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 September 30, 2008
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
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
incorporation or organization) Identification Number)
701 Western Avenue, Glendale, California 91201-2349
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 244-8080.
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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 is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
[ ] Yes [X] 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 the number of the registrant's outstanding common shares of beneficial
interest, as of November 6, 2008:
Common Shares of beneficial interest, $.10 par value per share - 169,399,441
shares
PUBLIC STORAGE
INDEX
Pages
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at
September 30, 2008 and December 31, 2007 1
Condensed Consolidated Statements of Income for the
Three and Nine Months Ended September 30, 2008 and 2007 2
Condensed Consolidated Statement of Shareholders' Equity
for the Nine Months Ended September 30, 2008 3
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2008 and 2007 4 - 5
Notes to Condensed Consolidated Financial Statements 6 - 44
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 45 - 75
Item 3. Quantitative and Qualitative Disclosures about Market Risk 75 - 76
Item 4. Controls and Procedures 77
PART II. OTHER INFORMATION (Items 3 and 5 are not applicable)
-----------------
Item 1. Legal Proceedings 78
Item 1A. Risk Factors 78
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 78
Item 6. Exhibits 78
PUBLIC STORAGE
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
September 30, December 31,
2008 2007
----------------- ------------------
(Unaudited)
ASSETS
Cash and cash equivalents.................................................... $ 789,294 $ 245,444
Real estate facilities, at cost:
Land...................................................................... 2,717,947 3,021,309
Buildings................................................................. 7,455,134 8,637,498
----------------- ------------------
10,173,081 11,658,807
Accumulated depreciation.................................................. (2,317,190) (2,128,225)
----------------- ------------------
7,855,891 9,530,582
Construction in process................................................... 45,419 60,324
----------------- ------------------
7,901,310 9,590,906
Investment in real estate entities........................................... 600,161 306,743
Goodwill..................................................................... 174,634 174,634
Intangible assets, net....................................................... 55,344 173,745
Restricted cash.............................................................. 18,614 18,972
Note receivable from affiliate............................................... 566,084 -
Other assets................................................................. 89,802 132,658
----------------- ------------------
Total assets................................................... $ 10,195,243 $ 10,643,102
================= ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable................................................................ $ 646,059 $ 1,031,847
Debt to joint venture partner................................................ - 38,081
Accrued and other liabilities................................................ 255,337 303,357
----------------- ------------------
Total liabilities................................................... 901,396 1,373,285
Minority interest:
Preferred partnership interests........................................... 325,000 325,000
Other partnership interests............................................... 39,452 181,688
Commitments and contingencies (Note 14)
Shareholders' equity:
Cumulative Preferred Shares of beneficial interest, $0.01 par value,
100,000,000 shares authorized, 1,739,500 shares issued (in series) and
outstanding, (1,739,500 at December 31, 2007) at liquidation preference. 3,527,500 3,527,500
Common Shares of beneficial interest, $0.10 par value, 650,000,000 shares
authorized, 168,239,183 shares issued and outstanding (169,422,475 at
December 31, 2007)....................................................... 16,824 16,943
Equity Shares of beneficial interest, Series A, $0.01 par value, 100,000,000
shares authorized, 8,744.193 shares issued and outstanding.............. - -
Paid-in capital........................................................... 5,558,579 5,653,975
Cumulative net income..................................................... 4,744,313 3,960,827
Cumulative distributions paid............................................. (4,921,750) (4,446,181)
Accumulated other comprehensive income.................................... 3,929 50,065
----------------- ------------------
Total shareholders' equity.......................................... 8,929,395 8,763,129
----------------- ------------------
Total liabilities and shareholders' equity..................... $ 10,195,243 $ 10,643,102
================= ===================
See accompanying notes.
1
PUBLIC STORAGE
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ------------------------------
2008 2007 2008 2007
------------- ------------ ------------- --------------
Revenues:
Self-storage rental income.............................. $ 393,326 $ 427,798 $ 1,199,491 $ 1,237,378
Ancillary operating revenue............................. 32,079 37,165 98,958 106,252
Interest and other income............................... 11,485 3,257 25,343 6,337
------------- ------------ ------------- --------------
436,890 468,220 1,323,792 1,349,967
------------- ------------ ------------- --------------
Expenses:
Cost of operations (excluding depreciation and amortization):
Self-storage facilities.............................. 121,833 143,371 407,102 441,200
Ancillary operations................................. 9,836 22,149 45,413 61,810
Depreciation and amortization............................ 92,031 147,741 309,900 491,617
General and administrative............................... 8,879 11,416 56,968 49,397
Interest expense......................................... 9,099 15,257 35,187 48,772
------------- ------------ ------------- --------------
241,678 339,934 854,570 1,092,796
------------- ------------ ------------- --------------
Income from continuing operations before equity in earnings
of real estate entities, gain on disposition of an interest
in Shurgard Europe, gain on disposition of other real
estate investments, casualty gain (loss), foreign currency
exchange (loss) gain, income (expense)from derivatives
and minority interest in income......................... 195,212 128,286 469,222 257,171
Equity in earnings of real estate entities................. 6,318 3,424 13,679 10,183
Gain on disposition of an interest in Shurgard Europe
(Note 3)................................................ - - 341,865 -
Gain on disposition of other real estate investments....... 1,024 92 932 2,330
Casualty gain (loss)....................................... (525) - (525) 2,665
Foreign currency exchange (loss) gain...................... (53,172) 30,384 (12,160) 40,977
Income (expense) from derivatives, net..................... - 117 (43) 1,126
Minority interest in income............................... (10,611) (8,304) (28,352) (21,611)
------------- ------------ ------------- --------------
Income from continuing operations.......................... 138,246 153,999 784,618 292,841
Discontinued operations.................................... (915) (1,233) (1,132) (3,193)
------------- ------------ ------------- --------------
Net income................................................. $ 137,331 $ 152,766 $ 783,486 $ 289,648
============= ============ ============= ==============
Net income allocated to:
Preferred shareholders.................................. $ 60,333 $ 60,333 $ 180,999 $ 176,424
Equity Shares, Series A................................. 5,356 5,356 16,068 16,068
Common shareholders..................................... 71,642 87,077 586,419 97,156
------------- ------------ ------------- --------------
$ 137,331 $ 152,766 $ 783,486 $ 289,648
============= ============ ============= ==============
Net income per common share - basic
Continuing operations................................... $ 0.44 $ 0.52 $ 3.50 $ 0.59
Discontinued operations................................. (0.01) (0.01) (0.01) (0.02)
------------- ------------ ------------- --------------
$ 0.43 $ 0.51 $ 3.49 $ 0.57
============= ============ ============= ==============
Net income per common share - diluted
Continuing operations................................... $ 0.43 $ 0.52 $ 3.48 $ 0.59
Discontinued operations................................. (0.01) (0.01) (0.01) (0.02)
------------- ------------ ------------- --------------
$ 0.42 $ 0.51 $ 3.47 $ 0.57
============= ============ ============= ==============
Net income per depositary share of Equity Shares, Series A
(basic and diluted) .................................... $ 0.61 $ 0.61 $ 1.84 $ 1.84
============= ============ ============= ==============
Basic weighted average common shares outstanding........... 168,133 169,374 168,248 169,317
============= ============ ============= ==============
Diluted weighted average common shares outstanding......... 168,919 170,085 168,988 170,166
============= ============ ============= ==============
Weighted average shares of Equity Shares, Series A (basic
and diluted)............................................ 8,744 8,744 8,744 8,744
============= ============ ============= ==============
See accompanying notes.
2
PUBLIC STORAGE
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands, except share data)
(Unaudited)
Cumulative Cumulative Net
Preferred Shares Common Shares Paid-in Capital Income
---------------- ------------- --------------- --------------
Balance at December 31, 2007.............................. $ 3,527,500 $ 16,943 $ 5,653,975 $ 3,960,827
Issuance of common shares in connection with:
Exercise of employee stock options (263,636 shares)... - 26 9,842 -
Vesting of restricted shares (73,268 shares) .......... - 7 (7) -
Repurchase of common shares (1,520,196 shares) (Note 10) . - (152) (111,751) -
Stock-based compensation expense (Note 12) ............... - - 6,520 -
Net income................................................ - - - 783,486
Cash distributions:
Cumulative preferred shares (Note 10).................. - - - -
Equity Shares, Series A ($1.838 per depositary share).. - - - -
Common Shares ($1.65 per share)........................ - - - -
Other comprehensive loss (Note 2)......................... - - - -
---------------- ------------- --------------- --------------
Balance at September 30, 2008............................. $ 3,527,500 $ 16,824 $ 5,558,579 $ 4,744,313
================ ============= =============== ==============
Accumulated
Other Total
Cumulative Comprehensive Shareholders'
Distributions Income Equity
------------- ------------- -------------
Balance at December 31, 2007.............................. $ (4,446,181) $ 50,065 $ 8,763,129
Issuance of common shares in connection with:
Exercise of employee stock options (263,636 shares)... - - 9,868
Vesting of restricted shares (73,268 shares) .......... - - -
Repurchase of common shares (1,520,196 shares) (Note 10) . - - (111,903)
Stock-based compensation expense (Note 12) ............... - - 6,520
Net income................................................ - - 783,486
Cash distributions:
Cumulative preferred shares (Note 10).................. (180,999) - (180,999)
Equity Shares, Series A ($1.838 per depositary share).. (16,068) - (16,068)
Common Shares ($1.65 per share)........................ (278,502) - (278,502)
Other comprehensive loss (Note 2)......................... - (46,136) (46,136)
------------- ------------- -------------
Balance at September 30, 2008............................. $ (4,921,750) $ 3,929 $ 8,929,395
============= ============= ==============
See accompanying notes.
3
PUBLIC STORAGE
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
For the Nine Months Ended
September 30,
------------------------------
2008 2007
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $ 783,486 $ 289,648
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of note premium, net of increase in debt to joint venture
partner (Notes 7 and 8).............................................. (3,645) (3,592)
Gain on disposition and realized currency translation gain associated
with disposition of an interest in Shurgard Europe (Note 3).......... (341,865) -
Gain on disposition of real estate and real estate investments
(Notes 4 and 14)..................................................... (932) (2,330)
Depreciation and amortization including discontinued operations......... 309,911 492,030
Equity in earnings of real estate entities.............................. (13,679) (10,183)
Distributions received from the real estate entities.................... 31,471 17,185
Foreign currency exchange loss (gain)................................... 12,160 (40,977)
Expense (income) from derivatives, net.................................. 43 (1,126)
Minority interest in income............................................. 28,352 21,611
Distributions paid to other minority interests.......................... (12,727) (15,828)
Other operating activities.............................................. 3,959 6,251
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Total adjustments.................................................... 13,048 463,041
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Net cash provided by operating activities............................ 796,534 752,689
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital improvements to real estate facilities ......................... (72,629) (49,453)
Construction in process................................................. (57,972) (81,134)
Acquisition of real estate facilities................................... (31,608) (72,787)
Acquisition of interest held by joint venture partner (Note 8).......... (45,799) -
Proceeds from the disposition of an interest in Shurgard Europe (Note 3) 609,059 -
Deconsolidation of Shurgard Europe (Note 3)............................. (34,588) -
Deconsolidation of partnerships (Note 2)................................ - (65)
Proceeds from sales of real estate...................................... 1,133 2,008
Sale of real estate investments to affiliates........................... - 4,909
Reductions (additions) to restricted cash............................... 358 (944)
Investment in Shurgard Europe........................................... (54,702) -
Proceeds from sales of held-to-maturity debt securities (Note 2)........ 181 6,019
Other investing activities.............................................. 21,878 (16,926)
------------- -------------
Net cash provided by (used in) investing activities.................. 335,311 (208,373)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable..................................... (10,860) (504,658)
Net repayments on bank credit facilities................................ - (345,000)
Proceeds from borrowings on debt of Existing European Joint Ventures.... 14,654 39,602
Net proceeds from the issuance of common shares......................... 9,868 8,052
Net proceeds from the issuance of cumulative preferred shares........... - 651,892
Repurchases of common shares............................................ (111,903) -
Redemption of cumulative preferred shares............................... - (302,150)
Distributions paid to shareholders...................................... (475,569) (447,514)
Distributions paid to holders of preferred partnership interests........ (16,209) (16,209)
------------- -------------
Net cash used in financing activities................................ (590,019) (915,985)
------------- -------------
Net increase (decrease) in cash and cash equivalents........................ 541,826 (371,669)
Net effect of foreign exchange translation on cash.......................... 2,024 4,571
------------- -------------
Cash and cash equivalents at the beginning of the period.................... 245,444 535,684
------------- -------------
Cash and cash equivalents at the end of the period.......................... $ 789,294 $ 168,586
============= =============
See accompanying notes.
4
PUBLIC STORAGE
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
(Continued)
For the Nine Months Ended
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: September 30,
------------------------------
2008 2007
------------- -------------
Foreign currency translation adjustment:
Real estate facilities, net of accumulated depreciation.............. $ (94,488) $ (99,305)
Construction in process.............................................. (956) (3,610)
Investment in real estate entities................................... 31,410 -
Intangible assets, net............................................... (4,536) (14,718)
Note receivable from affiliate....................................... 52,738 -
Other assets......................................................... (3,742) (4,694)
Notes payable........................................................ 28,912 26,337
Accrued and other liabilities........................................ 5,879 7,094
Minority interest - other partnership interests...................... 7,249 8,134
Accumulated other comprehensive income............................... (20,442) 85,333
Deconsolidation of Shurgard Europe:
Real estate facilities, net of accumulated depreciation.............. 1,693,524 -
Construction in process.............................................. 10,886 -
Investment in real estate entities................................... (594,330) -
Note receivable from affiliate....................................... (618,822) -
Intangible assets, net............................................... 78,135 -
Other assets......................................................... 68,486 -
Notes payable........................................................ (424,995) -
Accrued and other liabilities........................................ (98,571) -
Minority interest - other partnership interests...................... (148,901) -
Deconsolidation of real estate entities:
Real estate facilities, net of accumulated depreciation.............. - 41,409
Investment in real estate entities................................... - (23,079)
Intangible assets, net............................................... - 1,816
Other assets......................................................... - 344
Notes payable........................................................ - (19,329)
Accrued and other liabilities........................................ - (544)
Minority interests................................................... - (682)
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 debt to joint venture partner:
Debt to joint venture partner........................................ 224 -
Other assets......................................................... (224) -
See accompanying notes.
5
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
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"). We are a fully integrated,
self-administered and self-managed real estate investment trust ("REIT")
whose 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.
In addition to our self-storage facilities, we own interests in
commercial properties containing commercial and industrial space for rent
and conduct other ancillary operations at our self-storage locations
comprised principally of reinsurance of policies against losses to goods
stored by our self-storage tenants, retail sales of storage related
products and truck rentals.
At September 30, 2008, we had direct and indirect equity interests
in 2,017 self-storage facilities located in 38 states operating under the
"Public Storage" name, and 179 self-storage facilities located in Europe
which operate under the "Shurgard Storage Centers" name. We also have
direct and indirect equity interests in approximately 21 million net
rentable square feet of commercial space located in 11 states in the United
States (the "U.S.") primarily operated 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 nine months ended September 30, 2008 are not necessarily
indicative of the results that may be expected for the year ending December
31, 2008. 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, 2007.
Certain amounts previously reported have been reclassified to
conform to the September 30, 2008 presentation. Certain reclassifications
have also been made from previous presentations as a result of discontinued
operations.
Consolidation Policy
--------------------
Entities in which we have an interest are first evaluated to
determine whether, in accordance with the provisions of the Financial
6
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
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"). All significant intercompany
balances and transactions have been eliminated.
The accounts of the entities we control, along with the accounts
of the VIE's that we are the primary beneficiary of, are included in our
condensed consolidated financial statements along with those of the
Company. We account for our investment in entities that we do not control,
or entities for which we are not the primary beneficiary and over which we
have significant influence, using the equity 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."
On March 31, 2008, we entered into a transaction with an
institutional investor (the transaction referred to as the "Europe
Transaction") whereby the investor acquired a 51% interest in our European
operations ("Shurgard Europe"). Shurgard Europe held substantially all of
our operations in Europe. Since March 31, 2008, we own the remaining 49%
interest and are the managing member of Shurgard European Holdings LLC, a
new joint venture formed to own Shurgard Europe's operations. As a result
of the Europe Transaction, our remaining investment in Shurgard Europe is
accounted for using the equity method effective March 31, 2008 (see Note
3).
Collectively, at September 30, 2008, 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.
At September 30, 2008, the Unconsolidated Entities are comprised
of our interest in Shurgard Europe, PS Business Parks, Inc. ("PSB"), and
various limited and joint venture partnerships (the "Other Investments").
At September 30, 2008, PSB owns approximately 19.6 million rentable square
feet of commercial space, Shurgard Europe has interests in 178 self-storage
facilities in Europe with 9.3 million net rentable square feet, and the
Other Investments own in aggregate 26 self-storage facilities in the U.S.
Use of Estimates
----------------
The preparation of the 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 qualified
and intends to continue to qualify as a 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
7
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
distributed to our shareholders, provided that we meet certain tests. We
believe we have met these tests during 2007 and will meet these tests
during 2008 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
income.
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.
Due to the short period to maturity of our cash and cash
equivalents, accounts receivable and other financial instruments included
in other assets, and accrued and other liabilities, we believe the carrying
values as presented on the condensed consolidated balance sheets are
reasonable estimates of fair value.
Financial assets that are exposed to credit risk consist primarily
of cash and cash equivalents, accounts receivable, and notes receivable
from affiliates. Cash and cash equivalents, consisting of short-term
investments, including commercial paper, are only invested in entities with
an investment grade rating. Accounts receivable are not a significant
portion of total assets and are comprised of a large number of small
individual customer balances. Our note receivable totaling $566,084,000 at
September 30, 2008 is owed to us by Shurgard Europe. Although there can be
no assurance, we believe that Shurgard Europe has sufficient liquidity, and
we have sufficient creditor rights, such that credit risk is minimal.
At September 30, 2008, we have an investment in Shurgard Europe,
and one wholly owned real estate facility in London, England. In addition,
the aforementioned note receivable from Shurgard Europe is denominated in
Euros. Accordingly, 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.
8
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
Restricted Cash
---------------
Restricted cash at September 30, 2008 and December 31, 2007,
consists of cash held by our captive insurance entities which, due to
insurance and other regulations, can only be utilized to pay insurance
claims of these entities.
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.
Evaluation of Asset Impairment
------------------------------
We evaluate impairment of goodwill annually. If the fair value of
the reporting unit to which the goodwill applies is equal to or greater
than the carrying amount of the assets of the reporting unit, including the
goodwill, the goodwill is considered unimpaired. If the fair value of the
reporting unit including goodwill is less than the carrying amount, we
compute the implied fair value of the goodwill based upon the allocations
that would be made to the goodwill, other assets and liabilities of the
reporting unit as if a business combination transaction was consummated at
the fair value of the reporting unit, and an impairment loss is recorded to
the extent that the implied fair value of the goodwill is less than the
goodwill's carrying amount. No impairment of our goodwill was identified in
our annual evaluation at December 31, 2007, and no impairment indicators
were noted through September 30, 2008.
We evaluate impairment of long-lived assets on a quarterly basis.
We first evaluate these assets for indicators of impairment such as a) a
significant decrease in the market price of a long-lived asset, b) a
significant adverse change in the extent or manner in which a long-lived
asset is being used or in its physical condition, c) a significant adverse
change in legal factors or the business climate that could affect the value
of the long-lived asset, d) an accumulation of costs significantly in
excess of the amount originally projected for the acquisition or
construction of the long-lived asset, or e) a current-period operating or
cash flow loss combined with a history of operating or cash flow losses or
a projection or forecast that demonstrates continuing losses associated
with the use of the long-lived asset. When any such indicators of
impairment are noted, we compare the carrying value of these assets to the
future estimated undiscounted cash flows attributable to these assets. If
the asset's recoverable amount is less than the carrying value of the
asset, then an impairment charge is booked for the excess of carrying value
over the asset's estimated fair value.
Any long-lived assets which we expect to sell or otherwise dispose
of prior to their previously estimated useful life are stated at what we
estimate to be the lower of their estimated net realizable value (less cost
to sell) or their carrying value. No impairment was identified from our
evaluations as of September 30, 2008.
9
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
Accounting for Stock-Based Compensation
---------------------------------------
We utilize the Fair Value Method (as defined in Note 12) of
accounting for our employee stock options. Restricted share unit expense is
recorded over the relevant service period. See Note 12 for additional
information on our accounting for employee share options and restricted
share units.
Other Assets
------------
Other assets primarily consists of prepaid expenses, investments
in held-to-maturity debt securities, accounts receivable, merchandise
inventory held for sale as well as trucks and other equipment associated
with our ancillary operations. Other assets included a total of $56,714,000
related to Shurgard Europe at December 31, 2007, which we deconsolidated
effective March 31, 2008 as described in Note 3.
Accrued and Other Liabilities
-----------------------------
Accrued and other liabilities at September 30, 2008 consist
primarily of real property tax accruals, tenant prepayments of rents, trade
payables, losses and loss adjustment liabilities for our self-insured risks
(described below), accrued interest and, at December 31, 2007, value-added
tax accruals with respect to Shurgard Europe. Accrued and other liabilities
included $95,444,000 related to Shurgard Europe at December 31, 2007, which
we deconsolidated effective March 31, 2008 as described in Note 3.
We are self-insured for a portion of the risks associated with our
property and casualty losses, workers compensation and employee health
care. We also utilize third-party insurance carriers to limit our self
insurance exposure. We accrue liabilities for uninsured losses and loss
adjustment expense, which at September 30, 2008 totaled $28,358,000
($26,643,000 at December 31, 2007). Liabilities for losses and loss
adjustment expenses include estimates we determine from loss reports with
respect to identified individual cases and an amount, based on
recommendations from an independent actuary that is a member of the
American Academy of Actuaries using a frequency and severity method, for
losses incurred but not reported.
Through a wholly-owned subsidiary, we reinsure 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 in our self-storage
facilities for individual limits up to a maximum of $5,000. We purchase
third-party insurance coverage for losses from any individual event that
exceeds a loss of $1,000,000, to a maximum of $49,000,000. Estimated
uninsured losses are accrued and expensed as ancillary costs of operations.
While we believe that the amount of estimated accrued liabilities
with respect to tenant claims, property, casualty, workers compensation and
employee healthcare are adequate, the ultimate losses that are actually
paid will vary from what we have accrued. The methods for making such
estimates and for establishing the resulting liabilities are regularly
reviewed.
Goodwill
--------
Goodwill represents the excess of acquisition cost over the fair
value of net tangible and identifiable intangible assets acquired in
business combinations. Each business combination from which our goodwill
arose was for the acquisition of single businesses and accordingly, the
allocation of our goodwill to our business segments (principally Domestic
Self-Storage) is based directly on such acquisitions. Our goodwill has an
10
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
indeterminate life in accordance with the provisions of Statement of
Financial Accounting Standards No. 142 ("SFAS 142"). Our goodwill balance
of $174,634,000 is reported net of accumulated amortization of $85,085,000
as of September 30, 2008 and December 31, 2007 in our accompanying
condensed consolidated balance sheets.
Other Intangible Assets
-----------------------
As we acquire real estate facilities, we also acquire intangible
assets representing primarily the tenants in place at the date of the
acquisition of each respective facility. The value of these tenants
represent a finite-lived intangible asset (a "Tenant Intangible"), and
these assets are amortized relative to the benefit of the tenants in place
to each period. At September 30, 2008, our finite-lived intangibles have a
book value of $36,520,000 ($154,921,000 at December 31, 2007), which is net
of accumulated amortization of $332,091,000 ($423,788,000 at December 31,
2007). During the nine months ended September 30, 2008, intangible assets
were increased by approximately $4,536,000 due to the impact of changes in
foreign currency exchange rates, $804,000 in connection with the
acquisition of the remaining interests in the Acquisition Joint Venture
(Note 8) and $1,766,000 for the acquisition of Tenant Intangibles in
connection with the acquisition of self-storage facilities (Note 4). On
March 31, 2008, finite-lived intangible assets decreased approximately
$78,135,000 due to the deconsolidation of Shurgard Europe, as described
more fully in Note 3 below.
Amortization expense of $7,239,000 and $53,320,000 was recorded
for our finite-lived intangible assets for the three months ended September
30, 2008 and 2007, respectively, and $47,372,000 and $210,471,000, for the
nine months ended September 30, 2008 and 2007, respectively. The estimated
future amortization expense for our finite-lived intangible assets is as
follows:
2008 (remainder of) $ 3,608,000
2009 4,468,000
2010 2,664,000
2011 2,485,000
2012 2,381,000
2013 and beyond 20,914,000
We also have an intangible representing the value of the
"Shurgard" trade name, which is used by Shurgard Europe pursuant to a
licensing agreement described more fully in Note 3, with a book value of
$18,824,000 at September 30, 2008 and December 31, 2007. 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 in the most recent annual analysis at December 31, 2007.
