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, 2006
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number: 1-8389
PUBLIC STORAGE, INC.
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(Exact name of registrant as specified in its charter)
California 95-3551121
------------------------------------ ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
701 Western Avenue, Glendale, California 91201-2349
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 244-8080.
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [X] Accelerated Filer [ ] Non-accelerated Filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
Indicate the number of shares outstanding of the registrant's common stock, as
of August 8, 2006:
Common Stock, $.10 par value per share - 129,368,307 shares
PUBLIC STORAGE, INC.
INDEX
Pages
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PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at
June 30, 2006 and December 31, 2005 1
Condensed Consolidated Statements of Income for the
Three and Six Months Ended June 30, 2006 and 2005 2
Condensed Consolidated Statement of Shareholders' Equity
for the Six Months Ended June 30, 2006 3
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2006 and 2005 4 - 5
Notes to Condensed Consolidated Financial Statements 6 - 36
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 37 - 69
Item 3. Quantitative and Qualitative Disclosures about Market Risk 69 - 70
Item 4. Controls and Procedures 70
PART II. OTHER INFORMATION (Items 3 through 5 are not applicable)
-----------------
Item 1. Legal Proceedings 71
Item 1A. Risk Factors 71 - 77
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 77 - 78
Item 6. Exhibits 78
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
June 30, December 31,
2006 2005
---------------- --------------
(Unaudited)
ASSETS
Cash and cash equivalents.................................................... $ 983,630 $ 493,501
Real estate facilities, at cost:
Land...................................................................... 1,596,915 1,540,357
Buildings................................................................. 4,550,764 4,390,127
---------------- --------------
6,147,679 5,930,484
Accumulated depreciation.................................................. (1,594,913) (1,500,128)
---------------- --------------
4,552,766 4,430,356
Construction in process................................................... 19,695 54,472
---------------- --------------
4,572,461 4,484,828
Investment in real estate entities........................................... 303,884 328,555
Goodwill (Note 2)............................................................ 174,634 176,285
Other assets................................................................. 65,527 69,317
---------------- --------------
Total assets................................................... $ 6,100,136 $ 5,552,486
================ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable................................................................ $ 105,053 $ 113,950
Debt to joint venture partner................................................ 35,784 35,697
Preferred stock called for redemption........................................ - 172,500
Accrued and other liabilities................................................ 171,773 159,360
---------------- --------------
Total liabilities................................................... 312,610 481,507
Minority interest:
Preferred partnership interests........................................... 325,000 225,000
Other partnership interests............................................... 33,223 28,970
Commitments and contingencies (Note 14)
Shareholders' equity:
Cumulative Preferred Stock, $0.01 par value, 50,000,000 shares authorized,
1,723,236 shares issued (in series) and outstanding, (1,698,336 at
December 31, 2005) at liquidation preference............................ 3,120,900 2,498,400
Common Stock, $0.10 par value, 200,000,000 shares authorized, 128,210,747
shares issued and outstanding (128,089,563 at December 31, 2005)........ 12,821 12,809
Equity Stock, Series A, $0.01 par value, 200,000,000 shares authorized,
8,744.193 shares issued and outstanding................................. - -
Paid-in capital........................................................... 2,415,673 2,430,671
Cumulative net income..................................................... 3,432,344 3,189,266
Cumulative distributions paid............................................. (3,552,435) (3,314,137)
---------------- --------------
Total shareholders' equity.......................................... 5,429,303 4,817,009
---------------- --------------
Total liabilities and shareholders' equity..................... $ 6,100,136 $ 5,552,486
================ ==============
See accompanying notes.
1
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ------------------------
2006 2005 2006 2005
------------ ------------- ------------ -----------
Revenues:
Rental income:
Self-storage facilities........................................... $ 262,398 $ 235,255 $ 513,910 $ 462,601
Commercial properties............................................. 3,013 2,927 6,005 5,775
Containerized storage facilities.................................. 4,200 3,988 8,130 7,825
Ancillary operations................................................. 18,369 17,198 33,543 31,216
Interest and other income............................................ 10,047 3,394 15,122 6,287
------------ ------------- ------------ -----------
298,027 262,762 576,710 513,704
------------ ------------- ------------ -----------
Expenses:
Cost of operations (excluding depreciation and amortization below):
Self-storage facilities........................................... 89,425 80,402 177,160 162,046
Commercial properties............................................. 1,235 1,043 2,583 2,170
Containerized storage facilities.................................. 4,219 3,274 7,529 6,016
Ancillary operations.............................................. 11,696 10,140 22,312 20,557
Depreciation and amortization......................................... 48,626 48,240 98,675 96,178
General and administrative............................................ 6,975 6,128 13,754 11,269
Interest expense...................................................... 1,872 1,794 3,429 3,457
------------ ------------- ------------ -----------
164,048 151,021 325,442 301,693
------------ ------------- ------------ -----------
Income from continuing operations before equity in earnings of real
estate entities and minority interest in income...................... 133,979 111,741 251,268 212,011
Equity in earnings of real estate entities (Note 5)..................... 3,124 4,851 6,590 10,529
Minority interest in income:
Preferred partnership interests:
Based on ongoing distributions paid................................ (4,658) (3,590) (8,249) (8,965)
Allocation of redemption costs (Note 9)............................ - - - (874)
Other partnership interests........................................... (4,070) (4,878) (7,638) (9,273)
------------ ------------- ------------ -----------
Income from continuing operations....................................... 128,375 108,124 241,971 203,428
Cumulative effect of change in accounting principle (Note 12)........... - - 578 -
Gain on disposition of real estate assets............................... 466 53 466 53
Discontinued operations (Note 3)........................................ 21 89 63 1,196
------------ ------------- ------------ -----------
Net income.............................................................. $ 128,862 $ 108,266 $ 243,078 $ 204,677
============ ============= ============ ===========
Net income allocation:
----------------------
Allocable to preferred shareholders:
Based on distributions paid........................................ $ 52,376 $ 42,147 $ 98,991 $ 82,560
Based on redemptions of preferred stock (Note 2)................... - - - 1,904
Allocable to Equity Stock, Series A.................................. 5,356 5,356 10,712 10,731
Allocable to common shareholders..................................... 71,130 60,763 133,375 109,482
------------ ------------- ------------ -----------
$ 128,862 $ 108,266 $ 243,078 $ 204,677
============ ============= ============ ===========
Net income per common share - basic
Continuing operations................................................ $ 0.55 $ 0.47 $ 1.04 $ 0.84
Discontinued operations.............................................. - - - 0.01
------------ ------------- ------------ -----------
$ 0.55 $ 0.47 $ 1.04 $ 0.85
============ ============= ============ ===========
Net income per common share - diluted
Continuing operations................................................ $ 0.55 $ 0.47 $ 1.03 $ 0.84
Discontinued operations.............................................. - - - 0.01
------------ ------------- ------------ -----------
$ 0.55 $ 0.47 $ 1.03 $ 0.85
============ ============= ============ ===========
Net income per depositary share of Equity Stock, Series A (basic and
diluted)............................................................. $ 0.61 $ 0.61 $ 1.23 $ 1.23
============ ============= ============ ===========
Basic weighted average common shares outstanding........................ 128,180 127,986 128,151 128,284
============ ============= ============ ===========
Diluted weighted average common shares outstanding...................... 129,062 128,618 129,037 128,895
============ ============= ============ ===========
Weighted average shares of Equity Stock, Series A (basic and diluted)... 8,744 8,744 8,744 8,760
============ ============= ============ ===========
See accompanying notes.
2
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands, except share data)
(Unaudited)
Cumulative
Preferred Stock Common Stock Paid-in Capital
--------------- ------------- ---------------
Balance at December 31, 2005.............................. $ 2,498,400 $ 12,809 $ 2,430,671
Issuance of cumulative preferred stock:
Series H (4,200 shares)................................ 105,000 - (3,508)
Series I (20,700 shares)............................... 517,500 - (15,899)
Issuance of common stock in connection with:
Exercise of employee stock options (94,166 shares)..... - 10 3,329
Vesting of restricted stock (21,062 shares) ........... - 2 (2)
Stock-based compensation expense (Note 12) ............... - - 1,082
Net income................................................ - - -
Cash distributions:
Cumulative preferred stock (Note 10)................... - - -
Equity Stock, Series A ($1.23 per depositary share).... - - -
Common Stock ($1.00 per share)......................... - - -
--------------- ------------- ---------------
Balance at June 30, 2006.................................. $ 3,120,900 $ 12,821 $ 2,415,673
=============== ============= ===============
Total
Cumulative Net Cumulative Shareholders'
Income Distributions Equity
--------------- -------------- --------------
Balance at December 31, 2005.............................. $ 3,189,266 $ (3,314,137) $ 4,817,009
Issuance of cumulative preferred stock:
Series H (4,200 shares)................................ - - 101,492
Series I (20,700 shares)............................... - - 501,601
Issuance of common stock in connection with:
Exercise of employee stock options (94,166 shares)..... - - 3,339
Vesting of restricted stock (21,062 shares) ........... - - -
Stock-based compensation expense (Note 12) ............... - - 1,082
Net income................................................ 243,078 - 243,078
Cash distributions:
Cumulative preferred stock (Note 10)................... - (98,991) (98,991)
Equity Stock, Series A ($1.23 per depositary share).... - (10,712) (10,712)
Common Stock ($1.00 per share)......................... - (128,595) (128,595)
--------------- -------------- --------------
Balance at June 30, 2006.................................. $ 3,432,344 $ (3,552,435) $ 5,429,303
=============== ============== ==============
See accompanying notes.
3
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
For the Six Months Ended
June 30,
-----------------------------
2006 2005
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Cash flows from operating activities:
Net income............................................................... $ 243,078 $ 204,677
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of note premium (Note 7)................................... (474) (515)
Excess of effective interest over cash interest paid on debt to joint
venture partner (Note 8) ............................................ 87 86
Gain on sales of real estate facilities, net ........................... (466) (53)
Depreciation and amortization........................................... 98,675 96,178
Equity in earnings of real estate entities.............................. (6,590) (10,529)
Distributions received from the real estate entities (Note 5)........... 10,415 11,496
Minority interest in income............................................. 15,887 19,112
Depreciation and gain on sale associated with
discontinued operations (Note 3)..................................... 41 (1,034)
Other operating activities.............................................. 6,747 16,442
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Total adjustments.................................................... 124,322 131,183
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Net cash provided by operating activities............................ 367,400 335,860
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Cash flows from investing activities:
Capital improvements to real estate facilities ......................... (23,449) (9,370)
Construction in process................................................. (37,936) (26,220)
Acquisition of minority interests (Note 9).............................. - (36,798)
Acquisition of real estate facilities................................... (98,954) (82,456)
Consolidation of partnerships (Note 2).................................. 2,865 -
Proceeds from the sales of real estate and real estate investments...... 5,436 2,214
Proceeds from sales of held-to-maturity investments (Note 2)............ 7,743 2,038
Acquisition of held-to-maturity debt securities......................... - (9,998)
Other investing activities.............................................. - (670)
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Net cash used in investing activities................................ (144,295) (161,260)
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Cash flows from financing activities:
Principal payments on notes payable..................................... (13,013) (12,943)
Net proceeds from issuances of common stock............................. 3,339 5,443
Net proceeds from issuances of cumulative preferred stock............... 603,093 267,148
Repurchases of common stock............................................. - (4,990)
Redemption of cumulative preferred stock................................ (172,500) (112,392)
Redemption of preferred partnership interests........................... - (85,000)
Issuance of preferred partnership interests............................. 100,000 -
Distributions paid to shareholders...................................... (238,298) (208,956)
Distributions paid to holders of preferred partnership interests
Note 9).............................................................. (8,249) (8,965)
Distributions paid to other minority interests.......................... (7,348) (9,198)
Net proceeds from financing through acquisition joint venture (Note 8).. - 19,429
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Net cash provided by (used in) financing activities.................. 267,024 (150,424)
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Net decrease in cash and cash equivalents................................... 490,129 24,176
Cash and cash equivalents at the beginning of the year...................... 493,501 366,255
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Cash and cash equivalents at the end of the period.......................... $ 983,630 $ 390,431
============= ============
See accompanying notes.
4
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
(Continued)
For the Six Months Ended
June 30,
-----------------------------
2006 2005
------------- ------------
Supplemental schedule of non-cash investing and financing activities:
Real estate acquired in exchange for assumption of mortgage note........... $ (4,590) $ -
Mortgage note assumed in connection with acquisition of real estate........ 4,590 -
Consolidation of entities pursuant to Emerging Issues Task Force Topic 04-5
(Note 2):
Minority interest....................................................... 3,963 -
Real estate facilities.................................................. (22,459) -
Investments............................................................. 20,687 -
Other Assets............................................................ (167) -
Accrued and Other Liabilities........................................... 841 -
Retirement of common stock and Equity Stock, Series A, received as a
distribution from affiliated entities (Note 5):
Common stock............................................................ - (64)
Additional paid-in capital.............................................. - (11,125)
Investment in real estate entities...................................... - 11,189
See accompanying notes.
5
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
1. Description of the Business
---------------------------
Public Storage, Inc. (referred to herein as "the Company", "we",
"us" or "our") is a California corporation, which was organized in 1980. We
are a fully integrated, self-administered and self-managed real estate
investment trust ("REIT") whose principal business activities include the
acquisition, development, ownership and operation of self-storage
facilities which offer storage spaces for lease, generally on a
month-to-month basis, for personal and business use. In addition, we have
(i) interests in commercial properties, containing commercial and
industrial rental space, (ii) interests in facilities that lease storage
containers, and (iii) ancillary operations comprised principally of
reinsurance of policies against losses to goods stored by our self-storage
tenants, retail sales and truck rentals at our self-storage locations.
At June 30, 2006, we had direct and indirect equity interests in
1,516 self-storage facilities located in 37 states and operating under the
"Public Storage" name. We also have direct and indirect equity interests in
approximately 19 million net rentable square feet of commercial space
located in 10 states.
2. Summary of Significant Accounting Policies
------------------------------------------
Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles in the United States ("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 footnotes
required by United States generally accepted accounting principles 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, 2006 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2006. The
accompanying unaudited condensed consolidated financial statements should
be read together with the consolidated financial statements and related
notes included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2005.
Certain amounts previously reported have been reclassified to
conform to the June 30, 2006 presentation. In previous presentations,
intangible assets were reported separately from goodwill on the Company's
consolidated balance sheet. We have now reclassified the intangible assets
to goodwill (see "Goodwill and Intangible Assets" below). In previous
presentations, net income from our truck rental, merchandise sales, and
property management operations were included on a net basis in "Interest
and other income" in our consolidated statements of income. In our current
presentation, revenues with respect to each of these operations, along with
revenues from our tenant reinsurance operations, are included under the
caption "Revenues: Ancillary operations" and the related cost of operations
are included in "Expenses: Cost of operations - Ancillary operations" on
our accompanying condensed consolidated statements of income. Certain
reclassifications have also been made from previous presentations as a
result of discontinued operations (See Note 3).
Consolidation Policy
--------------------
Entities in which we have an interest are first evaluated to
determine whether, in accordance with the provisions of the Financial
Accounting Standards Board's Interpretation No. 46R, "Consolidation of
Variable Interest Entities," they represent Variable Interest Entities.
Variable Interest Entities in which we are the primary beneficiary are
consolidated. Entities that are not Variable Interest Entities that we
6
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
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.
In accordance with the guidance of EITF 04-5, effective January 1,
2006 we commenced consolidating the accounts of three partnerships that we
previously accounted for on the equity method. Our investment in these
entities totaling $20,687,000 was allocated to the real estate facilities,
cash, other assets, liabilities, and minority interests of these entities
as described in the table below (amounts in thousands).
Total
-----------
Real estate facilities..... $ 22,459
Cash....................... 2,865
Other assets............... 167
Accrued and other liabilities (841)
Minority interest ......... (3,963)
-----------
$ 20,687
===========
We have determined that we have no Variable Interest Entities for
any periods presented. We control 37 entities and, accordingly, the
consolidated financial statements include the accounts of these entities
(the "Consolidated Entities") as well as those of the Company.
Collectively, the Company and the Consolidated Entities own a total of
1,523 real estate facilities, consisting of 1,516 self-storage facilities,
three industrial facilities used by the containerized storage operations
and four commercial properties.
At June 30, 2006, we had equity investments in five limited
partnerships in which we do not have a controlling interest. These limited
partnerships collectively own 22 self-storage facilities, which are managed
by the Company. In addition, at June 30, 2006, we own approximately 45% of
the common equity of PS Business Parks, Inc. ("PSB"), which has interests
in approximately 18.2 million net rentable square feet of commercial space
at June 30, 2006. Our investment in these limited partnerships and PSB
(collectively, the "Unconsolidated Entities") are accounted for using the
equity method.
Use of Estimates
----------------
The preparation of the consolidated financial statements in
conformity with United States generally accepted accounting principles
requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates.
Income Taxes
------------
For all taxable years subsequent to 1980, the Company qualified and
intends to continue to qualify as a REIT, as defined in Section 856 of the
Internal Revenue Code. As a REIT, we are not taxed on that portion of our
taxable income which is distributed to our shareholders, provided that we
meet certain tests. We believe we will meet these tests during 2006 and,
accordingly, no provision for income taxes has been made in the
accompanying condensed consolidated financial statements.
Financial Instruments
---------------------
We have estimated the fair value of our financial instruments using
available market information and appropriate valuation methodologies.
7
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
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. At June 30, 2006, we believe that the carrying value of our
notes payable is, in aggregate, approximately $1 million higher than their
fair value.
Financial assets that are exposed to credit risk consist primarily
of cash and cash equivalents and accounts receivable. Cash and cash
equivalents, which consist of short-term investments, including commercial
paper, are only invested in entities with an investment grade rating.
Accounts receivable are not a significant portion of total assets and are
comprised of a large number of individual customers.
Included in cash and cash equivalents at June 30, 2006 is
$23,809,000 ($18,962,000 at December 31, 2005) held by our captive
insurance entities. Other assets at June 30, 2006 include investments
totaling $12,095,000 ($19,838,000 at December 31, 2005) in held-to-maturity
Federal government agency securities stated at amortized cost, which
approximates fair value. Insurance and other regulations place significant
restrictions on our ability to withdraw these funds for purposes other than
insurance activities.
Real Estate Facilities
----------------------
Real estate facilities are recorded at cost. Costs associated with
the acquisition, development, construction, renovation, and improvement of
properties are capitalized. Interest, property taxes, and other costs
associated with development incurred during the construction period are
capitalized as building cost. Expenditures for repairs and maintenance
expense are charged to expense when incurred. Depreciation is computed
using the straight-line method over the estimated useful lives of the
buildings and improvements, which are generally between 5 and 25 years.
Accounting for Acquisition Joint Venture
----------------------------------------
In January 2004, we entered into a joint venture partnership with an
institutional investor for the purpose of acquiring up to $125,000,000 of
existing self-storage properties in the United States from third parties
(the "Acquisition Joint Venture"). The Acquisition Joint Venture is funded
entirely with equity consisting of 30% from the Company and 70% from the
institutional investor. For a six-month period beginning 54 months after
formation, we have the right to acquire our partner's interest based upon
the market value of the properties. If we do not exercise our option, our
partner can elect to purchase our interest in the properties during a
six-month period commencing upon expiration of our six-month option period.
If our partner fails to exercise its option, the Acquisition Joint Venture
will be liquidated and the proceeds will be distributed to the partners
according to the joint venture agreement.
We have determined that the Acquisition Joint Venture is not a
variable interest entity, and we do not control this entity. Therefore, we
do not consolidate the accounts of the Acquisition Joint Venture on our
accompanying condensed consolidated financial statements.
During the year ended December 31, 2004, the Acquisition Joint
Venture acquired two facilities directly from third parties at an aggregate
cost of $9,086,000. We account for our investment with respect to these
8
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
facilities using the equity method, with our pro rata share of the income
from these facilities recorded as "Equity in earnings of real estate
entities" on our accompanying condensed consolidated statements of income.
See Note 5 for further discussion of these amounts.
In December 2004, we sold seven facilities to the Acquisition Joint
Venture for an aggregate of $22,993,000. During the first quarter of 2005,
we sold an interest in three additional facilities to the Acquisition Joint
Venture for an aggregate of approximately $27,755,000. Due to our
continuing interest in these facilities and the likelihood that we will
exercise our option to acquire our partner's interest, we have accounted
for our partner's investment ($35,784,000 and $35,697,000 at June 30, 2006
and December 31, 2005, respectively) in these facilities as, in substance,
debt financing. Accordingly, our partner's investment with respect to these
ten facilities is accounted for as a liability on our accompanying
condensed consolidated balance sheets under the caption "Debt to joint
venture partner," with our partner's share of operations with respect to
these ten facilities accounted for as interest expense on our accompanying
condensed consolidated statements of income. 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 will be made to
increase the liability to fair value; no adjustments were necessary during
2005 or for the six months ended June 30, 2006 (See Note 8).
Evaluation of Asset Impairment
------------------------------
We evaluate impairment of goodwill annually through a two-step
process. In the first step, if the fair value of the reporting unit to
which the goodwill applies is equal to or greater than the carrying amount
of the assets of the reporting unit, including the goodwill, the goodwill
is considered unimpaired and the second step is unnecessary. If, however,
the fair value of the reporting unit including goodwill is less than the
carrying amount, the second step is performed. In this test, we compute the
implied fair value of the goodwill based upon the allocations that would be
made to the goodwill, other assets and liabilities of the reporting unit if
a business combination transaction were consummated at the fair value of
the reporting unit. An impairment loss is recorded to the extent that the
implied fair value of the goodwill is less than the goodwill's carrying
amount. No impairments of our goodwill were identified in our annual
evaluation at December 31, 2005.
We evaluate impairment of long-lived assets on a quarterly basis. We
first evaluate these assets for indicators of impairment such as a) a
significant decrease in the market price of a long-lived asset, b) a
significant adverse change in the extent or manner in which a long-lived
asset is being used or in its physical condition, c) a significant adverse
change in legal factors or the business climate that could affect the value
of the long-lived asset, d) an accumulation of costs significantly in
excess of the amount originally projected for the acquisition or
construction of the long-lived asset, or e) a current-period operating or
cash flow loss combined with a history of operating or cash flow losses or
a projection or forecast that demonstrates continuing losses associated
with the use of the long-lived asset. When any such indicators of
impairment are noted, we compare the carrying value of these assets to the
future estimated undiscounted cash flows attributable to these assets. If
the asset's recoverable amount is less than the carrying value of the
asset, then an impairment charge is booked for the excess of carrying value
over the asset's fair value.
Any long-lived assets which we expect to sell or otherwise dispose
of prior to their previously estimated useful life are stated at what we
estimate to be the lower of their estimated net realizable value (less cost
to sell) or their carrying value. No impairments were identified from our
evaluations as of June 30, 2006.
Accounting for Stock-Based Compensation
---------------------------------------
We utilize the Fair Value Method (as defined in Note 12) of
accounting for our employee stock options. Restricted stock unit expense is
recorded over the relevant vesting period. See Note 12 for a discussion of
our accounting with respect to employee stock options and restricted stock
units.
9
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
Other Assets
------------
Other assets primarily consists of prepaid expenses, investments in
held-to-maturity debt securities (described below), accounts receivable,
assets associated with our containerized storage business, merchandise
inventory and rental trucks.
Included in depreciation and amortization expense for the three and
six months ended June 30, 2006, is $1,441,000 and $2,280,000, respectively,
compared to $1,851,000 and $3,783,000, respectively, for the same periods
in 2005, related to depreciation of other assets.
Accrued and Other Liabilities
-----------------------------
Accrued and other liabilities consist primarily of real and personal
property tax accruals, prepayments of rents, trade payables, losses and
loss adjustment liabilities from our insurance programs (described below),
and accrued interest. Prepaid rent totaled $27,708,000 at June 30, 2006
($26,145,000 at December 31, 2005).
STOR-Re Mutual Insurance Company, Inc. ("STOR-Re"), which is
consolidated with the Company, was formed in 1994 as an association captive
insurance company owned by the Company and affiliates of the Company.
STOR-Re provides limited property and liability insurance to the Company
and its affiliates for losses incurred during policy periods prior to April
1, 2004, and was succeeded by PS Insurance Company Hawaii, Ltd. ("PSIC-H"),
a wholly-owned subsidiary of the Company with respect to these insurance
activities for policy periods following March 31, 2004. We also utilize
other insurance carriers to provide property and liability insurance
coverage in excess of STOR-Re's and PSIC-H's limitations which are
described in Note 14. STOR-Re and PSIC-H accrue liabilities for covered
losses and loss adjustment expense, which at June 30, 2006 totaled
$31,023,000 ($32,797,000 at December 31, 2005) with respect to insurance
provided to the Company and its affiliates.
Liabilities for losses and loss adjustment expenses include an
amount we determine from loss reports and individual cases and an amount,
based on recommendations from an independent actuary that is a member of
the American Academy of Actuaries using a frequency and severity method,
for losses incurred but not reported. Determining the liability for unpaid
losses and loss adjustment expense is based upon estimates. While we
believe that the amount is adequate, the ultimate loss may be in excess of
or less than the amounts provided. See Note 14 for a discussion of our
maximum aggregate annual exposure, assuming the occurrence of multiple
significant events. The methods for making such estimates and for
establishing the resulting liability are reviewed quarterly.
PS Insurance Company, Ltd ("PSIC"), a wholly-owned subsidiary of the
Company, reinsured policies against claims for losses to goods stored by
tenants in our self-storage facilities for policy periods prior to March
31, 2004. PSIC-H succeeded PSIC with respect to these tenant re-insurance
activities effective April 1, 2004. Prior to January 1, 2006, both of these
entities utilize third-party insurance coverage for losses from any
individual event that exceeds a loss of $500,000, to a maximum of
$10,000,000. Commencing January 1, 2006, PSIC-H covers losses up to
$1,500,000 with third party insurers covering the next $9,000,000 from any
individual event. Losses below the third-party insurers' deductible amounts
are accrued as cost of operations for the tenant re-insurance operations.
Losses exceeding the third-party insurers' limit are the responsibility of
PSIC-H. See Note 14 for a discussion of our reinsured policies outstanding
at June 30, 2006.
The accrued liability for losses and loss adjustment expense with
respect to tenant insurance activities totaled $4,504,000 at June 30, 2006
($4,773,000 at December 31, 2005).
10
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
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 our goodwill to our business segments 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").
In prior periods, intangible assets (original acquisition cost of
$165,000,000 and net book value of $98,081,000 at December 31, 2005) were
presented on our consolidated balance sheets. For all periods presented
herein, we have reclassified this intangible asset to goodwill on our
accompanying condensed consolidated balance sheets and, in accordance with
the provisions of SFAS 142 as applied to the reclassification effective
April 1, 2006, we ceased amortization.
Included in depreciation and amortization expense for the six months
ended June 30, 2006 is $1,651,000 (none for the three months ended June 30,
2006) related to the amortization of our intangibles and goodwill, as
compared to $1,651,000 and $3,302,000 for the three and six months ended
June 30, 2005, respectively. Goodwill is reported net of accumulated
amortization of $85,085,000 and $83,434,000 at June 30, 2006 and December
31, 2005, respectively, on our accompanying condensed consolidated balance
sheets.
Revenue and Expense Recognition
-------------------------------
Rental income, which is generally earned pursuant to month-to-month
leases for storage space, is recognized as earned. Promotional discounts
are recognized as a reduction to rental income over the promotional period,
which is generally during the first month of occupancy. Late charges and
administrative fees are recognized as income when collected. Tenant
reinsurance premiums are recognized as premium revenue when earned.
Revenues from merchandise sales and truck rentals are recognized when
earned. Interest income is recognized as earned. Equity in earnings of real
estate entities is recognized based on our ownership interest in the
earnings of each of the Unconsolidated Entities.
We accrue for property tax expense based upon estimates and
historical trends. If these estimates are incorrect, the timing of expense
recognition could be affected.
Cost of operations, general and administrative expense, interest
expense, as well as television, yellow page, and other advertising
expenditures are expensed as incurred. Accordingly, the amounts incurred in
an interim period may not be indicative of the amounts to be incurred
during a full year. Television, yellow page, and other advertising expenses
totaled $8,922,000 and $17,623,000 for the three and six months ended June
30, 2006, respectively, and $8,992,000 and $16,563,000, respectively, for
the same periods in 2005.
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 any of our facilities, which individually or
in the aggregate would be material to our overall business, financial
condition, or results of operations.
