SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2006
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: 1-8389
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PUBLIC STORAGE, INC.
--------------------
(Exact name of registrant as specified in its charter)
California 95-3551121
----------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
701 Western Avenue, Glendale, California 91201-2349
------------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 244-8080.
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [X] Accelerated Filer [ ] Non-accelerated Filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
Indicate the number of shares outstanding of each of the registrant's common
stock, as of May 8, 2006:
Common Stock, $.10 par value per share - 129,309,950 shares
PUBLIC STORAGE, INC.
INDEX
Pages
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
March 31, 2006 and December 31, 2005 1
Condensed Consolidated Statements of Income for the
Three Months Ended March 31, 2006 and 2005 2
Condensed Consolidated Statement of Shareholders' Equity
for the Three Months Ended March 31, 2006 3
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2006 and 2005 4 - 5
Notes to Condensed Consolidated Financial Statements 6 - 33
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 34 - 62
Item 3. Quantitative and Qualitative Disclosures about Market Risk 62
Item 4. Controls and Procedures 62
PART II. OTHER INFORMATION (Items 3 through 5 are not applicable)
Item 1. Legal Proceedings 63
Item 1A. Risk Factors 63 - 69
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 69
Item 6. Exhibits 69 - 76
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
March 31, December 31,
2006 2005
------------------ -------------------
ASSETS
Cash and cash equivalents.................................................... $ 382,329 $ 493,501
Real estate facilities, at cost:
Land...................................................................... 1,564,937 1,540,357
Buildings................................................................. 4,466,239 4,390,127
------------------ -------------------
6,031,176 5,930,484
Accumulated depreciation.................................................. (1,547,708) (1,500,128)
------------------ -------------------
4,483,468 4,430,356
Construction in process................................................... 54,915 54,472
------------------ -------------------
4,538,383 4,484,828
Investment in real estate entities........................................... 305,558 328,555
Goodwill..................................................................... 78,204 78,204
Intangible assets, net....................................................... 96,430 98,081
Other assets................................................................. 69,700 69,317
------------------ -------------------
Total assets................................................... $ 5,470,604 $ 5,552,486
================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable................................................................ $ 106,200 $ 113,950
Debt to joint venture partner................................................ 35,740 35,697
Preferred stock called for redemption........................................ - 172,500
Accrued and other liabilities................................................ 153,159 159,360
------------------ -------------------
Total liabilities................................................... 295,099 481,507
Minority interest:
Preferred partnership interests........................................... 225,000 225,000
Other partnership interests............................................... 32,789 28,970
Commitments and contingencies (Note 14)...................................... - -
Shareholders' equity:
Cumulative Preferred Stock, $0.01 par value, 50,000,000 shares authorized,
1,702,536 shares issued (in series) and outstanding, (1,698,336 at
December 31, 2005) at liquidation preference............................ 2,603,400 2,498,400
Common Stock, $0.10 par value, 200,000,000 shares authorized, 128,162,629
shares issued and outstanding (128,089,563 at December 31, 2005)........ 12,816 12,809
Equity Stock, Series A, $0.01 par value, 200,000,000 shares authorized,
8,744.193 shares issued and outstanding................................. - -
Paid-in capital........................................................... 2,428,424 2,430,671
Cumulative net income..................................................... 3,303,482 3,189,266
Cumulative distributions paid............................................. (3,430,406) (3,314,137)
------------------ -------------------
Total shareholders' equity.......................................... 4,917,716 4,817,009
------------------ -------------------
Total liabilities and shareholders' equity..................... $ 5,470,604 $ 5,552,486
================== ===================
See accompanying notes.
1
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
(Unaudited)
For the Three Months Ended March 31,
----------------------------------------
2006 2005
----------------- ------------------
Revenues:
Rental income:
Self-storage facilities......................................... $ 251,512 $ 227,346
Commercial properties........................................... 2,992 2,848
Containerized storage facilities................................ 3,930 3,837
Ancillary operations............................................... 15,174 14,018
Interest and other income.......................................... 5,075 2,893
----------------- ------------------
278,683 250,942
----------------- ------------------
Expenses:
Cost of operations (excluding depreciation and amortization below):
Self-storage facilities......................................... 87,735 81,644
Commercial properties........................................... 1,348 1,127
Containerized storage facilities................................ 3,310 2,742
Ancillary operations............................................ 10,616 10,417
Depreciation and amortization....................................... 50,049 47,938
General and administrative.......................................... 6,779 5,141
Interest expense.................................................... 1,557 1,663
----------------- ------------------
161,394 150,672
----------------- ------------------
Income from continuing operations before equity in earnings of real
estate entities and minority interest in income.................... 117,289 100,270
Equity in earnings of real estate entities (Note 5)................... 3,466 5,678
Minority interest in income:
Preferred partnership interests:
Based on ongoing distributions paid.............................. (3,591) (5,375)
Allocation of redemption costs (Note 9).......................... - (874)
Other partnership interests......................................... (3,568) (4,395)
----------------- ------------------
Income from continuing operations..................................... 113,596 95,304
Cumulative effect of change in accounting principle (Note 12)........ 578 -
Discontinued operations (Note 3)...................................... 42 1,107
----------------- ------------------
Net income............................................................ $ 114,216 $ 96,411
================= ==================
Net income allocation:
----------------------
Allocable to preferred shareholders:
Based on distributions paid...................................... $ 46,615 $ 40,413
Based on redemptions of preferred stock (Note 2)................. - 1,904
Allocable to Equity Stock, Series A................................ 5,356 5,375
Allocable to common shareholders................................... 62,245 48,719
----------------- ------------------
$ 114,216 $ 96,411
================= ==================
Net income per common share - basic
Continuing operations.............................................. $ 0.49 $ 0.37
Discontinued operations............................................ - 0.01
----------------- ------------------
$ 0.49 $ 0.38
================= ==================
Net income per common share - diluted
Continuing operations.............................................. $ 0.48 $ 0.37
Discontinued operations............................................ - 0.01
----------------- ------------------
$ 0.48 $ 0.38
================= ==================
Net income per depositary share of Equity Stock, Series A (basic and
diluted)........................................................... $ 0.61 $ 0.61
================= ==================
Basic weighted average common shares outstanding...................... 128,122 128,586
================= ==================
Diluted weighted average common shares outstanding.................... 129,009 129,175
================= ==================
Weighted average shares of Equity Stock, Series A (basic and diluted). 8,744 8,776
================= ==================
See accompanying notes.
2
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands, except share data)
(Unaudited)
Cumulative Cumulative Net
Preferred Stock Common Stock Paid-in Capital Income
------------------- -------------- ---------------- ---------------
Balances at December 31, 2005............................. $ 2,498,400 $ 12,809 $ 2,430,671 $ 3,189,266
Issuance of cumulative preferred stock:
Series H (4,200 shares).............................. 105,000 - (3,508) -
Issuance of common stock in connection with:
Exercise of employee stock options (54,857 shares)..... - 5 1,536 -
Vesting of restricted stock (18,209 shares) ........... - 2 (2) -
Stock based compensation expense (Note 12) ............... - - (273) -
Net income................................................ - - - 114,216
Cash distributions:
Cumulative preferred stock (Note 10)................... - - - -
Equity Stock, Series A ($0.61 per depositary share).... - - - -
Common Stock ($0.50 per share)......................... - - - -
------------------- -------------- ---------------- ---------------
Balances at March 31, 2006................................ $ 2,603,400 $ 12,816 $ 2,428,424 $ 3,303,482
================= ============== ================ ===============
Total
Cumulative Shareholders'
Distributions Equity
--------------- --------------
Balances at December 31, 2005............................. $ (3,314,137) $ 4,817,009
Issuance of cumulative preferred stock:
Series H (4,200 shares).............................. - 101,492
Issuance of common stock in connection with:
Exercise of employee stock options (54,857 shares)..... - 1,541
Vesting of restricted stock (18,209 shares) ........... - -
Stock based compensation expense (Note 12) ............... - (273)
Net income................................................ - 114,216
Cash distributions:
Cumulative preferred stock (Note 10)................... (46,615) (46,615)
Equity Stock, Series A ($0.61 per depositary share).... (5,356) (5,356)
Common Stock ($0.50 per share)......................... (64,298) (64,298)
--------------- --------------
Balances at March 31, 2006................................ $ (3,430,406) $ 4,917,716
=============== ==============
See accompanying notes.
3
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
For the Three Months Ended
March 31,
------------------------------
2006 2005
-------------- -------------
Cash flows from operating activities:
Net income.................................................................. $ 114,216 $ 96,411
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of note premium (Note 7)...................................... (236) (327)
Excess of effective interest over cash interest paid on debt to joint
venture partner (Note 8) .............................................. 43 43
Depreciation and amortization........................................... 50,049 47,938
Equity in earnings of Real Estate Entities.............................. (3,466) (5,678)
Distributions received from the Real Estate Entities (Note 5)........... 5,776 4,537
Minority interest in income............................................. 7,159 10,644
Depreciation and gain on sale of non-real estate assets associated with
discontinued operations (Note 3)..................................... 21 (1,076)
Other operating activities.............................................. (10,729) (3,517)
-------------- -------------
Total adjustments.................................................... 48,617 52,564
-------------- -------------
Net cash provided by operating activities............................ 162,833 148,975
-------------- -------------
Cash flows from investing activities:
Capital improvements to real estate facilities ......................... (8,379) (6,806)
Construction in process................................................. (21,188) (9,254)
Acquisition of minority interests (Note 9).............................. - (4,366)
Acquisition of real estate facilities................................... (46,489) (23,751)
Cash of entities consolidated pursuant to EITF Topic 04-5 (Note 2)...... 2,865 -
Proceeds from the sale of real estate and real estate investments....... 1,970 -
Maturity of held to maturity debt securities (Note 2) ................. 2,359 1,177
Acquisition of held to maturity debt securities (Note 2)................ - (3,345)
Other investing activities.............................................. - (184)
-------------- -------------
Net cash used in investing activities................................ (68,862) (46,529)
-------------- -------------
Cash flows from financing activities:
Principal payments on notes payable..................................... (12,104) (12,024)
Net proceeds from the issuance of common stock.......................... 1,541 3,894
Net proceeds from the issuance of cumulative preferred stock............ 101,492 130,547
Repurchase of common stock.............................................. - (2,971)
Redemption of cumulative preferred stock................................ (172,500) (54,892)
Redemption of preferred partnership interest............................ - (85,000)
Distributions paid to shareholders...................................... (116,269) (103,860)
Distributions paid to holders of preferred partnership interests (Note
9)................................................................... (3,591) (5,375)
Distributions paid to minority interests................................ (3,712) (4,016)
Net proceeds from financing through acquisition joint venture (Note 8).. - 19,429
-------------- -------------
Net cash used in financing activities................................ (205,143) (114,268)
-------------- -------------
Net decrease in cash and cash equivalents................................... (111,172) (11,822)
Cash and cash equivalents at the beginning of the year...................... 493,501 366,255
-------------- -------------
Cash and cash equivalents at the end of the year............................ $ 382,329 $ 354,433
============== =============
See accompanying notes.
4
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
(Continued)
Supplemental schedule of non-cash investing and financing activities:
Real estate acquired in exchange for assumption of mortgage note........... $ (4,590) $ -
Mortgage note assumed in connection with acquisition of real estate....... 4,590 -
Consolidation of entities pursuant to Emerging Issues Task Force Topic 04-5
(Note 2):
Minority interest....................................................... 3,963 -
Real estate facilities.................................................. (22,459) -
Investments............................................................. 20,687 -
Other Assets............................................................ (167) -
Accrued and Other Liabilities........................................... 841 -
Retirement of common stock and Equity Stock, Series A, received as a
distribution from affiliated entities (Note 5):
Common stock......................................................... - (64)
Additional paid-in capital........................................... - (14,456)
Investment in real estate entities................................... - 14,520
See accompanying notes.
5
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
1. Description of the Business
---------------------------
Public Storage, Inc. (the "Company") is a California corporation,
which was organized in 1980. 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, we have (i) interests in commercial properties, containing
commercial and industrial rental space, (ii) interests in facilities that
lease storage containers, and (iii) ancillary operations comprised
principally of reinsurance of policies against losses to goods stored by
our self-storage tenants, retail sales and truck rentals at our
self-storage locations.
At March 31, 2006, we had direct and indirect equity interests in
1,524 self-storage facilities located in 37 states and operating under the
"Public Storage" name. We also have direct and indirect equity interests in
approximately 19 million net rentable square feet of commercial space
located in 10 states.
2. Summary of Significant Accounting Policies
------------------------------------------
Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with United States generally
accepted accounting principles for interim financial information and with
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by United
States generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation have been
included. Operating results for the three months ended March 31, 2006 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2006. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 2005.
Certain amounts previously reported have been reclassified to
conform to the March 31, 2006 presentation. In previous presentations, net
income from our truck rental, merchandise sales, and property management
operations were included on a net basis in "Interest and other income" in
our consolidated statements of income. In our current presentation,
revenues with respect to each of these operations, along with revenues from
our tenant reinsurance operations, are included under the caption
"Revenues: Ancillary operations" and the related cost of operations are
included in "Expenses: Cost of operations - Ancillary operations" on our
condensed consolidated statements of income. Certain reclassifications have
also been made from previous presentations as a result of discontinued
operations (See Note 3).
Consolidation Policy
--------------------
Entities in which we have an interest are first evaluated to
determine whether, in accordance with the provisions of the Financial
Accounting Standards Board's Interpretation No. 46R, "Consolidation of
Variable Interest Entities," they represent Variable Interest Entities.
Variable Interest Entities in which we are the primary beneficiary are
consolidated. Entities that are not Variable Interest Entities that we
control are consolidated. For purposes of determining control, 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.
6
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
In accordance with the guidance of EITF 04-5, effective January 1,
2006 we commenced consolidating the accounts of three partnerships that we
previously accounted for on the equity method. Our investment in these
entities totaling $20,687,000 was allocated to the cash, other assets,
liabilities, and minority interests of these entities as described in the
table below.
Total
------------
Real estate facilities.... $ 22,459
Cash...................... 2,865
Other assets.............. 167
Accrued and other liabilities (841)
Minority interest ........ (3,963)
------------
$ 20,687
=============
We have determined that we have no Variable Interest Entities for
any periods presented. We control 37 entities and, accordingly, the
consolidated financial statements include the accounts of these entities
(the "Consolidated Entities") as well as those of the Company.
Collectively, the Company and the Consolidated Entities own a total of
1,493 real estate facilities, consisting of 1,486 self-storage facilities,
three industrial facilities used by the containerized storage operations
and four commercial properties.
At March 31, 2006, we had equity investments in five limited
partnerships in which we do not have a controlling interest. These limited
partnerships collectively own 22 self-storage facilities, which are managed
by the Company. In addition, at March 31, 2006, we own approximately 44% of
the common equity of PS Business Parks, Inc. ("PSB"), which has interests
in approximately 17.9 million net rentable square feet of commercial space
at March 31, 2006. Our investment in these limited partnerships and PSB
(collectively, the "Unconsolidated Entities") are accounted for using the
equity method.
Use of Estimates
----------------
The preparation of the consolidated financial statements in
conformity with United States generally accepted accounting principles
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 are not taxed on that portion of
our taxable income which is distributed to our shareholders, provided that
we meet certain tests. We believe we will meet these tests during 2006 and,
accordingly, no provision for income taxes has been made in the
accompanying financial statements.
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.
7
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
For purposes of financial statement presentation, we consider all
highly liquid financial instruments such as short-term treasury securities
or investment grade short-term commercial paper to be cash equivalents.
Due to the short period to maturity of our cash and cash
equivalents, accounts receivable, other financial instruments included in
other assets, and accrued and other liabilities, the carrying values as
presented on the consolidated balance sheets are reasonable estimates of
fair value. At March 31, 2006, we believe that the carrying value of our
notes payable is, in aggregate, approximately $1.0 million higher than
their fair value.
Financial assets that are exposed to credit risk consist primarily
of cash and cash equivalents and accounts receivable. Cash and cash
equivalents, which consist 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 individual customers.
Included in cash and cash equivalents at March 31, 2006 is
$22,585,000 ($18,962,000 at December 31, 2005 held by our captive insurance
entities. Other assets at March 31, 2006 include investments totaling
$17,479,000 ($19,838,000 at December 31, 2005) in held to maturity Federal
government agency securities stated at amortized cost, which approximates
fair value. Insurance and other regulations place significant restrictions
on our ability to withdraw these funds for purposes other than insurance
activities.
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. Expenditures for repairs and maintenance
expense are charged to expense when incurred. Depreciation is computed
using the straight-line method over the estimated useful lives of the
buildings and improvements, which are generally between 5 and 25 years.
Accounting for Acquisition Joint Venture
----------------------------------------
In January 2004, we entered into a joint venture partnership with
an institutional investor for the purpose of acquiring up to $125.0 million
of existing self-storage properties in the United States from third parties
(the "Acquisition Joint Venture"). The Acquisition Joint Venture is funded
entirely with equity consisting of 30% from the Company and 70% from the
institutional investor. For a six-month period beginning 54 months after
formation, we have the right to acquire our partner's interest based upon
the market value of the properties. If we do not exercise our option, our
partner can elect to purchase our interest in the properties during a
six-month period commencing upon expiration of our six-month option period.
If our partner fails to exercise its option, the Acquisition Joint Venture
will be liquidated and the proceeds will be distributed to the partners
according to the joint venture agreement.
We have determined that the Acquisition Joint Venture is not a
variable interest entity, and we do not control this entity. Therefore, we
do not consolidate the accounts of the Acquisition Joint Venture on our
consolidated financial statements.
During the year ended December 31, 2004, the Acquisition Joint
Venture acquired two facilities directly from third parties at an aggregate
cost of $9,086,000. We account for our investment with respect to these
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 condensed consolidated statements of income. See Note 5
for further discussion of these amounts.
8
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
In December 2004, we sold seven facilities to the Acquisition
Joint Venture for an aggregate of $22,993,000. During the first quarter of
2005, we sold an interest in three additional facilities to the Acquisition
Joint Venture for an aggregate of approximately $27,755,000. Due to our
continuing interest in these facilities and the likelihood that we will
exercise our option to acquire our partner's interest, we have accounted
for our partner's investment ($35,740,000 and $35,697,000 at March 31, 2006
and December 31, 2005, respectively) in these facilities as, in substance,
debt financing. Accordingly, our partner's investment with respect to these
ten facilities is accounted for as a liability on our condensed
consolidated balance sheet under the caption "Debt to joint venture
partner," with our partner's share of operations with respect to these ten
facilities accounted for as interest expense on our condensed consolidated
statements of income. Quarterly we review the fair value of this liability
and to the extent fair value exceeds the carrying value of the liability an
adjustment will be made to increase the liability to fair value; no
adjustments were necessary during 2005 or for the three months ended March
31, 2006 (See Note 8).
Evaluation of Asset Impairment
------------------------------
We evaluate impairment of goodwill annually through a two-step
process. In the first step, 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 and the second step is unnecessary. If, however,
the fair value of the reporting unit including goodwill is less than the
carrying amount, the second step is performed. In this test, 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 if
a business combination transaction were consummated at the fair value of
the reporting unit. 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 impairments of our goodwill were identified in our annual
evaluation at December 31, 2005.
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 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 impairments were identified from our
evaluations as of March 31, 2006.
Accounting for Stock-Based Compensation
---------------------------------------
We utilize the Fair Value Method (as defined in Note 12) of
accounting for our employee stock options. Restricted stock unit expense is
recorded over the relevant vesting period. See Note 12 for a full
discussion of our accounting with respect to employee stock options and
restricted stock units.
9
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
Other Assets
------------
Other assets primarily consists of prepaid expenses, investments
in held to maturity debt securities (described below), accounts receivable,
assets associated with our containerized storage business, merchandise
inventory and rental trucks.
Included in depreciation and amortization expense for the three
months ended March 31, 2006 and 2005, is $839,000 and $1,961,000
respectively, related to depreciation of other assets.
Other assets at March 31, 2006 also includes investments totaling
$17,479,000 ($19,838,000 at December 31, 2005) in held to maturity debt
securities stated at amortized cost, which approximates fair value.
Accrued and Other Liabilities
-----------------------------
Accrued and other liabilities consist primarily of real and
personal property tax accruals, prepayments of rents, trade payables,
losses and loss adjustment liabilities from our insurance programs
(described below), and accrued interest. Prepaid rent totals $28,105,000 at
March 31, 2006 ($26,145,000 at December 31, 2005).
STOR-Re Mutual Insurance Company, Inc. ("STOR-Re"), which is
consolidated with the Company, was formed in 1994 as an association captive
insurance company owned by the Company and affiliates of the Company.
STOR-Re provides limited property and liability insurance to the Company
and its affiliates for losses incurred during policy periods prior to April
1, 2004, and was succeeded by PS Insurance Company Hawaii, Ltd. ("PSIC-H"),
a wholly owned subsidiary of the Company with respect to these insurance
activities for policy periods following March 31, 2004. We also utilize
other insurance carriers to provide property and liability insurance
coverage in excess of STOR-Re's and PSIC-H's limitations which are
described in Note 14. STOR-Re and PSIC-H accrue liabilities for covered
losses and loss adjustment expense, which at March 31, 2006 totaled
$31,830,000 ($32,797,000 at December 31, 2005) with respect to insurance
provided to the Company and its affiliates.
Liabilities for losses and loss adjustment expenses include an
amount we determine from loss reports and 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. Determining the liability for unpaid
losses and loss adjustment expense is based upon estimates. While we
believe that the amount is adequate, the ultimate loss may be in excess of
or less than the amounts provided. The methods for making such estimates
and for establishing the resulting liability are reviewed quarterly.
PS Insurance Company, Ltd ("PSIC"), a wholly-owned subsidiary of
the Company, reinsured policies against claims for losses to goods stored
by tenants in our self-storage facilities for policy periods prior to March
31, 2004. PSIC-H succeeded PSIC with respect to these tenant re-insurance
activities effective April 1, 2004. Prior to January 1, 2006 both of these
entities utilize third-party insurance coverage for losses from any
individual event that exceeds a loss of $500,000, to a maximum of
$10,000,000. Commencing January 1, 2006, PSIC-H covers losses up to
$1,500,000 with third party insurers covering the next $9,000,000 from any
individual event. Losses below the third-party insurers' deductible amounts
are accrued as cost of operations for the tenant re-insurance operations.
Losses exceeding the third-party insurers limit are the responsibility of
PSIC-H.
The accrued liability for losses and loss adjustment expense with
respect to tenant insurance activities totaled $4,795,000 at March 31, 2006
($4,773,000 at December 31, 2005).
10
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
Intangible Assets and Goodwill
------------------------------
Intangible assets consist of property management contracts
($165,000,000) that were acquired in 1995 and are net of accumulated
amortization of $68,570,000 ($66,919,000 at December 31, 2005). Included in
depreciation and amortization expense for each of the three month periods
ended March 31, 2006 and 2005 is $1,651,000, respectively, with respect to
the amortization of property management contracts. These assets have a
defined life and are amortized on a straight-line basis over a 25-year
period.
Goodwill ($94,719,000) represents the excess of acquisition cost
over the fair value of net tangible and identifiable intangible assets
acquired in business combinations. Each business combination from which our
Goodwill arose was for the acquisition of single businesses and
accordingly, the allocation of our goodwill to our business segments is
based directly on such acquisitions. Goodwill is net of accumulated
amortization of $16,515,000 at March 31, 2006 and December 31, 2005. Our
goodwill has an indeterminate life and, in accordance with the provisions
of Statement of Financial Accounting Standards No. 142, amortization of
goodwill ceased effective January 1, 2002.
