SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2007
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to ______________.
Commission File Number: 001-33519
PUBLIC STORAGE
(Exact name of registrant as specified in its charter)
Maryland 95-3551121
------------------------------- ---------------------------------------
(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 the registrant's outstanding common shares of beneficial
interest, as of August 6, 2007:
Common Shares of beneficial interest, $.10 par value per share - 170,513,010
shares
PUBLIC STORAGE
INDEX
PART I. FINANCIAL INFORMATION Pages
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at
June 30, 2007 and December 31, 2006 1
Condensed Consolidated Statements of Income for the
Three and Six Months Ended June 30, 2007 and 2006 2
Condensed Consolidated Statement of Shareholders' Equity
for the Six Months Ended June 30, 2007 3
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2007 and 2006 4-5
Notes to Condensed Consolidated Financial Statements 6-39
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 40-78
Item 3. Quantitative and Qualitative Disclosures about Market Risk 78-79
Item 4. Controls and Procedures 79-80
PART II. OTHER INFORMATION (Items 3 and 5 are not applicable)
Item 1. Legal Proceedings 81
Item 1A. Risk Factors 81
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 81
Item 4. Submission of Matters to a Vote of Security Holders 81
Item 6. Exhibits 82
PUBLIC STORAGE
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
June 30, December 31,
2007 2006
----------------- ----------------
(Unaudited)
ASSETS
Cash and cash equivalents.................................................... $ 46,743 $ 535,684
Real estate facilities, at cost:
Land...................................................................... 2,969,994 2,959,875
Buildings................................................................. 8,369,584 8,301,990
----------------- ----------------
11,339,578 11,261,865
Accumulated depreciation.................................................. (1,940,189) (1,754,362)
----------------- ----------------
9,399,389 9,507,503
Construction in process................................................... 98,645 90,038
----------------- ----------------
9,498,034 9,597,541
Investment in real estate entities........................................... 321,208 301,905
Goodwill..................................................................... 174,634 174,634
Intangible assets, net....................................................... 260,015 414,602
Restricted cash.............................................................. 20,206 19,900
Other assets................................................................. 156,268 154,207
----------------- ----------------
Total assets................................................... $ 10,477,108 $ 11,198,473
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings on bank credit facilities......................................... $ 70,000 $ 345,000
Notes payable................................................................ 981,018 1,466,284
Debt to joint venture partner................................................ 37,350 37,258
Preferred stock called for redemption........................................ - 302,150
Accrued and other liabilities................................................ 326,985 333,706
----------------- ----------------
Total liabilities................................................... 1,415,353 2,484,398
Minority interest:
Preferred partnership interests........................................... 325,000 325,000
Other partnership interests............................................... 178,124 181,030
Commitments and contingencies (Note 15)
Shareholders' equity:
Cumulative Preferred Shares of beneficial interest, $0.01 par value,
100,000,000 shares authorized, 1,732,600 shares issued (in series) and
outstanding, (1,712,600 at December 31, 2006) at liquidation preference. 3,355,000 2,855,000
Common Shares of beneficial interest, $0.10 par value, 650,000,000 shares
authorized, 169,360,999 shares issued and outstanding (169,144,467 at
December 31, 2006)...................................................... 16,937 16,915
Equity Shares of beneficial interest, Series A, $0.01 par value, 100,000,000
shares authorized, 8,744.193 shares issued and outstanding.............. - -
Paid-in capital........................................................... 5,655,666 5,661,507
Cumulative net income..................................................... 3,640,174 3,503,292
Cumulative distributions paid............................................. (4,144,819) (3,847,998)
Accumulated other comprehensive income.................................... 35,673 19,329
----------------- ----------------
Total shareholders' equity.......................................... 8,558,631 8,208,045
----------------- ----------------
Total liabilities and shareholders' equity..................... $ 10,477,108 $ 11,198,473
================= ================
See accompanying notes.
1
PUBLIC STORAGE
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- ----------------------------------
2007 2006 2007 2006
--------------- -------------- -------------- ----------------
Revenues:
Self-storage rental income.............................. $ 411,216 $ 262,232 $ 809,997 $ 513,579
Ancillary operating revenue............................. 36,977 25,582 70,438 47,678
Interest and other income............................... 955 10,047 3,080 15,122
--------------- -------------- -------------- ----------------
449,148 297,861 883,515 576,379
--------------- -------------- -------------- ----------------
Expenses:
Cost of operations (excluding depreciation and amortization):
Self-storage facilities.............................. 149,366 89,395 298,286 177,098
Ancillary operations................................. 21,743 17,150 42,744 32,424
Depreciation and amortization............................ 167,601 48,580 344,082 98,608
General and administrative............................... 21,465 6,975 37,981 13,754
Interest expense......................................... 16,707 1,872 33,515 3,429
--------------- -------------- -------------- ----------------
376,882 163,972 756,608 325,313
--------------- -------------- -------------- ----------------
Income from continuing operations before equity in earnings of
real estate entities, casualty gain, gain on disposition of
real estate investments, foreign currency exchange gain,
income from derivatives and
minority interest in income............................. 72,266 133,889 126,907 251,066
Equity in earnings of real estate entities................. 2,782 3,124 6,759 6,590
Casualty gain ............................................. - - 2,665 -
Gain on disposition of real estate investments............. 2,238 466 2,238 466
Foreign currency exchange gain............................. 5,553 - 10,593 -
Income from derivatives, net............................... 1,771 - 1,009 -
Minority interest in income................................ (7,524) (8,728) (13,307) (15,887)
--------------- -------------- -------------- ----------------
Income from continuing operations.......................... 77,086 128,751 136,864 242,235
Cumulative effect of a change in accounting principle...... - - - 578
Discontinued operations.................................... 18 111 18 265
--------------- -------------- -------------- ----------------
Net income................................................. $ 77,104 $ 128,862 $ 136,882 $ 243,078
=============== ============== ============== ================
Net income allocation:
----------------------
Allocable to preferred shareholders..................... $ 57,315 $ 52,376 $ 116,091 $ 98,991
Allocable to Equity Shares, Series A.................... 5,356 5,356 10,712 10,712
Allocable to common shareholders........................ 14,433 71,130 10,079 133,375
--------------- -------------- -------------- ----------------
$ 77,104 $ 128,862 $ 136,882 $ 243,078
=============== ============== ============== ================
Net income per common share - basic
Continuing operations................................... $ 0.09 $ 0.55 $ 0.06 $ 1.04
Discontinued operations................................. - - - -
--------------- -------------- -------------- ----------------
$ 0.09 $ 0.55 $ 0.06 $ 1.04
=============== ============== ============== ================
Net income per common share - diluted
Continuing operations................................... $ 0.08 $ 0.55 $ 0.06 $ 1.03
Discontinued operations................................. - - - -
--------------- -------------- -------------- ----------------
$ 0.08 $ 0.55 $ 0.06 $ 1.03
=============== ============== ============== ================
Net income per depositary share representing Equity
Shares, Series A (basic and diluted) ................... $ 0.61 $ 0.61 $ 1.23 $ 1.23
=============== ============== ============== ================
Basic weighted average common shares outstanding........... 169,346 128,180 169,288 128,151
=============== ============== ============== ================
Diluted weighted average common shares outstanding......... 170,213 129,062 170,275 129,037
=============== ============== ============== ================
Weighted average Equity Shares, Series A (basic and
diluted) ............................................... 8,744 8,744 8,744 8,744
=============== ============== ============== ================
See accompanying notes.
2
PUBLIC STORAGE
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands, except share data)
(Unaudited)
Cumulative Cumulative Net
Preferred Shares Common Shares Paid-in Capital Income
----------------- --------------- ---------------- ---------------
Balance at December 31, 2006.............................. $ 2,855,000 $ 16,915 $ 5,661,507 $ 3,503,292
Issuance of cumulative preferred shares:
Series M (20,000 shares)............................. 500,000 - (15,233) -
Issuance of common shares in connection with:
Exercise of employee stock options (177,938 shares).... - 18 7,107 -
Vesting of restricted shares (38,594 shares) .......... - 4 (4) -
Stock-based compensation expense (Note 13) ............... - - 2,289 -
Net income................................................ - - - 136,882
Cash distributions:
Cumulative preferred shares (Note 11).................. - - - -
Equity Shares, Series A ($1.225 per depositary share).. - - - -
Common Shares ($1.00 per share)........................ - - - -
Accumulated other comprehensive income:
Foreign currency translation adjustments............... - - - -
----------------- --------------- ---------------- ---------------
Balance at June 30, 2007.................................. $ 3,355,000 $ 16,937 $ 5,655,666 $ 3,640,174
================= =============== ================ ===============
Accumulated
Other Total
Cumulative Comprehensive Shareholders'
Distributions Income Equity
--------------- --------------- ---------------
Balance at December 31, 2006.............................. $ (3,847,998) $ 19,329 $ 8,208,045
Issuance of cumulative preferred shares:
Series M (20,000 shares)............................. - - 484,767
Issuance of common shares in connection with:
Exercise of employee stock options (177,938 shares).... - - 7,125
Vesting of restricted shares (38,594 shares) .......... - - -
Stock-based compensation expense (Note 13) ............... - - 2,289
Net income................................................ - - 136,882
Cash distributions:
Cumulative preferred shares (Note 11).................. (116,091) - (116,091)
Equity Shares, Series A ($1.225 per depositary share).. (10,712) - (10,712)
Common Shares ($1.00 per share)........................ (170,018) - (170,018)
Accumulated other comprehensive income:
Foreign currency translation adjustments............... - 16,344 16,344
--------------- --------------- ---------------
Balance at June 30, 2007.................................. $ (4,144,819) $ 35,673 $ 8,558,631
=============== =============== ===============
See accompanying notes.
3
PUBLIC STORAGE
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
For the Six Months Ended
June 30,
----------------------------------
2007 2006
----------------- ----------------
Cash flows from operating activities:
Net income............................................................... $ 136,882 $ 243,078
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of note premium, net of increase in debt to joint venture
partner (Notes 7 and 8).............................................. (2,329) (474)
Gain on sales of real estate and real estate investments (Notes 4 and 14) (2,238) (466)
Depreciation and amortization........................................... 344,082 98,608
Equity in earnings of real estate entities.............................. (6,759) (6,590)
Foreign currency exchange gain.......................................... (10,593) -
Income from derivatives, net............................................ (1,009) -
Distributions received from the real estate entities (Note 5)........... 10,535 10,415
Minority interest in income............................................. 13,307 15,887
Other operating activities.............................................. (2,756) 6,783
----------------- ----------------
Total adjustments.................................................... 342,240 124,163
----------------- ----------------
Net cash provided by operating activities............................ 479,122 367,241
----------------- ----------------
Cash flows from investing activities:
Capital improvements to real estate facilities ......................... (28,807) (23,449)
Construction in process................................................. (47,329) (37,936)
Acquisition of real estate facilities................................... (28,844) (98,954)
(Deconsolidation) consolidation of partnerships (Note 2)................ (65) 3,024
Proceeds from sales of real estate...................................... 2,242 5,436
Sale of real estate investments to affiliates........................... 4,909 -
Additions to restricted cash............................................ (306) (3,358)
Proceeds from sales of held-to-maturity debt securities (Note 2)........ 5,766 7,743
----------------- ----------------
Net cash used in investing activities................................ (92,434) (147,494)
----------------- ----------------
Cash flows from financing activities:
Principal payments on notes payable..................................... (502,134) (13,013)
Net repayments on bank credit facilities................................ (275,000) -
Proceeds from borrowings on European notes payable...................... 32,039 -
Net proceeds from the issuance of common shares......................... 7,125 3,339
Net proceeds from the issuance of cumulative preferred shares........... 484,767 603,093
Redemption of cumulative preferred shares............................... (302,150) (172,500)
Issuance of preferred partnership interests............................. - 100,000
Distributions paid to shareholders...................................... (296,821) (238,298)
Distributions paid to holders of preferred partnership interests
(Note 10)............................................................ (10,806) (8,249)
Distributions paid to other minority interests.......................... (10,357) (7,348)
----------------- ----------------
Net cash (used in) provided by financing activities.................. (873,337) 267,024
----------------- ----------------
Net (decrease) increase in cash and cash equivalents........................ (486,649) 486,771
Net effect of foreign exchange translation on cash.......................... (2,292) -
----------------- ----------------
Cash and cash equivalents at the beginning of the year...................... 535,684 481,995
----------------- ----------------
Cash and cash equivalents at the end of the period.......................... $ 46,743 $ 968,766
================= ================
See accompanying notes.
4
PUBLIC STORAGE
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:
Minority interest - other partnership interests......................... - 3,963
Real estate facilities.................................................. - (22,459)
Investments in real estate entities..................................... - 20,687
Other assets............................................................ - (167)
Accrued and other liabilities........................................... - 841
Foreign currency translation adjustment:
Real estate facilities, net of accumulated depreciation.............. (23,790) -
Construction in process.............................................. (785) -
Intangible assets, net............................................... (3,470) -
Other assets......................................................... (1,072) -
Notes payable........................................................ 6,579 -
Accrued and other liabilities........................................ 1,985 -
Minority interest - other partnership interests...................... 1,917 -
Accumulated other comprehensive income............................... 16,344 -
Deconsolidation of real estate entities:
Real estate facilities, net of accumulated depreciation.............. 41,409 -
Investment in real estate entities................................... (23,079) -
Intangible assets, net............................................... 1,816 -
Other assets......................................................... 344 -
Notes payable........................................................ (19,329) -
Accrued and other liabilities........................................ (544) -
Minority interests .................................................. (682) -
See accompanying notes.
5
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
1. Description of the Business
---------------------------
Public Storage Inc., formerly a California corporation was organized in
1980. Effective June 1, 2007, following approval by our shareholders, we
reorganized Public Storage, Inc. into Public Storage, a Maryland real
estate investment trust (referred to herein as "the Company", "the Trust",
"we", "us", or "our". We are a fully integrated, self-administered and
self-managed real estate investment trust ("REIT") whose principal business
activities include the acquisition, development, ownership and operation of
self-storage facilities which offer storage spaces for lease, generally on
a month-to-month basis, for personal and business use. Our self-storage
facilities are located primarily in the United States. As a result of the
merger with Shurgard Storage Centers, Inc. ("Shurgard") on August 22, 2006,
we have self-storage facilities located in several Western European
countries (Note 3).
In addition to our self-storage facilities, we own (i) interests in
commercial properties containing commercial and industrial rental space,
(ii) interests in facilities that lease storage containers, and (iii) other
ancillary operations conducted at our self-storage locations comprised
principally of reinsurance of policies against losses to goods stored by
our self-storage tenants, retail sales of storage related products and
truck rentals.
At June 30, 2007, we had direct and indirect equity interests in 2,006
self-storage facilities located in 38 states operating under the "Public
Storage" name, and 168 self-storage facilities located in seven Western
European nations which operate under the "Shurgard Storage Centers" name.
We also have direct and indirect equity interests in approximately 20
million net rentable square feet of commercial space located in 11 states
in the United States.
Any reference to the number of properties, square footage, number of
tenant reinsurance policies outstanding and the aggregate coverage of such
reinsurance policies are unaudited and outside the scope of our independent
registered public accounting firm's review of our financial statements in
accordance with the standards of the Public Company Accounting Oversight
Board (United States).
2. Summary of Significant Accounting Policies
------------------------------------------
Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with U.S. generally accepted accounting
principles ("GAAP") for interim financial information and the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and notes required by GAAP for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal and recurring adjustments) considered necessary for a
fair presentation have been reflected in these unaudited condensed
consolidated financial statements. Operating results for the three and six
months ended June 30, 2007 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2007. The accompanying
unaudited condensed consolidated financial statements should be read
together with the consolidated financial statements and related notes
included in the Company's Annual Report on Form 10-K (and amendments
thereto) for the year ended December 31, 2006.
Certain amounts previously reported have been reclassified to conform
to the June 30, 2007 presentation. In previous presentations, certain cash
balances held by our captive insurance entities which are restricted as to
their use were included in cash and cash equivalents on the Company's
condensed consolidated balance sheets. These restricted balances are
reclassified as "restricted cash" (see also "Restricted Cash" below). In
6
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
previous presentations, revenues and cost of operations with respect to our
Commercial facilities and Containerized Storage facilities were reported on
separate lines on our condensed consolidated statements of income. In our
current presentation, revenues with respect to each of these operations,
along with revenues from our tenant reinsurance, retail, truck and property
management 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 accompanying condensed
consolidated statements of income. Certain reclassifications have also been
made from previous presentations as a result of discontinued operations.
Consolidation Policy
--------------------
Entities in which we have an interest are first evaluated to determine
whether, in accordance with the provisions of the Financial Accounting
Standards Board's Interpretation No. 46R, "Consolidation of Variable
Interest Entities," they represent Variable Interest Entities ("VIE's").
VIE's in which we are the primary beneficiary are consolidated. Entities
that are not VIE's that we control are consolidated.
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.
The accounts of the entities we control along with the accounts of the
VIE's that we are the primary beneficiary of are included in our
consolidated financial statements along with those of the Company. We
account for our investment in entities that we do not control, or entities
that we are not the primary beneficiary of, using the equity method of
accounting. Changes in consolidation status are reflected effective the
date the change of control or determination of primary beneficiary status
occurred, and previously reported periods are not restated. The entities
that we consolidate during the periods to which the reference applies, are
referred to hereinafter as the "Consolidated Entities." The entities that
we have an interest in but do not consolidate during the periods to which
the reference applies, are referred to hereinafter as the "Unconsolidated
Entities."
Collectively, at June 30, 2007, the Company and the Consolidated
Entities own a total of 2,150 real estate facilities, consisting of 1,973
self-storage facilities in the United States, 168 facilities in Europe,
three industrial facilities used by the containerized storage operations
and six commercial properties.
At June 30, 2007, the Unconsolidated Entities are comprised of our
equity investments in various limited and joint venture partnerships owning
an aggregate of 33 self-storage facilities, as well as our ownership of
approximately 44% of the common equity of PS Business Parks, Inc. ("PSB"),
which has interests in approximately 19.4 million net rentable square feet
of commercial space at June 30, 2007.
Deconsolidation of Certain Entities
-----------------------------------
On May 24, 2007, a judgment was rendered which resulted in our losing
effective control over several entities that we had acquired an interest in
connection with the acquisition of Shurgard Storage Centers. These entities
owned 11 facilities with approximately 624,000 net rentable square feet at
June 30, 2007. Because of our loss of control, we discontinued
consolidation of these entities and therefore began to account for them on
the equity method, effective the date of the judgment. Notwithstanding our
loss of control, we continue to retain all of our previous financial
interests in these partnerships.
The deconsolidation of these entities resulted in an increase in
Investment in Real Estate Entities of $23,079,000, and adjustments to the
following balance sheet accounts, representing the balance sheet amounts of
these entities:
7
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
Total
---------
Real estate facilities, net.. $(41,409)
Intangible assets............ (1,816)
Cash......................... (65)
Other assets................. (344)
Debt......................... 19,329
Accrued and other liabilities 544
Minority interest ........... 682
---------
$(23,079)
=========
Use of Estimates
----------------
The preparation of the consolidated financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect
the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
Income Taxes
------------
For all taxable years subsequent to 1980, the Company qualified and
intends to continue to qualify as a REIT, as defined in Section 856 of the
Internal Revenue Code. As a REIT, we do not incur federal or significant
state tax on that portion of our taxable income which is distributed to our
shareholders, provided that we meet certain tests. We believe we will meet
these tests during 2007 and, accordingly, no provision for income taxes has
been made in the accompanying condensed consolidated financial statements
on income produced and distributed on real estate rental operations.
Financial Instruments
---------------------
We have estimated the fair value of our financial instruments using
available market information and appropriate valuation methodologies.
Considerable judgment is required in interpreting market data to develop
estimates of market value. Accordingly, estimated fair values are not
necessarily indicative of the amounts that could be realized in current
market exchanges.
For purposes of financial statement presentation, we consider all
highly liquid financial instruments such as short-term treasury securities
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.
Financial assets that are exposed to credit risk consist primarily of
cash and cash equivalents and accounts receivable. Cash and cash
equivalents, consisting of short-term investments, including commercial
paper, are only invested in entities with an investment grade rating.
Accounts receivable are not a significant portion of total assets and are
comprised of a large number of small individual customer balances.
Due to the acquisition of European subsidiaries in the merger with
Shurgard, the results of our operations and our financial position are
affected by the fluctuations in the value of the euro, and to a lesser
extent, other European currencies, against the U.S. dollar. Also, we are
exposed to foreign currency exchange risk related to intercompany
transactions, including debt, with or between our European subsidiaries.
8
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
Other assets at June 30, 2007 include investments totaling $998,000
($6,764,000 at December 31, 2006) representing held-to-maturity Federal
government agency securities stated at amortized cost, which approximates
fair value. Other assets at June 30, 2007 also include derivative financial
instruments totaling $5,415,000 ($11,810,000 at December 31, 2006) reported
at estimated fair value. See Note 9 for further discussion of the fair
value of our derivative financial instruments.
Restricted Cash
---------------
Restricted cash at June 30, 2007 and December 31, 2006, consists of
cash held by our captive insurance entities which, due to insurance and
other regulations with respect to required reserves and minimum capital
requirements, can only be utilized to pay captive claims.
Real Estate Facilities
----------------------
Real estate facilities are recorded at cost. Costs associated with the
acquisition, development, construction, renovation, and improvement of
properties are capitalized. Interest, property taxes, and other costs
associated with development incurred during the construction period are
capitalized as building cost. Costs associated with the sale of real estate
facilities or interests in real estate investments are expensed as
incurred. Expenditures for repairs and maintenance 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.
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, 2006.
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 impairment was identified from our
evaluations as of June 30, 2007.
9
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
Accounting for Stock-Based Compensation
---------------------------------------
We utilize the Fair Value Method (as defined in Note 13) of accounting
for our employee stock options. Restricted share unit expense is recorded
over the relevant vesting period. See Note 13 for a discussion of our
accounting with respect to employee share options and restricted share
units.
Other Assets
------------
Other assets primarily consists of prepaid expenses, investments in
held-to-maturity debt securities, accounts receivable, assets associated
with our containerized storage business, merchandise inventory and rental
trucks. Included in other assets is approximately $64 million and $65
million at June 30, 2007 and December 31, 2006, respectively, from our
European operations.
Accrued and Other Liabilities
-----------------------------
Accrued and other liabilities consist primarily of real property tax
accruals, value-added tax accruals with respect to our European operations,
prepayments of rents, trade payables, losses and loss adjustment
liabilities for our self-insured risks (described below), and accrued
interest. Prepaid rent totaled $69,021,000 at June 30, 2007 ($64,291,000 at
December 31, 2006), while property and value-added tax accruals
approximated $91,303,000 at June 30, 2007 ($80,336,000 at December 31,
2006).
We are self-insured for a portion of the risks associated with our
property and casualty losses, workers compensation, and employee health
care. We also utilize third-party insurance carriers to limit our self
insurance exposure. We accrue liabilities for uninsured losses and loss
adjustment expense, which at June 30, 2007 totaled $31,564,000 ($31,532,000
at December 31, 2006). 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.
Through a wholly-owned subsidiary, we reinsure policies against claims
for losses to goods stored by tenants in our self-storage facilities. For
our United States operations, we have third-party insurance coverage for
losses from any individual event that exceeds a loss of $1,500,000, to a
maximum of $9,000,000. Estimated uninsured losses are accrued as ancillary
costs of operations.
While we believe that the amount of estimated accrued liabilities with
respect to tenant claims, property, casualty, workers compensation, and
employee healthcare are adequate, the ultimate losses that are actually
paid may be different than what we have accrued. The methods for making
such estimates and for establishing the resulting liabilities are regularly
reviewed.
Included in accrued and other liabilities is $94,203,000 and
$108,331,000 at June 30, 2007 and December 31, 2006, respectively, from our
European operations.
Goodwill and Intangible Assets
------------------------------
Goodwill represents the excess of acquisition cost over the fair value
of net tangible and identifiable intangible assets acquired in business
combinations. Each business combination from which our goodwill arose was
for the acquisition of single businesses and accordingly, the allocation of
10
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
our goodwill to our business segments (principally Domestic Self-Storage)
is based directly on such acquisitions. Our goodwill has an indeterminate
life in accordance with the provisions of Statement of Financial Accounting
Standards No. 142 ("SFAS 142").
As a result of the merger with Shurgard (Note 3), we acquired
finite-lived intangible assets comprised primarily of tenant intangibles
valued at $565,341,000 and the "Shurgard" tradename, which we continue to
use in Europe, valued at $18,824,000. Our intangible assets were increased
by $3,470,000 during the six months ended June 30, 2007 due to the impact
of changes in exchange rates. During the six months ended June 30, 2007,
our intangible assets increased $910,000 for storage tenants in place with
respect to self-storage facility acquisitions. Also during the six months
ended June 30, 2007, our intangible assets decreased $1,816,000 in
connection with the deconsolidation of our investment in certain real
estate entities (Note 5). Our finite-lived intangible assets are reported
net of accumulated amortization of $333,095,000 as of June 30, 2007
($175,944,000 as of December 31, 2006).
The tenant intangible assets are amortized relative to the expected
benefit of the tenants in place to each period and relative to the benefit
of the below-market leases. The Shurgard tradename has an indefinite life
and, accordingly, we do not amortize this asset but instead analyze it on
an annual basis for impairment.
Amortization expense of $71,367,000 and $157,151,000 was recorded for
our finite-lived intangible assets for the three and six months ended June
30, 2007, respectively. The estimated annual amortization expense for our
finite-lived intangible assets for the current year and each of the next
four years ending December 31 is as follows:
2007 (remainder of) $ 89,220,000
2008 73,286,000
2009 24,001,000
2010 14,713,000
2011 11,463,000
2012 and beyond 28,508,000
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 and amount of expense
recognition could be affected.
Cost of operations, general and administrative expense, interest
expense, as well as television, yellow page, and other advertising
expenditures are expensed as incurred.
During the second quarter of 2007, a share offering of Shurgard Europe,
our European operations, was initiated to be listed on Eurolist of
EuronextTM Brussels. Due to adverse market conditions, this offering was
withdrawn on June 21, 2007. There is no estimate as to when or if a future
offering may occur. We incurred $9.6 million in expenses related to our
proposed offering of shares which is included in general and administrative
expense for the three and six months ended June 30, 2007.
11
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
Foreign Exchange Translation
----------------------------
The local currency is the functional currency for our European
subsidiaries. Assets and liabilities (other than for intercompany balances,
which are discussed below) are translated at end-of-period exchange rates
while revenues and expenses are translated at the average exchange rates in
effect during the period. The Euro was translated at an end-of-period
exchange rate of approximately 1.347 in US dollars per Euro at June 30,
2007 (1.333 at December 31, 2006). Equity is translated at historical rates
and the resulting cumulative translation adjustments are included as a
component of accumulated other comprehensive income (loss) until the
translation adjustments are realized. Included in other accumulated
comprehensive income was a cumulative foreign currency translation
adjustment gain of $35,673,000 at June 30, 2007 ($19,329,000 at December
31, 2006).
With respect to intercompany balances among our European subsidiaries
and our domestic operations, when settlement of such intercompany balances
are not expected in the near term (generally within one year), the impact
of end-of-period exchange rate changes on the expected settlement amounts
in U.S. Dollars are reflected in accumulated other comprehensive income
(loss). However, for any other intercompany balances where settlement is
expected in the foreseeable future, changes in exchange rates are recorded
in income in the period in which the change occurs. For the three and six
months ended June 30, 2007, we recorded foreign currency exchange gains of
$5,553,000 and $10,593,000, respectively, on our condensed consolidated
statement of income, principally related to such intercompany balances.
Substantially all of such intercompany balances are expected to settle in
the foreseeable future. At June 30, 2007 and December 31, 2006, our
European subsidiaries had intercompany balances payable to our United
States operations totaling $503,295,000 and $521,072,000, respectively.
Accounting for Casualty Losses
------------------------------
Our policy is to record casualty losses or gains in the period the
casualty occurs equal to the differential between (a) the book value of
assets destroyed and (b) insurance proceeds, if any, that we expect to
receive in accordance with our insurance contracts. Potential insurance
proceeds that are subject to uncertainties, such as interpretation of
deductible provisions of the governing agreements or the estimation of
costs of restoration, are treated as contingent proceeds in accordance with
Statement of Financial Accounting Standards No. 5 ("SFAS 5"), and not
recorded until the uncertainties are satisfied. During the first quarter of
2007, we recorded a casualty gain totaling $2,665,000, representing the
realization of such contingent proceeds relating to hurricanes which
occurred in 2005.
Derivative Financial Instruments
--------------------------------
We have certain derivative financial instruments held by our two joint
ventures in Europe, including interest rate caps, interest rate swaps,
cross-currency swaps and foreign currency forward contracts. These
derivatives were entered into by the joint ventures in order to mitigate
currency and exchange rate fluctuation risk in connection with European
borrowings, and are not for speculative or trading purposes.
In accordance with the provisions of Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Financial Instruments and
Hedging Activities ("SFAS 133"), derivative financial instruments are
measured at fair value and recognized on the balance sheet as assets or
liabilities.
As of June 30, 2007, none of the derivatives were considered effective
hedges because we believe it is not highly likely that the debt and the
related derivative instruments will remain outstanding for their entire
contractual period. Accordingly, all changes in the fair values of the
derivatives are reflected in earnings, along with the related cash flows
from these instruments, under "Income from derivatives, net" on our
condensed consolidated statements of income.
