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 quarterly period ended March 31, 2008.
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 shell company (as defined in
Rule 12b-2 of the Exchange Act).
[ ] Yes [X] 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]
Smaller Reporting Company [ ]
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, 2008: 20,000.
PUBLIC STORAGE PROPERTIES, LTD.
INDEX
PART I. FINANCIAL INFORMATION (Item 3 not applicable) Pages
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets at March 31, 2008
and December 31, 2007 1
Condensed Statements of Income for the Three
Months Ended March 31, 2008 and 2007 2
Condensed Statement of Partners' Equity for the
Three Months Ended March 31, 2008 3
Condensed Statements of Cash Flows for the
Three Months Ended March 31, 2008 and 2007 4
Notes to Condensed Financial Statements 5 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 13
Item 4. Controls and Procedures 13
PART II. OTHER INFORMATION (Items 2 - 5 not applicable)
Item 1. Legal Proceedings 14
Item 1A. Risk Factors 14 - 17
Item 6. Exhibits 17
PUBLIC STORAGE PROPERTIES, LTD.
CONDENSED BALANCE SHEETS
March 31, December 31,
2008 2007
---------------- -----------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 777,000 $ 559,000
Rent and other receivables 40,000 53,000
Real estate facilities, at cost:
Buildings, land improvements and equipment 9,906,000 9,878,000
Land 2,476,000 2,476,000
---------------- -----------------
12,382,000 12,354,000
Less accumulated depreciation (9,328,000) (9,299,000)
---------------- -----------------
3,054,000 3,055,000
Other assets 82,000 78,000
---------------- -----------------
Total assets $ 3,953,000 $ 3,745,000
================ =================
LIABILITIES AND PARTNERS' EQUITY
Accounts payable $ 120,000 $ 88,000
Deferred revenue 168,000 183,000
---------------- -----------------
Total liabilities 288,000 271,000
Commitments and contingencies (Note 6)
Partners' equity:
Limited partners' equity, $500 per unit, 20,000 units
authorized, issued and outstanding 2,721,000 2,579,000
General partners' equity 944,000 895,000
---------------- -----------------
Total partners' equity 3,665,000 3,474,000
---------------- -----------------
Total liabilities and partners' equity $ 3,953,000 $ 3,745,000
================ =================
See accompanying notes.
1
PUBLIC STORAGE PROPERTIES, LTD.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
March 31,
----------------------------------------
2008 2007
----------------- -------------------
REVENUES:
Rental income $ 1,872,000 $ 1,801,000
Other income 52,000 38,000
----------------- -------------------
1,924,000 1,839,000
----------------- -------------------
COSTS AND EXPENSES:
Cost of operations 386,000 392,000
Management fees paid to affiliate 112,000 108,000
Depreciation 29,000 33,000
Administrative 21,000 26,000
----------------- -------------------
549,000 559,000
----------------- -------------------
NET INCOME: $ 1,376,000 $ 1,280,000
================= ===================
Limited partners' share of net income $ 1,069,000 $ 980,000
General partners' share of net income 307,000 300,000
----------------- -------------------
$ 1,376,000 $ 1,280,000
================= ===================
Limited partners' share of net income per unit
(20,000 units outstanding) $ 53.45 $ 49.00
================= ===================
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, 2007 $ 2,579,000 $ 895,000 $ 3,474,000
Net income 1,069,000 307,000 1,376,000
Cash distributions (880,000) (305,000) (1,185,000)
Equity transfer (47,000) 47,000 -
-------------- -------------- -----------------
Balance at March 31, 2008 $ 2,721,000 $ 944,000 $ 3,665,000
============== ============== =================
See accompanying notes.
3
PUBLIC STORAGE PROPERTIES, LTD.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
--------------------------------------
2008 2007
---------------- ------------------
Cash flows from operating activities:
Net income $ 1,376,000 $ 1,280,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 29,000 33,000
Decrease in rent and other receivables 13,000 8,000
(Increase) decrease in other assets (4,000) 45,000
Increase in accounts payable 32,000 42,000
(Decrease) increase in deferred revenue (15,000) 31,000
---------------- ------------------
Total adjustments 55,000 159,000
---------------- ------------------
Net cash provided by operating activities 1,431,000 1,439,000
---------------- ------------------
Cash flows from investing activities:
Additions to real estate facilities (28,000) (1,000)
---------------- ------------------
Net cash used in investing activities (28,000) (1,000)
---------------- ------------------
Cash flows from financing activities:
Distributions paid to partners (1,185,000) (1,158,000)
---------------- ------------------
Net cash used in financing activities (1,185,000) (1,158,000)
---------------- ------------------
Net increase in cash and cash equivalents 218,000 280,000
Cash and cash equivalents at the beginning of the period 559,000 1,483,000
---------------- ------------------
Cash and cash equivalents at the end of the period $ 777,000 $ 1,763,000
================ ==================
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, formerly Public
Storage, Inc., ("PS") 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.