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 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 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. Accordingly, the amounts incurred in
an interim period may not be indicative of the amounts to be incurred
during a full year. Television, yellow page, and other advertising expense
totaled $8,701,000 and $7,571,000 for the three months ended March 31, 2006
and 2005, respectively.
Environmental Costs
-------------------
Our policy is to accrue environmental assessments and estimated
remediation cost when it is probable that such efforts will be required and
the related costs can be reasonably estimated. Our current practice is to
conduct environmental investigations in connection with property
acquisitions. Although there can be no assurance, we are not aware of any
environmental contamination of any of our facilities, which individually or
in the aggregate would be material to our overall business, financial
condition, or results of operations.
Net Income per Common Share
---------------------------
Distributions paid to the holders of our Cumulative Preferred
Stock totaled $46,615,000 and $40,413,000 for the three months ended March
31, 2006 and 2005, respectively, have been deducted from net income to
arrive at net income allocable to our common shareholders.
11
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
Emerging Issues Task Force ("EITF") Topic D-42, "The Effect on the
Calculation of Earnings per Share for the Redemption or the Induced
Conversion of Preferred Stock" provides, among other things, that any
excess of (1) the fair value of the consideration transferred to the
holders of preferred stock redeemed over (2) the carrying amount of the
preferred stock should be subtracted from net earnings to determine net
earnings available to common stockholders in the calculation of earnings
per share. At the July 31, 2003 meeting of the EITF, the Securities and
Exchange Commission ("SEC") Observer clarified that for purposes of
applying EITF Topic D-42, the carrying amount of the preferred stock should
be reduced by the issuance costs of the preferred stock, regardless of
where in the stockholders' equity section those costs were initially
classified on issuance.
In conformity with the SEC Observer's clarification, an additional
$1,904,000 was allocated to preferred stockholders for the three months
ended March 31, 2005 (none for March 31, 2006), for the excess of the
redemption amount over the carrying amount of our Cumulative Preferred
Stock. It is our policy to record such allocations at the time the
securities are called for redemption.
Net income allocated to our common shareholders has been further
allocated among our two classes of common stock; our regular common stock
and our Equity Stock, Series A. The allocation among each class was based
upon the two-class method. Under the two-class method, earnings per share
for each class of common stock are determined according to dividends
declared (or accumulated) and participation rights in undistributed
earnings. Under the two-class method, the Equity Stock, Series A, was
allocated net income of $5,356,000 and $5,375,000 for each of the three
months ended March 31, 2006 and 2005, respectively. The remaining
$62,245,000 and $48,719,000 for the three months ended March 31, 2006 and
2005, respectively, was 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 stock units outstanding). Diluted net income per common
share is computed using the weighted average common shares outstanding
(adjusted for the dilutive impact of stock options and restricted stock
units outstanding). Weighted average common shares excludes shares owned by
the Consolidated Entities as described in Note 10 for the three months
ended March 31, 2006 and 2005, as these shares of common stock are
eliminated in consolidation.
3. Discontinued Operations
-----------------------
We segregate all of our disposed components that have operations
that (i) can be distinguished from the rest of the entity and (ii) will be
eliminated from the ongoing operations of the entity in a disposal
transaction.
Since January 1, 2002, we closed a total of 43 containerized
storage facilities that were determined to be non-strategic (the "Closed
Facilities"). As the decision was made to close each facility, the related
assets were evaluated for recoverability and asset impairment charges were
recorded for the excess of these assets' net book value over their fair
value (less costs to sell), determined based upon recent selling prices for
similar assets. No asset impairment or lease termination charges were
recorded during 2005 or for the three months ended March 31, 2006.
During the first quarter of 2005, we sold the non-real estate
assets of six of the Closed Facilities, resulting in a gain on sale of
approximately $1,143,000.
During July 2005, in an eminent domain proceeding, one of our
self-storage facilities located in the Portland, Oregon market was
condemned. We received the proceeds, totaling $6.6 million, from the
disposal of this facility during the third quarter of 2005 and recorded a
gain of $5.2 million.
12
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
During the first quarter of 2006, we were notified that a
self-storage facility in Seattle, Washington is to be condemned. We expect
the condemnation to be completed by the third quarter of 2006, with an
expected gain on sale of approximately $2 million.
Collectively the Portland and Seattle self-storage facilities are
referred to as "the Eminent Domain Facilities". The operations of these
facilities prior to their disposition are classified as "discontinued
operations" for all periods presented on our condensed consolidated
statements of income and included under "Eminent Domain Facilities" in the
table below.
The following table summarizes the historical operations of each
component of our discontinued operations:
Discontinued Operations:
Three Months
Ended March 31,
-------------------------
2006 2005
----------- -----------
(Amounts in thousands)
Rental income (a):
Eminent Domain Facilities....... $ 113 $ 248
Closed Facilities............... - 95
----------- -----------
Total rental income............... 113 343
----------- -----------
Cost of operations (a):
Eminent Domain Facilities....... 50 118
Closed Facilities............... - 194
----------- -----------
Total cost of operations.......... 50 312
----------- -----------
Depreciation expense (a):
Eminent Domain Facilities....... 21 38
Closed Facilities............... - 29
----------- -----------
Total depreciation ............... 21 67
Other items (b)................... - 1,143
----------- -----------
Net discontinued operations (c)... $ 42 $ 1,107
========== ==========
(a) These amounts represent the historical operations of the Eminent Domain
Facilities and the Closed Facilities, and include amounts previously
classified as rental income, cost of operations, and depreciation expense
in the financial statements in prior periods.
(b) During the quarter ended March 31, 2005, assets of the Closed Facilities
were sold, resulting in a gain on sale of approximately $1,143,000.
(c) Earnings per share for the three months ended 2005, were increased by
$0.01 per share (none for the three months ended March 31, 2006), due to
the impact from discontinued operations.
13
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
4. Real Estate Facilities
----------------------
Activity in real estate facilities is as follows:
Three Months Ended
March 31, 2006
-------------------
(In thousands)
Real estate facilities, at cost:
Balance at December 31, 2005........................ $ 5,930,484
Facilities consolidated pursuant to EITF 04-5 (Note 2) 22,459
Newly developed facilities opened for operations.... 18,775
Acquisition of real estate facilities............... 51,079
Capital improvements................................ 8,379
-------------------
Balance at March 31, 2006........................... 6,031,176
-------------------
Accumulated depreciation:
Balance at December 31, 2005........................ (1,500,128)
Additions during the year........................... (47,580)
-------------------
Balance at March 31, 2006........................... (1,547,708)
-------------------
Construction in process:
Balance at December 31, 2005........................ 54,472
Current development................................. 21,188
Dispositions........................................ (1,970)
Newly developed facilities opened for operations.... (18,775)
-------------------
Balance at March 31, 2006........................... 54,915
-------------------
Total real estate facilities at March 31, 2006......... $ 4,538,383
===================
During the three months ended March 31, 2006, we opened one newly
developed self-storage facility (89,000 net rentable square feet) for an
aggregate cost of $9,343,000. We also completed two projects which
converted space previously used by our containerized storage business into
70,000 net rentable square feet of self-storage space for an aggregate cost
of $4,643,000. In addition, we completed one expansion project to an
existing self-storage facility adding 16,000 net rentable square feet for
an aggregate of $2,126,000, and we incurred trailing development costs with
respect to development projects completed in prior years, for an aggregate
net cost of $2,663,000.
During the three months ended March 31, 2006, we disposed of a
parcel of land for an aggregate of $1,970,000. The net proceeds were equal
to the book value of this parcel; accordingly, no gain or loss was
recorded.
During the three months ended March 31, 2006, we acquired six
self-storage facilities (380,000 net rentable square feet) from third
parties at an aggregate cost of $51,079,000, consisting of $46,489,000 in
cash and assumed mortgage debt totaling $4,590,000.
Construction in process at March 31, 2006 consists primarily of
three self-storage facilities (248,000 net rentable square feet) with costs
incurred of $39,893,000 at March 31, 2006 and total estimated costs to
complete of $11,446,000, 46 projects (2,802,000 net rentable square feet)
which expand or enhance the visual and structural appeal of our existing
self-storage facilities with cost incurred of $7,612,000 at March 31, 2006
and total estimated costs to complete of $222,963,000, and five projects
(419,000 net rentable square feet) to convert space at former containerized
storage facilities into self-storage space with cost incurred of $1,788,000
at March 31, 2006 and total estimated costs to complete of $15,314,000.
14
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
Our policy is to capitalize interest incurred on debt during the
course of construction of our self-storage facilities. Interest capitalized
during the three months ended March 31, 2006 and 2005 was $716,000 and
$665,000, respectively.
5. Investment in Real Estate Entities
----------------------------------
At March 31, 2006, our investments in real estate entities consist
of ownership interests in the Unconsolidated Entities. These interests are
non-controlling interests of less than 50% and are accounted for using the
equity method of accounting. Accordingly, earnings are recognized based
upon our ownership interest in each of the entities. The accounting
policies of these entities are similar to the Company's.
For the three months ended March 31, 2006, we recognized earnings
from our investments of $4,501,000 as compared to $5,678,000 for the same
period in 2005. For the three months ended March 31, 2006 and 2005, equity
in earnings includes an increase of $312,000 and $1,265,000, respectively,
for our pro rata share of PSB's gain on sale of real estate assets. See the
condensed financial information with respect to PSB below for further
information regarding these items recorded by PSB.
We received cash distributions from our investments for the three
months ended March 31, 2006 and 2005, in the amount of $5,776,000 and
$4,537,000, respectively.
The following table sets forth our investments in real estate
entities at March 31, 2006 and December 31, 2005, and our equity in
earnings of real estate entities for the three months ended March 31, 2006
and 2005 (amounts in thousands):
Equity in Earnings of Real
Investments in Real Estate Estate Entities for the
Entities at Three Months Ended March 31,
--------------------------------------- ----------------------------------
March 31, December 31,
2006 2005 2006 2005
----------------- ----------------- ------------- ---------------
PSB (a)....................... $ 287,980 $ 288,694 $ 2,976 $ 4,209
Acquisition Joint Venture..... 2,871 2,865 6 (15)
Other Investments (b)......... 14,707 36,996 484 1,484
----------------- ----------------- ------------- ---------------
Total....................... $ 305,558 $ 328,555 $ 3,466 $ 5,678
================ ================= ============= ================
(a) Equity in earnings of real estate entities includes our pro rata share
of the net impact of gains/losses on sale of assets and impairment
charges relating to the impending sale of real estate assets as well as
our pro rata share of the impact of the application of EITF Topic D-42
on redemptions of preferred securities recorded by PSB. Our net pro
rata impact from these items resulted in an increase of equity in
earnings of $312,000 and $1,265,000 for the three months ended March
31, 2006 and 2005, respectively.
(b) As described in Note 2, effective January 1, 2006 we commenced
consolidating the accounts of three limited partnerships that we
previously had accounted for on the equity method. As a result, we
decreased our investment in these partnerships by approximately
$20,687,000 on January 1, 2006.
Investment in PSB
-----------------
PS Business Parks, Inc. is a REIT traded on the American Stock
Exchange, which controls an operating partnership (collectively, the REIT
and the operating partnership are referred to as "PSB"). We have a 44%
common equity interest in PSB as of March 31, 2006. 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 March 31, 2006 and December 31, 2005; these limited partnership
units are convertible at our option, subject to certain conditions, on a
one-for-one basis into PSB common stock. Based upon the closing price at
March 31, 2006 ($55.92 per share of PSB common stock), the shares and units
had a market value of approximately $711.5 million as compared to a book
value of $288.0 million.
15
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
At March 31, 2006, PSB owned approximately 17.9 million net
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 the condensed statements of
operations for each of the three month periods ended March 31, 2006 and
2005 (as restated for discontinued operations), and the condensed balance
sheets of PSB at March 31, 2006 and December 31, 2005. The amounts below
represent 100% of PSB's balances and not our pro rata share.
Three Months Ended March 31,
----------------------------------------
2006 2005
------------------- -------------------
(Amounts in thousands)
Total revenue.................................... $ 58,903 $ 53,908
Cost of operations and other operating expenses.. (19,596) (17,308)
Other income and expense, net.................... 1,487 116
Depreciation and amortization.................... (20,586) (18,426)
Discontinued operations (a)...................... 458 2,958
Minority interest................................ (4,349) (4,155)
------------------- -------------------
Net income..................................... $ 16,317 $ 17,093
=================== ===================
March 31, December 31,
2006 2005
------------------- -------------------
(Amounts in thousands)
Total assets (primarily real estate)............. $ 1,453,015 $ 1,463,678
Total debt....................................... 25,726 25,893
Other liabilities................................ 41,433 39,126
Preferred equity and preferred minority interest. 729,100 729,100
Common equity and common minority interest....... 656,756 669,559
(a) Included in discontinued operations for the three months ended March
31, 2006 is a net gain on disposition of real estate of $711,000
($2,914,000 for the same period in 2005).
Acquisition Joint Venture
-------------------------
As described more fully under "Accounting for Acquisition Joint
Venture" in Note 2, we formed a partnership (the "Acquisition Joint
Venture") in January 2004 for the purpose of acquiring up to $125 million
in existing self-storage facilities from third parties. Through December
31, 2004, the Acquisition Joint Venture had acquired two self-storage
facilities directly from third parties at an aggregate cost of $9,086,000,
of which our pro rata share was $2,930,000. Our investment in these two
facilities is accounted for using the equity method of accounting. In
December 2004, we sold seven facilities to the Acquisition Joint Venture as
well as interest in three facilities in the first quarter of 2005. Our
accounting for these ten facilities is described in Note 2.
16
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
The following table sets forth certain condensed financial
information (representing 100% of this entity's balances and not our pro
rata share) with respect to the two self-storage facilities acquired by the
Acquisition Joint Venture that we account for using the equity method of
accounting:
Three Months Ended March 31,
--------------------------------------------
2006 2005
------------------- ----------------------
(Amounts in thousands)
Total revenue........................................ $ 354 $ 305
Cost of operations and other expenses................ (134) (120)
Depreciation and amortization........................ (69) (66)
------------------- ----------------------
Net income......................................... $ 151 $ 119
=================== ======================
At March 31, At December 31,
2006 2005
------------------- ----------------------
(Amounts in thousands)
Total assets (primarily storage facilities).......... $ 9,202 $ 8,974
Liabilities.......................................... 87 62
Partners' equity..................................... 9,115 8,912
Other Investments
-----------------
The Other Investments consist primarily of an average
approximately 24% common equity ownership during the three months ended
March 31, 2006 and 2005, in four limited partnerships (collectively, the
"Other Investments") owning an aggregate of 20 storage facilities.
The following table sets forth certain condensed financial
information (representing 100% of these entities' balances and not our pro
rata share) with respect to Other Investments:
Three Months Ended March 31,
-------------------------------------
2006 2005
------------------ -----------------
(Amounts in thousands)
Total revenue........................................ $ 3,937 $ 3,664
Cost of operations and other expenses................ (1,538) (1,555)
Depreciation and amortization........................ (423) (428)
------------------ -----------------
Net income......................................... $ 1,976 $ 1,681
================ ===================
March 31, December 31,
2006 2005
------------------ -----------------
(Amounts in thousands)
Total assets (primarily storage facilities).......... $ 39,685 $ 39,813
Other liabilities.................................... 1,058 1,178
Partners' equity..................................... 38,627 38,635
6. Revolving Line of Credit
------------------------
We have a revolving line of credit (the "Credit Agreement") with
an aggregate limit with respect to borrowings and letters of credit of $200
million, that has a maturity date of April 1, 2007 and bears an annual
interest rate ranging from the London Interbank Offered Rate ("LIBOR") plus
0.45% to LIBOR plus 1.20% depending on our credit ratings (currently LIBOR
plus 0.45%). In addition, we are required to pay a quarterly commitment fee
ranging from 0.15% per annum to 0.30% per annum depending on our credit
ratings (currently the fee is 0.15% per annum).
17
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
The Credit Agreement includes various covenants, the more
significant of which require us to (i) maintain a balance sheet leverage
ratio of less than 0.55 to 1.00, (ii) maintain certain quarterly interest
and fixed-charge coverage ratios (as defined therein) of not less than 2.25
to 1.0 and 1.5 to 1.0, respectively, and (iii) maintain a minimum total
shareholders' equity (as defined therein). In addition, we are limited in
our ability to incur additional borrowings (we are required to maintain
unencumbered assets with an aggregate book value equal to or greater than
1.5 times our unsecured recourse debt). We were in compliance with all
covenants of the Credit Agreement at March 31, 2006. At March 31, 2006 and
at May 8, 2006, we had no outstanding borrowings on our line of credit.
At March 31, 2006 and May 8, 2006, we had undrawn standby letters
of credit totaling $17,919,000. The beneficiaries of these standby letters
of credit were certain insurance companies associated with our captive
insurance and tenant re-insurance activities.
7. Notes Payable
-------------
Notes payable at March 31, 2006 and December 31, 2005 consist of
the following:
Carrying Amount
------------------------------
March 31, December 31,
2006 2005
--------------- -------------
(Amounts in thousands)
Unsecured senior notes:
7.66% note due January 2007............................. $ 11,200 $ 22,400
Mortgage notes payable:
5.58% mortgage note secured by a real estate facility
with a net book value of $9.1 million, principal and
interest payable monthly, due in September 2013......... 4,573 -
7.134% and 8.75% mortgage notes secured by two real estate
facilities with a net book value of $10.7 million, principal
and interest payable monthly, due at varying dates between
October 2009 and September 2028......................... 1,443 1,484
5.05% mortgage notes (including unamortized note premium of
$1.8 million) secured by 25 real estate facilities with a
net book value of $95.4 million, principal and interest due
monthly, due at varying dates between October 2010 and
May 2023................................................ 37,825 38,568
5.25% mortgage notes (including unamortized note premium
of $3.4 million) secured by seven real estate facilities
with a net book value of $90.0 million, principal and
interest due monthly, due at varying dates between
June 2011 and July 2013.................................. 51,159 51,498
--------------- -------------
Total notes payable.............................. $ 106,200 $ 113,950
=============== =============
All of our notes payable are fixed rate. The unsecured senior
notes require interest and principal payments to be paid semi-annually and
have various restrictive covenants, all of which have been met at March 31,
2006.
We assumed the 5.58% mortgage note in connection with a property
acquisition during the first quarter of 2006. The note was recorded at the
stated rate, which we believe approximates the market rate for similar
mortgage notes.
18
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
We assumed the 5.05% and 5.25% mortgage notes in connection with
property acquisitions in 2004. The stated interest rates on the notes range
from 5.4% to 8.0% with a weighted average of approximately 6.65%. The notes
were recorded at their estimated fair value based upon the estimated market
rate upon assumption of 5.05% and 5.25%, an aggregate of approximately
$94,693,000, as compared to actual assumed balances aggregating
approximately $88,247,000. This initial premium of approximately $6,446,000
over the principal balance of the notes payable is amortized over the
remaining term of the loans based upon the effective interest method.
We incurred interest expense with respect to our notes payable
aggregating $1,515,000 and $1,657,000 for the three months ended March 31,
2006 and 2005, respectively. These amounts were comprised of $1,751,000 and
$1,984,000 in cash for the three months ended March 31, 2006 and 2005,
respectively, less $236,000 and $327,000 in amortization of premium,
respectively.
At March 31, 2006, approximate principal maturities of notes
payable are as follows:
Unsecured Mortgage
senior notes notes payable Total
---------------- ---------------- ------------
(dollar amounts in thousands)
2006 (remainder of).......... $ - $ 3,499 $ 3,499
2007......................... 11,200 4,898 16,098
2008......................... - 5,155 5,155
2009......................... - 5,358 5,358
2010......................... - 5,404 5,404
Thereafter................... - 70,686 70,686
---------------- ---------------- ------------
$ 11,200 $ 95,000 $ 106,200
================ ================ ============
Weighted average rate........ 7.7% 5.2% 5.5%
================ ================ ============
8. Debt to Joint Venture Partner
-----------------------------
As described more fully in Note 2, our partner's equity
contributions with respect to certain transactions has been classified as
debt under the caption "Debt to Joint Venture Partner." The balances of
$35,740,000 and $35,697,000 as of March 31, 2006 and December 31, 2005,
approximate the fair value of our partners' interest in these facilities as
of each respective date.
A total of $758,000 and $671,000 was recorded as interest expense
on our condensed consolidated statements of income with respect to our Debt
to Joint Venture Partner during the three months ended March 31, 2006 and
2005, respectively, representing our partner's pro rata share of net
earnings with respect to the properties we sold to the Acquisition Joint
Venture (an 8.5% return on their investment). This interest expense was
comprised of a total of $715,000 and $628,000 paid to our joint venture
partner (an 8.0% return payable currently in accordance with the
partnership agreement) during the three months ended March 31, 2006 and
2005, respectively, and an increase in the debt balance of $43,000 in each
of the three months ended March 31, 2006 and 2005.
We expect that this debt will be repaid during 2008, assuming that
we exercise our option to acquire our partner's interest in the Acquisition
Joint Venture.
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 Consolidated Entities.
19
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
Preferred Partnership Interests
-------------------------------
The following table summarizes the preferred partnership units
outstanding at March 31, 2006 and December 31, 2005:
Earliest Redemption
Date or Dates Distribution Units Carrying
Series Redeemed Rate Outstanding Amount
----------------- ---------------------- ------------ ------------ -----------
(amounts in thousands)
Series NN........ March 17, 2010 6.400% 8,000 $ 200,000
Series Z......... October 12, 2009 6.250% 1,000 25,000
----------- -----------
Total............ 9,000 $ 225,000
=========== ===========
Income allocated to the preferred minority interests totaled
$3,591,000 and $6,249,000 for the three months ended March 31, 2006 and
2005, respectively, comprised of distributions paid and the allocation of
income resulting from the application of EITF Topic D-42 (see below).
On March 17, 2005, we redeemed all outstanding 9.5% Series N
Preferred Units ($40,000,000) and on March 29, 2005 we redeemed all
outstanding 9.125% Series O Preferred Units ($45,000,000), for their face
value plus accrued distributions, for cash. The redemption of these
Preferred Units resulted in an increase in income allocated to minority
interests and a reduction to the Company's net income for the three months
ended March 31, 2005 of $874,000 as a result of the application of the
SEC's clarification of EITF Topic D-42 which allocates the excess of the
stated amount of the preferred units over their carrying amount to the
holders of the redeemed securities.
On May 9, 2006, one of the Consolidated Entities issued 4,000,000
units of our 7.25% Series J Preferred Partnership Units for cash proceeds
of $100 million.
Subject to certain conditions, the Series NN preferred units are
convertible into shares of our 6.40% Series NN Cumulative Preferred Stock,
the Series Z preferred units are convertible into shares of our 6.25%
Series Z Cumulative Preferred Stock and the Series J preferred units are
convertible into shares of our 7.25% Series J Cumulative Preferred Stock.
The holders of the Series Z preferred partnership units, have a one-time
option exercisable five years from issuance, to require us to redeem their
units for $25.0 million in cash, plus any unpaid distribution.
