SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2009
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
------------- --------------
Commission File Number: 001-33519
PUBLIC STORAGE
(Exact name of registrant as specified in its charter)
Maryland 95-3551121
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
701 Western Avenue, Glendale, California 91201-2349
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 244-8080.
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
[ ] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [X] Accelerated Filer [ ] Non-accelerated Filer [ ]
Smaller Reporting Company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
Indicate the number of the registrant's outstanding common shares of beneficial
interest, as of May 7, 2009:
Common Shares of beneficial interest, $.10 par value per share - 169,489,966
shares
PUBLIC STORAGE
INDEX
Pages
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at
March 31, 2009 and December 31, 2008 1
Condensed Consolidated Statements of Income for the
Three Months Ended March 31, 2009 and 2008 2
Condensed Consolidated Statement of Equity
for the Three Months Ended March 31, 2009 3
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2009 and 2008 4 - 5
Notes to Condensed Consolidated Financial Statements 6 - 33
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 34 - 58
Item 3. Quantitative and Qualitative Disclosures about Market Risk 58 - 59
Item 4. Controls and Procedures 60
PART II. OTHER INFORMATION (Items 3, 4 and 5 are not applicable)
-----------------
Item 1. Legal Proceedings 61
Item 1A. Risk Factors 61
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 61 - 62
Item 6. Exhibits 62
PUBLIC STORAGE
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
March 31, December 31,
2009 2008
--------------- ----------------
(Unaudited) (Unaudited)
ASSETS
Cash and cash equivalents............................................... $ 493,400 $ 680,701
Real estate facilities, at cost:
Land................................................................. 2,715,866 2,716,254
Buildings............................................................ 7,507,641 7,490,768
--------------- ----------------
10,223,507 10,207,022
Accumulated depreciation............................................. (2,485,242) (2,405,473)
--------------- ----------------
7,738,265 7,801,549
Construction in process.............................................. 9,317 20,340
--------------- ----------------
7,747,582 7,821,889
Investment in real estate entities...................................... 545,224 544,598
Goodwill, net........................................................... 174,634 174,634
Intangible assets, net.................................................. 49,748 52,005
Loan receivable from Shurgard Europe.................................... 517,497 552,361
Other assets............................................................ 98,412 109,857
--------------- ----------------
Total assets.............................................. $ 9,626,497 $ 9,936,045
=============== ================
LIABILITIES AND EQUITY
Notes payable........................................................... $ 527,235 $ 643,811
Accrued and other liabilities........................................... 210,573 212,353
--------------- ----------------
Total liabilities.............................................. 737,808 856,164
Redeemable noncontrolling interests in subsidiaries (Note 7)............ 12,798 12,777
Commitments and contingencies (Note 12)
Equity:
Public Storage shareholders' equity:
Cumulative Preferred Shares of beneficial interest, $0.01 par
value, 100,000,000 shares authorized, 886,140 shares issued
(in series) and outstanding, (887,122 at December 31, 2008)
at liquidation preference........................................ 3,399,777 3,424,327
Common Shares of beneficial interest, $0.10 par value, 650,000,000
shares authorized, 168,343,759 shares issued and outstanding
(168,279,732 at December 31, 2008)............................... 16,835 16,829
Equity Shares of beneficial interest, Series A, $0.01 par value,
100,000,000 shares authorized, 8,377.193 shares issued and
outstanding...................................................... - -
Paid-in capital..................................................... 5,669,796 5,590,093
Retained earnings................................................... (301,582) (290,323)
Accumulated other comprehensive loss................................ (42,134) (31,931)
--------------- ----------------
Total Public Storage shareholders' equity..................... 8,742,692 8,708,995
Equity of permanent noncontrolling interests in subsidiaries (Note 7) 133,199 358,109
--------------- ----------------
Total equity...................................................... 8,875,891 9,067,104
--------------- ----------------
Total liabilities and equity.............................. $ 9,626,497 $ 9,936,045
=============== ================
See accompanying notes.
1
PUBLIC STORAGE
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
(Unaudited)
Three Months Ended
March 31,
----------------------------------
2009 2008
--------------- ---------------
Revenues:
Self-storage rental income....................................... $ 371,598 $ 424,606
Ancillary operating revenue...................................... 25,835 30,037
Interest and other income........................................ 7,633 2,844
--------------- ---------------
405,066 457,487
--------------- ---------------
Expenses:
Cost of operations (excluding depreciation and amortization):
Self-storage facilities....................................... 133,641 156,815
Ancillary operations.......................................... 9,653 11,304
Depreciation and amortization..................................... 85,167 122,441
General and administrative........................................ 9,679 14,916
Interest expense.................................................. 8,128 16,487
--------------- ---------------
246,268 321,963
--------------- ---------------
Income from continuing operations before equity in earnings of real
estate entities, gain on disposition of an interest in Shurgard
Europe and other real estate investments or early retirement of
debt, and foreign currency exchange (loss) gain.................. 158,798 135,524
Equity in earnings of real estate entities.......................... 22,811 2,729
Gain on disposition of an interest in Shurgard Europe (Note 3)...... - 341,865
Gain on disposition of other real estate investments................ 2,722 -
Gain on early retirement of debt.................................... 4,114 -
Foreign currency exchange (loss) gain............................... (34,733) 40,971
--------------- ---------------
Income from continuing operations................................... 153,712 521,089
Discontinued operations............................................. (283) (1,148)
--------------- ---------------
Net income.......................................................... 153,429 519,941
--------------- ---------------
Net income allocated from (to) noncontrolling equity interests (Note 7) 63,573 (7,599)
--------------- ---------------
Net income allocable to Public Storage shareholders................. $ 217,002 $ 512,342
=============== ===============
Allocation of net income to Public Storage shareholders:
Preferred shareholders based on distributions paid............... $ 58,108 $ 60,333
Preferred shareholders based on redemptions...................... (6,218) -
Equity Shares, Series A.......................................... 5,131 5,356
Restricted share units .......................................... 486 1,825
Common shareholders.............................................. 159,495 444,828
--------------- ---------------
$ 217,002 $ 512,342
=============== ===============
Net income per common share - basic
Continuing operations............................................ $ 0.95 $ 2.65
Discontinued operations.......................................... - (0.01)
--------------- ---------------
$ 0.95 $ 2.64
=============== ===============
Net income per common share - diluted
Continuing operations............................................ $ 0.95 $ 2.64
Discontinued operations.......................................... - (0.01)
--------------- ---------------
$ 0.95 $ 2.63
=============== ===============
Net income per depositary share of Equity Shares, Series A (basic and
diluted) ........................................................ $ 0.61 $ 0.61
=============== ===============
Basic weighted average common shares outstanding.................... 168,312 168,586
=============== ===============
Diluted weighted average common shares outstanding.................. 168,473 168,982
=============== ===============
Weighted average shares of Equity Shares, Series A (basic and diluted) 8,377 8,744
=============== ===============
See accompanying notes.
2
PUBLIC STORAGE
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Amounts in thousands, except share data)
(Unaudited)
Accumulated Total Public
Cumulative Other Storage
Preferred Common Paid-in Retained Comprehensive Shareholders'
Shares Shares Capital Earnings Income (Loss) Equity
-------------- ------------ ------------- ------------- --------------- --------------
Balance at December 31, 2008......... $ 3,424,327 $ 16,829 $ 5,590,093 $ (290,323) $ (31,931) $ 8,708,995
Repurchase of cumulative preferred
shares (982,000 shares) (Note 8)... (24,550) - 7,015 - - (17,535)
Redemption of permanent
noncontrolling equity interests
(Note 7)........................... - - 72,000 - - 72,000
Issuance of common shares in
connection with share-based
compensation (64,027 shares)
(Note 10)......................... - 6 549 - - 555
Stock-based compensation expense
(Note 10) ........................ - - 139 - - 139
Adjustments of permanent
noncontrolling interests in
subsidiaries to liquidation value
(Note 7).......................... - - - (99) - (99)
Net income of the Company............ - - - 145,264 - 145,264
Net income allocated from redeemable
noncontrolling interests in
subsidiaries (Note 7)............. - - - (262) - (262)
Distributions to equity holders:
Cumulative preferred shares (Note
8).............................. - - - (58,108) - (58,108)
Permanent noncontrolling -
interests in subsidiaries ...... - - - -
Equity Shares, Series A ($0.613
per depositary share)........... - - - (5,131) - (5,131)
Holders of unvested restricted
share units..................... - - - (341) - (341)
Common Shares ($0.55 per share)... - - - (92,582) - (92,582)
Other comprehensive income: Currency
translation adjustments (Note 2)... - - - - (10,203) (10,203)
-------------- ------------ ------------- ------------- --------------- --------------
Balance at March 31, 2009............ $ 3,399,777 $ 16,835 $ 5,669,796 $ (301,582) $ (42,134) $ 8,742,692
============== ============ ============= ============= =============== ==============
Permanent
Noncontrolling
Equity Interests
In Subsidiares Total Equity
---------------- ---------------
Balance at December 31, 2008......... $ 358,109 $ 9,067,104
Repurchase of cumulative preferred
shares (982,000 shares) (Note 8)... - (17,535)
Redemption of permanent
noncontrolling equity interests
(Note 7)........................... (225,000) (153,000)
Issuance of common shares in
connection with share-based
compensation (64,027 shares)
(Note 10)......................... - 555
Stock-based compensation expense
(Note 10) ........................ - 139
Adjustments of permanent
noncontrolling interests in
subsidiaries to liquidation value
(Note 7).......................... - (99)
Net income of the Company............ 8,165 153,429
Net income allocated from redeemable
noncontrolling interests in
subsidiaries (Note 7)............. - (262)
Distributions to equity holders:
Cumulative preferred shares (Note
8).............................. - (58,108)
Permanent noncontrolling
interests in subsidiaries ...... (8,075) (8,075)
Equity Shares, Series A ($0.613
per depositary share)........... - (5,131)
Holders of unvested restricted
share units..................... - (341)
Common Shares ($0.55 per share)... - (92,582)
Other comprehensive income: Currency
translation adjustments (Note 2)... - (10,203)
---------------- ---------------
Balance at March 31, 2009............ $ 133,199 $ 8,875,891
================ ===============
See accompanying notes.
3
PUBLIC STORAGE
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
For the Three Months Ended
March 31,
-------------------------------
2009 2008
-------------- ---------------
Cash flows from operating activities:
Net income............................................................... $ 153,429 $ 519,941
Adjustments to reconcile net income to net cash provided by operating
activities:
Gain on disposition of an interest in Shurgard Europe (Note 3).......... - (341,865)
Gain on disposition of other real estate investments including amounts in
discontinued operations (Note 4)..................................... (2,722) -
Gain on early retirement of debt (Note 6)............................... (4,114) -
Depreciation and amortization including amounts in discontinued
operations........................................................... 85,200 122,491
Equity share of income allocations from investee's repurchases of
preferred stock ..................................................... (16,284) -
Distributions received from real estate entities in excess of other equity
in earnings.......................................................... 5,292 3,764
Foreign currency exchange loss (gain)................................... 34,733 (40,971)
Adjustments for stock-based compensation, amortization of note premium,
and other............................................................ 3,991 (23,694)
-------------- ---------------
Total adjustments.................................................... 106,096 (280,275)
-------------- ---------------
Net cash provided by operating activities............................ 259,525 239,666
-------------- ---------------
Cash flows from investing activities:
Capital improvements to real estate facilities ......................... (8,499) (6,874)
Construction in process................................................. (2,328) (24,111)
Proceeds from sales of other real estate investments.................... 10,261 -
Proceeds from the disposition of interest in Shurgard Europe (Note 3)... - 601,485
Deconsolidation of Shurgard Europe (Note 3)............................. - (34,588)
Investment in Shurgard Europe........................................... - (32,911)
Other investing activities.............................................. (825) 3,787
-------------- ---------------
Net cash (used in) provided by investing activities.................. (1,391) 506,788
-------------- ---------------
Cash flows from financing activities:
Principal payments on notes payable..................................... (1,890) (4,368)
Redemption of senior unsecured notes payable............................ (109,622) -
Proceeds from borrowing on debt of Existing European Joint Ventures..... - 14,654
Net proceeds from the issuance of common shares......................... 555 2,503
Repurchases of common shares............................................ - (111,903)
Redemption of cumulative preferred shares............................... (17,535) -
Redemption of permanent noncontrolling equity interests................. (153,000) -
Distributions paid to Public Storage shareholders....................... (156,162) (158,472)
Distributions paid to permanent noncontrolling equity interests......... (8,075) (9,924)
-------------- ---------------
Net cash used in financing activities................................ (445,729) (267,510)
-------------- ---------------
Net (decrease) increase in cash and cash equivalents........................ (187,595) 478,944
Net effect of foreign exchange translation on cash.......................... 294 2,544
Cash and cash equivalents at the beginning of the period.................... 680,701 245,444
-------------- ---------------
Cash and cash equivalents at the end of the period.......................... $ 493,400 $ 726,932
============== ===============
See accompanying notes.
4
PUBLIC STORAGE
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
(Continued)
For the Three Months Ended
March 31,
------------------------------
2009 2008
------------- --------------
Supplemental schedule of non cash investing and financing activities:
Foreign currency translation adjustment:
Real estate facilities, net of accumulated depreciation........... $ - $ (96,534)
Construction in process........................................... - (956)
Investment in real estate entities................................ (10,366) -
Intangible assets, net............................................ - (4,529)
Loan receivable from Shurgard Europe.............................. (34,864) -
Other assets...................................................... - (3,742)
Notes payable..................................................... - 28,912
Accrued and other liabilities..................................... - 5,879
Permanent noncontrolling equity interests in subsidiaries......... - 7,249
Accumulated other comprehensive (loss) income..................... 45,524 66,265
Deconsolidation of Shurgard Europe (Note 3)
Real estate facilities, net of accumulated depreciation........... - 1,693,524
Construction in process........................................... - 10,886
Investment in real estate entities................................ - (594,330)
Loan receivable from Shurgard Europe.............................. - (618,822)
Intangible assets, net............................................ - 78,135
Other assets...................................................... - 68,486
Notes payable..................................................... - (424,995)
Accrued and other liabilities..................................... - (98,571)
Permanent noncontrolling equity interests in subsidiaries......... - (148,901)
See accompanuing notes.
5
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
1. Description of the Business
---------------------------
Public Storage, Inc., formerly a California corporation, was
organized in 1980. Effective June 1, 2007, following approval by our
shareholders, we reorganized Public Storage, Inc. into Public Storage, a
Maryland real estate investment trust (referred to herein as "the Company",
"the Trust", "we", "us", or "our"). Our principal business activities
include the acquisition, development, 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. Our self-storage
facilities are located primarily in the United States ("U.S."). We also
have interests in self-storage facilities located in seven Western European
countries.
At March 31, 2009, we had direct and indirect equity interests in
2,010 self-storage facilities located in 38 states operating under the
"Public Storage" name, and 183 self-storage facilities located in Europe
which operate under the "Shurgard Storage Centers" name. We also have
direct and indirect equity interests in approximately 21 million net
rentable square feet of commercial space located in 11 states in the U.S.
primarily operated by PS Business Parks, Inc. ("PSB") under the "PS
Business Parks" name.
Any reference to the number of properties, square footage, number
of tenant reinsurance policies outstanding and the aggregate coverage of
such reinsurance policies 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.
2. Summary of Significant Accounting Policies
------------------------------------------
Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with U.S. generally accepted
accounting principles ("GAAP") for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and notes required by GAAP for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal and recurring adjustments) considered
necessary for a fair presentation have been reflected in these unaudited
condensed consolidated financial statements. Operating results for the
three months ended March 31, 2009 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2009 due to
seasonality and other factors. The accompanying unaudited condensed
consolidated financial statements should be read together with the
consolidated financial statements and related notes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2008.
Certain amounts previously reported have been reclassified to
conform to the March 31, 2009 presentation, including discontinued
operations, the grouping of the separate captions "cumulative earnings" and
"cumulative distributions" into "retained earnings" on our condensed
consolidated balance sheet, as well as reclassifications required by newly
implemented accounting standards described below.
Adjustments due to accounting pronouncements becoming effective
----------------------------------------------------------------
January 1, 2009
---------------
Statement of Financial Accounting Standards No. 160,
"Noncontrolling Interests in Consolidated Financial Statements - an
amendment of ARB No. 51" ("SFAS No. 160") and other accounting standards
implemented by the Financial Accounting Standards Board and the Securities
6
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
and Exchange Commission ("SEC") (collectively, the "Revised Minority
Interest Standards") became effective January 1, 2009. As a result, we have
reclassified certain equity interests previously referred to as minority
interests on our balance sheet at December 31, 2008 to "permanent
noncontrolling interests in subsidiaries" or "redeemable noncontrolling
interests in subsidiaries." These reclassifications increased equity
$351,640,000, decreased minority interest $364,417,000, and increased
redeemable noncontrolling interests in subsidiaries by $12,777,000, as
compared to the amounts previously presented as of December 31, 2008. On
our condensed consolidated statement of income, income allocations to the
aforementioned equity interests were reclassified from "minority interest
in income", a reduction to income, to "income allocated to noncontrolling
interests in subsidiaries," an allocation of net income in calculating net
income allocable to our common shareholders. These adjustments increased
net income $7,599,000 for the three months ended March 31, 2008, but had no
impact upon net income allocable to our common shareholders or on earnings
per common share, as compared to amounts previously presented.
In addition, FASB Staff Position No. EITF 03-6-1, "Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities," which became effective January 1, 2009, requires
the "two class" method of allocating income with respect to restricted
share units to determine basic and diluted earnings per common share.
Previously, restricted share units were included in weighted average
diluted shares, based upon application of the treasury stock method. This
change resulted in a decrease in income allocable to common shareholders of
approximately $1,825,000 and a decrease in diluted weighted average common
shares outstanding of 248,000 for the three months ended March 31, 2008. As
a result of these changes, net income per basic and diluted earnings per
common share decreased approximately $0.01, as compared to amounts
previously presented for the three months ended March 31, 2008.
Consolidation Policy
--------------------
Entities in which we have an interest are first evaluated to
determine whether, in accordance with the provisions of the Financial
Accounting Standards Board's Interpretation No. 46R, "Consolidation of
Variable Interest Entities," they represent Variable Interest Entities
("VIE's"). VIE's in which we are the primary beneficiary are consolidated.
Entities that are not VIE's that we control are consolidated.
When we are the general partner, we are considered to control the
partnership unless the limited partners possess substantial "kick-out" or
"participative" rights as defined in Emerging Issues Task Force Statement
04-5 - "Determining whether a general partner or the general partners as a
group, controls a limited partnership or similar entity when the limited
partners have certain rights" ("EITF 04-5").
The accounts of the entities we control, along with the accounts
of the VIE's for which we are the primary beneficiary, are included in our
condensed consolidated financial statements, and all intercompany balances
and transactions are eliminated. We account for our investment in entities
that we do not consolidate using the equity method of accounting or, if we
do not have the ability to exercise significant influence over an investee,
the cost method of accounting. Changes in consolidation status are
reflected effective the date the change of control or determination of
primary beneficiary status occurred, and previously reported periods are
not restated. The entities that we consolidate during the periods, to which
the reference applies, are referred to hereinafter as the "Consolidated
Entities." The entities that we have an interest in but do not consolidate
during the periods, to which the reference applies, are referred to
hereinafter as the "Unconsolidated Entities."
Collectively, at March 31, 2009, the Company and the Consolidated
Entities own a total of 2,000 real estate facilities, consisting of 1,991
self-storage facilities in the U.S., one self-storage facility in London,
England and eight commercial facilities in the U.S.
7
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
At March 31, 2009, the Unconsolidated Entities are comprised of
PSB, Shurgard Europe, as well as various limited and joint venture
partnerships (referred to as the "Other Investments"). At March 31, 2009,
PSB owns approximately 19.6 million rentable square feet of commercial
space, Shurgard Europe has interests in 182 self-storage facilities in
Europe with 9.6 million net rentable square feet, and the Other Investments
own in aggregate 19 self-storage facilities in the U.S.
Use of Estimates
----------------
The preparation of the condensed consolidated financial statements
in conformity with GAAP requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Income Taxes
------------
For all taxable years subsequent to 1980, the Company has
qualified and intends to continue to qualify as a real estate investment
trust ("REIT"), as defined in Section 856 of the Internal Revenue Code. As
a REIT, we do not incur federal or significant state tax on that portion of
our taxable income which is distributed to our shareholders, provided that
we meet certain tests. We believe we have met these tests during 2008 and
will meet these tests during 2009 and, accordingly, no provision for
federal income taxes has been made in the accompanying condensed
consolidated financial statements on income produced and distributed on
real estate rental operations. Our taxable REIT subsidiaries are subject to
regular corporate tax on their taxable income, and such corporate taxes are
presented in ancillary cost of operations in our accompanying condensed
consolidated statements of income. We also are subject to certain state
income taxes, which are presented in general and administrative expense in
our accompanying condensed consolidated statements of income.
We adopted the provisions of Financial Accounting Standards Board
("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes
- an interpretation of FASB Statement No. 109" ("FIN 48"), on January 1,
2007. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statement in accordance with FASB
Statement 109, "Accounting for Income Taxes", and prescribes a recognition
threshold and measurement process for financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosures and
transition.