11
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
Net Income per Common Share
---------------------------
Distributions paid to the holders of our Cumulative Preferred Stock
totaling $52,376,000 and $42,147,000 for the three months ended June 30,
2006 and 2005, respectively, have been deducted from net income to arrive
at net income allocable to our common shareholders (dividends paid to
holders of our Cumulative Preferred Stock totaled $98,991,000 and
$82,560,000 for the six months ended June 30, 2006 and 2005, respectively).
Emerging Issues Task Force ("EITF") Topic D-42, "The Effect on the
Calculation of Earnings per Share for the Redemption or the Induced
Conversion of Preferred Stock" provides, among other things, that any
excess of (1) the fair value of the consideration transferred to the
holders of preferred stock redeemed over (2) the carrying amount of the
preferred stock should be subtracted from net earnings to determine net
earnings available to common stockholders in the calculation of earnings
per share. At the July 31, 2003 meeting of the EITF, the Securities and
Exchange Commission ("SEC") Observer clarified that for purposes of
applying EITF Topic D-42, the carrying amount of the preferred stock should
be reduced by the issuance costs of the preferred stock, regardless of
where in the stockholders' equity section those costs were initially
classified on issuance.
In conformity with the SEC Observer's clarification, an additional
$1,904,000 was allocated to preferred stockholders for the six months ended
June 30, 2005 (none for the same period in 2006), for the excess of the
redemption amount over the carrying amount of our Cumulative Preferred
Stock. It is our policy to record such allocations at the time the
securities are called for redemption.
Net income allocated to our common shareholders has been further
allocated among our two classes of common stock; our regular common stock
and our Equity Stock, Series A. The allocation among each class was based
upon the two-class method. Under the two-class method, earnings per share
for each class of common stock are determined according to dividends
declared (or accumulated) and participation rights in undistributed
earnings. Under the two-class method, the Equity Stock, Series A, was
allocated net income of $5,356,000 for each of the three months ended June
30, 2006 and 2005 and $10,712,000 and $10,731,000 for the six months ended
June 30, 2006 and 2005, respectively. The remaining $71,130,000 and
$60,763,000 for the three months ended June 30, 2006 and 2005,
respectively, was allocated to the regular common shareholders
($133,375,000 and $109,482,000 for the six months ended June 30, 2006 and
2005, respectively).
Basic net income per share is computed using the weighted average
common shares outstanding (prior to the dilutive impact of stock options
and restricted stock units outstanding). Diluted net income per common
share is computed using the weighted average common shares outstanding
(adjusted for the dilutive impact of stock options and restricted stock
units outstanding). Weighted average common shares excludes shares owned by
the Consolidated Entities as described in Note 10 for all periods
presented, as these shares of common stock are eliminated in consolidation.
Recently Issued Accounting Standards
------------------------------------
In July 2006, the Financial Accounting Standards Board (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
12
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
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 is 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.
The Company is evaluating FIN 48 and has not yet determined the impact the
adoption will have on the consolidated financial statements.
3. Discontinued Operations
-----------------------
We segregate all of our disposed components that have operations
that (i) can be distinguished from the rest of the entity and (ii) will be
eliminated from the ongoing operations of the entity in a disposal
transaction.
Since January 1, 2002, we closed a total of 43 containerized storage
facilities that were determined to be non-strategic (the "Closed
Facilities"). As the decision was made to close each facility, the related
assets were evaluated for recoverability and asset impairment charges were
recorded for the excess of these assets' net book value over their fair
value (less costs to sell), determined based upon recent selling prices for
similar assets. No asset impairment or lease termination charges were
recorded for these facilities during the three or six months ended June 30,
2006 and 2005.
During the first quarter of 2005, we sold the non-real estate assets
of six of the Closed Facilities, resulting in a gain on sale of
approximately $1,143,000.
During July 2005, in an eminent domain proceeding, one of our
self-storage facilities located in the Portland, Oregon market was
condemned. We received the proceeds, totaling $6,590,000, from the disposal
of this facility during the third quarter of 2005 and recorded a gain on
sale of $5,180,000.
During the first quarter of 2006, we were notified that one of our
self-storage facilities located in Seattle, Washington will be condemned by
local government authorities. We received the proceeds from the
condemnation of approximately $4,300,000 in July 2006, and a gain on
disposition of approximately $2,400,000 is expected to be recorded in the
third quarter of 2006.
Collectively, the aforementioned facilities in Portland and Seattle
self-storage facilities are referred to hereinafter as "the Eminent Domain
Facilities". The operations of these facilities prior to their disposition
are classified as "discontinued operations" for all periods presented on
our condensed consolidated statements of income and included under "Eminent
Domain Facilities" in the table below.
The following table summarizes the historical operations of each
component of our discontinued operations:
13
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
DISCONTINUED OPERATIONS:
------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2006 2005 2006 2005
----------- ----------- ---------- -----------
(Amounts in thousands)
Rental income (a):
Eminent Domain Facilities....... $ 79 $ 263 $ 192 $ 511
Closed Facilities............... - - - 95
----------- ----------- ---------- -----------
Total rental income............... 79 263 192 606
----------- ----------- ---------- -----------
Cost of operations (a):
Eminent Domain Facilities....... 38 132 88 250
Closed Facilities............... - - - 194
----------- ----------- ---------- -----------
Total cost of operations.......... 38 132 88 444
----------- ----------- ---------- -----------
Depreciation expense (a):
Eminent Domain Facilities....... 20 42 41 80
Closed Facilities............... - - - 29
----------- ----------- ---------- -----------
Total depreciation ............... 20 42 41 109
----------- ----------- ---------- -----------
Other items (b)................... - - - 1,143
----------- ----------- ---------- -----------
Net discontinued operations (c)... $ 21 $ 89 $ 63 $ 1,196
=========== =========== ========== ===========
(a) These amounts represent the historical operations of the Eminent Domain
Facilities and the Closed Facilities, and include amounts previously
classified as rental income, cost of operations, and depreciation expense
in the financial statements in prior periods.
(b) During the quarter ended March 31, 2005, assets of the Closed Facilities
were sold, resulting in a gain on sale of approximately $1,143,000.
(c) Earnings per share for the six months ended June 30, 2005, were increased
by $0.01 per share (none for the six months ended June 30, 2006), due to
the impact from discontinued operations.
14
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
4. Real Estate Facilities
-----------------------
Activity in real estate facilities is as follows:
Six Months Ended
June 30, 2006
-----------------
(Amounts in
thousands)
Real estate facilities, at cost:
Balance at December 31, 2005........................ $ 5,930,484
Facilities consolidated pursuant to EITF 04-5 (Note 2) 22,459
Newly developed facilities opened for operations.... 67,743
Acquisition of real estate facilities............... 103,544
Capital improvements................................ 23,449
-----------------
Balance at June 30, 2006............................ 6,147,679
-----------------
Accumulated depreciation:
Balance at December 31, 2005........................ (1,500,128)
Additions during the year........................... (94,785)
-----------------
Balance at June 30, 2006............................ (1,594,913)
-----------------
Construction in process:
Balance at December 31, 2005........................ 54,472
Current development................................. 37,936
Dispositions........................................ (4,970)
Newly developed facilities opened for operations.... (67,743)
-----------------
Balance at June 30, 2006............................ 19,695
-----------------
Total real estate facilities at June 30, 2006.......... $ 4,572,461
=================
During the six months ended June 30, 2006, we opened three newly
developed self-storage facilities (281,000 net rentable square feet) for an
aggregate cost of $49,255,000. We also completed three projects which
converted space previously used by our containerized storage business into
92,000 net rentable square feet of self-storage space for an aggregate cost
of $7,115,000. In addition, we completed three expansion projects to an
existing self-storage facility adding 91,000 net rentable square feet for
an aggregate cost of $8,056,000, and we incurred trailing development costs
with respect to development projects completed in prior years, for an
aggregate net cost of $3,317,000.
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 on our condensed consolidated statements of income for the three and
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.
During the six months ended June 30, 2006, we acquired 12
self-storage facilities (872,000 net rentable square feet) from third
parties at an aggregate cost of $103,544,000, consisting of $98,954,000 in
cash and assumed mortgage debt totaling $4,590,000.
Construction in process at June 30, 2006 consists primarily of 49
projects (2,874,000 net rentable square feet) which expand or enhance the
visual and structural appeal of our existing self-storage facilities with
costs incurred of $18,241,000 at June 30, 2006 and total estimated costs to
complete of $234,852,000, and five projects (420,000 net rentable square
feet) to convert space at former containerized storage facilities into
self-storage space with costs incurred of $1,454,000 at June 30, 2006 and
total estimated costs to complete of $16,989,000.
15
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
Our policy is to 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, 2006 was $353,000 and
$1,069,000, respectively. Interest capitalized for the three and six months
ended June 30, 2005 was $679,000 and $1,344,000, respectively.
5. Investment in Real Estate Entities
----------------------------------
At June 30, 2006, our investments in real estate entities consist of
ownership interests in the Unconsolidated Entities. These interests are
non-controlling interests of less than 50% and are accounted for using the
equity method of accounting. Accordingly, earnings are recognized based
upon our ownership interest in each of the entities. The accounting
policies of these entities are similar to those of the Company.
For the three and six months ended June 30, 2006, we recognized
earnings from our investments in real estate entities of $3,124,000 and
$6,590,000, respectively, as compared to $4,851,000 and $10,529,000 for the
same periods in 2005.
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. For the three and six
months ended June 30, 2005, our pro rata share of these items resulted in
net increases of $310,000 and $1,575,000, respectively. See the condensed
financial information with respect to PSB below for further information
regarding these items recorded by PSB.
We received cash distributions from our investments in real estate
entities for the six months ended June 30, 2006 and 2005, of $10,415,000
and $11,496,000, respectively.
The following table sets forth our investments in real estate
entities at June 30, 2006 and December 31, 2005, and our equity in earnings
of real estate entities for the three and six months ended June 30, 2006
and 2005 (amounts in thousands):
16
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
Equity in Earnings of Real Equity in Earnings of Real
Investments in Real Estate Estate Entities for the Estate Entities for the Six
Entities at Three Months Ended June 30, Months Ended June 30,
--------------------------------- ----------------------------- ----------------------------
June 30, December 31,
2006 2005 2006 2005 2006 2005
------------- --------------- ------------- -------------- ------------- --------------
PSB (a)...................... $ 286,930 $ 288,694 $ 2,640 $ 3,369 $ 5,616 $ 7,578
Acquisition Joint Venture.... 2,280 2,865 9 (5) 15 (20)
Other Investments (b)........ 14,674 36,996 475 1,487 959 2,971
------------- --------------- ------------- -------------- ------------- --------------
Total...................... $ 303,884 $ 328,555 $ 3,124 $ 4,851 $ 6,590 $ 10,529
============= =============== ============= ============== ============= ==============
(a) Equity in earnings of real estate entities includes our pro rata share of
the net impact of gains/losses on sale of assets and impairment charges
relating to the impending sale of real estate assets as well as our pro
rata share of the impact of the application of EITF Topic D-42 on
redemptions of preferred securities recorded by PSB. Our net pro rata 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. For the three and six
months ended June 30, 2005, our pro rata share of these items resulted in
net increases of $310,000 and $1,575,000, respectively.
(b) As described in Note 2, effective January 1, 2006 we commenced
consolidating the accounts of three limited partnerships previously
accounted for under the equity method of accounting. As a result, we
decreased our investment in these partnerships by approximately $20,687,000
on January 1, 2006.
Investment in PSB
-----------------
PS Business Parks, Inc. is a REIT traded on the American Stock
Exchange, which controls an operating partnership (collectively, the REIT
and the operating partnership are referred to as "PSB"). We have a 45%
common equity interest in PSB as of June 30, 2006. This common equity
interest is comprised of our ownership of 5,418,273 shares of PSB's common
stock and 7,305,355 limited partnership units in the operating partnership
at both June 30, 2006 and December 31, 2005; these limited partnership
units are convertible at our option, subject to certain conditions, on a
one-for-one basis into PSB common stock. Based upon the closing price at
June 30, 2006 ($59.00 per share of PSB common stock), the shares and units
had a market value of approximately $750.7 million as compared to a book
value of $286.9 million.
At June 30, 2006, PSB owned approximately 18.2 million net rentable
square feet of commercial space. In addition, PSB manages commercial space
owned by the Company and the Consolidated Entities pursuant to property
management agreements.
The following table sets forth the condensed statements of
operations for the six months ended June 30, 2006 and 2005 (as restated for
discontinued operations), and the condensed balance sheets of PSB at June
30, 2006 and December 31, 2005. The amounts below represent 100% of PSB's
balances and not our pro rata share.
Six Months Ended June 30,
-----------------------------------
2006 2005
---------------- ---------------
(Amounts in thousands)
Total revenue.................................... $ 118,208 $ 109,441
Cost of operations and other operating expenses.. (39,663) (35,257)
Other income and expense, net.................... 2,543 818
Depreciation and amortization.................... (41,536) (36,912)
Discontinued operations (a)...................... 1,643 4,172
Minority interest................................ (8,227) (8,664)
---------------- ---------------
Net income..................................... $ 32,968 $ 33,598
================ ================
17
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
June 30, December 31, 2005
2006
---------------- ---------------
(Amounts in thousands)
Total assets (primarily real estate)............. $ 1,475,970 $ 1,463,678
Total debt....................................... 43,497 25,893
Other liabilities................................ 43,634 39,126
Preferred equity and preferred minority interest. 738,250 729,100
Common equity and common minority interest....... 650,589 669,559
(a) Included in discontinued operations for the six months ended June 30, 2006
is a net gain on disposition of real estate of $2,328,000 ($3,930,000 for
the same period in 2005).
Acquisition Joint Venture
-------------------------
As described more fully under "Accounting for Acquisition Joint
Venture" in Note 2, we formed a partnership (the "Acquisition Joint
Venture") in January 2004 for the purpose of acquiring up to $125,000,000
in existing self-storage facilities from third parties. Through December
31, 2004, the Acquisition Joint Venture had acquired two self-storage
facilities directly from third parties at an aggregate cost of $9,086,000,
of which our pro rata share was $2,930,000. Our investment in these two
facilities is accounted for using the equity method of accounting. In
December 2004, we sold seven facilities to the Acquisition Joint Venture as
well as interest in three facilities in the first quarter of 2005. Our
accounting for these ten facilities is described in Note 2.
The following table sets forth certain condensed financial
information (representing 100% of this entity's balances and not our pro
rata share) with respect to the two self-storage facilities acquired by the
Acquisition Joint Venture that we account for using the equity method of
accounting:
Six Months Ended June 30,
-------------------------------------
2006 2005
----------------- ----------------
(Amounts in thousands)
Total revenue........................................ $ 725 $ 623
Cost of operations and other expenses................ (282) (238)
Depreciation and amortization........................ (137) (134)
----------------- ----------------
Net income......................................... $ 306 $ 251
================= =================
June 30, December 31,
2006 2005
----------------- ----------------
(Amounts in thousands)
Total assets (primarily storage facilities).......... $ 8,667 $ 8,974
Liabilities.......................................... 94 62
Partners' equity..................................... 8,573 8,912
Other Investments
-----------------
Other Investments consist primarily of our ownership in four limited
partnerships (collectively, the "Other Investments") owning an aggregate of
20 storage facilities. We owned an average common equity interest in Other
Investments of approximately 23% during the six months ended June 30, 2006
and 2005.
The following table sets forth certain condensed financial
information (representing 100% of these entities' balances and not our pro
rata share) with respect to Other Investments:
18
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
Six Months Ended June 30,
----------------------------------
2006 2005
---------------- ---------------
(Amounts in thousands)
Total revenue........................................ $ 7,904 $ 7,456
Cost of operations and other expenses................ (3,125) (3,009)
Depreciation and amortization........................ (858) (869)
Net income......................................... $ 3,921 $ 3,578
June 30, December 31,
2006 2005
---------------- ---------------
(Amounts in thousands)
Total assets (primarily storage facilities).......... $ 39,825 $ 39,813
Other liabilities.................................... 1,113 1,178
Partners' equity..................................... 38,712 38,635
6. Revolving Line of Credit
------------------------
We have a revolving line of credit (the "Credit Agreement") with an
aggregate limit with respect to borrowings and letters of credit of
$200,000,000, that has a maturity date of April 1, 2007 and bears an annual
interest rate ranging from the London Interbank Offered Rate ("LIBOR") plus
0.50% to LIBOR plus 1.20% depending on our credit ratings (currently LIBOR
plus 0.50%). In addition, we are required to pay a quarterly commitment fee
ranging from 0.15% per annum to 0.30% per annum depending on our credit
ratings (currently the fee is 0.15% per annum).
The Credit Agreement includes various covenants, the more
significant of which require us to (i) maintain a balance sheet leverage
ratio of less than 0.55 to 1.00, (ii) maintain certain quarterly interest
and fixed-charge coverage ratios (as defined therein) of not less than 2.25
to 1.0 and 1.5 to 1.0, respectively, and (iii) maintain a minimum total
shareholders' equity (as defined therein). In addition, we are limited in
our ability to incur additional borrowings (we are required to maintain
unencumbered assets with an aggregate book value equal to or greater than
1.5 times our unsecured recourse debt). We were in compliance with all
covenants of the Credit Agreement at June 30, 2006. At June 30, 2006 and
August 8, 2006, we had no outstanding borrowings on our line of credit.
At June 30, 2006 and August 8, 2006, we had undrawn standby letters
of credit totaling $17,919,000. The beneficiaries of these standby letters
of credit were certain insurance companies associated with our captive
insurance and tenant re-insurance activities.
7. Notes Payable
-------------
The carrying amounts of our notes payable at June 30, 2006 and
December 31, 2005 consist of the following:
19
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
June 30, December 31,
2006 2005
-------------- -------------
(Amounts in thousands)
Unsecured senior notes:
7.66% note due January 2007............................. $ 11,200 $ 22,400
Mortgage notes payable:
5.58% mortgage note secured by a real estate facility
with a net book value of $9.6 million, principal and interest
payable monthly, due in September 2013.................. 4,548 -
7.134% and 8.75% mortgage notes secured by two real estate
facilities with a net book value of $10.6 million, principal
and interest payable monthly, due at varying dates between
October 2009 and September 2028......................... 1,401 1,484
5.05% mortgage notes (including unamortized note premium of
$1.7 million) secured by 25 real estate facilities with a net
book value of $95.0 million, principal and interest due
monthly, due at varying dates between October 2010 and
May 2023................................................. 37,073 38,568
5.25% mortgage notes (including unamortized note premium
of $3.2 million) secured by seven real estate facilities with
a net book value of $89.3 million, principal and interest due
monthly, due at varying dates between June 2011
and July 2013........................................... 50,831 51,498
-------------- -------------
Total notes payable.............................. $ 105,053 $ 113,950
============== =============
All of our notes payable are fixed rate. The unsecured senior notes
require interest and principal payments to be paid semi-annually and have
various restrictive covenants, all of which have been met at June 30, 2006.
We assumed the 5.58% mortgage note in connection with a property
acquisition during the first quarter of 2006. The note was recorded at the
stated rate, which we believe approximates the market rate for similar
mortgage notes.
We assumed the 5.05% and 5.25% mortgage notes in connection with
property acquisitions in 2004. The stated interest rates on the notes range
from 5.4% to 8.0% with a weighted average of approximately 6.65%. The notes
were recorded at their estimated fair value based upon the estimated market
rate upon assumption of 5.05% and 5.25%, an aggregate of approximately
$94,693,000, as compared to actual assumed balances aggregating
approximately $88,247,000. This initial premium of approximately $6,446,000
over the principal balance of the notes payable is amortized over the
remaining term of the loans based upon the effective interest method.
We incurred interest expense with respect to our notes payable
aggregating $2,982,000 and $3,607,000 for the six months ended June 30,
2006 and 2005, respectively. These amounts were comprised of $3,456,000 and
$4,122,000 in cash for the six months ended June 30, 2006 and 2005,
respectively, less $474,000 and $515,000 in amortization of premium,
respectively.
20
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
At June 30, 2006, approximate principal maturities of our notes
payable are as follows:
Unsecured Mortgage
senior notes notes payable Total
------------- ------------- ------------
(Dollar amounts in thousands)
2006 (remainder of).......... $ - $ 2,352 $ 2,352
2007......................... 11,200 4,898 16,098
2008......................... - 5,155 5,155
2009......................... - 5,358 5,358
2010......................... - 5,404 5,404
Thereafter................... - 70,686 70,686
------------- ------------- ------------
$ 11,200 $ 93,853 $ 105,053
============= ============= ============
Weighted average rate........ 7.7% 5.2% 5.5%
============= ============= ============
8. Debt to Joint Venture Partner
-----------------------------
As described more fully in Note 2, our partner's equity
contributions with respect to certain transactions has been classified as
debt under the caption "Debt to Joint Venture Partner." The balances of
$35,784,000 and $35,697,000 as of June 30, 2006 and December 31, 2005,
approximate the fair value of our partners' interest in these facilities as
of each respective date.
A total of $1,516,000 and $1,194,000 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, 2006
and 2005, respectively, representing our partner's pro rata share of net
earnings with respect to the properties we sold to the Acquisition Joint
Venture (an 8.5% return on their investment). This interest expense was
comprised of a total of $1,429,000 and $1,340,000 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, 2006 and 2005,
respectively, and increases in the Debt to Joint Venture Partner of $87,000
and $86,000 in the six months ended June 30, 2006 and 2005, 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. 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, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
Preferred Partnership Interests
-------------------------------
The following table summarizes the preferred partnership units
outstanding at June 30, 2006 and December 31, 2005:
June 30, 2006 December 31, 2005
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 - -
----------- ------------ ----------- ------------
Total............ 13,000 $ 325,000 9,000 $ 225,000
=========== ============ =========== ============
Income allocated to the preferred minority interests totaled
$8,249,000 and $9,839,000 for the six months ended June 30, 2006 and 2005,
respectively, comprised of distributions paid and the allocation of income
resulting from the application of EITF Topic D-42 (see below).
On March 17, 2005, we redeemed all outstanding 9.5% Series N
Preferred Units ($40,000,000) and on March 29, 2005 we redeemed all
outstanding 9.125% Series O Preferred Units ($45,000,000), for their face
value plus accrued distributions, for cash. The redemption of these
Preferred Units resulted in an increase in income allocated to minority
interests and a reduction to the Company's net income for the three months
ended March 31, 2005 of $874,000 as a result of the application of the
SEC's clarification of EITF Topic D-42 which allocates the excess of the
stated amount of the preferred units over their carrying amount to the
holders of the redeemed securities.
On May 9, 2006, one of the Consolidated Entities issued 4,000,000
units of our 7.25% Series J Preferred Partnership Units for cash proceeds
of $100,000,000.
Subject to certain conditions, the Series NN preferred units are
convertible into shares of our 6.40% Series NN Cumulative Preferred Stock,
the Series Z preferred units are convertible into shares of our 6.25%
Series Z Cumulative Preferred Stock and the Series J preferred units are
convertible into shares of our 7.25% Series J Cumulative Preferred Stock.
The holders of the Series Z preferred partnership units, have a one-time
option exercisable five years from issuance (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, 2006 and
December 31, 2005 as well as the income allocated to minority interests for
the three and six months ended June 30, 2006 and 2005 with respect to the
other partnership interests (amounts in thousands):
22
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
Minority Interest at
----------------------------
June 30, December 31,
Description 2006 2005
----------------------------------------- ------------ -----------
Convertible Partnership Units........... $ 6,181 $ 6,177
Newly Consolidated Partnerships.......... 4,055 -
Other consolidated partnerships.......... 22,987 22,793
------------ -----------
Total other partnership interests........ $ 33,223 $ 28,970
============ ===========
Minority Interests in Income Minority Interests in Income
for the Three Months Ended for the Six Months Ended
----------------------------- ------------------------------
June 30, June 30, June 30, June 30,
Description 2006 2005 2006 2005
---------------------------------------- ------------ ------------- -------------- --------------
Convertible Partnership Units.......... $ 120 $ 83 $ 236 $ 173
Consolidated Development Joint Venture.. - 1,835 - 3,403
Newly Consolidated Partnerships......... 1,243 - 2,173 -
Other consolidated partnerships......... 2,707 2,960 5,229 5,697
------------ ------------- --------------- --------------
Total other partnership interests....... $ 4,070 $ 4,878 $ 7,638 $ 9,273
============ ============= =============== ==============
Distributions paid to minority interests for the three months ended
June 30, 2006 and 2005 were $3,636,000 and $5,182,000, respectively and for
the six months ended June 30, 2006 and 2005 were $7,348,000 and $9,198,000,
respectively.
Convertible Partnership Units
-----------------------------
As of June 30, 2006, one of the Consolidated Entities had
approximately 237,934 convertible operating 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 our common stock at the option of the
unitholder. Minority interest in income with respect to the Convertible
Units reflects the Convertible Units' share of our net income, with net
income allocated to minority interests with respect to weighted average
outstanding Convertible Units on a per unit basis equal to diluted earnings
per common share.
Consolidated Development Joint Venture
--------------------------------------
In November 1999, we formed a development joint venture (the
"Consolidated Development Joint Venture") with a joint venture partner
(PSAC Storage Investors, LLC, referred to as "PSAC") whose partners
included a third party institutional investor and B. Wayne Hughes ("Mr.
Hughes"), the Chairman of the Board of the Company, to develop
approximately $100,000,000 of self-storage facilities and to purchase
$100,000,000 of the our Equity Stock, Series AAA (see Note 10). We owned a
controlling interest in the Consolidated Development Joint Venture and
included the accounts of this partnership in our consolidated financial
statements since its inception. PSAC's interest in the Consolidated
Development Joint Venture was accounted for as minority interest, as
denoted in the above table.
On August 5, 2005, we acquired the institutional investor's interest
in PSAC for approximately $41,420,000 in cash and on November 17, 2005, we
acquired the remaining interest in PSAC from Mr. Hughes for $64,513,000 in
cash.
23
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
Newly Consolidated Partnerships
-------------------------------
As further described in Note 2, effective January 1, 2006 we
commenced consolidating the accounts of three partnerships that we had
previously accounted for under the equity method of accounting. This
consolidation resulted in a $3,963,000 increase in minority interest on
January 1, 2006. Effective January 1, 2006, the income allocated to the
interests we do not own in these three partnerships is shown in the table
above under Newly Consolidated Partnerships.
Other Consolidated Partnerships
-------------------------------
The partnership agreements of the Other Consolidated Partnerships
included in the table above have termination dates that cannot be
unilaterally extended by the Company and, upon termination of each
partnership, the net assets of these entities would be liquidated and paid
to the minority interests and the Company based upon their relative
ownership interests.
At June 30, 2006, the Other Consolidated Partnerships reflect common
equity interests that we do not own in 22 entities owning an aggregate of
73 self-storage facilities.
In January 2005, we acquired a portion of the minority interest we
did not own in one of the Consolidated Entities for an aggregate of
$4,366,000 in cash. The acquisition resulted in the reduction of minority
interest by $2,828,000 with the excess of cost over underlying book value
($1,538,000) allocated to real estate.
In April 2005, we acquired minority interests we did not own in two
Consolidated Entities for an aggregate of $32,432,000 in cash. The
acquisition resulted in a reduction of minority interest of $15,394,000
with the excess of cost over underlying book value ($17,038,000) allocated
to real estate.
In August 2005, we acquired the remaining minority interests we did
not own in the Consolidated Entities for an aggregate of $14,597,000 in
cash. The acquisition resulted in a reduction of minority interest of
$7,151,000 with the excess of cost over underlying book value ($7,446,000)
allocated to real estate.
Impact of SFAS No. 150
----------------------
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 - "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS No. 150"). This
statement prescribes reporting standards for financial instruments that
have characteristics of both liabilities and equity. This standard
generally indicates that certain financial instruments that give the issuer
a choice of setting an obligation with a variable number of securities or
settling an obligation with a transfer of assets, any mandatorily
redeemable security, and certain put options and forward purchase
contracts, should be classified as a liability on the balance sheet. With
the exception of minority interests, described above, we implemented SFAS
No. 150 on July 1, 2003, and the adoption had no impact on our accompanying
condensed consolidated financial statements.
