Public Storage
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:
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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;
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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;
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the impact of competition from new and existing self-storage and commercial facilities and other storage alternatives;
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difficulties in our ability to successfully evaluate, finance, integrate into our existing operations, and manage acquired and developed properties;
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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;
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risks related to our participation in joint ventures;
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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;
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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;
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changes in federal or state tax laws related to the taxation of REITs and other corporations;
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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;
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difficulties in raising capital at a reasonable cost;
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delays in the development process;
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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
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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.
			
		
			
		
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 ours. As 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:
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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
			
		
			
		
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.
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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.
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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
			
		
			
		
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 facilities: The 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 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, 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 type. PSB is a stand-alone public company traded on the NYSE. As 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
			
		
			
		
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
			
		
			
		
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:
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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.
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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.
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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.
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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.
			
		
			
		
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 us. None 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.
			
		
			
		
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
			
		
			
		
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.
			
		
			
		
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:
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Currency risks: Currency fluctuations can impact the fair value of our equity investment in Shurgard Europe, as well as future repatriation of cash.
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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.
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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.
			
		
			
		
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
			
		
			
		
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.
			
		
			
		
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.
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
				
						
17,901 				
Northern
				
						
10,962 				
Texas
				
						
19,485 				
Florida
				
						
19,024 				
Illinois
				
						
7,952 				
Georgia
				
						
7,129 				
Washington
				
						
6,438 				
North Carolina
				
						
5,959 				
Virginia
				
						
5,593 				
New York
				
						
4,622 				
Colorado
				
						
4,295 				
Maryland
				
						
3,761 				
New Jersey
				
						
3,630 				
Minnesota
				
						
3,313 				
South Carolina
				
						
3,075 				
Michigan
				
						
2,869 				
Ohio
				
						
2,854 				
Arizona
				
						
2,833 				
Missouri
				
						
2,236 				
Oregon
				
						
2,040 				
Indiana
				
						
2,031 				
Pennsylvania
				
						
1,993 				
Tennessee
				
						
1,952 				
Nevada
				
						
1,818 				
Massachusetts
				
						
1,691 				
Oklahoma
				
						
1,477 				
Kansas
				
						
1,268 				
Other states (12 states)
				
						
6,247 				
﻿
						
						
						
Total - U.S.
2,348 				
						
154,448 				
﻿
						
						
						
Europe (b):
						
						
						
Netherlands
				
						
3,110 				
France
				
						
2,879 				
Sweden
				
						
1,640 				
United Kingdom
				
						
1,417 				
Belgium
				
						
1,263 				
Germany
				
						
				
Denmark
				
						
				
﻿
						
						
						
Total - Europe
				
						
11,770 				
﻿
						
						
						
Grand Total
2,567 				
						
166,218 				
			
		
			
		
(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.
			
		
			
		
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.
			
		
			
		
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
1st
206.92 				 185.05 				
﻿
2nd
200.60 				 182.91 				
﻿
3rd
217.99 				 182.08 				
﻿
4th
253.93 				 210.87 				
﻿
						
						
						
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.
﻿
						
						
						
						
			
		
			
		
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.
﻿
﻿
ITEM 6.Selected Financial Data
﻿
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
For the year ended December 31,
﻿
						
						
						
						
﻿
						
(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 				
						
						
				
						
						
(7,047) 				
						
						
17,082 				
						
						
8,876 				
Gain on real estate investment sales
						
				
						
						
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) 				
﻿
﻿
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
			
		
			
		
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
			
		
			
		
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
			
		
			
		
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,
﻿
						
						
﻿
						
(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
			
		
			
		
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
﻿
						
						
						
						
						
Change
						
						
						
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.
			
		
			
		
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Self-Storage Operations
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Summary
Year Ended December 31,
						
Year Ended December 31,
﻿
						
						
						
						
Percentage
						
						
						
						
						
						
						
Percentage
﻿
						
						
Change
						
						
						
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
						
				
						
						
				
						
26.7% 				
						
						
				
						
						
				
						
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.
			