Based on our evaluation, we have concluded that there are no
significant uncertain tax positions requiring recognition in our financial
statements. Our evaluation was performed for all tax periods which remain
subject to examination by major tax jurisdictions as of March 31, 2009, as
well as the interim period ended March 31, 2009.
Financial Instruments
---------------------
We have estimated the fair value of our financial instruments
using available market information and appropriate valuation methodologies.
Considerable judgment is required in interpreting market data to develop
estimates of market value. Accordingly, estimated fair values are not
necessarily indicative of the amounts that could be realized in current
market exchanges.
For purposes of financial statement presentation, we consider all
highly liquid financial instruments such as short-term treasury securities,
money market funds with daily liquidity and a rating in excess of AAA by
Standard and Poor's, or investment grade short-term commercial paper with
remaining maturities of three months or less at the date of acquisition to
8
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
be cash equivalents. Any such cash and cash equivalents which are
restricted from general corporate use (restricted cash) due to insurance or
other regulations, or based upon contractual requirements, are included in
other assets.
Due to the short period to maturity of our cash and cash
equivalents, accounts receivable and other financial instruments included
in other assets, and accrued and other liabilities, we believe the carrying
values as presented on the consolidated balance sheets are reasonable
estimates of fair value.
Financial assets that are exposed to credit risk consist primarily
of cash and cash equivalents, notes receivable from affiliate, as well as
accounts receivable and restricted cash which are included in other assets
on our accompanying condensed consolidated balance sheets. Cash and cash
equivalents and restricted cash, consisting of short-term investments,
including commercial paper, are only invested in investment instruments
with an investment grade rating. Accounts receivable are not a significant
portion of total assets and are comprised of a large number of individually
insignificant customer balances. We have a loan receivable from Shurgard
Europe totaling $517,497,000 at March 31, 2009. Although there can be no
assurance, we believe that Shurgard Europe has sufficient liquidity and
collateral, and we have sufficient creditor rights, such that credit risk
is minimal. In addition, we believe the interest rate on the loan
approximates the market rate for loans with similar credit characteristics
and tenor. Accordingly, we believe the carrying value of the loan
approximates fair value based on these characteristics and other market
data, which represent significant unobservable inputs, which are "Level 3"
inputs as the term is utilized in SFAS No. 157, "Fair Value Measurement"
(or SFAS No. 157).
At March 31, 2009, due primarily to our investment in and loan
receivable from Shurgard Europe, our operations and our financial position
are affected by fluctuations in the exchange rates between the Euro, and to
a lesser extent, other European currencies, against the U.S. Dollar.
Real Estate Facilities
----------------------
Real estate facilities are recorded at cost. Costs associated with
the acquisition, development, construction, renovation and improvement of
properties are capitalized. Interest, property taxes and other costs
associated with development incurred during the construction period are
capitalized as building cost. Costs associated with the sale of real estate
facilities or interests in real estate investments are expensed as
incurred. The purchase cost of existing self-storage facilities that we
acquire are allocated based upon relative fair value of the land, building
and tenant intangible components of the real estate facility. Expenditures
for repairs and maintenance are expensed when incurred. Depreciation
expense is computed using the straight-line method over the estimated
useful lives of the buildings and improvements, which generally range from
5 to 25 years.
Other Assets
------------
Other assets primarily consist of prepaid expenses, investments in
held-to-maturity debt securities, accounts receivable, interest receivable,
restricted cash, merchandise inventory held for sale, as well as trucks and
other equipment associated with our ancillary operations.
Accrued and Other Liabilities
-----------------------------
Accrued and other liabilities consist primarily of real property
tax accruals, tenant prepayments of rents, accrued interest payable, and
trade payables. They also include losses and loss adjustment liabilities
for our own exposures, as well as estimated losses related to our tenant
insurance activities, which are not covered by third-party insurance
carriers, aggregating $27,814,000 at March 31, 2009 ($26,724,000 at
December 31, 2008).
9
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
Goodwill
--------
Goodwill represents the excess of acquisition cost over the fair
value of net tangible and identifiable intangible assets acquired in
business combinations. Each business combination from which our goodwill
arose was for the acquisition of single businesses and accordingly, the
allocation of our goodwill to our business segments is based directly on
such acquisitions. Our goodwill has an indeterminate life. Our goodwill
balance of $174,634,000 is reported net of accumulated amortization of
$85,085,000 as of March 31, 2009 and December 31, 2008 in our accompanying
condensed consolidated balance sheets.
We evaluate impairment of goodwill annually by comparing the
aggregate book value (including goodwill) of each reporting unit to their
respective estimated fair value. No impairment of our goodwill was
identified in our annual evaluation at December 31, 2008. No impairment
indicators were noted as of March 31, 2009 which would have required an
interim evaluation of goodwill for impairment.
Intangible Assets
-----------------
We acquire finite-lived intangible assets representing primarily
the tenants in place (a "Tenant Intangible") at the date of the acquisition
of each respective facility, and Tenant Intangibles are amortized relative
to the benefit of the tenants in place to each period. At March 31, 2009,
our Tenant Intangibles have a net book value of $30,924,000 ($33,181,000 at
December 31, 2008), which is net of accumulated amortization of
$338,262,000 ($336,005,000 at December 31, 2008).
Amortization expense of $2,257,000 and $28,411,000 was recorded
for our Tenant Intangibles for the three months ended March 31, 2009 and
2008, respectively. The estimated future amortization expense for our
finite-lived intangible assets is as follows:
2009 (remainder of) $ 2,814,000
2010 2,724,000
2011 2,395,000
2012 2,327,000
2013 2,222,000
2014 and beyond 18,442,000
---------------
$ 30,924,000
===============
We also have an intangible representing the value of the
"Shurgard" trade name, which is used by Shurgard Europe pursuant to a
licensing agreement described more fully in Note 3, with a book value of
$18,824,000 at March 31, 2009 and December 31, 2008. The Shurgard trade
name has an indefinite life and, accordingly, we do not amortize this asset
but instead analyze it on an annual basis for impairment. No impairments
were noted from our evaluations in any periods presented in these
accompanying condensed consolidated financial statements.
Evaluation of Asset Impairment
------------------------------
We evaluate our real-estate and Tenant Intangibles for impairment
on a quarterly basis. We first evaluate these assets for indicators of
impairment, and if any indicators of impairment are noted, we determine
whether the carrying value of such assets is in excess of the future
estimated undiscounted cash flows attributable to these assets. If there is
excess carrying value over such future undiscounted cash flows, an
10
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
impairment charge is booked for the excess of carrying value over the
assets' estimated fair value. Any long-lived assets which we expect to sell
or otherwise dispose of prior to their estimated useful life are stated at
the lower of their estimated net realizable value (less cost to sell) or
their carrying value. No impairment was identified from our evaluations in
any periods presented in the accompanying condensed consolidated financial
statements.
Revenue and Expense Recognition
-------------------------------
Rental income, which is generally earned pursuant to
month-to-month leases for storage space, as well as late charges and
administrative fees, are recognized as earned. Promotional discounts are
recognized as a reduction to rental income over the promotional period,
which is generally during the first month of occupancy. Ancillary revenues
and interest and other income is recognized when earned. Equity in earnings
of real estate entities is recognized based on our ownership interest in
the earnings of each of the Unconsolidated Entities.
We accrue for property tax expense based upon actual amounts
billed for the related time periods and, in some circumstances due to
taxing authority assessment timing and disputes of assessed amounts,
estimates and historical trends. If these estimates are incorrect, the
timing and amount of expense recognition could be affected. Cost of
operations, general and administrative expense, interest expense, as well
as television, yellow page, and other advertising expenditures are expensed
as incurred. Casualty losses or gains are recognized in the period the
casualty occurs, based upon the differential between the book value of
assets destroyed and estimated insurance proceeds, if any, that we expect
to receive in accordance with our insurance contracts.
Foreign Currency Exchange Translation
-------------------------------------
The local currency is the functional currency for the foreign
operations for which we have an interest. Assets and liabilities included
on our condensed consolidated balance sheets, including our equity
investment in Shurgard Europe, are translated at end-of-period exchange
rates, while revenues, expenses, and equity in earnings of the related real
estate entities, are translated at the average exchange rates in effect
during the period. The Euro, which represents the functional currency used
by a majority of the foreign operations for which we have an interest, was
translated at an end-of-period exchange rate of approximately 1.320 U.S.
Dollars per Euro at March 31, 2009 (1.409 at December 31, 2008), and
average exchange rates of 1.306 and 1.496 for the three months ended March
31, 2009 and 2008, respectively. Equity is translated at historical rates
and the resulting cumulative translation adjustments, to the extent not
included in net income, are included as a component of accumulated other
comprehensive income (loss) until the translation adjustments are realized.
See "Other Comprehensive Income" below for further information regarding
our foreign currency translation gains and losses.
Fair Value Accounting
---------------------
In 2006, the FASB issued SFAS No. 157. SFAS No. 157 expands
required fair value disclosures, whenever other accounting standards
require or permit fair value measurements, including the information used
to measure fair value, and the effect of fair value measurements on
earnings. SFAS No. 157 clarifies that fair value is an exit price,
representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants,
and establishes a three-tier fair value hierarchy, which prioritizes the
inputs used in measuring fair value. The Company adopted the provisions of
SFAS No. 157 on January 1, 2008 with respect to financial assets and
liabilities and on January 1, 2009 with respect to non-financial assets and
liabilities, which had no effect on our financial position, operating
results or cash flows.
Loan Receivable from Shurgard Europe
------------------------------------
As of March 31, 2009, we had a loan receivable from Shurgard
Europe totaling $517,497,000 ($552,361,000 at December 31, 2008).
11
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
The loan bears interest at a fixed rate of 7.5% per annum, and had
an initial term of one year expiring March 31, 2009 which was extended by
Shurgard Europe pursuant to the terms of the original note to March 31,
2010. In addition, if Shurgard Europe acquires its partner's interests in
First Shurgard and Second Shurgard (collectively, the "Existing European
Joint Ventures"), joint ventures in which Shurgard Europe has a 20%
interest, and is unable to obtain third-party financing, we have agreed to
provide additional loans to Shurgard Europe, under the same terms as the
existing loans, for up to (euro)305 million ($402.7 million as of March 31,
2009) for the acquisition. This commitment was also extended to March 31,
2010. Shurgard Europe has no obligation to acquire these interests, and the
acquisition of these interests is contingent on a number of items,
including whether we assent to the acquisition. Loan fees paid are
amortized on a straight-line basis as interest income over the applicable
term to which the fee applies.
The loan receivable from Shurgard Europe is denominated in Euros
and is converted to U.S. Dollars on our balance sheet. During each
applicable period, because we have expected repayment within two years of
each respective balance sheet date, we have been recognizing foreign
exchange rate gains or losses in income as a result of changes in exchange
rates between the Euro and the U.S. Dollar during the three months ended
March 31, 2009 and 2008. For the three months ended March 31, 2009, we
recorded interest income of approximately $5,177,000 related to the loan.
The $5,177,000 in interest income reflects the gross amount
charged to Shurgard Europe totaling $10,151,000 less our portion totaling
$4,974,000 which is reflected as equity in earnings of real estate entities
rather than interest and other income.
Other Comprehensive Income
--------------------------
We reflect other comprehensive income (loss) for our pro-rata
share of currency translation adjustments related to the foreign operations
for which we have an interest that is not already recognized in our net
income. Such other comprehensive income (loss) is reflected as a direct
adjustment to "Accumulated Other Comprehensive Income" in the equity
section of our consolidated balance sheet, and is added to our net income
in determining total comprehensive income for the period.
12
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
The following table reflects the components of our other
comprehensive (loss) income, and our total comprehensive income, for each
respective period:
For the Three Months Ended
March 31,
----------------------------
2009 2008
------------- ------------
(Amounts in thousands)
Net income................................ $ 153,429 $ 519,941
Other comprehensive income (loss):
Aggregate foreign currency translation
adjustments for the period.......... (44,936) 66,222
Less: foreign currency translation
adjustments recognized during the
period and reflected in "Gain on
disposition of an interest in
Shurgard Europe" (Note 3)........... - (37,854)
Less: foreign currency translation
adjustments reflected in net income
as "Foreign currency loss (gain)"... 34,733 (40,971)
------------- ------------
Other comprehensive income (loss) income
for the period...................... (10,203) (12,603)
------------- ------------
Total comprehensive income................ $ 143,226 $ 507,338
============= ============
Discontinued Operations
-----------------------
We segregate all of our discontinued operations that can be
distinguished from the rest of the Company and will be eliminated from the
ongoing operations of the Company, due to a sale, facility closure, or
activity termination. During the three months ended March 31, 2009, we
decided to terminate our truck rental and containerized storage business
units. As a result, we reclassified all of the historical revenues and
expenses of these operations from ancillary revenues and ancillary
expenses, into "discontinued operations." In addition, included in
discontinued operations is $3.5 million in expenses incurred in the three
months ended March 31, 2009 related primarily to disposing of trucks used
in our truck rental operations. Truck operations ceased as of March 31,
2009, and the containerized operations are being actively marketed for sale
and are expected to be disposed of by December 31, 2009.
Net Income per Common Share
---------------------------
In computing net income allocated to our common shareholders, we
first allocate net income to our noncontrolling interests in subsidiaries
(Note 7) and preferred shareholders to arrive at net income allocable to
our common shareholders. Net income allocated to preferred shareholders or
noncontrolling interests in subsidiaries includes any excess of the cash
required to redeem any preferred securities in the period over the net
proceeds from the original issuance of the securities (or, if securities
are redeemed for less than the original issuance proceeds, income allocated
to the holders of the redeemed securities is reduced.)
The remaining net income is allocated among our regular common
shares, restricted share units, and our Equity Shares, Series A based upon
the dividends declared (or accumulated) for each security in the period,
combined with each security's participation rights in undistributed
earnings.
Basic net income per share is computed using the weighted average
common shares outstanding. Diluted net income per share is computed using
13
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
the weighted average common shares outstanding, adjusted for the impact, if
dilutive, of stock options outstanding (Note 10). There were no securities
outstanding which would have had an anti-dilutive effect upon earnings per
common share in each of the three months ended March 31, 2009 and 2008.
The following table reflects the components of our earnings per
share for each respective period:
For the Three Months Ended March 31,
------------------------------------
2009 2008
---------------- --------------
(Amounts in thousands)
Earnings Per Share:
Net income....................................................... $ 153,429 $ 519,941
Less: Net income allocated from (to) noncontrolling equity
interests:
To preferred unitholders - redemptions........................ 72,000 -
To preferred unitholders - distributions...................... (4,017) (5,403)
To other noncontrolling equity interests...................... (4,410) (2,196)
---------------- --------------
Net income allocable to Public Storage shareholders.............. 217,002 512,342
Less net income allocated (to) from preferred shareholders:
Based on distributions paid.................................... (58,108) (60,333)
Based on redemptions of preferred shares (application of EITF
Topic D-42).................................................. 6,218 -
---------------- --------------
Total net income allocable to remaining shareholders............. $ 165,112 $ 452,009
================ ==============
Allocation of net income based upon distributions and
participation rights in undistributed earnings:
Equity Shares, Series A....................................... $ 5,131 $ 5,356
Restricted share units ....................................... 486 1,825
Common shares.............................................. 159,495 444,828
---------------- --------------
$ 165,112 $ 452,009
================ ==============
Weighted average common shares and equivalents outstanding:
Basic weighted average common shares outstanding.............. 168,312 168,586
Net effect of dilutive stock options - based on treasury stock
method using average market price........................... 161 396
---------------- --------------
Diluted weighted average common shares outstanding............ 168,473 168,982
================ ==============
Basic earnings per common and common equivalent share (a)........ $ 0.95 $ 2.64
================ ==============
Diluted earnings per common and common equivalent share (a)...... $ 0.95 $ 2.63
================ ==============
(a) See "Net Income per Common Share" above and the underlying discussion
on Emerging Issues Task Force Topic D-42.
Recent Accounting Pronouncements and Guidance
---------------------------------------------
Business Combinations
---------------------
In December 2007, the Financial Accounting Standards Board (the
"FASB") issued SFAS No. 141(R) and requires the acquiring entity in a
business combination to measure the assets acquired, liabilities assumed
(including contingencies) and any noncontrolling interests at their fair
values on the acquisition date. The statement also requires that
acquisition-related transaction costs be expensed as incurred. In addition,
acquisition-related restructuring costs are to be capitalized only if they
meet certain criteria. SFAS No. 141(R) was effective January 1, 2009. The
application of SFAS No.141(R) will have an impact on our results of
operations and financial position to the extent that we enter into any
business combinations.
14
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
3. Disposition of an Interest in Shurgard Europe
---------------------------------------------
On March 31, 2008, an institutional investor acquired a 51%
interest in Shurgard European Holdings LLC, a newly formed Delaware limited
liability company and the holding company for Shurgard Europe ("Shurgard
Holdings"). Public Storage owns the remaining 49% interest and is the
managing member of Shurgard Holdings.
Our net proceeds from the transaction aggregated $609,059,000,
comprised of i) $605,627,000 paid by the institutional investor on March
31, 2008, ii) a receivable from the investor totaling $7,574,000, iii),
less $4,142,000 in legal, accounting, and other expenses incurred in
connection with the transaction. As a result of the disposition, we reduced
our investment in Shurgard Europe by approximately $305,048,000 for the pro
rata portion of our March 31, 2008 investment that was sold, and recognized
a gain of $304,011,000 upon disposition, representing the difference
between the net proceeds received of $609,059,000 and the pro rata portion
of our investment sold of $305,048,000.
In addition, as a result of our disposition of this interest, a
portion of the cumulative currency exchange gains we had previously
recognized in Other Comprehensive Income with respect to Shurgard Europe
was realized. Accordingly, we recognized a cumulative currency exchange
gain of $37,854,000, representing 51% (the pro rata portion of Shurgard
Europe that was sold) of the cumulative currency exchange gain previously
included in Other Comprehensive Income.
The gain upon disposition of $304,011,000 and associated realized
currency exchange gain totaling $37,854,000 are both included in the gain
on disposition of an interest in Shurgard Europe of $341,865,000 in our
condensed consolidated statement of income for the three months ended March
31, 2008.
The results of operations of Shurgard Europe have been included in
our condensed consolidated statements of income for the three months ended
March 31, 2008. Commencing with the quarter beginning April 1, 2008, our
pro rata share of operations of Shurgard Europe is reflected on our
condensed consolidated statement of income under equity in earnings of real
estate entities.
15
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
4. Real Estate Facilities
----------------------
Activity in real estate facilities is as follows:
Three Months
Ended March 31,
2009
---------------
(Amounts in
thousands)
Operating facilities, at cost:
Beginning balance....................................... $ 10,207,022
Capital improvements.................................... 8,499
Newly developed facilities opened for operations........ 13,351
Disposition of real estate facilities................... (5,365)
---------------
Ending balance.......................................... 10,223,507
---------------
Accumulated depreciation:
Beginning balance....................................... (2,405,473)
Depreciation expense.................................... (81,776)
Disposition of real estate facilities................... 2,007
---------------
Ending balance.......................................... (2,485,242)
---------------
Construction in process:
Beginning balance...................................... 20,340
Current development (includes $190 in capitalized interest
for the three months ended March 31, 2009)........... 2,328
Newly developed facilities opened for operation........ (13,351)
---------------
Ending balance......................................... 9,317
---------------
Total real estate facilities at March 31, 2009........... $ 7,747,582
===============
During the three months ended March 31, 2009, we completed various
expansion projects with total cost of $13,351,000. We also sold an existing
real estate facility as well as a portion of certain real estate facilities
in the quarter, primarily condemnation proceedings, for aggregate proceeds
totaling $10,261,000. We recorded an aggregate gain of approximately
$6,903,000, of which $4,181,000 is included in discontinued operations and
$2,722,000 is included in "gain (loss) on disposition of real estate
investments."
Construction in process at March 31, 2009 includes the development
costs relating to various expansions to existing self-storage facilities.
5. Investments in Real Estate Entities
-----------------------------------
During the three months ended March 31, 2009 and 2008, we
recognized earnings from our investments in real estate entities of
$22,811,000, and $2,729,000, respectively, and received cash distributions
from such investments, totaling $11,819,000, and $6,493,000, respectively.
Included in earnings recognized for the three months ended March 31, 2009
is $16,284,000, representing our share of the earnings allocated from PSB's
preferred shareholders, as a result of PSB's repurchases of preferred stock
and preferred units for amounts that were less than the related book value,
during the period.
During the three months ended March 31, 2009, in addition to the
impact of earnings recognized and cash distributions received, our
investments in real estate entities decreased by $10,366,000 due to foreign
currency translation adjustments.
16
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
The following table sets forth our investments in the real estate
entities at March 31, 2009 and December 31, 2008, and our equity in
earnings of real estate entities the three months ended March 31, 2009 and
2008 (amounts in thousands):
Equity in Earnings of Real
Investments in Real Estate Estate Entities for the
Entities at Three Months Ended March31,
---------------------------- ---------------------------
March 31, December 31,
2009 2008 2009 2008
------------ ------------- ----------- -----------
PSB $ 280,517 $ 265,650 $ 20,466 $ 2,345
Shurgard Europe................ 250,529 264,145 1,901 -
Other Investments.............. 14,178 14,803 444 384
------------ ------------- ----------- -----------
Total...................... $ 545,224 $ 544,598 $ 22,811 $ 2,729
============ ============= =========== ===========
INVESTMENT IN PSB
-----------------
PSB is a REIT traded on the New York Stock Exchange, which
controls an operating partnership (collectively, the REIT and the operating
partnership are referred to as "PSB"). At March 31, 2009, PSB owned and
operated approximately 19.6 million net rentable square feet of commercial
space and manages certain of our commercial space.