24
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
10. Shareholders' Equity
--------------------
Cumulative Preferred Stock
--------------------------
At June 30, 2006 and December 31, 2005, we had the following series
of Cumulative Preferred Stock outstanding:
At June 30, 2006 At December 31, 2005
Earliest ----------------------------- ------------------------------
Redemption Dividend Shares Carrying Shares Carrying
Series Date (a) Rate Outstanding Amount Outstanding Amount
------------------ ------------- ------------ -------------- ------------- --------------- -------------
(Dollar amounts in thousands)
Series R 9/28/06 8.000% 20,400 $ 510,000 20,400 $ 510,000
Series S 10/31/06 7.875% 5,750 143,750 5,750 143,750
Series T 1/18/07 7.625% 6,086 152,150 6,086 152,150
Series U 2/19/07 7.625% 6,000 150,000 6,000 150,000
Series V 9/30/07 7.500% 6,900 172,500 6,900 172,500
Series W 10/6/08 6.500% 5,300 132,500 5,300 132,500
Series X 11/13/08 6.450% 4,800 120,000 4,800 120,000
Series Y 1/2/09 6.850% 1,600,000 40,000 1,600,000 40,000
Series Z 3/5/09 6.250% 4,500 112,500 4,500 112,500
Series A 3/31/09 6.125% 4,600 115,000 4,600 115,000
Series B 6/30/09 7.125% 4,350 108,750 4,350 108,750
Series C 9/13/09 6.600% 4,600 115,000 4,600 115,000
Series D 2/28/10 6.180% 5,400 135,000 5,400 135,000
Series E 4/27/10 6.750% 5,650 141,250 5,650 141,250
Series F 8/23/10 6.450% 10,000 250,000 10,000 250,000
Series G 12/12/10 7.000% 4,000 100,000 4,000 100,000
Series H 1/19/11 6.950% 4,200 105,000 - -
Series I 5/3/11 7.250% 20,700 517,500 - -
-------------- ------------- --------------- -------------
Total Cumulative Preferred Stock 1,723,236 $ 3,120,900 1,698,336 $ 2,498,400
============== ============= =============== =============
(a) Except under certain conditions relating to the Company's qualification as
a REIT, the Cumulative Preferred Stock are not redeemable prior to the
dates indicated. On or after the dates indicated, each series of Cumulative
Preferred Stock will be redeemable, at our option, in whole or in part, at
$25.00 per depositary share (or per share in the case of the Series Y),
plus accrued and unpaid dividends.
The holders of our Cumulative Preferred Stock have general
preference rights with respect to liquidation and quarterly distributions.
Holders of the preferred stock, except under certain conditions and as
noted below, will not be entitled to vote on most matters. In the event of
a cumulative arrearage equal to six quarterly dividends or failure to
maintain a Debt Ratio (as defined) of 50% or less, holders of all
outstanding series of preferred stock (voting as a single class without
regard to series) will have the right to elect two additional members to
serve on the Company's Board of Directors until events of default have been
cured. At June 30, 2006, there were no dividends in arrears and the Debt
Ratio was 1.8%.
Upon issuance of our Cumulative Preferred Stock, we classify the
liquidation value as preferred stock on our consolidated balance sheet with
any issuance costs recorded as a reduction to paid-in capital. Upon
redemption, we apply EITF Topic D-42, allocating income to the preferred
shareholders equal to the original issuance costs.
25
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
On January 19, 2006, we issued 4,000,000 depositary shares, with
each depositary share representing 1/1,000 of a share of our 6.95%
Cumulative Preferred Stock, Series H. The offering resulted in $100,000,000
of gross proceeds. On January 27, 2006, we issued an additional 200,000
depository shares, with each depositary share representing 1/1,000 of a
share of our 6.95% Cumulative Preferred Stock, Series H resulting in
$5,000,000 of gross proceeds. On May 3, 2006, we issued 20,700,000
depositary shares, with each depositary share representing 1/1,000 of a
share of our 7.25% Cumulative Preferred Stock, Series I. The offering
resulted in approximately $517,500,000 of gross proceeds.
During the first quarter of 2006, we redeemed our 8.60% Series Q
Cumulative Preferred Stock for $172,500,000 plus accrued and unpaid
dividends. The Series Q Cumulative Preferred Stock was called for
redemption in December 2005; accordingly, the redemption value of
$172,500,000 was classified as a liability at December 31, 2005.
During 2005, we issued four series of Cumulative Preferred Stock:
Series D - issued February 28, 2005, net proceeds totaling $130,548,000,
Series E - issued April 27, 2005, net proceeds totaling $136,601,000,
Series F - issued August 23, 2005, net proceeds totaling $242,550,000 and
Series G - issued December 12, 2005, aggregate net proceeds totaling
$96,886,000.
Subsequent to June 30, 2006, we issued 18,400,000 depositary shares
each representing 1/1,000 of a share our 7.25% Cumulative Preferred Stock,
Series K, for gross proceeds of approximately $460 million (including the
underwriters' overallotment option, which was exercised).
Equity Stock
------------
The Company is authorized to issue 200,000,000 shares of Equity
Stock. The Articles of Incorporation provide that the Equity Stock may be
issued from time to time in one or more series and gives the Board of
Directors broad authority to fix the dividend and distribution rights,
conversion and voting rights, redemption provisions and liquidation rights
of each series of Equity Stock.
Equity Stock, Series A
----------------------
At June 30, 2006 and December 31, 2005, we had 8,744,193 depositary
shares outstanding, each representing 1/1,000 of a share of Equity Stock,
Series A ("Equity Stock A"). The Equity Stock A ranks on parity with common
stock and junior to the Cumulative Preferred Stock with respect to general
preference rights and has a liquidation amount which cannot exceed $24.50
per share. Distributions with respect to each depositary share shall be the
lesser of: (i) five times the per share dividend on our common stock or
(ii) $2.45 per annum. We have no obligation to pay distributions on the
depositary shares if no distributions are paid to common shareholders.
Except in order to preserve the Company's Federal income tax status
as a REIT, we may not redeem the depositary shares before March 31, 2010.
On or after March 31, 2010, we may, at our option, redeem the depositary
shares at $24.50 per depositary share. If the Company fails to preserve its
Federal income tax status as a REIT, the depositary shares will be
convertible at the option of the shareholder into .956 shares of common
stock. The depositary shares are otherwise not convertible into common
stock. Holders of depositary shares vote as a single class with holders of
our common stock on shareholder matters, but the depositary shares have the
equivalent of one-tenth of a vote per depositary share.
26
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
Equity Stock, Series AAA
------------------------
In November 1999, we sold $100,000,000 (4,289,544 shares) of Equity
Stock, Series AAA ("Equity Stock AAA") to the Consolidated Development
Joint Venture. On November 17, 2005, upon the acquisition of Mr. Hughes'
interest in PSAC, we owned 100% of the partnership interest in the
Consolidated Development Joint Venture. For all periods presented, the
Equity Stock, Series AAA and related dividends are eliminated in
consolidation.
Common Stock
------------
During the six months ended June 30, 2006, we issued 115,228 shares
of our Common Stock in connection with employee stock-based compensation.
At June 30, 2006 and December 31, 2005, certain entities we
consolidate owned 1,146,207 shares of our Common Stock. These shares
continue to be legally issued and outstanding. In the consolidation
process, these shares and the related balance sheet amounts have been
eliminated. In addition, these shares are not included in the computation
of weighted average shares outstanding.
The following chart reconciles our legally issued and outstanding
shares of Common Stock and the reported outstanding shares of Common Stock
at June 30, 2006 and December 31, 2005:
June 30, December 31,
Reconciliation of Common Shares Outstanding 2006 2005
------------------------------------------- ------------- -------------
Legally issued and outstanding shares....... 129,356,954 129,235,770
Less - Shares owned by entities we consolidate
that are eliminated in consolidation.... (1,146,207) (1,146,207)
------------- -------------
Reported issued and outstanding shares...... 128,210,747 128,089,563
============= =============
Dividends
---------
The following table summarizes dividends declared and paid during
the six months ended June 30, 2006:
26
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
Distributions Per
Share or Depositary Total Distributions
Share
Preferred Stock: ------------------- -------------------
Series Q.............................. $0.108 $ 742,000
Series R.............................. $1.000 20,400,000
Series S.............................. $0.984 5,660,000
Series T.............................. $0.953 5,800,000
Series U.............................. $0.953 5,720,000
Series V.............................. $0.937 6,468,000
Series W.............................. $0.813 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.............................. $0.785 3,296,000
Series I.............................. $0.297 6,149,000
-------------------
98,991,000
Common Stock:
Equity Stock, Series A................ $1.225 10,712,000
Common ............................... $1.000 128,595,000
-------------------
Total dividends.................... $ 238,298,000
===================
The dividend rate on the common stock was $0.50 per common share and
$1.00 per common share for the three and six months ended June 30, 2006,
respectively. The dividend rate on the Equity Stock A was $0.6125 per
depositary share and $1.225 per depositary share for the three and six
months ended June 30, 2006, respectively.
11. Segment Information
-------------------
Description of Each Reportable Segment
--------------------------------------
Our reportable segments reflect significant operating activities
that are evaluated separately by management. We have four reportable
segments: self-storage operations, containerized storage operations,
commercial property operations, and ancillary operations. These segments
are organized generally based upon their operating characteristics.
The self-storage segment comprises the direct ownership,
development, and operation of traditional storage facilities, and the
ownership of equity interests in entities that own storage properties. The
containerized storage operations represent another segment. The commercial
property segment reflects our interest in the ownership, operation, and
management of commercial properties. The vast majority of the commercial
property operations are conducted through PSB, and to a much lesser extent
the Company and certain of its unconsolidated subsidiaries own commercial
28
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
space, managed by PSB, within facilities that combine storage and
commercial space for rent. The ancillary operations include four sources of
operating income: (i) the reinsurance of policies against losses to goods
stored by tenants in our self-storage facilities, (ii) sale of merchandise
at our self-storage facilities, (iii) truck rentals at our self-storage
facilities and (iv) management of facilities owned by third-party owners
and facilities owned by the Unconsolidated Entities.
Measurement of Segment Profit or Loss
-------------------------------------
We evaluate performance and allocate resources based upon the net
segment income of each segment. Net segment income represents net income in
conformity with GAAP and our significant accounting policies as denoted in
Note 2, before interest and other income, interest expense, corporate
general and administrative expense, and minority interest in income. The
accounting policies of the reportable segments are the same as those
described in the Summary of Significant Accounting Policies.
Interest and other income, interest expense, corporate general and
administrative expense, minority interest in income and gains and losses on
sales of real estate assets are not allocated to segments because
management does not utilize them to evaluate the results of operations of
each segment.
Measurement of Segment Assets
-----------------------------
No segment data relative to assets or liabilities is presented,
because we do not consider the historical cost of our real estate
facilities and investments in real estate entities in evaluating the
performance of operating management or in evaluating alternative courses of
action. The only other types of assets that might be allocated to
individual segments are trade receivables, payables, and other assets that
arise in the ordinary course of business, but they are also not a
significant factor in the measurement of segment performance.
Presentation of Segment Information
-----------------------------------
The following table reconciles the performance of each segment, in
terms of segment income, to our consolidated net income.
29
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
2006 2005 2006 2005
------------- ------------ ------------- -------------
(Amounts in thousands)
Reconciliation of Net Income by Segment:
Self-storage
Self-storage net operating income before depreciation
and amortization .................................... $ 172,973 $ 154,853 $ 336,750 $ 300,555
Depreciation and amortization............................ (47,854) (46,645) (97,058) (92,842)
Equity in earnings - self-storage property operations.... 528 1,774 1,100 3,076
Discontinued operations (Note 3) ........................ 21 89 63 181
------------- ------------ ------------- -------------
Total self-storage segment net income................ 125,668 110,071 240,855 210,970
------------- ------------ ------------- -------------
Commercial properties
Commercial properties net operating income before
depreciation and amortization......................... 1,778 1,884 3,422 3,605
Depreciation and amortization............................ (549) (580) (1,134) (1,159)
Equity in earnings - commercial property operations...... 8,965 8,632 17,856 17,593
------------- ------------ ------------- -------------
Total commercial property segment net income......... 10,194 9,936 20,144 20,039
------------- ------------ ------------- -------------
Containerized storage
Containerized storage net operating income before
depreciation............................................. (19) 714 601 1,809
Containerized storage depreciation....................... (223) (1,015) (483) (2,177)
Discontinued operations (Note 3) ........................ - - - 1,015
------------- ------------ ------------- -------------
Total containerized storage segment net income....... (242) (301) 118 647
------------- ------------ ------------- -------------
Ancillary Operations
Revenue less cost of operations......................... 6,673 7,058 11,231 10,659
------------- ------------ ------------- -------------
Other items not allocated to segments
General and administrative and other included in equity in
earnings.............................................. (6,369) (5,555) (12,366) (10,140)
Cumulative effect of change in accounting principal...... - - 578 -
Interest and other income................................ 10,047 3,394 15,122 6,287
General and administrative............................... (6,975) (6,128) (13,754) (11,269)
Interest expense......................................... (1,872) (1,794) (3,429) (3,457)
Gain on sale of real estate.............................. 466 53 466 53
Minority interest in income.............................. (8,728) (8,468) (15,887) (19,112)
------------- ------------ ------------- -------------
Total other items not allocated to segments (13,431) (18,498) (29,270) (37,638)
------------- ------------ ------------- -------------
Total consolidated net income....................... $ 128,862 $ 108,266 $ 243,078 $ 204,677
============= ============ ============= =============
12. Stock-Based Compensation
------------------------
Stock Options
We have a 1990 Stock Option Plan (the "1990 Plan"), which provides
for the grant of non-qualified stock options. We have a 1994 Stock Option
Plan (the "1994 Plan"), a 1996 Stock Option and Incentive Plan (the "1996
Plan"), a 2000 Non-Executive/Non-Director Stock Option and Incentive Plan
(the "2000 Plan"), a 2001 Non-Executive/Non-Director Stock Option and
30
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
Incentive Plan (the "2001 Non-Executive Plan") and a 2001 Stock Option and
Incentive Plan (the "2001 Plan"), each of which provides for the grant of
non-qualified options and incentive stock options. (The 1990 Plan, the 1994
Plan, the 1996 Plan and the 2000 Plan are collectively referred to as the
"PSI Plans"). Under the PSI Plans, the Company has granted non-qualified
options to certain directors, officers and key employees to purchase shares
of the Company's common stock at a price equal to the fair market value of
the common stock at the date of grant. Generally, options under the PSI
Plans vest over a three-year period from the date of grant at the rate of
one-third per year (options granted after, December 31, 2002 vest generally
over a five-year period) and expire (i) under the 1990 Plan, five years
after the date they became exercisable and (ii) under the 1994 Plan, the
1996 Plan and the 2000 Plan, ten years after the date of grant. The 1996
Plan, the 2000 Plan, the 2001 Non-Executive Plan and the 2001 Plan also
provide for the grant of restricted stock (see below) to officers, key
employees and service providers on terms determined by an authorized
committee of the Board of Directors.
We recognize compensation expense for stock-based awards based upon
their fair value on the date of grant amortized over the applicable vesting
period (the "Fair Value Method"), less an allowance for estimated future
forfeited awards.
For the three and six months ended June 30, 2006 we recorded
$331,000 and $598,000, respectively, in stock option compensation expense
related to options granted after January 1, 2002, as compared to $214,000
and $427,000, respectively, for the same periods in 2005. The estimated per
option value of $10.50 for the stock options granted in the first three
months of 2006 was based upon an estimated life of 5 years, an average
risk-free rate of 4.32%, an expected dividend yield of 7%, and an average
expected volatility of 0.265.
A total of 125,000 stock options were granted during the six months
ended June 30, 2006, 94,166 shares were exercised, and 2,000 shares were
forfeited. A total of 1,451,980 stock options were outstanding at June 30,
2006 (1,423,146 at December 31, 2005).
Restricted Stock Units
----------------------
Outstanding restricted stock units vest over a five or eight-year
period from the date of grant at the rate of one-fifth or one-eighth per
year, respectively. The employee receives additional compensation equal to
the per-share dividends received by common shareholders with respect to
restricted stock units outstanding. Such compensation is accounted for as
dividends paid. Any dividends paid on units which are subsequently
forfeited are expensed. Upon vesting, the employee receives common shares
equal to the number of vested restricted stock units in exchange for the
units.
The total value of each restricted stock unit grant, based upon the
market price of our common stock at the date of grant, is amortized over
the vesting period as compensation expense. The related employer portion of
payroll taxes is expensed as incurred. Until December 31, 2005 (see below),
forfeitures were recognized as experienced, reducing compensation expense.
Effective January 1, 2006, in accordance with Statement of Financial
Accounting Standards No. 123 - revised ("FAS 123R"), we began recording
compensation expense net of estimates for future forfeitures (the
"Estimated Forfeiture Method"). In addition, we estimated the cumulative
compensation expense that would have been recorded through December 31,
2005, had we used the Estimated Forfeiture Method, would have been $578,000
lower. Accordingly, as prescribed by FAS 123R, we recorded this adjustment
as a cumulative effect of change in accounting principal on our
accompanying condensed consolidated statement of income for the six months
ended June 30, 2006.
Outstanding restricted stock units are included on a one-for-one
basis in our diluted weighted average shares, less a reduction for the
treasury stock method applied to the average cumulative measured but
unrecognized compensation expense during the period. For purposes of the
disclosures that follow, "fair value" on any particular date reflects the
closing market price of our common stock on that date.
31
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
During the six months ended June 30, 2006, 208,250 restricted stock
units were granted, 13,780 restricted stock units were forfeited, and
32,400 restricted stock units vested. This vesting resulted in the issuance
of 21,062 shares of the Company's Common Stock. In addition, cash
compensation was paid to employees in lieu of 11,338 shares of Common Stock
based upon the market value of the stock at the date of vesting, and used
to settle the employees' tax liability generated by the vesting.
At June 30, 2006, approximately 461,900 restricted stock units were
outstanding (299,830 at December 31, 2005). A total of $1,160,000 and
$2,429,000 in restricted stock expense was recorded for the three and six
months ended June 30, 2006, respectively ($938,000 and $1,956,000,
respectively, for the same periods in 2005).
13. Related Party Transactions
--------------------------
Relationships and transactions with the Hughes Family
-----------------------------------------------------
Mr. Hughes and his family (the "Hughes Family") have ownership
interests in, and operate approximately 44 self-storage facilities in
Canada under the name "Public Storage" ("PS Canada") pursuant to a license
agreement with the Company. We currently do not own any interests in these
facilities nor do we own any facilities in Canada. The Hughes Family owns
approximately 36% of our Common Stock outstanding at June 30, 2006. We have
a right of first refusal to acquire the stock or assets of the corporation
that manages the 44 self-storage facilities in Canada, if the Hughes Family
or the corporation agrees to sell them. However, we have no interest in the
operations of this corporation, we have no right to acquire this stock or
assets unless the Hughes Family decides to sell, the right of first refusal
does not apply to the self-storage facilities, and we receive no benefit
from the profits and increases in value of the Canadian self-storage
facilities.
Through PSIC and PSCI-H, we continue to reinsure risks relating to
loss of goods stored by tenants in the self-storage facilities in Canada.
We acquired the tenant insurance business on December 31, 2001 through its
acquisition of PSIC. During each of the six months ended June 30, 2006 and
2005, we received $505,000 and $526,000, 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.
In November 1999, we formed the Consolidated Development Joint
Venture with a joint venture partner whose partners include an
institutional investor and Mr. Hughes. On August 5, 2005, we acquired the
institutional investor's interest in PSAC for approximately $41,420,000 in
cash. This acquisition gave us a controlling position in PSAC and the right
to acquire the remaining interest in PSAC held by Mr. Hughes, which we
exercised, for a stipulated amount of $64,513,000 plus accrued preferred
return on November 17, 2005.
The Company and Mr. Hughes are co-general partners in certain of the
Consolidated Entities and the Unconsolidated Entities. Mr. Hughes and his
family also own limited partnership interests in certain of these
partnerships. The Company and Mr. Hughes and his family receive
distributions from these partnerships in accordance with the terms of the
partnership agreements.
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.
32
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
Dann V. Angeloff, a director of the Company, is the general partner
of a limited partnership formed in June 1973 that owns a self-storage
facility that is managed by us. We recorded management fees with respect to
this facility amounting to $18,000 and $31,000 for the three and six months
ended June 30, 2006, respectively, compared to $11,000 and $22,000 for the
three and six months ended, June 30, 2005, respectively.
PSB manages certain of the commercial facilities that we own
pursuant to management agreements for a management fee equal to 5% of
revenues. We paid a total of $146,000, and $295,000 for the three and six
months ended June 30 2006, respectively, and $144,000 and $289,000,
respectively, for the same periods in 2005 in management fees with respect
to PSB's property management services. At June 30, 2006, we have recorded
amounts owed to PSB of $1,166,000 ($551,000 at December 31, 2005), for
management fees and certain other operating expenses related to the managed
facilities, paid by PSB on our behalf. These amounts are the result of a
time lag between PSB paying such expenditures and being reimbursed by us.
We manage the Company's wholly-owned self-storage facilities as well
as the facilities owned by the Unconsolidated Entities and the Consolidated
Entities on a joint basis, in order to take advantage of scale and other
efficiencies. As a result, significant components of self-storage operating
costs, such as payroll costs, advertising and promotion, data processing,
and insurance expenses are shared and allocated among the various entities
using methodologies meant to fairly allocate such costs based upon the
related activities. The total of such expenses which were included in the
operations of the Unconsolidated Entities were approximately $676,000, and
$1,267,000 for the three and six months ended June 30, 2006, respectively,
compared to $1,099,000 and $2,219,000 for the three and six months ended
June 30, 2005, respectively.
Pursuant to a cost-sharing and administrative services agreement,
PSB reimburses us for certain administrative services. PSB's share of these
costs totaled approximately $80,000 and $160,000 for the three and six
months ended June 30, 2006, respectively, and $85,000 and $170,000,
respectively, for the same periods in 2005.
Stor-RE and third party insurance carriers have provided PS Canada,
the Company, PSB, and other affiliates of the Company with liability and
casualty insurance coverage until March 31, 2004. PS Canada has a 2.2%
interest, and PSB has a 4.0% interest, in Stor-RE. PS Canada and PSB
obtained their own liability and casualty insurance covering occurrences
after April 1, 2004. For occurrences before April 1, 2004, STOR-Re
continues to provide liability and casualty insurance coverage consistent
with the relevant agreements.
14. Commitments and Contingencies
------------------------------
Legal Matters
Serrao v. Public Storage, Inc. (filed April 2003)
-----------------------------------------------------
(Superior Court of California - Orange County)
-----------------------------------------------
The plaintiff in this case filed a suit against the Company on
behalf of a putative class of renters who rented self-storage units from
the Company. Plaintiff alleges that the Company misrepresented the size of
its storage units, has brought claims under California statutory and common
law relating to consumer protection, fraud, unfair competition, and
negligent misrepresentation, and is seeking monetary damages, restitution,
and declaratory and injunctive relief.
The claim in this case is substantially similar to those in
Henriquez v. Public Storage, Inc., which was disclosed in prior reports. In
January 2003, the plaintiff caused the Henriquez action to be dismissed.
33
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
Based upon the uncertainty inherent in any putative class action, we
cannot presently determine the potential damages, if any, or the ultimate
outcome of this litigation. On November 3, 2003, the court granted our
motion to strike the plaintiff's nationwide class allegations and to limit
any putative class to California residents only. In August 2005, we filed a
motion to remove the case to federal court, but the case has been remanded
to the Superior Court. We are vigorously contesting the claims upon which
this lawsuit is based, including class certification efforts.
Potter, et al v. Hughes, et al (filed December 2004) (United States
----------------------------------------------------------------------
District Court - Central District of California)
-------------------------------------------------
As previously reported, in November 2002, a shareholder of the
Company made a demand on the Board of Directors challenging the fairness of
the Company's acquisition of PS Insurance Company, Ltd. ("PSIC") and
related matters. PSIC was previously owned by the Hughes Family. Following
the filing, in June 2003, by the Hughes Family of a complaint for
declaratory relief asking the court to find that the acquisition of PSIC
and related matters were fair to the Company, it was ruled that the PSIC
transaction was just and reasonable as to the Company and holding that the
Hughes Family was not required to make any payment to the Company.
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. 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 is suing the Company on behalf of a purported class of
California property managers who claim that they were not compensated for
all hours worked. The Brinkley suit is based upon California wage and hour
laws. The maximum potential liability cannot be estimated, but would be
increased if a class or classes are certified or, if claims are permitted
to be brought on behalf of others under the California Unfair Business
Practices Act. In May 2006, a motion for class certification was filed
seeking to certify five subclasses. Plaintiff is seeking certification for
alleged meal period violations, rest period violations, failure to pay for
travel time, failure to pay for mileage reimbursement, and for pay stub
violations. We are vigorously contesting the claims and intend to resist
any expansion beyond the named plaintiff on the grounds of lack of
commonality of claims. We do not believe that this matter will have any
material adverse effect on the results of operations of the Company.
Simas v. Public Storage, Inc. (filed January, 2006)
---------------------------------------------------
(Superior Court of California - Orange County)
----------------------------------------------
The plaintiff brings this action against the Company on behalf of a
purported class who bought insurance coverage at Company's facilities
alleging that the Company does not have a license to offer, sell and/or
transact storage insurance. The action was brought under California
Business and Professions Code Section 17200. The Company filed a demurrer
to the complaint. While the demurrer was pending, 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. We renewed our demurrer and moved to strike
the national class allegations. The Court dismissed all the claims with
leave to amend, except for the claim for unjust enrichment. Based on this
ruling, the Court held that the motion to strike was moot. Plaintiff
elected not to amend her complaint and is therefore only proceeding with
the claim for unjust enrichment. We are vigorously contesting the claims
upon which this lawsuit is based, including any efforts for class
certification.
34
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
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
Our facilities have historically carried comprehensive insurance,
including fire, earthquake, flood, liability and extended coverage through
STOR-Re and PSIC-H, our captive insurance programs, and insure portions of
these risks through nationally recognized insurance carriers. Our captive
insurance programs also insure affiliates of the Company.
The Company, STOR-Re, PSIC-H and its affiliates' maximum aggregate
annual exposure for losses that are below the deductibles set forth in the
third-party insurance contracts, assuming multiple significant events
occur, is approximately $35,000,000. In addition, if losses exhaust the
third-party insurers' limit of coverage of $125,000,000 for property
coverage (a maximum of $80,000,000 with respect to earthquake coverage) and
$102,000,000 for general liability, our exposure could be greater. These
limits are higher than estimates of maximum probable losses that could
occur from individual catastrophic events (i.e. earthquake and wind damage)
determined in engineering and actuarial studies.
Our tenant re-insurance program, operating through PSIC through
March 31, 2004, and through PSIC-H beginning April 1, 2004, reinsures
policies against claims for losses to goods stored by tenants at our
self-storage facilities. For 2005, we had outside third-party insurance
coverage for claims paid exceeding $500,000 resulting from any individual
event, to a limit of $10,000,000. Effective January 1, 2006, such coverage
was revised to cover claims paid exceeding $1,500,000 resulting from any
individual event, to a limit of $9,000,000. At June 30, 2006, we had
approximately 268,000 reinsured policies outstanding representing aggregate
coverage of approximately $658 million.
DEVELOPMENT AND ACQUISITION OF REAL ESTATE FACILITIES
We currently have 59 projects in our development pipeline, including
expansions and enhancements to existing self-storage facilities. The total
estimated cost of these facilities is approximately $271,536,000, of which
$19,695,000 has been spent at June 30, 2006. These projects are subject to
contingencies.
Subsequent to June 30, 2006, we did not acquire and are not
currently under contract to acquire any additional self-storage facilities
from third parties, with exception to the merger with Shurgard discussed
below.
MERGER WITH SHURGARD
--------------------
On March 6, 2006, we entered into an agreement with Shurgard Storage
Centers, Inc ("Shurgard") under which Public Storage will acquire Shurgard
at a total transaction value of approximately $5.0 billion. In connection
with the proposed merger, on July 24, 2006, Public Storage and Shurgard
filed the definitive joint proxy statement/prospectus with the Securities
and Exchange Commission and began mailing it to their shareholders. Each
company has scheduled a shareholders' meeting to be held on August 22, 2006
to, among other things, vote on approval of the merger.
35
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
Under the terms of the merger agreement, Public Storage will issue,
in a taxable transaction, approximately 41 million shares of common stock
to holders of Shurgard's common stock and assume Shurgard's debt and line
of credit of approximately $1.9 billion (at March 31 2006). Concurrent with
the closing of the merger, we expect to repay Shurgard's line of credit
($621 million at March 31, 2006), and pay approximately $60 million of
legal, consulting, and other merger-related costs. In addition,
approximately $136 million of Shurgard's preferred stock will be redeemed.
