UNITED STATES
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 period ended June 30, 2005
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
----------------- -----------------
Commission File Number 0-8667
PUBLIC STORAGE PROPERTIES, LTD.
(Exact name of registrant as specified in its charter)
California 95-3196921
----------------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
701 Western Avenue, Glendale, California 91201-2349
----------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 244-8080.
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
The Registrant is a limited partnership and issues units representing ownership
of limited partner interests, with a par value of $500.00 per unit. Number of
units outstanding at August 11, 2005: 20,000
PUBLIC STORAGE PROPERTIES, LTD.
INDEX
Pages
PART I. FINANCIAL INFORMATION (Item 3 not applicable)
---------------------
Item 1. Financial Statements
Condensed Balance Sheets at June 30, 2005
and December 31, 2004 1
Condensed Statements of Income for the Three and Six
Ended June 30, 2005 and 2004 2
Condensed Statement of Partners' Equity for the
Six Months Ended June 30, 2005 3
Condensed Statements of Cash Flows for the
Six Months Ended June 30, 2005 and 2004 4
Notes to Condensed Financial Statements 5-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-12
Item 2A. Risk Factors 12-14
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION (Items 2 - 5 not applicable)
-----------------
Item 1. Legal Proceedings 15
Item 6. Exhibits 15
PUBLIC STORAGE PROPERTIES, LTD.
CONDENSED BALANCE SHEETS
June 30, December 31,
2005 2004
---------------- -----------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 1,643,000 $ 1,407,000
Rent and other receivables 54,000 35,000
Real estate facilities, at cost:
Building, land improvements and equipment 9,579,000 9,574,000
Land 2,476,000 2,476,000
---------------- -----------------
12,055,000 12,050,000
Less accumulated depreciation (8,917,000) (8,823,000)
---------------- -----------------
3,138,000 3,227,000
Other assets 32,000 28,000
---------------- -----------------
Total assets $ 4,867,000 $ 4,697,000
================ =================
LIABILITIES AND PARTNERS' EQUITY
Accounts payable and accrued liabilities $ 69,000 $ 42,000
Deferred revenue 185,000 183,000
Commitments and contingencies (Note 5) - -
Partners' equity:
Limited partners' equity, $500 per unit, 20,000 units
authorized, issued and outstanding 3,425,000 3,321,000
General partners' equity 1,188,000 1,151,000
---------------- -----------------
Total partners' equity 4,613,000 4,472,000
---------------- -----------------
Total liabilities and partners' equity $ 4,867,000 $ 4,697,000
================ =================
See accompanying notes.
1
PUBLIC STORAGE PROPERTIES, LTD.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
2005 2004 2005 2004
--------------- --------------- -------------- ----------------
REVENUES:
Rental income $ 1,710,000 $ 1,601,000 $ 3,391,000 $ 3,173,000
Other income 23,000 11,000 43,000 25,000
--------------- --------------- -------------- ----------------
1,733,000 1,612,000 3,434,000 3,198,000
--------------- --------------- -------------- ----------------
COSTS AND EXPENSES:
Cost of operations 348,000 360,000 702,000 708,000
Management fees paid to affiliate 102,000 96,000 203,000 190,000
Depreciation 48,000 67,000 94,000 145,000
Administrative 30,000 26,000 58,000 53,000
--------------- --------------- -------------- ----------------
528,000 549,000 1,057,000 1,096,000
--------------- --------------- -------------- ----------------
NET INCOME: $ 1,205,000 $ 1,063,000 $ 2,377,000 $ 2,102,000
=============== =============== ============== ================
Limited partners' share of net income ($90.00 per
unit in 2005 and $79.05 per unit in 2004) 1,800,000 1,581,000
General partners' share of net income 577,000 521,000
-------------- ----------------
$ 2,377,000 $ 2,102,000
============== ================
See accompanying notes.
2
PUBLIC STORAGE PROPERTIES, LTD.