The accompanying unaudited condensed financial statements have
been prepared by us pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") on the same basis as our
audited annual financial statements and, in our opinion reflect all
adjustments (consisting only of normal recurring adjustments) necessary
to present fairly the financial information set forth therein. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with U.S. generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations, although we believe that the following
disclosures, when read in conjunction with the audited financial
statements and notes thereto as of December 31, 2007, are adequate to
make the information presented not misleading.
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.
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 with
remaining maturities of three months or less at the date of acquisition
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, 2008, all of the real estate facilities have been
in service longer than 25 years, and accordingly the original
development cost of such buildings is fully depreciated at March 31,
2008.
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
related carrying value, 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, 2008.
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.
Accounting for Casualty Losses:
-------------------------------
Our policy is to record casualty losses or gains in the period
the casualty occurs equal to the differential between (a) the book
value of assets destroyed and (b) insurance proceeds, if any, that we
expect to receive in accordance with our insurance contracts. Potential
insurance proceeds that are subject to uncertainties, such as
interpretation of deductible provisions of the governing agreements or
the estimation of costs of restoration, are treated as a contingent
proceeds in accordance with Statement of Financial Accounting Standards
No. 5 ("SFAS 5"), and not recorded until the uncertainties are
satisfied.
Deferred Revenue:
-----------------
Deferred revenue totaling $168,000 at March 31, 2008 ($183,000
at December 31, 2007), 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.
6
PUBLIC STORAGE PROPERTIES, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Income Taxes:
-------------
Public Storage Properties, Ltd. is treated as a partnership
for federal and state 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 15, 2008, there have been no recent accounting
pronouncements and guidance, which were not effective for
implementation prior to March 31, 2008, that would have a material
impact upon reporting the operations or financial position of the
Partnership.
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) be distributed at least quarterly.
During the three months ended March 31, 2008, we paid distributions to
the limited and general partners totaling $880,000 ($44.00 per unit)
and $305,000, respectively. During the three months ended March 31,
2007, 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
PS 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 PS:
-------------------------------------------------
The Partnership has a Management Agreement with PS pursuant to
which PS operates the self-storage facilities for a fee equal to 6% of
7
PUBLIC STORAGE PROPERTIES, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
the facilities' gross revenue (as defined). For the three months ended
March 31, 2008 and 2007, the Partnership paid PS $112,000, and
$108,000, respectively, under this Management Agreement.
The Management Agreement between the Partnership and PS
provides that the Management Agreement may be terminated without cause
upon 60 days written notice by the Partnership or six months notice by
PS.
The Partnership's facilities, along with facilities owned by
PS and its affiliates, are managed and marketed jointly by PS 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 in our accompanying condensed statements of income, amounted
to $183,000 and $205,000 for the three months ended March 31, 2008 and
2007, respectively.
Ownership Interest by the General Partners
------------------------------------------
PS owns 6,169 Limited Partnership Units ("Units"), as to which
PS 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.
PS 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 the Hughes Family owns
approximately 48% of the voting stock, PS owns 46% and members of PS's
management and related individuals own approximately 6%.
Captive Insurance Activities with PS
------------------------------------
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 PS. The
Partnership accounts for its investment in STOR-Re, which is included
in other assets on the accompanying condensed balance sheets, on the
cost method, and has received no distributions during the three months
ended March 31, 2008.
STOR-Re provides limited property and liability insurance
coverage to the Partnership, PS, 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 PS (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 reviewed quarterly.
8
PUBLIC STORAGE PROPERTIES, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Other Activities with PS
------------------------
PS owns a corporation that reinsures policies against losses
to goods stored by tenants in the Partnership's and PS' storage
facilities. 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 the number of spaces the Partnership has to rent.
Included in other income on our accompanying statements of income for
these fees are $30,000 and $14,000 for the three months ended March 31,
2008 and 2007, respectively.
A subsidiary of PS 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 PS receives the revenues and
bears the cost of the activities.
