01—Abstract
Summary
Summary of the 10-K filed February 21, 2023. Cited figures are marked; the original filing is the authoritative source.
Public Storage (PSA) closed 2022 with record earnings driven largely by a one-time event: the July 2022 sale of its 41% stake in PS Business Parks to Blackstone generated a $2.1 billion gain, lifting diluted EPS to $23.50a from $9.87.
Excluding that gain, the core business remained strong. Self-storage net operating income rose 26.1% to $2.97 billionb, Same Store revenue grew 14.8% on a 16.4% increase in realized rent per occupied square foot, and FFO per diluted share rose 23.2% to $16.46 (Core FFO up 23.1% to $15.92). Management was clear that momentum is slowing: weighted average same-store occupancy fell 1.5% to 94.9% and ended the year at 92.4%, and management expects revenue growth to decline significantly in 2023, with possible year-over-year revenue declines in the second half.
The balance sheet remains conservative. Total debt was about $6.9 billionc at a weighted average effective rate of roughly 2.0%, with $775 million of cash and a $500 million undrawn revolver. Interest expense rose to $136 million as the company refinanced and issued debt to fund its 2021 acquisitions.
Management described its credit ratings as among the strongest in the REIT sector. The company also disclosed a $2.3 billiond special dividend paid in August 2022 and a 50% increase in its regular quarterly dividend to $3.00 per share, effective with the March 2023 payment. The most significant forward-looking item is the unsolicited proposal, announced February 5, 2023, to acquire Life Storage in an all-stock deal at 0.4192 PSA shares per Life Storage share.
Life Storage rejected the offer on February 16, 2023, and Public Storage says it intends to pursue the transaction. Investors should weigh the strategic benefit of consolidating the industry against the risks of an unsolicited deal, potential dilution, and integration complexity. Other risks include rising property taxes (especially in California under Proposition 13), a $979.6 million development pipeline, and continued competitive pressure from new supply.
02—Key points
Key Highlights
- Record 2022 earnings inflated by one-time gain: net income allocable to common shareholders was $4.14 billion ($23.50 per diluted share), including a $2.1 billion gain on the PS Business Parks sale. Excluding that gain, earnings growth was driven by operations.
- Strong operating performance: self-storage NOI rose 26.1% to $2.97 billion; Same Store revenue grew 14.8%, driven by a 16.4% increase in realized rent per occupied square foot.
- FFO per diluted share rose 23.2% to $16.46 and Core FFO per share rose 23.1% to $15.92, with the company citing the strong results as evidence of pricing power.
- Demand is softening: same-store occupancy fell to 92.4% at year-end (from 94.8%), and management expects 2023 revenue growth to decline significantly, with possible second-half revenue declines.
- Proposed Life Storage acquisition: an unsolicited all-stock offer at 0.4192 PSA shares per Life Storage share, rejected by Life Storage on February 16, 2023, with PSA stating it intends to pursue the deal.
- Dividend increased 50% to $3.00 per quarter ($12.00 annualized), and a $13.15 per share special dividend ($2.3 billion) was paid in August 2022 from the PSB proceeds.
- Conservative balance sheet: about $6.9 billion of debt at a 2.0% weighted average effective rate, $775 million of cash, and a $500 million undrawn revolving credit facility.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2022filed February 21, 2023Financial Statements
FY2022 against FY2021
| Line item | FY2022FY2021 | Change |
|---|---|---|
| Revenue | $4.18B$3.42B | +22.4% |
| Operating Expenses | $2.18B$1.81B | +20.1% |
| Interest Expense | $136.32M$90.77M | +50.2% |
| Net Income | $4.35B$1.95B | +122.7% |
| EPS (Basic) | $23.64$9.91 | +138.5% |
| EPS (Diluted) | $23.50$9.87 | +138.1% |
| Shares Outstanding (Basic) | 175.26M174.86M | +0.2% |
| Shares Outstanding (Diluted) | 176.28M175.57M | +0.4% |
05—Questions
Frequently Asked Questions
How much of the 2022 earnings increase came from the PS Business Parks sale rather than core operations?
The $2.1 billion gain on the sale of the PSB stake accounts for most of the $2.41 billion increase in net income allocable to common shareholders. Core self-storage NOI grew $614.3 million, and that growth is the better measure of underlying performance. Investors should treat the 2022 GAAP EPS of $23.50 as non-recurring, and focus on FFO and Core FFO per share, which exclude the gain.
Why did management guide to slower revenue growth in 2023?
Management expects demand to weaken in 2023 because of a weaker macroeconomic outlook and reduced moving activity. Move-out volumes rose 9.7% in 2022 and occupancy fell to 92.4% at year-end. To support occupancy, the company plans higher marketing spending, lower rates for new customers, and more promotional discounts, all of which pressure revenue growth. Management said the range of outcomes is wide and could include year-over-year revenue declines in the second half of 2023.
What are the key risks in the proposed Life Storage acquisition?
Life Storage rejected the unsolicited all-stock proposal on February 16, 2023, and there is no assurance it will engage or that a deal will close. Life Storage can also use Maryland takeover defenses, including the Maryland Unsolicited Takeover Act, to classify its board. If a deal does close, the company may not realize the expected benefits, and combining the two companies could create unknown liabilities and higher costs. If no deal is completed, PSA may still incur significant transaction costs.
How secure is the dividend and what is the company's financial flexibility?
The dividend is supported by strong cash generation, and the company plans to retain roughly $500 million of operating cash flow in 2023 after distributions and capital expenditures. Its leverage is low, with debt to total assets of about 14% against a 65% covenant limit, and its A-rated senior notes provide good access to capital markets. The $500 million revolver had $481.4 million of availability as of February 21, 2023. Higher interest rates could increase the cost of new capital, and the dividend increase raises annual common distributions to roughly $2.1 billion, so cash flow trends will matter.
What property tax and California exposure should investors understand?
Property tax expense was $386.7 million in 2022, and management expects same-store property tax growth of about 5.3% in 2023 due to higher assessed values. About $767.2 million of 2022 NOI came from California properties, where Proposition 13 limits assessment increases to 2% a year. If that protection were reduced or eliminated, property taxes could rise substantially, which would significantly reduce cash flow and net income.
06—Continue