Revenue and Expense Recognition
-------------------------------
Rental income, which is generally earned pursuant to
month-to-month leases for storage space, is 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. Late charges and administrative fees are recognized as income
when collected. Tenant reinsurance premiums are recognized as premium
revenue when earned. Revenues from merchandise sales and truck rentals are
recognized when earned. Interest and other income is recognized as 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 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.
11
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
Foreign Currency Exchange Translation
-------------------------------------
The local currency is the functional currency for the European
operations that we have an interest in. Assets and liabilities included on
our consolidated balance sheet 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 Shurgard Europe's operations, was translated at an
end-of-period exchange rate of approximately 1.445 U.S. Dollars per Euro at
September 30, 2008 and 1.579 at June 30, 2008 (1.472 at December 31, 2007),
and average exchange rates of 1.504 and 1.374 for the three months ended
September 30, 2008 and 2007, respectively, and 1.521 and 1.344 for the nine
months ended September 30, 2008 and 2007, 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 February 2007, the FASB issued SFAS No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities, including an
amendment of FASB Statement No. 115" ("SFAS No. 159"). SFAS No. 159
provides companies with an option to report selected financial assets and
liabilities at fair value. The standard establishes presentation and
disclosure requirements designed to facilitate comparisons between
companies that choose different measurement attributes for similar types of
assets and liabilities. SFAS No. 159 was effective for fiscal years
beginning after November 15, 2007. The Company did not elect to report any
of its financial assets or liabilities at fair value, and as a result, the
adoption of SFAS No. 159 had no material impact on our financial position,
operating results or cash flows.
In 2006, the FASB issued SFAS No. 157, "Fair Value Measurement"
(SFAS No. 157). SFAS No. 157 provides guidance for using fair value to
measure assets and liabilities. SFAS No. 157 expands required disclosures
about the extent to which companies measure assets and liabilities at fair
value, the information used to measure fair value, and the effect of fair
value measurements on earnings. SFAS No. 157 applies whenever other
accounting standards require or permit fair value measurements. SFAS No.
157 does not require any new fair value measurements. 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. SFAS No. 157 is effective
for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. In December 2007, the FASB agreed to a one year
deferral of SFAS No. 157's fair value measurement requirements for
nonfinancial assets and liabilities that are not required or permitted to
be measured at fair value on a recurring basis. The Company adopted SFAS
No. 157 on January 1, 2008, which had no effect on our financial position,
operating results or cash flows.
SFAS No. 157 establishes a three-tier fair value hierarchy, which
prioritizes the inputs used in measuring fair value. Liabilities measured
at fair value on a recurring basis as of September 30, 2008 include our
debt to joint venture partner, which is described in Note 8, and our
estimate of the fair value of Other Minority Interests, described in Note
9. Each of these liabilities is valued based upon significant unobservable
inputs, which are "Level 3" inputs as the term is utilized in SFAS No. 157.
Note Receivable from Affiliate
------------------------------
As of September 30, 2008, we had a note receivable from Shurgard
Europe totaling $566,084,000 ($561,182,000 at December 31, 2007, which was
12
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
eliminated in consolidation). Effective March 31, 2008, as a result of the
Europe Transaction, Shurgard Europe is no longer consolidated, accordingly,
the note receivable is no longer eliminated in consolidation and is
presented as "Note Receivable from Affiliate" (see Note 3).
In connection with the Europe Transaction, the terms of the note
were modified. The outstanding loan balance was increased by approximately
(euro)10,529,000 ($16,626,000) on March 31, 2008 due to the conversion of a
portion of our equity investment into intercompany debt. The note bears
interest at a fixed rate of 7.5% per annum, and has an initial term of one
year expiring March 31, 2009, and an additional one year extension at
Shurgard Europe's option. If Shurgard Europe acquires its partner's
interests in First Shurgard and Second Shurgard (collectively, the
"Existing European Joint Ventures"), joint ventures in which Shurgard
Europe has a 20% interest, and is unable to obtain third-party financing,
we have agreed to provide additional loans to Shurgard Europe, under the
same terms as the existing loans, for up to (euro)305 million ($440.6
million as of September 30, 2008) for the acquisition. Shurgard Europe has
no obligation to acquire these interests, and the acquisition of these
interests is contingent on a number of items, including the outcome of
pending arbitration proceedings with the joint venture partner and whether
we assent to the acquisition.
The terms of the note receivable included Shurgard Europe's
payment of a 1% arrangement fee of (euro)3,919,000. These fees are being
amortized through March 31, 2009. During the three and nine months ended
September 30, 2008, we recorded interest income of $341,000 and $698,000,
respectively, (which represents the aggregate amortization of the fee, less
our 49% pro-rata share of the fee which is shown as "equity in earnings of
real estate entities"), in connection with these fees.
The note receivable is denominated in Euros and is converted to
U.S. Dollars on our balance sheet. At the end of each applicable period,
because we have expected repayment within one to two years, we have been
recognizing foreign exchange rate gains or losses as a result of changes in
exchange rates between the Euro and the U.S. Dollar during each period in
2008 and 2007. During the three months ended September 30, 2008, the
balance of this loan decreased due to foreign currency losses totaling
$53,172,000, as compared to an increase due to foreign currency gains of
$30,384,000 during the three months ended September 30, 2007. During the
nine months ended September 30, 2008, such foreign currency losses totaled
$12,160,000, as compared to an increase due to foreign currency gains of
$40,977,000 during the nine months ended September 30, 2007. See Note 5 for
a discussion of interest and other income with respect to this note.
Other Comprehensive Income
--------------------------
We reflect other comprehensive income (loss) for our pro-rata
share of currency translation adjustments related to Shurgard Europe or our
operations in London, England which are not already reflected in our
current net income. Such other comprehensive income (loss) is reflected as
a direct adjustment to "Accumulated Other Comprehensive Income" in the
equity section of our balance sheet.
Total comprehensive income for each period reflects our net
income, plus our other comprehensive income for the period.
13
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
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 Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2008 2007 2008 2007
------------ ------------ ----------- ------------
(Amounts in thousands)
Net income................................ $ 137,331 $ 152,766 $ 783,486 $ 289,648
Other comprehensive income:
Aggregate foreign currency translation
adjustments for the period.......... (85,760) 58,396 (20,442) 85,333
Less: foreign currency translation
adjustments recognized during the
period and reflected in "Gain on
disposition of an interest in
Shurgard Europe" (Note 3)........... - - (37,854) -
Less: foreign currency translation
adjustments reflected in net income
as "Foreign currency loss (gain)"... 53,172 (30,384) 12,160 (40,977)
------------ ------------ ----------- ------------
Other comprehensive income (loss) for the
period.............................. (32,588) 28,012 (46,136) 44,356
------------ ------------ ----------- ------------
Total comprehensive income................ $ 104,743 $ 180,778 $ 737,350 $ 334,004
============ ============ =========== ============
Accounting for Casualty Losses
------------------------------
Our policy is to record casualty losses or gains in the period the
casualty occurs equal to the differential between (a) the book value of
assets destroyed and (b) insurance proceeds, if any, that we expect to
receive in accordance with our insurance contracts. Potential insurance
proceeds that are subject to uncertainties, such as interpretation of
deductible provisions of the governing agreements or the estimation of
costs of restoration, are treated as contingent proceeds in accordance with
Statement of Financial Accounting Standards No. 5 ("SFAS 5"), and not
recorded until the uncertainties are satisfied. During the three and nine
months ended September 30, 2008, we recorded casualty losses of $525,000
due to damage caused by hurricanes comprised of $250,000 in impairment
charges to our facilities and $275,000 in other expenses. During the nine
months ended September 30, 2007, we recorded a casualty gain totaling
$2,665,000, representing the realization of contingent proceeds relating to
hurricanes which occurred in 2005.
Derivative Financial Instruments
--------------------------------
Shurgard Europe has certain derivative financial instruments in
its two joint venture partnerships, including interest rate caps, interest
rate swaps, cross-currency swaps and foreign currency forward contracts.
These derivatives were entered into by the joint venture partnerships in
order to mitigate currency and exchange rate fluctuation risk in connection
with borrowings, and are not for speculative or trading purposes. Since we
acquired an interest in Shurgard Europe in August 2006, none of the
derivatives were considered effective hedges because at the time we
acquired them, we believed it was not highly likely that the debt and the
related derivative instruments would remain outstanding for their entire
contractual period. Accordingly, for periods where Shurgard Europe was
consolidated (see Note 3) all changes in the fair values of the derivatives
are reflected in earnings, along with the related cash flows from these
instruments, under "Income from derivatives, net" on our condensed
consolidated statements of income.
14
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
Environmental Costs
-------------------
Our policy is to accrue environmental assessments and estimated
remediation costs when it is probable that such efforts will be required
and the related costs can be reasonably estimated. Our current practice is
to conduct environmental investigations in connection with property
acquisitions. Although there can be no assurance, we are not aware of any
environmental contamination of our facilities, which individually or in the
aggregate would be material to our overall business, financial condition,
or results of operations.
Discontinued Operations
-----------------------
We segregate all of our disposed facilities that have operations
that can be distinguished from the rest of the Company (generally, complete
self-storage or containerized storage facilities) and will be eliminated
from the ongoing operations of the Company, due to a sale or facility
closure. The following table summarizes the historical operations with
respect to these facilities:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- ---------------------
2008 2007 2008 2007
--------- --------- --------- ---------
(Amounts in thousands)
Rental income..................... $ 271 $ 950 $ 1,104 $ 2,738
Cost of operations................ (1,167) (1,105) (2,209) (4,647)
Depreciation expense.............. (3) (207) (11) (413)
Loss.............................. (16) (871) (16) (871)
--------- --------- --------- ---------
Total discontinued operations..... $ (915) $(1,233) $(1,132) $(3,193)
========= ========= ========= =========
Net Income per Common Share
---------------------------
In computing net income allocated to our common shareholders, we
first allocate net income to our preferred shareholders ($60,333,000 and
$180,999,000 for the three and nine months ended September 30, 2008,
respectively, and $60,333,000 and $176,424,000 for the three and nine
months ended September 30, 2007, respectively), to arrive at net income
allocable to our common shareholders.
The remaining net income is allocated among our regular common
shares and our Equity Shares, Series A using the two-class method which
allocates income based upon the dividends declared (or accumulated) for
each security in the period, combined with each security's rights to
earnings (or losses) that were not distributed to shareholders. Under this
method, the Equity Shares, Series A, were allocated net income of
$5,356,000 and $16,068,000 for each of the three and nine months ended
September 30, 2008 and 2007, respectively. Net income of $71,642,000 and
$586,419,000 for the three and nine months ended September 30, 2008,
respectively, and $87,077,000 and $97,156,000 for the three and nine months
ended September 30, 2007, respectively, were allocated to the regular
common shareholders.
Basic net income per share is computed using the weighted average
common shares outstanding (prior to the dilutive impact of stock options
and restricted share units outstanding). Diluted net income per common
share is computed using the weighted average common shares outstanding
(adjusted for the impact, if dilutive, of stock options and restricted
share units outstanding).
Recent Accounting Pronouncements and Guidance
---------------------------------------------
15
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
Business Combinations
---------------------
In December 2007, the Financial Accounting Standards Board (the
"FASB") issued SFAS No. 141(R) and requires the acquiring entity in a
business combination to measure the assets acquired, liabilities assumed
(including contingencies) and any noncontrolling interests at their fair
values on the acquisition date. The statement also requires that
acquisition-related transaction costs be expensed as incurred and acquired
research and development value be capitalized. In addition,
acquisition-related restructuring costs are to be capitalized only if they
meet certain criteria. SFAS No. 141(R) is effective for fiscal years
beginning after December 15, 2008. The application of SFAS No.141(R) would
have an impact on our results of operations and financial position
beginning January 1, 2009 to the extent that we enter into any business
combinations in the future.
Noncontrolling Interests in Consolidated Financial Statements
-------------------------------------------------------------
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 160, "Noncontrolling Interests in Consolidated
Financial Statements, an amendment of Accounting Research Bulletin No. 51"
(or SFAS No. 160). SFAS No. 160 requires the classification of
noncontrolling interests (formerly, minority interests) as a component of
the consolidated equity. In addition, net income will include the total
income of all consolidated subsidiaries with the attribution of earnings
and other comprehensive income between controlling and noncontrolling
interests reported as a separate disclosure on the face of the consolidated
income statement. The calculation of earnings per share will continue to be
based on income amounts attributable to the parent. SFAS No. 160 also
addresses accounting and reporting for a change in control of a subsidiary.
SFAS No. 160 is effective for fiscal years beginning after December 15,
2008, and is required to be adopted prospectively, except for the
presentation and disclosure requirements, which are required to be adopted
retrospectively. We are currently evaluating the impact of the application
of SFAS No. 160 on our results of operations and financial position.
3. Europe Transaction
------------------
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. In exchange for the 51% interest in
Shurgard Holdings, the investor paid Shurgard Holdings an aggregate of
$613,201,000, comprised of approximately (euro)383,200,000 ($605,627,000)
received on March 31, 2008 and, on June 20, 2008, an additional
(euro)4,797,000 ($7,574,000) was received, representing the operating
results (as defined) generated by Shurgard Europe during the three months
ended March 31, 2008.
In connection with the Europe Transaction, the intercompany notes
receivable owed by Shurgard Europe to Public Storage were modified (see
Note 2 under "Note Receivable from Affiliate,").
Based upon the provisions of Statement of Financial Accounting
Standards No. 66 ("FAS 66"), we have determined that this transaction
constitutes the partial disposition of an interest in Shurgard Europe that
is eligible for full profit recognition. We have evaluated the governing
documents, capitalization, and other risk-sharing and voting
characteristics of Shurgard Holdings and determined that it does not
represent a variable interest entity in accordance with the provisions of
FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities -
An Interpretation of ARB No. 51" ("FIN 46R").
The provisions of Emerging Issues Task Force 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," indicate there is a presumption that the managing member
of a limited liability company controls the company, unless the other
member has substantive "participating" or "kick-out" rights as those terms
are defined in the accounting standard. Even though we are the managing
16
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
member, based upon the terms of the governing documents of Shurgard
Holdings, the institutional investor shares with us the decision-making
authority with respect to a) the significant operating, capital, and
investing decisions of Shurgard Europe, including the establishment of
annual budgets, and b) the level of compensation of, and replacement and
selection of Shurgard Europe's senior operating officers. As a result, we
have concluded that the institutional investor has substantive
participating rights and, accordingly, we do not control Shurgard Europe.
Therefore, we have deconsolidated the operations of Shurgard Europe
effective March 31, 2008.
As a result of the deconsolidation of Shurgard Europe, our
investment in real estate entities increased by $594,330,000, representing
our net investment in Shurgard Europe at March 31, 2008 immediately before
the transaction. The following adjustments were made to our condensed
consolidated balance sheet to reflect the deconsolidation of our investment
in Shurgard Europe as of March 31, 2008 (amounts in thousands):
Total
--------------
Real estate facilities, net............. $(1,693,524)
Construction in progress................ (10,886)
Intangible assets....................... (78,135)
Cash.................................... (34,588)
Note receivable from affiliate.......... 618,822
Other assets............................ (68,486)
Notes payable........................... 424,995
Accrued and other liabilities........... 98,571
Minority interest - other partnership
interests............................... 148,901
--------------
$(594,330)
==============
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 recognized a gain
of $304,011,000, representing the difference between the net proceeds
received and the pro rata portion of our investment sold. The receivable
was paid by the investor in June 2008.
In addition, as a result of our disposition of this interest, a
portion of the cumulative currency exchange gains we had previously
recognized in Other Comprehensive Income with respect to Shurgard Europe
was realized. Accordingly, we recognized a cumulative currency exchange
gain of $37,854,000, representing 51% (the pro rata portion of Shurgard
Europe that was sold) of the cumulative currency exchange gain previously
included in Other Comprehensive Income.
The gain upon disposition of $304,011,000 and associated realized
currency exchange gain totaling $37,854,000 are both included in the gain
on disposition of an interest in Shurgard Europe of $341,865,000 in our
condensed consolidated statement of income for the nine months ended
September 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 and three and nine months ended September 30, 2007,
respectively. Commencing April 1, 2008, our pro rata share of operations of
Shurgard Europe are reflected on our income statement under equity in
earnings of real estate entities. See Note 5, "Investment in Shurgard
Europe" for further analysis of our earnings from Shurgard Europe for the
three and nine months ended September 30, 2008.
17
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
4. Real Estate Facilities
Activity in real estate facilities is as follows:
Nine Months Ended
September 30,
2008
-----------------
(Amounts in
thousands)
Operating facilities, at cost:
Beginning balance....................................... $ 11,658,807
Capital improvements.................................... 72,629
Acquisition of real estate facilities from third parties 40,092
Newly developed facilities opened for operation......... 62,947
Acquisition of real estate facilities from joint venture
partner (Note 8)..................................... 7,950
Deconsolidation of Shurgard Europe (Note 3)............. (1,766,122)
Disposition of real estate facilities................... (931)
Casualty loss (Note 2).................................. (464)
Impact of foreign exchange rate changes................. 98,173
-----------------
Ending balance.......................................... 10,173,081
-----------------
Accumulated depreciation:
Beginning balance....................................... (2,128,225)
Depreciation expense.................................... (258,206)
Deconsolidation of Shurgard Europe (Note 3)............. 72,598
Casualty loss (Note 2).................................. 214
Disposition of real estate facilities................... 114
Impact of foreign exchange rate changes................. (3,685)
-----------------
Ending balance.......................................... (2,317,190)
-----------------
Construction in process:
Beginning balance...................................... 60,324
Current development.................................... 57,972
Newly developed facilities opened for operation........ (62,947)
Deconsolidation of Shurgard Europe (Note 3) ............ (10,886)
Impact of foreign exchange rate changes................ 956
-----------------
Ending balance......................................... 45,419
-----------------
Total real estate facilities............................. $ 7,901,310
=================
During the nine months ended September 30, 2008, we completed a
newly developed facility with approximately 49,000 net rentable square feet
at a total cost of $5,592,000, five expansion projects in the U.S. which in
aggregate added approximately 236,000 net rentable square feet of
self-storage space at a total cost of $17,971,000 and one expansion project
in London, England which added approximately 21,000 net rentable square
feet of self-storage space at a total cost of $5,921,000. During the nine
months ended September 30, 2008, we acquired four self-storage facilities
(approximately 368,000 net rentable square feet) in the U.S. from third
parties for an aggregate cost of $41,858,000, consisting of $31,608,000 in
cash and assumed mortgage debt totaling $10,250,000. The aggregate cost was
allocated $40,092,000 to real estate facilities and $1,766,000 to
intangibles, based upon the estimated relative fair values of the land,
buildings and intangibles.
Also in the three months ended March 31, 2008, prior to its
deconsolidation, Shurgard Europe completed three development projects in
Europe at a total cost of $33,463,000.
18
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
Construction in process at September 30, 2008 includes the
development costs relating to 19 projects (910,000 net rentable square
feet), consisting of newly developed self-storage facilities, conversion of
space at facilities that was previously used for containerized storage and
expansions to existing self-storage facilities, with costs incurred of
$45,419,000 at September 30, 2008 and total estimated costs to complete of
$55,844,000.
From time to time, our facilities are subject to condemnation
proceedings, resulting in disposal of a portion or, in some cases, the
entire facility. In addition, we dispose of unused parcels of land in
certain cases. During the nine months ended September 30, 2008, we received
proceeds for such disposals aggregating $1,749,000 and recorded a gain of
$932,000 as a result of these transactions. During the nine months ended
September 30, 2007, we received proceeds for such disposals aggregating
$2,008,000 and recorded a gain of $1,136,000 as a result of these
transactions. In connection with the sale of limited liability partner
interests in Shurgard Europe (Note 9), we also recorded a gain of
$1,194,000 for the nine months ended September 30, 2007, representing the
excess of the sales proceeds over the book value of the interests sold.
Each of these items is reflected in Gain on Disposition of Other Real
Estate investments on our accompanying condensed consolidated statements of
income.
We capitalize interest incurred on debt during the course of
construction of our self-storage facilities. Interest capitalized for the
three and nine months ended September 30, 2008 was $448,000 and $1,630,000,
respectively, as compared to $1,297,000 and $3,011,000 for the same periods
in 2007.
5. Investment in Real Estate Entities
----------------------------------
For the three and nine months ended September 30, 2008, we
recognized earnings from our investments in real estate entities of
$6,318,000 and $13,679,000, respectively, as compared to $3,424,000 and
$10,183,000 for the same periods in 2007. For the nine months ended
September 30, 2008 and 2007, we received cash distributions totaling
$31,471,000 and $17,185,000, respectively.
Our investments in real estate entities increased by $293,418,000
due to (i) the deconsolidation of Shurgard Europe which increased our
investment by $289,282,000, representing our remaining 49% interest, and
(ii) additional investments in Shurgard Europe totaling $54,702,000, offset
by decreases due to (iii) foreign currency translation adjustments totaling
$31,410,000, (iv) the acquisition of the remaining interest that we did not
own in the Acquisition Joint Venture which decreased our investments in
real estate entities by $1,364,000 (see Note 8) and (v) distributions in
excess of equity in earnings totaling $17,792,000.
The following table sets forth our investments in the real estate
entities at September 30, 2008 and December 31, 2007, and our equity in
earnings of real estate entities for the three and nine months ended
September 30, 2008 and 2007 (amounts in thousands):
19
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
Equity in Earnings of Real
Estate Entities for the Equity in Earnings of Real
Investments in Real Estate Three Months Ended Estate Entities for the Nine
Entities at September 30, Months Ended September 30,
----------------------------- -------------------------- -----------------------------
September 30, December 31,
2008 2007 2008 2007 2008 2007
-------------- -------------- ---------- ------------- ------------ ---------------
PSB.......................... $ 265,435 $ 273,717 $ 3,320 $ 2,522 $ 8,512 $ 8,236
Shurgard Europe.............. 303,888 - 2,260 - 3,717 -
Other Investments............ 30,838 33,026 738 902 1,450 1,947
-------------- -------------- ---------- ------------- ------------ ---------------
Total...................... $ 600,161 $ 306,743 $ 6,318 $ 3,424 $ 13,679 $ 10,183
============== ============== ========== ============= ============ ===============
Investment in PSB
-----------------
PS Business Parks, Inc. 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"). We have a 46%
common equity interest in PSB as of September 30, 2008. This common equity
interest is 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
at both September 30, 2008 and December 31, 2007. 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
September 30, 2008 ($57.60 per share of PSB common stock), the shares and
units had a market value of approximately $732.9 million as compared to a
book value of $265.4 million.
At September 30, 2008, PSB owned approximately 19.6 million
rentable square feet of commercial space. In addition, PSB manages
commercial space owned by the Company and the Consolidated Entities
pursuant to property management agreements.
The following table sets forth selected financial information of
PSB; the amounts represent 100% of PSB's balances and not our pro rata
share.
2008 2007
-------------- -----------------
(Amounts in thousands)
For the nine months ended September 30,
--------------------------------------
Total operating revenue.............................. $ 212,571 $ 201,471
Costs of operations and other operating expenses..... (73,101) (68,603)
Other income and expense, net........................ (1,957) 1,013
Depreciation and amortization........................ (75,270) (71,841)
Minority interest.................................... (10,153) (9,888)
-------------- -----------------
Net income......................................... $ 52,090 $ 52,152
============== ==================
At September 30, At December 31,
2008 2007
-------------- -----------------
(Amounts in thousands)
Total assets (primarily real estate)................. $ 1,485,605 $ 1,516,583
Total debt........................................... 59,666 60,725
Other liabilities.................................... 54,404 51,058
Preferred equity and preferred minority interests.... 811,000 811,000
Common equity and common minority interests.......... 560,535 593,800
20
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
Investment in Shurgard Europe
-----------------------------
As described more fully in Note 3, at September 30, 2008 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.
For the three and nine ended September 30, 2008 following the
deconsolidation of Shurgard Europe, we recorded an aggregate of $2,260,000
and $3,717,000, respectively, in equity in earnings of real estate
entities. In addition, included in interest and other income for the three
and nine months ended September 30, 2008 (since March 31, 2008) is an
aggregate of $6,380,000 and $12,912,000, respectively, related to the notes
payable by Shurgard Europe and trademark license fees payable to Public
Storage. While interest and trademark license fees were charged prior to
April 1, 2008 to Shurgard Europe, these amounts were eliminated in
consolidation. During the nine months ended September 30, 2008, our
investment in Shurgard Europe was decreased by approximately $31,410,000
due to the impact of changes in foreign currency exchange rates, primarily
between the Euro and the U.S. Dollar.