The transaction is subject to customary closing conditions and regulatory
approvals, including the approval of the shareholders of both companies.
The merger is currently targeted to close on or shortly after the date of
the shareholder meetings.
Completion of the transaction is not assured and is subject to
risks, including that shareholders of either Public Storage or Shurgard do
not approve the transaction or that the other closing conditions are not
satisfied. In addition, Shurgard may under limited circumstances terminate
the agreement to take a superior proposal. Public Storage and Shurgard are
not aware of any significant governmental approvals that are required for
consummation of the merger. If any approval or action is required, it is
presently contemplated that Public Storage and Shurgard would use their
reasonable best efforts to obtain such approval. There can be no assurance
that any approvals, if required, will be obtained.
The foregoing description of the terms of our agreement to acquire
Shurgard does not purport to be complete, and is qualified in its entirety
by reference to the full text of the merger agreement, a copy of which is
filed with our current report on Form 8-K dated March 7, 2006, and our
definitive joint proxy statement/prospectus dated July 24, 2006.
15. Subsequent Events
-----------------
On August 8, 2006, we issued 18,400,000 depositary shares each
representing 1/1,000 of a share our 7.25% Cumulative Preferred Stock,
Series K, for gross proceeds of approximately $460 million (including the
underwriters' overallotment option, which was exercised).
36
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with our condensed consolidated financial statements and notes thereto.
FORWARD LOOKING STATEMENTS: All statements in this document, other than
statements of historical fact, are forward-looking statements which may be
identified by the use of the words "expects," "believes," "anticipates,"
"should," "estimates" and similar expressions. These forward-looking statements
involve known and unknown risks and uncertainties, which may cause Public
Storage's actual results and performance to be materially different from those
expressed or implied in the forward-looking statements. Factors and risks that
may impact future results and performance are described in Item 1A, "Risk
Factors" in Part II of this Quarterly Report on Form 10Q. These risks include,
but are not limited to, the following: changes in general economic conditions
and in the markets in which Public Storage operates; the impact of competition
from new and existing storage and commercial facilities and other storage
alternatives, which could impact rents and occupancy levels at our facilities;
difficulties in Public Storage's ability to evaluate, finance and integrate
acquired and developed properties into its existing operations and to fill up
those properties, which could adversely affect our profitability; the impact of
the regulatory environment as well as national, state, and local laws and
regulations including, without limitation, those governing Real Estate
Investment Trusts, which could increase our expenses and reduce cash available
for distribution; consumers' failure to accept the containerized storage concept
which would reduce our profitability; difficulties in raising capital at
reasonable rates, which would impede our ability to grow; delays in the
development process, which could adversely affect profitability; economic
uncertainty due to the impact of war or terrorism could adversely affect its
business plan; and risks related to our agreement to acquire Shurgard Storage
Centers, Inc, ("Shurgard") including risks related to the timing and completion
of the transaction, risks associated with Shurgard's level of debt, Shurgard's
investment in European operations, and risks associated with the integration of
Shurgard's operations. We disclaim any obligation to update publicly or
otherwise revise any forward-looking statements, whether as a result of new
information, new estimates, or other factors, events or circumstances after the
date of this document, except where expressly required by law.
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results
of Operations discusses our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles in the
United States ("GAAP"). The preparation of our financial statements and related
disclosures in conformity with GAAP and our discussion and analysis of our
financial condition and results of operations requires management to make
judgments, assumptions and estimates that affect the amounts reported in our
condensed consolidated financial statements and accompanying notes. Note 2 to
our 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 our financial presentation. That is,
they are both important to the portrayal of our financial condition and results,
and they require management to make judgments and estimates about matters that
are inherently uncertain.
QUALIFICATION AS A REIT - INCOME TAX EXPENSE: We believe that we have
been organized and operated, and we intend to continue to operate, as a
qualifying Real Estate Investment Trust ("REIT") under the Internal Revenue Code
and applicable state laws. A qualifying REIT generally does not pay corporate
level income taxes on its taxable income that is distributed to its
shareholders, and accordingly, we do not pay income tax on the share of our
taxable income that is distributed to our shareholders.
We therefore do not estimate or accrue any federal income tax expense.
This estimate could be incorrect, because due to the complex nature of the REIT
qualification requirements, the ongoing importance of factual determinations and
the possibility of future changes in our circumstances, we cannot be assured
that we actually have satisfied or will satisfy the requirements for taxation as
37
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.
IMPAIRMENT OF LONG-LIVED ASSETS: Substantially all of our assets
consist of long-lived assets, including real estate and goodwill. We evaluate
our goodwill for impairment on an annual basis, and on a quarterly basis
evaluate other long-lived assets for impairment. As described in Note 2 to our
condensed consolidated financial statements, the evaluation of goodwill for
impairment entails valuation of the reporting unit to which goodwill is
allocated, which involves significant judgment in the area of projecting
earnings, determining appropriate price-earnings multiples, and discount rates.
In addition, the evaluation of other long-lived assets for impairment requires
determining whether indicators of impairment exist, which is a subjective
process. When any indicators of impairment are found, the evaluation of such
long-lived assets then entails projections of future operating cash flows, which
also involves significant judgment. Future events, or facts and circumstances
that currently exist, that we have not yet identified, could cause us to
conclude in the future that other long-lived assets are impaired. Any resulting
impairment loss could have a material adverse impact on our financial condition
and results of operations.
ESTIMATED USEFUL LIVES OF LONG-LIVED ASSETS: Substantially all of our
assets consist of depreciable, long-lived assets. We record depreciation expense
with respect to these assets based upon their estimated useful lives. Any change
in the estimated useful lives of those assets, caused by functional or economic
obsolescence or other factors, could have a material adverse impact on our
financial condition or results of operations.
ESTIMATED LEVEL OF RETAINED RISK AND UNPAID TENANT CLAIM LIABILITIES:
As described in Notes 2 and 14 to 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, 2006, we had approximately 268,000 reinsured policies outstanding
representing aggregate coverage of approximately $658 million.
ACCRUALS FOR CONTINGENCIES: We are exposed to business and legal
liability risks with respect to events that have occurred, but in accordance
with accounting principles generally accepted in the United States, we have not
accrued for such potential liabilities because the loss is either not probable
or not estimable or because we are not aware of the event. Future events and the
result of pending litigation could result in such potential losses becoming
probable and estimable, which could have a material adverse impact on our
financial condition or results of operations. Some of these potential losses, of
which we are aware, are described in Note 14 to our condensed consolidated
financial statements.
ACCRUALS FOR OPERATING EXPENSES: We accrue for property tax expense and
certain other operating expenses based upon estimates, 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.
38
MERGER WITH SHURGARD
--------------------
On March 6, 2006, we entered into an agreement with Shurgard Storage
Centers, Inc ("Shurgard") (NYSE:SHU) under which Public Storage will acquire
Shurgard at a total transaction value of approximately $5.0 billion. In
connection with the proposed merger, on July 24, 2006, Public Storage and
Shurgard filed the definitive joint proxy statement/prospectus with the
Securities and Exchange Commission and began mailing it to their shareholders.
Each company has scheduled a shareholders' meeting to be held on August 22, 2006
to, among other things, vote on approval of the merger.
Under the terms of the merger agreement, Public Storage will issue, in
a taxable transaction, approximately 41 million shares of common stock to
holders of Shurgard's common stock and assume Shurgard's debt and line of credit
of approximately $1.9 billion (at March 31 2006). Concurrent with the closing of
the merger, we expect to repay Shurgard's line of credit ($621 million at March
31, 2006), and pay approximately $60 million of legal, consulting, and other
merger-related costs. In addition, approximately $136 million of Shurgard's
preferred stock will be redeemed. The transaction is subject to customary
closing conditions and regulatory approvals, including the approval of the
shareholders of both companies. The merger is currently targeted to close on or
shortly after the date of the shareholder meetings.
Completion of the transaction is not assured and is subject to risks,
including that shareholders of either Public Storage or Shurgard do not approve
the transaction or that the other closing conditions are not satisfied. In
addition, Shurgard may under limited circumstances terminate the agreement to
take a superior proposal. Public Storage and Shurgard are not aware of any
significant governmental approvals that are required for consummation of the
merger. If any approval or action is required, it is presently contemplated that
Public Storage and Shurgard would use their reasonable best efforts to obtain
such approval. There can be no assurance that any approvals, if required, will
be obtained.
The foregoing description of the terms of our agreement to acquire
Shurgard does not purport to be complete, and is qualified in its entirety by
reference to the full text of the merger agreement, a copy of which is filed
with our current report on Form 8-K dated March 7, 2006, and our definitive
joint proxy statement/prospectus dated July 24, 2006.
Included in general and administrative expense on our unaudited
condensed consolidated statements of income for the three and six months ended
June 30, 2006, respectively, are costs related to the proposed merger with
Shurgard incurred prior to signing the merger agreement, as well as expenditures
in planning the integration of the two companies of approximately $1.1 million
and $2.2 million, respectively. We expect to incur additional incremental costs
related to the integration of the two companies in the next few quarters, as
well as costs associated with winding down Shurgard's business affairs. These
costs cannot be estimated at this time and will be expensed as incurred;
therefore, they are expected to have a negative impact on our earnings going
forward.
RESULTS OF OPERATIONS
---------------------
FOR THE THREE MONTHS ENDED JUNE 30, 2006:
Net income for the three months ended June 30, 2006 was $128,862,000
compared to $108,266,000 for the same period in 2005, representing an increase
of $20,596,000, or 19.0%. This increase is primarily due to improved operations
from our Same Store group of facilities, continued growth in operations from our
newly developed and recently expanded facilities, continued growth in our
recently acquired self-storage facilities as well as higher interest income.
These items were partially offset by an increase in general and administrative
expense.
39
Same Store net operating income, before depreciation expense, increased
by $6,517,000 or 4.8% as a result of a 5.7% improvement in revenues partially
offset by a 7.4% increase in cost of operations. Aggregate net operating income,
before depreciation expense, for our newly developed and recently expanded and
acquired facilities increased by approximately $8,654,000. This increase was
largely due to the impact of facilities acquired in 2005 and 2006, combined with
continued fill-up of our newly developed and expansion facilities. Interest
income increased as a result of earning higher interest rates on invested cash
balances combined with significantly higher average cash balances invested in
interest-bearing accounts as compared to the same period in 2005. Higher
invested cash balances were primarily due to the issuances of $517.5 million of
our 7.25% Series I Cumulative Preferred Stock on May 3, 2006 and $100.0 million
of our 7.25% Series J Preferred Partnership Units on May 9, 2006. General and
administrative expense increased primarily as a result of certain costs and
expenses totaling $1.1 million with respect to the proposed merger with
Shurgard.
Net income allocable to our common shareholders (after allocating net
income to our preferred and equity shareholders) was $71,130,000 or $0.55 per
common share on a diluted basis for the three months ended June 30, 2006
compared to $60,763,000 or $0.47 per common share on a diluted basis for the
same period in 2005, representing an increase of $0.08 per common share, or
17.0%. The increases in net income allocable to common shareholders and earnings
per common diluted share are due primarily to the impact of the factors
described above, offset by an increase in income allocated to preferred
shareholders, as described below.
For the three months ended June 30, 2006 and 2005, we allocated
$52,376,000 and $42,147,000 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 129,062,000 for the three
months ended June 30, 2006 from 128,618,000 for the three months ended June 30,
2005.
FOR THE SIX MONTHS ENDED JUNE 30, 2006:
Net income for the six months ended June 30, 2006 was $243,078,000
compared to $204,677,000 for the same period in 2005, representing an increase
of $38,401,000, or 18.8%. This increase is primarily due to improved operations
from our Same Store, newly developed and acquired self-storage facilities,
reduced minority interest in income and higher interest income. These items were
partially offset by increases in general and administrative expense and
depreciation along with a decrease in equity in earnings of real estate
entities.
Same Store net operating income, before depreciation expense, increased
by $14,647,000 or 5.6% as a result of a 5.4% improvement in revenues partially
offset by a 5.1% increase in cost of operations before depreciation expense.
Aggregate net operating income for our newly developed, acquired and expansion
self-storage facilities increased by approximately $16,080,000 largely due to
the impact of facilities acquired in 2005 and 2006, combined with continued
fill-up of our newly developed and expansion facilities. Minority interest in
income declined due to the acquisition of minority interests that occurred in
2005. Interest income increased as a result of earning higher interest rates on
invested cash balances, combined with higher average cash balances invested in
interest-bearing accounts as compared to the same period in 2005. Depreciation
increased due principally to the expansion of our real estate portfolio as a
result of newly developed and acquired facilities. General and administrative
expense increased primarily as a result of certain costs and expenses totaling
$2.2 million with respect to the proposed merger with Shurgard.
Net income allocable to our common shareholders (after allocating net
income to our preferred and equity shareholders) was $133,375,000 or $1.03 per
common share on a diluted basis for the six months ended June 30, 2006 compared
to $109,482,000 or $0.85 per common share on a diluted basis for the same period
in 2005, representing an increase of $0.18 per common share, or 21.2%. The
increases in net income allocable to common shareholders and earnings per common
diluted share are due primarily to the impact of the factors described above,
offset partially by increased income allocated to preferred shareholders,
described below.
40
For the six months ended June 30, 2006 and 2005, we allocated
$98,991,000 and $82,560,000 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. We also recorded allocations of income to our
preferred shareholders with respect to the application of EITF Topic D-42
totaling $1,904,000 for the six months ended June 30, 2005 (none for the same
period in 2006).
Weighted average diluted shares increased to 129,037,000 for the six
months ended June 30, 2006 from 128,895,000 for the six months ended June 30,
2005.
As described more fully under "Liquidity and Capital Resources" below,
we have approximately $653,750,000 in higher coupon preferred stock that becomes
available for redemption during the remainder of 2006. While there is no
assurance, if we do redeem these securities, during 2006 there would be an
additional allocation to the preferred shareholders of approximately $22 million
($0.17 per common share, based upon weighted average diluted shares during the
six months ended June 30, 2006) from the application of EITF Topic D-42.
Similarly, if PS Business Parks redeems the preferred stock it has available
during the remainder of 2006, our pro-rata share will be approximately $1.4
million.
In the ensuing discussions of our operations, we present "net operating
income before depreciation and amortization and cost of operations before
depreciation and amortization", which excludes the impact of depreciation
expense. Although depreciation is an operating expense, we believe that these
operating metrics are meaningful measures of operating performance, because we
utilize these measures in making decisions with respect to capital allocations,
in determining current property values, segment performance, and comparing
period to period and market to market property operating results. Included in
Note 11 to our June 30, 2006 condensed consolidated financial statements,
"Segment Information," is a reconciliation of net operating income (before
depreciation) by each respective operating segment to our consolidated net
income.
REAL ESTATE OPERATIONS
----------------------
SELF-STORAGE OPERATIONS: Our self-storage operations are by far the
largest component of our operations, representing approximately 89% of our total
revenues generated for the six months ended June 30, 2006. The improvements in
rental income for the periods presented on our condensed consolidated statements
of income for the three and six months ended June 30, 2006 are due to
improvements in the performance of those facilities that we owned prior to
January 1, 2004, and the addition of new facilities to our portfolio, either
through our acquisition or development activities.
To enhance year-over-year comparisons, the following table summarizes,
and the ensuing discussion describes, the self-storage operating results.
41
Self - storage operations summary:
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- --------------------------------------
Percentage Percentage
2006 2005 Change 2006 2005 Change
----------- ----------- ----------- ----------- ------------ ----------
(Dollar amounts in thousands)
Rental income (a):
Same Store Facilities (b)................... $ 214,832 $ 203,302 5.7% $ 423,060 $ 401,361 5.4%
Acquired Facilities (c)..................... 16,090 8,831 82.2% 30,205 16,327 85.0%
Expansion Facilities (d).................... 13,240 11,606 14.1% 25,796 22,751 13.4%
Developed Facilities (e).................... 14,346 11,516 24.6% 27,661 22,162 24.8%
Newly consolidated facilities (g)........... 3,890 - - 7,188 - -
----------- ----------- ----------- ----------- ------------ ----------
Total rental income....................... 262,398 235,255 11.5% 513,910 462,601 11.1%
----------- ----------- ----------- ----------- ------------ ----------
Cost of operations before depreciation and
amortization (f):
Same Store Facilities....................... 72,749 67,736 7.4% 144,779 137,727 5.1%
Acquired Facilities......................... 6,306 3,880 62.5% 12,007 7,308 64.3%
Expansion Facilities........................ 4,282 3,917 9.3% 8,538 7,945 7.5%
Developed Facilities........................ 5,147 4,869 5.7% 10,116 9,066 11.6%
Newly consolidated facilities............... 941 - - 1,720 - -
----------- ----------- ----------- ----------- ------------ ----------
Total cost of operations.................... 89,425 80,402 11.2% 177,160 162,046 9.3%
----------- ----------- ----------- ----------- ------------ ----------
Net operating income before depreciation and
amortization:
Same Store Facilities....................... 142,083 135,566 4.8% 278,281 263,634 5.6%
Acquired Facilities......................... 9,784 4,951 97.6% 18,198 9,019 101.8%
Expansion Facilities........................ 8,958 7,689 16.5% 17,258 14,806 16.6%
Developed Facilities........................ 9,199 6,647 38.4% 17,545 13,096 34.0%
Newly consolidated facilities............... 2,949 - - 5,468 - -
----------- ----------- ----------- ----------- ------------ ----------
Total net operating income before depreciation
and amortization (i)........................ 172,973 154,853 11.7% 336,750 300,555 12.0%
----------- ----------- ----------- ----------- ------------ ----------
Depreciation and amortization expense:
-------------------------------------
Same Store Facilities....................... (36,472) (38,264) (4.7)% (75,020) (77,232) (2.9)%
Acquired Facilities......................... (4,589) (2,436) 88.4% (8,517) (4,063) 109.6%
Expansion Facilities........................ (3,048) (2,726) 11.8% (6,015) (5,259) 14.4%
Developed Facilities........................ (3,629) (3,219) 12.7% (7,118) (6,288) 13.2%
Newly consolidated facilities............... (116) - - (388) - -
----------- ----------- ----------- ----------- ------------ ----------
Total depreciation and amortization expense. (47,854) (46,645) 2.6% (97,058) (92,842) 4.5%
----------- ----------- ----------- ----------- ------------ ----------
Net operating income:
Same Store Facilities....................... 105,611 97,302 8.5% 203,261 186,402 9.0%
Acquired Facilities......................... 5,195 2,515 106.6% 9,681 4,956 95.3%
Expansion Facilities........................ 5,910 4,963 19.1% 11,243 9,547 17.8%
Developed Facilities........................ 5,570 3,428 62.5% 10,427 6,808 53.2%
Newly consolidated facilities............... 2,833 - - 5,080 - -
----------- ----------- ----------- ----------- ------------ ----------
Total net operating income.................. $125,119 $ 108,208 15.6% $ 239,692 $ 207,713 15.4%
=========== =========== =========== =========== ============ ==========
Number of self-storage facilities (at end of
period)........................................ 1,493 1,440 3.7%
Net rentable square feet (in thousands, at end of
period) (h): ............................... 91,637 86,810 5.6%
(a) Rental income includes late charges and administrative fees and is net of
promotional discounts given. Rental income excludes retail sales, truck
rental income and tenant reinsurance revenues generated at these
facilities. Such ancillary revenues are reflected as a component of
"Ancillary Operations" on our condensed consolidated statements of income.
(b) The Same Store Facilities include 1,266 facilities containing 73,946,000
net rentable square feet that have been owned prior to January 1, 2004, and
operated at a mature, stabilized occupancy level since January 1, 2004.
(c) The Acquired Facilities include 89 facilities containing 6,383,000 net
rentable square feet that were acquired after January 1, 2004.
42
(d) The Expansion Facilities include 61 facilities containing 5,327,000 net
rentable square feet of self-storage space; these facilities were owned
since January 1, 2004, however, operating results are not comparable
throughout the periods presented due primarily to expansions in their net
rentable square feet (described below).
(e) The Developed Facilities include 61 facilities containing 5,102,000 net
rentable square feet of self-storage space. These facilities were developed
and opened since January 1, 2002 at a total cost of $538.9 million.
(f) Cost of operations includes all costs, both direct and indirect costs,
incurred in the operating activities of the facilities. Cost of operations
excludes, costs associated with retail sales, truck rentals, and tenant
reinsurance activities; such costs are reflected under "Ancillary
Operations" on our income statement.
(g) Effective January 1, 2006, in connection with our implementation of EITF
04-5, we commenced consolidation of the accounts of three limited
partnerships that we had previously accounted for on the equity method of
accounting. As a result, we began including the revenues and cost of
operations of 16 facilities with an aggregate of 879,000 net rentable
square feet in the table above.
(h) Square footage does not include 424,000 net rentable square feet of
industrial space initially developed for pick-up and delivery activities.
This space is being converted into self-storage space; see "Development
Pipeline Summary" below.
(i) Total net operating income before depreciation and amortization, which is a
non-GAAP measure, for our self-storage segment is presented in Note 11 to
our June 30, 2006 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.
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.
Self-Storage Operations - Same Store Facilities
We increased the number of facilities included in the Same Store
Facilities from 1,260 facilities at December 31, 2005 to 1,266 facilities at
June 30, 2006. The increase in the Same Store pool of facilities is due to the
inclusion of 23 facilities previously classified as Developed or Expansion
facilities and the removal of 17 facilities that are now classified as Expansion
facilities. These facilities are included in the Same Store Facilities because
they are all stabilized and owned since January 1, 2004 and therefore provide
meaningful comparative data for 2004, 2005, and 2006.
As a result of the change in the Same Store Facilities, the relative
weighting of markets has changed. Accordingly, comparisons should not be made
between information presented in 2005 reports for the 1,260 Same Store
Facilities and the current 1,266 Same Store Facilities in order to identify
trends in occupancies, realized rents per square foot, or operating results.
The Same Store Facilities contain approximately 73.9 million net
rentable square feet, representing approximately 81% of the aggregate net
rentable square feet of our consolidated self-storage portfolio. Revenues and
operating expenses with respect to this group of properties are set forth in the
above Self-Storage Operations table under the caption, "Same Store Facilities."
The following table sets forth additional operating data with respect to the
Same Store Facilities:
43
SAME STORE FACILITIES Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- ------------------------------
Percentage Percentage
2006 2005 Change 2006 2005 Change
--------------- ----------- ------------ ------------ ----------- ---------
(Dollar amounts in thousands, except weighted average amounts)
Rental income...................................... $ 205,213 $ 194,377 5.6% $ 404,304 $ 383,949 5.3%
Late charges and administrative fees collected..... 9,619 8,925 7.8% 18,756 17,412 7.7%
--------------- ---------- ------------ ----------- ----------- --------
Total rental income............................. 214,832 203,302 5.7% 423,060 401,361 5.4%
--------------- ---------- ------------ ----------- ----------- --------
Cost of operations before depreciation and amortization:
Payroll expense............................... 22,409 20,956 6.9% 43,739 42,051 4.0%
Property taxes................................ 19,346 18,402 5.1% 40,009 38,333 4.4%
Repairs and maintenance....................... 7,105 6,368 11.6% 13,806 13,050 5.8%
Advertising and promotion..................... 6,716 6,814 (1.4)% 13,395 12,784 4.8%
Utilities..................................... 4,362 3,816 14.3% 9,162 8,373 9.4%
Property insurance............................ 3,169 2,246 41.1% 5,019 4,248 18.1%
Telephone reservation center.................. 2,102 2,041 3.0% 4,051 3,794 6.8%
Other cost of management...................... 7,540 7,093 6.3% 15,598 15,094 3.3%
--------------- ---------- ------------ ----------- ----------- --------
Total cost of operations........................ 72,749 67,736 7.4% 144,779 137,727 5.1%
--------------- ---------- ------------ ----------- ----------- --------
Net operating income before depreciation and
amortization (e)................................... 142,083 135,566 4.8% 278,281 263,634 5.6%
Depreciation and amortization...................... (36,472) (38,264) (4.7)% (75,020) (77,232) (2.9)%
--------------- ---------- ------------ ----------- ----------- --------
Net operating income.............................. $ 105,611 $ 97,302 8.5% $ 203,261 $ 186,402 9.0%
=============== ========== ============ =========== =========== ========
Gross margin (before depreciation and amortization) 66.1% 66.7% (0.9)% 65.8% 65.7% 0.2%
Weighted average for the fiscal year:
Square foot occupancy (a)....................... 92.1% 92.1% 0.0% 91.1% 91.0% 0.1%
Realized annual rent per occupied square foot (b) $12.05 $11.42 5.5% $12.00 $11.41 5.2%
REVPAF (c)...................................... $11.10 $10.52 5.5% $10.94 $10.39 5.3%
Weighted average at June 30:
Square foot occupancy........................... 92.6% 92.4% 0.2%
In place annual rent per occupied square foot (d) $13.30 $12.62 5.4%
Total net rentable square feet (in thousands)...... 73,946 73,946 -
(a) Square foot occupancies represent weighted average occupancy levels
over the entire period.
(b) Realized annual rent per occupied square foot is computed by dividing
rental income, prior to late charges and administrative fees, by the
weighted average occupied square footage for the period. Realized
annual rent per occupied square foot takes into consideration
promotional discounts, credit card fees and other costs that reduce
rental income from the contractual amounts due.
(c) Annualized rental income per available square foot ("REVPAF")
represents annualized rental income, prior to late charges and
administrative fees, divided by total available net rentable square
feet.
(d) In place annual rent per occupied square foot represents annualized
contractual rents per occupied square foot without reductions for
promotional discounts, and excludes late charges and administrative
fees.
(e) Total net operating income before depreciation and amortization, which
is a non-GAAP measure, 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 "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 11 to our June 30, 2006 condensed consolidated financial
statements, "Segment Information."
Rental income increased approximately 5.7% and 5.4% for the three and
six months ended June 30, 2006, respectively, as compared to the same periods in
2005. These increases were primarily attributable to higher average realized
annual rental rates per occupied square foot, which were 5.5% and 5.2% higher
for the three and six months ended June 30, 2006, respectively, as compared to
the same periods in 2005. Our occupancy levels remained approximately flat for
each of the periods.
44
Our primary goal is to continue to grow rental income in a consistent
and sustainable manner. Growth in rental income will depend upon various
factors, including our ability to (i) maintain high occupancy levels, (ii)
increase rental rates charged to both new and existing customers, and (iii)
reduce the amount of promotional discounts to attract new tenants.
Demand for self-storage space in each market is affected by many
factors which are beyond our control. Such factors include general economic
conditions, home sales and moving activities, changes in demographic trends and
population density, as well as the level of development of new self-storage
facilities. We believe that our share of the overall storage demand in any
particular market is impacted by our and our competitors' marketing, pricing,
and promotional activities, as well as the quality of execution of our property
personnel at the facilities.
We regularly evaluate the level of demand for our self-storage space by
monitoring reservation activity, move-ins, move-outs, and the level of telephone
and internet inquiries as a primary basis for our marketing, pricing, and
promotional decisions, as well as to identify localized execution issues. There
can be no assurance that we will achieve our goal of sustainable growth in our
rental income, while sustaining our occupancy levels.
We believe that our Same Store Facilities are well positioned for
continued rental income growth for the remainder of 2006. At June 30, 2006, our
existing tenants were paying rental rates that were 5.4% higher, and occupancies
were 0.2% higher than at June 30, 2005.
Cost of operations (excluding depreciation and amortization) increased
by 7.4% and 5.1% for the three and six months ended June 30, 2006, respectively,
as compared to the same periods in 2005.
Payroll expense has increased 6.9% and 4.0% for the three and six
months ended June 30, 2006, respectively, as compared to the same periods in
2005, due principally to higher wage rates required for some of our job
classifications because of a tight labor market in several market areas, as well
as higher overtime hours required due to understaffing issues. We do not expect
to experience the high level of payroll increase experienced in the second
quarter, during the remainder of 2006.
Repairs and maintenance expenditures increased 11.6% and 5.8% during
the three and six months ended June 30, 2006. During the second quarter, we
experienced higher repair and maintenance costs to address certain deferred
maintenance issues localized to a few markets. We do not expect to experience
the high level of repairs and maintenance increase experienced in the second
quarter, during the remainder of 2006.