CONDENSED STATEMENT OF PARTNERS' EQUITY
(UNAUDITED)
Total
Limited General Partners'
Partners' Partners' Equity
----------------- ----------------- -----------------
Balance at December 31, 2004 $ 3,321,000 $ 1,151,000 $ 4,472,000
Net income 1,800,000 577,000 2,377,000
Distributions (1,660,000) (576,000) (2,236,000)
Equity transfer (36,000) 36,000 -
----------------- ----------------- -----------------
Balance at June 30, 2005 $ 3,425,000 $ 1,188,000 $ 4,613,000
================= ================= =================
See accompanying notes.
3
PUBLIC STORAGE PROPERTIES, LTD.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
--------------------------------------
2005 2004
----------------- -----------------
Cash flows from operating activities:
Net income $ 2,377,000 $ 2,102,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 94,000 145,000
Increase in rent and other receivables (19,000) (11,000)
Increase in other assets (4,000) (21,000)
Increase in accounts payable and accrued liabilities 27,000 3,000
Increase (decrease) in deferred revenue 2,000 (1,000)
----------------- -----------------
Total adjustments 100,000 115,000
----------------- -----------------
Net cash provided by operating activities 2,477,000 2,217,000
----------------- -----------------
Cash flows from investing activities:
Additions to real estate facilities (5,000) (63,000)
----------------- -----------------
Net cash used in investing activities (5,000) (63,000)
----------------- -----------------
Cash flows from financing activities:
Distributions paid to partners (2,236,000) (2,020,000)
----------------- -----------------
Net cash used in financing activities (2,236,000) (2,020,000)
----------------- -----------------
Net increase in cash and cash equivalents 236,000 134,000
Cash and cash equivalents at the beginning of the period 1,407,000 1,070,000
----------------- -----------------
Cash and cash equivalents at the end of the period $ 1,643,000 $ 1,204,000
================= =================
See accompanying notes.
4
PUBLIC STORAGE PROPERTIES, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF THE BUSINESS
Public Storage Properties, Ltd. (the "Partnership") is a publicly held
limited partnership formed under the California Uniform Limited
Partnership Act in November 1976. The Partnership raised $10,000,000 in
gross proceeds by selling 20,000 units of limited partnership interest
("Units") in an interstate offering, which commenced in October 1977
and completed in January 1978. The general partners in the Partnership
are Public Storage, Inc. ("PSI") and B. Wayne Hughes ("Hughes").
The Partnership was formed to engage in the business of developing and
operating self-storage facilities for personal and business use. The
Partnership owns nine self-storage facilities located in California.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
----------------------
The accompanying unaudited condensed financial statements have been
prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial information and with
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal, recurring accruals) necessary for a fair
presentation have been included. The results of operations for the
three and six months ended June 30, 2005 are not necessarily indicative
of the results expected for the full year. These unaudited condensed
financial statements should be read in conjunction with the financial
statements and related notes appearing in the Partnership's Form 10-K
for the year ended December 31, 2004.
Use of Estimates:
-----------------
The preparation of the condensed financial statements in conformity
with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the
amounts reported in the condensed financial statements and accompanying
notes. Actual results could differ from those estimates.
Allocation of Net Income:
-------------------------
The general partners' share of net income consists of amounts
attributable to their 1% capital contribution and an additional
percentage of cash flow (as defined) which relates to the general
partners' share of cash distributions as set forth in the Partnership
Agreement (See "Ownership Interests by the General Partners" under Note
4). All remaining net income is allocated to the limited partners.
Per unit data is based on the weighted average number of the limited
partnership units (20,000) outstanding during the period.
Cash and Cash Equivalents:
--------------------------
For financial statement purposes, the Partnership considers all highly
liquid financial instruments such as short-term treasury securities or
investment grade short-term commercial paper to be cash equivalents.
Income Taxes:
-------------
Public Storage Properties, Ltd. is treated as a partnership for Federal
income tax purposes with the taxable income of the entity allocated to
each partner in accordance with the partnership agreement. Accordingly
no Federal income tax expense is recorded by the Partnership.