The $6,380,000 in interest and other income reflected on our
statement of operations for the three months ended September 30, 2008
reflects the gross amount charged to Shurgard Europe for interest and
license fees totaling $12,063,000 and $450,000, respectively, less our
pro-rata portion of these amounts totaling $5,912,000 and $221,000,
respectively, which are reflected as equity in earnings of real estate
entities rather than interest and other income. The $12,912,000 in interest
and other income reflected on our statement of operations for the nine
months ended September 30, 2008 reflects the gross amount charged to
Shurgard Europe for interest and license fees totaling $24,453,000 and
$868,000, respectively, less our pro-rata portion of these amounts totaling
$11,983,000 and $426,000, respectively, which are reflected as equity in
earnings of real estate entities rather than interest and other income.
The following table sets forth selected financial information of
Shurgard Europe. The amounts presented herein are consistent with the
foreign currency translation policy described more fully in Note 2,
"Foreign Currency Exchange Translation." These amounts are based upon 100%
of Shurgard Europe's balances, rather than our pro rata share of the
operations of Shurgard Europe, 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,
except for the six month period ended September 30, 2008, all amounts (net
of intercompany eliminations) are included in our condensed consolidated
financial statements and are not reflected as a component of equity in
earnings, in the case of our condensed consolidated income statement, or
investment in real estate entities, in the case of our condensed
consolidated balance sheet.
21
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
2008 2007 2008 2007
-------------- -------------- -------------- ---------------
(Amounts in thousands)
Self-storage revenues (a)............................ $ 56,902 $ 49,444 $ 169,382 $ 138,330
Ancillary revenues................................... 5,703 4,754 16,244 12,818
Interest and other income............................ 217 242 654 480
Self-storage cost of operations (b).................. (24,353) (21,256) (74,902) (66,556)
Ancillary cost of operations......................... (1,368) (1,424) (4,381) (4,114)
Trademark license fee payable to Public Storage...... (450) - (1,510) -
Depreciation and amortization........................ (23,200) (31,394) (70,675) (108,230)
General and administrative (c)....................... (2,690) (2,185) (9,724) (16,904)
Interest expense on third party debt (d)............. (6,719) (5,914) (20,293) (16,384)
Interest expense on debt to Public Storage........... (12,063) (9,668) (34,861) (28,684)
Income (expenses) from foreign exchange and
derivatives, net ................................. (2,016) 23 (2,016) 659
Discontinued operations.............................. - 130 - (204)
Minority interest (e)................................ 2,133 1,456 5,911 7,275
-------------- -------------- -------------- ---------------
Net (loss) income.................................. $ (7,904) $ (15,792) $ (26,171) $ (81,514)
============== ============== ============== ===============
At September 30, At December 31,
2008 2007
---------------- ---------------
(Amounts in thousands)
Total assets (primarily storage facilities).......... $ 1,767,557 $ 1,774,037
Total debt to third parties.......................... 376,485 384,045
Total debt to Public Storage......................... 566,084 561,182
Other liabilities.................................... 80,575 95,444
Equity............................................... 744,613 733,366
(a) Self-storage revenues for the three and nine months ended
September 30, 2008, respectively, include $19,468,000 and
$56,604,000 with respect to facilities owned by the Existing
European Joint Ventures, and $15,024,000 and $39,827,000 for the
same periods in 2007.
(b) Self-storage cost of operations for the three and nine months
ended September 30, 2008, respectively, include $10,781,000 and
$31,937,000 with respect to facilities owned by the Existing
European Joint Ventures, and $8,317,000 and $26,664,000 for the
same periods in 2007.
(c) General and administrative expense for the nine months ended
September 30, 2008 includes approximately $2.5 million in
incentive compensation, while general and administrative expense
for the same period in 2007 includes $9.6 million in expenses
associated with an offering of shares in Shurgard Europe.
(d) Represents interest expense on third-party debt as well as
capital leases. At September 30, 2008, $369,349,000 of such debt
is held by the Existing European Joint Ventures.
(e) Minority interest in income includes $3,287,000 and $9,919,000,
respectively, in depreciation and amortization expense for the
three and nine months ended September 30, 2008, and $2,674,000
and $8,281,000, respectively, for the same periods in 2007.
22
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
Our equity in earnings of Shurgard Europe for the three months
ended September 30, 2008, totaling $2,260,000 is comprised of (i) a loss of
$3,873,000, representing our 49% equity share of Shurgard Europe's
$7,904,000 net loss for the three months ended September 30, 2008 and (ii)
income of $5,912,000 and $221,000, respectively, representing our pro rata
share of the interest income and trademark license fees received from
Shurgard Europe during the three months ended September 30, 2008 (such
amounts are presented as equity in earnings of real estate entities rather
than interest and other income). Our equity in earnings of Shurgard Europe
for the nine months ended September 30, 2008, totaling $3,717,000 is
comprised of (i) a loss of $8,692,000, representing our 49% equity share of
Shurgard Europe's $17,738,000 net loss for the nine months ended September
30, 2008 and (ii) income of $11,983,000 and $426,000, respectively,
representing our pro rata share of the interest income and trademark
license fees received from Shurgard Europe since March 31, 2008 (such
amounts are presented as equity in earnings of real estate entities rather
than interest and other income).
Other Investments
-----------------
At September 30, 2008, other investments include an aggregate
common equity ownership of approximately 24% in five entities that own an
aggregate of 26 self-storage facilities. Of the 26 facilities, we account
for 20 using the equity method and six using the cost method.
On July 21, 2008, we reduced our investment in real estate
entities by $1,374,000 in connection with our acquisition of the remaining
interest that we did not own in the Acquisition Joint Venture (see Note 8).
The following table sets forth certain condensed financial
information (representing 100% of these entities' balances and not our pro
rata share) at September 30, 2008 with respect to the 20 facilities that we
account for using the equity method:
23
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
2008 2007
--------------- ----------------
(Amounts in thousands)
For the nine months ended September 30,
---------------------------------------
Total revenue........................ $ 12,910 $ 12,093
Cost of operations and other expenses (4,840) (4,713)
Depreciation and amortization........ (1,578) (1,412)
--------------- ----------------
Net income....................... $ 6,492 $ 5,968
=============== =================
At September 30, At December 31,
2008 2007
--------------- ----------------
(Amounts in thousands)
Total assets (primarily storage
facilities)...................... $ 40,032 $ 39,134
Total accrued and other liabilities.. 1,024 926
Total Partners' equity............... 39,008 38,208
6. Revolving Line of Credit
------------------------
On March 27, 2007, we entered into a five-year revolving credit
agreement (the "Credit Agreement") 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 September 30, 2008). 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 September 30, 2008). We had no outstanding borrowings on our
Credit Agreement at September 30, 2008 or at November 6, 2008.
The Credit Agreement includes various covenants, the more
significant of which require us to (i) maintain a leverage ratio (as
defined therein) of less than 0.55 to 1.00, (ii) maintain certain fixed
charge and interest coverage ratios (as defined therein) of not less than
1.5 to 1.0 and 1.75 to 1.0, respectively, and (iii) maintain a minimum
total shareholders' equity (as defined therein). We were in compliance with
all covenants of the Credit Agreement at September 30, 2008.
At September 30, 2008, 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 $17,736,000 ($20,408,000 at
December 31, 2007). The beneficiaries of these standby letters of credit
were primarily certain insurance companies associated with our captive
insurance and tenant re-insurance activities.
24
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
7. Notes Payable
-------------
The carrying amounts of our notes payable at September 30, 2008
and December 31, 2007 consist of the following (dollar amounts in
thousands):
September 30, December 31,
2008 2007
-------------- --------------
Domestic Unsecured Notes Payable:
5.875% effective and stated note rate, interest only and payable
semi-annually, matures in March 2013................................ $ 200,000 $ 200,000
5.73% effective rate, 7.75% stated note rate, interest only and payable
semi-annually, matures in February 2011 (carrying amount includes
$8,453 of unamortized premium at September 30, 2008) ............... 208,453 210,905
Secured Debt:
5.47% average effective rate fixed rate mortgage notes payable, secured by 89
real estate facilities with a net book value of $604,184 at September 30,
2008 and stated note rates between 4.95% and 8.75%, maturing at varying
dates between October 2008 and August 2015
(carrying amount includes $6,005 of unamortized premium at September
30, 2008) .......................................................... 237,606 236,897
First Shurgard credit agreement, due originally in 2008 but extended to
May 2009............................................................ - 189,064
Second Shurgard credit agreement, due in July 2009..................... - 187,665
Shurgard Europe's liability under Capital Leases....................... - 7,316
-------------- --------------
Total notes payable............................................. $ 646,059 $ 1,031,847
============== ==============
All of our notes payable represent preexisting debt that we
assumed in connection with the acquisition of real estate facilities or
business combinations. The Domestic Unsecured Notes Payable and the Secured
Debt were recorded at their estimated fair values upon acquisition based
upon estimated market rates for debt instruments with similar terms and
ratings. Any initial premium or discount, representing the difference
between the stated note rate and estimated fair value on the respective
date of assumption, is being amortized over the remaining term of the notes
using the effective interest method. During the nine months ended September
30, 2008, we assumed mortgage debt totaling $10,250,000 in connection with
the acquisition of a real estate facility (Note 4). This mortgage debt had
a stated note balance of $9,776,000, and we recorded a premium,
representing the differential between the fair value of the mortgage note
and the stated note balance of $474,000.
The Domestic Unsecured Notes Payable have various restrictive
covenants, the more significant of which require us to (i) maintain a ratio
of debt to total assets (as defined therein) of less than 0.60 to 1.00,
(ii) maintain a ratio of secured debt to total assets (as defined therein)
of less than 0.40 to 1.00, (iii) maintain a debt service coverage ratio (as
defined therein) of greater than 1.50 to 1.00, and (iv) maintain a ratio of
unencumbered assets to unsecured debt (as defined therein) of greater than
150%, all of which have been met at September 30, 2008.
The Secured Debt outstanding at September 30, 2008 require
interest and principal payments to be paid monthly and have various
restrictive covenants, all of which we believe have been met at September
30, 2008.
25
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
First Shurgard and Second Shurgard, in each of which Shurgard
Europe has a 20% interest, have senior credit agreements that were put into
place, prior to our acquisition of an interest in Shurgard Europe through a
business combination in August 2006, to fund development costs of various
self-storage projects. On March 31, 2008, we deconsolidated Shurgard Europe
and, as a result, the related notes payable owed by the Existing European
Joint Ventures are no longer included in our consolidated balance sheet.
At September 30, 2008, approximate principal maturities of our
notes payable are as follows (amounts in thousands):
Domestic Domestic
Unsecured Mortgage Notes
Notes Payable Payable Total
--------------- --------------- -------------
2008 (remainder of).......... $ - $ 13,971 $ 13,971
2009......................... 3,883 8,908 12,791
2010......................... 4,112 10,796 14,908
2011......................... 200,458 27,578 228,036
2012......................... - 55,335 55,335
Thereafter................... 200,000 121,018 321,018
--------------- --------------- -------------
$ 408,453 $ 237,606 $ 646,059
=============== =============== =============
Weighted average effective rate 5.8% 5.5% 5.7%
=============== =============== =============
We incurred interest expense with respect to our notes payable,
capital leases, debt to joint venture partner and line of credit
aggregating $36,817,000 and $51,783,000 for the nine months ended September
30, 2008 and 2007, respectively. These amounts were comprised of
$40,462,000 and $55,375,000 in cash for the nine months ended September 30,
2008 and 2007, respectively, less $3,645,000 and $3,592,000 in amortization
of premium net of increase in Debt to Joint Venture Partner described in
Note 8, respectively.
8. Acquisition Joint Venture
-------------------------
In January 2004, we entered into a joint venture partnership (the
"Acquisition Joint Venture") with an institutional investor for the purpose
of acquiring existing self-storage properties. The Acquisition Joint
Venture was funded entirely with equity consisting of 30% from the Company
and 70% from the institutional investor. Under the partnership agreements,
we had an option to acquire the institutional investor's interest for a six
month period beginning July 1, 2008.
We determined that the Acquisition Joint Venture was not a
variable interest entity, and we did not control this entity. Therefore, we
have not consolidated the accounts of the Acquisition Joint Venture on our
consolidated financial statements. The Acquisition Joint Venture owned 12
facilities. Two of these facilities were acquired directly from third
parties in 2004, and ten facilities were acquired from us in 2004.
We accounted for our investment with respect to the two facilities
using the equity method, with our pro rata share of the income from these
facilities recorded as "Equity in earnings of real estate entities" on our
consolidated statements of income.
The purchase of the other ten facilities in 2004 did not qualify
under FAS 66 as a completed sale due to our continued involvement and, due
to the likelihood that we would exercise our option to acquire our
partner's interest, we accounted for our partner's investment in these ten
facilities as, in substance, debt financing. Accordingly, our partner's
investment with respect to these ten facilities was accounted for as Debt
26
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
to Joint Venture Partner on our accompanying condensed consolidated balance
sheets, and presented at estimated fair value totaling $38,081,000 at
December 31, 2007. Our partner's share of operations with respect to these
facilities was accounted for as interest expense on our accompanying
condensed consolidated statements of income, totaling $1,808,000 and
$2,375,000 for the nine months ended September 30, 2008 and 2007,
respectively.
On July 21, 2008, in connection with our exercise of our
aforementioned purchase option, we acquired the remaining interest that we
did not own in the Acquisition Joint Venture from our joint venture partner
for an aggregate purchase price of $45,799,000 in cash. Of the acquisition
price, $38,409,000 constituted the repayment of Debt to Joint Venture
Partner, and $7,390,000 constituted the acquisition of our joint venture
partner's investment in the two facilities that were originally acquired
directly from third parties.
Upon the acquisition date of July 21, 2008, we began consolidating
the accounts of the two facilities. The total acquisition cost of
$8,754,000 for these two facilities, comprised of the $7,390,000 cash paid
and our pre-existing investment totaling $1,364,000, was allocated
$7,950,000 to real estate facilities and $804,000 to tenant intangibles.
9. Minority Interest
-----------------
In consolidation, we classify ownership interests in the net
assets of each of the Consolidated Entities, other than our own, as
minority interest on the condensed consolidated financial statements.
Minority interest in income consists of the minority interests' share of
the operating results of the applicable entity.
Preferred Partnership Interests
The following table summarizes the preferred partnership units
outstanding at September 30, 2008 and December 31, 2007:
September 30, 2008 December 31, 2007
-------------------------- ---------------------------
Earliest Redemption Distribution Units Carrying Units Carrying
Series Date Rate Outstanding Amount Outstanding Amount
----------------- -------------------- ------------ ----------- ------------ ------------ ------------
(Amounts in thousands)
Series NN........ March 17, 2010 6.400% 8,000 $ 200,000 8,000 $ 200,000
Series Z......... October 12, 2009 6.250% 1,000 25,000 1,000 25,000
Series J......... May 9, 2011 7.250% 4,000 100,000 4,000 100,000
----------- ------------ ------------ ------------
Total............ 13,000 $ 325,000 13,000 $ 325,000
=========== ============ ============ ============
Income allocated to the preferred minority interests totaled
$5,403,000 and $16,209,000 for each of the three and nine months ended
September 30, 2008 and 2007, respectively, comprised of distributions paid.
Subject to certain conditions, the Series NN preferred units are
convertible into our 6.40% Series NN Cumulative Preferred Shares of
beneficial interest, the Series Z preferred units are convertible into our
6.25% Series Z Cumulative Preferred Shares of beneficial interest and the
Series J preferred units are convertible into our 7.25% Series J Cumulative
Preferred Shares of beneficial interest. The holders of the Series Z
preferred partnership units have a one-time option exercisable on October
12, 2009 to require us to redeem their units for $25,000,000 in cash, plus
any unpaid distribution.
Other Partnership Interests
---------------------------
Income is allocated to the minority interests based upon their pro
rata interest in the operating results of the Consolidated Entities. The
27
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
following tables set forth the minority interests at September 30, 2008 and
December 31, 2007 as well as the income allocated to minority interests for
the three and nine months ended September 30, 2008 and 2007 with respect to
the other partnership interests:
Minority Interest at
--------------------------------
September 30, December 31,
Description of Minority Interest 2008 2007
------------- --------------
(Amounts in thousands)
Existing European Joint Ventures.. $ - $ 140,385
PS Officers' Europe Investment.... - 3,520
Convertible Partnership Units..... 5,693 5,516
Other consolidated partnerships... 33,759 32,267
------------- --------------
Total other partnership interests. $ 39,452 $ 181,688
============= ==============
Minority Interests in Minority Interests in
Income (Loss) Income (Loss)
for the Three Months Ended for the Nine Months Ended
-------------------------------- ---------------------------------
September 30, September 30, September 30, September 30,
Description 2008 2007 2008 2007
--------------------------------- -------------- --------------- --------------- ---------------
(Amounts in thousands)
Existing European Joint Ventures. $ - $ (1,456) $ (2,142) $ (7,275)
PS Officers' Europe Investment... - (109) (111) (109)
Convertible Partnership Units.... 99 121 805 132
Other consolidated partnerships.. 5,109 4,345 13,591 12,654
-------------- --------------- --------------- ---------------
Total other partnership interests $ 5,208 $ 2,901 $ 12,143 $ 5,402
============== =============== =============== ================
Distributions paid to minority interests for the three months
ended September 30, 2008 and 2007 were $4,132,000 and $5,471,000,
respectively, and for the nine months ended September 30, 2008 and 2007
were $12,727,000 and $15,828,000, respectively. Minority interests
increased $7,249,000 and $8,134,000 as a result of the impact of foreign
currency translation in the nine months ended September 30, 2008 and 2007,
respectively.
The Existing European Joint Ventures
------------------------------------
Through the Shurgard Merger, we acquired an interest in two joint
venture entities: First Shurgard SPRL ("First Shurgard") formed in January
2003 and Second Shurgard SPRL ("Second Shurgard") formed in May 2004. Those
joint ventures (referred to collectively hereinafter as the "Existing
European Joint Ventures") were expected to develop or acquire up to
approximately 75 storage facilities in Europe. Shurgard Europe has a 20%
interest in each of these ventures. We have determined that the Existing
European Joint Ventures are each VIEs, and that Shurgard Europe is the
primary beneficiary. Accordingly, the accounts of the Existing European
Joint Ventures have been included in our consolidated financial statements
until March 31, 2008, when Shurgard Europe was deconsolidated (see also
Note 3), reducing minority interests by $145,492,000 at March 31, 2008. See
Note 5 under "Investment in Shurgard Europe" for further historical
information regarding Shurgard Europe, including historical income
allocated to the minority interests in the Existing European Joint
Ventures.
28
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
PS Officers' Europe Investment
------------------------------
In the second quarter of 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. The
aggregate proceeds of the sale were $4,909,000. The sale price for the
interests was based upon the pro rata net asset value computed using, among
other sources, information provided by an independent third party appraisal
firm of the net asset value of Shurgard Europe as of March 31, 2007. In
connection with the sale of these LLP Interests, we recorded a gain of
$1,194,000 during the second quarter of 2007, representing the excess of
the sales proceeds over the book value of the LLP Interests sold. For
periods commencing from the sale of the interest through March 31, 2008,
the PS Officers' pro rata share of the earnings of Shurgard Europe are
reflected in minority interest in income - other partnership interests on
our accompanying condensed consolidated statement of income.
The investment of the PS Officers is included in minority interest
- other partnership interests on our accompanying condensed consolidated
balance sheet at December 31, 2007. As described in Note 3, on March 31,
2008, we deconsolidated Shurgard Europe and, as a result, minority interest
was reduced $3,409,000. See Note 5 under "Investment in Shurgard Europe"
for further historical information regarding Shurgard Europe, including
historical income allocated to the PS Officers' Europe Investment.
Convertible Partnership Units
-----------------------------
At September 30, 2008 and December 31, 2007, one of the
Consolidated Entities had approximately 231,978 convertible partnership
units ("Convertible Units") outstanding representing a limited partnership
interest in the entity. The Convertible Units are convertible on a
one-for-one basis (subject to certain limitations) into common shares of
the Company at the option of the unit-holder. Minority interest in income
with respect to Convertible Units reflects the Convertible Units' share of
our net income, with net income allocated to minority interests with
respect to weighted average outstanding Convertible Units on a per unit
basis equal to diluted earnings per common share.
Other Consolidated Partnerships
-------------------------------
At September 30, 2008 and December 31, 2007, the other
consolidated partnerships reflect common equity interests that we do not
own in 33 entities that own in aggregate 177 self-storage facilities. The
related partnership agreements have termination dates that cannot be
unilaterally extended by the Company and, upon termination of each
partnership, the net assets of these entities would be liquidated and paid
to the minority interests and the Company based upon their respective
ownership interests.
Impact of SFAS No. 150
----------------------
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 - "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS No. 150"). This
statement prescribes reporting standards for financial instruments that
have characteristics of both liabilities and equity. This standard
generally indicates that certain financial instruments that give the issuer
a choice of settling an obligation with a variable number of securities or
settling an obligation with a transfer of assets, any mandatorily
redeemable security, and certain put options and forward purchase
contracts, should be classified as a liability on the balance sheet. With
the exception of minority interests, described below, we implemented SFAS
No. 150 on July 1, 2003, and the adoption had no impact on our financial
statements.
The provisions of SFAS No. 150 indicate that the Other Minority
Interests would have to be treated as a liability, because these
partnerships have termination dates that cannot be unilaterally extended by
us and, upon termination, the net assets of these entities would be
liquidated and paid to the minority interest and us based upon relative
29
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
ownership interests. However, on October 29, 2003, the FASB decided to
defer indefinitely a portion of the implementation of SFAS No. 150, which
thereby deferred our requirement to recognize these minority interest
liabilities. We estimate that the fair values of the Other Partnership
Interests are approximately $319 million and $532 million at September 30,
2008 and December 31, 2007, respectively. The decrease between December 31,
2007 and September 30, 2008 is due to the deconsolidation of Shurgard
Europe, accordingly, the fair value of the Existing European Joint Ventures
and the PS Officers' Europe Investment is not included in the September 30,
2008 estimated fair value. We determine the fair value of the Other
Partnership Interests based upon our estimate of the fair value of the
underlying net assets (principally real estate assets), applying the
related liquidation provisions of the related partnership agreement. We
determine the fair value of the underlying real estate by reference to the
historical operating results, and apply an estimate of the effective
earnings multiple based upon our review of market transactions and other
market data.
10. Shareholders' Equity
--------------------
Cumulative Preferred Shares
---------------------------
At September 30, 2008 and December 31, 2007, we had the following
series of Cumulative Preferred Shares of beneficial interest outstanding:
At September 30, 2008 At December 31, 2007
Earliest ---------------------------- ----------------------------
Redemption Dividend Shares Carrying Shares Carrying
Series Date Rate Outstanding Amount Outstanding Amount
------------------ ------------- ----------- ------------- ------------- -------------- ------------
(Dollar amounts in thousands)
Series V 9/30/07 7.500% 6,900 $ 172,500 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% 1,600,000 40,000 1,600,000 40,000
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% 4,600 115,000 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% 10,000 250,000 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% 18,400 460,000 18,400 460,000
Series L 10/20/11 6.750% 9,200 230,000 9,200 230,000
Series M 1/9/12 6.625% 20,000 500,000 20,000 500,000
Series N 7/2/12 7.000% 6,900 172,500 6,900 172,500
------------- ------------- -------------- ------------
Total Cumulative Preferred Shares 1,739,500 $ 3,527,500 1,739,500 $ 3,527,500
============= ============= ============== ============
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
30
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
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 the Company's Board until events of default have been cured. At
September 30, 2008, there were no dividends in arrears.
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. Upon redemption, we apply EITF Topic D-42, allocating
income to the preferred shareholders equal to the original issuance costs.
Equity Shares
-------------
The Company is authorized to issue 100,000,000 Equity Shares of
beneficial interest. The Articles of Amendment and Restatement of
Declaration of Trust provide that the Equity Shares may be issued from time
to time in one or more series and give our Board broad authority to fix the
dividend and distribution rights, conversion and voting rights, redemption
provisions and liquidation rights of each series of Equity Shares.