We have a 46% common equity interest in PSB as of December 31,
2008 comprised of our ownership of 5,418,273 shares of PSB's common stock
and 7,305,355 limited partnership units in the operating partnership. The
limited partnership 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 March 31, 2009 ($36.85 per share of PSB common stock), the
shares and units had a market value of approximately $468.9 million as
compared to a book value of $280.5 million.
The following table sets forth selected financial information of
PSB; the amounts represent 100% of PSB's balances and not our pro-rata
share.
2009 2008
-------------- --------------
(Amounts in thousands)
For the three months ended March 31,
-----------------------------------
Total revenue........................................ $ 69,924 $ 70,306
Costs of operations and other operating expenses..... (24,731) (24,536)
Depreciation and amortization........................ (22,391) (25,447)
Other items.......................................... (751) (665)
-------------- --------------
Net income......................................... $ 22,051 $ 19,658
============== ==============
At March 31, At December 31,
2009 2008
-------------- --------------
(Amounts in thousands)
Total assets (primarily real estate)................. $ 1,399,881 $ 1,469,323
Debt and other liabilities........................... 102,213 105,736
Equity............................................... 1,297,668 1,363,587
17
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
INVESTMENT IN SHURGARD EUROPE
-----------------------------
At March 31, 2009 we had a 49% equity investment in Shurgard
Europe. As a result of our disposition of an interest in Shurgard Europe,
we deconsolidated Shurgard Europe effective March 31, 2008 (see Note 3).
For the three months ended March 31, 2009, we recorded an
aggregate of $1,901,000 in equity in earnings of real estate entities with
respect to our investment in Shurgard Europe. During the three months ended
March 31, 2009, our investment in Shurgard Europe was decreased by
approximately $10,366,000 due to the impact of changes in foreign currency
exchange rates, primarily between the Euro and the U.S. Dollar.
The following table sets forth selected financial information of
Shurgard Europe. These amounts are based upon 100% of Shurgard Europe's
balances, rather than our pro rata share and are based upon Public
Storage's historical acquired book basis.
Amounts for all periods are presented, notwithstanding that
Shurgard Europe was deconsolidated effective March 31, 2008. Accordingly,
all amounts (net of intercompany eliminations) prior to April 1, 2008 are
included in our consolidated financial statements.
For the Three Months Ended
March 31,
---------------------------
2009 2008
------------ ------------
(Amounts in thousands)
Self-storage and ancillary revenues.................. $ 51,044 $ 59,635
Interest and other income............................ 129 431
Self-storage and ancillary cost of operations........ (23,922) (26,064)
Trademark license fee payable to Public Storage...... (362) (640)
Depreciation and amortization........................ (17,436) (21,871)
General and administrative........................... (1,718) (4,644)
Interest expense on third party debt ................ (4,225) (6,892)
Interest expense on loan payable to Public Storage... (10,151) (10,351)
Income (expenses) from foreign currency exchange .... (587) (123)
Discontinued operations.............................. 8 (12)
------------ ------------
Net loss (a)....................................... $ (7,220) $ (10,531)
============ ============
(a) Approximately $586,000 and $2,142,000 in net loss was allocated to
permanent noncontrolling equity interests in subsidiaries for the three
months ended March 31, 2009 and 2008, respectively, of which $2,739,000
and $3,184,000, respectively, represented depreciation and amortization
expense.
At March 31, At December 31,
2009 2008
------------ ---------------
(Amounts in thousands)
Total assets (primarily self-storage facilities).. $1,410,997 $1,521,172
Total debt to third parties....................... 320,369 362,352
Total debt to Public Storage...................... 517,497 552,361
Other liabilities................................. 73,862 82,247
Equity............................................ 499,269 524,212
18
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
Our equity in earnings of Shurgard Europe for the three months
ended March 31, 2009, totaling $1,901,000 is comprised of (i) a loss of
$3,251,000, representing our share of Shurgard Europe's net loss for the
three months ended March 31, 2009 and (ii) income of $4,974,000 and
$178,000, respectively, representing our share of the interest income and
trademark license fees received from Shurgard Europe for the three months
ended March 31, 2009 (such amounts are presented as equity in earnings of
real estate entities rather than interest and other income).
OTHER INVESTMENTS
-----------------
At March 31, 2009, other investments include an aggregate common
equity ownership of approximately 24% in entities that collectively own 19
self-storage facilities.
The following table sets forth certain condensed financial
information (representing 100% of these entities' balances and not our
pro-rata share) with respect to the 19 facilities that we have an interest
in at March 31, 2009:
2009 2008
--------------- ----------------
(Amounts in thousands)
For the three months ended March 31,
-----------------------------------
Total revenue........................ $ 4,114 $ 4,178
Cost of operations and other expenses (1,670) (1,647)
Depreciation and amortization........ (479) (535)
Net income....................... $ 1,965 $ 1,996
At March 31, At December 31,
2009 2008
--------------- ----------------
(Amounts in thousands)
Total assets (primarily self- storage
facilities)...................... $ 38,112 $ 40,168
Total accrued and other liabilities. 1,106 888
Total Partners' equity.............. 37,006 39,280
19
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
6. Notes Payable and Line of Credit
--------------------------------
The carrying amounts of our notes payable at March 31, 2009 and
December 31, 2008 consist of the following (dollar amounts in thousands):
March 31, December 31,
2009 2008
------------- -------------
(Amounts in thousands)
Unsecured Notes Payable:
5.875% effective and stated note rate, interest only and payable
semi-annually, matures in March 2013........................... $ 186,460 $ 200,000
5.73% effective rate, 7.75% stated note rate, interest only and
payable semi-annually, matures in February 2011 (carrying
amount includes $3,380 of unamortized premium at March 31,
2009 and $7,433 at December 31, 2008) ......................... 106,697 207,433
Secured Notes Payable:
5.47% average effective rate fixed rate mortgage notes payable,
secured by 90 real estate facilities with a net book value of
$571,833 at March 31, 2009 and stated note rates between 4.95%
and 8.75%, maturing at varying dates between April 2009 and
August 2015 (carrying amount includes $5,210 of unamortized
premium at March 31, 2009 and $5,634 at December 31, 2008) .... 234,078 236,378
------------- -------------
Total notes payable........................................ $ 527,235 $ 643,811
============= =============
When assumed in connection with property or other acquisitions,
notes payable are recorded at their respective estimated fair values upon
acquisition, based upon discounting the future interest and principal
payments using estimated market rates for debt instruments with similar
terms and ratings. Any initial premium or discount, representing the
difference between the stated note rate and estimated fair value on the
respective date of assumption, is amortized over the remaining term of the
notes using the effective interest method. Fair values are determined based
upon discounting the future cash flows under each respective note at an
interest rate that approximates those of loans with similar credit
characteristics, term to maturity, and other market data which represent
significant unobservable inputs, which are "Level 3" inputs as the term is
utilized in SFAS No. 157.
At March 31, 2009, we have a revolving credit agreement (the
"Credit Agreement") which expires on March 27, 2012, with an aggregate
limit with respect to borrowings and letters of credit of $300 million.
Amounts drawn on the Credit Agreement bear an annual interest rate ranging
from the London Interbank Offered Rate ("LIBOR") plus 0.35% to LIBOR plus
1.00% depending on our credit ratings (LIBOR plus 0.35% at March 31, 2009).
In addition, we are required to pay a quarterly facility fee ranging from
0.10% per annum to 0.25% per annum depending on our credit ratings (0.10%
per annum at March 31, 2009). We had no outstanding borrowings on our
Credit Agreement at March 31, 2009 or at May 8, 2009. At March 31, 2009, we
had undrawn standby letters of credit, which reduce our borrowing
capability with respect to our line of credit by the amount of the letters
of credit, totaling $20,281,000 ($17,736,000 at December 31, 2008).
20
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
On February 12, 2009, we acquired $110,223,000 face amount
($113,736,000 book value) of our existing senior unsecured notes pursuant
to a tender offer for an aggregate of $109,622,000 in cash (including costs
associated with the tender of $414,000) plus accrued interest. In
connection with this transaction, we recognized a gain of $4,114,000 for
the three months ended March 31, 2009, representing the difference between
the book value of $113,736,000 and the retirement amount paid plus tender
costs.
Our notes payable and our Credit Agreement each have various
customary restrictive covenants, all of which have been met at March 31,
2009.
At March 31, 2009, approximate principal maturities of our notes
payable are as follows (amounts in thousands):
Unsecured Mortgage Notes
Notes Payable Payable Total
-------------- --------------- ------------
2009......................... $ 1,057 $ 6,830 $ 7,887
2010......................... 2,207 11,037 13,244
2011......................... 103,433 27,819 131,252
2012......................... - 55,575 55,575
2013......................... 186,460 64,961 251,421
Thereafter................... - 67,856 67,856
-------------- --------------- ------------
$ 293,157 $ 234,078 $ 527,235
============== =============== ============
Weighted average effective rate 5.8% 5.5% 5.7%
============== =============== ============
We incurred interest expense (including interest capitalized as
real estate totaling $190,000 and $748,000, respectively for the three
months ended March 31, 2009 and 2008) with respect to our notes payable,
capital leases, debt to joint venture partner and line of credit
aggregating $8,318,000 and $17,235,000 for the three months ended March 31,
2009 and 2008, respectively. These amounts were comprised of $9,282,000 and
$18,450,000 in cash paid for the three months ended March 31, 2009 and
2008, respectively, less $964,000 and $1,215,000 in amortization of
premium, respectively.
7. Noncontrolling Interests in Subsidiaries
----------------------------------------
In consolidation, we classify ownership interests in the net
assets of each of the Consolidated Entities, other than our own, as
"noncontrolling interests in subsidiaries." If these interests have the
ability to require us to redeem the underlying securities for cash, assets,
or other securities (other than under the circumstances of entity
liquidation) that would not also be classified as equity then such
interests are presented on our balance sheet outside of equity. At the end
of each reporting period, if the book value is less than the estimated
amount to be paid upon a redemption occurring on the related balance sheet
date, with the offset against retained earnings. All other noncontrolling
interests in subsidiaries are presented as a component of equity,
"permanent noncontrolling interests in subsidiaries."
The following table sets forth our noncontrolling interests in
subsidiaries at March 31, 2009 and December 31, 2008, as well as the income
allocated to these interests for the three months ended March 31, 2009 and
2008:
21
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
Allocated Income for the
Balance at Three Months Ended
Description March 31, December 31, March 31, December 31,
Noncontrolling Interest 2009 2008 2009 2008
------------------------------------ ---------- ------------- ----------- -------------
(Amounts in thousands)
Redeemable noncontrolling interests
in subsidiaries (a)........... $ 12,798 $ 12,777 $ 262 $ 239
---------- ------------- ----------- -------------
Permanent noncontrolling interests
in subsidiaries:
Preferred partnership interests
(b)........................... 100,000 325,000 (67,983) 5,403
Other (c)..................... 33,199 33,109 4,148 1,957
---------- ------------- ----------- -------------
Total noncontrolling interests in
subsidiaries.................. 133,199 358,109 (63,835) 7,360
---------- ------------- ----------- -------------
Total Noncontrolling interests in
subsidiaries.................. $ 145,997 $ 370,886 $ (63,573) $ 7,599
========== ============= =========== =============
(a) These interests are presented outside of equity on our condensed
consolidated balance sheets. Income allocated to these interests is
reflected in the line-item "income allocated to other noncontrolling
interests in subsidiaries." Distributions paid to these interests
totaled $340,000 and $463,000 for the three months ended March 31, 2009
and 2008, respectively.
(b) These interests are included in the equity section of our condensed
consolidated balance sheets. Distributions paid to the preferred
partnership interests equaled the income allocated to those interests
(other than allocations due to redemptions). During the three months
ended March 31, 2009, we allocated $72,000,000 in income to the
noncontrolling equity interests, based upon our redemption of certain
of the preferred partnership units for a cash payment that was
$72,000,000 less than the related book value.
(c) These interests are included in the equity section of our condensed
consolidated balance sheets. Income allocated to these interests is
reflected in the line-item "income allocated to other noncontrolling
interests in subsidiaries." Distributions paid to these interests
totaled $4,058,000 and $4,521,000 for the three months ended March 31,
2009 and 2008, respectively.
OTHER REDEEMABLE NONCONTROLLING INTERESTS IN SUBSIDIARIES
---------------------------------------------------------
At March 31, 2009, the Other Redeemable Noncontrolling Interests
in Subsidiaries represent equity interests in three entities that own in
aggregate 14 self-storage facilities. At December 31, 2008, these interests
were increased and retained earnings were decreased by a total of
$6,469,000 in connection with the implementation of SFAS No. 160, to adjust
to their estimated liquidation value (which approximates fair value). We
estimate the amount to be paid upon redemption of these interests by
applying the related provisions to our estimate of the fair value of the
underlying net assets (principally real estate assets).
In 2007, we sold an approximately 0.6% common equity interest in
Shurgard Europe to various officers of the Company (the "PS Officers"),
other than our chief executive officer. For periods commencing from the
sale of the interest through March 31, 2008, the PS Officers' were
allocated their pro rata share of the earnings of Shurgard Europe, and this
22
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
was included in "Other Redeemable noncontrolling interests in
subsidiaries." As described in Note 3, on March 31, 2008, we deconsolidated
Shurgard Europe and, as a result, noncontrolling interests in subsidiaries
with respect to the PS Officers' investment was eliminated. See Note 5
under "Investment in Shurgard Europe" for further historical information
regarding Shurgard Europe.
PREFERRED PARTNERSHIP INTERESTS
-------------------------------
At December 31, 2008, our preferred partnership units outstanding
were comprised of 8,000,000 units of our 6.400% Series NN ($200,000,000
carrying amount, redeemable March 17, 2010), 1,000,000 units of our 6.250%
Series Z ($25,000,000 carrying amount, redeemable October 12, 2009), and
4,000,000 units of our 7.250% Series J ($100,000,000 carrying amount,
redeemable May 9, 2011).
In March 2009, we acquired all of the 6.40% Series NN preferred
partnership units from a third party ($200.0 million carrying amount) for
approximately $128.0 million, plus accrued and unpaid distributions from
December 31, 2008 through the closing date. This transaction resulted in an
increase in income allocated to common shareholders and an increase in
equity allocable to Public Storage shareholders of approximately $72.0
million for the three months ended March 31, 2009, based upon the excess of
the carrying amount over the amount paid.
Also in March 2009, we acquired all of the 6.25% Series Z
preferred partnership units from a third party ($25.0 million carrying
amount) for $25.0 million. This resulted in no increase in income allocated
to the common shareholders as they were acquired at par.
At March 31, 2009, our preferred partnership units outstanding
were comprised of 4,000,000 units of our 7.250% Series J ($100,000,000
carrying amount, redeemable May 9, 2011). Subject to certain conditions,
the Series J preferred units are convertible into our 7.25% Series J
Cumulative Preferred Shares. Our preferred partnership interests are
presented as permanent noncontrolling interests in subsidiaries on our
condensed consolidated balance sheets.
OTHER PERMANENT NONCONTROLLING INTERESTS IN SUBSIDIARIES
--------------------------------------------------------
At March 31, 2009, the Other Permanent Noncontrolling Interests in
Subsidiaries represent equity interests in 28 entities (generally
partnerships) that own in aggregate 94 self-storage facilities.
Shurgard Europe has a 20% equity interest in two VIE's which
developed self-storage facilities in Europe, and Shurgard Europe was the
primary beneficiary. The remaining 80% equity interest in these entities is
owned by an unaffiliated investor. On March 31, 2008, Shurgard Europe was
deconsolidated (see Note 3), eliminating these permanent noncontrolling
interests in subsidiaries at March 31, 2008. See Note 5 under "Investment
in Shurgard Europe" for further historical information regarding Shurgard
Europe, including historical income allocated to these interests. Earnings
allocated to these interests are included in "Other Permanent
Noncontrolling Interests in Subsidiaries" for periods prior to the
deconsolidation of Shurgard Europe.
We estimate the fair value of the other permanent noncontrolling
interests in subsidiaries of $212 million at March 31, 2009, based upon our
estimate of the fair value of the underlying net assets (principally real
estate assets), applying the related liquidation provisions of the related
partnership agreements.
23
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
8. Public Storage Shareholders' Equity
-----------------------------------
Cumulative Preferred Shares
---------------------------
At March 31, 2009 and December 31, 2008, we had the following series
of Cumulative Preferred Shares of beneficial interest outstanding:
At March 31, 2009 At December 31, 2008
Earliest
Redemption Dividend Shares Liquidation Shares Liquidation
Series Date Rate Outstanding Preference Outstanding Preference
----------------- ------------ --------- ----------- ----------- ----------- ------------
(Dollar amounts in thousands)
Series V 9/30/07 7.500% 6,200 $ 155,000 6,900 $ 172,500
Series W 10/6/08 6.500% 5,300 132,500 5,300 132,500
Series X 11/13/08 6.450% 4,800 120,000 4,800 120,000
Series Y 1/2/09 6.850% 750,900 18,772 750,900 18,772
Series Z 3/5/09 6.250% 4,500 112,500 4,500 112,500
Series A 3/31/09 6.125% 4,600 115,000 4,600 115,000
Series B 6/30/09 7.125% 4,350 108,750 4,350 108,750
Series C 9/13/09 6.600% 4,425 110,625 4,600 115,000
Series D 2/28/10 6.180% 5,400 135,000 5,400 135,000
Series E 4/27/10 6.750% 5,650 141,250 5,650 141,250
Series F 8/23/10 6.450% 9,893 247,325 10,000 250,000
Series G 12/12/10 7.000% 4,000 100,000 4,000 100,000
Series H 1/19/11 6.950% 4,200 105,000 4,200 105,000
Series I 5/3/11 7.250% 20,700 517,500 20,700 517,500
Series K 8/8/11 7.250% 16,990 424,756 16,990 424,756
Series L 10/20/11 6.750% 8,267 206,665 8,267 206,665
Series M 1/9/12 6.625% 19,065 476,634 19,065 476,634
Series N 7/2/12 7.000% 6,900 172,500 6,900 172,500
----------- ----------- ----------- ------------
Total Cumulative Preferred Shares 886,140 $ 3,399,777 887,122 $ 3,424,327
=========== =========== =========== ============
The holders of our Cumulative Preferred Shares have general
preference rights with respect to liquidation and quarterly distributions.
Holders of the preferred shares, except under certain conditions and as
noted below, 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 until events of default have been cured. At
March 31, 2009, there were no dividends in arrears.
Except under certain conditions relating to the Company's
qualification as a REIT, the Cumulative Preferred Shares are not redeemable
prior the dates indicated on the table above. On or after the respective
dates, each of the series of Cumulative Preferred Shares will be
redeemable, at the option of the Company, in whole or in part, at $25.00
per share (or depositary shares as the case may be), plus accrued and
unpaid dividends. Holders of the Cumulative Preferred Shares do not have
the right to require the Company to redeem such shares.
24
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
Upon issuance of our Cumulative Preferred Shares of beneficial
interest, we classify the liquidation value as preferred equity on our
consolidated balance sheet with any issuance costs recorded as a reduction
to paid-in capital.
During March 2009, we repurchased certain of our Cumulative
Preferred Shares in privately negotiated transactions as follows: Series V
- 700,000 depositary shares, each representing 1/1,000 of a share of our
Cumulative Preferred Shares at a total cost of $13,230,000, Series C -
175,000 depositary shares, each representing 1/1,000 of a share of our
Cumulative Preferred Shares at a total cost of $2,695,000 and Series F -
107,000 depositary shares, each representing 1/1,000 of a share of our
Cumulative Preferred Shares at a total cost of $1,610,000. The carrying
value of the shares repurchased totaled $23.8 million ($24.6 million
liquidation preference less $0.8 million of original issuance costs), and
exceeded the aggregate repurchase cost of $17.5 million by approximately
$6.2 million. For purposes of determining net income per share, income
allocated to our preferred shareholders was reduced by the $6.2 million.
Common Shares
-------------
Common Shares
-------------
During the three months ended March 31, 2009, we issued 64,027
common shares in connection with employee stock-based compensation.
Our Board of Trustees previously authorized the repurchase from
time to time of up to 25,000,000 of our common shares on the open market or
in privately negotiated transactions. On May 8, 2008, such authorization
was increased to 35,000,000 common shares. During the three months ended
March 31, 2009, we did not repurchase any of our common shares. Through
March 31, 2009, we have repurchased a total of 23,721,916 of our common
shares pursuant to this authorization.
Equity Shares, Series A
-----------------------
At March 31, 2009 and December 31, 2008, we had 8,377,193 of
depositary shares outstanding, each representing 1/1,000 of an Equity
Share, Series A. The Equity Shares, Series A rank on parity with our common
shares and junior to the Cumulative Preferred Shares with respect to
general preference rights and have a liquidation amount which cannot exceed
$24.50 per share. Distributions with respect to each depositary share shall
be the lesser of: (i) five times the per share dividend on our common
shares or (ii) $2.45 per annum. We have no obligation to pay distributions
on the depositary shares if no distributions are paid to common
shareholders.