Advertising and promotion costs decreased 1.4% for the three months
ended June 30, 2006 and increased 4.8% for the six months ended June 30, 2006,
compared to the same periods in 2005. The increases in advertising and promotion
costs for the six months ended June 30, 2006 are due principally to increases in
internet and television advertising expenses. Television advertising decreased
from $2,955,000 to $2,611,000 in the three months ended June 30, 2006 as
compared to the same period in 2005, but increased from $6,543,000 to $6,589,000
for the six months ended June 30, 2006 as compared to the same period in 2005.
Future television advertising expenditures will continue to be volatile as we
adapt to market and competitive conditions.
Utility expenses increased 14.3% and 9.4% during the three and six
months ended June 30, 2006, due principally to higher energy costs. These levels
of increases are expected to persist during the remainder of 2006.
Insurance expense increased 41.1% and 18.1% for the three and six
months ended June 30, 2006, reflecting significant increases in property
insurance resulting primarily from the hurricanes experienced in 2005. These
rate increases became effective with our policy year starting April 1, 2006 and,
accordingly, we expect to continue these trends of higher insurance expense
throughout the remainder of 2006.
Telephone reservation center costs increased 3.0% and 6.8% for the
three and six months ended June 30, 2006, respectively, as compared to the same
periods in 2005. In preparation for our seasonal rental period, we increased our
staffing levels earlier this year compared to the same period in 2005, resulting
in higher payroll costs. We expect to realize certain benefits from the
increased staffing through better conversion ratios and lower temporary staffing
costs through the remainder of 2006.
45
The following table summarizes selected quarterly financial data with respect to
the Same Store Facilities:
For the Quarter Ended
------------------------------------------------------------------------
March 31 June 30 September 30 December 31 Entire Year
------------- ------------- --------------- --------------- --------------
(Amounts in thousands, except for per square foot amounts)
Total rental income:
2006 $ 208,228 $ 214,832
2005 $ 198,059 $ 203,302 $ 208,745 $ 208,272 $ 818,378
Total cost of operations (excluding depreciation and amortization):
2006 $ 72,030 $ 72,749
2005 $ 69,991 $ 67,736 $ 67,730 $ 65,873 $ 271,330
Property tax expense:
2006 $ 20,663 $ 19,346
2005 $ 19,931 $ 18,402 $ 19,573 $ 17,025 $ 74,931
Television advertising expense:
2006 $ 3,978 $ 2,611
2005 $ 3,588 $ 2,955 $ 2,314 $ 2,141 $ 10,998
REVPAF:
2006 $ 10.77 $ 11.10
2005 $ 10.25 $ 10.52 $ 10.77 $ 10.76 $ 10.58
Weighted average realized annual rent per occupied square foot:
2006 $ 11.94 $ 12.05
2005 $ 11.41 $ 11.42 $ 11.75 $ 11.89 $ 11.61
Weighted average occupancy levels for the period:
2006 90.2% 92.1%
2005 89.9% 92.1% 91.7% 90.5% 91.1%
46
ANALYSIS OF REGIONAL TRENDS
---------------------------
The following table sets forth regional trends in our Same Store Facilities:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------------- ---------------------------------------
2006 2005 Change 2006 2005 Change
----------- ---------- -------------- ----------- ------------- -------------
(Amounts in thousands, except for per square foot amounts)
Same Store Facilities Operating Trends
by Region
Rental income:
Southern California (126
facilities)...................... $ 35,123 $ 33,469 4.9% $ 69,360 $ 66,115 4.9%
Northern California (127
facilities)...................... 25,971 24,654 5.3% 51,161 48,509 5.5%
Texas (149 facilities).......... 18,940 17,847 6.1% 37,147 35,309 5.2%
Florida (130 facilities)........ 22,651 20,605 9.9% 44,554 40,605 9.7%
Illinois (91 facilities)........ 15,695 15,090 4.0% 30,979 30,045 3.1%
Georgia (58 facilities)......... 7,474 6,713 11.3% 14,614 13,406 9.0%
All other states (585 facilities) 88,978 84,924 4.8% 175,245 167,372 4.7%
----------- ---------- -------------- ----------- ------------- -------------
Total rental income................. 214,832 203,302 5.7% 423,060 401,361 5.4%
Cost of operations before depreciation
and amortization:
Southern California.............. 8,140 7,283 11.8% 16,375 14,917 9.8%
Northern California.............. 6,990 6,393 9.3% 13,738 12,757 7.7%
Texas............................ 8,808 7,863 12.0% 17,057 15,964 6.8%
Florida.......................... 7,541 7,373 2.3% 14,749 14,362 2.7%
Illinois......................... 7,057 6,276 12.4% 14,536 13,202 10.1%
Georgia.......................... 2,519 2,350 7.2% 5,051 4,756 6.2%
All other states................. 31,694 30,198 5.0% 63,273 61,769 2.4%
----------- ---------- -------------- ----------- ------------- -------------
Total cost of operations............ 72,749 67,736 7.4% 144,779 137,727 5.1%
Net operating income before depreciation
and amortization:
Southern California.............. 26,983 26,186 3.0% 52,985 51,198 3.5%
Northern California.............. 18,981 18,261 3.9% 37,423 35,752 4.7%
Texas............................ 10,132 9,984 1.5% 20,090 19,345 3.9%
Florida.......................... 15,110 13,232 14.2% 29,805 26,243 13.6%
Illinois......................... 8,638 8,814 (2.0)% 16,443 16,843 (2.4)%
Georgia.......................... 4,955 4,363 13.6% 9,563 8,650 10.6%
All other states................. 57,284 54,726 4.7% 111,972 105,603 6.0%
----------- ---------- -------------- ----------- ------------- -------------
Total net operating income before
depreciation and amortization.... $ 142,083 $ 135,566 4.8% $ 278,281 $ 263,634 5.6%
Weighted average occupancy:
Southern California.............. 91.9% 92.6% (0.8)% 91.6% 92.6% (1.1)%
Northern California.............. 91.5% 91.9% (0.4)% 90.7% 90.6% 0.1%
Texas............................ 92.0% 90.6% 1.5% 90.9% 89.7% 1.3%
Florida.......................... 93.9% 93.5% 0.4% 93.6% 92.7% 1.0%
Illinois......................... 90.8% 91.0% (0.2)% 89.2% 89.4% (0.2)%
Georgia.......................... 93.7% 92.9% 0.9% 93.1% 92.0% 1.2%
All other states................. 92.0% 92.1% (0.1)% 90.8% 90.8% 0.0%
----------- ---------- -------------- ----------- ------------- -------------
Total weighted average occupancy.... 92.1% 92.1% 0.0% 91.1% 91.0% 0.1%
REVPAF:
Southern California.............. $ 17.10 $ 16.29 5.0% $ 16.88 $ 16.08 5.0%
Northern California.............. 14.38 13.66 5.3% 14.18 13.45 5.4%
Texas............................ 7.79 7.36 5.9% 7.64 7.29 4.8%
Florida.......................... 11.60 10.55 9.9% 11.40 10.40 9.6%
Illinois......................... 10.78 10.38 3.9% 10.66 10.35 3.0%
Georgia.......................... 8.40 7.58 10.8% 8.22 7.57 8.6%
All other states................. 10.12 9.67 4.7% 9.98 9.54 4.6%
----------- ---------- -------------- ----------- ------------- -------------
Total REVPAF........................ $ 11.10 $ 10.52 5.5% $ 10.94 $ 10.39 5.3%
47
Same Store Facilities Operating
Trends by Region (Continued) Three Months Ended June 30, Six Months Ended June 30,
------------------------------------- ------------------------------------
2006 2005 Change 2006 2005 Change
---------- ------------ ---------- ----------- ----------- --------
Realized annual rent per occupied square foot:
Southern California.............. $ 18.60 $ 17.59 5.8% $ 18.42 $ 17.37 6.0%
Northern California.............. 15.72 14.86 5.8% 15.63 14.84 5.3%
Texas............................ 8.46 8.12 4.3% 8.41 8.12 3.6%
Florida.......................... 12.35 11.29 9.4% 12.18 11.21 8.7%
Illinois......................... 11.88 11.41 4.1% 11.95 11.58 3.2%
Georgia.......................... 8.97 8.17 9.8% 8.83 8.23 7.3%
All other states................. 11.00 10.50 4.8% 10.99 10.50 4.7%
---------- ------------ ---------- ----------- ----------- --------
Total realized rent per square foot. $ 12.05 $ 11.42 5.5% $ 12.00 $ 11.41 5.2%
In place annual rent per occupied square foot at June 30:
Southern California.............. $ 20.29 $ 19.19 5.7%
Northern California.............. 17.36 16.47 5.4%
Texas............................ 9.40 8.95 5.1%
Florida.......................... 13.39 12.23 9.4%
Illinois......................... 13.23 12.74 3.9%
Georgia.......................... 9.96 9.25 7.6%
All other states................. 12.20 11.67 4.6%
------------ ---------- -------
Total in place rent per occupied
square foot....................... $ 13.30 $ 12.62 5.4%
SELF-STORAGE OPERATIONS - ACQUIRED FACILITIES
During 2004, 2005 and the first six months of 2006, we acquired a total
of 89 self-storage facilities containing 6,383,000 net rentable square feet. The
following table summarizes operating data with respect to these facilities.
ACQUIRED SELF-STORAGE FACILITIES Three Months Ended June 30, Six Months Ended June 30,
------------------------------------ -----------------------------------
2006 2005 Change 2006 2005 Change
---------- ---------- ----------- ----------- ------------ ----------
(Dollar amounts in thousands, except square foot amounts)
Rental income:
Self-storage facilities acquired in 2006...... $ 1,442 $ - $ 1,442 $ 1,839 $ - $ 1,839
Self-storage facilities acquired in 2005...... 6,178 1,377 4,801 11,816 1,877 9,939
Self-storage facilities acquired in 2004...... 8,470 7,454 1,016 16,550 14,450 2,100
---------- ---------- ----------- ----------- ------------ ----------
Total rental income........................... 16,090 8,831 7,259 30,205 16,327 13,878
---------- ---------- ----------- ----------- ------------ ----------
Cost of operations before depreciation and
amortization :
Self-storage facilities acquired in 2006...... 717 - 717 942 - 942
Self-storage facilities acquired in 2005...... 2,385 674 1,711 4,854 951 3,903
Self-storage facilities acquired in 2004...... 3,204 3,206 (2) 6,211 6,357 (146)
---------- ---------- ----------- ----------- ------------ ----------
Total cost of operations...................... 6,306 3,880 2,426 12,007 7,308 4,699
---------- ---------- ----------- ----------- ------------ ----------
48
ACQUIRED SELF-STORAGE FACILITIES (Continued) Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ -----------------------------------
2006 2005 Change 2006 2005 Change
---------- ---------- ----------- ----------- ------------ ----------
Net operating income before depreciation and amortization:
Self-storage facilities acquired in 2006...... 725 - 725 897 - 897
Self-storage facilities acquired in 2005...... 3,793 703 3,090 6,962 926 6,036
Self-storage facilities acquired in 2004...... 5,266 4,248 1,018 10,339 8,093 2,246
---------- ---------- ----------- ----------- ------------ ----------
Total net operating income before depreciation and
amortization (a).............................. 9,784 4,951 4,833 18,198 9,019 9,179
Depreciation and amortization.................... (4,589) (2,436) (2,153) (8,517) (4,063) (4,454)
---------- ---------- ----------- ----------- ------------ ----------
Net operating income.......................... $ 5,195 $ 2,515 $ 2,680 $ 9,681 $ 4,956 $ 4,725
========== =========== ============ =========== =========== ==========
Weighted average square foot occupancy during the
period:
Self-storage facilities acquired in 2006...... 66.0% - - 63.4% - -
Self-storage facilities acquired in 2005...... 85.5% 82.8% 3.3% 83.6% 80.7% 3.6%
Self-storage facilities acquired in 2004...... 89.6% 87.6% 2.3% 87.8% 85.3% 2.9%
---------- ---------- ----------- ----------- ------------ ----------
85.6% 86.7% (1.3)% 84.4% 84.6% (0.2)%
========== =========== ============ =========== =========== ==========
Weighted average realized annual rent per occupied
square foot for the period (b):
Self-storage facilities acquired in 2006...... $ 13.44 $ - - $ 13.92 $ - -
Self-storage facilities acquired in 2005...... 11.58 9.33 24.1% 11.30 8.82 28.1%
Self-storage facilities acquired in 2004...... 11.63 10.51 10.7% 11.63 10.45 11.3%
---------- ---------- ----------- ----------- ------------ ----------
$ 11.72 $ 10.34 13.3% $ 11.58 $ 10.27 12.8%
========== =========== ============ =========== =========== ==========
In place annual rent per occupied square foot at
June 30 (c):
Self-storage facilities acquired in 2006...... $ 15.82 $ - -
Self-storage facilities acquired in 2005...... 12.87 11.00 17.0%
Self-storage facilities acquired in 2004...... 12.76 11.66 9.4%
--------- ---------- ---------
13.08 11.53 13.4%
========= ========== =========
Number of Facilities at June 30:
2006........................................ 12 - 12
2005........................................ 32 14 18
2004........................................ 45 45 -
--------- ---------- ---------
89 59 30
========= ========== =========
Net rentable square feet at June 30:
Self-storage facilities acquired in 2006...... 872 - 872
Self-storage facilities acquired in 2005...... 2,390 920 1,470
Self-storage facilities acquired in 2004 (d).. 3,121 3,109 12
--------- ---------- ---------
6,383 4,029 2,354
========= ========== ========
Cumulative acquisition cost at June 30:
Self-storage facilities acquired in 2006...... $ 103,544 $ - $ 103,544
Self-storage facilities acquired in 2005...... 254,549 82,456 172,093
Self-storage facilities acquired in 2004 (d).. 260,801 259,487 1,314
--------- ---------- ---------
$ 618,894 $341,943 $ 276,951
========= ========== ========
(a) Total net operating income before depreciation and amortization, which is a
non-GAAP measure, for our acquired self-storage 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 "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 11 to our June
30, 2006 condensed consolidated financial statements, "Segment
Information."
49
(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) 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) During 2005, we expanded one of the 2004 acquisitions, adding 12,000
net rentable square feet at a cost of $1,314,000.
The 2005 and 2006 acquisitions were acquired at various dates
throughout each period. Accordingly, rental income, cost of operations,
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, 2006 and 2005, reflect the
amounts for those facilities we owned at each of those respective dates.
During 2004, we acquired a total of 45 self-storage facilities for an
aggregate cost of approximately $260,801,000. These facilities contain in the
aggregate approximately 3,121,000 net rentable square feet and are located
principally in the Buffalo, Dallas, Miami, Milwaukee, and Minneapolis
metropolitan areas.
During 2005, we acquired a total of 32 self-storage facilities,
principally in single-property transactions, for an aggregate cost of
$254,549,000. These facilities contain in the aggregate approximately 2,390,000
net rentable square feet and are located principally in the Atlanta, Chicago,
Miami, and New York metropolitan areas.
For the six months ended June 30, 2006, we acquired a total of 12
self-storage facilities, each in a single-property transaction, containing an
aggregate of approximately 872,000 net rentable square feet for an aggregate
cost of $103,544,000 located in California, Florida, Illinois, New York,
Virginia, New Jersey, Delaware, Georgia and Colorado.
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 the remainder of 2006 as these facilities continue to improve
their occupancy levels as well as realized rental rates. In addition, during the
remainder of 2006 we expect to continue to acquire additional self-storage
facilities.
SELF-STORAGE OPERATIONS - EXPANSION FACILITIES
Our expansion facilities consist of (i) 53 self-storage facilities that
we have owned for a number of years and have recently expanded, or are in the
process of expanding, the amount of square footage available for rent combined
with (ii) eight self-storage facilities located in New Orleans that were heavily
impacted by Hurricane Katrina during 2005. The 53 self-storage facilities are
generally older facilities that are located in prime locations where we have
added additional space by either constructing new buildings on available land at
the existing site or by demolishing existing single story buildings and
rebuilding multi-story buildings in their place.
The operating results of these 53 expansion facilities and the eight
facilities located in New Orleans are not comparable on a year over year basis
due to the addition of square footage or the damage caused by the hurricane, in
the case of the New Orleans facilities. The operating results for these
facilities are presented in the table below.
50
EXPANSION SELF-STORAGE FACILITIES
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2006 2005 Change 2006 2005 Change
------------ ------------- ----------- ------------- ------------ --------
Rental income:
--------------
New Orleans facilities (a) ............... $ 1,445 $ 1,511 $ (66) $ 2,961 $ 2,955 $ 6
Other expansion facilities................ 11,795 10,095 1,700 22,835 19,796 3,039
------------ ------------- ----------- ------------- ------------ --------
Total rental income..................... 13,240 11,606 1,634 25,796 22,751 3,045
------------ ------------- ----------- ------------- ------------ --------
Cost of operations before depreciation:
---------------------------------------
New Orleans facilities.................... 405 469 (64) 773 975 (202)
Other expansion facilities................ 3,877 3,448 429 7,765 6,970 795
------------ ------------- ----------- ------------- ------------ --------
Total cost of operations................ 4,282 3,917 365 8,538 7,945 593
------------ ------------- ----------- ------------- ------------ --------
Net operating income before depreciation:
-----------------------------------------
New Orleans facilities.................... 1,040 1,042 (2) 2,188 1,980 208
Other expansion facilities................ 7,918 6,647 1,271 15,070 12,826 2,244
------------ ------------- ----------- ------------- ------------ --------
Total net operating income before depreciation (b) 8,958 7,689 1,269 17,258 14,806 2,452
Depreciation................................ (3,048) (2,726) (322) (6,015) (5,259) (756)
------------ ------------- ----------- ------------- ------------ --------
Net operating income...................... $ 5,910 $ 4,963 $ 947 $ 11,243 $ 9,547 $1,696
============ ============= =========== ============= =========== =========
Weighted average square foot occupancy during
----------------------------------------------
the period:
-----------
New Orleans facilities (c)................ 66.6% 92.0% (27.6)% 72.3% 90.6% (20.2)%
Other expansion facilities................ 81.0% 86.2% (6.0)% 79.8% 84.4% (5.5)%
------------ ------------- ----------- ------------- ------------ --------
79.6% 86.9% (8.4)% 79.0% 85.1% (7.2)%
------------ ------------- ----------- ------------- ------------ --------
Weighted average realized rent per occupied square
--------------------------------------------------
foot during the period (d):
---------------------------
New Orleans facilities (c) ............... $ 11.08 $ 11.89 (6.8)% $ 10.18 $ 11.83 (13.9)%
Other expansion facilities................ 12.22 11.68 4.6% 12.22 11.76 3.9%
------------ ------------- ----------- ------------- ------------ --------
$ 12.13 $ 11.71 3.6% $ 12.04 $ 11.77 2.3%
============ ============= =========== ============= =========== =========
In place annual rent per occupied square foot at
-------------------------------------------------
June 30 (e):
------------
New Orleans facilities (c) ............... $ 14.26 $ 13.22 7.9%
Other expansion facilities................ 13.79 13.12 5.1%
------------- ------------ --------
$ 13.82 $ 13.13 5.3%
============= ============= =========
Number of Facilities at June 30:
--------------------------------
New Orleans facilities.................... 8 8 -
Other expansion facilities................ 53 53 -
------------- ------------ --------
61 61 -
============= ============= ========
Net rentable square feet (in thousands, at end of period) (f):
--------------------------------------------------------------
New Orleans facilities.................... 524 524 -
Other expansion facilities................ 4,803 4,123 680
------------- ------------ --------
5,327 4,647 680
============= ============= ========
(a) Rental income for the New Orleans Facilities for the three and six months
ended June 30, 2006 includes $433,000 and $940,000, respectively, in
business interruption proceeds we expect to receive from our insurers,
relative to losses occurring in each respective period.
51
(b) Total net operating income before depreciation, which is a non-GAAP
measure, for our expansion self-storage facilities represents a portion of
our total self-storage segment's net operating income before depreciation,
and is reconciled to the segment total in the table "self-storage
operations summary" above. A reconciliation of our total self-storage
segment's net operating income before depreciation to consolidated net
income is included in Note 11 to our June 30, 2006 condensed consolidated
financial statements, "Segment Information."
(c) Occupied and available square footage excludes the impact of units taken
offline due to hurricane damage, where such amounts are factored in to the
computations of weighted average square foot occupancy, weighted average
realized rent per occupied square foot, and in place annual rent per
occupied square foot.
(d) Realized annual rent per occupied square foot is computed by dividing
rental income, prior to late charges and administrative fees, by the
weighted average occupied square footage for the period. Realized annual
rent per occupied square foot takes into consideration promotional
discounts, credit card fees and other costs that reduce rental income from
the contractual amounts due. Realized rent per square foot excludes the
impact of $433,000 and $940,000 in business interruption proceeds we
expect to receive from our insurers relative to the New Orleans facilities
for the three and six months ended June 30, 2006, respectively.
(e) 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.
(f) Square footage excludes 299,000 net rentable containerized storage space
initially developed for the containerized storage business at June 30,
2006, but includes square footage taken offline due to hurricane damage.
All of the New Orleans facilities were closed for operations for
several weeks following the hurricane; however, all but two of these facilities
have since reopened. The five that are operating are not operating at full
capacity, as many units are unavailable for lease due to damage. The two
facilities that remain closed will not be able to reopen at all without
substantial restoration and repair work. Notwithstanding that five of our
facilities in New Orleans are currently operating, we believe that the indirect
economic effects of the hurricane on the city may have a negative impact on our
facilities' operating results, and these effects are expected to continue for an
indeterminate time period. Included in revenues for the three and six months
ended June 30, 2006 are $433,000 and $940,000, respectively, in expected
business interruption proceeds for these facilities, representing the loss of
business for the six months ended June 30, 2006.
We expect that the Expansion Facilities, other than the New Orleans
facilities, will continue to provide growth to our earnings during the remainder
of 2006 as we continue to rent the newly added vacant space. The weighted
average occupancy level of these facilities was 81.0%, and 79.8% for the three
and six months ended June 30, 2006, respectively. For the three and six months
ended June 30, 2005, the weighted average occupancy level of these facilities
was 86.2% and 84.4%, respectively.
We expect that we will continue to redevelop additional facilities; at
June 30, 2006, we have five projects with an aggregate cost of $18,400,000 to
convert the containerized storage space into self-storage space and 49 other
expansion and repackaging projects to enhance the visual appeal of our
facilities or increase their net rentable space at an aggregate cost of
$244,300,000. These activities will increase our self-storage space by an
aggregate of 3,294,000 net rentable square feet and will result in short-term
dilution to earnings. However, we believe that expansion of our existing
self-storage facilities in markets that have unmet storage demand, and improving
our existing facilities' competitive position through enhancing their visual
appeal, provide an important means to improve the Company's earnings. Further,
the construction cost for these expansions is generally lower on a per-square
foot basis than the development of a new facility, resulting in a higher yield
potential on invested capital. There can be no assurance about the future level
of such expansion and enhancement opportunities, and these projects are subject
to contingencies.
52
SELF-STORAGE OPERATIONS - DEVELOPED FACILITIES
We have 44 newly developed self-storage facilities, and 17 facilities
that were developed to contain both self-storage and containerized storage at
the same location ("Combination Facilities") that have not been operating at a
stabilized level of operations since January 1, 2004. At June 30, 2006, these
newly developed facilities have an aggregate of 5,102,000 net rentable square
feet of self-storage space and 125,000 net rentable square feet of industrial
space developed originally for our containerized storage business. Aggregate
development cost for these 61 facilities was approximately $538,901,000 at June
30, 2006. The operating results of the self-storage facilities and Combination
Facilities are reflected in the Self-Storage Operations table under the caption,
"Developed Facilities." These facilities are not included in the "Same Store"
portfolio because their operations have not been stabilized.
The following table sets forth the operating results and selected
operating data with respect to the Developed Facilities:
53
DEVELOPED SELF-STORAGE FACILITIES Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ----------------------
2006 2005 Change 2006 2005 Change
------------- ------------ ------------- ------------ ------------ ------------
(Amounts in thousands, except per square foot amounts and facility count)
Rental income:
Self-storage facilities opened in 2006....... $ 56 $ - $ 56 $ 56 $ - $ 56
Self-storage facilities opened in 2005....... 584 48 536 953 50 903
Self-storage facilities opened in 2004....... 1,742 1,247 495 3,360 2,254 1,106
Self-storage facilities opened in 2003 and 2002 6,909 6,136 773 13,519 11,886 1,633
Combination facilities....................... 5,055 4,085 970 9,773 7,972 1,801
------------- ------------ ------------- ------------ ------------ ------------
Total rental income....................... 14,346 11,516 2,830 27,661 22,162 5,499
------------- ------------ ------------- ------------ ------------ ------------
Cost of operations before depreciation:
Self-storage facilities opened in 2006....... 114 - 114 114 - 114
Self-storage facilities opened in 2005....... 406 94 312 820 117 703
Self-storage facilities opened in 2004....... 551 659 (108) 1,129 1,178 (49)
Self-storage facilities opened in 2003 and 2002 2,230 2,218 12 4,395 4,266 129
Combination facilities....................... 1,846 1,898 (52) 3,658 3,505 153
------------- ------------ ------------- ------------ ------------ ------------
Total cost of operations before depreciation 5,147 4,869 278 10,116 9,066 1,050
------------- ------------ ------------- ------------ ------------ ------------
Net operating income before depreciation:
Self-storage facilities opened in 2006....... (58) - (58) (58) - (58)
Self-storage facilities opened in 2005....... 178 (46) 224 133 (67) 200
Self-storage facilities opened in 2004....... 1,191 588 603 2,231 1,076 1,155
Self-storage facilities opened in 2003 and 2002 4,679 3,918 761 9,124 7,620 1,504
Combination facilities....................... 3,209 2,187 1,022 6,115 4,467 1,648
------------- ------------ ------------- ------------ ------------ ------------
Net operating income before depreciation (a) 9,199 6,647 2,552 17,545 13,096 4,449
Depreciation.................................. (3,629) (3,219) (410) (7,118) (6,288) (830)
------------- ------------ ------------- ------------ ------------ ------------
Net operating income........................ $ 5,570 $ 3,428 $ 2,142 $ 10,427 $ 6,808 $ 3,619
============= ============ ============= ============ ============ ============
Weighted average square foot occupancy during
the period:
Self-storage facilities opened in 2006....... 18.2% - - 16.0% - -
Self-storage facilities opened in 2005....... 44.0% 31.2% 41.0% 37.4% 25.5% 46.7%
Self-storage facilities opened in 2004....... 87.6% 73.4% 19.3% 85.6% 66.2% 29.3%
Self-storage facilities opened in 2003 and 2002 92.8% 91.8% 1.1% 92.1% 89.4% 3.0%
Combination facilities....................... 77.8% 77.4% 0.5% 76.3% 75.4% 1.2%
------------- ------------ ------------- ------------ ------------ ------------
79.0% 82.5% (4.2)% 78.2% 80.1% (2.4)%
============= ============ ============= ============ ============ ============
Weighted average realized rent per occupied
square foot during the period (b):
Self-storage facilities opened in 2006....... $ 3.14 $ - - $ 3.14 $ - -
Self-storage facilities opened in 2005....... 10.74 5.14 108.9% 10.31 4.73 118.0%
Self-storage facilities opened in 2004....... 15.91 13.32 19.4% 15.63 13.32 17.3%
Self-storage facilities opened in 2003 and 2002 14.78 13.23 11.7% 14.56 13.16 10.6%
Combination facilities....................... 13.18 12.52 5.3% 13.16 12.63 4.2%
------------- ------------ ------------- ------------ ------------ ------------
$ 13.97 $ 12.89 8.4% $ 13.89 $ 12.93 7.4%
============= ============ ============= ============ ============ ============
In place annual rent per occupied square foot at June 30 (c):
Self-storage facilities opened in 2006....... $ 20.66 $ - -
Self-storage facilities opened in 2005....... 14.20 12.26 15.8%
Self-storage facilities opened in 2004....... 17.69 16.28 8.7%
Self-storage facilities opened in 2003 and 2002 16.24 14.74 10.2%
Combination facilities....................... 14.73 13.79 6.8%
------------ ------------ -------------
$ 15.75 $ 14.50 8.6%
============ ============ =============
54
DEVELOPED SELF-STORAGE FACILITIES
(continued)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -------------------------
2006 2005 Change 2006 2005 Change
------------- ----------- --------- --------- ----------- -----------
(Amounts in thousands, except per square foot amounts and facility count)
Number of facilities at June 30:
Self-storage facilities opened in 2006....... 3 - 3
Self-storage facilities opened in 2005....... 6 2 4
Self-storage facilities opened in 2004....... 7 7 -
Self-storage facilities opened in 2003 and 2002 28 28 -
Combination facilities....................... 17 17 -
----------- ----------- ----------
61 54 7
=========== =========== ==========
Square Footage at June 30:
Self-storage facilities opened in 2006....... 281 - 281
Self-storage facilities opened in 2005....... 463 125 338
Self-storage facilities opened in 2004....... 505 505 -
Self-storage facilities opened in 2003 and 2002 1,937 1,937 -
Combination facilities (d)................... 1,916 1,621 295
----------- ----------- ----------
5,102 4,188 914
=========== =========== ==========
Cumulative development cost at June 30:
Self-storage facilities opened in 2006....... $ 49,255 $ - $ 49,255
Self-storage facilities opened in 2005....... 37,815 11,423 26,392
Self-storage facilities opened in 2004....... 60,579 60,579 -
Self-storage facilities opened in 2003 and 2002 211,621 204,473 7,148
Combination facilities (d)................... 179,631 172,312 7,319
----------- ----------- ----------
$538,901 $448,787 $ 90,114
=========== =========== ==========
(a) Total net operating income before depreciation, which is a non-GAAP
measure, 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 operating income before depreciation to consolidated net
income is included in Note 11 to our June 30, 2006 condensed
consolidated financial statements, "Segment Information."