20
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
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
following table sets forth the minority interests at March 31, 2006 and
December 31, 2005 as well as the income allocated to minority interests for
the three months ended March 31, 2006 and 2005 with respect to the other
partnership interests (amounts in thousands):
Minority Interests in Income
Minority Interest at for the Three Months Ended
------------------------------ --------------------------------
March 31, December 31, March 31, March 31,
Description 2006 2005 2006 2005
------------- -------------- -------------- ---------------
Convertible Partnership Units........... $ 6,177 $ 6,177 $ 116 $ 90
Consolidated Development Joint Venture... - - - 1,568
Newly Consolidated Partnerships.......... 3,963 - 930 -
Other consolidated partnerships.......... 22,649 22,793 2,522 2,737
------------- --------------- ---------------- --------------
Total other partnership interests........ $ 32,789 $ 28,970 $ 3,568 $ 4,395
============= =============== ================ ===============
Distributions paid to minority interests with respect to the Newly
Consolidated Partnerships and the other partnership interests for the three
months ended March 31, 2006 and 2005 were $3,712,000 and $4,016,000,
respectively.
Convertible Partnership Units
-----------------------------
As of March 31, 2006, one of the Consolidated Entities had
approximately 231,978 convertible operating partnership units ("Convertible
Units") outstanding (237,934 at December 31, 2005) representing a limited
partnership interest in the partnership. The Convertible Units are
convertible on a one-for-one basis (subject to certain limitations) into
our common stock at the option of the unitholder. Minority interest in
income with respect to the 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. During the
three months ended March 31, 2006, a total of 5,956 units were converted
into common shares (none during 2005).
Consolidated Development Joint Venture
--------------------------------------
In November 1999, we formed a development joint venture (the
"Consolidated Development Joint Venture") with a joint venture partner
(PSAC Storage Investors, LLC, referred to as "PSAC") whose partners
included a third party institutional investor and B. Wayne Hughes ("Mr.
Hughes"), the Chairman of the Board of the Company, to develop
approximately $100 million of self-storage facilities and to purchase $100
million of the our Equity Stock, Series AAA (see Note 10). We owned a
controlling interest in the Consolidated Development Joint Venture and
included the accounts of this partnership in our consolidated financial
statements since its inception. PSAC's interest in the Consolidated
Development Joint Venture was accounted for as minority interest, as
denoted in the above table.
On August 5, 2005, we acquired the institutional investor's
interest in PSAC for approximately $41,420,000 in cash and on November 17,
2005, we acquired the remaining interest in PSAC from Mr. Hughes for
$64,513,000 in cash.
21
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
Newly Consolidated Partnerships
-------------------------------
As further described in Note 2, effective January 1, 2006 we
commenced consolidating the accounts of three partnerships that we had
previously accounted for on the equity method of accounting. This
consolidation resulted in a $3,963,000 increase in minority interest on
January 1, 2006. Effective January 1, 2006, the income allocated to the
interests we do not own in these three partnerships is shown in the table
above.
Other Consolidated Partnerships
-------------------------------
The partnership agreements of the Other Consolidated Partnerships
included in the table above 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 relative
ownership interests.
At March 31, 2006, the Other Consolidated Partnerships reflect
common equity interests that we do not own in 22 entities owning an
aggregate of 73 self-storage facilities.
In January 2005, we acquired a portion of the minority interest we
did not own in one of the Consolidated Entities for an aggregate of
$4,366,000 in cash. The acquisition resulted in the reduction of minority
interest by $2,828,000 with the excess of cost over underlying book value
($1,538,000) allocated to real estate.
In April 2005, we acquired minority interests we did not own in
two Consolidated Entities for an aggregate of $32,432,000 in cash. The
acquisition resulted in a reduction of minority interest of $15,394,000
with the excess of cost over underlying book value ($17,038,000) allocated
to real estate.
In August 2005, we acquired the remaining minority interests we
did not own in the Consolidated Entities for an aggregate of $14,597,000 in
cash. The acquisition resulted in a reduction of minority interest of
$7,151,000 with the excess of cost over underlying book value ($7,446,000)
allocated to real estate.
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 setting 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.
22
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
10. Shareholders' Equity
--------------------
Cumulative Preferred Stock
--------------------------
At March 31, 2006 and December 31, 2005, we had the following
series of Cumulative Preferred Stock outstanding:
At March 31, 2006 At December 31, 2005
----------------------------- ----------------------------
Earliest
Redemption Dividend Shares Carrying Shares Carrying
Series Date (a) Rate Outstanding Amount Outstanding Amount
----------------- -------------- ------------- --------------- -------------- ---------------- --------------
(Dollar amount in thousands)
Series R 9/28/06 8.000% 20,400 $ 510,000 20,400 $ 510,000
Series S 10/31/06 7.875% 5,750 143,750 5,750 143,750
Series T 1/18/07 7.625% 6,086 152,150 6,086 152,150
Series U 2/19/07 7.625% 6,000 150,000 6,000 150,000
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 - -
------------- -------------- ------------- -------------
Total Cumulative Preferred Stock 1,702,536 $ 2,603,400 1,698,336 $ 2,498,400
============= ============== ============= =============
(a) Except under certain conditions relating to the Company's qualification
as a REIT, the Cumulative Preferred Stock are not redeemable prior to
the dates indicated. On or after the dates indicated, each series of
Cumulative Preferred Stock will be redeemable, at our option, in whole
or in part, at $25.00 per depositary share (or per share in the case of
the Series Y), plus accrued and unpaid dividends.
The holders of our Cumulative Preferred Stock have general
preference rights with respect to liquidation and quarterly distributions.
Holders of the preferred stock, except under certain conditions and as
noted below, will not be entitled to vote on most matters. In the event of
a cumulative arrearage equal to six quarterly dividends or failure to
maintain a Debt Ratio (as defined) of 50% or less, holders of all
outstanding series of preferred stock (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 of Directors until events of default have been
cured. At March 31, 2006, there were no dividends in arrears and the Debt
Ratio was 2.0%.
Upon issuance of our Cumulative Preferred Stock, we classify the
liquidation value as preferred stock 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.
23
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
On January 19, 2006, we issued 4,000,000 depositary shares, with
each depositary share representing 1/1,000 of a share of 6.95% Cumulative
Preferred Stock, Series H. The offering resulted in $100 million of gross
proceeds. On January 27, 2006, we issued an additional 200,000 depository
shares, with each depositary share representing 1/1,000 of a share of our
6.95% Cumulative Preferred Stock, Series H resulting in $5 million of gross
proceeds.
During the first quarter of 2006, we redeemed our 8.60% Series Q
Cumulative Preferred Stock for $172,500,000 plus accrued and unpaid
dividends. The Series Q Cumulative Preferred Stock was called for
redemption in December 2005; accordingly, the redemption value of
$172,500,000 was classified as a liability at December 31, 2005. In
addition, during 2005, we redeemed our 9.75% Series F Cumulative Preferred
Stock for $57,500,000, plus accrued and unpaid dividends.
During 2005, we issued four series of Cumulative Preferred Stock:
Series D - issued February 28, 2005, net proceeds totaling $130,548,000,
Series E - issued April 27, 2005, net proceeds totaling $136,601,000,
Series F - issued August 23, 2005, net proceeds totaling $242,550,000 and
Series G - issued December 12, 2005, aggregate net proceeds totaling
$96,886,000.
Subsequent to March 31, 2006, we issued 20,700,000 depositary
shares each representing 1/1,000 of a share of our 7.25% Cumulative
Preferred Stock, Series I, for gross proceeds of approximately $517.5
million.
Equity Stock
------------
The Company is authorized to issue 200,000,000 shares of Equity
Stock. The Articles of Incorporation provide that the Equity Stock may be
issued from time to time in one or more series and gives the Board of
Directors broad authority to fix the dividend and distribution rights,
conversion and voting rights, redemption provisions and liquidation rights
of each series of Equity Stock.
Equity Stock, Series A
----------------------
At March 31, 2006 and December 31, 2005, we had 8,744,193
depositary shares outstanding, each representing 1/1,000 of a share of
Equity Stock, Series A ("Equity Stock A"). The Equity Stock A ranks on
parity with common stock and junior to the Cumulative Preferred Stock with
respect to general preference rights and has 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 stock 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 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, the depositary shares
will be convertible at the option of the shareholder into .956 shares of
common stock. The depositary shares are otherwise not convertible into
common stock. Holders of depositary shares vote as a single class with
holders of our common stock on shareholder matters, but the depositary
shares have the equivalent of one-tenth of a vote per depositary share.
Equity Stock, Series AAA
------------------------
In November 1999, we sold $100,000,000 (4,289,544 shares) of
Equity Stock, Series AAA ("Equity Stock 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 Stock, Series AAA and related dividends are eliminated in
consolidation.
24
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
Common Stock
------------
During the three months ended March 31, 2006, we issued 73,066
shares of common stock in connection with employee stock-based
compensation.
At March 31, 2006 and December 31, 2005, certain entities we
consolidate owned 1,146,207 shares of our Common Stock. 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.
The following chart reconciles our legally issued and outstanding
shares of Common Stock and the reported outstanding shares of Common Stock
at March 31, 2006 and December 31, 2005:
Reconciliation of Common Shares Outstanding
-------------------------------------------
At March 31, At December 31,
2006 2005
--------------- -----------------
Legally issued and outstanding shares....... 129,308,836 129,235,770
Less - Shares owned by entities we consolidate
that are eliminated in consolidation.... (1,146,207) (1,146,207)
--------------- ------------------
Reported issued and outstanding shares...... 128,162,629 128,089,563
================ ====================
Dividends
---------
The following table summarizes dividends declared and paid during
the three months ended March 31, 2006:
Distributions Per
Share or Depositary
Share Total Distributions
---------------------- -------------------
Preferred Stock:
Series Q.............................. $0.108 $ 742,000
Series R.............................. $0.500 10,200,000
Series S.............................. $0.492 2,830,000
Series T.............................. $0.477 2,900,000
Series U.............................. $0.477 2,860,000
Series V.............................. $0.469 3,234,000
Series W.............................. $0.406 2,153,000
Series X.............................. $0.403 1,935,000
Series Y.............................. $0.428 685,000
Series Z.............................. $0.391 1,758,000
Series A.............................. $0.383 1,761,000
Series B.............................. $0.445 1,937,000
Series C.............................. $0.413 1,898,000
Series D.............................. $0.386 2,086,000
Series E.............................. $0.422 2,384,000
Series F.............................. $0.403 4,031,000
Series G.............................. $0.438 1,750,000
Series H.............................. $0.350 1,471,000
-------------------
46,615,000
Common Stock:
Equity Stock, Series A................ $0.613 5,356,000
Common ............................... $0.500 64,298,000
--------------------
Total dividends.................... $116,269,000
====================
25
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
The dividend rate on the common stock was $0.50 per common share
for the three months ended March 31, 2006. The dividend rate on the Equity
Stock A was $0.6125 per depositary share for the three months ended March
31, 2006.
11. Segment Information
-------------------
Description of Each Reportable Segment
--------------------------------------
Our reportable segments reflect significant operating activities
that are evaluated separately by management. We have four reportable
segments: self-storage operations, containerized storage operations,
commercial property operations, and ancillary operations. These segments
are organized generally based upon their operating characteristics.
The self-storage segment comprises the direct ownership,
development, and operation of traditional storage facilities, and the
ownership of equity interests in entities that own storage properties. The
containerized storage operations represent another segment. The commercial
property segment reflects our interest in the ownership, operation, and
management of commercial properties. The vast majority of the commercial
property operations are conducted through PSB, and to a much lesser extent
the Company and certain of its unconsolidated subsidiaries own commercial
space, managed by PSB, within facilities that combine storage and
commercial space for rent. The ancillary operations include four sources of
operating income: (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) truck rentals at our self-storage
facilities and (iv) management of facilities owned by third-party owners
and facilities owned by the Unconsolidated Entities.
Measurement of Segment Profit or Loss
-------------------------------------
We evaluate performance and allocate resources based upon the net
segment income of each segment. Net segment income represents net income in
conformity with accounting principles generally accepted in the United
States and our significant accounting policies as denoted in Note 2, before
interest and other income, interest expense, corporate general and
administrative expense, and minority interest in income. The accounting
policies of the reportable segments are the same as those described in the
Summary of Significant Accounting Policies.
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 segments because
management does not utilize them to evaluate the results of operations of
each segment.
Measurement of Segment Assets
-----------------------------
No segment data relative to assets or liabilities is presented,
because we do not consider the historical cost of our real estate
facilities and investments in real estate entities in evaluating the
performance of operating management or in evaluating alternative courses of
action. The only other types of assets that might be allocated to
individual segments are trade receivables, payables, and other assets that
arise in the ordinary course of business, but they are also not a
significant factor in the measurement of segment performance.
26
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
Presentation of Segment Information
-----------------------------------
The following table reconciles the performance of each segment, in
terms of segment income, to our consolidated net income.
Three Months Ended
March 31,
-------------------------
2006 2005
------------ ------------
(Amounts in thousands)
Reconciliation of Net Income by Segment:
Self-storage
Self-storage net operating income....................... $ 163,777 $ 145,702
Self-storage depreciation............................... (49,204) (46,197)
Equity in earnings - self-storage property operations... 787 1,734
Equity in earnings - depreciation (self-storage)........ (215) (432)
Discontinued operations (Note 3) ....................... 42 92
------------ ------------
Total self-storage segment net income............... 115,187 100,899
------------ ------------
Commercial properties
Commercial properties net operating income.............. 1,644 1,721
Depreciation and amortization - commercial properties... (585) (579)
Equity in earnings - commercial property operations..... 17,930 17,214
Equity in earnings - depreciation (commercial
properties) ......................................... (9,039) (8,253)
------------ ------------
Total commercial property segment net income......... 9,950 10,103
------------ ------------
Containerized storage
Containerized storage net operating income.............. 620 1,095
Containerized storage depreciation...................... (260) (1,162)
Discontinued operations (Note 3) ....................... - 1,015
------------ ------------
Total containerized storage segment net income...... 360 948
------------ ------------
Ancillary Operations
Revenue less cost of operations........................ 4,558 3,601
------------ ------------
Other items not allocated to segments
-------------------------------------
General and administrative and other included in equity
in earnings.......................................... (5,997) (4,585)
Cumulative effect of change in accounting principal..... 578 -
Interest and other income............................... 5,075 2,893
General and administrative.............................. (6,779) (5,141)
Interest expense........................................ (1,557) (1,663)
Minority interest in income............................. (7,159) (10,644)
------------ ------------
Total other items not allocated to segments (15,839) (19,140)
------------ ------------
Total consolidated net income...................... $ 114,216 $ 96,411
============ ============
27
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
12. Stock-Based Compensation
------------------------
Stock Options
-------------
We have a 1990 Stock Option Plan (the "1990 Plan"), which provides
for the grant of non-qualified stock options. We have a 1994 Stock Option
Plan (the "1994 Plan"), a 1996 Stock Option and Incentive Plan (the "1996
Plan"), a 2000 Non-Executive/Non-Director Stock Option and Incentive Plan
(the "2000 Plan"), a 2001 Non-Executive/Non-Director Stock Option and
Incentive Plan (the "2001 Non-Executive Plan") and a 2001 Stock Option and
Incentive Plan (the "2001 Plan"), each of which provides for the grant of
non-qualified options and incentive stock options. (The 1990 Plan, the 1994
Plan, the 1996 Plan and the 2000 Plan are collectively referred to as the
"PSI Plans"). Under the PSI Plans, the Company has granted non-qualified
options to certain directors, officers and key employees to purchase shares
of the Company's common stock at a price equal to the fair market value of
the common stock at the date of grant. Generally, options under the PSI
Plans vest over a three-year period from the date of grant at the rate of
one-third per year (options granted after, December 31, 2002 vest generally
over a five-year period) and expire (i) under the 1990 Plan, five years
after the date they became exercisable and (ii) under the 1994 Plan, the
1996 Plan and the 2000 Plan, ten years after the date of grant. The 1996
Plan, the 2000 Plan, the 2001 Non-Executive Plan and the 2001 Plan also
provide for the grant of restricted stock (see below) to officers, key
employees and service providers on terms determined by an authorized
committee of the Board of Directors.
We recognize compensation expense for stock-based awards based
upon their fair value on the date of grant amortized over the applicable
vesting period (the "Fair Value Method"), less an allowance for estimated
future forfeited awards.
For the three months ended March 31, 2006 and 2005, we recorded
$267,000 and $211,000, respectively, in stock option compensation expense
related to options granted after January 1, 2002. The estimated per option
value of $10.50 for the stock options granted in the first three months of
2006 was based upon an estimated life of 5 years, an average risk-free rate
of 4.32%, an expected dividend yield of 7%, and an average expected
volatility of 0.265.
A total of 125,000 stock options were granted during the three
months ended March 31, 2006, 54,857 shares were exercised, and 2,000 shares
were forfeited. A total of 1,491,289 stock options were outstanding at
March 31, 2006 (1,423,146 at December 31, 2005).
Restricted Stock Units
----------------------
Outstanding restricted stock 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 stock 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 stock units in exchange for the
units.
The total value of each restricted stock unit grant, based upon
the market price of our common stock at the date of grant, is amortized
over the vesting period as compensation expense. The related employer
portion of payroll taxes is expensed as incurred. Until December 31, 2005
(see below), forfeitures were recognized as experienced, reducing
compensation expense.
Effective January 1, 2006, in accordance with Statement of
Financial Accounting Standards No. 123 - revised ("FAS 123R"), we began
recording compensation expense net of estimates for future forfeitures (the
"Estimated Forfeiture Method"). In addition, we estimated the cumulative
compensation expense that would have been recorded through December 31,
2005, had we used the Estimated Forfeiture Method, would have been $578,000
lower. Accordingly, as prescribed by FAS 123R, we recorded this adjustment
as a cumulative effect of change in accounting principal on our condensed
consolidated income statement for the quarter ended March 31, 2006.
28
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
Outstanding restricted stock 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 stock on that date.
From December 31, 2005 through March 31, 2006, 194,520 restricted
stock units were granted, 8,750 restricted stock units were forfeited, and
27,900 restricted stock units vested. This vesting resulted in the issuance
of 18,209 shares of the Company's Common Stock. In addition, cash
compensation was paid to employees in lieu of 9,691 shares of Common Stock
based upon the market value of the stock at the date of vesting, and used
to settle the employees' tax liability generated by the vesting.
At March 31, 2006, approximately 457,700 restricted stock units
were outstanding (299,830 at December 31, 2005). A total of $1,269,000 and
$1,018,000 in restricted stock expense was recorded for the three months
ended March 31, 2006 and 2005, respectively.
13. Related Party Transactions
--------------------------
Relationships and transactions with the Hughes Family
-----------------------------------------------------
Mr. Hughes and his family (the "Hughes Family") have ownership
interests in, and operate approximately 44 self-storage facilities in
Canada under the name "Public Storage" ("PS Canada") pursuant to a 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 36% of our Common Stock outstanding at March 31, 2006. We
have a right of first refusal to acquire the stock or assets of the
corporation that manages the 44 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, the right of
first refusal does not apply to the self-storage facilities, and we receive
no benefit from the profits and increases in value of the Canadian
self-storage facilities.
Through PSIC and PSCI-H, we continue to reinsure risks relating to
loss of goods stored by tenants in the self-storage facilities in Canada.
We acquired the tenant insurance business on December 31, 2001 through its
acquisition of PSIC. During each of the three month periods ended March 31,
2006 and 2005, we received $259,000 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.
In November 1999, we formed the Consolidated Development Joint
Venture with a joint venture partner whose partners include an
institutional investor and Mr. Hughes. On August 5, 2005, we acquired the
institutional investor's interest in PSAC for approximately $41,420,000 in
cash. This acquisition gave us a controlling position in PSAC and the right
to acquire the remaining interest in PSAC held by Mr. Hughes, which we
exercised, for a stipulated amount of $64,513,000 plus accrued preferred
return on November 17, 2005.
The Company and Mr. Hughes are co-general partners in certain of
the Consolidated Entities and the Unconsolidated Entities. Mr. Hughes and
his family also own limited partnership interests in certain of these
partnerships. The Company and Mr. Hughes and his family receive
distributions from these partnerships in accordance with the terms of the
partnership agreements.
29
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
13. 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 director 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 this facility amounting to $13,000 and $11,000 for the
three months ended March 31, 2006 and 2005, respectively.
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 $149,000, and $145,000, for the three months
ended March 31 2006 and 2005, respectively, in management fees with
respect to PSB's property management services.
We manage the Company's wholly-owned self-storage facilities as
well as the facilities owned by the Unconsolidated Entities and the
Consolidated Entities 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 total of such expenses which were
included in the operations of the Unconsolidated Entities were
approximately $591,000, and $631,000 or the three months ended March 31,
2006 and 2005, respectively.
Pursuant to a cost-sharing and administrative services agreement,
PSB reimburses us for certain administrative services. PSB's share of
these costs totaled approximately $80,000 and $85,000 for the three months
ended March 31, 2006 and 2005, respectively.
Stor-RE and third party insurance carriers have provided PS
Canada, the Company, PSB, and other affiliates of the Company with
liability and casualty insurance coverage until March 31, 2004. PS Canada
has a 2.2% interest, and PSB has a 4.0% 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.
14. Commitments and Contingencies
-----------------------------
LEGAL MATTERS
Serrao v. Public Storage, Inc. (filed April 2003) (Superior Court of
---------------------------------------------------------------------------
California - Orange County)
---------------------------
The plaintiff in this case filed a suit against the Company on
behalf of a putative class of renters who rented self-storage units from
the Company. Plaintiff alleges that the Company misrepresented the size of
its storage units, has brought claims under California statutory and
common law relating to consumer protection, fraud, unfair competition, and
negligent misrepresentation, and is seeking monetary damages, restitution,
and declaratory and injunctive relief.
The claim in this case is substantially similar to those in
Henriquez v. Public Storage, Inc., which was disclosed in prior reports.
In January 2003, the plaintiff caused the Henriquez action to be
dismissed.
30
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
Based upon the uncertainty inherent in any putative class action,
we cannot presently determine the potential damages, if any, or the
ultimate outcome of this litigation. On November 3, 2003, the court
granted our motion to strike the plaintiff's nationwide class allegations
and to limit any putative class to California residents only. In August
2005, we filed a motion to remove the case to federal court, but the case
has been remanded to the Superior Court. We are vigorously contesting the
claims upon which this lawsuit is based, including class certification
efforts.
Potter, et al v. Hughes, et al (filed December 2004) (United States
---------------------------------------------------------------------------
District Court - Central District of California)
------------------------------------------------
As previously reported, in November 2002, a shareholder of the
Company made a demand on the Board of Directors 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. Following
the filing, in June 2003, 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. These
proceedings have previously been reported.
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 June 2005, the court
granted the defendants' motion to dismiss the complaint with leave to
amend the complaint. In July 2005, the plaintiffs filed an amended
complaint, and the defendants filed a motion to dismiss the amended
complaint. The matter is currently under submission. We believe the
litigation will not have any financially adverse effect on the Company
(other than the costs and other expenses relating to the lawsuit).