Except in order to preserve the Company's Federal income tax
status as a REIT, we may not redeem the depositary shares representing the
Equity Shares, Series A before March 31, 2010. On or after March 31, 2010,
we may, at our option, redeem the depositary shares at $24.50 per
depositary share. If the Company fails to preserve its Federal income tax
status as a REIT, each of the depositary shares will be convertible at the
option of the shareholder into .956 common shares. The depositary shares
are otherwise not convertible into common shares. Holders of depositary
shares vote as a single class with holders of our common shares on
shareholder matters, but the depositary shares have the equivalent of
one-tenth of a vote per depositary share.
25
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
Dividends
---------
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 totaled $92.9 million
($0.55 per share) and $92.8 million ($0.55 per share), for the three months
ended March 31, 2009 and 2008, respectively. Equity Shares, Series A
dividends totaled $5.1 million ($0.6125 per share) and $5.4 million
($0.6125 per share), for the three months ended March 31, 2009 and 2008,
respectively. Preferred share dividends pay fixed rates from 6.125% to
7.500% with a total liquidation amount of $3,399,777,000 at March 31, 2009
($3,424,327,000 at December 31, 2008) and dividends aggregating $58.1
million and $60.3 million for the three months ended March 31, 2009 and
2008, respectively. Dividends paid to permanent noncontrolling interests in
subsidiaries totaled $4,058,000 and $4,521,000 for the three months ended
March 31, 2009 and 2008, respectively.
9. Related Party Transactions
--------------------------
Mr. Hughes, the Company's Chairman of the Board of Trustees and
his family (collectively the "Hughes Family") have ownership interests in,
and operate approximately 49 self-storage facilities in Canada using the
"Public Storage" brand name ("PS Canada") pursuant to a royalty-free
trademark license agreement with the Company. We currently do not own any
interests in these facilities nor do we own any facilities in Canada. The
Hughes Family owns approximately 20% of our common shares outstanding at
March 31, 2009. We have a right of first refusal to acquire the stock or
assets of the corporation that manages the 49 self-storage facilities in
Canada, if the Hughes Family or the corporation agrees to sell them.
However, we have no interest in the operations of this corporation, we have
no right to acquire this stock or assets unless the Hughes Family decides
to sell and we receive no benefit from the profits and increases in value
of the Canadian self-storage facilities.
We reinsure risks relating to loss of goods stored by tenants in
the self-storage facilities in Canada. During the three months ended March
31, 2009 and 2008, we received $183,000 and $225,000, respectively, in
reinsurance premiums attributable to the Canadian facilities. Since our
right to provide tenant reinsurance to the Canadian facilities may be
qualified, there is no assurance that these premiums will continue.
The Company and Mr. Hughes are co-general partners in certain
consolidated partnerships and affiliated partnerships of the Company that
are not consolidated. The Hughes Family owns 47.9% of the voting stock and
the Company holds 46% of the voting and 100% of the nonvoting stock
(representing substantially all the economic interest) of a private REIT.
The private REIT owns limited partnership interests in five affiliated
partnerships. The Hughes Family also owns limited partnership interests in
certain of these partnerships and holds securities in PSB. PS Canada holds
approximately a 1.2% interest in Stor-RE, a consolidated entity that
provides liability and casualty insurance for PS Canada, the Company and
certain affiliates of the Company, for occurrences prior to April 1, 2004
as described below. The Company and the Hughes Family receive distributions
from these entities in accordance with the terms of the partnership
agreements or other organizational documents.
From time to time, the Company and the Hughes Family have acquired
limited partnership units from limited partners of the Company's
consolidated partnerships. In connection with the acquisition in 1998 and
1999 of a total of 638 limited partnership units by Tamara Hughes Gustavson
and H-G Family Corp., a company owned by Hughes Family members, the Company
was granted an option to acquire the limited partnership units acquired at
cost, plus expenses. During the fourth quarter of 2008, the Company
exercised its option to acquire the units for a total purchase price of
approximately $239,000. The transaction was approved by the independent
members of the Board of Trustee.
26
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
10. Share-Based Compensation
------------------------
Stock Options
-------------
We have various stock option plans (collectively referred to as
the "PS Plans"). Under the PS Plans, the Company has granted non-qualified
options to certain trustees, officers and key employees to purchase the
Company's common shares at a price equal to the fair market value of the
common shares at the date of grant. Generally, options granted after
December 31, 2002 vest generally over a five-year period and expire between
eight years and ten years after the date they became exercisable. The PS
Plans also provide for the grant of restricted shares (see below) to
officers, key employees and service providers on terms determined by an
authorized committee of our Board.
We recognize compensation expense for share-based awards based
upon their fair value on the date of grant amortized over the applicable
vesting period (the "Fair Value Method"), net of estimates for future
forfeitures.
For the three months ended March 31, 2009, we recorded $600,000 in
stock option compensation expense related to options granted after January
1, 2002, as compared to $384,000 for the same period in 2008.
A total of 1,440,000 stock options were granted during the three
months ended March 31, 2009, 12,500 shares were exercised, and 23,000
shares were forfeited. A total of 3,801,832 stock options were outstanding
at March 31, 2009 (2,397,332 at December 31, 2008).
Outstanding stock options are included on a one-for-one basis in
our diluted weighted average shares, less a reduction for the treasury
stock method applied to a) the average cumulative measured but unrecognized
compensation expense during the period and b) the strike price proceeds
expected from the employee upon exercise.
Restricted Share Units
----------------------
Outstanding restricted share units vest over a five or eight-year
period from the date of grant at the rate of one-fifth or one-eighth per
year, respectively. The employee receives additional compensation equal to
the per-share dividends received by common shareholders with respect to
restricted share units outstanding. Such compensation is accounted for as
dividends paid. Any dividends paid on units which are subsequently
forfeited are expensed. Upon vesting, the employee receives common shares
equal to the number of vested restricted share units in exchange for the
units.
The total value of each restricted share unit grant, based upon
the market price of our common shares at the date of grant, is amortized
over the service period, net of estimates for future forfeitures, as
compensation expense. The related employer portion of payroll taxes is
expensed as incurred.
During the three months ended March 31, 2009, 89,450 restricted
share units were granted, 27,365 restricted share units were forfeited and
83,091 restricted share units vested. This vesting resulted in the issuance
of 51,527 common shares. In addition, cash compensation was paid to
employees in lieu of 31,564 common shares based upon the market value of
the shares at the date of vesting, and used to settle the employees' tax
liability generated by the vesting.
At March 31, 2009, approximately 609,206 restricted share units
were outstanding (630,212 at December 31, 2008). A total of $2,013,000 in
27
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
restricted share expense was recorded for the three months ended March 31,
2009, as compared to $2,390,000 for the same period in 2008. Restricted
share expense includes amortization of the fair value of the grant
reflected as an increase to paid-in capital, as well as payroll taxes we
incurred upon each respective vesting.
See also "net income per common share" above for further
discussion regarding the impact of restricted share units on our net income
per common and income allocated to common shareholders.
11. Segment Information
-------------------
Description of Each Reportable Segment
--------------------------------------
Our reportable segments reflect significant operating activities
that are evaluated separately by management, comprised of the following
segments which are organized based upon their operating characteristics.
Our self-storage segment comprises the direct ownership,
development, and operation of traditional self-storage facilities in the
U.S., and the ownership of equity interests in entities that own
self-storage facilities in the U.S., and our interest in the operations of
a facility in London, England. Our Shurgard Europe segment comprises our
interest in the self-storage and associated activities owned by Shurgard
Europe. See also Note 3 for a discussion of the disposition of an interest
in, and deconsolidation of, Shurgard Europe effective March 31, 2008.
Our ancillary segment includes (i) the reinsurance of policies
against losses to goods stored by tenants in our self-storage facilities,
(ii) merchandise sales, (iii) commercial property operations, and (iv)
management of facilities for third parties and facilities owned by the
Unconsolidated Entities. During the three months ended March 31, 2009, we
discontinued our truck rental and containerized storage operations, which
previously had been included in our ancillary segment. See "Discontinued
Operations" in Note 2 for further discussion.
Measurement of Segment Income (Loss) and Segment Assets -
---------------------------------------------------------
Self-Storage and Ancillary
--------------------------
The self-storage and ancillary segments are evaluated by
management based upon the net segment income of each segment. Net segment
income represents net income in conformity with GAAP and our significant
accounting policies as denoted in Note 2, before interest and other income,
interest expense, and corporate general and administrative expense.
Interest and other income, interest expense, corporate general and
administrative expense, and gains and losses on sales of real estate assets
are not allocated to these segments because management does not utilize
them to evaluate the results of operations of each segment. In addition,
there is no presentation of segment assets for these other segments because
total assets are not considered in the evaluation of these segments.
Measurement of Segment Income (Loss) and Segment Assets -
---------------------------------------------------------
Shurgard Europe
---------------
Shurgard Europe's operations are primarily independent of our
other segments, with a separate management team that makes the financing,
capital allocation, and other significant decisions. As a result, this
segment is evaluated by management as a stand-alone business unit. The
Shurgard Europe segment presentation includes all of the revenues,
expenses, and operations of this business unit to the extent consolidated
28
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
in our financial statements, and for periods following the deconsolidation
of Shurgard Europe, the presentation below includes our equity share of
Shurgard Europe's operations, the interest and other income received from
Shurgard Europe, as well as specific general and administrative expense,
disposition gains, and foreign currency exchange gains and losses that
management considers in evaluating our investment in Shurgard Europe. At
March 31, 2009, our condensed consolidated balance sheet includes an
investment in Shurgard Europe with a book value of $250.5 million ($264.1
million at December 31, 2008) and a loan receivable from Shurgard Europe
totaling (euro)391.9 million ($517.5 million) ($552.4 million at December
31, 2008).
Presentation of Segment Information
-----------------------------------
The following table reconciles the performance of each segment, in
terms of segment income, to our consolidated net income (amounts in
thousands):
29
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
For the three months ended March 31, 2009
Other Items Not
Shurgard Allocated to Total
Self-Storage Europe Ancillary Segments Consolidated
--------------- ------------- ------------ ---------------- -------------
(Amounts in thousands)
Revenues:
Self-storage rental income.................... $ 371,598 $ - $ - $ - $ 371,598
Ancillary operating revenue................... - - 25,835 - 25,835
Interest and other income..................... - 5,361 - 2,272 7,633
--------------- ------------- ------------ ---------------- -------------
371,598 5,361 25,835 2,272 405,066
--------------- ------------- ------------ ---------------- -------------
Expenses:
Cost of operations (excluding depreciation and
amortization below):
Self-storage facilities.................... 133,641 - - - 133,641
Ancillary operations....................... - - 9,653 - 9,653
Depreciation and amortization.................. 84,187 - 980 - 85,167
General and administrative..................... - - - 9,679 9,679
Interest expense............................... - - - 8,128 8,128
--------------- ------------- ------------ ---------------- -------------
217,828 - 10,633 17,807 246,268
--------------- ------------- ------------ ---------------- -------------
Income (loss) from continuing operations before
equity in earnings of real estate entities, gain
on disposition of other real estate investments,
gain on early retirement of debt and foreign
currency exchange loss........................ 153,770 5,361 15,202 (15,535) 158,798
Equity in earnings of real estate entities....... 444 1,901 20,466 - 22,811
Gain on disposition of other real estate
investments................................... - - - 2,722 2,722
Gain on early retirement debt.................... - - - 4,114 4,114
Foreign currency exchange loss................... - (34,733) - - (34,733)
--------------- ------------- ------------ ---------------- -------------
Income (loss) from continuing operations......... 154,214 (27,471) 35,668 (8,699) 153,712
Discontinued operations.......................... - - - (283) (283)
--------------- ------------- ------------ ---------------- -------------
Net income (loss)................................ $ 154,214 $ (27,471) $ 35,668 $ (8,982) $ 153,429
=============== ============= ============ ================ =============
30
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
For the three months ended March 31, 2008
Other Items Not
Shurgard Allocated to Total
Self-Storage Europe Ancillary Segments Consolidated
------------- ----------- ------------ ---------------- -------------
(Amounts in thousands)
Revenues:
Self-storage rental income.................... $ 369,884 $ 54,722 $ - $ - $ 424,606
Ancillary operating revenue................... - 4,913 25,124 - 30,037
Interest and other income..................... - - - 2,844 2,844
------------- ----------- ------------ ---------------- -------------
369,884 59,635 25,124 2,844 457,487
------------- ----------- ------------ ---------------- -------------
Expenses:
Cost of operations (excluding depreciation and
amortization below):
Self-storage facilities.................... 132,161 24,654 - - 156,815
Ancillary operations....................... - 1,409 9,895 - 11,304
Depreciation and amortization.................. 99,628 21,871 942 - 122,441
General and administrative..................... - 4,644 - 10,272 14,916
Interest expense............................... - 7,308 - 9,179 16,487
------------- ----------- ------------ ---------------- -------------
231,789 59,886 10,837 19,451 321,963
------------- ----------- ------------ ---------------- -------------
Income (loss) from continuing operations before
equity in earnings of real estate entities,
gain on disposition of an interest in Shurgard
Europe and foreign currency exchange gain..... 138,095 (251) 14,287 (16,607) 135,524
Equity in earnings of real estate entities....... 384 - 2,345 - 2,729
Gain on disposition of an interest in Shurgard
Europe........................................ - 341,865 - - 341,865
Foreign currency exchange gain................... - 40,971 - - 40,971
------------- ----------- ------------ ---------------- -------------
Income (loss) from continuing operations......... 138,479 382,585 16,632 (16,607) 521,089
Discontinued operations.......................... - - - (1,148) (1,148)
------------- ----------- ------------ ---------------- -------------
Net income (loss)................................ $ 138,479 $ 382,585 $ 16,632 $ (17,755) $ 519,941
============= =========== ============ ================ =============
31
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
12. Commitments and Contingencies
-----------------------------
Legal Matters
-------------
Brinkley v. Public Storage, Inc. (filed April 2005) (Superior
------------------------------------------------------------------
Court of California - Los Angeles County)
-----------------------------------------
The plaintiff sued the Company on behalf of a purported class of
California non-exempt employees based on various California wage and hour
laws and seeking monetary damages and injunctive relief. In May 2006, a
motion for class certification was filed seeking to certify five
subclasses. Plaintiff sought certification for alleged meal period
violations, rest period violations, failure to pay for travel time, failure
to pay for mileage reimbursement, and for wage statement violations. In
October 2006, the Court declined to certify three out of the five
subclasses. The Court did, however, certify subclasses based on alleged
meal period and wage statement violations. Subsequently, the Company filed
a motion for summary judgment seeking to dismiss the matter in its
entirety. On June 22, 2007, the Court granted the Company's summary
judgment motion as to the causes of action relating to the subclasses
certified and dismissed those claims. The only surviving claims are those
relating to the named plaintiff. The plaintiff has filed an appeal to the
Court's June 22, 2007 summary judgment ruling. On October 28, 2008, the
Court of Appeals sustained the trial court's ruling. The plaintiff filed a
petition for review with the California Supreme Court, which was granted
but further action in this matter was deferred pending consideration and
disposition of a related issue in Brinker Restaurant Corp. v. Superior
Court which is currently pending before the California Supreme Court.
Other Items
-----------
We are a party to various claims, complaints, and other legal
actions that have arisen in the normal course of business from time to time
that are not described above. We believe that it is unlikely that the
outcome of these other pending legal proceedings including employment and
tenant claims, in the aggregate, will have a material adverse impact upon
our operations or financial position.
Insurance and Loss Exposure
---------------------------
We have historically carried customary property, earthquake,
general liability and workers compensation coverage through internationally
recognized insurance carriers, subject to customary levels of deductibles.
The aggregate limits on these policies of $75 million for property coverage
and $102 million for general liability are higher than estimates of maximum
probable loss 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 exhausted.
Our tenant insurance program reinsures a program that provides
insurance to certificate holders against claims for property losses due to
specific named perils (earthquakes and floods are not covered by these
policies) to goods stored by tenants at our self-storage facilities for
individual limits up to a maximum of $5,000. We have third-party insurance
coverage for claims paid exceeding $1,000,000 resulting from any one
individual event, to a limit of $25,000,000. At March 31, 2009, there were
approximately 574,000 certificate holders participating in this program in
the U.S. representing aggregate coverage of approximately $1.3 billion. We
rely on a third-party insurance company to provide the insurance and are
subject to licensing requirements and regulations in several states. No
assurance can be given that this activity can continue to be conducted in
any given jurisdiction.
32
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
Operating Lease Obligations
---------------------------
We lease trucks, land, equipment and office space under various
operating leases. At March 31, 2009, the future minimum rental payments
required under our operating leases for the years ending December 31, are
as follows (amounts in thousands):
2009...................................... $ 5,100
2010...................................... 6,171
2011...................................... 5,632
2012...................................... 5,640
2013...................................... 5,530
Thereafter................................ 76,663
-----------
$ 104,736
===========
Expenses under operating leases were approximately $2.7 million
and $3.3 million for the three months ended March 31, 2009 and 2008,
respectively. Certain of our land leases include escalation clauses, and we
recognize related lease expenses on a straight-line basis.
33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------- ------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following discussion and analysis should be read in conjunction with
our condensed consolidated financial statements and notes thereto.
FORWARD LOOKING STATEMENTS: This Quarterly Report on Form 10-Q contains
forward-looking statements within the meaning of the federal securities laws.
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," "plans," "would," "should," "may,"
"estimates" and similar expressions. These forward-looking statements involve
known and unknown risks and uncertainties, which may cause Public Storage's
actual results and performance to be materially different from those expressed
or implied in the forward-looking statements. As a result, 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. We caution you not to place undue reliance on
forward-looking statements, which speak only as 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 entirely 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 this
document, except where expressly required by law. Accordingly, you should use
caution in relying on past forward-looking statements to anticipate future
results.
Factors and risks that may impact our future results and performance
include, but are not limited to, those described in Item 1A, "Risk Factors" in
the Public Storage Annual Report on Form 10-K for the year ended December 31,
2008, our subsequent filings on Form 8-K and in our other filings with the
Securities and Exchange Commission ("SEC"). These risks include, among other
things, the following:
o general risks associated with the ownership and operation of real
estate including changes in demand, potential liability for
environmental contamination, adverse changes in tax, real estate and
zoning laws and regulations, and the impact of natural disasters;
o risks associated with downturns in the national and local economies in
the markets in which we operate, including risks related to the
current global fiscal crisis;
o the impact of competition from new and existing self-storage and
commercial facilities and other storage alternatives;
o difficulties in our ability to successfully evaluate, finance,
integrate into our existing operations and manage acquired and
developed properties;
o risks associated with international operations including, but not
limited to, unfavorable foreign currency rate fluctuations, that could
adversely affect our earnings and cash flows;
o risks related to our participation in joint ventures;
o the impact of the regulatory environment as well as national, state,
and local laws and regulations including, without limitation, those
governing environmental, tax and tenant insurance matters and real
estate investment trusts ("REITs");
o risks associated with a possible failure by us to qualify as a REIT
under the Internal Revenue Code of 1986, as amended;
o disruptions or shutdowns of our automated processes and systems;
o difficulties in raising capital at a reasonable cost;
34
o delays in the development process; and
o economic uncertainty due to the impact of war or terrorism.
The risks included here are not exhaustive as it is not possible for
management to predict all possible risk factors that may exist or emerge from
time to time. Investors should refer to our future reports and other information
filed from time to time with the SEC for additional information.
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with United States ("U.S.") generally accepted accounting
principles ("GAAP"). The preparation of our financial statements and related
disclosures in conformity with GAAP and our discussion and analysis of our
financial condition and results of operations requires management to make
judgments, assumptions and estimates that affect the amounts reported in our
condensed consolidated financial statements and accompanying notes. The notes to
our March 31, 2009 condensed consolidated financial statements, primarily Note
2, summarize the significant accounting policies and methods used in the
preparation of our condensed consolidated financial statements and related
disclosures.
Management believes the following are critical accounting policies, the
application of which has a material impact on the Company's financial
presentation. That is, they are both important to the portrayal of our financial
condition and results, and they require management to make judgments and
estimates about matters that are inherently uncertain.
QUALIFICATION AS A REIT - INCOME TAX EXPENSE: We believe that we have been
organized and operated, and we intend to continue to operate, as a qualifying
REIT under the Code and applicable state laws. We also believe that Shurgard
qualified as a REIT. A REIT generally does not pay corporate level federal
income taxes on its REIT taxable income that is distributed to its shareholders,
and accordingly, we do not pay federal income tax on the share of our REIT
taxable income that is distributed to our shareholders.
We therefore do not estimate or accrue any federal income tax expense for
income earned and distributed related to REIT operations. This estimate could be
incorrect, because due to the complex nature of the REIT qualification
requirements, the ongoing importance of factual determinations and the
possibility of future changes in our circumstances, we cannot be assured that we
actually have satisfied or will satisfy the requirements for taxation as a REIT
for any particular taxable year. For any taxable year that we fail or have
failed to qualify as a REIT and for which applicable relief provisions did not
apply, we would be taxed at the regular corporate rates on all of our taxable
income, whether or not we made or make any distributions to our shareholders.