(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, 2006 and 2005 may not be
comparable to the same periods in prior years for self-storage
facilities opened in 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) Square footages exclude industrial space developed for containerized
storage activities totaling 125,000 net rentable square feet at June
30, 2006. Since January 1, 2003, we have converted industrial space no
longer used by the discontinued containerized storage business into
1,553,000 net rentable square feet of traditional self-storage space,
at an aggregate cost of $25,964,000.
Unlike many other forms of real estate, we are unable to pre-lease our
newly developed facilities due to the nature of our tenants. Accordingly, at the
time a newly developed facility first opens for operation the facility is
entirely vacant generating no rental income. Historically, we estimated that on
average it takes approximately 24 to 36 months for a newly developed facility to
fill up and reach a targeted occupancy level of approximately 90%.
55
As these facilities approach the targeted occupancy level of
approximately 90%, rates are increased, resulting in further improvement in net
operating income as the existing tenants, which moved in at lower rates, have
their rates increased or are replaced by new tenants paying higher rates. This
process of reaching stabilized rental rates can take approximately another 12 to
24 months following the time when the facilities reach a stabilized occupancy
level. In addition, move-in discounts have a more pronounced effect upon
realized rental rates for the newly developed facilities, because such
facilities tend to have a higher ratio of newer tenants.
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 these facilities for the six months
ended June 30, 2006, based on net operating income before depreciation, was
approximately 6.5%, which is lower than our ultimate yield expectations. We
expect these yields to increase as these facilities reach stabilization of both
occupancy levels and realized rents. Properties that were developed before 2005
have contributed greatly to our earnings growth. The growth in properties
developed in 2004 was principally due to occupancy growth, and growth for
properties developed in 2003 and 2002 were due principally to rate increases. We
expect that these facilities will continue to provide growth to our earnings.
Development of self-storage facilities causes short-term earnings
dilution because, as mentioned above, of the extended time to stabilize a
self-storage facility. We 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,
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.
SELF-STORAGE OPERATIONS - NEWLY CONSOLIDATED FACILITIES
Effective January 1, 2006, as described in Note 2 to our condensed
consolidated financial statements, we are including the accounts of three
limited partnerships that we had previously accounted for under the equity
method of accounting. These facilities are substantially all mature facilities
that we have managed and had an interest in for several years. These 16
facilities have an aggregate of 879,000 net rentable square feet. Accordingly,
their future operating characteristics and past operating history are similar to
those of our Same Store facilities.
56
The following chart sets forth the operations of the Newly Consolidated
Facilities (amounts in thousands):
Three Months Six Months
Ended Ended
June 30, 2006 June 30, 2006
----------------- -----------------
Rental income............................... $ 3,890 $ 7,188
Cost of operations (excluding depreciation). 941 1,720
----------------- -----------------
Net operating income before depreciation (a) 2,949 5,468
Depreciation................................ (116) (388)
----------------- -----------------
Net operating income..................... $ 2,833 $ 5,080
================= =================
Weighted average square foot occupancy
during the period:.......................... 89.8% 88.9%
Weighted average realized annual rent per
occupied square foot for the period:........ $ 16.37 $ 16.31
In place annual rent per occupied square
foot at June 30:............................ $ 18.48
(a) Total net operating income before depreciation, which is a non-GAAP
measure described above, for our commercial property segment is
presented in Note 11 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.
Commercial Property Operations: Commercial property operations included
in our consolidated financial statements include commercial space owned by the
Company and entities consolidated by the Company. We have a much larger interest
in commercial properties through our ownership interest in PS Business Parks
Inc. and its consolidated operating partnership (PS Business Parks, Inc. and its
consolidated operating partnership are hereinafter referred to as "PSB"). Our
investment in PSB is accounted for using the equity method of accounting, and
accordingly our share of PSB's earnings is reflected as "Equity in earnings of
real estate entities," see below.
Our commercial operations are comprised of 1,296,000 net rentable
square feet of commercial space operated principally at certain of the
self-storage facilities.
The results of our commercial operations are provided in the table
below (amounts in thousands):
COMMERCIAL PROPERTY OPERATIONS:
(excluding discontinued operations)
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------- -------------------------------------
2006 2005 Change 2006 2005 Change
------------ ------------ ---------- ----------- ---------- -----------
Rental income......................... $ 3,013 $ 2,927 $ 86 $ 6,005 $ 5,775 $ 230
Cost of operations.................... (1,235) (1,043) (192) (2,583) (2,170) (413)
------------ ------------ ---------- ----------- ----------- -----------
Net operating income before
depreciation (a)................... 1,778 1,884 (106) 3,422 3,605 (183)
Depreciation......................... (549) (580) 31 (1,134) (1,159) 25
------------ ------------ ---------- ----------- ----------- -----------
Operating income................... $ 1,229 $ 1,304 $ (75) $ 2,288 $ 2,446 $ (158)
=========== ============= ========== =========== =========== ===========
(a) Total net operating income before depreciation, which is a non-GAAP
measure, for our commercial property segment is presented in Note 11
to our June 30, 2006 condensed consolidated financial statements,
"Segment Information," which includes a reconciliation of net
operating income before depreciation for this segment to our
consolidated net income.
57
Our commercial property operations consist primarily of facilities that
are at a stabilized level of operations, and generally reflect the conditions of
the markets in which they operate. We do not expect any significant growth in
net operating income from this segment of our business for the remainder of
2006.
CONTAINERIZED STORAGE OPERATIONS: We have closed many of our
containerized storage facilities since 2002, and have refined our market and
product focus to 12 facilities located in eight densely populated markets with
above-average rent and income. The operations with respect to the facilities
other than the 12 ongoing facilities are included in "Discontinued Operations"
on our income statement. The operations of the 12 remaining facilities are
included in PSPUD's continuing operations and are reflected on the table below:
CONTAINERIZED STORAGE:
(EXCLUDING DISCONTINUED OPERATIONS)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- ---------------------------------
2006 2005 Change 2006 2005 Change
------------ --------- ---------- --------- --------- ---------
(Amounts in thousands)
Rental and other income ............ $ 4,200 $ 3,988 $ 212 $ 8,130 $ 7,825 $ 305
Cost of operations:
Direct operating costs.......... 3,462 2,910 552 6,099 5,294 805
Facility lease expense.......... 757 364 393 1,430 722 708
------------ --------- ---------- -------- ---------- ---------
Total cost of operations...... 4,219 3,274 945 7,529 6,016 1,513
------------ --------- ---------- -------- ---------- ---------
Net operating (loss) income before
depreciation (a).................... (19) 714 (733) 601 1,809 (1,208)
Depreciation expense (b)......... (223) (1,015) 792 (483) (2,177) 1,694
------------ --------- ---------- -------- ---------- ---------
Operating (loss) income............. $ (242) $ (301) $ 59 $ 118 $ (368) $ 486
=========== ========= ========== ======== =========== ==========
(a) Total net operating income before depreciation, which is a non-GAAP
measure described above, for our containerized storage segment is
presented in Note 11 to our June 30, 2006 condensed consolidated
financial statements, "Segment Information," which includes a
reconciliation of net operating income before depreciation for this
segment to our consolidated net income.
(b) Depreciation expense principally relates to the depreciation of
containers; however, depreciation expense for the three and six
months ended June 30, 2006 includes $178,000 and $378,000,
respectively, related to real estate facilities compared to $272,000
and $524,000 for the same periods in 2005, respectively.
Rental and other income includes monthly rental charges to customers
for storage of the containers, service fees charged for pickup and delivery of
containers to customers' homes and businesses and certain non-core services
which were eliminated, such as handling and packing customers' goods from city
to city. At June 30, 2006, there were approximately 22,143 occupied containers
in the continuing facilities.
Direct operating costs principally includes payroll, equipment lease
expense, utilities and vehicle expenses (fuel and insurance). Direct operating
costs for the three and six months ended June 30, 2006 also includes
approximately $441,000 and $623,000 of research and development costs,
respectively. Facility lease expense has increased significantly as we have
moved the operations from wholly-owned combination facilities to facilities that
we lease from third parties.
There can be no assurance as to the level of the containerized storage
business's expansion, level of gross rentals, level of move-outs or
profitability. We continue to evaluate the business operations, and additional
facilities may be closed.
ANCILLARY OPERATIONS: Our Ancillary operations include the operating
results of our tenant insurance, truck rental, merchandise, and third-party
property management operations. The following table sets forth our ancillary
operations:
58
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2006 2005 Change 2006 2005 Change
------------ --------- ----------- ---------- ----------- ---------
(Amounts in thousands)
Revenues:
Tenant reinsurance premiums..... $ 7,803 $ 6,251 $ 1,552 $ 14,589 $ 12,167 $ 2,422
Merchandise sales............... 6,300 6,445 (145) 11,313 11,252 61
Truck rentals................... 3,659 3,761 (102) 6,429 6,342 87
Property management............. 607 741 (134) 1,212 1,455 (243)
------------ --------- ----------- ---------- ----------- ---------
Total revenues............... 18,369 17,198 1,171 33,543 31,216 2,327
------------ --------- ----------- ---------- ----------- ---------
Cost of operations:
Tenant reinsurance.............. 3,123 1,566 1,557 6,215 4,543 1,672
Merchandise sales............... 5,621 5,013 608 10,194 9,284 910
Truck rentals................... 2,871 3,442 (571) 5,761 6,400 (639)
Property management............. 81 119 (38) 142 330 (188)
------------ --------- ----------- ---------- ----------- ---------
Total cost of operations..... 11,696 10,140 1,556 22,312 20,557 1,755
------------ --------- ----------- ---------- ----------- ---------
Net operating income:
Tenant reinsurance.............. 4,680 4,685 (5) 8,374 7,624 750
Merchandise sales............... 679 1,432 (753) 1,119 1,968 (849)
Truck rentals................... 788 319 469 668 (58) 726
Property management............. 526 622 (96) 1,070 1,125 (55)
------------ --------- ----------- ---------- ----------- ---------
Total net operating income... $ 6,673 $ 7,058 $ (385) $ 11,231 $ 10,659 $ 572
============ ========== =========== ============ ========== ==========
Tenant reinsurance operations
-----------------------------
On December 31, 2001, we acquired PSIC from a related party. PS
Insurance reinsures policies against losses to goods stored by tenants in our
self-storage facilities. Revenues are comprised of fees charged to tenants
electing such policies. Cost of operations primarily includes claims paid that
are not covered by our outside third-party insurers (described below), as well
as claims adjusting expenses.
For 2005, we had outside third-party insurance coverage for claims paid
exceeding $500,000 resulting from any individual event, to a limit of
$10,000,000. Effective January 1, 2006, such coverage was revised to cover
claims paid exceeding $1,500,000 resulting from any individual event, to a limit
of $9,000,000.
The future level of tenant reinsurance revenues is largely dependent
upon the number of new tenants electing to purchase policies, premiums charged
for such insurance and existing tenant retention to continue participating in
the insurance program. For the six months ended June 30, 2006 and 2005,
approximately 33.1% and 33.0%, respectively, of our self-storage tenant base had
such policies. During 2005 and 2004, we experienced damage caused by hurricanes
to several of our facilities in our Florida and New Orleans markets. As a result
of such damage, we recorded estimated tenant claim expense during the quarter in
which the damage occurred. As time progressed, the tenant claims liabilities
were adjusted, either increasing or decreasing the liabilities, based on actual
claims history. As a result of these adjustments, we experienced significant
volatility in our reported quarterly cost of operations, particularly with
respect to 2005.
The future cost of operations will be dependent primarily upon the
level of losses incurred, including the level of catastrophic events, such as
hurricanes, that occur and affect our properties. The aforementioned increase in
the deductible of $1,500,000 per event could result in higher loss expense in
the remainder of 2006, depending upon the number of catastrophic losses that
occur.
59
Merchandise and truck rental operations
---------------------------------------
Through a taxable REIT subsidiary, all of our self-storage facilities
sell locks, boxes, and packing supplies to our tenants as well as the general
public. Revenues and cost of operations for these activities are included in the
table above as "Merchandise Sales." In addition, at selected locations, our
subsidiary maintains trucks on site for rent to our self-storage customers and
the general public on a short-term basis for local use. In addition, we also act
as an agent for a national truck rental company to provide their rental trucks
to customers for long-distance use. The revenues and cost of operations for
these activities are included in the table above as "Truck rentals."
These activities generally serve as an adjunct to our self-storage
operations providing our tenants with goods and services that they need in
connection with moving and storing their goods.
The revenues of these activities have remained relatively stable during
the periods reflected in the table above. Cost of operations with respect to
merchandise sales has increased approximately $608,000, or 12.1% for the three
months ended June 30, 2006 as compared to the same period in 2005. This increase
has been caused primarily by higher payroll costs, as we have added more retail
store managers combined with higher cost of purchasing inventory for sale. Cost
of operations with respect to truck rentals decreased approximately $571,000, or
16.6% for the three months ended June 30, 2006 as compared to the same period in
2005. This decrease was principally due to lower truck maintenance cost combined
with lower payroll cost. The primary factors impacting the levels of operations
of these activities are the levels of customer traffic at our self-storage
facilities, including the levels of move-ins.
Property management operations
------------------------------
We manage 27 self-storage facilities on behalf of third-party owners
and 22 self-storage facilities that are owned by the Unconsolidated Entities.
Under the supervision of the property owners, we coordinate rental policies,
rent collections, marketing activities, the purchase of equipment and supplies,
maintenance activities, and the selection and engagement of vendors, suppliers,
and independent contractors. We also assist and advise the property owners in
establishing policies for the hire, discharge, and supervision of employees for
the operation of these facilities.
Property management operations declined in the six months ended June
30, 2006 as compared to the same period in 2005, due to our consolidation,
effective January 1, 2006, of three partnerships owning 16 self-storage
facilities that we had previously accounted for under the equity method of
accounting. This resulted in the elimination in consolidation of management fee
income and cost of operations with respect to these three partnerships for
periods after January 1, 2006.
Our operating income from these activities is generally dependent upon
the revenues earned at the managed facilities, because our management fee is
based upon revenues. Management contracts with the third-party owners can be
terminated by either party upon 60 days written notice.
EQUITY IN EARNINGS OF REAL ESTATE ENTITIES: In addition to our
ownership of equity interests in PSB, we had general and limited partnership
interests in eight limited partnerships at June 30, 2006. (PSB and the limited
partnerships are collectively referred to as the "Unconsolidated Entities"). Due
to our limited ownership interest and limited control of these entities, we do
not consolidate the accounts of these entities for financial reporting purposes.
We account for such investments using the equity method.
Equity in earnings of real estate entities for the three and six months
ended June 30, 2006 and 2005 consists of our pro-rata share of the
Unconsolidated Entities based upon our ownership interest for the period. The
following table sets forth the significant components of equity in earnings of
real estate entities:
60
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- --------------------------
2006 2005 Change 2006 2005 Change
------------- ----------- ----------- ----------- ----------- ------------
(Amounts in thousands)
Property operations:
PSB.................................... $ 18,181 $ 16,914 $ 1,267 $ 36,111 $ 34,128 $ 1,983
Acquisition Joint Venture.............. 101 63 38 187 114 73
Newly consolidated partnerships (1).... - 1,314 (1,314) - 2,590 (2,590)
Other investments (2).................. 677 873 (196) 1,378 1,280 98
------------- ----------- ----------- ----------- ----------- ------------
18,959 19,164 (205) 37,676 38,112 (436)
------------- ----------- ----------- ----------- ----------- ------------
Depreciation:
PSB.................................... (9,216) (8,282) (934) (18,255) (16,535) (1,720)
Acquisition Joint Venture.............. (68) (68) - (137) (134) (3)
Newly consolidated partnerships (1).... - (241) 241 - (416) 416
Other investments (2).................. (182) (167) (15) (328) (358) 30
------------- ----------- ----------- ----------- ----------- ------------
(9,466) (8,758) (708) (18,720) (17,443) (1,277)
------------- ----------- ----------- ----------- ----------- ------------
Other: (3)
PSB (4)................................ (6,325) (5,263) (1,062) (12,240) (10,015) (2,225)
Newly consolidated partnerships (1).... - (206) 206 - (79) 79
Other investments (2).................. (44) (86) 42 (126) (46) (80)
------------- ----------- ----------- ----------- ----------- ------------
(6,369) (5,555) (814) (12,366) (10,140) (2,226)
------------- ----------- ----------- ----------- ----------- ------------
Total equity in earnings of real estate
entities.................................. $ 3,124 $ 4,851 $ (1,727) $ 6,590 $ 10,529 $ (3,939)
============= ============= =========== ========== =========== ============
(1) As described more fully in Note 2 to our financial statements, we
commenced consolidating the accounts of three limited partnerships
that we had previously accounted for under the equity method of
accounting. Accordingly, equity in income with respect to these
partnerships ceased effective January 1, 2006.
(2) Amounts primarily reflect equity in earnings recorded for investments
that have been held consistently throughout each of the three and six
months ended June 30, 2006 and 2005.
(3) "Other" reflects our share of general and administrative expense,
interest expense, interest income, and other non-property;
non-depreciation related operating results of these entities. The
amount of interest expense included in "other" is $234,000 and
$458,000 for the three and six months ended June 30, 2006,
respectively, as compared to $121,000 and $244,000, respectively, for
the same periods in 2005.
(4) "Other" with respect to PSB also includes our pro-rata share of gains
on sale of real estate assets, impairment charges relating to pending
sales of real estate and the impact of PSB's application of the SEC's
clarification of EITF Topic D-42 on redemptions of preferred
securities.
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. For the three and six months ended June 30, 2005, our pro rata share
of these items resulted in net increases of $310,000 and $1,575,000,
respectively.
The impact of the PSB items discussed above led to a decrease in equity
in earnings of real estate entities totaling $329,000 and $1,282,000,
respectively, when comparing the three and six month periods ended June 30, 2006
to the same periods in 2005. In addition, equity in earnings real estate
entities decreased due to our consolidation of three limited partnerships
effective January 1, 2006 as described in Note 2 to our condensed consolidated
financial statements. As a result of this consolidation, equity in income with
respect to these partnerships ceased effective January 1, 2006.
61
Equity in earnings of PSB represents our pro rata share (averages of
approximately 45% and 44% for the six months ended June 30, 2006 and 2005,
respectively) of the earnings of PSB. Throughout 2005 and the six months ended
June 30, 2006, we owned 5,418,273 common shares and 7,305,355 operating
partnership units (units which are convertible into common shares on a
one-for-one basis) in PSB. At June 30, 2006, PSB owned and operated 18.2 million
net rentable square feet of commercial space located in eight states. PSB also
manages commercial space owned by the Company and affiliated entities at June
30, 2006 pursuant to property management agreements.
Our future equity income from PSB will be dependent entirely upon PSB's
operating results. Our investment in PSB provides us with some diversification
into another asset type. We have no plans of disposing of our investment in PSB.
PSB's filings and selected financial information can be accessed through the
Securities and Exchange Commission, and on its website, www.psbusinessparks.com.
In January 2004, we entered into a joint venture partnership with an
institutional investor for the purpose of acquiring up to $125.0 million of
existing self-storage properties in the United States from third parties (the
"Acquisition Joint Venture"). The venture is funded entirely with equity
consisting of 30% from us and 70% from the institutional investor. As described
more fully in note 2 to our condensed consolidated financial statements for the
six months ended June 30, 2006, our pro-rata share of earnings with respect to
two of the facilities acquired directly from third parties by the Acquisition
Joint Venture in 2004, at an aggregate cost of $9,086,000, are reflected in
Equity in Earnings in the table above. Our initial investment in the Acquisition
Joint Venture with respect to these two facilities was approximately $2,930,000.
Our future equity in earnings with respect to the Acquisition Joint Venture will
be dependent upon the level of earnings generated by these two properties.
The "Other Investments" are comprised primarily of our equity in
earnings from four limited partnerships, for which we held an approximate
consistent level of equity interest throughout 2005 and the first six months of
2006. The Company formed these limited partnerships during the 1980's. We are
the general partner in each limited partnership, and manage each of these
facilities for a management fee that is included in "Ancillary operations." The
limited partners consist of numerous individual investors, including the
Company, which throughout the 1990's acquired units of limited partnership
interests in these limited partnerships in various transactions.
Our future earnings with respect to the "Other Investments" will be
dependent upon the operating results of the 20 self-storage facilities that
these entities own. The operating characteristics of these facilities are
similar to those of the Company's self-storage facilities, and are subject to
the same operational issues as the Same Store Facilities as discussed above. See
Note 5 to our condensed consolidated financial statements for the operating
results of these entities for the six months ended June 30, 2006 and 2005.
OTHER INCOME AND EXPENSE ITEMS
------------------------------
INTEREST AND OTHER INCOME: Interest and other income was $10,047,000
and $15,122,000 for the three and six months ended June 30, 2006, respectively,
as compared to $3,394,000 and $6,287,000, respectively, for the same periods in
2005. This increase is due to earning higher interest rates on invested cash
balances combined with significantly higher average cash balances invested in
interest-bearing accounts as compared to the same periods in 2005.
As discussed more fully in "Liquidity and Capital Resources" below, at
June 30, 2006, we had cash balances totaling approximately $984,000,000, which
includes significant proceeds from recent equity issuances. These balances are
typically invested in short-term low-risk securities that, during the six months
ended June 30, 2006, earned a nominal yield. In addition, on August 8, 2006, we
raised approximately $460,000,000 in gross proceeds from our issuance of our
Series K Cumulative Preferred Stock. The future level of interest and other
income will be partially dependent upon the timing of our investment of these
unused offering proceeds and the level of interest earned on these short-term
investments.
62
DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense
was $48,626,000 and $98,675,000 for the three and six months ended June 30,
2006, respectively, compared to $48,240,000 and $96,178,000 for the same periods
in 2005. The increase in depreciation and amortization for the three and six
months ended June 30, 2006, as compared to the same period in 2005 is due
primarily to increased depreciation with respect to newly developed and acquired
facilities, partially offset by a reduction in amortization of our property
management contracts. Included in depreciation and amortization expense for the
six months ended June 30, 2006 is $1,651,000 (none for the three months ended
June 30, 2006) related to the amortization of intangibles, as compared to
$1,651,000 and $3,302,000 for the three and six months ended June 30, 2005,
respectively. Amortization ceased as of April 1, 2006, as described more fully
in Note 2 to our condensed consolidated financial statements.
GENERAL AND ADMINISTRATIVE: General and administrative expense was
$6,975,000 and $13,754,000 for the three and six months ended June 30, 2006, as
compared to $6,128,000 and $11,269,000 for the same periods in 2005,
representing increases of $847,000 and $2,485,000, 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.
Included in general and administrative expense for the three and six
months ended June 30, 2006, respectively, are costs related to the proposed
merger with Shurgard incurred prior to signing the merger agreement, as well as
expenditures in planning the integration of the two companies of approximately
$1.1 million and $2.2 million, respectively. We expect to incur additional
incremental costs related to the integration of the two companies in the next
few quarters, as well as costs associated with winding down Shurgard's business
affairs. These costs cannot be estimated at this time and will be expensed as
incurred; therefore, they are expected to have a negative impact on our earnings
going forward.
Restricted stock and stock option expense amounted to approximately
$1,491,000 and $3,027,000 for the three and six months ended June 30, 2006,
respectively, as compared to $1,152,000 and $2,383,000, respectively, for the
same periods in 2005.
INTEREST EXPENSE: Interest expense was $1,872,000 and $3,429,000 for
the three and six months ended June 30, 2006, respectively, compared to
$1,794,000 and $3,457,000, respectively, for the same periods in 2005. Interest
capitalized during the three and six months ended June 30, 2006 was $353,000 and
$1,069,000, respectively, as compared to $679,000 and $1,344,000, respectively,
for the same periods in 2005. See also Notes 7 and 8 to our condensed
consolidated financial statements for a schedule of our debt balances, principal
repayment requirements, and average interest rates.
MINORITY INTEREST IN INCOME: Minority interest in income represents the
income allocable to equity interests in Consolidated Entities, which are not
owned by the Company. The following table summarizes minority interest in income
for the three and six months ended June 30, 2006 and 2005:
63
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- ------------------------------
2006 2005 Change 2006 2005 Change
-------------- -------------- ----------------------- ------------- ---------
(Amounts in thousands)
Preferred partnership interests:
Ongoing distributions (a)................. $ 4,658 $ 3,590 $ 1,068 $ 8,249 $ 8,965 $ (716)
Special Distribution and EITF Topic D-42 (b) - - - - 874 (874)
Acquired minority interests (c).............. - 2,154 (2,154) - 4,479 (4,479)
Newly consolidated partnerships (d).......... 1,243 - 1,243 2,173 - 2,173
Convertible Partnership Units (e)............ 120 83 37 236 173 63
Other minority interests (f)................. 2,707 2,641 66 5,229 4,621 608
-------------- -------------- --------- ----------- ------------- ---------
Total minority interests in income....... $ 8,728 $ 8,468 $ 260 $ 15,887 $ 19,112 $ (3,225)
============== ============= ========== ============ ============= ============
(a) The decrease in ongoing distributions is due to the redemption of
$40,000,000 of our 9.5% Series N Preferred Units on March 17, 2005
and $45,000,000 of our 9.125% Series O Preferred units on March 29,
2005.
(b) In accordance with the Securities and Exchange Commissions
clarification of EITF Topic D-42, are original issuance costs with
respect to our first quarter of 2005 redemption of preferred units
included in minority interest in income for the three months ended
March 31, 2005 totaling $874,000.
(c) These amounts reflect income allocated to minority interests that the
Company acquired in 2005 and are no longer outstanding at June 30,
2006.
(d) These amounts reflect income allocated to minority interests for
three entities that we commenced consolidating the accounts for
effective January 1, 2006 (see Note 2 to our condensed consolidated
financial statements). Included in minority interest in income for
the three and six months ended June 30, 2006 was $32,000 and $66,000,
respectively, in depreciation expense.
(e) These amounts reflect the minority interests represented by the
Convertible Partnership Units (see Note 8 to our condensed
consolidated financial statements).
(f) These amounts reflect income allocated to minority interests that
were outstanding consistently throughout the six months ended June
30, 2006 and 2005. Included in minority interest in income is
$164,000 and $326,000 in depreciation expense for the three and six
months ended June 30, 2006, respectively, as compared to $174,000 and
$374,000 for the same periods in 2005.
Other minority interests reflect income allocated to minority interests
that have maintained a consistent level of interest throughout 2005 and the six
months ended June 30, 2006, comprised of investments in the Consolidated
Entities described in Note 9 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.
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 are expected to
increase.
Discontinued Operations: As described more fully in Note 3 to our
condensed consolidated financial statements, during 2002, 2003 and 2004, we
implemented a business plan which included the closure of 43 of 55 containerized
storage facilities that were open at December 31, 2001. The 43 facilities are
hereinafter referred to as the "Closed Facilities."
During July 2005, in an eminent domain proceeding, one of our
self-storage facilities located in the Portland, Oregon market was condemned by
local governmental authorities. Additionally, in July 2006, were notified that
one of our self-storage facilities in our Seattle, Washington market will be
condemned by local governmental authorities in an eminent domain proceeding.
