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EX-10.16 - EX-10.16 - Public Storagepsa-20161231xex10_16.htm
EX-32 - EX-32 - Public Storagepsa-20161231xex32.htm
EX-31.2 - EX-31.2 - Public Storagepsa-20161231xex31_2.htm
EX-31.1 - EX-31.1 - Public Storagepsa-20161231xex31_1.htm
EX-23 - EX-23 - Public Storagepsa-20161231xex23.htm
EX-21 - EX-21 - Public Storagepsa-20161231xex21.htm
EX-12 - EX-12 - Public Storagepsa-20161231xex12.htm
EX-10.19 - EX-10.19 - Public Storagepsa-20161231xex10_19.htm
EX-10.18 - EX-10.18 - Public Storagepsa-20161231xex10_18.htm
EX-10.17 - EX-10.17 - Public Storagepsa-20161231xex10_17.htm
EX-10.15 - EX-10.15 - Public Storagepsa-20161231xex10_15.htm

 

 

 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10‑K  

[X]  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2016.

or

[  ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                 to                 .

Commission File Number:  001‑33519

PUBLIC STORAGE

(Exact name of Registrant as specified in its charter)



 

Maryland

95‑3551121

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number)


701 Western Avenue, Glendale, California  91201-2349

(Address of principal executive offices) (Zip Code)  

 



(818) 244‑8080

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Depositary Shares Each Representing 1/1,000 of a 5.200% Cumulative Preferred Share, Series W $.01 par value


New York Stock Exchange


Title of each class

Name of each exchange
on which registered

Depositary Shares Each Representing 1/1,000 of a 5.900% Cumulative Preferred Share, Series S   $.01 par value

New York Stock Exchange

Depositary Shares Each Representing 1/1,000 of a 5.750% Cumulative Preferred Share, Series T $.01 par value

New York Stock Exchange

Depositary Shares Each Representing 1/1,000 of a 5.625% Cumulative Preferred Share, Series U $.01 par value

New York Stock Exchange

Depositary Shares Each Representing 1/1,000 of a 5.375% Cumulative Preferred Share, Series V $.01 par value

New York Stock Exchange

Depositary Shares Each Representing 1/1,000 of a 5.200% Cumulative Preferred Share, Series W $.01 par value

New York Stock Exchange

Depositary Shares Each Representing 1/1,000 of a 5.200% Cumulative Preferred Share, Series X $.01 par value

New York Stock Exchange

Depositary Shares Each Representing 1/1,000 of a 6.375% Cumulative Preferred Share, Series Y $.01 par value

New York Stock Exchange

Depositary Shares Each Representing 1/1,000 of a 6.000% Cumulative Preferred Share, Series Z $.01 par value

New York Stock Exchange

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Depositary Shares Each Representing 1/1,000 of a 5.875% Cumulative Preferred Share, Series A $.01 par value

New York Stock Exchange

Depositary Shares Each Representing 1/1,000 of a 5.400% Cumulative Preferred Share, Series B $.01 par value

New York Stock Exchange

Depositary Shares Each Representing 1/1,000 of a 5.125% Cumulative Preferred Share, Series C $.01 par value

New York Stock Exchange

Depositary Shares Each Representing 1/1,000 of a 4.950% Cumulative Preferred Share, Series D $.01 par value

New York Stock Exchange

Depositary Shares Each Representing 1/1,000 of a 4.900% Cumulative Preferred Share, Series E $.01 par value

New York Stock Exchange

Common Shares, $.10 par value

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None (Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 

Yes [X]No [   ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes [   ]No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X]No [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer [X]Accelerated Filer [   ]Non-accelerated Filer [   ]Smaller Reporting Company [   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [   ]No [X]

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The aggregate market value of the voting and non-voting common shares held by non-affiliates of the Registrant as of June 30, 2016:  

Common Shares, $0.10 Par Value Per Share – $37,898,005,000 (computed on the basis of $255.59 per share, which was the reported closing sale price of the Company's Common Shares on the New York Stock Exchange (the “NYSE”) on June 30, 2016).

As of February 27,  2017, there were 173,638,361 outstanding Common Shares, $.10 par value per share.


DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement to be filed in connection with the Annual Meeting of Shareholders to be held in 2017 are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent described therein.



 

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PART I

ITEM 1.Business

Forward Looking Statements

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  All statements in this document, other than statements of historical fact, are forward-looking statements which may be identified by the use of the words "expects,"  "believes,"  "anticipates," "should," "estimates" and similar expressions. 

These forward-looking statements involve known and unknown risks and uncertainties, which may cause our actual results and performance to be materially different from those expressed or implied in the forward-looking statements.  Factors and risks that may impact future results and performance include, but are not limited to, those described in Part 1, Item 1A, "Risk Factors" and in our other filings with the Securities and Exchange Commission (the “SEC”) including:

·

general risks associated with the ownership and operation of real estate, including changes in demand, risk related to development of self-storage facilities, potential liability for environmental contamination, natural disasters and adverse changes in laws and regulations governing property tax, real estate and zoning;

·

risks associated with downturns in the national and local economies in the markets in which we operate, including risks related to current economic conditions and the economic health of our customers;

·

the impact of competition from new and existing self-storage and commercial facilities and other storage alternatives;

·

difficulties in our ability to successfully evaluate, finance, integrate into our existing operations, and manage acquired and developed properties;

·

risks associated with international operations including, but not limited to, unfavorable foreign currency rate fluctuations, changes in tax laws, and local and global economic uncertainty that could adversely affect our earnings and cash flows;

·

risks related to our participation in joint ventures;

·

the impact of the regulatory environment as well as national, state and local laws and regulations including, without limitation, those governing environmental, taxes, our tenant reinsurance business and labor, and risks related to the impact of new laws and regulations;

·

risks of increased tax expense associated either with a possible failure by us to qualify as a real estate investment trust (“REIT”), or with challenges to the determination of taxable income for our taxable REIT subsidiaries;

·

changes in federal or state tax laws related to the taxation of REITs and other corporations;

·

security breaches or a failure of our networks, systems or technology could adversely impact our business, customer and employee relationships;

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·

risks associated with the self-insurance of certain business risks, including property and casualty insurance, employee health insurance and workers compensation liabilities;

·

difficulties in raising capital at a reasonable cost;

·

delays in the development process;

·

ongoing litigation and other legal and regulatory actions which may divert management’s time and attention, require us to pay damages and expenses or restrict the operation of our business; and

·

economic uncertainty due to the impact of war or terrorism.

These forward looking statements speak only as of the date of this report or as of the dates indicated in the statements.  All of our forward-looking statements, including those in this report, are qualified in their entirety by this statement.  We expressly disclaim any obligation to update publicly or otherwise revise any forward-looking statements, whether as a result of new information, new estimates, or other factors, events or circumstances after the date of these forward looking statements, except where expressly required by law.  Given these risks and uncertainties, you should not rely on any forward-looking statements in this report, or which management may make orally or in writing from time to time, as predictions of future events nor guarantees of future performance.

General

Public Storage (referred to herein as “the Company”, “we”, “us”, or “our”), a Maryland REIT, was organized in 1980.

At December 31, 2016, our principal business activities were as follows:

(i)

Self-storage Operations:  We acquire, develop, own, and operate self-storage facilities which offer storage spaces for lease on a month-to-month basis, for personal and business use.  We are the largest owner and operator of self-storage facilities in the United States (the “U.S.”).  We have direct and indirect equity interests in 2,336 self-storage facilities that we consolidate (an aggregate of 154 million net rentable square feet of space) located in 38 states within the U.S. operating under the “Public Storage” brand name.  We also own one self-storage facility in London, England which is managed by Shurgard Europe (defined below).

(ii)

Ancillary Operations:  We reinsure policies against losses to goods stored by customers in our self-storage facilities, and sell merchandise, primarily locks and cardboard boxes, at our self-storage facilities.

(iii)

Investment in PS Business Parks:  We have a 42% equity interest in PS Business Parks, Inc. (“PSB”), a publicly held REIT that owns, operates, acquires and develops commercial properties, primarily multi-tenant flex, office, and industrial parks.  At December 31, 2016, PSB owns and operates 28.1 million rentable square feet of commercial space.

(iv)

Investment in Shurgard Europe:  We have a 49% equity interest in Shurgard Self Storage Europe Limited (“Shurgard Europe”) which owns 218 self-storage facilities (twelve million net rentable square feet) located in seven countries in Western Europe operated under the “Shurgard” brand name.  We believe Shurgard Europe is the largest owner and operator of self-storage facilities in Western Europe. 

We also manage approximately 28 self-storage facilities for third parties, own 1.0 million net rentable square feet of commercial space which is managed primarily by PSB, and have equity interests in and manage 12 additional self-storage facilities.  

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For all periods presented herein, we have elected to be treated as a REIT, as defined in the Code.  As a REIT, we do not incur federal income tax if we distribute 100% of our REIT taxable income (generally, net rents and gains from real property, dividends, and interest) each year (for this purpose, certain distributions paid in a subsequent year may be considered), and if we meet certain organizational and operational rules.  We believe we met these requirements in all periods presented herein, and we expect to continue to elect and qualify as a REIT.   

We report annually to the SEC on Form 10-K, which includes financial statements certified by our independent registered public accountants.  We also report quarterly to the SEC on Form 10-Q, which includes unaudited financial statements.  We expect to continue such reporting.

On our website, www.publicstorage.com, we make available, free of charge, our Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after the reports and amendments are electronically filed with or furnished to the SEC.

Competition

We believe that our customers generally store their goods within a five mile radius of their home or business.  Our facilities compete with nearby self-storage facilities owned by other operators using marketing channels similar to ours, including Internet advertising, signage, and banners and offer services similar to oursAs a result, competition is significant and affects the occupancy levels, rental rates, rental income and operating expenses of our facilities.

Ownership and operation of self-storage facilities is highly fragmented.  As the largest owner of self-storage facilities, we believe that we own approximately 6% of the self-storage square footage in the U.S. and that collectively the five largest self-storage owners in the U.S. own approximately 13%, with the remaining 87% owned by numerous regional and local operators. 

We generally focus our ownership of facilities in major markets.  We believe that we have significant market share and concentration in major metropolitan centers, with approximately 72% of our 2016 same-store revenues generated in the 20 Metropolitan Statistical Areas (each, an “MSA”, as defined by the U.S. Census Bureau) with the highest population levels.  We believe this is a competitive advantage relative to other self-storage operators, which do not have our geographic concentration and market share. 

Industry fragmentation also provides opportunities for us to acquire additional facilities; however, we compete with a wide variety of institutions and other investors who also view self-storage facilities as attractive investments.  The amount of capital available for real estate investments greatly influences the competition for ownership interests in facilities and, by extension, the yields that we can achieve on newly acquired investments. 

Business Attributes

We believe that we possess several primary business attributes that permit us to compete effectively:

Centralized information networks:  Our centralized reporting and information network enables us to identify changing market conditions and operating trends as well as analyze customer data and quickly change each of our individual properties’ pricing and promotions  on an automated basis. 

Convenient shopping experience: Customers can conveniently shop for available storage space, reviewing attributes such as facility location, size, amenities such as climate-control, as well as pricing, through the following marketing channels: 

·

Our Desktop and Mobile Websites:  The online marketing channel continues to grow in prominence, with approximately 67% of our move-ins in 2016 sourced through our websites, as compared to 36% in 2010.  In addition, we believe that many of our customers who directly call

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our call center, or who move-in to a facility without making a reservation, have already reviewed our pricing and space availability through our websites.  We invest extensively in advertising on the Internet to attract potential customers, primarily through the use of search engines, and we regularly update our websites to enhance their productivity.  

·

Our Call Center:  Our call center is staffed by skilled sales specialists.  Customers reach our call center by calling our advertised toll-free telephone referral number, (800) 44-STORE, or telephone numbers provided on the Internet.  We believe giving customers the option to interact with a call center agent, despite the higher marginal cost relative to an internet reservation, enhances our ability to close sales with potential customers. 

·

Our Properties:  Customers can also shop at any one of our facilities.  Property managers access the same information that is available on our website and to our call center agents, and can inform the customer of available space at that site or our other nearby storage facilities.  Property managers are extensively trained to maximize the conversion of such “walk in” shoppers into customers. 

Economies of scale: The size and scope of our operations have enabled us to achieve high operating margins and a low level of administrative costs relative to revenues through the centralization of many functions, such as facility maintenance, employee compensation and benefits programs, revenue management, as well as the development and documentation of standardized operating procedures.  We also believe that our major market concentration provides managerial efficiencies stemming from having a large percentage of our facilities in close proximity to each other. 

Brand name recognition: We believe that the “Public Storage” brand name is the most recognized and established name in the self-storage industry in the U.S, due to our national reach in major markets in 38 states, our highly visible facilities, and our facilities’ distinct orange colored doors and signage.  We believe the “Public Storage” name is one of the most frequently used search terms used by customers using Internet search engines for self-storage.  We believe that the “Shurgard” brand, used by Shurgard Europe, is a well-established and valuable brand in Europe.  We believe that the awareness of our brand name results in a high percentage of potential storage customers considering our facilities relative to other operators. 

Marketing and advertising efficiencies: Our major-market concentration relative to the fragmented ownership and operation of the rest of the industry, combined with our well-recognized brand name, improves our prominence in unpaid search results for self-storage on major online search engines and enhances the efficiency of our bidding for paid multiple-keyword advertising.  The large number of facilities we have in major metropolitan centers enables us to efficiently use television advertising.    Our competitors do not use television advertising because they lack the scale in major metropolitan centers

Growth and Investment Strategies

Our growth strategies consist of: (i) improving the operating performance of our existing self-storage facilities, (ii) acquiring more facilities, (iii) developing new facilities and adding more self-storage space to existing facilities, (iv) participating in the growth of our investment in PSB, and (v) participating in the growth of our investment in Shurgard Europe.  While our long-term strategy includes each of these elements, in the short run the level of growth in our asset base in any period is dependent upon the cost and availability of capital, as well as the relative attractiveness of available investment alternatives. 

Improve the operating performance of existing facilities: We seek to increase the net cash flow of our existing self-storage facilities by (i) regularly analyzing our call volume, reservation activity, Internet activity, move-in/move-out rates and other market supply and demand factors and responding by adjusting our marketing and promotional activities and rental rates charged to new and existing customers,  (ii) attempting to maximize revenues through evaluating the appropriate balance between occupancy, rental rates, and promotional discounting and (iii) controlling operating costs.  We believe that our property management personnel, information technology, our

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convenient shopping options for the customer, our economies of scale, and our Internet marketing and advertising programs will continue to enhance our ability to meet these goals. 

Acquire properties owned by others in the U.S.: We seek to capitalize on the fragmentation of the self-storage business through acquiring attractively priced, well-located existing self-storage facilities.  We believe our presence in and knowledge of substantially all of the major markets in the U.S. enhances our ability to identify attractive acquisition opportunities.  Data on the rental rates and occupancy levels of our existing facilities provides us an advantage in evaluating the potential of acquisition opportunities.  Self-storage owners decide whether to market their facilities for sale based upon many factors, including potential reinvestment returns, expectations of future growth, estimated value, the cost of debt financing, as well as personal considerations.  Our aggressiveness in bidding for particular marketed facilities depends upon many factors including the potential for future growth, the quality of construction and location, the cash flow we expect from the facility when operated on our platform, how well the facility fits into our current geographic footprint, as well as our yield expectations.    During 2016, 2015 and 2014, we acquired 55, 17 and 44 facilities, respectively, from third parties for approximately $429 million, $169 million and $431 million, respectively, primarily through one to five property portfolio acquisitions.  We will continue to seek to acquire properties in 2017; however, there is significant competition to acquire existing facilities.  As a result, there can be no assurance as to the level of facilities we may acquire. 

Develop new self-storage facilities and expansion of existing facilitiesThe development of new self-storage locations and the expansion of existing facilities has been an important source of growth.   Since the beginning of 2013, we have expanded our development efforts due in part to the significant increase in prices being paid for existing facilities, in many cases well above the cost of developing new facilities.  At December 31, 2016, we had a development pipeline to develop new self-storage facilities and, to a lesser extent, expand existing self-storage facilities, which will add approximately 5.3 million net rentable square feet of self-storage space, at a total cost of $660.2 millionSome of these projects are subject to significant contingencies such as entitlement approval.  We expect to continue to seek additional development projects; however, the level of future development may be limited due to various constraints such as difficulty in finding projects that meet our risk-adjusted yield expectations, challenges in obtaining building permits for self-storage activities in certain municipalities, as well as challenges in sourcing quality construction materials, labor, and design elements. 

Participate in the growth of PS Business Parks, Inc.:  Our investment in PSB provides diversification into another asset typePSB is a stand-alone public company traded on the NYSEAs of December 31, 2016, we have a 42% equity interest in PSB.

PSB seeks to grow its asset base in favorable markets as well as increase the cash flows from its existing portfolio.  From 2010 through 2016, PSB has acquired an aggregate total of 11.5 million rentable square feet in key markets for an aggregate purchase price of approximately $1.1 billion, and has disposed of an aggregate of 2.7 million rentable square feet in markets deemed non-strategic for an aggregate of $282 million in net proceeds.  As of December 31, 2016, PSB owned and operated approximately 28.1 million rentable square feet of commercial space, and had an enterprise value of approximately $5.1 billion (based upon the trading price of PSB’s common stock combined with the liquidation value of its preferred stock as of December 31, 2016). 

Participate in the growth of Shurgard Europe:  We believe Shurgard Europe is the largest self-storage company in Western Europe.  It owns and operates 218 self-storage facilities with approximately 12 million net rentable square feet in: France (principally Paris), Sweden (principally Stockholm), the United Kingdom (principally London), the Netherlands, Denmark (principally Copenhagen), Belgium and Germany.  We own 49% of Shurgard Europe, with the other 51% owned by a large U.S. institutional investor. 

Customer awareness and availability of self-storage is significantly lower in Europe than in the U.S.  However, with more awareness and product supply, we believe there is potential for increased demand for storage space in Europe.  In the long run, we believe Shurgard Europe could capitalize on potential increased demand through the development of new facilities or, to a lesser extent, acquiring existing facilities.  In 2014, 2015 and 2016, Shurgard Europe acquired 27 facilities with 1.3 million net rentable square feet in Germany, the Netherlands, and the United Kingdom for an aggregate purchase price of approximately $250.5 million.  In addition, during 2015

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and 2016 Shurgard Europe opened four development properties in the United Kingdom containing 314,000 net rentable square feet at a cost of $52.3 million.

Financing of the Company’s Growth Strategies

Overview of financing strategy and sources of capital:  As a REIT, we generally distribute 100% of our taxable income to our shareholders, which relative to a taxable C corporation, limits the amount of cash flow from operations that we can retain for investments.  As a result, in order to grow our asset base, access to capital is important. 

Our financial profile is characterized by strong credit metrics, including low leverage relative to our total capitalization and operating cash flows.  We are one of the highest rated REITs, as rated by major rating agencies Moody’s and Standard & Poor’s.  Our senior debt has an “A” credit rating by Standard & Poor’s and “A2” by Moody’s.  Our credit ratings on each of our series of preferred shares are “A3” by Moody’s and “BBB+” by Standard & Poor’s.  Our credit profile and ratings enables us to effectively access both the public and private capital markets to raise capital.

Sources of capital available to us include retained cash flow, the issuance of preferred and common securities, the issuance of medium and long-term debt, joint venture financing, and the sale of properties.  We view our line of credit, as well as short-term bank loans, as bridge financing.  

Historically, we have financed our cash investment activities primarily with retained operating cash flow and the issuance of preferred securities.  While we have issued common shares, such issuances have been minimal, because preferred securities have had a more attractive cost of capital.  In 2015 and 2016, we issued euro-denominated medium-term debt primarily as a hedge to our euro-denominated investment in Shurgard Europe.  We expect to continue to use these same sources of capital, supplemented potentially by the issuance of long-term debt.   While we may increase the level of debt in our capital structure, we expect to continue to remain conservatively capitalized and not subject ourselves to significant refinancing risk.

We do not expect to use joint venture financing or the sale of properties as sources of capital; however, there can be no assurance that we will not.

We select among the sources of capital available to us based upon relative cost, availability, the desire for leverage, as well as intangibles such as covenants in the case of debt.      

Retained operating cash flow:  Although we are required to generally distribute 100% of our taxable income to our shareholders, we are nonetheless able to retain cash flow to the extent that our tax depreciation exceeds our maintenance capital expenditures.  In recent years, we have retained approximately $300 million per year in cash flow,  and we expect to retain $250 million in 2017.    

Preferred equity:  As noted above, we view preferred equity as an important source of capital over the long term.  However, rates and market conditions for the issuance of preferred securities can be volatile or inefficient from time to time, particularly so in the last few years.  Since 2013, we have issued preferred securities at fixed rates ranging from 4.900% to 6.375%.  Most recently, in October 2016, we issued $350 million of preferred securities at a fixed rate of 4.900%.  We believe that the market coupon rate of our preferred securities is influenced by long-term interest rates, as well as demand specifically from retail investors.  Institutional investors are generally not buyers of our preferred securities.  Currently, we believe that the cost to issue preferred securities would be approximately 5.875%.  At December 31, 2016, we have approximately $4.4 billion in preferred securities outstanding with an average coupon rate of 5.5% and an average market yield of 5.9%.    

Medium or long-term debt:  We have broad powers to issue debt to fund our business.  These powers are subject to a limitation on unsecured borrowings in our Bylaws described in “Limitations on Debt” below. Our corporate credit ratings are “A” by Standard & Poor’s and “A2” by Moody’s.  We believe this high rating, combined

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with our low level of debt, could allow us to issue a significant amount of unsecured debt at lower interest rates than the coupon rates on preferred securities. 

At December 31, 2016, we have approximately €342 million of Euro-denominated senior unsecured notes (collectively, the “Senior Notes”) outstanding, which were issued to institutional investors in 2015 and 2016.  

Common equity:  Except in connection with mergers, most notably a merger in 2006 with Shurgard Storage Centers, we have not raised capital through the issuance of common equity, because lower cost alternatives have been available.  However, we believe that the market for our common equity is liquid and, as a result, common equity is a significant potential source of capital.        

Bridge financing:  We have a $500.0 million revolving line of credit which we occasionally use as temporary “bridge” financing, along with short-term bank loans, until we are able to raise longer-term capital.  As of December 31, 2016, there we no borrowings outstanding on our revolving line of credit and no short-term bank loans.  

Unlikely capital alternatives:  We have issued both our common and preferred securities in exchange for real estate and other investments in the past.  We do not expect such issuances to be a material source of capital in the future, though there can be no assurance. 

We have participated in joint ventures with institutional investors in the past to acquire, develop, and operate self-storage facilities, most notably Shurgard Europe, in which we own a 49% interest and an institutional investor owns the remaining 51%.  We do not expect joint venture financing to be a material source of capital in  the future because we have other sources of capital that are less expensive and because of potential constraints resulting from joint management.  However, there can be no assurance that we will not. 

Generally, we have disposed of self-storage facilities only when compelled to do so through condemnation proceedings.  Because we believe that we are an optimal operator of self-storage facilities, we have generally found that we cannot obtain sufficient value in selling properties.  As a result, we do not expect to raise significant capital selling self-storage facilities; however, though there can be no assurance that we will not.

Investments in Real Estate and Unconsolidated Real Estate Entities

Investment Policies and Practices with respect to our investments: Following are our investment practices and policies which, though we do not anticipate any significant alteration, can be changed by our board of trustees (the “Board”) without a shareholder vote:

·

Our investments primarily consist of direct ownership of self-storage facilities (the nature of our self-storage facilities is described in Item 2, “Properties”), as well as partial interests in entities that own self-storage facilities.

·

Our partial ownership interests primarily reflect general and limited partnership interests in entities that own self-storage facilities that are managed by us under the “Public Storage” brand name in the U.S., as well as storage facilities located in Europe managed by Shurgard Europe under the “Shurgard” brand name.

·

Additional acquired interests in real estate (other than the acquisition of properties from third parties) will include common equity interests in entities in which we already have an interest.

·

To a lesser extent, we have interests in existing commercial properties (described in Item 2, “Properties”), containing commercial and industrial rental space, primarily through our investment in PSB.

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Facilities Owned by Unconsolidated Real Estate Entities

At December 31, 2016, we had ownership interests in entities that we do not control or consolidate.  These entities include PSB, Shurgard Europe (each discussed above), and various limited partnerships that own an aggregate of 12 self-storage facilities.  These entities are referred to collectively as the “Unconsolidated Real Estate Entities.”

PSB, which files financial statements with the SEC, and Shurgard Europe, have debt and other obligations that we do not consolidate in our financial statements.  Such debt or other obligations have no recourse to usNone of the other Unconsolidated Real Estate Entities have significant amounts of debt or other obligations.  See Note 4 to our December 31, 2016 financial statements for further disclosure regarding the assets, liabilities and operating results of PSB and Shurgard Europe.

Canadian self-storage facilities owned by Former Chairman and Member of Board of Trustees 

At December 31, 2016, B. Wayne Hughes, our former Chairman and his daughter, Tamara Hughes Gustavson, a member of our Board of Trustees, owned and controlled 57 self-storage facilities in Canada.  These facilities operate under the “Public Storage” tradename, which we license to the owners of these facilities for use in Canada on a royalty-free, non-exclusive basis.  Our subsidiaries reinsure risks relating to loss of goods stored by customers in these facilities, and have received approximately and $848,000, $562,000 and $480,000 for the years ended December 31, 2016, 2015 and 2014, respectively.  Our right to continue receiving these premiums may be qualified.

We have no ownership interest in these facilities and we do not own or operate any facilities in Canada.  If we chose to acquire or develop our own facilities in Canada, we would have to share the use of the “Public Storage” name in Canada with the facilities’ owners.  We have a right of first refusal, subject to limitations, to acquire the stock or assets of the corporation engaged in the operation of these facilities if their owners agree to sell them.

Limitations on Debt

Without the consent of holders of the various series of Preferred Shares, we may not take any action that would result in our “Debt Ratio” exceeding 50%.  “Debt Ratio”, as defined in the related governing documents, represents generally the ratio of debt to total assets before accumulated depreciation and amortization on our balance sheet, in accordance with U.S. generally accepted accounting principles (“GAAP”).  As of December 31, 2016, the Debt Ratio was approximately 3%. 

Our revolving credit facility and senior unsecured debt agreements contain various customary financial covenants, including limitations on the level of indebtedness and the prohibition of the payment of dividends upon the occurrence of defined events of default.  We believe we were in compliance with each of these covenants as of December 31, 2016.

Employees

We had approximately 5,500 employees in the U.S. at December 31, 2016 who are engaged primarily in property operations.    

Seasonality

We experience minor seasonal fluctuations in the demand for self-storage space, with demand and rental rates generally higher in the summer months than in the winter months.  We believe that these fluctuations result in part from increased moving activity during the summer months.

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Insurance

We have historically carried property, earthquake, general liability, employee medical insurance and workers compensation coverage through internationally recognized insurance carriers, subject to deductibles.  Deductibles for property and general liability are $25.0 million and $2.0 million, respectively, per occurrence.  The aggregate limits on these policies of $75.0 million for property losses and $102.0 million for general liability losses are higher than estimates of maximum probable losses that could occur from individual catastrophic events determined in recent engineering and actuarial studies; however, in case of multiple catastrophic events, these limits could be exceeded.

We reinsure a program that provides insurance to our customers from an independent third-party insurer.  This program covers tenant claims for losses to goods stored at our facilities as a result of specific named perils (earthquakes are not covered by this program), up to a maximum limit of $5,000 per storage unit.  We reinsure all risks in this program.  We are subject to licensing requirements and regulations in several states.  At December 31, 2016, there were approximately 894,000 certificates held by our self-storage customers, representing aggregate coverage of approximately $2.7 billion.

ITEM 1A.  Risk Factors

In addition to the other information in our Annual Report on Form 10-K, you should consider the risks described below that we believe may be material to investors in evaluating the Company.  This section contains forward-looking statements, and in considering these statements, you should refer to the qualifications and limitations on our forward-looking statements that are described in Item 1, Forward Looking Statements.”

We have significant exposure to real estate risk.

Since our business consists primarily of acquiring and operating real estate, we are subject to the risks related to the ownership and operation of real estate that can adversely impact our business and financial condition.  These risks include the following:  

Natural disasters or terrorist attacks could cause damage to our facilities, resulting in increased costs and reduced revenues.  Natural disasters, such as earthquakes, hurricanes and floods, or terrorist attacks could cause significant damage and require significant repair costs, and make facilities temporarily uninhabitable, reducing our revenues.  Damage and business interruption losses could exceed the aggregate limits of our insurance coverage.  In addition, because we self-insure a portion of our risks, losses below a certain level may not be covered by insurance.   See Note 12 to our December 31, 2016 financial statements for a description of the risks of losses that are not covered by third-party insurance contracts.  We may not have sufficient insurance coverage for losses caused by a terrorist attack, or such insurance may not be maintained, available or cost-effective.  In addition, significant natural disasters, terrorist attacks, threats of future terrorist attacks, or resulting wider armed conflicts could have negative impacts on the U.S. economy, reducing storage demand and impairing our operating results. 

Operating costs could increase.  We could be subject to increases in insurance premiums, increased or new property tax assessments or other taxes, repair and maintenance costs, payroll, utility costs, workers compensation, and other operating expenses due to various factors such as inflation, labor shortages, commodity and energy price increases, weather, increases to minimum wage rates, changes to governmental safety and real estate use limitations, as well as other governmental actions. 

The acquisition of existing properties is subject to risks that may adversely affect our growth and financial results.    We have acquired self-storage facilities from third parties in the past, and we expect to continue to do so in the future.    We face significant competition for suitable acquisition properties from other real estate investors.  As a result, we may be unable to acquire additional properties we desire or the purchase price for desirable properties may be significantly increased.    Failures or unexpected circumstances in integrating newly acquired properties into our operations or circumstances we did not detect during due diligence, such as environmental matters, needed repairs or deferred maintenance, or the effects of increased property tax following reassessment of a newly-acquired

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property, as well as the general risks of real estate investment, could jeopardize realization of the anticipated earnings from an acquisition. 

Development of self-storage facilities can subject us to risks.  At December 31, 2016, we have a pipeline of development projects totaling $660 million (subject to contingencies), and we expect to continue to seek additional development projects.  There are significant risks involved in developing self-storage facilities, such as delays or cost increases due to changes in or failure to meet government or regulatory requirements, failure of revenue to meet our underwriting estimates, weather issues, unforeseen site conditions, or personnel problems.  Self-storage space is generally not pre-leased, and rent-up of newly developed space can be delayed or ongoing cash flow yields can be reduced due to competition, reductions in storage demand, or other factors. 

There is significant competition among self-storage operators and from other storage alternatives.  Our self-storage facilities generate most of our revenue and earnings.  Competition in the local market areas in which many of our properties are located is significant and has affected our occupancy levels, rental rates and operating expenses.  Development of self-storage facilities has increased in recent years, which has intensified competition and will continue to do so as newly developed facilities are opened.  Development of self-storage facilities by other operators could continue to increase, due to increases in availability of funds for investment or other reasons, and further intensify competition.  

We may incur significant liabilities from environmental contamination or moisture infiltration.   Existing or future laws impose or may impose liability on us to clean up environmental contamination on or around properties that we currently or previously owned or operated, even if we were not responsible for or aware of the environmental contamination or even if such environmental contamination occurred prior to our involvement with the property.  We have conducted preliminary environmental assessments on most of our properties, which have not identified material liabilities.  These assessments, commonly referred to as “Phase 1 Environmental Assessments,” include an investigation (excluding soil or groundwater sampling or analysis) and a review of publicly available information regarding the site and other nearby properties.   

We are also subject to potential liability relating to moisture infiltration, which can result in mold or other damage to our or our customers’ property, as well as potential health concerns.  When we receive a complaint or otherwise become aware that an air quality concern exists, we implement corrective measures and seek to work proactively with our customers to resolve issues, subject to our contractual limitations on liability for such claims. 

We are not aware of any environmental contamination or moisture infiltration related liabilities that could be material to our overall business, financial condition, or results of operation.  However, we may not have detected all material liabilities, we could acquire properties with material undetected liabilities, or new conditions could arise or develop in the future.  Settling any such liabilities could negatively impact our earnings and cash available for distribution to shareholders, and could also adversely affect our ability to sell, lease, operate, or encumber affected facilities.

We incur liability from tenant and employment-related claims.  From time to time we have to make monetary settlements or defend actions or arbitration (including class actions) to resolve tenant or employment-related claims and disputes.    Settling any such liabilities could negatively impact our earnings and cash available for distribution to shareholders, and could also adversely affect our ability to sell, lease, operate, or encumber affected facilities.