		
			
		
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
﻿
						
						
						
Change
						
						
						
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% 				
			
		
			
		
(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:
			
		
			
		
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
Year Ended December 31,
						
Year Ended December 31,
﻿
						
						
						
						
Percentage
						
						
						
						
						
						
						
Percentage
﻿
						
						
						
Change
						
						
						
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.
			
		
			
		
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
Year Ended December 31,
						
Year Ended December 31,
﻿
						
						
						
						
Percentage
						
						
						
						
						
						
						
Percentage
﻿
						
						
						
Change
						
						
						
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.
			
		
			
		
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
			
		
			
		
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.
			
		
			
		
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:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
$
504,952 				
						
$
520,099 				
						
$
542,272 				
						
$
530,373 				
						
$
2,097,696 				
$
474,337 				
						
$
490,806 				
						
$
515,713 				
						
$
506,869 				
						
$
1,987,725 				
$
447,077 				
						
$
459,543 				
						
$
483,447 				
						
$
475,289 				
						
$
1,865,356 				
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Total cost of operations:
						
						
						
						
						
						
						
						
						
						
						
						
$
139,511 				
						
$
135,843 				
						
$
141,980 				
						
$
110,007 				
						
$
527,341 				
$
143,301 				
						
$
130,370 				
						
$
133,486 				
						
$
107,080 				
						
$
514,237 				
$
141,801 				
						
$
129,084 				
						
$
130,885 				
						
$
105,430 				
						
$
507,200 				
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Property taxes:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
$
52,720 				
						
$
52,929 				
						
$
52,629 				
						
$
29,073 				
						
$
187,351 				
$
50,508 				
						
$
50,407 				
						
$
49,946 				
						
$
27,845 				
						
$
178,706 				
$
48,456 				
						
$
48,055 				
						
$
47,064 				
						
$
28,281 				
						
$
171,856 				
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Repairs and maintenance:
						
						
						
						
						
						
						
						
						
						
						
						
$
11,111 				
						
$
10,308 				
						
$
10,760 				
						
$
10,801 				
						
$
42,980 				
$
16,167 				
						
$
9,025 				
						
$
10,179 				
						
$
10,300 				
						
$
45,671 				
$
14,957 				
						
$
9,649 				
						
$
10,025 				
						
$
9,440 				
						
$
44,071 				
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Advertising and selling expense:
						
						
						
						
						
						
						
						
						
						
						
						
$
5,080 				
						
$
5,552 				
						
$
7,573 				
						
$
7,115 				
						
$
25,320 				
$
6,192 				
						
$
5,541 				
						
$
6,954 				
						
$
6,432 				
						
$
25,119 				
$
6,605 				
						
$
6,140 				
						
$
7,893 				
						
$
6,468 				
						
$
27,106 				
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
REVPAF:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
$
15.13 				
						
$
15.63 				
						
$
16.25 				
						
$
15.92 				
						
$
15.73 				
$
14.22 				
						
$
14.73 				
						
$
15.44 				
						
$
15.19 				
						
$
14.90 				
$
13.35 				
						
$
13.76 				
						
$
14.47 				
						
$
14.24 				
						
$
13.96 				
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Weighted average realized annual rent per occupied square foot:
						
						
						
$
16.17 				
						
$
16.39 				
						
$
17.06 				
						
$
16.99 				
						
$
16.65 				
$
15.23 				
						
$
15.45 				
						
$
16.21 				
						
$
16.19 				
						
$
15.77 				
$
14.43 				
						
$
14.55 				
						
$
15.29 				
						
$
15.25 				
						
$
14.88 				
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Weighted average occupancy levels for the period:
						
						
						
						
						
						
						
						
						
93.6% 				
						
						
95.4% 				
						
95.3% 				
						
93.7% 				
						
						
94.5% 				
						
93.4% 				
						
						
95.4% 				
						
						
95.3% 				
						
						
93.9% 				
						
						
94.5% 				
						
92.6% 				
						
						
94.7% 				
						
						
94.7% 				
						
						
93.5% 				
						
						
93.9% 				
			
		
			