Any resulting requirement to pay corporate income tax, including any applicable
penalties or interest, could have a material adverse impact on our financial
condition or results of operations. Unless entitled to relief under specific
statutory provisions, we also would be disqualified from taxation as a REIT for
the four taxable years following the year for which qualification was lost.
There can be no assurance that we would be entitled to any statutory relief. In
addition, if Shurgard failed to qualify as a REIT, we generally would have
succeeded to or incurred significant tax liabilities.
IMPAIRMENT OF LONG-LIVED ASSETS: Substantially all of our assets consist of
long-lived assets, including real estate and other intangible assets. The
evaluation of our long-lived assets for impairment includes determining whether
indicators of impairment exist, which is a subjective process. When any
indicators of impairment are found, the evaluation of such long-lived assets
then entails projections of future operating cash flows, which also involves
significant judgment. Future events, or facts and circumstances that currently
exist, that we have not yet identified, could cause us to conclude in the future
that our long-lived assets are impaired. Any resulting impairment loss could
have a material adverse impact on our financial condition and results of
operations.
ESTIMATED USEFUL LIVES OF LONG-LIVED ASSETS: Substantially all of our
assets consist of depreciable or amortizable, long-lived assets. We record
depreciation and amortization expense with respect to these assets based upon
their estimated useful lives. Any change in the estimated useful lives of those
35
assets, caused by functional or economic obsolescence or other factors, could
have a material adverse impact on our financial condition or results of
operations.
ACCRUALS FOR CONTINGENCIES: We are exposed to business and legal liability
risks with respect to events that have occurred, but in accordance with GAAP, we
have not accrued for such potential liabilities because the loss is either not
probable or not estimable or because we are not aware of the event. Future
events and the results of pending litigation could result in such potential
losses becoming probable and estimable, which could have a material adverse
impact on our financial condition or results of operations. Some of these
potential losses, of which we are aware, are described in Note 12 to our March
31, 2009 condensed consolidated financial statements.
ACCRUALS FOR OPERATING EXPENSES: We accrue for property tax expense and
certain other operating expenses based upon estimates and historical trends and
current and anticipated local and state government rules and regulations. If
these estimates and assumptions are incorrect, our expenses could be misstated.
VALUATION OF ASSETS AND LIABILITIES ACQUIRED IN BUSINESS COMBINATIONS: We
have estimated the fair value of real estate, intangible assets, debt, and the
other assets and other liabilities acquired in business combinations, most
notably the Shurgard Merger. We have acquired these assets, in certain cases,
with non-cash assets, most notably the 38.9 million shares that we issued to the
Shurgard shareholders. These estimates are based upon many assumptions,
including interest rates, market values of land and buildings in the U.S. and
Europe, estimated future cash flows from the tenant base in place at the time of
the merger, and the recoverability of certain assets. We believe that the
assumptions used were reasonable, however, these assumptions were subject to a
significant degree of judgment, and others could come to materially different
conclusions as to the estimated values, if different assumptions were used. If
the values were determined using different assumptions than those used, our
depreciation and amortization expense, interest expense, gain on disposition of
an interest in Shurgard Europe, real estate, debt, and intangible assets could
have been materially different.
OVERVIEW OF MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
Our principal business activities include the acquisition, development,
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.
We are the largest owner and operator of self-storage facilities in the U.S.,
and we have an interest in what we believe is the largest owner and operator of
self-storage facilities in Europe.
We currently operate within three reportable segments: (i) self-storage,
(ii) Shurgard Europe and (iii) ancillary. The self-storage segment comprises the
direct and indirect ownership, development, and operation of storage facilities
in the U.S. Our Shurgard Europe segment comprises our equity interest in the
self-storage and associated activities in seven countries in Western Europe. Our
ancillary segment represents all of our other activities, which are reported as
a group, including (i) commercial property operations, directly and through our
46% ownership interest in PS Business Parks, Inc. ("PSB"), a publicly traded
REIT whose common stock trades on the New York Stock Exchange under the symbol
"PSB" (as of March 31, 2009, PSB owned and operated 19.6 million net rentable
square feet of commercial space), (ii) the reinsurance of policies against
losses to goods stored by tenants in our self-storage facilities, (iii) retail
operations conducted at our self-storage facilities including merchandise sales
and truck rentals, and (iv) management of self-storage facilities owned by
third-party owners and domestic facilities owned by the affiliated entities that
are not consolidated.
During the three months ended March 31, 2009, we decided to terminate our
containerized storage and truck rental operations, each of which had previously
been classified in our ancillary segment. Accordingly, the results of operations
for these operations have been included in discontinued operations on our
condensed consolidated statements of income. See "Discontinued Operations" in
Note 2 to our March 31, 2009 condensed consolidated financial statements for
further information regarding our discontinued operations. See also Note 11 to
our March 31, 2009 condensed consolidated financial statements for further
information regarding our segments.
Our self-storage facilities in the U.S. comprise approximately 93% of our
operating revenue, and represent the primary driver of growth in our net income
and cash flows from operations. In addition, much of our ancillary revenues are
derived at our self-storage facility locations, either from our existing
36
self-storage customer base or from the customer traffic within our self-storage
facilities. Accordingly, a large portion of management time and focus is placed
upon maximizing revenues and effectively managing expenses in our self-storage
facilities.
The self-storage industry is not immune to the recessionary pressures in
the general economic environment. Demand for self-storage space in both the U.S.
and Europe has softened and, as a result, we are experiencing downward pressure
on occupancy levels, rental rates, and revenues in each of our operating
segments.
An important determinant of our long-term growth is the expansion of our
asset base and deployment of capital. Acquisitions of self-storage facilities
have been minimal over the past year as we continue to monitor seller
expectations and wait for better opportunities that may come about as certain
local developers, who raised capital through the issuance of debt, endeavor to
refinance such debt in the near-term, but face the current tight credit markets
as well as pressure on operating cash flow due to the current difficult
operating environment.
While historically we have developed real estate facilities, we have
substantially reduced our development activities due to the existing recession
and our belief that our capital can be more effectively put to use in other
ways.
We currently have $493.4 million in cash and cash equivalents on hand at
March 31, 2009, and continue to monitor the appropriate and most effective way
to deploy this capital, primarily either through the acquisition of facilities
or through the opportunistic acquisition of our own debt and equity securities.
We acquired $110.2 million of our outstanding senior unsecured notes during
February 2009 and we acquired, for $24.6 million, certain of our preferred
securities in March 2009 at a substantial discount to liquidation value. Also
during March 2009, we acquired for $153.0 million, certain of our preferred
partnership units at a substantial discount to their carrying amount.
RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2009:
------------------------------------------------------------
Net income for the three months ended March 31, 2009 was $153.4 million
compared to $519.9 million for the same period in 2008, representing a decrease
of $366.5 million. This decrease is primarily due to a gain of $341.9 million in
the three months ended March 31, 2008 related to our disposition of an interest
in Shurgard Europe, combined with a $34.7 million foreign exchange loss during
the quarter ended March 31, 2009 as compared to an exchange gain of $41.0
million in the same period in 2008.
Net income to Public Storage shareholders for the three months ended March
31, 2009 was $217.0 million compared to $512.3 million for the same period in
2008, representing a decrease of $295.3 million. The decrease is due primarily
to the factors noted above with respect to net income, partially offset by a
$72.0 million reduction in earnings allocated to our preferred partnership
unitholders in the three months ended March 31, 2009.
The foreign currency exchange gains and losses relate primarily to a Euro
denominated loan receivable from Shurgard Europe and were due to changes in the
value of the U.S. Dollar relative to the Euro during each period.
During the three months ended March 31, 2009, we repurchased preferred
partnership units at an aggregate acquisition cost of $153.0 million which was
approximately $72.0 million less than the original net proceeds from issuance of
the respective units. The $72.0 million benefit to our common shareholders is
reflected as a reduction in the amount of net income allocated to these
preferred partnership unitholders and a corresponding increase in income
allocation to our common shareholders.
Net operating income with respect to our domestic operations increased by
$0.2 million in the three months ended March 31, 2009 as compared to the same
period in 2008 due to an increase of $4.2 million with respect to our
non-stabilized facilities combined with a decrease of $4.0 million with respect
to our Same Store operations.
37
During the three months ended March 31, 2009, pursuant to a tender offer,
we acquired $96.7 million principal amount of our 7.75% senior unsecured notes
due in 2011 at par plus accrued interest, and $13.5 million face amount of our
5.875% senior unsecured notes due in 2013 at 92.5% of par plus accrued interest.
We recorded a gain on early retirement of debt of approximately $4.1 million in
the quarter ended March 31, 2009.
During the three months ended March 31, 2009, we repurchased preferred
shares at an acquisition cost of $17.5 million was approximately $6.2 million
less than the original net proceeds from issuance of the respective preferred
securities. The $6.2 million benefit to our common shareholders is reflected as
an increase in the amount of net income allocated to our common shareholders and
a corresponding decrease in income allocation to our preferred shareholders.
For the three months ended March 31, 2009, net income allocable to our
common shareholders (after allocating net income to our preferred and equity
shareholders) was $159.5 million or $0.95 per common share on a diluted basis
compared to $444.8 million or $2.63 per common share on a diluted basis for the
same period in 2008, representing an decrease of $285.3 million or $1.68 per
common share on a diluted basis. These decreases are primarily due to the impact
of the factors described above.
Weighted average diluted common shares were 168,473,000 and 168,982,000 for
the three months ended March 31, 2009 and 2008, respectively.
REAL ESTATE OPERATIONS
--------------------------------------------------------------------------------
SELF-STORAGE OPERATIONS: Our self-storage operations are by far the largest
component of our operating activities, representing approximately 92% and 93% of
our total revenues generated for the three months ended March 31, 2009 and 2008,
respectively. Net operating income (after depreciation and amortization expense)
with respect to our self-storage operations increased by $7.5 million during the
three months ended March 31, 2009, when compared to the same period in 2008 due
to decreased amortization of tenant intangible assets, offset partially by the
deconsolidation of Shurgard Europe effective April 1, 2008.
To enhance year-over-year comparisons, the following table summarizes, and
the ensuing discussion describes the operating results of three groups of
facilities that management analyzes with respect to the Company's performance
for our self-storage segment, which includes: (i) the Same Store group,
representing our domestic facilities that we have owned and have been operating
on a stabilized basis since January 1, 2007, (ii) the facilities operated by
Shurgard Europe which were deconsolidated effective March 31, 2008, and (iii)
all other facilities included in our financial statements, which are primarily
those facilities that we have not owned and operated at a stabilized basis since
January 1, 2007 such as newly acquired, newly developed, or recently expanded
facilities.
38
SELF - STORAGE OPERATIONS SUMMARY:
--------------------------------- Three Months Ended March 31,
----------------------------------------
Percentage
2009 2008 Change
----------- ----------- -----------
(Dollar amounts in thousands)
Rental income:
Same Store Facilities....................... $ 347,185 $ 349,991 (0.8)%
Other Facilities ........................... 24,413 19,893 22.7%
----------- ----------- ---------
Total Self-Storage Segment............... 371,598 369,884 0.5%
Shurgard Europe Segment Facilities (a)...... - 54,722 (100.0)%
----------- ----------- ---------
Total rental income....................... 371,598 424,606 (12.5)%
----------- ----------- ---------
Cost of operations before depreciation and
amortization expense:
Same Store Facilities....................... 125,007 123,856 0.9%
Other Facilities............................ 8,634 8,305 4.0%
----------- ----------- ---------
Total Self-Storage Segment............... 133,641 132,161 1.1%
Shurgard Europe Segment Facilities (a)...... - 24,654 (100.0)%
----------- ----------- ---------
Total cost of operations................. 133,641 156,815 (14.8)%
----------- ----------- ---------
Net operating income before depreciation and
amortization expense (b):
Same Store Facilities....................... 222,178 226,135 (1.7)%
Other Facilities............................ 15,779 11,588 36.2%
----------- ----------- ---------
Total Self-Storage Segment............... 237,957 237,723 0.1%
Shurgard Europe Segment Facilities.......... - 30,068 (100.0)%
----------- ----------- ---------
Total net operating income before
depreciation and amortization expense.. 237,957 267,791 (11.1)%
Total depreciation and amortization expense. (84,187) (121,499) (30.7)%
----------- ----------- ---------
Total net operating income.................. $ 153,770 $ 146,292 5.1%
=========== =========== =========
Data for Same Store and Other Facilities:
Number of facilities at period end:
Same Store Facilities........................ 1,899 1,899 -
Other Facilities............................. 93 84 10.7%
Net rentable square footage at period end (in thousands):
Same Store Facilities........................ 117,462 117,462 -
Other Facilities............................. 8,536 7,381 15.6%
Weighted average square foot occupancy during the period:
Same Store Facilities........................ 87.9% 88.8% (1.0)%
Other Facilities............................. 79.9% 73.3% 9.0%
Realized rents per occupied square foot during the period:
Same Store Facilities........................ $ 12.84 $ 12.87 (0.2)%
Other Facilities............................. $ 13.80 $ 14.11 (2.2)%
Square foot occupancy at period end:
Same Store Facilities........................ 88.2% 89.3% (1.2)%
Other Facilities............................. 81.2% 74.6% 8.8%
In place rents per square foot at period end:
Same Store Facilities........................ $ 13.57 $ 13.86 (2.1)%
Other Facilities............................. $ 14.75 $ 15.45 (4.5)%
(a) Represents the results with respect to Shurgard Europe's properties
for the periods consolidated in our financial statements. We acquired
these facilities on August 22, 2006 in connection with the Shurgard
Merger. As described in Note 3 to our March 31, 2009 condensed
consolidated financial statements, effective March 31, 2008, we
deconsolidated Shurgard Europe. See also "Equity in Earnings of Real
Estate Entities - Investment in Shurgard Europe" for further analysis
of the historical same store property operations of Shurgard Europe.
(b) Total net operating income before depreciation and amortization or
"NOI" is a non-GAAP (generally accepted accounting principles)
financial measure that excludes the impact of depreciation and
amortization expense. See Note 11 to our March 31, 2009 consolidated
financial statements, "Segment Information," which includes a
39
reconciliation of NOI for our self-storage and Shurgard Europe
segments to our consolidated net income. Although depreciation and
amortization are operating expenses, we believe that NOI is a
meaningful measure of operating performance, because we utilize NOI in
making decisions with respect to capital allocations, in determining
current property values, segment performance, and comparing
period-to-period and market-to-market property operating results. NOI
is not a substitute for net operating income after depreciation and
amortization in evaluating our operating results.
Same Store Facilities
The Same Store Pool represents those 1,899 facilities that are stabilized
and owned since January 1, 2007 and therefore provide meaningful comparisons for
2007, 2008, and 2009. The Same Store Pool increased from 1,789 at December 31,
2008 to 1,899 at March 31, 2009, as we added facilities that are now stabilized
and owned since January 1, 2007, and removed facilities from the previous Same
Store Pool that, due primarily to construction activities, are no longer
expected to be stabilized through December 31, 2009. The following table
summarizes the historical operating results of these 1,899 facilities (117.5
million net rentable square feet) that represent approximately 93% of the
aggregate net rentable square feet of our U.S. consolidated self-storage
portfolio at March 31, 2009.
SAME STORE FACILITIES Three Months Ended March 31,
-------------------------------------
Percentage
2009 2008 Change
----------- ----------- -----------
(Dollar amounts in thousands, except
weighted average amounts)
Rental income...................................... $ 331,539 $ 335,553 (1.2)%
Late charges and administrative fees collected..... 15,646 14,438 8.4%
----------- ----------- --------
Total rental income............................. 347,185 349,991 (0.8)%
----------- ----------- --------
Cost of operations before depreciation and amortization:
Direct property payroll....................... 24,360 24,377 (0.1)%
Property taxes................................ 37,762 36,349 3.9%
Repairs and maintenance....................... 10,716 11,398 (6.0)%
Media advertising............................. 8,158 6,947 17.4%
Other advertising and promotion............... 4,614 4,426 4.2%
Utilities..................................... 9,598 9,437 1.7%
Property insurance............................ 2,698 3,213 (16.0)%
Telephone reservation center.................. 2,794 3,123 (10.5)%
Other cost of management...................... 24,307 24,586 (1.1)%
----------- ----------- --------
Total cost of operations........................ 125,007 123,856 0.9%
----------- ----------- --------
Net operating income before depreciation and
amortization expense (a)........................ 222,178 226,135 (1.7)%
Depreciation and amortization expense.............. (75,286) (89,358) 15.7%
----------- ----------- --------
Net operating income.............................. $ 146,892 $ 136,777 7.4%
=========== =========== ========
Gross margin (before depreciation and amortization
expense)........................................... 64.0% 64.6% (0.9)%
Weighted average for the period:
Square foot occupancy (b)....................... 87.9% 88.8% (1.0)%
Realized annual rent per occupied square foot (c)
(e)............................................. $ 12.84 $ 12.87 (0.2)%
REVPAF (d) (e).................................. $ 11.29 $ 11.43 (1.2)%
Weighted average at March 31:
Square foot occupancy........................... 88.2% 89.3% (1.2)%
In place annual rent per occupied square foot (f) $ 13.57 $ 13.86 (2.1)%
Total net rentable square feet (in thousands)...... 117,462 117,462 -
Number of facilities............................... 1,899 1,899 -
40
(a) Total net operating income before depreciation and amortization
expense or "NOI" is a non-GAAP (generally accepted accounting
principles) financial measure that excludes the impact of depreciation
and amortization expense. For our Same Store facilities, NOI
represents a portion of our total self-storage segment's NOI and is
reconciled to the self-storage segment total in the table
"self-storage operations summary" above. A reconciliation of our total
self-storage segment's NOI to consolidated net income is included in
Note 11 to our March 31, 2009 condensed consolidated financial
statements, "Segment Information." Although depreciation and
amortization are operating expenses, we believe that NOI is a
meaningful measure of operating performance, because we utilize NOI in
making decisions with respect to capital allocations, in determining
current property values, segment performance, and comparing
period-to-period and market-to-market property operating results. NOI
is not a substitute for net operating income after depreciation and
amortization expense in evaluating our operating results.
(b) Square foot occupancies represent weighted average occupancy levels
over the entire period.
(c) Realized annual rent per occupied square foot is computed by dividing
rental income, which excludes late charges and administrative fees, by
the weighted average occupied square footage for the period. Realized
annual rent per occupied square foot takes into consideration
promotional discounts and other items that reduce rental income from
the contractual amounts due.
(d) Annualized rental income per available square foot ("REVPAF")
represents annualized rental income, which excludes late charges and
administrative fees, divided by total available net rentable square
feet.
(e) Late charges and administrative fees are excluded from the computation
of realized annual rent per occupied square foot and REVPAF because
exclusion of these amounts provides a better measure of our ongoing
level of revenue, by excluding the volatility of late charges, which
are dependent principally upon the level of tenant delinquency, and
administrative fees, which are dependent principally upon the absolute
level of move-ins for a period.
(f) In place annual rent per occupied square foot represents annualized
contractual rents per occupied square foot without reductions for
promotional discounts, and excludes late charges and administrative
fees.
Rental income decreased approximately 1.2% in the three months ended March
31, 2009, as compared to the same period in 2008. These decreases were primarily
attributable to lower average realized annual rental rates per occupied square
foot, which were 0.2% lower in the three months ended March 31, 2009, as
compared to the same period in 2008 and to a 1.0% decline in occupancy levels
during the three months ended March 31, 2009, as compared to the same period in
2008.
We believe that demand for our self-storage space has been negatively
impacted by general economic conditions, the slow down in housing sales and
moving activity, as well as increased competition. It is unclear to us how much
these factors may impact us going forward.
In response to these conditions, during the quarter ended March 31, 2009,
we aggressively lowered rates charged to new tenants upon move-in and increased
our television advertising. While the move-in volume at our Same Stores
increased 3% during the three months ended March 31, 2009 over the same period
in 2008, our move-outs increased 4%. As a result, we lost 0.9% of occupancy
during the three months ended March 31, 2009, as compared to the same period in
2008, and ended March 31, 2009, 1.2% lower than at March 31, 2008. Our average
in-place rental rate per occupied square foot was 2.1% lower at March 31, 2009
than at March 31, 2008, due primarily to the aforementioned rate reductions. In
order to effectively address the softness in demand, we will continue to closely
monitor and adapt our media advertising, pricing, and promotional discounts on a
localized basis.
Cost of operations (excluding depreciation and amortization) increased by
0.9% in the three months ended March 31, 2009, as compared to the same period in
2008. Growth moderated in the three months ended March 31, 2009 as higher media
advertising and property tax expenses were partially offset by lower repairs and
maintenance and property insurance expenses.
Direct property payroll expense decreased by 0.1% in the three months ended
March 31, 2009, as compared to the same period in 2008. This reflects minimal
growth in average wage rates and lower hours incurred due to adjustments in
staffing levels. For the remainder of 2009, we expect moderate growth trends in
payroll.
Property tax expense increased by 3.9% in the three months ended March 31,
2009, as compared to the same period in 2008. These increases are due to
increases in assessments of property values that have been greater than we
41
experienced in prior years. While we expect property tax expense growth of
approximately 4% in 2009, the actual growth could be higher or lower because
there are several jurisdictions where we have not yet received tax bills or
assessment information for 2009, or appeals or assessments are pending.
