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 September 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
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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
Indicate by check mark whether the registrant is a shell company (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 November 14, 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 September 30, 2005
and December 31, 2004 1
Condensed Statements of Income for the Three and
Nine Months Ended September 30, 2005 and 2004 2
Condensed Statement of Partners' Equity for the
Nine Months Ended September 30, 2005 3
Condensed Statements of Cash Flows for the
Nine Months Ended September 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 14-15
PART II. OTHER INFORMATION (Items 2 - 5 not applicable)
-----------------
Item 1. Legal Proceedings 16
Item 6. Exhibits 16
PUBLIC STORAGE PROPERTIES, LTD.
CONDENSED BALANCE SHEETS
September 30, December 31,
2005 2004
------------------ -----------------
(Unaudited)
ASSETS
------
Cash and cash equivalents $ 1,792,000 $ 1,407,000
Rent and other receivables 80,000 35,000
Real estate facilities, at cost:
Building, land improvements and equipment 9,590,000 9,574,000
Land 2,476,000 2,476,000
------------------ -----------------
12,066,000 12,050,000
Less accumulated depreciation (8,962,000) (8,823,000)
------------------ -----------------
3,104,000 3,227,000
Other assets 34,000 28,000
------------------ -----------------
Total assets $ 5,010,000 $ 4,697,000
================== =================
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
Accounts payable and accrued liabilities $ 137,000 $ 42,000
Deferred revenue 163,000 183,000
Commitments and contingencies (Note 5) - -
Partners' equity:
Limited partners' equity, $500 per unit, 20,000 units
authorized, issued and outstanding 3,497,000 3,321,000
General partners' equity 1,213,000 1,151,000
------------------ ----------------
Total partners' equity 4,710,000 4,472,000
------------------ ----------------
Total liabilities and partners' equity $ 5,010,000 $ 4,697,000
================== =================
See accompanying notes.
1
PUBLIC STORAGE PROPERTIES, LTD.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------ -------------------------------------
2005 2004 2005 2004
------------------- --------------------- -------------------- ----------------
REVENUES:
Rental income $ 1,749,000 $ 1,666,000 $ 5,140,000 $ 4,839,000
Other income 28,000 14,000 71,000 39,000
------------------- --------------------- -------------------- ----------------
1,777,000 1,680,000 5,211,000 4,878,000
------------------- --------------------- -------------------- ----------------
COSTS AND EXPENSES:
Cost of operations 347,000 327,000 1,049,000 1,035,000
Management fees paid to affiliate 105,000 100,000 308,000 290,000
Depreciation 45,000 69,000 139,000 214,000
Administrative 25,000 18,000 83,000 71,000
------------------- --------------------- -------------------- ----------------
522,000 514,000 1,579,000 1,610,000
------------------- --------------------- -------------------- ----------------
NET INCOME: $ 1,255,000 $ 1,166,000 $ 3,632,000 $ 3,268,000
=================== ===================== ==================== ================
Limited partners' share of net income ($137.75
unit in 2005 and $123.45 per unit in 2004) 2,755,000 2,469,000
General partners' share of net income 877,000 799,000
-------------------- ----------------
$ 3,632,000 $ 3,268,000
==================== ================
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 2,755,000 877,000 3,632,000
Distributions (2,520,000) (874,000) (3,394,000)
Equity transfer (59,000) 59,000 -
-------------------- -------------------- -------------------
Balance at September 30, 2005 $ 3,497,000 $ 1,213,000 $ 4,710,000
==================== ==================== ===================
See accompanying notes.
3
PUBLIC STORAGE PROPERTIES, LTD.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
------------------------------------------------
2005 2004
------------------------ ----------------------
Cash flows from operating activities:
Net income $ 3,632,000 $ 3,268,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 139,000 214,000
(Increase) decrease in rent and other receivables (45,000) 5,000
Increase in other assets (6,000) (22,000)
Increase in accounts payable and accrued liabilities 95,000 61,000
Decrease in deferred revenue (20,000) (2,000)
------------------------ ----------------------
Total adjustments 163,000 256,000
------------------------ ----------------------
Net cash provided by operating activities 3,795,000 3,524,000
------------------------ ----------------------
Cash flows from investing activities:
Additions to real estate facilities (16,000) (67,000)
------------------------ ----------------------
Net cash used in investing activities (16,000) (67,000)
------------------------ ----------------------
Cash flows from financing activities:
Distributions paid to partners (3,394,000) (3,098,000)
------------------------ ----------------------
Net cash used in financing activities (3,394,000) (3,098,000)
------------------------ ----------------------
Net increase in cash and cash equivalents 385,000 359,000
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 $ 1,792,000 $ 1,429,000
======================== ======================
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 nine months ended September 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 September 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 September 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 $54,000 and $164,000 for the three and nine months ended
September 30, 2005, respectively, and $44,000 and $160,000 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
$2,520,000 ($126.00 per unit) and $874,000, respectively, for the nine
months ended September 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
September 30, 2005 and 2004, the Partnership paid PSI $105,000 and
$100,000, respectively. For the nine months ended September 30, 2005 and
2004, the Partnership paid PSI $308,000 and $290,000, 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 are principally comprised of
i) payroll costs relating to supervisory, relief, and administrative
personnel, ii) centralized corporate services such as the telephone
reservation center and customer service iii) advertising expenditures
including media advertising and yellow page costs, and iv) insurance
including workers compensation, property, casualty, liability, and employee
health coverage. The total of such expenses, which are primarily included
in cost of operations, amounted to $172,000 and $534,000 for the three and
nine months ended September 30, 2005, respectively, and $165,000 and
$553,000 for the same periods in 2004, 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 September 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
nine months ended September 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
8
PUBLIC STORAGE PROPERTIES, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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.
