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 June 30, 2009
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
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Commission File Number: 001-33519
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PUBLIC STORAGE
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(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 Identification
incorporation or organization) 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.
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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).
[X] 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 August 5, 2009:
Common Shares of beneficial interest, $.10 par value per share - 169,513,148
shares
PUBLIC STORAGE
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INDEX
Pages
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at
June 30, 2009 and December 31, 2008 1
Condensed Consolidated Statements of Income for the
Three and Six Months Ended June 30, 2009 and 2008 2
Condensed Consolidated Statement of Equity
for the Six Months Ended June 30, 2009 3
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2009 and 2008 4 - 5
Notes to Condensed Consolidated Financial Statements 6 - 36
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 37 - 63
Item 3. Quantitative and Qualitative Disclosures about Market Risk 64
Item 4. Controls and Procedures 65
PART II. OTHER INFORMATION (Items 3 and 5 are not applicable)
-----------------
Item 1. Legal Proceedings 66
Item 1A. Risk Factors 66
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 66 - 67
Item 4. Submission of Matters to a Vote of Security Holders 67
Item 6. Exhibits 67
PUBLIC STORAGE
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
(Unaudited)
June 30, December 31,
2009 2008
--------------- ----------------
ASSETS
Cash and cash equivalents............................................... $ 584,860 $ 680,701
Real estate facilities, at cost:
Land................................................................. 2,716,466 2,716,254
Buildings............................................................ 7,534,187 7,490,768
--------------- ----------------
10,250,653 10,207,022
Accumulated depreciation............................................. (2,568,215) (2,405,473)
--------------- ----------------
7,682,438 7,801,549
Construction in process.............................................. 12,703 20,340
--------------- ----------------
7,695,141 7,821,889
Investment in real estate entities...................................... 562,732 544,598
Goodwill, net........................................................... 174,634 174,634
Intangible assets, net.................................................. 40,511 52,005
Loan receivable from Shurgard Europe.................................... 550,499 552,361
Other assets............................................................ 95,459 109,857
--------------- ----------------
Total assets.............................................. $ 9,703,836 $ 9,936,045
=============== ================
LIABILITIES AND EQUITY
Notes payable........................................................... $ 524,440 $ 643,811
Accrued and other liabilities........................................... 219,697 212,353
--------------- ----------------
Total liabilities.............................................. 744,137 856,164
Redeemable noncontrolling interests in subsidiaries (Note 7)............ 12,872 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, 168,355,703 shares issued and outstanding
(168,279,732 at December 31, 2008)............................... 16,837 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..................................................... 5,673,201 5,590,093
Retained earnings (deficit)......................................... (258,732) (290,323)
Accumulated other comprehensive loss................................ (18,090) (31,931)
--------------- ----------------
Total Public Storage shareholders' equity..................... 8,812,993 8,708,995
Equity of permanent noncontrolling interests in subsidiaries
(Note 7) ........................................................... 133,834 358,109
--------------- ----------------
Total equity...................................................... 8,946,827 9,067,104
--------------- ----------------
Total liabilities and equity.............................. $ 9,703,836 $ 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 Six Months Ended
June 30, June 30,
------------------------------- --------------------------------
2009 2008 2009 2008
--------------- -------------- --------------- ---------------
Revenues:
Self-storage facilities................................... $ 371,630 $ 380,770 $ 742,869 $ 805,043
Ancillary operations...................................... 28,106 26,710 53,941 56,747
Interest and other income................................. 7,516 11,014 15,149 13,858
--------------- -------------- --------------- ---------------
407,252 418,494 811,959 875,648
--------------- -------------- --------------- ---------------
Expenses:
Cost of operations:
Self-storage facilities................................ 124,478 128,124 257,952 284,779
Ancillary operations................................... 10,374 12,064 20,027 23,368
Depreciation and amortization.............................. 83,796 94,829 168,762 217,069
General and administrative................................. 8,199 33,173 17,878 48,089
Interest expense........................................... 7,288 9,601 15,416 26,088
--------------- -------------- --------------- ---------------
234,135 277,791 480,035 599,393
--------------- -------------- --------------- ---------------
Income from continuing operations before equity in earnings
of real estate entities, gain (loss) on disposition of real
estate investments, gain on early retirement of debt
and foreign currency exchange gain (loss)................. 173,117 140,703 331,924 276,255
Equity in earnings of real estate entities................... 7,398 4,632 30,209 7,361
Gain (loss) on disposition of real estate investments........ - (92) 2,722 341,773
Gain on early retirement of debt............................. - - 4,114 -
Foreign currency exchange gain (loss)........................ 33,205 (2) (1,528) 40,969
--------------- -------------- --------------- ---------------
Income from continuing operations............................ 213,720 145,241 367,441 666,358
Discontinued operations...................................... (8,333) (1,286) (8,625) (2,462)
--------------- -------------- --------------- ---------------
Net income................................................... 205,387 143,955 358,816 663,896
Net income allocated (to) from noncontrolling equity
interests:
Based upon income of the consolidated entities............ (6,215) (10,142) (14,642) (17,741)
Based upon redemptions of preferred partnership units..... - - 72,000 -
--------------- -------------- --------------- ---------------
Net income allocable to Public Storage shareholders.......... $ 199,172 $ 133,813 $ 416,174 $ 646,155
=============== ============== =============== ===============
Allocation of net income to (from) Public Storage
shareholders:
Preferred shareholders based on distributions paid........ $ 58,108 $ 60,333 $ 116,216 $ 120,666
Preferred shareholders based on redemptions............... - - (6,218) -
Equity Shares, Series A................................... 5,131 5,356 10,262 10,712
Restricted share units ................................... 446 146 932 1,971
Common shareholders....................................... 135,487 67,978 294,982 512,806
--------------- -------------- --------------- ---------------
$ 199,172 $ 133,813 $ 416,174 $ 646,155
=============== ============== =============== ===============
Net income per common share - basic
Continuing operations..................................... $ 0.85 $ 0.41 $ 1.80 $ 3.06
Discontinued operations................................... (0.05) (0.01) (0.05) (0.01)
--------------- -------------- --------------- ---------------
$ 0.80 $ 0.40 $ 1.75 $ 3.05
=============== ============== =============== ===============
Net income per common share - diluted
Continuing operations..................................... $ 0.85 $ 0.41 $ 1.80 $ 3.05
Discontinued operations................................... (0.05) (0.01) (0.05) (0.01)
--------------- -------------- --------------- ---------------
$ 0.80 $ 0.40 $ 1.75 $ 3.04
=============== ============== =============== ===============
Net income per depositary share of Equity Shares, Series A
(basic and diluted) ................................. $ 0.61 $ 0.61 $ 1.23 $ 1.23
=============== ============== =============== ===============
Basic weighted average common shares outstanding............. 168,348 168,028 168,330 168,307
=============== ============== =============== ===============
Diluted weighted average common shares outstanding........... 168,528 168,479 168,501 168,731
=============== ============== =============== ===============
Weighted average shares of Equity Shares, Series A (basic
and diluted)......................................... 8,377 8,744 8,377 8,744
=============== ============== =============== ===============
See accompanying notes.
2
PUBLIC STORAGE
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(Amounts in thousands, except share data)
(Unaudited)
Accumulated
Cumulative Retained Other
Preferred Common Paid-in Earnings Comprehensive
Shares Shares Capital (Deficit) Loss
-------------- ----------- ------------- -------------- -------------
Balance at December 31, 2008....................... $ 3,424,327 $ 16,829 $ 5,590,093 $ (290,323) $ (31,931)
Repurchase of cumulative preferred shares (982,000
shares) (Note 8)................................. (24,550) - 7,015 - -
Redemption of preferred partnership units (Note 7). - - 72,000 - -
Issuance of common shares in connection with
share-based compensation (75,971 shares)
(Note 10)....................................... - 8 761 - -
Stock-based compensation expense (Note 10) ........ - - 3,332 - -
Adjustments of redeemable noncontrolling
interests in subsidiaries to liquidation value
(Note 7)........................................ - - - (255) -
Net income......................................... - - - 358,816 -
Net income allocated based upon income of the
consolidated entities to (Note 7):
Redeemable noncontrolling interests in
subsidiaries................................. - - - (506) -
Permanent noncontrolling equity interests...... - - - (14,136) -
Distributions to equity holders:
Cumulative preferred shares (Note 8)............ - - - (116,216) -
Permanent noncontrolling interests in
subsidiaries ................................. - - - - -
Equity Shares, Series A ($1.225 per depositary
share)........................................ - - - (10,262) -
Holders of unvested restricted share units...... - - - (674) -
Common Shares ($1.10 per share)................. - - - (185,176) -
Other comprehensive income: Currency translation
adjustments (Note 2)............................. - - - - 13,841
-------------- ----------- ------------- -------------- -------------
Balance at June 30, 2009........................... $ 3,399,777 $ 16,837 $ 5,673,201 $ (258,732) $ (18,090)
============== =========== ============= ============== =============
Equity of
Total Public Permanent
Storage Noncontrolling
Shareholders' Interests
Equity In Subsidiaries Total Equity
------------- ---------------- -------------
Balance at December 31, 2008....................... $ 8,708,995 $ 358,109 $ 9,067,104
Repurchase of cumulative preferred shares (982,000
shares) (Note 8)................................. (17,535) - (17,535)
Redemption of preferred partnership units (Note 7). 72,000 (225,000) (153,000)
Issuance of common shares in connection with
share-based compensation (75,971 shares)
(Note 10)....................................... 769 - 769
Stock-based compensation expense (Note 10) ........ 3,332 - 3,332
Adjustments of redeemable noncontrolling
interests in subsidiaries to liquidation value
(Note 7)........................................ (255) - (255)
Net income......................................... 358,816 - 358,816
Net income allocated based upon income of the
consolidated entities to (Note 7):
Redeemable noncontrolling interests in
subsidiaries................................. (506) - (506)
Permanent noncontrolling equity interests...... (14,136) 14,136 -
Distributions to equity holders:
Cumulative preferred shares (Note 8)............ (116,216) - (116,216)
Permanent noncontrolling interests in
subsidiaries ................................. - (13,411) (13,411)
Equity Shares, Series A ($1.225 per depositary
share)........................................ (10,262) - (10,262)
Holders of unvested restricted share units...... (674) - (674)
Common Shares ($1.10 per share)................. (185,176) - (185,176)
Other comprehensive income: Currency translation
adjustments (Note 2)............................. 13,841 - 13,841
------------- ---------------- -------------
Balance at June 30, 2009........................... $ 8,812,993 $ 133,834 $ 8,946,827
============= ================= =============
See accompanying notes.
3
PUBLIC STORAGE
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
For the Six Months Ended
June 30,
-----------------------------
2009 2008
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Cash flows from operating activities:
Net income............................................................... $ 358,816 $ 663,896
Adjustments to reconcile net income to net cash provided by operating
activities:
Gain on disposition of real estate investments, including amounts in
discontinued operations.............................................. (6,903) (341,773)
Gain on early retirement of debt........................................ (4,114) -
Impairment charge on intangible asset................................... 8,205 -
Depreciation and amortization including amounts in discontinued
operations........................................................... 169,484 217,877
Equity share of income allocations from investee's repurchases of
preferred stock ..................................................... (16,284) -
Distributions received from real estate entities in excess of equity in
earnings............................................................. 9,783 11,788
Foreign currency exchange loss (gain)................................... 1,528 (40,969)
Adjustments for stock-based compensation, amortization of note premium,
and other............................................................ 21,733 371
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Total adjustments.................................................... 183,432 (152,706)
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Net cash provided by operating activities............................ 542,248 511,190
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Cash flows from investing activities:
Capital improvements to real estate facilities ......................... (32,575) (31,571)
Construction in process................................................. (5,933) (40,081)
Acquisitions of real estate facilities.................................. - (20,992)
Proceeds from sales of other real estate investments.................... 10,261 493
Proceeds from the disposition of interest in Shurgard Europe (Note 3)... - 609,059
Deconsolidation of Shurgard Europe (Note 3)............................. - (34,588)
Investment in Shurgard Europe........................................... - (32,911)
Other investing activities.............................................. (823) 1,157
------------- -------------
Net cash (used in) provided by investing activities.................. (29,070) 450,566
------------- -------------
Cash flows from financing activities:
Principal payments on notes payable..................................... (3,746) (6,200)
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......................... 769 5,090
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....................... (312,328) (316,980)
Distributions paid to noncontrolling equity interests................... (14,077) (19,401)
------------- -------------
Net cash used in financing activities................................ (609,539) (434,740)
------------- -------------
Net (decrease) increase in cash and cash equivalents........................ (96,361) 527,016
Net effect of foreign exchange translation on cash.......................... 520 2,542
Cash and cash equivalents at the beginning of the period.................... 680,701 245,444
------------- -------------
Cash and cash equivalents at the end of the period.......................... $ 584,860 $ 775,002
============= =============
See accompanying notes.
4
PUBLIC STORAGE
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
(Continued)
For the Six Months Ended
June 30,
--------------------------------
2009 2008
-------------- ---------------
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES:
Foreign currency translation adjustment:
Real estate facilities, net of accumulated depreciation........... $ (2,022) $ (96,581)
Construction in process........................................... - (956)
Investment in real estate entities................................ (11,633) 891
Intangible assets, net............................................ - (4,526)
Loan receivable from Shurgard Europe.............................. 1,862 98
Other assets...................................................... - (3,699)
Notes payable..................................................... - 28,912
Accrued and other liabilities..................................... - 5,879
Permanent noncontrolling equity interests in subsidiaries......... - 7,249
Accumulated other comprehensive income............................ 12,313 65,275
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)
Real estate acquired in exchange for assumption of mortgage note...... - (10,250)
Mortgage note assumed in connection with the acquisition of real
estate......................................................... - 10,250
Revaluation of notes payable:
Notes payable..................................................... - 224
Other assets...................................................... - (224)
See accompanying notes.
5
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 30, 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 185 self-storage facilities located in Europe
which operate under the "Shurgard Storage Centers" name. Included in the
2,010 self-storage facilities is one facility for which we discontinued
operations during the three months ended June 30, 2009 in connection with
an eminent domain proceeding. 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 and six months ended June 30, 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 in our December 31, 2008,
March 31, 2008, and June 30, 2008 financial statements have been
reclassified to conform to the June 30, 2009 presentation, including
discontinued operations, the grouping of the separate captions "cumulative
earnings" and "cumulative distributions" into "retained earnings (deficit)"
on our condensed consolidated balance sheet, as well as reclassifications
required by newly implemented accounting standards described below.
