 73.2% NOI margin; revenue rose 1.4%, while operating costs rose 5.0%, leaving same-store NOI up just 0.2%. Same-store average occupancy was 93.5%, and realized annual rent per occupied square foot increased 1.1% to $17.60.
FFO was $10.58 per diluted share, up 1.2%; Core FFO was $10.75, up 1.8%. These are non-GAAP measures and are not substitutes for GAAP earnings or cash flow. The fourth quarter reported net income of $387.1 million and diluted EPS of $1.87.
Material changes versus the prior year
- Revenue increased 3.4%, but net income allocable to common shareholders fell $216.1 million, or $1.25 per diluted share. The 2018 comparison included a $151.6 million accounting gain related to Shurgard’s IPO, real-estate sale gains, and $37.7 million of the company’s share of PS Business Parks’ property-sale gains.
- Same-store revenue growth remained modest, while higher property taxes and sharply higher marketing costs pressured operating performance. Same-store marketing expense rose 47.2% to $47.6 million.
- Debt increased from $1.412 billion to $1.902 billion, including $500 million of U.S. dollar notes issued in 2019. Preferred shares outstanding increased slightly in net terms after issuing $1.09 billion and redeeming $1.05 billion during the year.
- Operating cash flow was broadly flat, but investing outflow rose with increased acquisitions and development spending. Maintenance capital expenditures were $192.5 million, versus $139.4 million in 2018.
Outlook, commentary, risks, and unusual items
- Management expected moderate same-store revenue growth in 2020, mainly from rent increases to existing tenants, while noting uncertainty around demand, move-in pricing, customer length of stay, and new supply. Management said 2019 development-related earnings dilution was expected to continue at similar levels in 2020.
- Management anticipated approximately 5% growth in property-tax expense in 2020, excluding any potential California ballot initiative effects; continued wage and Internet marketing cost increases; and approximately $250 million of 2020 maintenance capital expenditures.
- The development and expansion pipeline was estimated at $619.2 million, with $477.3 million remaining to spend, primarily over the next 18 months. Projects are subject to contingencies, including entitlement approvals, and new facilities take time to stabilize.
- Liquidity resources expected over the following year were approximately $1.7 billion, compared with identified needs of about $722.6 million. At year-end, cash was $409.7 million and available revolver capacity was $484.1 million; the company reported no revolver borrowings. In January 2020, it issued €500 million of 0.875% senior notes due 2032. The company reported no substantial debt principal payments due until 2022.
- Key risks include increasing self-storage supply and competition, particularly in several large U.S. markets; reliance on Google for customer acquisition (about 59% of new customers sourced directly or indirectly through Google search); rising operating costs; California property-tax exposure if Proposition 13 protections change; and natural-disaster, cybersecurity, regulatory, REIT-qualification, and foreign-currency risks.
- After year-end, the company made a non-binding proposal to acquire National Storage REIT in Australia and New Zealand. The proposal was subject to conditions and approvals; there was no assurance a transaction would be agreed or completed. Subsequent to year-end, the company also acquired or was under contract to acquire 14 facilities for $245.3 million.
- Management assessed legal contingencies as unlikely to result in a material loss. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether same-store revenue and NOI growth improve, and how new supply affects occupancy and rental pricing in weaker markets.
- Whether marketing, property taxes, labor, and maintenance costs continue to outpace same-store revenue growth.
- Progress, remaining cost, occupancy, and eventual returns on the development pipeline, including entitlement and construction risks.
- Debt and preferred-equity funding costs, the timing of preferred-share redemptions, and the company’s capacity to fund acquisitions while maintaining distributions.
- Potential consequences of California property-tax proposals, continued Google channel concentration, and any outcome of the National Storage REIT proposal.