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 March 31, 2006
---------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to .
----------------- -----------------
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 a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-accelerated Filer [ X ]
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 May 15, 2006: 20,000
PUBLIC STORAGE PROPERTIES, LTD.
INDEX
Pages
PART I. FINANCIAL INFORMATION (Item 3 not applicable)
---------------------
Item 1. Financial Statements
Condensed Balance Sheets at March 31, 2006
and December 31, 2005 1
Condensed Statements of Income for the Three
Months Ended March 31, 2006 and 2005 2
Condensed Statement of Partners' Equity for the
Three Months Ended March 31, 2006 3
Condensed Statements of Cash Flows for the
Three Months Ended March 31, 2006 and 2005 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 4. Controls and Procedures 12
PART II. OTHER INFORMATION (Items 2 - 5 not applicable)
-----------------
Item 1. Legal Proceedings 13
Item 1A. Risk Factors 13-15
Item 6. Exhibits 15
PUBLIC STORAGE PROPERTIES, LTD.
CONDENSED BALANCE SHEETS
March 31, December 31,
2006 2005
----------------- -------------------
(Unaudited)
ASSETS
------
Cash and cash equivalents $ 1,505,000 $ 1,448,000
Rent and other receivables 133,000 69,000
Real estate facilities, at cost:
Building, land improvements and equipment 9,634,000 9,622,000
Land 2,476,000 2,476,000
----------------- -------------------
12,110,000 12,098,000
Less accumulated depreciation (9,046,000) (9,004,000)
----------------- -------------------
3,064,000 3,094,000
Other assets 103,000 71,000
----------------- -------------------
Total assets $ 4,805,000 $ 4,682,000
================== ==================
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
Accounts payable $ 137,000 $ 88,000
Deferred revenue 194,000 163,000
Commitments and contingencies (Note 6) - -
Partners' equity:
Limited partners' equity, $500 per unit, 20,000 units
authorized, issued and outstanding 3,322,000 3,290,000
General partners' equity 1,152,000 1,141,000
----------------- -------------------
Total partners' equity 4,474,000 4,431,000
----------------- -------------------
Total liabilities and partners' equity $ 4,805,000 $ 4,682,000
================== ==================
See accompanying notes.
1
PUBLIC STORAGE PROPERTIES, LTD.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
March 31,
----------------------------------------
2006 2005
------------------ -----------------
REVENUES:
Rental income $ 1,758,000 $ 1,681,000
Other income 34,000 20,000
------------------ -----------------
1,792,000 1,701,000
------------------ -----------------
COSTS AND EXPENSES:
Cost of operations 409,000 354,000
Management fees paid to affiliate 105,000 101,000
Depreciation 42,000 46,000
Administrative 35,000 28,000
------------------ -----------------
591,000 529,000
------------------ -----------------
NET INCOME: $ 1,201,000 $ 1,172,000
================== =================
Limited partners' share of net income ($45.10 per
unit in 2006 and $44.70 per unit in 2005) 902,000 894,000
General partners' share of net income 299,000 278,000
------------------ -----------------
$ 1,201,000 $ 1,172,000
================== =================
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, 2005 $ 3,290,000 $ 1,141,000 $ 4,431,000
Net income 902,000 299,000 1,201,000
Distributions (860,000) (298,000) (1,158,000)
Equity transfer (10,000) 10,000 -
------------------- ---------------- -------------------
Balance at March 31, 2006 $ 3,322,000 $ 1,152,000 $ 4,474,000
=================== =============== ==================
See accompanying notes.
3
PUBLIC STORAGE PROPERTIES, LTD.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
----------------------------------------
March 31,
2006 2005
Cash flows from operating activities: ------------------- ------------------
Net income $ 1,201,000 $ 1,172,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 42,000 46,000
(Increase) decrease in rent and other receivables (64,000) 5,000
(Increase) decrease in other assets (32,000) 13,000
Increase (decrease) in accounts payable and accrued liabilities 49,000 (32,000)
Increase (decrease) in deferred revenue 31,000 (14,000)
------------------ -----------------
Total adjustments 26,000 18,000
------------------ -----------------
Net cash provided by operating activities 1,227,000 1,190,000
------------------ -----------------
Cash flows from investing activities:
Additions to real estate facilities (12,000) (2,000)
------------------ -----------------
Net cash used in investing activities (12,000) (2,000)
------------------ -----------------
Cash flows from financing activities:
Distributions paid to partners (1,158,000) (1,077,000)
------------------ -----------------
Net cash used in financing activities (1,158,000) (1,077,000)
------------------ -----------------
Net increase in cash and cash equivalents 57,000 111,000
Cash and cash equivalents at the beginning of the period 1,448,000 1,407,000
------------------ -----------------
Cash and cash equivalents at the end of the period $ 1,505,000 $ 1,518,000
================== =================
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 AND PARTNERSHIP MATTERS
Use of Estimates:
-----------------
The preparation of the financial statements in conformity with
U.S. generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from those estimates.