The Company has evaluated subsequent events through August 7,
2009, which represents the filing date of this Form 10-Q with the
Securities and Exchange Commission ("SEC"). As of August 7, 2009, there
were no subsequent events which required recognition or disclosure.
6
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
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 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 by $351,640,000, increased redeemable
noncontrolling interests in subsidiaries by $12,777,000, and decreased
minority interest by $364,417,000, 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 $10,142,000 and
$17,741,000 for the three and six months ended June 30, 2008, respectively,
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 our common
shareholders of approximately $146,000 and $1,971,000 and a decrease in
diluted weighted average common shares outstanding of 335,000 and 291,000
for the three and six months ended June 30, 2008, respectively. As a result
of these changes, basic and diluted earnings per common share each
decreased approximately $0.01, as compared to amounts previously presented
for the three and six months ended June 30, 2008, respectively.
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
7
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
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 June 30, 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.
At June 30, 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 June 30, 2009,
PSB owns approximately 19.6 million rentable square feet of commercial
space, Shurgard Europe has interests in 184 self-storage facilities in
Europe with 9.8 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
we expect to 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
taxes, which are presented in general and administrative expense in our
accompanying condensed consolidated statements of income. We have concluded
that there are no significant uncertain tax positions requiring recognition
in our financial statements with respect to all tax periods which remain
subject to examination by major tax jurisdictions as of June 30, 2009, as
well as the six month interim period ended June 30, 2009.
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.
8
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
Other Assets
------------
Other assets primarily consist of prepaid expenses, investments in
held-to-maturity debt securities, accounts receivable, interest receivable,
and restricted cash.
Accrued and Other Liabilities
-----------------------------
Accrued and other liabilities consist primarily of real property
tax accruals, tenant prepayments of rents, accrued interest payable, losses
and loss adjustment liabilities for our own exposures and estimated losses
related to our tenant insurance activities, and trade payables.
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
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 and the underlying
characteristics of our cash and cash equivalents, 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 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. We have
a loan receivable from Shurgard Europe. See "Loan Receivable from Shurgard
Europe" below for information regarding our fair value measurement of this
instrument.
At June 30, 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.
We estimate the fair value of our notes payable to be $529,532,000
at June 30, 2009, based upon discounting the future current 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.
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
9
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
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 June 30, 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 June 30, 2009 which would have required an
interim evaluation of goodwill for impairment.
Intangible Assets
-----------------
We acquire finite-lived intangible assets representing primarily
the estimated value of tenants in place (a "Tenant Intangible") at the date
of the acquisition of each respective acquired facility. Tenant Intangibles
are amortized relative to the benefit of the tenants in place to each
period. At June 30, 2009, our Tenant Intangibles have a net book value of
$21,687,000 ($33,181,000 at December 31, 2008), which is net of accumulated
amortization and impairment charges of $347,499,000 ($336,005,000 at
December 31, 2008).
Amortization expense of $1,032,000 and $11,722,000 was recorded
for our Tenant Intangibles for the three months ended June 30, 2009 and
2008, respectively and $3,289,000 and $40,133,000 was recorded for the six
months ended June 30, 2009 and 2008, respectively. Also during the three
and six months ended June 30, 2009, we recorded an impairment charge of
$8,205,000 in connection with an eminent domain proceeding at one of our
facilities. This impairment charge is reflected under "discontinued
operations" on our condensed consolidated statement of income. The
estimated future amortization expense for our finite-lived intangible
assets is as follows:
2009 (remainder of) $ 2,062,000
2010 2,113,000
2011 1,590,000
2012 1,521,000
2013 1,414,000
2014 and beyond 12,987,000
-----------------
$ 21,687,000
=================
We also have an intangible asset 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 June 30, 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
10
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
excess carrying value over such future undiscounted cash flows, an
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, other than the impairment totaling $8,205,000 described above
with respect to intangible assets recorded in the three months ended June
30, 2009.
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 1.405 U.S.
Dollars per Euro at June 30, 2009 (1.409 at December 31, 2008), and average
exchange rates of 1.361 and 1.563 for the three months ended June 30, 2009
and 2008, respectively and 1.334 and 1.530 for the six months ended June
30, 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, "Fair Value Measurement"
("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. See "Loan Receivable
from Shurgard Europe" and "Financial Instruments", as well as "Redeemable
Noncontrolling Interests in Subsidiaries" and "Other Permanent
Noncontrolling Interests in Subsidiaries" in Note 7 for information
regarding our fair value measurements.
11
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
Loan Receivable from Shurgard Europe
------------------------------------
As of June 30, 2009, we had a loan receivable from Shurgard Europe
totaling $550,499,000 ($552,361,000 at December 31, 2008).
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. If Shurgard Europe acquires its partner's interests in First Shurgard
and Second Shurgard (collectively, the "Existing European Joint Ventures"),
we have agreed to provide additional loans to Shurgard Europe, under the
same terms as the existing loans, for up to (euro)185 million ($259.9
million as of June 30, 2009). This commitment was also extended to March
31, 2010 and was originally for (euro)305 million, but was reduced as the
result of refinancing one of the joint venture loans. 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 collected from Shurgard Europe 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 for financial statement purposes. During
each applicable period, because we 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 and six months
ended June 30, 2009 and 2008. For the three and six months ended June 30,
2009, we recorded interest income of approximately $5,797,000 and
$10,974,000, respectively, related to the loan. For the three and six
months ended June 30, 2008, we recorded interest income of approximately
$6,319,000 related to the loan.
The $5,797,000 in interest income for the three months ended June
30, 2009 reflects the gross amount charged to Shurgard Europe totaling
$11,366,000 less our 49% pro-rata portion totaling $5,569,000 which is
reflected as part of our equity in earnings of real estate entities rather
than interest and other income. The $10,974,000 in interest income for the
six months ended June 30, 2009 reflects the gross amount charged to
Shurgard Europe totaling $21,517,000 less our 49% pro-rata portion totaling
$10,543,000 which is reflected as part of our equity in earnings of real
estate entities rather than interest and other income. The $6,319,000 in
interest income for the three and six months ended June 30, 2008 reflects
the gross amount charged to Shurgard Europe totaling $12,390,000 less our
49% pro-rata portion totaling $6,071,000 which is reflected as equity in
earnings of real estate entities rather than interest and other income.
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; however, due to dysfunctions in
current credit markets, it is difficult to estimate a market rate.
Nonetheless, based upon the estimated market rate combined with the short
term to maturity, we believe the carrying value of the loan approximates
fair value. The characteristics of the loan and comparative metrics
utilized in our evaluation represent significant unobservable inputs, which
are "Level 3" inputs as the term is utilized in SFAS No. 157.
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
12
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
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.
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 For the Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2009 2008 2009 2008
----------- ------------ ----------- -------------
(Amounts in thousands)
Net income................................ $ 205,387 $ 143,955 $ 358,816 $ 663,896
Other comprehensive income (loss):
Aggregate foreign currency translation
adjustments for the period.......... 57,249 (947) 12,313 65,275
Less: foreign currency translation
adjustments recognized during the
period and reflected in "Gain
(loss) on disposition of real
estate investments"................. - - - (37,854)
Less: foreign currency translation
adjustments reflected in net income
as "Foreign currency (gain) loss"... (33,205) 2 1,528 (40,969)
----------- ------------ ----------- -------------
Other comprehensive income (loss) income
for the period...................... 24,044 (945) 13,841 (13,548)
----------- ------------ ----------- -------------
Total comprehensive income................ $ 229,431 $ 143,010 $ 372,657 $ 650,348
=========== ============ =========== =============
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. During the six months ended June 30,
2009, we decided to terminate our truck rental and containerized storage
business units. 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. As a result, we
reclassified all of the historical revenues and expenses of these
operations from ancillary revenues and ancillary expenses, into
"discontinued operations." Included in discontinued operations is $3.5
million in expenses incurred in the six months ended June 30, 2009 related
primarily to disposing of trucks used in our truck rental operations. Also
included in discontinued operations for the three and six months ended June
30, 2009 is an $8.2 million impairment charge on intangible assets in
connection with an eminent domain proceeding at one of our self-storage
facilities.
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.
13
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
Net income allocated to our regular common shares from continuing
operations is computed by eliminating the net income or loss from
discontinued operations allocable to our regular common shares, from net
income allocated to our regular common shares.
Basic net income per share, basic net income (loss) from
discontinued operations per share, and basic net income from continuing
operations per share are computed using the weighted average common shares
outstanding. Diluted net income per share, diluted net income (loss) from
discontinued operations per share, and diluted net income from continuing
operations per share are computed using the weighted average common shares
outstanding, adjusted for the impact, if dilutive, of stock options
outstanding (Note 10). Diluted net loss per share from discontinued
operations does not include the impact of stock options outstanding,
because including stock options would be anti-dilutive when applied to the
loss on discontinued operations for each period presented.
The following table reflects the components of the calculations of
our basic and diluted net income per share, basic and diluted net income
(loss) from discontinued operations per share, and basic and diluted net
income from continuing operations per share which are not already otherwise
set forth on the face of our condensed consolidated statements of income:
For the Three Months Ended For the Six Months Ended
June 30, June 30,
---------------------------- ---------------------------
2009 2008 2009 2008
------------ -------------- ------------ ------------
(Amounts in thousands)
Net income allocable to common shareholders from
------------------------------------------------
continuing operations and discontinued operations:
--------------------------------------------------
Net income allocable to common shareholders.......... $ 135,487 $ 67,978 $ 294,982 $ 512,806
Eliminate: Loss on Discontinued operations allocable
to common shareholders ........................... 8,333 1,286 8,625 2,462
------------ -------------- ------------ ------------
Net income from continuing operations allocable to
common shareholders............................... $ 143,820 $ 69,264 $ 303,607 $ 515,268
============ ============== ============ ============
Weighted average common shares and equivalents
----------------------------------------------
outstanding:
------------
Basic weighted average common shares outstanding.... 168,348 168,028 168,330 168,307
Net effect of dilutive stock options - based on
treasury stock method using average market price . 180 451 171 424
------------ -------------- ------------ ------------
Diluted weighted average common shares outstanding.. 168,528 168,479 168,501 168,731
============ ============== ============ ============
Recent Accounting Pronouncements and Guidance
---------------------------------------------
Codification and Hierarchy of GAAP
----------------------------------
In June 2009, the Financial Accounting Standards Board (the
"FASB") issued SFAS 168, "The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles - a replacement
of FASB Statement No 162." SFAS 168 established the effective date for use
of the FASB codification for interim and annual periods ending after
September 15, 2009. Companies should account for the adoption of the
guidance on a prospective basis. We do not anticipate the adoption of SFAS
168 will have a material impact on our financial statements. We will update
our disclosures for the appropriate FASB codification references after
adoption, in the third quarter of 2009.
14
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
Accounting for Transfers of Financial Assets
--------------------------------------------
In June 2009, the FASB also issued SFAS 167 "Amendments to FASB
Interpretation No. 46", and SFAS 166 "Accounting for Transfers of Financial
Assets - an Amendment of FASB Statement No. 140." SFAS 167 amends the
existing guidance around FIN 46(R), to address the elimination of the
concept of a qualifying special purpose entity. Also, it replaces the
quantitative-based risks and rewards calculation for determining which
enterprise has a controlling financial interest in a variable interest
entity with an approach focused on identifying which enterprise has the
power to direct the activities of a variable interest entity and the
obligation to absorb losses of the entity or the right to receive benefits
from the entity. Additionally, SFAS 167 provides for additional disclosures
about an enterprise's involvement with a variable interest entity. SFAS 166
amends SFAS 140 to eliminate the concept of a qualifying special purpose
entity, amends the derecognition criteria for a transfer to be accounted
for as a sale under SFAS 140, and will require additional disclosure over
transfers accounted for as a sale. The effective date for both
pronouncements is for the first fiscal year beginning after November 15,
2009, and will require retrospective application. We are still assessing
the potential impact of adopting these two statements.
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 $613,201,000 paid by the institutional investor 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
line-item "gain (loss) on disposition of real estate investments" in our
condensed consolidated statement of income for the six months ended June
30, 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
June 30, 2009
4. Real Estate Facilities
----------------------
Activity in real estate facilities is as follows:
Six Months Ended
June 30, 2009
----------------
(Amounts in
thousands)
Operating facilities, at cost:
Beginning balance....................................... $ 10,207,022
Capital improvements.................................... 32,575
Newly developed facilities opened for operations........ 13,570
Disposition of real estate facilities................... (5,365)
Impact of foreign exchange rate changes................. 2,851
----------------
Ending balance.......................................... 10,250,653
----------------
Accumulated depreciation:
Beginning balance....................................... (2,405,473)
Depreciation expense.................................... (163,920)
Disposition of real estate facilities................... 2,007
Impact of foreign exchange rate changes................. (829)
----------------
Ending balance.......................................... (2,568,215)
----------------
Construction in process:
Beginning balance...................................... 20,340
Current development (includes $347 in capitalized interest
for the six months ended June 30, 2009).............. 5,933
Newly developed facilities opened for operation........ (13,570)
----------------
Ending balance......................................... 12,703
----------------
Total real estate facilities at June 30, 2009............ $ 7,695,141
================
During the six months ended June 30, 2009, we completed various
expansion projects with total costs of $13,570,000. We also sold an
existing real estate facility as well as a portion of certain real estate
facilities during the six months ended June 30, 2009, primarily in
connection with 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 June 30, 2009 includes the development
costs relating to various expansions to existing self-storage facilities.
5. Investments in Real Estate Entities
-----------------------------------
During the three and six months ended June 30, 2009, we recognized
earnings from our investments in real estate entities of $7,398,000, and
$30,209,000, respectively, and received cash distributions from such
investments, totaling $11,889,000, and $23,708,000, respectively. During
the three and six months ended June 30, 2008, we recognized earnings from
our investments in real estate entities of $4,632,000, and $7,361,000,
respectively, and received cash distributions from such investments,
totaling $12,656,000, and $19,149,000, respectively. Included in earnings
recognized for the six months ended June 30, 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.
16
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
During the six months ended June 30, 2009 and 2008, in addition to
the impact of earnings recognized and cash distributions received, our
investments in real estate entities increased by $11,633,000 and decreased
by $891,000, respectively, due to foreign currency translation adjustments.