		
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,
﻿
						
						
						
						
Change
						
						
						
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% 				
			
		
			
		
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Same Store Facilities Operating Trends by Market (Continued)
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
﻿
						
Year Ended December 31,
						
Year Ended December 31,
﻿
						
						
						
Change
						
						
						
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% 				
			
		
			
		
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Same Store Facilities Operating Trends by Market (Continued)
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
﻿
						
Year Ended December 31,
						
Year Ended December 31,
﻿
						
						
						
Change
						
						
						
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:
﻿
			
		
			
		
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
NON SAME STORE
Year Ended December 31,
						
Year Ended December 31,
FACILITIES
						
						
Change
						
						
						
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 				
						
						
				
						
						
12,304 				
						
						
4,566 				
						
						
7,738 				
2013 acquisitions
						
28,508 				
						
						
28,017 				
						
						
				
						
						
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 				
						
						
				
						
						
26,137 				
						
						
25,554 				
						
						
				
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 				
						
						
				
						
						
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% 				
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
			
		
			
		
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
NON SAME STORE
Year Ended December 31,
						
						
Year Ended December 31,
FACILITIES (Continued)
						
						
Change
						
						
						
						
Change
﻿
						
Number of facilities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
2016 acquisitions
						
				
						
						
-
						
						
				
						
						
-
						
						
-
						
						
-
2015 acquisitions
						
				
						
						
				
						
						
-
						
						
				
						
						
-
						
						
				
2014 acquisitions
						
				
						
						
				
						
						
-
						
						
				
						
						
				
						
						
-
2013 acquisitions
						
				
						
						
				
						
						
-
						
						
				
						
						
				
						
						
-
Developed facilities
						
				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
				
Other facilities
						
				
						
						
				
						
						
-
						
						
				
						
						
				
						
						
(2) 				
﻿
						
				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
				
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 				
						
						
				
2013 acquisitions
						
6,906 				
						
						
6,906 				
						
						
-
						
						
6,906 				
						
						
6,906 				
						
						
-
Developed facilities
						
4,019 				
						
						
1,878 				
						
						
2,141 				
						
						
1,878 				
						
						
				
						
						
1,242 				
Other facilities
						
6,748 				
						
						
6,614 				
						
						
				
						
						
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.
			
		
			
		
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,
﻿
						
						
Change
						
						
						
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 				
						
				
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 				
						
						
				
						
						
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
			
		
			
		
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,
﻿
						
						
						
Change
						
						
						
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 				
						
				
						
2,510 				
						
2,087 				
						
				
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
			
		
			
		
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 dispositions. See 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.
			
		
			
		
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,
﻿
						
						
						
Change
						
						
						
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 				
						
						
				
						
						
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 				
						
						
				
Legal costs
						
						
7,305 				
						
						
18,366 				
						
						
(11,061) 				
						
						
18,366 				
						
						
5,080 				
						
						
13,286 				
Public company costs
						
						
3,768 				
						
						
3,632 				
						
						
				
						
						
3,632 				
						
						
3,465 				
						
						
				
Other costs
						
						
15,468 				
						
						
12,679 				
						
						
2,789 				
						
						
12,679 				
						
						
12,343 				
						
						
				
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
			
		
			
		
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
			
		
			
		
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):
			
		
			
		
﻿
﻿
						
						
﻿
						
						
$
1,665 				
						
11,241 				
						
1,505 				
						
1,585 				
						
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
			
		
			
		
$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
						
						
						
						
						
						
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.
			
		
			
		
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.
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).
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
Thereafter
						
Total
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Fixed rate debt
$
1,665 				
						
$
11,241 				
						
$
1,505 				
						
$
1,585 				
						
$
1,503 				
						
$
373,250 				
						
$
390,749 				
﻿
﻿
﻿
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.
			
		
			
		
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
ITEM 9B.Other Information
None.
			
		
			
		
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.
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.
﻿
			 		
			
		
			
		
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.
﻿
			
		
			
		
﻿
						
						
						
						
						
﻿
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.
﻿
						
﻿
			
		
			
		
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.
			
