01—Abstract
Summary
Summary of the 10-K filed March 1, 2017. Cited figures are marked; the original filing is the authoritative source.
Public Storage (PSA) closed 2016 with record results: total revenues rose 7.5% to $2.56 billiona, and net income allocable to common shareholders reached $1.18 billion, or $6.81 per diluted share, up from $6.07 in 2015.
Core FFO per share grew 10.0% to $9.79b, and FFO per share rose 10.4% to $9.70. Growth was driven by a 6.6% increase in same-store net operating income, supported by 5.5% same-store revenue growth and 5.6% growth in realized rent per occupied square foot. Balance sheet strength remained a central theme: debt was only about 3% of total assets under the company's Debt Ratio, the company holds an A/A2 senior credit rating, and it had $183.7 million in cash plus $484.8 million of revolver availability.
The filing also flags a notable shift in operating momentum. Same-store move-in volume declined 0.7%c in 2016, vacates exceeded move-ins, and the growth in average new-tenant rent slowed to 1.3% from 5.7% in 2015. Management attributes this to softness in demand in major markets such as Houston, Chicago, Washington D.C., Denver, and New York, and says it is increasing marketing spend and promotional discounts.
Management expects Same Store revenue growth to moderate in 2017, and it expects tenant reinsurance growth and merchandise sales to slow. Investors should weigh the strong 2016 earnings and dividend coverage against this weakening pricing power and rising development exposure, with about $660 milliond of pipeline and $430 million still to be spent. Capital allocation is also in focus.
The company has about $4.4 billion of preferred equity, with $1.7 billion callable in 2017, and it has relied on preferred issuance at a 4.9% to 5.4% coupon range for growth. Common distributions rose to $7.30 per share in 2016 (about $1.26 billion), and the board declared a $2.00 quarterly dividend for Q1 2017.
The Hughes family holds about 14.3% of common shares, and the declaration of trust limits outside ownership to 3%, which investors should note as a governance consideration. Overall, the filing presents a financially conservative REIT with a strong 2016 track record, but the outlook has become more cautious.
02—Key points
Key Highlights
- Revenue grew 7.5% to $2.56 billion in 2016, and net income allocable to common shareholders rose to $1.18 billion, or $6.81 per diluted share, from $6.07 in 2015.
- FFO per diluted share increased 10.4% to $9.70, and Core FFO per share increased 10.0% to $9.79, reflecting strong same-store NOI growth of 6.6%.
- Same-store move-in volume fell 0.7%, vacates exceeded move-ins, and growth in new-tenant rent per move-in slowed to 1.3% from 5.7%, signaling weaker pricing power.
- Management expects Same Store revenue growth to moderate in 2017, citing demand softness in Houston, Chicago, Washington D.C., Denver, and New York, and plans to increase marketing and promotional discounts.
- Leverage is conservative: the Debt Ratio is about 3% against a 50% covenant limit, total debt is $390.7 million, and the company has $183.7 million in cash plus $484.8 million of revolver availability.
- Preferred equity totals $4.4 billion, and $1.7 billion becomes redeemable in 2017, giving management flexibility to refinance higher-coupon preferred shares with lower-cost capital.
- The Hughes family owns about 14.3% of common shares and can hold up to 35.66% under the declaration of trust, which may allow significant influence over shareholder votes and corporate control.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2016, Public Storage kept $0.57.
- Revenue$2.56B100.0%
- Cost of revenue−$669.1M26.1%
- Gross profit$1.89B73.9%
- Operating costs−$517.0M20.2%
- Operating income$1.37B53.7%
- Interest, other & tax$85.9M3.4%
- Net income$1.46B57.0%
Where FY2016 revenue went
$2.56B- Operating income: $1.37B, 54% of revenue
- Cost of revenue: $669.1M, 26% of revenue
- Operating costs: $517.0M, 20% of revenue
Kept 54% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2016filed March 1, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $2.56B$2.38B | +7.5% |
| Cost of Revenue | $669.08M$635.50M | +5.3% |
| Gross Profit | $1.89B$1.75B | +8.3% |
| Operating Expenses | $1.19B$1.15B | +3.5% |
| Operating Income | $1.37B$1.23B | +11.6% |
| Interest Expense | $4.21M$610K | +590.2% |
| Net Income | $1.46B$1.32B | +10.8% |
| EPS (Basic) | $6.84$6.10 | +12.1% |
| EPS (Diluted) | $6.81$6.07 | +12.2% |
| Shares Outstanding (Basic) | 173.09M172.70M | +0.2% |
| Shares Outstanding (Diluted) | 173.88M173.51M | +0.2% |
05—Questions
Frequently Asked Questions
How strong were Public Storage's 2016 earnings and cash flows?
Net income allocable to common shareholders was $1.18 billion, or $6.81 per diluted share, up from $6.07 in 2015. FFO per diluted share rose to $9.70 from $8.79, and Core FFO per share rose to $9.79 from $8.90. Operating cash flow was $1.95 billion, and common distributions of $7.30 per share were covered by FFO.
Is the company's self-storage business still growing, and what is the 2017 outlook?
Same-store revenue grew 5.5% in 2016 and realized rent per occupied square foot grew 5.6%, but occupancy was flat at 94.5%. Management expects same-store revenue growth to moderate in 2017 because of weaker move-in demand, rising promotional discounts, and the cost of marketing spend. It expects rental growth to come mainly from annual increases to existing tenants.
How is Public Storage financed, and is its debt a risk?
Debt is minimal. Total debt was $390.7 million, including €342 million of euro-denominated senior notes that partly hedge the Shurgard Europe investment, and the Debt Ratio was about 3% against a 50% limit. The company is rated A by S&P and A2 by Moody's, with $183.7 million in cash and $484.8 million of revolver availability. Preferred stock, which totals $4.4 billion, is the main source of capital, so the cost and availability of preferred issuance matter more than debt.
What are the main risks to shareholders?
Key risks include weakening demand and pricing power in major markets, the $660 million development pipeline and its dilutive effect on earnings, and currency exposure from the Shurgard Europe stake and euro notes. Governance risk also exists because the Hughes family holds about 14.3% of common shares and can hold up to 35.66%. Finally, REIT qualification is a risk: failing it would trigger corporate-level taxes.
06—Continue