The following table sets forth our investments in the real estate
entities at June 30, 2009 and December 31, 2008, and our equity in earnings
of real estate entities for the three and six months ended June 30, 2009
and 2008 (amounts in thousands):
Investments in Real Estate
Entities at
--------------------------------
June 30, December 31,
2009 2008
--------------- ---------------
PSB............................ $ 280,120 $ 265,650
Shurgard Europe................ 268,478 264,145
Other Investments.............. 14,134 14,803
--------------- ---------------
Total...................... $ 562,732 $ 544,598
=============== ===============
Equity in Earnings of Real Equity in Earnings of Real
Estate Entities for the Estate Entities for the
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2009 2008 2009 2008
------------ ------------- ----------- --------------
PSB............................ $ 5,201 $ 2,847 $ 25,667 $ 5,192
Shurgard Europe................ 1,709 1,457 3,608 1,457
Other Investments.............. 488 328 934 712
------------ ------------- ----------- --------------
Total...................... $ 7,398 $ 4,632 $ 30,209 $ 7,361
============ ============= =========== ==============
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 June 30, 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 June 30, 2009
and 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 June 30, 2009 ($48.44 per share of
PSB common stock), the shares and units had a market value of approximately
$616.3 million as compared to a book value of $280.1 million.
17
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
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 six months ended June 30,
--------------------------------
Total revenue.................................. $ 138,073 $ 140,929
Costs of operations and general and
administrative expense....................... (47,818) (48,560)
Depreciation and amortization.................. (43,803) (50,567)
Other items.................................... (76) (1,373)
-------------- -------------
Net income................................... $ 46,376 $ 40,429
============== =============
At June 30, At December 31,
2009 2008
-------------- -------------
(Amounts in thousands)
Total assets (primarily real estate)........... $ 1,400,457 $ 1,469,323
Debt and other liabilities..................... 102,312 105,736
Equity......................................... 1,298,145 1,363,587
INVESTMENT IN SHURGARD EUROPE
-----------------------------
At June 30, 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 and six months ended June 30, 2009, we recorded an
aggregate of $1,709,000 and $3,608,000, respectively, in equity in earnings
of real estate entities with respect to our investment in Shurgard Europe.
For the three and six months ended June 30, 2008, we recorded an aggregate
of $1,457,000 in equity in earnings of real estate entities with respect to
our investment in Shurgard Europe. During the six months ended June 30,
2009 and 2008, our investment in Shurgard Europe increased by approximately
$11,633,000 and decreased by $891,000, respectively, 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.
18
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
For the Three Months Ended For the Six Months Ended
June 30, June 30,
---------------------------------- --------------------------------
2009 2008 2009 2008
--------------- --------------- --------------- --------------
(Amounts in thousands)
Self-storage and ancillary revenues.................. $ 53,613 $ 63,386 $ 104,657 $ 123,021
Interest and other income (expense).................. 64 (75) 193 356
Self-storage and ancillary cost of operations........ (25,461) (27,499) (49,383) (53,563)
Trademark license fee payable to Public Storage...... (384) (418) (746) (1,060)
Depreciation and amortization........................ (17,376) (25,604) (34,812) (47,475)
General and administrative........................... (3,364) (2,390) (5,082) (7,034)
Interest expense on third party debt ................ (4,198) (7,235) (8,423) (14,127)
Interest expense on loan payable to Public Storage... (11,366) (12,390) (21,517) (22,798)
Income (expenses) from foreign currency exchange .... 972 763 385 655
Discontinued operations.............................. - (8) 8 (20)
--------------- --------------- --------------- --------------
Net loss (a)....................................... $ (7,500) $ (11,470) $ (14,720) $ (22,045)
=============== =============== =============== ==============
(a) Approximately $764,000 in net income and $1,636,000 in net loss was
allocated to permanent noncontrolling equity interests in subsidiaries
for the three months ended June 30, 2009 and 2008, respectively, of
which $2,858,000 and $3,448,000, respectively, represented depreciation
and amortization expense. During the six months ended June 30, 2009 and
2008, approximately $178,000 in net income and $3,778,000 in net loss,
respectively, was allocated to permanent noncontrolling equity
interests in subsidiaries, of which $5,597,000 and $6,632,000,
respectively, represented depreciation and amortization expense.
At June 30, At December 31,
2009 2008
----------- ---------------
(Amounts in thousands)
Total assets (primarily self-storage
facilities)................................... $ 1,610,400 $ 1,615,370
Total debt to third parties.................... 335,033 362,352
Total debt to Public Storage................... 550,499 552,361
Other liabilities.............................. 78,827 82,247
Equity......................................... 646,041 618,410
Our equity in earnings of Shurgard Europe for the three and six
months ended June 30, 2009 and the six months ended June 30, 2008 totaling
$1,709,000, $3,608,000 and $1,457,000, respectively, are comprised of (i)
losses of $4,049,000, $7,300,000 and $4,819,000, respectively, representing
our 49% pro-rata share of Shurgard Europe's net loss for the respective
periods and (ii) income of $5,758,000, $10,908,000, and $6,276,000,
respectively, representing our 49% pro-rata share of the interest income
and trademark license fees received from Shurgard Europe for the respective
periods (such amounts are presented as equity in earnings of real estate
entities rather than interest and other income).
OTHER INVESTMENTS
-----------------
At June 30, 2009, other investments include an aggregate common
equity ownership of approximately 24% in entities that collectively own 19
self-storage facilities.
19
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
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 June 30, 2009:
2009 2008
------------ --------------
(Amounts in thousands)
For the six months ended June 30,
--------------------------------
Total revenue........................ $ 8,266 $ 8,439
Cost of operations and other expenses (3,310) (3,320)
Depreciation and amortization........ (966) (1,076)
------------ --------------
Net income....................... $ 3,990 $ 4,043
============ ==============
At June 30, At December 31,
2009 2008
------------ --------------
(Amounts in thousands)
Total assets (primarily self-storage
facilities)...................... $ 37,926 $ 40,168
Total accrued and other liabilities.. 1,047 888
Total Partners' equity............... 36,879 39,280
20
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
6. Notes Payable and Line of Credit
--------------------------------
The carrying amounts of our notes payable at June 30, 2009 and
December 31, 2008 consist of the following (dollar amounts in thousands):
June 30, 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 $2,856 of unamortized premium at June 30,
2009 and $7,433 at December 31, 2008) ......................... 106,173 207,433
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
$567,582 at June 30, 2009 and stated note rates between 4.95%
and 8.75%, maturing at varying dates between July 2009 and
August 2015 (carrying amount includes $4,809 of unamortized
premium at June 30, 2009 and $5,634 at December 31, 2008) ..... 231,807 236,378
-------------- --------------
Total notes payable........................................ $ 524,440 $ 643,811
============== ==============
When assumed in connection with property or other acquisitions,
notes payable are recorded at their respective estimated fair values upon
acquisition. 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 June 30, 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 June 30, 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 June 30, 2009). We had no outstanding borrowings on our Credit
Agreement at June 30, 2009 or at August 7, 2009. At June 30, 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 $20,000,000 ($17,736,000 at December 31, 2008).
On February 12, 2009, we acquired $110,223,000 face amount
($113,736,000 book value) of our existing unsecured notes pursuant to a
21
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
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 six months ended June 30, 2009, representing the difference between the
book value of $113,736,000 and the retirement amount paid plus tender offer
costs.
Our notes payable and our Credit Agreement each have various
customary restrictive covenants, all of which have been met at June 30,
2009.
At June 30, 2009, approximate principal maturities of our notes
payable are as follows (amounts in thousands):
Unsecured Mortgage Notes
Notes Payable Payable Total
-------------- -------------- -----------
2009........................ $ 909 $ 4,559 $ 5,468
2010........................ 1,900 11,037 12,937
2011........................ 103,364 27,819 131,183
2012........................ - 55,575 55,575
2013........................ 186,460 64,961 251,421
Thereafter.................. - 67,856 67,856
-------------- -------------- -----------
$ 292,633 $ 231,807 $ 524,440
============== ============== ===========
Weighted average effective
rate 5.8% 5.5% 5.7%
============== ============== ===========
We incurred interest expense (including interest capitalized as
real estate totaling $347,000 and $1,182,000, respectively for the six
months ended June 30, 2009 and 2008) with respect to our notes payable,
capital leases, debt to joint venture partner and line of credit
aggregating $15,763,000 and $27,270,000 for the six months ended June 30,
2009 and 2008, respectively. These amounts were comprised of $17,652,000
and $29,704,000 in cash paid for the six months ended June 30, 2009 and
2008, respectively, less $1,889,000 and $2,434,000 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, except in the circumstances of an entity
liquidation, to redeem the underlying securities for cash, assets, or other
securities 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."
Redeemable Noncontrolling Interests in Subsidiaries
---------------------------------------------------
At June 30, 2009, the Other Redeemable Noncontrolling Interests in
Subsidiaries represent equity interests in three entities that own in
22
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
aggregate 14 self-storage facilities. At December 31, 2008, these interests
were increased and retained earnings (deficit) was 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 of the governing documents 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
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.
During the three and six months ended June 30, 2009, we allocated
a total of $244,000 and $506,000, respectively, in income to these
interests. During the same periods in 2008, we allocated a total of
$274,000 and $513,000, respectively, of income to these interests. During
the six months ended June 30, 2009, these interests were increased by
$255,000 to adjust to their estimated liquidation value (which approximates
fair value). During the six months ended June 30, 2009 and 2008, we paid
distributions to these interests totaling $666,000 and $645,000,
respectively.
Permanent Noncontrolling Interests in Subsidiaries
--------------------------------------------------
At June 30, 2009, the Other Permanent Noncontrolling Interests in
Subsidiaries represent equity interests in 28 entities that own an
aggregate of 94 self-storage facilities (the "Other Permanent
Noncontrolling Interests in Subsidiaries") and our various preferred
partnership units (the "Preferred Partnership Interests"). These interests
are presented as equity because the holders of the interests do not have
the ability to require us to redeem them for cash or other assets, or other
securities that would not also be classified as equity.
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) preferred partnership units.
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 paid-in capital of approximately $72.0 million for the six
months ended June 30, 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 June 30, 2009, our preferred partnership units outstanding were
comprised of 4,000,000 units of our 7.250% Series J preferred units
($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.
During the three and six months ended June 30, 2009, we allocated
a total of $1,813,000 and $5,830,000, respectively, in income to these
interests based upon distributions paid. During the same periods in 2008,
we allocated a total of $5,403,000 and $10,806,000, respectively, in income
to these interests based upon distributions paid.
23
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
In addition, during the six months ended June 30, 2009, we
allocated $72,000,000 in income from these interests in determining net
income allocable to Public Storage shareholders 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.
Other Permanent Noncontrolling Interests in Subsidiaries
--------------------------------------------------------
At June 30, 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.
During the three and six months ended June 30, 2009, we allocated
a total of $4,158,000 and $8,306,000, respectively, in income to these
interests. During the same periods in 2008, we allocated a total of
$4,465,000 and $6,422,000, respectively, of income to these interests.
During the six months ended June 30, 2009 and 2008, we paid distributions
to these interests totaling $7,581,000 and $7,950,000, respectively.
24
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
8. Public Storage Shareholders' Equity
-----------------------------------
Cumulative Preferred Shares
---------------------------
At June 30, 2009 and December 31, 2008, we had the following series
of Cumulative Preferred Shares of beneficial interest outstanding:
At June 30, 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
June 30, 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 share 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.
25
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 for
the six months ended June 30, 2009.
Common Shares
-------------
Common Shares
-------------
During the six months ended June 30, 2009, we issued 75,971 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 six months ended June
30, 2009, we did not repurchase any of our common shares. Through June 30,
2009, we have repurchased a total of 23,721,916 of our common shares
pursuant to this authorization.
Equity Shares, Series A
-----------------------
At June 30, 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. During the six months ended June 30, 2009 and 2008, we paid
quarterly distributions to the holders of the Equity Shares, Series A of
$0.6125 per share for each of the quarters ended March 31 and June 30.
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.
26
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
Equity Shares, Series AAA
-------------------------
In November 1999, we sold $100,000,000 (4,289,544 shares) of
Equity Shares, Series AAA ("Equity Shares AAA") to a newly formed joint
venture. The Equity Shares AAA ranks on a parity with common shares and
junior to the Senior Preferred Shares with respect to general preference
rights, and has a liquidation amount equal to 120% of the amount
distributed to each common share. Annual distributions per share are equal
to the lesser of (i) five times the amount paid per common share or (ii)
$2.1564. We have no obligation to pay distributions if no distributions are
paid to common shareholders. During the six months ended June 30, 2009 and
2008, we paid quarterly distributions to the holder of the Equity Shares,
Series AAA of $0.5391 per share for each of the quarters ended March 31 and
June 30. For all periods presented, the Equity Shares, Series AAA and
related dividends are eliminated in consolidation.
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 June 30, 2009 and 2008, respectively, and $185.8 million ($1.10 per
share) and $185.6 million ($1.10 per share), for the six months ended June
30, 2009 and 2008, respectively. Equity Shares, Series A dividends totaled
$5.1 million ($0.6125 per share) and $5.3 million ($0.6125 per share), for
the three months ended June 30, 2009 and 2008, respectively, and totaled
$10.3 million ($1.225 per share) and $10.7 million ($1.225 per share), for
the six months ended June 30, 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 June 30, 2009 ($3,424,327,000 at December 31,
2008) and dividends aggregating $58.1 million and $60.3 million for the
three months ended June 30, 2009 and 2008, respectively, and $116.2 million
and $120.7 million for the six months ended June 30, 2009 and 2008,
respectively.
9. Related Party Transactions
--------------------------
Mr. Hughes, Public Storage's Chairman of the Board of Trustees,
and his family (collectively the "Hughes Family") have ownership interests
in, and operate approximately 51 self-storage facilities in Canada using
the "Public Storage" brand name ("PS Canada") pursuant to a royalty-free
trademark license agreement with Public Storage. We currently do not own
any interests in these facilities nor do we own any facilities in Canada.
27
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
The Hughes Family owns approximately 20% of our common shares outstanding
at June 30, 2009. We have a right of first refusal to acquire the stock or
assets of the corporation that manages the 51 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 six months ended June 30,
2009 and 2008, we received $390,000 and $441,000, 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.