Brinkley v. Public Storage, Inc. (filed April, 2005) (Superior Court of
---------------------------------------------------------------------------
California - Los Angeles County)
--------------------------------
The Brinkley plaintiffs are suing the Company on behalf of a
purported class of California property managers who claim that they were
not compensated for all the hours they worked. The Brinkley suit is based
upon California wage and hour laws. The maximum potential liability cannot
be estimated, but would be increased if a class or classes are certified
or, if claims are permitted to be brought on behalf of others under the
California Unfair Business Practices Act. We are vigorously contesting the
claims and intend to resist any expansion beyond the named plaintiffs on
the grounds of lack of commonality of claims. We do not believe that this
matter will have any material adverse effect on the results of operations
of the Company.
Simas v. Public Storage, Inc. (filed January, 2006) (Superior Court of
---------------------------------------------------------------------------
California - Orange County)
---------------------------
The Simas plaintiffs bring this action against the Company on
behalf of a purported class who bought insurance coverage at Company's
facilities alleging that the Company does not have a license to offer,
sell and/or transact storage insurance. The action was brought under
California Business and Professions Code Section 17200. The Company filed
a demurrer to the complaint. While the demurrer was pending, Plaintiffs
amended the complaint to allege a national class and claims for unfair
business practices, quasi-contract, common counts, and negligent and
intentional misrepresentation. We are vigorously contesting the claims
upon which this lawsuit is based, including any efforts for class
certifications.
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.
31
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
INSURANCE AND LOSS EXPOSURE
Our facilities have historically carried comprehensive insurance,
including fire, earthquake, flood, liability and extended coverage through
STOR-Re and PSIC-H, our captive insurance programs, and insure portions of
these risks through nationally recognized insurance carriers. Our captive
insurance programs also insure affiliates of the Company.
The Company, STOR-Re, PSIC-H and its affiliates' maximum aggregate
annual exposure for losses that are below the deductibles set forth in the
third-party insurance contracts, assuming multiple significant events
occur, is approximately $35 million. In addition, if losses exhaust the
third-party insurers' limit of coverage of $125,000,000 for property
coverage (a maximum of $80,000,000 with respect to earthquake coverage) and
$102,000,000 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 engineering and actuarial studies.
Our tenant re-insurance program, operating through PSIC through
March 31, 2004, and through PSIC-H beginning April 1, 2004, reinsures
policies against claims for losses to goods stored by tenants at our
self-storage facilities. For 2005, we had outside third-party insurance
coverage for claims paid exceeding $500,000 resulting from any individual
event, to a limit of $10,000,000. Effective January 1, 2006, such coverage
was revised to cover claims paid exceeding $1,500,000 resulting from any
individual event, to a limit of $9,000,000.
DEVELOPMENT AND ACQUISITION OF REAL ESTATE FACILITIES
We currently have 54 projects in our development pipeline,
including newly developed facilities and expansions and enhancements to
existing self-storage facilities. The total estimated cost of these
facilities is approximately $299 million, of which $49.3 million has been
spent at March 31, 2006. These projects are subject to contingencies.
As of May 8, 2006, we are under contract to purchase four
self-storage facilities (total approximate net rentable square feet of
336,000) at an aggregate cost of approximately $28.1 million. We anticipate
that these acquisitions will be funded entirely by us. Each of these
contracts is subject to significant contingencies, and there is no
assurance that any of these facilities will be acquired.
MERGER WITH SHURGARD
On March 6, 2006, we entered into an agreement with Shurgard under
which Public Storage will acquire Shurgard at a total transaction value of
approximately $5.0 billion. Under the transaction, which is taxable, Public
Storage will issue approximately 38.7 million shares of common stock in
exchange for outstanding Shurgard common stock and assume Shurgard's debt
and line of credit of approximately $1.9 billion (as of March 31, 2006).
Concurrent with the closing of the merger, we expect to repay Shurgard's
line of credit ($621 million at March 31, 2006), and pay approximately $90
million in legal, consulting, and other merger related costs. In addition,
approximately $136 million of Shurgard's preferred stock will be redeemed.
The transaction is subject to customary closing conditions and regulatory
approvals, including the approval of the shareholders of both companies,
and is currently targeted to close during the third quarter of 2006.
32
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
Completion of the transaction is not assured and is subject to
risks, including that shareholders of either Public Storage or Shurgard do
not approve the transaction or that the other closing conditions are not
satisfied. In addition, Shurgard may under limited circumstances terminate
the agreement to take a superior proposal. Public Storage and Shurgard are
not aware of any significant governmental approvals that are required for
consummation of the merger. If any approval or action is required, it is
presently contemplated that Public Storage and Shurgard would use their
reasonable best efforts to obtain such approval. There can be no assurance
that any approvals, if required, will be obtained.
The foregoing description of the terms of our agreement to acquire
Shurgard does not purport to be complete, and is qualified in its entirety
by reference to the full text of the merger agreement, a copy of which is
filed with our current report on Form 8-K dated March 7, 2006, and our Form
S-4, which was filed April 20, 2006.
During the quarter ended March 31, 2006, we incurred approximately
$1.2 million in legal, consulting, and other costs incurred prior to
signing the merger agreement, which are included in our general and
administrative expense for the quarter. We expect that additional costs
will be incurred subsequent to the merger related to the integration of the
two companies and the winding down of Shurgard. Such costs, the amount of
which cannot be determined at this time, are expected to be expensed when
incurred and, as a result, have a negative impact on earnings.
15. Subsequent Events
-----------------
From March 31, 2006 through May 8, 2006, we acquired three
additional self-storage facilities (228,000 net rentable square feet) at an
aggregate cost of approximately $31.1 million in cash. These acquisitions
were entirely funded by us.
On May 3, 2006, we issued 20,700,000 depositary shares each
representing 1/1,000 of a share of our 7.25% Cumulative Preferred Stock,
Series I, for gross proceeds of approximately $517.5 million. We expect
that these proceeds will be used to fund cash requirements with respect to
the merger with Shurgard.
On May 9, 2006, one of the Consolidated Entities issued 4,000,000
7.25% Cumulative Redeemable Preferred Units, Series J, which are
exchangeable under certain circumstances into our 7.25% Cumulative
Redeemable Preferred Stock, Series J. Gross proceeds received by PSAIP were
$100 million and are expected to be used to fund cash requirements with
respect to the merger with Shurgard.
33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with our consolidated financial statements and notes thereto.
Forward Looking Statements: All statements in this document, other than
statements of historical fact, are forward-looking statements which may be
identified by the use of the words "expects," "believes," "anticipates,"
"should," "estimates" and similar expressions. These forward-looking statements
involve known and unknown risks and uncertainties, which may cause Public
Storage's actual results and performance to be materially different from those
expressed or implied in the forward-looking statements. Factors and risks that
may impact future results and performance are described in Item 1A, "Risk
Factors" in Part II of this Quarterly Report on Form 10Q. These risks include,
but are not limited to, the following: changes in general economic conditions
and in the markets in which Public Storage operates; the impact of competition
from new and existing storage and commercial facilities and other storage
alternatives, which could impact rents and occupancy levels at our facilities;
difficulties in Public Storage's ability to evaluate, finance and integrate
acquired and developed properties into its existing operations and to fill up
those properties, which could adversely affect our profitability; the impact of
the regulatory environment as well as national, state, and local laws and
regulations including, without limitation, those governing Real Estate
Investment Trusts, which could increase our expenses and reduce cash available
for distribution; consumers' failure to accept the containerized storage concept
which would reduce our profitability; difficulties in raising capital at
reasonable rates, which would impede our ability to grow; delays in the
development process, which could adversely affect profitability; economic
uncertainty due to the impact of war or terrorism could adversely affect its
business plan; and risks related to our agreement to acquire Shurgard Storage
Centers, Inc, including risks related to the timing and completion of the
transaction, risks associated with Shurgard's level of debt, Shurgard's
investment in European operations, and risks associated with the integration of
Shurgard's operations. We 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.
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results
of Operations discusses our consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles. The
preparation of financial statements and related disclosures in conformity with
United States generally accepted accounting principles 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 consolidated financial statements and accompanying notes. Note 2
to our consolidated financial statements summarizes the significant accounting
policies and methods used in the preparation of our consolidated financial
statements and related disclosures.
Management believes the following are critical accounting policies
whose application has a material impact on our 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 Real Estate Investment Trust ("REIT") under the Internal Revenue Code
and applicable state laws. A qualifying REIT generally does not pay corporate
level income taxes on its taxable income that is distributed to its
shareholders, and accordingly, we do not pay income tax on the share of our
taxable income that is distributed to our shareholders.
We therefore do not estimate or accrue any federal income tax expense.
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
34
have failed to qualify as a REIT and 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 during which qualification was lost.
There can be no assurance that we would be entitled to any statutory relief.
IMPAIRMENT OF LONG-LIVED ASSETS: Substantially all of our assets
consist of long-lived assets, including real estate, goodwill, and other
intangible assets. We evaluate our goodwill for impairment on an annual basis,
and on a quarterly basis evaluate other long-lived assets for impairment. As
described in Note 2 to the consolidated financial statements, the evaluation of
goodwill for impairment entails valuation of the reporting unit to which
goodwill is allocated, which involves significant judgment in the area of
projecting earnings, determining appropriate price-earnings multiples, and
discount rates. In addition, the evaluation of other long-lived assets for
impairment requires 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 other 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, long-lived assets. We record depreciation expense
with respect to these assets based upon their estimated useful lives. Any change
in the estimated useful lives of those assets, caused by functional or economic
obsolescence or other factors, could have a material adverse impact on our
financial condition or results of operations.
ESTIMATED LEVEL OF RETAINED RISK AND UNPAID TENANT CLAIM LIABILITIES:
As described in Notes 2 and 14 to the 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
policies against claims for losses 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 may be in excess of or less than the amounts recorded.
ACCRUALS FOR CONTINGENCIES: We are exposed to business and legal
liability risks with respect to events that have occurred, but in accordance
with accounting principles generally accepted in the United States, 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
result 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 the 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, interest expense, general and administrative expense, as
well as television, yellow page, and other advertising expenditures are expensed
as incurred.
MERGER WITH SHURGARD
--------------------
On March 6, 2006, we entered into an agreement with Shurgard Storage
Centers, Inc ("Shurgard") under which Public Storage will acquire Shurgard at a
total transaction value of approximately $5.0 billion. Under the transaction,
which is taxable, Public Storage will issue approximately 38.7 million shares of
common stock in exchange for outstanding Shurgard common stock and assume
Shurgard's debt and line of credit of approximately $1.9 billion (as of March
31, 2006). Concurrent with the closing of the merger, we expect to repay
35
Shurgard's line of credit ($621 million at March 31, 2006), and pay
approximately $90 million of legal, consulting, and other merger-related costs.
In addition, approximately $136 million of Shurgard's preferred stock will be
redeemed. The transaction is subject to customary closing conditions and
regulatory approvals, including the approval of the shareholders of both
companies, and is currently targeted to close during the third quarter of 2006.
Completion of the transaction is not assured and is subject to risks,
including that shareholders of either Public Storage or Shurgard do not approve
the transaction or that the other closing conditions are not satisfied. In
addition, Shurgard may under limited circumstances terminate the agreement to
take a superior proposal. Public Storage and Shurgard are not aware of any
significant governmental approvals that are required for consummation of the
merger. If any approval or action is required, it is presently contemplated that
Public Storage and Shurgard would use their reasonable best efforts to obtain
such approval. There can be no assurance that any approvals, if required, will
be obtained.
The foregoing description of the terms of our agreement to acquire
Shurgard does not purport to be complete, and is qualified in its entirety by
reference to the full text of the merger agreement, a copy of which is filed
with our current report on Form 8-K dated March 7, 2006, and our Form S-4, which
was filed April 20, 2006.
During the quarter ended March 31, 2006, we incurred approximately $1.2
million in legal, consulting, and other costs incurred prior to signing the
merger agreement, which are included in our general and administrative expense
for the quarter. We expect that additional costs will be incurred subsequent to
the merger related to the integration of the two companies and the winding down
of Shurgard. Such costs, the amount of which cannot be determined at this time,
are expected to be expensed when incurred and, as a result, have a negative
impact on earnings.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2006:
Net income for the three months ended March 31, 2006 was $114,216,000
compared to $96,411,000 for the same period in 2005, representing an increase of
$17,805,000, or 18.5%. This increase is primarily due to improved operations
from our Same Store, newly developed and acquired self-storage facilities,
reduced minority interest in income and higher interest income. These items were
partially offset by increases in general and administrative expense and
depreciation along with a decrease in equity in earnings of real estate
entities.
Net income allocable to our common shareholders (after allocating net
income to our preferred and equity shareholders) was $62,245,000 or $0.48 per
common share on a diluted basis for the three months ended March 31, 2006
compared to $48,719,000 or $0.38 per common share on a diluted basis for the
same period in 2005, representing an increase of $0.10 per common share, or
26.3%. The increases in net income allocable to common shareholders and earnings
per common diluted share are due primarily to the impact of the factors
described above.
For the three months ended March 31, 2006 and 2005, we allocated
$46,615,000 and $40,413,000 of our net income, respectively, to our preferred
shareholders based on distributions paid. The year-over-year increase is due to
the issuance of additional preferred securities, partially offset by the
redemption of preferred securities that had higher dividend rates than the newly
preferred securities issued. We also recorded allocations of income to our
preferred shareholders with respect to the application of EITF Topic D-42
totaling $1,904,000 for the three months ended March 31, 2005 (none for the same
period in 2006).
Weighted average diluted shares decreased to 129,009,000 for the three
months ended March 31, 2006 from 129,175,000 for the three months ended March
31, 2005.
As described more fully under "Liquidity and Capital Resources" below,
we have approximately $653,750,000 in higher coupon preferred stock that becomes
available for redemption during the remainder of 2006. While there is no
36
assurance that we will be able to raise the necessary capital and at appropriate
rates to redeem these securities, if we do redeem these securities, during 2006
there would be an additional allocation to the preferred shareholders of
approximately $22 million ($0.17 per common share, based upon weighted average
shares during the first quarter of 2006) from the application of EITF Topic
D-42.
In the ensuing discussions of our operations, we present Net Operating
Income (before depreciation) and cost of operations (before depreciation), which
exclude the impact of depreciation expense. Although depreciation is an
operating expense, we believe that these operating metrics are meaningful
measures of operating performance, because we utilize these measures 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.
REAL ESTATE OPERATIONS
SELF-STORAGE OPERATIONS: Our self-storage operations are by far the
largest component of our operations, representing approximately 90% of our total
revenues generated for the three months ended March 31, 2006. The improvements
in rental income for the periods presented on our condensed consolidated
statements of income, are due to improvements in the performance of those
facilities that we owned prior to January 1, 2004, and the addition of new
facilities to our portfolio, either through our acquisition or development
activities.
To enhance year-over-year comparisons, the following table summarizes,
and the ensuing discussion describes, the self-storage operating results.
Self - storage operations summary: Three Months Ended March 31,
---------------------------------- ------------------------------------
Percentage
2006 2005 Change
----------- ----------- ----------
(dollar amounts in thousands)
Rental income (a):
Same Store Facilities (b)................... $ 208,228 $ 198,059 5.1%
Acquired Facilities (c)..................... 14,115 7,496 88.3%
Expansion Facilities (d).................... 12,556 11,145 12.7%
Developed Facilities (e).................... 13,315 10,646 25.1%
Newly consolidated facilities (g)........... 3,298 - -
----------- ----------- ----------
Total rental income....................... 251,512 227,346 10.6%
----------- ----------- ----------
Cost of operations (excluding depreciation) (f):
Same Store Facilities....................... 72,030 69,991 2.9%
Acquired Facilities......................... 5,701 3,428 66.3%
Expansion Facilities........................ 4,256 4,028 5.7%
Developed Facilities........................ 4,969 4,197 18.4%
Newly consolidated facilities (g)........... 779 - -
----------- ----------- ----------
Total cost of operations.................... 87,735 81,644 7.5%
----------- ----------- ----------
Net operating income before depreciation :
-----------------------------------------
Same Store Facilities....................... 136,198 128,068 6.3%
Acquired Facilities......................... 8,414 4,068 106.8%
Expansion Facilities........................ 8,300 7,117 16.6%
Developed Facilities........................ 8,346 6,449 29.4%
Newly consolidated facilities (g)........... 2,519 - -
----------- ----------- ----------
Total net operating income before depreciation 163,777 145,702 12.4%
Depreciation.................................. (49,204) (46,197) 6.5%
----------- ----------- ----------
Net operating income........................ $ 114,573 $ 99,505 15.1%
=========== =========== ==========
Number of self-storage facilities (at end of
period)........................................ 1,485 1,431 3.8%
Net rentable square feet (in thousands, at end of
period) (h): ............................... 90,860 87,305 4.1%
(a) Rental income includes late charges and administrative fees and is net of
promotional discounts given. Rental income excludes retail sales, truck
rental income and tenant reinsurance revenues generated at these
facilities. Such ancillary revenues are reflected as a component of
"Ancillary Operations" on our consolidated statements of income.
37
(b) The Same Store Facilities include 1,266 facilities containing 73,946,000
net rentable square feet that have been owned prior to January 1, 2004,
and operated at a mature, stabilized occupancy level since January 1,
2004.
(c) The Acquired Facilities include 83 facilities containing 5,891,000 net
rentable square feet that were acquired after January 1, 2004.
(d) The Expansion Facilities include 61 facilities containing 5,185,000 net
rentable square feet of self-storage space; these facilities were owned
since January 1, 2004, however, operating results are not comparable
throughout the periods presented due primarily to expansions in their net
rentable square feet (described below).
(e) The Developed Facilities include 59 facilities containing 4,840,000 net
rentable square feet of self-storage space. These facilities were
developed and opened since January 1, 2002 at a total cost of $501.2
million.
(f) Cost of operations includes all costs, both direct and indirect costs,
incurred in the operating activities of the facilities. Cost of operations
excludes, costs associated with retail sales, truck rentals, and tenant
reinsurance activities; such costs are reflected under "Ancillary
Operations" on our income statement.
(g) Effective January 1, 2006, in connection with our implementation of EITF
04-5, we commenced consolidation the accounts of three limited
partnerships that we had previously accounted for on the equity method of
accounting. As a result, we began including the revenues and cost of
operations of 16 facilities with an aggregate of 998,000 net rentable
square feet in the table above.
(h) Square footages do not include 472,000 net rentable square feet of
industrial space initially developed for containerized storage activities.
This space is being converted into self-storage space; see "Development
Pipeline Summary" below.
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.
Late charges and administrative fees are excluded to more effectively measures
our ongoing level of revenue associated with the leasing of the units.
Self-Storage Operations - Same Store Facilities
We increased the number of facilities included in the Same Store
Facilities from 1,260 facilities at December 31, 2005 to 1,266 facilities at
March 31, 2006. The increase in the Same Store pool of facilities is due to the
inclusion of 23 facilities previously classified as Developed or Expansion
facilities and the removal of 17 facilities that are now classified as Expansion
facilities. These facilities are included in the Same Store Facilities because
they are all stabilized and owned since January 1, 2004 and therefore provide
meaningful comparative data for 2004, 2005, and 2006.
As a result of the change in the Same Store Facilities, the relative
weighting of markets has changed. Accordingly, comparisons should not be made
between information presented in 2005 reports for the 1,260 Same Store
Facilities and the current 1,266 Same Store Facilities in order to identify
trends in occupancies, realized rents per square foot, or operating results.
The Same Store Facilities contain approximately 73.9 million net
rentable square feet, representing approximately 81% of the aggregate net
rentable square feet of our consolidated self-storage portfolio. 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."
The following table sets forth additional operating data with respect to the
Same Store Facilities:
38
SAME STORE FACILITIES Three Months Ended March 31,
-------------------------------------
Percentage
2006 2005 Change
------------ ------------ ----------
(Dollar amounts in thousands, except
rents per square foot)
Rental income...................................... $ 199,091 $ 189,572 5.0%
Late charges and administrative fees collected..... 9,137 8,487 7.7%
------------ ------------ ----------
Total rental income............................. 208,228 198,059 5.1%
------------ ------------ ----------
Cost of operations (excluding depreciation):
Payroll expense............................... 21,330 21,095 1.1%
Property taxes................................ 20,663 19,931 3.7%
Repairs and maintenance....................... 6,701 6,682 0.3%
Advertising and promotion..................... 6,679 5,970 11.9%
Utilities..................................... 4,800 4,557 5.3%
Property insurance............................ 1,850 2,002 (7.6)%
Telephone reservation center.................. 1,949 1,753 11.2%
Other cost of management...................... 8,058 8,001 0.7%
------------ ------------ ----------
Total cost of operations........................ 72,030 69,991 2.9%
------------ ------------ ----------
Net operating income before depreciation .......... 136,198 128,068 6.3%
Depreciation....................................... (38,548) (38,968) (1.1)%
------------ ------------ ----------
Net operating income.............................. $ 97,650 $ 89,100 9.6%
============ =========== ==========
Gross margin (before depreciation)................. 65.4% 64.7% 1.1%
Weighted average for the fiscal year:
Square foot occupancy (a)....................... 90.2% 89.9% 0.3%
Realized annual rent per occupied square foot (b) . $11.94 $11.41 4.6%
REVPAF (c)...................................... $10.77 $10.25 5.1%
Weighted average at March 31:
Square foot occupancy........................... 90.4% 90.0% 0.4%
In place annual rent per occupied square foot (d) $12.99 $12.36 5.1%
Total net rentable square feet (in thousands)...... 73,946 73,946 -
(a) Square foot occupancies represent weighted average occupancy levels over
the entire period.
(b) Realized annual rent per occupied square foot is computed by dividing
rental income, prior to 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, credit card fees and other costs that reduce rental income from
the contractual amounts due.
(c) Annualized rental income per available square foot ("REVPAF") represents
annualized rental income, prior to late charges and administrative fees,
divided by total available net rentable square feet.
(d) In place annual rent per occupied square foot represents annualized
contractual rents per occupied square foot without reductions for
promotional discounts, and excludes late charges and administrative fees.
Rental income increased approximately 5.1% for the three months ended
March 31, 2006, as compared to the same period in 2005. This increase was
primarily attributable to higher average realized annual rental rates per
occupied square foot, which were 4.6% higher for the three months ended March
31, 2006, as compared to the same period in 2005. Our occupancy levels increased
approximately 0.3% for the three months ended March 31, 2006, as compared to the
same period in 2005.
Our primary goal is to continue to grow rental income in a consistent
and sustainable manner. Growth in rental income will depend upon various
factors, including our ability to (i) maintain high occupancy levels, (ii)
increase rental rates charged to both new and existing customers, and (iii)
39
reduce the amount of promotional discounts to attract new tenants. In this
regard, we are continuously evaluating call volume, reservation activity and
move-in/move-out rates relative to our marketing activities and rental rates.
When warranted we will adjust our pricing, promotional discounts, and media
strategies to accommodate changing conditions in each market in which we
operate.
We believe that our Same Store Facilities are well positioned for
continued rental income growth for the remainder of 2006. At March 31, 2006, our
existing tenants were paying rental rates that were 5.1% higher than one year
earlier and occupancies improved by 0.4% for the same period.
There can be no assurance that we will achieve our goal of sustainable
growth in our rental income, while sustaining our occupancy levels.
Cost of operations (excluding depreciation) increased by 2.9% for the
three months ended March 31, 2006, as compared to the same period in 2005.
Payroll expense has increased 1.1% in the quarter, due principally to
higher wage rates offset partially by reduced incentives.
Advertising and promotion costs increased approximately 11.9%, due
principally to increases in internet and television advertising expenses.
