Public Storage — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a standalone fourth-quarter report; selected Q4 results are included. Public Storage is a Maryland REIT focused on self-storage, with investments in PS Business Parks (42%) and Shurgard Europe (49%). At year-end, it had interests in 2,277 U.S. self-storage facilities totaling approximately 148 million net rentable square feet.
Financial performance and position
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $2,381.7 million | $2,177.3 million | +9.4% |
| Operating income | $1,232.0 million | $1,055.4 million | +16.7% |
| Net income | $1,317.7 million | $1,150.0 million | +14.6% |
| Net income allocable to common shareholders | $1,053.1 million | $908.2 million | +16.0% |
| Diluted earnings per common share | $6.07 | $5.25 | +15.6% |
| FFO per diluted share | $8.79 | $7.98 | +10.2% |
| Core FFO per diluted share | $8.90 | $8.09 | +10.0% |
| Cash provided by operating activities | $1,732.6 million | $1,592.1 million | +8.8% |
- Self-storage revenue was $2,235.5 million. Self-storage NOI rose 11.2% to $1,648.8 million; same-store NOI increased 8.5% to $1,463.4 million. Same-store operating margin before depreciation was 74.2%, versus 72.9%.
- Same-store revenue increased 6.5%, driven primarily by a 6.1% rise in realized rent per occupied square foot. Weighted-average occupancy improved to 94.5% from 93.9%.
- Cash used in investing was $440.1 million, including $228.5 million for construction in process and $177.1 million for acquisitions. Cash used in financing was $1,375.6 million, including $1,371.0 million of distributions to Public Storage shareholders.
- Common distributions were $6.50 per share, up from $5.60. Total year-end cash was $104.3 million, down from $187.7 million.
- Total debt was $319.0 million at year-end, versus $64.4 million in 2014; it included $263.9 million of unsecured notes and $55.1 million of mortgage debt. The new euro-denominated notes carry a fixed 2.175% rate and mature in 2025. Management reported a debt ratio of approximately 2% under its defined measure and compliance with debt covenants.
- Total assets were $9.78 billion. Preferred equity was $4.06 billion and shareholders’ equity was $9.17 billion.
Material changes versus prior year
- Growth in common-shareholder earnings was principally supported by a $165.8 million increase in self-storage NOI, including $114.1 million from same-store facilities and $51.7 million from non-same-store facilities.
- Same-store revenue growth accelerated to 6.5% from 5.5% in 2014; same-store NOI growth rose to 8.5% from 6.9%.
- Equity earnings from unconsolidated real estate entities fell to $50.9 million from $88.3 million. PSB earnings declined largely because of lower property-disposition gains; Shurgard Europe earnings declined in part because its shareholder loan repayment eliminated interest income to Public Storage.
- General and administrative expense increased to $88.2 million from $71.5 million, including higher legal costs. Gains on real estate sales increased to $18.5 million from $2.5 million, primarily from eminent-domain-related dispositions.
- Acquisitions slowed: 17 facilities for approximately $169 million in 2015, compared with 44 for $431 million in 2014. The company redeemed $270 million of preferred shares in 2015 and issued €242 million of senior notes.
Outlook, management commentary, and risks
- Management expected continued revenue growth in 2016, citing current move-in, move-out, rent, and occupancy trends. It expected to continue annual rent increases for existing tenants and anticipated that new-tenant pricing would also contribute; no quantified earnings or revenue guidance was provided.
- Management expected same-store property-tax expense to increase approximately 4.5%–5% in 2016, with modest inflationary increases in payroll, repairs, utilities, and other costs. It expected advertising expense to remain approximately flat and maintenance capital expenditures of about $73 million.
- The development pipeline was approximately 3.7 million square feet at an estimated total cost of $486 million; $219 million had been spent by year-end, with the remaining $267 million expected primarily in 2016. Entitlements and permitting remain contingencies. Management cautioned that new developments may take three to four years to stabilize and may dilute earnings in the near term.
- Management reported capital resources exceeding planned needs by $445 million. Resources it identified included $104 million cash, $485 million of available revolver capacity, $250 million–$300 million of expected retained operating cash flow, and approximately $290 million net proceeds from January 2016 preferred issuance. Planned needs included development spending, acquisitions under contract, and debt repayments; potential preferred redemptions and further investment could increase capital requirements.
- Key risks include intense local competition, economic and demand shifts, acquisition and development execution, property taxes and operating-cost inflation, natural disasters and insurance limits, environmental or moisture-related liabilities, litigation, cybersecurity and system disruptions, REIT qualification and tax exposure, and foreign-currency, regulatory, and joint-venture risks relating to Shurgard Europe.
- Shurgard Europe had €600 million of unsecured debt outstanding at year-end. Public Storage’s euro-denominated notes and European investment expose results and financial position to currency movements. Management expected a €100 million Shurgard Europe dividend in early 2016, of which Public Storage’s 49% share was expected to be distributed.
- Unusual items included an $8.9 million earnings allocation to preferred shareholders related to preferred-share redemptions and a $3.5 million accrual for a legal settlement. The company stated that material losses from its disclosed legal proceedings were considered remote.
Most important facts for investors to verify
- Whether same-store rent growth and occupancy can remain strong as occupancy approaches levels management says are difficult to increase further.
- Development pipeline costs, entitlement approvals, delivery timing, and the expected duration and scale of earnings dilution.
- Debt and capital-allocation plans, including potential redemption of $862.5 million of preferred shares and funding for acquisitions and development.
- How much of 2015 earnings growth reflects recurring property operations versus real-estate sale gains and equity-method investment results.
- Shurgard Europe’s operating performance, debt service and refinancing capacity, and foreign-exchange exposure.
- Legal and insurance exposures, including the effects of the accrued settlement and the stated limits and deductibles on coverage.