Public Storage and Mr. Hughes are co-general partners in certain
consolidated partnerships and affiliated partnerships of Public Storage
that are not consolidated. The Hughes Family owns 47.9% of the voting stock
and Public Storage 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, Public Storage and
certain affiliates of Public Storage, for occurrences prior to April 1,
2004 as described below. Public Storage 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 Trustees after considering that the value of the
units had appreciated significantly since 1998 and 1999 and that the
exercise price for the Company was substantially below the prices paid to
acquire similar limited partner units in third party transactions. The
acquisition was effective January 1, 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 and six months ended June 30, 2009, we recorded
$900,000 and $1,500,000, respectively, in stock option compensation expense
related to options granted after January 1, 2002, as compared to $951,000
and $1,367,000 for the same periods in 2008.
A total of 1,485,000 stock options were granted during the six
months ended June 30, 2009, 19,619 shares were exercised, and 79,000 shares
were forfeited. A total of 3,783,713 stock options were outstanding at June
30, 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.
28
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
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 six months ended June 30, 2009, 99,050 restricted share
units were granted, 42,022 restricted share units were forfeited and 90,633
restricted share units vested. This vesting resulted in the issuance of
56,352 common shares. In addition, cash compensation was paid to employees
in lieu of 34,281 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 June 30, 2009, approximately 596,607 restricted share units
were outstanding (630,212 at December 31, 2008). A total of $2,580,000 and
$4,593,000 in restricted share expense was recorded for the three and six
months ended June 30, 2009, respectively, as compared to $2,533,000 and
$4,891,000 for the same periods in 2008. Restricted share expense includes
amortization of the grant-date fair value of the units 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.
29
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
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
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
June 30, 2009, our condensed consolidated balance sheet includes an
investment in Shurgard Europe with a book value of $268.5 million ($264.1
million at December 31, 2008) and a loan receivable from Shurgard Europe
totaling (euro)391.9 million ($550.5 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):
30
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
For the three months ended June 30, 2009
Other Items Not
Shurgard Allocated to Total
Self-Storage Europe Ancillary Segments Consolidated
--------------- ------------ ------------- --------------- -------------
(Amounts in thousands)
Revenues:
Self-storage facilities....................... $ 371,630 $ - $ - $ - $ 371,630
Ancillary operations.......................... - - 28,106 - 28,106
Interest and other income..................... - 5,993 - 1,523 7,516
--------------- ------------ ------------- --------------- -------------
371,630 5,993 28,106 1,523 407,252
--------------- ------------ ------------- --------------- -------------
Expenses:
Cost of operations:
Self-storage facilities.................... 124,478 - - - 124,478
Ancillary operations....................... - - 10,374 - 10,374
Depreciation and amortization.................. 83,124 - 672 - 83,796
General and administrative..................... - - - 8,199 8,199
Interest expense............................... - - - 7,288 7,288
--------------- ------------ ------------- --------------- -------------
207,602 - 11,046 15,487 234,135
--------------- ------------ ------------- --------------- -------------
Income (loss) from continuing operations before
equity in earnings of real estate entities
and foreign currency exchange gain............ 164,028 5,993 17,060 (13,964) 173,117
Equity in earnings of real estate entities....... 488 1,709 5,201 - 7,398
Foreign currency exchange gain................... - 33,205 - - 33,205
--------------- ------------ ------------- --------------- -------------
Income (loss) from continuing operations......... 164,516 40,907 22,261 (13,964) 213,720
Discontinued operations.......................... - - - (8,333) (8,333)
--------------- ------------ ------------- --------------- -------------
Net income (loss)................................ $ 164,516 $ 40,907 $ 22,261 $ (22,297) $ 205,387
=============== ============ ============= =============== =============
31
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
For the three months ended June 30, 2008
Other Items Not
Shurgard Allocated to Total
Self-Storage Europe Ancillary Segments Consolidated
-------------- ------------- ------------ --------------- ---------------
(Amounts in thousands)
Revenues:
Self-storage facilities....................... $ 380,770 $ - $ - $ - $ 380,770
Ancillary operations.......................... - - 26,710 - 26,710
Interest and other income..................... - 6,532 - 4,482 11,014
-------------- ------------- ------------ --------------- ---------------
380,770 6,532 26,710 4,482 418,494
-------------- ------------- ------------ --------------- ---------------
Expenses:
Cost of operations:
Self-storage facilities.................... 128,124 - - - 128,124
Ancillary operations....................... - - 12,064 - 12,064
Depreciation and amortization.................. 94,177 - 652 - 94,829
General and administrative..................... - 25,400 - 7,773 33,173
Interest expense............................... - - - 9,601 9,601
-------------- ------------- ------------ --------------- ---------------
222,301 25,400 12,716 17,374 277,791
-------------- ------------- ------------ --------------- ---------------
Income (loss) from continuing operations before
equity in earnings of real estate entities, loss
on disposition of other real estate investments
and foreign currency exchange loss............ 158,469 (18,868) 13,994 (12,892) 140,703
Equity in earnings of real estate entities....... 328 1,457 2,847 - 4,632
Loss on disposition of other real estate
investments................................... - - - (92) (92)
Foreign currency exchange loss................... - (2) - - (2)
-------------- ------------- ------------ --------------- ---------------
Income (loss) from continuing operations......... 158,797 (17,413) 16,841 (12,984) 145,241
Discontinued operations.......................... - - - (1,286) (1,286)
-------------- ------------- ------------ --------------- ---------------
Net income (loss)................................ $ 158,797 $ (17,413) $ 16,841 $ (14,270) $ 143,955
============== ============= ============ =============== ===============
32
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
For the six months ended June 30, 2009
Other Items Not
Shurgard Allocated to Total
Self-Storage Europe Ancillary Segments Consolidated
-------------- ------------- ------------ --------------- ---------------
(Amounts in thousands)
Revenues:
Self-storage facilities....................... $ 742,869 $ - $ - $ - $ 742,869
Ancillary operations.......................... - - 53,941 - 53,941
Interest and other income..................... - 11,354 - 3,795 15,149
-------------- ------------- ------------ --------------- ---------------
742,869 11,354 53,941 3,795 811,959
-------------- ------------- ------------ --------------- ---------------
Expenses:
Cost of operations:
Self-storage facilities.................... 257,952 - - - 257,952
Ancillary operations....................... - - 20,027 - 20,027
Depreciation and amortization.................. 167,110 - 1,652 - 168,762
General and administrative..................... - - - 17,878 17,878
Interest expense............................... - - - 15,416 15,416
-------------- ------------- ------------ --------------- ---------------
425,062 - 21,679 33,294 480,035
-------------- ------------- ------------ --------------- ---------------
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................................. 317,807 11,354 32,262 (29,499) 331,924
Equity in earnings of real estate entities....... 934 3,608 25,667 - 30,209
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................... - (1,528) - - (1,528)
-------------- ------------- ------------ --------------- ---------------
Income (loss) from continuing operations......... 318,741 13,434 57,929 (22,663) 367,441
Discontinued operations.......................... - - - (8,625) (8,625)
-------------- ------------- ------------ --------------- ---------------
Net income (loss)................................ $ 318,741 $ 13,434 $ 57,929 $ (31,288) $ 358,816
============== ============= ============ =============== ===============
33
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
For the six months ended June 30, 2008
Other Items Not
Shurgard Allocated to Total
Self-Storage Europe Ancillary Segments Consolidated
-------------- ------------- ------------ --------------- ---------------
(Amounts in thousands)
Revenues:
Self-storage facilities....................... $ 750,321 $ 54,722 $ - $ - $ 805,043
Ancillary operations.......................... - 4,913 51,834 - 56,747
Interest and other income..................... - 6,532 - 7,326 13,858
-------------- ------------- ------------ --------------- ---------------
750,321 66,167 51,834 7,326 875,648
-------------- ------------- ------------ --------------- ---------------
Expenses:
Cost of operations:
Self-storage facilities.................... 260,125 24,654 - - 284,779
Ancillary operations....................... - 1,409 21,959 - 23,368
Depreciation and amortization.................. 193,604 21,871 1,594 - 217,069
General and administrative..................... - 30,044 - 18,045 48,089
Interest expense............................... - 6,892 - 19,196 26,088
-------------- ------------- ------------ --------------- ---------------
453,729 84,870 23,553 37,241 599,393
-------------- ------------- ------------ --------------- ---------------
Income (loss) from continuing operations before
equity in earnings of real estate entities, gain
on disposition of real estate investments and
foreign currency exchange gain................ 296,592 (18,703) 28,281 (29,915) 276,255
Equity in earnings of real estate entities....... 712 1,457 5,192 - 7,361
Gain on disposition of real estate investments... - 341,865 - (92) 341,773
Foreign currency exchange gain................... - 40,969 - - 40,969
-------------- ------------- ------------ --------------- ---------------
Income (loss) from continuing operations......... 297,304 365,588 33,473 (30,007) 666,358
Discontinued operations.......................... - - - (2,462) (2,462)
-------------- ------------- ------------ --------------- ---------------
Net income (loss)................................ $ 297,304 $ 365,588 $ 33,473 $ (32,469) $ 663,896
============== ============= ============ =============== ===============
34
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 30, 2009, there were
approximately 612,000 certificate holders participating in this program in
the U.S. representing aggregate coverage of approximately $1.4 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.
35
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
Operating Lease Obligations
---------------------------
We lease land, equipment and office space under various operating
leases. At June 30, 2009, the future minimum rental payments required under
our operating leases for the years ending December 31, are as follows
(amounts in thousands):
2009...................................... $ 3,497
2010...................................... 5,858
2011...................................... 5,315
2012...................................... 5,321
2013...................................... 5,201
Thereafter................................ 74,492
-----------
$ 99,684
===========
Expenses under operating leases were approximately $1.3 million
and $2.7 million for the three and six months ended June 30, 2009,
respectively, as compared to $1.3 million and $2.6 million for the same
periods in 2008.
36
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 document 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. Risk that could impact our performance and results
include, but are not limited to, those described in Item 1A, "Risk Factors" in
our most recent Annual Report on Form 10-K and in this Form 10-Q, in our other
filings with the Securities and Exchange Commission, and 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, including
property 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 current
economic conditions;
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"), and risks related to the impact of
new laws and regulations;
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 or
breaches of our data security;
o difficulties in raising capital at a reasonable cost;
o fill-up of our newly developed properties; and
o economic uncertainty due to the impact of war or terrorism.
Our forward-looking statements speak only as of the date of this report or
as of the dates indicated in the statements. We assume no obligation to update,
revise or supplement publicly any forward-looking statements, whether as a
result of new information, future events or otherwise.
37
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 June 30, 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 Internal Revenue Code and applicable state laws. We also believe
that Shurgard, prior to merging with us, 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
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
38
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 June
30, 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 June 30, 2009, PSB owned and operated 19.6 million rentable square
feet of commercial space), (ii) the reinsurance of policies against losses to
goods stored by tenants in our self-storage facilities, (iii) merchandise sales
at our self-storage facilities 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. Our self-storage facilities in the
U.S. comprise approximately 91% of our operating revenue for each of the three
and six months ended June 30, 2009, 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 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
39
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. There can be no assurance that such opportunities may
arise either in the short or long-term.
While historically we have developed real estate facilities, our current
development of real estate facilities has been minimized due to the existing
recession and our belief that our capital can be more effectively put to use in
other ways.
We currently have $584.9 million in cash and cash equivalents on hand at
June 30, 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 JUNE 30, 2009:
-----------------------------------------------------------
Net income to our shareholders for the three months ended June 30, 2009 was
$199.2 million compared to $133.8 million for the same period in 2008,
representing an increase of $65.4 million. This increase is primarily due to (i)
a $33.2 million foreign exchange gain during the three months ended June 30,
2009, (ii) a $25.4 million reduction in general and administrative expenses due
to incentive compensation incurred in the three months ended June 30, 2008
related to our disposition of an interest in Shurgard Europe, and (iii) an $11.0
million reduction in depreciation and amortization, primarily due to reduced
intangible amortization, offset by (iv) a reduction in Same Store facility
operations and (v) an impairment charge included in discontinued operations with
respect to intangible assets totaling $8.2 million in the three months ended
June 30, 2009.
Revenues for the Same Store Facilities decreased 3.5% or $12.6 million in
the three months ended June 30, 2009 as compared to the same period in 2008, due
to a 2.9% reduction in realized rent per occupied square foot, combined with a
1.1% reduction in average occupancies. Cost of operations for the Same Store
Facilities declined 3.4% or $4.1 million in the three months ended June 30, 2009
as compared to the same period in 2008, due primarily to a $2.6 million
reduction in media advertising and a $1.5 million reduction in repairs and
maintenance, offset by a 4.3% ($1.5 million) increase in property tax expense.
For the three months ended June 30, 2009, net income allocable to our
common shareholders (after allocating net income to our preferred and equity
shareholders) was $135.5 million or $0.80 per common share on a diluted basis
compared to $68.0 million or $0.40 per common share on a diluted basis for the
same period in 2008, representing an increase of $67.5 million or $0.40 per
common share on a diluted basis. These increases are primarily due to the impact
of the factors described above.
Weighted average diluted common shares were 168,528,000 and 168,479,000 for
the three months ended June 30, 2009 and 2008, respectively.
OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2009:
---------------------------------------------------------
Net income to our shareholders for the six months ended June 30, 2009 was
$416.2 million compared to $646.2 million for the same period in 2008,
representing a decrease of $230.0 million. This decrease is primarily due to (i)
a gain of $341.8 million in the six months ended June 30, 2008 related to our
disposition of an interest in Shurgard Europe and (ii) an impairment charge
included in discontinued operations with respect to intangible assets totaling
$8.2 million in the six months ended June 30, 2009, (iii) a foreign exchange
gain of $41.0 million during the same period in 2008, and (iv) a reduction in
Same Store operations, partially offset by (v) a $72.0 million reduction in
earnings allocated to our preferred partnership unitholders in the first three
months of 2009 associated with the redemption of securities, (vi) a reduction in
general and administrative expenses due to $27.9 million in incentive
40
compensation incurred in the six months ended June 30, 2008 related to our
disposition of an interest in Shurgard Europe, and (vii) a $26.5 million
reduction in depreciation and amortization related to our domestic assets,
primarily representing reduced intangible amortization.
Revenues for the Same Store Facilities decreased 2.2% or $15.4 million in
the six months ended June 30, 2009 as compared to the same period in 2008, due
to a 1.5% reduction in realized rent per occupied square foot, combined with a
1.1% reduction in average occupancies. Cost of operations for the Same Store
Facilities declined 1.2% or $2.9 million in the six months ended June 30, 2009
as compared to the same period in 2008, due primarily to a $1.4 million
reduction in media advertising and a $2.2 million reduction in repairs and
maintenance, offset by a 4.1% ($2.9 million) increase in property tax expense.