5
PUBLIC STORAGE PROPERTIES, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Real Estate Facilities and Evaluation of Asset Impairment:
----------------------------------------------------------
Real estate facilities are recorded at cost. Costs associated with the
development, construction, renovation and improvement of properties are
capitalized. Interest, property taxes, and other costs associated with
the development incurred during the construction period are capitalized
as building cost. Expenditures for repairs and maintenance are charged
to expense as 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. Certain
real estate facilities have been in service longer than 25 years, and
accordingly the original development cost of such buildings are fully
depreciated at June 30, 2005.
We evaluate our real estate for impairment on a quarterly basis. We
first evaluate these assets for indicators of impairment such as a) a
significant decrease in the market price of real estate, b) a
significant adverse change in the extent or manner in which real estate
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 real estate, d) an accumulation of costs significantly in
excess of the amount originally projected for the acquisition of or
construction of the real estate, 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 real estate. When any such indicators of
impairment are noted, we compare the carrying value of the real estate
to the future estimated undiscounted cash flows attributable to the
real estate. If the real estate'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 real estate's fair value. Our
evaluations have identified no such impairments at June 30, 2005.
Any real estate facility which we expect to sell or dispose of prior to
its previously estimated useful life is stated at the lower of its
estimated net realizable value, less cost to sell, or its carrying
value.
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
rental income when collected.
Property taxes are accrued 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 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 amounts to be incurred during a full year. Total
advertising expenses were $61,000 and $110,000 for the three and six
months ended June 30, 2005, respectively, and $59,000 and $117,000 for
the same periods in 2004, respectively.
Environmental Costs:
--------------------
The Partnership's policy is to accrue environmental assessments and/or
remediation costs when it is probable that such efforts will be
required and the related costs can be reasonably estimated. Although
there can be no assurance, we are not aware of any environmental
contamination at any of our facilities, which, individually or in the
aggregate, would be material to our overall business, financial
condition or results of operations.
6
PUBLIC STORAGE PROPERTIES, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
3. CASH DISTRIBUTIONS
The Partnership Agreement requires that any cash available for
distribution (cash flow from all sources less cash necessary for any
obligations or capital improvement needs) be distributed at least
quarterly. The Partnership paid distributions to the limited and
general partners totaling $1,660,000 ($83.00 per unit) and $576,000,
respectively, for the six months ended June 30, 2005. Future
distributions will be based on amounts supported by operating cash flow
after capital improvements and any other necessary obligations.
4. RELATED PARTY TRANSACTIONS
Management Agreement and Shared Expenses with PSI:
--------------------------------------------------
The Partnership has a management agreement with PSI. Under the terms of
the agreement, PSI operates the self-storage facilities for a fee equal
to 6% of the facilities' gross revenue (as defined). For the three
months ended June 30, 2005 and 2004, the Partnership paid PSI $102,000
and $96,000, respectively. For the six months ended June 30, 2005 and
2004, the Partnership paid PSI $203,000 and $190,000, respectively,
pursuant to this management agreement. The management agreement between
the Partnership and PSI may be terminated without cause upon 60 days
written notice by the Partnership or six months notice by PSI.
The Partnership's facilities, along with facilities owned by PSI and
its affiliates, are managed jointly by PSI in order to take advantage
of scale and other efficiencies. Joint costs are allocated on a
methodology meant to fairly allocate such costs. Such joint costs
include supervisory, relief, and administrative personnel costs,
television advertising expenses, yellow page advertising, data
processing, and insurance. The total of such expenses, which are
primarily included in cost of operations, amounted to $187,000 and
$164,000 for the three months ended June 30, 2005 and 2004,
respectively. For the six months ended June 30, 2005 and 2004, the
total expenses were $323,000 and $319,000, respectively.
