01—Abstract
Summary
Summary of the 10-K filed March 1, 2018. Cited figures are marked; the original filing is the authoritative source.
Public Storage (PSA) closed 2017 with total revenues of $2.67 billiona (up 4.2% year over year) and net income allocable to common shareholders of $1.17 billion, or $6.73 per diluted share, down slightly from $6.81 in 2016.
The decline was driven primarily by a $50.0 millionb foreign currency loss on its euro-denominated debt, higher interest expense, and $7.8 million in hurricane-related casualty losses. Core operating performance was solid: self-storage net operating income rose 3.7% to $1.85 billion, and Core FFO per share increased 4.5% to $10.23. Management reported that same-store revenue growth decelerated through the year, from 4.0% in Q1 to 2.1% in Q4, as demand softened across most major markets and new supply intensified in several metros.
The balance sheet remains conservative, with total debt of $1.43 billionc against a $10.7 billion asset base and a $500 million undrawn revolver. The company issued its first public bond offering in September 2017, raising $1.0 billion in 2.370% and 3.094% notes. Preferred equity totals $4.0 billion, and management expects roughly $200 to $300 million per year of retained operating cash flow to fund growth.
Management also flagged an upcoming leadership transition effective January 1, 2019, when CEO Ronald Havner steps down and President Joseph Russell becomes CEO, with CFO John Reyes also retiring. Share-based compensation is expected to rise by $23.6 milliond in 2018 as the retiring executives' grants accelerate. Investors should weigh decelerating same-store growth and rising development dilution against a strong REIT balance sheet and a 5.3% dividend-adjusted cash return profile implied by the $8.00 annual distribution.
02—Key points
Key Highlights
- Same-store revenue growth slowed from 5.8% in 2016 to 3.0% in 2017, and quarterly growth decelerated each quarter, reaching 2.1% in Q4 2017. Management cited softer demand and increased supply in markets such as Atlanta, Austin, Charlotte, Chicago, Dallas, Denver, Houston and New York.
- Diluted EPS fell to $6.73 from $6.81, but Core FFO per share rose 4.5% to $10.23, reflecting strong net operating income growth of 3.7% to $1.85 billion.
- A $50.0 million foreign currency translation loss on euro-denominated debt, along with a $7.8 million casualty loss from Hurricanes Harvey and Irma, weighed on reported GAAP earnings.
- The company issued $1.0 billion of unsecured notes in September 2017, its first public debt offering, and redeemed $922.5 million of Series S and T preferred shares, leaving total debt at $1.43 billion, about 16% of book equity.
- Development pipeline of $613.8 million (4.6 million sq ft) with $349.4 million remaining to spend, which management expects to dilute earnings in 2018 and beyond while new facilities fill up over three to four years.
- Leadership transition announced: CEO Ronald Havner steps down January 1, 2019 and President Joseph Russell becomes CEO, while CFO John Reyes retires. This accelerates about $23.6 million of share-based compensation expense into 2018.
- Quarterly distributions of $2.00 per common share ($8.00 annually) were maintained in 2017, funded by operating cash flow of $1.98 billion, with 2017 REIT distributions fully classified as ordinary income.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, Public Storage kept $0.54.
- Revenue$2.67B100.0%
- Cost of revenue−$708.0M26.5%
- Gross profit$1.96B73.5%
- Operating costs−$537.4M20.1%
- Operating income$1.42B53.3%
- Interest, other & tax$25.3M0.9%
- Net income$1.45B54.3%
Where FY2017 revenue went
$2.67B- Operating income: $1.42B, 53% of revenue
- Cost of revenue: $708.0M, 27% of revenue
- Operating costs: $537.4M, 20% of revenue
Kept 53% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2017filed March 1, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $2.67B$2.56B | +4.2% |
| Cost of Revenue | $707.98M$669.08M | +5.8% |
| Gross Profit | $1.96B$1.89B | +3.7% |
| Operating Expenses | $1.26B$1.19B | +5.7% |
| Operating Income | $1.42B$1.37B | +3.5% |
| Interest Expense | $12.69M$4.21M | +201.4% |
| Net Income | $1.45B$1.46B | −0.8% |
| EPS (Basic) | $6.75$6.84 | −1.3% |
| EPS (Diluted) | $6.73$6.81 | −1.2% |
| Shares Outstanding (Basic) | 173.61M173.09M | +0.3% |
| Shares Outstanding (Diluted) | 174.15M173.88M | +0.2% |
05—Questions
Frequently Asked Questions
Why did Public Storage's GAAP earnings decline in 2017 even though operations improved?
Diluted EPS fell to $6.73 from $6.81, mainly because of a $50.0 million foreign currency loss on euro-denominated debt, which contrasts with a $17.6 million gain in 2016. Higher interest expense of about $8.5 million and a $7.8 million hurricane-related casualty loss also reduced earnings. Self-storage net operating income grew 3.7%, and Core FFO per share, which excludes currency effects and other one-time items, rose 4.5% to $10.23.
How concerning is the slowdown in same-store revenue growth?
It is a meaningful signal for investors. Same-store revenue growth fell from 5.8% in 2016 to 3.0% in 2017, and quarterly growth slowed steadily to 2.1% in Q4. Management attributed this to softer move-in demand, a lack of pricing power with new tenants, and new supply in several major metros. Management expects moderate revenue growth in 2018 driven mainly by existing-tenant rent increases, but it also warned that promotional discounts and lower initial rates may pressure revenue in the near term.
Is the dividend safe, and how is it funded?
The $8.00 per share annual distribution is funded by operating cash flow, which totaled $1.98 billion in 2017. Management has said it intends to distribute only taxable income, and the board declared a $2.00 quarterly dividend for Q1 2018. Retained operating cash flow after distributions and maintenance capex is expected to be $200 to $300 million annually. Preferred dividends of about $216 million per year must also be covered before common distributions.
What are the main balance sheet and financing risks?
Leverage is low: debt is $1.43 billion against a $10.7 billion asset base, and the company holds $433 million in cash plus $484 million of revolver availability. The company has A/A2 corporate ratings. Risks include euro exposure through a $324 million Shurgard Europe investment and €342 million of euro notes, which create currency gains and losses. Preferred securities totaling $4.0 billion are a significant part of the capital structure, and four series worth about $1.5 billion become callable in 2018.
What does the leadership change mean for investors?
Ronald Havner will step down as CEO on January 1, 2019, remaining Chairman, and Joseph Russell, currently President, will succeed him as CEO. CFO John Reyes will retire and join the board. The company has an established operating track record under these executives. Investors should note that accelerated share-based compensation will add $23.6 million to 2018 G&A expense, and the Hughes family controls about 14.3% of common shares, which gives them significant influence over governance matters.
06—Continue