6. COMMITMENTS AND CONTINGENCIES
Legal Proceedings:
------------------
Brinkley v. Public Storage, Inc. (filed April 2005) (Superior Court of
-----------------------------------------------------------------------
California - Los Angeles County)
--------------------------------
The plaintiff sued PS on behalf of a purported class of
California non-exempt employees based on various California wage and
hour laws and seeking monetary damages and injunctive relief. In May
2006, a motion for class certification was filed seeking to certify
five subclasses. Plaintiff sought certification for alleged meal period
violations, rest period violations, failure to pay for travel time,
failure to pay for mileage reimbursement, and for wage statement
violations. In October 2006, the Court declined to certify three out of
the five subclasses. The Court did, however, certify subclasses based
on alleged meal period and wage statement violations. Subsequently, PS
filed a motion for summary judgment seeking to dismiss the matter in
its entirety. On June 22, 2007, the Court granted PS' summary judgment
motion as to the causes of action relating to the subclasses certified
and dismissed those claims. The only surviving claims are those
relating to the named plaintiff only. The plaintiff has filed an appeal
to the Court's June 22, 2007 summary judgment ruling. An appeal to the
Court's June 22, 2007 order granting PS' summary judgment motion is
currently pending.
Other Items
-----------
PS 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: This Quarterly Report on Form 10-Q contains
forward-looking statements within the meaning of the federal securities laws.
All statements in this document, other than statements of historical fact, are
forward-looking statements which may be identified by the use of the words
"expects," "believes," "anticipates," "plans," "would," "should," "may,"
"estimates" and similar expressions. These forward-looking statements involve
known and unknown risks and uncertainties, which may cause Public Storage
Properties, Ltd.'s (the "Partnership") actual results and performance to be
materially different from those expressed or implied in the forward-looking
statements. As a result, you should not rely on any forward-looking statements
in this report, or which management may make orally or in writing from time to
time, as predictions of future events nor guarantees of future performance. We
caution you not to place undue reliance on forward-looking statements, which
speak only as the date of this report or as of the dates indicated in the
statements. All of our forward-looking statements, including those in this
report, are qualified in their entirely by this statement. We expressly disclaim
any obligation to update publicly or otherwise revise any forward-looking
statements, whether as a result of new information, new estimates, or other
factors, events or circumstances after the date of this document, except where
expressly required by law. Accordingly, you should use caution in relying on
past forward-looking statements to anticipate future results.
Factors and risks that may impact our future results and performance
include, but are not limited to, those described in Item 1A, "Risk Factors" and
in our other filings with the Securities and Exchange Commission. ("SEC"). These
risks include, among others, the following:
o general risks associated with the ownership and operation of real
estate including changes in demand, potential liability for
environmental contamination, adverse changes in tax, real estate and
zoning laws and regulations, and the impact of natural disasters;
o risks associated with downturns in the local economies in the markets
in which we operate;
o the impact of competition from new and existing self-storage and
commercial facilities and other storage alternatives;
o the impact of the regulatory environment as well as national, state,
and local laws and regulations;
o disruptions or shutdowns of our automated processes and systems; and
o economic uncertainty due to the impact of war or terrorism.
The risks included here are not exhaustive as it is not possible for
management to predict all possible risk factors that may exist or emerge from
time to time. Investors should refer to our future reports and other information
filed from time to time with the SEC for additional information.
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 Public Storage ("PS") provides
several distinguishing characteristics that enable the Partnership to compete
effectively with other owners and operators.
10
PS is the largest owner and operator of self-storage facilities in the
United States ("U.S."). All of the PS facilities in the U.S. 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
PS as one of the dominant providers of self-storage space in most markets in
which PS operates and enables PS 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 competitors of PS, as well
as more substantial, well-placed yellow page advertisements than can many of its
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 rather than increases
in occupancy, 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,
2008. 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 U.S. generally accepted
accounting principles, 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 March 31, 2008 condensed 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, 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.
11
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED MARCH 31, 2008 COMPARED TO THREE MONTHS ENDED MARCH 31, 2007:
The Partnership's net income for the three months ended March 31, 2008
was $1,376,000 compared to $1,280,000 for the three months ended March 31, 2007,
representing an increase of $96,000 or 7.5%.
Rental income for the three months ended March 31, 2008 was $1,872,000
compared to $1,801,000 for the three months ended March 31, 2007, representing
an increase of $71,000 or 3.9%. The increase in rental income was a result of
improvements in realized rent per square foot and in occupancies. Weighted
average occupancy levels at the self-storage facilities were 92.0% and 90.4% for
the three months ended March 31, 2008 and 2007, respectively. Annual realized
rent for the three months ended March 31, 2008 increased to $15.75 per occupied
square foot, as compared to $15.49 per occupied square foot for the three months
ended March 31, 2007.