Ownership Interests by the General Partners:
--------------------------------------------
PSI and Hughes are general partners of the Partnership. In 1995, Hughes
contributed his ownership and rights to distributions from the
Partnership to BWH Marina Corporation II, a corporation wholly-owned by
Hughes. Hughes continues to act as a general partner of the
Partnership.
The general partners have a 1% interest in the Partnership. In
addition, the general partners had an 8% interest in cash distributions
attributable to operations (exclusive of distributions attributable to
sale and financing proceeds) until the limited partners recovered all
of their initial investment. Thereafter, the general partners have a
25% interest in all cash distributions (including sale and financing
proceeds). During 1987, the limited partners recovered all of their
initial investment. All subsequent distributions are being made 25.75%
(including the 1% interest) to the general partners and 74.25% to the
limited partners. Transfers of equity are made periodically to
reconcile the partners' equity accounts to the provisions of the
Partnership Agreement. These transfers have no effect on results of
operations or distributions to partners.
As of June 30, 2005, Hughes and members of his family own approximately
31% of the limited partnership units. PSI owns approximately 31% of the
limited partnership units. Approximately 1% of the limited partnership
units are owned by PS Orangeco Partnerships, Inc., a corporation in
which Hughes and members of his family own approximately 48% of the
voting stock, PSI owns 46% and members of PSI's management and related
individuals own approximately 6%.
7
PUBLIC STORAGE PROPERTIES, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Ownership in STOR-Re:
---------------------
The Partnership has a 0.9% ownership interest in STOR-Re Mutual
Insurance Corporation ("STOR-Re"), which was formed in 1994 as an
association captive insurance company, and is controlled by PSI. The
Partnership accounts for its investment in STOR-Re, which is included
in other assets, using the cost method, and has not received any
distributions during 2004 or for the six months ended June 30, 2005.
STOR-Re provides limited property and liability insurance coverage to
the Partnership, PSI, and affiliates for losses occurring before April
1, 2004. STOR-Re was succeeded with respect to these activities for
losses occurring after March 31, 2004 by a wholly owned subsidiary of
PSI. Liabilities for losses and loss adjustment expenses include an
amount determined from loss reports and individual cases and an amount,
based on recommendations from an outside 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
and while we believe that the amount is adequate, the ultimate loss may
be in excess of or less than the amounts provided. The methods for
making such estimates and for establishing the resulting liability are
continually reviewed.
Other Business Activities
A corporation that reinsures policies against losses to goods stored by
tenants in the Partnership's storage facilities is owned by PSI. We
believe that the availability of insurance reduces our potential
liability to tenants for losses to their goods from theft or
destruction. This corporation receives the premiums and bears the risks
associated with the re-insurance of tenant goods.
A subsidiary of PSI sells locks and boxes and rents trucks to the
general public and tenants to be used in securing their spaces and
moving their goods. The subsidiary receives the revenues and bears the
cost of the activities. We believe that the availability of locks and
boxes for sale and the rental of trucks promote the rental of spaces.
5. COMMITMENTS AND CONTINGENCIES
Legal Proceedings:
Serrao v. Public Storage, Inc. (filed April 2003)
----------------------------------------------------
(Superior Court - Orange County)
--------------------------------
The plaintiff in this case filed a suit against Public Storage, Inc. on
behalf of a putative class of renters who rented self-storage units
from Public Storage, Inc. Plaintiff alleges that Public Storage, Inc.
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.
Based upon the uncertainty inherent in any putative class action,
Public Storage, Inc. cannot presently determine the potential damages,
if any, or the ultimate outcome of this litigation. On November 3,
2003, the court granted Public Storage, Inc.'s motion to strike the
plaintiff's nationwide class allegations and to limit any putative
class to California residents only. In August 2005, Public Storage,
Inc. filed a motion to remove the case to federal court. There can be
no assurance that this motion will be granted. Public Storage, Inc. is
vigorously contesting the claims upon which this lawsuit is based
including class certification efforts.