For the six months ended June 30, 2009, net income allocable to our common
shareholders (after allocating net income to our preferred and equity
shareholders) was $295.0 million or $1.75 per common share on a diluted basis
compared to $512.8 million or $3.04 per common share on a diluted basis for the
same period in 2008, representing a decrease of $217.8 million or $1.29 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 168,501,000 and 168,731,000 for
the six months ended June 30, 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 91% of our
total revenues generated for each of the three and six months ended June 30,
2009 and 2008. Net operating income (after depreciation and amortization
expense) with respect to our self-storage operations increased by $5.6 million
and $13.0 million during the three and six months ended June 30, 2009, when
compared to the same periods 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.
41
SELF-STORAGE OPERATIONS
SUMMARY Three Months Ended June 30, Six Months Ended June 30,
----------------------------------------- -----------------------------------------
Percentage Percentage
2009 2008 Change 2009 2008 Change
----------- ----------- ------------ ----------- ----------- ------------
(Dollar amounts in thousands)
Rental income:
Same Store Facilities.......... $ 346,839 $ 359,461 (3.5)% $ 694,024 $ 709,452 (2.2)%
Other Facilities .............. 24,791 21,309 16.3% 48,845 40,869 19.5%
Shurgard Europe Facilities (a). - - - - 54,722 (100.0)%
----------- ----------- ------------ ----------- ----------- ------------
Total rental income.......... 371,630 380,770 (2.4)% 742,869 805,043 (7.7)%
----------- ----------- ------------ ----------- ----------- ------------
Cost of operations:
Same Store Facilities.......... 116,426 120,526 (3.4)% 241,433 244,382 (1.2)%
Other Facilities............... 8,052 7,598 6.0% 16,519 15,743 4.9%
Shurgard Europe Facilities (a). - - - - 24,654 (100.0)%
----------- ----------- ------------ ----------- ----------- ------------
Total cost of operations.... 124,478 128,124 (2.8)% 257,952 284,779 (9.4)%
----------- ----------- ------------ ----------- ----------- ------------
Net operating income (b):
Same Store Facilities.......... 230,413 238,935 (3.6)% 452,591 465,070 (2.7)%
Other Facilities............... 16,739 13,711 22.1% 32,326 25,126 28.7%
Shurgard Europe Facilities (a). - - - - 30,068 (100.0)%
----------- ----------- ------------ ----------- ----------- ------------
Total net operating income. 247,152 252,646 (2.2)% 484,917 520,264 (6.8)%
Total depreciation and
amortization expense ........ (83,124) (94,177) (11.7)% (167,110) (215,475) (22.4)%
----------- ----------- ------------ ----------- ----------- ------------
Total net income............... $ 164,028 $ 158,469 3.5% $ 317,807 $ 304,789 4.3%
=========== =========== ============ =========== =========== ============
Data for Same Store and Other Facilities:
Weighted average square foot
occupancy during the period (c):
Same Store Facilities........... 90.0% 91.0% (1.1)% 88.9% 89.9% (1.1)%
Other Facilities................ 84.4% 79.2% 6.6% 82.2% 76.0% 8.2%
Realized rents per occupied square
foot during the period (d)(e):
Same Store Facilities........... $ 12.52 $ 12.90 (2.9)% $ 12.69 $ 12.88 (1.5)%
Other Facilities................ $ 13.27 $ 13.51 (1.8)% $ 13.46 $ 13.71 (1.8)%
Number of facilities at period end:
Same Store Facilities........... 1,899 1,899 -
Other Facilities................ 92 86 7.0%
Net rentable square footage at
period end (in thousands):
Same Store Facilities........... 117,462 117,462 -
Other Facilities................ 8,499 7,682 10.6%
Square foot occupancy at period end:
Same Store Facilities........... 90.7% 91.7% (1.1)%
Other Facilities................ 86.3% 84.6% 2.0%
In place rents per square foot at
period end:
Same Store Facilities........... $ 13.61 $ 14.20 (4.2)%
Other Facilities................ $ 14.65 $ 15.35 (4.6)%
(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 June 30, 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) See "Net Operating income or NOI" below.
(c) Square foot occupancies represent weighted average occupancy levels
over the entire period.
(d) Realized annual rent per occupied square foot is computed by
annualizing the result of dividing rental income (which excludes late
charges and administrative fees) by the weighted average occupied
square feet for period. Realized annual rent per occupied square foot
42
takes into consideration promotional discounts and other items that
reduce rental income from the contractual amounts due.
(e) Late charges and administrative fees are excluded from the computation
of realized annual rent per occupied square foot. 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.
NET OPERATING INCOME
--------------------
Throughout the discussion that follows, we refer to net operating income
("NOI") of our self-storage facilities, which is a non-GAAP (generally accepted
accounting principles) financial measure that excludes the impact of
depreciation and amortization expense. Although depreciation and amortization
are a component of GAAP net income, we believe that NOI is a meaningful measure
of operating performance, because we utilize NOI in making decisions with
respect to capital allocations, property performance, and comparing
period-to-period and market-to-market property operating results. In addition,
we believe the investment community utilizes NOI in determining real estate
values, and does not consider depreciation expense as it is based upon
historical cost. NOI is not a substitute for net operating income after
depreciation and amortization in evaluating our operating results. The following
reconciles NOI generated by our self-storage and Shurgard Europe segments to our
consolidated net income in our June 30, 2009 condensed consolidated financial
statements.
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
2009 2008 2009 2008
----------- ----------- ------------ -----------
(Amounts in thousands)
Net operating income:
Same-store facilities................. $ 230,413 $ 238,935 $ 452,591 $ 465,070
Other facilities...................... 16,739 13,711 32,326 25,126
Shurgard Europe facilities............ - - - 30,068
----------- ----------- ------------ -----------
Total net operating income......... 247,152 252,646 484,917 520,264
Ancillary operating revenue.............. 28,106 26,710 53,941 56,747
Interest and other income................ 7,516 11,014 15,149 13,858
Ancillary cost of operations............. (10,374) (12,064) (20,027) (23,368)
Depreciation and amortization............ (83,796) (94,829) (168,762) (217,069)
General and administrative expense....... (8,199) (33,173) (17,878) (48,089)
Interest expense......................... (7,288) (9,601) (15,416) (26,088)
Equity in earnings of real estate
entities............................ 7,398 4,632 30,209 7,361
Gain (loss) on disposition of real
estate investments.................. - (92) 2,722 341,773
Gain on early debt retirement............ - - 4,114 -
Foreign currency exchange gain (loss).... 33,205 (2) (1,528) 40,969
Discontinued operations.................. (8,333) (1,286) (8,625) (2,462)
----------- ----------- ------------ -----------
Net income of the Company................ $ 205,387 $ 143,955 $ 358,816 $ 663,896
=========== =========== =========== ===========
Same Store Facilities
The "Same Store Pool" represents those 1,899 facilities that we have
owned, and have been operated on a stabilized basis, 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 June 30, 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 June 30, 2009.
43
SAME STORE FACILITIES Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- ------------------------------------
Percentage Percentage
2009 2008 Change 2009 2008 Change
---------- ---------- ---------- ---------- ---------- ----------
Revenues: (Dollar amounts in thousands, except weighted average amounts)
Rental income.................................. $ 330,854 $ 344,703 (4.0)% $ 662,393 $ 680,256 (2.6)%
Late charges and admin fees collected.......... 15,985 14,758 8.3% 31,631 29,196 8.3%
---------- ---------- ---------- ---------- ---------- ----------
Total revenues (a).............................. 346,839 359,461 (3.5)% 694,024 709,452 (2.2)%
---------- ---------- ---------- ---------- ---------- ----------
Cost of operations:
Property taxes................................. 36,659 35,156 4.3% 74,421 71,505 4.1%
Direct property payroll........................ 23,339 23,329 0.0% 47,699 47,706 0.0%
Media advertising.............................. 7,224 9,836 (26.6)% 15,382 16,783 (8.3)%
Other advertising and promotion................ 5,967 5,027 18.7% 10,581 9,453 11.9%
Utilities...................................... 7,899 8,360 (5.5)% 17,497 17,797 (1.7)%
Repairs and maintenance........................ 9,159 10,679 (14.2)% 19,875 22,077 (10.0)%
Telephone reservation center................... 2,817 3,318 (15.1)% 5,611 6,441 (12.9)%
Property insurance............................. 2,566 2,911 (11.9)% 5,264 6,124 (14.0)%
Other cost of management....................... 20,796 21,910 (5.1)% 45,103 46,496 (3.0)%
---------- ---------- ---------- ---------- ---------- ----------
Total cost of operations (a).................... 116,426 120,526 (3.4)% 241,433 244,382 (1.2)%
---------- ---------- ---------- ---------- ---------- ----------
Net operating income (b)........................... 230,413 238,935 (3.6)% 452,591 465,070 (2.7)%
Depreciation and amortization expense (c).......... (75,200) (85,178) (11.7)% (150,486) (174,536) (13.8)%
---------- ---------- ---------- ---------- ---------- ----------
Net income......................................... $ 155,213 $ 153,757 0.9% $ 302,105 $ 290,534 4.0%
========== ========== ========== =========== =========== ==========
Gross margin (before depreciation and amortization
expense)........................................... 66.4% 66.5% (0.2)% 65.2% 65.6% (0.6)%
Weighted average for the period:
Square foot occupancy (d)....................... 90.0% 91.0% (1.1)% 88.9% 89.9% (1.1)%
Realized annual rent per occupied square
foot(e)(f)...................................... $ 12.52 $ 12.90 (2.9)% $ 12.69 $ 12.88 (1.5)%
REVPAF (f)(g)................................... $ 11.27 $ 11.74 (4.0)% $ 11.28 $ 11.58 (2.6)%
Weighted average at June 30:
Square foot occupancy........................... 90.7% 91.7% (1.1)%
In place annual rent per occupied square foot (h) $ 13.61 $ 14.20 (4.2)%
Total net rentable square feet (in thousands)...... 117,462 117,462 -
Number of facilities............................... 1,899 1,899 -
(a) Revenues and cost of operations do not include ancillary revenues and
expenses generated at the facilities with respect to tenant
reinsurance, retail sales and truck rentals. "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.
(b) See "Net Operating Income" above.
(c) Depreciation and amortization expense for the three and six months
ended June 30, 2009 decreased primarily due to a reduction in
amortization expense related to intangible assets that we obtained in
the Shurgard Merger.
(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 (which excludes late
charges and administrative fees) by the weighted average occupied
square feet 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) Late charges and administrative fees are excluded from the computation
of realized annual rent per occupied square foot and REVPAF. 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.
(g) Realized annual rent per available foot or "REVPAF" is computed by
dividing rental income (which excludes late charges and administrative
fees) by the total available net rentable square feet for the period.
44
(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.
Revenues generated by our Same Store facilities decreased approximately
3.5% and 2.2% in the three and six months ended June 30, 2009, respectively, as
compared to the same periods in 2008. These decreases were caused by lower
rental income generated by these facilities as a result of lower average
realized annual rental rates per occupied square foot combined with lower
average occupancy levels. For the three months ended June 30, 2009, average
realized annual rental rates per occupied square foot were 2.9% lower and
average occupancy levels were 1.1% lower as compared to the same period in 2008,
resulting in a 4.0% reduction in rental income. For the six months ended June
30, 2009, average realized annual rental rates per occupied square foot were
1.5% lower and average occupancy levels were 1.1% lower as compared to the same
period in 2008, resulting in a 2.6% reduction in rental income.
Demand for self-storage space has been negatively impacted by recessionary
pressures, including increased unemployment, reduced housing sales, and reduced
moving activity, in each of the markets in which we operate. In the top twenty
markets in which we have the highest concentration of facilities, only two
markets (New York and Houston) had positive year-over-year revenue growth for
the three months ended June 30, 2009. This compares to the first three months of
the year, where seven markets (New York, Houston, San Francisco, Washington
D.C., Chicago, Minneapolis and Dallas) had positive year-over-year revenues
growth. Accordingly, the operating trends, with respect to year-over-year
revenue growth, have progressively declined.
From a geographic standpoint, we are experiencing levels of greatest
year-over-year revenue declines in our Southeast markets, located in North and
South Carolina, Georgia, and Florida, as well as the Pacific Northwest, which
includes Seattle and Portland. See Analysis of Regional Trends table that
follows.
The following summarizes Same Store quarterly revenue growth trends, on a
year-over-year basis:
Same Store
Year-over-Year
Three Months Ended: Revenue Growth
--------------------------- -----------------
March 31, 2008 3.4%
June 30, 2008 3.5%
September 30, 2008 2.6%
December 31, 2008 1.7%
March 31, 2009 (0.8)%
June 30, 2009 (3.5)%
As indicated in the table above, during the first three quarters of 2008,
we generated relatively strong year-over-year revenue growth. Beginning in
September 2008, we began to experience a notable decline in year-over-year
move-ins that continued through October 2008, which we believe reflected general
economic conditions. To offset the decline in new rentals, we significantly
reduced rental rates, increased promotional discounts to new incoming tenants,
and increased marketing efforts. These actions have stabilized move-in volumes
on a year-over-year basis; however, we have not yet been able to restore rental
rates to the levels experienced in the prior year. We believe overall demand for
self-storage space in virtually all of our markets in which we operate has
decreased due to current economic conditions, and coupled with an increase in
the number of self-storage operators over the past 10 years, will continue to
foster a very difficult operating environment, at least in the near term. In
addition, increased move-out activity beginning in August 2008 exacerbated the
downward pressure on occupancy levels created by reduced demand. In March 2009,
the increase in move-out activity began to subside to the extent that move-outs
during the three months ended June 30, 2009 were less than the comparable period
in 2008.
Based upon certain comparative key operating metrics as of June 30, 2009 -
the 1.1% decline in square foot occupancy and 4.2% lower in place annual rent
per occupied square foot detailed in the Self Storage Operations Summary table
above - we expect that the revenue decline for our Same Store facilities
45
for the three months ended September 30, 2009 as compared to the same period in
2008 will surpass 5%. Our operating strategy will be to continue to focus on
maintaining occupancy levels by adjusting rental rates, promotional discounts
and marketing activities. It is unclear to us how much the above mentioned
factors will impact our revenues beyond the third quarter of 2009.
