01—Abstract
Summary
Summary of the 10-K filed February 29, 2016. Cited figures are marked; the original filing is the authoritative source.
Public Storage (PSA) closed 2015 with its strongest year on record by its own measures: revenue rose to $2.38 billiona (up 9.4%), net income allocable to common shareholders reached $1.05 billion ($6.07 diluted EPS, up from $5.25), and FFO per diluted share climbed 10.2% to $8.79 (Core FFO up 10.0% to $8.90).
The engine of growth was the Same Store portfolio of 1,990 facilities, where revenues rose 6.5%b, cost of operations rose only 1.4%, and NOI grew 8.5%, driven mainly by realized rent per occupied square foot up 6.1% and occupancy up 0.6 points to 94.5%. Total self-storage NOI grew 11.2%, aided by a 111% jump in Non Same Store NOI from recent acquisitions and fill-ups. Management also flagged headwinds: development dilution is expected to grow in 2016, tenant reinsurance growth will slow substantially, and property tax growth is guided to 4.5%-5%.
The balance sheet remains very conservative. Debt totaled only $319 millionc (a Debt Ratio of roughly 2% against a 50% covenant cap), against $4.06 billion of preferred equity and $9.17 billion of shareholder equity. The company's strategy is shifting toward medium- and long-term debt: it issued EUR 242 million of 2.175% senior notes in November 2015 and rated A (S&P) and A2 (Moody's) on senior debt.
Liquidity is ample, with $445 milliond of capital resources against about $445 million of planned needs for 2016 once the $290 million net preferred proceeds from January 2016 are included. Ongoing growth funding depends on capital markets, since acquisitions fell sharply to $169 million in 2015 from $1.2 billion in 2013, and development pipeline commitments of $486 million were $219 million spent through year-end.
Key risks for investors include concentration in the Hughes family's 14.4% ownership stake (permitted up to 35.66% under the declaration of trust), exposure to Shurgard Europe through a $388 million book investment with euro and repatriation risks, and dependence on PS Business Parks, whose REIT status also underpins PSA's own. Dividends were raised to $1.70 per quarter ($6.50 for 2015), and the company reported no common share repurchases in 2015.
02—Key points
Key Highlights
- Revenue grew 9.4% to $2.38 billion in 2015, and diluted EPS rose 15.6% to $6.07 from $5.25.
- FFO per diluted share increased 10.2% to $8.79; Core FFO per share rose 10.0% to $8.90.
- Same Store revenue rose 6.5% and NOI rose 8.5%, with realized rent per occupied sq. ft. up 6.1% to $15.76 and occupancy up to 94.5%.
- Total debt is only $319 million (about 2% Debt Ratio), while the company issued EUR 242 million of 2.175% senior notes, starting a move toward investment-grade debt funding.
- Acquisition volume dropped to $169 million in 2015 from $1.2 billion in 2013, and a $486 million development pipeline is expected to dilute earnings further in 2016.
- Shareholder distributions totaled $6.50 per share in 2015 (quarterly dividend raised to $1.70), and $300 million of 5.40% Series B preferreds were issued in January 2016.
- Governance and structural risks include Hughes family control of about 14.4% of common shares and reliance on the 49% Shurgard Europe and 42% PS Business Parks stakes.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2015, Public Storage kept $0.55.
- Revenue$2.38B100.0%
- Cost of revenue−$635.5M26.7%
- Gross profit$1.75B73.3%
- Operating costs−$514.2M21.6%
- Operating income$1.23B51.7%
- Interest, other & tax$85.7M3.6%
- Net income$1.32B55.3%
Where FY2015 revenue went
$2.38B- Operating income: $1.23B, 52% of revenue
- Cost of revenue: $635.5M, 27% of revenue
- Operating costs: $514.2M, 22% of revenue
Kept 52% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 29, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $2.38B$2.18B | +9.4% |
| Cost of Revenue | $635.50M$613.32M | +3.6% |
| Gross Profit | $1.75B$1.56B | +11.7% |
| Operating Expenses | $1.15B$1.12B | +2.5% |
| Operating Income | $1.23B$1.06B | +16.7% |
| Interest Expense | $610K$6.78M | −91.0% |
| Net Income | $1.32B$1.15B | +14.6% |
| EPS (Basic) | $6.10$5.27 | +15.7% |
| EPS (Diluted) | $6.07$5.25 | +15.6% |
| Shares Outstanding (Basic) | 172.70M172.25M | +0.3% |
| Shares Outstanding (Diluted) | 173.51M173.14M | +0.2% |
05—Questions
Frequently Asked Questions
How much of Public Storage's 2015 earnings growth came from its core self-storage business?
Most of it. Self-storage net operating income rose $165.8 million, or 11.2%, to $1.65 billion, which accounts for the bulk of the $144.9 million increase in net income allocable to common shareholders. Same Store NOI contributed $114.1 million and Non Same Store NOI contributed $51.7 million. Partly offsetting this were lower equity earnings from PS Business Parks ($22.1 million decline, mainly from fewer property gains) and Shurgard Europe ($15.6 million decline, mainly from the 2014 loan repayment).
Is Public Storage's balance sheet risky given its growth plans?
The balance sheet is very conservative. Total debt was $319 million at year-end 2015, equal to roughly 3.5% of book equity, and the bylaws cap the Debt Ratio at 50%, far above the current ~2%. Preferred equity of $4.06 billion is the main capital source, and the company has said it intends to add medium- and long-term debt while staying conservatively capitalized. Near-term maturities are modest, with $29 million due in 2016.
What could limit Public Storage's growth in 2016?
Several factors. Competition for acquisitions is intense, and the company has no guarantee of deal volume. Development dilution is expected to grow as more unstabilized facilities are added, since new facilities take three to four years to reach stabilized cash flows. Tenant reinsurance growth is expected to slow substantially from 2014-2015 levels, and property tax expense is guided to rise about 4.5%-5%. Growth also depends on continued annual rent increases to existing tenants, since move-in rates are generally below move-out rates.
How concentrated is ownership and control of Public Storage?
Concentration is significant. The Hughes family, including former Chairman B. Wayne Hughes and two family members on the Board, owned about 14.4% of common shares at year-end 2015. The declaration of trust lets the family hold up to 35.66% while limiting other holders to 3%, so the family could materially influence trustee elections, charter amendments, and takeover outcomes. Maryland takeover statutes are currently not applied, though the Board could opt in without shareholder approval.
What is the outlook for Public Storage's international and affiliate investments?
The Shurgard Europe 49% stake carried a $388 million book value and is exposed to currency swings, tax and regulatory changes, and repatriation limits, with the joint venture partner's consent required for major decisions. Shurgard Europe holds EUR 600 million of unsecured debt, which could affect the stake if refinancing becomes difficult. The 42% PS Business Parks stake (market value about $1.3 billion) is significant for PSA's own REIT status, and its equity earnings fell in 2015 because gains on property sales declined.
06—Continue