Revenue and Expense Recognition:
--------------------------------
Rental income, which is generally earned pursuant to
month-to-month leases for storage space, is recognized as earned.
Promotional discounts are recognized as a reduction to rental income
over the promotional period, which is generally during the first month
of occupancy. Late charges and administrative fees are recognized as
income when collected. Interest income is recognized as earned.
We accrue for property tax expense based upon estimates and
historical trends. If these estimates are incorrect, the timing of
expense recognition could be affected.
Cost of operations, general and administrative expense, as
well as television, yellow page, and other advertising expenditures are
expensed as incurred. Television, yellow page, and other advertising
expenditures totaled $83,000 and $48,000 for the three months ended
March 31, 2006 and 2005, respectively.
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 (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.
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. At March 31, 2006, all of the real estate facilities have been
in service longer than 25 years, and accordingly the original
development cost of such buildings are fully depreciated at March 31,
2006.
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 March 31, 2006.
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.
Deferred revenue:
-----------------
Deferred revenue totaling $194,000 for the three months ended
March 31, 2006 ($163,000 for the year ended December 31, 2005),
consists of prepaid rents, which are recognized when earned.
Environmental Cost:
-------------------
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.
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.
Recent Accounting Pronouncements and Guidance:
----------------------------------------------
As of May 12, 2006, there have been no recent accounting
pronouncements and guidance, which were not effective for
implementation prior to March 31, 2006, that would have a material
impact upon reporting the operations or financial position of the
Partnership.
6
PUBLIC STORAGE PROPERTIES, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Segment Reporting:
------------------
The Partnership only has one reportable segment as defined
within Statement of Financial Accounting Standards No. 131.
3. CASH DISTRIBUTIONS
The Partnership Agreement requires that cash available for
distribution (cash flow from all sources less cash necessary for any
obligations or capital improvements) needs to be distributed at least
quarterly. For the three months ended March 31, 2006, we paid
distributions to the limited and general partners totaling $860,000
($43.00 per unit) and $298,000, respectively. Future distribution rates
may be adjusted to levels which are supported by operating cash flow
after capital improvements and any other obligations.
4. PARTNERS' EQUITY
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. In 2002, BWH Marina Corporation II sold its
interests to H-G Family Corporation. As such, Mr. Hughes continues to
act as a general partner but receives no direct compensation or other
consideration from the Partnership.
The general partners have a 1% interest in the Partnership. In
addition, the general partners have an 8% interest in cash
distributions attributable to operations (exclusive of distributions
attributable to sale and financing proceeds until the limited partners
recover all of their initial investment). Thereafter, the general
partners have a 25% interest in all cash distributions (including sale
and financing proceeds). In 1985, the limited partners recovered all of
their initial investment. All subsequent cash 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 the results of operations or distributions to partners.
5. RELATED PARTY TRANSACTIONS
Management Agreement and Shared Expenses with PSI:
--------------------------------------------------
The Partnership has a Management Agreement with PSI pursuant
to which PSI operates the self-storage facilities for a fee equal to 6%
of the facilities' gross revenue (as defined). For the three months
ended March 31, 2006, the Partnership paid PSI $105,000 and $101,000,
respectively, under this management agreement.
The Management Agreement between the Partnership and PSI
provides that the Management Agreement 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 and marketed jointly by PSI in
order to take advantage of scale and other efficiencies. As a result,
significant components of cost of operations, such as payroll costs,
advertising and promotion, data processing and insurance expenses are
shared and allocated among the properties using methodologies meant to
fairly allocate such costs based upon the related activities. The total
of such expenses, substantially all of which are included in Cost of
Operations, amounted to $235,000 and $177,000 for the three months
ended March 31, 2006 and 2005, respectively.
7
PUBLIC STORAGE PROPERTIES, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Ownership Interest by the General Partners
------------------------------------------
PSI owns 6,169 Limited Partnership Units ("Units"), as to
which PSI has sole voting and dispositive power.
Hughes and members of his family (the "Hughes Family") own
6,105 Units. Hughes owns 6,025 Units, as to which Hughes has sole
voting and dispositive power, through a wholly-owned corporation and
Tamara Hughes Gustavson, an adult daughter of Hughes, owns 80 Units as
to which Tamara Hughes Gustavson has sole voting and dispositive power.