Economic conditions can adversely affect our business, financial condition, growth and access to capital.

Our revenues and operating cash flow can be negatively impacted by reductions in employment and population levels, household and disposable income, and other general economic factors that lead to a reduction in demand for rental space in each of the markets in which we operate.   

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Our ability to raise capital to fund our activities may be adversely affected by challenging market conditions.  If we were unable to raise capital at reasonable rates, prospective earnings growth through expanding our asset base could be limited. 

We have exposure to European operations through our ownership in Shurgard Europe.

We own a 49% equity interest in Shurgard Europe, with our investment having a $280 million book value at December 31, 2016, and $22.3 million in equity in earnings in 2016.  As a result, we are exposed to additional risks related to international operations that may adversely impact our business and financial results, including the following:

·

Currency risks:  Currency fluctuations can impact the fair value of our equity investment in Shurgard Europe, as well as future repatriation of cash.

·

Legislative, tax, and regulatory risks:  We are subject to complex foreign laws and regulations related to permitting and land use, the environment, labor, and other areas, as well as income, property, sales, value added and employment tax laws.  These laws can be difficult to apply or interpret and can vary in each country or locality, and are subject to unexpected changes in their form and application due to regional, national, or local political uncertainty and other factors.  Such changes, or Shurgard’s failure to comply with these laws, could subject it to penalties or other sanctions, adverse changes in business processes, as well as potentially adverse income tax, property tax, or other tax burdens. 

·

Impediments to capital repatriation could negatively impact the realization of our investment in Shurgard Europe: Laws in Europe and the U.S. may create, impede or increase our cost to repatriate capital or earnings from Shurgard Europe. 

·

Risks of collective bargaining and intellectual property:  Collective bargaining, which is prevalent in certain areas in Europe, could negatively impact Shurgard Europe’s labor costs or operations.  Many of Shurgard Europe’s employees participate in various national unions.    

·

Potential operating and individual country risks:  Economic slowdowns or extraordinary political or social change in the countries in which it operates have posed, and could continue to pose, challenges or result in future reductions of Shurgard Europe’s operating cash flows.  

·

Impediments of Shurgard Europe’s joint venture structure:  Shurgard Europe’s strategic decisions, involving activities such as borrowing money, capital contributions, raising capital from third parties, as well as selling or acquiring significant assets, require the consent of our joint venture partner.  As a result, Shurgard Europe may be precluded from taking advantage of opportunities that we would find attractive and we could be unable to separately pursue such opportunities due to certain market exclusivity provisions, which expire on March 31, 2018, of the Shurgard Europe joint venture agreement.  In addition, our 49% equity investment may not be easily sold or readily accepted as collateral by potential lenders to Public Storage due to the joint venture structure.  

The Hughes Family could control us and take actions adverse to other shareholders.  

At December 31, 2016, B. Wayne Hughes, our former Chairman and his family, which includes his daughter, Tamara Hughes Gustavson and his son, B. Wayne Hughes, Jr., who are both members of our Board of Trustees (collectively, the “Hughes Family”), owned approximately 14.3% of our aggregate outstanding common shares. Our declaration of trust permits the Hughes Family to own up to 35.66% of our outstanding common shares while it generally restricts the ownership by other persons and entities to 3% of our outstanding common shares. Consequently, the Hughes Family may significantly influence matters submitted to a vote of our shareholders, including electing trustees, amending our organizational documents, dissolving and approving other extraordinary transactions, such as a takeover attempt, resulting in an outcome that may not be favorable to other shareholders.

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Takeover attempts or changes in control could be thwarted, even if beneficial to shareholders.

In certain circumstances, shareholders might desire a change of control or acquisition of us, in order to realize a premium over the then-prevailing market price of our shares or for other reasons.  However, the following could prevent, deter, or delay such a transaction:  

·

Provisions of Maryland law may impose limitations that may make it more difficult for a third party to negotiate or effect a business combination transaction or control share acquisition with Public Storage.  Currently, the Board has opted not to subject the Company to these provisions of Maryland law, but it could choose to do so in the future without shareholder approval.   

·

To protect against the loss of our REIT status due to concentration of ownership levels, our declaration of trust generally limits the ability of a person, other than the Hughes Family or “designated investment entities” (each as defined in our declaration of trust), to own, actually or constructively, more than 3% of our outstanding common shares or 9.9% of the outstanding shares of any class or series of preferred or equity shares, in either case unless a specific exemption is granted by our Board.  These limits could discourage, delay or prevent a transaction involving a change in control of the Company not approved by our Board.  

·

Similarly, current provisions of our declaration of trust and powers of our Board could have the same effect, including (1) limitations on removal of trustees in our declaration of trust, (2) restrictions on the acquisition of our shares of beneficial interest, (3) the power to issue additional common shares, preferred shares or equity shares on terms approved by the Board without obtaining shareholder approval, (4) the advance notice provisions of our bylaws and (5) the Board’s ability under Maryland law, without obtaining shareholder approval, to implement takeover defenses that we may not yet have and to take, or refrain from taking, other actions that could have the effect of delaying, deterring or preventing a transaction or a change in control.

If we failed to qualify as a REIT, we would have to pay substantial income taxes.

REITs are subject to a range of complex organizational and operational requirements.  A qualifying REIT does not generally incur federal income tax on its net income that is distributed to its shareholders.  Our REIT status is also dependent upon the ongoing REIT qualification of PSB as a result of our substantial ownership interest in it. We believe we have qualified as a REIT and we intend to continue to maintain our REIT status.

There can be no assurance that we qualify or will continue to qualify as a REIT.  The highly technical nature of the REIT rules, the ongoing importance of factual determinations, the possibility of unidentified issues in prior periods or changes in our circumstances, all could adversely affect our ability to comply.  For any taxable year that we fail to qualify as a REIT and statutory relief provisions did not apply, we would be taxed at the regular federal corporate rates on all of our taxable income and we also could be subject to penalties and interest.  We would generally not be eligible to seek REIT status again until the fifth taxable year after the first year of our failure to qualify. Any taxes, interest and penalties incurred would reduce the amount of cash available for distribution to our shareholders or for reinvestment and would adversely affect our earnings, which could have a material adverse effect.  

Holders of our preferred shares have dividend, liquidation and other rights that are senior to the rights of the holders of shares of our common stock.

Holders of our preferred shares are entitled to cumulative dividends before any dividends may be declared or set aside on our common stock.  Upon liquidation, holders of our preferred shares will receive a liquidation preference of $25,000 per share (or $25.00 per depositary share) plus any accrued and unpaid distributions before any payment is made to the common shareholders.  These preferences may limit the amount received by our common shareholders either from ongoing distributions or upon liquidation.  In addition, our preferred shareholders

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have the right to elect two additional directors to our Board whenever dividends are in arrears in an aggregate amount equivalent to six or more quarterly dividends, whether or not consecutive.

Potential changes in tax laws could negatively impact us.

The Trump Administration and the Republican-led Congress are exploring potential changes to U.S. tax law, such as reducing income tax rates, reducing the deductibility of interest, changing the allowable recovery periods for acquired assets, and eliminating or limiting many other deductions and credits.  These potential changes, and others we may not be aware of, could have negative impacts such as reducing the value of our common stock, reducing our access to capital, or making the acquisition of real estate assets less attractive.  In response, we may need to take actions such as changing our sources of capital, revising our capital allocation and asset acquisition strategy, or reconsidering our status as a REIT.  Such responses could be costly, reduce cash available for distributions to shareholders, and present certain business and tax risks.  We cannot predict whether, when, or to what extent new federal tax laws, regulations, interpretations or rulings will be adopted. 

We may pay some taxes, reducing cash available for shareholders.

Even if we qualify as a REIT for federal income tax purposes, we may be subject to some federal, foreign, state and local taxes on our income and property.  Since January 1, 2001, certain consolidated corporate subsidiaries of the Company have elected to be treated as “taxable REIT subsidiaries” for federal income tax purposes, and are taxable as regular corporations and subject to certain limitations on intercompany transactions.  If tax authorities determine that amounts paid by our taxable REIT subsidiaries to us are not reasonable compared to similar arrangements among unrelated parties, we could be subject to a 100% penalty tax on the excess payments, and ongoing intercompany arrangements could have to change, resulting in higher ongoing tax payments.  To the extent the Company is required to pay federal, foreign, state or local taxes or federal penalty taxes due to existing laws or changes thereto, we will have less cash available for distribution to shareholders.  In addition, certain local and state governments have imposed taxes on self-storage rent.  While in most cases those taxes are paid by our customers, they increase the cost of self-storage rental to our customers and can negatively impact our revenues.  Other local and state governments may impose self-storage rent taxes in the future. 

We are exposed to ongoing litigation and other legal and regulatory actions, which may divert management’s time and attention, require us to pay damages and expenses or restrict the operation of our business.

We are subject to the risk of legal claims and proceedings and regulatory enforcement actions in the ordinary course of our business and otherwise, and we could incur significant liabilities and substantial legal fees as a result of these actions.  Resolution of these claims and actions may divert time and attention by our management and could involve payment of damages or expenses by us, all of which may be significant.  In addition, any such resolution could involve our agreement to terms that restrict the operation of our business.  The results of legal proceedings cannot be predicted with certainty.  We cannot guarantee losses incurred in connection with any current or future legal or regulatory proceedings or actions will not exceed any provisions we may have set aside in respect of such proceedings or actions or will not exceed any available insurance coverage.  The impact of any such legal claims, proceedings, and regulatory enforcement actions could have a material adverse effect on us.

We are heavily dependent on computer systems, telecommunications and the Internet to process transactions, summarize results and manage our business.  Security breaches or a failure of such networks, systems or technology could adversely impact our business, customer, and employee relationships.

We are heavily dependent upon automated information technology and Internet commerce, with more than half of our new customers coming from the telephone or over the Internet, and the nature of our business involves the receipt and retention of personal information about our customers.  We also maintain personally identifiable information about our employees.  We centrally manage significant components of our operations with our computer systems, including our financial information, and we also rely extensively on third-party vendors to retain data, process transactions and provide other systems services.  These systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer worms, viruses and other destructive or disruptive security breaches and catastrophic events.

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As a result, our operations could be severely impacted by a natural disaster, terrorist attack or other circumstance that results in a significant outage of our systems or those of our third party providers, despite our use of back up and redundancy measures.  Our or our customers’ or employees’ confidential information could be compromised or misappropriated, due to a breach of our network security.  Such cybersecurity and data security breaches as well as systems disruptions and shutdowns could result in additional costs to repair or replace such networks or information systems and possible legal liability, including government enforcement actions and private litigation.  In addition, our customers could lose confidence in our ability to protect their personal information, which could cause them to discontinue leasing our self-storage facilities.  Such events could lead to lost future revenues and adversely affect our results of operations and could result in remedial and other costs, fines or lawsuits, which could be in excess of any available insurance that we have procured.  

We are subject to laws and governmental regulations and actions that require us to incur compliance costs affecting our operating results and financial condition.

Our business is subject to regulation under a wide variety of U.S. federal, state and local laws, regulations and policies including those imposed by the SEC, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act and NYSE, as well as applicable local, state, and national labor laws. Although we have policies and procedures designed to comply with applicable laws and regulations, failure to comply with the various laws and regulations may result in civil and criminal liability, fines and penalties, increased costs of compliance, restatement of our financial statements and could also affect the marketability of our real estate facilities.

In response to current economic conditions or the current political environment or otherwise, laws and regulations could be implemented or changed in ways that adversely affect our operating results and financial condition, such as legislation that could facilitate union activity or that would otherwise increase operating costs.

All of our properties must comply with the Americans with Disabilities Act and with related regulations and similar state law requirements, as well as various real estate and zoning laws and regulations, which are subject to change and could become more costly to comply with in the future.  Compliance with these requirements can require us to incur significant expenditures, which would reduce cash otherwise available for distribution to shareholders.  A failure to comply with these laws could lead to fines or possible awards of damages to individuals affected by the non-compliance.  Failure to comply with these requirements could also affect the marketability of our real estate facilities.

Our tenant reinsurance business is subject to governmental regulation which could reduce our profitability or limit our growth.

We hold Limited Lines Self-Service Storage Insurance Agent licenses from a number of individual state Departments of Insurance and are subject to state governmental regulation and supervision.  Our continued ability to maintain these Limited Lines Self-Service Storage Insurance Agent licenses in the jurisdictions in which we are licensed depends on our compliance with related rules and regulations.  The regulatory authorities in each jurisdiction generally have broad discretion to grant, renew and revoke licenses and approvals, to promulgate, interpret, and implement regulations, and to evaluate compliance with regulations through periodic examinations, audits and investigations of the affairs of insurance agents.  As a result of regulatory or private action in any jurisdiction, we may be temporarily or permanently suspended from continuing some or all of our reinsurance activities, or otherwise fined or penalized or suffer an adverse judgment, which could reduce our net income

ITEM 1B.Unresolved Staff Comments

None.

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ITEM 2.Properties

At December 31, 2016, we had direct and indirect ownership interests in 2,348 (including 12 owned by Unconsolidated real estate entities) self-storage facilities located in 38 states within the U.S. and 219 (including one wholly-owned facility) storage facilities located in seven Western European nations:





 

 

 



At December 31, 2016



Number of Storage Facilities (a)

 

Net Rentable Square Feet (in thousands)

U.S.:

 

 

 

California

 

 

 

Southern

247 

 

17,901 

Northern

177 

 

10,962 

Texas

281 

 

19,485 

Florida

282 

 

19,024 

Illinois

126 

 

7,952 

Georgia

108 

 

7,129 

Washington

94 

 

6,438 

North Carolina

86 

 

5,959 

Virginia

91 

 

5,593 

New York

66 

 

4,622 

Colorado

67 

 

4,295 

Maryland

62 

 

3,761 

New Jersey

57 

 

3,630 

Minnesota

47 

 

3,313 

South Carolina

56 

 

3,075 

Michigan

44 

 

2,869 

Ohio

44 

 

2,854 

Arizona

44 

 

2,833 

Missouri

38 

 

2,236 

Oregon

39 

 

2,040 

Indiana

32 

 

2,031 

Pennsylvania

29 

 

1,993 

Tennessee

32 

 

1,952 

Nevada

27 

 

1,818 

Massachusetts

25 

 

1,691 

Oklahoma

21 

 

1,477 

Kansas

21 

 

1,268 

Other states (12 states)

105 

 

6,247 



 

 

 

Total - U.S.

2,348 

 

154,448 



 

 

 

Europe (b):

 

 

 

Netherlands

61 

 

3,110 

France

55 

 

2,879 

Sweden

30 

 

1,640 

United Kingdom

26 

 

1,417 

Belgium

21 

 

1,263 

Germany

16 

 

889 

Denmark

10 

 

572 



 

 

 

Total - Europe

219 

 

11,770 



 

 

 

Grand Total

2,567 

 

166,218 

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(a)

See Schedule III:  Real Estate and Accumulated Depreciation in the Company’s 2016 financials, for a summary of land, building, and accumulated depreciation by market.

(b)

The facilities located in Europe include one facility in the United Kingdom that we wholly own, as well as the facilities owned by Shurgard Europe.

We seek to maximize our facilities’ cash flow through the regular review and adjustment of rents charged and promotions granted to our existing and new incoming customers, and controlling expenses.  For the year ended December 31, 2016, the weighted average occupancy level and the average realized rent per occupied square foot for our self-storage facilities were approximately 93.6% and $16.34, respectively, in the U.S. and 86.7% and $21.68, respectively, in Europe

At December 31, 2016,  30 of our U.S. facilities with a net book value of $122 million were encumbered by an aggregate of $31 million in mortgage notes payable. 

We have no specific policy as to the maximum size of any one particular self-storage facility.  However, none of our facilities involves, or is expected to involve, 1% or more of our total assets, gross revenues or net income.

Description of Self-Storage Facilities: Self-storage facilities, which comprise the majority of our investments, offer accessible storage space for personal and business use at a relatively low cost.  A user rents a fully enclosed space, securing the space with their lock, which is for the user's exclusive use and to which only the user has access.  Property managers operate the facility and are supervised by district managers.  Some self-storage facilities also include rentable uncovered parking areas for vehicle storage.  Space is rented on a month-to-month basis and rental rates vary according to the location of the property, the size of the storage space and other characteristics that affect the relative attractiveness of each particular space, such as whether the space has “drive-up” access, its proximity to elevators, or if the space is climate controlled.  All of our self-storage facilities in the U.S. are operated under the "Public Storage" brand name, while our facilities in Europe are operated under the “Shurgard” brand name.

Users include individuals from virtually all demographic groups, as well as businesses.  Individuals usually store furniture, household appliances, personal belongings, motor vehicles, boats, campers, motorcycles and other household goods.  Businesses normally store excess inventory, business records, seasonal goods, equipment and fixtures.

Our self-storage facilities generally consist of between 350 to 750 storage spaces.  Most spaces have between 25 and 400 square feet and an interior height of approximately eight to 12 feet.

We experience minor seasonal fluctuations in the occupancy levels of self-storage facilities with occupancies generally higher in the summer months than in the winter months.  We believe that these fluctuations result in part from increased demand from moving activity during the summer months and incremental demand from college students.

Our self-storage facilities are geographically diversified and are located primarily in or near major metropolitan markets in 38 states in the U.S.  Generally our self-storage facilities are located in heavily populated areas and close to concentrations of apartment complexes, single family residences and commercial developments. 

Competition from other self-storage facilities is significant and affects the occupancy levels, rental rates, rental income and operating expenses of our facilities. 

We believe that self-storage facilities, upon achieving stabilized occupancy levels of approximately 90%, have attractive characteristics consisting of high profit margins, a broad tenant base, low levels of capital expenditures to maintain their condition and appearance, and excellent returns on invested capital.  Historically, upon reaching stabilization, our U.S. self-storage facilities have generally shown a high degree of stability in generating cash flows. 

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Description of Commercial Properties: We have an interest in PSB, which, as of December 31, 2016, owns and operates approximately 28.1 million rentable square feet of commercial space in six states.  At December 31, 2016, the $402.8 million book value and $1.7 billion market value, respectively, of our investment in PSB represents approximately 4% and 17%, respectively, of our total assets.  We also directly own 1.0 million net rentable square feet of commercial space managed primarily by PSB. 

The commercial properties owned by PSB consist primarily of flex, multi-tenant office and industrial space.  Flex space is defined as buildings that are configured with a combination of office and warehouse space and can be designed to fit a wide variety of uses (including office, assembly, showroom, laboratory, light manufacturing and warehouse space). 

Environmental Matters:  We accrue environmental assessments and estimated remediation cost when it is probable that such efforts will be required and the related costs can be reasonably estimated.  Our current practice is to conduct environmental investigations in connection with property acquisitions.  Although there can be no assurance, we are not aware of any environmental contamination of any of our facilities, which individually or in the aggregate would be material to our overall business, financial condition, or results of operations.

ITEM 3.Legal Proceedings

We are a party to various legal proceedings and subject to various claims and complaints; however, we believe that the likelihood of these contingencies resulting in a material loss to the Company, either individually or in the aggregate, is remote.

ITEM 4.Mine Safety Disclosures

Not applicable.

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PART II

ITEM 5.Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

a.

Market Information of the Registrant’s Common Equity:

Our Common Shares of beneficial interest (the “Common Shares”) (NYSE: PSA) have been listed on the NYSE since October 19, 1984.  The following table sets forth the high and low sales prices of our Common Shares on the NYSE composite tapes for the applicable periods.



 

 

 



 

Range

Year

Quarter

High 

Low

2015

1st

206.92  185.05 



2nd

200.60  182.91 



3rd

217.99  182.08 



4th

253.93  210.87 



 

 

 

2016

1st

276.83  224.71 



2nd

277.60  234.98 



3rd

260.83  212.69 



4th

224.40  200.65 

As of February 27, 2017, there were approximately 13,532 holders of record of our Common Shares.  Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.

b.

Dividends

We have continuously paid quarterly distributions to our shareholders since 1981, our first full year of operations.  During 2016 we paid distributions to our common shareholders of $1.70 per common share for the quarter ended March 31, $1.80 per common share for each of the quarters ended June 30 and September 30 and $2.00 per common share for the quarter ended December 31, representing an aggregate of $1.263  billion or $7.30 per share.  During 2015 we paid distributions to our common shareholders of $1.40 per common share for the quarter ended March 31 and $1.70 per common share for each of the quarters ended June 30, September 30 and December 31, representing an aggregate of $1.122 billion or $6.50 per share.  During 2014 we paid distributions to our common shareholders of $1.40 per common share for each of the quarters ended March 31, June 30, September 30 and December 31, representing an aggregate of $964.6 million or $5.60 per share. 

Holders of common shares are entitled to receive distributions when and if declared by our Board out of any funds legally available for that purpose.  As a REIT, we do not incur federal income tax on our REIT taxable income (generally, net rents and gains from real property, dividends, and interest) that is fully distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and if we meet certain organizational and operational rules.  We believe we have met these requirements in all periods presented herein, and we expect to continue to elect and qualify as a REIT.  

For Federal income tax purposes, distributions to shareholders are treated as ordinary income, capital gains, return of capital or a combination thereof.  For 2016, the dividends paid on common shares and preferred shares were all classified as 100% ordinary income.  For 2015, 1.5117% of the dividends paid in the third quarter were classified as long-term capital gain, with the remainder and all other dividends being classified as 100% ordinary income. 



 

 

 

 

21

 


 

 

c.

Equity Shares

We are authorized to issue 100,000,000 equity shares from time to time in one or more series and our Board has broad authority to fix the dividend and distribution rights, conversion and voting rights, redemption provisions and liquidation rights of each series of equity shares.  We had no equity shares outstanding for any period in the years ended December 31, 2016 and 2015.

d.

Common Share Repurchases

Our Board has authorized management to repurchase up to 35,000,000 of our common shares on the open market or in privately negotiated transactions.  From the inception of the repurchase program through February 28, 2017, we have repurchased a total of 23,721,916 common shares (all purchased prior to 2010) at an aggregate cost of approximately $679.1 million.  Our common share repurchase program does not have an expiration date and there are 11,278,084 common shares that may yet be repurchased under our repurchase program as of December 31, 2016.  We have no current plans to repurchase shares; however, future levels of common share repurchases will be dependent upon our available capital, investment alternatives, and the trading price of our common shares. 

e.

Preferred Share Redemptions

We had no preferred redemptions during the three months ended December 31, 2016





22

 


 

 

ITEM 6.Selected Financial Data









 

 

 

 

 

 

 

 

 

 

 

 

 

 



For the year ended December 31,



2016

 

2015

 

2014

 

2013

 

2012



 

(Amounts in thousands, except share and per share data)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

2,560,549 

 

$

2,381,696 

 

$

2,177,296 

 

$

1,964,942 

 

$

1,826,186 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operations

 

669,083 

 

 

635,502 

 

 

613,324 

 

 

559,759 

 

 

550,805 

Depreciation and amortization

 

433,314 

 

 

426,008 

 

 

437,114 

 

 

387,402 

 

 

357,781 

General and administrative

 

83,656 

 

 

88,177 

 

 

71,459 

 

 

66,679 

 

 

56,837 

 

 

1,186,053 

 

 

1,149,687 

 

 

1,121,897 

 

 

1,013,840 

 

 

965,423 

Operating income

 

1,374,496 

 

 

1,232,009 

 

 

1,055,399 

 

 

951,102 

 

 

860,763 

Interest and other income

 

15,138 

 

 

16,544 

 

 

17,638 

 

 

33,979 

 

 

33,293 

Interest expense

 

(4,210)

 

 

(610)

 

 

(6,781)

 

 

(6,444)

 

 

(19,813)

Equity in earnings of unconsolidated real

 

 

 

 

 

 

 

 

 

 

 

 

 

 

estate entities

 

56,756 

 

 

50,937 

 

 

88,267 

 

 

57,579 

 

 

45,586 

Foreign currency exchange gain (loss)

 

17,570 

 

 

306 

 

 

(7,047)

 

 

17,082 

 

 

8,876 

Gain on real estate investment sales

 

689 

 

 

18,503 

 

 

2,479 

 

 

4,233 

 

 

1,456 

Income from continuing operations

 

1,460,439 

 

 

1,317,689 

 

 

1,149,955 

 

 

1,057,531 

 

 

930,161 

Discontinued operations

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

12,874 

Net income

 

1,460,439 

 

 

1,317,689 

 

 

1,149,955 

 

 

1,057,531 

 

 

943,035 

Net income allocated to noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

equity interests

 

(6,863)

 

 

(6,445)

 

 

(5,751)

 

 

(5,078)

 

 

(3,777)

Net income allocable to Public Storage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

shareholders

$

1,453,576 

 

$

1,311,244 

 

$

1,144,204 

 

$

1,052,453 

 

$

939,258 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Common Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions

 

$7.30 

 

 

$6.50 

 

 

$5.60 

 

 

$5.15 

 

 

$4.40 

Net income – Basic

 

$6.84 

 

 

$6.10 

 

 

$5.27 

 

 

$4.92 

 

 

$3.93 

Net income – Diluted

 

$6.81 

 

 

$6.07 

 

 

$5.25 

 

 

$4.89 

 

 

$3.90 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares –

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

173,091 

 

 

172,699 

 

 

172,251 

 

 

171,640 

 

 

170,562 

Weighted average common shares –

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

173,878 

 

 

173,510 

 

 

173,138 

 

 

172,688 

 

 

171,664 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

10,130,338 

 

$

9,778,232 

 

$

9,818,676 

 

$

9,876,266 

 

$

8,793,403 

Total debt

$

390,749 

 

$

319,016 

 

$

64,364 

 

$

839,053 

 

$

468,828 

Total preferred equity

$

4,367,500 

 

$

4,055,000 

 

$

4,325,000 

 

$

3,562,500 

 

$

2,837,500 

Public Storage shareholders’ equity

$

9,411,910 

 

$

9,170,461 

 

$

9,480,796 

 

$

8,791,730 

 

$

8,093,756 

Permanent noncontrolling interests’

 

 

 

 

 

 

 

 

 

 

 

 

 

 

equity

$

29,744 

 

$

26,997 

 

$

26,375 

 

$

27,125 

 

$

29,108 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash flow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provided by operating activities

$

1,945,336 

 

$

1,748,279 

 

$

1,603,542 

 

$

1,438,407 

 

$

1,293,315 

Used in investing activities

$

(716,726)

 

$

(440,105)

 

$

(198,331)

 

$

(1,412,393)

 

$

(290,465)

Used in financing activities

$

(1,148,826)

 

$

(1,391,283)

 

$

(1,236,864)

 

$

(24,228)

 

$

(1,124,961)





23

 


 

 

ITEM 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our financial statements and notes thereto.

Critical Accounting Policies

Our MD&A discusses our financial statements, which have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”), and are affected by our judgments, assumptions and estimates.  The notes to our December 31, 2016 financial statements, primarily Note 2, summarize our significant accounting policies.

We believe the following are our critical accounting policies, because they have a material impact on the portrayal of our financial condition and results, and they require us to make judgments and estimates about matters that are inherently uncertain.

Income Tax Expense:  We have elected to be treated as a REIT, as defined in the Internal Revenue Code of 1986, as amended (the “Code”).  As a REIT, we do not incur federal income tax on our REIT taxable income that is fully distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and if we meet certain organizational and operational rules.  We believe we have met these REIT requirements for all periods presented herein.  Accordingly, we have recorded no federal income tax expense related to our REIT taxable income.

Our evaluation that we have met the REIT requirements could be incorrect, because compliance with the tax rules requires factual determinations, and circumstances we have not identified could result in noncompliance with the tax requirements in current or prior years.  For any taxable year that we fail to qualify as a REIT and for which applicable statutory relief provisions did not apply, we would be taxed at the regular corporate rates on all of our taxable income for at least that year and the ensuing four years, we could be subject to penalties and interest, and our net income would be materially different from the amounts estimated in our financial statements. 

In addition, certain of our consolidated corporate subsidiaries have elected to be treated as “taxable REIT subsidiaries” for federal income tax purposes, which are taxable as regular corporations and subject to certain limitations on intercompany transactions.  If tax authorities determine that amounts paid by our taxable REIT subsidiaries to us are not reasonable compared to similar arrangements among unrelated parties, we could be subject to a 100% penalty tax on the excess payments.  Such a penalty tax could have a material adverse impact on our net income.

Impairment of Long-Lived Assets:  The analysis of impairment of our long-lived assets involves identification of indicators of impairment, projections of future operating cash flows, and estimates of fair values, all of which require significant judgment and subjectivity.  Others could come to materially different conclusions.  In addition, we may not have identified all current facts and circumstances that may affect impairment.  Any unidentified impairment loss, or change in conclusions, could have a material adverse impact on our net income.

Accrual for Uncertain and Contingent Liabilities:  We accrue for certain contingent and other liabilities that have significant uncertain elements, such as property taxes, workers compensation claims, tenant reinsurance claims, as well as other legal claims and disputes involving customers, employees, governmental agencies and other third parties.  We estimate such liabilities based upon many factors such as assumptions of past and future trends and our evaluation of likely outcomes.  However, the estimates of known liabilities could be incorrect or we may not be aware of all such liabilities, in which case our accrued liabilities and net income could be misstated. 

Accounting for Acquired Real Estate Facilities:    We estimate the fair values of the land, buildings and intangible assets acquired for purposes of allocating the purchase price.  Such estimates are based upon many assumptions and judgments, including (i) market rates of return and capitalization rates on real estate and intangible assets, (ii) building and material cost levels, (iii) comparisons of the acquired underlying land parcels to recent land

24

 


 

 

transactions, and (iv) future cash flows from the real estate and the existing tenant base.  Others could come to materially different conclusions as to the estimated fair values, which would result in different depreciation and amortization expense, gains and losses on sale of real estate assets, and real estate and intangible assets.

Overview

Our self-storage operations generate most of our net income, and we believe that our earnings growth is most impacted by the level of organic growth in our existing self-storage portfolio.  Accordingly, a significant portion of management’s time is devoted to maximizing cash flows from our existing self-storage facilities. 

Most of our facilities compete with other well-managed and well-located competitors and we are subject to general economic conditions, particularly those that affect the spending habits of consumers and moving trends.  We believe that our centralized information networks, national telephone and online reservation system, the brand name “Public Storage,” and our economies of scale enable us to meet such challenges effectively.

We plan on growing organically, as well as through the acquisition and development of additional facilities.  Since the beginning of 2013 through December 31, 2016, we acquired a total of 237 facilities with 16.9 million net rentable square feet from third parties for approximately $2.2 billion, and we opened newly developed and redeveloped self-storage space for a total cost of $575.8 million, adding approximately 5.3 million net rentable square feet. 

Subsequent to December 31, 2016, we acquired or were under contract to acquire five self-storage facilities for $26.4 million.  We will continue to seek to acquire properties; however, there is significant competition to acquire existing facilities and there can be no assurance as to the level of facilities we may acquire. 

As of December 31, 2016, we had additional development projects which will add approximately 5.3 million net rentable square feet of storage space at a total cost of approximately $660.2 million.  We expect to continue to seek additional development projects; however, the level of future development may be limited due to various constraints such as difficulty in finding available sites that meet our risk-adjusted yield expectations, as well as challenges in obtaining building permits for self-storage activities in certain municipalities. 

We believe that our real estate development activities are beneficial to our business operations over the long run.  However, in the short run, development activities dilute our earnings due to the three to four year period that it takes to fill up newly developed and redeveloped storage facilities and reach a stabilized level of cash flows offset by the cost of capital to fund the development cost, combined with related overhead expenses flowing through general and administrative expense.  We believe this dilution will increase in 2017 and beyond, because of an increased level of unstabilized newly developed and redeveloped facilities in our portfolio due to continued development efforts.

We also have equity investments in Shurgard Europe and PS Business Parks, Inc. (“PSB”).  We may make further investments in these companies. 

As of December 31, 2016, our capital resources over the next year are expected to be approximately $918.5 million which exceeds our current planned capital needs over the next year of approximately $458.0 million.  Our capital resources include: (i) $183.7 million of cash as of December 31, 2016, (ii) $484.8 million of available borrowing capacity on our revolving line of credit, and (iii) approximately $250.0 million of expected retained operating cash flow for the next twelve months.  Retained operating cash flow represents our expected cash flow provided by operating activities, less shareholder distributions and capital expenditures to maintain real estate facilities. 

Our planned capital needs over the next year consist of (i) $429.9 million of remaining spend on our current development pipeline, (ii) $26.4 million in property acquisitions currently under contract, and (iii) $1.7 million in principal repayments on existing debt.  Our capital needs may increase significantly over 2017 as we expect to

25

 


 

 

increase our development pipeline and acquire additional properties.  We may also redeem outstanding preferred securities or repurchase shares of our common stock in the future. 