Collectively, these Portland and Seattle facilities are referred to as "the
Eminent Domain Facilities".
64
The following table summarizes the historical operations of the Eminent
Domain Facilities and the Closed Facilities:
Discontinued Operations:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ------------------------
2006 2005 Change 2006 2005 Change
------------ ------------ ----------- ----------- ---------- ----------
(Amounts in thousands)
Rental income....................... $ 79 $ 263 $(184) $ 192 $ 606 $ (414)
Cost of operations................... (38) (132) 94 (88) (444) 356
Depreciation and amortization ...... (20) (42) 22 (41) (109) 68
------------ ------------ ----------- ----------- ---------- ----------
Income before other items........... 21 89 (68) 63 53 10
Other items:
Net gain on disposition of assets - - - - 1,143 (1,143)
------------ ------------ ----------- ----------- ---------- ----------
Net discontinued operations......... $ 21 $ 89 $ (68) $ 63 $ 1,196 $ (1,133)
============ ========== ============= ============ ========== ==========
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. In addition, at June 30, 2006, cash on
hand totaled $983,600,000 and we had no outstanding borrowings under our
$200,000,000 bank line of credit. We anticipate that a significant portion of
the cash on-hand will be utilized in connection with the proposed merger with
Shurgard, see below.
Operating as a real estate investment trust ("REIT"), our ability to
retain cash flow for reinvestment is restricted. In order for us to maintain our
REIT status, a substantial portion of our operating cash flow must be
distributed to our shareholders (see "Requirement to Pay Distributions" below).
However, despite the significant distribution requirements, we have been able to
retain a significant amount of our operating cash flow. The following table
summarizes our ability to fund distributions to the minority interest, capital
improvements to maintain our facilities, and distributions to our shareholders
through the use of cash provided by operating activities. The remaining cash
flow generated is available to make both principal payments on debt and for
reinvestment.
65
Six Months Ended June 30,
--------------------------------
2006 2005
-------------- --------------
(Amounts in thousands)
Net cash provided by operating activities....................... $ 367,400 $ 335,860
Distributions to minority interest (Preferred Units)............ (8,249) (8,965)
Distributions to minority interest (common equity).............. (7,348) (9,198)
-------------- --------------
Cash from operations allocable to our shareholders.............. 351,803 317,697
Capital improvements to maintain our facilities................. (23,449) (9,370)
-------------- --------------
Remaining operating cash flow available for distributions to our
shareholders................................................ 328,354 308,327
Distributions paid:
Preferred stock dividends..................................... (98,991) (82,560)
Equity Stock, Series A dividends.............................. (10,712) (10,731)
Distributions to Common shareholders.......................... (128,595) (115,665)
-------------- --------------
Cash available for principal payments on debt and reinvestment.. $ 90,056 $ 99,371
============== ===============
Our financial profile is characterized by a low level of debt-to-total
capitalization and a conservative dividend payout ratio with respect to the
common stock. We expect to fund our growth strategies with cash on hand at June
30, 2006, internally generated retained cash flows and proceeds from issuing
equity securities. In general, our current strategy is to continue to finance
our growth with permanent capital; either common or preferred equity. We have in
the past used our $200,000,000 line of credit as temporary "bridge" financing
and repaid those amounts with internally generated cash flows and proceeds from
the placement of permanent capital.
Over the past three years, we have funded substantially all of our
acquisitions with permanent capital (both common and preferred securities). We
have elected to use preferred securities as a form of leverage despite the fact
that the dividend rates of our preferred securities exceed the prevailing market
interest rates on conventional debt. We have chosen this method of financing for
the following reasons: (i) under the REIT structure, a significant amount of
operating cash flow needs to be distributed to our shareholders, making it
difficult to repay debt with operating cash flow alone, (ii) our perpetual
preferred stock has no sinking fund requirement or maturity date and does not
require redemption, all of which eliminate any future refinancing risks, (iii)
after the end of a non-call period, we have the option to redeem the preferred
stock at any time, which enabled us to effectively refinance higher coupon
preferred stock with new preferred stock at lower rates, (iv) preferred stock
does not contain onerous covenants, thus allowing us to maintain significant
financial flexibility, and (v) dividends on the preferred stock can be applied
to our REIT distribution requirements.
Our credit ratings on each of our series of Cumulative Preferred Stock
are "Baa2" by Moody's and "BBB+" by Standard & Poor's.
Our portfolio of real estate facilities remains substantially
unencumbered. At June 30, 2006, we have mortgage debt outstanding of $93,900,000
(which encumbers 35 facilities with a book value of approximately $204,500,000)
and unsecured debt in the amount of $11,200,000. At June 30, 2006, we also have
Debt to Joint Venture Partner amounting to $35,800,000 with respect to ten real
estate facilities with an aggregate book value of $48,100,000.
RECENT ISSUANCE OF PREFERRED STOCK AND PROJECTED REDEMPTION OF
PREFERRED SECURITIES: One of our financing objectives over the past several
years has been to reduce our average cost of capital with respect to our
preferred securities. Accordingly, we have redeemed higher rate preferred
securities outstanding and have financed the redemption with cash on-hand or
from the proceeds from the issuance of lower rate preferred securities. The
table below reflects the preferred stock that is redeemable in the second half
of 2006 (amounts in 000's):
66
Redeem 8.00% Series R (Redeemable 09/28/06) $ 510,000
Redeem 7.88% Series S (Redeemable 10/31/06) 143,750
--------------
Total redemptions $ 653,750
==============
We believe that our size and financial flexibility enables us to access
capital when appropriate. During 2006, we have issued approximately $1.1 billion
of our Cumulative Preferred Stocks and $100 million of our preferred partnership
units. We used approximately $172.5 million of these net proceeds in order to
redeem higher-coupon preferred securities.
REQUIREMENT TO PAY DISTRIBUTIONS: We estimate the distribution
requirement with respect to our Preferred Stock outstanding at June 30, 2006 to
be approximately $222.5 million per year. We estimate that the annual
distribution requirement with respect to the preferred partnership units
outstanding at June 30, 2006, to be approximately $21.6 million per year.
During each of the six months ended June 30, 2006 and 2005, we paid
cash dividends totaling $10,712,000 and $10,731,000, respectively, to the
holders of our Equity Stock, Series A. With respect to the depositary shares of
Equity Stock, Series A, we have no obligation to pay distributions if no
distributions are paid to the common shareholders. To the extent that we do pay
common distributions in any year, the holders of the depositary shares receive
annual distributions equal to the lesser of (i) five times the per share
dividend on the common stock or (ii) $2.45. The depositary shares are
non-cumulative, and have no preference over our common stock either as to
dividends or in liquidation. With respect to the Equity Stock, Series A
outstanding at June 30, 2006, we estimate the total regular distribution for the
third quarter of 2006 to be approximately $5.4 million.
During the six months ended June 30, 2006, we paid dividends totaling
$128,595,000 ($1.00 per common share) to the holders of our common stock. Based
upon shares outstanding at August 2, 2006 and a quarterly distribution of $0.50
per share, which was declared by the Board of Directors on August 2, 2006 and
payable on September 28, 2006, to shareholders of record as of September 15,
2006, we estimate a dividend payment with respect to our common stock of
approximately $64.1 million for the third quarter of 2006.
CAPITAL IMPROVEMENT REQUIREMENTS: For 2006, we budgeted approximately
$43.0 million for capital improvements. During the six months ended June 30,
2006, we incurred capital improvements of approximately $23.5 million. Capital
improvements include major repairs or replacements to the facilities that
maintain the facilities' existing operating condition and visual appeal. Capital
improvements do not include costs relating to the development or expansion of
facilities, or expenditures associated with improving the visual and structural
appeal of our existing self-storage facilities.
DEBT SERVICE REQUIREMENTS: We do not believe we have any significant
refinancing risks with respect to our debt, all of which is fixed rate. At June
30, 2006, we have total outstanding debt of approximately $140,837,000. See Note
7 to our condensed consolidated financial statements for approximate principal
maturities of such borrowings.
We anticipate that our retained operating cash flow will continue to be
sufficient to enable us to make scheduled principal payments. It is our current
intention to fully amortize our debt as opposed to refinance debt maturities
with additional debt.
ACQUISITION AND DEVELOPMENT OF REAL ESTATE FACILITIES: During 2006, we
will continue to seek to acquire additional self-storage facilities from third
parties; however, it is difficult to estimate the amount of third party
acquisitions we will undertake.
At June 30, 2006, we have a development "pipeline" of 59 projects
consisting of self-storage facilities, conversion of space at facilities that
was previously used for containerized storage and expansions to existing
self-storage facilities. At June 30, 2006, we have acquired the land for all of
these projects.
67
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 $251.8 million and will be incurred over the next 24 months. The
following table sets forth certain information with respect to our development
pipeline.
DEVELOPMENT PIPELINE SUMMARY (as of June 30, 2006)
Total
Number Net extimated Costs incurred
of rentable development through Costs to
projects sq. ft. costs 06/30/06 complete
----------- ---------- ------------- -------------- ----------
(Amounts in thousands, except number of projects)
Facilities currently under construction:
PUD conversions 2 152 $ 6,622 $ 1,192 $ 5,430
Expansions and other enhancements to 8 249 18,244 4,435 13,809
----------- ---------- ------------- -------------- ------------
existing self-storage facilities
10 401 24,866 5,627 19,239
----------- ---------- ------------- -------------- ------------
Facilities awaiting construction:
PUD conversions 3 268 11,821 262 11,559
Expansions and other enhancements to 46 2,625 234,849 13,806 221,043
----------- ---------- ------------- -------------- ------------
existing self-storage facilities
49 2,893 246,670 14,068 232,602
----------- ---------- ------------- -------------- ------------
Total Development Pipeline 59 3,294 $ 271,536 $ 19,695 $ 251,841
========== ========= ============ =============== =============
MERGER WITH SHURGARD: On March 6, 2006, we entered into an agreement
with Shurgard Storage Centers, Inc ("Shurgard") under which Public Storage will
acquire Shurgard at a total transaction value of approximately $5.0 billion. In
connection with the proposed merger, on July 24, 2006, Public Storage and
Shurgard filed the definitive joint proxy statement/prospectus with the
Securities and Exchange Commission and began mailing it to their shareholders.
Each company has scheduled a shareholders' meeting to be held on August 22, 2006
to, among other things, vote on approval of the merger.
Under the terms of the merger agreement, Public Storage will issue, in
a taxable transaction, approximately 41 million shares of common stock to
holders of Shurgard's common stock and assume Shurgard's debt and line of credit
of approximately $1.9 billion (at March 31 2006). Concurrent with the closing of
the merger, we expect to repay Shurgard's line of credit ($621 million at March
31, 2006), and pay approximately $60 million of legal, consulting, and other
merger-related costs. In addition, approximately $136 million of Shurgard's
preferred stock will be redeemed. The transaction is subject to customary
closing conditions and regulatory approvals, including the approval of the
shareholders of both companies. The merger is currently targeted to close on or
shortly after the date of the shareholder meetings.
Completion of the transaction is not assured and is subject to risks,
including that shareholders of either Public Storage or Shurgard do not approve
the transaction or that the other closing conditions are not satisfied. In
addition, Shurgard may under limited circumstances terminate the agreement to
take a superior proposal. Public Storage and Shurgard are not aware of any
significant governmental approvals that are required for consummation of the
merger. If any approval or action is required, it is presently contemplated that
Public Storage and Shurgard would use their reasonable best efforts to obtain
such approval. There can be no assurance that any approvals, if required, will
be obtained.
The foregoing description of the terms of our agreement to acquire
Shurgard does not purport to be complete, and is qualified in its entirety by
reference to the full text of the merger agreement, a copy of which is filed
with our current report on Form 8-K dated March 7, 2006, and our definitive
joint proxy statement/prospectus dated July 24, 2006.
68
CONTRACTUAL OBLIGATIONS
Our significant contractual obligations at June 30, 2006 and their
impact on our cash flows and liquidity are summarized below for the years ending
December 31 (amounts in thousands):
Total 2006 2007 2008 2009 2010 Thereafter
---------- ----------- ------------ ----------- ----------- ------------ -----------
Long-term debt (1) ........... $139,000 $ 5,227 $ 21,226 $ 9,597 $ 9,498 $ 9,259 $ 84,193
Operating leases (2).......... 68,983 5,185 10,737 7,466 5,367 2,932 37,296
Construction commitments (3).. 19,239 16,923 2,316 - - - -
---------- ----------- ------------ ----------- ----------- ------------ -----------
Total......................... $ 227,222 $ 27,335 $ 34,279 $ 17,063 $ 14,865 $ 12,191 $ 121,489
========== =========== ============= =========== =========== ============ ===========
(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.
(2) We lease trucks, land, equipment and office space under various
operating leases. Certain leases are cancelable with substantial
penalties.
(3) Includes obligations for facilities currently under construction at
June 30, 2006 as described above under "Acquisition and Development
of Real Estate Facilities".
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 2 to our June 30,
2006 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, 2006, our Debt to Joint Venture Partner was
$35,784,000. 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.
We have not included any contractual obligations that we may assume
from Shurgard, as described above under "Merger with Shurgard" since the
completion of the transaction is not assured and is subject to risks, including
that shareholders of either Public Storage or Shurgard do not approve the
transaction or that the other closing conditions are not satisfied.
OFF-BALANCE SHEET ARRANGEMENTS
At June 30, 2006, we had no off-balance sheet arrangements as defined
under Regulation S-K 303(a)(4) and the instructions thereto.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------
To limit our exposure to market risk, we principally finance our
operations and growth with permanent equity capital, consisting of either common
or preferred stock. At June 30, 2006, our debt as a percentage of total
shareholders' equity (based on book values) was 2.6%.
69
Our preferred stock is not redeemable at the option of the holders.
Except under certain conditions relating to the Company's qualification as a
REIT, the Preferred Stock is not redeemable by the Company prior to the
following dates: Series R - September 28, 2006, Series S - October 31, 2006,
Series T - January 18, 2007, Series U - February 19, 2007, Series V - September
30, 2007, Series W - October 6, 2008, Series X - November 13, 2008, Series Y -
January 2, 2009, Series Z - March 5, 2009, Series A - March 31, 2009, Series B -
June 30, 2009, Series C - September 13, 2009, Series D - February 28, 2010,
Series E - April 27, 2010, Series F - August 23, 2010, Series G - December 12,
2010, Series H - January 19, 2011, Series I - May 3, 2011 and Series K - August
8, 2011. On or after the respective dates, each of the series of Preferred Stock
will be redeemable at the option of the Company, in whole or in part, at $25 per
depositary share (or share in the case of the Series Y), plus accrued and unpaid
dividends through the redemption date.
Our market risk sensitive instruments include notes payable, which
totaled $105,053,000 at June 30, 2006. All of the Company's debt bears interest
at fixed rates. See Note 7 to our condensed consolidated financial statements
for approximate principal maturities of the notes payable at June 30, 2006.
ITEM 4. CONTROLS AND PROCEDURES
--------------------------------
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in reports the
Company files and submits under the Exchange Act, is recorded, processed,
summarized and reported within the time periods specified in accordance with SEC
guidelines and that such information is communicated to the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
to allow timely decisions regarding required disclosure based on the definition
of "disclosure controls and procedures" in Rules 13a-15(e) of the Exchange Act.
In designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures in
reaching that level of reasonable assurance. Also, the Company has investments
in certain unconsolidated entities. As the Company does not control or manage
these entities, its disclosure controls and procedures with respect to such
entities are substantially more limited than those it maintains with respect to
its consolidated subsidiaries.
As of the end of the fiscal quarter covered by this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
the Company's Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as such term is
defined in Rules 13a - 15(e) and 15d - 15(e) under the Securities Act of 1934 as
amended) as of the end of the period covered by this report. Based upon this
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of such period, the Company's disclosure controls
and procedures were effective.
There have not been any changes in our internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
70
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
------------------
The information set forth under the heading "Legal Matters" in Note 14
to the Consolidated Financial Statements in this Form 10-Q is incorporated by
reference in this Item 1.
Item 1A. Risk Factors
------------
In addition to the other information in our Form 10-Q and our Form 10-K
for the year ended December 31, 2005, you should consider the following factors
in evaluating the Company:
PUBLIC STORAGE SHAREHOLDERS WILL INCUR IMMEDIATE DILUTION IF THE SHURGARD MERGER
IS COMPLETED.
Public Storage shareholders will incur immediate dilution in connection
with the merger. During 2005, Public Storage shareholders would incur a loss of
$0.44 per share (diluted) on a pro-forma basis compared to earnings of $1.92 per
share (diluted) on a historical basis primarily as a result of an increase in
depreciation and amortization expense. No adjustments have been made to the
pro-forma financial information to reflect certain expected self-storage
operating cost of savings or increases in property taxes resulting from the
merger because they have not been quantified.
IF THE SHURGARD MERGER IS COMPLETED, IT MAY SUBJECT US TO ADDITIONAL RISKS
Completion of the Shurgard merger transaction is not assured and is
subject to risks, including that shareholders of either Public Storage or
Shurgard do not approve the transaction or that the other closing conditions are
not satisfied. In addition, Shurgard may under limited circumstances terminate
the agreement to take a superior proposal. Public Storage and Shurgard are not
aware of any significant governmental approvals that are required for
consummation of the merger. If any approval or action is required, it is
presently contemplated that Public Storage and Shurgard would use their
reasonable best efforts to obtain such approval. There can be no assurance that
any approvals, if required, will be obtained.
In addition to the general risks related to real estate noted below
which may also adversely impact Shurgard's operations, we are also subject to
the following risks in connection with our acquisition of Shurgard into our
operations, including without limitation the following:
o difficulties in the integration of operations, technologies and
personnel of Shurgard;
o inability to realize or delays in realizing expected synergies;
o unanticipated operating costs;
o diversion of our management's attention away from other business
concerns;
o exposure to any undisclosed or unknown potential liabilities of
Shurgard;
o potential underinsured losses on Shurgard properties; and
o risk of failure to mitigate any Shurgard material weaknesses in
internal control to the extent that it affects our internal
controls.
The success of the merger will depend, in part, on our ability to
realize the anticipated cost savings from combining the businesses of Public
Storage and Shurgard. However, to realize the anticipated benefits from the
merger, we must successfully combine the businesses of Public Storage and
Shurgard in a manner that permits those cost savings to be realized. If we are
not able to successfully achieve those objectives, the anticipated benefits of
the merger may not be realized fully or at all or may take longer or cost more
to realize than expected. Public Storage and Shurgard have operated and, until
the completion of the merger, will continue to operate independently. It is
possible that the integration process could result in the loss of valuable
71
employees, the disruption of each company's ongoing business or inconsistencies
in standards, controls, procedures, practices, policies and compensation
arrangements that adversely affect our ability to maintain relationships with
tenants and employees or to achieve the anticipated benefits of the merger.
Further, the size of the transaction may make integration of Public Storage and
Shurgard difficult, expensive, and disruptive, adversely affecting the combined
company's revenues and earnings, and implementation of merger integration
efforts may divert management's attention from other strategic priorities. In
addition, the merger has been structured so that it should be a taxable
transaction for U.S. Federal income tax purposes. As a result, the combined
company should have the benefit of a step-up in tax basis in Shurgard's assets.
It is possible that the IRS may challenge the step-up in basis. If such
challenge were sustained, we would not achieve this benefit, which would reduce
our depreciation deductions and our ability to retain cash flow.
Shurgard also holds many of its properties through joint ventures,
which have additional risks, including risks related to the financial strength,
common business goals and strategies and cooperation of the venture partner, as
well as the inability to take some actions that may require approval by the
venture partner. In addition, Shurgard holds substantially all of its real
estate investments in Europe indirectly through partnerships and joint venture
arrangements. If we are unable to effectively control these indirect
investments, there is a risk that our ownership of the joint ventures could
cause us to lose our REIT status.
As a share of total operations, particularly in Europe, Shurgard has
more recently developed properties whose occupancies have not stabilized and has
more construction activity than Public Storage. Delays in construction and
fill-up could result in additional cost.
We have assumed based on public filings that Shurgard has qualified and
will continue to qualify as a REIT and that we would be able to continue to
qualify as a REIT following an acquisition. However, if Shurgard has failed or
fails to qualify as a REIT, we generally would succeed to or incur significant
tax liabilities (including the significant tax liability that would result from
the deemed sale of assets by Shurgard pursuant to the merger) and we might
possibly lose our REIT status should disqualifying activities continue after the
acquisition.
Shurgard has a significantly greater level of debt than we do with more
fixed and floating-rate debt, as well as derivative instruments that we would
assume. Shurgard's outstanding borrowings on its lines of credit ($621 million
at March 31, 2006) would become payable immediately upon completion of the
merger. In addition, there would be an estimated $60 million in additional cash
costs related to the merger, cash requirements for the redemption of
approximately $136 million of Shurgard's preferred stock on the merger date, and
additional possible cash requirements following the merger. We may look to
obtain a new line of credit (with an increased borrowing capacity), bridge
financing, or issue additional preferred or common equity to provide liquidity
as Shurgard's other borrowings come due. As a result, this transaction would
result in a significant increase in our exposure to interest rate and
refinancing risks.
We would also be acquiring Shurgard's international operations in
Europe, which consist principally of facilities that have been completed in the
last few years and are in various stages of fill-up. Shurgard's international
operations have not been profitable, and there is no assurance they will
ultimately be profitable. Also, Shurgard has a number of non-stabilized
properties and construction activity, and delays in construction and fill-up
could result in additional costs. We have no experience in European operations,
which may adversely impact our ability to operate profitably in Europe. In
addition, these operations have specific inherent risks, including without
limitation the following:
o currency risks, including currency fluctuations;
o unexpected changes in legislative and regulatory requirements;
o potentially adverse tax burdens;
o burdens of complying with different permitting standards,
environmental and labor laws and a wide variety of foreign laws;
o obstacles to the repatriation of earnings and cash;
o regional, national and local political uncertainty;
72
o economic slowdown and/or downturn in foreign markets;
o difficulties in staffing and managing international operations;
o reduced protection for intellectual property in some countries; and
o inability to effectively control less than wholly-owned partnerships
and joint ventures.
In connection with the proposed acquisition of Shurgard's European
operations, we will be evaluating various strategic alternatives, including, but
not limited to, public or private offerings of securities, one or more possible
joint ventures, and possible asset acquisitions and/or sales.
THE HUGHES FAMILY COULD CONTROL US AND TAKE ACTIONS ADVERSE TO OTHER
SHAREHOLDERS.
At August 2, 2006, B. Wayne Hughes, Chairman of the Board, and members
of his family (the "Hughes Family") owned approximately 36% of our outstanding
shares of common stock. Consequently, the Hughes Family could control matters
submitted to a vote of our shareholders, including electing directors, amending
our organizational documents, dissolving and approving other extraordinary
transactions, such as a takeover attempt, even though such actions may not be
favorable to the other common shareholders.
PROVISIONS IN OUR ORGANIZATIONAL DOCUMENTS MAY PREVENT CHANGES IN CONTROL.
Restrictions in our organizational documents may further limit changes
in control. Unless our Board of Directors waives these limitations, no
shareholder may own more than (1) 2.0% of our outstanding shares of our common
stock or (2) 9.9% of the outstanding shares of each class or series of our
preferred or equity stock. Our organizational documents in effect provide,
however, that the Hughes Family may continue to own the shares of our common
stock held by them at the time of the 1995 reorganization. In the event the
Shurgard transaction is completed, the Hughes Family is permitted to acquire
additional Common Stock to maintain their premerger holding percentage. These
limitations are designed, to the extent possible, to avoid a concentration of
ownership that might jeopardize our ability to qualify as a real estate
investment trust or REIT. These limitations, however, also may make a change of
control significantly more difficult (if not impossible) even if it would be
favorable to the interests of our public shareholders. These provisions will
prevent future takeover attempts not approved by our board of directors even if
a majority of our public shareholders deem it to be in their best interests
because they would receive a premium for their shares over the shares' then
market value or for other reasons.
WE WOULD INCUR ADVERSE TAX CONSEQUENCES IF WE OR SHURGARD FAILED TO QUALIFY AS A
REIT.
We have assumed based on public filings that Shurgard has qualified and
will continue to qualify as a REIT following the merger. However, if Shurgard
has failed or fails to qualify as a REIT, we generally would succeed to or incur
significant tax liabilities and possibly lose our REIT status should
disqualifying activities continue after the Shurgard merger.
You will be subject to the risk that we may not qualify as a REIT.
REITs are subject to a range of complex organizational and operational
requirements. As a REIT, we must distribute with respect to each year at least
90% of our REIT taxable income to our shareholders. Other restrictions apply to
our income and assets. Our REIT status is also dependent upon the ongoing
qualification of our affiliate, PS Business Parks, Inc., as a REIT, as a result
of our substantial ownership interest in that company.
For any taxable year that we fail to qualify as a REIT and are unable
to avail ourselves of certain savings provisions set forth in the Code, we would
be subject to federal income tax at the regular corporate rates on all of our
taxable income, whether or not we make any distributions to our shareholders.
Those taxes would reduce the amount of cash available for distribution to our
shareholders or for reinvestment and would adversely affect our earnings. As a
result, our failure to qualify as a REIT during any taxable year could have a
material adverse effect upon us and our shareholders. Furthermore, unless
certain relief provisions apply, we would not be eligible to elect REIT status
again until the fifth taxable year that begins after the first year for which we
fail to qualify.
73
WE MAY PAY SOME TAXES, REDUCING CASH AVAILABLE FOR SHAREHOLDERS.
Even if we qualify as a REIT for federal income tax purposes, we are
required to pay some federal, state and local taxes on our income and property.
Several corporate subsidiaries of the Company have elected to be treated as
"taxable REIT subsidiaries" of the Company for Federal income tax purposes since
January 1, 2001. A taxable REIT subsidiary is taxable as a regular corporation
and is limited in its ability to deduct interest payments made to us in excess
of a certain amount. In addition, if we receive certain payments and the
economic arrangements among our taxable REIT subsidiaries and us are not
comparable to similar arrangements among unrelated parties we will be subject to
a 100% penalty tax on those payments. To the extent that the Company or any
taxable REIT subsidiary is required to pay Federal, state or local taxes, we
will have less cash available for distribution to shareholders.
WE HAVE BECOME INCREASINGLY DEPENDENT UPON AUTOMATED PROCESSES AND THE INTERNET
AND ARE FACED WITH SECURITY SYSTEM RISKS.
We have become increasingly centralized and dependent upon automated
information technology processes. While we have attempted to mitigate this risk
through offsite backup procedures and contracted data centers that include, in
some cases, redundant operations, we could still be severely impacted by a
catastrophic occurrence, such as a natural disaster or a terrorist attack. In
addition, an increasing portion of our business operations are conducted over
the Internet, increasing the risk of viruses that could cause system failures
and disruptions of operations despite our deployment of anti-virus measures.
Experienced computer programmers may be able to penetrate our network security
and misappropriate our confidential information, create system disruptions or
cause shutdowns.
WE AND OUR SHAREHOLDERS ARE SUBJECT TO FINANCING RISKS.
DEBT INCREASES THE RISK OF LOSS. In making real estate investments, we
may borrow money, which increases the risk of loss. At June 30, 2006, our debt
of $140.8 million was 2.3% of our total assets.
Certain securities have a liquidation preference over our common stock
and Equity Stock, Series A. If we liquidated, holders of our preferred
securities would be entitled to receive liquidating distributions, plus any
accrued and unpaid distributions, before any distribution of assets to the
holders of our common stock and Equity Stock, Series A. Holders of preferred
securities are entitled to receive, when declared by our Board of Directors,
cash distributions in preference to holders of our common stock and Equity
Stock, Series A.
SINCE OUR BUSINESS CONSISTS PRIMARILY OF ACQUIRING AND OPERATING REAL ESTATE, WE
ARE SUBJECT TO REAL ESTATE OPERATING RISKS.
THE VALUE OF OUR INVESTMENTS MAY BE REDUCED BY GENERAL RISKS OF REAL
ESTATE OWNERSHIP. Since we derive substantially all of our income from real
estate operations, we are subject to the general risks of owning real
estate-related assets, including:
o lack of demand for rental spaces or units in a locale;
o changes in general economic or local conditions;
o natural disasters, such as earthquakes or hurricanes;
o potential terrorist attacks;
o changes in supply of or demand for similar or competing facilities
in an area;
o the impact of environmental protection laws;
o changes in interest rates and availability of permanent mortgage
funds which may render the sale or financing of a property difficult
or unattractive;
74
o changes in tax, real estate and zoning laws; and
o tenant claims.