Television advertising increased from $3,588,000 to $3,978,000 in the three
months ended March 31, 2006 as compared to the same period in 2005, due
principally to more aggressive media programs. Future television advertising
expenditures will continue to be volatile as we adopt to market and competitive
conditions.
Telephone reservation center costs increased 11.2% in the quarter. In
preparation for our seasonal rental period, we increased our staffing levels
earlier this year compared to the same period in 2005, resulting in higher
payroll costs. We should see some benefit from this through better conversion
ratios and lower temporary staffing costs in the second and third quarters.
Property insurance expense declined 7.6% in the quarter ended March 31,
2006 as compared to the same period in 2005, due to improved cost controls as
well as a somewhat softer insurance market that was in place when our insurance
contracts for the policy year April 1, 2005 through March 31, 2006 were entered
into. However, our policy renewed on April 1, 2006, with substantial increases
in our property insurance premiums primarily due to the impact of last year's
hurricanes. This increase is expected to be approximately $1.0 million each
quarter, as compared to the same quarter in the previous year, for the current
policy year.
Utility costs increased 5.3% in the quarter ended March 31, 2006 as
compared to the same period in 2005. We expect that this trend will continue and
accelerate throughout 2006, as energy prices remain high.
Our operating expense growth in the first quarter of 2006 was more
moderate than we anticipated. We believe that this will change in the remainder
of 2006, for the reasons indicated above.
The following table summarizes selected quarterly financial data with respect to
the Same Store Facilities:
40
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:
2006 $ 208,228
2005 $ 198,059 $ 203,302 $ 208,745 $ 208,272 $ 818,378
Total cost of operations
(excluding depreciation):
2006 $ 72,030
2005 $ 69,991 $ 67,736 $ 67,730 $ 65,873 $ 271,330
Property tax expense:
2006 $ 20,663
2005 $ 19,931 $ 18,402 $ 19,573 $ 17,025 $ 74,931
Television advertising
expense:
2006 $ 3,978
2005 $ 3,588 $ 2,955 $ 2,314 $ 2,141 $ 10,998
REVPAF:
2006 $ 10.77
2005 $ 10.25 $ 10.51 $ 10.77 $ 10.76 $ 10.58
Weighted average realized annual rent
per occupied square foot:
2006 $ 11.94
2005 $ 11.41 $ 11.42 $ 11.75 $ 11.89 $ 11.61
Weighted average occupancy levels
for the period:
2006 90.2%
2005 89.9% 92.1% 91.7% 90.5% 91.1%
41
ANALYSIS OF REGIONAL TRENDS
The following table sets forth regional trends in our Same Store Facilities:
Three Months Ended March 31,
---------------------------------------
2006 2005 Change
----------- ------------ -----------
Same Store Facilities Operating (Dollar amounts in thousands, except by
Trends Region rents per square
foot) Rental income:
Southern California
(126 facilities)................. $ 34,237 $ 32,646 4.9%
Northern California
(127 facilities)................. 25,190 23,855 5.6%
Texas (149 facilities).......... 18,207 17,462 4.3%
Florida (130 facilities)........ 21,903 20,000 9.5%
Illinois (91 facilities)........ 15,284 14,955 2.2%
Georgia (58 facilities)......... 7,140 6,693 6.7%
All other states (585 facilities) 86,267 82,448 4.6%
----------- ------------ -----------
Total rental income................. 208,228 198,059 5.1%
Cost of operations (excluding
depreciation expense)
Southern California.............. 8,235 7,634 7.9%
Northern California.............. 6,748 6,364 6.0%
Texas............................ 8,249 8,101 1.8%
Florida.......................... 7,208 6,989 3.1%
Illinois......................... 7,479 6,926 8.0%
Georgia.......................... 2,532 2,406 5.2%
All other states................. 31,579 31,571 0.0%
----------- ------------ -----------
Total cost of operations............ 72,030 69,991 2.9%
Net operating income (excluding
depreciation expense)
Southern California.............. 26,002 25,012 4.0%
Northern California.............. 18,442 17,491 5.4%
Texas............................ 9,958 9,361 6.4%
Florida.......................... 14,695 13,011 12.9%
Illinois......................... 7,805 8,029 (2.8)%
Georgia.......................... 4,608 4,287 7.5%
All other states................. 54,688 50,877 7.5%
----------- ------------ -----------
Total net operating income.......... $ 136,198 $ 128,068 6.3%
Weighted average occupancy:
Southern California.............. 91.3% 92.5% (1.3)%
Northern California.............. 89.8% 89.3% 0.6%
Texas............................ 89.9% 88.8% 1.2%
Florida.......................... 93.4% 91.9% 1.6%
Illinois......................... 87.6% 87.7% (0.1)%
Georgia.......................... 92.5% 91.1% 1.5%
All other states................. 89.5% 89.5% 0.0%
----------- ------------ -----------
Total weighted average occupancy.... 90.2% 89.9% 0.3%
REVPAF
Southern California.............. $ 16.66 $ 15.88 4.9%
Northern California.............. 13.96 13.23 5.5%
Texas............................ 7.50 7.22 3.9%
Florida.......................... 11.21 10.24 9.5%
Illinois......................... 10.53 10.32 2.0%
Georgia.......................... 8.03 7.56 6.2%
All other states................. 9.83 9.40 4.6%
----------- ------------ -----------
Total REVPAF:....................... $ 10.77 $ 10.25 5.1%
42
Same Store Facilities Operating Trends Three Months Ended March 31,
by Region (Continued) --------------------------------------
2006 2005 Change
----------- ------------ -----------
Realized annual rent per occupied
square foot
Southern California.............. $ 18.25 $ 17.17 6.3%
Northern California.............. 15.55 14.81 5.0%
Texas............................ 8.34 8.13 2.6%
Florida.......................... 12.00 11.14 7.7%
Illinois......................... 12.02 11.77 2.1%
Georgia.......................... 8.69 8.30 4.7%
All other states................. 10.98 10.51 4.5%
----------- ------------ -----------
Total realized rent per square foot:... $ 11.94 $ 11.41 4.6%
In place annual rent per occupied
square foot at March 31
Southern California.............. $ 19.80 $ 18.77 5.5%
Northern California.............. 16.93 16.11 5.1%
Texas............................ 9.15 8.80 3.9%
Florida.......................... 13.08 11.96 9.4%
Illinois......................... 12.93 12.51 3.4%
Georgia.......................... 9.67 9.04 7.0%
All other states................. 11.92 11.40 4.6%
----------- ------------ -----------
Total in place rent per occupied
square foot:...................... $ 12.99 $ 12.36 5.1%
Self-Storage Operations - Acquired Facilities
During 2004, 2005 and the first three months of 2006, we acquired a
total of 83 self-storage facilities containing 5,891,000 net rentable square
feet. The following table summarizes operating data with respect to these
facilities.
ACQUIRED SELF-STORAGE FACILITIES
Three Months Ended March 31,
-------------------------------------
2006 2005 Change
----------- ---------- -----------
(Dollar amounts in thousands, except
per square foot amounts)
Rental income:
Self-storage facilities acquired in 2006...... $ 397 $ - $ 397
Self-storage facilities acquired in 2005...... 5,638 500 5,138
Self-storage facilities acquired in 2004...... 8,080 6,996 1,084
----------- ---------- -----------
Total rental income........................... 14,115 7,496 6,619
----------- ---------- -----------
43
ACQUIRED SELF-STORAGE FACILITIES (Continued)
Cost of operations (excluding depreciation):
Self-storage facilities acquired in 2006...... 225 - 225
Self-storage facilities acquired in 2005...... 2,469 277 2,192
Self-storage facilities acquired in 2004...... 3,007 3,151 (144)
----------- ---------- -----------
Total cost of operations...................... 5,701 3,428 2,273
----------- ---------- -----------
Net operating income before depreciation:
Self-storage facilities acquired in 2006...... 172 - 172
Self-storage facilities acquired in 2005...... 3,169 223 2,946
Self-storage facilities acquired in 2004...... 5,073 3,845 1,228
----------- ---------- -----------
Total net operating income before depreciation 8,414 4,068 4,346
Depreciation..................................... (3,928) (1,627) (2,301)
----------- ---------- -----------
Net operating income.......................... $ 4,486 $ 2,441 $ 2,045
=========== ========== ===========
Weighted average square foot occupancy during the
period:
Self-storage facilities acquired in 2006...... 55.7% - -
Self-storage facilities acquired in 2005...... 81.9% 73.0% 12.2%
Self-storage facilities acquired in 2004...... 85.9% 82.9% 3.6%
----------- ---------- -----------
83.1% 81.6% 1.8%
=========== ========== ===========
Weighted average realized annual rent per occupied
square foot for the period (a):
Self-storage facilities acquired in 2006...... $ 16.63 $ - -
Self-storage facilities acquired in 2005...... 11.02 7.64 44.2%
Self-storage facilities acquired in 2004...... 12.12 10.80 12.2%
----------- ---------- -----------
$ 11.73 $ 10.58 10.9%
=========== ========== ===========
In place annual rent per occupied square foot at
March 31(b):
Self-storage facilities acquired in 2006...... $ 17.08 $ - -
Self-storage facilities acquired in 2005...... 12.24 8.61 42.2%
Self-storage facilities acquired in 2004...... 13.05 12.08 8.0%
----------- ---------- -----------
$ 12.81 $ 11.74 9.1%
=========== ========== ===========
Number of Facilities:
2006........................................ 6 - 6
2005........................................ 32 6 26
2004........................................ 45 45 -
----------- ---------- -----------
83 51 32
=========== ========== ===========
Net rentable square feet at March 31:
Self-storage facilities acquired in 2006......... 380 - 380
Self-storage facilities acquired in 2005......... 2,390 460 1,930
Self-storage facilities acquired in 2004 (c)..... 3,121 3,109 12
----------- ---------- -----------
5,891 3,569 2,322
=========== ========== ===========
Cumulative acquisition cost at March 31:
Self-storage facilities acquired in 2006......... $ 51,079 $ - $ 51,079
Self-storage facilities acquired in 2005......... 254,549 23,751 230,798
Self-storage facilities acquired in 2004 (c)..... 260,801 259,487 1,314
----------- ---------- -----------
$566,429 $283,238 $ 283,191
=========== ========== ===========
(a) Realized annual rent per occupied square foot is computed by dividing
rental income, prior to 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, credit card fees and other costs that reduce rental income from
the contractual amounts due.
44
(b) 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.
(c) During 2005, we expanded one of the 2004 acquisitions, adding 12,000 net
rentable square feet at a cost of $1,314,000.
The 2005 and 2006 acquisitions were acquired at various dates
throughout each period. Accordingly, rental income, cost of operations, net
operating income and weighted average square foot occupancy levels represent the
operating results for the partial period that we owned the facilities during the
year acquired.
During 2004, we acquired a total of 45 self-storage facilities for an
aggregate cost of approximately $259,487,000. These facilities contain in the
aggregate approximately 3,121,000 net rentable square feet and are located
principally in the Buffalo, Dallas, Miami, Milwaukee, and Minneapolis
metropolitan areas.
During 2005, we acquired a total of 32 self-storage facilities,
principally in single-property transactions, for an aggregate cost of
$254,549,000. These facilities contain in the aggregate approximately 2,390,000
net rentable square feet and are located principally in the Atlanta, Chicago,
Miami, and New York metropolitan areas.
For the three months ended March 31, 2006, we acquired a total of six
self-storage facilities, principally in single-property transactions, containing
an aggregate of approximately 380,000 net rentable square feet for an aggregate
cost of $51,079,000 located in California, Florida, Illinois, New York and
Virginia.
We believe our presence in and knowledge of substantially all of the
major markets in the United States 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 acquisitions will continue to provide earnings
growth during 2006 as these facilities continue to improve their occupancy
levels as well as realized rental rates. In addition, during the remainder of
2006 we expect to continue to acquire additional self-storage facilities.
Between April 1, 2006 and May 8, 2006, we acquired three self-storage
facilities from third parties with total net rentable square feet of 228,000, at
an aggregate cost of approximately $31.1 million in cash. At May 8, 2006, we are
under contract to purchase four self-storage facilities (total approximate net
rentable square feet of 336,000) at an aggregate cost of approximately $28.1
million. We anticipate that these acquisitions will be funded entirely by us.
Each of these contracts is subject to significant contingencies, and there is no
assurance that any of these facilities will be acquired.
Self-Storage Operations - Expansion Facilities
Our expansion facilities consist of (i) 53 self-storage facilities that
we have owned for a number of years and have recently expanded, or are in the
process of expanding, the amount of square footage available for rent combined
with (ii) eight self-storage facilities located in New Orleans that were heavily
impacted by Hurricane Katrina during 2005. The 53 self-storage facilities are
generally older facilities that are located in prime locations where we have
added additional space by either constructing new buildings on available land at
the existing site or by demolishing existing single story buildings and
rebuilding multi-story buildings in their place.
The operating results of these 53 expansion facilities and the eight
facilities located in New Orleans are not comparable on a year over year basis
due to the addition of square footage or the damage caused by the hurricane, in
the case of the New Orleans facilities. The operating results for these
facilities are presented in the table below.
45
EXPANSION SELF-STORAGE FACILITIES Three Months Ended March 31,
---------------------------------------
2006 2005 Change
------------ ----------- ------------
(Amounts in thousands, except per
square foot amounts)
Rental income:
New Orleans facilities (a) ............... $ 1,516 $ 1,444 $ 72
Other expansion facilities................ 11,040 9,701 1,339
------------ ----------- ------------
Total rental income..................... 12,556 11,145 1,411
------------ ----------- ------------
Cost of operations (excluding depreciation):
New Orleans facilities.................... 368 506 (138)
Other expansion facilities................ 3,888 3,522 366
------------ ----------- ------------
Total cost of operations................ 4,256 4,028 228
------------ ----------- ------------
Net operating income before depreciation :
New Orleans facilities.................... 1,148 938 210
Other expansion facilities................ 7,152 6,179 973
------------ ----------- ------------
Total net operating income before depreciation 8,300 7,117 1,183
Depreciation................................ (2,967) (2,533) (434)
------------ ----------- ------------
Net operating income...................... $ 5,333 $ 4,584 $ 749
============ =========== ============
Weighted average square foot occupancy during the
period:
New Orleans facilities (b)................ 78.1% 89.3% (12.5)%
Other expansion facilities................ 78.6% 82.5% (4.7)%
------------ ----------- ------------
78.5% 83.3% (5.8)%
------------ ----------- ------------
Weighted average realized rent per occupied square
foot during the period (c):
New Orleans facilities (b) ............... $ 12.88 $ 11.74 9.7%
Other expansion facilities................ 12.59 12.27 2.6%
------------ ----------- ------------
$ 12.61 $ 12.21 3.3%
============ =========== ============
In place annual rent per occupied square foot at
March 31 (d):
New Orleans facilities (b) ............... $ 13.71 $ 12.90 6.3%
Other expansion facilities................ 13.46 12.94 4.0%
------------ ----------- ------------
$ 13.49 $ 12.93 4.3%
============ =========== ============
Number of Facilities:
New Orleans facilities.................... 8 8 -
Other expansion facilities................ 53 53 -
------------ ----------- ------------
61 61 -
============ =========== ============
Net rentable square feet (in thousands, at end
of period): (e)
New Orleans facilities.................... 524 524 -
Other expansion facilities................ 4,661 4,003 658
------------ ----------- ------------
5,185 4,527 658
============ =========== ============
(a) Rental income for the New Orleans Facilities for the quarter ended March
31, 2006 includes $507,000 in business interruption proceeds we expect to
receive from our insurers, relative to losses occurring in the quarter
ended March 31, 2006.
(b) Occupied and available square footage excludes the impact of units taken
offline due to hurricane damage, where such amounts are factored in to the
computations of weighted average square foot occupancy, weighted average
realized rent per occupied square foot, and in place annual rent per
occupied square foot.
46
(c) Realized annual rent per occupied square foot is computed by dividing
rental income, prior to 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, credit card fees and other costs that reduce rental income from
the contractual amounts due. Realized rent per square foot excludes the
impact of $507,000 in business interruption proceeds we expect to receive
from our insurers relative to the New Orleans facilities for the three
months ended March 31, 2006.
(d) 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.
(e) Square footage excludes 299,000 net rentable containerized storage space
initially developed for the containerized storage business at March 31,
2006, but includes square footage taken offline due to hurricane damage.
All of the New Orleans facilities were closed for operations for
several weeks following the hurricane; however, all but three of these
facilities have since reopened. The five that are operating are not operating at
full capacity, as many units are unavailable for lease due to damage. Two of the
three facilities that remain closed will not be able to reopen at all without
substantial restoration and repair work. Notwithstanding that five of our
facilities in New Orleans are currently operating, we believe that the indirect
economic effects of the hurricane on the city may have a negative impact on our
facilities' operating results, and these effects are expected to continue for an
indeterminate time period. Included in revenues for the three months ended March
31, 2006 are $575,000 in expected business interruption proceeds for these
facilities, representing the loss of business for the quarter ended March 31,
2006.
We expect that the Expansion Facilities, other than the New Orleans
facilities, will continue to provide growth to our earnings during 2006 as we
continue to rent the newly added vacant space. The weighted average occupancy
level of these facilities was 78.6%, and 82.5% for the three months ended March
31, 2006 and 2005, respectively.
We expect that we will continue to redevelop additional facilities; at
March 31, 2006, we have 5 projects with an aggregate cost of $17.1 million to
convert the containerized storage space into self-storage space and 46 other
expansion and repackaging projects to enhance the visual appeal of our
facilities or increase their net rentable space at an aggregate cost of $230.6
million. These activities will increase our self-storage space by an aggregate
of 3,221,000 net rentable square feet and will result in short-term dilution to
earnings. However, we believe that expansion of our existing self-storage
facilities in markets that have unmet storage demand, and improving our existing
facilities' competitive position through enhancing their visual appeal, provide
an important means to improve the Company's earnings. Further, the construction
cost for these expansions is generally lower on a per-square foot basis than the
development of a new facility, resulting in a higher yield potential on invested
capital. There can be no assurance about the future level of such expansion and
enhancement opportunities, and these projects are subject to contingencies.
Self-Storage Operations - Developed Facilities
We have 42 newly developed self-storage facilities, and 17 facilities
that were developed to contain both self-storage and containerized storage at
the same location ("Combination Facilities") that have not been operating at a
stabilized level of operations since January 1, 2004. At March 31, 2006, these
newly developed facilities have an aggregate of 4,840,000 net rentable square
feet of self-storage space and 173,000 net rentable square feet of industrial
space developed originally for our containerized storage business. Aggregate
development cost for these 59 facilities was approximately $501.2 million at
March 31, 2006. The operating results of the self-storage facilities and
Combination Facilities are reflected in the Self-Storage Operations table under
the caption, "Developed Facilities." These facilities are not included in the
"Same Store" portfolio because their operations have not been stabilized.
The following table sets forth the operating results and selected
operating data with respect to the Developed Facilities:
47
DEVELOPED SELF-STORAGE FACILITIES Three Months Ended March 31,
--------------------------------------
2006 2005 Change
------------ ----------- -----------
(Amounts in thousands, except per
square foot amounts and facility count)
Rental income:
Self-storage facility opened on March 31, 2006 $ - $ - $ -
Self-storage facilities opened in 2005....... 369 2 367
Self-storage facilities opened in 2004....... 1,618 1,007 611
Self-storage facilities opened in 2003 and 2002 6,610 5,750 860
Combination facilities....................... 4,718 3,887 831
------------ ----------- -----------
Total rental income....................... 13,315 10,646 2,669
------------ ----------- -----------
Cost of operations (excluding depreciation):
Self-storage facility opened on March 31, 2006 - - -
Self-storage facilities opened in 2005....... 414 23 391
Self-storage facilities opened in 2004....... 578 519 59
Self-storage facilities opened in 2003 and 2002 2,165 2,048 117
Combination facilities....................... 1,812 1,607 205
------------ ----------- -----------
Total cost of operations.................. 4,969 4,197 772
------------ ----------- -----------
Net operating income before depreciation :
Self-storage facility opened on March 31, 2006 - - -
Self-storage facilities opened in 2005....... (45) (21) (24)
Self-storage facilities opened in 2004....... 1,040 488 552
Self-storage facilities opened in 2003 and 2002 4,445 3,702 743
Combination facilities....................... 2,906 2,280 626
------------ ----------- -----------
Net operating income before depreciation.... 8,346 6,449 1,897
Depreciation.................................. (3,489) (3,069) (420)
------------ ----------- -----------
Net operating income........................ $ 4,857 $ 3,380 $ 1,477
============ =========== ===========
Weighted average square foot occupancy during
the period:
Self-storage facility opened on March 31, 2006 - - -
Self-storage facilities opened in 2005....... 31.0% 8.6% 260.5%
Self-storage facilities opened in 2004....... 83.8% 59.0% 42.0%
Self-storage facilities opened in 2003 and 2002 91.5% 86.9% 5.3%
Combination facilities....................... 74.9% 73.4% 2.0%
------------ ----------- -----------
77.6% 77.6% -
============ =========== ===========
Weighted average realized rent per occupied
square foot during the period (a):
Self-storage facility opened on March 31, 2006 $ - $ - -
Self-storage facilities opened in 2005....... 9.65 - -
Self-storage facilities opened in 2004....... 15.34 13.34 15.0%
Self-storage facilities opened in 2003 and 2002 14.34 13.09 9.5%
Combination facilities....................... 13.14 12.73 3.2%
------------ ----------- -----------
$ 13.79 $ 12.96 6.4%
============ =========== ===========
In place annual rent per occupied square foot at
March 31 (b):
Self-storage facility opened on March 31, 2006 $ - $ - -
Self-storage facilities opened in 2005....... 13.78 13.50 2.1%
Self-storage facilities opened in 2004....... 17.02 16.30 4.4%
Self-storage facilities opened in 2003 and 2002 15.67 14.38 9.0%
Combination facilities....................... 14.29 13.74 4.0%
------------ ----------- -----------
$ 15.19 $ 14.30 6.2%
============ =========== ===========
48
DEVELOPED SELF-STORAGE FACILITIES Three Months Ended March 31,
(continued) --------------------------------------
----------- 2006 2005 Change
------------ ----------- -----------
(Amounts in thousands, except per
square foot amounts and facility count)
Number of facilities:
Self-storage facility opened on March 31, 2006 1 - 1
Self-storage facilities opened in 2005....... 6 1 5
Self-storage facilities opened in 2004....... 7 7 -
Self-storage facilities opened in 2003 and 2002 28 28 -
Combination facilities....................... 17 17 -
------------ ----------- -----------
59 53 6
============ =========== ===========
Square Footage:
Self-storage facility opened on March 31, 2006 89 - 89
Self-storage facilities opened in 2005....... 463 52 411
Self-storage facilities opened in 2004....... 505 505 -
Self-storage facilities opened in 2003 and 2002 1,937 1,937 -
Combination facilities (c)................... 1,846 1,561 285
------------ ----------- -----------
4,840 4,055 785
============ =========== ===========
Cumulative development cost:
Self-storage facility opened on March 31, 2006 $ 9,343 $ - $ 9,343
Self-storage facilities opened in 2005....... 37,716 4,252 33,464
Self-storage facilities opened in 2004....... 60,579 61,558 (979)
Self-storage facilities opened in 2003 and 2002 211,621 204,473 7,148
Combination facilities (c)................... 181,899 170,745 11,154
------------ ----------- -----------
$501,158 $441,028 $ 60,130
============ =========== ===========
(a) Realized annual rent per occupied square foot is computed by dividing
rental income, prior to 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, credit card fees and other costs that reduce rental income from
the contractual amounts due.