See Liquidity and Capital Resources for further information regarding our capital requirements and anticipated sources of capital to fund such requirements. 

Results of Operations

Operating results for 2016 and 2015

For the year ended December 31, 2016, net income allocable to our common shareholders was $1,183.9 million or $6.81 per diluted common share, compared to $1,053.1 million or $6.07 per share in 2015 representing an increase of $130.8 million or $0.74 per share.  The increase is primarily due to (i) a $139.1 million increase in self-storage net operating income (defined below) and (ii) a $17.3 million increase in foreign exchange translation gains associated with our euro denominated debt offset partially by (iii) a $29.0 million reduction in gains on sales of real estate investments, including our equity share and (iv) a $20.0 million increase in EITF D-42 charges, including our equity share, as a result of preferred redemption activities.

The $139.1 million increase in self-storage net operating income is a result of a $96.9 million increase in our Same Store Facilities and a $42.2 million increase in our Non Same Store Facilities.  Revenues for the Same Store Facilities increased 5.5% or $110.0 million in the year ended December 31, 2016 as compared to 2015, due primarily to higher realized annual rent per occupied square foot.  Cost of operations for the Same Store Facilities increased by 2.5% or $13.1 million in the year ended December 31, 2016 as compared to 2015, due primarily to increased property taxes, on-site property manager payroll and repairs and maintenance, offset partially by lower snow removal costs.  The increase in net operating income for the Non Same Store Facilities is due primarily to the impact of 337 self-storage facilities acquired, developed or expanded since January 2013.

Operating results for 2015 and 2014

For the year ended December 31, 2015, net income allocable to our common shareholders was $1,053.1 million or $6.07 per diluted common share, compared to $908.2 million or $5.25 per share in 2014 representing an increase of $144.9 million or $0.82 per diluted common share. The increase is primarily due to (i) a $165.8 million increase in self-storage net operating income and (ii) a $16.0 million increase in gains on sale of real estate, offset partially by (iii) a $22.1 million reduction in equity in earnings of PSB due primarily to reduced gains on disposition in 2015 as compared to 2014 and (iv) a $15.6 million reduction in equity in earnings of Shurgard Europe due primarily to Shurgard Europe’s repayment of a loan payable to us.

The $165.8 million increase in self-storage net operating income is a result of a $115.3 million increase in our Same Store Facilities and a $50.5 million increase in our Non Same Store Facilities.  Revenues for the Same Store Facilities increased 6.6% or $122.4 million in the year ended December 31, 2015 as compared to 2014, due primarily to higher realized annual rent per occupied square foot.  Cost of operations for the Same Store Facilities increased by 1.4% or $7.0 million in the year ended December 31, 2015 as compared to 2014, due primarily to increases in snow removal and property taxes, offset partially by lower advertising and selling expenses.  The increase in net operating income for the Non Same Store Facilities is due primarily to the impact of the development and acquisition of 186 self-storage facilities in 2013, 2014 and 2015.

Funds from Operations and Core Funds from Operations

Funds from Operations (“FFO”) and FFO per share are non-GAAP measures defined by the National Association of Real Estate Investment Trusts and are considered helpful measures of REIT performance by REITs and many REIT analysts.  FFO represents net income before real estate depreciation, gains and losses, and impairment charges, which are excluded because they are based upon historical real estate costs and assume that building values diminish ratably over time, while we believe that real estate values fluctuate due to market conditions.  FFO and FFO per share are not a substitute for net income or earnings per share.  FFO is not a substitute

26

 


 

 

for GAAP net cash flow in evaluating our liquidity or ability to pay dividends, because it excludes financing activities presented on our statements of cash flows.  In addition, other REITs may compute these measures differently, so comparisons among REITs may not be helpful.

For the year ended December 31, 2016, FFO was $9.70 per diluted common share, as compared to $8.79 for the same period in 2015, representing an increase of 10.4%, or $0.91 per diluted common share.

For the year ended December 31, 2015, FFO was $8.79 per diluted common share, as compared to $7.98 for the same period in 2014, representing an increase of 10.2%, or $0.81 per diluted common share.

The following tables reconcile diluted earnings per share to FFO per share and set forth the computation of FFO per share:



 

 

 

 

 

 

 

 

 



 

Year Ended December 31,



 

2016

 

2015

 

2014



 

(Amounts in thousands, except per share data)

Reconciliation of Diluted Earnings per Share to

 

 

 

 

 

 

 

 

 

FFO per Share:

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

Diluted Earnings per Share

 

$

6.81 

 

$

6.07 

 

$

5.25 

Eliminate amounts per share excluded from FFO:

 

 

 

 

 

 

 

 

 

Depreciation and amortization, including

 

 

 

 

 

 

 

 

 

amounts from investments and excluding

 

 

 

 

 

 

 

 

 

amounts allocated to noncontrolling

 

 

 

 

 

 

 

 

 

interests and restricted share unitholders

 

 

2.90 

 

 

2.89 

 

 

2.96 

Gains on sale of real estate investments,

 

 

 

 

 

 

 

 

 

including our equity share from

 

 

 

 

 

 

 

 

 

investments, and other

 

 

(0.01)

 

 

(0.17)

 

 

(0.23)

FFO per share

 

$

9.70 

 

$

8.79 

 

$

7.98 



 

 

 

 

 

 

 

 

 

Computation of FFO per Share:

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

Net income allocable to common shareholders

 

$

1,183,879 

 

$

1,053,050 

 

$

908,176 

Eliminate items excluded from FFO:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

433,314 

 

 

426,008 

 

 

437,114 

Depreciation from unconsolidated

 

 

 

 

 

 

 

 

 

real estate investments

 

 

74,407 

 

 

78,985 

 

 

79,413 

Depreciation allocated to noncontrolling

 

 

 

 

 

 

 

 

 

interests and restricted share unitholders

 

 

(3,549)

 

 

(3,519)

 

 

(3,638)

Gains on sale of real estate investments,

 

 

 

 

 

 

 

 

 

including our equity share from

 

 

 

 

 

 

 

 

 

investments, and other

 

 

(768)

 

 

(29,721)

 

 

(39,083)

FFO allocable to common shares

 

$

1,687,283 

 

$

1,524,803 

 

$

1,381,982 

Diluted weighted average common shares

 

 

173,878 

 

 

173,510 

 

 

173,138 

FFO per share

 

$

9.70 

 

$

8.79 

 

$

7.98 

We also present “Core FFO per share,” a non-GAAP measure that represents FFO per share excluding the impact of (i) foreign currency exchange gains and losses, (ii) EITF D-42 charges related to the redemption of preferred securities, (iii) general and administrative expenses associated with the acquisition of self-storage facilities and (iv) certain other noncash and/or nonrecurring income or expense items.  We review Core FFO per share to evaluate our ongoing operating performance, and we believe it is useful for investors and REIT analysts in the same manner.  However, Core FFO per share is not a substitute for net income per share.  Because other REITs may not

27

 


 

 

compute Core FFO per share in the same manner as we do, may not use the same terminology or may not present such a measure, Core FFO per share may not be comparable among REITs.

The following table reconciles FFO per share to Core FFO per share:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

Year Ended December 31,

 

Year Ended December 31,



 

 

 

 

 

 

 

 

 

Percentage

 

 

 

 

 

 

 

Percentage



 

 

 

2016

 

2015

 

Change

 

2015

 

2014

 

Change



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FFO per share

$

9.70 

 

$

8.79 

 

10.4% 

 

$

8.79 

 

$

7.98 

 

10.2% 

Eliminate the per share impact of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

items excluded from Core FFO,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

including our equity share from

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency exchange (gain) loss

 

(0.11)

 

 

 -

 

 

 

 

 -

 

 

0.04 

 

 

Application of EITF D-42

 

0.17 

 

 

0.06 

 

 

 

 

0.06 

 

 

 -

 

 

Property acquisition costs

 

0.01 

 

 

0.04 

 

 

 

 

0.04 

 

 

0.03 

 

 

Other items

 

0.02 

 

 

0.01 

 

 

 

 

0.01 

 

 

0.04 

 

 

Core FFO per share

$

9.79 

 

$

8.90 

 

10.0% 

 

$

8.90 

 

$

8.09 

 

10.0% 

Analysis of Net Income by Reportable Segment

The following discussion and analysis is presented and organized in accordance with Note 10 to our December 31, 2016 financial statements, “Segment Information.”  Accordingly, refer to the tables presented in Note 10 in order to reconcile such amounts to our total net income and for further information on our reportable segments.

Self-Storage Operations

Our self-storage operations are analyzed in two groups: (i) the 2,000 facilities that we have owned and operated on a stabilized basis since January 1, 2014 (the “Same Store Facilities”), and (ii) all other facilities, which are newly acquired, newly developed, or recently redeveloped (the “Non Same Store Facilities”).  See Note 10 to our December 31, 2016 financial statements “Segment Information,” for a reconciliation of the amounts in the tables below to our total net income.

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Self-Storage Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summary

Year Ended December 31,

 

Year Ended December 31,



 

 

 

 

Percentage

 

 

 

 

 

 

 

Percentage



2016

 

2015

 

Change

 

2015

 

2014

 

Change



(Dollar amounts in thousands)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities

$

2,097,696 

 

$

1,987,725 

 

5.5% 

 

$

1,987,725 

 

$

1,865,356 

 

6.6% 

Non Same Store Facilities 

 

308,132 

 

 

247,800 

 

24.3% 

 

 

247,800 

 

 

184,526 

 

34.3% 



 

2,405,828 

 

 

2,235,525 

 

7.6% 

 

 

2,235,525 

 

 

2,049,882 

 

9.1% 

Cost of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities

 

527,341 

 

 

514,237 

 

2.5% 

 

 

514,237 

 

 

507,200 

 

1.4% 

Non Same Store Facilities

 

90,564 

 

 

72,459 

 

25.0% 

 

 

72,459 

 

 

59,698 

 

21.4% 



 

617,905 

 

 

586,696 

 

5.3% 

 

 

586,696 

 

 

566,898 

 

3.5% 

Net operating income (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities

 

1,570,355 

 

 

1,473,488 

 

6.6% 

 

 

1,473,488 

 

 

1,358,156 

 

8.5% 

Non Same Store Facilities

 

217,568 

 

 

175,341 

 

24.1% 

 

 

175,341 

 

 

124,828 

 

40.5% 

Total net operating income

 

1,787,923 

 

 

1,648,829 

 

8.4% 

 

 

1,648,829 

 

 

1,482,984 

 

11.2% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities

 

(328,736)

 

 

(333,695)

 

(1.5)%

 

 

(333,695)

 

 

(339,372)

 

(1.7)%

Non Same Store Facilities

 

(104,578)

 

 

(92,313)

 

13.3% 

 

 

(92,313)

 

 

(97,742)

 

(5.6)%

Total depreciation and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

amortization expense

 

(433,314)

 

 

(426,008)

 

1.7% 

 

 

(426,008)

 

 

(437,114)

 

(2.5)%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities

 

1,241,619 

 

 

1,139,793 

 

8.9% 

 

 

1,139,793 

 

 

1,018,784 

 

11.9% 

Non Same Store Facilities

 

112,990 

 

 

83,028 

 

36.1% 

 

 

83,028 

 

 

27,086 

 

206.5% 

Total net income

$

1,354,609 

 

$

1,222,821 

 

10.8% 

 

$

1,222,821 

 

$

1,045,870 

 

16.9% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of facilities at period end:

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities

 

2,000 

 

 

2,000 

 

 -

 

 

2,000 

 

 

2,000 

 

 -

Non Same Store Facilities

 

337 

 

 

266 

 

26.7% 

 

 

266 

 

 

238 

 

11.8% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net rentable square footage at period end (in thousands):

 

 

 

 

 

 

 

 

 

 

Same Store Facilities

 

127,222 

 

 

127,222 

 

 -

 

 

127,222 

 

 

127,222 

 

 -

Non Same Store Facilities

 

26,536 

 

 

20,140 

 

31.8% 

 

 

20,140 

 

 

17,652 

 

14.1% 

(a)

Net operating income or “NOI” is a non-GAAP financial measure that excludes the impact of depreciation and amortization expense, which is based upon historical real estate costs and assumes that building values diminish ratably over time, while we believe that real estate values fluctuate due to market conditions.  We utilize NOI in determining current property values, evaluating property performance, and in evaluating property operating trends.  We believe that investors and analysts utilize NOI in a similar manner.  NOI is not a substitute for net income, net operating cash flow, or other related GAAP financial measures, in evaluating our operating results.  See Note 10 to our December 31, 2016 financial statements for a reconciliation of NOI to our total net income for all periods presented.

Net operating income from our self-storage operations has increased 8.4% in 2016 as compared to 2015 and 11.2% in 2015 as compared to the 2014.  These increases are due to higher revenues in our Same Store Facilities, as well as the acquisition and development of new facilities and the fill-up of unstabilized facilities. 

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Same Store Facilities

The Same Store Facilities represent those facilities that have been owned and operated on a stabilized level of occupancy, revenues and cost of operations since January 1, 2014.  We review the operations of our Same Store Facilities, which excludes facilities whose operating trends are significantly affected by factors such as casualty events, as well as recently developed or acquired facilities, to more effectively evaluate the ongoing performance of our self-storage portfolio in 2014, 2015, and 2016.  We believe the Same Store information is used by investors and analysts in a similar manner.  The following table summarizes the historical operating results of these 2,000 facilities (127.2 million net rentable square feet) that represent approximately 83% of the aggregate net rentable square feet of our U.S. consolidated self-storage portfolio at December 31, 2016.



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Operating Data for the Same Store Facilities (2,000 facilities)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Year Ended December 31,

 

Year Ended December 31,



 

 

 

 

Percentage

 

 

 

 

 

 

 

Percentage



 

2016

 

2015

 

Change

 

2015

 

2014

 

Change



(Dollar amounts in thousands, except weighted average amounts)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

$

2,001,608 

 

$

1,895,352 

 

5.6% 

 

$

1,895,352 

 

$

1,775,614 

 

6.7% 

Late charges and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

administrative fees

 

96,088 

 

 

92,373 

 

4.0% 

 

 

92,373 

 

 

89,742 

 

2.9% 

Total revenues (a)

 

2,097,696 

 

 

1,987,725 

 

5.5% 

 

 

1,987,725 

 

 

1,865,356 

 

6.6% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property taxes

 

187,351 

 

 

178,706 

 

4.8% 

 

 

178,706 

 

 

171,856 

 

4.0% 

On-site property manager

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

payroll

 

104,120 

 

 

100,661 

 

3.4% 

 

 

100,661 

 

 

100,070 

 

0.6% 

Supervisory payroll

 

36,217 

 

 

35,092 

 

3.2% 

 

 

35,092 

 

 

34,390 

 

2.0% 

Repairs and maintenance

 

42,980 

 

 

45,671 

 

(5.9)%

 

 

45,671 

 

 

44,071 

 

3.6% 

Utilities

 

37,918 

 

 

39,287 

 

(3.5)%

 

 

39,287 

 

 

40,319 

 

(2.6)%

Advertising and selling expense

 

25,320 

 

 

25,119 

 

0.8% 

 

 

25,119 

 

 

27,106 

 

(7.3)%

Other direct property costs

 

54,322 

 

 

52,372 

 

3.7% 

 

 

52,372 

 

 

51,241 

 

2.2% 

Allocated overhead

 

39,113 

 

 

37,329 

 

4.8% 

 

 

37,329 

 

 

38,147 

 

(2.1)%

Total cost of operations (a)

 

527,341 

 

 

514,237 

 

2.5% 

 

 

514,237 

 

 

507,200 

 

1.4% 

Net operating income

 

1,570,355 

 

 

1,473,488 

 

6.6% 

 

 

1,473,488 

 

 

1,358,156 

 

8.5% 

Depreciation and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

amortization expense

 

(328,736)

 

 

(333,695)

 

(1.5)%

 

 

(333,695)

 

 

(339,372)

 

(1.7)%

Net income

$

1,241,619 

 

$

1,139,793 

 

8.9% 

 

$

1,139,793 

 

$

1,018,784 

 

11.9% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin (before depreciation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and amortization expense)

 

74.9% 

 

 

74.1% 

 

1.1% 

 

 

74.1% 

 

 

72.8% 

 

1.8% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average for the period:

 

 

 

 

 

 

 

 

 

 

 

 

 

Square foot occupancy

 

94.5% 

 

 

94.5% 

 

0.0% 

 

 

94.5% 

 

 

93.9% 

 

0.6% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized annual rental income per (b):

 

 

 

 

 

 

 

 

 

 

 

 

 

Occupied square foot

$

16.65 

 

$

15.77 

 

5.6% 

 

$

15.77 

 

$

14.88 

 

6.0% 

Available square foot

$

15.73 

 

$

14.90 

 

5.6% 

 

$

14.90 

 

$

13.96 

 

6.7% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Square foot occupancy

 

92.3% 

 

 

92.8% 

 

(0.5)%

 

 

92.8% 

 

 

92.5% 

 

0.3% 

Annual contract rent per

 

 

 

 

 

 

 

 

 

 

 

 

 

occupied square foot (c)

$

17.55 

 

$

16.76 

 

4.7% 

 

$

16.76 

 

$

15.83 

 

5.9% 

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(a)

Revenues and cost of operations do not include tenant reinsurance and merchandise sale revenues and expenses generated at the facilities.

(b)

Realized annual rent per occupied square foot is computed by dividing rental income, before late charges and administrative fees, by the weighted average occupied square feet for the period.  Realized annual rent per available square foot (“REVPAF”) is computed by dividing rental income, before late charges and administrative fees, by the total available net rentable square feet for the period.  These measures exclude late charges and administrative fees in order to provide a better measure of our ongoing level of revenue.  Late charges are dependent upon the level of delinquency, and administrative fees are dependent upon the level of move-ins.  In addition, the rates charged for late charges and administrative fees can vary independently from rental rates.  These measures take into consideration promotional discounts, which reduce rental income.

(c)

Annual contract rent represents the agreed upon monthly rate that is paid by our tenants in place at the time of measurement.   Contract rates are initially set in the lease agreement upon move-in, and we adjust them from time to time with notice.  Contract rent excludes other fees that are charged on a per-item basis, such as late charges and administrative fees, does not reflect the impact of promotional discounts, and does not reflect the impact of rents that are written off as uncollectible.  

Analysis of Same Store Revenue

Revenues generated by our Same Store Facilities increased by 5.5% in 2016 as compared to 2015 and by 6.6% in 2015 as compared to 2014.  These increases were primarily due to higher rental rates charged to our tenants, as realized annual rental income per occupied square foot increased 5.6% and 6.0% in 2016 and 2015, respectively, as compared to the year prior.  From a volume standpoint, average square foot occupancy for 2016 remained relatively flat compared to 2015 at approximately 94.5% and increased 0.6% during 2015 from 93.9% in 2014.

We believe that high occupancies help maximize our rental income.  We seek to maintain a weighted average square foot occupancy level of at least 90%, by regularly adjusting the rental rates and promotions offered to attract new tenants as well as adjusting our marketing efforts on both television and the Internet in order to generate sufficient move-in volume to replace tenants that vacate.

As we began 2015, the aggregate monthly contract rent for those tenants occupying a unit in our Same Store Facilities totaled $155.2 million as compared to $146.7 million at the beginning of 2014, representing an increase of 5.8%.  This “embedded growth” gave us a great starting point to achieve the 6.6% revenue growth we experienced in fiscal 2015.  Also contributing to revenue growth during 2015 were monthly rental rate adjustments, generally annual rate increases to tenants who have been with us longer than one year, which increased 10.6% in 2015 as compared to 2014.  The net negative impact of replacing vacating tenants with new tenants with lower contract rates continued from 2014 into 2015.  This “rent roll down”, however, was relatively constant at $4.8 million in 2015 compared to $4.7 million in 2014 and therefore had little impact on revenue growth in 2015.

We started off 2016 in a better position than 2015.  The aggregate monthly contract rent for those tenants occupying a unit in our Same Store Facilities totaled $165.0 million as compared to $155.2 million at the beginning of 2015, representing a starting embedded growth of 6.3%.  During 2016, monthly rental rate adjustments were also strong; increasing 14.4% compared to 2015.  However, the net negative impact of replacing vacating tenants with new tenants at lower contract rates was much more significant in 2016 compared to 2015.  The rent roll down was $9.9 million in 2016 as compared to $4.8 million in 2015, negatively impacting revenue growth in 2016.  The following table summarizes the aforementioned activity for 2016, 2015 and 2014:

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Year Ended December 31,

 

Year Ended December 31,



 

 

 

 

Percentage

 

 

 

 

 

 

 

Percentage



 

2016

 

2015

 

Change

 

2015

 

2014

 

Change



(Amounts in thousands, except for square foot amounts)

Aggregate Monthly Contract Rent:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning in place contracts

$

164,966 

 

$

155,170 

 

6.3% 

 

$

155,170 

 

$

146,696 

 

5.8% 

For new tenants

 

129,549 

 

 

128,744 

 

0.6% 

 

 

128,744 

 

 

121,626 

 

5.9% 

For vacating tenants

 

(139,459)

 

 

(133,535)

 

4.4% 

 

 

(133,535)

 

 

(126,336)

 

5.7% 

Rental rate adjustments

 

16,692 

 

 

14,587 

 

14.4% 

 

 

14,587 

 

 

13,184 

 

10.6% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending in place contracts

$

171,748 

 

$

164,966 

 

4.1% 

 

$

164,966 

 

$

155,170 

 

6.3% 

Ending occupied square feet

 

117,473 

 

 

118,124 

 

(0.6)%

 

 

118,124 

 

 

117,625 

 

0.4% 

Annual contract rent per

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

occupied square foot

$

17.55 

 

$

16.76 

 

4.7% 

 

$

16.76 

 

$

15.83 

 

5.9% 

Move-in volumes in both 2015 and 2014 exceeded the number of vacates and, as a result, average occupancy levels improved on a year-over-year basis.  The average monthly rent per move-in was approximately 5.7% higher in 2015 compared to 2014; accordingly, the 2015 move-in volume was strong, not only exceeding 2014 volume, but at higher rates, reflecting our pricing power.  During 2016, we experienced softness in demand.  Move-in volume during 2016 was not only lower than 2015, but also lower than the number of vacates during 2016.  Further, pricing power diminished as the growth in average monthly rent per move-in decelerated to approximately 1.3% in 2016 compared to 5.7% experienced in 2015.  See table below.

Demand is higher in the summer months than in the winter months and, as a result, rental rates charged to new tenants are typically higher in the summer months than in the winter months.  Demand fluctuates due to various local and regional factors, including the overall economy.  Demand into our system is also impacted by new supply of self-storage space as well as alternatives to self-storage. 

Vacate activity during 2016, 2015 and 2014 was as expected.  We generally experience monthly vacate activity ranging from approximately 6% to 8% per month.  Vacate activity is somewhat seasonal as we experience higher monthly vacate levels during late summer and lower levels during late spring and early summer.  It is not unusual for the average monthly rental rates for vacating tenants to exceed the average monthly rental rates for new move-ins (see table below).  This is primarily due to vacating tenants, many of which have been with us for several years, paying higher rates after experiencing several rental rate increases during their tenure, and others who moved out before receiving a rate increase, but moved in during our seasonal busy periods when move-in rates tend to be higher.

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Year Ended December 31,

 

Year Ended December 31,



 

 

 

 

Percentage

 

 

 

 

 

 

 

Percentage



 

2016

 

2015

 

Change

 

2015

 

2014

 

Change

Move-in activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of move-ins

 

993,632 

 

 

1,000,496 

 

(0.7)%

 

 

1,000,496 

 

 

999,119 

 

0.1% 

Square feet rented ( in 000's)

 

105,885 

 

 

106,492 

 

(0.6)%

 

 

106,492 

 

 

106,175 

 

0.3% 

Total monthly contract rent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

( in 000's)

$

129,549 

 

$

128,744 

 

0.6% 

 

$

128,744 

 

$

121,626 

 

5.9% 

Average monthly rent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

per unit rented

$

130.38 

 

$

128.68 

 

1.3% 

 

$

128.68 

 

$

121.73 

 

5.7% 

Average annual contract rent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

per square foot rented

$

14.68 

 

$

14.51 

 

1.2% 

 

$

14.51 

 

$

13.75 

 

5.5% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vacate activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of vacates

 

999,126 

 

 

993,861 

 

0.5% 

 

 

993,861 

 

 

986,548 

 

0.7% 

Square feet rented ( in 000's)

 

106,536 

 

 

105,944 

 

0.6% 

 

 

105,944 

 

 

105,191 

 

0.7% 

Total monthly contract rent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

( in 000's)

$

139,459 

 

$

133,535 

 

4.4% 

 

$

133,535 

 

$

126,336 

 

5.7% 

Average monthly rent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

per unit vacated

$

139.58 

 

$

134.36 

 

3.9% 

 

$

134.36 

 

$

128.06 

 

4.9% 

Average annual contract rent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

per square foot vacated

$

15.71 

 

$

15.12 

 

3.9% 

 

$

15.12 

 

$

14.41 

 

4.9% 

In order to stimulate move-in volume, we often give promotional discounts, generally in the form of a “$1.00 rent for the first month” offer.  Promotional discounts, based upon the move-in contractual rates for the related promotional period, totaled $83.6 million, $83.0 million, and $80.4 million for 2016, 2015, and 2014, respectively, and are recorded as a reduction to revenue.  The year-over-year increase for 2015 over 2014 reflects increased move-in contractual rates offset partially by a reduced proportion of new tenants receiving promotional discounts

We believe rental growth in 2017 will need to come primarily from continued annual rent increases to existing tenants.  Our future rental growth will also be dependent upon many factors for each market that we operate in, including demand for self-storage space, the level of new supply of self-storage space and the average length of stay of our tenants. 

We believe that the current trends in move-in, move-out, in place contractual rents and occupancy levels are consistent with our expectation of continued revenue growth in 2017.  However, such trends, when viewed in the short-run, are volatile and not necessarily predictive of our revenues going forward because they are subject to many short-term factors.  Such factors include initial move-in rates, seasonal factors, the unit size and geographical mix of the specific tenants moving in or moving out, the length of stay of the tenants moving in or moving out, changes in our pricing strategies, and the degree and timing of rate increases previously passed to existing tenants.

We expect year-over-year growth in our Same Store revenues will continue to moderate in 2017.  As mentioned above, we are experiencing softness in demand in several of our major markets, most notably Houston, Chicago, Washington D.C., Denver, and New York, which has led to a lack of pricing power with respect to new tenants.  As indicated above, we attribute some of this softness to local economic conditions and, in some markets, increased supply of newly constructed self-storage facilities, including facilities that we have constructed.

We are taking a number of actions to improve demand into our system, including (i) increasing marketing spend on the Internet and television, and (ii) reducing rental rates and increasing promotional discounts to new tenants.  Even if these actions are successful in improving demand into our system, in at least the near term, we believe these actions will have a negative impact on our revenue trends due to decelerating rental rate increases and increased promotional discounts.

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Analysis of Same Store Cost of Operations 

Cost of operations (excluding depreciation and amortization) increased 2.5% in 2016 as compared to 2015, due primarily to increased property tax expense, on-site property manager payroll and repairs and maintenance expense (excluding snow removal cost), and offset partially by reduced snow removal cost.  Cost of operations increased by 1.4% in 2015 as compared to 2014, due primarily to increased property tax expense and snow removal cost), and offset partially by lower advertising and selling expenses.

Property tax expense increased 4.8% in 2016 as compared to 2015 and by 4.0% in 2015 as compared to 2014, due primarily to higher assessed values.  We expect property tax expense growth of approximately 4.5% in 2017 due primarily to higher assessed values and changes in tax rates.

On-site property manager payroll expense increased 3.4% in 2016 as compared to 2015 and by 0.6% in 2015 as compared to 2014, due primarily to reductions in prior estimates of workers compensation costs recorded in 2015, higher employee health care expenses experienced in 2016 and higher wage rates.  We expect on-site property manager payroll expense to increase on an inflationary basis in 2017.

Supervisory payroll expense, which represents compensation paid to the management personnel who directly and indirectly supervise the on-site property managers, increased 3.2% in 2016 as compared to 2015 and by 2.0% in 2015 as compared to 2014, due primarily to higher wage rates.  We expect greater than inflationary increases in wage rates and increased headcount in 2017. 

Repairs and maintenance expense decreased 5.9% in 2016 as compared to 2015 and increased by 3.6% in 2015 as compared to 2014.  Repair and maintenance costs include snow removal expense totaling $4.1 million, $9.7 million and $7.9 million in 2016, 2015 and 2014, respectively.  Excluding snow removal costs, repairs and maintenance increased 7.9% in 2016 as compared to 2015 and 0.4% in 2015 as compared to 2014.

Repairs and maintenance expense levels are dependent upon many factors such as weather conditions, which can impact repair and maintenance needs including snow removal, inflation in material and labor costs, and random events.  We expect inflationary increases in repairs and maintenance expense in 2017, excluding snow removal expense, which is primarily weather dependent and not predictable. 

Our utility expenses are comprised primarily of electricity costs, which are dependent upon energy prices and usage levels.  Changes in usage levels are driven primarily by weather and temperature.  Utility expense decreased 3.5% in 2016 as compared to 2015 and by 2.6% in 2015 as compared to 2014.  The decrease in 2016 over 2015 is due primarily to lower usage as a result of milder weather.  It is difficult to estimate future utility costs, because weather, temperature, and energy prices are volatile and not predictable.  However, based upon current trends and expectations regarding commercial electricity rates, we expect inflationary increases in rates. 

Advertising and selling expense is comprised principally of Internet advertising, television advertising and the operating costs of our telephone reservation center.  Advertising and selling expense varies based upon demand, occupancy levels, and other factors.  Television and Internet advertising, in particular, can increase or decrease significantly in the short term.  Advertising and selling expenses increased 0.8% in 2016 as compared to 2015 and decreased 7.3% in 2015 as compared to 2014.  As mentioned above, we have increased our Internet marketing expenditures and beginning in late August 2016, we increased our television advertising expenditures due to softness in demand in several of our larger markets.  As a result, we expect advertising and selling expense to increase in 2017.

Other direct property costs include administrative expenses incurred at the self-storage facilities, such as property insurance, business license costs, bank charges related to processing the facilities’ cash receipts, credit card fees, and the cost of operating each property’s rental office including supplies and telephone data communication lines.  These costs increased 3.7% in 2016 as compared to 2015 and 2.2% in 2015 as compared to 2014.  The increases were due primarily to higher credit card fees, offset partially by lower property insurance

34

 


 

 

costs.  Credit card fees increased due to a higher proportion of collections being received from credit cards and higher revenues.  We expect moderate increases in other direct property costs in 2017.

Allocated overhead represents administrative expenses for shared general corporate functions, which are allocated to self-storage property operations to the extent their efforts are devoted to self-storage operations.  Such functions include data processing, human resources, operational accounting and finance, marketing, and costs of senior executives (other than the Chief Executive Officer and Chief Financial Officer, which are included in general and administrative expense).  Allocated overhead increased 4.8% in 2016 as compared to 2015 and decreased 2.1% in 2015 as compared to 2014.  The increase in 2016 over 2015 is due primarily to additional costs of our annual field staff sales meetings and increased compensation costs.  We expect moderate growth in allocated overhead in 2017 as compared to 2016 due to inflationary wage increases and increased headcount. 

Analysis of Same Store Depreciation and Amortization

Depreciation and amortization for Same Store Facilities decreased 1.5% in 2016 as compared to 2015 and 1.7% in 2015 as compared to 2014.  We expect depreciation to be flat in 2017 as compared to 2016.