Equity Shares, Series A
-----------------------
At September 30, 2008 and December 31, 2007, we had 8,744,193
depositary shares outstanding, each representing 1/1,000 of an Equity
Share, Series A ("Equity Shares A"). The Equity Shares A rank on parity
with our common shares and junior to the Cumulative Preferred Shares with
respect to general preference rights and have a liquidation amount which
cannot exceed $24.50 per share. Distributions with respect to each
depositary share shall be the lesser of: (i) five times the per share
dividend on our common shares or (ii) $2.45 per annum. We have no
obligation to pay distributions on the depositary shares if no
distributions are paid to common shareholders.
Except in order to preserve the Company's Federal income tax
status as a REIT, we may not redeem the depositary shares representing the
Equity Shares 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.
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 the Consolidated
Development Joint Venture. On November 17, 2005, upon the acquisition of
Mr. Hughes' interest in PSAC, we owned 100% of the partnership interest in
the Consolidated Development Joint Venture. For all periods presented, the
Equity Shares, Series AAA and related dividends are eliminated in
consolidation.
Common Shares
-------------
During the nine months ended September 30, 2008, we issued 336,904
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 nine months ended
31
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
September 30, 2008, we repurchased a total of 1,520,196 of our common
shares for an aggregate of approximately $111.9 million. Through September
30, 2008, we have repurchased a total of 23,721,916 of our common shares
pursuant to this authorization.
At September 30, 2008 and December 31, 2007, certain entities we
consolidate owned 1,146,207 common shares. These shares continue to be
legally issued and outstanding. In the consolidation process, these shares
and the related balance sheet amounts have been eliminated. In addition,
these shares are not included in the computation of weighted average shares
outstanding.
Dividends
---------
The following table summarizes dividends declared and paid during
the nine months ended September 30, 2008:
Distributions Per
Share or Depositary
Preferred Shares: Share Total Distributions
----------------- ------------------- -------------------
Series V.............................. $1.406 $ 9,702,000
Series W.............................. $1.219 6,459,000
Series X.............................. $1.209 5,805,000
Series Y.............................. $1.284 2,055,000
Series Z.............................. $1.172 5,274,000
Series A.............................. $1.148 5,283,000
Series B.............................. $1.336 5,811,000
Series C.............................. $1.238 5,694,000
Series D.............................. $1.159 6,258,000
Series E.............................. $1.266 7,152,000
Series F.............................. $1.209 12,093,000
Series G.............................. $1.313 5,250,000
Series H.............................. $1.303 5,474,000
Series I.............................. $1.359 28,140,000
Series K.............................. $1.359 25,011,000
Series L.............................. $1.266 11,643,000
Series M.............................. $1.242 24,841,000
Series N.............................. $1.312 9,054,000
-------------------
180,999,000
Common Shares:
--------------
Equity Shares, Series A............... $1.838 16,068,000
Common ............................... $1.650 278,502,000
-------------------
Total dividends.................... $ 475,569,000
===================
The dividend rate on our common shares was $0.55 per common share
and $1.65 per common share for the three and nine months ended September
30, 2008, respectively. The dividend rate on the Equity Share A was $0.6125
per depositary share and $1.838 per depositary share for the three and nine
months ended September 30, 2008, respectively.
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.
32
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
Our self-storage segment comprises the direct ownership,
development, and operation of traditional storage facilities in the U.S.,
and the ownership of equity interests in entities that own storage
properties 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 represents all of our other segments, which
are reported as a group, including (i) containerized storage, (ii)
commercial property operations, directly and through our interest in PSB
(iii) the reinsurance of policies against losses to goods stored by tenants
in our self-storage facilities, (iv) sale of merchandise at our
self-storage facilities, (v) truck rentals at our self-storage facilities
and (vi) management of facilities owned by third-party owners and domestic
facilities owned by the Unconsolidated Entities.
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, minority interest in income 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
December 31, 2007, assets of Shurgard Europe include real estate with a
book value of approximately $1.6 billion, intangible assets with a book
value of approximately $87 million, and other assets with a book value of
approximately $57 million. At December 31, 2007, liabilities of Shurgard
Europe include intercompany payables of $561 million, third party debt of
$384 million, and accrued and other liabilities of $95 million. At
September 30, 2008, our condensed consolidated balance sheet includes an
investment in Shurgard Europe with a book value of $303.9 million and a
note receivable totaling (euro)391.9 million ($566.1 million).
Presentation of Segment Information
-----------------------------------
The following table reconciles the performance of each segment, in
terms of segment income, to our condensed consolidated net income (amounts
in thousands):
33
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
For the three months ended September 30, 2008
Other Items
Shurgard Not Allocated Total
Self Storage Europe Ancillary to Segments Consolidated
------------- ----------- ------------ ------------- -------------
(Amounts in thousands)
Revenues:
Self-storage rental income.................... $ 393,326 $ - $ - $ - $ 393,326
Ancillary operating revenue................... - - 32,079 - 32,079
Interest and other income..................... - 6,380 - 5,105 11,485
------------- ----------- ------------ ------------- -------------
393,326 6,380 32,079 5,105 436,890
------------- ----------- ------------ ------------- -------------
Expenses:
Cost of operations (excluding depreciation and
amortization below):
Self-storage facilities.................... 121,833 - - - 121,833
Ancillary operations....................... - - 9,836 - 9,836
Depreciation and amortization.................. 91,140 - 891 - 92,031
General and administrative..................... - - - 8,879 8,879
Interest expense............................... - - - 9,099 9,099
------------- ----------- ------------ ------------- -------------
212,973 - 10,727 17,978 241,678
------------- ----------- ------------ ------------- -------------
Income (loss) from continuing operations before
equity in earnings of real estate entities,
gain on disposition of other real estate
investments, casualty loss, foreign currency
exchange loss and minority interest in
(income) loss................................. 180,353 6,380 21,352 (12,873) 195,212
Equity in earnings of real estate entities....... 738 2,260 3,320 - 6,318
Gain on disposition of other real estate
investments................................... - - - 1,024 1,024
Casualty loss.................................... - - - (525) (525)
Foreign currency exchange loss................... - (53,172) - - (53,172)
Minority interest in income...................... (5,208) - - (5,403) (10,611)
------------- ----------- ------------ ------------- -------------
Income (loss) from continuing operations......... 175,883 (44,532) 24,672 (17,777) 138,246
Discontinued operations.......................... - - - (915) (915)
------------- ----------- ------------ ------------- -------------
Net income (loss)................................ $ 175,883 $ (44,532) $ 24,672 $ (18,692) $ 137,331
============= =========== ============ ============= ==============
34
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
For the three months ended September 30, 2007
Other Items
Shurgard Not Allocated Total
Self Storage Europe Ancillary to Segments Consolidated
------------- ----------- ------------ ------------- -------------
(Amounts in thousands)
Revenues:
Self-storage rental income.................... $ 378,354 $ 49,444 $ - $ - $ 427,798
Ancillary operating revenue................... - 4,754 32,411 - 37,165
Interest and other income..................... - 242 - 3,015 3,257
------------- ----------- ------------ ------------- -------------
378,354 54,440 32,411 3,015 468,220
------------- ----------- ------------ ------------- -------------
Expenses:
Cost of operations (excluding depreciation and
amortization below):
Self-storage facilities.................... 122,115 21,256 - - 143,371
Ancillary operations....................... - 1,424 20,725 - 22,149
Depreciation and amortization.................. 115,498 31,394 849 - 147,741
General and administrative..................... - 2,185 - 9,231 11,416
Interest expense............................... - 5,914 - 9,343 15,257
------------- ----------- ------------ ------------- -------------
237,613 62,173 21,574 18,574 339,934
------------- ----------- ------------ ------------- -------------
Income (loss) from continuing operations before
equity in earnings of real estate entities,
gain on disposition of other real estate
investments, foreign currency exchange gain,
income from derivatives and minority interest
in income..................................... 140,741 (7,733) 10,837 (15,559) 128,286
Equity in earnings of real estate entities....... 902 - - 2,522 3,424
Gain on disposition of other real estate
investments................................... - - - 92 92
Foreign currency exchange gain................... - 30,384 - - 30,384
Income from derivatives, net..................... - 117 - - 117
Minority interest in (income) loss............... (4,357) 1,456 - (5,403) (8,304)
------------- ----------- ------------ ------------- -------------
Income (loss) from continuing operations......... 137,286 24,224 10,837 (18,348) 153,999
Discontinued operations.......................... - 130 - (1,363) (1,233)
------------- ----------- ------------ ------------- -------------
Net income (loss)................................ $ 137,286 $ 24,354 $ 10,837 $ (19,711) $ 152,766
============= =========== ============ ============== =============
35
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
For the nine months ended September 30, 2008
Other Items
Shurgard Not Allocated Total
Self Storage Europe Ancillary to Segments Consolidated
------------- ----------- ------------ ------------- -------------
(Amounts in thousands)
Revenues:
Self-storage rental income.................... $ 1,144,769 $ 54,722 $ - $ - $ 1,199,491
Ancillary operating revenue................... - 4,913 94,045 - 98,958
Interest and other income..................... - 12,912 - 12,431 25,343
------------- ----------- ------------ ------------- -------------
1,144,769 72,547 94,045 12,431 1,323,792
------------- ----------- ------------ ------------- -------------
Expenses:
Cost of operations (excluding depreciation and
amortization below):
Self-storage facilities.................... 382,448 24,654 - - 407,102
Ancillary operations....................... - 1,409 44,004 - 45,413
Depreciation and amortization.................. 285,357 21,871 2,672 - 309,900
General and administrative..................... - 30,044 - 26,924 56,968
Interest expense............................... - 6,597 - 28,590 35,187
------------- ----------- ------------ ------------- -------------
667,805 84,575 46,676 55,514 854,570
------------- ----------- ------------ ------------- -------------
Income (loss) from continuing operations before
equity in earnings of real estate entities,
gain on disposition of an interest in Shurgard
Europe, gain on disposition of other real estate
investments, casualty loss, foreign currency
exchange loss, expense from derivatives and
minority interest in (income) loss............ 476,964 (12,028) 47,369 (43,083) 469,222
Equity in earnings of real estate entities....... 1,450 3,717 8,512 - 13,679
Gain on disposition of an interest in Shurgard
Europe........................................ - 341,865 - - 341,865
Gain on disposition of other real estate
investments................................... - - - 932 932
Casualty loss.................................... - - - (525) (525)
Foreign currency exchange loss................... - (12,160) - - (12,160)
Expense from derivatives, net.................... - (43) - - (43)
Minority interest in (income) loss............... (14,285) 2,142 - (16,209) (28,352)
------------- ----------- ------------ ------------- -------------
Income from continuing operations................ 464,129 323,493 55,881 (58,885) 784,618
Discontinued operations.......................... - - - (1,132) (1,132)
------------- ----------- ------------ ------------- -------------
Net income (loss)................................ $ 464,129 $ 323,493 $ 55,881 $ (60,017) $ 783,486
============= =========== ============ ============= =============
36
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
For the nine months ended September 30, 2007
Other Items
Shurgard Not Allocated Total
Self Storage Europe Ancillary to Segments Consolidated
------------- ----------- ------------ ------------- -------------
(Amounts in thousands)
Revenues:
Self-storage rental income.................... $ 1,099,048 $ 138,330 $ - $ - $ 1,237,378
Ancillary operating revenue................... - 12,818 93,434 - 106,252
Interest and other income..................... - 480 - 5,857 6,337
------------- ----------- ------------ ------------- -------------
1,099,048 151,628 93,434 5,857 1,349,967
------------- ----------- ------------ ------------- -------------
Expenses:
Cost of operations (excluding depreciation and
amortization below):
Self-storage facilities.................... 374,644 66,556 - - 441,200
Ancillary operations....................... - 4,114 57,696 - 61,810
Depreciation and amortization.................. 380,840 108,230 2,547 - 491,617
General and administrative..................... - 16,904 - 32,493 49,397
Interest expense............................... - 16,384 - 32,388 48,772
------------- ----------- ------------ ------------- -------------
755,484 212,188 60,243 64,881 1,092,796
------------- ----------- ------------ ------------- -------------
Income (loss) from continuing operations before
equity in earnings of real estate entities,
gain on disposition of other real estate investments,
casualty gain, foreign currency exchange gain,
income from derivatives and minority interest
in income..................................... 343,564 (60,560) 33,191 (59,024) 257,171
Equity in earnings of real estate entities....... 1,947 - - 8,236 10,183
Gain on disposition of other real estate
investments................................... - - - 2,330 2,330
Casualty gain.................................... 2,665 - - - 2,665
Foreign currency exchange gain................... - 40,977 - - 40,977
Income from derivatives, net..................... - 1,126 - - 1,126
Minority interest in (income) loss............... (12,677) 7,275 - (16,209) (21,611)
------------- ----------- ------------ ------------- -------------
Income (loss) from continuing operations......... 335,499 (11,182) 33,191 (64,667) 292,841
Discontinued operations.......................... - (204) - (2,989) (3,193)
------------- ----------- ------------ ------------- -------------
Net income (loss)................................ $ 335,499 $ (11,386) $ 33,191 $ (67,656) $ 289,648
============= =========== ============ ============= ==============
37
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
12. 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 nine months ended September 30, 2008, we
recorded $904,000 and $2,271,000, respectively, in stock option
compensation expense related to options granted after January 1, 2002, as
compared to $695,000 and $1,301,000, for the same periods in 2007.
A total of 1,010,000 stock options were granted during the nine
months ended September 30, 2008, 263,636 shares were exercised, and 8,000
shares were forfeited. A total of 2,427,838 stock options were outstanding
at September 30, 2008 (1,689,474 at December 31, 2007).
Outstanding stock options are included on a one-for-one basis in
our diluted weighted average shares, less a reduction for the treasury
stock method applied to a) the average cumulative measured but unrecognized
compensation expense during the period and b) the strike price proceeds
expected from the employee upon exercise.
Restricted Share Units
----------------------
Outstanding restricted share units vest over a five or eight-year
period from the date of grant at the rate of one-fifth or one-eighth per
year, respectively. The employee receives additional compensation equal to
the per-share dividends received by common shareholders with respect to
restricted share units outstanding. Such compensation is accounted for as
dividends paid. Any dividends paid on units which are subsequently
forfeited are expensed. Upon vesting, the employee receives common shares
equal to the number of vested restricted share units in exchange for the
units.
The total value of each restricted share unit grant, based upon
the market price of our common shares at the date of grant, is amortized
over the service period, net of estimates for future forfeitures, as
compensation expense. The related employer portion of payroll taxes is
expensed as incurred.
Outstanding restricted share units are included on a one-for-one
basis in our diluted weighted average shares, less a reduction for the
treasury stock method applied to the average cumulative measured but
unrecognized compensation expense during the period. For purposes of the
disclosures that follow, "fair value" on any particular date reflects the
closing market price of our common shares on that date.
During the nine months ended September 30, 2008, 233,475
restricted share units were granted, 61,878 restricted share units were
forfeited and 113,364 restricted share units vested. This vesting resulted
38
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
in the issuance of 73,268 common shares. In addition, cash compensation was
paid to employees in lieu of 40,096 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 September 30, 2008, approximately 667,001 restricted share
units were outstanding (608,768 at December 31, 2007). A total of
$2,601,000 and $7,492,000 in restricted share expense was recorded for the
three and nine months ended September 30, 2008, respectively, as compared
to $1,751,000 and $6,013,000 for the same periods in 2007. Restricted share
expense includes amortization of the fair value of the grant reflected as
an increase to paid-in capital, as well as payroll taxes we incurred upon
each respective vesting.
13. Related Party Transactions
--------------------------
Relationships and transactions with the Hughes Family
-----------------------------------------------------
Mr. Hughes, the Company's Chairman of the Board of Trustees and
his family (collectively the "Hughes Family") have ownership interests in,
and operate approximately 48 self-storage facilities in Canada under the
name "Public Storage" ("PS Canada") pursuant to a royalty-free trademark
license agreement with the Company. We currently do not own any interests
in these facilities nor do we own any facilities in Canada. The Hughes
Family owns approximately 25.5% of our common shares outstanding at
September 30, 2008. We have a right of first refusal to acquire the stock
or assets of the corporation that manages the 48 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.
Through consolidated entities, we continue to reinsure risks
relating to loss of goods stored by tenants in the self-storage facilities
in Canada. During the nine months ended September 30, 2008 and 2007, we
received $649,000 and $666,000, respectively, in reinsurance premiums
attributable to the Canadian facilities. Since our right to provide tenant
reinsurance to the Canadian facilities may be qualified, there is no
assurance that these premiums will continue.
The Company and Mr. Hughes are co-general partners in certain
consolidated partnerships and affiliated partnerships of the Company that
are not consolidated, and the Hughes Family owns 47.9% of the voting stock
of a private REIT that owns limited partnership interests in five
affiliated partnerships, in which the Company holds 46% of the voting and
100% of the nonvoting stock of the entity and substantially all the
economic interest. The Hughes Family also owns limited partnership
interests in certain of these partnerships and holds securities in PSB. PS
Canada holds approximately a 2.4% interest in Stor-RE, a consolidated
entity that provides liability and casualty insurance for PS Canada, the
Company and certain affiliates of the Company, for occurrences prior to
April 1, 2004 as described below. The Company and the Hughes Family receive
distributions from these entities in accordance with the terms of the
partnership agreements or other organizational documents.
Other Related Party Transactions
--------------------------------
Ronald L. Havner, Jr. is our Vice-Chairman and Chief Executive
Officer, and he is Chairman of the Board of PSB.
Dann V. Angeloff, a trustee of the Company, is the general partner
of a limited partnership formed in June of 1973 that owns a self-storage
facility that is managed by us. We recorded management fees with respect to
39
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
this facility amounting to $19,000 and $57,000 for the three and nine
months ended September 30, 2008, respectively, as compared to $18,000 and
$55,000 for the same periods in 2007.
PSB manages certain of the commercial facilities that we own
pursuant to management agreements for a management fee equal to 5% of
revenues. We paid a total of $178,000 and $550,000 for the three and nine
months ended September 30, 2008, respectively, as compared to $177,000 and
$542,000 for the three and nine months ended September 30, 2007,
respectively, in management fees with respect to PSB's property management
services. At September 30, 2008, included in other liabilities are normal
recurring amounts owed to PSB of $128,000 ($717,000 at December 31, 2007),
for unpaid management fees and certain other operating expenses related to
the managed facilities which are initially paid by PSB on our behalf and
then reimbursed by us.
During 2007, PSB acquired certain commercial facilities that
include self-storage space. We are managing this self-storage space for PSB
for a management fee equal to 6% of revenues generated by the self-storage
space. We recorded management fees with respect to these facilities
amounting to $12,000 and $36,000 for the three and nine months ended
September 30, 2008, respectively, as compared to $11,000 and $35,000 for
the same periods in 2007.
Pursuant to a cost-sharing and administrative services agreement,
PSB reimburses us for certain administrative services that we provide to
them. PSB's share of these costs totaled approximately $97,000 and $292,000
for the three and nine months ended September 30, 2008, respectively, as
compared to $76,000 and $228,000 for the same periods in 2007.
Shurgard Europe also entered into a licensing agreement with
Public Storage effective January 1, 2008, under which it pays Public
Storage a fee equal to 1.0% of its pro rata share of revenues in exchange
for the rights to use the "Shurgard Europe" trade name. During each of the
three and nine months ended September 30, 2008, net of our 49% equity
interest in Shurgard Europe, we recorded aggregate other income and equity
earnings (see Note 5) of $450,000 and $868,000, respectively, under this
licensing agreement.
Shurgard Europe manages a facility located in London, England for
us in exchange for a fee of 7% of revenues. During each of the three and
nine months ended September 30, 2008, we recorded management fees of
$31,000 and $62,000, respectively, in connection with this management
agreement since March 31, 2008. Such fees are included in cost of
operations - self-storage facilities in our condensed consolidated
statements of income for periods following the deconsolidation of Shurgard
Europe on March 31, 2008.
As described more fully in Note 2 under "Note Receivable from
Affiliate," Shurgard Europe owes us an aggregate of (euro)391.9 million
($566.1 million) at September 30, 2008. This note bears interest at 7.5%
per annum. During each of the three and nine months ended September 30,
2008, we recorded aggregate interest income and equity earnings (see Note
5) of $11,394,000 and $23,084,000, respectively, in connection with this
note. Also during each of the three and nine months ended September 30,
2008, we recorded aggregate interest income and equity earnings (see Note
5) of $669,000 and $1,369,000, respectively, in connection with the 1% debt
arrangement fee on this note.
We manage our wholly-owned self-storage facilities as well as the
facilities owned by the Consolidated Entities and affiliated entities that
are not consolidated on a joint basis, in order to take advantage of scale
and other efficiencies. As a result, significant components of self-storage
operating costs, such as payroll costs, advertising and promotion, data
processing, and insurance expenses are shared and allocated among the
various entities using methodologies meant to fairly allocate such costs
based upon the related activities. The amount of such expenses allocated to
Unconsolidated Entities was approximately $590,000 and $1,967,000 for the
three and nine months ended September 30, 2008, respectively, as compared
to $599,000 and $1,895,000 for the same periods in 2007.
40
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
Stor-RE, a consolidated entity, and third party insurance carriers
provided PS Canada, the Company, PSB, and other affiliates of the Company
with liability and casualty insurance coverage until March 31, 2004. PS
Canada owns a 2.4% interest and PSB owns a 4.1% interest in Stor-RE. PS
Canada and PSB obtained their own liability and casualty insurance covering
occurrences after April 1, 2004. For occurrences before April 1, 2004,
Stor-Re continues to provide liability and casualty insurance coverage
consistent with the relevant agreements.
In the second quarter of 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. The
aggregate proceeds of the sale were $4,909,000. The sale price for the
interests was based upon the pro rata net asset value computed using, among
other sources, information provided by an independent third party appraisal
firm of the net asset value of Shurgard Europe as of March 31, 2007. In
connection with the initial sale of these LLP Interests to our officers, we
recorded a gain of $1,194,000 during the second quarter of 2007,
representing the excess of the sales proceeds over the book value of the
LLP Interests sold. In connection with the acquisition by an institutional
investor of a 51% interest in Shurgard Europe, Shurgard Holdings (an
unconsolidated affiliate which is the holding company of Shurgard Europe)
purchased, on June 20, 2008, each holder's interest in Shurgard Europe at a
price based on the price paid by the institutional investor. The total
repurchase amount was $7.1 million. See Note 5 under "Investment in
Shurgard Europe" for further historical information regarding Shurgard
Europe.
14. Commitments and Contingencies
-----------------------------
Legal Matters
-------------
Potter, et al v. Hughes, et al (filed December 2004)
---------------------------------------------------------
(United States District Court - Central District of California)
---------------------------------------------------------------
In November 2002, a shareholder of the Company made a demand on
our Board challenging the fairness of the Company's acquisition of PS
Insurance Company, Ltd. ("PSIC") and related matters. PSIC was previously
owned by the Hughes Family. In June 2003, following the filing by the
Hughes Family of a complaint for declaratory relief asking the court to
find that the acquisition of PSIC and related matters were fair to the
Company, it was ruled that the PSIC transaction was just and reasonable as
to the Company and holding that the Hughes Family was not required to make
any payment to the Company.
At the end of December 2004, the same shareholder referred to
above and a second shareholder filed this shareholder's derivative
complaint naming as defendants the Company's directors (and two former
directors) and certain officers of the Company. The matters alleged in this
complaint relate to PSIC, the Hughes Family's Canadian self-storage
operations and the Company's 1995 reorganization. In July 2006, the Court
granted the defendants' motion to dismiss the amended Complaint without
leave to amend. In August 2006, Plaintiffs filed a notice of appeal of the
Court's decision. On October 10, 2008, the Ninth Circuit Court of Appeals
affirmed the trial court's dismissal of this matter.
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
41
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
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 only. 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.
European Joint Venture Arbitration Proceeding
---------------------------------------------
Shurgard Europe holds a 20% interest in each of two joint ventures
in Europe, First Shurgard and Second Shurgard, that collectively own 74
self-storage properties in Europe. On August 24, 2006, the Company, through
its affiliate, Shurgard Europe, served an exit notice on the European joint
venture partners informing them of its intention to purchase their
interests in First Shurgard and Second Shurgard pursuant to an early exit
procedure that the Company believes is provided for in the respective joint
venture agreements. The exit notice offered to pay the joint venture
partners an amount for their interests in accordance with the provisions of
the joint venture agreements. The joint venture partners have contested
both the valuation of their interests and whether the Company has the right
to purchase its interests under this early exit procedure. Accordingly, it
is uncertain as to whether the Company will acquire such interests pursuant
to the early exit notice served. On January 17, 2007, Shurgard Europe filed
an arbitration request with the International Chamber of Commerce to compel
arbitration of the matter. The arbitration proceedings occurred from June
30, 2008 through July 3, 2008. A decision is pending.