12
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
Other Comprehensive Income
--------------------------
Our comprehensive income is as follows (amounts in thousands):
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
2007 2006 2007 2006
---------- --------- --------- ----------
Net income............... $ 77,104 $ 128,862 $ 136,882 $ 243,078
Accumulated other
comprehensive income:
Foreign currency
translation adjustment 5,933 - 16,344 -
---------- --------- --------- ----------
Total comprehensive income $ 83,037 $ 128,862 $ 153,226 $ 243,078
========== ========= ========= ==========
The foreign currency translation adjustments reflected in the above
table represent the net currency translation adjustment gains and losses
related to our European subsidiaries, which have not been reflected in net
income, measured as from December 31, 2006 through June 30, 2007.
Environmental Costs
-------------------
Our policy is to accrue environmental assessments and estimated
remediation costs when it is probable that such efforts will be required
and the related costs can be reasonably estimated. Our current practice is
to conduct environmental investigations in connection with property
acquisitions. Although there can be no assurance, we are not aware of any
environmental contamination of our facilities, which individually or in the
aggregate would be material to our overall business, financial condition,
or results of operations.
Discontinued Operations
-----------------------
We segregate all of our disposed components that have operations that
can be distinguished from the rest of the Company and will be eliminated
from the ongoing operations of the Company in a disposal transaction.
Discontinued operations principally consists of the historical operations
related to facilities that were closed and are no longer in operation and
facilities that have been disposed of either through condemnation by a
local governmental agency or sale. In each of the three and six months
ended June 30, 2007, income from discontinued operations totaled $18,000.
Net Income per Common Share
---------------------------
In computing net income allocated to our common shareholders, we first
allocate net income to our preferred shareholders. Distributions paid to
the holders of our Cumulative Preferred Shares totaling $57,315,000 and
$116,091,000 for the three and six months ended June 30, 2007,
respectively, and $52,376,000 and $98,991,000 for the three and six months
ended June 30, 2006, respectively, have been deducted from net income to
arrive at net income allocable to our common shareholders.
When we call any of our Cumulative Preferred Shares for redemption, we
record an additional allocation of income to our preferred shareholders
equal to the excess of a) the cash required to redeem the securities and b)
the "Book Value" (the net proceeds from the original issuance of the
securities) of the securities. No such additional allocations were recorded
in the three or six months ended June 30, 2007 or 2006.
The remaining income allocated to our common shareholders has been
further allocated among our our regular common shares and our Equity
Shares, Series A. The allocation among each class was based upon the
13
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
two-class method. Under the two-class method, earnings per share for each
class of common shares are determined according to dividends declared (or
accumulated) and participation rights in undistributed earnings. Under the
two-class method, the Equity Shares, Series A, was allocated net income of
$5,356,000 and $10,712,000 for each of the three and six months ended June
30, 2007 and 2006, respectively. Income of $14,433,000 and $10,079,000 for
the three and six months ended June 30, 2007, respectively, and income of
$71,130,000 and $133,375,000 for the three and six months ended June 30,
2006, 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 share units outstanding). Diluted net income per common
share is computed using the weighted average common shares outstanding
(adjusted for the impact if dilutive, of stock options and restricted share
units outstanding). Weighted average common shares excludes shares owned by
the Consolidated Entities as described in Note 11 for all periods
presented, as these common shares are eliminated in consolidation.
Recently Issued Accounting Standards
------------------------------------
The Fair Value Option for Financial Assets and Financial
------------------------------------------------------------------
Liabilities
-----------
In February 2007, the Financial Accounting Standards Board (the
"FASB") issued SFAS No. 159, "The Fair Value Option for Financial Assets
and Financial Liabilities, including an amendment of FASB Statement No.
115" ("SFAS No. 159"). SFAS No. 159 provides companies with an option to
report selected financial assets and liabilities at fair value. The
standard establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. SFAS No. 159 is
effective as of the beginning of an entity's first fiscal year beginning
after November 15, 2007. We do not expect the adoption of SFAS No. 159 to
have a material impact on our financial condition or results of operations.
Accounting for Uncertainty in Income Taxes
------------------------------------------
In July 2006, the FASB issued Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes" ("FIN 48"). This interpretation, among
other things, creates a two step approach for evaluating uncertain tax
positions. Recognition (step one) occurs when an enterprise concludes that
a tax position, based solely on its technical merits, is
more-likely-than-not to be sustained upon examination. Measurement (step
two) determines the amount of benefit that more-likely-than-not will be
realized upon settlement. Derecognition of a tax position that was
previously recognized would occur when a company subsequently determines
that a tax position no longer meets the more-likely-than-not threshold of
being sustained. FIN 48 specifically prohibits the use of a valuation
allowance as a substitute for derecognition of tax positions, and it has
expanded disclosure requirements. FIN 48 was effective for fiscal years
beginning after December 15, 2006, in which the impact of adoption should
be accounted for as a cumulative-effect adjustment to the beginning balance
of retained earnings. We adopted the provisions of FIN 48 as of January 1,
2007. The adoption of FIN 48 had no material impact on our financial
position, operating results or cash flows. See Note 16 for further
discussion of our adoption of FIN 48.
Fair Value Measurement
----------------------
In 2006, the FASB issued SFAS No. 157, "Fair Value Measurement" (SFAS
No. 157). SFAS No. 157 provides guidance for using fair value to measure
assets and liabilities. The standard expands required disclosures about the
extent to which companies measure assets and liabilities at fair value, the
information used to measure fair value, and the effect of fair value
measurements on earnings. SFAS No. 157 applies whenever other standards
14
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
require (or permit) assets or liabilities to be measured at fair value.
SFAS No. 157 does not expand the use of fair value in any new
circumstances. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. We do not expect the impact to be material to
our financial condition or results of operations.
3. Merger with Shurgard
--------------------
On August 22, 2006, we merged with Shurgard Storage Centers, Inc.
("Shurgard"), a REIT which had interests in 487 self-storage facilities in
the United States and 160 self-storage facilities in Europe.
Shurgard shareholders received 0.82 shares of Public Storage, Inc.
common stock for each share of Shurgard common stock they owned. Total
consideration for the merger was approximately $5,323,956,000.
The results of operations of the facilities acquired from Shurgard have
been included in our consolidated financial statements since the merger
date of August 22, 2006.
4. Real Estate Facilities
----------------------
Activity in real estate facilities is as follows:
Six Months Ended
June 30, 2007
-----------------
(Amounts in
thousands)
Real estate facilities, at cost:
Balance at December 31, 2006........................ $ 11,261,865
Newly developed facilities opened for operations.... 39,507
Acquisition of real estate facilities............... 27,934
Deconsolidation of Entities (Note 2) ............... (42,473)
Disposition of real estate facilities............... (2,454)
Capital improvements................................ 28,807
Impact of foreign exchange rate changes............. 26,392
-----------------
Balance at June 30, 2007............................ 11,339,578
-----------------
Accumulated depreciation:
Balance at December 31, 2006........................ (1,754,362)
Deconsolidation of Entities (Note 2) ............... 1,064
Additions during the year........................... (185,545)
Dispositions during the year........................ 1,256
Impact of foreign exchange rate changes............. (2,602)
-----------------
Balance at June 30, 2007............................ (1,940,189)
-----------------
Construction in process:
Balance at December 31, 2006........................ 90,038
Current development................................. 47,329
Newly developed facilities opened for operations.... (39,507)
Impact of foreign exchange rate changes............. 785
-----------------
Balance at June 30, 2007............................ 98,645
-----------------
Total real estate facilities at June 30, 2007.......... $ 9,498,034
=================
During the six months ended June 30, 2007, we completed four
development and five expansion projects which in aggregate added
approximately 266,000 net rentable square feet of self-storage space at a
total cost of $39,507,000. In addition, we acquired two self-storage
facilities (132,000 net rentable square feet) from third parties for an
aggregate cost of $28,844,000, in cash; $27,934,000 was allocated to real
estate facilities and $910,000 was allocated to intangibles, based upon the
relative fair values of the land, buildings and intangibles.
15
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
Construction in process at June 30, 2007 includes 41 projects
(1,786,000 net rentable square feet), consisting of newly developed
self-storage facilities, conversion of space at facilities that was
previously used for containerized storage and expansions to existing
self-storage facilities, with costs incurred of $48,835,000 at June 30,
2007 and total estimated costs to complete of $99,558,000. In addition, we
have 15 projects to develop new self-storage facilities in Europe (765,000
aggregate net rentable square feet), with costs incurred at June 30, 2007
of $49,810,000 and total estimated costs to complete of $89,015,000.
We capitalize interest incurred on debt during the course of
construction of our self-storage facilities. Interest capitalized for the
three and six months ended June 30, 2007 was $973,000 and $1,714,000,
respectively, as compared to $353,000 and $1,069,000 for the same periods
in 2006.
During the six months ended June 30, 2007, we have received proceeds
for partial condemnations and other disposals to certain of our
self-storage facilities for an aggregate of $2,242,000 and recorded a gain
of $1,044,000 as a result of these transactions. In connection with the
sale of limited liability partner interests in Shurgard Europe (Note 10),
we also recorded a gain of $1,194,000 for the three and six months ended
June 30, 2007, representing the excess of the sales proceeds less the book
value of the interests sold. The gain is reflected in gain on disposition
of real estate investments on our accompanying condensed consolidated
statements of income.
Included in real estate facilities, accumulated depreciation, and
construction in process is $1.5 billion with respect to our European
operations at June 30, 2007.
5. Investment in Real Estate Entities
----------------------------------
Interests in entities for periods that they are either VIE's that we
are not the primary beneficiary of, or other non-VIE entities that we do
not have a controlling financial interest in, are accounted for using the
equity method of accounting. At June 30, 2007, our investments in real
estate entities consist of ownership interests in the Unconsolidated
Entities.
For the three and six months ended June 30, 2007, we recognized
earnings from our investments in real estate entities of $2,782,000 and
$6,759,000, respectively, as compared to $3,124,000 and $6,590,000 for the
same periods in 2006.
We received cash distributions from our investments in real estate
entities for the six months ended June 30, 2007 and 2006, of $10,535,000
and $10,415,000, respectively.
The following table sets forth our investments in real estate entities
at June 30, 2007 and December 31, 2006, and our equity in earnings of real
estate entities for the three and six months ended June 30, 2007 and 2006
(amounts in thousands):
Equity in Earnings Equity in Earnings
of Real Estate of Real Estate
Investments in Entities for the Entities for the
Real Estate Three Months Six Months
Entities at Ended June 30, Ended June 30,
---------------------- ----------------- ------------------
June 30, December 31,
2007 2006 2007 2006 2007 2006
--------- ---------- ------- -------- ------- ---------
PSB.............. $ 280,125 $ 283,700 $ 2,224 $ 2,640 $ 5,714 $ 5,616
Other Investments 41,083 18,205 558 484 1,045 974
--------- ---------- ------- -------- ------- ---------
Total.......... $ 321,208 $ 301,905 $ 2,782 $ 3,124 $ 6,759 $ 6,590
========= ========== ======= ======== ======== =========
16
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
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 June 30, 2007. 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 June 30, 2007 and December 31, 2006; 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
June 30, 2007 ($63.37 per share of PSB common stock), the shares and units
had a market value of approximately $806.3 million as compared to a book
value of $280.1 million.
At June 30, 2007, PSB owned approximately 19.4 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 selected financial information of PSB;
the amounts represent 100% of PSB's balances and not our pro-rata share.
2007 2006
----------- -----------
(Amounts in thousands)
For the six months ended June 30,
--------------------------------
Total operating revenue........................... $ 132,764 $ 118,208
Costs of operations and other operating expenses.. (45,275) (39,663)
Other income and expense, net..................... 871 2,543
Depreciation and amortization..................... (46,556) (41,536)
Discontinued operations........................... - 1,643
Minority interest................................. (6,675) (8,227)
----------- ----------
Net income...................................... $ 35,129 $ 32,968
=========== ==========
At At
June 30, December 31,
2007 2006
----------- -----------
(Amounts in thousands)
Total assets (primarily real estate).............. $ 1,553,568 $ 1,462,864
Total debt........................................ 61,392 67,048
Other liabilities................................. 43,974 42,394
Preferred equity and preferred minority interests. 811,000 705,250
Common equity and common minority interests....... 637,202 648,172
Other Investments
-----------------
Other investments consist primarily of an average of approximately 29%
common equity ownership in 12 entities that own an aggregate of 33
self-storage facilities that we held on a consistent basis for each of the
three and six months ended June 30, 2007 and 2006, respectively.
The following table sets forth certain condensed financial information
(representing 100% of these entities' balances and not our pro-rata share)
with respect to these other investments:
17
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
2007 2006
----------- -----------
(Amounts in thousands)
For the six months ended June 30,
--------------------------------
Total revenue........................ $ 11,535 $ 10,607
Cost of operations and other expenses (5,384) (5,066)
Depreciation and amortization........ (1,596) (1,365)
------------ -----------
Net income....................... $ 4,555 $ 4,176
============ ===========
At At
June 30, December 31,
2007 2006
----------- ------------
(Amounts in thousands)
Total assets (primarily storage
facilities)...................... $ 72,841 $ 73,031
Total liabilities.................... 21,096 21,112
Total Partners' equity............... 51,745 51,919
6. Revolving Line of Credit
------------------------
On December 27, 2006, we entered into a $300 million unsecured
short-term credit agreement (the "Bridge Loan") with a commercial bank that
matured April 1, 2007. Pursuant to the credit agreement, we borrowed $300
million at an initial interest rate of LIBOR plus 0.30% (5.63% at December
31, 2006). At December 31, 2006, our outstanding borrowings under this
facility totaled $300 million. On January 10, 2007, borrowings under this
facility were repaid in full and the Bridge Loan terminated.
On March 27, 2007, we entered into a five-year revolving credit
agreement (the "Credit Agreement") with an aggregate limit with respect to
borrowings and letters of credit of $300 million, and bears an annual
interest rate ranging from the London Interbank Offered Rate ("LIBOR") plus
0.35% to LIBOR plus 1.00% depending on our credit ratings (LIBOR plus 0.35%
at June 30, 2007). In addition, we are required to pay a quarterly facility
fee ranging from 0.10% per annum to 0.25% per annum depending on our credit
ratings (0.10% per annum at June 30, 2007). Outstanding borrowings on our
revolving line of credit totaled $70 million at June 30, 2007.
The Credit Agreement includes various covenants, the more significant
of which require us to (i) maintain a leverage ratio (as defined therein)
of less than 0.55 to 1.00, (ii) maintain certain fixed charge and interest
coverage ratios (as defined therein) of not less than 1.5 to 1.0 and 1.75
to 1.0, respectively, and (iii) maintain a minimum total shareholders'
equity (as defined therein). We were in compliance with all covenants of
the Credit Agreement at June 30, 2007.
At June 30, 2007, we had undrawn standby letters of credit, which
reduce our borrowing capability with respect to our line of credit by the
amount of the letter of credit, totaling $20,653,000 ($21,068,000 at
December 31, 2006). The beneficiaries of these standby letters of credit
were primarily certain insurance companies associated with our captive
insurance and tenant re-insurance activities.
7. Notes Payable
-------------
The carrying amounts of our notes payable at June 30, 2007 and December
31, 2006 consist of the following (dollar amounts in thousands):
18
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
June 30, December 31,
2007 2006
----------- -------------
Domestic Unsecured Notes Payable:
5.875% effective and stated note rate,
interest only and payable semi-annually
matures in March 2013.......................... $ 200,000 $ 200,000
5.73% effective rate, 7.75% stated note rate,
interest only and payable semi-annually,
matures in February 2011 (carrying amount
includes $12,700 of unamortized premium
at June 30, 2007) ............................. 212,700 214,033
6.53% effective rate, 7.625% stated note rate,
interest only and payable semi-annually,
due April 2007................................. - 50,119
7.66% senior unsecured note due January 2007...... - 11,200
Domestic Mortgage Notes:
5.59% average effective rate fixed rate mortgage
notes payable, secured by 53 real estate
facilities with a net book value of $411,191
at June 30, 2007 and stated note rates between
4.95% and 7.76%, due between July 2007 and
August 2015 (carrying amount includes $3,706 of
unamortized premium at June 30, 2007) ......... 145,832 166,737
Variable rate mortgage notes payable due
December 2007.................................. - 8,428
5.29% average effective rate fixed rate mortgage
notes payable, secured by 33 real estate
facilities with a net book value of $189,315
at June 30, 2007, stated note rates between
5.40% and 8.75%, principal and interest payable
monthly, due at varying dates between October
2009 and September 2028 (carrying amount
includes $4,005 of unamortized premium at
June 30, 2007.................................. 89,179 91,489
European Secured Notes Payable:
(euro)325 million notes payable due originally
in 2011, but prepaid in January 2007.......... - 428,760
First and Second Shurgard credit agreement,
due in 2008 and 2009, secured by 63 real
estate facilities with a net book value
of $488,588 at June 30, 2007 (interest rate
of EURIBOR + 2.25%, 6.033% average for the six
months ended June 30, 2007, 6.372% rate
at June 30, 2007 which approximate market rates) 326,597 288,918
Liability under Capital Leases..................... 6,710 6,600
----------- -------------
Total notes payable......................... $ 981,018 $ 1,466,284
=========== =============
The 5.875% and 5.73% effective rate domestic unsecured notes payable
were recorded at their estimated fair value upon assumption based upon
estimated market rates for debt with similar terms and ratings. The
aggregate fair value of these notes was approximately $415,344,000 as
compared to the actual assumed balances of $400,000,000. This initial
premium of $15,344,000 is being amortized over the remaining term of the
notes using the effective interest method.
The domestic unsecured notes payable have various restrictive
covenants, the more significant of which require us to (i) maintain a ratio
of debt to total assets (as defined therein) of less than 0.60 to 1.00,
(ii) maintain a ratio of secured debt to total assets (as defined therein)
of less than 0.40 to 1.00, (iii) maintain a debt service coverage ratio (as
defined therein) of greater than 1.50 to 1.00, and (iv) maintain a ratio of
unencumbered assets to unsecured debt (as defined therein) of greater than
150%, all of which have been met at June 30, 2007.
19
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
The 5.59% average effective rate fixed rate domestic mortgage notes
were recorded at their estimated fair value based upon the estimated market
rate upon assumption of approximately 5.59%, an aggregate of approximately
$184,592,000 as compared to the actual assumed balances of an aggregate of
$179,827,000. This initial premium of $4,765,000 is being amortized over
the remaining term of the mortgage notes using the effective interest
method. These mortgage notes require interest and principal payments to be
paid monthly and have various restrictive covenants, all of which we
believe have been met at June 30, 2007.
On January 2, 2007, we repaid the (euro)325 million collateralized
European notes that were otherwise payable in 2011. We also terminated the
related European currency and interest rate hedges.
First Shurgard and Second Shurgard, joint venture partnerships in which
we have a 20% interest, (see Note 10) have senior credit agreements
denominated in euros to borrow, in aggregate, up to (euro)271 million
($365.1 million as of June 30, 2007; $357.5 million as of December 31,
2006). As of June 30, 2007, the available amount under those credit
facilities was, in aggregate, (euro)28 million ($37.7 million) and (euro)52
million ($68.6 million), respectively. Our draws under the First Shurgard
and Second Shurgard credit facilities are determined on a development
project basis, or on an acquisition project basis when applicable for
Second Shurgard, and can be limited if the completion of projects is not
timely and if we have certain cost overruns. The credit facilities also
require us to maintain a maximum loan to value of the collateral ratio and
a minimum debt service ratio. As of June 30, 2007, we were in compliance
with these financial covenants.
At June 30, 2007, approximate principal maturities of our notes payable
are as follows (amounts in thousands):
Domestic Domestic European Liabilities
Unsecured Mortgage Note under Capital
Notes Payable Notes Payable Leases Total
------------- --------- --------- ------------ ---------
2007 (remainder of). $ 1,631 $ 4,253 $ 1,617 $ 39 $ 7,540
2008................ 3,404 20,505 174,078 106 198,093
2009................ 3,605 8,707 150,902 116 163,330
2010................ 3,817 10,584 - 81 14,482
2011................ 200,243 27,355 - 739 228,337
Thereafter.......... 200,000 163,607 - 5,629 369,236
------------- --------- --------- ------------ ---------
$ 412,700 $ 235,011 $ 326,597 $ 6,710 $ 981,018
============= ========= ========= ============ =========
Weighted average
effective rate 5.8% 5.4% 6.1% 9.9% 5.8%
============= ========= ========= ============ =========
We incurred interest expense with respect to our notes payable, capital
leases, debt to joint venture partner and line of credit aggregating
$35,229,000 and $4,498,000 for the six months ended June 30, 2007 and 2006,
respectively. These amounts were comprised of $37,558,000 and $4,972,000 in
cash for the six months ended June 30, 2007 and 2006, respectively, less
$2,329,000 and $474,000 in amortization of premium, respectively.
The net book value of the properties under capital leases was
$30,070,000 as of June 30, 2007, which is net of accumulated depreciation
of $1,064,000.
8. Debt to Joint Venture Partner
-----------------------------
On December 31, 2004, we sold seven self-storage facilities to an
unconsolidated affiliated joint venture for $22,993,000. On January 14,
2005, we sold an 86.7% interest in three additional self-storage facilities
to the joint venture for an aggregate amount of $27,424,000. Our partner's
combined equity contribution with respect to these transactions was
$35,292,000. Due to our continuing interest in these facilities and the
20
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
likelihood that we will exercise our option to acquire our partner's
interest, we have accounted for our partner's investment in these
facilities as, in substance, debt financing. Accordingly, our partner's
investment with respect to these facilities is accounted for as a liability
on our accompanying consolidated balance sheets. Our partner's share of
operations with respect to these facilities has been accounted for as
interest expense on our accompanying consolidated statements of income.
The outstanding balances of $37,350,000 and $37,258,000 due the joint
venture partner as of June 30, 2007 and December 31, 2006, respectively,
approximate the fair value of our partner's interest in these facilities as
of each respective date. On a quarterly basis, we review the fair value of
this liability, and to the extent fair value exceeds the carrying value of
the liability, an adjustment is made to increase the liability to fair
value, and to increase other assets, with the other assets amortized over
the remaining period term of the joint venture. We increased the note
balance by $1,386,000 during 2006 as a result of our periodic review of
fair value.
A total of $1,583,000 and $1,516,000 was recorded as interest expense
on our condensed consolidated statements of income with respect to our Debt
to Joint Venture Partner during the six months ended June 30, 2007 and
2006, 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 $1,492,000 and $1,429,000 paid to our joint venture
partner (an 8.0% return payable currently in accordance with the
partnership agreement) during the six months ended June 30, 2007 and 2006,
respectively, and increases in the Debt to Joint Venture Partner of $91,000
and $87,000 for the six months ended June 30, 2007 and 2006, respectively.
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. Derivative Financial Instruments
--------------------------------
As described in Note 2, under Derivative Financial Instruments, we
report these derivative financial instruments at fair value on our
consolidated balance sheet and changes in fair values for the six months
ended June 30, 2007, have been recognized in earnings. The respective
balances of these financial instruments are included in other assets and
accrued and other liabilities as follows:
June 30, 2007 December 31, 2006
-------------- -------------------
(Amounts in thousands)
Assets:
Interest rate contracts....... $ 5,415 $ 11,810
============= ==================
Liabilities:
Interest rate contracts....... $ - $ (4,162)
Foreign currency exchange
contracts..................... (1,601) (7,837)
------------- ------------------
$ (1,601) $ (11,999)
============= ==================
For the six months ended June 30, 2007, net income from derivatives of
$1,009,000 was comprised of a change in value of the related instruments
representing gain of $1,137,000, offset by $128,000 in net payments
incurred during the period under the underlying instruments.
On January 2, 2007, in connection with our prepayment of the (euro)325
million collateralized notes at our European operations, we terminated the
related European currency and interest rate hedges.
10. 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.
21
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
Preferred Partnership Interests
-------------------------------
The following table summarizes the preferred partnership units
outstanding at June 30, 2007 and December 31, 2006:
June 30, 2007 December 31, 2006
Earliest --------------------- ---------------------
Redemption
Date or Dates Distribution Units Carrying Units Carrying
Series Redeemed Rate Outstanding Amount Outstanding Amount
---------------------- ---------------- ------------ ----------- --------- ----------- ---------
(Amounts in thousands)
Series NN....... March 17, 2010 6.400% 8,000 $200,000 8,000 $ 200,000
Series Z........ October 12, 2009 6.250% 1,000 25,000 1,000 25,000
Series J........ May 9, 2011 7.250% 4,000 100,000 4,000 100,000
----------- --------- ----------- ---------
Total............ 13,000 $325,000 13,000 $ 325,000
=========== ========= =========== =========
Income allocated to the preferred minority interests totaled
$10,806,000 and $8,249,000 for the six months ended June 30, 2007 and 2006,
respectively, comprised of distributions paid.
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
$100,000,000.
Subject to certain conditions, the Series NN preferred units are
convertible into our 6.40% Series NN Cumulative Preferred Shares of
beneficial interest, the Series Z preferred units are convertible into our
6.25% Series Z Cumulative Preferred Shares of beneficial interest and the
Series J preferred units are convertible into our 7.25% Series J Cumulative
Preferred Shares of beneficial interest. The holders of the Series Z
preferred partnership units have a one-time option exercisable five years
from issuance (October 12, 2009), to require us to redeem their units for
$25,000,000 in cash, plus any unpaid distribution.
Other Partnership Interests
---------------------------
Income is allocated to the minority interests based upon their pro rata
interest in the operating results of the Consolidated Entities. The
following tables set forth the minority interests at June 30, 2007 and
December 31, 2006 as well as the income allocated to minority interests for
the three and six months ended June 30, 2007 and 2006 with respect to the
other partnership interests (amounts in thousands):
Minority Interest at
----------------------------
June 30, December 31,
Description 2007 2006
---------------------------------- ------------ ------------
European joint ventures........... $ 136,132 $ 140,034
European investors................ 3,715 -
Convertible Partnership Units..... 5,517 5,710
Other consolidated partnerships... 32,760 35,286
------------ -------------
Total other partnership interests. $ 178,124 $ 181,030
============ =============
22
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
Minority Interests Minority Interests
in Income (Loss) in Income (Loss)
for the Three for the Six
Months Ended Months Ended
------------------ ------------------
June 30, June 30, June 30, June 30,
Description 2007 2006 2007 2006
-------- ------- -------- --------
European joint ventures.......... $(2,065) $ - $(5,819) $ -
European investors............... - - - -
Convertible Partnership Units.... 19 120 11 236
Other consolidated partnerships.. 4,167 3,950 8,309 7,402
-------- ------- -------- --------
Total other partnership interests $ 2,121 $4,070 $ 2,501 $ 7,638
======== ======= ======== ========
Distributions paid to minority interests for the three months ended
June 30, 2007 and 2006 were $4,856,000 and $3,636,000, respectively, and
for the six months ended June 30, 2007 and 2006 were $10,357,000 and
$7,348,000, respectively. Minority interests increased $1,917,000 as a
result of the impact of foreign currency translation in the six months
ended June 30, 2007.
European Joint Ventures
-----------------------
Through the merger with Shurgard, we acquired two joint venture
entities: First Shurgard SPRI ("First Shurgard") formed in January 2003 and
Second Shurgard SPRL ("Second Shurgard") formed in May 2004. Those joint
ventures were expected to develop or acquire up to approximately 75 storage
facilities in Europe. Through a wholly-owned subsidiary, we have a 20%
interest in each of these ventures. We have determined that First Shurgard
and Second Shurgard are each VIEs, and that we are the primary beneficiary.
Accordingly, First Shurgard and Second Shurgard have been consolidated in
our consolidated financial statements. At June 30, 2007, First Shurgard and
Second Shurgard had aggregate total assets of $523.5 million ($497.2
million at December 31, 2006), total liabilities of $356.1 million ($322.1
million at December 31, 2006), and credit facilities collateralized by
assets with a net book value of $488.6 million ($461.6 million at December
31, 2006). At June 30, 2007, First Shurgard's and Second Shurgard's
creditors had no recourse to the general credit of Public Storage or
Shurgard Europe other than a commitment, to subscribe to up to $20 million
and an additional $10.1 million as of June 30, 2007 in preferred bonds in
order for First Shurgard to fulfill its obligations under its senior credit
agreement. We have an option to put 80% of the bonds issued by First
Shurgard to Crescent Euro Self Storage Investments, Shurgard Europe's
partner in the joint venture.
On September 5, 2006, we informed the joint venture partners of First
Shurgard and Second Shurgard of our intention to purchase their interests
in First Shurgard and Second Shurgard, pursuant to an "exit procedure" that
we believe is provided for in the respective agreements. The exit procedure
can, in certain circumstances, result in a third party acquiring the
facilities owned by First and Second Shurgard, including our interest in
these facilities. Our joint venture partners currently contest whether we
have the right to purchase their interests under this procedure. On January
17, 2007, we filed an arbitration action with our joint venture partner
related to our intention to terminate the joint venture early. As part of
our efforts to resolve our dispute with our joint venture partner, we have
entered into an agreement to exchange their interest in the joint ventures
for shares in Shurgard Europe.