35

 


 

 

The following table summarizes selected quarterly financial data with respect to the Same Store Facilities:





 

 

 

 

 

 

 

 

 

 

 

 

 

 



For the Quarter Ended

 

 

 



March 31

 

June 30

 

September 30

 

December 31

 

Entire Year



(Amounts in thousands, except for per square foot amounts)

Total revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

$

504,952 

 

$

520,099 

 

$

542,272 

 

$

530,373 

 

$

2,097,696 

2015

$

474,337 

 

$

490,806 

 

$

515,713 

 

$

506,869 

 

$

1,987,725 

2014

$

447,077 

 

$

459,543 

 

$

483,447 

 

$

475,289 

 

$

1,865,356 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cost of operations:

 

 

 

 

 

 

 

 

 

 

 

 

2016

$

139,511 

 

$

135,843 

 

$

141,980 

 

$

110,007 

 

$

527,341 

2015

$

143,301 

 

$

130,370 

 

$

133,486 

 

$

107,080 

 

$

514,237 

2014

$

141,801 

 

$

129,084 

 

$

130,885 

 

$

105,430 

 

$

507,200 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

$

52,720 

 

$

52,929 

 

$

52,629 

 

$

29,073 

 

$

187,351 

2015

$

50,508 

 

$

50,407 

 

$

49,946 

 

$

27,845 

 

$

178,706 

2014

$

48,456 

 

$

48,055 

 

$

47,064 

 

$

28,281 

 

$

171,856 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repairs and maintenance:

 

 

 

 

 

 

 

 

 

 

 

 

2016

$

11,111 

 

$

10,308 

 

$

10,760 

 

$

10,801 

 

$

42,980 

2015

$

16,167 

 

$

9,025 

 

$

10,179 

 

$

10,300 

 

$

45,671 

2014

$

14,957 

 

$

9,649 

 

$

10,025 

 

$

9,440 

 

$

44,071 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising and selling expense:

 

 

 

 

 

 

 

 

 

 

 

 

2016

$

5,080 

 

$

5,552 

 

$

7,573 

 

$

7,115 

 

$

25,320 

2015

$

6,192 

 

$

5,541 

 

$

6,954 

 

$

6,432 

 

$

25,119 

2014

$

6,605 

 

$

6,140 

 

$

7,893 

 

$

6,468 

 

$

27,106 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

REVPAF:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

$

15.13 

 

$

15.63 

 

$

16.25 

 

$

15.92 

 

$

15.73 

2015

$

14.22 

 

$

14.73 

 

$

15.44 

 

$

15.19 

 

$

14.90 

2014

$

13.35 

 

$

13.76 

 

$

14.47 

 

$

14.24 

 

$

13.96 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average realized annual rent per occupied square foot:

 

 

 

2016

$

16.17 

 

$

16.39 

 

$

17.06 

 

$

16.99 

 

$

16.65 

2015

$

15.23 

 

$

15.45 

 

$

16.21 

 

$

16.19 

 

$

15.77 

2014

$

14.43 

 

$

14.55 

 

$

15.29 

 

$

15.25 

 

$

14.88 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average occupancy levels for the period:

 

 

 

 

 

 

 

 

2016

 

93.6% 

 

 

95.4% 

 

 

95.3% 

 

 

93.7% 

 

 

94.5% 

2015

 

93.4% 

 

 

95.4% 

 

 

95.3% 

 

 

93.9% 

 

 

94.5% 

2014

 

92.6% 

 

 

94.7% 

 

 

94.7% 

 

 

93.5% 

 

 

93.9% 

36

 


 

 

Analysis of Market Trends

The following table sets forth selected market trends in our Same Store Facilities:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities Operating Trends by Market

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

Year Ended December 31,

 

Year Ended December 31,



 

2016

 

 

2015

 

Change

 

2015

 

2014

 

Change



(Amounts in thousands, except for weighted average data)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Los Angeles (204 facilities)

$

322,731 

 

$

300,645 

 

7.3% 

 

$

300,645 

 

$

278,136 

 

8.1% 

San Francisco (126 facilities)

 

176,106 

 

 

165,246 

 

6.6% 

 

 

165,246 

 

 

152,506 

 

8.4% 

New York (86 facilities)

 

142,321 

 

 

137,423 

 

3.6% 

 

 

137,423 

 

 

130,538 

 

5.3% 

Chicago (129 facilities)

 

120,344 

 

 

117,848 

 

2.1% 

 

 

117,848 

 

 

113,870 

 

3.5% 

Washington DC (78 facilities)

 

97,409 

 

 

94,960 

 

2.6% 

 

 

94,960 

 

 

92,563 

 

2.6% 

Seattle-Tacoma (81 facilities)

 

95,714 

 

 

88,069 

 

8.7% 

 

 

88,069 

 

 

81,911 

 

7.5% 

Miami (65 facilities)

 

91,855 

 

 

87,106 

 

5.5% 

 

 

87,106 

 

 

82,212 

 

6.0% 

Dallas-Ft. Worth (98 facilities)

 

84,158 

 

 

78,722 

 

6.9% 

 

 

78,722 

 

 

72,869 

 

8.0% 

Houston (74 facilities)

 

69,884 

 

 

69,084 

 

1.2% 

 

 

69,084 

 

 

64,016 

 

7.9% 

Atlanta (91 facilities)

 

73,623 

 

 

68,444 

 

7.6% 

 

 

68,444 

 

 

63,980 

 

7.0% 

Philadelphia (55 facilities)

 

51,141 

 

 

48,574 

 

5.3% 

 

 

48,574 

 

 

46,481 

 

4.5% 

Denver (44 facilities)

 

45,658 

 

 

44,427 

 

2.8% 

 

 

44,427 

 

 

40,376 

 

10.0% 

Minneapolis-St Paul

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(41 facilities)

 

38,589 

 

 

37,031 

 

4.2% 

 

 

37,031 

 

 

35,947 

 

3.0% 

Portland (40 facilities)

 

37,410 

 

 

34,559 

 

8.2% 

 

 

34,559 

 

 

31,171 

 

10.9% 

Orlando-Daytona (49 facilities)

 

38,421 

 

 

36,047 

 

6.6% 

 

 

36,047 

 

 

33,231 

 

8.5% 

All other markets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(739 facilities)

 

612,332 

 

 

579,540 

 

5.7% 

 

 

579,540 

 

 

545,549 

 

6.2% 

Total revenues

$

2,097,696 

 

$

1,987,725 

 

5.5% 

 

$

1,987,725 

 

$

1,865,356 

 

6.6% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Los Angeles

$

267,164 

 

$

246,463 

 

8.4% 

 

$

246,463 

 

$

223,457 

 

10.3% 

San Francisco

 

144,226 

 

 

134,690 

 

7.1% 

 

 

134,690 

 

 

121,737 

 

10.6% 

New York

 

102,704 

 

 

99,358 

 

3.4% 

 

 

99,358 

 

 

93,362 

 

6.4% 

Chicago

 

71,264 

 

 

68,433 

 

4.1% 

 

 

68,433 

 

 

65,520 

 

4.4% 

Washington DC

 

74,427 

 

 

72,605 

 

2.5% 

 

 

72,605 

 

 

70,966 

 

2.3% 

Seattle-Tacoma

 

76,242 

 

 

69,418 

 

9.8% 

 

 

69,418 

 

 

63,484 

 

9.3% 

Miami

 

71,205 

 

 

66,491 

 

7.1% 

 

 

66,491 

 

 

62,163 

 

7.0% 

Dallas-Ft. Worth

 

60,628 

 

 

55,668 

 

8.9% 

 

 

55,668 

 

 

50,964 

 

9.2% 

Houston

 

47,604 

 

 

48,193 

 

(1.2)%

 

 

48,193 

 

 

42,939 

 

12.2% 

Atlanta

 

54,846 

 

 

49,958 

 

9.8% 

 

 

49,958 

 

 

45,780 

 

9.1% 

Philadelphia

 

36,367 

 

 

33,438 

 

8.8% 

 

 

33,438 

 

 

31,539 

 

6.0% 

Denver

 

34,991 

 

 

33,411 

 

4.7% 

 

 

33,411 

 

 

29,674 

 

12.6% 

Minneapolis-St. Paul

 

26,990 

 

 

25,681 

 

5.1% 

 

 

25,681 

 

 

23,933 

 

7.3% 

Portland

 

29,351 

 

 

26,890 

 

9.2% 

 

 

26,890 

 

 

23,315 

 

15.3% 

Orlando-Daytona

 

28,019 

 

 

25,920 

 

8.1% 

 

 

25,920 

 

 

23,297 

 

11.3% 

All other markets

 

444,327 

 

 

416,871 

 

6.6% 

 

 

416,871 

 

 

386,026 

 

8.0% 

Total net operating income

$

1,570,355 

 

$

1,473,488 

 

6.6% 

 

$

1,473,488 

 

$

1,358,156 

 

8.5% 

37

 


 

 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities Operating Trends by Market (Continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

Year Ended December 31,

 

Year Ended December 31,



 

2016

 

2015

 

Change

 

2015

 

2014

 

Change

Weighted average square foot

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 occupancy:

 

Los Angeles

 

95.9% 

 

 

95.6% 

 

0.3% 

 

 

95.6% 

 

 

94.2% 

 

1.5% 

San Francisco

 

96.0% 

 

 

96.1% 

 

(0.1)%

 

 

96.1% 

 

 

95.1% 

 

1.1% 

New York

 

94.6% 

 

 

94.8% 

 

(0.2)%

 

 

94.8% 

 

 

93.9% 

 

1.0% 

Chicago

 

92.3% 

 

 

92.7% 

 

(0.4)%

 

 

92.7% 

 

 

93.4% 

 

(0.7)%

Washington DC

 

93.2% 

 

 

93.0% 

 

0.2% 

 

 

93.0% 

 

 

92.4% 

 

0.6% 

Seattle-Tacoma

 

95.8% 

 

 

95.2% 

 

0.6% 

 

 

95.2% 

 

 

94.1% 

 

1.2% 

Miami

 

95.0% 

 

 

94.9% 

 

0.1% 

 

 

94.9% 

 

 

94.6% 

 

0.3% 

Dallas-Ft. Worth

 

94.7% 

 

 

94.9% 

 

(0.2)%

 

 

94.9% 

 

 

94.2% 

 

0.7% 

Houston

 

92.2% 

 

 

94.3% 

 

(2.2)%

 

 

94.3% 

 

 

94.4% 

 

(0.1)%

Atlanta

 

94.8% 

 

 

94.6% 

 

0.2% 

 

 

94.6% 

 

 

93.5% 

 

1.2% 

Philadelphia

 

94.5% 

 

 

93.8% 

 

0.7% 

 

 

93.8% 

 

 

93.5% 

 

0.3% 

Denver

 

94.6% 

 

 

95.5% 

 

(0.9)%

 

 

95.5% 

 

 

95.2% 

 

0.3% 

Minneapolis-St. Paul

 

93.2% 

 

 

92.6% 

 

0.6% 

 

 

92.6% 

 

 

93.2% 

 

(0.6)%

Portland

 

96.6% 

 

 

96.5% 

 

0.1% 

 

 

96.5% 

 

 

95.3% 

 

1.3% 

Orlando-Daytona

 

95.1% 

 

 

95.3% 

 

(0.2)%

 

 

95.3% 

 

 

93.7% 

 

1.7% 

All other markets

 

94.3% 

 

 

94.1% 

 

0.2% 

 

 

94.1% 

 

 

93.6% 

 

0.5% 

Total weighted average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

square foot occupancy

 

94.5% 

 

 

94.5% 

 

0.0% 

 

 

94.5% 

 

 

93.9% 

 

0.6% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized annual rent per

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 occupied square foot:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Los Angeles

$

23.23 

 

$

21.69 

 

7.1% 

 

$

21.69 

 

$

20.33 

 

6.7% 

San Francisco

 

24.37 

 

 

22.81 

 

6.8% 

 

 

22.81 

 

 

21.25 

 

7.3% 

New York

 

24.36 

 

 

23.46 

 

3.8% 

 

 

23.46 

 

 

22.45 

 

4.5% 

Chicago

 

15.33 

 

 

14.96 

 

2.5% 

 

 

14.96 

 

 

14.34 

 

4.3% 

Washington DC

 

21.36 

 

 

20.89 

 

2.2% 

 

 

20.89 

 

 

20.61 

 

1.4% 

Seattle-Tacoma

 

18.37 

 

 

16.99 

 

8.1% 

 

 

16.99 

 

 

15.95 

 

6.5% 

Miami

 

19.79 

 

 

18.78 

 

5.4% 

 

 

18.78 

 

 

17.74 

 

5.9% 

Dallas-Ft. Worth

 

13.53 

 

 

12.63 

 

7.1% 

 

 

12.63 

 

 

11.74 

 

7.6% 

Houston

 

14.15 

 

 

13.68 

 

3.4% 

 

 

13.68 

 

 

12.67 

 

8.0% 

Atlanta

 

12.26 

 

 

11.43 

 

7.3% 

 

 

11.43 

 

 

10.78 

 

6.0% 

Philadelphia

 

15.09 

 

 

14.44 

 

4.5% 

 

 

14.44 

 

 

13.84 

 

4.3% 

Denver

 

16.35 

 

 

15.72 

 

4.0% 

 

 

15.72 

 

 

14.29 

 

10.0% 

Minneapolis-St. Paul

 

14.02 

 

 

13.54 

 

3.5% 

 

 

13.54 

 

 

13.05 

 

3.8% 

Portland

 

17.76 

 

 

16.41 

 

8.2% 

 

 

16.41 

 

 

14.95 

 

9.8% 

Orlando-Daytona

 

12.81 

 

 

11.99 

 

6.8% 

 

 

11.99 

 

 

11.20 

 

7.1% 

All other markets

 

13.36 

 

 

12.66 

 

5.5% 

 

 

12.66 

 

 

11.97 

 

5.8% 

Total realized rent per

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

occupied square foot

$

16.65 

 

$

15.77 

 

5.6% 

 

$

15.77 

 

$

14.88 

 

6.0% 

38

 


 

 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities Operating Trends by Market (Continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

Year Ended December 31,

 

Year Ended December 31,



 

2016

 

2015

 

Change

 

2015

 

2014

 

Change

REVPAF:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Los Angeles

$

22.29 

 

$

20.74 

 

7.5% 

 

$

20.74 

 

$

19.16 

 

8.2% 

San Francisco

 

23.39 

 

 

21.91 

 

6.8% 

 

 

21.91 

 

 

20.20 

 

8.5% 

New York

 

23.05 

 

 

22.23 

 

3.7% 

 

 

22.23 

 

 

21.07 

 

5.5% 

Chicago

 

14.16 

 

 

13.88 

 

2.0% 

 

 

13.88 

 

 

13.40 

 

3.6% 

Washington DC

 

19.90 

 

 

19.42 

 

2.5% 

 

 

19.42 

 

 

19.04 

 

2.0% 

Seattle-Tacoma

 

17.60 

 

 

16.17 

 

8.8% 

 

 

16.17 

 

 

15.01 

 

7.7% 

Miami

 

18.80 

 

 

17.82 

 

5.5% 

 

 

17.82 

 

 

16.78 

 

6.2% 

Dallas-Ft. Worth

 

12.81 

 

 

11.98 

 

6.9% 

 

 

11.98 

 

 

11.06 

 

8.3% 

Houston

 

13.04 

 

 

12.91 

 

1.0% 

 

 

12.91 

 

 

11.96 

 

7.9% 

Atlanta

 

11.63 

 

 

10.81 

 

7.6% 

 

 

10.81 

 

 

10.08 

 

7.2% 

Philadelphia

 

14.27 

 

 

13.55 

 

5.3% 

 

 

13.55 

 

 

12.94 

 

4.7% 

Denver

 

15.47 

 

 

15.01 

 

3.1% 

 

 

15.01 

 

 

13.60 

 

10.4% 

Minneapolis-St. Paul

 

13.06 

 

 

12.54 

 

4.1% 

 

 

12.54 

 

 

12.16 

 

3.1% 

Portland

 

17.15 

 

 

15.83 

 

8.3% 

 

 

15.83 

 

 

14.24 

 

11.2% 

Orlando-Daytona

 

12.19 

 

 

11.42 

 

6.7% 

 

 

11.42 

 

 

10.49 

 

8.9% 

All other markets

 

12.60 

 

 

11.92 

 

5.7% 

 

 

11.92 

 

 

11.20 

 

6.4% 

Total REVPAF

$

15.73 

 

$

14.90 

 

5.6% 

 

$

14.90 

 

$

13.96 

 

6.7% 

We believe that our geographic diversification and scale provide some insulation from localized economic effects and add to the stability of our cash flows.  It is difficult to predict localized trends in short-term self-storage demand and operating results.  Over the long run, we believe that markets that experience population growth, high employment, and otherwise exhibit economic strength and consistency will outperform markets that do not exhibit these characteristics. 

Non Same Store Facilities

The Non Same Store Facilities at December 31, 2016 represent 337 facilities that were not stabilized with respect to occupancies or rental rates since January 1, 2014, or that we did not own as of January 1, 2014.  As a result of the stabilization process and timing of when the facilities were acquired, year-over-year changes can be significant. 

The following table summarizes operating data with respect to the Non Same Store Facilities:



39

 


 

 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NON SAME STORE

Year Ended December 31,

 

Year Ended December 31,

FACILITIES

2016

 

2015

 

Change

 

2015

 

2014

 

Change



(Dollar amounts in thousands, except square foot amounts)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016 acquisitions

$

18,174 

 

$

 -

 

$

18,174 

 

$

 -

 

$

 -

 

$

 -

2015 acquisitions

 

15,574 

 

 

6,255 

 

 

9,319 

 

 

6,255 

 

 

 -

 

 

6,255 

2014 acquisitions

 

46,428 

 

 

41,972 

 

 

4,456 

 

 

41,972 

 

 

15,347 

 

 

26,625 

2013 acquisitions

 

99,390 

 

 

91,481 

 

 

7,909 

 

 

91,481 

 

 

79,457 

 

 

12,024 

Developed facilities

 

23,405 

 

 

9,460 

 

 

13,945 

 

 

9,460 

 

 

1,973 

 

 

7,487 

Other facilities

 

105,161 

 

 

98,632 

 

 

6,529 

 

 

98,632 

 

 

87,749 

 

 

10,883 

    Total revenues

 

308,132 

 

 

247,800 

 

 

60,332 

 

 

247,800 

 

 

184,526 

 

 

63,274 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016 acquisitions

 

6,455 

 

 

 -

 

 

6,455 

 

 

 -

 

 

 -

 

 

 -

2015 acquisitions

 

5,010 

 

 

2,067 

 

 

2,943 

 

 

2,067 

 

 

 -

 

 

2,067 

2014 acquisitions

 

12,845 

 

 

12,304 

 

 

541 

 

 

12,304 

 

 

4,566 

 

 

7,738 

2013 acquisitions

 

28,508 

 

 

28,017 

 

 

491 

 

 

28,017 

 

 

28,120 

 

 

(103)

Developed facilities

 

10,932 

 

 

3,934 

 

 

6,998 

 

 

3,934 

 

 

1,458 

 

 

2,476 

Other facilities

 

26,814 

 

 

26,137 

 

 

677 

 

 

26,137 

 

 

25,554 

 

 

583 

    Total cost of operations

 

90,564 

 

 

72,459 

 

 

18,105 

 

 

72,459 

 

 

59,698 

 

 

12,761 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016 acquisitions

 

11,719 

 

 

 -

 

 

11,719 

 

 

 -

 

 

 -

 

 

 -

2015 acquisitions

 

10,564 

 

 

4,188 

 

 

6,376 

 

 

4,188 

 

 

 -

 

 

4,188 

2014 acquisitions

 

33,583 

 

 

29,668 

 

 

3,915 

 

 

29,668 

 

 

10,781 

 

 

18,887 

2013 acquisitions

 

70,882 

 

 

63,464 

 

 

7,418 

 

 

63,464 

 

 

51,337 

 

 

12,127 

Developed facilities

 

12,473 

 

 

5,526 

 

 

6,947 

 

 

5,526 

 

 

515 

 

 

5,011 

Other facilities

 

78,347 

 

 

72,495 

 

 

5,852 

 

 

72,495 

 

 

62,195 

 

 

10,300 

    Net operating income

 

217,568 

 

 

175,341 

 

 

42,227 

 

 

175,341 

 

 

124,828 

 

 

50,513 

Depreciation and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

amortization expense

 

(104,578)

 

 

(92,313)

 

 

(12,265)

 

 

(92,313)

 

 

(97,742)

 

 

5,429 

Net income

$

112,990 

 

$

83,028 

 

$

29,962 

 

$

83,028 

 

$

27,086 

 

$

55,942 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Square foot occupancy:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016 acquisitions

 

82.9% 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

2015 acquisitions

 

90.8% 

 

 

85.3% 

 

 

6.4% 

 

 

85.3% 

 

 

 -

 

 

 -

2014 acquisitions

 

92.0% 

 

 

91.1% 

 

 

1.0% 

 

 

91.1% 

 

 

89.9% 

 

 

1.3% 

2013 acquisitions

 

92.4% 

 

 

92.2% 

 

 

0.2% 

 

 

92.2% 

 

 

89.9% 

 

 

2.6% 

Developed facilities

 

58.6% 

 

 

70.0% 

 

 

(16.3)%

 

 

70.0% 

 

 

53.1% 

 

 

31.8% 

Other facilities

 

88.2% 

 

 

88.2% 

 

 

0.0% 

 

 

88.2% 

 

 

87.4% 

 

 

0.9% 



 

84.6% 

 

 

88.2% 

 

 

(4.1)%

 

 

88.2% 

 

 

87.6% 

 

 

0.7% 

Annual contract rent per

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

occupied square foot:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016 acquisitions

$

9.99 

 

$

 -

 

 

 -

 

$

 -

 

$

 -

 

 

 -

2015 acquisitions

 

13.77 

 

 

12.87 

 

 

7.0% 

 

 

12.87 

 

 

 -

 

 

 -

2014 acquisitions

 

14.47 

 

 

13.51 

 

 

7.1% 

 

 

13.51 

 

 

12.15 

 

 

11.2% 

2013 acquisitions

 

15.50 

 

 

14.68 

 

 

5.6% 

 

 

14.68 

 

 

13.51 

 

 

8.7% 

Developed facilities

 

12.96 

 

 

12.45 

 

 

4.1% 

 

 

12.45 

 

 

12.64 

 

 

(1.5)%

Other facilities

 

18.04 

 

 

16.82 

 

 

7.3% 

 

 

16.82 

 

 

15.70 

 

 

7.1% 



$

14.80 

 

$

14.88 

 

 

(0.5)%

 

$

14.88 

 

$

14.01 

 

 

6.2% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40

 


 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NON SAME STORE

Year Ended December 31,

 

 

Year Ended December 31,

FACILITIES (Continued)

2016

 

2015

 

Change

 

 

2015

 

2014

 

Change



 

Number of facilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016 acquisitions

 

55 

 

 

 -

 

 

55 

 

 

 -

 

 

 -

 

 

 -

2015 acquisitions

 

17 

 

 

17 

 

 

 -

 

 

17 

 

 

 -

 

 

17 

2014 acquisitions

 

44 

 

 

44 

 

 

 -

 

 

44 

 

 

44 

 

 

 -

2013 acquisitions

 

105 

 

 

105 

 

 

 -

 

 

105 

 

 

105 

 

 

 -

Developed facilities

 

36 

 

 

20 

 

 

16 

 

 

20 

 

 

 

 

13 

Other facilities

 

80 

 

 

80 

 

 

 -

 

 

80 

 

 

82 

 

 

(2)



 

337 

 

 

266 

 

 

71 

 

 

266 

 

 

238 

 

 

28 

Net rentable square feet (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016 acquisitions

 

4,121 

 

 

 -

 

 

4,121 

 

 

 -

 

 

 -

 

 

 -

2015 acquisitions

 

1,285 

 

 

1,285 

 

 

 -

 

 

1,285 

 

 

 -

 

 

1,285 

2014 acquisitions

 

3,457 

 

 

3,457 

 

 

 -

 

 

3,457 

 

 

3,442 

 

 

15 

2013 acquisitions

 

6,906 

 

 

6,906 

 

 

 -

 

 

6,906 

 

 

6,906 

 

 

 -

Developed facilities

 

4,019 

 

 

1,878 

 

 

2,141 

 

 

1,878 

 

 

636 

 

 

1,242 

Other facilities

 

6,748 

 

 

6,614 

 

 

134 

 

 

6,614 

 

 

6,668 

 

 

(54)



 

26,536 

 

 

20,140 

 

 

6,396 

 

 

20,140 

 

 

17,652 

 

 

2,488 





The facilities included above under “2016 acquisitions,” “2015 acquisitions,” “2014 acquisitions” and “2013 acquisitions,” were acquired at a cost of $429.1 million, $168.8 million, $430.7 million, and $938.3 million, respectively.

For the year ended December 31, 2016, the weighted average annualized yield on cost, based upon net operating income, for the facilities acquired in each of 2015, 2014 and 2013 was 6.3%, 7.8% and 7.6%, respectively.  The yields for the facilities acquired in the year ended December 31, 2016 were not meaningful due to our limited ownership period. 

We believe that our management and operating infrastructure allows us to generate higher net operating income from newly acquired facilities than was achieved by the previous owners.  However, it can take 24 or more months for us to fully achieve the higher net operating income, and the ultimate levels of net operating income to be achieved can be affected by changes in general economic conditions.  As a result, there can be no assurance that we will achieve our expectations with respect to these newly acquired facilities. 

Since the beginning of 2013, we have opened newly developed facilities with a total cost of $445.8 million and redeveloped existing facilities, expanding their square footage, for a total cost of $130.0 million.  The newly developed facilities are included in “Developed facilities” and the redeveloped facilities are included in “Other facilities” in the table above.  We believe that our real estate development activities are beneficial to our business operations over the long run.  However, in the short run, development activities dilute our earnings due to the three to four year period to reach a stabilized level of cash flows and the cost of capital to fund development, combined with general and administrative expenses associated with development.  We believe this dilution will increase in 2017 and beyond, because of an increased level of unstabilized newly developed and redeveloped facilities in our portfolio.

We expect the Non Same Store Facilities to continue to provide increased net operating income in 2017 as these facilities approach stabilized occupancy levels and the earnings of the 2016 acquisitions are reflected in our operations for a longer period in 2017 as compared to 2016. 

41

 


 

 

We also expect to increase the number and net rentable square feet of Non Same Store Facilities over at least the next 24 months through development of new self-storage facilities, redevelopment of existing facilities and acquisitions of facilities. 

As of December 31, 2016, we had development and redevelopment projects which will add approximately 5.3 million net rentable square feet of storage space at a total cost of approximately $660.2 million.  Some of these projects are subject to significant contingencies such as entitlement approval.  We expect to continue to seek additional development projects; however, the level of future development may be limited due to various constraints such as difficulty in finding projects that meet our risk-adjusted yield expectations and challenges in obtaining building permits for self-storage activities in certain municipalities. 

Subsequent to December 31, 2016, we acquired or were under contract to acquire five self-storage facilities for $26.4 million.  We will continue to seek to acquire properties; however, there is significant competition to acquire existing facilities and therefor the dollar value of acquisitions is unpredictable. 

Depreciation and amortization with respect to the Non Same Store Facilities totaled $104.6 million, $92.3 million, and $97.7 million in 2016, 2015, and 2014, respectively.  These amounts include i) depreciation of the buildings acquired or developed, which is recorded generally on a straight line basis, and ii) amortization of cost allocated to the tenants in place upon acquisition of a facility, which is recorded based upon the benefit of such existing tenants to each period and thus is highest when the facility is first acquired and declines as such tenants vacate.  With respect to Non Same Store Facilities owned at December 31, 2016, depreciation of buildings and amortization of tenant intangibles is expected to total $92.9 million and $10.2 million, respectively, in 2017.   The level of future depreciation and amortization will also depend upon the level of acquisitions of facilities and the level of newly developed storage space.

Ancillary Operations

Ancillary revenues and expenses include amounts associated with the reinsurance of policies against losses to goods stored by tenants in our self-storage facilities in the U.S. and the sale of merchandise at our self-storage facilities.  The following table sets forth our ancillary operations:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Year Ended December 31,

 

Year Ended December 31,



2016

 

2015

 

Change

 

2015

 

2014

 

Change



(Amounts in thousands)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant reinsurance premiums

$

118,911 

 

$

109,836 

 

$

9,075 

 

$

109,836 

 

$

95,056 

 

$

14,780 

Merchandise

 

35,810 

 

 

36,335 

 

 

(525)

 

 

36,335 

 

 

32,358 

 

 

3,977 

Total revenues

 

154,721 

 

 

146,171 

 

 

8,550 

 

 

146,171 

 

 

127,414 

 

 

18,757 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant reinsurance

 

29,145 

 

 

25,997 

 

 

3,148 

 

 

25,997 

 

 

25,600 

 

 

397 

Merchandise

 

22,033 

 

 

22,809 

 

 

(776)

 

 

22,809 

 

 

20,826 

 

 

1,983 

Total cost of operations

 

51,178 

 

 

48,806 

 

 

2,372 

 

 

48,806 

 

 

46,426 

 

 

2,380 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant reinsurance

 

89,766 

 

 

83,839 

 

 

5,927 

 

 

83,839 

 

 

69,456 

 

 

14,383 

Merchandise

 

13,777 

 

 

13,526 

 

 

251 

 

 

13,526 

 

 

11,532 

 

 

1,994 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net income

$

103,543 

 

$

97,365 

 

$

6,178 

 

$

97,365 

 

$

80,988 

 

$

16,377 



Tenant reinsurance operations: Our tenants have the option of purchasing insurance from a non-affiliated insurance company to cover certain losses to their goods stored at our facilities.  A wholly-owned, consolidated subsidiary of Public Storage fully reinsures such policies, and thereby assumes all risk of losses under these policies

42

 


 

 

from the insurance company.  The subsidiary receives reinsurance premiums, substantially equal to the premiums collected from our tenants, from the non-affiliated insurance company.  Such reinsurance premiums are shown as “Tenant reinsurance premiums” in the above table. 

The subsidiary pays a fee to Public Storage to assist with the administration of the program and to allow the insurance to be marketed to our tenants.  This fee represents a substantial amount of the reinsurance premiums received by our subsidiary.  The fee is eliminated in consolidation and is therefore not shown in the above table. 

Tenant reinsurance revenue increased from $95.1 million in 2014, to $109.8 million in 2015, and to $118.9 million in 2016, due to (i) increased average premiums per insured tenant resulting from higher average policy limits, (ii) a higher proportion of tenants having insurance, and (iii) a larger number of potential insurance customers due to newly acquired and developed facilities in 2015 and 2016.

We expect growth in tenant insurance revenues in 2017 to be lower than the growth experienced in 2016, as we approach practical limits to the proportion of tenants having insurance and the premiums per insured tenant.   Future growth will come primarily from tenants of newly acquired and developed facilities, as well as additional tenants at our existing unstabilized self-storage facilities.           

Cost of operations primarily includes claims paid that are not covered by our outside third-party insurers, as well as claims adjustment expenses.  Tenant reinsurance cost of operations increased from $25.6 million in 2014, to $26.0 million in 2015, and to $29.1 million in 2016.  These increases are due primarily to an increase in exposure associated with more insured tenants and increased claims experience. 

Merchandise sales: We sell locks, boxes, and packing supplies at our self-storage facilities, and the level of sales of these items is primarily impacted by the level of move-ins and other customer traffic at our self-storage facilities.  We do not expect any significant changes in revenues or profitability from our merchandise sales in 2017.

Equity in earnings of unconsolidated real estate entities

At December 31, 2016, we have equity investments in PSB, Shurgard Europe and various limited partnerships.  We account for such investments using the equity method and record our pro-rata share of the net income of these entities for each period.  The following table, and the discussion below, sets forth the significant components of our equity in earnings of unconsolidated real estate entities:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Year Ended December 31,

 

Year Ended December 31,



 

2016

 

2015

 

Change

 

2015

 

2014

 

Change



 

(Amounts in thousands)

Equity in earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PSB

 

$

31,707 

 

$

34,155 

 

$

(2,448)

 

$

34,155 

 

$

56,280 

 

$

(22,125)

Shurgard Europe 

 

 

22,324 

 

 

14,272 

 

 

8,052 

 

 

14,272 

 

 

29,900 

 

 

(15,628)

Other Investments 

 

 

2,725 

 

 

2,510 

 

 

215 

 

 

2,510 

 

 

2,087 

 

 

423 

Total equity in earnings

 

$

56,756 

 

$

50,937 

 

$

5,819 

 

$

50,937 

 

$

88,267 

 

$

(37,330)

Investment in PSB: At December 31, 2016 and 2015, we had approximately a 42% common equity interest in PSB, comprised of our ownership of 7,158,354 shares of PSB’s common stock and 7,305,355 limited partnership units in an operating partnership controlled by PSB.  The limited partnership units are convertible at our option, subject to certain conditions, on a one-for-one basis into PSB common stock. 

At December 31, 2016, PSB owned and operated 28.1 million rentable square feet of commercial space located in six states.  PSB also manages commercial space that we own pursuant to property management agreements.

Equity in earnings from PSB decreased $2.4 million in 2016 as compared to 2015, due primarily to our $11.3 million equity share of gains on dispositions recorded by PSB in 2015, offset partially by our equity share of

43

 


 

 

improved property operations.  Equity in earnings from PSB decreased $22.1 million in 2015 as compared to 2014, due primarily to a $25.2 million reduction in our equity share of PSB’s gains on dispositionsSee Note 4 to our December 31, 2016 financial statements for selected financial information on PSB, as well as PSB’s filings and selected financial information that can be accessed through the SEC, and on PSB’s website, www.psbusinessparks.com.