Repairs and maintenance expenditures were decreased by 6.0% in the three
months ended March 31, 2009, as compared to the same period in 2008. Repairs and
maintenance expenditures are dependent upon several factors, such as weather,
the timing of periodic needs throughout our portfolio, inflation, and random
events and accordingly are difficult to project from year to year. We expect
repairs and maintenance expenditures to moderate for the remainder of 2009.
Media advertising for the Same Store facilities increased 17.4% in the
three months ended March 31, 2009, as compared to the same period in 2008, as we
expanded our media spend in order to stimulate move-in volume. Other advertising
and promotion is comprised principally of yellow page and internet advertising,
which increased 4.2% in the three months ended March 31, 2009, as compared to
the same period in 2008.
Due to current market conditions we expect that we will continue to be
aggressive with media advertising in the near term, however we will experience
moderate decreases in the second quarter of 2009 as compared to the high level
of spending incurred in the second quarter of 2008. Our future spending on
yellow page, media, and internet advertising expenditures will be driven in part
by demand for our self-storage spaces, our current occupancy levels, and the
relative efficacy of each type of advertising. Media advertising in particular
can be volatile and increase or decrease significantly in the short-term.
Utility expenses increased 1.7% in the three months ended March 31, 2009,
as compared to the same period in 2008. It is difficult to estimate future
utility cost levels because utility costs are dependent upon changes in demand
driven by weather and temperature, as well as fuel prices, both of which are
volatile and not predictable.
Property insurance expense decreased 16.0% in the three months ended March
31, 2009, as compared to the same period in 2008. This decline is primarily due
to softer insurance markets as lack of hurricane activity and additional
competition from insurance providers has benefited us. We expect insurance
expense to be down slightly in the remainder of 2009, as compared to the same
period in 2008.
Telephone reservation center costs decreased 10.5% in the three months
ended March 31, 2009, as compared to the same period in 2008, as we adjusted
staffing levels to expected inquiry volumes. We expect future telephone
reservation center costs to remain flat.
42
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 amount)
Total rental income:
2009 $ 347,185
2008 $ 349,991 $ 359,461 $ 368,976 $ 357,202 $ 1,435,630
Total cost of operations (excluding
depreciation and amortization expense):
2009 $ 125,007
2008 $ 123,856 $ 120,526 $ 113,972 $ 104,442 $ 462,796
Property tax expense:
2009 $ 37,762
2008 $ 36,349 $ 35,156 $ 36,161 $ 28,159 $ 135,825
Media advertising expense:
2009 $ 8,158
2008 $ 6,947 $ 9,836 $ 2,148 $ 922 $ 19,853
Other advertising and promotion expense:
2009 $ 4,614
2008 $ 4,426 $ 5,027 $ 4,645 $ 4,137 $ 18,235
REVPAF:
2009 $ 11.29
2008 $ 11.43 $ 11.74 $ 12.03 $ 11.65 $ 11.71
Weighted average realized annual rent per occupied square foot:
2009 $ 12.84
2008 $ 12.87 $ 12.90 $ 13.29 $ 13.27 $ 13.08
Weighted average occupancy levels for the period:
2009 87.9%
2008 88.8% 91.0% 90.5% 87.8% 89.5%
43
ANALYSIS OF REGIONAL TRENDS
---------------------------
The following table sets forth regional trends in our Same Store
Facilities:
Three Months Ended March 31,
--------------------------------------
2009 2008 Change
------------ ------------ ------------
(Amounts in thousands, except for
weighted average data)
SAME STORE FACILITIES OPERATING TRENDS
BY REGION
Rental income:
Southern California (176 facilities) $ 51,738 $ 52,147 (0.8)%
Northern California (167 facilities) 37,426 37,239 0.5%
Texas (231 facilities).......... 34,594 34,193 1.2%
Florida (182 facilities)........ 33,803 35,085 (3.7)%
Illinois (119 facilities)....... 21,963 21,847 0.5%
Georgia (86 facilities)......... 12,192 12,682 (3.9)%
All other states (938 facilities) 155,469 156,798 (0.8)%
------------ ------------ ------------
Total rental income................. 347,185 349,991 (0.8)%
Cost of operations before depreciation and amortization expense:
Southern California.............. 12,149 11,648 4.3%
Northern California.............. 10,702 10,448 2.4%
Texas............................ 14,195 14,323 (0.9)%
Florida.......................... 12,467 12,756 (2.3)%
Illinois......................... 11,011 11,099 (0.8)%
Georgia.......................... 4,307 4,218 2.1%
All other states................. 60,176 59,364 1.4%
------------ ------------ ------------
Total cost of operations............ 125,007 123,856 0.9%
Net operating income before depreciation and amortization expense:
Southern California.............. 39,589 40,499 (2.2)%
Northern California.............. 26,724 26,791 (0.3)%
Texas............................ 20,399 19,870 2.7%
Florida.......................... 21,336 22,329 (4.4)%
Illinois......................... 10,952 10,748 1.9%
Georgia.......................... 7,885 8,464 (6.8)%
All other states................. 95,293 97,434 (2.2)%
------------ ------------ ------------
Total net operating income before
depreciation and amortization expense $ 222,178 $ 226,135 (1.7)%
Weighted average occupancy:
Southern California.............. 90.6% 90.1% 0.6%
Northern California.............. 88.1% 89.0% (1.0)%
Texas............................ 88.6% 89.9% (1.4)%
Florida.......................... 88.1% 87.1% 1.1%
Illinois......................... 86.3% 87.4% (1.3)%
Georgia.......................... 85.7% 88.5% (3.2)%
All other states................. 87.4% 88.7% (1.5)%
------------ ------------ ------------
Total weighted average occupancy.... 87.9% 88.8% (1.0)%
44
SAME STORE FACILITIES OPERATING
TRENDS BY REGION (CONTINUED) Three Months Ended March 31,
--------------------------------------
2009 2008 Change
------------ ------------ ------------
(Amounts in thousands, except for
weighted average data)
Realized annual rent per occupied square foot:
Southern California.............. $ 18.91 $ 19.18 (1.4)%
Northern California.............. 16.99 16.73 1.6%
Texas............................ 9.92 9.71 2.2%
Florida.......................... 12.32 13.07 (5.7)%
Illinois......................... 13.22 13.04 1.4%
Georgia.......................... 9.92 10.08 (1.6)%
All other states................. 11.97 11.96 0.1%
------------ ------------ ------------
Total realized rent per square foot. $ 12.84 $ 12.87 (0.2)%
============ ============ ============
REVPAF:
Southern California.............. $ 17.14 $ 17.28 (0.8)%
Northern California.............. 14.97 14.88 0.6%
Texas............................ 8.79 8.73 0.7%
Florida.......................... 10.86 11.38 (4.6)%
Illinois......................... 11.41 11.40 0.1%
Georgia.......................... 8.50 8.92 (4.7)%
All other states................. 10.46 10.61 (1.4)%
------------ ------------ ------------
Total REVPAF........................ $ 11.29 $ 11.43 (1.2)%
============ ============ ============
We believe that our geographic diversification and scale provide some
insulation from localized economic effects and add to the stability of our cash
flows. However, it is difficult to predict localized trends in short-term
self-storage demand and operating results. Accordingly, the discussion below
primarily focuses on the long-term characteristics of our markets rather than
the short-term impacts of current economic trends, notwithstanding, we believe
that each market has been negatively impacted to some degree by general economic
trends and may continue to experience negative operating trends until such time
that general economic trends improve.
The Southern California Market consists principally of the greater Los
Angeles area and San Diego, and has historically been a source of strong growth
due to its diverse economy and continued population growth. In addition,
barriers to entry in the form of difficult permitting requirements tend to
reduce the potential for increased competition in the infill locations where we
focus our operations.
The Northern California market consists principally of San Francisco and
related peripheral submarkets/cities. While this area has a vibrant economy and
relatively strong population growth, it has been subject to periodic turbulence
in general economic conditions, particularly associated with the technology
sector.
The Texas market principally includes Dallas, Houston, Austin and San
Antonio. This market has historically been subject to volatility due to minimal
regulatory restraint upon building, which results in cycles of overbuilding and
absorption.
The Florida market principally includes Miami, Orlando, Tampa, and West
Palm Beach. Florida continues to be one of our weakest markets, reflecting the
general economic trend of Florida, which has underperformed the U.S. economy for
the past two years. We believe that Florida will continue to experience negative
operating trends at least in the near-term.
45
OTHER FACILITIES
----------------
In addition to the Same Store facilities, at March 31, 2009, we had an
additional 93 self-storage facilities. These facilities include recently
acquired facilities, recently developed facilities and facilities that were
recently expanded by adding additional storage units. In general, these
facilities are not stabilized with respect to occupancies or rental rates. As a
result of the fill-up process and timing of when the facilities were put into
place, year-over-year changes can be significant. There were no facilities
acquired in the three months ended March 31, 2009.
Rental income, cost of operations, depreciation, net operating income,
weighted average square foot occupancies and realized rents per square foot in
the table above represent the operating results following the date each
particular facility began to be included in our consolidated operating results,
and in the case of acquired facilities, do not include any operating results
prior to our acquisition of these facilities.
In the three months ended March 31, 2009, we completed three expansion
projects to existing real estate facilities (75,000 net rentable square feet)
for an aggregate cost of $13.4 million, and did not acquire any new properties.
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 and capitalize on the overall fragmentation in the storage
industry. Our acquisitions consist of facilities that have been operating for a
number of years as well as newly constructed facilities that were in the process
of filling up to stabilized occupancy levels. In either case, we have been able
to leverage off of our operating strategies and improve the occupancy levels of
the facilities, or with respect to the newly developed facilities we have been
able to accelerate the fill-up pace.
We expect that the Other Facilities will continue to provide earnings
growth during the remainder of 2009 as these facilities continue to reach
stabilization. However, the Other Facilities are subject to the same occupancy
and rate pressures that our same-store facilities are facing as a result of the
recession, and accordingly the pace at which these facilities reach
stabilization, and the ultimate level of cash flows to be reached upon
stabilization, may be negatively impacted by the current economic trends.
Our development pipeline is nominal at March 31, 2009. Our level of newly
developed facilities, and starts to newly developed facilities, has declined
significantly in the last few years due to increases in construction cost,
increases in competition with retail, condominium, and apartment operators for
quality construction sites in urban locations, and more difficult zoning and
permitting requirements, which has reduced the number of attractive sites
available for development and reduced our development of facilities. In
addition, we further reduced our development pipeline in late 2008 due to
reduced self-storage demand and our belief that our capital can be put to use in
a more advantageous manner. It is unclear when these conditions will improve.
46
ANCILLARY OPERATIONS: Ancillary operations include (i) the reinsurance of
policies against losses to goods stored by tenants in our self-storage
facilities, (ii) retail operations, comprised of merchandise sales, (iii)
commercial property operations, and (iv) management of facilities for third
parties and facilities owned by the Unconsolidated Entities.
During the three months ended March 31, 2009, we decided to terminate our
truck rental and containerized operations. Accordingly, the revenues and
expenses of these operations are included in discontinued operations on our
condensed consolidated statements of income for the three months ended March 31,
2009 and 2008.
The following table sets forth our ancillary operations:
Three Months Ended March 31,
----------------------------------
2009 2008 Change
---------- ---------- ---------
(Amounts in thousands)
Revenues:
Tenant reinsurance premiums (a)..... $ 15,103 $ 13,822 $ 1,281
Merchandise sales (a)............... 6,427 6,589 (162)
Other ancillary operations (a)...... 4,305 4,713 (408)
Shurgard Europe merchandise and tenant
insurance......................... - 4,913 (4,913)
---------- ---------- ---------
Total revenues................... 25,835 30,037 (4,202)
---------- ---------- ---------
Cost of operations:
Tenant reinsurance premiums (a)..... 3,227 3,023 204
Merchandise sales (a)............... 4,951 5,213 (262)
Other ancillary operations (a)...... 1,475 1,659 (184)
Shurgard Europe merchandise and tenant
insurance......................... - 1,409 (1,409)
---------- ---------- ---------
Total cost of operations......... 9,653 11,304 (1,651)
---------- ---------- ---------
Depreciation - Other ancillary operations (a): 980 942 38
Net income:
Tenant reinsurance premiums (a)..... 11,876 10,799 1,077
Merchandise sales (a)............... 1,476 1,376 100
Other ancillary operations (a)...... 1,850 2,112 (262)
Shurgard Europe merchandise and tenant
insurance......................... - 3,504 (3,504)
---------- ---------- ---------
Total net income................. $ 15,202 $ 17,791 $ (2,589)
========== ========== =========
(a) Revenues and expenses for these items are a component of our Ancillary
segment, as described in Note 11 to our March 31, 2009 condensed
consolidated financial statements.
Tenant reinsurance operations: We reinsure policies offered through a
non-affiliated insurance company against losses to goods stored by tenants,
primarily in our domestic self-storage facilities. The revenues that we record
are based upon premiums, which are originally paid by the customer, which are
then paid to us by the broker in accordance with our reinsurance arrangements.
Cost of operations primarily includes claims paid that are not covered by our
outside third-party insurers, as well as claims adjustment expenses.
The increase in tenant reinsurance revenues over the past year was
attributable to higher rates combined with an increase in the percentage of our
existing tenants retaining such policies. Approximately 55% and 50% of our
tenants had such policies at March 31, 2009 and 2008, respectively.
The future level of tenant reinsurance revenues is largely dependent upon
the number of new tenants electing to purchase policies, the level of premiums
charged for such insurance, and the number of tenants that continue
47
participating in the insurance program. Future cost of operations will be
dependent primarily upon the level of losses incurred, including the level of
catastrophic events, such as hurricanes, that occur and affect our properties.
Merchandise sales: We sell locks, boxes, and packing supplies at the
self-storage facilities that we operate. The primary factor impacting the level
of merchandise sales is the level of customer traffic at our self-storage
facilities, including the level of move-ins.
Other Ancillary: We also operate commercial facilities, primarily small
storefronts and office space located on or near our existing self-storage
facilities that are rented to third parties, and we also manage self-storage
facilities utilizing our existing management infrastructure, to third party
owners as well as to the Unconsolidated Entities. These businesses are largely
independent of the self-storage operations at our facility and have remained
largely unchanged in scope. We do not expect any significant changes in revenues
or profitability from these ancillary businesses.
EQUITY IN EARNINGS OF REAL ESTATE ENTITIES: In addition to our ownership of
equity interests in PSB and Shurgard Europe, we had general and limited
partnership interests in five limited partnerships at March 31, 2009 Due to our
limited ownership interest and limited control of these entities, we do not
consolidate the accounts of these entities for financial reporting purposes, and
account for such investments using the equity method.
Equity in earnings of real estate entities for the three months ended March
31, 2009 and 2008, consists of our pro-rata share of the Unconsolidated Entities
based upon our ownership interest for the period. The following table sets forth
the significant components of equity in earnings of real estate entities.
Amounts with respect to PSB, Shurgard Europe, and Other Investments are included
in our Ancillary, Shurgard Europe, and Self-Storage segments, respectively, as
described in Note 11 to our March 31, 2009 condensed consolidated financial
statements.
48
HISTORICAL SUMMARY: Three Months Ended March 31,
------------------- -----------------------------------
2009 2008 Change
--------- --------- ---------
(Amounts in thousands)
Property operations:
PSB $ 21,553 $ 21,779 $ (226)
Shurgard Europe........................ 10,012 - 10,012
Other Investments...................... 653 1,149 (496)
--------- --------- ----------
32,218 22,928 9,290
--------- --------- ----------
Depreciation:
PSB.................................... (10,231) (11,591) 1,360
Shurgard Europe ....................... (7,209) - (7,209)
Other Investments...................... (192) (581) 389
--------- --------- ----------
(17,632) (12,172) (5,460)
--------- --------- ----------
Other: (1)
PSB (2) ............................... 9,144 (7,843) 16,987
Shurgard Europe........................ (902) - (902)
Other Investments ..................... (17) (184) 167
--------- --------- ----------
8,225 (8,027) 16,252
--------- --------- ----------
Total equity in earnings of real estate entities:
PSB.................................... 20,466 2,345 18,121
Shurgard Europe ....................... 1,901 - 1,901
Other Investments ..................... 444 384 60
--------- --------- ----------
$ 22,811 $ 2,729 $ 20,082
========= ========= ==========
(1) "Other" reflects our share of general and administrative expense,
interest expense, interest income, our pro-rata share of gains on sale
of real estate assets, and other non-property; non-depreciation
related operating results of these entities.
(2) Includes our pro rata share of benefit totaling $16.3 million from
PSB's preferred stock and preferred unit repurchases for the three
months ended March 31, 2009.
Investment in PSB
-----------------
Throughout each of the three months ended March 31, 2009 and 2008, we owned
5,418,273 common shares and 7,305,355 operating partnership units (units which
are convertible into common shares on a one-for-one basis) in PS Business Parks,
Inc., a public REIT (NYSE: PSB). At March 31, 2009, PSB owned and operated 19.6
million net rentable square feet of commercial space located in eight states.
PSB also manages commercial space owned by the Company and affiliated entities
at March 31, 2009 pursuant to property management agreements.
Our future equity income from PSB will be dependent entirely upon PSB's
operating results. Our investment in PSB provides us with some diversification
into another asset type. We have no plans of disposing of our investment in PSB.
PSB's filings and selected financial information can be accessed through the
Securities and Exchange Commission, and on its website, www.psbusinessparks.com.
Investment in Shurgard Europe
-----------------------------
As described in Note 3 to our March 31, 2009 condensed consolidated
financial statements, due to the disposition of a 51% interest in Shurgard
Europe, our pro-rata share of the operating results of Shurgard Europe after
March 31, 2008 is included in "equity in earnings of real estate entities."
Selected financial data for Shurgard Europe for each of the three months ended
March 31, 2009 and 2008 is included in Note 5 to our March 31, 2009 condensed
consolidated financial statements.
At March 31, 2009, Shurgard Europe's operations comprise 182 facilities
with an aggregate of 9,644,000 net rentable square feet. The portfolio consists
of 110 wholly owned facilities and 72 facilities owned by two joint venture
partnerships, in which Shurgard Europe has a 20% equity interest.
49
Our equity in earnings of Shurgard Europe, for the three months ended March
31, 2009 totaling $1,901,000 is comprised of (i) a loss of $3,251,000,
representing our 49% equity share of Shurgard Europe's net loss for the three
months ended March 31, 2009 and (ii) income of $4,974,000 and $178,000,
respectively, representing our 49% pro-rata share of the interest income and
trademark license fees received from Shurgard Europe during the three months
ended March 31, 2009 (our pro-rata share of such amounts received are presented
as equity in earnings of real estate entities rather than interest and other
income). Our future equity income will be dependent upon the future operating
results of Shurgard Europe.
In the three months ended March 31, 2009, we also recognized $5,177,000 in
interest income on our note receivable from Shurgard Europe and $184,000 in
trademark license income, representing 51% of the aggregate amounts paid to us
by Shurgard Europe. See Note 5 to our March 31, 2009 condensed consolidated
financial statements, "Investment in Shurgard Europe" for further analysis of
the presentation of our equity earnings and interest and other income from
Shurgard Europe.
The Shurgard Europe Same Store Pool represents those 94 facilities that are
stabilized and owned since January 1, 2007 and therefore provide meaningful
comparisons for 2007, 2008, and 2009. The number of facilities in the Shurgard
Europe Same Store Pool declined from 96 at December 31, 2008 to 94 at March 31,
2009, as we removed facilities from the previous Shurgard Europe Same Store Pool
that, due primarily to construction activities, are no longer expected to be
stabilized through December 31, 2009, and added facilities that are now
stabilized and owned since January 1, 2007. The following table reflects the
operating results of these 94 facilities.
SELECTED OPERATING DATA FOR THE 94 FACILITIES OPERATED
------------------------------------------------------
BY SHURGARD EUROPE ON A STABILIZED BASIS SINCE JANUARY
------------------------------------------------------
1, 2007 ("EUROPE SAME STORE FACILITIES"): Three Months Ended March 31,
----------------------------------------- ---------------------------------------
Percentage
2009 2008 Change
------------ ------------ ----------
(Dollar amounts in thousands, except
weighted average data,
utilizing constant exchange rates) (a)
Revenues:
Rental income................................. $ 26,607 $ 27,828 (4.4)%
Late charges and administrative fees collected 435 479 (9.2)%
------------ ------------ ----------
Total revenues (b)............................ 27,042 28,307 (4.5)%
Cost of operations (excluding depreciation
and amortization expense):
Property taxes ............................... 1,373 1,326 3.5%
Direct property payroll....................... 3,284 3,153 4.2%
Advertising and promotion..................... 1,443 729 97.9%
Utilities..................................... 864 670 29.0%
Repairs and maintenance....................... 802 759 5.7%
Property insurance............................ 164 175 (6.3)%
Other costs of management..................... 3,733 3,937 (5.2)%
------------ ------------ ----------
Total cost of operations (b).................... 11,663 10,749 8.5%
------------ ------------ ----------
Net operating income (excluding depreciation and
amortization expense) (c)................... $ 15,379 $ 17,558 (12.4)%
=========== ============ ==========
Gross margin (before depreciation and amortization
expense)....................................... 56.9% 62.0% (8.2)%
Weighted average for the period:
Square foot occupancy (d)....................... 84.7% 88.3% (4.1)%
Realized annual rent per occupied square foot (e) $24.35 $24.43 (0.3)%
REVPAF (f) (g).................................. $20.63 $21.57 (4.4)%
Weighted average at March 31:
Square foot occupancy........................... 85.1% 87.5% (2.7)%
In place annual rent per occupied square foot (h) $25.96 $26.24 (1.1)%
Total net rentable square feet (in thousands)..... 5,160 5,160 -
50
(a) The majority of Shurgard Europe's operations are denominated in Euros.