European Investors
------------------
On May 14, 2007, one of our European subsidiaries sold limited
liability partner interests ("LLP Interests") it held in Shurgard
Self-Storage SCA, ("Shurgard Europe"), also an indirect subsidiary of
Public Storage, to various officers of the Company, other than our chief
executive officer. The aggregate proceeds of the sale were $4,909,000. The
sale price for the LLP Interests was the net asset value per LLP Interest
using, among other items, information provided by an independent third
party appraisal firm of the net asset value of Shurgard Europe as of March
31, 2007. The Company has a right to repurchase the LLP Interests upon (1)
upon a purchaser's termination of employment or (2) for any reason, on or
after May 14, 2008. The repurchase price is set at the lesser of (1) the
then net asset value per share or (2) the original purchase price with a
10% compounded annual return. In connection with the sale of these LLP
23
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
Interests, we recorded a gain of $1,194,000 for the three and six months
ended June 30, 2007, representing the excess of the sales proceeds less the
book value of the LLP Interests sold. The gain is reflected in gain on
disposition of real estate investments on our accompanying condensed
consolidated statements of income. The investment of these various officers
is included in minority interest - other partnership interests on our
accompanying condensed consolidated balance sheet at June 30, 2007 and
their pro rata share of the earnings of Shurgard Europe are reflected in
minority interest in income - other partnership interests on our
accompanying condensed consolidated statements of income for the three and
six months ended June 30, 2007.
Convertible Partnership Units
-----------------------------
At June 30, 2007 and December 31, 2006, one of the Consolidated
Entities had approximately 231,978 convertible partnership units
("Convertible Units") outstanding representing a limited partnership
interest in the partnership. The Convertible Units are convertible on a
one-for-one basis (subject to certain limitations) into common shares of
the Company at the option of the unit-holder. Minority interest in income
with respect to Convertible Units reflects the Convertible Units' share of
our net income, with net income allocated to minority interests with
respect to weighted average outstanding Convertible Units on a per unit
basis equal to diluted earnings per common share.
Other Consolidated Partnerships
-------------------------------
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.
In connection with the merger with Shurgard, we obtained partial equity
interests in certain joint ventures. Following the merger with Shurgard, in
2006 we acquired the minority interests in certain of these joint ventures,
for an aggregate of approximately $62,300,000 in cash. As a result of these
transactions, we obtained the remaining interest in a total of 68
self-storage facilities. This acquisition was recorded as a reduction in
minority interest totaling $12,177,000, with the remainder allocated to
real estate ($50,123,000).
In May 2007 we discontinued the consolidation of certain of these joint
ventures due to our losing control of these entities. As a result, minority
interest in income with respect to these joint ventures ceased effective
May 2007, and $682,000 in minority interest was eliminated.
The partnership agreements of the Shurgard Domestic Joint Ventures 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 June 30, 2007 and December 31, 2006, the Other Consolidated
Partnerships reflect common equity interests that we do not own in 33
entities owning an aggregate of 117 self-storage facilities.
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
24
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
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.
The provisions of SFAS No. 150 indicate that the Other Minority
Interests would have to be treated as a liability, because these
partnerships have termination dates that cannot be unilaterally extended by
us and, upon termination, the net assets of these entities would be
liquidated and paid to the minority interest and us based upon relative
ownership interests. However, on October 29, 2003, the FASB decided to
defer indefinitely a portion of the implementation of SFAS No. 150, which
thereby deferred our requirement to recognize these minority interest
liabilities. We estimate that the fair value of the Other Partnership
Interests is approximately $450 million at December 31, 2006 and June 30,
2007.
11. Shareholders' Equity
--------------------
Cumulative Preferred Shares
At June 30, 2007 and December 31, 2006, we had the following series of
Cumulative Preferred Shares of beneficial interest outstanding:
At June 30, 2007 At December 31, 2006
-------------------- -----------------------
Earliest
Redemption Dividend Shares Carrying Shares Carrying
Series Date Rate Outstanding Amount Outstanding Amount
--------- ---------- ------- ------------- -------- ----------- ---------
(Dollar amounts in thousands)
Series V 9/30/07 7.500% 6,900 $ 172,500 6,900 $ 172,500
Series W 10/6/08 6.500% 5,300 132,500 5,300 132,500
Series X 11/13/08 6.450% 4,800 120,000 4,800 120,000
Series Y 1/2/09 6.850% 1,600,000 40,000 1,600,000 40,000
Series Z 3/5/09 6.250% 4,500 112,500 4,500 112,500
Series A 3/31/09 6.125% 4,600 115,000 4,600 115,000
Series B 6/30/09 7.125% 4,350 108,750 4,350 108,750
Series C 9/13/09 6.600% 4,600 115,000 4,600 115,000
Series D 2/28/10 6.180% 5,400 135,000 5,400 135,000
Series E 4/27/10 6.750% 5,650 141,250 5,650 141,250
Series F 8/23/10 6.450% 10,000 250,000 10,000 250,000
Series G 12/12/10 7.000% 4,000 100,000 4,000 100,000
Series H 1/19/11 6.950% 4,200 105,000 4,200 105,000
Series I 5/3/11 7.250% 20,700 517,500 20,700 517,500
Series K 8/8/11 7.250% 18,400 460,000 18,400 460,000
Series L 10/20/11 6.750% 9,200 230,000 9,200 230,000
Series M 1/9/12 6.625% 20,000 500,000 - -
--------- ---------- ------- ----------- ----------- ---------- -----------
Total Cumulative
Preferred Shares 1,732,600 $ 3,355,000 1,712,600 $ 2,855,000
========== ============ =========== ===========
The holders of our Cumulative Preferred Shares have general preference
rights with respect to liquidation and quarterly distributions. Holders of
the preferred shares, except under certain conditions and as noted below,
25
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
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 shares (voting as a single class without regard to series) will
have the right to elect two additional members to serve on the Company's
Board until events of default have been cured. At June 30, 2007, there were
no dividends in arrears and the Debt Ratio was 9.6%.
Upon issuance of our Cumulative Preferred Shares of beneficial
interest, we classify the liquidation value as preferred equity on our
condensed 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.
On January 9, 2007, we issued 20,000 depositary shares, with each
depositary share representing 1/1,000 of a share of our 6.625% Cumulative
Preferred Shares, Series M. The offering resulted in $500,000,000 of gross
proceeds.
During 2006, we issued four series of Cumulative Preferred Shares:
Series H - issued January 19, 2006, net proceeds totaling $101,492,000,
Series I - issued May 3, 2006, net proceeds totaling $501,601,000, Series K
- issued August 8, 2006, net proceeds totaling $445,852,000 and Series L -
issued October 20, 2006, net proceeds totaling $223,623,000.
During 2006, we redeemed our Series R and Series S Cumulative Preferred
Shares at par value plus accrued dividends. In December 2006, we called for
redemption our Series T and Series U Cumulative Preferred Shares, at par.
The aggregated redemption value of $302,150,000 of these two series was
classified as a liability at December 31, 2006 and repaid in the six months
ended June 30, 2007.
On July 2, 2007, we issued 6,900,000 depositary shares each
representing 1/1,000 of a 7.000% Cumulative Preferred Share, Series N, for
gross process of approximately $172,500,000.
Equity Shares
-------------
The Company is authorized to issue 100,000,000 shares of Equity Shares
of beneficial interest. The Articles of Amendment and Restatement of
Declaration of Trust provide that the Equity Shares may be issued from time
to time in one or more series and gives our Board broad authority to fix
the dividend and distribution rights, conversion and voting rights,
redemption provisions and liquidation rights of each series of Equity
Shares.
Equity Shares, Series A
-----------------------
At June 30, 2007 and December 31, 2006, we had 8,744,193 depositary
shares outstanding, each representing 1/1,000 of an Equity Share, Series A
("Equity Shares A"). The Equity Shares A ranks on parity with common shares
and junior to the Cumulative Preferred Shares 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 shares or
(ii) $2.45 per annum. We have no obligation to pay distributions on the
depositary shares if no distributions are paid to common shareholders.
Except in order to preserve the Company's Federal income tax status as
a REIT, we may not redeem the depositary shares representing the Equity
Shares A before March 31, 2010. On or after March 31, 2010, we may, at our
option, redeem the depositary shares at $24.50 per depositary share. If the
Company fails to preserve its Federal income tax status as a REIT, each of
the depositary shares will be convertible at the option of the shareholder
26
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
into .956 common shares. The depositary shares are otherwise not
convertible into common shares. Holders of depositary shares vote as a
single class with holders of our common shares on shareholder matters, but
the depositary shares have the equivalent of one-tenth of a vote per
depositary share.
Equity Shares, Series AAA
-------------------------
In November 1999, we sold $100,000,000 (4,289,544 shares) of Equity
Shares, Series AAA ("Equity Shares AAA") to the Consolidated Development
Joint Venture. On November 17, 2005, upon the acquisition of Mr. Hughes'
interest in PSAC, we owned 100% of the partnership interest in the
Consolidated Development Joint Venture. For all periods presented, the
Equity Shares, Series AAA and related dividends are eliminated in
consolidation.
Common Shares
-------------
During the six months ended June 30, 2007, we issued 216,532 common
shares in connection with employee stock-based compensation.
At June 30, 2007 and December 31, 2006, certain entities we consolidate
owned 1,146,207 common shares. These shares continue to be legally issued
and outstanding. In the consolidation process, these shares and the related
balance sheet amounts have been eliminated. In addition, these shares are
not included in the computation of weighted average shares outstanding.
Dividends
---------
The following table summarizes dividends declared and paid during the
six months ended June 30, 2007:
Distributions Per
Share or Depositary Total Distributions
Share
------------------- -------------------
Preferred Shares:
-----------------
Series T............... $0.090 $ 548,000
Series U............... $0.259 1,557,000
Series V............... $0.937 6,468,000
Series W............... $0.812 4,306,000
Series X............... $0.806 3,870,000
Series Y............... $0.856 1,370,000
Series Z............... $0.781 3,516,000
Series A............... $0.766 3,522,000
Series B............... $0.891 3,874,000
Series C............... $0.825 3,796,000
Series D............... $0.773 4,172,000
Series E............... $0.844 4,768,000
Series F............... $0.806 8,062,000
Series G............... $0.875 3,500,000
Series H............... $0.869 3,649,000
Series I............... $0.906 18,760,000
Series K............... $0.906 16,674,000
Series L............... $0.844 7,762,000
Series M............... $0.796 15,917,000
----------------
116,091,000
Common Shares:
Equity Shares, Series A $1.225 10,712,000
Common ................ $1.000 170,018,000
----------------
Total dividends.. $ 296,821,000
================
27
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
The dividend rate on our common shares was $0.50 per common share and
$1.00 per common share for the three and six months ended June 30, 2007.
The dividend rate on the Equity Share A was $0.6125 per depositary share
and $1.225 per depositary share for the three and six months ended June 30,
2007, respectively.
12. Segment Information
-------------------
Description of Each Reportable Segment
--------------------------------------
Our reportable segments reflect significant operating activities that
are evaluated separately by management, comprised of the following segments
which are organized based upon their operating characteristics.
Our domestic self-storage segment comprises the direct ownership,
development, and operation of traditional storage facilities in the U.S.,
and the ownership of equity interests in entities that own storage
properties in the U.S. Our European self-storage segment comprises our
self-storage and associated activities owned by affiliated entities based
in Europe.
Our domestic ancillary operating segment represents all of our other
segments, which are reported as a group, including (i) containerized
storage, (ii) commercial property operations, which reflects our interest
in the ownership, operation, and management of commercial properties both
directly and through our interest in PSB (iii) the reinsurance of policies
against losses to goods stored by tenants in our self-storage facilities,
(iv) sale of merchandise at our self-storage facilities, (v) truck rentals
at our self-storage facilities and (vi) management of facilities owned by
third-party owners and facilities owned by the Unconsolidated Entities.
Measurement of Segment Income (Loss) and Segment Assets - Domestic
-----------------------------------------------------------------------
Self-Storage and Domestic Ancillary
-----------------------------------
The domestic self-storage and domestic ancillary segments are evaluated
by management based upon the net segment income of each segment. Net
segment income represents net income in conformity with GAAP and our
significant accounting policies as denoted in Note 2, before interest and
other income, interest expense, and corporate general and administrative
expense. Interest and other income, interest expense, corporate general and
administrative expense, minority interest in income and gains and losses on
sales of real estate assets are not allocated to these segments because
management does not utilize them to evaluate the results of operations of
each segment. In addition, there is no presentation of segment assets for
these other segments because total assets are not considered in the
evaluation of these segments.
Measurement of Segment Income (Loss) and Segment Assets - European
------------------------------------------------------------------
Operations
----------
The European segment operations are primarily independent of the other
segments, with separate management, debt, financing activities, and capital
allocation decisions. Accordingly, this segment is evaluated by management
as a stand-alone business unit and the European segment presentation
includes all of the revenues, expenses, and operations of this business
unit, including interest expense paid to outside parties and general and
administrative expense. Assets of our European operations at June 30, 2007,
include real estate with a book value of approximately $1.5 billion ($1.4
28
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
billion at December 31, 2006), intangibles with a book value of
approximately $118 million ($161 million at December 31, 2006), and other
assets with a book value of approximately $64 million ($65 million at
December 31, 2006). At June 30, 2007, liabilities of our European
operations include; intercompany payables of $503 million ($521 million at
December 31, 2006), debt of $333 million ($724 million at December 31,
2006) and accrued and other liabilities of $94 million ($108 million at
December 31, 2006). At December 31, 2006, assets of our European operations
included approximately $480 million in cash (of which approximately $429
million was utilized on January 2, 2007 to prepay the (euro)325M
collateralized notes).
Presentation of Segment Information
-----------------------------------
The following table reconciles the performance of each segment, in
terms of segment income, to our consolidated net income (amounts in
thousands):
For the three months ended June 30, 2007
Domestic Other Items Not
Domestic European Ancillary Allocated to Total
Self-Storage Operations Operations Segments Consolidated
--------------- -------------- -------------- ---------------- -------------
(Amounts in thousands)
Revenues:
Self-storage rental income.................... $ 364,859 $ 46,357 $ - $ - $ 411,216
Ancillary operating revenue................... - 4,324 32,653 - 36,977
Interest and other income..................... - - - 955 955
--------------- -------------- -------------- ---------------- -------------
364,859 50,681 32,653 955 449,148
--------------- -------------- -------------- ---------------- -------------
Expenses:
Cost of operations (excluding depreciation and
amortization below):
Self-storage facilities.................... 126,260 23,106 - - 149,366
Ancillary operations....................... - 1,356 20,387 - 21,743
Depreciation and amortization.................. 127,459 39,202 940 - 167,601
General and administrative..................... - 12,022 - 9,443 21,465
Interest expense............................... - 5,232 - 11,475 16,707
--------------- -------------- -------------- ---------------- -------------
253,719 80,918 21,327 20,918 376,882
--------------- -------------- -------------- ---------------- -------------
Income (loss) from continuing operations before equity
in earnings of real estate entities, gain on
disposition of real estate investments, foreign
currency exchange gain, income from derivatives and
minority interest in income.................... 111,140 (30,237) 11,326 (19,963) 72,266
Equity in earnings of real estate entities....... 558 - - 2,224 2,782
Gain on disposition of real estate investments... - - - 2,238 2,238
Foreign currency exchange gain................... - 5,553 - - 5,553
Income from derivatives, net..................... - 1,771 - - 1,771
Minority interest in (income) loss............... (4,094) 1,973 - (5,403) (7,524)
--------------- -------------- -------------- ---------------- -------------
Income (loss) from continuing operations......... 107,604 (20,940) 11,326 (20,904) 77,086
Discontinued operations.......................... - (130) - 148 18
--------------- -------------- -------------- ---------------- -------------
Net income (loss)................................ $ 107,604 $ (21,070) $ 11,326 $ (20,756) $ 77,104
=============== ============== ============== ================ =============
29
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
For the three months ended June 30, 2006
Domestic Other Items Not
Domestic European Ancillary Allocated to Total
Self-Storage Operations Operations Segments Consolidated
---------------- ------------- --------------- ------------------ ------------
(Amounts in thousands)
Revenues:
Self-storage rental income.................... $ 262,232 $ - $ - $ - $ 262,232
Ancillary operating revenue................... - - 25,582 - 25,582
Interest and other income..................... - - - 10,047 10,047
---------------- ------------- --------------- ------------------ ------------
262,232 - 25,582 10,047 297,861
---------------- ------------- --------------- ------------------ ------------
Expenses:
Cost of operations (excluding depreciation and
amortization below):
Self-storage facilities.................... 89,395 - - - 89,395
Ancillary operations....................... - - 17,150 - 17,150
Depreciation and amortization.................. 47,808 - 772 - 48,580
General and administrative..................... - - - 6,975 6,975
Interest expense............................... - - - 1,872 1,872
---------------- ------------- --------------- ------------------ ------------
137,203 - 17,922 8,847 163,972
---------------- ------------- --------------- ------------------ ------------
Income from continuing operations before equity in
earnings of real estate entities, gain on disposition
of real estate investments and
minority interest in income................... 125,029 - 7,660 1,200 133,889
Equity in earnings of real estate entities....... 484 - - 2,640 3,124
Gain on disposition of real estate investments... - - - 466 466
Minority interest in income...................... (4,070) - - (4,658) (8,728)
---------------- ------------- --------------- ------------------ ------------
Income (loss) from continuing operations......... 121,443 - 7,660 (352) 128,751
Discontinued operations.......................... - - 111 111
---------------- ------------- --------------- ------------------ ------------
Net income (loss)................................ $ 121,443 $ - $ 7,660 $ (241) $ 128,862
================ ============= =============== ================= ============
30
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
For the six months ended June 30, 2007
Domestic Other Items Not
Domestic European Ancillary Allocated to Total
Self-Storage Operations Operations Segments Consolidated
--------------- ------------ ------------- ------------------ --------------
(Amounts in thousands)
Revenues:
Self-storage rental income.................... $ 719,778 $ 90,219 $ - $ - $ 809,997
Ancillary operating revenue................... - 8,103 62,335 - 70,438
Interest and other income..................... - - - 3,080 3,080
--------------- ------------ ------------- ------------------ --------------
719,778 98,322 62,335 3,080 883,515
--------------- ------------ ------------- ------------------ --------------
Expenses:
Cost of operations (excluding depreciation and
amortization below):
Self-storage facilities.................... 252,126 46,160 - - 298,286
Ancillary operations....................... - 2,698 40,046 - 42,744
Depreciation and amortization.................. 264,010 78,202 1,870 - 344,082
General and administrative..................... - 14,729 - 23,252 37,981
Interest expense............................... - 10,330 - 23,185 33,515
--------------- ------------ ------------- ------------------ --------------
516,136 152,119 41,916 46,437 756,608
--------------- ------------ ------------- ------------------ --------------
Income (loss) from continuing operations before
equity in earnings of real estate entities,
casualty gain, gain on disposition of real estate
investments, foreign currency exchange gain, income
from derivatives and minority
interest in income............................ 203,642 (53,797) 20,419 (43,357) 126,907
Equity in earnings of real estate entities....... 1,045 - - 5,714 6,759
Casualty gain.................................... 2,665 - - - 2,665
Gain on disposition of real estate investments... - - - 2,238 2,238
Foreign currency exchange gain................... - 10,593 - - 10,593
Income from derivatives, net..................... - 1,009 - - 1,009
Minority interest in (income) loss............... (8,286) 5,785 - (10,806) (13,307)
--------------- ------------ ------------- ------------------ --------------
Income (loss) from continuing operations......... 199,066 (36,410) 20,419 (46,211) 136,864
Discontinued operations.......................... - (130) - 148 18
--------------- ------------ ------------- ------------------ --------------
Net income (loss)................................ $ 199,066 $ (36,540) $ 20,419 $ (46,063) $ 136,882
=============== ============ ============= ================== ==============
31
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
For the six months ended June 30, 2006
Domestic Other Items Not
Domestic European Ancillary Allocated to Total
Self-Storage Operations Operations Segments Consolidated
-------------- ----------- -------------- ----------------- ---------------
(Amounts in thousands)
Revenues:
Self-storage rental income.................... $ 513,579 $ - $ - $ - $ 513,579
Ancillary operating revenue................... - - 47,678 - 47,678
Interest and other income..................... - - - 15,122 15,122
-------------- ----------- -------------- ----------------- ---------------
513,579 - 47,678 15,122 576,379
-------------- ----------- -------------- ----------------- ---------------
Expenses:
Cost of operations (excluding depreciation and
amortization below):
Self-storage facilities.................... 177,098 - - - 177,098
Ancillary operations....................... - - 32,424 - 32,424
Depreciation and amortization.................. 96,991 - 1,617 - 98,608
General and administrative..................... - - - 13,754 13,754
Interest expense............................... - - - 3,429 3,429
-------------- ----------- -------------- ----------------- ---------------
274,089 - 34,041 17,183 325,313
-------------- ----------- -------------- ----------------- ---------------
Income (loss) from continuing operations before
equity in earnings of real estate entities,
gain on disposition of real estate
investments and minority interest in income... 239,490 - 13,637 (2,061) 251,066
Equity in earnings of real estate entities....... 974 - - 5,616 6,590
Gain on disposition of real estate investments... - - - 466 466
Minority interest in income...................... (7,638) - - (8,249) (15,887)
-------------- ----------- -------------- ----------------- ---------------
Income (loss) from continuing operations......... 232,826 - 13,637 (4,228) 242,235
Cumulative effect of a change in accounting
principle..................................... - - - 578 578
Discontinued operations.......................... - - 265 265
-------------- ----------- -------------- ----------------- ---------------
Net income (loss)................................ $ 232,826 $ - $ 13,637 $ (3,385) $ 243,078
============== =========== ============== ================= ===============
13. Share-Based Compensation
------------------------
Stock Options
-------------
We have various stock option plans (collectively referred to as the "PS
Plans"). Under the PS Plans, the Company has granted non-qualified options
to certain trustees, officers and key employees to purchase 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 PS 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 between eight years and ten years after
the date they became exercisable. The PS Plans 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 our Board.
We recognize compensation expense for share-based awards based upon
their fair value on the date of grant amortized over the applicable vesting
period (the "Fair Value Method"), less an allowance for estimated future
forfeited awards.
32
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
For the three and six months ended June 30, 2007 we recorded $303,000
and $606,000, respectively, in stock option compensation expense related to
options granted after January 1, 2002, as compared to $331,000 and
$598,000, for the same periods in 2006.
A total of 220,000 stock options were granted during the six months
ended June 30, 2007, 177,938 shares were exercised, and no shares were
forfeited. A total of 1,644,996 stock options were outstanding at June 30,
2007 (1,602,934 at December 31, 2006). The weighted average exercise price
for the options outstanding at June 30, 2007 is $59.13 per share.
Restricted Share Units
----------------------
Outstanding restricted share units vest over a five or eight-year
period from the date of grant at the rate of one-fifth or one-eighth per
year, respectively. The employee receives additional compensation equal to
the per-share dividends received by common shareholders with respect to
restricted share units outstanding. Such compensation is accounted for as
dividends paid. Any dividends paid on units which are subsequently
forfeited are expensed. Upon vesting, the employee receives common shares
equal to the number of vested restricted share units in exchange for the
units.
The total value of each restricted share unit grant, based upon the
market price of our common shares at the date of grant, is amortized over
the 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
accompanying condensed consolidated statement of income for the six months
ended June 30, 2006.
Outstanding restricted share units are included on a one-for-one basis
in our diluted weighted average shares, less a reduction for the treasury
stock method applied to the average cumulative measured but unrecognized
compensation expense during the period. For purposes of the disclosures
that follow, "fair value" on any particular date reflects the closing
market price of our common shares on that date.
During the six months ended June 30, 2007, 169,925 restricted share
units were granted, 57,694 restricted share units were forfeited, and
58,274 restricted share units vested. This vesting resulted in the issuance
of 38,594 shares of the Company's common shares. In addition, cash
compensation was paid to employees in lieu of 19,680 common shares based
upon the market value of the shares at the date of vesting, and used to
settle the employees' tax liability generated by the vesting.
At June 30, 2007, approximately 670,427 restricted share units were
outstanding (616,470 at December 31, 2006). A total of $2,057,000 and
$4,262,000 in restricted share expense was recorded for the three and six
months ended June 30, 2007, respectively, as compared to $1,160,000 and
$2,429,000, for the same periods in 2006.
33
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
14. Related Party Transactions
--------------------------
Relationships and transactions with the Hughes Family
-----------------------------------------------------
Mr. Hughes and his family (collectively the "Hughes Family") have
ownership interests in, and operate approximately 48 self-storage
facilities in Canada under the name "Public Storage" ("PS Canada") pursuant
to a 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 27% of our common shares outstanding at
June 30, 2007. We have a right of first refusal to acquire the stock or
assets of the corporation that manages the 48 self-storage facilities in
Canada, if the Hughes Family or the corporation agrees to sell them.
However, we have no interest in the operations of this corporation, we have
no right to acquire this stock or assets unless the Hughes Family decides
to sell, 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 consolidated entities, we continue to reinsure risks relating
to loss of goods stored by tenants in the self-storage facilities in
Canada. During the six months ended June 30, 2007 and 2006, respectively,
we received $418,000 and $505,000, respectively, in reinsurance premiums
attributable to the Canadian facilities. Since our right to provide tenant
reinsurance to the Canadian facilities may be qualified, there is no
assurance that these premiums will continue.
The Company and Mr. Hughes are co-general partners in certain
consolidated entities and affiliated entities of the Company that are not
consolidated. The Hughes Family also owns limited partnership interests in
certain of these entities. The Company and the Hughes Family receive
distributions from these partnerships in accordance with the terms of the
partnership agreements.
Other Related Party Transactions
--------------------------------
Ronald L. Havner, Jr. is our Vice-Chairman and Chief Executive Officer,
and he is Chairman of the Board of PSB.
Dann V. Angeloff, a trustee of the Company, is the general partner of a
limited partnership formed in June of 1973 that owns a self-storage
facility that is managed by us. We recorded management fees with respect to
this facility amounting to $19,000, and $37,000 for the three and six
months ended June 30, 2007, respectively, compared to $18,000 and $31,000
for the three and six months ended June 30, 2006, 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 $182,000, and $365,000 for the three and six months ended
June 30, 2007, respectively, as compared to $146,000 and $295,000 for the
three and six months ended June 30, 2006, respectively, in management fees
with respect to PSB's property management services. At June 30, 2007,
included in other assets are normal recurring amounts owed to PSB of
$385,000 ($871,000 at December 31, 2006), for unpaid management fees and
certain other operating expenses related to the managed facilities which
are initially paid by PSB on our behalf and then reimbursed by us.
PSB recently acquired commercial facilities which included self-storage
space. We are managing this self-storage space for them for a management
fee of 6% of revenues. We recorded management fees with respect to these
facilities amounting to $12,000 and $24,000 for the three and six months
ended June 30, 2007 (none for the same period in 2006).
Pursuant to a cost-sharing and administrative services agreement, PSB
reimburses us for certain administrative services that we provide to them.
PSB's share of these costs totaled approximately $76,000 and $152,000 for
the three and six months ended June 30, 2007, respectively, as compared to
$80,000 and $160,000 for the three and six months ended June 30, 2006,
respectively.
34
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
We manage our wholly-owned self-storage facilities as well as the
facilities owned by the Consolidated Entities and affiliated entities that
are not consolidated on a joint basis, in order to take advantage of scale
and other efficiencies. As a result, significant components of self-storage
operating costs, such as payroll costs, advertising and promotion, data
processing, and insurance expenses are shared and allocated among the
various entities using methodologies meant to fairly allocate such costs
based upon the related activities. The amount of such expenses allocated to
Unconsolidated Entities was approximately $682,000 and $1,296,000 for the
three and six months ended June 30, 2007, respectively, as compared to
$676,000 and $1,267,000 for the three and six months ended June 30, 2006,
respectively.
Stor-RE, a consolidated entity, and third party insurance carriers
provided PS Canada, the Company, PSB, and other affiliates of the Company
with liability and casualty insurance coverage until March 31, 2004. PS
Canada owns a 2.2% interest and PSB owns 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.
On May 14, 2007, one of our European subsidiaries sold limited
liability partner interests ("LLP Interests") it held in Shurgard Europe,
also an indirect subsidiary of Public Storage, to various officers of the
Company, other than our chief executive officer. The aggregate proceeds of
the sale were $4,909,000. The sale price for the LLP Interests was the net
asset value per LLP Interest using, among other items, information provided
by an independent third party appraisal firm of the net asset value of
Shurgard Europe as of March 31, 2007. The Company has a right to repurchase
the LLP Interests (1) upon a purchaser's termination of employment or (2)
for any reason, on or after May 14, 2008. The repurchase price is set at
the lesser of (1) the then net asset value per share or (2) the original
purchase price with a 10% compounded annual return. In connection with the
sale of these LLP Interests, we recorded a gain of $1,194,000 for the three
and six months ended June 30, 2007, representing the excess of the sales
proceeds over the book value of the LLP Interests sold. The gain is
reflected in gain on disposition of real estate investments on our
accompanying condensed consolidated statements of income. The investment of
these various officers is included in minority interest - other partnership
interests on our accompanying condensed consolidated balance sheet at June
30, 2007 and their pro rata share of the earnings of Shurgard Europe are
reflected in minority interest in income - other partnership interests on
our accompanying condensed consolidated statements of income for the three
and six months ended June 30, 2007.
15. 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.
35
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(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.
Drake v. Shurgard Storage Centers, Inc. (filed September 2002)
-----------------------------------------------------------------------
(Superior Court of California - Orange County)
----------------------------------------------
This is a companion case to the Serrao matter discussed above. The
plaintiff alleges the same set of operative facts and seeks the same relief
as in Serrao against Shurgard Storage Centers, Inc. ("Shurgard"), whose
liability Public Storage assumed following the merger of Public Storage and
Shurgard on August 22, 2006. In June 2007, the Court certified a class of
all Shurgard renters who rented a storage unit at a Shurgard facility in
California that was smaller than represented. The maximum potential
liability cannot presently be estimated. We intend to vigorously contest
the substantive merits of the class certification while seeking an
appellate writ challenging the Court's certification of the class.