		
			
		
﻿
						
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.
﻿
						
			
		
			
		
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.
﻿
						
Statement Re: Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends. Filed herewith.
Listing of Subsidiaries. Filed herewith.
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.
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.
﻿
﻿
						
						
			
		
			
		
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.
						
﻿
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
						
						
			
		
			
		
﻿
﻿
﻿
﻿
PUBLIC STORAGE
AND SCHEDULES
(Item 15 (a))
﻿
						
﻿
Page References
﻿
						
Report of Independent Registered Public Accounting Firm...........................................................................
﻿
						
Balance sheets as of December 31, 2016 and 2015.....................................................................................
﻿
						
For the years ended December 31, 2016, 2015 and 2014:
						
﻿
						
Statements of income.............................................................................................................................
﻿
						
Statements of comprehensive income.......................................................................................................
﻿
						
Statements of equity .............................................................................................................................
-
﻿
						
Statements of cash flows.......................................................................................................................
-
﻿
						
Notes to financial statements...................................................................................................................
-
﻿
						
Schedule:
						
﻿
						
III - Real estate and accumulated depreciation...........................................................................................
-
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.
﻿
			 		
			
		
			
		
﻿
﻿
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
﻿
			 		
PUBLIC STORAGE
BALANCE SHEETS
(Amounts in thousands, except share data)
			
		
﻿
﻿
﻿
﻿
						
						
						
						
						
﻿
December 31,
						
December 31,
﻿
						
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.
PUBLIC STORAGE
STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
			
		
﻿
﻿
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
﻿
						
For the Years Ended December 31,
﻿
						
						
						
﻿
						
						
						
						
						
						
						
						
						
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 				
						
						
				
						
						
(7,047) 				
Gain on real estate investment sales
						
						
				
						
						
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.
PUBLIC STORAGE
STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
			
		
﻿
﻿
﻿
﻿
						
						
						
						
						
						
						
						
﻿
For the Years Ended December 31,
﻿
						
						
﻿
						
						
						
						
						
						
						
						
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.
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)
-
						
						
				
						
						
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)
						
-
						
						
				
						
						
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.
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) 				
						
						
-
						
						
-
						
						
-
						
						
-
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)
						
-
						
						
				
						
						
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.
PUBLIC STORAGE
STATEMENTS OF CASH FLOWS
(Amounts in thousands)
			
		
﻿
﻿
﻿
﻿
						
						
						
						
						
						
						
						
﻿
For the Years Ended December 31,
﻿
						
						
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
						
				
						
						
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) 				
						
						
				
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.
PUBLIC STORAGE
STATEMENTS OF CASH FLOWS
(Amounts in thousands)
			
		
﻿
﻿
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
﻿
For the Years Ended December 31,
﻿
						
						
Supplemental schedule of non-cash investing and
						
						
						
						
						
						
						
						
financing activities:
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
Foreign currency translation adjustment:
						
						
						
						
						
						
						
						
Real estate facilities, net of accumulated depreciation
$
1,317 				
						
$
				
						
$
				
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.
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
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.
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.
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.
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:
PUBLIC STORAGE
NOTES TO FINANCIAL STATEMENTS
December 31, 2016
			
		
﻿
						
						
						
						
						
						
						
						
						
﻿
						
						
﻿
						
For the Years Ended December 31,
﻿
						
						
						
﻿
						
(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
						
				
						
						
				
						
						
				
﻿
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,
﻿
						
						
						
						
						
﻿
						
(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 				
						
						
				
﻿
Impact of foreign exchange rate changes
						
1,821 				
						
						
				
						
						
				
﻿
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
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,
﻿
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
﻿
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.
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.
﻿
﻿
						
						
						
						
						
						
						
						
﻿
						
						
﻿
(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 				
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.
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
﻿
						
						
						
﻿
						
(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.
PUBLIC STORAGE
NOTES TO FINANCIAL STATEMENTS
December 31, 2016
			
		
﻿
﻿
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
﻿
						
(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).
﻿
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
$
-
						