Cost of operations decreased by 3.4% and 1.2% in the three and six months
ended June 30, 2009, as compared to the same periods in 2008. These decreases
were driven by reduction in repairs and maintenance, media advertising, and
property insurance expenses, partially offset by increases in property taxes and
other advertising and promotion activities.
Direct property payroll expense remained flat in the three and six months
ended June 30, 2009, as compared to the same periods 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 4.3% and 4.1% in the three and six months
ended June 30, 2009, respectively, as compared to the same periods in 2008.
These increases are due to increases in assessments of property values. 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 declined by 14.2% and 10.0% in the
three and six months ended June 30, 2009, respectively, as compared to the same
periods 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 in
quarterly or annual periods. However, we expect that repairs and maintenance
expenditures will continue to moderate for the remainder of 2009.
Media advertising for the Same Store facilities decreased 26.6% and 8.3% in
the three and six months ended June 30, 2009, respectively, as compared to the
same periods in 2008, as we realized cost reductions from more competitive media
rates and narrowed our media focus to selected markets which we believe respond
most effectively to media efforts. We expect aggregate media advertising for the
quarter ending September 30, 2009 to be approximately $1.5 million to $2.0
million higher than the same period in 2008. Other advertising and promotion is
comprised principally of yellow page and internet advertising, which increased
18.7% and 11.9% in the three and six months ended June 30, 2009, respectively,
as compared to the same periods in 2008.
Due to current market conditions we expect that we will continue to be
aggressive with media advertising in the near term, and expect our media costs
to be approximately $4.1 million in the third quarter of 2009 as compared to the
low level of spending incurred in the third 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 decreased 5.5% and 1.7% in the three and six months ended
June 30, 2009, respectively, as compared to the same periods 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 11.9% and 14.0% in the three and six
months ended June 30, 2009, respectively, as compared to the same periods 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 15.1% and 12.9% in the three
and six months ended June 30, 2009, respectively, as compared to the same
periods in 2008, as we adjusted staffing levels to expected inquiry volumes. We
expect future telephone reservation center costs to remain flat.
46
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 revenues:
2009 $ 347,185 $ 346,839
2008 $ 349,991 $ 359,461 $ 368,976 $ 357,202 $1,435,630
Total cost of operations:
2009 $ 125,007 $ 116,426
2008 $ 123,856 $ 120,526 $ 113,972 $ 104,442 $ 462,796
Property tax expense:
2009 $ 37,762 $ 36,659
2008 $ 36,349 $ 35,156 $ 36,161 $ 28,159 $ 135,825
Media advertising expense:
2009 $ 8,158 $ 7,224
2008 $ 6,947 $ 9,836 $ 2,148 $ 922 $ 19,853
Other advertising and promotion expense:
2009 $ 4,614 $ 5,967
2008 $ 4,426 $ 5,027 $ 4,645 $ 4,137 $ 18,235
REVPAF (a):
2009 $ 11.29 $ 11.27
2008 $ 11.43 $ 11.74 $ 12.03 $ 11.65 $ 11.71
Weighted average realized annual rent per occupied square foot (a):
2009 $ 12.84 $ 12.52
2008 $ 12.87 $ 12.90 $ 13.29 $ 13.27 $ 13.08
Weighted average occupancy levels for the period (a):
2009 87.9% 90.0%
2008 88.8% 91.0% 90.5% 87.8% 89.5%
(a) See "Same Store Facilities" table above for further information
regarding these measures, which are derived from non-GAAP measures.
47
ANALYSIS OF REGIONAL TRENDS
---------------------------
The following table sets forth regional trends in our Same Store
Facilities:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------------- --------------------------------------
2009 2008 Change 2009 2008 Change
------------ ------------ ------------- ------------ ------------ ------------
(Amounts in thousands, except for weighted average data)
SAME STORE FACILITIES OPERATING
TRENDS BY REGION
Revenues:
Southern California (176
facilities)...................... $ 51,019 $ 53,105 (3.9)% $ 102,757 $ 105,252 (2.4)%
Northern California (167
facilities)...................... 37,310 38,372 (2.8)% 74,736 75,611 (1.2)%
Texas (231 facilities).......... 34,877 35,291 (1.2)% 69,471 69,484 0.0%
Florida (182 facilities)........ 33,454 35,445 (5.6)% 67,257 70,530 (4.6)%
Illinois (119 facilities)....... 21,869 22,457 (2.6)% 43,832 44,304 (1.1)%
Washington (88 facilities)....... 17,705 18,922 (6.4)% 35,610 37,228 (4.3)%
Georgia (86 facilities)......... 12,028 12,893 (6.7)% 24,220 25,575 (5.3)%
All other states (850 facilities) 138,577 142,976 (3.1)% 276,141 281,468 (1.9)%
------------ ------------ ------------- ------------ ------------ ------------
Total revenues...................... 346,839 359,461 (3.5)% 694,024 709,452 (2.2)%
Cost of operations:
Southern California.............. 11,523 11,870 (2.9)% 23,672 23,517 0.7%
Northern California.............. 10,081 10,429 (3.3)% 20,783 20,876 (0.4)%
Texas............................ 14,025 14,101 (0.5)% 28,220 28,421 (0.7)%
Florida.......................... 12,426 13,143 (5.5)% 24,893 25,899 (3.9)%
Illinois......................... 9,693 10,384 (6.7)% 20,704 21,482 (3.6)%
Washington....................... 4,528 4,550 (0.5)% 9,282 9,400 (1.3)%
Georgia.......................... 4,219 4,325 (2.5)% 8,526 8,543 (0.2)%
All other states................. 49,931 51,724 (3.5)% 105,353 106,244 (0.8)%
------------ ------------ ------------- ------------ ------------ ------------
Total cost of operations............ 116,426 120,526 (3.4)% 241,433 244,382 (1.2)%
Net operating income (a):
Southern California.............. 39,496 41,235 (4.2)% 79,085 81,735 (3.2)%
Northern California.............. 27,229 27,943 (2.6)% 53,953 54,735 (1.4)%
Texas............................ 20,852 21,190 (1.6)% 41,251 41,063 0.5%
Florida.......................... 21,028 22,302 (5.7)% 42,364 44,631 (5.1)%
Illinois......................... 12,176 12,073 0.9% 23,128 22,822 1.3%
Washington....................... 13,177 14,372 (8.3)% 26,328 27,828 (5.4)%
Georgia.......................... 7,809 8,568 (8.9)% 15,694 17,032 (7.9)%
All other states................. 88,646 91,252 (2.9)% 170,788 175,224 (2.5)%
------------ ------------ ------------- ------------ ------------ ------------
Total net operating income.......... $ 230,413 $ 238,935 (3.6)% $ 452,591 $ 465,070 (2.7)%
Weighted average occupancy (a):
Southern California.............. 90.2% 90.8% (0.7)% 90.4% 90.5% (0.1)%
Northern California.............. 89.6% 91.1% (1.6)% 88.9% 90.0% (1.2)%
Texas............................ 90.4% 91.9% (1.6)% 89.5% 90.1% (0.7)%
Florida.......................... 89.6% 89.2% 0.4% 88.9% 88.1% 0.9%
Illinois......................... 88.9% 90.5% (1.8)% 87.6% 88.9% (1.5)%
Washington....................... 89.6% 91.6% (2.2)% 88.6% 90.6% (2.2)%
Georgia.......................... 88.3% 90.6% (2.5)% 87.0% 89.6% (2.9)%
All other states................. 90.4% 91.2% (0.9)% 88.9% 89.9% (1.1)%
------------ ------------ ------------- ------------ ------------ ------------
Total weighted average occupancy.... 90.0% 91.0% (1.1)% 88.9% 89.9% (1.1)%
48
SAME STORE FACILITIES OPERATING
TRENDS BY REGION (CONTINUED) Three Months Ended June 30, Six Months Ended June 30,
------------------------------------- ------------------------------------
2009 2008 Change 2009 2008 Change
----------- ---------- ---------- ---------- ---------- ---------
(Amounts in thousands, except for weighted average data)
Realized annual rent per occupied square foot (a):
Southern California.............. $ 18.76 $ 19.41 (3.3)% $ 18.83 $ 19.30 (2.4)%
Northern California.............. 16.66 16.86 (1.2)% 16.83 16.80 0.2%
Texas............................ 9.78 9.81 (0.3)% 9.85 9.76 0.9%
Florida.......................... 11.97 12.88 (7.1)% 12.14 12.97 (6.4)%
Illinois......................... 12.74 12.93 (1.5)% 12.98 12.99 (0.1)%
Washington....................... 13.48 14.16 (4.8)% 13.70 14.08 (2.7)%
Georgia.......................... 9.50 10.01 (5.1)% 9.71 10.04 (3.3)%
All other states................. 11.43 11.75 (2.7)% 11.59 11.74 (1.3)%
----------- ---------- ---------- ---------- ---------- ---------
Total realized rent per square foot. $ 12.52 $ 12.90 (2.9)% $ 12.69 $ 12.88 (1.5)%
=========== ========== ========== ========== ========== =========
REVPAF (a):
Southern California.............. $ 16.92 $ 17.63 (4.0)% $ 17.03 $ 17.46 (2.5)%
Northern California.............. 14.93 15.36 (2.8)% 14.95 15.12 (1.1)%
Texas............................ 8.84 9.02 (2.0)% 8.82 8.87 (0.6)%
Florida.......................... 10.73 11.49 (6.6)% 10.79 11.44 (5.7)%
Illinois......................... 11.33 11.70 (3.2)% 11.37 11.55 (1.6)%
Washington....................... 12.08 12.97 (6.9)% 12.15 12.75 (4.7)%
Georgia.......................... 8.38 9.07 (7.6)% 8.44 8.99 (6.1)%
All other states................. 10.33 10.72 (3.6)% 10.30 10.56 (2.5)%
----------- ---------- ---------- ---------- ---------- ---------
Total REVPAF........................ $ 11.27 $ 11.74 (4.0)% $ 11.28 $ 11.58 (2.6)%
=========== ========== ========== ========== ========== =========
(a) See "Same Store Facilities" table above for further information
regarding these measures, which represent or are derived from non-GAAP
measures.
We believe that our geographic diversification and scale provide some
insulation from localized economic effects and add to the stability of our cash
flows. It is difficult to predict localized trends in short-term self-storage
demand and operating results. 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.
49
OTHER FACILITIES
----------------
In addition to the Same Store facilities, at June 30, 2009, we had an
additional 92 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.
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 six months ended June 30, 2009, we completed three expansion
projects to existing real estate facilities (75,000 net rentable square feet)
for an aggregate cost of $13.6 million, and did not acquire any new properties.
Also during the three and six months ended June 30, 2009, we discontinued
operations at one of our self-storage facilities in connection with an eminent
domain proceeding, resulting in an impairment charge of $8.2 million. This
impairment charge along with the historical operations of this facility for all
periods presented is included in discontinued operations on our condensed
consolidated statements of income.
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 June 30, 2009. Our level of 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. In addition,
we eliminated 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 we might change our strategy with respect to
development activities.
50
ANCILLARY OPERATIONS: Ancillary revenues and expenses include amounts
associated with (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 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 and six months ended
June 30, 2009 and 2008.
The following table sets forth our ancillary operations as presented on our
condensed consolidated statement of operations:
Three Months Ended June 30 Six Months Ended June 30,
----------------------------------- --------------------------------
2009 2008 Change 2009 2008 Change
------------ --------- -------- ----------- --------- --------
(Amounts in thousands)
Ancillary Revenues:
Tenant reinsurance premiums ........ $ 15,979 $ 14,186 $ 1,793 $ 31,082 $ 28,008 $ 3,074
Merchandise sales................... 7,808 8,106 (298) 14,235 14,695 (460)
Other ancillary operations ......... 4,319 4,418 (99) 8,624 9,131 (507)
--------- --------- -------- --------- -------- --------
Total ancillary segment revenues (a) 28,106 26,710 1,396 53,941 51,834 2,107
Shurgard Europe merchandise and tenant
insurance (b)..................... - - - - 4,913 (4,913)
--------- --------- -------- --------- -------- --------
Total revenues.................. 28,106 26,710 1,396 53,941 56,747 (2,806)
--------- --------- -------- --------- -------- --------
Ancillary Cost of operations:
Tenant reinsurance premiums......... 3,211 3,916 (705) 6,438 6,939 (501)
Merchandise sales................... 5,658 6,457 (799) 10,609 11,670 (1,061)
Other ancillary operations.......... 1,505 1,691 (186) 2,980 3,350 (370)
--------- --------- -------- --------- -------- --------
Total ancillary cost of operations (a) 10,374 12,064 (1,690) 20,027 21,959 (1,932)
--------- --------- -------- --------- -------- --------
Shurgard Europe merchandise and tenant
insurance (b)..................... - - - - 1,409 (1,409)
--------- --------- -------- --------- -------- --------
Total cost of operations......... 10,374 12,064 (1,690) 20,027 23,368 (3,341)
--------- --------- -------- --------- -------- --------
Depreciation - Other ancillary operations (a): 672 652 20 1,652 1,594 58
Ancillary net income:
Tenant reinsurance premiums......... 12,768 10,270 2,498 24,644 21,069 3,575
Merchandise sales .................. 2,150 1,649 501 3,626 3,025 601
Other ancillary operations ......... 2,142 2,075 67 3,992 4,187 (195)
--------- --------- -------- --------- -------- --------
Total ancillary segment net income (c) 17,060 13,994 3,066 32,262 28,281 3,981
Shurgard Europe merchandise and tenant
insurance (b)..................... - - - - 3,504 (3,504)
--------- --------- -------- --------- -------- --------
Total ancillary net income....... $ 17,060 $ 13,994 $ 3,066 $ 32,262 $ 31,785 $ 477
========= ========= ======== ========= ======== ========
(a) Revenues and expenses for these items are a component of our Ancillary
segment, which is described and reconciled to consolidated revenues
and expenses, respectively, in Note 11 to our June 30, 2009 condensed
consolidated financial statements.
(b) Shurgard Europe's ancillary revenues and expenses are included in
Shurgard Europe Net Segment Income, which is described and reconciled
to net income in Note 11 to our June 30, 2009 condensed consolidated
financial statements.
(c) Ancillary net income as presented herein represents Net Segment Income
prior to equity in earnings of real estate entities associated with
our investment in PS Business Parks. Net Segment Income for our
ancillary segment is described and reconciled to net income in Note 11
to our June 30, 2009 condensed consolidated financial statements.