Potter, et al v. Hughes, et al (filed December 2004) (United States
-----------------------------------------------------------------------
District Court - Central District of California)
------------------------------------------------
In November 2002, a shareholder of the Company made a demand on our
Board challenging the fairness of the Company's acquisition of PS Insurance
Company, Ltd. ("PSIC") and related matters. PSIC was previously owned by
the Hughes Family. In June 2003, following the filing by the Hughes Family
of a complaint for declaratory relief asking the court to find that the
acquisition of PSIC and related matters were fair to the Company, it was
ruled that the PSIC transaction was just and reasonable as to the Company
and holding that the Hughes Family was not required to make any payment to
the Company.
At the end of December 2004, the same shareholder referred to above and
a second shareholder filed this shareholder's derivative complaint naming
as defendants the Company's directors (and two former directors) and
certain officers of the Company. The matters alleged in this complaint
relate to PSIC, the Hughes Family's Canadian self-storage operations and
the Company's 1995 reorganization. In July 2006, the Court granted the
defendants' motion to dismiss the amended Complaint without leave to amend.
In August 2006, Plaintiffs filed a notice of appeal of the Court's
decision. The appeal is currently pending. 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 plaintiff sued the Company on behalf of a purported class of
California non-exempt employees based on various California wage and hour
laws and seeking monetary damages and injunctive relief. In May 2006, a
motion for class certification was filed seeking to certify five
subclasses. Plaintiff sought certification for alleged meal period
violations, rest period violations, failure to pay for travel time, failure
to pay for mileage reimbursement, and for wage statement violations. In
October 2006, the Court declined to certify three out of the five
subclasses. The Court did, however, certify subclasses based on alleged
meal period and wage statement violations. Subsequently, the Company filed
a motion for summary judgment seeking to dismiss the matter in its
entirety. On June 22, 2007, the Court granted the Company's summary
judgment motion as to the causes of action relating to the subclasses
certified and dismissed those claims. The only surviving claims are those
relating to the named plaintiff only.
36
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
Simas v. Public Storage, Inc. (filed January 2006) (Superior Court of
-----------------------------------------------------------------------
California - Orange County)
---------------------------
The plaintiff brought this action against the Company on behalf of a
purported class who bought insurance coverage at the Company's facilities
alleging that the Company does not have a license to offer, sell and/or
transact storage insurance. The action was originally brought under
California Business and Professions Code Section 17200 and seeks retention,
monetary damages and injunctive relief. The Company filed a demurrer to the
complaint. While the demurrer was pending, Plaintiff amended the complaint
to allege a national class and claims for unfair business practices, unjust
enrichment, money had and received, and negligent and intentional
misrepresentation. Ultimately all claims except for unjust enrichment were
dismissed. A subsequent demurrer was filed and sustained without leave to
amend. The case was therefore dismissed. The plaintiff has appealed the
trial court's ruling.
Other Items
-----------
We are a party to various claims, complaints, and other legal actions
that have arisen in the normal course of business from time to time that
are not described above. We believe that it is unlikely that the outcome of
these other pending legal proceedings including employment and tenant
claims, in the aggregate, will have a material adverse impact upon our
operations or financial position.
Insurance and Loss Exposure
---------------------------
We have historically carried comprehensive insurance, including
property, earthquake, general liability and workers compensation, through
nationally recognized insurance carriers and through our captive insurance
programs. Our insurance programs also insure affiliates of the Company. Our
estimated maximum annual exposure for losses that are below the deductibles
set forth in the third-party insurance contracts, assuming multiple
significant events occur, is approximately $37 million. In addition, if
losses exhaust the third-party insurers' limit of coverage of $75 million
for property coverage including earthquake coverage ((euro)25 million for
Europe) and $102 million for general liability, our exposure could be
greater. These limits are higher than estimates of maximum probable losses
that could occur from individual catastrophic events (i.e. earthquake and
wind damage) determined in recent engineering and actuarial studies.
Our tenant insurance program reinsures policies against claims for
losses to goods stored by tenants at our self-storage facilities. We have
third-party insurance coverage for claims paid exceeding $1,500,000
resulting from any individual event, to a limit of $9,000,000. At June 30,
2007, we had approximately 458,000 reinsured policies outstanding
representing aggregate coverage of approximately $1.2 billion.
Development and Acquisition of Real Estate Facilities
-----------------------------------------------------
We currently have 56 projects in our development pipeline, consisting
of newly developed self-storage facilities, expansions and enhancements to
existing self-storage facilities. The total estimated cost of these
facilities is approximately $279 million of which $98,645,000 has been
spent at June 30, 2007. These projects are subject to contingencies. We
expect to incur these expenditures over the next 12 - 24 months.
As of August 8, 2007, we are under contract to purchase five
self-storage facilities (total approximate net rentable square feet of
395,000) at an aggregate cost of approximately $44 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 these facilities will be acquired.
37
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
Operating Lease Obligations
---------------------------
We lease trucks, land, equipment and office space. At June 30, 2007,
the future minimum rental payments required under our operating leases for
the years ending December 31, principally representing amounts payable
under land leases for our European subsidiaries, are as follows (amounts in
thousands):
2007 (remainder of)....................... $ 13,287
2008...................................... 18,898
2009...................................... 15,857
2010...................................... 11,966
2011...................................... 10,430
Thereafter................................ 193,608
----------
$ 264,046
==========
We lease trucks, land, equipment and office space under various
operating leases. Certain leases are cancelable with substantial penalties.
Certain of our European land operating leases have indefinite terms or
extension options exercisable at the discretion of the lessee. For such
land leases we have disclosed operating lease obligations over the
estimated useful life of the related property.
Expenses under operating leases were approximately $7,319,000and
$14,771,000 for the three and six months ended June 30, 2007, respectively,
as compared to $2,389,000 and $4,570,000 for the three and six months ended
June 30, 2006, respectively. Certain of our land leases include escalation
clauses, and we recognize related lease expenses on a straight-line basis.
16. Income Taxes
------------
For all taxable years subsequent to 1980, the Company qualified and we
intend to continue to qualify the Company as a REIT, as defined in Section
856 of the Internal Revenue Code. As a REIT, we do not incur federal or
significant state tax on that portion of our taxable income which is
distributed to our shareholders, provided that we meet certain tests. We
believe we will meet these tests during 2007 and, accordingly, no provision
for income taxes has been made in the accompanying condensed consolidated
financial statements on income produced and distributed on real estate
rental operations.
Domestic operations other than rental real estate are primarily
conducted through taxable REIT subsidiaries. Income of our taxable REIT
subsidiaries is subject to federal, state and local income taxes.
As of August 22, 2006, the date of the Shurgard merger, the Company
consolidates the income tax provision of the former Shurgard domestic and
European activities, the latter of which are subject to income taxes in the
jurisdictions of the countries where they operate.
We adopted the provisions of Financial Accounting Standards Board
("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes
- an interpretation of FASB Statement No. 109" ("FIN 48"), on January 1,
2007. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statement in accordance with FASB
Statement 109, "Accounting for Income Taxes", and prescribes a recognition
threshold and measurement process for financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosures and
transition.
Based on our evaluation, we have concluded that there are no
significant uncertain tax positions requiring recognition in our financial
statements. Our evaluation was performed for the tax years ended December
31, 2003, 2004, 2005, 2006 and the first and second quarters of 2007.
38
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
We may from time to time be assessed interest or penalties by certain
tax jurisdictions, although any such assessments have historically been
minimal and immaterial to our financial results. In the event we have
received an assessment for interest and/or penalties, it has been
classified in the financial statements as general and administrative
expense.
17. Subsequent Events
-----------------
On July 2, 2007, we issued 6,900,000 depositary shares, with each
depositary share representing 1/1,000 of a 7.000% Cumulative Preferred
Share of Beneficial Interest, Series N, for aggregate gross proceeds of
$172.5 million.
39
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with our condensed consolidated financial statements and notes thereto.
FORWARD LOOKING STATEMENTS: All statements in this document, other than
statements of historical fact, are forward-looking statements which may be
identified by the use of the words "expects," "believes," "anticipates,"
"plans", "would", "should," "may", "estimates" and similar expressions. These
forward-looking statements are made pursuant to the safe-harbor provisions of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended. These forward-looking statements
involve known and unknown risks and uncertainties, which may cause Public
Storage's actual results and performance to be materially different from those
expressed or implied in the forward-looking statements. As a result, you should
not rely on these forward-looking statements as predictions of future events.
Factors and risks that may impact future results and performance
include, but are not limited to, those described in Item 1A, "Risk Factors" in
the Public Storage, Inc. Annual Report on Form 10-K for the year ended December
31, 2006 and in our other filings with the Securities and Exchange Commission.
These risks include the following: changes in general economic conditions and in
the markets in which we operate; the impact of competition from new and existing
storage and commercial facilities and other storage alternatives; difficulties
in our ability to successfully evaluate, finance and integrate acquired and
developed properties into our existing operations; risks associated with
international operations; the impact of the regulatory environment as well as
national, state, and local laws and regulations including, without limitation,
those governing REITs; difficulties in raising capital at reasonable rates;
delays in the development process; and economic uncertainty due to the impact of
war or terrorism.
We caution you not to place undue reliance on forward-looking
statements, which speak only as the date of this report or as of the dates
indicated in the statements. All of our forward looking statements, including
those in this report, are qualified in their entirely by this statement. We
assume no 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
("GAAP"). The preparation of our financial statements and related disclosures in
conformity with GAAP and our discussion and analysis of our financial condition
and results of operations requires management to make judgments, assumptions and
estimates that affect the amounts reported in our consolidated financial
statements and accompanying notes. Note 2 to our condensed consolidated
financial statements summarizes the significant accounting policies and methods
used in the preparation of our condensed consolidated financial statements and
related disclosures.
Management believes the following are critical accounting policies
whose application has a material impact on the Company's financial presentation.
That is, they are both important to the portrayal of our financial condition and
results, and they require management to make judgments and estimates about
matters that are inherently uncertain.
QUALIFICATION AS A REIT - INCOME TAX EXPENSE: We believe that we have
been organized and operated, and we intend to continue to operate, as a
qualifying Real Estate Investment Trust ("REIT") under the Internal Revenue Code
and applicable state laws. We also believe that Shurgard qualified as a REIT. 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.
40
We therefore do not estimate or accrue any federal income tax expense
for income earned and distributed related to REIT operations. This estimate
could be incorrect, because due to the complex nature of the REIT qualification
requirements, the ongoing importance of factual determinations and the
possibility of future changes in our circumstances, we cannot be assured that we
actually have satisfied or will satisfy the requirements for taxation as a REIT
for any particular taxable year. For any taxable year that we fail or have
failed to qualify as a REIT and 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. In
addition, if Shurgard failed to qualify as a REIT, we generally would have
succeeded to or incurred significant tax liabilities.
IMPAIRMENT OF LONG-LIVED ASSETS: Substantially all of our assets
consist of long-lived assets, including real estate and other intangible assets.
The evaluation of our long-lived assets for impairment includes determining
whether indicators of impairment exist, which is a subjective process. When any
indicators of impairment are found, the evaluation of such long-lived assets
then entails projections of future operating cash flows, which also involves
significant judgment. Future events, or facts and circumstances that currently
exist, that we have not yet identified, could cause us to conclude in the future
that our long-lived assets are impaired. Any resulting impairment loss could
have a material adverse impact on our financial condition and results of
operations.
ESTIMATED USEFUL LIVES OF LONG-LIVED ASSETS: Substantially all of our
assets consist of depreciable, 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 15 to our condensed 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. At
June 30, 2007, we had approximately 458,000 reinsured policies in the United
States outstanding representing aggregate coverage of approximately $1.2
billion.
ACCRUALS FOR CONTINGENCIES: We are exposed to business and legal
liability risks with respect to events that have occurred, but in accordance
with GAAP, we have not accrued for such potential liabilities because the loss
is either not probable or not estimable or because we are not aware of the
event. Future events and the 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 15 to our
condensed consolidated financial statements.
ACCRUALS FOR OPERATING EXPENSES: We accrue for property tax expense and
certain other operating expenses based upon estimates and historical trends and
current and anticipated local and state government rules and regulations. If
these estimates and assumptions are incorrect, our expenses could be misstated.
Cost of operations, interest expense, general and administrative expense, as
well as television, yellow page, and other advertising expenditures are expensed
as incurred.
VALUATION OF DERIVATIVES: As described in our Significant Accounting
Policies in Note 2 to our condensed consolidated financial statements, our
derivative instruments are not considered effective hedges. Accordingly, any
changes in value of these derivatives are reflected as an increase or decrease
in net income. The determination of the value of derivatives is based upon
significant judgment and assumptions including interest rates, currency rates,
and expected rates of return. The actual value of derivative instruments is
dependent upon many factors that our judgments and assumptions may not consider,
or may not consider effectively.
41
EUROPEAN NET OPERATING LOSSES - INCOME TAX TREATMENT: The Shurgard
European real estate operations generated significant operating losses from
inception to the date of our merger with Shurgard. We recorded a deferred tax
asset arising from the net operating loss carryforward as of the date of
acquisition, and concluded that a valuation allowance was required for the net
amount of the deferred tax asset. To the extent that we determine the valuation
allowance is no longer required, the change in the valuation allowance will
first be treated as a reduction of goodwill and other intangible assets related
to the Shurgard merger before being treated as a reduction to the provision for
income taxes.
VALUATION OF ASSETS AND LIABILITIES ACQUIRED IN THE MERGER WITH
SHURGARD: In recording the merger with Shurgard, we have estimated the value of
real estate, intangible assets, debt, and the other assets and other liabilities
of Shurgard that we acquired. In addition, we have estimated the fair market
value of the 38.9 million shares that we issued to the Shurgard shareholders.
These value estimates are based upon many assumptions, including interest rates,
market values of land and buildings in the United States and Europe, estimated
future cash flows from the tenant base in place, and the recoverability of
certain assets. While we believe that the assumptions we used are reasonable,
these assumptions are subject to a significant degree of judgment, and others
could come to materially different conclusions as to value. If these assumptions
were computed differently, our depreciation and amortization expense, interest
expense, real estate, debt, and intangible assets could be materially different.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2007:
Net income for the three months ended June 30, 2007 was $77,104,000
compared to net income of $128,862,000 for the same period in 2006, representing
a decrease of $51,758,000. This decrease is primarily due to increased
amortization expense totaling $70.9 million due to the amortization of certain
intangible assets acquired in our merger with Shurgard Storage Centers, Inc.
("Shurgard"), which closed on August 22, 2006, combined with an increase of
$35.7 million in depreciation expense related to facilities acquired in the
merger. In addition, during the three months ended June 30, 2007, our general
and administrative expense increased significantly as we incurred $9.6 million
in expenses related to our proposed offering of shares in our European business
and $2.0 million of expenses related to our reorganization as a Maryland real
estate investment trust (a "Maryland REIT").
The negative impacts to our net income from the above mentioned items
were partially offset by improved operations from our Same Store group of
facilities, continued growth in operations from our newly developed and recently
expanded facilities, as well as continued growth in our recently acquired
self-storage facilities including the facilities acquired in the merger with
Shurgard.
Our Same Store net operating income, before depreciation expense,
increased by approximately $2,224,000 to $151,927,000, or 1.5%, as a result of a
1.7% improvement in revenues partially offset by a 2.1% increase in cost of
operations. Aggregate net operating income for our newly developed and recently
expanded and acquired facilities (other than the Shurgard facilities) increased
by approximately $2,968,000 to $26,102,000 compared to the same period in 2006.
This increase was largely due to the impact of facilities acquired in 2005, 2006
and 2007, combined with continued fill-up of our newly developed and expansion
facilities. For those facilities that were acquired in the Shurgard merger, net
operating income was approximately $83,821,000 for the quarter ended June 30,
2007. Our expanded media advertising, along with our aggressive pricing and
promotional discount programs, increased our entire domestic portfolio's
(including the Shurgard portfolio for all periods presented) average occupancy
to 89.7% for the second quarter 2007 compared to 88.6% last year and 87.5% in
the first quarter 2007. The overall occupancy at the end of June 2007 was 90.6%
compared to 89.3% last year.
For the three months ended June 30, 2007, we had a net income allocable
to our common shareholders (after allocating net income to our preferred and
equity shareholders) of $14,433,000 or $0.08 per common share on a diluted basis
compared to income of $71,130,000 or $0.55 per common share on a diluted basis
for the same period in 2006, representing a decrease of $56,697,000 or $0.47 per
diluted common share, or 84.6%. The decreases in net income allocable to common
shareholders on an aggregate and per-share basis are due primarily to the impact
of the factors described above, combined with an increase in income allocated to
preferred shareholders, as described below.
For the three months ended June 30, 2007 and 2006, we allocated
$57,315,000 and $52,376,000 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
issued preferred securities.
Weighted average diluted shares increased to 170,213,000 for the three
months ended June 30, 2007 from 129,062,000 for the three months ended June 30,
2006. The increase in weighted average diluted shares is due primarily to the
42
issuance of approximately 38.9 million shares in the merger with Shurgard, as
well as the exercise of employee stock options assumed in the merger with
Shurgard.
FOR THE SIX MONTHS ENDED JUNE 30, 2007:
Net income for the six months ended June 30, 2007 was $136,882,000
compared to $243,078,000 for the same period in 2006, representing a decrease of
$106,196,000. This decrease is primarily due to increased amortization expense
totaling $156.7 million due to the amortization of certain intangible assets
acquired in our merger with Shurgard combined with an increase of $71.4 million
in depreciation expense related to facilities acquired in the merger. In
addition, during the six months ended June 30, 2007, our general and
administrative expense increased significantly as we incurred $9.6 million in
expenses related to our proposed offering of shares in our European business,
$2.0 million of expenses related to our reorganization as a Maryland REIT, and
$5.3 million in integration expenses related to the merger.
These items were partially offset by improved operations from our Same
Store group of facilities, continued growth in operations from our newly
developed and recently expanded facilities along with continued growth in our
recently acquired self-storage facilities (including the facilities acquired
from Shurgard).
Same Store net operating income, before depreciation expense, increased
by $6,578,000 to $299,776,000, or 2.2%, as a result of a 2.3% improvement in
revenues partially offset by a 2.4% increase in cost of operations. Aggregate
net operating income for our newly developed, acquired and expansion
self-storage facilities (excluding the Shurgard facilities) increased by
approximately $7,722,000 to $51,005,000. We earned an aggregate of $160,930,000
in net operating income with respect to the facilities acquired from Shurgard.
Net income allocable to our common shareholders (after allocating net
income to our preferred and equity shareholders) was $10,079,000 or $0.06 per
common share on a diluted basis for the six months ended June 30, 2007 compared
to $133,375,000 or $1.03 per common share on a diluted basis for the same period
in 2006, representing a decrease of $0.97 per common share, or 94.2%. The
decrease in net income allocable to common shareholders and earnings per common
diluted share are due primarily to the impact of the factors described above,
combined with an increase in income allocated to preferred shareholders, as
described below.
For the six months ended June 30, 2007 and 2006, we allocated
$116,091,000 and $98,991,000 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.
Weighted average diluted shares increased to 170,275,000 for the six
months ended June 30, 2007 from 129,037,000 for the six months ended June 30,
2006. The increase in weighted average diluted shares is due primarily to the
issuance of approximately 38.9 million shares in the merger with Shurgard, as
well as the exercise of employee stock options assumed in the merger with
Shurgard.
REAL ESTATE OPERATIONS
DOMESTIC SELF-STORAGE OPERATIONS: Our domestic self-storage operations
are by far the largest component of our operating activities, representing
approximately 81% of our total revenues generated for each of the three and six
month periods ended June 30, 2007. Rental income with respect to our domestic
self-storage operations has grown from $262 million and $514 million for the
three and six months ended June 30, 2006, respectively, to $365 million and $720
million for the three and six months ended June 30, 2007, respectively,
representing increases of $103 million, or approximately 39% for the three
months ended June 30, 2007 and $206 million, or approximately 40% for the six
months ended June 30, 2007. The year-over-year improvements in rental income are
due to improvements in the performance of those facilities that we owned prior
to January 1, 2005 (our "Same Store" facilities), 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 operating results of these three
groups, our Same Store group, acquisition facilities and development facilities.
43
Domestic self - storage operations summary:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ---------- ------------------------ -----------
Percentage Percentage
2007 2006 Change 2007 2006 Change
------------ ----------- ---------- ----------- ------------ -----------
(Dollar amounts in thousands)
Rental income:
Same Store Facilities....................... $ 230,161 $ 226,352 1.7% $ 455,838 $ 445,649 2.3%
Acquired Facilities......................... 107,087 11,510 830.4% 209,710 20,843 906.1%
Development Facilities...................... 27,611 24,370 13.3% 54,230 47,087 15.2%
------------ ----------- ---------- ----------- ------------ -----------
Total rental income....................... 364,859 262,232 39.1% 719,778 513,579 40.1%
------------ ----------- ---------- ----------- ------------ -----------
Cost of operations before depreciation and
amortization (a):
Same Store Facilities....................... 78,234 76,649 2.1% 156,062 152,451 2.4%
Acquired Facilities......................... 37,793 4,043 834.8% 76,008 7,516 911.3%
Development Facilities...................... 10,233 8,703 17.6% 20,056 17,131 17.1%
------------ ----------- ---------- ----------- ------------ -----------
Total cost of operations................. 126,260 89,395 41.2% 252,126 177,098 42.4%
------------ ----------- ---------- ----------- ------------ -----------
Net operating income before depreciation and
amortization(a):
Same Store Facilities....................... 151,927 149,703 1.5% 299,776 293,198 2.2%
Acquired Facilities......................... 69,294 7,467 828.0% 133,702 13,327 903.2%
Development Facilities...................... 17,378 15,667 10.9% 34,174 29,956 14.1%
------------ ----------- ---------- ----------- ------------ -----------
Total net operating income before
depreciation and amortization (a)...... 238,599 172,837 38.0% 467,652 336,481 39.0%
------------ ----------- ---------- ----------- ------------ -----------
Depreciation and amortization expense:
Same Store Facilities....................... (40,391) (39,298) 2.8% (80,797) (80,349) 0.6%
Acquired Facilities......................... (77,451) (2,658) 2813.9% (167,183) (5,244) 3088.1%
Development Facilities...................... (9,617) (5,852) 64.3% (16,030) (11,398) 40.6%
------------ ----------- ---------- ----------- ------------ -----------
Total depreciation and amortization expense. (127,459) (47,808) 166.6% (264,010) (96,991) 172.2%
------------ ----------- ---------- ----------- ------------ -----------
Net operating income (loss):
Same Store Facilities....................... 111,536 110,405 1.0% 218,979 212,849 2.9%
Acquired Facilities......................... (8,157) 4,809 (269.6)% (33,481) 8,083 (514.2)%
Development Facilities...................... 7,761 9,815 (20.9)% 18,144 18,558 (2.2)%
------------ ----------- ---------- ----------- ------------ -----------
Total net operating income.................. $ 111,140 $ 125,029 (11.1)% $ 203,642 $ 239,490 (15.0)%
============ =========== ========== =========== ============ ===========
Weighted average square foot occupancy during
the period.................................. 89.7% 90.3% (0.7)% 88.0% 89.4% (1.6)%
Number of self-storage facilities (at end of
period)..................................... 1,973 1,492 32.2%
Net rentable square
feet (in thousands, at end
of period):................................. 123,683 91,579 35.1%
(a) Total net operating income before depreciation and amortization or "NOI"
is a non-GAAP (generally accepted accounting principles) financial
measure that excludes the impact of depreciation and amortization
expense. See Note 12 to our June 30, 2007 condensed consolidated
financial statements, "Segment Information," which includes a
reconciliation of net operating income before depreciation and
amortization for this segment to our consolidated net income. Although
depreciation and amortization are operating expenses, we believe that NOI
is a meaningful measure of operating performance, because we utilize NOI
in making decisions with respect to capital allocations, in determining
current property values, segment performance, and comparing
period-to-period and market-to-market property operating results. NOI is
not a substitute for net operating income after depreciation and
amortization in evaluating our operating results.
In the discussion that follows, we present realized annual rent per
occupied square foot, which is computed by dividing rental income, before late
charges and administrative fees, by the weighted average occupied square footage
for the period. We also present annualized rental income per available square
foot ("REVPAF"), which represents annualized rental income, before late charges
and administrative fees, divided by total available net rentable square feet.
Late charges and administrative fees are excluded to more effectively measure
our ongoing level of revenue associated with the leasing of the units.
44
In the above table, the significant increases in revenues and cost of
operations, in the three and six months ended June 30, 2007 as compared to the
same periods in 2006, are primarily due to the acquisition of self-storage
facilities in connection with the merger with Shurgard which was completed on
August 22, 2006 (see Note 3 to the condensed consolidated financial statements).
As a result of the merger, we acquired interests in 487 self-storage facilities
(32.3 million net rentable square feet) located in the United States, including
459 wholly-owned facilities and 28 facilities owned by joint ventures in which
we have an interest. The operating results of all of the facilities acquired in
the merger and located in the United States are included in our financial
statements and in the above table for the period we owned the facilities.
Immediately preceding the close of the merger, all of the acquired
facilities in the United States were integrated into our property management
systems, centralized pricing systems, national call center, and website.
Temporary signage, re-branding the facilities from "Shurgard" to "Public
Storage", was also put into place immediately after the close of the merger.
Our property management personnel worked diligently to absorb this
large acquisition of facilities. Training and hiring new property managers were
key elements for the successful integration process. New employees needed to be
trained on how to use our property management systems and follow our operating
policies and procedures. As expected in a merger of this nature, immediately
following the close of the merger, turnover at the property manager level was
higher than we normally experience. In anticipation of such turnover, we began
to hire additional "bench" property managers in the second quarter of 2006 to
fill openings when turnover occurred. Although this strategy was effective at
keeping properties opened for business, it did result in incurring additional
payroll costs in the second, third and fourth quarters of 2006 due to the
additional head count.
As a result of the merger, the amount of vacant space increased
significantly in our system. The acquired Shurgard portfolio of 487 facilities
in the United States had an aggregate average square foot occupancy of 84.4% at
August 31, 2006, which was 530 basis points below the 89.7% for the existing
Public Storage portfolio. Average rental rates were approximately the same for
each of the portfolios. Our goal has been to increase our overall portfolio
occupancy in order to be in a position to drive rental rates. The primary focus
in meeting our goal has been to work to improve the Shurgard portfolio's overall
occupancy level to the occupancy level experienced by our existing portfolio.
In order to increase move-in volumes and ultimately increase occupancy
levels as quickly as possible, and because there is typically low seasonal
demand in the fourth and first quarters, we were much more aggressive at
reducing our pricing, and increasing promotional discounts and marketing
programs during the fourth quarter of 2006 and the first six months of 2007. We
have substantially increased our media advertising expenditures to $10.6 million
and $17.2 million for the three and six months ended June 30, 2007 as compared
to $3.5 million and $8.6 million, respectively, in the same periods in 2006.
We have made significant progress in improving the occupancy level of
the Shurgard portfolio. However, this improvement has come somewhat at the
expense of reduced rates, and has also resulted in a reduction in Same-Store
occupancies and rates. We believe that the more aggressive pricing and
discounting at the Shurgard properties, combined with the fact that the Shurgard
properties have relatively more vacant spaces to rent, has resulted in shifting
of new tenant flow from our existing portfolio to the Shurgard properties during
the past nine months, putting some pressure on occupancies and rental rate
growth for the Same Store facilities.
Short-term occupancy increases, like those we have experienced in the
Shurgard portfolio, tend to result in a higher proportion of short-term tenants
and a resulting increase in move-out ratios, which subsides over time. We
believe this is related to the nature of the occupancy stabilization process,
which we have observed to have two principal stages -- first, the physical
fill-up of the facilities, then the achievement of a stable tenant base with
historical levels of move-outs, as successive groups of tenants move in, the
tenants in such groups with short-term needs (such as moving) move out, and the
tenants with long-term storage needs remain.
It is often difficult to see the benefits of the strategy we are
employing to increase occupancies in our short-term operating results, because
promotional discounts and marketing expense adversely affect earnings in the
45
month the customer moves in, while the revenue from these tenants are reflected
in our operating results throughout their tenancy. However, we expect that, as
occupancies for the Shurgard facilities continue to approach the Public Storage
historical levels, and as we continue to achieve a tenant base with historical
move-out rates, the more aggressive pricing and discounting at the Shurgard
properties can subside, providing rental rate growth and putting less pressure
on the Public Storage same-store portfolio. We believe that achieving our goal
of high occupancies with a stabilized tenant base will positively impact our
future operating income by a) allowing us to reduce customer acquisition costs
such as advertising and promotion, as we will have to attract fewer new tenants
to replace vacating tenants and b) allowing us to be more aggressive in raising
rental rates to new and existing tenants.
In addition to our strategy to increase Shurgard occupancies, our
operating results have been, and will continue to be, impacted by the general
economic trends that affect self-storage. While it is difficult to quantify the
impact of these economic trends, and even more difficult to predict what the
impact will be in the future, we do believe that several such factors, including
the slowdown in the national housing market as well as reduced year-over-year
demand in markets which had enhanced self-storage demand in 2005 and 2006 due to
the hurricanes (such as in Florida), have impacted our operating results.