8
PUBLIC STORAGE PROPERTIES, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Brinkley et al v. Public Storage, Inc. (filed April, 2005) (Superior
-----------------------------------------------------------------------
Court of California - Los Angeles County) and Inhan et al v. Public
-----------------------------------------------------------------------
Storage, Inc. (filed May, 2005) (United States District Court -
-----------------------------------------------------------------------
Southern District of Florida)
-----------------------------
The Brinkley plaintiffs are suing Public Storage, Inc. on behalf of a
purported class of California property managers who claim that they
were not compensated for all the hours they worked. The Brinkley suit
is based upon California wage and hour laws. The Inhan plaintiffs are
suing Public Storage, Inc. in Florida on behalf of a purported class of
property managers who claim they were not compensated for all hours
worked. The Inhan suit is based upon the Federal Fair Labor Standards
Act. The maximum potential liability cannot be estimated, but would be
increased if a class or classes are certified or, in California, if
claims are permitted to be brought on behalf of others under the
California Unfair Business Practices Act. Public Storage, Inc. is
vigorously contesting the claims in each case and intends to resist any
expansion beyond the named plaintiffs on the grounds of lack of
commonality of claims.
Other Items
-----------
PSI and the Partnership are parties 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 the operations or financial position of
the Partnership.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with the Partnership's
condensed financial statements and notes thereto.
FORWARD LOOKING STATEMENTS: When used within this document, the words
"expects," "believes," "anticipates," "may," "should," "estimates," and similar
expressions are intended to identify "forward-looking statements" within the
meaning of that term in Section 27A of the Securities Exchange Act of 1933, as
amended, and in Section 21E of the Securities Exchange Act of 1934, as amended.
Such forward-looking statements involve known and unknown risks, uncertainties,
and other factors, which may cause the actual results and performance of the
Partnership to be materially different from those expressed or implied in the
forward looking statements. Such factors are described in "Risk Factors" (as
discussed below) and include changes in general economic conditions and in the
markets in which the Partnership operates and the impact of competition from new
and existing storage and commercial facilities and other storage alternatives,
which could impact rents and occupancy levels at the Partnership's facilities;
the impact of the regulatory environment as well as national, state, and local
laws and regulations, which could increase the Partnership's expense and reduce
the Partnership's cash available for distribution; and economic uncertainty due
to the impact of war or terrorism could adversely affect our business plan. We
disclaim any obligation to publicly release the results of any revisions to
these forward-looking statements reflecting new estimates, events or
circumstances after the date of this report.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
IMPAIRMENT OF LONG-LIVED ASSETS: Substantially all of our assets
consist of real estate. On a quarterly basis we evaluate our real estate for
impairment. The evaluation of real estate for impairment requires determining
whether indicators of impairment exist, which is a subjective process. When any
indicators of impairment are found, the evaluation then entails projections of
future operating cash flows, which also involves significant judgment. We have
identified no such impairments at June 30, 2005. However, future events, or
facts and circumstances that currently exist that we have not yet identified,
could cause us to conclude in the future that our real estate is 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.
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 5 to the Partnership's unaudited
condensed financial statements at June 30, 2005.
ACCRUALS FOR OPERATING EXPENSES: We accrue for property tax expense and
other operating expenses based upon estimates and historical trends and current
and anticipated local and state government rules and regulations. If these
estimates and assumptions are incorrect, our expenses could be misstated. Cost
of operations, general and administrative expense, as well as television, yellow
page, and other advertising expenditures are expensed as incurred. Accordingly,
the amounts incurred in an interim period may not be indicative of the amounts
to be incurred in a full year.
10
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO THREE MONTHS ENDED JUNE 30, 2004:
Our net income for the three months ended June 30, 2005 was $1,205,000
compared to $1,063,000 for the three months ended June 30, 2004, representing an
increase of $142,000 or 13%.