Brinkley et al v. Public Storage, Inc. (filed April, 2005) (Superior court
---------------------------------------------------------------------------
of California - Los Angeles County)
-----------------------------------
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 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. Public Storage, Inc. is
vigorously contesting the claims and intends to resist any expansion beyond
the named plaintiffs on the grounds of lack of commonality of claims.
Public Storage, Inc. does not believe that this matter will have any
material adverse effect on the results of operations of the Partnership.
Inhan et al v. Public Storage, Inc (filed May, 2005) (United States
---------------------------------------------------------------------------
District Court - Southern District of Florida)
----------------------------------------------
Inhan and a co-plaintiff are suing Public Storage, Inc. in Florida claiming
they were not compensated for all hours worked under the Federal Fair Labor
Standards Act. The suit is brought as a putative class action. The time to
add additional parties in this action has expired and no additional parties
have been added. Public Storage, Inc. vigorously contests the claims and
although the maximum potential liability cannot be estimated, the fact that
the time to add additional parties in this action has expired limits the
maximum potential liability. As a result, we believe this matter is no
longer potentially material and therefore will no longer report on it.
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
- ----------------------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations discusses our consolidated financial statements, which
have been prepared in accordance with U.S. generally accepted accounting
principles. The preparation of financial statements and related disclosures in
conformity with United States generally accepted accounting principles and our
discussion and analysis of our financial condition and results of operations
requires management to make judgments, assumptions and estimates that affect the
amounts reported in our consolidated financial statements and accompanying
notes. Note 2 to our consolidated financial statements summarize the significant
accounting policies and methods used in the preparation of our consolidated
financial statements and related disclosures.
Management believes the following are critical accounting policies
whose application has a material impact on our financial presentation. That is,
they are both important to the portrayal of our financial condition and results,
and they require management to make judgments and estimates about matters that
are inherently uncertain.
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 September 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
10
which we are aware are described in Note 5 to the Partnership's unaudited
condensed financial statements at September 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.
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2004:
Our net income for the three months ended September 30, 2005 was
$1,255,000 compared to $1,166,000 for the three months ended September 30, 2004,
representing an increase of $89,000 or 8%.
Rental income for the three months ended September 30, 2005 was $1,749,000
compared to $1,666,000 for the three months ended September 30, 2004,
representing an increase of $83,000 or 5%. 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 were 91% and 93% for the three
months ended September 30, 2005 and 2004, respectively. Annual realized rent for
the three months ended September 30, 2005 increased to $14.92 occupied square
foot compared to $13.93 per occupied square foot for the three months ended
September 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 September 30, 2005 was $452,000 compared to $427,000 for the three months
ended September 30, 2004, representing an increase of $25,000 or 6%. The
increase was primarily due to increases in advertising, utilities, repairs and
maintenance and management fee expenses, partially offset by a decrease in
payroll expense.
Depreciation expense was $45,000 for the three months ended September 30,
2005 compared to $69,000 for the same period in 2004, a decrease of $24,000 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.
NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2004:
Our net income for the nine months ended September 30, 2005 was $3,632,000
compared to $3,268,000 for the nine months ended September 30, 2004,
representing an increase of $364,000 or 11%.
Rental income for the nine months ended September 30, 2005 was $5,140,000
compared to $4,839,000 for the nine months ended September 30, 2004,
representing an increase of $301,000 or 6%. 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 were 91% and 92% for the nine
months ended September 30, 2005 and 2004, respectively. Annual realized rent for
the nine months ended September 30, 2005 increased to $14.59 per occupied square
foot compared to $13.73 per occupied square foot for the nine months ended
September 30, 2004.
Cost of operations, including management fees paid to an affiliate, (see
Note 4 to the unaudited condensed financial statements) for the nine months
ended September 30, 2005 was $1,357,000 compared to $1,325,000 for the nine
months ended September 30, 2004, representing an increase of $32,000 or 2%. The
increase was primarily due to increases in advertising, management fees and
property tax expense, partially offset by a reduction in repairs and
maintenance.
Depreciation expense was $139,000 for the nine months ended September 30,
2005 compared to $214,000 for the same period in 2004, a decrease of $75,000 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.
11
LIQUIDITY AND CAPITAL RESOURCES
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Cash generated from operations ($3,795,000 for the nine months ended
September 30, 2005) has been sufficient to meet all current obligations of the
Partnership.
We paid distributions to the limited and general partners totaling
$2,520,000 ($126.00 per unit) and $874,000, respectively, for the nine months
ended September 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.
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
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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 September 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 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. 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 disruptions
of operations. Experienced computer programmers may be able to penetrate our
network security and misappropriate our confidential information, create system
disruptions or cause shutdowns.
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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;
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. Fusther 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
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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
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
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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
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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
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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
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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.
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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: November 14, 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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EXHIBIT NO. EXHIBIT INDEX
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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.
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