51
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 that we reinsure. 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 58% and 53% of our
tenants had such policies at June 30, 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
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 with 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 facilities 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 June 30, 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 and six months
ended June 30, 2009 and 2008, consists of our pro-rata share of the net income
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 June 30, 2009 condensed
consolidated financial statements.
52
HISTORICAL SUMMARY: Three Months Ended June 30, Six Months Ended June 30,
------------------ ----------------------------------- ----------------------------------
2009 2008 Change 2009 2008 Change
--------- --------- --------- --------- --------- ---------
(Amounts in thousands)
Net operating income (1):
PSB.................................... $ 20,983 $ 22,119 $ (1,136) $ 42,536 $ 43,898 $ (1,362)
Shurgard Europe........................ 10,427 13,757 (3,330) 20,439 13,757 6,682
Other Investments...................... 679 1,101 (422) 1,332 2,250 (918)
--------- --------- --------- --------- --------- ---------
32,089 36,977 (4,888) 64,307 59,905 4,402
--------- --------- --------- --------- --------- ---------
Depreciation:
PSB.................................... (9,639) (11,412) 1,773 (19,870) (23,003) 3,133
Shurgard Europe ....................... (7,106) (10,856) 3,750 (14,315) (10,856) (3,459)
Other Investments...................... (194) (553) 359 (386) (1,134) 748
--------- --------- --------- --------- --------- ---------
(16,939) (22,821) 5,882 (34,571) (34,993) 422
--------- --------- --------- --------- --------- ---------
Other:(2):
PSB (3)................................ (6,143) (7,860) 1,717 3,001 (15,703) 18,704
Shurgard Europe........................ (1,612) (1,444) (168) (2,516) (1,444) (1,072)
Other Investments ..................... 3 (220) 223 (12) (404) 392
--------- --------- --------- --------- --------- ---------
(7,752) (9,524) 1,772 473 (17,551) 18,024
--------- --------- --------- --------- --------- ---------
Total equity in earnings of real estate entities:
PSB.................................... 5,201 2,847 2,354 25,667 5,192 20,475
Shurgard Europe ....................... 1,709 1,457 252 3,608 1,457 2,151
Other Investments ..................... 488 328 160 934 712 222
--------- --------- --------- --------- --------- ---------
$ 7,398 $ 4,632 $ 2,766 $ 30,209 $ 7,361 $ 22,848
========= ========= ========= ========= ========= =========
(1) These amounts represent our pro-rata share of the net operating income
of the Unconsolidated Entities. See also "net operating income" above
for a discussion of this non-GAAP measure.
(2) "Other" reflects our share of general and administrative expense,
interest expense, interest income, gains on sale of real estate
assets, and other non-property; non-depreciation related operating
results of these entities.
(3) Includes our pro rata share of benefit totaling $16.3 million from
PSB's preferred stock and preferred unit repurchases for the six
months ended June 30, 2009.
Investment in PSB
-----------------
Throughout each of the three and six months ended June 30, 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) representing a 46% common equity
interest in PSB. At June 30 2009, PSB owned and operated 19.6 million rentable
square feet of commercial space located in eight states. PSB also manages
commercial space owned by the Company and affiliated entities at June 30, 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 June 30, 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."
Subsequent to March 31, 2008, we no longer consolidate the revenues and expenses
of Shurgard Europe on our consolidated statements of income. Selected financial
53
data for Shurgard Europe for each of the three and six months ended June 30,
2009 and 2008 is included in Note 5 to our June 30, 2009 condensed consolidated
financial statements.
We originally acquired our 100% interest in Shurgard Europe during our
merger with Shurgard, which occurred in August 2006. Our primary objective for
merging with Shurgard was to acquire Shurgard's U.S. domestic assets which
accounted for approximately 484 facilities in the U.S. as compared to 149
facilities in Europe at the time of the Shurgard Merger. Subsequent to the
Shurgard Merger, management of Public Storage determined that it was in the best
interests of Public Storage to reduce our investment in Shurgard Europe. There
were many reasons for that decision, most relating to the fact that continued
growth of Shurgard Europe would require a significant capital commitment.
Movement of capital from Public Storage (in the U.S.) to various European
countries would have exposed Public Storage to currency fluctuation risks and to
potential tax burdens when Public Storage wished to repatriate its capital
investment. Accordingly, in March 2008, we sold 51% of our ownership interest in
Shurgard Europe, which helped to limit our capital requirements to continue to
grow Shurgard Europe and to limit our exposure to other risks of owning
operations in foreign countries. We do not intend to sell any of our remaining
interest in Shurgard Europe. In the future, we expect Shurgard Europe to
function as a stand-alone entity and to fund its capital requirements primarily
with its retained operating cash flow, bank borrowings and, to the extent
available, public or private equity.
This transaction has resulted in the operations of Shurgard Europe having a
less significant impact on our operating results, as we have a 49% interest and
a loan receivable from Shurgard Europe upon which we receive interest income,
rather than the 100% equity interest in Shurgard Europe we held prior to the
transaction. Our future operating results will be impacted by the ultimate
returns realized on the reinvestment of the cash proceeds received in connection
with this transaction.
At June 30, 2009, Shurgard Europe's operations comprise 184 facilities with
an aggregate of 9,783,000 net rentable square feet. The portfolio consists of
112 wholly owned facilities and 72 facilities owned by two joint venture
partnerships, in which Shurgard Europe has a 20% equity interest.
Equity in earnings from our investment in Shurgard Europe for the three
months ended June 30, 2009 was $1,709,000 compared to $1,457,000 for the same
period in 2008, representing an increase of $252,000. This increase was
primarily due to a $3,750,000 reduction in our pro rata share of Shurgard
Europe's depreciation expense, offset partially by a $3,330,000 decrease in our
pro rata share of the net operating income of Shurgard Europe's self-storage
facilities, see further discussion of operating results at Shurgard Europe's
Same Stores below. The reduction in depreciation expense was due to reductions
in the amount of amortization associated with tenant intangibles acquired in
August 2006.
Equity in earnings from our investment in Shurgard Europe for the six
months ended June 30, 2009 was $3,608,000 compared to $1,457,000 for the same
period in 2008, representing an increase of $2,151,000. This increase is due to
the timing of our disposition of the 51% interest in Shurgard Europe. Equity in
earnings for the six month period in 2008 only includes amounts for the period
of April 1, 2008 through June 30, 2008 while the 2009 period includes amounts
for the entire six month period.
Key metrics that we use to evaluate the performance of our investment in
Shurgard Europe are the performance metrics of Shurgard Europe's Same Store
Facilities.
The Shurgard Europe Same Store Facilities represent 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
June 30, 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.
54
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 June 30, Six Months Ended June 30,
----------------------------------------- --------------------------------------- --------------------------------------
Percentage Percentage
2009 2008 Change 2009 2008 Change
----------- ----------- --------- ----------- ----------- --------
(Dollar amounts in thousands, except weighted average data,
utilizing constant exchange rates) (a) (b)
Revenues:
Rental income.................................. $ 27,815 $ 29,224 (4.8)% $ 54,422 $ 57,052 (4.6)%
Late charges and administrative fees collected. 451 517 (12.8)% 886 996 (11.0)%
----------- ----------- --------- ----------- ----------- --------
Total revenues................................... 28,266 29,741 (5.0)% 55,308 58,048 (4.7)%
Cost of operations (excluding depreciation and
amortization expense):
Property taxes ................................ 1,460 1,422 2.7% 2,833 2,748 3.1%
Direct property payroll........................ 3,387 3,315 2.2% 6,671 6,468 3.1%
Advertising and promotion...................... 1,498 1,073 39.6% 2,941 1,802 63.2%
Utilities...................................... 640 694 (7.8)% 1,504 1,364 10.3%
Repairs and maintenance........................ 725 803 (9.7)% 1,527 1,562 (2.2)%
Property insurance............................. 179 188 (4.8)% 343 363 (5.5)%
Other costs of management...................... 4,127 3,986 3.5% 7,860 7,923 (0.8)%
----------- ----------- --------- ----------- ----------- --------
Total cost of operations.......................... 12,016 11,481 4.7% 23,679 22,230 6.5%
----------- ----------- --------- ----------- ----------- --------
Net operating income (c)......................... $ 16,250 $ 18,260 (11.0)% $ 31,629 $ 35,818 (11.7)%
=========== =========== ========= =========== =========== ========
Gross margin........................................ 57.5% 61.4% (6.4)% 57.2% 61.7% (7.3)%
Weighted average for the period:
Square foot occupancy (d)...................... 86.1% 86.9% (0.9)% 85.4% 87.3% (2.2)%
Realized annual rent per occupied square
foot (e)(f).................................... $25.04 $26.07 (4.0)% $24.70 $25.33 (2.5)%
REVPAF (f)(g).................................. $21.56 $22.65 (4.8)% $21.09 $22.11 (4.6)%
Weighted average at June 30:
Square foot occupancy.......................... 87.0% 87.4% (0.5)%
In place annual rent per occupied square foot (h) $26.63 $27.66 (3.7)%
Total net rentable square feet (in thousands)....... 5,160 5,160 -
(a) The majority of Shurgard Europe's operations are denominated in Euros.
For comparative purposes, amounts for the three and six months ended
June 30, 2009 and 2008 are translated at constant exchange rates
representing the average exchange rates for the three and six months
ended June 30, 2009, respectively. The average exchange rate for the
Euro was approximately 1.3606 and 1.3334 during the three and six
months ended June 30, 2009, respectively, as compared to 1.563 and
1.530, respectively, for the same periods in 2008.
(b) Only the amounts for the period ended March 31, 2008 are included in
our consolidated financial statements. We include our pro-rata share
of these operating results for periods after March 31, 2008 in Equity
in Earnings of Real Estate Entities. The amounts incorporated in our
financial statements, either consolidated or equity method amounts,
are based upon the actual weighted average exchange rates for each
period.
(c) We present net operating income "NOI" of the Shurgard Europe
same-store facilities, which is a non-GAAP financial measure that
excludes the impact of depreciation and amortization expense. Although
depreciation and amortization is a component of GAAP net income, we
believe that NOI is a meaningful measure of operating performance,
because we utilize NOI in making decisions with respect to capital
allocations, segment performance, and comparing period-to-period and
market-to-market property operating results. In addition, the
investment community utilizes NOI in determining real estate values,
and does not consider depreciation expense as it is based upon
historical cost. NOI is not a substitute for net operating income
after depreciation and amortization 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 before late charges
and administrative fees by the weighted average occupied square feet
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.
55
(f) Late charges and administrative fees are excluded from the computation
of realized annual rent per occupied square foot and REVPAF. 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.
(g) Realized annual rent per available foot or "REVPAF" is computed by
dividing rental income before late charges and admin fees by the total
available net rentable square feet for the 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 six months ended June 30, 2009,
occupancies as well as rates charged to new customers are below that of the same
periods 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 June 30,
2009, Shurgard Europe has two newly developed facilities and two expansions to
existing facilities under construction (210,000 net rentable square feet), with
costs incurred of $24.8 million and $14.5 million in costs to complete. The
development of these projects is subject to various risks and contingencies.
Shurgard Europe's Condensed Consolidated Operating Results
----------------------------------------------------------
In Note 5 to our June 30, 2009 condensed consolidated financial statements,
we disclose Shurgard Europe's condensed consolidated operating results for the
three and six months ended June 30, 2009 and 2008. Shurgard Europe's condensed
consolidated operating results include additional facilities that are not Europe
Same Store Facilities, and are based upon historical exchange rates rather than
constant exchange rates for each of the respective periods.
In addition, for the reasons denoted above under NET OPERATING INCOME OR
"NOI", we present net operating income for the Shurgard Europe Same-Store
facilities, which is a non-GAAP measure excluding the impact of depreciation and
amortization.
Other Investments
-----------------
The "Other Investments" at June 30, 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 June 30, 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 $7,516,000 and
$15,149,000 in three and six months ended June 30, 2009, respectively, as
compared to $11,014,000 and $13,858,000 in the same periods in 2008. The
increase is principally as a result of (i) interest income with respect to notes
receivable from Shurgard Europe (described below), offset by lower interest
income on our cash reserve balances. While we had higher average cash balances,
interest rates were significantly lower in the three and six months ended June
30, 2009, as compared to the same periods in 2008. We have $584.9 million in
cash on hand at June 30, 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 $550.5 million as
of June 30, 2009 that bears interest at a fixed rate of 7.5% per annum. We
received interest income with respect to this loan of approximately $11.4
million and $21.5 million in the three and six months ended June 30, 2009,
56
respectively, as compared to $12.4 million for each of the same periods in 2008,
however, for financial reporting purposes due to our 49% ownership interest in
Shurgard Europe, 51% of this amount ($5.8 million and $11.0 million for the
three and six months ended June 30, 2009, respectively, as compared to $6.3
million for each of the same periods in 2008) is included in interest and other
income and the remainder was recorded as additional equity in earnings for the
three and six months ended June 30, 2009 and 2008. No interest income in
connection with this loan was recorded in the three months ended March 31, 2008,
as such interest income was fully eliminated in consolidation until March 31,
2008. The level of interest income recorded in connection with this loan will be
dependent upon the average outstanding balance as well as the exchange rate of
the Euro versus the U.S. Dollar. All such interest has been paid currently when
due and we expect the interest to continue to be paid when due with Shurgard
Europe's operating cash flow.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense was
$83,796,000 and $168,762,000 for the three and six months ended June 30, 2009,
respectively, as compared to $94,829,000 and $217,069,000 for the same periods
in 2008.
The decrease in depreciation and amortization expense in the three months
ended June 30, 2009, as compared to the same period in 2008 is due principally
to declines in amortization of tenant intangible amortization. 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 related to 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
$8,199,000, and $17,878,000 for the three and six months ended June 30, 2009,
respectively, as compared to $33,173,000 and $48,089,000 for the same periods in
2008. 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 and six months ended June
30, 2008 includes $25,440,000 and $27,900,000 in additional incentive
compensation incurred related to our disposition of an interest in 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 $7,288,000 and $15,416,000 for the
three and six months ended June 30, 2009, respectively, as compared to
$9,601,000 and $26,088,000 for the same periods in 2008. The decrease in
interest expense in the six-month periods is due primarily to the
deconsolidation of Shurgard Europe. Interest expense was also reduced due to our
early retirement in February 2009 of $110.2 million face amount of senior notes.