For comparative purposes, amounts for the three months ended March 31,
2008 and 2009 are translated at constant exchange rates representing
the average exchange rates for the three months ended March 31, 2009.
The average exchange rate for the Euro was approximately 1.3065 during
the three months ended March 31, 2009. The amounts that are included
in our March 31, 2009 condensed consolidated financial statements are
based upon the actual exchange rate for each period.
(b) Revenues and cost of operations do not include ancillary revenues and
expenses generated at the facilities with respect to tenant
reinsurance and retail sales. "Other costs of management" included in
cost of operations principally represents all the indirect costs
incurred in the operations of the facilities. Indirect costs
principally include supervisory costs and corporate overhead cost
incurred to support the operating activities of the facilities.
(c) Net operating income (excluding depreciation and amortization expense)
or "NOI" is a non-GAAP (generally accepted accounting principles)
financial measure that excludes the impact of depreciation and
amortization expense. Although depreciation and amortization are
operating expenses, we believe that NOI is a meaningful measure of
operating performance, because we utilize NOI in making decisions with
respect to capital allocations, in determining current property
values, segment performance, and comparing period-to-period and
market-to-market property operating results. NOI is not a substitute
for net operating income after depreciation and amortization expense
in evaluating our operating results.
(d) Square foot occupancies represent weighted average occupancy levels
over the entire period.
(e) Realized annual rent per occupied square foot is computed by
annualizing the result of dividing rental income by the weighted
average occupied square footage for the period. Realized annual rent
per occupied square foot takes into consideration promotional
discounts and other items that reduce rental income from the
contractual amounts due.
(f) Annualized rental income per available square foot ("REVPAF")
represents annualized rental income divided by total available net
rentable square feet.
(g) Late charges and administrative fees are excluded from the computation
of realized annual rent per occupied square foot and REVPAF because
exclusion of these amounts provides a better measure of our ongoing
level of revenue, by excluding the volatility of late charges, which
are dependent principally upon the level of tenant delinquency, and
administrative fees, which are dependent principally upon the absolute
level of move-ins for a period.
(h) In place annual rent per occupied square foot represents annualized
contractual rents per occupied square foot without reductions for
promotional discounts, and excludes late charges and administrative
fees.
We have recently seen softness in Shurgard Europe's operations, as it
appears to be impacted by the same trends in self-storage demand that our
domestic facilities are facing, but to a larger degree. In addition to
same-store NOI growth being negative for the three months ended March 31, 2009,
occupancies as well as rates charged to new customers are below that of the same
period in 2008, continuing a trend that began in the fourth quarter of 2008. We
expect continued declines in operating results for the remainder of 2009.
Shurgard Europe has ceased commencement of new development projects. At March
31, 2009, Shurgard Europe has five newly developed facilities and two expansions
to existing facilities under construction (373,000 net rentable square feet),
with costs incurred of $43.5 million and $18.9 million in costs to complete. The
development of these projects is subject to various risks and contingencies.
Other Investments
-----------------
The "Other Investments" at March 31, 2009 are comprised primarily of our
equity in earnings from entities that own 19 self-storage facilities. Amounts
included in the tables above also include our equity in earnings with respect to
three facilities owned by the Unconsolidated Entities, until we acquired the
remaining interest we did not own in these entities during 2008, and commenced
consolidating these facilities. Our future earnings with respect to the other 19
facilities will be dependent upon the operating results of the facilities that
these entities own. See Note 5 to our March 31, 2009 condensed consolidated
financial statements for the operating results of these 19 facilities under the
"Other Investments."
OTHER INCOME AND EXPENSE ITEMS
--------------------------------------------------------------------------------
INTEREST AND OTHER INCOME: Interest and other income was $7,633,000 in
three months ended March 31, 2009, as compared to $2,844,000 in the same period
in 2008. The increase is principally as a result of (i) interest income with
51
respect to notes receivable from Shurgard Europe (described below), offset by
lower interest income on cash balances. While we had higher average cash
balances, interest rates were significantly lower in the three months ended
March 31, 2009 as compared to the same period in 2008. We have $493.4 million in
cash on hand at March 31, 2009 invested primarily in money-market funds, which
earn nominal rates of interest in the current interest rate environment. Future
interest income will depend upon the level of interest rates and the timing of
when the cash on hand is ultimately invested.
We have a loan receivable from Shurgard Europe totaling $517.5 million as
of March 31, 2009 that bears interest at the rate of 7.5% per annum. We received
interest income with respect to this loan receivable of approximately $10.2
million in the three months ended March 31, 2009, however, for financial
reporting purposes, 51% of this amount ($5.2 million) is included in interest
and other income and the remainder was recorded as additional equity in earnings
for the three months ended March 31, 2009. No interest income in connection with
this loan receivable was recorded in the same period in 2008, as such interest
income was fully eliminated in consolidation until March 31, 2008. The level of
interest income recorded in connection with the loan receivable from Shurgard
Europe will be dependent upon the balances due from Shurgard Europe as well as
the exchange rate of the Euro versus the U.S. Dollar.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense was
$85,167,000 and $122,441,000 for the three months ended March 31, 2009 and 2008,
respectively.
The decrease in depreciation and amortization expense in the three months
ended March 31, 2009, as compared to the same period in 2008 is due principally
to a decline of $26,153,000 from $28,391,000 in the three months ended March 31,
2008 to $2,257,000 in the three months ended March 31, 2009 in tenant intangible
amortization, principally tenant intangibles acquired in the Shurgard Merger in
2006, that are being amortized relative to the expected future benefit of the
tenants in place to each period. We expect minimal amortization expense of our
existing intangibles during the remainder of 2009, and future intangible
amortization will be dependent upon our future level of acquisition of
facilities with existing tenants in place.
Effective March 31, 2008, depreciation and amortization ceased on the
facilities owned by Shurgard Europe, which was deconsolidated effective March
31, 2008. Included in our depreciation and amortization on Shurgard Europe's
facilities were $21,871,000 for the three months ended March 31, 2008.
GENERAL AND ADMINISTRATIVE EXPENSE: General and administrative expense was
$9,679,000, and $14,916,000 for the three months ended March 31, 2009 and 2008,
respectively. General and administrative expense principally consists of state
income taxes, investor relations expenses, and corporate and executive salaries.
In addition, general and administrative expenses includes expenses that vary
depending on our activity levels in certain areas, such as overhead associated
with the acquisition and development of real estate facilities, certain expenses
related to capital raising and merger and acquisition activities, litigation
expenditures, employee severance, stock-based compensation, and incentive
compensation.
General and administrative expense for the three months ended March 31,
2008 includes $2,487,000 in additional incentive compensation incurred by
Shurgard Europe related to our disposition of an interest in Shurgard Europe as
well as ongoing general and administrative expense incurred by Shurgard Europe.
Following March 31, 2008 we record no further general and administrative expense
incurred by Shurgard Europe's operations.
We expect ongoing general and administrative expense to approximate $8
million to $10 million per quarter.
INTEREST EXPENSE: Interest expense was $8,128,000 and $16,487,000 for the
three months ended March 31, 2009 and 2008, respectively. The decrease in
interest expense is due primarily to the deconsolidation of Shurgard Europe and
the retirement of $110.2 million face amount of our senior notes. See also Note
6 to our March 31, 2009 condensed consolidated financial statements for a
schedule of our notes payable balances, principal repayment requirements, and
average interest rates.
52
Capitalized interest expense totaled $190,000 and $748,000 for the three
months ended March 31, 2009 and 2008, respectively, in connection with our
development activities.
Included in our condensed consolidated statement of income for the three
months ended March 31, 2008 is interest expense incurred by Shurgard Europe of
$7,308,000, relative to third-party debt (excluding the debt payable to Public
Storage). Interest expense incurred by Shurgard Europe after March 31, 2008 is
no longer reflected in our financial statements.
On February 12, 2009, in connection with a tender offering, we acquired
$110.2 million face amount of our senior unsecured notes for cash. See "GAIN ON
EARLY RETIREMENT OF DEBT" below. This retirement reduced our interest expense
for the three months ended March 31, 2009 by $895,000, as compared to the same
period in 2008. On an annualized basis, this retirement will reduce our interest
expense by approximately $6.4 million.
GAIN ON DISPOSITION OF AN INTEREST IN SHURGARD EUROPE: On March 31, 2008,
an institutional investor acquired a 51% interest in Shurgard European Holdings
LLC, a newly formed Delaware limited liability company and the holding company
for Shurgard Europe ("Shurgard Holdings"). In connection with this transaction,
we recorded a gain on disposition of $341,865,000 for the three months ended
March 31, 2008. Public Storage owns the remaining 49% interest and is the
managing member of Shurgard Holdings. See Note 3 to our March 31, 2009 condensed
consolidated financial statements for further information regarding this
transaction.
GAIN ON DISPOSITION OF REAL ESTATE INVESTMENTS: During the three months
ended March 31, 2009, we recorded gains totaling $2,722,000 on sales of assets,
principally partial disposals in connection with property condemnations. During
the three months ended March 31, 2008, we had no such dispositions of assets.
Future gains or losses will be dependent upon the level of such partial
condemnations, and are expected to be minimal.
GAIN ON EARLY RETIREMENT OF DEBT: On February 12, 2009, we acquired
$110,223,000 face amount ($113,736,000 book value) of our existing senior
unsecured notes pursuant to a tender offer for an aggregate of $109,622,000 in
cash (including costs associated with the tender of $414,000) plus accrued
interest. In connection with this transaction, we recognized a gain of
$4,114,000 for the three months ended March 31, 2009, representing the
difference between the book value of $113,736,000 and the retirement amount paid
plus tender costs.
FOREIGN EXCHANGE GAIN (LOSS): At March 31, 2009, we had a loan receivable
from Shurgard Europe of approximately (euro)391.9 million ($517.5 million). We
expect Shurgard Europe to repay the loan in the near term. These amounts are
denominated in Euros but have not been hedged. The amount of U.S. Dollars that
will be received on repayment will depend upon the exchange rates at the time.
Based upon the change in estimated U.S. Dollars to be received caused by
fluctuation in currency rates during the three months ended March 31, 2009, we
recorded foreign currency translation losses of $34,733,000, as compared to
foreign currency translation gains of $40,971,000 for the three months ended
March 31, 2008. The U.S. Dollar exchange rate relative to the Euro was
approximately 1.320 and 1.409 at March 31, 2009 and December 31 2008,
respectively.
Future foreign exchange gains or losses will be dependent primarily upon
the movement of the Euro relative to the U.S. Dollar (the closing exchange rate
of the U.S. dollar relative to the Euro was 1.320 at March 31, 2009), the amount
owed from Shurgard Europe and our continued expectation with respect to repaying
the loan.
DISCONTINUED OPERATIONS: During the three months ended March 31, 2009, we
decided to terminate our truck rental and containerized storage business units,
and disposed of a complete self-storage facility in connection with a
condemnation proceeding. As a result, we reclassified all of the historical
revenues and expenses of these operations from revenues and expenses, into
"discontinued operations." Included in discontinued operations is $3.5 million
in expenses incurred in the three months ended March 31, 2009 related primarily
to disposing of trucks used in our truck rental operations, as well as a gain on
sale of the sold self-storage facility of approximately $4.2 million.
53
LIQUIDITY AND CAPITAL RESOURCES
--------------------------------------------------------------------------------
We have $493.4 million of cash on hand at March 31, 2009, and believe that
these funds, together with our internally generated net cash provided by
operating activities and cash on hand will continue to be sufficient to enable
us to meet our operating expenses, capital improvements, debt service
requirements and distributions requirements to our shareholders for the
foreseeable future.
Operating as a REIT, our ability to retain cash flow for reinvestment is
restricted. In order for us to maintain our REIT status, a substantial portion
of our operating cash flow must be used to make distributions to our
shareholders (see "REQUIREMENT TO PAY DISTRIBUTIONS" below). However, despite
the significant distribution requirements, we have been able to retain a
significant amount of our operating cash flow. The following table summarizes
our ability to fund distributions to the minority interests, capital
improvements to maintain our facilities, and distributions to our shareholders
through the use of cash provided by operating activities. The remaining cash
flow generated is available to make both scheduled and optional principal
payments on debt and for reinvestment.
For the Three Months Ended
March 31,
------------------------------
2009 2008
----------- -----------
(Amount in thousands)
Net cash provided by operating activities (a)......................... $ 259,525 $ 239,666
Capital improvements to maintain our facilities....................... (8,499) (6,874)
------------ ------------
Remaining operating cash flow available for distributions to equity
holders............................................................ 251,026 232,792
Distributions to permanent noncontrolling interests in subsidiaries... (4,058) (4,521)
Distribution requirements paid to preferred partnership interests..... (4,017) (5,403)
------------ ------------
Cash from operations allocable to Public Storage shareholders......... 242,951 222,868
Distributions paid to Public Storage shareholders:
Preferred share dividends.......................................... (58,108) (60,333)
Equity Shares, Series A dividends.................................. (5,131) (5,356)
Common shareholders ($0.55 per share).............................. (92,582) (92,499)
------------ ------------
Cash from operations available for principal payments on debt and
reinvestment (b)................................................... $ 87,130 $ 64,680
============ ============
(a) Represents net cash provided by operating activities for each
respective three month period as presented in our March 31, 2009
Condensed Consolidated Statements of Cash Flows.
(b) Cash from operations available for principal payments on debt and
reinvestment is not a substitute for cash flows from operations in
evaluating our liquidity, ability to repay our debt, or to meet our
distribution requirements.
Cash from operations available for principal payments on debt and
reinvestment increased from $64.7 million in the three months ended March 31,
2008 to $87.1 million in the three months ended March 31, 2009.
Other sources of readily available liquidity and capital resources include
unrestricted cash on hand at March 31, 2009 totaling $493.4 million and a $300
million revolving line of credit. The line of credit expires in March 2012 and
there were no outstanding borrowings on the line of credit at May 8, 2009.
We also have a loan receivable from Shurgard Europe totaling $517.5 million
that matures on March 31, 2010. We expect that this loan will be repaid in full
on the maturity date.
Significant requirements on our liquidity and capital resources include:
(i) capital improvements to maintain our facilities, (ii) distribution
requirements to our shareholders to maintain our REIT status, (iii) debt
54
service, (iv) acquisition and development commitments and (v) commitments to
provide funding to Shurgard Europe for certain investing and financing
activities.
CAPITAL IMPROVEMENT REQUIREMENTS: During 2009, we expect approximately $74
million for capital improvements for our facilities. Capital improvements
include major repairs or replacements to the facilities, which keep the
facilities in good operating condition and maintain their visual appeal. Capital
improvements do not include costs relating to the development or expansion of
facilities. During the three months ended March 31, 2009, we incurred capital
improvements of approximately $8.5 million.
REQUIREMENT TO PAY DISTRIBUTIONS: We have operated, and intend to continue
to operate, in such a manner as to qualify as a REIT under the Code, but no
assurance can be given that we will at all times so qualify. To the extent that
the Company continues to qualify as a REIT, we will not be taxed, with certain
limited exceptions, on the REIT taxable income that is distributed to our
shareholders, provided that at least 90% of our taxable income is so distributed
to our shareholders. We believe we have satisfied the REIT distribution
requirement since 1981.
Aggregate dividends paid during the three months ended March 31, 2009
totaled $58.1 million to the holders of our Cumulative Preferred Shares, $92.9
million to the holders of our common shares and $5.1 million to the holders of
our Equity Shares, Series A. Although we have not finalized the calculation of
our 2008 taxable income, we believe that the aggregate dividends paid in 2008 to
our shareholders enable us to continue to meet our REIT distribution
requirements.
During the three months ended March 31, 2009, we paid distributions
totaling $4.0 million with respect to our Preferred Partnership Units, and
expect our annual distribution requirement based upon preferred partnership
units outstanding at March 31, 2009, to be approximately $7.3 million. In
addition, we estimate the annual distribution requirements with respect to our
preferred shares outstanding at March 31, 2009, to be approximately $232.4
million, assuming no additional preferred share issuances or redemptions during
2009.
For 2009, distributions with respect to the common shares will be
determined based upon our REIT distribution requirements after taking into
consideration distributions to the preferred shareholders. We anticipate that,
at a minimum, quarterly distributions per common share for 2009 will be $0.55
per common share. For the second quarter of 2009, a quarterly distribution of
$0.55 per common share has been declared by our Board of Trustees.
With respect to the depositary shares representing the Equity Shares,
Series A, we have no obligation to pay distributions if no distributions are
paid to the common shareholders. To the extent that we do pay common
distributions in any year, the holders of the depositary shares receive annual
distributions equal to the lesser of (i) five times the per share dividend on
the common shares or (ii) $2.45. The depositary shares are non-cumulative, and
have no preference over our Common Shares either as to dividends or in
liquidation.
We are required by the underlying governing documents to pay distributions
to permanent noncontrolling interests in subsidiaries based upon the operating
cash flows of the underlying entities less any required reserves for capital
expenditures or debt repayment. Such interests received a total of $4,508,000
during the three months ended March 31, 2009.
DEBT SERVICE REQUIREMENTS: At March 31, 2009, we have total outstanding
debt of approximately $527.2 million. See Note 6 to our March 31, 2009 condensed
consolidated financial statements for approximate principal maturities of such
borrowings. It is our current intention to fully amortize our outstanding debt
as opposed to refinance debt maturities with additional debt. Alternatively, we
may prepay debt and finance such prepayments with retained operating cash flow
or proceeds from the issuance of preferred securities or common shares.
Our portfolio of real estate facilities remains substantially unencumbered.
At March 31, 2009, we have secured debt outstanding of $234.1 million, which
encumbers 90 self-storage facilities with an aggregate net book value of
approximately $571.8 million.
55
ACQUISITION AND DEVELOPMENT OF FACILITIES: During 2009, we will continue to
seek to acquire additional self-storage facilities from third parties; however,
it is difficult to estimate the amount of third party acquisitions we will
undertake. We have a minimal development pipeline at March 31, 2009.
EUROPEAN ACTIVITIES: At the end of February 2009, the maturity date of the
loan owed by Shurgard Europe to Public Storage was extended to March 31, 2010.
The loan totaled approximately $517.5 million at March 31, 2009.
In addition, if Shurgard Europe acquires its partner's interests in First
Shurgard and Second Shurgard, joint ventures in which Shurgard Europe has a 20%
interest, and is unable to obtain third-party financing, we have agreed to
provide additional loans to Shurgard Europe, under the same terms as the
existing loans, for up to (euro)305 million ($402.7 million as of March 31,
2009) for the acquisition. Shurgard Europe has no obligation to acquire these
interests, and the acquisition of these interests is contingent on a number of
items, including whether we assent to the acquisition. In February 2009,
Shurgard Europe exercised their option to extend the (euro)305 million
commitment through March 31, 2010.
Shurgard Europe has a 20% interest in two joint ventures and one other
partner owns 80% interest in each. The two joint ventures collectively had
approximately (euro)238 million ($314 million) of outstanding debt payable to
third parties at March 31, 2009, which is non-recourse to Shurgard Europe. One
of the joint venture loans, totaling (euro)117 million ($154 million), is due
May 2009 and the other joint venture loan, totaling (euro)121 million ($160
million), is due in July 2010. Shurgard Europe is currently negotiating terms
with the respective lenders to extend the maturities out one to three years. We
expect Shurgard Europe will finalize a loan extension of the joint venture loan
that matures in May 2009 within the next 30 days, although there can be no
assurance that such an extension will actually be completed.
If Shurgard Europe was unable to extend the maturity dates of the joint
venture loan, it is our expectation that the loans would be repaid with each
partner contributing their pro rata share towards repayment. Shurgard Europe's
pro rata share, in the aggregate, would be approximately (euro)24 million ($32
million) which Shurgard Europe could borrow from us pursuant to our loan
commitment described above. Further, it is also possible that Shurgard Europe's
joint venture partner will be unable to contribute its pro rata share to repay
the loans and may want to sell their interest. Shurgard Europe could borrow on
the loan commitment we have provided to consummate such a transaction and repay
the loans.
We also committed to fund up to $88.2 million of additional equity
contributions to Shurgard Europe to fund certain investing activities. Our
remaining obligation under this commitment totaled $66.4 million at March 31,
2009.
We expect that Shurgard Europe will repay the existing loan due to us (and
any additional borrowings pursuant to our commitment) no later than March 31,
2010 or sooner if capital markets become accessible to Shurgard Europe on
appropriate terms. Given the difficulty in the credit markets, it is possible
that Shurgard Europe may not able to repay the loans prior to March 31, 2010.
Our business operations are not dependent on the repayment of such loans.