(b) 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.
(c) Square footages exclude industrial space developed for containerized
storage activities totaling 173,000 net rentable square feet at March 31,
2006. Since January 1, 2003, we have converted industrial space no longer
used by the discontinued containerized storage business into 1,483,000 net
rentable square feet of traditional self-storage space, at an aggregate
cost of $23,207,000.
Unlike many other forms of real estate, we are unable to pre-lease our
newly developed facilities due to the nature of our tenants. Accordingly, at the
time a newly developed facility first opens for operation the facility is
entirely vacant generating no rental income. Historically, we estimated that on
average it takes approximately 24 - 36 months for a newly developed facility to
fill up and reach a targeted occupancy level of approximately 90%.
As these facilities approach the targeted occupancy level of
approximately 90%, rates are increased, resulting in further improvement in net
operating income as the existing tenants, which moved in at lower rates, have
their rates increased or are replaced by new tenants paying higher rates. This
process of reaching stabilized rental rates can take approximately another 12 to
24 months following the time when the facilities reach a stabilized occupancy
level. In addition, move-in discounts have a more pronounced effect upon
realized rental rates for the newly developed facilities, because such
facilities tend to have a higher ratio of newer tenants.
49
Property operating expenses are substantially fixed, consisting
primarily of payroll, property taxes, utilities, and marketing costs. The rental
revenue of a newly developed facility will generally not cover its property
operating expenses (excluding depreciation) until the facility has reached an
occupancy level of approximately 30% to 35%. However, at that occupancy level,
the rental revenues from the facility are still not sufficient to cover related
depreciation expense and cost of capital with respect to the facility's
development cost. During construction of the self-storage facility, we
capitalize interest costs and include such cost as part of the overall
development cost of the facility. Once the facility is opened for operations
interest is no longer capitalized.
The annualized yield on cost for these facilities for the quarter ended
March 31, 2006, based on net operating income before depreciation, was
approximately 6.7%, which is lower than our ultimate yield expectations. We
expect these yields to increase as these facilities reach stabilization of both
occupancy levels and realized rents. Properties that were developed before 2005
have contributed greatly to our earnings growth. The growth in properties
developed in 2004 was principally due to occupancy growth, and growth for
properties developed in 2003 and 2002 were due principally to rate increases. We
expect that these facilities will continue to provide growth to our earnings.
Development of self-storage facilities causes short-term earnings
dilution because, as mentioned above, of the extended time to stabilize a
self-storage facility. We believe that development of self-storage facilities is
favorable, despite the short-term earnings dilution, because it is advantageous
for us to continue to expand our asset base and benefit from the resulting
increased critical mass, with facilities that will improve our portfolio's
overall average construction and location quality.
However, the development environment has changed in the last few years
due to increases in construction costs, 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.
Self-Storage Operations - Newly Consolidated Facilities
Effective January 1, 2006, as described in Note 2 to our condensed
consolidated financial statements, we commenced including the accounts of three
limited partnerships that we had previously accounted for on the equity method
of accounting. These facilities are substantially all mature facilities that we
have managed and had an interest in for several years, and these 16 facilities
have an aggregate of 998,000 net rentable square feet. Accordingly, their future
operating characteristics and past operating history are similar to those of our
Same Store facilities.
The following chart sets forth the operations of the Newly Consolidated
Facilities:
Three Months
Ended
March 31, 2006
---------------
Rental income............................... $ 3,298
Cost of operations (excluding depreciation). 779
---------------
Net operating income before depreciation.... 2,519
Depreciation................................ (272)
---------------
Net operating income..................... 2,247
===============
Weighted average square foot occupancy
during the period:.......................... 88.5%
Weighted average realized annual rent per
occupied square foot for the period::....... $ 14.28
In place annual rent per occupied square
foot at March 31:........................... $ 15.66
COMMERCIAL PROPERTY OPERATIONS: Commercial property operations included
in our 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 PS Business Parks
50
Inc. and its consolidated operating partnership (PS Business Parks, Inc. and its
consolidated operating partnership are hereinafter referred to as "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," see below.
Our commercial operations are comprised of 1,296,000 net rentable
square feet of commercial space operated principally at certain of the
self-storage facilities.
The results of our commercial operations are provided in the table
below:
Commercial Property Operations:
Three Months Ended March 31,
----------------------------------
2006 2005 Change
---------- ----------- ----------
(amounts in thousands)
Rental income......................... $ 2,992 $ 2,848 $ 144
Cost of operations................... 1,348 1,127 221
---------- ----------- ----------
Net operating income............... 1,644 1,721 (77)
Depreciation......................... (585) (579) (6)
---------- ----------- ----------
Operating income................... $ 1,059 $ 1,142 $ (83)
========== =========== ==========
Our commercial property operations consist primarily of facilities that
are at a stabilized level of operations, and generally reflect the conditions of
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
2006.
CONTAINERIZED STORAGE OPERATIONS:
We have closed many of our containerized storage facilities since 2002,
and have refined our market and product focus to twelve facilities located in
eight densely populated markets with above-average rent and income. The
operations with respect to the facilities other than the twelve ongoing
facilities are included in "Discontinued Operations" on our income statement.
The operations of the twelve remaining facilities are included in PSPUD's
continuing operations and are reflected on the table below:
Containerized Storage:
(excluding discontinued operations)
Three Months Ended March 31,
---------------------------------
2006 2005 Change
--------- --------- ----------
(Amounts in thousands)
Rental and other income ............ $ 3,930 $ 3,837 $ 93
Cost of operations:
Direct operating costs.......... 2,952 2,384 568
Facility lease expense.......... 358 358 -
--------- --------- ----------
Total cost of operations...... 3,310 2,742 568
--------- --------- ----------
Operating income prior to depreciation 620 1,095 (475)
Depreciation expense (a)......... (260) (1,162) 902
--------- --------- ----------
Operating income.................... $ 360 $ (67) $ 427
========= ========= ==========
(a) Depreciation expense principally relates to the depreciation of
containers; however, depreciation expense for the three months ended March
31, 2006 includes $200,000, related to real estate facilities compared to
$252,000 for the same period in 2005, respectively.
Rental and other income includes monthly rental charges to customers
for storage of the containers, service fees charged for pickup and delivery of
containers to customers' homes and businesses and certain non-core services
which were eliminated, such as handling and packing customers' goods from city
to city. At March 31, 2006, there were approximately 20,939 occupied containers
in the continuing facilities.
51
Direct operating costs principally includes payroll, equipment lease
expense, utilities and vehicle expenses (fuel and insurance).
There can be no assurance as to the level of the containerized storage
business's expansion, level of gross rentals, level of move-outs or
profitability. We continue to evaluate the business operations, and additional
facilities may be closed.
ANCILLARY OPERATIONS: Our Ancillary operations include the operating
results of our tenant insurance, truck rental, merchandise, and third-party
property management operations. The following table sets forth our ancillary
operations:
52
Three Months Ended March 31,
--------------------------------------
2006 2005 Change
------------- ----------- -----------
(amounts in thousands)
Revenues:
Tenant reinsurance premiums..... $ 6,786 $ 5,916 $ 870
Merchandise sales............... 5,013 4,807 206
Truck rentals................... 2,770 2,581 189
Property management............. 605 714 (109)
------------- ----------- -----------
Total revenues............... 15,174 14,018 1,156
------------- ----------- -----------
Cost of operations:
Tenant reinsurance.............. 3,092 2,977 115
Merchandise sales............... 4,573 4,271 302
Truck rentals................... 2,890 2,958 (68)
Property management............. 61 211 (150)
------------- ----------- -----------
Total cost of operations..... 10,616 10,417 199
------------- ----------- -----------
Net operating income:
Tenant reinsurance.............. 3,694 2,939 755
Merchandise sales............... 440 536 (96)
Truck rentals................... (120) (377) 257
Property management............. 544 503 41
------------- ----------- -----------
Total net operating income... $ 4,558 $ 3,601 $ 957
============ =========== ===========
Tenant reinsurance operations
-----------------------------
On December 31, 2001, we acquired PSIC from a related party. PS
Insurance reinsures policies against losses to goods stored by tenants in our
self-storage facilities. Revenues are comprised of fees charged to tenants
electing such policies. Cost of operations primarily includes claims paid that
are not covered by our outside third-party insurers (described below), as well
as claims adjusting expenses.
For 2005, we had outside third-party insurance coverage for claims paid
exceeding $500,000 resulting from any individual event, to a limit of
$10,000,000. Effective January 1, 2006, such coverage was revised to cover
claims paid exceeding $1,500,000 resulting from any individual event, to a limit
of $9,000,000.
The future level of tenant reinsurance revenues is largely dependent
upon the number of new tenants electing to purchase policies, premiums charged
for such insurance, and existing tenant retention to continue participating in
the insurance program. For the three months ended March 31, 2006 and 2005,
approximately 32% and 33%, respectively, of our self-storage tenant base had
such policies.
The 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. The aforementioned increase in
the deductible of $1,500,000 per event could result in higher loss expense in
2006, depending upon the number of catastrophic losses that occur.
Merchandise and truck rental operations
---------------------------------------
Through a taxable REIT subsidiary, all of our self-storage facilities
sell locks, boxes, and packing supplies to our 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, our
subsidiary maintains 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."
53
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.
The revenues and expenses of these activities have remained relatively
stable during the periods reflected in the table above. The primary factors
impacting the level of operations of these activities is the level of customer
and tenant traffic at our self-storage facilities, including the level of
move-ins.
Property management operations
------------------------------
We manage 27 self-storage facilities on behalf of third-party owners
and 22 self-storage facilities that are owned by the Unconsolidated Entities.
Under the supervision of the property owners, we coordinate rental policies,
rent collections, marketing activities, the purchase of equipment and supplies,
maintenance activities, and the selection and engagement of vendors, suppliers,
and independent contractors. We also assist and advise the property owners in
establishing policies for the hire, discharge, and supervision of employees for
the operation of these facilities.
Property management operations declined in the quarter ended March 31,
2006 as compared to the same period in 2005, due to our consolidation, effective
January 1, 2006, of three partnerships owning 16 self-storage facilities that we
had previously accounted for using the equity method of accounting. This
resulted in the elimination in consolidation of management fee income and cost
of operations with respect to these three partnerships for periods after January
1, 2006.
Our operating income from these activities is generally dependent upon
the revenues earned at the managed facilities, because our management fee is
based upon revenues. Management contracts with the third-party owners can be
terminated by either party upon 60 days written notice.
EQUITY IN EARNINGS OF REAL ESTATE ENTITIES: In addition to our
ownership of equity interests in PSB, we had general and limited partnership
interests in eight limited partnerships at March 31, 2006. (PSB and the limited
partnerships are collectively referred to as the "Unconsolidated Entities"). 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.
We account for such investments using the equity method.
Equity in earnings of real estate entities for the three months ended
March 31, 2006 and 2005 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:
54
Three Months Ended March 31,
------------------------------------
2006 2005 Change
---------- ----------- -----------
(Amounts in thousands)
Property operations:
PSB $17,930 $17,214 $716
Acquisition Joint Venture.............. 86 51 35
Newly consolidated partnerships (1).... - 1,276 (1,276)
Other investments (2).................. 701 407 294
---------- ----------- -----------
18,717 18,948 (231)
---------- ----------- -----------
Depreciation:
PSB.................................... (9,039) (8,253) (786)
Acquisition Joint Venture.............. (69) (66) (3)
Newly consolidated partnerships (1).... - (175) 175
Other investments (2).................. (146) (191) 45
---------- ----------- -----------
(9,254) (8,685) (569)
---------- ----------- -----------
Other: (3)
PSB (4)................................ (5,915) (4,752) (1,163)
Newly consolidated partnerships (1).... - 127 (127)
Other investments (2).................. (82) 40 (122)
---------- ----------- -----------
(5,997) (4,585) (1,412)
---------- ----------- -----------
Total equity in earnings of real estate
entities.................................. $3,466 $5,678 $(2,212)
========== =========== ===========
(1) As described more fully in Note 2 to our financial statements, we
commenced consolidating the accounts of three limited partnerships that we
had previously accounted for on the equity method of accounting.
Accordingly, equity in income with respect to these partnerships ceased
effective January 1, 2006.
(2) Amounts primarily reflect equity in earnings recorded for investments that
have been held consistently throughout each of the three months ended
March 31, 2006 and 2005.
(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. The amount of interest expense
included in "other" is $224,000 for the three months ended March 31, 2006,
as compared to $123,000, respectively, for the same periods in 2005.
(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.
The decrease in equity in earnings of real estate entities is
principally due to our $312,000 pro-rata share of PSB's gain on sale of real
estate assets recorded in the quarter ended March 31, 2006, as compared to
$1,265,000 for the same period in 2005, as well as our consolidation of three
limited partnerships effective January 1, 2006 as described in Note 2 to our
condensed consolidated financial statements. As a result of this consolidation,
equity in income with respect to these partnerships ceased effective January 1,
2006.
Equity in earnings of PSB represents our pro-rata share (an average of
approximately 44% for the three months ended March 31, 2006 and 2005) of the
earnings of PSB. Throughout 2005 and the first three months of 2006, 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 PSB. At March 31,
2006, PSB owned and operated 17.9 million net rentable square feet of commercial
space located in eight states. PSB also manages commercial space owned by the
Company and affiliated entities at March 31, 2006 pursuant to property
management agreements.
Our future equity income from PSB will be dependent entirely upon PSB's
operating results. PSB's filings and selected financial information can be
accessed through the Securities and Exchange Commission, and on its website,
www.psbusinessparks.com.
In January 2004, we entered into a joint venture partnership with an
institutional investor for the purpose of acquiring up to $125.0 million of
existing self-storage properties in the United States from third parties (the
"Acquisition Joint Venture"). The venture is funded entirely with equity
consisting of 30% from us and 70% from the institutional investor. As described
more fully in Note 2 to the Consolidated Financial Statements for the quarter
ended March 31, 2006, our pro-rata share of earnings with respect to two of the
55
facilities acquired directly from third parties by the Acquisition Joint Venture
in 2004, at an aggregate cost of $9,086,000, are reflected in Equity in Earnings
in the table above. Our investment in the Acquisition Joint Venture with respect
to these two facilities was approximately $2,930,000. Our future equity in
earnings with respect to the Acquisition Joint Venture will be dependent upon
the level of earnings generated by these two properties.
The "Other Investments" are comprised primarily of our equity in
earnings from four limited partnerships, for which we held an approximately
consistent level of equity interest throughout 2005 and the first three months
of 2006. These limited partnerships were formed by the Company during the
1980's. We are the general partner in each limited partnership, and manage each
of these facilities for a management fee that is included in "Ancillary
operations." The limited partners consist of numerous individual investors,
including the Company, which throughout the 1990's acquired units of limited
partnership interests in these limited partnerships in various transactions.
Our future earnings with respect to the "Other Investments" will be
dependent upon the operating results of the 20 self-storage facilities that
these entities own. The operating characteristics of these facilities are
similar to those of the Company's self-storage facilities, and are subject to
the same operational issues as the Same Store Facilities as discussed above. See
Note 5 to the consolidated financial statements for the operating results of
these entities for the three months ended March 31, 2006 and 2005.
OTHER INCOME AND EXPENSE ITEMS
INTEREST AND OTHER INCOME: Interest and other income was $5,075,000 for
the three months ended March 31, 2006, respectively, as compared to $2,893,000,
respectively, for the same periods in 2005. This increase is due to higher
interest income on cash balances due to higher average interest rates.
As discussed more fully in "Liquidity and Capital Resources" below, at
March 31, 2006, we had cash balances totaling approximately $382 million, which
includes significant proceeds from recent equity issuances. These balances are
typically invested in short-term low-risk securities that, during the quarter
ended March 31, 2006, earned a nominal yield. In addition, on May 3, 2006, we
raised approximately $518 million in gross proceeds from our issuance of our
Series I Cumulative Preferred Stock and on May 9, 2006 we raised an additional
$100 million through one of the Consolidated Entities' issuance of its Series J
Preferred Units. The future level of interest and other income will be partially
dependent upon the timing of our investment of these unused offering proceeds
and the level of interest earned on these short-term investments.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense
was $50,049,000 and $47,938,000 for the three months ended March 31, 2006 and
2005, respectively. The increase in depreciation and amortization for the three
months ended March 31, 2006 as compared to the same period in 2005 is due
primarily to increased depreciation with respect to newly developed and acquired
facilities, offset partially by a reduction in depreciation with respect to
maintenance capital expenditures.
GENERAL AND ADMINISTRATIVE: General and administrative expense was
$6,779,000 for the three months ended March 31, 2006, as compared to $5,141,000
for the same period in 2005, representing an increase of approximately
$1,638,000. General and administrative expense principally consists of state
income taxes, investor relation expenses and corporate and executive salaries.
In addition, general and administrative expense 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,
employee severance, stock-based compensation and product research and
development expenditures.
The increase in general and administrative expense for the three months
ended March 31, 2006 as compared to the same period in 2005 is primarily due to
costs incurred prior to the signing of the merger agreement with Shurgard,
totaling approximately $1,224,000.
56
We expect that additional costs associated with the integration of
Shurgard and winding down of Shurgard will be incurred. Such costs, the amount
of which cannot be determined at this time, are expected to be expensed when
incurred.
INTEREST EXPENSE: Interest expense was $1,557,000 and $1,663,000 for
the three months ended March 31, 2006 and 2005, respectively. Interest
capitalized during the three months ended March 31, 2006 and 2005 was $716,000
and $665,000, respectively. See also Notes 7 and 8 for a schedule of our debt
balances, principal repayment requirements, and average interest rates.
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 months ended March 31, 2006 and 2005:
Three Months Ended March 31,
----------------------------------------
2006 2005 Change
------------ ------------ -----------
(Amounts in thousands)
Preferred partnership interests:
Ongoing distributions (a)................. $ 3,591 $ 5,375 $ (1,784)
Special Distribution and EITF Topic D-42 (b) - 874 (874)
Acquired minority interests (c).............. - 2,325 (2,325)
Newly consolidated partnerships (d) 930 - 930
Convertible Partnership Units (e)............ 116 90 26
Other minority interests (f)................. 2,522 1,980 542
------------ ------------ -----------
Total minority interests in income....... $ 7,159 $ 10,644 $ (3,485)
============ ============ ===========
(a) The decrease in ongoing distributions is due to the redemption of $40
million of our 9.5% Series N Preferred Units on March 17, 2005 and $45
million of our 9.125% Series O Preferred units on March 29, 2005.
(b) In accordance with the Securities and Exchange Commissions clarification
of EITF Topic D-42, are original issuance cost with respect to our first
quarter of 2005 redemption of preferred units included in minority
interest in income for the three months ended March 31, 2005 totaling
$874,000.
(c) These amounts reflect income allocated to minority interests that the
Company acquired in 2005 and are no longer outstanding at March 31, 2006.
(d) Thse amounts reflect income allocated to minority interests for three
entities that we commenced consolidating the accounts for effective
January 1, 2006 (see Note 2 to the condensed consolidated financial
statements). Included in minority interest in income for the three months
ended March 31, 2006 was $34,000 in depreciation expense.
(e) These amounts reflect the minority interests represented by the
Convertible
Partnership Units (see Note 8 to the condensed consolidated financial
statements).
(f) These amounts reflect income allocated to minority interests that were
outstanding consistently throughout the three months ended March 31, 2006
and 2005. Included in minority interest in income is $162,000 in
depreciation expense for the three months ended March 31, 2006,
respectively, as compared to $200,000 for the same period in 2005.
Other minority interests reflect income allocated to minority interests
that have maintained a consistent level of interest throughout 2005 and the
three months ended March 31, 2006, comprised of investments in the Consolidated
Entities described in Note 9 to the Company's financial statements. The level of
income allocated to these interests in the future is dependent upon the
operating results of the storage facilities that these entities own, as well as
any minority interests that the Company acquires in the future.
57
On May 9, 2006, one of the Consolidated Entities issued $100 million of
its 7.25% Series J Preferred Partnership Units. Accordingly, ongoing
distributions with respect to preferred partnership interest are expected to
increase. Discontinued Operations: As described more fully in Note 3 to the
consolidated financial statements, during 2002, 2003 and 2004, we implemented a
business plan which included the closure of 43 of 55 containerized storage
facilities that were open at December 31, 2001. The 43 facilities are
hereinafter referred to as the "Closed Facilities."
During July 2005, in an eminent domain proceeding, one of our
self-storage facilities located in the Portland, Oregon market was condemned,
additionally, in 2006, we will be losing a facility in our Seattle, Washington
market to an eminent domain proceeding, (collectively these facilities a
referred to as "the Eminent Domain Facilities").
The following table summarizes the historical operations of the Eminent
Domain Facilities and the Closed Facilities:
Discontinued Operations: Three Months Ended March 31,
----------------------------------
2006 2005 Change
----------- ---------- ---------
(amounts in thousands)
Rental income....................... $ 113 $ 343 $
(230)
Cost of operations................... (50) (312) 262
Depreciation and amortization ...... (21) (67) 46
----------- ---------- ---------
Income before other items........... 42 (36) 78
Other items:
Net gain on disposition of assets - 1,143 (1,143)
----------- ---------- ---------
Net discontinued operations......... $ 42 $ 1,107 $ (1,065)
========== ========== =========
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 to
shareholders for the foreseeable future. At March 31, 2006, cash on hand totaled
$382.3 million and we had no outstanding borrowings under our $200 million bank
line of credit.
Operating as a real estate investment trust ("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
distributed 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 interest, 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 principal payments on debt and for
reinvestment.
58
Three Months Ended March 31,
---------------------------------
2006 2005
--------------- ---------------
(Amounts in thousands)
Net cash provided by operating activities....................... $ 162,833 $ 148,975
Allocable to minority interest (Preferred Units) - ongoing
distributions................................................... (3,591) (5,375)
Allocable to minority interest (common equity).................. (3,712) (4,016)
--------------- ---------------
Cash from operations allocable to our shareholders.............. 155,530 139,584
Capital improvements to maintain our facilities................. (8,379) (6,806)
--------------- ---------------
Remaining operating cash flow available for distributions to our
shareholders................................................ 147,151 132,778
Distributions paid:
Preferred stock dividends..................................... (46,615) (40,413)
Equity Stock, Series A dividends.............................. (5,356) (5,375)
Distributions to Common shareholders.......................... (64,298) (58,072)
--------------- ---------------
Cash available for principal payments on debt and reinvestment.. $ 30,882 $ 28,918
============== ===============
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 stock. We expect to fund our growth strategies with cash on hand at March
31, 2006, internally generated retained cash flows and 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. We have in
the past used our $200 million line of credit as temporary "bridge" financing
and repaid those amounts with internally generated cash flows and proceeds from
the placement of permanent capital.
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
difficult to repay debt with operating cash flow alone, (ii) our perpetual
preferred stock has no sinking fund requirement or maturity date and does 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
stock at any time, which enabled us to effectively refinance higher coupon
preferred stock with new preferred stock at lower rates, (iv) preferred stock
does not contain onerous covenants, thus allowing us to maintain significant
financial flexibility, and (v) dividends on the preferred stock can be applied
to our REIT distribution requirements.
Our credit ratings on each of our series of Cumulative Preferred Stock
are "Baa2" by Moody's and "BBB+" by Standard & Poor's.