We expect to continue with aggressive pricing, promotional discounts
and marketing in the third quarter to continue to drive improvement in our
overall occupancy levels. We expanded our media programs in the second quarter
of 2007 and were on television in approximately 25 markets versus 14 markets in
the second quarter of 2006, along with national cable and selected radio. Future
media advertising expenditures after the third quarter of 2007 are not
determinable at this time, and will be driven in part by demand for our
self-storage spaces, our current occupancy levels, as well as our evaluation of
the most effective mix of yellow page, media, and internet advertising.
We continue to believe that the acquisition of the Shurgard portfolio
provides operational efficiencies, specifically in the areas of marketing,
national call center, and indirect overhead costs that support the operations of
the facilities. We do not believe that these efficiencies are fully realized due
to the recent integration, increased property manager head count and increased
marketing costs, as noted above.
Domestic - Same Store Facilities
We increased the number of facilities included in the Same Store
Facilities from 1,266 facilities at December 31, 2006 to 1,316 facilities at
June 30, 2007. The increase in the Same Store pool of facilities is due to the
inclusion of 79 facilities previously classified as either Acquired or
Development facilities and the removal of 29 facilities that are now classified
as Development facilities. The facilities included in the Same Store Facilities
are all stabilized and have been owned since January 1, 2005 and will therefore
provide meaningful comparative data for 2005, 2006 and 2007. The 29 facilities
that have been classified as Expansion facilities are facilities that are either
currently undergoing repackaging activities or are expected to commence such
activities during 2007, and accordingly, will no longer provide meaningful
comparative data for 2005, 2006 and 2007.
As a result of the increase in the number of Same Store Facilities,
comparisons should not be made between information presented in our 2006 reports
for the 1,266 Same Store Facilities and the current 1,316 Same Store Facilities
to identify trends in occupancies, realized rents per square foot, or other
operating trends.
The Same Store Facilities contain approximately 77.8 million net
rentable square feet, representing approximately 63% of the aggregate net
rentable square feet of our consolidated domestic 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:
46
SAME STORE FACILITIES Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ----------- ------------------------- -----------
Percentage Percentage
2007 2006 Change 2007 2006 Change
------------ ----------- ----------- ------------ ------------ -----------
(Dollar amounts in thousands, except weighted average amounts)
Rental income...................................... $ 220,056 $ 216,347 1.7% $ 435,783 $ 426,152 2.3%
Late charges and administrative fees collected..... 10,105 10,005 1.0% 20,055 19,497 2.9%
------------ ----------- ----------- ------------ ------------ -----------
Total rental income............................. 230,161 226,352 1.7% 455,838 445,649 2.3%
------------ ----------- ----------- ------------ ------------ -----------
Cost of operations before depreciation and amortization:
Direct property payroll....................... 16,098 16,624 (3.2)% 32,239 32,143 0.3%
Property taxes................................ 21,630 20,730 4.3% 44,501 42,718 4.2%
Repairs and maintenance....................... 7,016 7,437 (5.7)% 14,057 14,541 (3.3)%
Advertising and promotion..................... 9,161 7,058 29.8% 15,889 14,021 13.3%
Utilities..................................... 5,112 4,734 8.0% 10,540 9,929 6.2%
Property insurance............................ 2,377 3,343 (28.9)% 4,831 5,305 (8.9)%
Telephone reservation center.................. 2,182 2,204 (1.0)% 4,251 4,247 0.1%
Other cost of management...................... 14,658 14,519 1.0% 29,754 29,547 0.7%
------------ ----------- ----------- ------------ ------------ -----------
Total cost of operations........................ 78,234 76,649 2.1% 156,062 152,451 2.4%
------------ ----------- ----------- ------------ ------------ -----------
Net operating income before depreciation and
amortization (e)................................... 151,927 149,703 1.5% 299,776 293,198 2.2%
Depreciation and amortization...................... (40,391) (39,298) 2.8% (80,797) (80,349) 0.6%
------------ ----------- ----------- ------------ ------------ -----------
Net operating income.............................. $ 111,536 $ 110,405 1.0% $ 218,979 $ 212,849 2.9%
============ =========== =========== ============ ============ ===========
Gross margin (before depreciation and amortization) 66.0% 66.1% (0.2)% 65.8% 65.8% 0.0%
Weighted average for the fiscal year:
Square foot occupancy (a)....................... 91.5% 92.1% (0.7)% 90.6% 91.1% (0.5)%
Realized annual rent per occupied square foot (b) $ 12.37 $ 12.08 2.4% $ 12.37 $ 12.03 2.8%
REVPAF (c)...................................... $ 11.32 $ 11.13 1.7% $ 11.21 $ 10.96 2.3%
Weighted average at June 30:
Square foot occupancy........................... 92.2% 92.6% (0.4)%
In place annual rent per occupied square foot (d) $ 13.69 $ 13.33 2.7%
Total net rentable square feet (in thousands)...... 77,782 77,782 -
(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.
(e) Total net operating income before depreciation and amortization or "NOI"
is a non-GAAP (generally accepted accounting principles) financial
measure that excludes the impact of depreciation and amortization
expense, for our Same Store facilities represents a portion of our total
self-storage segment's net operating income before depreciation and
amortization, and is reconciled to the segment total in the table
"domestic self-storage operations summary" above. A reconciliation of our
total self-storage segment's net operating income before depreciation and
amortization to consolidated net income is included in Note 12 to our
June 30, 2007 condensed consolidated financial statements, "Segment
Information." Although depreciation and amortization are operating
expenses, we believe that NOI is a meaningful measure of operating
performance, because we utilize NOI in making decisions with respect to
capital allocations, in determining current property values, segment
performance, and comparing period-to-period and market-to-market property
operating results. NOI is not a substitute for net operating income after
depreciation and amortization in evaluating our operating results.
47
Rental income increased approximately 1.7% and 2.3% in the three and
six months ended June 30, 2007 as compared to the same periods in 2006. These
increases were primarily attributable to higher average realized annual rental
rates per occupied square foot, which were 2.4% and 2.8% higher in the three and
six months ended June 30, 2007 as compared to the same periods in 2006, offset
partially by lower occupancy levels.
In the beginning of 2006, the quarterly year-over-year growth in rental
income was consistent for each quarter, as rental income growth was 5.5% for the
quarter ended March 31, 2006, and started accelerating to 5.9% for the quarter
ended June 30, 2006 and 6.3% for the quarter ended September 30, 2006. For the
quarter ended December 31, 2006, the year-over-year growth in rental income
slowed to 3.5%. In 2007, rental income for the quarters ended March 31, 2007 and
June 30, 2007 were 2.9% and 1.7%, respectively. This reduction in growth was the
result of lower occupancy levels combined with a reduction in year-over-year
growth in realized rents.
It is difficult for us to pinpoint the exact causes for this slow down
and the degree to which such causes have negatively affected the growth in
rental income. We believe, however, that the reduction was due to a number of
factors including; (i) the increased number of vacant spaces added to our
overall system as a result of the Shurgard merger and our aforementioned focus
on improving the occupancies of the Shurgard portfolio, (ii) hurricane activity
that created unusual demand for storage space in our Florida markets in 2005 and
2004, making year-over-year trends in 2007 less favorable, (iii) general
economic conditions, specifically the slow down in housing sales and moving
activity, and (iv) increased competition. Many of these factors are beyond our
control.
As indicated above, it is our objective to close the occupancy gap
between the acquired Shurgard properties versus the Public Storage existing
portfolio and achieve a stabilized tenant base. We believe, at least in the
short term, this strategy will continue to put pressure on occupancies and
rental rate growth on our existing Same Store facilities as demand appears to
have shifted somewhat to the acquired Shurgard facilities as we adjust the level
of discounts and monthly rents at the acquired Shurgard facilities to accelerate
occupancy growth. Notwithstanding, it is important for us to maintain our
occupancy levels in our Same Store portfolio; accordingly, we have adjusted
rental rates and the level of promotional discounts offered to new tenants as a
means to expand move-in volumes throughout the entire portfolio. It has been,
and will continue to be, challenging in the near term to maintain occupancy
levels at our Same Store group of facilities, while at the same time trying to
continue to improve the occupancy levels of the acquired Shurgard facilities. As
a result of these factors and our aggressive pricing and discounting to drive
customer volumes, compared to modest discounting in the third quarter of 2006,
and despite expanded marketing expenditures described below, we expect continued
modest revenue growth in the Public Storage Same Store pool of properties in the
third quarter of 2007.
Cost of operations (excluding depreciation and amortization) increased
by 2.1% and 2.4% in the three and six months ended June 30, 2007 as compared to
the same periods in 2006.
Payroll expense has decreased 3.2% in the three months ended June 30,
2007 and increased 0.3% in the six months ended June 30, 2007, respectively, as
compared to the same periods in 2006. The decrease experienced in the three
months ended June 30, 2007 is primarily due to a reduction in payroll hours
incurred, offset partially by higher wage rates.
Property tax expense increased 4.3% and 4.2% in the three and six
months ended June 30, 2007, respectively, as compared to the same periods in
2006, due to higher assessments.
Repairs and maintenance expenditures decreased 5.7% and 3.3% in the
three and six months ended June 30, 2007, respectively. We expect repairs and
maintenance expenditures to be higher in the remainder of 2007 as compared to
the same period in 2006.
Advertising and promotion is comprised principally of media (television
and radio), yellow page, and internet advertising. Our Same Stores pro rata
share of advertising and promotion costs increased 29.8% and 13.3% in the three
and six months ended June 30, 2007 as compared to the same periods in 2006.
48
Media advertising for the Same Store properties increased from
$2,802,000 in the three months ended June 30, 2006 to $5,332,000 in the three
months ended June 30, 2007, notwithstanding the substantially higher increase in
aggregate media advertising expenditures increased as discussed above, due to
the impact of allocation of these expenditures over a larger pool of properties
in the three months ended 2007. We expect to continue with aggressive pricing,
promotional discounts and marketing in the third quarter to continue to drive
improvement in our overall occupancy levels. We expanded our media programs in
the second quarter of 2007 and were on television in approximately 25 markets
versus 14 markets in the second quarter of 2006, along with national cable and
selected radio. Future media advertising expenditures after the third quarter of
2007 are not determinable at this time, and will be driven in part by demand for
our self-storage spaces, our current occupancy levels, as well as our evaluation
of the most effective mix of yellow page, media, and internet advertising.
Our internet advertising expenses were $885,000 and $1,339,000 in the
three and six months ended June 30, 2006, respectively, to $724,000 and
$1,547,000 in the three and six months ended June 30, 2007, respectively. We
expect that internet advertising will continue to grow as that marketing channel
becomes a more important source of new tenants.
Same-store yellow page advertising expenditures have remained
relatively stable in the three and six months ended June 30, 2007 versus the
same periods in 2006. Certain efficiencies related to the merger with Shurgard
should be reflected in the third and fourth quarters of 2007, specifically the
allocation of costs over a larger pool of properties.
Utility expenses increased 8.0% and 6.2% in the three and six months
ended June 30, 2007, respectively, due principally to higher energy costs as
compared to the same periods in 2006. These levels of increases are expected to
persist during 2007.
Insurance expense decreased 28.9% and 8.9% in the three and six months
ended June 30, 2007, respectively, as compared to the same periods in 2006
reflecting significant decreases in property insurance resulting primarily from
the softer insurance markets.
Telephone reservation center costs were $2,204,000 and $4,247,000 in
the three and six months ended June 30, 2006, respectively, and $2,182,000 and
$4,251,000 in the three and six months ended June 30, 2007, respectively. During
the last half of 2006, we began to realize certain benefits from increased
staffing through better conversion ratios and lower temporary staffing costs. We
continue to evaluate our telephone reservation center as we evaluate the
appropriate staffing levels and location of personnel relative to our expanded
portfolio, and as a result, expect telephone reservation center costs to remain
somewhat volatile during the remainder of 2007 until we determine our
appropriate ongoing level of expenses.
The following table summarizes selected quarterly financial data with
respect to the Same Store Facilities:
49
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:
2007 $ 225,677 $ 230,161
2006 $ 219,297 $ 226,352 $ 233,420 $ 227,007 $ 906,076
Total cost of operations
(excluding depreciation
and amortization):
2007 $ 77,828 $ 78,234
2006 $ 75,802 $ 76,649 $ 74,947 $ 72,149 $ 299,547
Property tax expense:
2007 $ 22,871 $ 21,630
2006 $ 21,988 $ 20,730 $ 21,700 $ 18,844 $ 83,262
Media advertising expense:
2007 $ 3,365 $ 5,333
2006 $ 4,130 $ 2,802 $ 1,049 $ 3,823 $ 11,804
REVPAF:
2007 $ 11.09 $ 11.32
2006 $ 10.79 $ 11.13 $ 11.46 $ 11.16 $ 11.13
Weighted average realized
annual rent per occupied
square foot:
2007 $ 12.35 $ 12.37
2006 $ 11.97 $ 12.08 $ 12.55 $ 12.42 $ 12.26
Weighted average occupancy
levels for the period:
2007 89.8% 91.5%
2006 90.1% 92.1% 91.3% 89.8% 90.8%
50
Analysis of Regional Trends
The following table sets forth regional trends in our Same Store Facilities:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -------------------------
2007 2006 Change 2007 2006 Change
------------ ------------- -------- ----------- ------------- ---------
(Amounts in thousands, except for weighted average data)
Same Store Facilities Operating Trends
by Region
Rental income:
Southern California (133 $ 37,455 $ 36,570 2.4% $ 74,274 $ 72,208 2.9%
facilities)......................
Northern California (133 27,971 27,129 3.1% 55,298 53,422 3.5%
facilities)......................
Texas (156 facilities).......... 20,638 20,102 2.7% 40,755 39,458 3.3%
Florida (141 facilities)........ 26,139 26,858 (2.7)% 52,294 52,837 (1.0)%
Illinois (92 facilities)........ 16,637 15,902 4.6% 32,809 31,387 4.5%
Georgia (60 facilities)......... 8,026 8,102 (0.9)% 16,017 15,817 1.3%
All other states (601 facilities) 93,295 91,689 1.8% 184,391 180,520 2.1%
------------ ------------- -------- ----------- ------------- ---------
Total rental income................. 230,161 226,352 1.7% 455,838 445,649 2.3%
Cost of operations before depreciation
and amortization:
Southern California.............. 8,399 8,613 (2.5)% 16,849 17,287 (2.5)%
Northern California.............. 7,223 7,303 (1.1)% 14,437 14,372 0.5%
Texas............................ 9,309 9,292 0.2% 18,114 18,008 0.6%
Florida.......................... 9,236 8,613 7.2% 17,976 16,887 6.4%
Illinois......................... 7,440 7,124 4.4% 15,029 14,668 2.5%
Georgia.......................... 2,802 2,720 3.0% 5,546 5,445 1.9%
All other states................. 33,825 32,984 2.5% 68,111 65,784 3.5%
------------ ------------- -------- ----------- ------------- ---------
Total cost of operations............ 78,234 76,649 2.1% 156,062 152,451 2.4%
Net operating income before depreciation
and amortization:
Southern California.............. 29,056 27,957 3.9% 57,425 54,921 4.6%
Northern California.............. 20,748 19,826 4.7% 40,861 39,050 4.6%
Texas............................ 11,329 10,810 4.8% 22,641 21,450 5.6%
Florida.......................... 16,903 18,245 (7.4)% 34,318 35,950 (4.5)%
Illinois......................... 9,197 8,778 4.8% 17,780 16,719 6.3%
Georgia.......................... 5,224 5,382 (2.9)% 10,471 10,372 1.0%
All other states................. 59,470 58,705 1.3% 116,280 114,736 1.3%
------------ ------------- -------- ----------- ------------- ---------
Total net operating income before
depreciation and amortization.... $ 151,927 $ 149,703 1.5% $ 299,776 $ 293,198 2.2%
Weighted average occupancy:
Southern California.............. 90.7% 91.9% (1.3)% 90.6% 91.6% (1.1)%
Northern California.............. 90.5% 91.5% (1.1)% 90.3% 90.6% (0.3)%
Texas............................ 91.6% 91.8% (0.2)% 90.7% 90.9% (0.2)%
Florida.......................... 90.5% 93.7% (3.4)% 90.7% 93.4% (2.9)%
Illinois......................... 90.5% 90.8% (0.3)% 89.5% 89.2% 0.3%
Georgia.......................... 91.2% 93.7% (2.7)% 90.6% 93.1% (2.7)%
All other states................. 91.4% 91.9% (0.5)% 90.4% 90.6% (0.2)%
------------ ------------- -------- ----------- ------------- ---------
Total weighted average occupancy.... 91.5% 92.1% (0.7)% 90.6% 91.1% (0.5)%
REVPAF:
Southern California.............. $ 17.19 $ 16.80 2.3% $ 17.05 $ 16.59 2.8%
Northern California.............. 14.71 14.29 2.9% 14.55 14.08 3.3%
Texas............................ 7.96 7.74 2.8% 7.86 7.61 3.3%
Florida.......................... 11.91 12.26 (2.9)% 11.90 12.05 (1.2)%
Illinois......................... 11.30 10.78 4.8% 11.14 10.65 4.6%
Georgia.......................... 8.36 8.45 (1.1)% 8.33 8.25 1.0%
All other states................. 10.30 10.10 2.0% 10.17 9.95 2.2%
------------ ------------- -------- ----------- ------------- ---------
Total REVPAF........................ $ 11.32 $ 11.13 1.7% $ 11.21 $ 10.96 2.3%
51
Same Store Facilities Operating Three Months Ended Six Months Ended
Trends by Region (Continued) June 30, June 30,
2007 2006 Change 2007 2006 Change
------------ ----------- --------- ------------ ----------- --------
(Amounts in thousands, except for weighted average data)
Realized annual rent per occupied square foot:
Southern California.............. $ 18.96 $ 18.28 3.7% $ 18.81 $ 18.11 3.9%
Northern California.............. 16.26 15.62 4.1% 16.12 15.54 3.7%
Texas............................ 8.69 8.44 3.0% 8.66 8.37 3.5%
Florida.......................... 13.16 13.08 0.6% 13.13 12.91 1.7%
Illinois......................... 12.48 11.87 5.1% 12.45 11.94 4.3%
Georgia.......................... 9.16 9.01 1.7% 9.19 8.86 3.7%
All other states................. 11.27 10.99 2.5% 11.26 10.98 2.6%
------------ ----------- --------- ------------ ----------- --------
Total realized rent per square foot. $ 12.37 $ 12.08 2.4% $ 12.37 $ 12.03 2.8%
============ =========== ========= ============ =========== ========
In place annual rent per occupied square foot at June 30:
Southern California................. $ 20.72 $ 19.96 3.8%
Northern California................. 17.95 17.26 4.0%
Texas............................... 9.57 9.35 2.4%
Florida............................. 14.42 14.12 2.1%
Illinois............................ 13.80 13.22 4.4%
Georgia............................. 10.21 9.99 2.2%
All other states.................... 12.48 12.19 2.4%
------------ ----------- --------
Total in place rent per occupied
square foot:........................ $ 13.69 $ 13.33 2.7%
============ =========== ========
The Southern California Market consists principally of the greater Los
Angeles area and San Diego, and has historically been a source of strong growth
due to its diverse economy and continued population growth. In addition,
barriers to entry in the form of difficult permitting requirements tend to
reduce the potential for increased competition in the infill locations where we
focus our operations.
The Northern California market consists principally of San Francisco
and related peripheral areas. While this area has a vibrant economy and
relatively strong population growth, it has been subject to general economic
conditions, principally issues associated with the technology sector. In
addition, there has been increased competition in the areas that we do business,
principally in the peripheral areas near San Francisco, due to new supply. As a
result, revenue growth in this area has been average relative to our other
markets.
The Texas market principally includes Dallas, Houston and San Antonio.
This market has historically been subject to volatility due to minimal
regulatory restraint upon building, which results in cycles of overbuilding and
absorption. For the last few years, we have been in a period of increased supply
and competition in the areas we operate, and as a result revenue growth has been
average relative to other markets.
The Florida market principally includes Miami, Orlando, Tampa, and West
Palm Beach. These markets were our strongest in terms of revenue growth in 2005
and 2006, due in part to increased moving and storage demand resulting from the
impact of hurricane activity in 2005 and 2004. However, growth in revenues
during the first six months of 2007 has moderated due primarily to the lack of
hurricane activity during the 2006 season resulting in difficult year-over-year
comparisons, and we expect this trend to continue throughout 2007. Over the
longer term we believe that this market benefits from continued strong
population growth and barriers to entry.
Domestic - Acquired Self-Storage Facilities
During 2005, 2006 and 2007, in addition to the 487 self-storage
facilities we acquired in the Shurgard merger, we acquired a total of 46
self-storage facilities containing 3,400,000 net rentable square feet.
Commencing January 1, 2006, we began consolidating the accounts of 16 facilities
previously accounted for on the equity method. Commencing May 24, 2007, we began
deconsolidating 11 properties that we had acquired in connection with the merger
with Shurgard. The following table summarizes operating data with respect to
these facilities.
52
DOMESTIC - ACQUIRED SELF-STORAGE Three Months Ended Six Months Ended
FACILITIES June 30 June 30,
---------------------- -------------------------
2007 2006 Change 2007 2006 Change
----------- ---------- ----------- ------------- ----------- ------------
(Dollar amounts in thousands, except square foot amounts)
Rental income:
Facilities acquired in 2007................... $ 299 $ - $ 299 $ 311 $ - $ 311
Facilities acquired in 2006:
Consolidated Shurgard Properties (a):
Shurgard Domestic Same Store Facilities.. 67,561 - 67,561 132,706 - 132,706
Other facilities......................... 25,224 - 25,224 48,670 - 48,670
Deconsolidated Shurgard facilities (b)..... 831 - 831 2,198 - 2,198
Newly consolidated (c)..................... 3,834 3,890 (56) 7,570 7,188 382
Other acquisitions (d)..................... 2,401 1,442 959 4,686 1,839 2,847
Facilities acquired in 2005 (e)............... 6,937 6,178 759 13,569 11,816 1,753
----------- ---------- ----------- ------------- ----------- ------------
Total rental income........................... 107,087 11,510 95,577 209,710 20,843 188,867
----------- ---------- ----------- ------------- ----------- ------------
Cost of operations before depreciation and
amortization:
Facilities acquired in 2007................... 126 - 126 129 - 129
Facilities acquired in 2006:
Consolidated Shurgard Properties:
Shurgard Domestic Same Store Facilities.. 22,807 - 22,807 45,997 - 45,997
Other facilities......................... 9,895 - 9,895 19,790 - 19,790
Deconsolidated Shurgard facilities......... 344 - 344 916 - 916
Newly consolidated......................... 865 941 (76) 1,742 1,720 22
Other acquisitions......................... 1,179 717 462 2,288 942 1,346
Facilities acquired in 2005................... 2,577 2,385 192 5,146 4,854 292
----------- ---------- ----------- ------------- ----------- ------------
Total cost of operations...................... 37,793 4,043 33,750 76,008 7,516 68,492
----------- ---------- ----------- ------------- ----------- ------------
Net operating income before depreciation and
amortization:
Facilities acquired in 2007................... 173 - 173 182 - 182
Facilities acquired in 2006:
Consolidated Shurgard Properties:
Shurgard Domestic Same Store Facilities.. 44,754 - 44,754 86,709 - 86,709
Other facilities......................... 15,329 - 15,329 28,880 - 28,880
Deconsolidated Shurgard facilities......... 487 - 487 1,282 - 1,282
Newly consolidated......................... 2,969 2,949 20 5,828 5,468 360
Other acquisitions......................... 1,222 725 497 2,398 897 1,501
Facilities acquired in 2005................... 4,360 3,793 567 8,423 6,962 1,461
----------- ---------- ----------- ------------- ----------- ------------
Total net operating income before depreciation
and amortization (f).......................... 69,294 7,467 61,827 133,702 13,327 120,375
Depreciation and amortization.................... (77,451) (2,658) (74,793) (167,183) (5,244) (161,939)
----------- ---------- ----------- ------------- ----------- ------------
Net operating income (loss)................... $ (8,157) $ 4,809 $(12,966) $ (33,481) $ 8,083 $ (41,564)
=========== ========== =========== ============= =========== ============
Weighted average square foot occupancy during the
period:
Facilities acquired in 2007................... 67.7% - - 67.0% - -
Facilities acquired in 2006:
Consolidated Shurgard Properties:
Shurgard Domestic Same Store Facilities.. 89.4% - - 88.1% - -
Other facilities......................... 85.9% - - 82.7% - -
Deconsolidated Shurgard facilities......... 89.9% - - 89.0% - -
Newly consolidated......................... 88.0% 89.8% (2.0)% 87.0% 88.9% (2.1)%
Other acquisitions......................... 81.1% 66.0% 22.9% 79.1% 63.4% 24.8%
Facilities acquired in 2005................... 88.1% 85.5% 3.0% 86.9% 83.6% 3.9%
----------- ---------- ----------- ------------- ----------- ------------
88.1% 82.6% 6.7% 85.7% 83.8% 2.3%
=========== ========== =========== ============= =========== ============
53
DOMESTIC - ACQUIRED SELF-STORAGE Three Months Ended Six Months Ended
FACILITIES (continued) June 30 June 30,
------------------------ ----------------------------
2007 2006 Change 2007 2006 Change
----------- ------------ --------- -------------- ------------- ------------
Weighted average realized annual rent per occupied
square foot for the period:
Facilities acquired in 2007 .................. $ 18.07 $ - - $ 17.49 $ - -
Facilities acquired in 2006:
Consolidated Shurgard Properties:
Shurgard Domestic Same Store Facilities . 13.26 - - 13.21 - -
Other facilities......................... 11.56 - - 11.56 - -
Deconsolidated Shurgard facilities......... 9.58 - - 9.52 - -
Newly consolidated......................... 16.38 16.37 0.1% 16.35 16.31 0.2%
Other acquisitions......................... 12.99 13.44 (3.3)% 12.99 13.92 (6.7)%
Facilities acquired in 2005................... 12.48 11.58 7.8% 12.37 11.30 9.5%
----------- ------------ --------- -------------- ------------- ------------
$ 12.84 $ 12.97 (1.0)% $ 12.82 $ 12.79 0.2%
=========== ============ ========= ============== ============= ============
In place annual rent per occupied square foot at
June 30:
Facilities acquired in 2007................... $ 22.34 $ - -
Facilities acquired in 2006:
Consolidated Shurgard Properties:
Shurgard Domestic Same Store Facilities.. 14.51 - -
Other facilities......................... 12.82 - -
Deconsolidated Shurgard facilities......... - - -
Newly consolidated......................... 18.93 18.48 2.4%
Other acquisitions......................... 14.80 15.82 (6.4)%
Facilities acquired in 2005................... 13.94 12.87 8.3%
-------------- ------------- ------------
$ 14.20 $ 14.75 (3.7)%
============== ============= ============
At June 30:
Number of Facilities ........................ 538 60 478
Net rentable square feet..................... 35,920 4,146 31,774
Cumulative acquisition cost.................. $ 5,255,878 $ 380,552 $4,875,326
(a) Reflects the operations of the 476 Shurgard facilities which remain
consolidated in our financial statements at June 30, 2007. These
facilities comprise the 344 "Shurgard Same Store" facilities described
below, and 132 facilities which have not been stabilized and owned by
Shurgard since January 1, 2005.
(b) Represents the operations of 11 facilities which we no longer consolidate
in our financial statements effective May 24, 2007. The operations for
these facilities from January 1, 2007 through May 24, 2007 are included
in this table.
(c) Represents the operations of 16 facilities that we commenced
consolidating in our financial statements effective January 1, 2006.
(d) Represents the operations of 12 facilities we acquired from third parties
in 2006 described below.
(e) Represents the operations of 32 facilities we acquired from third parties
in 2005 described below.
(f) Total net operating income before depreciation and amortization or "NOI"
is a non-GAAP (generally accepted accounting principles) financial
measure that excludes the impact of depreciation and amortization
expense, for our self-storage facilities represents a portion of our
total self-storage segment's net operating income before depreciation,
and is denoted in the table "self-storage operations summary" above. A
reconciliation of our total self-storage segment's net operating income
before depreciation to consolidated net income is included in Note 12 to
our June 30, 2007 condensed consolidated financial statements, "Segment
Information." Although depreciation and amortization are operating
expenses, we believe that NOI is a meaningful measure of operating
performance, because we utilize NOI in making decisions with respect to
capital allocations, in determining current property values, segment
performance, and comparing period-to-period and market-to-market property
operating results. NOI is not a substitute for net operating income after
depreciation and amortization in evaluating our operating results.
(g) Realized annual rent is not a meaningful measure as this facility was
acquired at the end of the first quarter of 2007.
54
The acquisitions were acquired at various dates throughout each period.
Accordingly, rental income, cost of operations, depreciation, net operating
income, weighted average square foot occupancies and realized rents per square
foot represent the operating results for the partial period that we owned the
facilities during the year acquired. In addition, in place rents per occupied
square foot at June 30, 2007 and 2006, reflect the amounts for those facilities
we owned at each of those respective dates.
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.
Durring 2006, in addition to the 487 self-storage facilities we
acquired in the merger with Shurgard, we acquired a total of 12 self-storage
facilities, each in a single-property transaction. These 12 facilities contain
in aggregate approximately 877,000 net rentable square feet and were acquired
for an aggregate cost of $103,544,000. The 12 facilities are located in
California, Florida, Illinois, New York, Virginia, New Jersey, Delaware, Georgia
and Colorado.
In 2007, we acquired two facilities, in single property transactions,
for an aggregate cost of $28,844,000. These facilities contain, in aggregate
approximately, 132,000 net rentable square feet and are located in California
and Hawaii.
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 2007 as these facilities continue to improve their occupancy
levels as well as realized rental rates.