$
1,665 				
						
$
1,665 				
						
-
						
						
11,241 				
						
						
11,241 				
						
-
						
						
1,505 				
						
						
1,505 				
						
-
						
						
1,585 				
						
						
1,585 				
						
-
						
						
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.
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.
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):
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
﻿
						
						
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”.
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.
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:
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
﻿
						
						
						
						
						
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 				
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
﻿
						
						
						
﻿
						
						
						
						
						
						
						
						
						
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
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):
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
﻿
						
						
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 				
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
﻿
						
						
						
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
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):
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
						
-
						
						
-
						
						
-
						
						
-
						
						
				
						
						
				
Net income (loss)
$
1,354,609 				
						
$
103,543 				
						
$
31,707 				
						
$
22,324 				
						
$
(51,744) 				
						
$
1,460,439 				
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
						
-
						
						
-
						
						
-
						
						
-
						
						
				
						
						
				
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 				
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.
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
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,
﻿
						
						
						
						
﻿
						
						
(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,
﻿
						
						
						
						
﻿
						
						
(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 				
﻿
						
						
						
						
						
						
						
						
						
						
						
						
﻿
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.
﻿
			 		
						
						
						
						
						
						
						
						
						
						
PUBLIC STORAGE
SCHEDULE III - REAL ESTATE
AND ACCUMULATED DEPRECIATION
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
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
				 463,462 				 870,049 				 259,362 				 472,090 				 1,120,783 				 1,592,873 				 585,457 				
San Francisco
-
227,468 				 500,407 				 157,104 				 240,218 				 644,761 				 884,979 				 365,824 				
New York
-
216,305 				 488,667 				 144,862 				 222,615 				 627,219 				 849,834 				 329,626 				
Washington DC
-
226,934 				 402,488 				 103,971 				 232,128 				 501,265 				 733,393 				 245,447 				
Miami
-
210,096 				 435,932 				 80,465 				 211,980 				 514,513 				 726,493 				 234,906 				
Seattle/Tacoma
-
177,451 				 443,495 				 87,630 				 178,106 				 530,470 				 708,576 				 257,515 				
Chicago
-
137,165 				 352,595 				 103,618 				 140,047 				 453,331 				 593,378 				 300,655 				
Houston
-
152,174 				 341,413 				 104,841 				 151,949 				 446,479 				 598,428 				 221,091 				
Atlanta
-
122,880 				 327,975 				 58,946 				 123,242 				 386,559 				 509,801 				 208,790 				
Dallas/Ft. Worth
-
133,401 				 331,636 				 87,129 				 134,272 				 417,894 				 552,166 				 220,409 				
Orlando/Daytona
12,714 				 140,411 				 253,375 				 50,872 				 145,892 				 298,766 				 444,658 				 118,792 				
West Palm Beach
-
151,323 				 207,388 				 23,264 				 150,327 				 231,648 				 381,975 				 89,845 				
Charlotte
-
75,968 				 186,599 				 48,875 				 84,195 				 227,247 				 311,442 				 87,541 				
Minneapolis/St. Paul
5,438 				 81,895 				 177,533 				 19,740 				 82,060 				 197,108 				 279,168 				 85,704 				
Denver
10,354 				 82,240 				 154,622 				 43,445 				 82,803 				 197,504 				 280,307 				 112,437 				
Tampa
-
80,486 				 165,639 				 40,545 				 83,258 				 203,412 				 286,670 				 95,802 				
Philadelphia
-
51,682 				 152,406 				 50,486 				 50,703 				 203,871 				 254,574 				 138,918 				
Boston
-
61,583 				 158,870 				 19,294 				 62,217 				 177,530 				 239,747 				 70,011 				
Phoenix
-
59,267 				 162,505 				 16,411 				 59,259 				 178,924 				 238,183 				 77,396 				
Detroit
-
62,990 				 159,461 				 20,347 				 63,840 				 178,958 				 242,798 				 86,716 				
Portland
-
51,182 				 126,464 				 23,813 				 51,840 				 149,619 				 201,459 				 82,757 				
Austin
-
51,150 				 115,641 				 35,129 				 53,173 				 148,747 				 201,920 				 66,173 				
San Diego
-
47,884 				 108,911 				 26,871 				 49,395 				 134,271 				 183,666 				 68,794 				
Honolulu
-
54,184 				 106,299 				 9,736 				 55,101 				 115,118 				 170,219 				 51,054 				
Raleigh
-
41,377 				 81,821 				 16,598 				 42,502 				 97,294 				 139,796 				 44,190 				
Norfolk
-
33,316 				 81,267 				 15,461 				 32,755 				 97,289 				 130,044 				 49,461 				
San Antonio
-
27,566 				 76,028 				 23,876 				 27,524 				 99,946 				 127,470 				 55,516 				
Baltimore
-
25,176 				 79,734 				 15,689 				 25,300 				 95,299 				 120,599 				 58,842 				
Sacramento
-
25,141 				 69,409 				 25,667 				 25,646 				 94,571 				 120,217 				 64,386 				
St. Louis
-
20,037 				 56,237 				 19,785 				 20,680 				 75,379 				 96,059 				 55,021 				
Indianapolis
-
21,064 				 57,655 				 11,495 				 22,064 				 68,150 				 90,214 				 37,899 				
						