PSI has an option to acquire 25 of the Units held by Hughes and the 80
Units held by Tamara Hughes Gustavson.
In addition, there are 196 Units owned by PS Orangeco
Partnerships, Inc., a corporation in which Hughes Family owns
approximately 48% of the voting stock, PSI owns 46% and members of
PSI's management and related individuals own approximately 6%.
Captive Insurance Activities with PSI
-------------------------------------
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, on the cost method, and has received no distributions
during the three years ended December 31, 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 (collectively, this entity and STOR-Re are referred
to as the "Captive Entities"). 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 Activities with PSI
-------------------------
A corporation that reinsures policies against losses to goods
stored by tenants in PSI's storage facilities was purchased by PSI from
Mr. Hughes and members of his family (the "Hughes Family") on December
31, 2001. This corporation receives the premiums and bears the risks
associated with the re-insurance. The Partnership receives an access
fee from this corporation in return for providing tenant listings. This
fee is based on number of spaces the Partnership has to rent. Included
in other income on our income statement for these fees $14,000 and
$9,000 for the three months ended March 31, 2006 and 2005,
respectively.
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 of PSI receives the revenues and
bears the cost of the activities.
8
PUBLIC STORAGE PROPERTIES, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES
Legal Proceedings:
------------------
Serrao v. Public Storage, Inc. (filed April 2003) (Superior Court of
-----------------------------------------------------------------------
California - Orange County)
---------------------------
The plaintiff in this case filed a suit against PSI on behalf
of a putative class of renters who rented self-storage units from PSI.
Plaintiff alleges that PSI 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, PSI cannot presently determine the potential damages, if any,
or the ultimate outcome of this litigation. On November 3, 2003, the
court granted our motion to strike the plaintiff's nationwide class
allegations and to limit any putative class to California residents
only. In August 2005, PSI filed a motion to remove the case to federal
court, but the case has been remanded to the Superior Court. PSI is
vigorously contesting the claims upon which this lawsuit is based,
including class certification efforts.
Brinkley v. Public Storage, Inc. (filed April, 2005) (Superior Court of
-----------------------------------------------------------------------
California - Los Angeles County)
--------------------------------
The Brinkley plaintiffs are suing PSI 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. PSI is vigorously
contesting the claims and intends to resist any expansion beyond the
named plaintiffs on the grounds of lack of commonality of claims. PSI
does not believe that this matter will have any material adverse effect
on the results of operations of the Partnership.
Simas v. Public Storage, Inc. (filed January, 2006) (Superior Court of
-----------------------------------------------------------------------
California - Orange County)
---------------------------
The Simas plaintiffs bring this action against PSI on behalf
of a purported class who bought insurance coverage at Company's
facilities alleging that PSI does not have a license to offer, sell
and/or transact storage insurance. The action was brought under
California Business and Professions Code Section 17200. PSI filed a
demurrer to the complaint. While the demurrer was pending, Plaintiffs
amended the complaint to allege a national class and claims for unfair
business practices, quasi-contract, common counts, and negligent and
intentional misrepresentation. PSI is vigorously contesting the claims
upon which this lawsuit is based, including any efforts for class
certifications.
Other Items
-----------
PSI and the Partnership are a party to various claims,
complaints, and other legal actions that have arisen in the normal
course of business from time to time, that are not described above. We
believe that it is unlikely that the outcome of these other pending
legal proceedings including employment and tenant claims, in the
aggregate, will have a material adverse effect 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," "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 Item 1A, "Risk
Factors" in Part II of this Quarterly Report on Form 10-Q. These risks include,
but are not limited to, the following: 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.
Overview
- --------
The self-storage industry is highly fragmented and is composed
predominantly of numerous local and regional operators. Competition in the
markets in which we operate is significant and has increased over the past
several years due to additional development of self-storage facilities. We
believe that the increase in competition has had a negative impact to the
Partnership's occupancy levels and rental rates in many markets. However, we
believe that the Partnership's affiliation with PSI provides several
distinguishing characteristics that enable the Partnership to compete
effectively with other owners and operators.
PSI is the largest owner and operator of self-storage facilities in the
United States. All of PSI's facilities are operated under the "Public Storage"
brand name, which we believe is the most recognized and established name in the
self-storage industry. Market concentration establishes PSI as one of the
dominant providers of self-storage space in most markets in which PSI operates
and enables PSI to use a variety of promotional activities, such as television
advertising as well as targeted discounting and referrals, which are generally
not economically viable to most of PSI's competitors.