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 comprehensive insurance, including
property, earthquake, general liability and workers compensation, through
nationally recognized insurance carriers and through our captive insurance
programs. Our insurance programs also insure affiliates of the Company. Our
estimated maximum annual exposure for losses that are below the deductibles
set forth in the third-party insurance contracts, assuming multiple
significant events occur, is approximately $22 million. In addition, if
losses exhaust the third-party insurers' limit of coverage of $75 million
for property coverage including earthquake coverage and $102 million for
general liability, our exposure could be greater. These limits are higher
than estimates of maximum probable losses that could occur from individual
catastrophic events (i.e. earthquake and wind damage) determined in recent
engineering and actuarial studies.
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 $49,000,000. At September 30, 2008, there
were approximately 551,000 certificate holders participating in this
program in the U.S. representing aggregate coverage of approximately $1.2
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 assurances can be given that our business can continue
to be conducted in any given jurisdiction. For the nine months ended
September 30, 2008, our tenant insurance program revenues accounted for
approximately 3% of our total revenues.
42
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
Development and Acquisition of Real Estate Facilities
-----------------------------------------------------
We currently have 19 projects in our development pipeline,
consisting of newly developed self-storage facilities, expansions and
enhancements to existing self-storage facilities. The total estimated cost
of these facilities is approximately $101 million of which $45,419,000 has
been spent at September 30, 2008. These projects are subject to
contingencies. We expect to incur these expenditures over the next 12 - 24
months.
As of November 6, 2008, we are under contract to purchase one
self-storage facility in California (total approximate net rentable square
feet of 38,000) at an aggregate cost of $4,800,000. This contract is
subject to significant contingencies, and there is no assurance this
facility will be acquired.
Operating Lease Obligations
---------------------------
We lease trucks, land, equipment and office space. At September
30, 2008, the future minimum rental payments required under our operating
leases for the years ending December 31, are as follows (amounts in
thousands):
2008...................................... $ 3,284
2009...................................... 7,615
2010...................................... 9,941
2011...................................... 6,834
2012...................................... 6,032
Thereafter................................ 82,204
-----------
$ 115,910
===========
Expenses under operating leases were approximately $2,793,000 and
$8,767,000 for the three and nine months ended September 30, 2008,
respectively, as compared to $3,745,000 and $11,171,000 for the same
periods in 2007.
15. Income Taxes
------------
For all taxable years subsequent to 1980, the Company qualified
and we intend to continue to qualify the Company as a 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 REIT taxable income
which is distributed to our shareholders, provided that we meet certain
tests. We believe we met those tests during 2007 and will continue to meet
those tests in 2008 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.
Domestic operations other than rental real estate are primarily
conducted through taxable REIT subsidiaries. Income of our taxable REIT
subsidiaries is subject to federal, state and local income taxes. We are
subject to the income tax provisions of the various European countries in
which we have rental real estate operations.
We adopted the provisions of Financial Accounting Standards Board
("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes
- an interpretation of FASB Statement No. 109" ("FIN 48"), on January 1,
2007. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statement in accordance with FASB
43
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
Statement 109, "Accounting for Income Taxes", and prescribes a recognition
threshold and measurement process for financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosures and
transition.
Based on our evaluation, we have concluded that there are no
significant uncertain tax positions requiring recognition in our financial
statements. Our evaluation was performed for the tax years ended December
31, 2004, 2005, 2006, 2007 and the nine months ended September 30, 2008.
We may from time to time be assessed interest or penalties by
certain tax jurisdictions, although any such assessments have historically
been minimal and immaterial to our financial results. In the event we have
received an assessment for interest and/or penalties, it has been
classified in the financial statements as general and administrative
expense.
16. Subsequent Events
-----------------
On November 6, 2008, a special dividend of $0.60 per common share
was declared by our Board of Trustees and will be payable on December 30,
2008 to common shareholders of record as of December 15, 2008. Based upon
our common shares outstanding as of September 30, 2008, we estimate this
special dividend payment to be approximately $100.9 million.
44
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
------------ ----------------------------------------------------------
OF OPERATIONS
-------------
The following discussion and analysis should be read in conjunction with
our condensed consolidated financial statements and notes thereto.
FORWARD LOOKING STATEMENTS: This Quarterly Report on Form 10-Q contains
forward-looking statements within the meaning of the federal securities laws.
All statements in this document, other than statements of historical fact, are
forward-looking statements which may be identified by the use of the words
"expects," "believes," "anticipates," "plans," "would," "should," "may,"
"estimates" and similar expressions. These forward-looking statements involve
known and unknown risks and uncertainties, which may cause Public Storage's
actual results and performance to be materially different from those expressed
or implied in the forward-looking statements. As a result, you should not rely
on any forward-looking statements in this report, or which management may make
orally or in writing from time to time, as predictions of future events nor
guarantees of future performance. We caution you not to place undue reliance on
forward-looking statements, which speak only as the date of this report or as of
the dates indicated in the statements. All of our forward-looking statements,
including those in this report, are qualified in their entirely by this
statement. We expressly disclaim any obligation to update publicly or otherwise
revise any forward-looking statements, whether as a result of new information,
new estimates, or other factors, events or circumstances after the date of this
document, except where expressly required by law. Accordingly, you should use
caution in relying on past forward-looking statements to anticipate future
results.
Factors and risks that may impact future results and performance include,
but are not limited to, those described in Item 1A, "Risk Factors" in the Public
Storage Annual Report on Form 10-K for the year ended December 31, 2007, our
subsequent filings on Form 10-Q and Form 8-K and in our other filings with the
Securities and Exchange Commission ("SEC"). These risks include, among other
things, the following:
o general risks associated with the ownership and operation of real
estate including changes in demand, potential liability for
environmental contamination, adverse changes in tax, real estate and
zoning laws and regulations, and the impact of natural disasters;
o risks associated with downturns in the national and local economies in
the markets in which we operate;
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 related to our participation in joint ventures;
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 the impact of the regulatory environment as well as national, state,
and local laws and regulations including, without limitation, those
governing environmental, tax and insurance matters and real estate
investment trusts ("REITs");
o risks associated with a possible failure by us to qualify as a REIT
under the Internal Revenue Code of 1986, as amended;
o disruptions or shutdowns of our automated processes and systems;
o difficulties in raising capital at a reasonable cost;
45
o delays in the development proess; and
o economic uncertainty due to the impact of war or terrorism.
The risks included here are not exhaustive as it is not possible for
management to predict all possible risk factors that may exist or emerge from
time to time. Investors should refer to our future reports and other information
filed from time to time with the SEC for additional information.
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our condensed 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. Note 2 to
our September 30, 2008 condensed consolidated financial statements summarizes
the significant accounting policies and methods used in the preparation of our
condensed consolidated financial statements and related disclosures.
Management believes the following are critical accounting policies the
application of which has a material impact on the Company's financial
presentation. That is, they are both important to the portrayal of our financial
condition and results, and they require management to make judgments and
estimates about matters that are inherently uncertain.
QUALIFICATION AS A REIT - INCOME TAX EXPENSE: We believe that we have been
organized and operated, and we intend to continue to operate, as a qualifying
REIT under the Code and applicable state laws. We also believe that Shurgard
qualified as a REIT. A REIT generally does not pay corporate level federal
income taxes on its REIT taxable income that is distributed to its shareholders,
and accordingly, we do not pay federal income tax on the share of our REIT
taxable income that is distributed to our shareholders.
We therefore do not estimate or accrue any federal income tax expense for
income earned and distributed related to REIT operations. This estimate could be
incorrect, because due to the complex nature of the REIT qualification
requirements, the ongoing importance of factual determinations and the
possibility of future changes in our circumstances, we cannot be assured that we
actually have satisfied or will satisfy the requirements for taxation as a REIT
for any particular taxable year. For any taxable year that we fail or have
failed to qualify as a REIT and for which applicable relief provisions did not
apply, we would be taxed at the regular corporate rates on all of our taxable
income, whether or not we made or make any distributions to our shareholders.
Any resulting requirement to pay corporate income tax, including any applicable
penalties or interest, could have a material adverse impact on our financial
condition or results of operations. Unless entitled to relief under specific
statutory provisions, we also would be disqualified from taxation as a REIT for
the four taxable years following the year for which qualification was lost.
There can be no assurance that we would be entitled to any statutory relief. In
addition, if Shurgard failed to qualify as a REIT, we generally would have
succeeded to or incurred significant tax liabilities.
IMPAIRMENT OF LONG-LIVED ASSETS: Substantially all of our assets consist of
long-lived assets, including real estate and other intangible assets. The
evaluation of our long-lived assets for impairment includes determining whether
indicators of impairment exist, which is a subjective process. When any
indicators of impairment are found, the evaluation of such long-lived assets
then entails projections of future operating cash flows, which also involves
significant judgment. Future events, or facts and circumstances that currently
exist, that we have not yet identified, could cause us to conclude in the future
that our long-lived assets are impaired. Any resulting impairment loss could
have a material adverse impact on our financial condition and results of
operations.
ESTIMATED USEFUL LIVES OF LONG-LIVED ASSETS: Substantially all of our
assets consist of depreciable or amortizable, long-lived assets. We record
depreciation and amortization expense with respect to these assets based upon
their estimated useful lives. Any change in the estimated useful lives of those
46
assets, caused by functional or economic obsolescence or other factors, could
have a material adverse impact on our financial condition or results of
operations.
ESTIMATED LEVEL OF RETAINED RISK AND UNPAID TENANT CLAIM LIABILITIES: As
described in Notes 2 and 14 to our September 30, 2008 consolidated financial
statements, we retain certain risks with respect to property perils, legal
liability, and other such risks. In addition, a wholly-owned subsidiary of the
Company reinsures a program that provides insurance to certificate holders
against claims for losses (earthquakes and floods are not covered by these
policies) to goods stored by tenants in our self-storage facilities. In
connection with these risks, we accrue losses based upon the estimated level of
losses incurred using certain actuarial assumptions followed in the insurance
industry and based on recommendations from an independent actuary that is a
member of the American Academy of Actuaries. While we believe that the amounts
of the accrued losses are adequate, the ultimate liability will be in excess of
or less than the amounts recorded and the difference could be material.
ACCRUALS FOR CONTINGENCIES: We are exposed to business and legal liability
risks with respect to events that have occurred, but in accordance with GAAP, we
have not accrued for such potential liabilities because the loss is either not
probable or not estimable or because we are not aware of the event. Future
events and the results of pending litigation could result in such potential
losses becoming probable and estimable, which could have a material adverse
impact on our financial condition or results of operations. Some of these
potential losses, of which we are aware, are described in Note 14 to our
September 30, 2008 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.
Cost of operations, general and administrative expense, as well as television,
yellow page, and other advertising expenditures are expensed as incurred.
VALUATION OF ASSETS AND LIABILITIES ACQUIRED IN THE SHURGARD MERGER: We
have estimated the fair value of real estate, intangible assets, debt, and the
other assets and other liabilities acquired in the Shurgard Merger. In addition,
we have estimated the fair market value of 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 then tenant base in place, 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.
47
RESULTS OF OPERATIONS
---------------------
OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008:
----------------------------------------------------------------
Net income for the three months ended September 30, 2008 was $137.3 million
compared to $152.8 million for the same period in 2007, representing a decrease
of $15.5 million. This decline is primarily due to the impact of a $53.2 million
foreign exchange loss during the quarter ended September 30, 2008 as compared to
an exchange gain of $30.4 million in the same period in 2007, offset by reduced
depreciation and amortization expense and improvements in operating income with
respect to our domestic self-storage facilities.
The foreign currency exchange gains and losses relate primarily to
intercompany loans due from Shurgard Europe. The foreign currency gains and
losses were due to changes in the value of the U.S. Dollar relative to the Euro
during each period when converting these Euro denominated loans to U.S. Dollars
for financial reporting purposes.
Amortization expense for the quarter ended September 30, 2008, with respect
to domestic intangible assets obtained in the August 22, 2006 acquisition of
Shurgard Storage Centers, Inc. (the "Shurgard Merger") decreased by $27.1
million as compared to the same period in 2007.
Net operating income (before depreciation and amortization) with respect to
our domestic operations increased $15.3 million in the three months ended
September 30, 2008 as compared to the same period in 2007 due to an increase of
$8.8 million with respect to our domestic same-store operations combined with an
increase of $6.5 million with respect to our non-stabilized
facilities.
For the three months ended September 30, 2008, net income allocable to our
common shareholders (after allocating net income to our preferred and equity
shareholders) was $71.6 million or $0.42 per common share on a diluted basis
compared to $87.1 million or $0.51 per common share on a diluted basis for the
same period in 2007, representing a decrease of $15.5 million or $0.09 per
common share on a diluted basis. These decreases are due primarily to the impact
of the factors described above with respect to the decline in our net income.
For each of the three months ended September 30, 2008 and 2007, we
allocated $60.3 million of our net income to our preferred shareholders based on
distributions paid during each period.
Weighted average diluted common shares were 168,919,000 and 170,085,000,
respectively, for the three months ended September 30, 2008 and 2007. The
decline is due to share repurchases in the first quarter of 2008.
OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008:
---------------------------------------------------------------
Net income for the nine months ended September 30, 2008 was $783.5 million
compared to $289.6 million for the same period in 2007, representing an
improvement of $493.9 million. This improvement is primarily due to a gain of
$341.9 million recognized on the disposition of a 51% interest in Shurgard
Europe on March 31, 2008 (see "Shurgard Europe" below for further information),
improvements in operating income with respect to our domestic self-storage
facilities and reduced amortization expense, offset by a foreign exchange loss
of $12.2 million for the nine months ended September 30, 2008 as compared to a
foreign exchange gain of $41.0 million in the same period in 2007.
Net operating income (before depreciation and amortization) with respect to
our domestic operations increased $37.9 million in the nine months ended
September 30, 2008 as compared to the same period in 2007 due to an increase of
$22.1 million with respect to our domestic same-store operations combined with
an increase of $15.8 million with respect to our non-stabilized facilities.
Amortization expense for the nine months ended September 30, 2008, with
respect to domestic intangible assets obtained in the Shurgard Merger decreased
by $103.9 million compared to the same period in 2007.
48
For the nine months ended September 30, 2008, net income allocable to our
common shareholders (after allocating net income to our preferred and equity
shareholders) was $586.4 million or $3.47 per common share on a diluted basis
compared to $97.2 million or $0.57 per common share on a diluted basis for the
same period in 2007, representing an improvement of $489.2 million or $2.90 per
common share on a diluted basis. These improvements are due primarily to the
impact of the factors described above with respect to the improvement in our net
income.
For the nine months ended September 30, 2008 and 2007, we allocated $181.0
million and $176.4 million of our net income, respectively, to our preferred
shareholders based on distributions paid each period. The year-over-year
increase is due primarily to the issuance of additional preferred securities in
2007.
Weighted average diluted common shares were 168,988,000 and 170,166,000,
respectively, for the nine months ended September 30, 2008 and 2007. The decline
is due primarily to share repurchases in the first quarter of 2008.
REAL ESTATE OPERATIONS
----------------------
SELF-STORAGE OPERATIONS: Our self-storage operations are by far the largest
component of our operating activities, representing approximately 90% and 91% of
our total revenues generated for the three and nine months ended September 30,
2008, respectively. Rental income with respect to our self-storage operations
declined by 8.1% and 3.1% in the three and nine months ended September 30, 2008,
respectively, when compared to the same periods in 2007. The year over year
decline in rental income is due primarily to the deconsolidation of Shurgard
Europe effective April 1, 2008. This was offset partially by the addition of new
facilities to our portfolio, either through our acquisition or development
activities, combined with increased revenues in our Same Store Facilities
(defined below).
To enhance year-over-year comparisons, the following table summarizes, and
the ensuing discussion describes the operating results of three groups that
management analyzes with respect to the Company's performance: i) the Same Store
group, representing our domestic facilities that we have owned and have been
stabilized prior to January 1, 2006 as well as certain of the facilities we
acquired in the Shurgard merger on August 22, 2006 which were stabilized since
January 1, 2006, 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 have not
been operated at a stabilized basis since January 1, 2006 because they are
either newly developed or acquired since 2006 or because of expansion
activities.
49
SELF - STORAGE OPERATIONS SUMMARY: Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- ---------------------------------- ---------------------------------
Percentage Percentage
2008 2007 Change 2008 2007 Change
----------- ----------- --------- ---------- ----------- ---------
(Dollar amounts in thousands)
Rental income:
Same Store Facilities....................... $ 344,033 $ 336,117 2.4% $1,006,226 $ 978,430 2.8%
Other Facilities............................ 49,293 42,237 16.7% 138,543 120,618 14.9%
Shurgard Europe Facilities (a).............. - 49,444 (100.0)% 54,722 138,330 (60.4)%
------------ ------------ --------- ----------- ------------ ---------
Total rental income....................... 393,326 427,798 (8.1)% 1,199,491 1,237,378 (3.1)%
------------ ------------ --------- ----------- ------------ ---------
Cost of operations before depreciation and
amortization expense:
Same Store Facilities....................... 105,814 106,668 (0.8)% 333,343 327,671 1.7%
Other Facilities............................ 16,019 15,447 3.7% 49,105 46,973 4.5%
Shurgard Europe Facilities.................. - 21,256 (100.0)% 24,654 66,556 (63.0)%
------------ ------------ --------- ----------- ------------ ---------
Total cost of operations................. 121,833 143,371 (15.0)% 407,102 441,200 (7.7)%
------------ ------------ --------- ----------- ------------ ---------
Net operating income before depreciation and
amortization expense (b):
Same Store Facilities....................... 238,219 229,449 3.8% 672,883 650,759 3.4%
Other Facilities............................ 33,274 26,790 24.2% 89,438 73,645 21.4%
Shurgard Europe Facilities.................. - 28,188 (100.0)% 30,068 71,774 (58.1)%
------------ ------------ --------- ----------- ------------ ---------
Total net operating income before
depreciation and amortization expense (b) 271,493 284,427 (4.5)% 792,389 796,178 0.5%
------------ ------------ --------- ----------- ------------ ---------
Depreciation and amortization expense:
Same Store Facilities....................... (75,154) (96,162) (21.8)% (234,784) (320,158) (26.7)%
Other Facilities............................ (15,986) (19,336) (17.3)% (50,573) (60,682) (16.7)%
Shurgard Europe Facilities.................. - (31,394) (100.0)% (21,871) (108,230) (79.8)%
------------ ------------ --------- ----------- ------------ ---------
Total depreciation and amortization expense. (91,140) (146,892) (38.0)% (307,228) (489,070) (37.2)%
------------ ------------ --------- ----------- ------------ ---------
Net operating income (loss):
Same Store Facilities....................... 163,065 133,287 22.3% 438,099 330,601 32.5%
Other Facilities............................ 17,288 7,454 131.9% 38,865 12,963 199.8%
Shurgard Europe Facilities.................. - (3,206) (100.0)% 8,197 (36,456) (122.5)%
------------ ------------ --------- ----------- ------------ ---------
Total net operating income.................. $ 180,353 $ 137,535 31.1% $ 485,161 $ 307,108 58.0%
============ ============ ========= =========== ============ =========
Data for Same Store and Other Facilities:
Weighted average square foot occupancy during
the period.................................. 90.0% 89.2% 0.9% 89.4% 88.8% 0.7%
Number of self-storage facilities (at end of
period)..................................... 1,992 1,980 0.6%
Net rentable square feet (in
thousands, at end of period):.................. 125,701 124,402 1.0%
(a) Represents the results with respect to Shurgard Europe's properties
for the periods consolidated in our financial statements. As described
in Note 3 to our September 30, 2008 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 property operations of
Shurgard Europe.
(b) Total net operating income before depreciation and amortization or
"NOI" is a non-GAAP (generally accepted accounting principles)
financial measure that excludes the impact of depreciation and
amortization expense. See Note 11 to our September 30, 2008 condensed
consolidated financial statements, "Segment Information," which
includes a reconciliation of net operating income before depreciation
and amortization for this segment to our consolidated net income.
Although depreciation and amortization are operating expenses, we
believe that NOI is a meaningful measure of operating performance,
because we utilize NOI in making decisions with respect to capital
allocations, in determining current property values, segment
performance, and comparing period-to-period and market-to-market
property operating results. NOI is not a substitute for net operating
income after depreciation and amortization in evaluating our operating
results.
In the discussion that follows, we present realized annual rent per
occupied square foot, which is computed by dividing rental income, before late
charges and administrative fees, by the weighted average occupied square footage
for the period. We also present annualized rental income per available square
foot ("REVPAF"), which represents annualized rental income, before late charges
and administrative fees, divided by total available net rentable square feet.
50
Late charges and administrative fees are excluded to more effectively measure
our ongoing level of revenue associated with the leasing of the units.
Same Store Facilities
The facilities included in the "Same Store Facilities" pool are all
stabilized and have been owned since January 1, 2006 and therefore provide
meaningful comparative data for 2006, 2007 and 2008.
The Same Store Facilities, totaling 1,789 facilities contain approximately
109.4 million net rentable square feet, representing approximately (87%) of the
aggregate net rentable square feet of our consolidated domestic self-storage
portfolio at September 30, 2008. Revenues and operating expenses with respect to
this group of properties are set forth in the above Self-Storage Operations
table under the caption, "Same Store Facilities".
51
SAME STORE FACILITIES Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------- ----------------------------------
Percentage Percentage
2008 2007 Change 2008 2007 Change
----------- ----------- ------- ----------- ---------- -------
(Dollar amounts in thousands, except weighted average amounts)
Rental income...................................... $ 329,280 $ 322,095 2.2% $ 964,127 $ 938,063 2.8%
Late charges and administrative fees collected..... 14,753 14,022 5.2% 42,099 40,367 4.3%
----------- ----------- ------- ----------- ---------- -------
Total rental income............................. 344,033 336,117 2.4% 1,006,226 978,430 2.8%
----------- ----------- ------- ----------- ---------- -------
Cost of operations before depreciation and amortization:
Direct property payroll....................... 21,467 21,364 0.5% 66,217 66,084 0.2%
Property taxes................................ 33,465 32,340 3.5% 99,696 95,768 4.1%
Repairs and maintenance....................... 9,096 10,286 (11.6)% 29,804 30,136 (1.1)%
Media advertising............................. 1,998 4,044 (50.6)% 17,512 16,453 6.4%
Other advertising and promotion............... 4,348 4,180 4.0% 13,211 13,840 (4.5)%
Utilities..................................... 9,295 8,401 10.6% 25,581 24,417 4.8%
Property insurance............................ 2,458 3,003 (18.1)% 8,167 9,830 (16.9)%
Telephone reservation center.................. 2,970 2,751 8.0% 8,986 8,619 4.3%
Other cost of management...................... 20,717 20,299 2.1% 64,169 62,524 2.6%
----------- ----------- ------- ----------- ---------- -------
Total cost of operations........................ 105,814 106,668 (0.8)% 333,343 327,671 1.7%
----------- ----------- ------- ----------- ---------- -------
Net operating income before depreciation and
amortization expense (a)........................ 238,219 229,449 3.8% 672,883 650,759 3.4%
Depreciation and amortization expense.............. (75,154) (96,162) (21.8)% (234,784) (320,158) (26.7)%
----------- ----------- ------- ----------- ---------- -------
Net operating income.............................. $ 163,065 $ 133,287 22.3% $ 438,099 $ 330,601 32.5%
=========== =========== ======= =========== ========== =======
Gross margin (before depreciation and amortization
expense)........................................... 69.2% 68.3% 1.3% 66.9% 66.5% 0.6%
Weighted average for the fiscal year:
Square foot occupancy (b)....................... 90.5% 90.1% 0.4% 90.1% 90.0% 0.1%
Realized annual rent per occupied square foot (c)(e) $ 13.30 $ 13.06 1.8% $ 13.04 $ 12.70 2.7%
REVPAF (d) (e).................................. $ 12.04 $ 11.77 2.3% $ 11.75 $ 11.43 2.8%
Weighted average at September 30:
Square foot occupancy........................... 89.4% 89.1% 0.3%
In place annual rent per occupied square foot (f) $ 14.37 $ 14.11 1.8%
Total net rentable square feet (in thousands)...... 109,436 109,436 -
Number of facilities............................... 1,789 1,789 -
(a) Total net operating income before depreciation and amortization
expense or "NOI" is a non-GAAP (generally accepted accounting
principles) financial measure that excludes the impact of depreciation
and amortization expense, for our Same Store facilities represents a
portion of our total self-storage segment's net operating income
before depreciation and amortization expense, and is reconciled to the
segment total in the table "self-storage operations summary" above. A
reconciliation of our total self-storage segment's net operating
income before depreciation and amortization expense to consolidated
net income is included in Note 11 to our September 30, 2008 condensed
consolidated financial statements, "Segment Information." Although
depreciation and amortization are operating expenses, we believe that
NOI is a meaningful measure of operating performance, because we
utilize NOI in making decisions with respect to capital allocations,
in determining current property values, segment performance, and
comparing period-to-period and market-to-market property operating
results. NOI is not a substitute for net operating income after
depreciation and amortization expense in evaluating our operating
results.