						
						
						
						
						
						
						
						
						
PUBLIC STORAGE
SCHEDULE III - REAL ESTATE
AND ACCUMULATED DEPRECIATION
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
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
-
14,225 				 43,732 				 23,593 				 14,425 				 67,125 				 81,550 				 52,021 				
Las Vegas
-
17,879 				 44,357 				 8,926 				 17,128 				 54,034 				 71,162 				 41,216 				
Columbia
-
16,167 				 44,429 				 10,243 				 16,915 				 53,924 				 70,839 				 25,408 				
Savannah
-
33,094 				 42,465 				 2,521 				 32,738 				 45,342 				 78,080 				 9,720 				
Greensboro
-
12,737 				 29,811 				 12,384 				 14,826 				 40,106 				 54,932 				 21,399 				
Fort Myers/Naples
-
15,373 				 35,353 				 4,062 				 15,608 				 39,180 				 54,788 				 11,757 				
Milwaukee
1,822 				 13,189 				 32,071 				 8,904 				 13,158 				 41,006 				 54,164 				 26,342 				
Charleston
-
10,849 				 31,144 				 6,490 				 11,825 				 36,658 				 48,483 				 15,725 				
Jacksonville
-
11,252 				 27,714 				 9,451 				 11,301 				 37,116 				 48,417 				 27,288 				
Hartford/New Haven
-
6,778 				 19,959 				 20,244 				 8,443 				 38,538 				 46,981 				 26,879 				
Columbus
-
25,341 				 64,746 				 21,209 				 25,447 				 85,849 				 111,296 				 35,674 				
New Orleans
-
9,205 				 30,832 				 4,823 				 9,373 				 35,487 				 44,860 				 21,009 				
Richmond
-
13,248 				 23,253 				 3,717 				 13,053 				 27,165 				 40,218 				 14,260 				
Tucson
-
9,403 				 25,491 				 5,178 				 9,884 				 30,188 				 40,072 				 15,679 				
Colorado Springs
-
8,229 				 19,659 				 11,634 				 8,225 				 31,297 				 39,522 				 24,953 				
Nashville/Bowling Green
-
10,405 				 24,175 				 8,952 				 10,402 				 33,130 				 43,532 				 22,890 				
Memphis
-
7,962 				 21,981 				 8,183 				 9,315 				 28,811 				 38,126 				 16,253 				
Greensville/Spartanburg/Asheville
-
9,036 				 20,767 				 8,390 				 9,965 				 28,228 				 38,193 				 16,379 				
Monterey/Salinas
-
8,465 				 24,151 				 3,567 				 8,455 				 27,728 				 36,183 				 17,306 				
Birmingham
-
5,229 				 17,835 				 12,645 				 5,117 				 30,592 				 35,709 				 25,718 				
Cincinnati
-
13,178 				 25,988 				 15,201 				 13,096 				 41,271 				 54,367 				 24,507 				
Reno
-
5,487 				 18,704 				 3,486 				 5,487 				 22,190 				 27,677 				 9,674 				
Palm Springs
-
8,309 				 18,065 				 				 8,309 				 18,942 				 27,251 				 7,861 				
Buffalo/Rochester
-
6,159 				 14,850 				 2,594 				 6,157 				 17,446 				 23,603 				 11,147 				
Mobile
-
4,148 				 14,152 				 3,760 				 3,975 				 18,085 				 22,060 				 10,381 				
London, UK
-
5,730 				 14,278 				 (3,579) 				 3,172 				 13,257 				 16,429 				 10,348 				
Salt Lake City
-
7,846 				 15,947 				 3,554 				 7,495 				 19,852 				 27,347 				 11,524 				
Oklahoma City
-
32,708 				 65,664 				 9,246 				 32,708 				 74,910 				 107,618 				 13,736 				
Santa Barbara
-
5,733 				 9,106 				 				 5,733 				 9,398 				 15,131 				 4,338 				
Cleveland/Akron
-
3,778 				 13,928 				 4,009 				 4,171 				 17,544 				 21,715 				 8,983 				
Chattanooga
-
6,569 				 26,045 				 6,016 				 6,371 				 32,259 				 38,630 				 10,720 				
Wichita
-
2,017 				 6,691 				 6,186 				 2,130 				 12,764 				 14,894 				 10,500 				
						