Rental income for the three months ended June 30, 2005 was $1,710,000
compared to $1,601,000 for the three months ended June 30, 2004, representing an
increase of $109,000 or 7%. The increase in rental income was a result of an
increase in realized rent per square foot. Weighted average occupancy levels at
the self-storage facilities remained at 92% for the three months ended June 30,
2005 and 2004, respectively. Annual realized rent for the three months ended
June 30, 2005 increased to $14.40 per occupied square foot compared to $13.62
per occupied square foot for the three months ended June 30, 2004.
Cost of operations, including management fees paid to an affiliate,
(see Note 4 to the unaudited condensed financial statements) for the three
months ended June 30, 2005 was $450,000 compared to $456,000 for the three
months ended June 30, 2004, representing a decrease of $6,000 or 1%. The
decrease was primarily due to a decrease in repairs and maintenance.
Depreciation expense was $48,000 for the three months ended June 30,
2005 compared to $67,000 for the same period in 2004, a decrease of $19,000 or
28%. The decrease in depreciation expense is primarily related to the initial
development costs of buildings for the Partnership's self-storage facilities
becoming fully depreciated.
SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO SIX MONTHS ENDED JUNE 30, 2004:
Our net income for the six months ended June 30, 2005 was $2,377,000
compared to $2,102,000 for the six months ended June 30, 2004, representing an
increase of $275,000 or 13%.
Rental income for the six months ended June 30, 2005 was $3,391,000
compared to $3,173,000 for the six months ended June 30, 2004, representing an
increase of $218,000 or 7%. The increase in rental income was a result of an
increase in realized rent per square foot. Weighted average occupancy levels at
the self-storage facilities remained at 91% for the six months ended June 30,
2005 and 2004, respectively. Annual realized rent for the six months ended June
30, 2005 increased to $14.42 per occupied square foot compared to $13.63 per
occupied square foot for the six months ended June 30, 2004.
Cost of operations, including management fees paid to an affiliate,
(see Note 4 to the unaudited condensed financial statements) for the six months
ended June 30, 2005 was $905,000 compared to $898,000 for the six months ended
June 30, 2004, representing an increase of $7,000 or 1%. The increase was
primarily due to an increase in management fees, partially offset by a reduction
in repairs and maintenance.
Depreciation expense was $94,000 for the six months ended June 30, 2005
compared to $145,000 for the same period in 2004, a decrease of $51,000 or 35%.
The decrease in depreciation expense is primarily related to the initial
development costs of buildings for the Partnership's self-storage facilities
becoming fully depreciated.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from operations ($2,477,000 for the six months ended
June 30, 2005) has been sufficient to meet all current obligations of the
Partnership.
We paid distributions to the limited and general partners totaling
$1,660,000 ($83.00 per unit) and $576,000, respectively, for the six months
ended June 30, 2005. Future distribution rates will be adjusted to levels which
are supported by operating cash flow after capital improvements and any other
necessary obligations.
11
The Partnership may borrow in the future with the intent of using the
proceeds to finance distributions to the limited and general partners.
Item 2A. RISK FACTORS
In addition to the other information in our Form 10-Q and Annual Report
on Form 10-K for the year ended December 31, 2004, you should consider the
following factors in evaluating the Partnership:
THE GENERAL PARTNERS HAVE A SIGNIFICANT DEGREE OF CONTROL OVER THE
PARTNERSHIP AND COULD TAKE ACTIONS ADVERSE TO OTHER UNITHOLDERS.
As of June 30, 2005, Hughes and members of his family own approximately
31% of the limited partnership units. PSI owns approximately 31% of the limited
partnership units. Approximately 1% of the limited partnership units are owned
by PS Orangeco Partnerships, Inc., a corporation in which Hughes and members of
his family own approximately 48% of the voting stock, PSI owns 46% and members
of PSI's management and related individuals own approximately 6%. As a result,
the General Partners have a significant degree of control over matters submitted
to a vote of our unitholders, including amending our organizational documents,
dissolving the Partnership and approving other extraordinary transactions, and
could take actions that may not be favorable to the other unitholders.