We acquired 487 self-storage facilities in 23 U.S. states with 32.3
million net rentable square feet in connection with the Shurgard merger.
Effective May 24, 2007, due to a loss in control of the related partnerships
that owned these facilities, we began deconsolidating 11 of these facilities
with an aggregate of 624,000 net rentable square feet (referred to hereinafter
as "The Deconsolidated Shurgard Properties."). The 476 Shurgard facilities that
continue to be consolidated on our financial statements at June 30, 2007 are
referred to as the "Consolidated Shurgard Properties." With respect to the
Consolidated Shurgard Properties, the operating data presented in the table
above reflects the historical data from January 1 through June 30, 2007, the
period owned and operated by Public Storage. With respect to the Deconsolidated
Shurgard Properties, the operating data presented includes the historical data
from January 1, 2007 through May 24, 2007. Our pro-rata share of the operating
results of the Deconsolidated Shurgard Properties after May 24, 2007 are
presented as a component of Equity in Earnings of Real Estate Entities.
Many of the Consolidated Shurgard Properties, however, have been
operating at a stabilized occupancy level for several years under the Shurgard
system and then under the Public Storage system following the merger. To provide
additional comparative operating data, the table below sets forth the operations
of the 344 facilities of the Consolidated Shurgard Properties that have been
operating at a stabilized basis (the "Shurgard Domestic Same Stores") since
January 1, 2005. The data presented does not reflect the actual results included
in our operations for the three and six months ended June 30, 2006, as we did
not own these facilities and did not begin to reflect them in our operating
results until August 22, 2006, the date of the merger with Shurgard. These
amounts do not purport to project results of operations for any future date or
period.
55
Selected Operating Data for the 344 facilities
----------------------------------------------
operated on a stabilized basis since January 1, 2005
-----------------------------------------------------
("Shurgard Domestic Same Store Facilities"): (a)
------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
Percentage Percentage
2007 2006 Change 2007 2006 Change
------------- ------------ ----------- ------------ ------------- ----------
(Dollar amounts in thousands, except weighted average amounts)
Revenues:
Rental income................................. $ 65,402 $ 63,155 3.6% $ 128,484 $ 124,181 3.5%
Late charges and administrative fees collected 2,159 2,183 (1.1)% 4,222 4,248 (0.6)%
------------- ------------ ----------- ------------ ------------- ----------
Total revenues (b)............................ 67,561 65,338 3.4% 132,706 128,429 3.3%
------------- ------------ ----------- ------------ ------------- ----------
Cost of operations (excluding depreciation):
Property taxes ............................... 6,703 6,178 8.5% 13,443 12,367 8.7%
Direct property payroll....................... 4,361 7,735 (43.6)% 9,051 15,449 (41.4)%
Advertising and promotion..................... 2,317 1,211 91.3% 4,160 2,775 49.9%
Utilities..................................... 1,696 1,587 6.9% 3,702 3,465 6.8%
Repairs and maintenance....................... 2,011 1,402 43.4% 4,032 2,979 35.3%
Telephone reservation center.................. 574 - - 1,118 - -
Property insurance............................ 708 348 103.4% 1,425 687 107.4%
Other costs of management..................... 4,437 5,442 (18.5)% 9,066 11,174 (18.9)%
------------- ------------ ----------- ------------ ------------- ----------
Total cost of operations (b).................... 22,807 23,903 (4.6)% 45,997 48,896 (5.9)%
------------- ------------ ----------- ------------ ------------- ----------
Net operating income (excluding depreciation) (c) $ 44,754 $ 41,435 8.0% $ 86,709 $ 79,533 9.0%
============= ============ =========== ============ ============= ==========
Gross margin (before depreciation)................ 66.2% 63.4% 4.4% 65.3% 61.9% 5.5%
Weighted average for the period:
Square foot occupancy (d)....................... 89.4% 84.6% 5.7% 88.1% 84.0% 4.9%
Realized annual rent per occupied square foot (e) $ 13.26 $ 13.53 (2.0)% $ 13.21 $ 13.39 (1.3)%
REVPAF (f) (g).................................. $ 11.85 $ 11.44 3.6% $ 11.64 $ 11.25 3.5%
Weighted average at June 30:
Square foot occupancy........................... 90.4% 85.5% 5.7%
Total net rentable square feet (in thousands)..... 22,076 22,076 -
(a) Operating data reflects the operations of these facilities without regard
to the time period in which Public Storage owned the facilities.
(b) Revenues and cost of operations do not include ancillary revenues and
expenses generated at the facilities with respect to tenant reinsurance,
and retail sales and truck rentals. "Other costs of management" included
in cost of operations principally represents all the indirect costs
incurred in the operations of the facilities. Indirect costs principally
include supervisory costs and corporate overhead cost incurred to support
the operating activities of the facilities. These amounts presented
herein will not necessarily compare to amounts previously presented by
Shurgard in its public reporting due to differences in classification of
revenues and expenses, including tenant reinsurance, retail sales and
truck rental activities which are included on our income statement under
"ancillary operations" but were previously presented by Shurgard as
self-storage revenue and operating expenses.
(c) Net operating income (before depreciation) or "NOI" is a non-GAAP
(generally accepted accounting principles) financial measure that
excludes the impact of depreciation expense. Although depreciation is an
operating expense, we believe that NOI is a meaningful measure of
operating performance, because we utilize NOI in making decisions with
respect to capital allocations, in determining current property values,
segment performance, and comparing period-to-period and market-to-market
property operating results. NOI is not a substitute for net operating
income after depreciation in evaluating our operating results. We have
not presented depreciation expense for these facilities because the
depreciation expense is based upon historical cost, which is
substantially different before the merger and after.
56
(d) Square foot occupancies represent weighted average occupancy levels over
the entire period.
(e) Realized annual rent per occupied square foot is computed by annualizing
the result of dividing rental income by the weighted average occupied
square footage for the period. Realized annual rent per occupied square
foot takes into consideration promotional discounts and other costs that
reduce rental income from the contractual amounts due.
(f) Annualized rental income per available square foot ("REVPAF") represents
annualized rental income divided by total available net rentable square
feet.
(g) Late charges and administrative fees are excluded from the computation of
realized annual rent per occupied square foot and REVPAF because
exclusion of these amounts provides a better measure of our ongoing level
of revenue, by excluding the volatility of late charges, which are
dependent principally upon the level of tenant delinquency, and
administrative fees, which are dependent principally upon the absolute
level of move-ins for a period.
As noted above, our 1,316 Same-Store facilities had occupancies of
approximately 92.2% at June 30, 2007, as compared to 90.4% for the acquired
Shurgard Domestic Same Store Facilities. It is our objective to continue to
close this occupancy gap in order to increase REVPAF. In attempting to
accomplish this objective, we significantly expanded our domestic pricing,
promotional, and media programs, and aggregate media costs increased in the
first two quarters of 2007 versus the aggregate level of spending incurred for
the same period in 2006.
We have improved the occupancy of the Shurgard Same-Store facilities,
with average occupancy up 5.7% at June 30, 2007 as compared to June 30, 2006;
however, this improvement has come at the cost of lower realized rent per
occupied square foot, which has dropped 2.0% in the quarter compared to prior
year. There can be no assurance that we will meet our objectives or that any
increase in occupancies will not be offset by further realized rent per occupied
square foot reductions either due to promotional discounts or lower monthly rent
in the acquired Shurgard facilities or the Same Store facilities.
On the date of the merger, we successfully installed our real-time
property operation system at all U.S. Shurgard locations. As a result, these
facilities are integrated into our national call center, website, and management
structure. The integration of these facilities into our operations should have
additional benefits and cost savings.
Property tax expense increased 8.5% and 8.7% in the three and six
months ended June 30, 2007, respectively, as compared to the same periods in
2006, due to higher assessments following the merger, including properties in
California.
Beginning January 2007, former Shurgard employees became participants
in the Public Storage compensations and benefit plan, which in general has lower
wage rates and benefit plan costs than the historical Shurgard plan. This
decline is reflected in direct payroll costs, which have declined 43.6% and
41.4% in the three and six months ended June 30, 2007, respectively, as compared
to the same periods in 2006.
Overall advertising and promotion increased 91.3% and 49.7% in the
three and six months ended June 30, 2007, respectively, as compared to the same
periods in 2006, due primarily to our media advertising expenditures, offset
partially by lower yellow page advertising expense.
Utility expense increased 6.9% and 6.8% in the three and six months
ended June 30, 2007, respectively, as compared to the same periods in 2006, due
primarily to higher utility rates.
Domestic - Development Self-Storage Facilities
We have a total of 119 facilities which have unstabilized occupancies
due to development activities.
Thirty-two of these facilities that have been developed from the ground
up between 2003 and 2007. At June 30, 2007, these newly developed facilities
have an aggregate of 2,444,000 net rentable square feet of self-storage space,
and were developed at an aggregate cost of $278,832,000. These facilities are
presented in the table below based upon the year of opening.
We also have 87 facilities that were originally opened prior to 2003
that have been expanded or are in the process of being expanded (these 87
facilities are referred to as the "Expansion Facilities" below). We have
incurred an aggregate of $140,441,000 since January 1, 2004, to expand,
repurpose, or otherwise enhance the revenue generating capacity of these 87
Expansion Facilities.
57
The following table sets forth the operating results and selected
operating data with respect to the Developed and Expansion Facilities:
DOMESTIC - DEVELOPMENT SELF-STORAGE FACILITIES
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- --------------------------
2007 2006 Change 2007 2006 Change
------------ ------------ ----------- ------------ ------------- ----------
(Amounts in thousands, except per square foot amounts and facility count)
Rental income:
Facility opened in 2007...................... $ 71 $ - $ 71 $ 79 $ - $ 79
Facilities opened in 2006.................... 1,080 56 1,024 1,937 56 1,881
Facilities opened in 2005.................... 1,005 584 421 1,916 953 963
Facilities opened in 2004 and 2003........... 5,655 5,244 411 11,135 10,192 943
Expansion facilities......................... 19,800 18,486 1,314 39,163 35,886 3,277
------------ ------------ ----------- ------------ ------------- ----------
Total rental income....................... 27,611 24,370 3,241 54,230 47,087 7,143
------------ ------------ ----------- ------------ ------------- ----------
Cost of operations before depreciation:
Facility opened in 2007...................... 47 - 47 88 - 88
Facilities opened in 2006.................... 680 114 566 1,216 114 1,102
Facilities opened in 2005.................... 568 406 162 1,128 820 308
Facilities opened in 2004 and 2003........... 1,585 1,601 (16) 3,206 3,182 24
Expansion facilities......................... 7,353 6,582 771 14,418 13,015 1,403
------------ ------------ ----------- ------------ ------------- ----------
Total cost of operations before depreciation 10,233 8,703 1,530 20,056 17,131 2,925
------------ ------------ ----------- ------------ ------------- ----------
Net operating income before depreciation:
Facility opened in 2007...................... 24 - 24 (9) - (9)
Facilities opened in 2006.................... 400 (58) 458 721 (58) 779
Facilities opened in 2005.................... 437 178 259 788 133 655
Facilities opened in 2004 and 2003........... 4,070 3,643 427 7,929 7,010 919
Expansion facilities......................... 12,447 11,904 543 24,745 22,871 1,874
------------ ------------ ----------- ------------ ------------- ----------
Net operating income before depreciation (a) 17,378 15,667 1,711 34,174 29,956 4,218
Depreciation.................................. (9,617) (5,852) (3,765) (16,030) (11,398) (4,632)
------------ ------------ ----------- ------------ ------------- ----------
Net operating income........................ $ 7,761 $ 9,815 $ (2,054) $ 18,144 $ 18,558 $ (414)
============ ============ =========== ============ ============= ==========
Weighted average square foot occupancy during
the period:
Self-storage facility opened in 2007......... 78.6% - - 60.0% - -
Self-storage facilities opened in 2006....... 52.5% 18.2% 188.5% 46.9% 16.0% 193.1%
Self-storage facilities opened in 2005....... 64.5% 44.0% 46.6% 61.5% 37.4% 64.4%
Self-storage facilities opened in 2004 and 2003 91.8% 91.5% 0.3% 91.3% 90.4% 1.0%
Expansion facilities......................... 82.8% 80.0% 3.5% 81.2% 78.7% 3.2%
------------ ------------ ----------- ------------ ------------- ----------
78.9% 74.5% 5.9% 76.7% 74.3% 3.2%
============ ============ =========== ============ ============= ==========
58
DOMESTIC - DEVELOPMENT SELF-STORAGE FACILITIES
(Continued)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- --------- ------------------------- -------------
2007 2006 Change 2007 2006 Change
------------ ----------- --------- ------------- ------------ -------------
Weighted average realized rent per occupied
square foot during the period (b):
Self-storage facility opened in 2007 (e)..... $ 7.76 $ - - $ 6.43 $ - -
Self-storage facilities opened in 2006....... 17.63 3.14 461.5% 17.79 3.14 466.6%
Self-storage facilities opened in 2005....... 12.89 10.74 20.0% 12.91 10.31 25.2%
Self-storage facilities opened in 2004 and 2003 16.63 15.40 8.0% 16.46 15.15 8.6%
Expansion facilities......................... 12.45 12.14 2.6% 12.56 12.18 3.1%
------------ ----------- --------- ------------- ------------ -------------
$ 15.98 $ 14.53 10.0% $ 15.92 $ 14.44 10.2%
============ =========== ========= ============= ============ =============
In place annual rent per occupied square foot at
June 30 (c):
Self-storage facility opened in 2007......... $ 13.00 $ - -
Self-storage facilities opened in 2006....... 21.50 20.66 4.1%
Self-storage facilities opened in 2005....... 15.27 14.20 7.5%
Self-storage facilities opened in 2004 and 2003 18.30 17.01 7.6%
Expansion facilities......................... 14.01 13.80 1.5%
------------- ------------ -------------
$ 18.12 $ 16.75 8.2%
============= ============ =============
Number of facilities at June 30:
Facility opened in 2007...................... 1 - 1
Facilities opened in 2006.................... 5 3 2
Facilities opened in 2005.................... 6 6 -
Facilities opened in 2004 and 2003........... 20 20 -
Expansion facilities......................... 87 87 -
------------- ------------ -------------
119 116 3
------------- ------------ -------------
Square Footage at June 30:
Facility opened in 2007...................... 42 - 42
Facilities opened in 2006.................... 440 281 159
Facilities opened in 2005.................... 463 463 -
Facilities opened in 2004 and 2003........... 1,499 1,499 -
Expansion facilities......................... 7,537 7,408 129
------------- ------------ -------------
9,981 9,651 330
------------- ------------ -------------
Cumulative development cost at June 30:
Facility opened in 2007...................... $ 4,112 $ - $ 4,112
Facilities opened in 2006.................... 68,962 49,255 19,707
Facilities opened in 2005.................... 37,857 37,857 -
Facilities opened in 2004 and 2003........... 167,901 167,901 -
Expansion facilities (d)..................... 140,441 100,699 39,742
------------- ------------ -------------
$ 419,273 $ 355,712 $ 63,561
============= ============ =============
(a) Total net operating income before depreciation and amortization or "NOI"
is a non-GAAP (generally accepted accounting principles) financial
measure that excludes the impact of depreciation and amortization
expense, for our developed self-storage facilities represents a portion
of our total self-storage segment's net operating income before
depreciation, and is denoted in the table "self-storage operations
summary" above. A reconciliation of our total self-storage segment's net
59
operating income before depreciation to consolidated net income is
included in Note 12 to our June 30, 2007 condensed consolidated financial
statements, "Segment Information." Although depreciation and amortization
are operating expenses, we believe that NOI is a meaningful measure of
operating performance, because we utilize NOI in making decisions with
respect to capital allocations, in determining current property values,
segment performance, and comparing period-to-period and market-to-market
property operating results. NOI is not a substitute for net operating
income after depreciation and amortization in evaluating our operating
results.
(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, and therefore amounts for the three and
six months ended June 30, 2007 and 2006 may not be comparable to the same
periods in prior years for self-storage facilities opened in 2007, 2006
and 2005. We typically provide significant promotional discounts to new
tenants when a facility first opens for operations. As facilities reach a
stabilized occupancy level, the amounts of discounts given will be
reduced significantly.
(c) 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.
(d) Since January 1, 2004, we have spent an aggregate of approximately
$140,441,000 to expand the square footage or otherwise enhance the
revenue potential of these facilities, adding an aggregate of 2,511,000
net rentable self-storage space.
(e) Realized annual rent is not a meaningful measure as this facility was
opened at the end of the first quarter of 2007.
Unlike many other forms of real estate, we are unable to pre-lease
newly developed storage space due to the nature of our tenants. Accordingly, at
the time newly developed space first opens, it is entirely vacant generating no
rental income. Historically, we estimated that on average it takes approximately
24 to 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 of 90%. 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.
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 costs for the 32 newly developed facilities for
the three months ended June 30, 2007, based on net operating income before
depreciation, was approximately 7.1%, 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 2006 have contributed greatly to our earnings growth. The
growth in properties developed in 2005 was principally due to occupancy growth,
and growth for properties developed in 2004 and 2003 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 have developed self-storage facilities, 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.
The decision to commence development of any particular self-storage
location is based upon several factors with respect to that local market,
including our estimate of current and future general economic conditions,
60
demographic conditions, population growth, the likelihood of and cost of
obtaining permits, construction costs, as well as the level of demand at our
existing self-storage facilities in proximity to the prospective facility. Our
level of new development starts has declined significantly 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.
SHURGARD EUROPEAN OPERATING DATA
In the merger with Shurgard, we acquired 160 facilities located in
seven European countries with an aggregate of 8,385,000 net rentable square
feet. During the first six months of 2007, three additional facilities opened in
Europe with an aggregate of 147,000 net rentable square feet. At June 30, 2007,
our European operations comprise 168 facilities with an aggregate of 8,790,000
net rentable square feet, of which, 96 of these facilities are referred to as
the Europe Same Store Facilities (defined below). Of the 168 facilities, 103
facilities are wholly owned, with the remaining 65 facilities owned by the
European Development Joint Venture, in which we have a 20% equity interest.
The following chart sets forth the operations of the Shurgard
Facilities from January 1 through June 30, 2007, the period operated under
Public Storage and consolidated in our financial statements:
Three Months Ended Six Months Ended
June 30, June 30,
2007 2007
------------------ ------------------
(Amounts in thousands)
Rental income:
European Same Store Facilities (a)......... $ 31,045 $ 60,595
Other wholly-owned facilities (b).......... 2,240 4,518
Joint Venture 2007 Openings (c)............ 89 94
Other joint-venture facilities (d)......... 12,983 25,012
------------------ ------------------
Total rental income.......................... 46,357 90,219
Cost of operations (excluding depreciation):
European Same Store Facilities (a)......... 13,121 25,723
Other wholly-owned facilities (b).......... 906 1,824
Joint Venture 2007 Openings (c)............ 348 616
Other joint-venture facilities (d)......... 8,731 17,997
------------------ ------------------
Total cost of operations..................... 23,106 46,160
Net operating income before depreciation (e):
European Same Store Facilities (a)......... 17,924 34,872
Other wholly-owned facilities (b).......... 1,334 2,694
Joint Venture 2007 Openings (c)............ (259) (522)
Other joint-venture facilities (d)......... 4,252 7,015
------------------ ------------------
Total net operating income before
depreciation................................. 23,251 44,059
Depreciation and amortization................ (39,202) (78,202)
------------------ ------------------
Net operating loss........................ $ (15,951) $ (34,143)
================== ==================
Weighted average square foot occupancy:
European Same Store Facilities (a)......... 89.9% 89.2%
Other wholly-owned facilities (b).......... 88.0% 88.2%
Joint Venture 2007 Openings (c)............ 15.1% 12.9%
Other joint-venture facilities (d)......... 76.4% 74.1%
------------------ ------------------
Total weighted average square foot occupancy. 83.9% 82.6%
------------------ ------------------
61
Three Months Ended Six Months Ended
June 30, June 30,
2007 2007
------------------ ------------------
(Amounts in thousands)
Weighted average realized annualized rent
per occupied square foot for the period
European Same Store Facilities (a)......... $25.87 $25.45
Other wholly-owned facilities (b).......... 35.39 35.63
Joint Venture 2007 Openings (c)............ 16.04 9.91
Other joint-venture facilities (d)......... 22.04 21.88
------------------ ------------------
Weighted average realized annual rent per
occupied square foot for the period:......... $24.95 $24.65
REVPAF
European Same Store Facilities (a)......... $23.26 $22.70
Other wholly-owned facilities (b).......... 31.14 31.42
Joint Venture 2007 Openings (c)............ 2.42 1.28
Other joint-venture facilities (d)......... 16.84 16.21
------------------ ------------------
Total REVPAF:................................ $20.93 $20.36
================== ==================
In place annual rent per occupied square
foot at June 30:
European Same Store Facilities (a)......... $27.29
Other wholly-owned facilities (b).......... 37.53
Joint Venture 2007 Openings (c)............ 23.18
Other joint-venture facilities (d)......... 24.23
------------------
In place annual rent per occupied square
foot at June 30:............................. $26.54
==================
Occupancy at June 30:
European Same Store Facilities (a)......... 91.1%
Other wholly-owned facilities (b).......... 89.1%
Joint Venture 2007 Openings (c)............ 19.7%
Other joint-venture facilities (d)......... 80.1%
------------------
Total weighted average square foot occupancy. 86.0%
------------------
Net rentable square feet at period end
European Same Store Facilities (a)......... 5,286
Other wholly-owned facilities (b).......... 285
Joint Venture 2007 Openings (c)............ 147
Other joint-venture facilities (d)......... 3,072
------------------
Total net rentable square feet............... 8,790
------------------
(a) The European Same Store facilities, described below, are comprised of 96
facilities that are wholly owned.
(b) The other wholly-owned facilities include seven facilities that we wholly
own, which are not considered European Same Store facilities.
(c) There are three facilities, which were acquired or developed the first six
months of 2007 for an aggregate of approximately $21,972,000. These
facilities are owned by the European Development Joint Venture.
(d) The European Development Joint Venture, in which we have a 20% equity
interest, owns an additional 62 facilities which were acquired or developed
from 2003 to 2006.
(e) Total net operating income before depreciation and amortization or "NOI" is
a non-GAAP (generally accepted accounting principles) financial measure
that excludes the impact of depreciation and amortization expense, for our
commercial property segment is presented in Note 12 to our condensed
consolidated financial statements, "Segment Information," which includes a
reconciliation of net operating income before depreciation for this segment
to our consolidated net income. Although depreciation and amortization are
operating expenses, we believe that NOI is a meaningful measure of
operating performance, because we utilize NOI in making decisions with
respect to capital allocations, in determining current property values,
segment performance, and comparing period-to-period and market-to-market
property operating results. NOI is not a substitute for net operating
income after depreciation and amortization in evaluating our operating
results.
62
The operating data presented in the table below reflect the historical
data from January 1 to June 30, 2006, the period for which the 96 facilities,
which have been operated by Shurgard since January 1, 2005, with the historical
data from January 1 through June 30, 2007, the period operated under Public
Storage. In addition, such amounts are reflected utilizing the average exchange
rates for the three months ended June 30, 2007, rather than the respective
exchange rates in effect for each period. We present this data on such a
"constant exchange rate" basis because we believe it allows comparability of the
various periods, and isolates the impact of exchange rates with respect to the
trends in revenues and cost of operations.
As a result, the data presented below does not reflect the actual
results included in our operations for the three and six months ended June 30,
2006, and does not represent the actual amounts reflected in our financial
statements for the quarter or six months ended June 30, 2007. We have applied
our definition of what qualifies as a Same Store. As a result, the number of
properties included in the Shurgard European Same Store portfolio has decreased
from 123 facilities (as reported by Shurgard in the second quarter of 2006) to
96 facilities as is currently being reported.
Selected Operating Data for the 96 facilities
---------------------------------------------------
operated by Shurgard Europe on a stabilized basis
----------------------------------------------------
since January 1, 2005 ("Europe Same Store
---------------------------------------------------
Facilities"): (a)
----------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
Percentage Percentage
2007 2006 Change 2007 2006 Change
------------- ------------- ---------- ------------- ------------- ------------
(Dollar amounts in thousands, except weighted average data, utilizing constant
exchange rates) (b)
Revenues:
Rental income................................. $ 30,732 $ 27,961 9.9% $ 60,003 $ 54,569 10.0%
Late charges and administrative fees collected 313 255 22.7% 592 534 10.9%
------------- ------------- ---------- ------------- ------------- ------------
Total revenues (c)............................ 31,045 28,216 10.0% 60,595 55,103 10.0%
Cost of operations (excluding depreciation):
Property taxes ............................... 1,464 1,301 12.5% 2,662 2,619 1.6%
Direct property payroll....................... 3,629 4,074 (10.9)% 7,209 8,129 (11.3)%
Advertising and promotion..................... 1,309 1,595 (17.9)% 2,532 3,455 (26.7)%
Utilities..................................... 722 815 (11.4)% 1,572 1,708 (8.0)%
Repairs and maintenance....................... 738 867 (14.9)% 1,561 1,718 (9.1)%
Property insurance............................ 343 372 (7.8)% 701 741 (5.4)%
Other costs of management..................... 4,916 4,941 (0.5)% 9,486 9,341 1.6%
------------- ------------- ---------- ------------- ------------- ------------
Total cost of operations (c).................... 13,121 13,965 (6.0)% 25,723 27,711 (7.2)%
------------- ------------- ---------- ------------- ------------- ------------
Net operating income (excluding depreciation) (d) $ 17,924 $ 14,251 25.8% $ 34,872 $ 27,392 27.3%
============= ============= ========== ============= ============= ============
Gross margin (before depreciation)................ 57.7% 50.5% 14.3% 57.5% 49.7% 15.7%
Weighted average for the period:
Square foot occupancy (e)....................... 89.9% 83.5% 7.7% 89.2% 82.8% 7.7%
Realized annual rent per occupied square foot (f) $25.87 $25.34 2.1% $25.45 $24.94 2.0%
REVPAF (g) (h).................................. $23.26 $21.16 9.9% $ 22.70 $20.65 9.9%
Weighted average at June 30:
Square foot occupancy........................... 91.1% 85.9% 6.1%
In place annual rent per occupied square foot (i) $ 27.29 $26.10 4.6%
Total net rentable square feet (in thousands)..... 5,286 5,286 -
(a) Operating data reflects the operations of these facilities without regard
to the time period in which Public Storage owned the facilities; only the
amounts for the period January 1 through June 30, 2007 are included in our
consolidated operating results.
63
(b) Amounts for the three and six months, respectively, ended June 30, 2006 are
translated based upon the average exchange rates for the three and six
months, respectively, ended June 30, 2007. Amounts for the three and six
months, respectively, ended June 30, 2007 are translated based upon the
average exchange rates in effect for each period as denoted more fully in
Note 2 to our financial statements, "Summary of Significant Accounting
Policies." The majority of our operations are denominated in Euros and
British Pounds. The Euro was translated at an average exchange rate of
approximately 1.348 and 1.329, respectively, in US Dollars per Euro for the
three and six months ended June 30, 2007, respectively. The British Pound
was translated at an average exchange rate of approximately 1.985 and
1.969, respectively, in US dollars per British Pound for the three and six
months ended June 30, 2007, respectively.
(c) Revenues and cost of operations do not include ancillary revenues and
expenses generated at the facilities with respect to tenant reinsurance and
retail sales. "Other costs of management" included in cost of operations
principally represents all the indirect costs incurred in the operations of
the facilities. Indirect costs principally include supervisory costs and
corporate overhead cost incurred to support the operating activities of the
facilities. These amounts presented herein will not necessarily compare to
amounts previously presented by Shurgard in its public reporting due to
differences in classification of revenues and expenses, including tenant
reinsurance, retail sales, and truck rental activities which are included
on our income statement under "ancillary operations" but were previously
presented by Shurgard as self-storage revenue and operating expenses.
(d) Net operating income (before depreciation) or "NOI" is a non-GAAP
(generally accepted accounting principles) financial measure that excludes
the impact of depreciation expense. Although depreciation is an operating
expense, we believe that NOI is a meaningful measure of operating
performance, because we utilize NOI in making decisions with respect to
capital allocations, in determining current property values, segment
performance, and comparing period-to-period and market-to-market property
operating results. NOI is not a substitute for net operating income after
depreciation in evaluating our operating results. We have not presented
depreciation and amortization expense for these facilities because the
depreciation and amortization expense is based upon historical cost, which
is substantially different before the merger and after.
(e) Square foot occupancies represent weighted average occupancy levels over
the entire period.
(f) Realized annual rent per occupied square foot is computed by annualizing
the result of dividing rental income by the weighted average occupied
square footage for the period. Realized annual rent per occupied square
foot takes into consideration promotional discounts and other costs that
reduce rental income from the contractual amounts due.
(g) Annualized rental income per available square foot ("REVPAF") represents
annualized rental income divided by total available net rentable square
feet.
(h) Late charges and administrative fees are excluded from the computation of
realized annual rent per occupied square foot and REVPAF because exclusion
of these amounts provides a better measure of our ongoing level of revenue,
by excluding the volatility of late charges, which are dependent
principally upon the level of tenant delinquency, and administrative fees,
which are dependent principally upon the absolute level of move-ins for a
period.
(i) 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.
The European Same Store properties continue to reflect above average
growth. With occupancy stabilized at above 90%, we believe we have pricing power
and expect to generate additional growth through rental rate increases. The
properties are also benefiting from expense control, resulting in negative
expense growth. The European team is selectively adapting various operating
strategies we use in the United States and incorporating them into their
operating model.