(b) Square foot occupancies represent weighted average occupancy levels
over the entire period.
(c) Realized annual rent per occupied square foot is computed by dividing
rental income, which excludes late charges and administrative fees, by
the weighted average occupied square footage for the period. Realized
annual rent per occupied square foot takes into consideration
promotional discounts and other items that reduce rental income from
the contractual amounts due.
(d) Annualized rental income per available square foot ("REVPAF")
represents annualized rental income, which excludes late charges and
administrative fees, divided by total available net rentable square
feet.
52
(e) Late charges and administrative fees are excluded from the computation
of realized annual rent per occupied square foot and REVPAF because
exclusion of these amounts provides a better measure of our ongoing
level of revenue, by excluding the volatility of late charges, which
are dependent principally upon the level of tenant delinquency, and
administrative fees, which are dependent principally upon the absolute
level of move-ins for a period.
(f) In place annual rent per occupied square foot represents annualized
contractual rents per occupied square foot without reductions for
promotional discounts, and excludes late charges and administrative
fees.
We believe that demand for our self-storage spaces has been negatively
impacted by general economic conditions, the slow down in housing sales and
moving activity, as well as increased competition. It is unclear to us how much
we have been negatively impacted by these factors, and how much these factors
may impact us going forward. In order to most effectively address these economic
conditions, we have continued to closely monitor and change our media
advertising on a localized basis, increased the level of promotional discounts
and have been conservative with rental rates during the first nine months of
2008.
Rental income increased approximately 2.4% and 2.8% in the three and nine
months ended September 30, 2008 as compared to the same periods in 2007. These
increases were primarily attributable to higher average realized annual rental
rates per occupied square foot, which were 1.8% and 2.7% higher in the three and
nine months ended September 30, 2008, respectively, as compared to the same
periods in 2007.
Cost of operations (excluding depreciation and amortization) decreased by
0.8% in the three months ended September 30, 2009 and increased by 1.7% in the
nine months ended September 30, 2008, as compared to the same periods in 2007.
Payroll expense increased by 0.5% and 0.2% for the three and nine months
ended September 30, 2008, respectively, as compared to the same periods in 2007.
The variance for each period includes lower incentive pay and stagnant growth in
average wage rates, offset by higher hours incurred due to adjustments in
staffing levels. For the remainder of 2008, we expect moderate growth trends in
payroll.
Property tax expense increased by 3.5% and 4.1% in the three and nine
months ended September 30, 2008, respectively, as compared to the same periods
in 2007. The main reason for the increase is due to increases in assessments of
property values that have been greater than we experienced in prior years.
Property tax expense fluctuates on a quarterly basis, as indicated in the table
below with respect to 2007. The quarterly property tax expense for 2008 has
similarly fluctuated on a sequential basis with the fourth quarter expected to
be significantly lower. At this time we expect the fourth quarter's property tax
expense to be approximately 3.0% to 4.0% higher than for the same period in
2007.
Repairs and maintenance expenditures decreased 11.6% and 1.1% in the three
and nine months ended September 30, 2008, respectively, as compared to the same
periods in 2007. We expect repairs and maintenance expenditures (other than snow
removal costs) to grow moderately in the fourth quarter of 2008 as compared to
the same period in 2007, as we will incur additional repairs and maintenance
expenditures in connection with Hurricane Ike.
Media advertising for the Same Store Facilities decreased 50.6% in the
three months ended September 30, 2008 and increased 6.4% in the nine months
ended September 30, 2008, as compared to the same periods in 2007. The decrease
in the three months ended September 30, 2008 was due to a significant reduction
in television advertising as compared to the same period in 2007. The increase
in the nine months ended September 30, 2008 was due to a combination of
advertising in more markets than last year combined with increased frequency.
Other advertising and promotion is comprised principally of yellow page and
Internet advertising, which increased 4.0% during the three months ended
September 30, 2008 and decreased 4.5% during the nine months ended September 30,
2008 as compared to the same periods in 2007. Media spending in September and
October of 2008 declined to 21 market weeks from 138 in the same period in 2007,
an 85% reduction. 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.
53
Utility expenses increased 10.6% and 4.8% in the three and nine months
ended September 30, 2008, respectively, as compared to the same periods in 2007.
We believe this negative impact is due to the rapid increase in energy prices
during the first nine months of 2008, particularly in our Texas and New York
markets. However, assuming continuance of the recent downward trends in other
energy prices and to the extent that such downward trends are reflected in our
utility costs, we expect some moderation in utility price increases in the
fourth quarter of 2008 relative to the same period in 2007. However, utility
expenses are also dependent upon changes in demand driven by weather and
temperature, both of which are volatile and not predictable.
Insurance expense decreased 18.1% and 16.9% in the three and nine months
ended September 30, 2008, respectively, as compared to the same periods in 2007,
reflecting significant decreases in property insurance resulting primarily from
the softer insurance markets as lack of hurricane activity and additional
competition from insurance providers has benefited us.
Telephone reservation center costs increased 8.0% and 4.3% in the three and
nine months ended September 30, 2008, respectively, as compared to the same
periods in 2007. We expect future increases in our telephone reservation center
to be based primarily upon general inflation.
54
The following table summarizes selected quarterly financial data with
respect to the Same Store Facilities:
For the Quarter Ended
---------------------------------------------------------------------
March 31 June 30 September 30 December 31 Entire Year
----------- --------- ------------ ----------- -----------
(Amounts in thousands, except for per square foot amount)
Total rental income:
2008 $ 326,781 $ 335,412 $ 344,033 - -
2007 $ 317,169 $ 325,144 $ 336,117 $ 327,885 $1,306,315
Total cost of operations (excluding
depreciation and amortization expense):
2008 $ 115,347 $ 112,182 $ 105,814
2007 $ 110,523 $ 110,480 $ 106,668 $ 98,557 $ 426,228
Property tax expense:
2008 $ 33,705 $ 32,526 $ 33,465
2007 $ 32,318 $ 31,110 $ 32,340 $ 26,389 $ 122,157
Media advertising expense:
2008 $ 6,366 $ 9,148 $ 1,998
2007 $ 4,820 $ 7,589 $ 4,044 $ 2,622 $ 19,075
Other advertising and promotion expense:
2008 $ 4,130 $ 4,733 $ 4,348
2007 $ 4,633 $ 5,027 $ 4,180 $ 3,874 $ 17,714
REVPAF:
2008 $ 11.45 $ 11.75 $ 12.04
2007 $ 11.12 $ 11.40 $ 11.77 $ 11.50 $ 11.45
Weighted average realized annual rent per
occupied square foot:
2008 $ 12.89 $ 12.92 $ 13.30
2007 $ 12.52 $ 12.54 $ 13.06 $ 13.02 $ 12.79
Weighted average occupancy levels for
the period:
2008 88.8% 91.0% 90.5%
2007 88.8% 90.9% 90.1% 88.3% 89.5%
55
ANALYSIS OF REGIONAL TRENDS
---------------------------
The following table sets forth regional trends in our Same Store
Facilities:
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------------- --------------------------------------
2008 2007 Change 2008 2007 Change
------------ ------------ ------------- ------------ ------------ ------------
(Amounts in thousands, except for weighted average data)
SAME STORE FACILITIES OPERATING TRENDS
BY REGION
Rental income:
Southern California (170 facilities) $ 52,809 $ 51,057 3.4% $ 155,218 $ 149,503 3.8%
Northern California (161 facilities) 38,114 36,205 5.3% 110,644 105,300 5.1%
Texas (214 facilities).......... 33,114 32,080 3.2% 96,484 92,445 4.4%
Florida (171 facilities)........ 32,365 32,731 (1.1)% 95,782 97,742 (2.0)%
Illinois (118 facilities)....... 23,177 22,407 3.4% 67,242 64,469 4.3%
Georgia (82 facilities)......... 12,363 12,309 0.4% 36,374 36,020 1.0%
All other states (873 facilities) 152,091 149,328 1.9% 444,482 432,951 2.7%
------------ ------------ ------------- ------------ ------------ ------------
Total rental income................. 344,033 336,117 2.4% 1,006,226 978,430 2.8%
Cost of operations before depreciation and amortization expense:
Southern California.............. 10,955 11,020 (0.6)% 33,647 33,725 (0.2)%
Northern California.............. 9,006 9,363 (3.8)% 28,449 28,583 (0.5)%
Texas............................ 12,992 12,776 1.7% 38,969 38,895 0.2%
Florida.......................... 10,984 11,375 (3.4)% 34,416 33,770 1.9%
Illinois......................... 8,581 8,943 (4.0)% 29,902 28,479 5.0%
Georgia.......................... 3,747 3,944 (5.0)% 11,879 11,915 (0.3)%
All other states................. 49,549 49,247 0.6% 156,081 152,304 2.5%
------------ ------------ ------------- ------------ ------------ ------------
Total cost of operations............ 105,814 106,668 (0.8)% 333,343 327,671 1.7%
Net operating income before depreciation and amortization expense:
Southern California.............. 41,854 40,037 4.5% 121,571 115,778 5.0%
Northern California.............. 29,108 26,842 8.4% 82,195 76,717 7.1%
Texas............................ 20,122 19,304 4.2% 57,515 53,550 7.4%
Florida.......................... 21,381 21,356 0.1% 61,366 63,972 (4.1)%
Illinois......................... 14,596 13,464 8.4% 37,340 35,990 3.8%
Georgia.......................... 8,616 8,365 3.0% 24,495 24,105 1.6%
All other states................. 102,542 100,081 2.5% 288,401 280,647 2.8%
------------ ------------ ------------- ------------ ------------ ------------
Total net operating income before
depreciation and amortization
expense.......................... $ 238,219 $ 229,449 3.8% $ 672,883 $ 650,759 3.4%
Weighted average occupancy:
Southern California.............. 90.8% 90.2% 0.7% 90.6% 90.4% 0.2%
Northern California.............. 90.9% 89.5% 1.6% 90.3% 89.4% 1.0%
Texas............................ 91.1% 91.6% (0.5)% 91.1% 90.8% 0.3%
Florida.......................... 90.8% 88.9% 2.1% 89.2% 89.6% (0.4)%
Illinois......................... 90.5% 89.4% 1.2% 89.4% 88.9% 0.6%
Georgia.......................... 89.5% 90.7% (1.3)% 89.5% 90.4% (1.0)%
All other states................. 90.2% 90.1% 0.1% 90.0% 89.9% 0.1%
------------ ------------ ------------- ------------ ------------ ------------
Total weighted average occupancy.... 90.5% 90.1% 0.4% 90.1% 90.0% 0.1%
REVPAF:
Southern California.............. $ 18.25 $ 17.67 3.3% $ 17.90 $ 17.25 3.8%
Northern California.............. 15.88 15.10 5.2% 15.38 14.65 5.0%
Texas............................ 9.23 8.93 3.4% 8.97 8.57 4.7%
Florida.......................... 11.68 11.87 (1.6)% 11.54 11.82 (2.4)%
Illinois......................... 12.07 11.65 3.6% 11.69 11.19 4.5%
Georgia.......................... 9.16 9.13 0.3% 8.99 8.90 1.0%
All other states................. 11.12 10.93 1.7% 10.85 10.57 2.6%
------------ ------------ ------------- ------------ ------------ ------------
Total REVPAF........................ $ 12.04 $ 11.77 2.3% $ 11.75 $ 11.43 2.8%
56
SAME STORE FACILITIES OPERATING
TRENDS BY REGION (Continued) Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------------- --------------------------------------
2008 2007 Change 2008 2007 Change
------------ ------------ ------------- ------------ ------------ ------------
(Amounts in thousands, except for weighted average data)
Realized annual rent per occupied
square foot:
Southern California.............. $ 20.09 $ 19.58 2.6% $ 19.75 $ 19.07 3.6%
Northern California.............. 17.47 16.88 3.5% 17.03 16.38 4.0%
Texas............................ 10.14 9.75 4.0% 9.85 9.44 4.3%
Florida.......................... 12.87 13.36 (3.7)% 12.94 13.19 (1.9)%
Illinois......................... 13.33 13.03 2.3% 13.07 12.59 3.8%
Georgia.......................... 10.23 10.06 1.7% 10.04 9.84 2.0%
All other states................. 12.33 12.13 1.6% 12.05 11.76 2.5%
------------ ------------ ------------- ------------ ------------ ------------
Total realized rent per square foot. $ 13.30 $ 13.06 1.8% $ 13.04 $ 12.70 2.7%
============ ============ ============= ============ ============ ============
In place annual rent per occupied
square foot at September 30:
Southern California.............. $ 21.67 $ 21.05 2.9%
Northern California.............. 19.00 18.23 4.2%
Texas............................ 10.85 10.49 3.4%
Florida.......................... 13.97 14.46 (3.4)%
Illinois......................... 14.50 14.18 2.3%
Georgia.......................... 11.14 11.05 0.8%
All other states................. 13.30 13.07 1.8%
------------ ------------ ------------
Total in place rent per occupied
square foot:................... $ 14.37 $ 14.11 1.8%
============ ============ ============
The Southern California Market consists principally of the greater Los
Angeles area and San Diego, and has historically been a source of strong growth
due to its diverse economy and continued population growth. In addition,
barriers to entry in the form of difficult permitting requirements tend to
reduce the potential for increased competition in the infill locations where we
focus our operations.
The Northern California market consists principally of San Francisco and
related peripheral submarkets/cities. While this area has a vibrant economy and
relatively strong population growth, it has been subject to periodic turbulence
in general economic conditions, particularly associated with the technology
sector. During the third quarter of 2008, revenue growth in this area has been
on the upper end relative to our other markets.
The Texas market principally includes Dallas, Houston, Austin and San
Antonio. This market has historically been subject to volatility due to minimal
regulatory restraint upon building, which results in cycles of overbuilding and
absorption. In September 2008, Hurricane Ike caused minor damage to our
facilities located in Houston. We have a total of 83 facilities in Houston, many
of which were closed for several days in September 2008 due to the storm.
The Florida market principally includes Miami, Orlando, Tampa, and West
Palm Beach. Florida has suffered negative growth trends in the year, and has
been one of our weakest markets. We believe that the absence of hurricanes,
which created unusual demand following the hurricanes and the rebuilding period,
has adversely impacted growth in Florida. In addition, the Florida economy has
underperformed the U.S. economy for the past year. Over the long term we believe
that this market will benefit from continued strong population growth and
barriers to entry.
57
OTHER FACILITIES
----------------
In addition to the Same Store facilities, at September 30 2008, we had 203
facilities that were not classified into this pool. These properties 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.
The following table summarizes operating data with respect to these
facilities:
OTHER FACILITIES Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------- -----------------------------------
2008 2007 Change 2008 2007 Change
---------- --------- ---------- ---------- ---------- ---------
(Dollar amounts in thousands, except square foot amounts)
Rental income:
Facilities put in place in 2008............... $ 1,008 $ - $ 1,008 $ 1,363 $ - $ 1,363
Facilities put in place in 2007............... 1,806 799 1,007 4,707 1,189 3,518
Facilities put in place prior to 2007 (a)..... 22,850 19,928 2,922 65,141 57,896 7,245
Expansion facilities.......................... 23,629 21,510 2,119 67,332 61,533 5,799
---------- --------- ---------- ---------- ---------- ---------
Total rental income........................... 49,293 42,237 7,056 138,543 120,618 17,925
---------- --------- ---------- ---------- ---------- ---------
Cost of operations before depreciation and amortization expense:
Facilities put in place in 2008............... $ 368 $ - $ 368 $ 534 $ - $ 534
Facilities put in place in 2007............... 759 396 363 2,222 613 1,609
Facilities put in place prior to 2007......... 7,718 7,415 303 23,982 24,115 (133)
Expansion facilities.......................... 7,174 7,636 (462) 22,367 22,245 122
---------- --------- ---------- ---------- ---------- ---------
Total cost of operations...................... 16,019 15,447 572 49,105 46,973 2,132
---------- --------- ---------- ---------- ---------- ---------
Net operating income before depreciation and
amortization expense:
Facilities put in place in 2008............... $ 640 $ - $ 640 $ 829 $ - $ 829
Facilities put in place in 2007............... 1,047 403 644 2,485 576 1,909
Facilities put in place prior to 2007......... 15,132 12,513 2,619 41,159 33,781 7,378
Expansion facilities.......................... 16,455 13,874 2,581 44,965 39,288 5,677
---------- --------- ---------- ---------- ---------- ---------
Total net operating income before depreciation
and amortization expense (b) ................. 33,274 26,790 6,484 89,438 73,645 15,793
Depreciation and amortization expense............ (15,986) (19,336) 3,350 (50,573) (60,682) 10,109
---------- --------- ---------- ---------- ---------- ---------
Net operating income.......................... $ 17,288 $ 7,454 $ 9,834 $ 38,865 $ 12,963 $ 25,902
========== ========= ========== ========== ========== =========
Weighted average square foot occupancy during the
period:
Facilities put in place in 2008............... 78.5% - - 81.7% - -
Facilities put in place in 2007............... 79.9% 59.7% 33.8% 69.2% 61.9% 11.8%
Facilities put in place prior to 2007......... 89.1% 82.8% 7.6% 86.9% 80.0% 8.6%
Expansion facilities.......................... 86.2% 82.0% 5.1% 83.7% 80.6% 3.8%
---------- --------- ---------- ---------- ---------- ---------
87.0% 82.7% 5.2% 84.5% 80.0% 5.6%
========== ========= ========== ========== ========== =========
58
OTHER FACILITIES Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------- -----------------------------------
2008 2007 Change 2008 2007 Change
---------- --------- ---------- ---------- ---------- ---------
Weighted average realized annual rent per occupied
square foot for the period:
Facilities put in place in 2008............... $ 11.97 $ - - $ 11.85 $ - -
Facilities put in place in 2007 (c)........... 12.62 15.41 (18.1)% 12.68 15.12 (16.1)%
Facilities put in place prior to 2007......... 12.24 11.72 4.4% 12.24 11.71 4.5%
Expansion facilities.......................... 12.07 11.92 1.3% 12.04 11.95 0.8%
---------- --------- ---------- ---------- ---------- ---------
$ 12.17 $ 11.87 2.5% $ 12.15 $ 11.86 2.4%
========== ========= ========== ========== ========== =========
In place annual rent per occupied square foot at
September 30:
Facilities put in place in 2008............... $ 13.47 $ - -
Facilities put in place in 2007 (c)........... 14.50 16.79 (13.6)%
Facilities put in place prior to 2007......... 14.98 14.37 4.2%
Expansion facilities.......................... 14.74 14.83 (0.6)%
---------- ---------- ---------
$ 14.81 $ 14.64 1.2%
========== ========== =========
At September 30:
Number of Facilities:
Facilities put in place in 2008............ 7 - 7
Facilities put in place in 2007............ 10 9 1
Facilities put in place prior to 2007...... 95 90 5
Expansion facilities....................... 91 92 (1)
---------- ---------- ---------
203 191 12
========== ========== =========
Net rentable square feet (in thousands):
Facilities put in place in 2008............ 564 - 564
Facilities put in place in 2007............ 679 613 66
Facilities put in place prior to 2007...... 7,256 6,947 309
Expansion facilities....................... 7,766 7,406 360
---------- ---------- ---------
16,265 14,966 1,299
========== ========== =========
(a) Includes 65 domestic facilities, and one facility located in London,
England, which we acquired in the Shurgard Merger, along with 29
facilities that were otherwise acquired or developed. We discontinued
consolidation of 11 of these facilities effective May 24, 2007. On
November 15, 2007, we recommenced consolidation of five of the 11
properties. The operations for these 11 facilities from January 1,
2007 through May 24, 2007, combined with the operations of the five
facilities that we recommenced consolidation after November 15, 2007,
are included in this table under "facilities put in place prior to
2007."
(b) Total net operating income before depreciation and amortization or
"NOI" is a non-GAAP (generally accepted accounting principles)
financial measure that excludes the impact of depreciation and
amortization expense, for our self-storage facilities represents a
portion of our total self-storage segment's net operating income
before depreciation and amortization expense, and is denoted in the
table "self-storage operations summary" above. A reconciliation of our
total self-storage segment's net operating income before depreciation
and amortization expense to consolidated net income is included in
Note 11 to our September 30, 2008 condensed consolidated financial
statements, "Segment Information." Although depreciation and
amortization expense are operating expenses, we believe that NOI is a
meaningful measure of operating performance, because we utilize NOI in
making decisions with respect to capital allocations, in determining
current property values, segment performance, and comparing
period-to-period and market-to-market property operating results. NOI
is not a substitute for net operating income after depreciation and
amortization in evaluating our operating results.
(c) Realized rent per occupied square foot, and in place annual rent per
occupied square foot, for the facilities put in place in 2007 varies
significantly between the periods in 2007 and 2008 due to the timing
of when the specific facilities were put in place.
The properties denoted under "Facilities put in place in 2008" were put
into operation within the Public Storage system at various dates in 2008.
Accordingly, rental income, cost of operations, depreciation, net operating
income, weighted average square foot occupancies and realized rents per square
foot represent the operating results for the partial period that we owned the
facilities during the year acquired. In addition, in place rents per occupied
59
square foot at September 30, 2008 and 2007, reflect the amounts for those
facilities we owned at each of those respective dates. The properties denoted
under "Facilities put in place prior to 2007" include the domestic facilities
acquired in the merger with Shurgard which are not included in the Same Store
group, as well as other newly developed and acquired facilities.
During the first nine months of 2008, we completed a newly developed
facility with 49,000 net rentable square feet at a total cost of $5.6 million,
five expansions to existing real estate facilities (236,000 net rentable square
feet) for an aggregate cost of $18.0 million, and one project to expand an
existing real estate facility in London, England (21,000 net rentable square
feet) for an aggregate cost of $5.9 million. At September 30, 2008, our
development pipeline includes two newly developed self-storage facilities
located in the U.S. adding 119,000 net rentable square feet at an aggregate cost
of $18.5 million, and 17 projects to expand our existing real estate facilities
located in the U.S. by 791,000 net rentable square feet at an aggregate cost of
$82.8 million. These projects are subject to contingencies including obtaining
governmental approvals, but we expect completion of these projects over the next
12 - 24 months.
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 our non-stabilized facilities will continue to provide
earnings growth during 2008 as these facilities continue to improve their
occupancy levels as well as realized rental rates.
Our level of newly developed facilities, and starts to newly developed
facilities, has declined significantly in the last few years due to increases in
construction cost, increases in competition with retail, condominium, and
apartment operators for quality construction sites in urban locations, and more
difficult zoning and permitting requirements, which has reduced the number of
attractive sites available for development and reduced our development of
facilities. It is unclear when, or if, these conditions will improve.
60
ANCILLARY OPERATIONS: Ancillary operations include (i) the reinsurance of
policies against losses to goods stored by tenants in our self-storage
facilities, (ii) sale of merchandise at our self-storage facilities, (iii)
containerized storage operations, (iv) truck rentals at our self-storage
facilities, (v) commercial property operations, and (vi) management of
facilities owned by third-party owners and facilities owned by affiliates that
are not included in our consolidated financial statements.