Investment in Shurgard Europe: We have a 49% equity share in Shurgard Europe’s net income.  At December 31, 2016, Shurgard Europe’s operations are comprised of 218 wholly-owned facilities with 12 million net rentable square feet.  See Note 4 to our December 31, 2016 financial statements for selected financial data on Shurgard Europe for the years ended December 31, 2016, 2015 and 2014.  As described in more detail in Note 4, we receive trademark license fees from Shurgard Europe.  

In 2016, Shurgard Europe opened a newly developed facility in the United Kingdom with a total cost of $12.9 million and in 2015, Shurgard Europe opened three newly developed facilities in the United Kingdom with a total cost of $39.4 million.   

In June 2015, Shurgard Europe acquired 21 facilities in the Netherlands (0.9 million net rentable square feet), for approximately $146 million (€132 million).  In December 2014, Shurgard Europe acquired five facilities in Germany (0.3 million net rentable square feet) for $90 million (€72 million) which was paid in March 2015.  

In each of July 2014 and June 2015, Shurgard Europe issued €300 million of unsecured senior notes in various tranches due between July 2021 and June 2030, with an average interest rate of approximately 2.9%.

Our equity in earnings from Shurgard Europe increased $8.1 million in 2016 as compared to 2015, due primarily to (i) improved same-store operating results and increased earnings from newly acquired properties, (ii) lower general and administrative expenses associated with property acquisitions and (iii) a reduction in depreciation expense, offset, by (iv) increased interest expense due to increased outstanding borrowings. 

Our equity in earnings from Shurgard Europe decreased $15.6 million in 2015 as compared to 2014, due primarily to Shurgard’s July 2014 repayment of a €311 million shareholder loan, which eliminated $10.7 million in interest paid to us in 2014 with respect to our 49% ownership of the loan.  The interest paid was classified as equity in earnings (see Note 4 to our December 31, 2016 financial statements for further information).  The decrease also included a reduction of 16.5% in the average exchange rate between the U.S. Dollar and the Euro in 2015 as compared to 2014.

For purposes of recording our equity in earnings from Shurgard Europe, the Euro was translated into U.S. Dollars based upon average exchange rates of 1.107 for 2016, 1.110 for 2015 and 1.329 for 2014.

Our future earnings from Shurgard Europe will be affected primarily by the operating results of its existing facilities, the exchange rate between the U.S. Dollar and currencies in the countries in which Shurgard Europe conducts its business (principally the Euro), the impact of income taxes, and the degree to which Shurgard Europe reinvests the cash it generates from operations into real estate investments or distributes the amounts to its shareholders. 

Unlike our operations in the United States, Shurgard Europe operates through taxable corporations in each of the countries in which it does business and incurs tax expense.  Our equity share of such income tax expense was approximately $5.2 million, $5.3 million, and $2.6 million in 2016, 2015, and 2014, respectively.   We expect continued increases in tax expense incurred by Shurgard Europe in 2017 and beyond, as its operations improve and its taxable income increases.

44

 


 

 

Analysis of items not allocated to segments

General and administrative expense: The following table sets forth our general and administrative expense:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

Year Ended December 31,



 

2016

 

2015

 

Change

 

2015

 

2014

 

Change



 

(Amounts in thousands)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation expense

 

$

37,483 

 

$

32,570 

 

$

4,913 

 

$

32,570 

 

$

29,541 

 

$

3,029 

Costs of senior executives

 

 

6,052 

 

 

5,552 

 

 

500 

 

 

5,552 

 

 

5,558 

 

 

(6)

Development and acquisition costs

 

 

9,721 

 

 

10,006 

 

 

(285)

 

 

10,006 

 

 

10,614 

 

 

(608)

Tax compliance costs and taxes paid 

 

 

3,859 

 

 

5,372 

 

 

(1,513)

 

 

5,372 

 

 

4,858 

 

 

514 

Legal costs

 

 

7,305 

 

 

18,366 

 

 

(11,061)

 

 

18,366 

 

 

5,080 

 

 

13,286 

Public company costs

 

 

3,768 

 

 

3,632 

 

 

136 

 

 

3,632 

 

 

3,465 

 

 

167 

Other costs

 

 

15,468 

 

 

12,679 

 

 

2,789 

 

 

12,679 

 

 

12,343 

 

 

336 

Total

 

$

83,656 

 

$

88,177 

 

$

(4,521)

 

$

88,177 

 

$

71,459 

 

$

16,718 

Share-based compensation expense includes the amortization of restricted share units and stock options granted to employees and trustees, as well as related employer taxes.  Share-based compensation expense varies based upon the level of grants and forfeitures as well as the Company’s stock price on the date of grant.  The increases in share-based compensation costs in 2016 as compared to 2015 and in 2015 as compared to 2014 are due primarily to a higher average grant-date fair value per share.  Based upon grants of restricted share units and stock options made during the first two months of 2017, we expect share-based compensation expense to increase approximately $10 million in 2017 as compared to 2016.  See Note 9 to our December 31, 2016 financial statements for further information on our share-based compensation. 

Costs of senior executives represent the cash compensation paid to our chief executive officer and chief financial officer. 

Development and acquisition costs primarily represent internal and external expenses related to our development activities and the acquisition of real estate facilities and varies primarily based upon the level of development activities undertaken.  The amounts in the above table are net of $8.5 million, $8.1 million and $5.0 million in development costs that were capitalized in 2016, 2015 and 2014, respectively, to newly developed and redeveloped self-storage facilities.  Amounts include $0.9 million, $1.3 million, and $3.4 million in 2016, 2015, and 2014, respectively, of external costs including legal expenses and transfer taxes, associated with the acquisition of real estate facilities.  Due to new accounting standards, effective October 1, 2016, external costs associated with the acquisition of real estate facilities are capitalized and no longer reflected in general and administrative expenses.  Development and acquisition costs are expected to increase modestly in 2017.

Tax compliance costs and taxes paid include taxes paid to various state and local authorities, the internal and external costs of filing tax returns, costs associated with complying with federal and state tax laws, and maintaining our compliance with Internal Revenue Service REIT rules.  Such costs vary primarily based upon the tax rates of the various states in which we do business. 

Legal costs include internal personnel as well as fees paid to legal firms and other third parties with respect to general corporate legal matters and risk management, and varies based upon the level of litigation activity.  The decrease of $11.1 million in 2016 as compared to 2015, and the increase of $13.3 million in legal costs in 2015 as compared to 2014, is due primarily to legal fees and expenses associated with certain litigated matters in 2015, including $3.5 million accrued in 2015 in connection with the settlement of a legal matter.  The future level of legal costs is not determinable.    

Public company costs represent the incremental costs of operating as a publicly-traded company, such as internal and external investor relations expenses, stock listing and transfer agent fees, board of trustees’ costs, and

45

 


 

 

costs associated with maintaining compliance with applicable laws and regulations, including the Dodd-Frank Act and Sarbanes-Oxley Act. 

Other costs represent professional and consulting fees, payroll and overhead that are not directly attributable to our property operations.  Such costs vary depending upon the level of corporate activities and initiatives and, as such, are not predictable.

Our future general and administrative expenses are difficult to estimate, due to their dependence upon many factors, including those noted above.

Interest and other income:  Interest and other income is comprised primarily of the net income from our commercial operations and property management operations and to a lesser extent interest earned on cash balances, trademark license fees received from Shurgard Europe, as well as sundry other income items that are received from time to time in varying amounts.  Amounts attributable to our commercial operations and property management operations totaled $10.6 million, $12.0 million and $12.7 million in 2016, 2015 and 2014, respectively.  Interest income on cash balances has been minimal, because rates have been at historic lows, and we expect this trend to continue in the foreseeable future.  We do not expect any significant changes in interest and other income in 2017. 

Interest expense:  For 2016, 2015 and 2014, we incurred $9.4 million, $3.3 million, and $8.4 million of interest on our outstanding debt.  During 2016, 2015 and 2014, we capitalized interest of $5.2 million, $2.7 million and $1.6 million, respectively, associated with our development activities.  The increase in interest expense incurred in 2016 as compared to 2015 is due to increased outstanding debt.  At December 31, 2016 and 2015, we had €342.0 million ($359.8 million) and €242.0 million ($263.9 million), respectively, of Euro-denominated senior unsecured notes payable to institutional investors (collectively, the “Senior Unsecured Notes”).  See Note 5 to our December 31, 2016 financial statements for a schedule of our debt balances, principal repayment requirements and average interest rates at December 31, 2016.  The increases in capitalized interest are due to increased development activities.  Future interest expense will be dependent upon the level of outstanding debt and the amount of in-process development costs. 

Foreign Exchange Gain (Loss): We recorded foreign currency translation gains of $17.6 million and $306,000 for 2016 and 2015, respectively, representing the change in the U.S. Dollar equivalent of our Senior Unsecured Notes due to fluctuations in exchange rates.  The Euro was translated at exchange rates of approximately 1.052 U.S. Dollars per Euro at December 31, 2016 and 1.091 at December 31, 2015.  We had a foreign currency translation loss of $7.0 million for 2014 representing primarily the change in the U.S. Dollar equivalent of our Euro-based loan receivable from Shurgard Europe due to fluctuations in exchange rates.  This loan receivable was repaid in 2014.  Future gains and losses on foreign currency translation will be dependent upon changes in the relative value of the Euro to the U.S. Dollar, and the level of Euro-denominated debt outstanding. 

Gain on Real Estate Sales:  In 2016, we sold our interest in a property recording a gain of $689,000.  In 2015 and 2014, we sold various parcels of real estate primarily in connection with eminent domain proceedings recording gains on real estate sales totaling $18.5 million and $2.5 million, respectively. 

Net Income Allocable to Preferred Shareholders:  Net income allocable to preferred shareholders based upon distributions decreased in 2016 as compared to 2015 due primarily to lower average rates.  We also allocated $26.9 million of income from our common shareholders to the holders of our Preferred Shares in 2016, as compared to $8.9 million in 2015, in connection with the redemption of our Preferred Shares (there were no redemptions of our Preferred Shares in 2014).  Based upon our preferred shares outstanding at December 31, 2016, our quarterly distribution to our preferred shareholders is expected to be approximately $60.1 million.

Liquidity and Capital Resources



Financial Strategy:  As a REIT, we generally distribute 100% of our taxable income to our shareholders, which relative to a taxable C corporation, limits the amount of cash flow from operations that we can retain for investments.  As a result, in order to grow our asset base, access to capital is important.  Historically we have

46

 


 

 

primarily financed our cash investment activities with retained operating cash flow combined with the proceeds from the issuance of preferred securities.  Over the past twelve months, we began to diversify our capital sources by issuing medium term debt. 

Our financial profile is characterized by strong credit metrics, including low leverage relative to our total capitalization and operating cash flows.  We are one of the highest rated REITs, as rated by major rating agencies Moody’s and Standard & Poor’s.  Our senior debt has an “A” credit rating by Standard & Poor’s and “A2” by Moody’s.  Our credit ratings on each of our series of preferred shares are “A3” by Moody’s and “BBB+” by Standard & Poor’s.  Our credit profile and ratings enables us to effectively access both the public and private capital markets to raise capital.

We have a $500.0 million revolving line of credit which we occasionally use as temporary “bridge” financing until we are able to raise longer term capital.  As of December 31, 2016, there we no borrowings outstanding on the revolving line of credit, however, we do have approximately $15.2 million of outstanding letters of credit which limits our borrowing capacity to $484.8 million.  Over the long-term, we expect to fund our capital requirements with retained operating cash flow, the issuance of medium or long term debt, and proceeds from the issuance of common and preferred securities.  We will select among these sources of capital based upon availability, relative cost, the desire for leverage, and considering potential constraints caused by certain features of capital sources, such as debt covenants. 

Liquidity and Capital Resource Analysis:  We believe that our net cash provided by our operating activities will continue to be sufficient to enable us to meet our ongoing requirements for principal payments on debt, maintenance capital expenditures, and distributions to our shareholders for the foreseeable future. 

As of December 31, 2016, our capital resources over the next year are expected to be approximately $918.5 million which exceeds our current planned capital needs over the next year of approximately $458.0 million.  Our capital resources include: (i) $183.7 million of cash as of December 31, 2016, (ii) $484.8 million of available borrowing capacity on our revolving line of credit, and (iii) approximately $250.0 million of expected retained operating cash flow for the next twelve months.  Retained operating cash flow represents our expected cash flow provided by operating activities, less shareholder distributions and capital expenditures to maintain our facilities. 

Our planned capital needs over the next year consist of (i) $429.9 million of remaining spend on our current development pipeline, (ii) $26.4 million in property acquisitions currently under contract, and (iii) $1.7 million in principal repayments on existing debt.  Our capital needs may increase significantly over the next year as we expect to increase our development pipeline, and acquire additional properties.  We may also redeem outstanding preferred securities or repurchase shares of our common stock in the future. 

To the extent our retained operating cash flow and line of credit are insufficient to fund our activities, we believe we have a variety of possibilities to raise additional capital to fund such future commitments including issuing common or preferred securities, issuing debt, or entering into joint venture arrangements to acquire or develop facilities.

Required Debt Repayments: As of December 31, 2016, our outstanding debt totaled approximately $390.7 million, consisting of $30.9 million of secured debt and $359.8 million of unsecured debt.  Approximate principal maturities are as follows (amounts in thousands):

47

 


 

 





 

 



 

 

2017

$

1,665 

2018

 

11,241 

2019

 

1,505 

2020

 

1,585 

2021

 

1,503 

Thereafter

 

373,250 



$

390,749 

The remaining maturities on our debt over at least the next five years are nominal compared to our expected annual retained operating cash flow.

Capital Expenditure Requirements: Capital expenditures include general maintenance, major repairs or replacements to elements of our facilities to keep our facilities in good operating condition and maintain their visual appeal.  Capital expenditures do not include costs relating to the development of new facilities or redevelopment of existing facilities to increase their available rentable square footage. 

Capital expenditures totaled $86.0 million in 2016 and are expected to be approximately $110 million in 2017.  For the last four years, capital expenditures have ranged between approximately $0.45 and $0.55 per net rentable square foot per year.

Requirement to Pay Distributions: For all periods presented herein, we have elected to be treated as a REIT, as defined in the Code.  As a REIT, we do not incur federal income tax on our REIT taxable income (generally, net rents and gains from real property, dividends, and interest) that is fully distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and if we meet certain organizational and operational rules.  We believe we have met these requirements in all periods presented herein, and we expect to continue to elect and qualify as a REIT. 

Distributions paid during 2016 totaled $1.5 billion, consisting of $238.2 million to preferred shareholders and $1.3 billion to common shareholders and restricted share unitholders.  All of these distributions were REIT qualifying distributions.

We estimate the annual distribution requirements with respect to our Preferred Shares outstanding at December 31, 2016, to be approximately $240.5 million per year. 

On February 22, 2017, our Board declared a regular common quarterly dividend of $2.00 per common share.  Our consistent, long-term dividend policy has been to distribute only our taxable income.  Future quarterly distributions with respect to the common shares will continue to be determined based upon our REIT distribution requirements after taking into consideration distributions to the preferred shareholders and will be funded with cash provided by operating activities. 

We estimate we will pay approximately $8.0 million per year in distributions to noncontrolling interests outstanding at December 31, 2016. 

Real Estate Investment Activities: Subsequent to December 31, 2016, we acquired or were under contract to acquire five self-storage facilities (two in Ohio and one each in Minnesota, New York and North Carolina), with 275,000 net rentable square feet, for $26.4 million. We will continue to seek to acquire properties; however, there is significant competition to acquire existing facilities and there can be no assurance as to the level of facilities we may acquire. 

As of December 31, 2016 we had development and redevelopment projects which will add approximately 5.3 million net rentable square feet of storage space at a total cost of approximately $660.2 million.  A total of $230.3 million of these costs were incurred through December 31, 2016, with the remaining cost to complete of

48

 


 

 

$429.9 million expected to be incurred primarily in the next 18 months.  Some of these projects are subject to significant contingencies such as entitlement approval.  We expect to continue to seek additional projects; however, the level of future development and redevelopment may be limited due to various constraints such as difficulty in finding projects that meet our risk-adjusted yield expectations and challenges in obtaining building permits for self-storage activities in certain municipalities. 

Redemption of Preferred Securities: Historically, we have taken advantage of refinancing higher coupon preferred securities with lower coupon preferred securities.  During 2016, we redeemed two series of preferred securities totaling $862.5 million which had a weighted average coupon of 6.42%.  During the same period, we issued $1,175.0 million of preferred securities which have a weighted average coupon of 5.079%.  In the future, we may elect to finance the redemption of preferred securities with proceeds from the issuance of debt.  We have four series of preferred securities that become redeemable during 2017, at our option, with coupons ranging from 5.90% to 5.375%, with an aggregate $1.7 billion outstanding (see Note 7 to our December 31, 2016 financial statements).  As of February 28, 2017, we have two series of preferred securities that are eligible for redemption, at our option and with 30 days’ notice; our 5.90% Series S Preferred Shares, with $460.0 million outstanding and our 5.75% Series T Preferred Shares, with $462.5 million outstanding.  Redemption of such preferred shares will depend upon many factors including whether we can issue capital at a lower cost of capital than the shares that would be redeemed.  Currently, we believe that the cost to issue preferred securities would be approximately 5.875%.  None of our preferred securities are redeemable at the option of the holders. 

Repurchases of Common Shares: Our Board has authorized management to repurchase up to 35,000,000 of our common shares on the open market or in privately negotiated transactions.  During 2016, we did not repurchase any of our common shares.  From the inception of the repurchase program through February 28, 2017, we have repurchased a total of 23,721,916 common shares at an aggregate cost of approximately $679.1 million.  Future levels of common share repurchases will be dependent upon our available capital, investment alternatives and the trading price of our common shares. 

Contractual Obligations 

Our significant contractual obligations at December 31, 2016 and their impact on our cash flows and liquidity are summarized below for the years ending December 31 (amounts in thousands):





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Total

 

2017

 

2018

 

2019

 

2020

 

2021

 

Thereafter

Mortgage notes (1) 

$

36,508 

 

$

2,957 

 

$

12,601 

 

$

2,316 

 

$

2,316 

 

$

2,147 

 

$

14,171 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior unsecured notes (2)

 

419,995 

 

 

7,156 

 

 

7,156 

 

 

7,156 

 

 

7,156 

 

 

7,156 

 

 

384,215 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases (3)

 

88,746 

 

 

4,452 

 

 

4,224 

 

 

4,145 

 

 

4,138 

 

 

4,134 

 

 

67,653 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction commitments (4)

137,536 

 

 

110,029 

 

 

27,507 

 

 

 -

 

 

 -

 

 

 -

 

 

 -



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

682,785 

 

$

124,594 

 

$

51,488 

 

$

13,617 

 

$

13,610 

 

$

13,437 

 

$

466,039 



(1)Amounts include principal and interest payments (all of which are fixed-rate) on our secured notes (the “Mortgage Notes”) based on their contractual terms.  See Note 5 to our December 31, 2016 financial statements for additional information on our notes payable. 

(2)Reflects interest and principal on €342.0 million of Euro-denominated senior unsecured notes.  See Note 5 to our December 31, 2016 financial statements for further information on our senior unsecured notes.

(3)Represents future contractual payments on land, equipment and office space under various operating leases. 

(4)Represents future expected development spending that was under contract at December 31, 2016.

We estimate the annual distribution requirements with respect to our Preferred Shares outstanding at December 31, 2016, to be approximately $240.5 million per year.  Dividends are paid when and if declared by our Board and accumulate if not paid. 

49

 


 

 

Off-Balance Sheet Arrangements: At December 31, 2016, we had no material off-balance sheet arrangements as defined under Regulation S-K 303(a)(4) and the instructions thereto.

50

 


 

 

ITEM 7A.    Quantitative and Qualitative Disclosures about Market Risk

To limit our exposure to market risk, we are capitalized primarily with preferred and common equity.  Our preferred shares are redeemable at our option generally five years after issuance, but the holder has no redemption option.  Our debt is our only market-risk sensitive portion of our capital structure, which totals $390.7 million and represents 4.2% of the book value of our equity at December 31, 2016.

We have foreign currency exposure at December 31, 2016 related to i) our investment in Shurgard Europe, with a book value of $280.0 million and ii) €342.0 million ($359.8 million) of Euro-denominated senior unsecured notes payable. 

The fair value of our fixed rate debt at December 31, 2016 is approximately $412.7 million.  The table below summarizes the annual maturities of our fixed rate debt, which had a weighted average fixed rate of 2.2% at December 31, 2016.  See Note 5 to our December 31, 2016 financial statements for further information regarding our fixed rate debt (amounts in thousands).



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



2017

 

2018

 

2019

 

2020

 

2021

 

Thereafter

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate debt

$

1,665 

 

$

11,241 

 

$

1,505 

 

$

1,585 

 

$

1,503 

 

$

373,250 

 

$

390,749 







51

 


 

 

ITEM 9A.    Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports we file and submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in accordance with SEC guidelines and that such information is communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure based on the definition of "disclosure controls and procedures" in Rules 13a-15(e) and 15d-15(e) of the Exchange Act.  In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures in reaching that level of reasonable assurance.  We also have investments in certain unconsolidated real estate entities and because we do not control these entities, our disclosure controls and procedures with respect to such entities are substantially more limited than those we maintain with respect to our consolidated subsidiaries.

As of December 31, 2016, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act).  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2016, at a reasonable assurance level.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act.  Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee on Sponsoring Organizations of the Treadway Commission (2013 Framework).  Based on our evaluation under the framework in Internal Control-Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2016.

The effectiveness of internal control over financial reporting as of December 31, 2016, has been audited by Ernst & Young LLP, an independent registered public accounting firm. Ernst & Young LLP’s report on our internal control over financial reporting appears below.

Changes in Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2016 to which this report relates that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.

52

 


 

 

Report of Independent Registered Public Accounting Firm

The Board of Trustees and Shareholders of

Public Storage

We have audited Public Storage’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria).  Public Storage’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting.  Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and trustees of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Public Storage maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Public Storage as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2016 and our report dated February 28, 2017 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Los Angeles, California

February 28, 2017

53

 


 

 

ITEM 9B.Other Information

None.

54

 


 

 

PART III

ITEM 10.Trustees, Executive Officers and Corporate Governance 

The following is a biographical summary of the current executive officers of the Company:

Ronald L. Havner, Jr., age 59, has been Chairman and Chief Executive Officer of Public Storage since August 2011 and November 2002, respectively.  Mr. Havner joined Public Storage in 1986 and has held a variety of senior management positions. Mr. Havner has been Chairman of the Board of Public Storage’s affiliate, PS Business Parks, Inc. (“PSB”) since March 1998

John Reyes, age 56, has served as Senior Vice President and Chief Financial Officer of Public Storage since 1996, having joined the Company in 1990.

Joseph D. Russell, Jr., age 57, has been President of Public Storage since July 2016.  Prior to joining Public Storage, Mr. Russell was Chief Executive Officer of PS Business Parks, Inc. from August 2003 to July 2016. Mr. Russell was President of PS Business Parks, Inc. from September 2003 until August 2015.  Mr. Russell has also served as a director of PS Business Parks, Inc. since August 2003.  He currently serves on the Board of Directors of the Self Storage Association (“SSA”).

David F. Doll, age 58, has served as Senior Vice President and President, Real Estate Group, since February 2005, with responsibility for the real estate activities of Public Storage, including property acquisitions, developments, re-developments, and capital improvements.

Lily Y. Hughes, age 53, became Senior Vice President, Chief Legal Officer and Corporate Secretary in January 2015.  Prior to joining Public Storage, Ms. Hughes was Vice President and Associate General Counsel-Corporate, M&A and Finance at Ingram Micro Inc., a Fortune 100 NYSE company with operations in 39 countries, which she joined in 1997. 

Candace N. Krol, age 55, has served as Senior Vice President and Chief Human Resources Officer of Public Storage since February 2015 and has served as Senior Vice President of Human Resources since September 2005.

Other information required by this item is hereby incorporated by reference to the material appearing in the Notice and Proxy Statement for the 2016 Annual Meeting of Shareholders, to be filed pursuant to Regulation 14A under the Exchange Act.

ITEM 11.Executive Compensation

The information required by this item is hereby incorporated by reference to the material appearing in the Notice and Proxy Statement for the 2017 Annual Meeting of Shareholders, to be filed pursuant to Regulation 14A under the Exchange Act.

55

 


 

 

ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

The following table sets forth information as of December 31, 2016 on the Company’s equity compensation plans:



 

 

 



Number of securities to be issued upon exercise of outstanding options, warrants and rights

Weighted average exercise price of outstanding options, warrants and rights

Number of securities remaining available for future issuance under equity compensation plans

Equity compensation plans approved by security holders (a)

2,692,081 (b)

$150.83 (d)

2,700,390 



 

 

 

Equity compensation plans not approved by security holders (c)

-

-

-

a)

The Company’s stock option and stock incentive plans are described more fully in Note 9 to the December 31, 2016 financial statements.  All plans were approved by the Company’s shareholders.

b)

Includes 696,641 restricted share units that, if and when vested, will be settled in common shares of the Company on a one for one basis.

c)

There are no securities available for future issuance or currently outstanding under plans not approved by the Company’s shareholders as of December 31, 2016. 

d)

Represents the average exercise price of 1,995,440 stock options outstanding at December 31, 2016.  We also have 696,641 restricted share units outstanding at December 31, 2016 that vest for no consideration.

Other information required by this item is hereby incorporated by reference to the material appearing in the Notice and Proxy Statement for the 2017 Annual Meeting of Shareholders, to be filed pursuant to Regulation 14A under the Exchange Act.

ITEM 13.Certain Relationships and Related Transactions and Trustee Independence

The information required by this item is hereby incorporated by reference to the material appearing in the Notice and Proxy Statement for the 2017 Annual Meeting of Shareholders, to be filed pursuant to Regulation 14A under the Exchange Act.

ITEM 14.Principal Accountant Fees and Services

The information required by this item is hereby incorporated by reference to the material appearing in the Notice and Proxy Statement for the 2017 Annual Meeting of Shareholders, to be filed pursuant to Regulation 14A under the Exchange Act of 1934.



 

56

 


 

 

PART IV

ITEM 15.Exhibits and Financial Statement Schedules



 

 

 

a.

1.

Financial Statements



 

 

 



 

 

The financial statements listed in the accompanying Index to Financial Statements and Schedules hereof are filed as part of this report.



 

 

 



2.

Financial Statement Schedules



 

 

 



 

 

The financial statements schedules listed in the accompanying Index to Financial Statements and Schedules are filed as part of this report.



 

 

 



3.

Exhibits



 

 

 



 

 

See Index to Exhibits contained herein.



 

 

 

b.

Exhibits:



 

 

 



 

See Index to Exhibits contained herein.



 

 

 

c.

Financial Statement Schedules



 

 

 



 

Not applicable.



57

 


 

 



 

 

 

 

 



PUBLIC STORAGE



INDEX TO EXHIBITS (1)



(Items 15(a)(3) and 15(c))

3.1

Articles of Amendment and Restatement of Declaration of Trust of Public Storage, a Maryland real estate investment trust.  Filed with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009 and incorporated by reference herein.



 

3.2

Bylaws of Public Storage, a Maryland real estate investment trust.  Filed with the Registrant’s Current Report on Form 8-K dated May 11, 2010 and incorporated by reference herein.



 

3.3

Articles Supplementary for Public Storage 5.900% Cumulative Preferred Shares, Series S.  Filed with the Registrant’s Current Report on Form 8-K dated January 9, 2012 and incorporated by reference herein.



 

3.4

Articles Supplementary for Public Storage 5.750% Cumulative Preferred Shares, Series T.  Filed with the Registrant’s Current Report on Form 8-K dated March 7, 2012 and incorporated by reference herein.



 

3.5

Articles Supplementary for Public Storage 5.625% Cumulative Preferred Shares, Series U.  Filed with the Registrant’s Current Report on Form 8-K dated June 6, 2012 and incorporated by reference herein.



 

3.6

Articles Supplementary for Public Storage 5.375% Cumulative Preferred Shares, Series V.  Filed with the Registrant’s Current Report on Form 8-K dated September 11, 2012 and incorporated by reference herein.



 

3.7

Articles Supplementary for Public Storage 5.20% Cumulative Preferred Shares, Series W.  Filed with the Registrant’s Current Report on Form 8-K dated January 8, 2013 and incorporated by reference herein.



 

3.8

Articles Supplementary for Public Storage 5.20% Cumulative Preferred Shares, Series X.  Filed with the Registrant’s Current Report on Form 8-K dated March 5, 2013 and incorporated by reference herein.



 

3.9

Articles Supplementary for Public Storage 6.375% Cumulative Preferred Shares, Series Y.  Filed with the Registrant’s Current Report on Form 8-K dated March 11, 2014 and incorporated by reference herein.



 

3.10

Articles Supplementary for Public Storage 6.375% Cumulative Preferred Shares, Series Y.  Filed with the Registrant’s Current Report on Form 8-K dated April 9, 2014 and incorporated by reference herein.



 

3.11

Articles Supplementary for Public Storage 6.00% Cumulative Preferred Shares, Series Z.  Filed with the Registrant’s Current Report on Form 8-K dated May 29, 2014 and incorporated by reference herein.



 

3.12

Articles Supplementary for Public Storage 5.875% Cumulative Preferred Shares, Series A.  Filed with the Registrant’s Current Report on Form 8-K/A dated November 24, 2014 and incorporated by reference herein.



 

3.13

Articles Supplementary for Public Storage 5.400% Cumulative Preferred Shares, Series B.  Filed with the Registrant’s Current Report on Form 8-K dated January 13, 2016 and incorporated by reference herein.



 

3.14

Articles Supplementary for Public Storage 5.125% Cumulative Preferred Shares, Series C.  Filed with the Registrant’s Current Report on Form 8-K dated May 10, 2016 and incorporated by reference herein.



 

3.15

Articles Supplementary for Public Storage 4.950% Cumulative Preferred Shares, Series D.  Filed with the Registrant’s Current Report on Form 8-K dated July 13, 2016 and incorporated by reference herein.



 



58

 


 

 

3.16

Articles Supplementary for Public Storage 4.900% Cumulative Preferred Shares, Series E.  Filed with the Registrant’s Current Report on Form 8-K dated October 6, 2016 and incorporated by reference herein.



 

4.1

Master Deposit Agreement, dated as of May 31, 2007.  Filed with the Registrant’s Current Report on Form 8-K dated June 6, 2007 and incorporated by reference herein.



 

10.1

Amended Management Agreement between Registrant and Public Storage Commercial Properties Group, Inc. dated as of February 21, 1995.  Filed with Public Storage Inc.’s (“PSI”) Annual Report on Form 10-K for the year ended December 31, 1994 (SEC File No. 001-0839) and incorporated herein by reference.



 



 

10.2

Second Amended and Restated Management Agreement by and among Registrant and the entities listed therein dated as of November 16, 1995.  Filed with PS Partners, Ltd.’s Annual Report on Form 10-K for the year ended December 31, 1996 (SEC File No. 001-11186) and incorporated herein by reference.



 

10.3

Agreement of Limited Partnership of PS Business Parks, L.P.  Filed with PS Business Parks, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998 (SEC File No. 001-10709) and incorporated herein by reference.



 

10.4

Amended and Restated Agreement of Limited Partnership of Storage Trust Properties, L.P. (March 12, 1999).  Filed with PSI’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999 (SEC File No. 001-0839) and incorporated herein by reference.



 

10.5

Amended and Restated Credit Agreement by and among Registrant, Wells Fargo Securities, LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated as joint lead arrangers, Wells Fargo Bank, National Association, as administrative agent, and the other financial institutions party thereto, dated as of March 21, 2012.  Filed with PSI’s Current Report on Form 8-K on March 27, 2012 (SEC File No. 001-0839) and incorporated herein by reference.



 

10.5.1

Second Amendment to Amended and Restated Credit Agreement, dated as of July 17, 2013, by and among Public Storage, the Lenders party thereto and Wells Fargo Bank, National Association.  Filed with the Registrant’s Current Report on Form 8-K on July 18, 2013 and incorporated herein by reference.



 

10.5.2

Third Amendment to the Amended and Restated Credit Agreement, dated as of March 31, 2015, among Public Storage, the lenders party thereto and Wells Fargo Bank, National Association, as agent.  Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K on April 2, 2015 (“April 2015 8-K”) and incorporated herein by reference.



 

10.5.3

Copy of the Amended and Restated Credit Agreement dated as of March 21, 2012, consolidating all amendments made by the Letter Agreement, dated as of April 12, 2012, the Second Amendment to Amended and Restated Credit Agreement, dated as of July 17, 2013, and the Third Amendment to Amended and Restated Credit Agreement, dated as of March 31, 2015.  This conformed copy was filed as Exhibit 10.2 to the April 2015 8-K for ease of reference and was qualified in its entirety by reference to the Third Amendment and incorporated herein by reference.



