01—Abstract
Summary
Summary of the 10-K filed February 27, 2019. Cited figures are marked; the original filing is the authoritative source.
Public Storage (PSA) closed 2018 with record earnings and a conservative balance sheet, though the filing shows that same-store growth is slowing.
Net income allocable to common shareholders was $1,488.9 milliona, or $8.54 per diluted share, up from $6.73 in 2017, but the increase was driven largely by one-time gains: $151.6 million from the Shurgard Europe offering dilution, $37.9 million in real estate sale gains (including the West London sale), and $37.7 million of PSB equity gains. Management's preferred FFO measure, FFO per diluted share, rose 7.7% to $10.45, and Core FFO per share rose 3.2% to $10.56. Core FFO excludes foreign currency swings and accelerated executive share-based compensation, so it is the better gauge of recurring operating performance.
The core self-storage business is decelerating. Same-store revenue growth fell from 3.0%b in 2017 to 1.5% in 2018, and same-store NOI grew only 0.9%. Management attributes this to softer demand, pricing pressure from new supply in major metros such as Atlanta, Austin, Chicago, Dallas, Denver, and Portland, and rising property taxes (up 5.3%).
Same-store cost of operations rose 3.2%. Management expects moderate revenue growth in 2019, with property tax expense up roughly 5%, and warns that marketing and promotional spending may weigh on revenue trends. Development dilution is ongoing, with a $607.4 millionc pipeline ($322.1 million remaining to spend).
Balance-sheet strength is a key positive. Debt is only about $1.4 billiond (about 2.6% weighted average rate), against roughly $4.0 billion of preferred equity and $9.1 billion of shareholders' equity.
The company holds $361 million in cash and $484 million of revolver availability, and is one of the highest-rated REITs (A/A2 corporate). Investors should note two risks: the potential November 2020 California ballot initiative that could eliminate Proposition 13 protections and sharply raise property taxes on about $565 million of NOI, and the Hughes family's roughly 14.5% stake, which gives them significant influence over governance.
02—Key points
Key Highlights
- Net income to common shareholders rose to $1,488.9M ($8.54 diluted EPS) from $6.73, but roughly $183M of the increase came from one-time gains tied to the Shurgard Europe offering and a West London property sale.
- FFO per diluted share rose 7.7% to $10.45; Core FFO per share rose 3.2% to $10.56, excluding FX, executive retirement share-comp charges, and other non-recurring items.
- Same-store revenue growth slowed sharply to 1.5% (from 3.0% in 2017), with same-store NOI up only 0.9%, due to weaker demand and new supply in major metros.
- Same-store cost of operations rose 3.2%, driven by property taxes (+5.3%); management expects property taxes to grow about 5% in 2019.
- Strong balance sheet: about $1.4B total debt at a 2.6% weighted average rate, $361M cash, $484M revolver availability, and A-rated senior unsecured debt.
- Shurgard Europe IPO (Oct 2018) diluted PSA's stake from 49% to 35.2%, generating a $151.6M gain; the ~$4.0B preferred stack includes a $285M Series Y redemption in March 2019.
- Key risks: a potential November 2020 California ballot measure that could remove Proposition 13 protections for ~$565M of NOI, and Hughes family influence (~14.5% ownership).
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 27, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $2.76B$2.67B | +3.4% |
| Cost of Revenue | $739.72M$707.98M | +4.5% |
| Gross Profit | $2.01B$1.96B | +2.8% |
| Operating Expenses | $1.38B$1.26B | +9.5% |
| Interest Expense | $32.54M$12.69M | +156.4% |
| Net Income | $1.72B$1.45B | +18.6% |
| EPS (Basic) | $8.56$6.75 | +26.8% |
| EPS (Diluted) | $8.54$6.73 | +26.9% |
| Shares Outstanding (Basic) | 173.97M173.61M | +0.2% |
| Shares Outstanding (Diluted) | 174.30M174.15M | +0.1% |
05—Questions
Frequently Asked Questions
Is Public Storage's 2018 earnings growth sustainable?
Only partly. The headline EPS increase to $8.54 from $6.73 was inflated by non-recurring gains, including $151.6M from the Shurgard Europe offering and $37.9M from property sales. Core FFO per share, which strips out many non-recurring items, grew a more modest 3.2%. Core same-store NOI grew just 0.9%, so underlying growth is slowing.
Why did same-store revenue growth slow in 2018?
Management cites softer demand across most major markets, which reduced pricing power with new tenants, plus increased new supply in metros like Atlanta, Austin, Chicago, Dallas, Denver, and Portland. Move-in rental rates fell, and promotional discounts were increased to attract tenants. Management expects moderate revenue growth in 2019 but notes these trends are volatile.
How financially secure is Public Storage?
Very. Total debt is about $1.4 billion (about 15.5% of book equity) at a 2.6% weighted average rate, with no revolver borrowings and roughly $484 million of available capacity. The company has $361 million in cash and high credit ratings (A by S&P, A2 by Moody's on senior debt). Preferred equity of about $4.0 billion is the main form of leverage, and the company has no significant near-term debt maturities.
What is the biggest long-term risk to investors?
The potential November 2020 California ballot measure could create a 'split roll,' removing Proposition 13 protections for commercial and self-storage properties. About $565 million of 2018 NOI comes from California, and property tax expense ($41 million from California) could rise substantially. Separately, the Hughes family's ~14.5% stake lets them significantly influence shareholder votes and potential takeover outcomes.
How is the company's growth being funded?
Growth is funded mainly through retained operating cash flow (about $200–300 million per year), preferred issuance, and medium-term debt. The company issued $1.0 billion of unsecured notes in 2017 and has $711.4 million in planned 2019 capital needs against about $1.1 billion of resources. It has said it has no current plans to use joint ventures or property sales as funding sources, and it does not expect to issue common equity given the preferred cost advantage.
06—Continue