The following table sets forth our ancillary operations:
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------- --------------------------------------
2008 2007 Change 2008 2007 Change
----------- ---------- -------- ----------- ---------- --------
(Amounts in thousands)
Revenues:
Tenant reinsurance premiums......... $ 14869 $ 13,115 $ 1,754 $ 42,877 $ 37,474 $ 5,403
Merchandise sales................... 7,648 7,850 (202) 22,343 23,141 (798)
Shurgard Europe ancillary operations - 4,754 (4,754) 4,913 12,818 (7,905)
Containerized storage .............. 3,161 3,452 (291) 9,437 9,841 (404)
Truck rentals....................... 1,972 3,640 (1,668) 5,828 9,795 (3,967)
Commercial property operations...... 3,745 3,687 58 11,546 11,157 389
Property management................. 684 667 17 2,014 2,026 (12)
----------- ---------- -------- ----------- ---------- --------
Total revenues................... 32,079 37,165 (5,086) 98,958 106,252 (7,294)
----------- ---------- -------- ----------- ---------- --------
Cost of operations:
Tenant reinsurance.................. (3,628) 5,618 (9,246) 3,309 14,064 (10,755)
Merchandise sales................... 5,776 6,646 (870) 17,448 19,894 (2,446)
Shurgard Europe ancillary operations - 1,424 (1,424) 1,409 4,114 (2,705)
Containerized storage............... 2,749 3,043 (294) 8,114 8,359 (245)
Truck rentals....................... 3,331 3,883 (552) 10,175 10,848 (673)
Commercial property operations...... 1,555 1,471 84 4,789 4,349 440
Property management................. 53 64 (11) 169 182 (13)
----------- ---------- -------- ----------- ---------- --------
Total cost of operations......... 9,836 22,149 (12,313) 45,413 61,810 (16,397)
----------- ---------- -------- ----------- ---------- --------
Depreciation:
Containerized storage............... 239 207 32 716 621 95
Commercial property operations...... 652 642 10 1,956 1,926 30
----------- ---------- -------- ----------- ---------- --------
Total depreciation............... 891 849 42 2,672 2,547 125
----------- ---------- -------- ----------- ---------- --------
Net income (loss):
Tenant reinsurance.................. 18,497 7,497 11,000 39,568 23,410 16,158
Merchandise sales................... 1,872 1,204 668 4,895 3,247 1,648
Shurgard Europe ancillary operations - 3,330 (3,330) 3,504 8,704 (5,200)
Containerized storage............... 173 202 (29) 607 861 (254)
Truck rentals....................... (1,359) (243) (1,116) (4,347) (1,053) (3,294)
Commercial property operations...... 1,538 1,574 (36) 4,801 4,882 (81)
Property management................. 631 603 28 1,845 1,844 1
----------- ---------- -------- ----------- ---------- --------
Total net income................. $ 21,352 $ 14,167 $ 7,185 $ 50,873 $ 41,895 $ 8,978
=========== ========== ======== =========== ========== ========
Tenant reinsurance operations: We reinsure policies offered through a
non-affiliated insurance broker against losses to goods stored by tenants,
primarily in our domestic self-storage facilities. The revenues that we record
are based upon premiums, which are originally paid by the customer, which are
then paid to us by the broker in accordance with our reinsurance arrangements.
Cost of operations primarily includes claims paid that are not covered by our
outside third-party insurers, as well as claims adjusting expenses.
Our increase in tenant reinsurance revenues was attributable to higher
rates, and an increase in the percentage of our existing tenants retaining such
policies, with respect to our ongoing tenant insurance activities in the U.S.
Approximately 52.2% and 46.5% of our tenants had such policies at September 30,
2008 and 2007, respectively.
61
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. During the three and nine months ended
September 30, 2008, we reduced our cost of operations by $7 million due to a
change in accounting estimate.
Merchandise and truck rental operations: Our subsidiaries sell locks,
boxes, and packing supplies to our domestic tenants as well as the general
public. Revenues and cost of operations for these activities are included in the
table above as "Merchandise sales." In addition, at selected locations in the
U.S., our subsidiaries maintain trucks on site for rent to our self-storage
customers and the general public on a short-term basis for local use. In
addition, we also act as an agent for a national truck rental company to provide
their rental trucks to customers for long-distance use. The revenues and cost of
operations for these activities are included in the table above as "Truck
rentals."
These activities generally serve as an adjunct to our self-storage
operations providing our tenants with goods and services that they need in
connection with moving and storing their goods.
Our truck revenues have declined significantly in the three and nine months
ended September 30, 2008 as compared to the same periods in 2007. These declines
are due partially to our termination, in the latter part of the fourth quarter
of 2007, of our agency relationship with Penske, and the implementation of a new
relationship with Budget Truck Rental. While revenues with Penske ceased
immediately, our agency locations with Budget Truck Rental at our self-storage
locations have been gradually ramping up over the last nine months. As a result,
during this transition period our aggregate level of truck agency revenues has
been less than under the Penske relationship.
Further contributing to the decline in revenues is that we now have fewer
Public Storage wholly-owned rental trucks, in favor of using the Budget Truck
Rental fleet, as well as reduced overall truck rental activity as a result of
the decline in long-distance moving activity.
It is difficult to estimate what our ultimate revenues will be under this
new strategy relative to the Penske relationship, because of a) differences in
the geographic focus and types of equipment used by the Penske and Budget Truck
Rental systems, b) differing commission structures, as well as c) the uncertain
impact that the continued general slump in housing and moving activity will
have.
The primary factor impacting the level of operations of these activities is
the level of customer traffic at our self-storage facilities, including the
level of move-ins.
Shurgard Europe ancillary operations: Shurgard Europe offers merchandise
and tenant insurance to its tenants, similar to the business model in the U.S.
As described in Note 3 to our September 30, 2008 condensed consolidated
financial statements, Shurgard Europe's operations are no longer included in our
consolidated financial statements after March 31, 2008. Instead, our pro-rata
share of the operating results of these facilities and the other operating
results of Shurgard Europe are included in "equity in earnings of real estate
entities." As a result, no further amounts are included in ancillary revenues or
ancillary cost of operations for the Shurgard Europe facilities.
Containerized storage operations: We have containerized storage facilities
located in six densely populated markets with above-average rent and income.
62
Rental and other income includes monthly rental charges to customers for
storage of the containers, and service fees charged for pickup and delivery of
containers to customers' homes and businesses. Direct operating costs
principally includes payroll, equipment lease expense, utilities and vehicle
expenses (fuel and insurance).
We closed certain containerized storage locations; the results of these
facilities for all periods presented have been reclassified to the line item
"discontinued operations."
There can be no assurance as to the level of the containerized storage
business's operations or profitability, and we continue to evaluate the
business's operations. Based upon these evaluations, we have closed certain of
these facilities in recent years, including two facilities in the nine months
ended September 30, 2008 which are included in "discontinued operations," and we
may decide to close additional facilities in the future.
Commercial property operations: Commercial property operations included in
our condensed consolidated financial statements include commercial space owned
by the Company and entities consolidated by the Company. We have a much larger
interest in commercial properties through our ownership interest in PSB. Our
investment in PSB is accounted for using the equity method of accounting, and
accordingly our share of PSB's earnings is reflected as "Equity in earnings of
real estate entities," below.
Our commercial operations are comprised of 1,469,000 net rentable square
feet of commercial space, which is principally operated at certain of the
self-storage facilities.
Our commercial property operations consist primarily of facilities that are
at a stabilized level of operations, and generally reflect the conditions in the
markets in which they operate. We do not expect any significant growth in net
operating income from this segment of our business for the remainder of 2008.
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 September 30, 2008. 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 nine months
ended September 30, 2008 and 2007, consists of our pro-rata share of the
Unconsolidated Entities based upon our ownership interest for the period. The
following table sets forth the significant components of equity in earnings of
real estate entities:
63
HISTORICAL SUMMARY: Three Months Ended September 30, Nine Months Ended September 30,
------------------- ---------------------------------- ------------------------------------
2008 2007 Change 2008 2007 Change
--------- --------- --------- --------- --------- ---------
(Amounts in thousands)
Property operations:
PSB.................................... $ 22,291 $ 20,890 $ 1,401 $ 66,189 $ 60,952 $ 5,237
Shurgard Europe (1).................... 13,893 - 13,893 27,283 - 27,283
Other Investments (2).................. 988 1,554 (566) 3,238 3,392 (154)
--------- --------- --------- --------- --------- ---------
37,172 22,444 14,728 96,710 64,344 32,366
--------- --------- --------- --------- --------- ---------
Depreciation:
PSB.................................... (11,226) (11,117) (109) (34,229) (31,547) (2,682)
Shurgard Europe (1).................... (9,757) - (9,757) (20,613) - (20,613)
Other Investments (2).................. (215) (402) 187 (1,349) (1,006) (343)
--------- --------- --------- --------- --------- ---------
(21,198) (11,519) (9,679) (56,191) (32,553) (23,638)
--------- --------- --------- --------- --------- ---------
Other: (3)
PSB (4)................................ (7,745) (7,251) (494) (23,448) (21,169) (2,279)
Shurgard Europe (1).................... (1,876) - (1,876) (2,953) - (2,953)
Other Investments (2).................. (35) (250) 215 (439) (439) -
--------- --------- --------- --------- --------- ---------
(9,656) (7,501) (2,155) (26,840) (21,608) (5,232)
--------- --------- --------- --------- --------- ---------
Total equity in earnings of real estate entities:
PSB.................................... 3,320 2,522 798 8,512 8,236 276
Shurgard Europe (1).................... 2,260 - 2,260 3,717 - 3,717
Other Investments (2).................. 738 902 (164) 1,450 1,947 (497)
--------- --------- --------- --------- --------- ---------
$ 6,318 $ 3,424 $ 2,894 $ 13,679 $ 10,183 $ 3,496
======== ======== ========= ======== ======== =========
(1) In addition to $2,260,000 and $3,717,000 in equity earnings that we
recognized with respect to our investment in Shurgard Europe in the
three and nine months ended September 30, 2008, respectively, we also
recognized $6,151,000 and $12,470,000 in interest income on our note
receivable from Shurgard Europe and $229,000 and $442,000 in trademark
license income, for periods following the deconsolidation of Shurgard
Europe on March 31, 2008, in the three and nine months ended September
30, 2008, respectively. See Note 5 to our September 30, 2008 condensed
consolidated financial statements, "Investment in Shurgard Europe" for
further analysis of the presentation of our equity earnings and
interest and other income from Shurgard Europe.
(2) Amounts primarily reflect equity in earnings recorded for investments
that have been held consistently throughout each of the three and nine
months ended September 30, 2008 and 2007. Amounts also include our
investment in two facilities owned by the Acquisition Joint Venture
that, on July 21, 2008, we began consolidating due to our acquiring
the remaining interest we did not own in the Acquisition Joint
Venture. Equity in earnings with respect to these two properties
ceased as of July 21, 2008 (see Note 8 to our September 30, 2008
condensed consolidated financial statements).
(3) "Other" reflects our share of general and administrative expense,
interest expense, interest income, and other non-property;
non-depreciation related operating results of these entities.
(4) "Other" with respect to PSB also includes our pro-rata share of gains
on sale of real estate assets, impairment charges relating to pending
sales of real estate and the impact of PSB's application of the SEC's
clarification of EITF Topic D-42 on redemptions of preferred
securities.
Investment in PS Business Parks
-------------------------------
Throughout each of the three and nine months ended September 30, 2008 and
2007, 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). Our percentage ownership of PSB
increased in the first nine months of 2008 as PSB repurchased a portion of its
common stock. At September 30, 2008, PSB owned and operated 19.6 million net
rentable square feet of commercial space located in eight states. PSB also
manages commercial space owned by the Company and affiliated entities at
September 30, 2008 pursuant to property management agreements.
64
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.
Other Investments
-----------------
The "Other Investments" at September 30, 2008 are comprised primarily of
our equity in earnings from entities that own 26 self-storage facilities.
Amounts included in the tables above also include our investment in two
facilities owned by the Acquisition Joint Venture that, on July 21, 2008, we
began consolidating due to our acquiring the remaining interest we did not own
in the Acquisition Joint Venture. Equity in earnings with respect to these two
properties ceased as of July 21, 2008 (see Note 8 to our September 30, 2008
condensed consolidated financial statements). Our future earnings with respect
to the other 26 facilities will be dependent upon the operating results of the
facilities that these entities own.
Investment in Shurgard Europe
-----------------------------
As described in Note 3 to our September 30, 2008 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."
Included in Note 5 to our September 30, 2008 condensed consolidated financial
statements is selected financial data for Shurgard Europe for the three and nine
months ended September 30, 2008 and 2007.
At September 30, 2008, Shurgard Europe's operations comprise 178 facilities
with an aggregate of 9,339,000 net rentable square feet. The portfolio consists
of 104 wholly owned facilities and 74 facilities owned by the two joint venture
partnerships, in which Shurgard Europe has a 20% equity interest.
Our equity in earnings of Shurgard Europe for the three months ended
September 30, 2008 totaling $2,260,000 is comprised of (i) a loss of $3,873,000,
representing our 49% equity share of Shurgard Europe's $7,904,000 net loss for
the three months ended September 30, 2008, (ii) income of $5,912,000 and
$221,000, respectively, representing our pro-rata share of the interest income
and trademark license fees received from Shurgard Europe during the three months
ended September 30, 2008 (our pro-rata share of such amounts received are
presented as equity in earnings of real estate entities rather than interest and
other income). For periods following the deconsolidation of Shurgard Europe on
March 31, 2008, our equity in earnings of Shurgard Europe, for the nine months
ended September 30, 2008 totaling $3,717,000 is comprised of (i) a loss of
$8,692,000, representing our 49% equity share of Shurgard Europe's $17,738,000
net loss for the nine months ended September 30, 2008, (ii) income of
$11,983,000 and $426,000, respectively, representing our pro-rata share of the
interest income and trademark license fees received from Shurgard Europe during
the nine months ended September 30, 2008. Our future equity income will be
dependent upon the future operating results of Shurgard Europe.
In evaluating the operations of Shurgard Europe, management reviews the
operating results of 96 facilities, all of which are wholly owned by Shurgard
Europe, which have been operated on a stabilized basis by Shurgard Europe since
January 1, 2006. The operating data presented in the table with respect to these
facilities is reflected utilizing the average exchange rates for the three and
nine months ended September 30, 2008, respectively for the same periods in 2007,
rather than the respective exchange rates in effect for each period. We present
this data on such a "constant exchange rate" basis because we believe it allows
comparability of the various periods, and isolates the impact of exchange rates
with respect to the trends in revenues and cost of operations. As a result, the
data presented below does not reflect the actual results included in our
operations, or the operations of Shurgard Europe, for the three and nine months
ended September 30, 2008 and 2007.
65
SELECTED OPERATING DATA FOR THE 96 FACILITIES OPERATED
BY SHURGARD EUROPE ON A STABILIZED BASIS SINCE JANUARY
1, 2006 ("EUROPE SAME STORE FACILITIES"):
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------- -------------------------------------
Percentage Percentage
2008 2007 Change 2008 2007 Change
---------- ---------- ------- ----------- ---------- -------
(Dollar amounts in thousands, except weighted average data,
utilizing constant exchange rates) (a)
Revenues:
Rental income................................. $ 34,629 $ 34,533 0.3% $ 103,187 $ 100,346 2.8%
Late charges and administrative fees collected 602 346 74.0% 1,796 1,001 79.4%
---------- ---------- ------- ----------- ---------- -------
Total revenues (b)............................ 35,231 34,879 1.0% 104,983 101,347 3.6%
Cost of operations (excluding depreciation and
amortization expense):
Property taxes ............................... 1,576 1,584 (0.5)% 4,737 4,446 6.5%
Direct property payroll....................... 4,000 3,948 1.3% 11,796 11,922 (1.1)%
Advertising and promotion..................... 1,025 785 30.6% 3,182 3,577 (11.0)%
Utilities..................................... 782 672 16.4% 2,458 2,402 2.3%
Repairs and maintenance....................... 854 848 0.7% 2,707 2,574 5.2%
Property insurance............................ 214 243 (11.9)% 648 1,015 (36.2)%
Other costs of management..................... 4,566 4,730 (3.5)% 14,174 15,172 (6.6)%
---------- ---------- ------- ----------- ---------- -------
Total cost of operations (b).................... 13,017 12,810 1.6% 39,702 41,108 (3.4)%
Net operating income (excluding depreciation and
amortization expense) (c)...................... $ 22,214 $ 22,069 0.7% $ 65,281 $ 60,239 8.4%
========== ========== ======= =========== ========== ========
Gross margin (before depreciation and amortization
expense).......................................... 63.1% 63.3% (0.3)% 62.2% 59.4% 4.7%
Weighted average for the period:
Square foot occupancy (d)....................... 87.3% 91.0% (4.1)% 87.2% 89.7% (2.8)%
Realized annual rent per occupied square foot (e) $30.02 $28.72 4.5% $29.85 $28.22 5.8%
REVPAF (f) (g).................................. $26.20 $26.13 0.3% $26.03 $25.31 2.8%
Weighted average at September 30:
Square foot occupancy........................... 87.7% 91.4% (4.0)%
In place annual rent per occupied square foot (h) $31.54 $29.96 5.3%
Total net rentable square feet (in thousands)..... 5,286 5,286 -
(a) The majority of Shurgard Europe's operations are denominated in Euros.
For comparative purposes, amounts for 2007 and 2008 are translated at
constant exchange rates representing the average exchange rates for the
three and nine months ended September 30, 2008. The average exchange
rates for the Euro were approximately 1.5038 and 1.5210 during the
three and nine months ended September 30, 2008, respectively. The
amounts that are included in our condensed consolidated financial
statements are based upon the actual exchange rate for each period.
(b) Revenues and cost of operations do not include ancillary revenues and
expenses generated at the facilities with respect to tenant reinsurance
and retail sales. "Other costs of management" included in cost of
operations principally represents all the indirect costs incurred in
the operations of the facilities. Indirect costs principally include
supervisory costs and corporate overhead cost incurred to support the
operating activities of the facilities.
(c) Net operating income (excluding depreciation and amortization expense)
or "NOI" is a non-GAAP (generally accepted accounting principles)
financial measure that excludes the impact of depreciation and
amortization expense. Although depreciation and amortization are
operating expenses, we believe that NOI is a meaningful measure of
operating performance, because we utilize NOI in making decisions with
respect to capital allocations, in determining current property values,
segment performance, and comparing period-to-period and
market-to-market property operating results. NOI is not a substitute
for net operating income after depreciation and amortization expense in
evaluating our operating results.
(d) Square foot occupancies represent weighted average occupancy levels
over the entire period.
(e) Realized annual rent per occupied square foot is computed by
annualizing the result of dividing rental income by the weighted
average occupied square footage for the period. Realized annual rent
per occupied square foot takes into consideration promotional discounts
and other items that reduce rental income from the contractual amounts
due.
66
(f) Annualized rental income per available square foot ("REVPAF")
represents annualized rental income divided by total available net
rentable square feet.
(g) Late charges and administrative fees are excluded from the computation
of realized annual rent per occupied square foot and REVPAF because
exclusion of these amounts provides a better measure of our ongoing
level of revenue, by excluding the volatility of late charges, which
are dependent principally upon the level of tenant delinquency, and
administrative fees, which are dependent principally upon the absolute
level of move-ins for a period.
(h) In place annual rent per occupied square foot represents annualized
contractual rents per occupied square foot without reductions for
promotional discounts, and excludes late charges and administrative
fees.
We have recently seen softness in Shurgard Europe's operations. While
same-store NOI growth was positive for the quarter ended September 30, 2008,
occupancies as well as rates charged to new customers are below that of last
year. During the third quarter of 2008, Shurgard Europe terminated plans for
future development and will wind down its development program as existing sites
are completed in 2009.
67
OTHER INCOME AND EXPENSE ITEMS
------------------------------
INTEREST AND OTHER INCOME: Interest and other income was $11,485,000 and
$25,343,000 for the three and nine months ended September 30, 2008,
respectively, as compared to $3,257,000 and $6,337,000 for the three and nine
months ended September 30, 2007, respectively. These increases are principally
as a result of (i) higher average cash balances invested in interest bearing
accounts and (ii) interest income with respect to notes receivable from Shurgard
Europe (described below).
On March 31, 2008, we completed a transaction whereby an institutional
investor acquired a 51% interest in Shurgard Europe (see Note 3 to our September
30, 2008 condensed consolidated financial statements). In connection with this
transaction, we received net proceeds totaling $609.1 million which
significantly increased our average cash on-hand throughout the three and nine
months ended September 30, 2008 as compared to the same periods in 2007,
resulting in approximately $3.3 million and $6.6 million of additional interest
income in the three and nine months ended September 30, 2008 as compared to the
same periods in 2007.
In addition, a part of the transaction, we also have a note receivable from
Shurgard Europe totaling $566.1 million as of September 30, 2008 that bears
interest at the rate of 7.5% per annum. Interest income with respect to this
receivable was approximately $12.1 million and $24.5 million for the three and
nine months ended September 30, 2008, respectively, however, for financial
reporting purposes, 51% of this amount ($6.2 million and $12.5 million) was
recorded as interest income and the remaining 49% ($5.9 million and $12.0
million) was recorded as additional equity in earnings for the three and nine
months ended September 30, 2008, respectively.
The level of interest income recorded in connection with our note
receivable from Shurgard Europe will be dependent upon the balances due from
Shurgard Europe as well as the exchange rate of the Euro versus the U.S. Dollar.
The level of interest income recorded on outstanding cash balances will depend
upon the ultimate timing of the investment or other disposition of the net
proceeds.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense was
$92,031,000 and $309,900,000 for the three and nine months ended September 30,
2008, respectively, as compared to $147,741,000 and $491,617,000 for the three
and nine months ended September 30, 2007, respectively.
The decrease in depreciation and amortization expense in the three and nine
months ended September 30, 2008 as compared to the same periods in 2007 is due
principally to a decline of $27.1 million and $103.9 million, respectively, with
respect to domestic assets due primarily to reduced tenant intangible
amortization with respect to domestic assets acquired in the Shurgard Merger.
These intangible assets represent the estimated fair value of the storage
tenants in place at the time of the merger, and are being amortized relative to
the expected future benefit of the tenants in place to each period. We expect
the amortization expense with respect to these intangibles to approximate
$3,608,000 for the fourth quarter of 2008. Effective March 31, 2008,
depreciation and amortization ceased on the facilities owned by Shurgard Europe,
which was deconsolidated effective March 31, 2008. Included in our depreciation
and amortization on Shurgard Europe's facilities were $21,871,000 for the three
months ended March 31, 2008, and $31,394,000 and $108,230,000 for the three and
nine months ended September 30, 2007, respectively.
GENERAL AND ADMINISTRATIVE: General and administrative expense was
$8,879,000, and $56,968,000 for the three and nine months ended September 30,
2008, respectively, as compared to $11,416,000 and $49,397,000 for the three and
nine months ended September 30, 2007, respectively. General and administrative
expense principally consists of state income taxes, investor relations expenses,
and corporate and executive salaries. In addition, general and administrative
expenses includes expenses that vary depending on the Company's 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, employee severance, and
stock-based compensation.
General and administrative expense includes the following items that vary
depending upon our activities: a) costs and expenses totaling $5,300,000 during
the nine months ended September 30, 2007, incurred in connection with the
integration of Shurgard and Public Storage, b) $27,900,000 in additional
incentive compensation in the nine months ended September 30, 2008 related to
the disposition of an interest in Shurgard Europe, c) $9,600,000 in costs
68
associated with our proposed offering of shares in Shurgard Europe during the
nine months ended September 30, 2007 and d) $2,000,000 in costs associated with
reorganizing as a Maryland REIT during the three and nine months ended September
30, 2007. Certain of these amounts were incurred by Shurgard Europe and included
in our consolidated financial statements.
General and administrative expense also excludes the ongoing levels of
general and administrative expense incurred by Shurgard Europe for periods after
March 31, 2008.
INTEREST EXPENSE: Interest expense was $9,099,000 and $35,187,000 for the
three and nine months ended September 30, 2008, respectively, as compared to
$15,257,000 and $48,772,000 for the three and nine months ended September 30,
2007, respectively. See also Notes 7 and 8 to our September 30, 2008 condensed
consolidated financial statements for a schedule of our debt balances, principal
repayment requirements, and average interest rates.
Capitalized interest expense totaled $448,000 and $1,630,000 for the three
and nine months ended September 30, 2008, respectively, as compared to
$1,297,000, and $3,011,000 for the three and nine months ended September 30,
2007, respectively, in connection with our development activities.
Included in our condensed consolidated financial statements is interest
expense incurred by Shurgard Europe of $6,597,000 for the nine months ended
September 30, 2008 (none during the three months ended September 30, 2008) and
$5,914,000 and $16,384,000 for the three and nine months ended September 30,
2007, respectively, 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.
GAIN ON DISPOSITION OF AN INTEREST IN SHURGARD EUROPE: On March 31, 2008,
an institutional investor acquired a 51% interest in Shurgard European Holdings
LLC, a newly formed Delaware limited liability company and the holding company
for Shurgard Europe ("Shurgard Holdings"). Public Storage owns the remaining 49%
interest and is the managing member of Shurgard Holdings. In exchange for the
51% interest in Shurgard Holdings, the investor paid Shurgard Holdings
approximately (euro)383,200,000 ($605,627,000) on March 31, 2008. During the
three months ended June 30, 2008, the investor paid an additional
(euro)4,797,000 ($7,574,000) based upon the operating results (as defined)
generated by Shurgard Europe during the three months ended March 31, 2008.
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 recognized a gain of $304,011,000 upon
disposition, representing the difference between the net proceeds received of
$609,059,000 and the pro rata portion of our investment sold of $305,048,000.
In addition, as a result of our disposition of this interest, a portion of
the cumulative currency exchange gains we had previously recognized in Other
Comprehensive Income with respect to Shurgard Europe was realized. Accordingly,
we recognized a cumulative currency exchange gain of $37,854,000, representing
51% (the pro rata portion of Shurgard Europe that was sold) of the cumulative
currency exchange gain previously included in Other Comprehensive Income.