 

10.5.4

Fourth Amendment to the Amended and Restated Credit Agreement, dated as of December 22, 2015, among Public Storage, the lenders party thereto and Wells Fargo Bank, National Association, as agent.  Filed as Exhibit 10.5.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 and incorporated herein by reference.



 

10.6*

Shurgard Storage Centers, Inc. 2004 Long Term Incentive Compensation Plan.  Filed as Appendix A of Definitive Proxy Statement dated June 7, 2004 filed by Shurgard (SEC File No. 001-11455) and incorporated herein by reference.



 

10.7*

Public Storage, Inc. 2001 Stock Option and Incentive Plan (the “2001 Plan”).  Filed with PSI’s Registration Statement on Form S-8 (SEC File No. 333-59218) and incorporated herein by reference.

59

 


 

 



 

10.8*

Form of 2001 Plan Non-qualified Stock Option Agreement.  Filed with PSI’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004 (SEC File No. 001-0839) and incorporated herein by reference.



 

10.9*

Form of 2001 Plan Restricted Share Unit Agreement.  Filed with PSI’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004 (SEC File No. 001-0839) and incorporated herein by reference.



 

10.10*

Form of 2001 Plan Non-Qualified Outside Director Stock Option Agreement.  Filed with PSI’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004 (SEC File No. 001-0839) and incorporated herein by reference.



 

10.11*

Form of 2007 Plan Restricted Stock Unit Agreement.  Filed as Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 and incorporated herein by reference.



 

10.12*

Form of 2007 Plan Restricted Stock Unit Agreement – deferral of receipt of shares.  Filed as Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 and incorporated herein by reference.



 

10.13*

Form of 2007 Plan Stock Option Agreement.  Filed as Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 and incorporated herein by reference.



 

10.14*

Form of 2007 Plan Trustee Stock Option Agreement.  Filed as Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 and incorporated herein by reference.



 

10.15*

Form of 2016 Plan Restricted Stock Unit Agreement.  Filed herewith.



 

10.16*

Form of 2016 Plan Restricted Stock Unit Agreement – deferral of receipt of shares.  Filed herewith.



 

10.17*

Form of 2016 Plan Non-Qualified Stock Option Agreement.  Filed herewith.



 

10.18*

Form of 2016 Plan Trustee Non-Qualified Stock Option Agreement.  Filed herewith.



 

10.19*

Form of Trustee and Officer Indemnification Agreement.  Filed herewith.



 

10.20

Term Loan Agreement, by and among Public Storage, Wells Fargo Securities, LLC as Lead Arranger and Wells Fargo National Bank N.A. as Administrative Agent, dated as of December 2, 2013.  Filed with Registrant’s Current Report on Form 8-K dated December 2, 2013 and incorporated herein by reference.



 

10.21*

Public Storage 2007 Equity and Performance-Based Incentive Compensation Plan, as Amended.  Filed with Registrant’s Current Report on Form 8-K dated May 1, 2014 and incorporated herein by reference.



 

10.22*

Public Storage 2016 Equity and Performance-Based Incentive Compensation Plan.  Filed as Appendix A to the Company’s 2016 Proxy Statement dated March 16, 2016 and incorporated herein by reference.



 

10.23

Note Purchase Agreement, dated as of November 3, 2015, by and among Public Storage and the signatories thereto.  Filed with Registrant’s Current Report on Form 8-K dated November 3, 2015 and incorporated herein by reference.



 

60

 


 

 

10.24

Note Purchase Agreement, dated as of April 12, 2016, by and among Public Storage and the signatories thereto.  Filed with Registrant’s Current Report on Form 8-K dated April 12, 2016 and incorporated herein by reference.



 

12

Statement Re: Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.  Filed herewith.

21

Listing of Subsidiaries.  Filed herewith.

23

Consent of Ernst & Young LLP.  Filed herewith.

31.1

Rule 13a – 14(a) Certification.  Filed herewith.

31.2

Rule 13a – 14(a) Certification.  Filed herewith.

32

Section 1350 Certifications.  Filed herewith.

101 .INS

XBRL Instance Document.  Filed herewith.

101 .SCH

XBRL Taxonomy Extension Schema.  Filed herewith.

101 .CAL

XBRL Taxonomy Extension Calculation Linkbase.  Filed herewith.

101 .DEF

XBRL Taxonomy Extension Definition Linkbase.  Filed herewith.

101 .LAB

XBRL Taxonomy Extension Label Linkbase.  Filed herewith.

101 .PRE

XBRL Taxonomy Extension Presentation Link.  Filed herewith.

_

(1)

SEC File No. 001-33519 unless otherwise indicated.

*

Denotes management compensatory plan agreement or arrangement.





 

 

61

 


 

 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

4

 



PUBLIC STORAGE



 

Date:  February 28, 2017

By:/s/ Ronald L. Havner, Jr.



Ronald L. Havner, Jr., Chairman and
Chief Executive Officer

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.



 

 

Signature

Title

Date



 

 

/s/ Ronald L. Havner, Jr.

Chairman, Chief Executive Officer and Trustee (principal executive officer)

February 28, 2017

Ronald L. Havner, Jr.

 

 



 

 

/s/ John Reyes

Senior Vice President and Chief Financial Officer

February 28, 2017

John Reyes

(principal financial officer and principal accounting officer)

 



 

 

/s/ Tamara Hughes Gustavson

Trustee

February 28, 2017

Tamara Hughes Gustavson

 

 



 

 

/s/ Uri P. Harkham

Trustee

February 28, 2017

Uri P. Harkham

 

 



 

 

/s/ B. Wayne Hughes, Jr.

Trustee

February 28, 2017

B. Wayne Hughes, Jr.

 

 



 

 

/s/ Avedick B. Poladian

Trustee

February 28, 2017

Avedick B. Poladian

 

 



 

 

/s/ Gary E. Pruitt

Trustee

February 28, 2017

Gary E. Pruitt

 

 



 

 

/s/ Ronald P. Spogli

Trustee

February 28, 2017

Ronald P. Spogli

 

 



 

 

/s/ Daniel C. Staton

Trustee

February 28, 2017

Daniel C. Staton

 

 

62

 


 

 









PUBLIC STORAGE

INDEX TO FINANCIAL STATEMENTS

AND SCHEDULES

(Item 15 (a))



 



Page References



 

Report of Independent Registered Public Accounting Firm...........................................................................

F-1



 

Balance sheets as of December 31, 2016 and 2015.....................................................................................

F-2



 

For the years ended December 31, 2016, 2015 and 2014:

 



 

Statements of income.............................................................................................................................

F-3



 

Statements of comprehensive income.......................................................................................................

F-4



 

Statements of equity .............................................................................................................................

F-5 – F-6



 

Statements of cash flows.......................................................................................................................

F-7 – F-8



 

Notes to financial statements...................................................................................................................

F-9 – F-31



 

Schedule:

 



 

III – Real estate and accumulated depreciation...........................................................................................

F-32 – F-34

All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements or notes thereto.



 

63

 


 

 





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Trustees and Shareholders of Public Storage

We have audited the accompanying consolidated balance sheets of Public Storage as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2016.  Our audits also included the financial statement schedule listed in the Index at Item 15(a).  These financial statements and financial statement schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Public Storage at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.  Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Public Storage’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated February 28, 2017 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Los Angeles, California

February 28, 2017



 

F-1


 

PUBLIC STORAGE

BALANCE SHEETS

 (Amounts in thousands, except share data)

 









 

 

 

 

 



December 31,

 

December 31,



2016

 

2015

ASSETS

 

 

 

 

 



 

 

 

 

 

Cash and cash equivalents

$

183,688 

 

$

104,285 

Real estate facilities, at cost:

 

 

 

 

 

Land

 

3,781,479 

 

 

3,564,810 

Buildings

 

10,181,750 

 

 

9,640,451 



 

13,963,229 

 

 

13,205,261 

Accumulated depreciation

 

(5,270,963)

 

 

(4,866,738)



 

8,692,266 

 

 

8,338,523 

Construction in process

 

230,310 

 

 

219,190 



 

8,922,576 

 

 

8,557,713 



 

 

 

 

 

Investments in unconsolidated real estate entities

 

689,207 

 

 

809,308 

Goodwill and other intangible assets, net

 

212,719 

 

 

211,458 

Other assets

 

122,148 

 

 

95,468 

Total assets

$

10,130,338 

 

$

9,778,232 



 

 

 

 

 



 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 



 

 

 

 

 

Senior unsecured notes

$

359,810 

 

$

263,940 

Mortgage notes

 

30,939 

 

 

55,076 

Accrued and other liabilities

 

297,935 

 

 

261,578 

    Total liabilities

 

688,684 

 

 

580,594 



 

 

 

 

 

Commitments and contingencies (Note 12)

 

 

 

 

 



 

 

 

 

 

Equity:

 

 

 

 

 

Public Storage shareholders’ equity:

 

 

 

 

 

Preferred Shares, $0.01 par value, 100,000,000 shares authorized,

 

 

 

 

 

174,700 shares issued (in series) and outstanding, (162,200 at

 

 

 

 

 

December 31, 2015), at liquidation preference

 

4,367,500 

 

 

4,055,000 

Common Shares, $0.10 par value, 650,000,000 shares authorized,

 

 

 

 

 

173,288,787 shares issued and outstanding  (172,921,241 shares at

 

 

 

 

 

December 31, 2015)

 

17,329 

 

 

17,293 

Paid-in capital

 

5,609,768 

 

 

5,601,506 

Accumulated deficit

 

(487,581)

 

 

(434,610)

Accumulated other comprehensive loss

 

(95,106)

 

 

(68,548)

Total Public Storage shareholders’ equity

 

9,411,910 

 

 

9,170,641 

Noncontrolling interests

 

29,744 

 

 

26,997 

  Total equity

 

9,441,654 

 

 

9,197,638 

Total liabilities and equity

$

10,130,338 

 

$

9,778,232 













 

See accompanying notes.

F-2


 

PUBLIC STORAGE

STATEMENTS OF INCOME

 (Amounts in thousands, except per share amounts)

 











 

 

 

 

 

 

 

 

 



 

For the Years Ended December 31,



 

2016

 

2015

 

2014



 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Self-storage facilities

 

$

2,405,828 

 

$

2,235,525 

 

$

2,049,882 

Ancillary operations

 

 

154,721 

 

 

146,171 

 

 

127,414 



 

 

2,560,549 

 

 

2,381,696 

 

 

2,177,296 



 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Self-storage cost of operations

 

 

617,905 

 

 

586,696 

 

 

566,898 

Ancillary cost of operations

 

 

51,178 

 

 

48,806 

 

 

46,426 

Depreciation and amortization

 

 

433,314 

 

 

426,008 

 

 

437,114 

General and administrative

 

 

83,656 

 

 

88,177 

 

 

71,459 



 

 

1,186,053 

 

 

1,149,687 

 

 

1,121,897 



 

 

 

 

 

 

 

 

 

Operating income

 

 

1,374,496 

 

 

1,232,009 

 

 

1,055,399 

Interest and other income

 

 

15,138 

 

 

16,544 

 

 

17,638 

Interest expense

 

 

(4,210)

 

 

(610)

 

 

(6,781)

Equity in earnings of unconsolidated real estate entities

 

 

56,756 

 

 

50,937 

 

 

88,267 

Foreign currency exchange gain (loss)

 

 

17,570 

 

 

306 

 

 

(7,047)

Gain on real estate investment sales

 

 

689 

 

 

18,503 

 

 

2,479 

Net income

 

 

1,460,439 

 

 

1,317,689 

 

 

1,149,955 

Allocation to noncontrolling interests

 

 

(6,863)

 

 

(6,445)

 

 

(5,751)

Net income allocable to Public Storage shareholders

 

 

1,453,576 

 

 

1,311,244 

 

 

1,144,204 

Allocation of net income to:

 

 

 

 

 

 

 

 

 

Preferred shareholders

 

 

(238,214)

 

 

(245,097)

 

 

(232,636)

Preferred shareholders - redemptions (Note 7)

 

 

(26,873)

 

 

(8,897)

 

 

 -

Restricted share units 

 

 

(4,610)

 

 

(4,200)

 

 

(3,392)

Net income allocable to common shareholders

 

$

1,183,879 

 

$

1,053,050 

 

$

908,176 

Net income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

6.84 

 

$

6.10 

 

$

5.27 

Diluted

 

$

6.81 

 

$

6.07 

 

$

5.25 



 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

 

173,091 

 

 

172,699 

 

 

172,251 

Diluted weighted average common shares outstanding

 

 

173,878 

 

 

173,510 

 

 

173,138 



 

 

 

 

 

 

 

 

 















 

See accompanying notes.

F-3


 

PUBLIC STORAGE

STATEMENTS OF COMPREHENSIVE INCOME

 (Amounts in thousands)

 









 

 

 

 

 

 

 

 



For the Years Ended December 31,



2016

 

2015

 

2014



 

 

 

 

 

 

 

 

Net income

$

1,460,439 

 

$

1,317,689 

 

$

1,149,955 

Other comprehensive loss:

 

 

 

 

 

 

 

 

Aggregate foreign currency exchange loss

 

(8,047)

 

 

(20,086)

 

 

(54,703)

Adjust for aggregate foreign currency exchange

 

 

 

 

 

 

 

 

gain in equity in earnings of unconsolidated

 

 

 

 

 

 

 

 

real estate entities

 

(941)

 

 

 -

 

 

 -

Adjust for aggregate foreign currency exchange

 

 

 

 

 

 

 

 

(gain) loss included in net income

 

(17,570)

 

 

(306)

 

 

7,047 

Other comprehensive loss

 

(26,558)

 

 

(20,392)

 

 

(47,656)

Total comprehensive income

 

1,433,881 

 

 

1,297,297 

 

 

1,102,299 

Allocation to noncontrolling interests

 

(6,863)

 

 

(6,445)

 

 

(5,751)

Comprehensive income allocable to

 

 

 

 

 

 

 

 

Public Storage shareholders

$

1,427,018 

 

$

1,290,852 

 

$

1,096,548 









 

See accompanying notes.

F-4


 

PUBLIC STORAGE

STATEMENTS OF EQUITY

 (Amounts in thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Total

 

 

 

 

 

 

 

Cumulative

 

 

 

 

 

 

 

 

 

 

Other

 

Public Storage

 

 

 

 

 

 

Preferred

 

Common

 

Paid-in

 

Accumulated

 

Comprehensive

 

Shareholders’

 

Noncontrolling

 

Total

 

Shares

 

Shares

 

Capital

 

Deficit

 

Loss

 

Equity

 

Interests

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2013

$

3,562,500 

 

$

17,178 

 

$

5,531,034 

 

$

(318,482)

 

$

(500)

 

$

8,791,730 

 

$

27,125 

 

$

8,818,855 

Issuance of 30,500 preferred shares (Note 7)

 

762,500 

 

 

 -

 

 

(23,546)

 

 

 -

 

 

 -

 

 

738,954 

 

 

 -

 

 

738,954 

Issuance of common shares in connection with

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

share-based compensation (669,263 shares) (Note 9)

 -

 

 

67 

 

 

37,805 

 

 

 -

 

 

 -

 

 

37,872 

 

 

 -

 

 

37,872 

Share-based compensation expense, net of cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

paid in lieu of common shares (Note 9)

 

 -

 

 

 -

 

 

16,926 

 

 

 -

 

 

 -

 

 

16,926 

 

 

 -

 

 

16,926 

Acquisition of noncontrolling interests

 

 -

 

 

 -

 

 

(689)

 

 

 -

 

 

 -

 

 

(689)

 

 

(32)

 

 

(721)

Net income

 

 -

 

 

 -

 

 

 -

 

 

1,149,955 

 

 

 -

 

 

1,149,955 

 

 

 -

 

 

1,149,955 

Net income allocated to noncontrolling interests

 -

 

 

 -

 

 

 -

 

 

(5,751)

 

 

 -

 

 

(5,751)

 

 

5,751 

 

 

 -

Distributions to equity holders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred shares (Note 7)

 

 -

 

 

 -

 

 

 -

 

 

(232,636)

 

 

 -

 

 

(232,636)

 

 

 -

 

 

(232,636)

Noncontrolling interests

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(6,469)

 

 

(6,469)

Common shares and restricted share units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($5.60 per share)

 

 -

 

 

 -

 

 

 -

 

 

(967,909)

 

 

 -

 

 

(967,909)

 

 

 -

 

 

(967,909)

Other comprehensive loss (Note 2)

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(47,656)

 

 

(47,656)

 

 

 -

 

 

(47,656)

Balances at December 31, 2014

$

4,325,000 

 

$

17,245 

 

$

5,561,530 

 

$

(374,823)

 

$

(48,156)

 

$

9,480,796 

 

$

26,375 

 

$

9,507,171 

Redemption of 10,800 preferred shares (Note 7)

 

(270,000)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(270,000)

 

 

 -

 

 

(270,000)

Issuance of common shares in connection with

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

share-based compensation (475,687 shares) (Note 9)

 

 -

 

 

48 

 

 

29,615 

 

 

 -

 

 

 -

 

 

29,663 

 

 

 -

 

 

29,663 

Share-based compensation expense, net of cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

paid in lieu of common shares (Note 9)

 

 -

 

 

 -

 

 

15,793 

 

 

 -

 

 

 -

 

 

15,793 

 

 

 -

 

 

15,793 

Acquisition of noncontrolling interests

 

 -

 

 

 -

 

 

(5,432)

 

 

 -

 

 

 -

 

 

(5,432)

 

 

(60)

 

 

(5,492)

Contributions by noncontrolling interests

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,562 

 

 

1,562 

Net income

 

 -

 

 

 -

 

 

 -

 

 

1,317,689 

 

 

 -

 

 

1,317,689 

 

 

 -

 

 

1,317,689 

Net income allocated to noncontrolling interests

 -

 

 

 -

 

 

 -

 

 

(6,445)

 

 

 -

 

 

(6,445)

 

 

6,445 

 

 

 -

Distributions to equity holders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred shares (Note 7)

 

 -

 

 

 -

 

 

 -

 

 

(245,097)

 

 

 -

 

 

(245,097)

 

 

 -

 

 

(245,097)

Noncontrolling interests

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(7,325)

 

 

(7,325)

Common shares and restricted share units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($6.50 per share)

 

 -

 

 

 -

 

 

 -

 

 

(1,125,934)

 

 

 -

 

 

(1,125,934)

 

 

 -

 

 

(1,125,934)

Other comprehensive loss (Note 2)

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(20,392)

 

 

(20,392)

 

 

 -

 

 

(20,392)

Balances at December 31, 2015

 

4,055,000 

 

 

17,293 

 

 

5,601,506 

 

 

(434,610)

 

 

(68,548)

 

 

9,170,641 

 

 

26,997 

 

 

9,197,638 

See accompanying notes.

F-5


 

PUBLIC STORAGE

STATEMENTS OF EQUITY

 (Amounts in thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Total

 

 

 

 

 

 

 

Cumulative

 

 

 

 

 

 

 

 

 

 

Other

 

Public Storage

 

 

 

 

 

 

Preferred

 

Common

 

Paid-in

 

Accumulated

 

Comprehensive

 

Shareholders’

 

Noncontrolling

 

Total

 

Shares

 

Shares

 

Capital

 

Deficit

 

Loss

 

Equity

 

Interests

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of a change in accounting

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

principle (Note 9)

 

 -

 

 

 -

 

 

789 

 

 

(789)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Balances at December 31, 2015, as adjusted

$

4,055,000 

 

$

17,293 

 

$

5,602,295 

 

$

(435,399)

 

$

(68,548)

 

$

9,170,641 

 

$

26,997 

 

$

9,197,638 

Issuance of 47,000 preferred shares (Note 7)

 

1,175,000 

 

 

 -

 

 

(38,797)

 

 

 -

 

 

 -

 

 

1,136,203 

 

 

 -

 

 

1,136,203 

Redemption of 34,500 preferred shares (Note 7)

 

(862,500)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(862,500)

 

 

 -

 

 

(862,500)

Issuance of common shares in connection with

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

share-based compensation (367,546 shares) (Note 9)

 

 -

 

 

36 

 

 

25,505 

 

 

 -

 

 

 -

 

 

25,541 

 

 

 -

 

 

25,541 

Share-based compensation expense, net of cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

paid in lieu of common shares (Note 9)

 

 -

 

 

 -

 

 

20,765 

 

 

 -

 

 

 -

 

 

20,765 

 

 

 -

 

 

20,765 

Contributions by noncontrolling interests

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

3,470 

 

 

3,470 

Net income

 

 -

 

 

 -

 

 

 -

 

 

1,460,439 

 

 

 -

 

 

1,460,439 

 

 

 -

 

 

1,460,439 

Net income allocated to noncontrolling interests

 -

 

 

 -

 

 

 -

 

 

(6,863)

 

 

 -

 

 

(6,863)

 

 

6,863 

 

 

 -

Distributions to equity holders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred shares (Note 7)

 

 -

 

 

 -

 

 

 -

 

 

(238,214)

 

 

 -

 

 

(238,214)

 

 

 -

 

 

(238,214)

Noncontrolling interests

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(7,586)

 

 

(7,586)

Common shares and restricted share units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($7.30 per share)

 

 -

 

 

 -

 

 

 -

 

 

(1,267,544)

 

 

 -

 

 

(1,267,544)

 

 

 -

 

 

(1,267,544)

Other comprehensive loss (Note 2)

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(26,558)

 

 

(26,558)

 

 

 -

 

 

(26,558)

Balances at December 31, 2016

$

4,367,500 

 

$

17,329 

 

$

5,609,768 

 

$

(487,581)

 

$

(95,106)

 

$

9,411,910 

 

$

29,744 

 

$

9,441,654 







 

See accompanying notes.

F-6


 

PUBLIC STORAGE

STATEMENTS OF CASH FLOWS

 (Amounts in thousands)

 









 

 

 

 

 

 

 

 



For the Years Ended December 31,



2016

 

2015

 

2014

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

$

1,460,439 

 

$

1,317,689 

 

$

1,149,955 

Adjustments to reconcile net income to net cash provided

 

 

 

 

 

 

 

 

by operating activities:

 

 

 

 

 

 

 

 

Gain on real estate investment sales

 

(689)

 

 

(18,503)

 

 

(2,479)

Depreciation and amortization

 

433,314 

 

 

426,008 

 

 

437,114 

Equity in earnings of unconsolidated real estate entities

 

(56,756)

 

 

(50,937)

 

 

(88,267)

Distributions from retained earnings of unconsolidated

 

 

 

 

 

 

 

 

real estate entities

 

84,397 

 

 

35,695 

 

 

83,458 

Foreign currency exchange (gain) loss

 

(17,570)

 

 

(306)

 

 

7,047 

Shared-based compensation expense

 

37,483 

 

 

32,570 

 

 

29,541 

Other

 

4,718 

 

 

6,063 

 

 

(12,827)

Total adjustments

 

484,897 

 

 

430,590 

 

 

453,587 

Net cash provided by operating activities

 

1,945,336 

 

 

1,748,279 

 

 

1,603,542 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures to maintain real estate facilities 

 

(81,435)

 

 

(65,594)

 

 

(80,962)

Construction in process

 

(269,916)

 

 

(228,478)

 

 

(141,569)

Acquisition of real estate facilities and intangible assets

(416,178)

 

 

(177,076)

 

 

(410,210)

Distributions in excess of retained earnings from

 

 

 

 

 

 

 

 

unconsolidated real estate entities

 

67,420 

 

 

 -

 

 

 -

Proceeds from sale of real estate investments

 

998 

 

 

15,013 

 

 

17,246 

Disposition of portion of loan receivable from

 

 

 

 

 

 

 

 

Shurgard Europe

 -

 

 

 -

 

 

216,217 

Repayments of loan receivable from Shurgard Europe

 

 -

 

 

 -

 

 

204,947 

Other

 

(17,615)

 

 

16,030 

 

 

(4,000)

Net cash used in investing activities

 

(716,726)

 

 

(440,105)

 

 

(198,331)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repayments on bank credit facility

 

 -

 

 

 -

 

 

(50,100)

Repayments on term loan

 

 -

 

 

 -

 

 

(700,000)

Repayments on notes payable

 

(36,459)

 

 

(17,237)

 

 

(44,406)

Issuance of senior unsecured notes

 

113,620 

 

 

264,255 

 

 

 -

Issuance of preferred shares

 

1,136,203 

 

 

 -

 

 

738,954 

Issuance of common shares

 

25,541 

 

 

29,663 

 

 

37,872 

Redemption of preferred shares

 

(862,500)

 

 

(270,000)

 

 

 -

Cash paid upon vesting of restricted share units

 

(15,357)

 

 

(15,678)

 

 

(11,449)

Acquisition of noncontrolling interests

 

 -

 

 

(5,492)

 

 

(721)

Contributions by noncontrolling interests

 

3,470 

 

 

1,562 

 

 

 -

Distributions paid to Public Storage shareholders

 

(1,505,758)

 

 

(1,371,031)

 

 

(1,200,545)

Distributions paid to noncontrolling interests

 

(7,586)

 

 

(7,325)

 

 

(6,469)

Net cash used in financing activities

 

(1,148,826)

 

 

(1,391,283)

 

 

(1,236,864)

Net increase (decrease) in cash and cash equivalents

 

79,784 

 

 

(83,109)

 

 

168,347 

Net effect of foreign exchange translation on cash and cash equivalents

 

(381)

 

 

(318)

 

 

196 

Cash and cash equivalents at the beginning of the period

 

104,285 

 

 

187,712 

 

 

19,169 

Cash and cash equivalents at the end of the period

$

183,688 

 

$

104,285 

 

$

187,712 

See accompanying notes.

F-7


 

PUBLIC STORAGE

STATEMENTS OF CASH FLOWS

 (Amounts in thousands)

 





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



For the Years Ended December 31,



2016

 

2015

 

2014

Supplemental schedule of non-cash investing and

 

 

 

 

 

 

 

 

financing activities:

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Foreign currency translation adjustment:

 

 

 

 

 

 

 

 

Real estate facilities, net of accumulated depreciation

$

1,317 

 

$

500 

 

$

673 

Investments in unconsolidated real estate entities

 

24,099 

 

 

19,583 

 

 

47,251 

Senior unsecured notes

 

(17,750)

 

 

(315)

 

 

 -

Loan receivable from Shurgard Europe

 

 -

 

 

 -

 

 

6,975 

Accumulated other comprehensive loss

 

(8,047)

 

 

(20,086)

 

 

(54,703)



 

 

 

 

 

 

 

 

Real estate acquired in exchange for assumption of mortgage notes

(12,945)

 

 

(8,311)

 

 

(20,460)

Mortgage notes assumed in connection with acquisition of real estate

 

12,945 

 

 

8,311 

 

 

20,460 



 

 

 

 

 

 

 

 

Accrued construction costs and capital expenditures:

 

 

 

 

 

 

 

 

Capital expenditures to maintain real estate facilities 

 

(4,612)

 

 

2,525 

 

 

1,178 

Construction in process

 

(18,238)

 

 

(9,623)

 

 

(8,830)

Accrued and other liabilities

 

22,850 

 

 

7,098 

 

 

7,652 





 

See accompanying notes.

F-8


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

December 31, 2016

 

1.Description of the Business

Public Storage (referred to herein as “the Company”, “we”, “us”, or “our”), a Maryland real estate investment trust (“REIT”), was organized in 1980.  Our principal business activities include the ownership and operation of self-storage facilities which offer storage spaces for lease, generally on a month-to-month basis, for personal and business use, ancillary activities such as merchandise sales and tenant reinsurance to the tenants at our self-storage facilities, as well as the acquisition and development of additional self-storage space. 

At December 31, 2016, we have direct and indirect equity interests in 2,348 self-storage facilities (with approximately 154 million net rentable square feet) located in 38 states in the United States (“U.S.”) operating under the “Public Storage” name.  We also own one self-storage facility in London, England and we have a 49% interest in Shurgard Europe, which owns 218 self-storage facilities (with approximately 12 million net rentable square feet) located in seven Western European countries, all operating under the “Shurgard” name.  We also have direct and indirect equity interests in approximately 29 million net rentable square feet of commercial space located in eight states in the U.S. primarily owned and operated by PS Business Parks, Inc. (“PSB”) under the “PS Business Parks” name.  At December 31, 2016, we have an approximate 42% common equity interest in PSB.

Disclosures of the number and square footage of facilities, as well as the number and coverage of tenant reinsurance policies (Note 12) are unaudited and outside the scope of our independent registered public accounting firm’s review of our financial statements in accordance with the standards of the Public Company Accounting Oversight Board (U.S.). 

2.Summary of Significant Accounting Policies

Basis of Presentation

The financial statements are presented on an accrual basis in accordance with U.S. generally accepted accounting principles (“GAAP”) as defined in the Financial Accounting Standards Board Accounting Standards Codification (the “Codification”). 

On our statement of cash flows for the years ended December 31, 2015 and 2014, we reclassified the $15.7 million and $11.4 million, respectively, we paid for the restricted share units that we withheld upon their vesting for employee tax requirements from a reduction in cash flows from operating activities to a reduction in cash flows from financing activities.  This reclassification was in connection with a recently issued accounting pronouncement related to employee share-based payment accounting we early adopted effective January 1, 2016 (see “Recent Accounting Pronouncements and Guidance” below).

Consolidation and Equity Method of Accounting

We consider entities to be Variable Interest Entities (“VIEs”) when they have insufficient equity to finance their activities without additional subordinated financial support provided by other parties, or the equity holders as a group do not have a controlling financial interest.  We consolidate VIEs when we have (i) the power to direct the activities most significantly impacting economic performance, and (ii) either the obligation to absorb losses or the right to receive benefits from the VIE.  We have no involvement with any material VIEs.  We consolidate all other entities when we control them through voting shares or contractual rights.  The entities we consolidate, for the period in which the reference applies, are referred to collectively as the “Subsidiaries”, and we eliminate intercompany transactions and balances. 

We account for our investments in entities that we do not consolidate but have significant influence over using the equity method of accounting.  These entities, for the periods in which the reference applies, are

F-9


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

December 31, 2016

 

referred to collectively as the “Unconsolidated Real Estate Entities”, eliminating intra-entity profits and losses and amortizing any differences between the cost of our investment and the underlying equity in net assets against equity in earnings as if the Unconsolidated Real Estate Entity were a consolidated subsidiary. 

When we begin consolidating an entity, we record a gain or loss representing the differential between the book value and fair value of any preexisting equity interest.  All changes in consolidation status are reflected prospectively.

Collectively, at December 31, 2016, the Company and the Subsidiaries own 2,336 self-storage facilities in the U.S., one self-storage facility in London, England and three commercial facilities in the U.S.  At December 31, 2016, the Unconsolidated Real Estate Entities are comprised of PSB, Shurgard Europe, as well as limited partnerships that own an aggregate of 12 self-storage facilities in the U.S.

Use of Estimates

The financial statements and accompanying notes reflect our estimates and assumptions.  Actual results could differ from those estimates and assumptions.

Income Taxes

We have elected to be treated as a REIT, as defined in the Internal Revenue Code of 1986, as amended (the “Code”).  As a REIT, we do not incur federal income tax if we distribute 100% of our REIT taxable income each year, and if we meet certain organizational and operational rules.  We believe we have met these REIT requirements for all periods presented herein.  Accordingly, we have recorded no federal income tax expense related to our REIT taxable income.

Our merchandise and tenant reinsurance operations are subject to corporate income tax and such taxes are included in ancillary cost of operations.  We also incur income and other taxes in certain states, which are included in general and administrative expense. 

We recognize tax benefits of uncertain income tax positions that are subject to audit only if we believe it is more likely than not that the position would ultimately be sustained assuming the relevant taxing authorities had full knowledge of the relevant facts and circumstances of our positions.  As of December 31, 2016, we had no tax benefits that were not recognized.

Real Estate Facilities

Real estate facilities are recorded at cost.  We capitalize all costs incurred to acquire, develop, construct, renovate and improve facilities, including interest and property taxes incurred during the construction period and, effective October 1, 2016, the external transaction costs associated with acquisitions of real estate. Prior to October 1, 2016, transaction costs for acquisitions were included in general and administrative expense on our income statements in 2016, 2015, and 2014.  This change was made due to a change in GAAP, which results in real estate facility acquisitions generally being considered acquisitions of assets rather than business combinations.  We allocate the net acquisition cost of acquired real estate facilities to the underlying land, buildings, and identified intangible assets based upon their respective individual estimated fair values. 

Costs associated with dispositions of real estate, as well as repairs and maintenance costs, are expensed as incurred.  We depreciate buildings and improvements on a straight-line basis over estimated useful lives ranging generally between 5 to 25 years.