In addition, we self-insure certain of our property loss, liability,
and workers compensation risks; areas that other real estate companies may use
third-party insurers for. This results in a higher risk of losses that are not
covered by third-party insurance contracts, as described in Note 14 under
"Insurance and Loss Exposure" to our consolidated financial statements at June
30, 2006.
There is significant competition among self-storage facilities and from
other storage alternatives. Most of our properties are self-storage facilities,
which generated most of our revenue for the six months ended June 30, 2006.
Local market conditions will play a significant part in how competition will
affect us. Competition in the market areas in which many of our properties are
located from other self-storage facilities and other storage alternatives is
significant and has affected the occupancy levels, rental rates and operating
expenses of some of our properties. Any increase in availability of funds for
investment in real estate may accelerate competition. Further development of
self-storage facilities may intensify competition among operators of
self-storage facilities in the market areas in which we operate.
We may incur significant environmental costs and liabilities. As an
owner and operator of real properties, under various federal, state and local
environmental laws, we are required to clean up spills or other releases of
hazardous or toxic substances on or from our properties. Certain environmental
laws impose liability whether or not the owner knew of, or was responsible for,
the presence of the hazardous or toxic substances. In some cases, liability may
not be limited to the value of the property. The presence of these substances,
or the failure to properly remediate any resulting contamination, whether from
environmental or microbial issues, also may adversely affect the owner's or
operator's ability to sell, lease or operate its property or to borrow using its
property as collateral.
We have conducted preliminary environmental assessments of most of our
properties (and intend to conduct these assessments in connection with property
acquisitions) to evaluate the environmental condition of, and potential
environmental liabilities associated with, our properties. These assessments
generally consist of an investigation of environmental conditions at the
property (not including soil or groundwater sampling or analysis), as well as a
review of available information regarding the site and publicly available data
regarding conditions at other sites in the vicinity. In connection with these
property assessments, our operations and recent property acquisitions, we have
become aware that prior operations or activities at some facilities or from
nearby locations have or may have resulted in contamination to the soil or
groundwater at these facilities. In this regard, some of our facilities are or
may be the subject of federal or state environment investigations or remedial
actions. We have obtained, with respect to recent acquisitions, and intend to
obtain with respect to pending or future acquisitions, appropriate purchase
price adjustments or indemnifications that we believe are sufficient to cover
any related potential liability. Although we cannot provide any assurance, based
on the preliminary environmental assessments, we believe we have funds available
to cover any liability from environmental contamination or potential
contamination and we are not aware of any environmental contamination of our
facilities material to our overall business, financial condition or results of
operation.
There has been an increasing number of claims and litigation against
owners and managers of rental properties relating to moisture infiltration,
which can result in mold or other property damage. When we receive a complaint
concerning moisture infiltration, condensation or mold problems and/or become
aware that an air quality concern exists, we implement corrective measures in
accordance with guidelines and protocols we have developed with the assistance
of outside experts. We seek to work proactively with our tenants to resolve
moisture infiltration and mold-related issues, subject to our contractual
limitations on liability for such claims. However, we can provide no assurance
that material legal claims relating to moisture infiltration and the presence
of, or exposure to, mold will not arise in the future.
Delays in development and fill-up of our properties would reduce our
profitability. Since January 1, 2002, we have opened 44 newly developed
self-storage facilities and 17 facilities that combine self-storage and
containerized storage space at the same location, with aggregate development
75
costs of approximately $538.9 million. In addition, at June 30, 2006 we had 59
projects in development that are expected to be completed in approximately the
next two years. These 59 projects have total estimated costs of approximately
$272 million. Construction delays due to weather, unforeseen site conditions,
personnel problems, and other factors, as well as cost overruns, would adversely
affect our profitability. Delays in the rent-up of newly developed facilities as
a result of competition or other factors would also adversely impact our
profitability.
Property taxes can increase and cause a decline in yields on
investments. Each of our properties is subject to real property taxes. These
real property taxes may increase in the future as property tax rates change and
as our properties are assessed or reassessed by tax authorities. Such increases
could adversely impact our profitability.
We must comply with the Americans with Disabilities Act and fire and
safety regulations, which can require significant expenditures. All our
properties must comply with the Americans with Disabilities Act and with related
regulations (the "ADA"). The ADA has separate compliance requirements for
"public accommodations" and "commercial facilities," but generally requires that
buildings be made accessible to persons with disabilities. Various state laws
impose similar requirements. A failure to comply with the ADA or similar state
laws could result in government imposed fines on us and could award damages to
individuals affected by the failure. In addition, we must operate our properties
in compliance with numerous local fire and safety regulations, building codes,
and other land use regulations. Compliance with these requirements can require
us to spend substantial amounts of money, which would reduce cash otherwise
available for distribution to shareholders. Failure to comply with these
requirements could also affect the marketability of our real estate facilities.
Any failure by us to manage acquisitions and other significant
transactions successfully could negatively impact our financial results. As an
increasing part of our business, we acquire other self-storage facilities. We
also evaluate from time to time other significant transactions. If these
facilities are not properly integrated into our system, our financial results
may suffer.
We incur liability from employment related claims. From time to time we
must resolve employment related claims by corporate level and field personnel.
WE HAVE NO INTEREST IN CANADIAN SELF-STORAGE FACILITIES OWNED BY THE HUGHES
FAMILY.
B. Wayne Hughes, Chairman of the Board, and his family (the "Hughes
Family") have ownership interests in, and operate, approximately 44 self-storage
facilities in Canada under the name "Public Storage." We currently do not own
any interests in these facilities nor do we own any facilities in Canada. We
have a right of first refusal to acquire the stock or assets of the corporation
engaged in the operation of the self-storage facilities in Canada if the Hughes
Family or the corporation agrees to sell them. However, we have no ownership
interest in the operations of this corporation, have no right to acquire their
stock or assets unless the Hughes Family decides to sell, and receive no benefit
from the profits and increases in value of the Canadian self-storage facilities.
Prior to December 31, 2003, our personnel were engaged in the
supervision and the operation of these properties and provided certain
administrative services for the Canadian owners, and certain other services,
primarily tax services, with respect to certain other Hughes Family interests.
The Hughes Family and the Canadian owners reimbursed us at cost for these
services in the amount of $542,499 with respect to the Canadian operations and
$151,063 for other services during 2003 (in United States dollars). There were
conflicts of interest in allocating time of our personnel between Company
properties, the Canadian properties, and certain other Hughes Family interests.
The sharing of our personnel with the Canadian entities was substantially
eliminated by December 31, 2003.
Through our subsidiaries, we continue to reinsure risks relating to
loss of goods stored by tenants in the self-storage facilities in Canada. We
acquired the tenant insurance business on December 31, 2001 through our
acquisition of PSIC. For each of the six month periods ended June 30, 2006 and
2005, we collected $505,000 and $526,000, respectively in reinsurance premiums
attributable to the Canadian operations. Since PSIC's right to provide tenant
reinsurance to the Canadian facilities may be qualified, there is no assurance
that these premiums will continue.
76
OUR CONTAINERIZED STORAGE BUSINESS HAS INCURRED OPERATING LOSSES.
Public Storage Pickup & Delivery ("PSPUD") was organized in 1996 to
operate a containerized storage business. We own all of the economic interest of
PSPUD. Since PSPUD will operate profitably only if it can succeed in the
relatively new field of containerized storage, we cannot provide any assurance
as to its profitability. PSPUD incurred an operating loss of $10,058,000 in
2002, and generated operating profits of $2,543,000 in 2003, $684,000 in 2004,
$1,818,000 for 2005 and $118,000 for the six months ended June 30, 2006. Since
2002, PSPUD closed or consolidated facilities that were deemed not strategic to
its business plan, and has 12 facilities open at June 30, 2006.
INCREASES IN INTEREST RATES MAY ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK.
One of the factors that influences the market price of our common stock
and our other securities is the annual rate of distributions that we pay on the
securities, as compared with interest rates. An increase in interest rates may
lead purchasers of REIT shares to demand higher annual distribution rates, which
could adversely affect the market price of our common stock and other
securities.
TERRORIST ATTACKS AND THE POSSIBILITY OF WIDER ARMED CONFLICT MAY HAVE AN
ADVERSE IMPACT ON OUR BUSINESS AND OPERATING RESULTS AND COULD DECREASE THE
VALUE OF OUR ASSETS.
Terrorist attacks and other acts of violence or war, such as those that
took place on September 11, 2001, could have a material adverse impact on our
business and operating results. There can be no assurance that there will not be
further terrorist attacks against the United States or its businesses or
interests. Attacks or armed conflicts that directly impact one or more of our
properties could significantly affect our ability to operate those properties
and thereby impair our operating results. Further, we may not have insurance
coverage for losses caused by a terrorist attack. Such insurance may not be
available, or if it is available and we decide to obtain such terrorist
coverage, the cost for the insurance may be significant in relationship to the
risk overall. In addition, the adverse effects that such violent acts and
threats of future attacks could have on the United States economy could
similarly have a material adverse effect on our business and results of
operations. Finally, further terrorist acts could cause the United States to
enter into a wider armed conflict, which could further impact our business and
operating results.
DEVELOPMENTS IN CALIFORNIA MAY HAVE AN ADVERSE IMPACT ON OUR BUSINESS.
We are headquartered in, and approximately one-quarter of our
properties are located in, California. California is facing budgetary problems.
Action that may be taken in response to these problems, such as an increase in
property taxes on commercial properties, could adversely impact our business and
results of operations. In addition, we could be adversely impacted by efforts to
reenact legislation mandating medical insurance for employees of California
businesses and members of their families.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
-----------------------------------------------------------
On May 9, 2006, PSA Institutional Partners, L.P., a California limited
partnership ("PSAIP") and a majority - owned indirect subsidiary of the Company,
sold 4,000,000 7.25% Series J Cumulative Preferred Redeemable Perpetual
Preferred Units for $100,000,000. The terms of the Series J Preferred Units are
specified by the Fourth Amendment to the Amended and Restated Agreement of
Limited Partnership of PSAIP dated as of May 9, 2006 (the "Fourth Amendment").
Under the Fourth Amendment, PSAIP has the right to redeem the Series J Preferred
Units on or after the fifth anniversary of issuance at the Liquidation
Preference as defined in the Partnership Agreement. The Series J Preferred Units
are exchangeable for depositary shares representing interests in shares of
Series J Preferred Stock on or after the tenth anniversary of issuance at the
option of a holder or PSAIP, at a rate of one Series J Preferred Unit for one
depositary shares representing one thousandth (1/1000) of a share of Series J
Preferred Stock, subject to certain adjustments. In addition, under certain
circumstance, Series J Preferred Units may be exchanged prior to the tenth
anniversary of the date of issuance.
77
On June 12, 1998, we announced that the Board of Directors (the
"Directors") authorized the repurchase from time to time of up to 10,000,000
shares of the Company's common stock on the open market or in privately
negotiated transactions. On subsequent dates the Directors increased the
repurchase authorization, the last being April 13, 2001, when the Board of
Directors increased the repurchase authorization to 25,000,000 shares. The
Company has repurchased a total of 22,201,720 shares of Common Stock under this
authorization. The Company did not repurchase any shares of Common Stock during
the six months ended June 30, 2006.
ITEM 6. EXHIBITS
---------
Exhibits required by Item 601 of Regulation S-K are filed herewith or
incorporated herein by reference and are listed in the attached Exhibit Index
which is incorporated herein by reference.
78
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: August 8, 2006
PUBLIC STORAGE, INC.
By: /s/ John Reyes
---------------
John Reyes
Senior Vice President and Chief Financial Officer
(Principal financial officer and duly authorized
officer)
79
Exhibit No. Exhibit Index
3.1 Restated Articles of Incorporation of Storage Equities, Inc. Filed
with Registrant's Registration Statement on Form S-4 (SEC File No.
33-54557) and incorporated herein by reference.
3.2 Certificate of Amendment of Articles of Incorporation of Storage
Equities, Inc. Filed with Registrant's Registration Statement on
Form S-3/A (SEC File No. 33-63947) and incorporated herein by
reference.
3.3 Certificate of Amendment of Articles of Incorporation of Public
Storage, Inc. Filed with Registrant's Registration Statement on Form
S-3 (SEC File No. 333-18395) and incorporated herein by reference.
3.4 Certificate of Determination of Preferences of 10% Cumulative
Preferred Stock, Series A of Storage Equities, Inc. Filed with
Registrant's Registration Statement on Form S-4 (SEC File No.
33-54557) and incorporated herein by reference.
3.5 Amendment to Certificate of Determination of Preferences of 10%
Cumulative Preferred Stock, Series A of Public Storage, Inc. Filed
with the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2004 and incorporated herein by
reference.
3.6 Certificate of Determination of Preferences of 9.20% Cumulative
Preferred Stock, Series B of Storage Equities, Inc. Filed with
Registrant's Registration Statement on Form S-4 (SEC File No.
33-54557) and incorporated herein by reference.
3.7 Amendment to Certificate of Determination of Preferences of 9.20%
Cumulative Preferred Stock, Series B of Storage Equities, Inc. Filed
with Registrant's Registration Statement on Form S-4 (SEC File No.
33-56925) and incorporated herein by reference.
3.8 Amendment to Certificate of Determination of Preferences of 9.20%
Cumulative Preferred Stock, Series B of Public Storage, Inc. Filed
with the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2004 and incorporated herein by
reference.
3.9 Certificate of Determination of Preferences of 8.25% Convertible
Preferred Stock of Public Storage, Inc. Filed with Registrant's
Registration Statement on Form S-4 (SEC File No. 33-54557) and
incorporated herein by reference.
3.10 Certificate of Determination of Preferences of Adjustable Rate
Cumulative Preferred Stock, Series C of Storage Equities, Inc. Filed
with Registrant's Registration Statement on Form S-4 (SEC File No.
33-54557) and incorporated herein by reference.
3.11 Amendment to Certificate of Determination of Preferences of
Adjustable Rate Cumulative Preferred Stock, Series C of Public
Storage, Inc. Filed with Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2004 and incorporated
herein by reference.
3.12 Certificate of Determination of Preferences of 9.50% Cumulative
Preferred Stock, Series D of Storage Equities, Inc. Filed with
Registrant's Registration Statement on Form 8-A/A relating to the
9.50% Cumulative Preferred Stock, Series D and incorporated herein
by reference.
3.13 Amendment to Certificate of Determination of Preferences of 9.50%
Cumulative Preferred Stock, Series D of Public Storage, Inc. Filed
with Registrant's Annual Report on Form 10-K for the year ended
December 31, 2004 and incorporated herein by reference.
3.14 Certificate of Determination of Preferences of 10% Cumulative
Preferred Stock, Series E of Storage Equities, Inc. Filed with
Registrant's Registration Statement on Form 8-A/A relating to the
10% Cumulative Preferred Stock, Series E and incorporated herein by
reference.
3.15 Amendment to Certificate of Determination of Preferences of 10%
Cumulative Preferred Stock, Series E of Public Storage, Inc. Filed
with Registrant's Current Report on Form 8-K dated April 25, 2005
and incorporated herein by reference.
80
3.16 Certificate of Determination of Preferences of 9.75% Cumulative
Preferred Stock, Series F of Storage Equities, Inc. Filed with
Registrant's Registration Statement on Form 8-A/A relating to the
9.75% Cumulative Preferred Stock, Series F and incorporated herein
by reference.
3.17 Amendment to Certificate of Determination of Preferences of 9.750%
Cumulative Preferred Stock, Series F of Public Storage, Inc. Filed
with Registrant's Current Report on Form 8-K dated August 17, 2005
and incorporated herein by reference.
3.18 Certificate of Determination of Preferences of 8-7/8% Cumulative
Preferred Stock, Series G of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A/A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 8-7/8%
Cumulative Preferred Stock, Series G and incorporated herein by
reference.
3.19 Certificate of Determination of Preferences of 8.45% Cumulative
Preferred Stock, Series H of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A/A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 8.45%
Cumulative Preferred Stock, Series H and incorporated herein by
reference.
3.20 Certificate of Determination of Preferences of Convertible Preferred
Stock, Series CC of Public Storage, Inc. Filed with Registrant's
Registration Statement on Form S-4 (SEC File No. 333-03749) and
incorporated herein by reference.
3.21 Certificate of Correction of Certificate of Determination of
Preferences of Convertible Participating Preferred Stock of Public
Storage, Inc. Filed with Registrant's Registration Statement on Form
S-4 (SEC File No. 333-08791) and incorporated herein by reference.
3.22 Certificate of Determination of Preferences of 8 5/8% Cumulative
Preferred Stock, Series I of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A/A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 8 5/8%
Cumulative Preferred Stock, Series I and incorporated herein by
reference.
3.23 Certificate of Determination of Equity Stock, Series A of Public
Storage, Inc. Filed with Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1997 and incorporated herein
by reference.
3.24 Certificate of Determination of Preferences of 8% Cumulative
Preferred Stock, Series J of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A/A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 8%
Cumulative Preferred Stock, Series J and incorporated herein by
reference.
3.25 Certificate of Correction of Certificate of Determination of
Preferences of 8.25% Convertible Preferred Stock of Public Storage,
Inc. Filed with Registrant's Registration Statement on Form S-4 (SEC
File No. 333-61045) and incorporated herein by reference.
3.26 Certificate of Determination of Preferences of 8 1/4% Cumulative
Preferred Stock, Series K of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A/A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 8 1/4%
Cumulative Preferred Stock, Series K and incorporated herein by
reference.
3.27 Certificate of Determination of Preferences of 8 1/4% Cumulative
Preferred Stock, Series L of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A/A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 8 1/4%
Cumulative Preferred Stock, Series L and incorporated herein by
reference.
3.28 Certificate of Determination of Preferences of 8.75% Cumulative
Preferred Stock, Series M of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A/A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 8.75%
Cumulative Preferred Stock, Series M and incorporated herein by
reference.
3.29 Certificate of Determination of Equity Stock, Series AA of Public
Storage, Inc. Filed with Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1999 and incorporated
herein by reference.
81
3.30 Certificate Decreasing Shares Constituting Equity Stock, Series A of
Public Storage, Inc. Filed with Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1999 and
incorporated herein by reference.
3.31 Certificate of Determination of Equity Stock, Series A of Public
Storage, Inc. Filed with Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1999 and incorporated
herein by reference.
3.32 Certificate of Amendment of Certificate of Determination of Equity
Stock, Series A of Public Storage, Inc. Filed with Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 2001 and incorporated herein by reference.
3.33 Certificate of Determination of Equity Stock, Series AAA of Public
Storage, Inc. Filed with Registrant's Current Report on Form 8-K
dated November 15, 1999 and incorporated herein by reference.
3.34 Certificate of Determination of Preferences of 9.5% Cumulative
Preferred Stock, Series N of Public Storage, Inc. Filed with
Registrant's Annual Report on Form 10-K for the year ended December
31, 1999 and incorporated herein by reference.
3.35 Certificate of Determination of Preferences of 9.125% Cumulative
Preferred Stock, Series O of Public Storage, Inc. Filed with
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2000 and incorporated herein by reference.
3.36 Certificate of Determination of Preferences of 8.75% Cumulative
Preferred Stock, Series P of Public Storage, Inc. Filed with
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2000 and incorporated herein by reference.
3.37 Certificate of Determination of Preferences of 8.600% Cumulative
Preferred Stock, Series Q of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A/A (No. 001-08389)
relating to the Depositary Shares Each Representing 1/1,000 of a
Share of 8.600% Cumulative Preferred Stock, Series Q and
incorporated herein by reference.
3.38 Certificate of Amendment of Certificate of Determination of Equity
Stock, Series A of Public Storage, Inc. Filed with Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 2001 and incorporated herein by reference.
3.39 Certificate of Determination of Preferences of 8.000% Cumulative
Preferred Stock, Series R of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 8.000%
Cumulative Preferred Stock, Series R and incorporated herein by
reference.
3.40 Certificate of Determination of Preferences of 7.875% Cumulative
Preferred Stock, Series S of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 7.875%
Cumulative Preferred Stock, Series S and incorporated herein by
reference.
3.41 Certificate of Determination of Preferences of 7.625% Cumulative
Preferred Stock, Series T of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 7.625%
Cumulative Preferred Stock, Series T and incorporated herein by
reference.
3.42 Certificate of Determination of Preferences of 7.625% Cumulative
Preferred Stock, Series U of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A relating to
Depositary Shares Each Representing 1/1,000 of a Share of 7.625%
Cumulative Preferred Stock, Series U and incorporated herein by
reference.
82
3.43 Amendment to Certificate of Determination of Preferences of 7.625%
Cumulative Preferred Stock, Series T of Public Storage, Inc. Filed
with Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2002 and incorporated herein by
reference.
3.44 Certificate of Determination of Preferences of 7.500% Cumulative
Preferred Stock, Series V of Public Storage, Inc. Filed with
Registrant's Registration Statement Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 7.500%
Cumulative Preferred Stock, Series V and incorporated herein by
reference.
3.45 Certificate of Determination of Preferences of 6.500% Cumulative
Preferred Stock, Series W of Public Storage, Inc. Filed with
Registrant's Registration Statement Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 6.500%
Cumulative Preferred Stock, Series W and incorporated herein by
reference.
3.46 Certificate of Determination of Preferences 6.450% Cumulative
Preferred Stock, Series X of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 6.450%
Cumulative Preferred Stock, Series X and incorporated herein by
reference.
3.47 Certificate of Determination of Preferences of 6.85% Cumulative
Preferred Stock, Series Y of Public Storage, Inc. Filed with the
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2004 and incorporated herein by reference.
3.48 Certificate of Determination of Preferences of 6.250% Cumulative
Preferred Stock, Series Z of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 6.250%
Cumulative Preferred Stock, Series Z and incorporated herein by
reference.
3.49 Certificate of Determination of Preferences of 6.125% Cumulative
Preferred Stock, Series A of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 6.125%
Cumulative Preferred Stock, Series A and incorporated herein by
reference.
3.50 Certificate of Determination of Preferences of 6.40% Cumulative
Preferred Stock, Series NN of Public Storage, Inc. Filed with
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2004 and incorporated herein by reference.
3.51 Certificate of Determination of Preferences of 7.125% Cumulative
Preferred Stock, Series B of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 7.125%
Cumulative Preferred Stock, Series B and incorporated herein by
reference.
3.52 Certificate of Determination of Preferences of 6.60% Cumulative
Preferred Stock, Series C of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 6.60%
Cumulative Preferred Stock, Series C and incorporated herein by
reference.
3.53 Certificate of Determination of Preferences of 6.18% Cumulative
Preferred Stock, Series D of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 6.18%
Cumulative Preferred Stock, Series D and incorporated herein by
reference.
3.54 Certificate of Determination of Preferences of 6.75% Cumulative
Preferred Stock, Series E of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a share of 6.75%
Cumulative Preferred Stock, Series E and incorporated herein by
reference.
3.55 Certificate of Determination of Preferences of 6.45% Cumulative
Preferred Stock, Series F of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 6.45%
Cumulative Preferred Stock, Series F and incorporated herein by
reference.
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3.56 Amendment to Certificate of Determination of Preferences 6.45%
Cumulative Preferred Stock, Series F of Public Storage, Inc. Filed
with Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 6.45%
Cumulative Preferred Stock, Series F and incorporated herein by
reference.
3.57 Certificate of Determination of Preferences of 7.00% Cumulative
Preferred Stock, Series G of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 7.00%
Cumulative Preferred Stock, Series G and incorporated herein by
reference.
3.58 Certificate of Determination of Preferences of 6.95% Cumulative
Preferred Stock, Series H of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 6.95%
Cumulative Preferred Stock, Series H and incorporated herein by
reference.
3.59 Certificate of Determination of Preferences of 7.25% Cumulative
Preferred Stock, Series I of Public Storage, Inc. Filed with
Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 7.25%
Cumulative Preferred Stock, Series I and incorporated herein by
reference.
3.60 Certificate of Determination of Preferences of 7.25% Cumulative
Preferred Stock, Series J of Public Storage, Inc. Filed with
Registrant's Current Report on Form 8-K filed May 9, 2006 relating
to the Depositary Shares Each Representing 1/1,000 of a Share of
7.25% Cumulative Preferred Stock, Series J and incorporated herein
by reference.
3.61 Amendment to Certificate of Determination of Determination of
Preferences of Cumulative Preferred Stock, Series G (8.875%), H
(8.45%), I (8.625%), J (8%), K (8.25%), L (8.25%), M (8.75%), N
(9.5%), O (9.125%) and P (8.75%) of Public Storage, Inc. Filed with
Registrant's Current Report on Form 8-K dated November 22, 2005 and
incorporated herein by reference.
3.62 Revised Bylaws of Storage Equities, Inc. Filed with Registrant's
Registration Statement on Form S-4/A (SEC File No. 33-64971) and
incorporated herein by reference.
3.63 Amendment to Bylaws of Public Storage, Inc. adopted on May 9, 1996.
Filed with Registrant's Registration Statement on Form S-4 (Sec File
No. 333-03749) and incorporated herein by reference.
3.64 Amendment to Bylaws of Public Storage, Inc. adopted on June 26,
1997. Filed with Registrant's Registration Statement on Form S-3/A
(SEC File No. 333-41123) and incorporated herein by reference.
3.65 Amendment to Bylaws of Public Storage, Inc. adopted on January 6,
1998. Filed with Registrant's Registration Statement on Form S-3/A
(SEC File No. 333-41123) and incorporated herein by reference.
3.66 Amendment to Bylaws of Public Storage, Inc. adopted on February 10,
1998. Filed with Registrant's Current Report on Form 8-K dated
February 10, 1998 and incorporated herein by reference.
3.67 Amendment to Bylaws of Public Storage, Inc. adopted on March 4,
1999. Filed with Registrant's Current Report on Form 8-K dated March
4, 1999 and incorporated herein by reference.
3.68 Amendment to Bylaws of Public Storage, Inc. adopted on May 6, 1999.
Filed with Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1999 and incorporated herein by
reference.
3.69 Amendment to Bylaws of Public Storage, Inc. adopted on November 7,
2002. Filed with Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2002 and incorporated herein by
reference.
84
3.70 Amendment to Bylaws of Public Storage, Inc. adopted on May 8, 2003.
Filed with Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2003 and incorporated herein by
reference.
3.71 Amendment to Bylaws of Public Storage, Inc. adopted on August 5,
2003. Filed with Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2003 and incorporated herein by
reference.
3.72 Amendment to Bylaws of Public Storage, Inc. adopted on March 11,
2004. Filed with Registrant's Annual Report on Form 10-K for the
year ended December 31, 2003 and incorporated herein by reference.
4.1 Registration Rights Agreement dated as of May 9, 2006 relating to
7.25% Series J Cumulative Preferred Stock of the Registrant. Filed
with Registrant's Current Report on Form 8-K dated May 9, 2006 and
incorporated herein by reference.
10.1. Merger Agreement, dated as of March 6, 2006, by and among Shurgard
Storage Centers, Inc., ASKL Sub LLC and Public Storage, Inc. Filed
with Registrant's Current Report on Form 8-K dated March 6, 2006 and
incorporated herein by reference.
10.2. Voting Agreement, dated as of March 6, 2006, by and among Charles K.
Barbo and Public Storage, Inc. Filed with Registrant's Current
Report on Form 8-K dated March 6, 2006 and incorporated herein by
reference.
10.3. Deposit Agreement dated as of May 3, 2006 among Registrant and
Computershare Trust Company N.A. and the holders of depositary
receipts evidencing the Depositary Shares Each Representing 1/1,000
of a share of 7.25% Cumulative Preferred Stock, Series I. Filed with
Registrant's Registration Statement on Form 8-A relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 7.25%
Cumulative Preferred Stock, Series I and incorporated herein by
reference.
10.4. Fourth Amendment dated as of May 9, 2006 to Amended and Restated
Agreement of Limited Partnership of PSA Institutional Partners, L.
P. Filed with Registrant's Current Report on Form 8-K filed May 9,
2006 and incorporated herein by reference.
11 Statement Re: Computation of Earnings per Share. Filed herewith.
12 Statement Re: Computation of Ratio of Earnings to Fixed Charges.
Filed herewith.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
Filed herewith.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
Filed herewith.
32 Section 1350 Certification of Chief Executive Officer and Chief
Financial Officer. Filed herewith.
85