We will continue to focus our growth strategies on improving the
operating performance of our existing self-storage properties primarily through
increases in revenues achieved through the telephone reservation center and
associated marketing efforts. We expect potential future increases in rental
income to come primarily from increases in realized rent, although there can be
no assurance.
Critical Accounting Policies
- ----------------------------
IMPAIRMENT OF REAL ESTATE
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 identified no such impairments at March 31,
2006. 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.
10
ACCRUALS FOR CONTINGENCIES
We are exposed to business and legal liability risks with respect to
events that have occurred, but in accordance with generally accepted accounting
principles in the U.S., 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, which we are aware of, are described
in Notes 5 and 6 to the Partnership's financial statements.
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, the timing of the recognition our expenses could be incorrect. Cost
of operations, interest expense, general and administrative expense, as well as
television, yellow page, and other advertising expenditures are expensed as
incurred.
Results of Operations
- ---------------------
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THREE MONTHS ENDED MARCH 31, 2005:
Our net income for the three months ended March 31, 2006 was $1,201,000
compared to $1,172,000 for the three months ended March 31, 2005, representing
an increase of $29,000 or 2%.
Rental income for the three months ended March 31, 2006 was $1,758,000
compared to $1,681,000 for the three months ended March 31, 2005, representing
an increase of $77,000 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 90.0% and 90.5% for the three months ended
March 31, 2006 and 2005, respectively. Annual realized rent for the three months
ended March 31, 2006 increased to $15.23 occupied square foot compared to $14.48
per occupied square foot for the three months ended March 31, 2005.
Cost of operations, including management fees paid to an affiliate,
(see Note 5 to the unaudited condensed financial statements) for the three
months ended March 31, 2006 was $514,000 compared to $455,000 for the three
months ended March 31, 2005, representing an increase of $59,000 or 13%. The
increase was primarily due to increases in advertising, repairs and maintenance
and management fees, partially offset by a decrease in professional fees.
Depreciation expense was $42,000 for the three months ended March 31,
2006 compared to $46,000 for the same period in 2005, a decrease of $4,000 or
9%.
Liquidity and Capital Resources
- -------------------------------
Cash generated from operations ($1,227,000 for the three months ended
March 31, 2006) has been sufficient to meet all current obligations of the
Partnership.
11
The Partnership Agreement requires that cash available for distribution
(cash flow from all sources less cash necessary for any obligations or capital
improvement needs) be distributed at least quarterly. We paid distributions to
the limited and general partners totaling $860,000 ($43.00 per unit) and
$298,000, respectively, for the three months ended March 31, 2006. 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 does not anticipate issuing senior securities, making
loans to other persons, investing in the securities of other issuers for the
purpose of exercising control, underwriting the securities of other issuers,
engaging in the purchase and sale of investments, offering securities in
exchange for property, or repurchasing or otherwise reacquiring its outstanding
securities. The partnership may consider borrowing money with the intent of
using the proceeds for distribution to partners.
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 its Chief Executive Officer and Chief Financial Officer,
to allow timely decisions regarding required disclosure based on the definition
of "disclosure controls and procedures" in 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.
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. During the first quarter of 2006, there were no significant changes
in the Partnership's internal controls over financial reporting that have
materially affected, or are reasonably likely to materially affect, the
Partnership's 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
6 to the unaudited condensed financial statements in this Form 10-Q is
incorporated by reference in this Item 1.
Item 1A. Risk Factors
--------------
In addition to the other information in our Form 10-Q and Annual Report
on Form 10-K for the year ended December 31, 2005, you should consider the
following factors in evaluating the Partnership:
THE GENERAL PARTNERS CONTROL THE PARTNERSHIP AS A GROUP.
Public Storage Inc. and B. Wayne Hughes are general partners of the
partnership. In the aggregate, Public Storage Inc., B. Wayne Hughes, and members
of his family control approximately 62% of the limited partnership units of the
partnership. As a result, this group controls any matters submitted to a vote of
our unitholders, including amending our organizational documents, dissolving the
partnership, or approving other such transactions.
PUBLIC STORAGE'S PROPOSED ACQUISITION OF SHURGARD MAY SUBJECT THE
PARTNERSHIP TO ADDITIONAL RISKS.
Public Storage announced recently that it had entered into an agreement
to acquire Shurgard Storage Centers, Inc. ("Shurgard"), a publicly held REIT
that has interests in approximately 650 self-storage facilities located in the
United States and Europe.