F-10


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

December 31, 2016

 

Other Assets

Other assets primarily consist of rents receivable from our tenants, prepaid expenses and restricted cash.

Accrued and Other Liabilities

Accrued and other liabilities consist primarily of rents prepaid by our tenants, trade payables, property tax accruals, accrued payroll, accrued tenant reinsurance losses, and contingent loss accruals when probable and estimable.  We believe the fair value of our accrued and other liabilities approximates book value, due to the short period until repayment.  We disclose the nature of significant unaccrued losses that are reasonably possible of occurring and, if estimable, a range of exposure.

Cash Equivalents, Marketable Securities and Other Financial Instruments

Cash equivalents represent highly liquid financial instruments such as money market funds with daily liquidity or short-term commercial paper or treasury securities maturing within three months of acquisition.  Cash and cash equivalents which are restricted from general corporate use are included in other assets.  We believe that the book value of all such financial instruments for all periods presented approximates fair value, due to the short period to maturity.

Transfers of financial assets are recorded as sales when the asset is put presumptively beyond our and our creditors’ reach, there is no impediment to the transferee’s right to pledge or exchange the asset, we have surrendered effective control of the asset, we have no actual or effective right or requirement to repurchase the asset and, in the case of a transfer of a participating interest, there is no impediment to our right to pledge or exchange the participating interest we retain.

Fair Value

As used herein, the term “fair value” is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  Our estimates of fair value involve considerable judgment and are not necessarily indicative of the amounts that could be realized in current market exchanges.

We estimate the fair value of our cash and cash equivalents, marketable securities, other assets, debt, and other liabilities by applying a discount rate to the future cash flows of the financial instrument.  The discount rate is based upon quoted interest rates for securities that have similar characteristics such as credit quality and time to maturity; such quoted interest rates are referred to generally as “Level 2” inputs.

Currency and Credit Risk

Financial instruments that are exposed to credit risk consist primarily of cash and cash equivalents, certain portions of other assets including rents receivable from our tenants and restricted cash.  Cash equivalents we invest in are either money market funds with a rating of at least AAA by Standard &  Poor’s, commercial paper that is rated A1 by Standard & Poor’s or deposits with highly rated commercial banks.

At December 31, 2016, due primarily to our investment in Shurgard Europe (Note 4) and our senior unsecured notes denominated in Euros (Note 5), our operating results and financial position are affected by fluctuations in currency exchange rates between the Euro, and to a lesser extent, other European currencies, against the U.S. Dollar. 

F-11


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

December 31, 2016

 

Goodwill and Other Intangible Assets

Intangible assets are comprised of goodwill, the “Shurgard” trade name, acquired customers in place, and leasehold interests in land.

Goodwill totaled $174.6 million at December 31, 2016 and 2015.  The “Shurgard” trade name, which is used by Shurgard Europe pursuant to a fee-based licensing agreement, has a book value of $18.8 million at December 31, 2016 and 2015.  Goodwill and the “Shurgard” trade name have indefinite lives and are not amortized.

Acquired customers in place and leasehold interests in land are finite-lived and are amortized relative to the benefit of the customers in place or the benefit to land lease expense to each period.  At December 31, 2016, these intangibles had a net book value of $19.3 million ($18.0 million at December 31, 2015).  Accumulated amortization totaled $54.0 million at December 31, 2016 ($66.4 million at December 31, 2015), and amortization expense of $21.7 million, $26.1 million and $48.4 million was recorded in 2016, 2015 and 2014, respectively.  The estimated future amortization expense for our finite-lived intangible assets at December 31, 2016 is approximately $11.2 million in 2017, $2.3 million in 2018 and $5.8 million thereafter.  During 2016, 2015 and 2014, intangibles were increased $23.0 million, $8.9 million and $30.2 million, respectively, in connection with the acquisition of self-storage facilities (Note 3). 

Evaluation of Asset Impairment

We evaluate our real estate and finite-lived intangible assets for impairment each quarter.  If there are indicators of impairment and we determine that the asset is not recoverable from future undiscounted cash flows to be received through the asset’s remaining life (or, if earlier, the expected disposal date), we record an impairment charge to the extent the carrying amount exceeds the asset’s estimated fair value or net proceeds from expected disposal. 

We evaluate our investments in unconsolidated real estate entities for impairment on a quarterly basis.  We record an impairment charge to the extent the carrying amount exceeds estimated fair value, when we believe any such shortfall is other than temporary.  

We evaluate goodwill for impairment annually and whenever relevant events, circumstances and other related factors indicate that fair value of the related reporting unit may be less than the carrying amount.  If we determine that the fair value of the reporting unit exceeds the aggregate carrying amount, no impairment charge is recorded.  Otherwise, we record an impairment charge to the extent the carrying amount of the goodwill exceeds the amount that would be allocated to goodwill if the reporting unit were acquired for estimated fair value.  

We evaluate other indefinite-lived intangible assets, such as the “Shurgard” trade name for impairment at least annually and whenever relevant events, circumstances and other related factors indicate that the fair value is less than the carrying amount.  When we conclude that it is likely that the asset is not impaired, we do not record an impairment charge and no further analysis is performed.  Otherwise, we record an impairment charge to the extent the carrying amount exceeds the asset’s estimated fair value. 

No impairments were recorded in any of our evaluations for any period presented herein.

F-12


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

December 31, 2016

 

Revenue and Expense Recognition

Revenues from self-storage facilities, which are primarily composed of rental income earned pursuant to month-to-month leases, as well as associated late charges and administrative fees, are recognized as earned.  Promotional discounts reduce rental income over the promotional period, which is generally one month.  Ancillary revenues and interest and other income are recognized when earned.  Equity in earnings of unconsolidated real estate entities represents our pro-rata share of the earnings of the Unconsolidated Real Estate Entities. 

We accrue for property tax expense based upon actual amounts billed and, in some circumstances, estimates when bills or assessments have not been received from the taxing authorities.  If these estimates are incorrect, the timing and amount of expense recognition could be incorrect.  Cost of operations, general and administrative expense, interest expense, as well as advertising expenditures are expensed as incurred. 

Foreign Currency Exchange Translation

The local currency (primarily the Euro) is the functional currency for our interests in foreign operations.  The related balance sheet amounts are translated into U.S. Dollars at the exchange rates at the respective financial statement date, while amounts on our statements of income are translated at the average exchange rates during the respective period.  When financial instruments denominated in a currency other than the U.S. Dollar are expected to be settled in cash in the foreseeable future, the impact of changes in the U.S. Dollar equivalent are reflected in current earnings.  The Euro was translated at exchange rates of approximately 1.052 U.S. Dollars per Euro at December 31, 2016 (1.091 at December 31, 2015), and average exchange rates of 1.107,  1.110 and 1.329 for the years ended December 31, 2016, 2015 and 2014, respectively.  Cumulative translation adjustments, to the extent not included in cumulative net income, are included in equity as a component of accumulated other comprehensive income (loss).

Comprehensive Income

Total comprehensive income represents net income, adjusted for changes in other comprehensive income (loss) for the applicable period.  The aggregate foreign currency exchange gains and losses reflected on our statements of comprehensive income are comprised primarily of foreign currency exchange gains and losses on our investment in Shurgard Europe and our senior unsecured notes denominated in Euros.

Net Income per Common Share

Net income is allocated to (i) noncontrolling interests based upon their share of the net income of the Subsidiaries, (ii) preferred shareholders, to the extent redemption cost exceeds the related original net issuance proceeds (an “EITF D-42 allocation”), and (iii) the remaining net income allocated to each of our equity securities based upon the dividends declared or accumulated during the period, combined with participation rights in undistributed earnings. 

Basic and diluted net income per common share are each calculated based upon net income allocable to common shareholders presented on the face of our income statement, divided by (i) in the case of basic net income per common share, weighted average common shares, and (ii) in the case of diluted income per share, weighted average common shares adjusted for the impact, if dilutive, of stock options outstanding (Note 9).  The following table reconciles from basic to diluted common shares outstanding:

F-13


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

December 31, 2016

 



 

 

 

 

 

 

 

 

 



 

 



 

For the Years Ended December 31,



 

2016

 

2015

 

 

2014



 

(Amounts in thousands)



 

 

 

 

 

 

 

 

 



Weighted average common shares and equivalents

 

 

 

 

 

 

 

 



outstanding:

 

 

 

 

 

 

 

 



Basic weighted average common

 

 

 

 

 

 

 

 



shares outstanding

 

173,091 

 

 

172,699 

 

 

172,251 



Net effect of dilutive stock options -

 

 

 

 

 

 

 

 



based on treasury stock method

 

787 

 

 

811 

 

 

887 



Diluted weighted average common

 

 

 

 

 

 

 

 



shares outstanding

 

173,878 

 

 

173,510 

 

 

173,138 





3.Real Estate Facilities

Activity in real estate facilities during 2016, 2015 and 2014 is as follows:  







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

For the Years Ended December 31,



 

2016

 

 

2015

 

 

2014



 

(Amounts in thousands)



Operating facilities, at cost:

 

 

 

 

 

 

 

 



Beginning balance

$

13,205,261 

 

$

12,863,235 

 

$

12,286,256 



Capital expenditures to maintain real estate facilities

86,047 

 

 

63,069 

 

 

79,784 



Acquisitions

 

406,154 

 

 

176,444 

 

 

400,514 



Dispositions

 

 -

 

 

(19,970)

 

 

(112)



Newly developed facilities opened for operation

 

268,905 

 

 

123,484 

 

 

98,162 



Impact of foreign exchange rate changes

 

(3,138)

 

 

(1,001)

 

 

(1,369)



Ending balance

 

13,963,229 

 

 

13,205,261 

 

 

12,863,235 



Accumulated depreciation:

 

 

 

 

 

 

 

 



Beginning balance

 

(4,866,738)

 

 

(4,482,520)

 

 

(4,098,814)



Depreciation expense

 

(406,046)

 

 

(393,605)

 

 

(384,412)



Dispositions

 

 -

 

 

8,886 

 

 

10 



Impact of foreign exchange rate changes

 

1,821 

 

 

501 

 

 

696 



Ending balance

 

(5,270,963)

 

 

(4,866,738)

 

 

(4,482,520)



Construction in process:

 

 

 

 

 

 

 

 



Beginning balance

 

219,190 

 

 

104,573 

 

 

52,336 



Current development

 

288,154 

 

 

238,101 

 

 

150,399 



Newly developed facilities opened for operation

 

(268,905)

 

 

(123,484)

 

 

(98,162)



Transfer to other assets

 

(8,129)

 

 

 -

 

 

 -



Ending balance

 

230,310 

 

 

219,190 

 

 

104,573 



Total real estate facilities at December 31,

$

8,922,576 

 

$

8,557,713 

 

$

8,485,288 

During 2016, we acquired 55 self-storage facilities (4,121,000 net rentable square feet), for a total cost of $429.1 million, consisting of $416.2 million in cash and the assumption of $12.9 million in mortgage notes.  Approximately $23.0 million of the total cost was allocated to intangible assets.  We completed development

F-14


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

December 31, 2016

 

and redevelopment activities during 2016, adding 2,275,000 net rentable square feet of self-storage space, at an aggregate cost of $268.9 million.  Construction in process at December 31, 2016 consists of projects to develop new self-storage facilities and redevelop existing self-storage facilities, which would add a total of 5.3 million net rentable square feet of storage space, for an aggregate estimated cost of approximately $660.2 million.  During 2016, we also transferred $8.1 million of accumulated construction costs to other assets, with respect to a development project that was suspended.

During 2015, we acquired 17 self-storage facilities (1,285,000 net rentable square feet) and the leasehold interest in the land of one of our existing self-storage facilities, for a total cost of $185.4 million, consisting of $177.1 million in cash and the assumption of $8.3 million in mortgage notes.  Approximately $8.9 million of the total cost was allocated to intangible assets.  We completed expansion and development activities during 2015, adding 1,312,000 net rentable square feet of self-storage space, at an aggregate cost of $123.5 million.  During 2015, we sold one commercial facility and two self-storage facilities in connection with eminent domain proceedings for a total of $29.7 million in cash proceeds, of which $14.7 million was collected in 2014, and recorded related gains on real estate sales totaling $18.5 million.

During 2014, we acquired 44 self-storage facilities (3,442,000 net rentable square feet), for a total cost of $430.7 million, consisting of $410.2 million in cash and the assumption of $20.5 million in mortgage notes.  Approximately $30.2 million of the total cost was allocated to intangible assets.  We completed expansion and development activities during 2014, adding 1,145,000 net rentable square feet of self-storage space, at an aggregate cost of $98.2 million.  We received approximately $2.6 million in proceeds for real estate disposed of in 2014.



At December 31, 2016, the adjusted basis of real estate facilities for federal tax purposes was approximately $9.4 billion (unaudited).

4.Investments in Unconsolidated Real Estate Entities

The following table sets forth our investments in, and equity in earnings of, the Unconsolidated Real Estate Entities (amounts in thousands):



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Investments in Unconsolidated Real Estate Entities at December 31,

 

Equity in Earnings of Unconsolidated Real Estate Entities for the Year Ended December 31,



 

2016

 

2015

 

2016

 

2015

 

2014



 

 

 

 

 

 

 

 

 

 



PSB

$

402,765 

 

$

414,450 

 

$

31,707 

 

$

34,155 

 

$

56,280 



Shurgard Europe

 

280,019 

 

 

388,367 

 

 

22,324 

 

 

14,272 

 

 

29,900 



Other Investments

 

6,423 

 

 

6,491 

 

 

2,725 

 

 

2,510 

 

 

2,087 



Total

$

689,207 

 

$

809,308 

 

$

56,756 

 

$

50,937 

 

$

88,267 



During 2016, 2015 and 2014, we received cash distributions from our investments in the Unconsolidated Real Estate Entities totaling $151.8 million, $35.7 million and $83.5 million, respectively.  For 2016, $67.4 million of the distributions received exceeded the retained earnings of the Unconsolidated Real Estate Entities and are presented as an investing activity on our statement of cash flows.  At December 31, 2016, the cost of our investment in the Unconsolidated Real Estate Entities exceeds our pro rata share of the underlying equity by approximately $54.0 million ($62.0 million at December 31, 2015).  This differential is being amortized as a reduction in equity in earnings of the Unconsolidated Real Estate Entities based upon allocations to the underlying net assets.  Such amortization was approximately $1.8 million, $2.4 million and $4.4 million during 2016, 2015 and 2014, respectively.  

F-15


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

December 31, 2016

 

Investment in PSB

PSB is a REIT traded on the New York Stock Exchange.  We have an approximate 42% common equity interest in PSB as of December 31, 2016 and 2015, comprised of our ownership of 7,158,354 shares of PSB’s common stock and 7,305,355 limited partnership units (“LP Units”) in an operating partnership controlled by PSB.  The LP Units are convertible at our option, subject to certain conditions, on a one-for-one basis into PSB common stock.  Based upon the closing price at December 31, 2016 ($116.52 per share of PSB common stock), the shares and units we owned had a market value of approximately $1.7 billion.  At December 31, 2016, the adjusted tax basis of our investment in PSB was less than its book value.

Included in equity in earnings of unconsolidated real estate entities is our $11.3 million and $36.5 million share of gains on sale of facilities recorded by PSB for 2015 and 2014, respectively.  PSB did not dispose of any facilities during 2016.

The following table sets forth selected financial information of PSB.  The amounts represent all of PSB’s balances and not our pro-rata share.





 

 

 

 

 

 

 

 



2016

 

2015

 

2014



(Amounts in thousands)

For the year ended December 31,

 

 

 

 

 

 

 

 

Total revenue

$

387,389 

 

$

373,675 

 

$

376,915 

Costs of operations

 

(123,108)

 

 

(121,224)

 

 

(127,371)

Depreciation and amortization

 

(99,486)

 

 

(105,394)

 

 

(110,357)

General and administrative

 

(14,862)

 

 

(13,582)

 

 

(13,639)

Other items

 

(4,949)

 

 

(12,740)

 

 

(13,221)

Gain on sale of facilities

 

 -

 

 

28,235 

 

 

92,373 

Net income

 

144,984 

 

 

148,970 

 

 

204,700 

Allocations to preferred shareholders and

 

 

 

 

 

 

 

 

restricted share unitholders

 

(65,157)

 

 

(62,184)

 

 

(60,817)

Net income allocated to common shareholders

 

 

 

 

 

 

 

 

and LP Unitholders

$

79,827 

 

$

86,786 

 

$

143,883 



 

 

 

 

 

 

 

 









 

 

 

 

 

 

 

 

As of December 31,

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Total assets (primarily real estate)

$

2,119,371 

 

$

2,186,658 

 

$

2,227,114 

Debt

 

 -

 

 

250,000 

 

 

250,000 

Preferred stock called for redemption

 

230,000 

 

 

 -

 

 

 -

Other liabilities

 

78,657 

 

 

76,059 

 

 

68,905 

Equity:

 

 

 

 

 

 

 

 

Preferred stock

 

879,750 

 

 

920,000 

 

 

995,000 

Common equity and LP units

 

930,964 

 

 

940,599 

 

 

913,209 

F-16


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

December 31, 2016

 

Investment in Shurgard Europe

For all periods presented, we had a 49% equity investment in Shurgard Europe and our joint venture partner owns the remaining 51% interest.  Our equity in earnings of Shurgard Europe is comprised of our 49% share of Shurgard Europe’s net income and 49% of the trademark license fees that Shurgard Europe pays to us for the use of the “Shurgard” trademark, as well as certain interest income received in 2014 on a shareholder loan described below.  The remaining 51% of the license fees are classified as interest and other income on our income statement. 

At December 31, 2013, Shurgard Europe owed us €311.0 million ($428.1 million).  This loan bore interest at a 9.0% annual rate, which we believed represented the market rate of interest for loans with similar characteristics.  In January 2014, our joint venture partner in Shurgard Europe acquired a 51% interest in the loan at face value for €158.6 million ($216.2 million) in cash.  In July 2014, Shurgard Europe fully repaid the loan, and we received our 49% share of the loan totaling €152.4 million ($204.9 million) in cash.  We collected $12.2 million in interest on this loan during 2014, of which $10.7 million was reflected as equity in earnings of Shurgard Europe, and $1.5 million was reflected as interest and other income.  During 2014, we also recorded a $7.0 million foreign currency exchange loss on the loan due to changes in foreign currency exchange rates. 

Changes in foreign currency exchange rates caused our investment in Shurgard Europe to decrease by approximately $24.1 million, $19.6 million and $47.3 million in 2016, 2015 and 2014, respectively.  Included in our equity in earnings of Shurgard Europe for 2016 is a $941,000 increase for the recognition of accumulated comprehensive income, representing a decrease to equity rather than an increase to investments in unconsolidated real estate entities.

The following table sets forth selected consolidated financial information of Shurgard Europe based upon all of Shurgard Europe’s balances for all periods, rather than our pro rata share.  Such amounts are based upon our historical acquired book basis.







 

 

 

 

 

 

 

 

 



 

2016

 

2015

 

2014



 

(Amounts in thousands)

For the year ended December 31,

 

 

 

 

 

 

 

 

 

Self-storage and ancillary revenues

 

$

252,321 

 

$

236,990 

 

$

254,136 

Self-storage and ancillary cost of operations

 

 

(97,099)

 

 

(93,575)

 

 

(100,177)

Depreciation and amortization

 

 

(62,829)

 

 

(66,665)

 

 

(61,796)

General and administrative

 

 

(13,199)

 

 

(12,619)

 

 

(9,565)

Interest expense on third party debt 

 

 

(20,617)

 

 

(16,695)

 

 

(9,607)

Trademark license fee payable to Public Storage

 

 

(2,531)

 

 

(2,376)

 

 

(2,544)

Income tax expense

 

 

(10,669)

 

 

(10,799)

 

 

(5,399)

Interest expense on shareholder loan

 

 

 -

 

 

 -

 

 

(21,761)

Costs of acquiring facilities and other, net (a)

 

 

(2,348)

 

 

(7,509)

 

 

(6,573)



 

 

 

 

 

 

 

 

 

Net income

 

$

43,029 

 

$

26,752 

 

$

36,714 

Average exchange rates of Euro to the U.S. Dollar

 

 

1.107 

 

 

1.110 

 

 

1.329 



 

 

 

 

 

 

 

 

 

(a)

Amounts during 2016 include a $1.9 million foreign exchange gain on a repaid intercompany note between entities consolidated by Shurgard Europe, and amounts during 2016, 2015 and 2014 include $410,000,  $10.5 million and $4.3 million, respectively, associated with the acquisition of real estate facilities.

F-17


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

December 31, 2016

 





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

2016

 

 

2015

 

 

2014



 

(Amounts in thousands)

As of December 31,

 

 

 

 

 

 

 

 

 

Total assets (primarily self-storage facilities)

 

$

1,261,912 

 

$

1,476,632 

 

$

1,404,246 

Total debt to third parties

 

 

666,926 

 

 

662,336 

 

 

500,767 

Other liabilities

 

 

106,916 

 

 

110,522 

 

 

180,546 

Equity

 

 

488,070 

 

 

703,774 

 

 

722,933 



 

 

 

 

 

 

 

 

 

Exchange rate of Euro to U.S. Dollar

 

 

1.052 

 

 

1.091 

 

 

1.216 





5.Borrowings

Credit Facility

We have a revolving credit agreement (the “Credit Facility”) with a $500 million borrowing limit, which expires on March 31, 2020.  Amounts drawn on the Credit Facility bear annual interest at rates ranging from LIBOR plus 0.850% to LIBOR plus 1.450% depending upon the ratio of our Total Indebtedness to Gross Asset Value (as defined in the Credit Facility) (LIBOR plus 0.850% at December 31, 2016).  We are also required to pay a quarterly facility fee ranging from 0.080% per annum to 0.250% per annum depending upon the ratio of our Total Indebtedness to our Gross Asset Value (0.080% per annum at December 31, 2016).  At December 31, 2016 and February 28, 2017, we had no outstanding borrowings under this Credit Facility.  We had undrawn standby letters of credit, which reduce our borrowing capacity, totaling $15.2 million at December 31, 2016 ($14.9 million at December 31, 2015).  The Credit Facility has various customary restrictive covenants, all of which we were in compliance with at December 31, 2016.

Senior Unsecured Notes and Term Loan

At December 31, 2016 and 2015, we had €342.0 million ($359.8 million) and €242.0 million ($263.9 million), respectively, of Euro-denominated senior unsecured notes payable to institutional investors (collectively, the “Senior Unsecured Notes”).  The Senior Unsecured Notes consists of two tranches, (i) €242.0 million (2.175% fixed rate of interest) which was issued on November 3, 2015 for $264.3 million in net proceeds upon converting the Euros to U.S. Dollars, which matures in November 2025 and (ii) €100.0 million (1.54% fixed rate of interest), which was issued on April 12, 2016 for $113.6 million in net proceeds upon converting the Euros to U.S. Dollars, which matures in April 2024.  The fair value of our Senior Unsecured Notes was approximately $381.8 million at December 31, 2016 ($263.9 million at December 31, 2015).

We reflect changes in the U.S. Dollar equivalent of the amount payable, as a result of changes in foreign exchange rates as “foreign currency exchange gain (loss)” on our income statement (gains of $17.6 million and $306,000 for 2016 and 2015, respectively).  The Senior Unsecured Notes have various customary financial covenants, all of which we were in compliance with at December 31, 2016.

On December 2, 2013, we borrowed $700 million from Wells Fargo under an unsecured term loan.  The term loan was repaid in 2014.  We incurred origination costs of $1.9 million, which were amortized using the effective interest method through the date of extinguishment ($1.8 million for 2014).



F-18


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

December 31, 2016

 



Mortgage Notes

During 2016, 2015 and 2014, we assumed mortgage notes with aggregate contractual values of $12.9 million, $8.3 million and $19.8 million, respectively, and interest rates of 4.2%,  6.2% and 5.2%, respectively, which approximated market rates, in connection with the acquisition of real estate facilities.

The carrying amounts of our mortgage notes (the “Mortgage Notes”) at December 31, 2016 and 2015, totaled $30.9 million and $55.1 million, respectively, which approximates contractual note values and estimated fair values.  These notes were assumed in connection with acquisitions of real estate facilities and recorded at fair value with any premium or discount to the stated note balance amortized using the effective interest method.  At December 31, 2016, the notes are secured by 30 real estate facilities with a net book value of approximately $121.6 million, have contractual interest rates between 2.9% and 7.1%, and mature between November 2018 and September 2028.

At December 31, 2016, approximate principal maturities of our Senior Unsecured Notes and Mortgage Notes are (amounts in thousands):



 

 

 

 

 

 

 

 



Senior

 

Mortgage

 

 



Unsecured Notes

 

Notes

 

Total

2017

$

 -

 

$

1,665 

 

$

1,665 

2018

 

 -

 

 

11,241 

 

 

11,241 

2019

 

 -

 

 

1,505 

 

 

1,505 

2020

 

 -

 

 

1,585 

 

 

1,585 

2021

 

 -

 

 

1,503 

 

 

1,503 

Thereafter

 

359,810 

 

 

13,440 

 

 

373,250 



$

359,810 

 

$

30,939 

 

$

390,749 

Weighted average effective rate

 

2.0% 

 

 

4.0% 

 

 

2.2% 

Cash paid for interest totaled $9.4 million, $3.4 million and $9.0 million for 2016, 2015 and 2014, respectively.  Interest capitalized as real estate totaled $5.1 million, $2.7 million and $1.6 million in 2016, 2015 and 2014, respectively.

6.Noncontrolling Interests

At December 31, 2016, the noncontrolling interests represent (i) third-party equity interests in subsidiaries owning 14 operating self-storage facilities and seven self-storage facilities that are under construction and (ii) 231,978 partnership units held by third-parties in a subsidiary that are convertible on a one-for-one basis (subject to certain limitations) into common shares of the Company at the option of the unitholder (collectively, the “Noncontrolling Interests”).  At December 31, 2016, the Noncontrolling Interests cannot require us to redeem their interests, other than pursuant to a liquidation of the subsidiary.  During 2016, 2015 and 2014, we allocated a total of $6.9 million, $6.4 million and $5.8 million, respectively, of income to these interests; and we paid $7.6 million, $7.3 million and $6.5 million, respectively, in distributions to these interests. 

During 2015 and 2014, we acquired Noncontrolling Interests for $5.5 million and $721,000, respectively, in cash, substantially all of which was allocated to Paid-in-capital.  During 2016 and 2015, Noncontrolling Interests contributed $3.5 million and $1.6 million, respectively.    

F-19


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

December 31, 2016

 



7.Shareholders’ Equity

Preferred Shares

At December 31, 2016 and 2015, we had the following series of Cumulative Preferred Shares (“Preferred Shares”) outstanding:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

At December 31, 2016

 

At December 31, 2015



Series

 

Earliest Redemption Date

 

Dividend Rate

 

Shares Outstanding

 

Liquidation Preference

 

Shares Outstanding

 

Liquidation Preference



 

 

 

 

 

 

(Dollar amounts in thousands)



Series Q

 

4/14/2016

 

6.500% 

 

 -

 

$

 -

 

15,000 

 

$

375,000 



Series R

 

7/26/2016

 

6.350% 

 

 -

 

 

 -

 

19,500 

 

 

487,500 



Series S

 

1/12/2017

 

5.900% 

 

18,400 

 

 

460,000 

 

18,400 

 

 

460,000 



Series T

 

3/13/2017

 

5.750% 

 

18,500 

 

 

462,500 

 

18,500 

 

 

462,500 



Series U

 

6/15/2017

 

5.625% 

 

11,500 

 

 

287,500 

 

11,500 

 

 

287,500 



Series V

 

9/20/2017

 

5.375% 

 

19,800 

 

 

495,000 

 

19,800 

 

 

495,000 



Series W

 

1/16/2018

 

5.200% 

 

20,000 

 

 

500,000 

 

20,000 

 

 

500,000 



Series X

 

3/13/2018

 

5.200% 

 

9,000 

 

 

225,000 

 

9,000 

 

 

225,000 



Series Y

 

3/17/2019

 

6.375% 

 

11,400 

 

 

285,000 

 

11,400 

 

 

285,000 



Series Z

 

6/4/2019

 

6.000% 

 

11,500 

 

 

287,500 

 

11,500 

 

 

287,500 



Series A

 

12/2/2019

 

5.875% 

 

7,600 

 

 

190,000 

 

7,600 

 

 

190,000 



Series B

 

1/20/2021

 

5.400% 

 

12,000 

 

 

300,000 

 

 -

 

 

 -



Series C

 

5/17/2021

 

5.125% 

 

8,000 

 

 

200,000 

 

 -

 

 

 -



Series D

 

7/20/2021

 

4.950% 

 

13,000 

 

 

325,000 

 

 -

 

 

 -



Series E

 

10/14/2021

 

4.900% 

 

14,000 

 

 

350,000 

 

 -

 

 

 -



Total Preferred Shares

 

 

 

174,700 

 

$

4,367,500 

 

162,200 

 

$

4,055,000 

The holders of our Preferred Shares have general preference rights with respect to liquidation, quarterly distributions and any accumulated unpaid distributions.  Except under certain conditions and as noted below, holders of the Preferred Shares will not be entitled to vote on most matters.  In the event of a cumulative arrearage equal to six quarterly dividends, holders of all outstanding series of preferred shares (voting as a single class without regard to series) will have the right to elect two additional members to serve on our board of trustees (the “Board”) until the arrearage has been cured.  At December 31, 2016, there were no dividends in arrears.

Except under certain conditions relating to the Company’s qualification as a REIT, the Preferred Shares are not redeemable prior to the dates indicated on the table above.  On or after the respective dates, each of the series of Preferred Shares is redeemable at our option, in whole or in part, at $25.00 per depositary share, plus accrued and unpaid dividends.  Holders of the Preferred Shares cannot require us to redeem such shares.

Upon issuance of our Preferred Shares, we classify the liquidation value as preferred equity on our balance sheet with any issuance costs recorded as a reduction to Paid-in capital.

F-20


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

December 31, 2016

 

In 2016, we redeemed our Series Q and Series R Preferred Shares at par, for a total of $862.5 million in cash, before payment of accrued dividends. 

In 2016, we issued an aggregate 47.0 million depositary shares, each representing 1/1,000 of a share of our Series B, Series C, Series D and Series E Preferred Shares, at an issuance price of $25.00 per depositary share, for a total of $1,175.0  million in gross proceeds, and we incurred $38.8 million in issuance costs. 

In 2015, we redeemed our Series O and Series P Preferred Shares at par, for a total of $270.0 million in cash, before payment of accrued dividends.

In 2014, we issued an aggregate 30.5 million depositary shares, each representing 1/1,000 of a share of our Series Y, Series Z, and Series A Preferred Shares, at an issuance price of $25.00 per depositary share, for a total of $762.5 million in gross proceeds, and we incurred $23.5 million in issuance costs. 

In 2016 and 2015, we recorded $26.9 million $8.9 million, respectively, in EITF D-42 allocations of income from our common shareholders to the holders of our Preferred Shares in connection with redemptions of Preferred Shares.

Common Shares

During 2016, 2015 and 2014, activity with respect to the issuance or repurchase of our common shares was as follows (dollar amounts in thousands):



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

2016

 

2015

 

2014



 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

Employee stock-based compensation and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

exercise of stock options (Note 9)

 

 

367,546 

 

$

25,541 

 

 

475,687 

 

$

29,663 

 

 

669,263 

 

$

37,872 

Our Board previously authorized the repurchase from time to time of up to 35.0 million of our common shares on the open market or in privately negotiated transactions.  Through December 31, 2016, we repurchased approximately 23.7 million shares pursuant to this authorization; none of which were repurchased during the three years ended December 31, 2016.

At December 31, 2016 and 2015, we had 2,692,081 and 2,677,667, respectively, of common shares reserved in connection with our share-based incentive plans (see Note 9), and 231,978 shares reserved for the conversion of partnership units owned by Noncontrolling Interests.

The unaudited characterization of dividends for Federal income tax purposes is made based upon earnings and profits of the Company, as defined by the Internal Revenue Code.  Common share dividends including amounts paid to our common shareholders and our restricted share unitholders totaled $1.268 billion ($7.30 per share), $1.126 billion ($6.50 per share) and $967.9 million ($5.60 per share), for the years ended December 31, 2016, 2015 and 2014, respectively.  Preferred share dividends totaled $238.2 million, $245.1 million and $232.6 million for the years ended December 31, 2016, 2015 and 2014, respectively.

For the tax year ended December 31, 2016, 100% of the distributions for the common shares and all the various series of preferred shares were classified as ordinary income.  Such dividends do not constitute “qualified dividend income”.