See Note 6 to the condensed consolidated financial statements for a schedule of
our notes payable balances, principal repayment requirements, and average
interest rates.
Capitalized interest expense totaled $157,000 and $347,000 for the three
and six months ended June 30, 2009, respectively, as compared to $434,000 and
$1,182,000 for the same periods in 2008, in connection with our development
activities.
57
Interest expense for the three months ended March 31, 2008 included
$6,892,000 incurred by Shurgard Europe, 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.
FOREIGN EXCHANGE GAIN (LOSS): Our loan receivable from Shurgard Europe is
denominated in Euros but has not been hedged. The amount of U.S. Dollars that
will be received on repayment will depend upon the currency 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 June 30, 2009, we
recorded foreign currency translation gains of $33,205,000, as compared to
foreign currency translation losses of $2,000 for the three months ended June
30, 2008. During the six months ended June 30, 2009, we recorded foreign
currency translation losses of $1,528,000, as compared to foreign currency
translation gains of $40,969,000 for the six months ended June 30, 2008. The
U.S. Dollar exchange rate relative to the Euro was approximately 1.405, 1.320
and 1.409 at June 30, 2009, 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 amount owed from
Shurgard Europe and our continued expectation with respect to repaying the loan.
DISCONTINUED OPERATIONS: During the six months ended June 30, 2009, we
decided to terminate our truck rental and containerized storage business units,
disposed of a complete self-storage facility in connection with a condemnation
proceeding and discontinued operations on a self-storage facility in connection
with an eminent domain 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 six months ended June 30, 2009 related
primarily to disposing of trucks used in our truck rental operations, a gain on
sale of the sold self-storage facility of approximately $4.2 million, as well as
an impairment charge on intangible assets of $8.2 million in connection with an
eminent domain proceeding at one of our self-storage facilities.
58
LIQUIDITY AND CAPITAL RESOURCES
--------------------------------------------------------------------------------
We have $584.9 million of cash on hand at June 30, 2009, and believe that
these funds, together with our internally generated net cash provided by
operating activities 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 Six Months Ended
June 30,
-----------------------------
2009 2008
----------- -----------
(Amount in thousands)
Net cash provided by operating activities (a)......................... $ 542,248 $ 511,190
Capital improvements to maintain our facilities....................... (32,575) (31,571)
------------ -----------
Remaining operating cash flow available for distributions to equity
holders............................................................ 509,673 479,619
Distributions to noncontrolling interests in subsidiaries............. (8,247) (8,595)
Distribution requirements paid to preferred partnership interests..... (5,830) (10,806)
------------ -----------
Cash from operations allocable to Public Storage shareholders......... 495,596 460,218
Distributions paid to Public Storage shareholders:
Preferred share dividends.......................................... (116,216) (120,666)
Equity Shares, Series A dividends.................................. (10,262) (10,712)
Common shareholders and restricted share unitholders
($1.10 per share).................................................. (185,850) (185,602)
------------ -----------
Cash from operations available for principal payments on debt and
reinvestment (b)................................................... $ 183,268 $ 143,238
============ ============
(a) Represents net cash provided by operating activities for each
respective six month period as presented in our June 30, 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 $143.2 million in the six months ended June 30, 2008
to $183.3 million in the six months ended June 30, 2009.
In addition to cash on hand, other sources of readily available liquidity
and capital resources include 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 August 7, 2009.
We also have a loan receivable from Shurgard Europe totaling $550.5 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
service, (iv) acquisition and development commitments and (v) commitments to
provide funding to Shurgard Europe for certain investing and financing
activities.
59
CAPITAL IMPROVEMENT REQUIREMENTS: During 2009, we expect approximately $72
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 six months ended June 30, 2009, we incurred capital
improvements of approximately $32.6 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 six months ended June 30, 2009 totaled
$116.2 million to the holders of our Cumulative Preferred Shares, $185.9 million
to the holders of our common shares and restricted share units and $10.3 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 first six months of 2009, we paid distributions totaling $5.8
million with respect to our Preferred Partnership Units. We expect distributions
to the units to be approximately $3.6 million for the remainder of 2009, a
reduction from the first half of the year due to unit repurchases. We expect our
annual distribution requirement based upon preferred partnership units
outstanding at June 30, 2009, to be approximately $7.3 million on a go forward
basis. In addition, we estimate the annual distribution requirements with
respect to our preferred shares outstanding at June 30, 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 third 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 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 $8,247,000 during the six
months ended June 30, 2009 and $8,595,000 for the same period in 2008, which
represents our expectations with respect to future distribution levels.
DEBT SERVICE REQUIREMENTS: At June 30, 2009, we have total outstanding debt
of approximately $524.4 million. See Note 6 to our June 30, 2009 condensed
consolidated financial statements for approximate principal maturities of such
borrowings. It is our current intention to fully amortize and repay the debt at
maturity and not seek 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 June 30, 2009, we have secured debt outstanding of $231.8 million, which
encumbers 90 self-storage facilities with an aggregate net book value of
approximately $567.6 million.
60
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 June 30, 2009 and have no
current plan to expand our development activities.
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 $550.5 million at June 30, 2009.
In addition, if Shurgard Europe acquires its partner's interests in First
Shurgard and Second Shurgard 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)185 million ($259.9 million as of June
30, 2009) for the acquisition. This commitment was also extended to March 31,
2010 and was originally for (euro)305 million, but was reduced as the result of
refinancing one of the joint venture loans. 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.
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)233 million ($328 million) of outstanding debt payable to
third parties at June 30, 2009, which is non-recourse to Shurgard Europe. In
April 2009, Shurgard Europe obtained loan extensions on both of its joint
venture loans. One of the joint venture loans, totaling (euro)112 million ($158
million), is now due May 2011 and the other joint venture loan, totaling
(euro)121 million ($170 million), is now due in July 2010. Both joint venture
loans are secured by the joint ventures' respective facilities, and are not
guaranteed by Public Storage or any third party.
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 June 30,
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 and Shurgard Europe is able
to raise capital on appropriate terms. Given the difficulty in the credit
markets, it is possible that Shurgard Europe may not able to repay the loan
prior to March 31, 2010. Our business operations are not dependent on the
repayment of such the loan.
In March 2009, Shurgard Europe's joint venture partner gave its "exit
notice" with respect to one of the joint ventures. In June 2009, the joint
venture partner withdrew its exit notice, with no impact upon the current or
future operations or governance of the joint venture or the terms of the joint
venture agreement.
ACCESS TO CAPITAL: Over the past nine 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. We are not dependent, however, on raising capital
to fund our operations or meet our obligations.
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
and debt obligations with (i) cash on hand at June 30, 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
61
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 June 30, 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 six months ended June 30, 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 six months ended June
30, 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 six months ended June 30, 2009, we did not repurchase
any of our common shares. From the inception of the repurchase program through
August 7, 2009, we have repurchased a total of 23,721,916 common shares at an
aggregate cost of approximately $679.1 million. Future levels of 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 June 30, 2009 and their impact
on our cash flows and liquidity are summarized below for the years ending
December 31 (amounts in thousands):
62
Total 2009 2010 2011 2012 2013 Thereafter
---------- ---------- ---------- --------- ---------- ---------- ----------
Long-term debt (1) ............ $ 631,423 $ 25,977 $ 41,643 $ 154,095 $ 74,712 $ 259,878 $ 75,118
Operating leases (2)........... 99,684 3,497 5,858 5,315 5,321 5,201 74,492
Construction commitments (3)... 7,192 6,473 719 - - - -
---------- ---------- ---------- --------- ---------- ---------- ----------
Total.......................... $ 738,299 $ 35,947 $ 48,220 $ 159,410 $ 80,033 $ 265,079 $ 149,610
========== ========== ========== ========= ========== ========== ==========
(1) Amounts include interest payments on our notes payable based on their
contractual terms. See Note 6 to our June 30, 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 June 30,
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 June 30, 2009.
OFF-BALANCE SHEET ARRANGEMENTS: At June 30, 2009 we had no material
off-balance sheet arrangements as defined under Regulation S-K 303(a)(4) and the
instructions thereto.
63
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 June 30, 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
June 30, 2009, our Series V, Series W, Series X, Series Y, Series Z, Series A
and Series B preferred 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 June 30, 2009 condensed
consolidated financial statements.
Our market risk sensitive instruments include notes payable, which totaled
$524,440,000 at June 30, 2009.
We have foreign currency exposures related to our investment in Shurgard
Europe, which has a book value of $268.5 million at June 30, 2009. We also have
a loan receivable from Shurgard Europe, which is denominated in Euros, totaling
(euro)391.9 million ($550.5 million) at June 30, 2009. We also have an
obligation, in certain circumstances, to loan up to an additional (euro)185
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 June 30, 2009 (dollar amounts in
thousands).
2009 2010 2011 2012 2013 Thereafter Total Fair Value
----------- ---------- ------------ ------------- ------------ ------------ ------------ ------------
Fixed rate debt........ $ 6,467 $ 13,277 $ 130,679 $ 55,575 $ 251,421 $ 67,021 $ 524,440 $ 529,532
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 June 30, 2009, we have no borrowings under our line of
credit.
64
ITEM 4. CONTROLS AND PROCEDURES
-----------------------
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in reports we file and submit under
the Securities Exchange Act of 1934, as amended ("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
Public Storage's management, including our Chief Executive Officer and Chief
Financial Officer, to allow timely decisions regarding required disclosure based
on the definition of "disclosure controls and procedures" in Rules 13a-15(e) and
15d-15(e) of the Exchange Act. In designing and evaluating our disclosure
controls and procedures, we 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 that our 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, we have investments in certain unconsolidated entities. Since Public
Storage does not control or manage these entities, our disclosure controls and
procedures with respect to such entities are substantially more limited than
those we maintain with respect to our consolidated subsidiaries.
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
our the effectiveness of our disclosure controls and procedures, as required by
Exchange Act Rule 13a-15(b), as of the end of the period covered by this report.
Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were effective.
There were no changes in our internal control over financial reporting during
the quarter ended June 30, 2009 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
65
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
------------
The risk factors set forth below update the corresponding risk factor in
Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year
ended December 31, 2008. In addition to the risk factors below, you should
carefully consider the other risk factors discussed in our Annual Report on Form
10-K for the year ended December 31, 2008, which could materially affect our
business, financial position and results of operations.
IF WE FAILED TO QUALIFY AS A REIT FOR INCOME TAX PURPOSES, WE WOULD BE TAXED AS
A CORPORATION, WHICH WOULD SUBSTANTIALLY REDUCE FUNDS AVAILABLE FOR PAYMENT OF
DIVIDENDS.
Investors are subject to the risk that we may not qualify as a REIT for
income tax purposes. REITs are subject to a range of complex organizational and
operational requirements. As a REIT, we must distribute with respect to each
year at least 90% of our REIT taxable income to our shareholders (which may take
into account certain dividends paid in the subsequent year). Other restrictions
apply to our income and assets. Our REIT status is also dependent upon the
ongoing qualification of our affiliate, PSB, as a REIT, as a result of our
substantial ownership interest in that company.
For any taxable year that we fail to qualify as a REIT and are unable to
avail ourselves of relief provisions set forth in the Code, we would be subject
to federal income tax at the regular corporate rates on all of our taxable
income, whether or not we make any distributions to our shareholders. Those
taxes would reduce the amount of cash available for distribution to our
shareholders or for reinvestment and would adversely affect our earnings. As a
result, our failure to qualify as a REIT during any taxable year could have a
material adverse effect upon us and our shareholders. Furthermore, unless
certain relief provisions apply, we would not be eligible to elect REIT status
again until the fifth taxable year that begins after the first year for which we
fail to qualify.
We have also assumed, based on Shurgard Storage Center, Inc.'s public
filings and due diligence performed in connection with our acquisition of
Shurgard, that Shurgard qualified as a REIT through the date of the Shurgard
Merger on August 22, 2006. However, if Shurgard failed to qualify as a REIT, we
generally would have succeeded to or incurred significant tax liabilities
(including the significant tax liability that would have resulted from the
deemed sale of assets by Shurgard to us as part of the Shurgard Merger).
WE ARE SUBJECT TO GOVERNMENTAL REGULATIONS AND ACTIONS THAT AFFECT OUR OPERATING
RESULTS AND FINANCIAL CONDITION.
Our business is subject to regulation under a wide variety of U.S. federal,
state and local laws, regulations and policies. There can be no assurance that,
in response to current economic conditions or the current political environment
or otherwise, laws and regulations will not be implemented or changed in ways
that adversely affect our operating results and financial condition, such as
current federal legislative proposals to expand health care coverage costs or
facilitate union activity or otherwise increase operating costs.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
-----------------------------------------------------------
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 six months ended June 30, 2009, we did not repurchase
any of our common shares. From the inception of the repurchase program through
August 7, 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
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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 June 30, 2009.
During the six months ended June 30, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
We held our annual meeting of shareholders on May 7, 2009, and the
following matters were voted on at the meeting:
1. The election of the following members of our Board for the succeeding
year or until their successors are duly qualified and elected:
Total Votes
----------------------------------------
Name Total Votes For Total Votes Withheld
--------------------------- --------------- --------------------
B. Wayne Hughes 136,268,892 8,242,045
Ronald L. Havner, Jr. 141,721,592 2,789,345
Dann V. Angeloff 128,731,490 15,779,448
William C. Baker 116,886,151 27,624,786
John T. Evans 143,192,863 1,318,075
Tamara Hughes Gustavson 141,107,206 3,403,732
Uri P. Harkham 142,348,801 2,162,137
B. Wayne Hughes, Jr. 141,104,545 3,406,393
Harvey Lenkin 141,534,760 2,976,178
Gary E. Pruitt 143,224,450 1,286,487
Daniel C. Staton 143,124,706 1,386,232
2. Our Company's shareholders approved ratification of the appointment of
Ernst & Young LLP as the Company's independent auditors for the fiscal
year ended December 31, 2009. There were 142,670,717 votes cast for
ratification; 1,748,559 votes cast against ratification; 91,661 votes
abstained; and no broker nonvotes.
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.
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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: August 7, 2009
PUBLIC STORAGE
By: /s/ John Reyes
---------------------------------
John Reyes
Senior Vice President and
Chief Financial Officer
(Principal financial officer
and duly authorized officer)
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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.
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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.
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.
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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.
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* Post-Retirement Agreement between Registrant and B. Wayne Hughes dated
as of March 11, 2004. Filed herewith.
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.
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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.
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.
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