The gain upon disposition of $304,011,000 and associated realized currency
exchange gain totaling $37,854,000 are both included in the gain on disposition
of an interest in Shurgard Europe of $341,865,000 in our condensed consolidated
statement of income for the nine months ended September 30, 2008.
CASUALTY GAIN OR LOSS: Our policy is to record casualty losses or gains in
the period the casualty occurs equal to the differential between (a) the book
value of assets destroyed and (b) insurance proceeds, if any, that we expect to
receive in accordance with our insurance contracts. Potential insurance proceeds
that are subject to uncertainties, such as interpretation of deductible
provisions of the governing agreements or the estimation of costs of
restoration, are treated as a contingent proceeds in accordance with Statement
of Financial Accounting Standards No. 5 ("SFAS 5"), and not recorded until the
uncertainties are satisfied. During the three months ended September 30, 2008,
69
we recorded a casualty loss of $525,000 related to damage to our properties from
a hurricane. During the three months ended March 31, 2007, we recorded a
casualty gain totaling $2,665,000, representing the realization of contingent
proceeds relating to hurricanes which occurred in 2005.
FOREIGN EXCHANGE GAIN (LOSS): At September 30, 2008, Shurgard Europe owed
us approximately (euro)391.9 million ($566.1 million). We expect Shurgard Europe
to obtain external financing in the next 12 to 24 months, but not later than
March 31, 2010, which will fund the repayment of the loans. These amounts are
denominated in Euros but have not been hedged. The amount of U.S. Dollars that
will be received on repayment will depend upon the exchange rates at the time.
Based upon the change in estimated U.S. Dollars to be received caused by
fluctuation in currency rates during the three months ended September 30, 2008
and 2007, foreign currency translation losses of $53,172,000 and gains of
$30,384,000 were recorded in those periods, respectively. During the nine months
ended September 30, 2008 and 2007, we recorded foreign currency translation
losses of $12,160,000 and gains of $40,977,000, respectively. The U.S. Dollar
exchange rate relative to the Euro was approximately 1.445 at September 30,
2008, 1.579 at June 30, 2008, and 1.472 at December 31, 2007.
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
intercompany debt. Based upon a closing exchange rate of the U.S. Dollar
relative to the Euro of 1.268 on November 6, 2008, we would record an additional
foreign exchange rate loss totaling $69,366,000 thus far in the quarter ending
December 31, 2008.
INCOME (EXPENSE) FROM DERIVATIVES, NET: This represents the net gain or
loss as recognized for the changes in the fair market values of those derivative
financial instruments that do not qualify for hedge accounting treatment under
SFAS No. 133, combined with net payments from derivative instruments. We
recognized net expense of $43,000 in the nine months ended September 30, 2008,
as compared to net income of $117,000 and $1,126,000 for the same periods in
2007. We do not expect any further activity in derivatives because all such
derivatives are owned by Shurgard Europe, which was deconsolidated effective
March 31, 2008.
MINORITY INTEREST IN INCOME: Minority interest in income represents the
income allocable to equity interests in Consolidated Entities, which are not
owned by the Company. The following table summarizes minority interest in income
for the three and nine months ended September 30, 2008 and 2007:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------------- ----------------------------------------
2008 2007 Change 2008 2007 Change
---------- ----------- --------- ----------- ----------- ----------
(Amounts in thousands)
Preferred partnership interests....... $ 5,403 $ 5,403 $ - $ 16,209 $ 16,209 $ -
Existing European Joint Ventures (a).. - (1,456) 1,456 (2,142) (7,275) 5,133
Other minority interests (b).......... 5,208 4,357 851 14,285 12,677 1,608
---------- ----------- --------- ----------- ----------- ----------
Total minority interests in income $ 10,611 $ 8,304 $ 2,307 $ 28,352 $ 21,611 $ 6,741
========== =========== ========= =========== =========== ==========
(a) These amounts reflect income allocated to minority interests from
entities we acquired in the Shurgard Merger. These interests include
the 80% partner's interests in the European joint ventures, First
Shurgard and Second Shurgard. Included in minority interest in income
is $3,184,000 in depreciation expense for the nine months ended
September 30, 2008, as compared to $2,674,000 and $8,281,000 for the
three and nine months ended September 30, 2007, respectively. As a
result of the deconsolidation of Shurgard Europe on March 31, 2008, no
minority interest in income was recognized for the Existing European
Joint Ventures during the three months ended September 30, 2008.
(b) The other minority interests include depreciation expense of $469,000
and $1,463,000 for the three and nine months ended September 30, 2008,
respectively, as compared to $717,000 and $1,885,000 for the same
periods in 2007.
Future minority interest will no longer include minority interest for the
Existing European Joint Ventures, because Shurgard Europe was deconsolidated
effective March 31, 2008. Such future minority interest in income for periods
after March 31, 2008 is not included in our financial statements.
70
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
We believe that 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 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 Nine Months Ended
September 30,
----------------------------
2008 2007
------------ ------------
(Amount in thousands)
Net cash provided by operating activities (a)......................... $ 796,534 $ 752,689
Allocable to minority interests (Preferred Units)..................... (16,209) (16,209)
------------ ------------
Cash from operations allocable to our shareholders.................... 780,325 736,480
Capital improvements to maintain our facilities....................... (72,629) (49,453)
------------ ------------
Remaining operating cash flow available for distributions to our
shareholders....................................................... 707,696 687,027
Distributions paid:
Preferred share dividends.......................................... (180,999) (176,424)
Equity Shares, Series A dividends.................................. (16,068) (16,068)
Common shareholders ($1.65 per share for the nine months ended
September 30, 2008 and $1.50 per share for the same period in
2007)............................................................. (278,502) (255,022)
------------ ------------
Cash from operations available for principal payments on debt and
reinvestment (b)................................................... $ 232,127 $ 239,513
============ ============
(a) Represents net cash provided from operating activities for each of the
respective nine month periods ended September 30, 2008 and 2007 as
presented in our condensed consolidated statements of cash flows.
(b) Cash 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 decreased from $239.5 million in the nine months ended September
30, 2007 to $232.1 million in the nine months ended September 30, 2008. In
addition, we have unrestricted cash on hand at September 30, 2008 totaling
$789.3 million.
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 growth strategies and debt obligations with
(i) cash on hand at September 30, 2008, (ii) internally generated retained cash
flows and (iii) proceeds from issuing equity securities. In general, our current
strategy is to continue to finance our growth with permanent capital, either
common or preferred equity to the extent that market conditions are favorable,
not withstanding current market conditions are not favorable.
Over the past three years, 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
71
difficult to repay debt with operating cash flow alone, (ii) our perpetual
preferred shares have no sinking fund requirement or maturity date and do not
require redemption, all of which eliminate any future refinancing risks, (iii)
after the end of a non-call period, we have the option to redeem the preferred
shares at any time, which enable us to refinance higher coupon preferred shares
with new preferred shares at lower rates if appropriate, (iv) preferred shares
do not contain covenants, thus allowing us to maintain significant financial
flexibility, and (v) dividends on the preferred shares can be applied to satisfy
our REIT distribution requirements.
Our credit ratings on each of our series of preferred shares are "Baa1" by
Moody's and "BBB" by Standard & Poor's.
On March 27, 2007, we entered into a five-year revolving credit agreement
(the "Credit Agreement") with an aggregate limit with respect to borrowings,
letters of credit and foreign currency borrowings in Euros or British pounds of
$300 million. Amounts drawn under 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 September
30, 2008). 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 September 30, 2008). We had no outstanding borrowings on our Credit
Agreement at September 30, 2008 or November 6, 2008.
At September 30, 2008, we had undrawn standby letters of credit, which
reduce our borrowing capacity with respect to our line of credit by the amount
of the standby letters of credit, totaling $17.7 million.
The Credit Agreement includes various covenants, the more significant of
which require us to (i) maintain a leverage ratio (as defined therein) of less
than 0.55 to 1.00, (ii) maintain certain fixed charge and interest coverage
ratios (as defined therein) of not less than 1.5 to 1.0 and 1.75 to 1.0,
respectively, and (iii) maintain a minimum total shareholders' equity (as
defined therein). We were in compliance with all covenants of the Credit
Agreement at September 30, 2008.
EXISTING CASH BALANCES: At September 30, 2008, we had cash balances
totaling $789.3 million. These cash balances were generated principally due to
the net proceeds we received from the disposition of a 51% interest in Shurgard
Europe to an institutional investor. While these cash balances represent a
significant amount of liquidity, they do dilute our cash flows from operations
because they are invested generally in short-term cash investments earning
nominal rates of interest of approximately 2.2% for the quarter ended September
30, 2008. This dilution will not be rectified until, and if, we invest these
proceeds in real estate assets having higher yields.
Over the past several months, accessing capital through the equity or
credit markets has become very difficult, in part due to the lack of liquidity,
particularly with respect to real estate companies. As a result, our ability to
raise additional capital by issuing common or preferred securities is not
currently a viable option.
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.
72
Aggregate dividends paid during the nine months ended September 30, 2008
totaled $181.0 million to the holders of our Cumulative Preferred Shares, $278.5
million to the holders of our common shares and $16.1 million to the holders of
our Equity Shares, Series A. Although we have not finalized the calculation of
our 2007 taxable income, we believe that the aggregate dividends paid in 2007 to
our shareholders enable us to continue to meet our REIT distribution
requirements.
During the nine months ended September 30, 2008, we paid distributions
totaling $16.2 million with respect to our Preferred Partnership Units. We
estimate the 2008 distribution requirements with respect to the preferred
partnership units outstanding at September 30, 2008, to be approximately $21.6
million. In addition, we estimate the 2008 distribution requirements with
respect to our preferred shares outstanding at September 30, 2008, to be
approximately $241.3 million, assuming no additional preferred share issuances
or redemptions during 2008.
For 2008, distributions with respect to the common shares and Equity
Shares, Series A will be determined based upon our REIT distribution
requirements after taking into consideration distributions to the preferred
shareholders. For the fourth quarter of 2008, a regular quarterly distribution
of $0.55 per common share and a special dividend of $0.60 per common share were
declared by our Board of Trustees and will be payable on December 30, 2008 to
shareholders of record as of December 15, 2008. Based upon shares outstanding as
of September 30, 2008, we estimate a regular dividend payment with respect to
our common shares of approximately $92.5 million and a special dividend payment
of $100.9 million for the fourth quarter of 2008. Notwithstanding the
significant gain recognized for book purposes as a result of our disposition of
51% of Shurgard Europe, we currently do not expect an increase to be necessary
to our 2008 distributions to meet our REIT distribution requirements.
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.
CAPITAL IMPROVEMENT REQUIREMENTS: During 2008, we have budgeted
approximately $92 million for capital improvements for our facilities. Through
September 30, 2008, approximately $72.6 million of this budget has been
incurred. 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.
EUROPEAN ACTIVITIES: Pursuant to our disposition of a 51% interest in
Shurgard Europe on March 31, 2008 (see Note 3 to our September 30, 2008
condensed consolidated financial statements), the intercompany notes receivable
owed by Shurgard Europe to Public Storage were modified, principally to fix the
interest rate to 7.5% per annum and extend the maturity date to March 31, 2009
(March 31, 2010 if Shurgard Europe exercises its option to extend one additional
year). The note totaled approximately $566.1 million at September 30, 2008.
If Shurgard Europe acquires its partner's interests in two joint ventures
and is unable to obtain third-party financing, we have agreed to provide
additional loans to Shurgard Europe, under the same terms as the existing loans,
for up to (euro)305 million ($440.6 million as of September 30, 2008) for the
acquisition. Shurgard Europe has no obligation to acquire these interests, and
the acquisition of these interests is contingent on a number of items, including
the outcome of pending arbitration proceedings with the joint venture partner
and whether we assent to the acquisition. In connection with our disposition of
an interest in Shurgard Europe on March 31, 2008, we also committed to fund up
to $88.2 million of additional equity contributions to Shurgard Europe to fund
certain investing activities. During September 2008, we made an equity
contribution of approximately $21.8 million to Shurgard Europe, reducing our
remaining commitment to $66.4 million at September 30, 2008.
We expect that Shurgard Europe will repay the loan no later than March 31,
2010 or sooner if capital markets become accessible to Shurgard Europe on
appropriate terms. Given the difficulty in the credit markets, it is possible
that Shurgard Europe may be unable to repay the loans prior to March 31, 2010.
Our business operations are not dependent on the repayment of such loans.
73
DEBT SERVICE REQUIREMENTS: At September 30, 2008, we have total outstanding
debt of approximately $646 million. We do not believe we have any significant
refinancing risks with respect to our debt.
Our portfolio of real estate facilities remains substantially unencumbered.
At September 30, 2008, we have secured debt outstanding of $237.6 million, which
encumbers 89 self-storage facilities with an aggregate net book value of
approximately $604.2 million.
We anticipate that our retained operating cash flow will continue to be
sufficient to enable us to make scheduled principal and interest payments. See
Notes 7 and 8 to our September 30, 2008 condensed consolidated financial
statements for approximate principal maturities of such borrowings. It is our
current intention to fully amortize our outstanding debt as opposed to refinance
debt maturities with additional debt. Alternatively, we may prepay debt and
finance such prepayments with retained operating cash flow or proceeds from the
issuance of preferred securities.
ACQUISITION OF REAL ESTATE ASSETS: We believe that the credit crisis may
result in opportunities to acquire self-storage facilities and related loans
secured by self-storage facilities at very attractive prices. However, it is
difficult to estimate the amount of such acquisitions we will undertake. During
the nine months ended September 30, 2008, we acquired two self-storage
facilities (approximately 211,000 net rentable square feet) located in
California and two self-storage facilities (approximately 157,000 net rentable
square feet) located in Nevada from third parties for an aggregate cost of $41.9
million.
DEVELOPMENT OF FACILITIES: At September 30, 2008, we have a development
"pipeline" of 19 projects in the U.S. consisting of newly developed self-storage
facilities, conversion of space at facilities that was previously used for
containerized storage and expansions to existing self-storage facilities. At
September 30, 2008, we have acquired the land for all of these projects.
The development and fill-up of these storage facilities is subject to
significant contingencies such as obtaining appropriate governmental approvals.
We estimate that the amount remaining to be spent to complete development to be
approximately $55.8 million and will be incurred over the next 24 months. The
following table sets forth certain information with respect to our development
pipeline.
DEVELOPMENT PIPELINE SUMMARY
AS OF SEPTEMBER 30, 2008
Number Net Total Costs incurred
of rentable estimated through Costs to
projects sq. ft. development 09/30/08 complete
costs
-------- -------- ------------- ------------- -------------
(Amounts in thousands, except number of projects)
Under construction 11 479 $ 57,253 $ 39,485 $ 17,768
In development 8 431 44,010 5,934 38,076
-------- -------- ------------- ------------- -------------
Total Development Pipeline 19 910 $ 101,263 $ 45,419 $ 55,844
======== ======== ============= ============= =============
The development and fill-up of these storage facilities is subject to
significant contingencies such as obtaining appropriate governmental approvals.
The future costs with respect to all other development projects will be funded
by us.
CONTRACTUAL OBLIGATIONS
Our significant contractual obligations at September 30, 2008 and their
impact on our cash flows and liquidity are summarized below for the years ending
December 31 (amounts in thousands):
74
Total 2008 2009 2010 2011 2012 Thereafter
---------- --------- ---------- --------- ---------- ---------- ----------
Long-term debt (1) ............ $ 779,872 $ 22,838 $ 47,519 $ 48,905 $ 251,263 $ 74,560 $ 334,787
Operating leases (2)........... 115,910 3,284 7,615 9,941 6,834 6,032 82,204
Construction commitments (3)... 17,768 15,991 1,777 - - - -
---------- --------- ---------- --------- ---------- ---------- ----------
Total.......................... $ 913,550 $ 42,113 $ 55,911 $ 58,846 $ 258,097 $ 80,592 $ 416,991
========== ========= ========== ========= ========== ========== ==========
(1) Amounts include interest payments on our notes payable based on their
contractual terms. See Note 7 to our September 30, 2008 condensed
consolidated financial statements for additional information on our
notes payable.
(2) We lease trucks, land, equipment and office space under various
operating leases. Certain leases are cancelable with substantial
penalties.
(3) Includes obligations for facilities currently under construction at
September 30, 2008 as described above under "Acquisition and
Development of Facilities."
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.
OFF-BALANCE SHEET ARRANGEMENTS: At September 30, 2008 we had no material
off-balance sheet arrangements as defined under Regulation S-K 303(a)(4) and the
instructions thereto.
SHARE REPURCHASE PROGRAM: 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 2004 and 2005, we repurchased 529,700 shares. During 2006 and 2007,
we did not repurchase any shares. During 2008 (through November 6, 2008), we
repurchased 1,520,196 shares for approximately $111.9 million. From the
inception of the repurchase program through November 6, 2008, we have
repurchased a total of 23,721,916 common shares at an aggregate cost of
approximately $679.1 million.
Future levels of repurchases will be dependent upon our available capital,
investment alternatives, and the trading price of our common shares.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
------- ----------------------------------------------------------
To limit our exposure to market risk, we principally finance our operations
and growth with permanent equity capital consisting of common stock and
preferred shares. At September 30, 2008, our debt as a percentage of total
shareholders' equity (based on book values) was 7.2%.
Our preferred shares are not redeemable at the option of the holders. At
September 30, 2008, our Series V 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 prior to the following dates:
Series W - October 6, 2008, Series X - November 13, 2008, Series Y - January 2,
2009, Series Z - March 5, 2009, Series A - March 31, 2009, Series B - September
30, 2009, Series C - September 13, 2009, Series D - February 28, 2010, Series E
- April 27, 2010, Series F - August 23, 2010, Series G - December 12, 2010,
Series H - January 19, 2011, Series I - May 3, 2011, Series K - August 8, 2011,
Series L - October 20, 2011, Series M - January 9, 2012 and Series N - July 2,
2012. On or after the respective dates, each of the series of preferred shares
will be redeemable at the option of the Company, in whole or in part, at $25 per
depositary share (or share in the case of the Series Y), plus accrued and unpaid
dividends through the redemption date.
75
Our market risk sensitive instruments include notes payable and borrowing
on bank credit facilities, which totaled $646,059,000 and none, respectively, at
September 30, 2008.
We have foreign currency exposures related to our investment in Shurgard
Europe, which has a book value of $303.9 million at September 30, 2008. We also
have a note receivable from Shurgard Europe, which is denominated in Euros,
totaling (euro)391.9 million ($566,084,000) at September 30, 2008. We also have
an obligation, in certain circumstances, to loan up to an additional (euro)305
million to Shurgard Europe.
The table below summarizes annual debt maturities and weighted-average
interest rates on our outstanding debt at the end of each year and fair values
required to evaluate our expected cash-flows under debt agreements and our
sensitivity to interest rate changes at September 30, 2008 (dollar amounts in
thousands).
2008 2009 2010 2011 2012 Thereafter Total Fair Value
--------- -------- ---------- ---------- ------- ---------- ---------- ----------
Fixed rate debt........ $ 13,971 $ 12,791 $ 14,908 $ 228,036 $55,335 $ 321,018 $ 646,059 $ 646,059
Average interest rate.. 6.73% 6.72% 6.71% 6.01% 5.80% 5.50%
-------------------------------------------------------------------------------------------------------------------------
Variable rate debt (1). $ - $ - $ - $ - $ - $ - $ - $ -
Average interest rate..
-------------------------------------------------------------------------------------------------------------------------
(1) Amounts include borrowings under our line of credit, which expires in
2012.
76
ITEM 4. CONTROLS AND PROCEDURES
------- -----------------------
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in reports the Company files
and submits under the Securities Exchange Act of 1934, as amended ("Exchange
Act"), is recorded, processed, summarized and reported within the time periods
specified in accordance with SEC guidelines and that such information is
communicated to the Company's management, including its Chief Executive Officer
and Chief Financial Officer, to allow timely decisions regarding required
disclosure based on the definition of "disclosure controls and procedures" in
Rules 13a-15(e) and 15d-15(e) of the Exchange Act. In designing and evaluating
the disclosure controls and procedures, management recognized that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures in reaching that level of
reasonable assurance. Also, the Company has investments in certain
unconsolidated entities. As the Company does not control or manage these
entities, its disclosure controls and procedures with respect to such entities
are substantially more limited than those it maintains with respect to its
consolidated subsidiaries.
As of the end of the fiscal quarter covered by this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
the Company's Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as such term is
defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective.
There have not been any changes in our internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the quarter to which this report relates that have
materially affected, or are reasonable likely to materially affect, our internal
control over financial reporting.
77
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The information set forth under the heading "Legal Matters" in Note 14 to
the Condensed Consolidated Financial Statements in this Form 10-Q is
incorporated by reference in this Item 1.
Item 1A. Risk Factors
------------
As of September 30, 2008, no material changes had occurred in our risk
factors as discussed in Item 1A of the Public Storage Quarterly Report on Form
10-Q for the quarter ended March 31, 2008.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
On June 12, 1998, our Board authorized the repurchase from time to time of
up to 10,000,000 common shares on the open market or in privately negotiated
transactions. On subsequent dates our Board increased the repurchase
authorization, and on May 8, 2008, the Board increased the total repurchase
authorization by 10,000,000 common shares to 35,000,000 common shares. During
2008 (through November 6, 2008), we repurchased 1,520,196 shares for
approximately $111.9 million. From the inception of the repurchase program
through November 6, 2008, we have repurchased a total of 23,721,916 common
shares at an aggregate cost of approximately $679.1 million. As of November 6,
2008, we have Board authorization to repurchase an additional 11,278,084 shares
under our repurchase program.
Our share repurchase program does not have an expiration date. During the
nine months ended September 30, 2008, 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.
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.
78
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: November 7, 2008
PUBLIC STORAGE
By: /s/ John Reyes
--------------
John Reyes
Senior Vice President and Chief Financial Officer
(Principal financial officer and duly authorized
officer)
79
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.
80
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.
81
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 Senior Credit Agreement dated May 26, 2003, as amended by Amendment
Agreements dated July 11, 2003 and December 2, 2003, by and among First
Shurgard Sprl, First Shurgard Finance Sarl, First Shurgard Deutschland
GmbH, Societe Generale and others. Incorporated by reference to Exhibit
10.1 filed with the Current Report on Form 8-K dated February 21, 2005
filed by Shurgard Storage Centers, Inc. ("Shurgard") (SEC File No.
001-11455).
10.15 Amendment and Waiver Agreement dated February 21, 2005 to the Senior
Credit Agreement dated May 26, 2003, as amended as of December 2, 2003,
by and among First Shurgard Sprl, First Shurgard Finance Sarl, First
Shurgard Deutschland GmbH, Societe Generale and others. Incorporated by
reference to Exhibit 10.2 filed with the Current Report on Form 8-K
dated February 21, 2005 filed by Shurgard (SEC File No. 001-11455).
10.16 Credit Facility Agreement dated July 12, 2004, between Second Shurgard
SPRL, Second Shurgard Finance SARL, the Royal Bank of Scotland as
Mandated Lead Arranger, the Royal Bank of Scotland PLC as Facility
Agent. Incorporated by reference to Exhibit 10.43 filed with the Report
on Form 10-Q for the quarter ended June 30, 2004 filed by Shurgard (SEC
File No. 001-11455).
10.17* Employment Agreement between Registrant and B. Wayne Hughes dated as of
November 16, 1995. Filed with PSI's Annual Report on Form 10-K for the
year ended December 31, 1995 (SEC File No. 001-0839) and incorporated
herein by reference.
10.18* 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).
10.19* 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).
10.20* 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).
10.21* 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.
82
10.22* 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.
10.23* 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.
10.24* 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.
10.25* Form of 2001 Plan Non-qualified Stock Option Agreement. Filed with
PSI's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2004 (SEC File No. 001-0839) and incorporated herein by
reference.
10.26* 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.
10.27* 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.
10.28* 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.
10.29* 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.
10.30* 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.
10.31* 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.
10.32 Form of Stock Purchase Agreement. Filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2007 and
incorporated herein by reference.
10.33* 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.
10.34* Agreement dated April 16, 2008 between Registrant and executive. Filed
as Exhibit 10.1 to Registrant's Current Report on Form 8-K dated April
22, 2008 and incorporated herein by reference.
10.35* 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.
11 Statement Re: Computation of Earnings per Share. Filed herewith.
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.
83
32 Section 1350 Certifications. Filed herewith.
--------
(1) SEC File No. 001-33519 unless otherwise indicated.
* Denotes management compensatory plan agreement or arrangement.
84