F-21


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

December 31, 2016

 

8.Related Party Transactions

B. Wayne Hughes, our former Chairman and his family, including his daughter Tamara Hughes Gustavson and his son B. Wayne Hughes, Jr., who are both members of our Board, collectively own approximately 14.3% of our common shares outstanding at December 31, 2016.

At December 31, 2016, B. Wayne Hughes and Tamara Hughes Gustavson together owned and controlled 57 self-storage facilities in Canada.  These facilities operate under the “Public Storage” tradename, which we license to the owners of these facilities for use in Canada on a royalty-free, non-exclusive basis.  Our subsidiaries reinsure risks relating to loss of goods stored by customers in these facilities, and have received approximately $848,000,  $562,000 and $480,000 for the years ended December 31, 2016, 2015 and 2014, respectively.  Our right to continue receiving these premiums may be qualified.  We have no ownership interest in these facilities and we do not own or operate any facilities in Canada.  If we chose to acquire or develop our own facilities in Canada, we would have to share the use of the “Public Storage” name in Canada with the facilities’ owners.  We have a right of first refusal, subject to limitations, to acquire the stock or assets of the corporation engaged in the operation of these facilities (“PS Canada”) if their owners agree to sell them.  

9.Share-Based Compensation

Under various share-based compensation plans and under terms established by our Board or a committee thereof, we grant non-qualified options to purchase the Company’s common shares, as well as restricted share units (“RSUs”), to trustees, officers, and key employees.  

Stock options and RSUs are considered “granted” and “outstanding” as the terms are used herein, when (i) the Company and the recipient reach a mutual understanding of the key terms of the award, (ii) the award has been authorized, (iii) the recipient is affected by changes in the market price of our stock, and (iv) it is probable that any performance and service conditions will be met.  

As noted under “Recent Accounting Pronouncements and Guidance” in Note 11, we have elected to account for forfeitures of share-based payments as they occur, rather than estimating them in advance.  Accordingly, we recorded a cumulative-effect adjustment of $789,000 to increase accumulated deficit and increase paid-in capital as of January 1, 2016, representing the impact of estimated forfeitures on our cumulative share-based compensation expense recorded through December 31, 2015.

We amortize the grant-date fair value of awards as compensation expense over the service period, which begins on the grant date and ends on the vesting date.  For awards that are earned solely upon the passage of time and continued service, the entire cost of the award is amortized on a straight-line basis over the service period.  For awards with performance conditions, the individual cost of each vesting is amortized separately over each individual service period (the “accelerated attribution” method).

See also “net income per common share” in Note 2 for further discussion regarding the impact of RSUs and stock options on our net income per common share and income allocated to common shareholders.

Stock Options

Stock options vest over a three to five-year period, expire ten years after the grant date, and the exercise price is equal to the closing trading price of our common shares on the grant date.  Employees cannot require the Company to settle their award in cash.  We use the Black-Scholes option valuation model to estimate the fair value of our stock options. 

F-22


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

December 31, 2016

 

Outstanding stock option grants are included on a one-for-one basis in our diluted weighted average shares, to the extent dilutive, after applying the treasury stock method (based upon the average common share price during the period) to assumed exercise proceeds and measured but unrecognized compensation.

The stock options outstanding at December 31, 2016 have an aggregate intrinsic value (the excess, if any, of each option’s market value over the exercise price) of approximately $150.0 million and remaining average contractual lives of approximately six years.  The aggregate intrinsic value of exercisable stock options at December 31, 2016 amounted to approximately $126.8 million.  Approximately 360,000 of the stock options outstanding at December 31, 2016, have an exercise price of more than $200.  We have 429,556 stock options exercisable at December 31, 2016, that expire through June 30, 2018, with an average exercise price per share of $82.39.

Additional information with respect to stock options during 2016, 2015 and 2014 is as follows:    





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

2016

 

2015

 

2014



 

 

 

 

 

Weighted

 

 

 

 

 

Weighted

 

 

 

 

 

Weighted



 

 

 

 

 

Average

 

 

 

 

 

Average

 

 

 

 

 

Average



 

 

Number

 

 

Exercise

 

 

Number

 

 

Exercise

 

 

Number

 

 

Exercise



 

 

of

 

 

Price

 

 

of

 

 

Price

 

 

of

 

 

Price



 

 

Options

 

 

per Share

 

 

Options

 

 

per Share

 

 

Options

 

 

per Share

Options outstanding January 1,

 

 

1,940,279 

 

$

130.08 

 

 

2,085,544 

 

$

111.96 

 

 

2,174,211 

 

$

85.49 

Granted

 

 

310,000 

 

 

239.11 

 

 

335,000 

 

 

200.70 

 

 

485,000 

 

 

176.74 

Exercised

 

 

(254,839)

 

 

100.23 

 

 

(365,265)

 

 

80.99 

 

 

(570,417)

 

 

66.39 

Cancelled

 

 

 -

 

 

 -

 

 

(115,000)

 

 

163.15 

 

 

(3,250)

 

 

63.76 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options outstanding December 31,

 

 

1,995,440 

 

$

150.83 

 

 

1,940,279 

 

$

130.08 

 

 

2,085,544 

 

$

111.96 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at December 31,

 

 

1,105,433 

 

$

108.84 

 

 

1,150,272 

 

$

94.18 

 

 

1,321,537 

 

$

82.46 







 

 

 

 

 

 

 

 

 



 

2016

 

2015

 

2014



 

 

 

 

 

 

 

 

 

Stock option expense for the year (in 000's)

 

$

5,180 

 

$

3,871 

 

$

3,216 



 

 

 

 

 

 

 

 

 

Aggregate exercise date intrinsic value of options exercised during the year (in 000's)

$

33,228 

 

$

46,719 

 

$

59,322 



 

 

 

 

 

 

 

 

 

Average assumptions used in valuing options with the Black-Scholes method:

 

 

 

 

 

 

 

 

 

Expected life of options in years, based upon historical experience

 

 

 

 

 

 

Risk-free interest rate

 

 

1.2% 

 

 

1.6% 

 

 

1.6% 

Expected volatility, based upon historical volatility

 

 

17.9% 

 

 

15.1% 

 

 

16.8% 

Expected dividend yield

 

 

2.9% 

 

 

2.9% 

 

 

3.2% 



 

 

 

 

 

 

 

 

 

Average estimated value of options granted during the year

 

$

26.18 

 

$

18.39 

 

$

17.66 

Restricted Share Units

RSUs generally vest ratably over a five to eight-year period from the grant date.  The grantee receives dividends for each outstanding RSU equal to the per-share dividends received by our common shareholders.  We expense any dividends previously paid upon forfeiture of the related RSU.  Upon vesting, the grantee

F-23


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

December 31, 2016

 

receives common shares equal to the number of vested RSUs, less common shares withheld in exchange for tax deposits made by the Company to satisfy the grantee’s statutory tax liabilities arising from the vesting. 

The fair value of our RSUs is determined based upon the applicable closing trading price of our common shares.

The fair value of our RSUs outstanding at December 31, 2016 was approximately $136.9 million.  Remaining compensation expense related to RSUs outstanding at December 31, 2016 totals approximately $98.7 million and is expected to be recognized as compensation expense over the next 2.5 years on average.  The following tables set forth relevant information with respect to restricted shares (dollar amounts in thousands):





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

2016

 

2015

 

2014



 

 

Number of

 

 

Grant Date

 

 

Number of

 

 

Grant Date

 

 

Number of

 

 

Grant Date



 

 

Restricted

 

 

Aggregate

 

 

Restricted

 

 

Aggregate

 

 

Restricted

 

 

Aggregate



 

 

Share Units

 

 

Fair Value

 

 

Share Units

 

 

Fair Value

 

 

Share Units

 

 

Fair Value

Restricted share units outstanding January 1,

 

 

737,388 

 

$

129,284 

 

 

751,048 

 

$

110,874 

 

 

636,329 

 

$

77,284 

Granted

 

 

171,144 

 

 

40,263 

 

 

252,376 

 

 

55,307 

 

 

339,607 

 

 

59,009 

Vested

 

 

(180,050)

 

 

(26,689)

 

 

(187,342)

 

 

(24,752)

 

 

(166,905)

 

 

(18,456)

Forfeited

 

 

(31,841)

 

 

(5,953)

 

 

(78,694)

 

 

(12,145)

 

 

(57,983)

 

 

(6,963)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted share units outstanding December 31,

 

696,641 

 

$

136,905 

 

 

737,388 

 

$

129,284 

 

 

751,048 

 

$

110,874 







 

 

 

 

 

 

 

 

 



 

2016

 

2015

 

2014

Amounts for the year (in 000's, except number of shares):

 

 

 

 

 

 

 

 

 

Fair value of vested shares on vesting date

 

$

41,400 

 

$

38,182 

 

$

27,591 

Cash paid upon vesting in lieu of issuing common shares

 

$

15,357 

 

$

15,678 

 

$

11,449 

Common shares issued upon vesting

 

 

112,707 

 

 

110,422 

 

 

98,846 

Restricted share unit expense (a)

 

$

32,303 

 

$

28,699 

 

$

26,325 



 

 

 

 

 

 

 

 

 



(a)Amounts for 2016, 2015 and 2014 include approximately $1.4 million, $1.1 million and $1.2 million, respectively, in employer taxes incurred upon vesting.

10.Segment Information

Our reportable segments reflect the significant components of our operations where discrete financial information is evaluated separately by our chief operating decision maker (“CODM”).  We organize our segments based primarily upon the nature of the underlying products and services, as well as the drivers of profitability growth.  The net income for each reportable segment included in the tables below are in conformity with GAAP and our significant accounting policies as denoted in Note 2.  The amounts not attributable to reportable segments are aggregated under “other items not allocated to segments.” 

Following is a description of and basis for presentation for each of our reportable segments.

Self-Storage Operations

The Self-Storage Operations segment reflects the rental operations from all self-storage facilities owned by the Company and the Subsidiaries.  Our CODM reviews the net operating income (“NOI”) of this

F-24


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

December 31, 2016

 

segment, which represents the related revenues less cost of operations (prior to depreciation expense), in assessing performance and making resource allocation decisions.  The presentation in the tables below sets forth the NOI of this segment, as well as the depreciation expense for this segment, which while reviewed by our CODM and included in net income, is not considered by the CODM in assessing performance and decision making.  For all periods presented, substantially all of our real estate facilities, goodwill and other intangible assets, other assets, and accrued and other liabilities are associated with the Self-Storage Operations segment.

Ancillary Operations

The Ancillary Operations segment reflects the sale of merchandise and reinsurance of policies against losses to goods stored by our self-storage tenants, activities which are incidental to our primary self-storage rental activities.  Our CODM reviews the NOI of these operations in assessing performance and making resource allocation decisions. 

Investment in PSB

This segment represents our 42% equity interest in PSB, a publicly-traded REIT that owns, operates, acquires and develops commercial properties, primarily multi-tenant flex, office, and industrial space.  PSB has a separate management team that makes its financing, capital allocation, and other significant decisions.  In making resource allocation decisions with respect to our investment in PSB, the CODM reviews PSB’s net income, which is detailed in PSB’s periodic filings with the United States Securities and Exchange Commission (“SEC”), and as included in Note 4.  The segment presentation in the tables below includes our equity earnings from PSB. 

Investment in Shurgard Europe

This segment represents our 49% equity interest in Shurgard Europe, which owns and operates self-storage facilities located in seven countries in Western Europe.  Shurgard Europe has a separate management team reporting to our CODM and our joint venture partner.  In making resource allocation decisions with respect to our investment in Shurgard Europe, the CODM reviews Shurgard Europe’s net income, which is detailed in Note 4.  The segment presentation below includes our equity earnings from Shurgard Europe.

Presentation of Segment Information

The following tables reconcile NOI (as applicable) and net income of each segment to our consolidated net income (amounts in thousands):

F-25


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

December 31, 2016

 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Self-Storage Operations

 

Ancillary Operations

 

Investment in PSB

 

Investment in Shurgard Europe

 

Other Items Not Allocated to Segments

 

Total



(Amounts in thousands)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

$

2,405,828 

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

2,405,828 

Ancillary operations

 

 -

 

 

154,721 

 

 

 -

 

 

 -

 

 

 -

 

 

154,721 



 

2,405,828 

 

 

154,721 

 

 

 -

 

 

 -

 

 

 -

 

 

2,560,549 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

 

617,905 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

617,905 

Ancillary operations

 

 -

 

 

51,178 

 

 

 -

 

 

 -

 

 

 -

 

 

51,178 



 

617,905 

 

 

51,178 

 

 

 -

 

 

 -

 

 

 -

 

 

669,083 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

 

1,787,923 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,787,923 

Ancillary operations

 

 -

 

 

103,543 

 

 

 -

 

 

 -

 

 

 -

 

 

103,543 

  

 

1,787,923 

 

 

103,543 

 

 

 -

 

 

 -

 

 

 -

 

 

1,891,466 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other components of net income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

(433,314)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(433,314)

General and administrative

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(83,656)

 

 

(83,656)

Interest and other income

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

15,138 

 

 

15,138 

Interest expense

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(4,210)

 

 

(4,210)

Equity in earnings of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  unconsolidated real estate entities

 -

 

 

 -

 

 

31,707 

 

 

22,324 

 

 

2,725 

 

 

56,756 

Foreign currency exchange gain

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

17,570 

 

 

17,570 

Gain on real estate investment sales

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

689 

 

 

689 

Net income (loss)

$

1,354,609 

 

$

103,543 

 

$

31,707 

 

$

22,324 

 

$

(51,744)

 

$

1,460,439 

F-26


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

December 31, 2016

 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Self-Storage Operations

 

Ancillary Operations

 

Investment in PSB

 

Investment in Shurgard Europe

 

Other Items Not Allocated to Segments

 

Total



(Amounts in thousands)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

$

2,235,525 

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

2,235,525 

Ancillary operations

 

 -

 

 

146,171 

 

 

 -

 

 

 -

 

 

 -

 

 

146,171 



 

2,235,525 

 

 

146,171 

 

 

 -

 

 

 -

 

 

 -

 

 

2,381,696 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

 

586,696 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

586,696 

Ancillary operations

 

 -

 

 

48,806 

 

 

 -

 

 

 -

 

 

 -

 

 

48,806 



 

586,696 

 

 

48,806 

 

 

 -

 

 

 -

 

 

 -

 

 

635,502 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

 

1,648,829 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,648,829 

Ancillary operations

 

 -

 

 

97,365 

 

 

 -

 

 

 -

 

 

 -

 

 

97,365 

  

 

1,648,829 

 

 

97,365 

 

 

 -

 

 

 -

 

 

 -

 

 

1,746,194 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other components of net income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

(426,008)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(426,008)

General and administrative

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(88,177)

 

 

(88,177)

Interest and other income

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

16,544 

 

 

16,544 

Interest expense

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(610)

 

 

(610)

Equity in earnings of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  unconsolidated real estate entities

 -

 

 

 -

 

 

34,155 

 

 

14,272 

 

 

2,510 

 

 

50,937 

Foreign currency exchange gain

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

306 

 

 

306 

Gain on real estate investment sales

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

18,503 

 

 

18,503 

Net income (loss)

$

1,222,821 

 

$

97,365 

 

$

34,155 

 

$

14,272 

 

$

(50,924)

 

$

1,317,689 

F-27


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

December 31, 2016

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Self-Storage Operations

 

Ancillary Operations

 

Investment in PSB

 

Investment in Shurgard Europe

 

Other Items Not Allocated to Segments

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



(Amounts in thousands)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

$

2,049,882 

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

2,049,882 

Ancillary operations

 

 -

 

 

127,414 

 

 

 -

 

 

 -

 

 

 -

 

 

127,414 



 

2,049,882 

 

 

127,414 

 

 

 -

 

 

 -

 

 

 -

 

 

2,177,296 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

 

566,898 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

566,898 

Ancillary operations

 

 -

 

 

46,426 

 

 

 -

 

 

 -

 

 

 -

 

 

46,426 



 

566,898 

 

 

46,426 

 

 

 -

 

 

 -

 

 

 -

 

 

613,324 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-storage operations

 

1,482,984 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,482,984 

Ancillary operations

 

 -

 

 

80,988 

 

 

 -

 

 

 -

 

 

 -

 

 

80,988 

  

 

1,482,984 

 

 

80,988 

 

 

 -

 

 

 -

 

 

 -

 

 

1,563,972 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other components of net income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

(437,114)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(437,114)

General and administrative

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(71,459)

 

 

(71,459)

Interest and other income

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

17,638 

 

 

17,638 

Interest expense

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(6,781)

 

 

(6,781)

Equity in earnings of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  unconsolidated real estate entities

 -

 

 

 -

 

 

56,280 

 

 

29,900 

 

 

2,087 

 

 

88,267 

Foreign currency exchange loss

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(7,047)

 

 

(7,047)

Gain on real estate investment sales

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

2,479 

 

 

2,479 

Net income (loss)

$

1,045,870 

 

$

80,988 

 

$

56,280 

 

$

29,900 

 

$

(63,083)

 

$

1,149,955 





11.Recent Accounting Pronouncements and Guidance

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which requires revenue to be based upon the consideration expected from customers for promised goods or services.  The new standard, effective on January 1, 2018, permits either the retrospective or cumulative effects transition method and allows for early adoption on January 1, 2017.  We do not believe this standard will have a material impact on our results of operations or financial condition, primarily because most of our revenue is from rental revenue, which this standard does not cover and because we do not provide any material associated services to our tenants.

F-28


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

December 31, 2016

 

In August, 2014, the FASB issued new accounting guidance, which defines management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern.  This guidance is effective for annual periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016.  The Company adopted the new guidance during the fourth quarter of 2016 and the adoption did not require any disclosures about the Company’s ability to continue as a going concern.

In February 2015, the FASB issued ASU 2015-02, Consolidation – Amendments to the Consolidation Analysis, which modifies the criteria surrounding the consolidation of VIEs and partnerships.  We adopted this standard effective January 1, 2016, which did not change the consolidation status of any entities in which we have an interest or significant involvement in; however, certain entities began to be considered VIE’s as a result of the change. 

In February 2016, the FASB issued ASU 2016-02, Leases, which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting.  The new standard, effective on January 1, 2019, requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief and allows for early adoption on January 1, 2016.   We do not believe this standard will have a material impact on our results of operations or financial condition, because substantially all of our lease revenues are derived from month-to-month self-storage leases, and we do not have material amounts of lease expense.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting.  We early adopted this standard effective January 1, 2016.  Under this standard, a share-based compensation-related tax liability paid on behalf of employees in lieu of shares received is classified as a financing activity on the statement of cash flows, rather than as an operating activity as we had previously presented such amounts.  We applied this provision retrospectively.  The standard also allows a company to choose, with respect to recording share-based expense, between (i) recognizing forfeitures only as they occur or (ii) estimating future forfeitures in advance.  We chose to recognize forfeitures only as they occur, rather than estimating in advance, accordingly, effective January 1, 2016, under the modified retrospective transition method as required by the standard, we recorded a cumulative-effect adjustment of $789,000 to increase accumulated deficit and increase paid-in capital for the impact of estimated future forfeitures after December 31, 2015 (Note 9).

12.Commitments and Contingencies

Contingent Losses

We are a party to various legal proceedings and subject to various claims and complaints; however, we believe that the likelihood of these contingencies resulting in a material loss to the Company, either individually or in the aggregate, is remote.

Insurance and Loss Exposure 

We have historically carried property, earthquake, general liability, employee medical insurance and workers compensation coverage through internationally recognized insurance carriers, subject to deductibles.  Deductibles for property and general liability are $25.0 million and $2.0 million, respectively, per occurrence.  The aggregate limits on these policies of $75.0 million for property losses and $102.0 million for general liability losses are higher than estimates of maximum probable losses that could occur from individual

F-29


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

December 31, 2016

 

catastrophic events determined in recent engineering and actuarial studies; however, in case of multiple catastrophic events, these limits could be exceeded.

We reinsure a program that provides insurance to our customers from an independent third-party insurer.  This program covers tenant claims for losses to goods stored at our facilities as a result of specific named perils (earthquakes are not covered by this program), up to a maximum limit of $5,000 per storage unit.  We reinsure all risks in this program.  We are subject to licensing requirements and regulations in several states.  At December 31, 2016, there were approximately 894,000 certificates held by our self-storage customers, representing aggregate coverage of approximately $2.7 billion.

13.Supplementary Quarterly Financial Data (unaudited)







 

 

 

 

 

 

 

 

 

 

 

 



 

 

Three Months Ended



 

March 31,

 

June 30,

 

September 30,

 

December 31,



 

2016

 

2016

 

2016

 

2016



 

 

(Amounts in thousands, except per share data)



 

 

 

 

 

 

 

 

 

 

 

 

Self-storage and ancillary revenues

 

$

611,786 

 

$

634,188 

 

$

663,148 

 

$

651,427 



 

 

 

 

 

 

 

 

 

 

 

 

Self-storage and ancillary cost of operations

 

$

173,286 

 

$

172,004 

 

$

178,627 

 

$

145,166 



 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

105,128 

 

$

107,013 

 

$

109,432 

 

$

111,741 



 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

317,349 

 

$

358,359 

 

$

369,050 

 

$

415,681 



 

 

 

 

 

 

 

 

 

 

 

 

Per Common Share

 

 

 

 

 

 

 

 

 

 

 

 

    Net income - Basic

 

$

1.40 

 

$

1.62 

 

$

1.78 

 

$

2.04 



 

 

 

 

 

 

 

 

 

 

 

 

    Net income - Diluted

 

$

1.39 

 

$

1.61 

 

$

1.78 

 

$

2.03 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

Three Months Ended



 

March 31,

 

June 30,

 

September 30,

 

December 31,



 

2015

 

2015

 

2015

 

2015



 

 

(Amounts in thousands, except per share data)



 

 

 

 

 

 

 

 

 

 

 

 

Self-storage and ancillary revenues

 

$

564,879 

 

$

588,615 

 

$

618,872 

 

$

609,330 



 

 

 

 

 

 

 

 

 

 

 

 

Self-storage and ancillary cost of operations

 

$

172,010 

 

$

161,097 

 

$

164,686 

 

$

137,709 



 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

107,146 

 

$

106,473 

 

$

106,082 

 

$

106,307 



 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

283,254 

 

$

328,040 

 

$

341,136 

 

$

365,259 



 

 

 

 

 

 

 

 

 

 

 

 

Per Common Share

 

 

 

 

 

 

 

 

 

 

 

 

    Net income - Basic

 

$

1.23 

 

$

1.53 

 

$

1.58 

 

$

1.75 



 

 

 

 

 

 

 

 

 

 

 

 

    Net income - Diluted

 

$

1.23 

 

$

1.52 

 

$

1.58 

 

$

1.74 



 

 

 

 

 

 

 

 

 

 

 

 



 

F-30


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

December 31, 2016

 



14.Subsequent Events

 Subsequent to December 31,  2016, we acquired or were under contract to acquire five self-storage facilities (two in Ohio and one each in Minnesota, New York and North Carolina), with 275,000 net rentable square feet, for $26.4 million.



 

F-31


 

 

 

 

 

 

 

 

 

 

 

PUBLIC STORAGE

SCHEDULE III - REAL ESTATE

AND ACCUMULATED DEPRECIATION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

Initial Cost

Costs

Gross Carrying Amount

 

 

No. of

Encum-

 

Buildings &

Subsequent

At December 31, 2016

Accumulated

Description

Facilities

brances

Land

Improvements

to Acquisition

Land

Buildings

Total

Depreciation

 















 

 

 

 

 

 

 

 

 

Self-storage facilities by market:

 

 

 

 

 

 

 

 

 

Los Angeles

216

611  463,462  870,049  259,362  472,090  1,120,783  1,592,873  585,457 

San Francisco

137

 -

227,468  500,407  157,104  240,218  644,761  884,979  365,824 

New York

90

 -

216,305  488,667  144,862  222,615  627,219  849,834  329,626 

Washington DC

90

 -

226,934  402,488  103,971  232,128  501,265  733,393  245,447 

Miami

88

 -

210,096  435,932  80,465  211,980  514,513  726,493  234,906 

Seattle/Tacoma

90

 -

177,451  443,495  87,630  178,106  530,470  708,576  257,515 

Chicago

130

 -

137,165  352,595  103,618  140,047  453,331  593,378  300,655 

Houston

112

 -

152,174  341,413  104,841  151,949  446,479  598,428  221,091 

Atlanta

101

 -

122,880  327,975  58,946  123,242  386,559  509,801  208,790 

Dallas/Ft. Worth

110

 -

133,401  331,636  87,129  134,272  417,894  552,166  220,409 

Orlando/Daytona

72

12,714  140,411  253,375  50,872  145,892  298,766  444,658  118,792 

West Palm Beach

44

 -

151,323  207,388  23,264  150,327  231,648  381,975  89,845 

Charlotte

53

 -

75,968  186,599  48,875  84,195  227,247  311,442  87,541 

Minneapolis/St. Paul

45

5,438  81,895  177,533  19,740  82,060  197,108  279,168  85,704 

Denver

55

10,354  82,240  154,622  43,445  82,803  197,504  280,307  112,437 

Tampa

51

 -

80,486  165,639  40,545  83,258  203,412  286,670  95,802 

Philadelphia

57

 -

51,682  152,406  50,486  50,703  203,871  254,574  138,918 

Boston

25

 -

61,583  158,870  19,294  62,217  177,530  239,747  70,011 

Phoenix

39

 -

59,267  162,505  16,411  59,259  178,924  238,183  77,396 

Detroit

41

 -

62,990  159,461  20,347  63,840  178,958  242,798  86,716 

Portland

43

 -

51,182  126,464  23,813  51,840  149,619  201,459  82,757 

Austin

31

 -

51,150  115,641  35,129  53,173  148,747  201,920  66,173 

San Diego

20

 -

47,884  108,911  26,871  49,395  134,271  183,666  68,794 

Honolulu

11

 -

54,184  106,299  9,736  55,101  115,118  170,219  51,054 

Raleigh

25

 -

41,377  81,821  16,598  42,502  97,294  139,796  44,190 

Norfolk

28

 -

33,316  81,267  15,461  32,755  97,289  130,044  49,461 

San Antonio

28

 -

27,566  76,028  23,876  27,524  99,946  127,470  55,516 

Baltimore

23

 -

25,176  79,734  15,689  25,300  95,299  120,599  58,842 

Sacramento

34

 -

25,141  69,409  25,667  25,646  94,571  120,217  64,386 

St. Louis

26

 -

20,037  56,237  19,785  20,680  75,379  96,059  55,021 

Indianapolis

22

 -

21,064  57,655  11,495  22,064  68,150  90,214  37,899 

F-32


 

 

 

 

 

 

 

 

 

 

 

PUBLIC STORAGE

SCHEDULE III - REAL ESTATE

AND ACCUMULATED DEPRECIATION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

Initial Cost

Costs

Gross Carrying Amount

 

 

No. of

Encum-

 

Buildings &

Subsequent

At December 31, 2016

Accumulated

Description

Facilities

brances

Land

Improvements

to Acquisition

Land

Buildings

Total

Depreciation

 

Kansas City

24

 -

14,225  43,732  23,593  14,425  67,125  81,550  52,021 

Las Vegas

18

 -

17,879  44,357  8,926  17,128  54,034  71,162  41,216 

Columbia

20

 -

16,167  44,429  10,243  16,915  53,924  70,839  25,408 

Savannah

12

 -

33,094  42,465  2,521  32,738  45,342  78,080  9,720 

Greensboro

13

 -

12,737  29,811  12,384  14,826  40,106  54,932  21,399 

Fort Myers/Naples

9

 -

15,373  35,353  4,062  15,608  39,180  54,788  11,757 

Milwaukee

15

1,822  13,189  32,071  8,904  13,158  41,006  54,164  26,342 

Charleston

10

 -

10,849  31,144  6,490  11,825  36,658  48,483  15,725 

Jacksonville

14

 -

11,252  27,714  9,451  11,301  37,116  48,417  27,288 

Hartford/New Haven

11

 -

6,778  19,959  20,244  8,443  38,538  46,981  26,879 

Columbus

22

 -

25,341  64,746  21,209  25,447  85,849  111,296  35,674 

New Orleans

9

 -

9,205  30,832  4,823  9,373  35,487  44,860  21,009 

Richmond

10

 -

13,248  23,253  3,717  13,053  27,165  40,218  14,260 

Tucson

7

 -

9,403  25,491  5,178  9,884  30,188  40,072  15,679 

Colorado Springs

12

 -

8,229  19,659  11,634  8,225  31,297  39,522  24,953 

Nashville/Bowling Green

14

 -

10,405  24,175  8,952  10,402  33,130  43,532  22,890 

Memphis

9

 -

7,962  21,981  8,183  9,315  28,811  38,126  16,253 

Greensville/Spartanburg/Asheville

11

 -

9,036  20,767  8,390  9,965  28,228  38,193  16,379 

Monterey/Salinas

7

 -

8,465  24,151  3,567  8,455  27,728  36,183  17,306 

Birmingham

14

 -

5,229  17,835  12,645  5,117  30,592  35,709  25,718 

Cincinnati

14

 -

13,178  25,988  15,201  13,096  41,271  54,367  24,507 

Reno

7

 -

5,487  18,704  3,486  5,487  22,190  27,677  9,674 

Palm Springs

3

 -

8,309  18,065  877  8,309  18,942  27,251  7,861 

Buffalo/Rochester

8

 -

6,159  14,850  2,594  6,157  17,446  23,603  11,147 

Mobile

8

 -

4,148  14,152  3,760  3,975  18,085  22,060  10,381 

London, UK

1

 -

5,730  14,278  (3,579) 3,172  13,257  16,429  10,348 

Salt Lake City

8

 -

7,846  15,947  3,554  7,495  19,852  27,347  11,524 

Oklahoma City

21

 -

32,708  65,664  9,246  32,708  74,910  107,618  13,736 

Santa Barbara

2

 -

5,733  9,106  292  5,733  9,398  15,131  4,338 

Cleveland/Akron

6

 -

3,778  13,928  4,009  4,171  17,544  21,715  8,983 

Chattanooga

10

 -

6,569  26,045  6,016  6,371  32,259  38,630  10,720 

Wichita

7

 -

2,017  6,691  6,186  2,130  12,764  14,894  10,500 

F-33


 

 

 

 

 

 

 

 

 

 

 

PUBLIC STORAGE

SCHEDULE III - REAL ESTATE

AND ACCUMULATED DEPRECIATION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

Initial Cost

Costs

Gross Carrying Amount

 

 

No. of

Encum-

 

Buildings &

Subsequent

At December 31, 2016

Accumulated

Description

Facilities

brances

Land

Improvements

to Acquisition

Land

Buildings

Total

Depreciation

 

Providence

3

 -

995  11,206  2,399  995  13,605  14,600  4,730 

Louisville

10

 -

15,578  28,069  3,442  15,577  31,512  47,089  7,247 

Augusta

4

 -

1,793  5,990  2,116  1,793  8,106  9,899  4,928 

Dayton

3

 -

394  3,014  4,241  393  7,256  7,649  5,825 

Huntsville/Decatur

3

 -

1,024  3,321  2,914  971  6,288  7,259  5,659 

Fort Wayne

3

 -

349  3,594  2,999  349  6,593  6,942  5,644 

Springfield/Holyoke

2

 -

1,428  3,380  1,251  1,427  4,632  6,059  3,925 

Shreveport

2

 -

817  3,030  2,054  741  5,160  5,901  4,035 

Rochester

2

 -

1,047  2,246  1,456  980  3,769  4,749  3,408 

Lansing

2

 -

556  2,882  615  556  3,497  4,053  1,702 

Flint

1

 -

543  3,068  169  542  3,238  3,780  1,440 

Evansville

2

 -

899  2,096  798  871  2,922  3,793  2,372 

Topeka

2

 -

225  1,419  1,669  225  3,088  3,313  2,686 

Roanoke

1

 -

819  1,776  560  819  2,336  3,155  1,960 

Syracuse

1

 -

545  1,279  690  545  1,969  2,514  1,724 

Omaha

1

 -

109  806  1,386  109  2,192  2,301  1,730 

Joplin

1

 -

264  904  841  264  1,745  2,009  1,432 

Modesto/Fresno/Stockton

1

 -

44  206  746  193  803  996  583 



 

 

 

 

 

 

 

 

 

Commercial and non-operating real estate

 -

11,517  26,939  23,777  12,541  49,692  62,233  41,363 



 

 

 

 

 

 

 

 

 



 

$30,939  $3,711,932  $8,205,089  $2,046,208  $3,781,479  $10,181,750  $13,963,229  $5,270,963 



 

 

 

 

 

 

 

 

 



 

Note:  Buildings and improvements are depreciated on a straight-line basis over estimated useful lives ranging generally



 

  between 5 to 25 years.







 

















F-34