In March 2009, Shurgard Europe's joint venture partner gave its "exit
notice" with respect to one of the joint ventures. There are specific exit
procedures to be followed in accordance with the joint venture agreement and
Shurgard Europe has 90 days to respond. We are evaluating our options.
ACCESS TO CAPITAL: Over the past several months, accessing capital through
the equity or credit markets has become very difficult, in part due to the lack
of liquidity, particularly with respect to real estate companies. As a result,
our ability to raise additional capital by issuing common or preferred
securities is not currently a viable option.
Our financial profile is characterized by a low level of
debt-to-total-capitalization and a conservative dividend payout ratio with
respect to the common shares. We expect to fund our long-term growth strategies
56
and debt obligations with (i) cash on hand at March 31, 2009, (ii) internally
generated retained cash flows and (iii) depending upon current market
conditions, proceeds from issuing equity securities. In general, our strategy is
to continue to finance our growth with permanent capital, either common or
preferred equity to the extent that market conditions are favorable,
notwithstanding current market conditions are not favorable.
Historically, we have funded substantially all of our acquisitions with
permanent capital (both common and preferred securities). We have elected to use
preferred securities as a form of leverage despite the fact that the dividend
rates of our preferred securities exceed the prevailing market interest rates on
conventional debt. We have chosen this method of financing for the following
reasons: (i) under the REIT structure, a significant amount of operating cash
flow needs to be distributed to our shareholders, making it difficult to repay
debt with operating cash flow alone, (ii) our perpetual preferred shares have no
sinking fund requirement or maturity date and do not require redemption, all of
which eliminate any future refinancing risks, (iii) after the end of a non-call
period, we have the option to redeem the preferred shares at any time, which
enable us to refinance higher coupon preferred shares with new preferred shares
at lower rates if appropriate, (iv) preferred shares do not contain covenants,
thus allowing us to maintain significant financial flexibility, and (v)
dividends on the preferred shares can be applied to satisfy our REIT
distribution requirements.
Our credit ratings on each of our series of preferred shares are "Baa1" by
Moody's and "BBB" by Standard & Poor's.
ISSUANCE AND REDEMPTION OF PREFERRED SECURITIES: We believe that our size
and financial flexibility enables us to access capital when appropriate and when
market conditions are favorable. However, over the past six months, accessing
capital through the credit markets has become very difficult, in part due to the
lack of liquidity.
As of March 31, 2009, several of our series of preferred shares were
redeemable at our option; however, we have not called these series for
redemption. Although we may acquire these shares on the open market, it is not
advantageous to redeem these shares at face pursuant to our redemption option at
this time because, based upon current market conditions, we cannot issue
additional preferred securities at a lower coupon rate than the securities that
would be called. The timing of redemption of any of these series of preferred
shares will depend upon many factors including when, or if, market conditions
improve such that we can issue new preferred shares at a lower cost of capital
than the shares that would be redeemed.
In the past we have typically raised additional capital in advance of the
redemption dates to ensure that we have available funds to redeem these
securities. Provided market conditions improve in the future, we may raise
capital in advance to fund redemptions.
REPURCHASES OF THE COMPANY'S EQUITY AND PREFERRED SECURITIES: Dislocations
in capital markets have provided opportunities for the repurchase of our
preferred and debt securities. During the three months ended March 31, 2009, we
repurchased certain of our Cumulative Preferred Shares in privately negotiated
transactions with a liquidation value of $24.6 million for approximately $17.5
million, including accrued dividends, reducing our ongoing dividend requirement
by approximately $1.8 million per year. Also during the three months ended March
31, 2009, we repurchased certain of our Preferred Partnership Units in privately
negotiated transactions with a carrying amount of $225 million for approximately
$153 million, reducing our ongoing dividend requirement by approximately $14.4
million per year.
On February 12, 2009, we acquired approximately $110 million face amount of
our existing senior unsecured notes pursuant to a tender offer. The amounts paid
in the tender were substantially less than what would have been paid if we were
to repay this debt early subject to the prepayment premiums under the related
debt agreement.
Our Board of Trustees has authorized the repurchase from time to time of up
to 35,000,000 of our common shares on the open market or in privately negotiated
transactions. During the three months ended March 31, 2009, we did not
repurchase any of our common shares. From the inception of the repurchase
program through May 8, 2009, we have repurchased a total of 23,721,916 common
shares at an aggregate cost of approximately $679.1 million. Future levels of
57
common repurchases will be dependent upon our available capital, investment
alternatives, and the trading price of our common shares.
These acquisitions were funded by us with cash on hand. We continue to
monitor the existing trading ranges of all our outstanding debt and equity
securities for potential opportunities.
CONTRACTUAL OBLIGATIONS
Our significant contractual obligations at March 31, 2009 and their impact
on our cash flows and liquidity are summarized below for the years ending
December 31 (amounts in thousands):
Total 2009 2010 2011 2012 2013 Thereafter
---------- --------- ---------- --------- -------- ---------- ----------
Long-term debt (1) ............ $ 634,868 $ 29,557 $ 41,642 $ 154,096 $ 74,716 $ 259,880 $ 74,977
Operating leases (2)........... 104,736 5,100 6,171 5,632 5,640 5,530 76,663
Construction commitments (3)... 5,176 4,659 517 - - - -
---------- --------- ---------- --------- -------- ---------- ----------
Total.......................... $ 744,780 $ 39,316 $ 48,330 $ 159,728 $ 80,356 $ 265,410 $ 151,640
========== ========= ========== ========= ======== ========== ==========
(1) Amounts include interest payments on our notes payable based on their
contractual terms. See Note 6 to our March 31, 2009 condensed
consolidated financial statements for additional information on our
notes payable.
(2) We lease land, equipment and office space under various operating
leases. Certain leases are cancelable with substantial penalties.
(3) Includes obligations for facilities under construction at March 31,
2009.
We have not included any additional funding requirements that we may be
required make to Shurgard Europe as a contractual obligation in the table above,
since it is uncertain whether or not we will be required to fund any additional
amounts and because such funding is subject to our assent.
We have no substantial construction commitments at March 31, 2009.
OFF-BALANCE SHEET ARRANGEMENTS: At March 31, 2009 we had no material
off-balance sheet arrangements as defined under Regulation S-K 303(a)(4) and the
instructions thereto.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
To limit our exposure to market risk, we principally finance our operations
and growth with permanent equity capital consisting either of common shares and
preferred shares. At March 31, 2009, our debt as a percentage of total
equity (based on book values) was 5.9%.
Our preferred shares are not redeemable at the option of the holders. At
March 31, 2009, our Series V, Series W, Series X, Series Y, Series Z and Series
A shares are currently redeemable by us. Except under certain conditions
relating to the Company's qualification as a REIT, the preferred shares are not
redeemable by the Company pursuant to its redemption option prior to the dates
set forth in Note 8 to our March 31, 2009 condensed consolidated financial
statements.
Our market risk sensitive instruments include notes payable, which totaled
$527,235,000 at March 31, 2009.
We have foreign currency exposures related to our investment in Shurgard
Europe, which has a book value of $250.5 million at March 31, 2009. We also have
a loan receivable from Shurgard Europe, which is denominated in Euros, totaling
58
(euro)391.9 million ($517.5 million) at March 31, 2009. We also have an
obligation, in certain circumstances, to loan up to an additional (euro)305
million to Shurgard Europe.
The table below summarizes annual debt maturities and weighted-average
interest rates on our outstanding debt at the end of each year and fair values
required to evaluate our expected cash-flows under debt agreements and our
sensitivity to interest rate changes at March 31, 2009 (dollar amounts in
thousands).
2009 2010 2011 2012 2013 Thereafter Total Fair Value
----------- ---------- ------------ ------------ ----------- ------------ ------------ ------------
Fixed rate debt........ $ 7,887 $ 13,244 $ 131,252 $ 55,575 $ 251,421 $ 67,856 $ 527,235 $ 528,833
Average interest rate.. 5.68% 5.68% 5.68% 5.70% 5.62% 5.50%
----------------------------------------------------------------------------------------------------------------------------
Variable rate debt (1). $ - $ - $ - $ - $ - $ - $ - $ -
Average interest rate..
----------------------------------------------------------------------------------------------------------------------------
(1) Amounts include borrowings under our line of credit, which expires in
2012. As of March 31, 2009, we have no borrowings under our line of
credit.
59
ITEM 4. CONTROLS AND PROCEDURES
------- -----------------------
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in reports the Company files
and submits under the Securities Exchange Act of 1934, as amended ("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 the Company's management, including its 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. Also, the Company has investments in certain
unconsolidated entities. As the Company does not control or manage these
entities, its disclosure controls and procedures with respect to such entities
are substantially more limited than those it maintains with respect to its
consolidated subsidiaries.
As of the end of the fiscal quarter covered by this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
the Company's Chief Financial Officer, of the effectiveness of the design and
operation of the Company's 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, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective.
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 quarter to which this report relates that have
materially affected, or are reasonable likely to materially affect, our internal
control over financial reporting.
60
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
The information set forth under the heading "Legal Matters" in Note 12 to
the Condensed Consolidated Financial Statements in this Form 10-Q is
incorporated by reference in this Item 1.
ITEM 1A. RISK FACTORS
------------
As of March 31, 2009, no material changes had occurred in our risk factors
as discussed in Item 1A of the Public Storage Annual Report on Form 10-K for the
year ended December 31, 2008.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
-----------------------------------------------------------
Common Share Repurchases
Our Board of Trustees has authorized the repurchase from time to time of up
to 35,000,000 of our common shares on the open market or in privately negotiated
transactions. On May 8, 2008, the Board of Trustees authorized an increase in
the total repurchase authorization from 25,000,000 common shares to 35,000,000
common shares. During the three months ended March 31, 2009, we did not
repurchase any of our common shares. From the inception of the repurchase
program through May 8, 2009, we have repurchased a total of 23,721,916 common
shares 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
March 31, 2009. During the three months ended March 31, 2009, we did not
repurchase any of our common shares outside our publicly announced repurchase
program, except shares withheld for payment of tax withholding in connection
with our various stock option plans. Future levels of common repurchases will be
dependent upon our available capital, investment alternatives, and the trading
price of our common shares.
Preferred and Equity Share Repurchases
During March 2009, in privately negotiated transactions we repurchased
various series of our Cumulative Preferred Shares with an aggregate liquidation
amount of $24.6 million, for an aggregate of $17.5 million in cash (which was
inclusive of accrued dividends), in addition to various series of our Preferred
Partnership Units with an aggregate carrying amount of $225.0 million, for an
aggregate of $155.2 million in cash (inclusive of accrued dividends).
61
The following table presents monthly information related to our privately
negotiated repurchases of our Cumulative Preferred Shares and Preferred
Partnership Units during the three months ended March 31, 2009:
Total Number
of Average Price
Shares/Units Paid per
Period Covered Purchased Share/Unit
--------------------------------------------- ------------ -------------
January 1, 2009 - January 31, 2009 - -
February 1, 2009 - February 28, 2009 - -
March 1, 2009 - March 31, 2009
Preferred Shares - Series V 700,000 $18.90
Preferred Shares - Series C 175,000 $15.40
Preferred Shares - Series F 107,000 $15.05
Preferred Partnership Units - Series NN 8,000,000 $16.00
Preferred Partnership Units - Series Z 1,000,000 $25.00
--------- ------
Monthly Total 9,982,000 $16.54
--------- ------
Total 9,982,000 $17.08
========= ======
ITEM 6. EXHIBITS
--------
Exhibits required by Item 601 of Regulation S-K are filed herewith or
incorporated herein by reference and are listed in the attached Exhibit Index
which is incorporated herein by reference.
62
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: May 8, 2009
PUBLIC STORAGE
By: /s/ John Reyes
--------------
John Reyes
Senior Vice President and
Chief Financial Officer
(Principal financial officer
and duly authorized officer)
63
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 Current Report on Form 8-K dated June 6, 2007 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 June 6,
2007 and incorporated by reference herein.
3.3 Articles Supplementary for Public Storage Equity Shares, Series A.
Filed with the Registrant's Current Report on Form 8-K dated June 6,
2007 and incorporated by reference herein.
3.4 Articles Supplementary for Public Storage Equity Shares, Series AAA.
Filed with the Registrant's Current Report on Form 8-K dated June 6,
2007 and incorporated by reference herein.
3.5 Articles Supplementary for Public Storage 7.500% Cumulative Preferred
Shares, Series V. Filed with the Registrant's Current Report on Form
8-K dated June 6, 2007 and incorporated by reference herein.
3.6 Articles Supplementary for Public Storage 6.500% Cumulative Preferred
Shares, Series W. Filed with the Registrant's Current Report on Form
8-K dated June 6, 2007 and incorporated by reference herein.
3.7 Articles Supplementary for Public Storage 6.450% Cumulative Preferred
Shares , Series X. Filed with the Registrant's Current Report on Form
8-K dated June 6, 2007 and incorporated by reference herein.
3.8 Articles Supplementary for Public Storage 6.850% Cumulative Preferred
Shares, Series Y. Filed with the Registrant's Current Report on Form
8-K dated June 6, 2007 and incorporated by reference herein.
3.9 Articles Supplementary for Public Storage 6.250% Cumulative Preferred
Shares, Series Z. Filed with the Registrant's Current Report on Form
8-K dated June 6, 2007 and incorporated by reference herein.
3.10 Articles Supplementary for Public Storage 6.125% Cumulative Preferred
Shares, Series A. Filed with the Registrant's Current Report on Form
8-K dated June 6, 2007 and incorporated by reference herein.
3.11 Articles Supplementary for Public Storage 7.125% Cumulative Preferred
Shares, Series B. Filed with the Registrant's Current Report on Form
8-K dated June 6, 2007 and incorporated by reference herein.
3.12 Articles Supplementary for Public Storage 6.600% Cumulative Preferred
Shares, Series C. Filed with the Registrant's Current Report on Form
8-K dated June 6, 2007 and incorporated by reference herein.
3.13 Articles Supplementary for Public Storage 6.180% Cumulative Preferred
Shares, Series D. Filed with the Registrant's Current Report on Form
8-K dated June 6, 2007 and incorporated by reference herein.
3.14 Articles Supplementary for Public Storage 6.750% Cumulative Preferred
Shares, Series E. Filed with the Registrant's Current Report on Form
8-K dated June 6, 2007 and incorporated by reference herein.
3.15 Articles Supplementary for Public Storage 6.450% Cumulative Preferred
Shares, Series F. Filed with the Registrant's Current Report on Form
8-K dated June 6, 2007 and incorporated by reference herein.
3.16 Articles Supplementary for Public Storage 7.000% Cumulative Preferred
Shares, Series G. Filed with the Registrant's Current Report on Form
8-K dated June 6, 2007 and incorporated by reference herein.
64
3.17 Articles Supplementary for Public Storage 6.950% Cumulative Preferred
Shares, Series H. Filed with the Registrant's Current Report on Form
8-K dated June 6, 2007 and incorporated by reference herein.
3.18 Articles Supplementary for Public Storage 7.250% Cumulative Preferred
Shares, Series I. Filed with the Registrant's Current Report on Form
8-K dated June 6, 2007 and incorporated by reference herein.
3.19 Articles Supplementary for Public Storage 7.250% Cumulative Preferred
Shares, Series K. Filed with the Registrant's Current Report on Form
8-K dated June 6, 2007 and incorporated by reference herein.
3.20 Articles Supplementary for Public Storage 6.750% Cumulative Preferred
Shares, Series L. Filed with the Registrant's Current Report on Form
8-K dated June 6, 2007 and incorporated by reference herein.
3.21 Articles Supplementary for Public Storage 6.625% Cumulative Preferred
Shares, Series M. Filed with the Registrant's Current Report on Form
8-K dated June 6, 2007 and incorporated by reference herein.
3.22 Articles Supplementary for Public Storage 7.000% Cumulative Preferred
Shares, Series N. Filed with the Registrant's Current Report on Form
8-K dated June 28, 2007 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 Limited Partnership Agreement of PSAF Development Partners, L.P. Filed
with PSI's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1997 (SEC File No. 001-0839) and incorporated herein by
reference.
10.4 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.
10.5 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.
10.6 Limited Partnership Agreement of PSAC Development Partners, L.P. Filed
with PSI's Current Report on Form 8-K dated November 15, 1999 (SEC File
No. 001-0839) and incorporated herein by reference.
10.7 Agreement of Limited Liability Company of PSAC Storage Investors,
L.L.C. Filed with PSI's Current Report on Form 8-K dated November 15,
1999 (SEC File No. 001-0839) and incorporated herein by reference.
10.8 Amended and Restated Agreement of Limited Partnership of PSA
Institutional Partners, L.P. Filed with PSI's Annual Report on Form
10-K for the year ended December 31, 1999 (SEC File No. 001-0839) and
incorporated herein by reference.
10.9 Amendment to Amended and Restated Agreement of Limited Partnership of
PSA Institutional Partners, L.P. Filed with PSI's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2000 (SEC File No.
001-0839) and incorporated herein by reference.
65
10.10 Second Amendment to Amended and Restated Agreement of Limited
Partnership of PSA Institutional Partners, L.P. Filed with PSI's
Quarterly Report on Form 10-Q for the quarterly period ended March 31,
2004 (SEC File No. 001-0839) and incorporated herein by reference.
10.11 Third Amendment to Amended and Restated Agreement of Limited
Partnership of PSA Institutional Partners, L.P. 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.
10.12 Limited Partnership Agreement of PSAF Acquisition Partners, L.P. Filed
with PSI's Annual Report on Form 10-K for the year ended December 31,
2003 (SEC File No. 001-0839) and incorporated herein by reference.
10.13 Credit Agreement by and among Registrant, Wells Fargo Bank, National
Association and Wachovia Bank, National Association as co-lead
arrangers, and the other financial institutions party thereto, dated
March 27, 2007. Filed with PSI's Current Report on Form 8-K on April 2,
2007 (SEC File No. 001-0839) and incorporated herein by reference.
10.14* Employment Agreement between Registrant and B. Wayne Hughes dated as of
November 16, 1995. Filed with PSI's Annual Report on Form 10-K for the
year ended December 31, 1995 (SEC File No. 001-0839) and incorporated
herein by reference.
10.15* Shurgard Storage Centers, Inc. 1995 Long Term Incentive Compensation
Plan. Incorporated by reference to Appendix B of Definitive Proxy
Statement dated June 8, 1995 filed by Shurgard (SEC File No.
001-11455).
10.16* Shurgard Storage Centers, Inc. 2000 Long-Term Incentive Plan.
Incorporated by reference to Exhibit 10.27 Annual Report on Form 10-K
for the year ended December 31, 2000 filed by Shurgard (SEC File No.
001-11455).
10.17* Shurgard Storage Centers, Inc. 2004 Long Term Incentive Compensation
Plan. Incorporated by reference to Appendix A of Definitive Proxy
Statement dated June 7, 2004 filed by Shurgard (SEC File No.
001-11455).
10.18* Public Storage, Inc. 1996 Stock Option and Incentive Plan. Filed with
PSI's Annual Report on Form 10-K for the year ended December 31, 2000
(SEC File No. 001-0839) and incorporated herein by reference.
10.19* Public Storage, Inc. 2000 Non-Executive/Non-Director Stock Option and
Incentive Plan. Filed with PSI's Registration Statement on Form S-8
(SEC File No. 333-52400) and incorporated herein by reference.
10.20* Public Storage, Inc. 2001 Non-Executive/Non-Director Stock Option and
Incentive Plan. Filed with PSI's Registration Statement on Form S-8
(SEC File No. 333-59218) and incorporated herein by reference.
10.21* Public Storage, Inc. 2001 Stock Option and Incentive Plan ("2001
Plan"). Filed with PSI's Registration Statement on Form S-8 (SEC File
No. 333-59218) and incorporated herein by reference.
10.22* 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.
10.23* 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.
10.24* 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.
66
10.25* Public Storage, Inc. Performance Based Compensation Plan for Covered
Employees. Filed with PSI's Current Report on Form 8-K dated May 11,
2005 (SEC File No. 001-0839) and incorporated herein by reference.
10.26* Public Storage 2007 Equity and Performance-Based Incentive Compensation
Plan. Filed as Exhibit 4.1 to Registrant's Registration Statement on
Form S-8 (SEC File No. 333-144907) and incorporated herein by
reference.
10.27* Form of 2007 Plan Restricted Stock Unit Agreement. Filed with
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 2007 and incorporated herein by reference.
10.28* Form of 2007 Plan Stock Option Agreement. Filed with Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 and
incorporated herein by reference.
10.29* Form of Indemnity Agreement. Filed with Registrant's Amendment No. 1 to
Registration Statement on Form S-4 (SEC File No. 333-141448) and
incorporated herein by reference.
10.30* Offer letter/Employment Agreement dated as of July 28, 2008 between
Registrant and Mark Good. Filed as Exhibit 10.1 to Registrant's Current
Report on Form 8-K dated September 9, 2008 and incorporated herein by
reference.
12 Statement Re: Computation of Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends. Filed herewith.
31.1 Rule 13a - 14(a) Certification. Filed herewith.
31.2 Rule 13a - 14(a) Certification. Filed herewith.
32 Section 1350 Certifications. Filed herewith.
_ (1) SEC File No. 001-33519 unless otherwise indicated.
* Denotes management compensatory plan agreement or arrangement.
67