INCREASES IN INTEREST RATES MAY ADVERSELY AFFECT THE VALUE OF
PARTNERSHIP UNITS.
One of the factors that influence the value of our partnership units is
the annual rate of distributions that we pay as compared with interest rates. An
increase in interest rates may lead purchasers of real estate partnership units
to demand higher annual distribution rates, which could adversely affect the
market price of our partnership units.
DEVELOPMENTS IN CALIFORNIA MAY HAVE AN ADVERSE IMPACT ON OUR BUSINESS.
All of our properties are located in California. California is facing
serious 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.
WE HAVE DEVELOPED A DEPENDENCY UPON AUTOMATED PROCESSES AND THE
INTERNET.
We have become increasingly centralized and dependent upon automated
information technology processes. As a result, we could be severely impacted by
a catastrophic occurrence, such as a natural disaster or a terrorist attack. In
addition, a portion of our business operations are conducted over the internet,
increasing the risk of viruses that could cause system failures and disruption
of operations.
SINCE OUR BUSINESS CONSISTS PRIMARILY OF 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 changes in supply of or demand for similar or competing facilities in
an area;
o natural disasters, such as earthquakes;
o potential terrorists attacks;
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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; and
o changes in tax, real estate and zoning laws.
There is significant competition among self-storage facilities and from
other storage alternatives. All of our properties are self-storage facilities.
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 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, 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 on the
properties the Partnership has an interest in 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, 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. 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 with our tenants to resolve moisture
infiltration and mold-related issues, subject to our contractual limitations on
liability for such claims. However, we can make no assurance that material legal
claims relating to moisture infiltration and the presence of, or exposure to,
mold will not arise in the future.
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 the Partnership's 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 the award of damages to
individuals affected by the failure. In addition, we must operate our properties
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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 partners. Failure to comply with these
requirements could also affect the marketability of our real estate facilities.
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 U.S. 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.
OUR OWNERSHIP IN STOR-RE MAY LOSE VALUE OR BECOME A LIABILITY.
The Partnership has a 0.9% ownership interest in STOR-Re Mutual
Insurance Corporation ("STOR-Re"), which was formed in 1994 as an association
captive insurance company, and is controlled by PSI. STOR-Re provides limited
property and liability coverage to the Partnership, PSI and affiliates of PSI
for losses occurring before April 1, 2004. Liabilities for losses and loss
adjustment expenses include an amount determined from loss reports and
individual cases and an amount, based on recommendations from an outside 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 and while
we believe that the amount is adequate, the ultimate loss may be in excess of or
less than the amount provided, which may result in a reduction in the value of
the Partnership's investment or could result in future payments to STOR-Re if
its reserves were determined to be inadequate.
ITEM 4. CONTROLS AND PROCEDURES
Public Storage, Inc. maintains disclosure controls and procedures that
are designed to ensure that information required to be disclosed in reports the
Partnership 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 Partnership's
management, including Public Storage, Inc.'s Chief Executive Officer and Chief
Financial Officer, to allow timely decisions regarding required disclosure based
on the definition of "disclosure controls and procedures" in Rule 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.
At the end of the period covered by this report, Public Storage, Inc.
carried out an evaluation, under the supervision and with the participation of
the Partnership's management, including Public Storage, Inc.'s Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Partnership's disclosure controls and procedures. Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Partnership'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 has
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth under the heading "Legal Proceedings" in Note 5 to the
unaudited condensed financial statements in this Form 10-Q is incorporated by
reference in this Item 1.
ITEM 6. EXHIBITS
(a) The following Exhibits are included herein:
31.1 Certification by Ronald L. Havner, Jr. pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification by John Reyes pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002
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SIGNATURES
Pursuant to the requirements 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 12, 2005
PUBLIC STORAGE PROPERTIES, LTD.
BY: Public Storage, Inc.,
General Partner
BY: /s/ John Reyes
-------------------------
John Reyes
Senior Vice President and
Chief Financial Officer
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