The following table sets forth certain regional trends in the Europe
Same Store facilities:
64
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- --------------------------
Percentage Percentage
2007 2006 Change 2007 2006 Change
------------- ----------- ----------- ------------ ------------ ------------
(Dollar amounts in thousands, except per square foot amounts)
Rental income:
Belgium..................................... $ 3,857 $ 3,550 8.6% $ 7,517 $ 7,026 7.0%
Denmark..................................... 1,409 1,237 13.9% 2,764 2,418 14.3%
France...................................... 7,876 7,200 9.4% 15,449 14,137 9.3%
Netherlands................................. 6,236 5,549 12.4% 12,133 10,796 12.4%
Sweden...................................... 6,520 6,178 5.5% 12,735 11,881 7.2%
United Kingdom.............................. 5,147 4,502 14.3% 9,997 8,845 13.0%
------------- ----------- ----------- ------------ ------------ ------------
Total rental income....................... $ 31,045 $ 28,216 10.0% $ 60,595 $ 55,103 10.0%
============= =========== =========== ============ ============ ============
Cost of operations before depreciation and
amortization (a):
Belgium..................................... $ 1,670 $ 2,079 (19.7)% $ 3,365 $ 4,069 (17.3)%
Denmark..................................... 568 630 (9.8)% 1,077 1,303 (17.3)%
France...................................... 3,598 3,714 (3.1)% 7,112 7,128 (0.2)%
Netherlands................................. 2,597 2,639 (1.6)% 5,064 5,435 (6.8)%
Sweden...................................... 2,629 2,840 (7.4)% 5,130 5,610 (8.6)%
United Kingdom.............................. 2,059 2,063 (0.2)% 3,975 4,166 (4.6)%
------------- ----------- ----------- ------------ ------------ ------------
Total cost of operations before
depreciation and amortization............. $ 13,121 $ 13,965 (6.0)% $ 25,723 $ 27,711 (7.2)%
============= =========== =========== ============ ============ ============
Weighted average occupancy levels for the period:
Belgium..................................... 87.4% 79.0% 10.6% 86.3% 78.6% 9.8%
Denmark..................................... 93.4% 90.8% 2.9% 93.7% 89.4% 4.8%
France...................................... 90.7% 85.3% 6.3% 90.2% 84.7% 6.5%
Netherlands................................. 87.9% 80.7% 8.9% 87.6% 79.9% 9.6%
Sweden...................................... 92.0% 89.0% 3.4% 91.3% 87.9% 3.9%
United Kingdom.............................. 91.1% 79.6% 14.4% 89.7% 79.6% 12.7%
------------- ----------- ----------- ------------ ------------ ------------
89.9% 83.5% 7.7% 89.2% 82.8% 7.7%
============= =========== =========== ============ ============ ============
65
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -----------------------
Percentage Percentage
2007 2006 Change 2007 2006 Change
------------- ---------- ----------- ----------- ------------ ------------
(Dollar amounts in thousands, except per square foot amounts)
Weighted average realized annual rent per
occupied square foot: (continued)
Belgium..................................... $ 17.45 $ 17.84 (2.2)% $ 17.21 $ 17.74 (3.0)%
Denmark..................................... 28.50 25.79 10.5% 27.83 25.58 8.8%
France...................................... 27.76 26.95 3.0% 27.37 26.61 2.9%
Netherlands................................. 23.99 23.28 3.0% 23.41 22.86 2.4%
Sweden...................................... 24.86 24.39 1.9% 24.48 23.74 3.1%
United Kingdom.............................. 41.74 41.75 - 41.15 41.04 0.3%
------------- ---------- ----------- ----------- ------------ ------------
$ 25.87 $ 25.34 2.1% $ 25.45 $ 24.94 2.0%
============= ========== =========== =========== ============ ============
Net rentable square feet (in thousands):
Belgium..................................... 999 999 -
Denmark..................................... 210 210 -
France...................................... 1,236 1,236 -
Netherlands................................. 1,172 1,172 -
Sweden...................................... 1,130 1,130 -
United Kingdom.............................. 539 539 -
----------- ------------ ------------
5,286 5,286 -
=========== ============ ============
Number of facilities:
Belgium..................................... 17 17 -
Denmark..................................... 4 4 -
France...................................... 23 23 -
Netherlands................................. 22 22 -
Sweden...................................... 20 20 -
United Kingdom.............................. 10 10 -
----------- ------------ ------------
96 96 -
=========== ============ ============
ANCILLARY OPERATIONS: Ancillary operations include (i) the reinsurance
of policies against losses to goods stored by tenants in our self-storage
facilities, (ii) sale of merchandise at our self-storage facilities, (iii)
containerized storage operations, (iv) truck rentals at our self-storage
facilities and (v) commercial property operations, and (vi) management of
facilities owned by third-party owners and facilities owned by affiliates that
are not included in our consolidated financial statements.
The following table sets forth our ancillary operations:
66
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2007 2006 Change 2007 2006 Change
------------ ------------ ---------- ------------- ----------- -------------
(Amounts in thousands)
Revenues:
Tenant reinsurance............. $ 14,789 $ 7,803 $ 6,986 $ 28,608 $ 14,589 $ 14,019
Merchandise sales............... 10,406 6,300 4,106 19,106 11,313 7,793
Containerized storage........... 3,829 4,200 (371) 7,596 8,130 (534)
Truck rentals................... 3,479 3,659 (180) 6,155 6,429 (274)
Commercial property operations.. 3,792 3,013 779 7,614 6,005 1,609
Property management............. 682 607 75 1,359 1,212 147
------------ ------------ ---------- ------------- ----------- -------------
Total revenues............... $ 36,977 $ 25,582 $ 11,395 $ 70,438 $ 47,678 $ 22,760
------------ ------------ ---------- ------------- ----------- -------------
Cost of operations:
Tenant reinsurance ............. 4,717 3,123 1,594 9,280 6,215 3,065
Merchandise sales............... 7,855 5,621 2,234 15,104 10,194 4,910
Containerized storage........... 4,078 4,219 (141) 8,370 7,529 841
Truck rentals................... 3,560 2,871 689 6,965 5,761 1,204
Commercial property operations.. 1,473 1,235 238 2,907 2,583 324
Property management............. 60 81 (21) 118 142 (24)
------------ ------------ ---------- ------------- ----------- -------------
Total cost of operations..... 21,743 17,150 4,593 42,744 32,424 10,320
------------ ------------ ---------- ------------- ----------- -------------
Depreciation:
Tenant reinsurance............. - - - - - -
Merchandise sales............... - - - - - -
Containerized storage........... (276) (223) (53) (542) (483) (59)
Truck rentals................... - - - - - -
Commercial property operations.. (664) (549) (115) (1,328) (1,134) (194)
Property management............. - - - - - -
------------ ------------ ---------- ------------- ----------- -------------
Total depreciation........... (940) (772) (168) (1,870) (1,617) (253)
------------ ------------ ---------- ------------- ----------- -------------
Net Income:
Tenant reinsurance............. 10,072 4,680 5,392 19,328 8,374 10,954
Merchandise sales............... 2,551 679 1,872 4,002 1,119 2,883
Containerized storage........... (525) (242) (283) (1,316) 118 (1,434)
Truck rentals................... (81) 788 (869) (810) 668 (1,478)
Commercial property operations.. 1,655 1,229 426 3,379 2,288 1,091
Property management............. 622 526 96 1,241 1,070 171
------------ ------------ ---------- ------------- ----------- -------------
Total net income................ $ 14,294 $ 7,660 $ 6,634 $ 25,824 $ 13,637 $ 12,187
============ ============ ========== ============= =========== =============
Our ancillary operations have increased significantly in the three and
six months ended June 30, 2007 as compared to the same periods in 2006. This
increase is attributable primarily to the self-storage facilities we acquired in
the Shurgard merger, which has given us more locations in which to conduct our
tenant reinsurance and merchandise activities, as well as due to additional
commercial space acquired in the merger with Shurgard.
Tenant reinsurance operations: We reinsure policies offered through a
non-affiliated insurance broker 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, as well as claims adjusting
expenses.
67
The significant increase in tenant reinsurance revenues is due
primarily to the increase in properties associated with the acquisition of
Shurgard. For the three and six months ended June 30, 2007, tenant reinsurance
revenues totaled $2,255,000 and $4,539,000, respectively, related to the United
States Shurgard portfolio and $2,245,000 and $4,276,000, respectively, related
to the European Shurgard portfolio. Further contributing to our increase in
tenant reinsurance revenues was higher rates, and an increase in the percentage
of our existing tenants retaining such policies. For the three and six months
ended June 30, 2007, approximately 44.4% and 43.3%, respectively, of our
self-storage tenant base had such policies, as compared to approximately 33.2%
and 32.7% for the same periods in 2006.
The future level of tenant reinsurance revenues is largely dependent
upon the number of new tenants electing to purchase policies, the level of
premiums charged for such insurance, and the number of tenants that continue
participating in the insurance program.
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.
Merchandise and truck rental operations: Our subsidiaries 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
subsidiaries maintain trucks on site for rent to our self-storage customers and
the general public on a short-term basis for local use. In addition, we also act
as an agent for a national truck rental company to provide their rental trucks
to customers for long-distance use. The revenues and cost of operations for
these activities are included in the table above as "Truck rentals."
These activities generally serve as an adjunct to our self-storage
operations providing our tenants with goods and services that they need in
connection with moving and storing their goods.
The significant increase in merchandise revenues is due primarily to
the increase in properties associated with the acquisition of Shurgard. For the
three and six months ended June 30, 2007, merchandise revenues included
$2,448,000 and $4,478,000, respectively, related to the Shurgard facilities we
acquired in the United States, and $2,079,000 and $3,827,000, respectively,
related to the Shurgard facilities in Europe.
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.
For the three months and six months ended June 30, 2007, truck revenues
included $473,000 and $829,000, respectively and cost of operations included
$482,000 and $926,000, respectively, related to the Shurgard facilities we
acquired in the United States.
Containerized storage operations: We have 13 containerized storage
facilities located in eight densely populated markets with above-average rent
and income.
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.
Direct operating costs principally includes payroll, equipment lease
expense, utilities and vehicle expenses (fuel and insurance). Direct operating
costs for three and six months ended June 30, 2007, also includes approximately
$860,000 and $2,012,000, respectively, in research and development costs, as
compared to $441,000 and $623,000 for the three and six months ended June 30,
2006.
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's operations, based on which
we have closed certain of these facilities in recent years, and we may decide to
close additional facilities in the future.
68
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 PSB. Our investment
in PSB is accounted for using the equity method of accounting, and accordingly
our share of PSB's earnings is reflected as "Equity in earnings of real estate
entities," below.
The significant increase in commercial property revenues is due
principally to commercial space in the facilities we acquired from Shurgard in
the United States. For the three and six months ended June 30, 2007, commercial
revenues included $743,000 and $1,435,000 with respect to the Shurgard
facilities we acquired in the United States. Our commercial operations are
comprised of 1,561,000 net rentable square feet of commercial space, which is
principally operated at certain of the self-storage facilities.
Our commercial property operations consist primarily of facilities that
are at a stabilized level of operations, and generally reflect the conditions in
the markets in which they operate. Other than the continuing year-over-year
growth due to the increase in commercial space in the Shurgard properties, we do
not expect any significant growth in net operating income from this segment of
our business for 2007.
EQUITY IN EARNINGS OF REAL ESTATE ENTITIES: In addition to our
ownership of equity interests in PSB, we have interests in 12 entities owning 33
properties at June 30, 2007. (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 manage each of
these facilities for a management fee that is included in "Ancillary
Operations."
Equity in earnings of real estate entities for the three and six months
ended June 30, 2007 and 2006 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:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -------------------------
2007 2006 Change 2007 2006 Change
------------ ------------ ------------ ------------ ------------ ------------
(Amounts in thousands)
Property operations:
PSB $ 20,373 $ 18,181 $ 2,192 $ 40,062 $ 36,111 $ 3,951
Deconsolidated Shurgard Facilities..... 283 - 283 283 - 283
Other investments (1).................. 789 778 11 1,555 1,565 (10)
------------ ------------ ------------ ------------ ------------ ------------
21,445 18,959 2,486 41,900 37,676 4,224
------------ ------------ ------------ ------------ ------------ ------------
Depreciation:
PSB.................................... (10,934) (9,216) (1,718) (20,430) (18,255) (2,175)
Deconsolidated Shurgard Facilities..... (85) - (85) (85) - (85)
Other investments (1).................. (260) (250) (10) (519) (465) (54)
------------ ------------ ------------ ------------ ------------ ------------
(11,279) (9,466) (1,813) (21,034) (18,720) (2,314)
------------ ------------ ------------ ------------ ------------ ------------
Other: (2)
PSB (3)................................ (7,215) (6,325) (890) (13,918) (12,240) (1,678)
Deconsolidated Shurgard Facilities..... (128) - (128) (128) - (128)
Other investments (1).................. (41) (44) 3 (61) (126) 65
------------ ------------ ------------ ------------ ------------ ------------
(7,384) (6,369) (1,015) (14,107) (12,366) (1,741)
------------ ------------ ------------ ------------ ------------ ------------
Total equity in earnings of real estate
entities.................................. $ 2,782 $ 3,124 $ (342) $ 6,759 $ 6,590 $ 169
============ ============ ============ ============ ============ ============
(1) Amounts reflect equity in earnings recorded for investments that have been
held consistently throughout each of the three and six months ended June
30, 2007 and 2006.
(2) "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 $565,000 and $1,051,000 for the three and six months
ended June 30, 2007, respectively, as compared to $234,000 and $458,000 for
the three and six months ended June 30, 2006, respectively.
(3) "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.
69
Equity in earnings of real estate entities includes our pro rata share
of the net impact of gains/losses on sales 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 share from these items
resulted in a net decrease of equity in earnings of $19,000 for the three months
ended June 30, 2006 and a net increase of $293,000 for the six months ended June
30, 2006 (none for the same periods in 2007).
Our future equity income from PSB will be dependent entirely upon PSB's
operating results. Our investment in PSB provides us with some diversification
into another asset type. We have no plans of disposing of our investment in PSB.
PSB's filings and selected financial information can be accessed through the
Securities and Exchange Commission, and on its website, www.psbusinessparks.com.
The Deconsolidated Shurgard Facilities include 11 properties in which
we have a partial equity interest, acquired in the merger with Shurgard, and
which are subject to mortgage loans aggregating $19.3 million at June 30, 2007.
We commenced deconsolidating these properties effective May 24, 2007 due to a
loss of control in the entities owning these properties; accordingly, equity in
earnings of real estate entities includes, the operating results of these 11
properties and the associated interest expense incurred after May 24, 2007.
The "Other Investments" are comprised five limited partnerships, which
own 22 properties, for which we held an approximate consistent level of equity
interest throughout each of the periods presented. Our future earnings with
respect to the "Other Investments" will be dependent upon the operating results
of the 22 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 our
self-storage facilities as discussed above.
See Note 5 to our condensed consolidated financial statements for the
operating results of these entities for the three and six months ended June 30,
2007 and 2006.
OTHER INCOME AND EXPENSE ITEMS
INTEREST AND OTHER INCOME: Interest and other income was $955,000 and
$3,080,000 for the three and six months ended June 30, 2007, respectively, as
compared to $10,047,000 and $15,122,000 for the three and six months ended June
30, 2006, respectively. These decreases are due to lower average cash balances,
partially offset by higher interest rates on invested cash balances as compared
to the same periods in 2006.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense
was $167,601,000 and $344,082,000 for the three and six months ended June 30,
2007, respectively, as compared to $48,580,000 and $98,608,000 for the three and
six months ended June 30, 2006, respectively. The increases in depreciation and
amortization for the three months ended June 30, 2007, as compared to the same
period in 2006 are due primarily to $70,979,000 and $156,763,000 in amortization
expense recorded during the three and six months ended June 30, 2007,
respectively, on the intangible assets, which we acquired in the Shurgard
merger. These intangible assets were valued in our purchase accounting analysis
at $565,341,000 and are being amortized relative to the expected future benefit
of the tenants in place to each period. Amortization is expected to be
approximately $52,178,000 in the third quarter of 2007 and $37,042,000 in the
fourth quarter of 2007.
The remainder of the increase in depreciation and amortization for the
three and six months ended June 30, 2007 as compared to the same periods in 2006
is due primarily to buildings acquired in the Shurgard merger and to our newly
developed and acquired facilities. See Notes 2 and 3 to our condensed
consolidated financial statements for further discussion of the Shurgard merger
and the acquisition of tangible and intangible assets.
GENERAL AND ADMINISTRATIVE: General and administrative expense was
$21,465,000 and $37,981,000 for the three and six months ended June 30, 2007,
respectively, as compared to $6,975,000 and $13,754,000 for the three and six
70
months ended June 30, 2006, respectively. General and administrative expense
principally consists of state income taxes, investor relations expenses and
corporate and executive salaries. In addition, general and administrative
expenses includes expenses that vary depending on the Company's activity levels
in certain areas, such as overhead associated with the acquisition and
development of real estate facilities, employee severance and stock-based
compensation, and product research and development expenditures.
A portion of our increase in general and administrative expense is due
to certain significant nonrecurring factors, including a) additional expenses
incurred in connection with the merger with Shurgard totaling approximately $1.3
million and $5.3 million for the three and six months ended June 30, 2007,
respectively, as compared to $1.1 million and $2.2 million for the three and six
months ended June 30, 2006, respectively b) the costs associated with our
attempted European share offering of $9.6 million for the three and six months
ended June 30, 2007, c) costs associated with our reorganization into a Maryland
trust of approximately $2.0 million for the three and six months ended June 30,
2007. The increase in general and administrative expense for the three and six
months ended June 30, 2007 and 2006, respectively, also includes approximately
$2.3 million and $2.4 million, respectively, in ongoing general and
administrative expense associated with our European operations.
We expect that for the remainder of 2007, general and administrative
expense will approximate $20 million to $25 million.
INTEREST EXPENSE: Interest expense was $16,707,000 and $33,515,000 for
the three and six months ended June 30, 2007, respectively, as compared to
$1,872,000 and $3,429,000,respectively, for the same periods in 2006. Interest
capitalized during the three and six months ended June 30, 2007, was $973,000
and $1,714,000, respectively, compared to $353,000 and $1,069,000 for the same
periods in 2006. The increase in interest expense is primarily due to
$28,379,000 in interest incurred on the debt and other obligations we assumed in
the Shurgard merger, as well as $1,775,000 of interest on borrowings against our
line of credit. These amounts are partially offset by a decrease of $510,000 in
interest expense due to lower balances on our outstanding notes. See also Notes
6, 7 and 8 to our condensed consolidated financial statements for a schedule of
our debt balances, principal repayment requirements, and average interest rates.
GAIN ON DISPOSITION OF REAL ESTATE INVESTMENTS: During the six months
ended June 30, 2007, we have received proceeds for partial condemnations and
other disposals to certain of our self-storage facilities for an aggregate of
$2,242,000 and recorded a gain of $1,044,000 on our condensed consolidated
statements of income for the three and six months ended June 30, 2007 as a
result of these transactions.
On May 14, 2007, one of European subsidiaries, sold limited liability
partner interests ("LLP Interests") it held in Shurgard Self-Storage SCA,
("Shurgard Europe"), also an indirect subsidiary of Public Storage, to various
officers of the Company other than our chief executive officer. The aggregate
proceeds of the sale were $4,909,000. The sale price for the LLP Interests was
the net asset value per LLP Interest using, among other items, information
provided by an independent third party appraisal firm of the net asset value of
Shurgard Europe as of March 31, 2007. The Company has a right to repurchase the
LLP Interests (1) upon a purchaser's termination of employment or (2) for any
reason, on or after May 14, 2008. The repurchase price is set at the lesser of
(1) the then net asset value per share or (2) the original purchase price with a
10% compounded annual return. In connection with the sale of these LLP
Interests, we recorded a gain of $1,194,000 for the three and six months ended
June 30, 2007, representing the excess of the sales proceeds less the book value
of the LLP Interests sold. The gain is reflected in gain on disposition of real
estate investments on our accompanying condensed consolidated statements of
income. The investment of these various officers is included in minority
interest - other partnership interests on our accompanying condensed
consolidated balance sheet at June 30, 2007 and their pro rata share of the
earnings of Shurgard Europe are reflected in minority interest in income - other
partnership interests on our accompanying condensed consolidated statements of
income for the three and six months ended June 30, 2007.
During the three months ended June 30, 2006, we received $466,000 of
additional proceeds from a partial condemnation that occurred in 2005. These
additional proceeds are reflected as a gain on disposition of real estate
investments on our condensed consolidated statements of income for the three and
71
six months ended June 30, 2006. Also during the six months ended June 30, 2006,
we disposed of parcels of vacant land for an aggregate of $4,970,000. The net
proceeds were equal to the book value of these parcels; accordingly, no gain or
loss was recorded.
FOREIGN EXCHANGE GAIN: Our foreign exchange gain is primarily related
to intercompany balances between our European subsidiaries and our United States
operations. When such intercompany balances are expected to settle in the
foreseeable future, changes in exchange rates are recorded in income in the
period in which the change occurs. For the three and six months ended June 30,
2007, we recorded foreign currency exchange gains of $5,553,000 and $10,593,000,
respectively, on our condensed consolidated statement of income, driven
primarily by the weakening of the US dollar relative to the Euro at June 30,
2007 as compared to December 31, 2006. Future foreign exchange gains will be
dependent primarily upon the movement of the Euro relative to the US Dollar, the
level of our intercompany debt and our expectations with respect to repaying
intercompany debt. At June 30, 2007 our European subsidiaries had intercompany
balances payable to our United States operations totaling approximately $503
million.
HURRICANE CASUALTY GAIN: Our policy is to record casualty losses or
gains in the period the casualty occurs equal to the differential between (a)
the book value of assets destroyed and (b) insurance proceeds, if any, that we
expect to receive in accordance with our insurance contracts. Potential
insurance proceeds that are subject to uncertainties, such as interpretation of
deductible provisions of the governing agreements or the estimation of costs of
restoration, are treated as a contingent proceeds in accordance with Statement
of Financial Accounting Standards No. 5 ("SFAS 5"), and not recorded until the
uncertainties are satisfied. During the first quarter of 2007, we recorded a
casualty gain totaling $2,665,000, representing the realization of such
contingent proceeds relating to hurricanes which occurred in 2005.
INCOME FROM DERIVATIVES, NET: This represents a net gain as recognized
for the changes in the fair market values of those derivative financial
instruments that do not qualify for hedge accounting treatment under SFAS No.
133 combined with net payments from derivative instruments. The gain of
$1,771,000 for the three months ended June 30, 2007 is primarily due to gains of
$1,803,000 in changes in value of our interest rate swaps and currency forward
contracts on the euro that do not qualify for hedge accounting combined with
payments of $32,000 relative to certain interest rate swaps and foreign currency
exchange derivatives acquired in the Shurgard merger as described under Note 3
to our condensed consolidated financial statements. The gain of $1,009,000 for
the six months ended June 30, 2007 is primarily due to gains of $1,137,000 in
changes in value of our interest rate swaps and currency forward contracts on
the euro that do not qualify for hedge accounting combined with payments of
$128,000 relative to certain interest rate swaps and foreign currency exchange
derivatives acquired in the Shurgard merger.
MINORITY INTEREST IN INCOME: Minority interest in income represents the
income allocable to equity interests in Consolidated Entities, which are not
owned by the Company. The following table summarizes minority interest in income
for the three and six months ended June 30, 2007 and 2006:
72
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -------------------------
2007 2006 Change 2007 2006 Change
------------- ----------- ----------- ------------ ------------- -----------
(Amounts in thousands)
Preferred partnership interests (a).......... $ 5,403 $ 4,658 $ 745 $ 10,806 $ 8,249 $ 2,557
Convertible Partnership Units (b)............ 19 120 (101) 11 236 (225)
Shurgard U.S. minority interests (c)......... 279 - 279 444 - 444
Shurgard European minority interests (d)..... (2,065) - (2,065) (5,819) - (5,819)
Other minority interests (e)................. 3,888 3,950 (62) 7,865 7,402 463
------------- ----------- ----------- ------------ ------------- -----------
Total minority interests in income....... $ 7,524 $ 8,728 $(1,204) $ 13,307 $ 15,887 $ (2,580)
============= =========== =========== ============ ============= ===========
(a) On May 9, 2006, one of our Consolidated Entities issued $100,000,000 of its
7.25% Series J Preferred Partnership Units. Accordingly, ongoing
distributions with respect to preferred partnership interest have
increased.
(b) These amounts reflect the minority interests represented by the Convertible
Partnership Units (see Note 10 to our condensed consolidated financial
statements).
(c) These amounts reflect income allocated to minority interests in entities we
acquired in the merger with Shurgard, and include $169,000 and $396,000 in
depreciation in the three and six months ended June 30, 2007, respectively.
(d) These amounts reflect income allocated to our minority partner's 80%
interest in the European joint ventures, First Shurgard and Second
Shurgard, as well as those in domestic joint ventures. These amounts are
negative because the related joint ventures operations are at a loss
position. Included in these minority interest amounts is $2,774,000 and
$5,607,000 for the three and six months ended June 30, 2007, respectively,
in depreciation, $3,600,000 and $7,046,000 in interest expense, and
$1,300,000 and $1,906,000 in minority interest in income from derivatives
and foreign exchange.
(e) These amounts reflect income allocated to minority interests that were
outstanding consistently throughout the three and six months ended June 30,
2007 and 2006. Included in minority interest in income is $128,000 and
$326,000 in depreciation expense for the three and six months ended June
30, 2007, respectively, as compared to $196,000 and $392,000 for the same
periods in 2006.
Other minority interests reflect income allocated to minority interests
that have maintained a consistent level of interest throughout 2006 and the six
months ended June 30, 2007, comprised of investments in the Consolidated
Entities described in Note 10 to our condensed consolidated 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.
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.
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 used to
make distributions to our shareholders (see "REQUIREMENT TO PAY DISTRIBUTIONS"
below). However, despite the significant distribution requirements, we have been
able to retain a significant amount of our operating cash flow. The following
table summarizes our ability to fund distributions to the minority 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 scheduled and optional
principal payments on debt and for reinvestment.
73
Six Months Ended June 30,
2007 2006
---------------- ----------------
(Amounts in thousands)
Net cash provided by operating activities (a)................... $ 479,122 $ 367,241
Distributions to minority interest (Preferred Units)............ (10,806) (8,249)
Distributions to minority interest (common equity).............. (10,357) (7,348)
---------------- ----------------
Cash from operations allocable to our shareholders.............. 457,959 351,644
Capital improvements to maintain our facilities................. (28,807) (23,449)
---------------- ----------------
Remaining operating cash flow available for distributions to our
shareholders................................................ 429,152 328,195
Distributions paid:
Preferred share dividends..................................... (116,091) (98,991)
Equity Shares, Series A dividends............................. (10,712) (10,712)
Distributions to common shareholders.......................... (170,018) (128,595)
---------------- ----------------
Cash available for principal payments on debt and reinvestment.. $ 132,331 $ 89,897
================ ================
(a) Represents net cash provided from operating activities as presented on our
June 30, 2007 Condensed Consolidated Statements of Cash Flows.
Cash available for principal payments on debt and reinvestment
increased from $89.9 million in the six months ended June 30, 2006 to $133.3
million in the six months ended June 30, 2007 principally due to improved
operations from our Same Store group of facilities, continued growth in
operations from our newly developed and recently expanded facilities, as well as
continued growth in our recently acquired self-storage facilities included the
facilities acquired in the merger with Shurgard.
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 and debt obligations with
(i) cash on hand at June 30, 2007, (ii) internally generated retained cash flows
and (iii) proceeds from issuing equity securities. In general, our current
strategy is to continue to finance our growth with permanent capital; either
common or preferred equity.
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 shares have no sinking fund requirement or maturity date and do not
require redemption, all of which eliminate any future refinancing risks, (iii)
after the end of a non-call period, we have the option to redeem the preferred
shares at any time, which enable us to refinance higher coupon preferred shares
with new preferred stock at lower rates if appropriate, (iv) preferred shares do
not contain covenants, thus allowing us to maintain significant financial
flexibility, and (v) dividends on the preferred shares can be applied to satisfy
our REIT distribution requirements.
Our credit ratings on each outstanding series of preferred shares are
"Baa1" by Moody's and "BBB+" by Standard & Poor's.
On March 27, 2007, we entered into a five-year revolving credit
agreement (the "Credit Agreement") with an aggregate limit with respect to
borrowings, letters of credit and foreign currency borrowings in Euros or
74
British pounds of $300 million. Amounts drawn under the Credit Agreement bear an
annual interest rate ranging from the London Interbank Offered Rate ("LIBOR")
plus 0.35% to LIBOR plus 1.00% depending on our credit ratings (LIBOR plus 0.35%
at June 30, 2007). In addition, we are required to pay a quarterly facility fee
ranging from 0.10% per annum to 0.25% per annum depending on our credit ratings
(0.10% per annum at June 30, 2007). Outstanding borrowings on our revolving line
of credit totaled $70 million at June 30, 2007, which was repaid on July 2, 2007
with proceeds from an issuance of preferred stock discussed below. There were no
outstanding borrowings on the revolving line of credit as of August 8, 2007.
The Credit Agreement includes various covenants, the more significant
of which require us to (i) maintain a leverage ratio (as defined therein) of
less than 0.55 to 1.00, (ii) maintain certain fixed charge and interest coverage
ratios (as defined therein) of not less than 1.5 to 1.0 and 1.75 to 1.0,
respectively, and (iii) maintain a minimum total shareholders' equity (as
defined therein). We were in compliance with all covenants of the Credit
Agreement at June 30, 2007.