Our portfolio of real estate facilities remains substantially
unencumbered. At March 31, 2006, we had mortgage debt outstanding of $95.0
million (which encumbers 35 facilities with a book value of approximately $205.2
million) and unsecured debt in the amount of $11.2 million. We also have Debt to
Joint Venture Partner amounting to $35.7 million with respect to ten real estate
facilities with an aggregate book value of $48.3 million.
RECENT ISSUANCE OF PREFERRED STOCK AND PROJECTED REDEMPTION OF
PREFERRED SECURITIES: One of our financing objectives over the past several
years has been to reduce our average cost of capital with respect to our
preferred securities. Accordingly, we have redeemed higher rate preferred
securities outstanding and have financed the redemption with cash on-hand or
from the proceeds from the issuance of lower rate preferred securities. The
table below reflects the preferred stock that is redeemable in 2006 (amounts in
000's):
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Redeem 8.00% Series R (Redeemable 09/28/06) $ 510,000
Redeem 7.88% Series S (Redeemable 10/31/06) 143,750
------------
Total redemptions $ 653,750
============
We believe that our size and financial flexibility enables us to access
capital when appropriate. Since the beginning of 2003 through March 31, 2006, we
have issued approximately $1.5 billion of our Cumulative Preferred Stock, and
used approximately $0.8 billion of these net proceeds in order to redeem
higher-coupon preferred securities.
REQUIREMENT TO PAY DISTRIBUTIONS: We estimate the distribution
requirement with respect to our Preferred Stock outstanding at May 8, 2006 to be
approximately $222.5 million per year. We estimate that the annual distribution
requirement with respect to the preferred partnership units outstanding at March
31, 2006, to be approximately $14.4 million per year. On May 9, 2006, we issued
4,000,000 units of our Series J Preferred Partnership Units, raising
approximately $100 million in cash proceeds. Our annual distribution requirement
is estimated to be approximately $7.3 million per year with respect to these
units.
During each of the three months ended March 31, 2006 and 2005, we paid
cash dividends totaling $5,356,000 and $5,375,000, respectively, to the holders
of our Equity Stock, Series A. With respect to the depositary shares of Equity
Stock, 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 stock or (ii) $2.45. The depositary shares are non-cumulative, and
have no preference over our common stock either as to dividends or in
liquidation. With respect to the Equity Stock, Series A outstanding at March 31,
2006, we estimate the total regular distribution for the second quarter of 2006
to be approximately $5.4 million.
During the three months ended March 31, 2006, we paid dividends
totaling $64,298,000 ($0.50 per common share) to the holders of our common
stock. Based upon shares outstanding at May 8, 2006 and a quarterly distribution
of $0.50 per share, which was declared by the Board of Directors on May 3, 2006
and payable on June 29, 2006, to shareholders of record as of June 2, 2006, we
estimate a dividend payment with respect to our common stock of approximately
$64.1 million for the second quarter of 2006.
CAPITAL IMPROVEMENT REQUIREMENTS: For 2006, we budgeted approximately
$38 million for capital improvements. During the three months ended March 31,
2006, we incurred capital improvements of approximately $8.4 million. Capital
improvements include major repairs or replacements to the facilities that
maintain the facilities' existing operating condition and visual appeal. Capital
improvements do not include costs relating to the development or expansion of
facilities, or expenditures associated with improving the visual and structural
appeal of our existing self-storage facilities.
DEBT SERVICE REQUIREMENTS: We do not believe we have any significant
refinancing risks with respect to our debt, all of which is fixed rate. At March
31, 2006, we had total outstanding debt of approximately $141.9 million. See
Note 7 to the consolidated financial statements for approximate principal
maturities of such borrowings.
We anticipate that our retained operating cash flow will continue to be
sufficient to enable us to make scheduled principal payments. It is our current
intention to fully amortize our debt as opposed to refinance debt maturities
with additional debt.
ACQUISITION AND DEVELOPMENT OF REAL ESTATE FACILITIES: During 2006, we
will continue to seek to acquire additional self-storage facilities from third
parties; however, it is difficult to estimate the amount of third party
acquisitions we will undertake.
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Between March 31, 2006 and May 8, 2006, we acquired three additional
self-storage facilities from third parties at an aggregate cost of approximately
$31.1 million in cash. At May 8, 2005, we are under contract to acquire four
additional facilities at an aggregate cost of approximately $28.1 million. Each
of these acquisitions is subject to significant contingencies, and there can be
no assurance that these facilities will be acquired.
At March 31, 2006 we have a development "pipeline" of 54 projects
consisting of self-storage facilities, conversion of space at facilities that
was previously used for containerized storage and expansions to existing
self-storage facilities. At March 31, 2006, 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 $249.7 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 March 31, 2006)
Total
Number Net estimated Costs incurred
of rentable development through Costs to
projects sq. ft costs 3/31/06 complete
---------- ---------- ------------ -------------- ----------
(Amounts in thousands, except number of projects)
Facilities currently under construction:
Self-storage facilities 2 191 $ 44,223 $ 37,558 $ 6,665
Expansions and other enhancements to
existing self-storage facilities 8 337 24,624 7,586 17,038
---------- ---------- ------------ -------------- ----------
10 528 68,847 45,144 23,703
Facilities awaiting construction, where land
has been acquired:
Self-storage facilities 1 57 7,116 2,335 4,781
Expansions and other enhancements to
existing self-storage facilities 43 2,884 223,053 1,814 221,239
---------- ---------- ------------ -------------- ----------
44 2,941 230,169 4,149 226,020
Total Development Pipeline 54 3,469 $ 299,016 $ 49,293 $ 249,723
========== ========== ============ ============== ===========
In addition, we have parcels of land held for development with an
aggregate cost of $5,622,000.
MERGER WITH SHURGARD: On March 6, 2006, we entered into an agreement
with Shurgard Storage Centers, Inc ("Shurgard") under which Public Storage will
acquire Shurgard at a total transaction value of approximately $5.0 billion.
Under the transaction, which is taxable, Public Storage will issue approximately
38.7 million shares of common stock in exchange for outstanding Shurgard common
stock and assume Shurgard's debt and line of credit of approximately $1.9
billion (as of March 31, 2006). Concurrent with the closing of the merger, we
expect to repay Shurgard's line of credit ($621 million at March 31, 2006), and
pay approximately $90 million of legal, consulting, and other merger-related
costs. In addition, approximately $136 million of Shurgard's preferred stock
will be redeemed. The transaction is subject to customary closing conditions and
regulatory approvals, including the approval of the shareholders of both
companies, and is currently targeted to close during the third quarter of 2006.
The foregoing description of the terms of our agreement to acquire
Shurgard does not purport to be complete, and is qualified in its entirety by
reference to the full text of the merger agreement, a copy of which is filed
with our current report on Form 8-K dated March 7, 2006, and our Form S-4, which
was filed April 20, 2006.
REPURCHASES OF THE COMPANY'S COMMON STOCK: The Company's Board of
Directors authorized the repurchase from time to time of up to 25,000,000 shares
of our common stock on the open market or in privately negotiated transactions.
For the three months ended March 31, 2006, we did not repurchase any shares of
our common stock.
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From the initial authorization through May 8, 2005, we have repurchased
a total of 22,201,720 shares of common stock at an aggregate cost of
approximately $567 million.
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 either common
or preferred stock. At March 31, 2006, our debt as a percentage of total
shareholders' equity (based on book values) was 2.9%.
Our preferred stock is not redeemable at the option of the holders.
Except under certain conditions relating to the Company's qualification as a
REIT, the Preferred Stock is not redeemable by the Company prior to the
following dates: Series R - September 28, 2006, Series S - October 31, 2006,
Series T - January 18, 2007, Series U - February 19, 2007, Series V - September
30, 2007, 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 -
June 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 and Series I - May 3, 2011. On or after the
respective dates, each of the series of Preferred Stock 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.
Our market risk sensitive instruments include notes payable, which
totaled $141.9 million at March 31, 2006. All of the Company's debt bears
interest at fixed rates. See Note 7 to the consolidated financial statements at
March 31, 2006 for approximate principal maturities of the notes payable at
March 31, 2006.
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 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) 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) under the Securities Act of 1934 as
amended) as of the end of the period covered by this report. Based upon this
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of such period, 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 fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
62
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
The information set forth under the heading "Legal Matters" in Note 14
to the Consolidated Financial Statements in this Form 10-Q is incorporated by
reference in this Item 1.
ITEM 1A. RISK FACTORS
------------
In addition to the other information in our Form 10-Q and our Form 10-K
for the year ended December 31, 2005, you should consider the following factors
in evaluating the Company:
IF THE SHURGARD MERGER IS COMPLETED, IT MAY SUBJECT US TO ADDITIONAL RISKS
On March 6, 2006, we entered into an agreement with Shurgard Storage
Centers, Inc ("Shurgard") under which Public Storage will acquire Shurgard at a
total transaction value of approximately $5.0 billion. Under the transaction,
which is taxable, Public Storage will issue approximately 38.7 million shares of
common stock in exchange for outstanding Shurgard common stock and assume
Shurgard's debt and line of credit of approximately $1.9 billion (as of March
31, 2006 ). Concurrent with the closing of the merger, we expect to repay
Shurgard's line of credit ($621 million at March 31, 2006), and pay
approximately $90 million of legal, consulting, and other merger-related costs.
In addition, approximately $136 million of Shurgard's preferred stock will be
redeemed. The transaction is subject to customary closing conditions and
regulatory approvals, including the approval of the shareholders of both
companies, and is currently targeted to close during the third quarter of 2006.
Completion of the transaction is not assured and is subject to risks,
including that shareholders of either Public Storage or Shurgard do not approve
the transaction or that the other closing conditions are not satisfied. In
addition, Shurgard may under limited circumstances terminate the agreement to
take a superior proposal. Public Storage and Shurgard are not aware of any
significant governmental approvals that are required for consummation of the
merger. If any approval or action is required, it is presently contemplated that
Public Storage and Shurgard would use their reasonable best efforts to obtain
such approval. There can be no assurance that any approvals, if required, will
be obtained.
The foregoing description of the terms of our agreement to acquire
Shurgard does not purport to be complete, and is qualified in its entirety by
reference to the full text of the merger agreement, a copy of which is filed
with our current report on Form 8-K dated March 7, 2006, and our Form S-4, which
was filed April 20, 2006.
In addition to the general risks related to real estate noted above
which may also adversely impact Shurgard's operations, we are also subject to
the following risks in connection with our acquisition of Shurgard into our
operations, including without limitation the following:
o difficulties in the integration of operations, technologies and
personnel of Shurgard;
o inability to realize or delays in realizing expected synergies;
o unanticipated operating costs;
o diversion of our management's attention away from other business
concerns;
o exposure to any undisclosed or unknown potential liabilities of
Shurgard;
o potential underinsured losses on Shurgard properties; and
o risk of failure to mitigate any Shurgard material weaknesses in
internal control to the extent that it affects our internal controls.
The success of the merger will depend, in part, on our ability to
realize the anticipated cost savings from combining the businesses of Public
Storage and Shurgard. However, to realize the anticipated benefits from the
merger, we must successfully combine the businesses of Public Storage and
Shurgard in a manner that permits those cost savings to be realized. If we are
not able to successfully achieve those objectives, the anticipated benefits of
the merger may not be realized fully or at all or may take longer or cost more
to realize than expected. Public Storage and Shurgard have operated and, until
the completion of the merger, will continue to operate independently. It is
63
possible that the integration process could result in the loss of valuable
employees, the disruption of each company's ongoing business or inconsistencies
in standards, controls, procedures, practices, policies and compensation
arrangements that adversely affect our ability to maintain relationships with
tenants and employees or to achieve the anticipated benefits of the merger.
Further, the size of the transaction may make integration of Public Storage and
Shurgard difficult, expensive, and disruptive, adversely affecting the combined
company's revenues and earnings, and implementation of merger integration
efforts may divert management's attention from other strategic priorities. In
addition, the merger has been structured so that it should be a taxable
transaction for U.S. Federal income tax purposes. As a result, the combined
company should have the benefit of a step-up in tax basis in Shurgard's assets.
It is possible that the IRS may challenge the step-up in basis. If such
challenge were sustained, we would not achieve this benefit, which would reduce
our depreciation deductions and our ability to retain cash flow.
Shurgard also holds many of its properties through joint ventures,
which have additional risks, including risks related to the financial strength,
common business goals and strategies and cooperation of the venture partner, as
well as the inability to take some actions that may require approval by the
venture partner. In addition, Shurgard holds substantially all of its real
estate investments in Europe indirectly through partnerships and joint venture
arrangements. If we are unable to effectively control these indirect
investments, there is a risk that our ownership of the joint ventures could
cause us to lose our REIT status.
We have assumed based on public filings that Shurgard has qualified and
will continue to qualify as a REIT and that we would be able to continue to
qualify as a REIT following an acquisition. However, if Shurgard has failed or
fails to qualify as a REIT, we might succeed to or incur significant tax
liabilities and possibly lose our REIT status should disqualifying activities
continue after the acquisition.
Shurgard has a significantly greater level of debt than we do with more
fixed and floating-rate debt, as well as derivative instruments that we would
assume. Shurgard's outstanding borrowings on its lines of credit ($621 million
at March 31, 2006) would become payable immediately upon completion of the
merger. In addition, there would be $90 million in additional cash costs related
to the merger, cash requirements for the redemption of $136 million of
Shurgard's preferred stock on the merger date, and additional possible cash
requirements following the merger. As a result, this transaction may result in
an increase in our exposure to interest rate and refinancing risks.
We would also be acquiring Shurgard's international operations in
Europe, which consist principally of facilities that have been completed in the
last few years and are in various stages of fill-up. We have no experience in
European operations, which may adversely impact our ability to operate
profitably in Europe. In addition, these operations have specific inherent
risks, including without limitation the following:
o currency risks, including currency fluctuations;
o unexpected changes in legislative and regulatory requirements;
o potentially adverse tax burdens;
o burdens of complying with different permitting standards, environmental
and labor laws and a wide variety of foreign laws;
o obstacles to the repatriation of earnings and cash;
o regional, national and local political uncertainty;
o economic slowdown and/or downturn in foreign markets;
o difficulties in staffing and managing international operations;
o reduced protection for intellectual property in some countries; and
o inability to effectively control less than wholly-owned partnerships
and joint ventures.
64
In connection with the proposed acquisition of Shurgard's European
operations, we will be evaluating various strategic alternatives, including, but
not limited to, public or private offerings of securities, one or more possible
joint ventures, and possible asset acquisitions and/or sales.
The foregoing description of the terms and conditions of our agreement
to acquire Shurgard does not purport to be complete, and is qualified in its
entirety by reference to the full text of the merger agreement, a copy of which
is filed with our current report on Form 8-K dated March 7, 2006.
THE HUGHES FAMILY COULD CONTROL US AND TAKE ACTIONS ADVERSE TO OTHER
SHAREHOLDERS.
At May 8, 2006, B. Wayne Hughes, Chairman of the Board, and members of
his family (the "Hughes Family") owned approximately 36% of our outstanding
shares of common stock. Consequently, the Hughes Family could control matters
submitted to a vote of our shareholders, including electing directors, amending
our organizational documents, dissolving and approving other extraordinary
transactions, such as a takeover attempt, even though such actions may not be
favorable to the other common shareholders.
PROVISIONS IN OUR ORGANIZATIONAL DOCUMENTS MAY PREVENT CHANGES IN CONTROL.
Restrictions in our organizational documents may further limit changes
in control. Unless our Board of Directors waives these limitations, no
shareholder may own more than (1) 2.0% of our outstanding shares of our common
stock or (2) 9.9% of the outstanding shares of each class or series of our
preferred or equity stock. Our organizational documents in effect provide,
however, that the Hughes Family may continue to own the shares of our common
stock held by them at the time of the 1995 reorganization. In the event the
Shurgard transaction is completed, the Hughes Family is permitted to acquire
additional Common Stock to maintain their premerger holding percentage. These
limitations are designed, to the extent possible, to avoid a concentration of
ownership that might jeopardize our ability to qualify as a real estate
investment trust or REIT. These limitations, however, also may make a change of
control significantly more difficult (if not impossible) even if it would be
favorable to the interests of our public shareholders. These provisions will
prevent future takeover attempts not approved by our board of directors even if
a majority of our public shareholders deem it to be in their best interests
because they would receive a premium for their shares over the shares' then
market value or for other reasons.
WE WOULD INCUR ADVERSE TAX CONSEQUENCES IF WE OR SHURGARD FAILED TO QUALIFY AS A
REIT.
We have assumed based on public filings that Shurgard has qualified and
will continue to qualify as a REIT following the merger. However, if Shurgard
has failed or fails to qualify as a REIT, we generally would succeed to or incur
significant tax liabilities and possibly lose our REIT status should
disqualifying activities continue after the Shurgard merger.
You will be subject to the risk that we may not qualify as a REIT.
REITs are subject to a range of complex organizational and operational
requirements. As a REIT, we must distribute with respect to each year at least
90% of our REIT taxable income to our shareholders. Other restrictions apply to
our income and assets. Our REIT status is also dependent upon the ongoing
qualification of our affiliate, PS Business Parks, Inc., as a REIT, as a result
of our substantial ownership interest in that company.
For any taxable year that we fail to qualify as a REIT and are unable
to avail ourselves of certain savings provisions set forth in the Code, we would
be subject to federal income tax at the regular corporate rates on all of our
taxable income, whether or not we make any distributions to our shareholders.
Those taxes would reduce the amount of cash available for distribution to our
shareholders or for reinvestment and would adversely affect our earnings. As a
result, our failure to qualify as a REIT during any taxable year could have a
material adverse effect upon us and our shareholders. Furthermore, unless
certain relief provisions apply, we would not be eligible to elect REIT status
again until the fifth taxable year that begins after the first year for which we
fail to qualify.
65
WE MAY PAY SOME TAXES, REDUCING CASH AVAILABLE FOR SHAREHOLDERS.
Even if we qualify as a REIT for federal income tax purposes, we are
required to pay some federal, state and local taxes on our income and property.
Several corporate subsidiaries of the Company have elected to be treated as
"taxable REIT subsidiaries" of the Company for Federal income tax purposes since
January 1, 2001. A taxable REIT subsidiary is taxable as a regular corporation
and is limited in its ability to deduct interest payments made to us in excess
of a certain amount. In addition, if we receive certain payments and the
economic arrangements among our taxable REIT subsidiaries and us are not
comparable to similar arrangements among unrelated parties we will be subject to
a 100% penalty tax on those payments. To the extent that the Company or any
taxable REIT subsidiary is required to pay Federal, state or local taxes, we
will have less cash available for distribution to shareholders.
WE HAVE BECOME INCREASINGLY DEPENDENT UPON AUTOMATED PROCESSES AND THE INTERNET
AND ARE FACED WITH SECURITY SYSTEM RISKS.
We have become increasingly centralized and dependent upon automated
information technology processes. While we have attempted to mitigate this risk
through offsite backup procedures and contracted data centers that include, in
some cases, redundant operations, we could still be severely impacted by a
catastrophic occurrence, such as a natural disaster or a terrorist attack. In
addition, an increasing portion of our business operations are conducted over
the Internet, increasing the risk of viruses that could cause system failures
and disruptions of operations despite our deployment of anti-virus measures.
Experienced computer programmers may be able to penetrate our network security
and misappropriate our confidential information, create system disruptions or
cause shutdowns.
WE AND OUR SHAREHOLDERS ARE SUBJECT TO FINANCING RISKS.
Debt increases the risk of loss. In making real estate investments, we
may borrow money, which increases the risk of loss. At March 31, 2006, our debt
of $141.9 million was 2.6% of our total assets.
Certain securities have a liquidation preference over our common stock
and Equity Stock, Series A. If we liquidated, holders of our preferred
securities would be entitled to receive liquidating distributions, plus any
accrued and unpaid distributions, before any distribution of assets to the
holders of our common stock and Equity Stock, Series A. Holders of preferred
securities are entitled to receive, when declared by our Board of Directors,
cash distributions in preference to holders of our common stock and Equity
Stock, Series A.
SINCE OUR BUSINESS CONSISTS PRIMARILY OF ACQUIRING AND OPERATING REAL ESTATE, WE
ARE SUBJECT TO REAL ESTATE OPERATING RISKS.
The value of our investments may be reduced by general risks of real
estate ownership. Since we derive substantially all of our income from real
estate operations, we are subject to the general risks of owning real
estate-related assets, including:
o lack of demand for rental spaces or units in a locale;
o changes in general economic or local conditions;
o natural disasters, such as earthquakes or hurricanes;
o potential terrorist attacks;
o changes in supply of or demand for similar or competing facilities in
an area;
o the impact of environmental protection laws;
o changes in interest rates and availability of permanent mortgage funds
which may render the sale or financing of a property difficult or
unattractive;
o changes in tax, real estate and zoning laws; and
o tenant claims.
66
In addition, we self-insure certain of our property loss, liability,
and workers compensation risks; areas that other real estate companies may use
third-party insurers for. This results in a higher risk of losses that are not
covered by third-party insurance contracts, as described in Note 16 under
"Insurance and Loss Exposure" to our consolidated financial statements at March
31, 2006.
There is significant competition among self-storage facilities and from
other storage alternatives. Most of our properties are self-storage facilities,
which generated most of our revenue for the three months ended March 31, 2006.
Local market conditions will play a significant part in how competition will
affect us. Competition in the market areas in which many of our properties are
located from other self-storage facilities and other storage alternatives is
significant and has affected the occupancy levels, rental rates and operating
expenses of some of our properties. Any increase in availability of funds for
investment in real estate may accelerate competition. Further development of
self-storage facilities may intensify competition among operators of
self-storage facilities in the market areas in which we operate.
We may incur significant environmental costs and liabilities. As an
owner and operator of real properties, under various federal, state and local
environmental laws, we are required to clean up spills or other releases of
hazardous or toxic substances on or from our properties. Certain environmental
laws impose liability whether or not the owner knew of, or was responsible for,
the presence of the hazardous or toxic substances. In some cases, liability may
not be limited to the value of the property. The presence of these substances,
or the failure to properly remediate any resulting contamination, whether from
environmental or microbial issues, also may adversely affect the owner's or
operator's ability to sell, lease or operate its property or to borrow using its
property as collateral.
We have conducted preliminary environmental assessments of most of our
properties (and intend to conduct these assessments in connection with property
acquisitions) to evaluate the environmental condition of, and potential
environmental liabilities associated with, our properties. These assessments
generally consist of an investigation of environmental conditions at the
property (not including soil or groundwater sampling or analysis), as well as a
review of available information regarding the site and publicly available data
regarding conditions at other sites in the vicinity. In connection with these
property assessments, our operations and recent property acquisitions, we have
become aware that prior operations or activities at some facilities or from
nearby locations have or may have resulted in contamination to the soil or
groundwater at these facilities. In this regard, some of our facilities are or
may be the subject of federal or state environment investigations or remedial
actions. We have obtained, with respect to recent acquisitions, and intend to
obtain with respect to pending or future acquisitions, appropriate purchase
price adjustments or indemnifications that we believe are sufficient to cover
any related potential liability. Although we cannot provide any assurance, based
on the preliminary environmental assessments, we believe we have funds available
to cover any liability from environmental contamination or potential
contamination and we are not aware of any environmental contamination of our
facilities material to our overall business, financial condition or results of
operation.