There would be no change in the financial interests of the Partnership
if this acquisition of Shurgard is completed. However, because the self-storage
facilities of the Partnership and Public Storage are managed by Public Storage,
and the self-storage facilities owned by Shurgard would also be managed by
Public Storage, the merger could have potential negative impacts on the
Partnership, as follows:
o Difficulties in the integration of operations, technologies, and
personnel of Shurgard could negatively impact the operations of
the facilities managed by Public Storage, including the
Partnership's.
o Public Storage's management attention to the integration and
acquisition of Shurgard could divert attention away from the
operations of the existing self-storage portfolio that it manages,
including the Partnership's properties.
o Individual Partnership properties could experience a decrease in
move-ins, reductions to rental rates, increases to promotional
discounts, or other negative impacts to revenues in the short
and/or long term due to the competitive impact of Public Storage
commencing management of the former Shurgard facilities,
particularly with respect to those facilities that are close to
the Partnership's facilities.
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 natural disasters, such as earthquakes;
o potential terrorist attacks;
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o changes in supply of or demand for similar or competing facilities
in an area;
o the impact of environmental protection laws;
o changes in interest rates and availability of permanent mortgage
funds which may render the sale or financing of a property
difficult or unattractive; 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,
which generated substantially all of our revenue for the year ended March 31,
2006. Local market conditions will play a significant part in how competition
will affect us. Competition in the market areas in which many of our properties
are located from other self-storage facilities and other storage alternatives is
significant and has affected the occupancy levels, rental rates and operating
expenses of our properties. Any increase in availability of funds for investment
in real estate may accelerate competition. Further development of self-storage
facilities may intensify competition among operators of self-storage facilities
in the market areas in which we operate.
We may incur significant environmental costs and liabilities. As an
owner and operator of real properties, under various federal, state and local
environmental laws, we are required to clean up spills or other releases of
hazardous or toxic substances on or from our properties. Certain environmental
laws impose liability whether or not the owner knew of, or was responsible for,
the presence of the hazardous or toxic substances. In some cases, liability may
not be limited to the value of the property. The presence of these substances,
or the failure to properly remediate any resulting contamination, whether from
environmental or microbial issues, also may adversely affect the owner's or
operator's ability to sell, lease or operate its property or to borrow using its
property as collateral.
We have conducted preliminary environmental assessments on the
Partnership's properties 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 proactively with our tenants to resolve
moisture infiltration and mold-related issues, subject to our contractual
limitations on liability for such claims. However, we can provide no assurance
that material legal claims relating to moisture infiltration and the presence
of, or exposure to, mold will not arise in the future.
Property taxes can increase and cause a decline in yields on
investments. Each of our properties is subject to real property taxes. These
real property taxes may increase in the future as property tax rates change and
as our properties are assessed or reassessed by tax authorities. Such increases
could adversely impact our profitability.
We must comply with the Americans with Disabilities Act and fire and
safety regulations, which can require significant expenditures. All our
properties must comply with the Americans with Disabilities Act and with related
regulations (the "ADA"). The ADA has separate compliance requirements for
"public accommodations" and "commercial facilities," but generally requires that
buildings be made accessible to persons with disabilities. Various state laws
impose similar requirements.
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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 shareholders. 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.
DEVELOPMENTS IN CALIFORNIA MAY HAVE AN ADVERSE IMPACT ON OUR BUSINESS
AND OPERATING RESULTS AND COULD DECREASE THE VALUE OF OUR ASSETS.
All of the Partnership's properties are located in California.
California is facing budgetary problems. Action that may be taken in response to
these problems, such as an increase in property taxes on commercial properties,
could adversely impact our business and results of operations. In addition, the
Partnership could be adversely impacted by efforts to reenact legislation
mandating medical insurance for employees of California businesses and members
of their families.
INCREASES IN INTEREST RATES MAY ADVERSELY AFFECT THE PRICE OF OUR
PARTNERSHIP UNITS.
One of the factors that influences the market price of our partnership
units is the annual rate of distributions that we pay on the securities, as
compared with interest rates. An increase in interest rates may lead purchasers
of partnership units to demand higher annual distribution rates, which could
adversely affect the market price of our partnership units.
OUR OWNERSHIP INTEREST 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 provided limited
property and liability insurance coverage to the Partnership, PSI, and
affiliates of PSI for losses occurring prior to 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 amounts 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. Financial
data with respect to STOR-Re is included in Note 5 to the Partnership's December
31, 2005 financial statements.
Item 6. Exhibits
Exhibits required by Item 601 of Regulation S-K are listed in the
attached Exhibit Index, and are filed herewith or incorporated herein by
reference.
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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: May 15, 2006
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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