						
						
						
						
						
						
						
						
						
PUBLIC STORAGE
SCHEDULE III - REAL ESTATE
AND ACCUMULATED DEPRECIATION
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
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
-
				 11,206 				 2,399 				 				 13,605 				 14,600 				 4,730 				
Louisville
-
15,578 				 28,069 				 3,442 				 15,577 				 31,512 				 47,089 				 7,247 				
Augusta
-
1,793 				 5,990 				 2,116 				 1,793 				 8,106 				 9,899 				 4,928 				
Dayton
-
				 3,014 				 4,241 				 				 7,256 				 7,649 				 5,825 				
Huntsville/Decatur
-
1,024 				 3,321 				 2,914 				 				 6,288 				 7,259 				 5,659 				
Fort Wayne
-
				 3,594 				 2,999 				 				 6,593 				 6,942 				 5,644 				
Springfield/Holyoke
-
1,428 				 3,380 				 1,251 				 1,427 				 4,632 				 6,059 				 3,925 				
Shreveport
-
				 3,030 				 2,054 				 				 5,160 				 5,901 				 4,035 				
Rochester
-
1,047 				 2,246 				 1,456 				 				 3,769 				 4,749 				 3,408 				
Lansing
-
				 2,882 				 				 				 3,497 				 4,053 				 1,702 				
Flint
-
				 3,068 				 				 				 3,238 				 3,780 				 1,440 				
Evansville
-
				 2,096 				 				 				 2,922 				 3,793 				 2,372 				
Topeka
-
				 1,419 				 1,669 				 				 3,088 				 3,313 				 2,686 				
Roanoke
-
				 1,776 				 				 				 2,336 				 3,155 				 1,960 				
Syracuse
-
				 1,279 				 				 				 1,969 				 2,514 				 1,724 				
Omaha
-
				 				 1,386 				 				 2,192 				 2,301 				 1,730 				
Joplin
-
				 				 				 				 1,745 				 2,009 				 1,432 				
Modesto/Fresno/Stockton
-
				 				 				 				 				 				 				
﻿
						
						
						
						
						
						
						
						
						
Commercial and non-operating real estate
-
11,517 				 26,939 				 23,777 				 12,541 				 49,692 				 62,233 				 41,363 				
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$30,939 				 $3,711,932 				 $8,205,089 				 $2,046,208 				 $3,781,479 				 $10,181,750 				 $13,963,229 				 $5,270,963 				
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Note: Buildings and improvements are depreciated on a straight-line basis over estimated useful lives ranging generally
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between 5 to 25 years.
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