There has been an increasing number of claims and litigation against
owners and managers of rental properties relating to moisture infiltration,
which can result in mold or other property damage. When we receive a complaint
concerning moisture infiltration, condensation or mold problems and/or become
aware that an air quality concern exists, we implement corrective measures in
accordance with guidelines and protocols we have developed with the assistance
of outside experts. We seek to work proactively with our tenants to resolve
moisture infiltration and mold-related issues, subject to our contractual
limitations on liability for such claims. However, we can provide no assurance
that material legal claims relating to moisture infiltration and the presence
of, or exposure to, mold will not arise in the future.
67
Delays in development and fill-up of our properties would reduce our
profitability. Since January 1, 2002, we have opened 42 newly developed
self-storage facilities and 17 facilities that combine self-storage and
containerized storage space at the same location, with aggregate development
costs of approximately $501.2 million. In addition, at March 31, 2006 we had 54
projects in development that are expected to be completed in approximately the
next two years. These 54 projects have total estimated costs of approximately
$299 million. Construction delays due to weather, unforeseen site conditions,
personnel problems, and other factors, as well as cost overruns, would adversely
affect our profitability. Delays in the rent-up of newly developed facilities as
a result of competition or other factors would also adversely impact our
profitability.
Property taxes can increase and cause a decline in yields on
investments. Each of our properties is subject to real property taxes. These
real property taxes may increase in the future as property tax rates change and
as our properties are assessed or reassessed by tax authorities. Such increases
could adversely impact our profitability.
We must comply with the Americans with Disabilities Act and fire and
safety regulations, which can require significant expenditures. All our
properties must comply with the Americans with Disabilities Act and with related
regulations (the "ADA"). The ADA has separate compliance requirements for
"public accommodations" and "commercial facilities," but generally requires that
buildings be made accessible to persons with disabilities. Various state laws
impose similar requirements. A failure to comply with the ADA or similar state
laws could result in government imposed fines on us and could award damages to
individuals affected by the failure. In addition, we must operate our properties
in compliance with numerous local fire and safety regulations, building codes,
and other land use regulations. Compliance with these requirements can require
us to spend substantial amounts of money, which would reduce cash otherwise
available for distribution to shareholders. Failure to comply with these
requirements could also affect the marketability of our real estate facilities.
Any failure by us to manage acquisitions and other significant
transactions successfully could negatively impact our financial results. As an
increasing part of our business, we acquire other self-storage facilities. We
also evaluate from time to time other significant transactions. If these
facilities are not properly integrated into our system, our financial results
may suffer.
We incur liability from employment related claims. From time to time we
must resolve employment related claims by corporate level and field personnel.
WE HAVE NO INTEREST IN CANADIAN SELF-STORAGE FACILITIES OWNED BY THE HUGHES
FAMILY.
B. Wayne Hughes, Chairman of the Board, and his family (the "Hughes
Family") have ownership interests in, and operate, approximately 44 self-storage
facilities in Canada under the name "Public Storage." We currently do not own
any interests in these facilities nor do we own any facilities in Canada. We
have a right of first refusal to acquire the stock or assets of the corporation
engaged in the operation of the self-storage facilities in Canada if the Hughes
Family or the corporation agrees to sell them. However, we have no ownership
interest in the operations of this corporation, have no right to acquire their
stock or assets unless the Hughes Family decides to sell, and receive no benefit
from the profits and increases in value of the Canadian self-storage facilities.
Prior to December 31, 2003, our personnel were engaged in the
supervision and the operation of these properties and provided certain
administrative services for the Canadian owners, and certain other services,
primarily tax services, with respect to certain other Hughes Family interests.
The Hughes Family and the Canadian owners reimbursed us at cost for these
services in the amount of $542,499 with respect to the Canadian operations and
$151,063 for other services during 2003 (in United States dollars). There were
conflicts of interest in allocating time of our personnel between Company
properties, the Canadian properties, and certain other Hughes Family interests.
The sharing of our personnel with the Canadian entities was substantially
eliminated by December 31, 2003.
Through our subsidiaries, we continue to reinsure risks relating to
loss of goods stored by tenants in the self-storage facilities in Canada. We
acquired the tenant insurance business on December 31, 2001 through our
acquisition of PSIC. For each of the three month periods ended March 31, 2006
and 2005, we collected $259,000 in reinsurance premiums attributable to the
Canadian operations. Since PSIC's right to provide tenant reinsurance to the
Canadian facilities may be qualified, there is no assurance that these premiums
will continue.
68
OUR CONTAINERIZED STORAGE BUSINESS HAS INCURRED OPERATING LOSSES.
Public Storage Pickup & Delivery ("PSPUD") was organized in 1996 to
operate a containerized storage business. We own all of the economic interest of
PSPUD. Since PSPUD will operate profitably only if it can succeed in the
relatively new field of containerized storage, we cannot provide any assurance
as to its profitability. PSPUD incurred an operating loss of $10,058,000 in
2002, and generated operating profits of $2,543,000 in 2003, $684,000 in 2004,
$1,818,000 for 2005 and $360,000 for the three months ended March 31, 2006.
Since 2002, PSPUD closed or consolidated facilities that were deemed not
strategic to its business plan, and has 12 facilities open at March 31, 2006.
INCREASES IN INTEREST RATES MAY ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK.
One of the factors that influences the market price of our common stock
and our other securities is the annual rate of distributions that we pay on the
securities, as compared with interest rates. An increase in interest rates may
lead purchasers of REIT shares to demand higher annual distribution rates, which
could adversely affect the market price of our common stock and other
securities.
TERRORIST ATTACKS AND THE POSSIBILITY OF WIDER ARMED CONFLICT MAY HAVE AN
ADVERSE IMPACT ON OUR BUSINESS AND OPERATING RESULTS AND COULD DECREASE THE
VALUE OF OUR ASSETS.
Terrorist attacks and other acts of violence or war, such as those that
took place on September 11, 2001, could have a material adverse impact on our
business and operating results. There can be no assurance that there will not be
further terrorist attacks against the United States or its businesses or
interests. Attacks or armed conflicts that directly impact one or more of our
properties could significantly affect our ability to operate those properties
and thereby impair our operating results. Further, we may not have insurance
coverage for losses caused by a terrorist attack. Such insurance may not be
available, or if it is available and we decide to obtain such terrorist
coverage, the cost for the insurance may be significant in relationship to the
risk overall. In addition, the adverse effects that such violent acts and
threats of future attacks could have on the United States economy could
similarly have a material adverse effect on our business and results of
operations. Finally, further terrorist acts could cause the United States to
enter into a wider armed conflict, which could further impact our business and
operating results.
DEVELOPMENTS IN CALIFORNIA MAY HAVE AN ADVERSE IMPACT ON OUR BUSINESS.
We are headquartered in, and approximately one-quarter of our
properties are located in, California. California is facing budgetary problems.
Action that may be taken in response to these problems, such as an increase in
property taxes on commercial properties, could adversely impact our business and
results of operations. In addition, we could be adversely impacted by efforts to
reenact legislation mandating medical insurance for employees of California
businesses and members of their families.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
-----------------------------------------------------------
On June 12, 1998, we announced that the Board of Directors (the
"Directors") authorized the repurchase from time to time of up to 10,000,000
shares of the Company's common stock on the open market or in privately
negotiated transactions. On subsequent dates the Directors increased the
repurchase authorization, the last being April 13, 2001, when the Board of
Directors increased the repurchase authorization to 25,000,000 shares. The
Company has repurchased a total of 22,201,720 shares of Common Stock under this
authorization. The Company did not repurchase any shares of Common Stock during
the quarter ended March 31, 2006.
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.
69
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: May 10, 2006
PUBLIC STORAGE, INC.
By: /s/ John Reyes
--------------
John Reyes
Senior Vice President and
Chief Financial Officer
(Principal financial officer
and duly authorized officer)
70
EXHIBIT NO. EXHIBIT INDEX
3.1 Restated Articles of Incorporation of Storage Equities, Inc. Filed
with Registrant's Registration Statement on Form S-4 (SEC File No.
33-54557) and incorporated herein by reference.
3.2 Certificate of Amendment of Articles of Incorporation of Storage
Equities, Inc. Filed with Registrant's Registration Statement on
Form S-3/A (SEC File No. 33-63947) and incorporated herein by
reference.
3.3 Certificate of Amendment of Articles of Incorporation of Public
Storage, Inc. Filed with Registrant's Registration Statement on Form
S-3 (SEC File No. 333-18395) and incorporated herein by reference.
3.4 Certificate of Determination of Preferences of 10% Cumulative
Preferred Stock, Series A of Storage Equities, Inc. Filed with
Registrant's Registration Statement on Form S-4 (SEC File No.
33-54557) and incorporated herein by reference.
3.5 Amendment to Certificate of Determination of Preferences of 10%
Cumulative Preferred Stock, Series A of Public Storage, Inc. Filed
with the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2004 and incorporated herein by
reference.
3.6 Certificate of Determination of Preferences of 9.20% Cumulative
Preferred Stock, Series B of Storage Equities, Inc. Filed with
Registrant's Registration Statement on Form S-4 (SEC File No.
33-54557) and incorporated herein by reference.
3.7 Amendment to Certificate of Determination of Preferences of 9.20%
Cumulative Preferred Stock, Series B of Storage Equities, Inc. Filed
with Registrant's Registration Statement on Form S-4 (SEC File No.
33-56925) and incorporated herein by reference.
3.8 Amendment to Certificate of Determination of Preferences of 9.20%
Cumulative Preferred Stock, Series B of Public Storage, Inc. Filed
with the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2004 and incorporated herein by
reference.
3.9 Certificate of Determination of Preferences of 8.25% Convertible
Preferred Stock of Public Storage, Inc. Filed with Registrant's
Registration Statement on Form S-4 (SEC File No. 33-54557) and
incorporated herein by reference.
3.10 Certificate of Determination of Preferences of Adjustable Rate
Cumulative Preferred Stock, Series C of Storage Equities, Inc. Filed
with Registrant's Registration Statement on Form S-4 (SEC File No.
33-54557) and incorporated herein by reference.
3.11 Amendment to Certificate of Determination of Preferences of
Adjustable Rate Cumulative Preferred Stock, Series C of Public
Storage, Inc. Filed with Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2004 and incorporated
herein by reference.
3.12 Certificate of Determination of Preferences of 9.50% Cumulative
Preferred Stock, Series D of Storage Equities, Inc. Filed with
Registrant's Registration Statement on Form 8-A/A relating to the
9.50% Cumulative Preferred Stock, Series D and incorporated herein
by reference.
3.13 Amendment to Certificate of Determination of Preferences of 9.50%
Cumulative Preferred Stock, Series D of Public Storage, Inc. Filed
with Registrant's Annual Report on Form 10-K for the year ended
December 31, 2004 and incorporated herein by reference.
3.14 Certificate of Determination of Preferences of 10% Cumulative
Preferred Stock, Series E of Storage Equities, Inc. Filed with
Registrant's Registration Statement on Form 8-A/A relating to the
10% Cumulative Preferred Stock, Series E and incorporated herein by
reference.
71
3.15 Amendment to Certificate of Determination of Preferences of 10%
Cumulative Preferred Stock, Series E of Public Storage, Inc. Filed
with Registrant's Current Report on Form 8-K dated April 25, 2005
and incorporated herein by reference.
3.16 Certificate of Determination of Preferences of 9.75% Cumulative
Preferred Stock, Series F of Storage Equities, Inc. Filed with
Registrant's Registration Statement on Form 8-A/A relating to the
9.75% Cumulative Preferred Stock, Series F and incorporated herein
by reference.
3.17 Amendment to Certificate of Determination of Preferences of 9.750%
Cumulative Preferred Stock, Series F of Public Storage, Inc. Filed
with Registrant's Current Report on Form 8-K dated August 17, 2005
and incorporated herein by reference.
3.18 Certificate of Determination of Preferences of 8-7/8% Cumulative
Preferred Stock, Series G of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A/A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 8-7/8%
Cumulative Preferred Stock, Series G and incorporated herein by
reference.
3.19 Certificate of Determination of Preferences of 8.45% Cumulative
Preferred Stock, Series H of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A/A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 8.45%
Cumulative Preferred Stock, Series H and incorporated herein by
reference.
3.20 Certificate of Determination of Preferences of Convertible Preferred
Stock, Series CC of Public Storage, Inc. Filed with Registrant's
Registration Statement on Form S-4 (SEC File No. 333-03749) and
incorporated herein by reference.
3.21 Certificate of Correction of Certificate of Determination of
Preferences of Convertible Participating Preferred Stock of Public
Storage, Inc. Filed with Registrant's Registration Statement on Form
S-4 (SEC File No. 333-08791) and incorporated herein by reference.
3.22 Certificate of Determination of Preferences of 8 5/8% Cumulative
Preferred Stock, Series I of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A/A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 8 5/8%
Cumulative Preferred Stock, Series I and incorporated herein by
reference.
3.23 Certificate of Determination of Equity Stock, Series A of Public
Storage, Inc. Filed with Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1997 and incorporated herein
by reference.
3.24 Certificate of Determination of Preferences of 8% Cumulative
Preferred Stock, Series J of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A/A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 8%
Cumulative Preferred Stock, Series J and incorporated herein by
reference.
3.25 Certificate of Correction of Certificate of Determination of
Preferences of 8.25% Convertible Preferred Stock of Public Storage,
Inc. Filed with Registrant's Registration Statement on Form S-4 (SEC
File No. 333-61045) and incorporated herein by reference.
3.26 Certificate of Determination of Preferences of 8 1/4% Cumulative
Preferred Stock, Series K of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A/A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 8 1/4%
Cumulative Preferred Stock, Series K and incorporated herein by
reference.
3.27 Certificate of Determination of Preferences of 8 1/4% Cumulative
Preferred Stock, Series L of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A/A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 8 1/4%
Cumulative Preferred Stock, Series L and incorporated herein by
reference.
3.28 Certificate of Determination of Preferences of 8.75% Cumulative
Preferred Stock, Series M of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A/A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 8.75%
Cumulative Preferred Stock, Series M and incorporated herein by
reference.
72
3.29 Certificate of Determination of Equity Stock, Series AA of Public
Storage, Inc. Filed with Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1999 and incorporated
herein by reference.
3.30 Certificate Decreasing Shares Constituting Equity Stock, Series A of
Public Storage, Inc. Filed with Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1999 and
incorporated herein by reference.
3.31 Certificate of Determination of Equity Stock, Series A of Public
Storage, Inc. Filed with Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1999 and incorporated
herein by reference.
3.32 Certificate of Amendment of Certificate of Determination of Equity
Stock, Series A of Public Storage, Inc. Filed with Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 2001 and incorporated herein by reference.
3.33 Certificate of Determination of Equity Stock, Series AAA of Public
Storage, Inc. Filed with Registrant's Current Report on Form 8-K
dated November 15, 1999 and incorporated herein by reference.
3.34 Certificate of Determination of Preferences of 9.5% Cumulative
Preferred Stock, Series N of Public Storage, Inc. Filed with
Registrant's Annual Report on Form 10-K for the year ended December
31, 1999 and incorporated herein by reference.
3.35 Certificate of Determination of Preferences of 9.125% Cumulative
Preferred Stock, Series O of Public Storage, Inc. Filed with
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2000 and incorporated herein by reference.
3.36 Certificate of Determination of Preferences of 8.75% Cumulative
Preferred Stock, Series P of Public Storage, Inc. Filed with
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2000 and incorporated herein by reference.
3.37 Certificate of Determination of Preferences of 8.600% Cumulative
Preferred Stock, Series Q of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A/A (No. 001-08389)
relating to the Depositary Shares Each Representing 1/1,000 of a
Share of 8.600% Cumulative Preferred Stock, Series Q and
incorporated herein by reference.
3.38 Certificate of Amendment of Certificate of Determination of Equity
Stock, Series A of Public Storage, Inc. Filed with Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 2001 and incorporated herein by reference.
3.39 Certificate of Determination of Preferences of 8.000% Cumulative
Preferred Stock, Series R of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 8.000%
Cumulative Preferred Stock, Series R and incorporated herein by
reference.
3.40 Certificate of Determination of Preferences of 7.875% Cumulative
Preferred Stock, Series S of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 7.875%
Cumulative Preferred Stock, Series S and incorporated herein by
reference.
3.41 Certificate of Determination of Preferences of 7.625% Cumulative
Preferred Stock, Series T of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 7.625%
Cumulative Preferred Stock, Series T and incorporated herein by
reference.
3.42 Certificate of Determination of Preferences of 7.625% Cumulative
Preferred Stock, Series U of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A relating to
Depositary Shares Each Representing 1/1,000 of a Share of 7.625%
Cumulative Preferred Stock, Series U and incorporated herein by
reference.
73
3.43 Amendment to Certificate of Determination of Preferences of 7.625%
Cumulative Preferred Stock, Series T of Public Storage, Inc. Filed
with Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2002 and incorporated herein by
reference.
3.44 Certificate of Determination of Preferences of 7.500% Cumulative
Preferred Stock, Series V of Public Storage, Inc. Filed with
Registrant's Registration Statement Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 7.500%
Cumulative Preferred Stock, Series V and incorporated herein by
reference.
3.45 Certificate of Determination of Preferences of 6.500% Cumulative
Preferred Stock, Series W of Public Storage, Inc. Filed with
Registrant's Registration Statement Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 6.500%
Cumulative Preferred Stock, Series W and incorporated herein by
reference.
3.46 Certificate of Determination of Preferences 6.450% Cumulative
Preferred Stock, Series X of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 6.450%
Cumulative Preferred Stock, Series X and incorporated herein by
reference.
3.47 Certificate of Determination of Preferences of 6.85% Cumulative
Preferred Stock, Series Y of Public Storage, Inc. Filed with the
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2004 and incorporated herein by reference.
3.48 Certificate of Determination of Preferences of 6.250% Cumulative
Preferred Stock, Series Z of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 6.250%
Cumulative Preferred Stock, Series Z and incorporated herein by
reference.
3.49 Certificate of Determination of Preferences of 6.125% Cumulative
Preferred Stock, Series A of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 6.125%
Cumulative Preferred Stock, Series A and incorporated herein by
reference.
3.50 Certificate of Determination of Preferences of 6.40% Cumulative
Preferred Stock, Series NN of Public Storage, Inc. Filed with
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2004 and incorporated herein by reference.
3.51 Certificate of Determination of Preferences of 7.125% Cumulative
Preferred Stock, Series B of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 7.125%
Cumulative Preferred Stock, Series B and incorporated herein by
reference.
3.52 Certificate of Determination of Preferences of 6.60% Cumulative
Preferred Stock, Series C of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 6.60%
Cumulative Preferred Stock, Series C and incorporated herein by
reference.
3.53 Certificate of Determination of Preferences of 6.18% Cumulative
Preferred Stock, Series D of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 6.18%
Cumulative Preferred Stock, Series D and incorporated herein by
reference.
3.54 Certificate of Determination of Preferences of 6.75% Cumulative
Preferred Stock, Series E of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a share of 6.75%
Cumulative Preferred Stock, Series E and incorporated herein by
reference.
3.55 Certificate of Determination of Preferences of 6.45% Cumulative
Preferred Stock, Series F of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 6.45%
Cumulative Preferred Stock, Series F and incorporated herein by
reference.
74
3.56 Amendment to Certificate of Determination of Preferences 6.45%
Cumulative Preferred Stock, Series F of Public Storage, Inc. Filed
with Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 6.45%
Cumulative Preferred Stock, Series F and incorporated herein by
reference.
3.57 Certificate of Determination of Preferences of 7.00% Cumulative
Preferred Stock, Series G of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 7.00%
Cumulative Preferred Stock, Series G and incorporated herein by
reference.
3.58 Certificate of Determination of Preferences of 6.95% Cumulative
Preferred Stock, Series H of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 6.95%
Cumulative Preferred Stock, Series H and incorporated herein by
reference.
3.59 Certificate of Determination of Preferences of 7.25% Cumulative
Preferred Stock, Series I of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 7.25%
Cumulative Preferred Stock, Series I and incorporated herein by
reference.
3.60 Amendment to Certificate of Determination of Determination of
Preferences of Cumulative Preferred Stock, Series G (8.875%), H
(8.45%), I (8.625%), J (8%), K (8.25%), L (8.25%), M (8.75%), N
(9.5%), O (9.125%) and P (8.75%) of Public Storage, Inc. Filed with
Registrant's Current Report on Form 8-K dated November 22, 2005 and
incorporated herein by reference.
3.61 Revised Bylaws of Storage Equities, Inc. Filed with Registrant's
Registration Statement on Form S-4/A (SEC File No. 33-64971) and
incorporated herein by reference.
3.62 Amendment to Bylaws of Public Storage, Inc. adopted on May 9, 1996.
Filed with Registrant's Registration Statement on Form S-4 (Sec File
No. 333-03749) and incorporated herein by reference.
3.63 Amendment to Bylaws of Public Storage, Inc. adopted on June 26,
1997. Filed with Registrant's Registration Statement on Form S-3/A
(SEC File No. 333-41123) and incorporated herein by reference.
3.64 Amendment to Bylaws of Public Storage, Inc. adopted on January 6,
1998. Filed with Registrant's Registration Statement on Form S-3/A
(SEC File No. 333-41123) and incorporated herein by reference.
3.65 Amendment to Bylaws of Public Storage, Inc. adopted on February 10,
1998. Filed with Registrant's Current Report on Form 8-K dated
February 10, 1998 and incorporated herein by reference.
3.66 Amendment to Bylaws of Public Storage, Inc. adopted on March 4,
1999. Filed with Registrant's Current Report on Form 8-K dated March
4, 1999 and incorporated herein by reference.
3.67 Amendment to Bylaws of Public Storage, Inc. adopted on May 6, 1999.
Filed with Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1999 and incorporated herein by
reference.
3.68 Amendment to Bylaws of Public Storage, Inc. adopted on November 7,
2002. Filed with Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2002 and incorporated herein by
reference.
3.69 Amendment to Bylaws of Public Storage, Inc. adopted on May 8, 2003.
Filed with Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2003 and incorporated herein by
reference.
3.70 Amendment to Bylaws of Public Storage, Inc. adopted on August 5,
2003. Filed with Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2003 and incorporated herein by
reference.
75
3.71 Amendment to Bylaws of Public Storage, Inc. adopted on March 11,
2004. Filed with Registrant's Annual Report on Form 10-K for the
year ended December 31, 2003 and incorporated herein by reference.
10.1. Merger Agreement, dated as of March 6, 2006, by and among Shurgard
Storage Centers, Inc., ASKL Sub LLC and Public Storage, Inc. Filed
with Registrant's Current Report on Form 8-K dated March 6, 2006 and
incorporated herein by reference.
10.2. Voting Agreement, dated as of March 6, 2006, by and among Charles K.
Barbo and Public Storage, Inc.. Filed with Registrant's Current
Report on Form 8-K dated March 6, 2006 and incorporated herein by
reference.
10.3. Deposit Agreement dated as of May 3, 2006 among Registrant and
Computershare Trust Company N.A. and the holders of depositary
receipts evidencing the Depositary Shares Each Representing 1/1,000
of a share of 7.25% Cumulative Preferred Stock, Series I. Filed with
Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 7.25%
Cumulative Preferred Stock, Series I 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.
Filed herewith.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
Filed herewith.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
Filed herewith.
32 Section 1350 Certification of Chief Executive Officer and Chief
Financial Officer. Filed herewith
76