RECENT ISSUANCE AND 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.
On January 9, 2007, we issued our 6.625% Series M Preferred Stock for
gross proceeds of $500 million. On January 18, 2007, we redeemed our 7.625%
Series T Cumulative Preferred Stock totaling $152.2 million and on February 19,
2007, we redeemed our 7.625% Series U Cumulative Preferred Stock totaling $150.0
million. These redemptions were funded with cash on hand and funds raised
through the issuance of our Series M preferred stock. On July 2, 2007, we issued
our 7.000% Series N Preferred Stock for gross proceeds of $172.5 million. We
currently have approximately $172.5 million of additional preferred securities
that become redeemable at our option during the remainder of 2007.
From time-to-time, we may raise additional capital primarily through
the issuance of lower rate preferred securities, in advance of the redemption
dates to ensure that we have available funds to redeem these securities. The
timing and our ability to issue additional preferred securities to finance the
redemption of these preferred securities depends on many factors and
accordingly, there is no assurance that we will be able to raise the necessary
capital and at appropriate rates to redeem these securities.
REQUIREMENT TO PAY DISTRIBUTIONS: We have operated, and intend to
continue to operate, in such a manner as to qualify as a REIT under the Internal
Revenue Code of 1986, but no assurance can be given that we will at all times so
qualify. To the extent that the Company continues to qualify as a REIT, we will
not be taxed, with certain limited exceptions, on the taxable income that is
distributed to our shareholders, provided that at least 90% of our taxable
income is so distributed to our shareholders prior to filing of the Company's
tax return. We have satisfied the REIT distribution requirement since 1980.
We estimate the distribution requirement with respect to our preferred
shares outstanding at June 30, 2007 to be approximately $229.3 million per year.
The annual distribution requirement with respect to our Series N Preferred Stock
issued on July 2, 2007 is approximately $12.1 million. We estimate that the
annual distribution requirement with respect to the preferred partnership units
outstanding at June 30, 2007, to be approximately $21.6 million per year.
During the six months ended June 30, 2007, we paid dividends totaling
$170,018,000 ($1.00 per common share) to the holders of our common shares. Based
upon shares outstanding at August 6, 2007 and a quarterly distribution of $0.50
per share, which was declared by our Board on August 2, 2007 and payable on
September 27, 2007, to shareholders of record as of September 12, 2007, we
estimate a dividend payment with respect to our common shares of approximately
$85 million for the third quarter of 2007.
During each of the six months ended June 30, 2007 and 2006, we paid
cash dividends totaling $10,712,000 to the holders of our Equity Shares, Series
A. With respect to the depositary shares representing Equity Shares, Series A,
we have no obligation to pay distributions if no distributions are paid to the
common shareholders. To the extent that we do pay common distributions in any
75
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 share or (ii)
$2.45. The depositary shares are non-cumulative, and have no preference over our
common shares either as to dividends or in liquidation. With respect to the
Equity Shares, Series A outstanding at June 30, 2007, we estimate the total
regular distribution for the third quarter of 2007 to be approximately $5.4
million.
CAPITAL IMPROVEMENT REQUIREMENTS: During 2007, we have budgeted
approximately $65,000,000 for capital improvements for our facilities. Capital
improvements include major repairs or replacements to the facilities, which keep
the facilities in good operating condition and maintain their visual appeal.
Capital improvements do not include costs relating to the development or
expansion of facilities. During the six months ended June 30, 2007, we incurred
capital improvements of approximately $28,807,000. 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: At June 30, 2007, we have total outstanding
debt of approximately $1.1 billion. We do not believe we have any significant
refinancing risks with respect to our debt.
On January 2, 2007, we retired approximately $429 million of debt
assumed from Shurgard that was secured by substantially all of our wholly-owned
facilities in Europe.
Our portfolio of real estate facilities remains substantially
unencumbered. At June 30, 2007, we have domestic mortgage debt outstanding of
$235 million, which encumbers 86 self-storage facilities with an aggregate net
book value of approximately $601 million. In Europe, mortgage debt at June 30,
2007 totaled $327 million and encumbers 63 facilities, owned by consolidated
joint ventures, with an aggregate net book value of approximately $489 million
at June 30, 2007.
We anticipate that our retained operating cash flow will continue to be
sufficient to enable us to make scheduled principal payments. See Notes 7 and 8
to our condensed consolidated financial statements for approximate principal
maturities of such borrowings. It is our current intention to fully amortize our
outstanding debt as opposed to refinance debt maturities with additional debt.
Alternatively, we may prepay debt and finance such prepayments with retained
operating cash flow or proceeds from the issuance of preferred securities.
ACQUISITION AND DEVELOPMENT OF FACILITIES: During 2007, 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.
As of August 8, 2007, we are under contract to purchase five
self-storage facilities (total approximate net rentable square feet of 395,000)
at an aggregate cost of approximately $44 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 these facilities
will be acquired.
At June 30, 2007, we have a development "pipeline" of 41 projects in
the U.S. and 15 projects in Europe, consisting of newly developed self-storage
facilities, conversion of space at facilities that was previously used for
containerized storage and expansions to existing self-storage facilities. At
June 30, 2007, we have acquired the land for all of the U.S projects and nine of
the projects in Europe.
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 $179.9 million and will be incurred over the next 24 months. The
following table sets forth certain information with respect to our development
pipeline.
76
DEVELOPMENT PIPELINE SUMMARY
AS OF JUNE 30, 2007 Total
Number Net estimated Costs incurred
of rentable development through Costs to
projects sq. ft. costs 06/30/07 complete
---------- ---------- -------------- -------------- --------------
(Amounts in thousands, except number of projects)
U.S. under construction 14 824 $ 60,970 $ 41,225 $ 19,745
U.S. in development, land acquired 27 962 78,732 7,610 71,122
European projects in construction 7 358 74,737 45,407 29,330
European projects under development 8 407 64,088 4,403 59,685
---------- ---------- -------------- -------------- --------------
Total Development Pipeline 56 2,551 $ 278,527 $ 98,645 $ 179,882
========== ========== ============== ============== ==============
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 will
be incurred over the next 24 months. Substantially all of the future costs for
the seven European projects that are in construction will be funded by the
Shurgard European Joint Ventures, in which we have a 20% interest, and which
have a substantial degree of funding by debt. The future costs with respect to
all other development projects will be funded by us.
CONTRACTUAL OBLIGATIONS: Our significant contractual obligations at
June 30, 2007 and their impact on our cash flows and liquidity are summarized
below for the years ending December 31 (amounts in thousands):
Total 2007 2008 2009 2010 2011 Thereafter
------------ ------------ ------------ ------------ ------------ ----------- --------------
Long-term debt (1) ............ $1,180,720 $ 36,014 $ 247,524 $ 202,444 $ 48,211 $ 254,135 $ 392,392
Line of credit and other
short-term bank financing (2).. 70,058 70,058 - - - - -
Capital leases (3)............. 41,206 350 728 742 688 1,333 37,365
Operating leases (4)........... 264,046 13,287 18,898 15,857 11,966 10,430 193,608
Construction commitments (5)... 49,075 38,899 10,176 - - - -
------------ ------------ ------------ ------------ ------------ ----------- --------------
Total.......................... $1,605,105 $ 158,608 $ 277,326 $ 219,043 $ 60,865 $ 265,898 $ 623,365
============ ============ ============ ============ ============ =========== ==============
(1) Amounts include interest payments on our notes payable based on their
contractual terms. See Note 7 to our condensed consolidated financial
statements for additional information on our notes payable. Debt to Joint
Venture Partner is not reflected since we have not exercised our option to
acquire our partner's interest.
(2) Amounts include borrowings under our $300 million revolving line of credit.
See Note 6 to our condensed consolidated financial statements for
additional information on our line of credit and other short-term bank
financing.
(3) This line item reflects amounts due on five European properties with
commitments extending to April 2052 that we assumed in the merger with
Shurgard.
(4) We lease trucks, land, equipment and office space under various operating
leases. Certain leases are cancelable with substantial penalties.
(5) Includes obligations for facilities currently under construction at June
30, 2007 as described above under "Acquisition and Development of Real
Estate Facilities."
77
In January 2004, we entered into a joint venture partnership with an
institutional investor for the purpose of acquiring up to $125,000,000 of
existing self-storage properties in the United States from third parties (the
"Acquisition Joint Venture"). As described more fully in Note 8 to our June 30,
2007 condensed consolidated financial statements, our partner's equity
contributions with respect to certain transactions are classified as debt under
the caption "Debt to Joint Venture Partner" in our condensed consolidated
balance sheets. At June 30, 2007, our Debt to Joint Venture Partner was
$37,350,000. 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
not included our Debt to Joint Venture Partner as a contractual obligation in
the table above, since we only have the right, rather than a contractual
obligation, to acquire our partner's interest.
OFF-BALANCE SHEET ARRANGEMENTS: At June 30, 2007 we had no material
off-balance sheet arrangements as defined under Regulation S-K 303(a)(4) and the
instructions thereto.
STOCK REPURCHASE PROGRAM: Our Board has 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. During 2004, we repurchased 445,700
shares for approximately $20.3 million. During 2005, we repurchased 84,000
shares for approximately $5.0 million. During 2006 or 2007 (through August 8,
2007), we did not repurchase any shares. From the inception of the repurchase
program through June 30, 2007, we have repurchased a total of 22,201,720 common
shares at an aggregate cost of approximately $567.2 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 either of common
shares or preferred shares. At June 30, 2007, our debt as a percentage of total
shareholders' equity (based on book values) was 12.7%.
Our preferred shares are not redeemable at the option of the holders.
Except under certain conditions relating to the Company's qualification as a
REIT, the preferred shares are not redeemable by the Company prior to the
following dates: Series 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,
Series I - May 3, 2011, Series K - August 8, 2011, Series L - October 20, 2011,
Series M - January 9, 2012 and Series N - July 2, 2012. On or after the
respective dates, each of the series of preferred shares will be redeemable at
the option of the Company, in whole or in part, at $25 per depositary share (or
share in the case of the Series Y), plus accrued and unpaid dividends through
the redemption date.
Our market risk sensitive instruments include notes payable and
borrowing on bank credit facilities, which totaled $981,018,000 and $70,000,000,
respectively, at June 30, 2007.
We are exposed to changes in interest rates primarily from the floating
rate debt arrangements we acquired in the merger with Shurgard.
We have foreign currency exposures related to our investment in the
construction, acquisition, and operation of storage centers in countries outside
the U.S. to the extent such activities are financed with financial instruments
or equity denominated in non-functional currencies. The aggregate book value of
such real estate and intangibles was approximately $1.6 billion at June 30,
2007. Since all foreign debt is denominated in the corresponding functional
currency, our currency exposure is limited to our equity investment in those
countries. Countries in which Shurgard had exposure to foreign currency
fluctuations include Belgium, France, the Netherlands, Sweden, Denmark, Germany
and the United Kingdom.
78
The table below summarizes annual debt maturities and weighted-average
interest rates on our outstanding debt at the end of each year (based on
relevant LIBOR of 5.32% and a EURIBOR of 4.12% at June 30, 2007 and the
applicable forward curve for following years) and fair values required to
evaluate our expected cash-flows under debt agreements and our sensitivity to
interest rate changes at June 30, 2007 (dollar amounts in thousands).
2007 2008 2009 2010 2011 Thereafter Total Fair Value
----------- ---------- ----------- ------------ ----------- ----------- ----------- -------------
Fixed rate debt........ $ 5,884 $ 23,909 $ 12,312 $ 14,401 $227,598 $ 363,607 $ 647,711 $ 647,711
Average interest rate.. 6.52% 6.37% 6.01% 6.10% 5.83% 5.79%
----------------------------------------------------------------------------------------------------------------------------
Variable rate debt (1). $ 70,000 $ - $ - $ - $ - $ - $ 70,000 $ 70,000
Average interest rate.. 5.67%
------------------------ ----------- ---------- ------------ ------------- ---------- ------------ ------------ ------------
Variable rate EURIBOR
debt (2)............. $ - $175,694 $ 150,903 $ - $ - $ - $ 326,597 $ 326,597
Average interest rate.. 6.11% 6.11%
----------------------------------------------------------------------------------------------------------------------------
Interest rate swaps
Swap on EURIBOR........ $ - $ 847 $ 2,738 $ - $ - $ - $ 3,585 $ 3,585
(1) Amounts include borrowings under our line of credit, which expires in 2012.
(2) First Shurgard and Second Shurgard have senior credit agreements
denominated in euros to borrow, in aggregate, up to (euro)271 million
($365.1 million as of June 30, 2007). As of June 30, 2007, the available
amount under those credit facilities was in aggregate (euro)28 million
($37.7 million).
At June 30, 2007, we were party to pay-fixed, receive-variable interest
rate swaps. The notional amounts, the weighted-average pay rates and the terms
of these agreements are summarized as follows:
2007 2008 2009 2010 2011 Thereafter
----------- ----------- ---------- ---------- ----------- -------------
Notional amounts (in millions)... $ 246.1 $ 124.0 $ 118.0 $ - $ - $ -
Weighted average interest rate... 3.75% 3.72% 3.73% - - -
Based on our outstanding variable-rate EURIBOR debt and interest rate
swaps at March 31, 2007, a hypothetical increase in the interest rates of 100
basis points would cause the value of our derivative financial instruments to
increase by $3.2 million. Conversely, a hypothetical decrease in the interest
rates of 100 basis points would cause the value of our derivative financial
instruments to decrease by $3.1 million.
On January 2, 2007, we prepaid the (euro)325 million collateralized
notes ($429 million at December 31, 2006) at our European operations that were
otherwise payable in 2011. We also terminated the related European currency and
interest rate hedges. Accordingly, the remaining debt in Europe relates to the
joint venture properties, in which we have a 20% equity interest, and which are
consolidated for financial reporting purposes.
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
79
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.
80
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
The information set forth under the heading "Legal Matters" in Note 15
to the Condensed Consolidated Financial Statements in this Form 10-Q is
incorporated by reference in this Item 1.
ITEM 1A. RISK FACTORS
------------
As of June 30, 2007, no material changes had occurred in our risk
factors as discussed in Item 1A of the Public Storage, Inc. Annual Report on
Form 10-K for the year ended December 31, 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
-----------------------------------------------------------
On June 12, 1998, our Board authorized the repurchase from time to time
of up to 10,000,000 common shares on the open market or in privately negotiated
transactions. On subsequent dates our Board increased the repurchase
authorization, the last being April 13, 2001, when our Board increased the
repurchase authorization to 25,000,000 shares. The Company has repurchased a
total of 22,201,720 common shares under this authorization. The Company did not
repurchase any common shares during the six months ended June 30, 2007.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Company held its annual meeting of shareholders on May 3, 2007, and
the following matters were voted on at the meeting:
1. The election of the following members of our Board for the succeeding year
or until their successors are duly qualified and elected
Total Votes
----------------------------------------
Name Total Votes For Total Votes Withheld
---------------------- ---------------- --------------------
B. Wayne Hughes 152,359,529 4,108,298
Ronald L. Havner, Jr. 152,935,432 3,532,392
Dann V. Angeloff 150,053,595 6,414,249
William C. Baker 153,975,050 2,492,774
John T. Evans 153,381,299 3,086,525
Uri P. Harkham 152,940,807 3,527,017
B. Wayne Hughes, Jr. 151,069,005 5,398,818
Harvey Lenkin 148,633,446 7,834,377
Gary E. Pruitt 154,336,517 2,131,307
Daniel C. Staton 154,177,165 2,290,658
2. The Company's shareholders approved ratification of the appointment of
Ernst & Young LLP as the Company's independent auditors for the fiscal year
ended December 31, 2007. There were 153,322,014 votes cast for
ratification; 2,334,166 votes cast against ratification; and 811,644 votes
abstained.
3. The Company's shareholders approved the Public Storage 2007 Equity and
Performance-Based Incentive Compensation Plan. There were 133,398,565 votes
cast for approval; 10,539,333 votes cast against approval; and 1,048,559
votes abstained.
4. The Company's shareholders approved a proposal to reorganize the Company as
a Maryland real estate investment trust. Of the shares of common stock
voted at the meeting, 95,201,017 votes were cast in favor of the proposal;
48,344,864 shares voted against; 988,107 shares abstained; and 11,104,174
were broker non-votes. Of the Company's shares of Equity Stock, Series A
and Equity Stock, Series AAA voting together as a class, 4,596,785 votes
were cast in favor of the merger agreement, 140,240 shares voted against;
5,025 shares abstained; and 377,192 were broker non-votes. Of the Company's
preferred stock voting together as a class, 1,028,473 shares were cast in
favor of the merger agreement; 15,802 shares voted against; and 862,428
shares abstained.
81
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.
82
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: August 9, 2007
PUBLIC STORAGE
By: /s/ John Reyes
---------------
John Reyes
Senior Vice President and Chief Financial Officer
(Principal financial officer and duly authorized
officer)
83
PUBLIC STORAGE
INDEX TO EXHIBITS (1)
(Items 15(a)(3) and 15(c))
3.1 Articles of Amendment and Restatement of Declaration of Trust of Public
Storage, a Maryland real estate Anvestment trust. Filed with the
Registrant's Current Report on Form 8-K dated June 6, 2007 and
incorporated by reference herein.
3.2 Bylaws of Public Storage, a Maryland real estate investment trust. Filed
with the Registrant's Current Beport on Form 8-K dated June 6, 2007 and
incorporated by reference herein.
3.3 Articles Supplementary for Public Storage Equity Shares, Series A. Filed
with the Registrant's Current Aeport on Form 8-K dated June 6, 2007 and
incorporated by reference herein.
3.4 Articles Supplementary for Public Storage Equity Shares, Series AAA.
Filed with the Registrant's Current Aeport on Form 8-K dated June 6, 2007
and incorporated by reference herein.
3.5 Articles Supplementary for Public Storage 7.500% Cumulative Preferred
Shares, Series V. Filed with the Aegistrant's Current Report on Form 8-K
dated June 6, 2007 and incorporated by reference herein.
3.6 Articles Supplementary for Public Storage 6.500% Cumulative Preferred
Shares, Series W. Filed with the Aegistrant's Current Report on Form 8-K
dated June 6, 2007 and incorporated by reference herein.
3.7 Articles Supplementary for Public Storage 6.450% Cumulative Preferred
Shares , Series X. Filed with the Aegistrant's Current Report on Form 8-K
dated June 6, 2007 and incorporated by reference herein.
3.8 Articles Supplementary for Public Storage 6.850% Cumulative Preferred
Shares, Series Y. Filed with the Aegistrant's Current Report on Form 8-K
dated June 6, 2007 and incorporated by reference herein.
3.9 Articles Supplementary for Public Storage 6.250% Cumulative Preferred
Shares, Series Z. Filed with the Aegistrant's Current Report on Form 8-K
dated June 6, 2007 and incorporated by reference herein.
3.10 Articles Supplementary for Public Storage 6.125% Cumulative Preferred
Shares, Series A. Filed with the Aegistrant's Current Report on Form 8-K
dated June 6, 2007 and incorporated by reference herein.
3.11 Articles Supplementary for Public Storage 7.125% Cumulative Preferred
Shares, Series B. Filed with the Aegistrant's Current Report on Form 8-K
dated June 6, 2007 and incorporated by reference herein.
3.12 Articles Supplementary for Public Storage 6.600% Cumulative Preferred
Shares, Series C. Filed with the Aegistrant's Current Report on Form 8-K
dated June 6, 2007 and incorporated by reference herein.
3.13 Articles Supplementary for Public Storage 6.180% Cumulative Preferred
Shares, Series D. Filed with the Aegistrant's Current Report on Form 8-K
dated June 6, 2007 and incorporated by reference herein.
3.14 Articles Supplementary for Public Storage 6.750% Cumulative Preferred
Shares, Series E. Filed with the Aegistrant's Current Report on Form 8-K
dated June 6, 2007 and incorporated by reference herein.
3.15 Articles Supplementary for Public Storage 6.450% Cumulative Preferred
Shares, Series F. Filed with the Aegistrant's Current Report on Form 8-K
dated June 6, 2007 and incorporated by reference herein.
3.16 Articles Supplementary for Public Storage 7.000% Cumulative Preferred
Shares, Series G. Filed with the Aegistrant's Current Report on Form 8-K
dated June 6, 2007 and incorporated by reference herein.
84
3.17 Articles Supplementary for Public Storage 6.950% Cumulative Preferred
Shares, Series H. Filed with the Aegistrant's Current Report on Form 8-K
dated June 6, 2007 and incorporated by reference herein.
3.18 Articles Supplementary for Public Storage 7.250% Cumulative Preferred
Shares, Series I. Filed with the Aegistrant's Current Report on Form 8-K
dated June 6, 2007 and incorporated by reference herein.
3.19 Articles Supplementary for Public Storage 7.250% Cumulative Preferred
Shares, Series K. Filed with the Aegistrant's Current Report on Form 8-K
dated June 6, 2007 and incorporated by reference herein.
3.20 Articles Supplementary for Public Storage 6.750% Cumulative Preferred
Shares, Series L. Filed with the Aegistrant's Current Report on Form 8-K
dated June 6, 2007 and incorporated by reference herein.
3.21 Articles Supplementary for Public Storage 6.625% Cumulative Preferred
Shares, Series M. Filed with the Aegistrant's Current Report on Form 8-K
dated June 6, 2007 and incorporated by reference herein.
3.22 Articles Supplementary for Public Storage 7.000% Cumulative Preferred
Shares, Series N. Filed with the Aegistrant's Current Report on Form 8-K
dated June 28, 2007 and incorporated by reference herein.
4.1 Master Deposit Agreement, dated as of May 31, 2007. Filed with the
Registrant's Current Report on Form 8-K dated June 6, 2007 and
incorporated by reference herein.
10.1 Amended Management Agreement between Registrant and Public Storage
Commercial Properties Group, Inc. dated as of February 21, 1995. Filed
with Public Storage Inc.'s ("PSI") Annual Report on Form 10-K for the
year ended December 31, 1994 (SEC File No. 001-0839) and incorporated
herein by reference.
10.2 Second Amended and Restated Management Agreement by and among Registrant
and the entities listed therein dated as of November 16, 1995. Filed with
PS Partners, Ltd.'s Annual Report on Form 10-K for the year ended
December 31, 1996 (SEC File No. 001-11186) and incorporated herein by
reference.
10.3 Limited Partnership Agreement of PSAF Development Partners, L.P. Filed
with PSI's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1997 (SEC File No. 001-0839) and incorporated herein by
reference.
10.4 Agreement of Limited Partnership of PS Business Parks, L.P. Filed with PS
Business Parks, Inc.'s Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1998 (SEC File No. 001-10709) and incorporated
herein by reference.
10.5 Amended and Restated Agreement of Limited Partnership of Storage Trust
Properties, L.P. (March 12, 1999). Filed with PSI's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1999 (SEC File No.
001-0839) and incorporated herein by reference.
10.6 Limited Partnership Agreement of PSAC Development Partners, L.P. Filed
with PSI's Current Report on Form 8-K dated November 15, 1999 (SEC File
No. 001-0839) and incorporated herein by reference.
10.7 Agreement of Limited Liability Company of PSAC Storage Investors, L.L.C.
Filed with PSI's Current Report on Form 8-K dated November 15, 1999 (SEC
File No. 001-0839) and incorporated herein by reference.
10.8 Amended and Restated Agreement of Limited Partnership of PSA
Institutional Partners, L.P. Filed with PSI's Annual Report on Form 10-K
for the year ended December 31, 1999 (SEC File No. 001-0839) and
incorporated herein by reference.
85
10.9 Amendment to Amended and Restated Agreement of Limited Partnership of PSA
Institutional Partners, L.P. Filed with PSI's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2000 (SEC File No. 001-0839)
and incorporated herein by reference.
10.10 Second Amendment to Amended and Restated Agreement of Limited Partnership
of PSA Institutional Partners, L.P. Filed with PSI's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2004 (SEC File No.
001-0839) and incorporated herein by reference.
10.11 Third Amendment to Amended and Restated Agreement of Limited Partnership
of PSA Institutional Partners, L.P. Filed with PSI's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 2004 (SEC File No.
001-0839) and incorporated herein by reference.
10.12 Limited Partnership Agreement of PSAF Acquisition Partners, L.P. Filed
with PSI's Annual Report on Form 10-K for the year ended December 31,
2003 (SEC File No. 001-0839) and incorporated herein by reference.
10.13 Credit Agreement by and among Registrant, Wells Fargo Bank, National
Association and Wachovia Bank, National Association as co-lead arrangers,
and the other financial institutions party thereto, dated March 27, 2007.
Filed with PSI's Current Report on Form 8-K on April 2, 2007 (SEC File
No. 001-0839) and incorporated herein by reference.
10.14 Senior Credit Agreement dated May 26, 2003, as amended by Amendment
Agreements dated July 11, 2003 and December 2, 2003, by and among First
Shurgard Sprl, First Shurgard Finance Sarl, First Shurgard Deutschland
GmbH, Societe Generale and others. Incorporated by reference to Exhibit
10.1 filed with the Current Report on Form 8-K dated February 21, 2005
filed by Shurgard Storage Centers, Inc. ("Shurgard") (SEC File No.
001-11455).
10.15 Amendment and Waiver Agreement dated February 21, 2005 to the Senior
Credit Agreement dated May 26, 2003, as amended as of December 2, 2003,
by and among First Shurgard Sprl, First Shurgard Finance Sarl, First
Shurgard Deutschland GmbH, Societe Generale and others. Incorporated by
reference to Exhibit 10.2 filed with the Current Report on Form 8-K dated
February 21, 2005 filed by Shurgard (SEC File No. 001-11455).
10.16 Credit Facility Agreement dated July 12, 2004, between Second Shurgard
SPRL, Second Shurgard Finance SARL, the Royal Bank of Scotland as
Mandated Lead Arranger, the Royal Bank of Scotland PLC as Facility Agent.
Incorporated by reference to Exhibit 10.43 filed with the Report on Form
10-Q for the quarter ended June 30, 2004 filed by Shurgard (SEC File No.
001-11455).
10.17* Employment Agreement between Registrant and B. Wayne Hughes dated as of
November 16, 1995. Filed with PSI's Annual Report on Form 10-K for the
year ended December 31, 1995 (SEC File No. 001-0839) and incorporated
herein by reference.
10.18* Shurgard Storage Centers, Inc. 1995 Long Term Incentive Compensation
Plan. Incorporated by reference to Appendix B of Definitive Proxy
Statement dated June 8, 1995 filed by Shurgard (SEC File No. 001-11455).
10.19* Shurgard Storage Centers, Inc. 2000 Long-Term Incentive Plan.
Incorporated by reference to Exhibit 10.27 Annual Report on Form 10-K for
the year ended December 31, 2000 filed by Shurgard (SEC File No.
001-11455).
10.20* Shurgard Storage Centers, Inc. 2004 Long Term Incentive Compensation
Plan. Incorporated by reference to Appendix A of Definitive Proxy
Statement dated June 7, 2004 filed by Shurgard (SEC File No. 001-11455).
10.21* Public Storage, Inc. 1996 Stock Option and Incentive Plan. Filed with
PSI's Annual Report on Form 10-K for the year ended December 31, 2000
(SEC File No. 001-0839) and incorporated herein by reference.
86
10.22* Public Storage, Inc. 2000 Non-Executive/Non-Director Stock Option and
Incentive Plan. Filed with PSI's Registration Statement on Form S-8 (SEC
File No. 333-52400) and incorporated herein by reference.
10.23* Public Storage, Inc. 2001 Non-Executive/Non-Director Stock Option and
Incentive Plan. Filed with PSI's Registration Statement on Form S-8 (SEC
File No. 333-59218) and incorporated herein by reference.
10.24* Public Storage, Inc. 2001 Stock Option and Incentive Plan. Filed with
PSI's Registration Statement on Form S-8 (SEC File No. 333-59218) and
incorporated herein by reference.
10.25* Form of 2001 Stock Option and Incentive Plan Non-qualified Stock Option
Agreement. Filed with PSI's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2004 (SEC File No. 001-0839) and
incorporated herein by reference.
10.26* Form of Restricted Share Unit Agreement. Filed with the PSI's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 2004
(SEC File No. 001-0839) and incorporated herein by reference.
10.27* Form of 2001 Stock Option and Incentive Plan Stock Option Agreement.
Filed with PSI's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2004 (SEC File No. 001-0839) and incorporated herein
by reference.
10.28* Public Storage, Inc. Performance Based Compensation Plan for Covered
Employees. Filed with PSI's Current Report on Form 8-K dated May 11, 2005
(SEC File No. 001-0839) and incorporated herein by reference.
10.29* Public Storage 2007 Equity and Performance-Based Incentive Compensation
Plan. Filed as Exhibit 4.1 to Registrant's Registration Statement on Form
S-8 (SEC File No. 333-144907) and incorporated herein by reference.
10.30* Form of Restricted Stock Unit Agreement. Filed herewith.
10.31* Form of Stock Option Agreement. Filed herewith.
10.32 Form of Stock Purchase Agreement. Filed herewith.
10.33* Form of Indemnity Agreement. Filed with Registrant's Amendment No. 1 to
Registration Statement on Form S-4 (SEC File No. 333-141448) and
incorporated herein by reference.
87
11 Statement Re: Computation of Earnings per Share. Filed herewith.
12 Statement Re: Computation of Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends. Filed herewith.
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Filed herewith.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Filed herewith.
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Filed herewith.
* Compensatory benefit plan or arrangement or management contract.
(1) SEC File No. 001-33519 unless otherwise indicated.
88