Cost of operations, including management fees paid to an affiliate,
(see Note 5 the Partnership's March 31, 2008 condensed financial statements) for
the three months ended March 31, 2008 was $498,000 compared to $500,000 for the
three months ended March 31, 2007, representing a decrease of $2,000. For the
three months ended March 31, 2008, advertising and promotion expenses decreased
by $20,000 or 30% compared to the same period in 2007. This decrease is due
primarily to lower television advertising expense. The reductions in advertising
and promotion expenses were offset by increases in utilities, payroll and
property tax expenses.
Depreciation expense was $29,000 and $33,000 for the three months ended
March 31, 2008 and 2007, respectively.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash generated from operations ($1,431,000 for the three months ended
March 31, 2008) has been sufficient to meet all current obligations of the
Partnership. Capital improvements totaled $28,000 and $1,000 for the three
months ended March 31, 2008 and 2007, respectively.
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.
DISTRIBUTIONS
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 $880,000 ($44.00 per unit) and
$305,000, respectively, for the three months ended March 31, 2008. During the
three months ended March 31, 2007, we paid distributions to the limited and
general partners totaling $860,000 ($43.00 per unit) and $298,000, respectively.
Future distribution rates amy be adjusted to levels which are supported by
operating cash flow after capital improvements and any other necessary
obligations.
12
ITEM 4. CONTROLS AND PROCEDURES
-----------------------
Public Storage 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 Securities Exchange Act of 1934, as
amended, ("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'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 Rules 13a-15(e) and 15d-15(e) of the Exchange Act.
In designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures in
reaching that level of reasonable assurance.
As of the end of the fiscal quarter covered by this report, Public
Storage carried out an evaluation, under the supervision and with the
participation of the Partnership's management, including Public Storage's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Partnership's disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based
on that evaluation, Public Storage's 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 quarter to which this report relates that have
materially affected, or are reasonable likely to materially affect, our internal
control over financial reporting.
13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth under the heading "Legal Proceedings" in Note
6 to our March 31, 2008 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 this Quarterly Report on Form
10-Q, you should consider the risks described below that we believe may be
material to investors in evaluating the Partnership. This section contains
forward-looking statements, and in considering these statements, you should
refer to the qualifications and limitations on our forward-looking statements
that are described in Forward Looking Statements at the beginning of Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
THE GENERAL PARTNERS CONTROL THE PARTNERSHIP AS A GROUP.
Public Storage is a general partner and beneficially owns approximately
31.4% of our outstanding limited partnership units. In addition, B. Wayne
Hughes, General Partner of the Partnership, and Chairman of PS and members of
his family beneficially own 31.5% of the limited partnership units. As a result,
the General Partners, as a group, control matters submitted to a vote of our
unitholders, including amending our organizational documents, dissolving the
Partnership and approving other such transactions.
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;
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;
o increases in insurance premiums, property tax assessments and other
operating and maintenance expenses;
o adverse changes in tax, real estate and zoning laws and regulations;
and
o tenant and employment-related claims.
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 three month period
14
ended March 31, 2008. 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. 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.
We incur liability from tenant and employment-related claims. From time
to time we must resolve tenant claims and employment-related claims by corporate
level and field personnel.
15
PUBLIC STORAGE'S ACQUISITION OF SHURGARD OR OTHER POTENTIAL
ACQUISITIONS OR DEVELOPMENT OF PROPERTIES MAY SUBJECT THE PARTNERSHIP TO
ADDITIONAL RISKS.
In August 2006, Public Storage completed the acquisition of Shurgard
Storage Centers, Inc. ("Shurgard"), a publicly held REIT that had interests in
approximately 646 self-storage facilities located in the United States ("U.S.")
and Europe and acquires and develops other real estate facilities as part of its
ongoing operations. Such acquisitions, including the Shurgard merger, do not
change the financial interests of the Partnership. However, because the
self-storage facilities of the Partnership and Public Storage are managed by
Public Storage, together with the newly acquired self-storage facilities,
individual Partnership properties may 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 management of the newly acquired
facilities, particularly with respect to those facilities that are close to the
Partnership's facilities.
SOME OF OUR REVENUES INVOLVE BUSINESSES THAT ARE SUBJECT TO
GOVERNMENTAL REGULATION WHICH COULD REDUCE OUR PROFITABILITY OR LIMIT OUR
GROWTH.
We receive revenues related to the offering of insurance products to
our tenants. These products are offered through an affiliate of PS, which holds
Limited Lines Self Storage Insurance Agent licenses from a number of individual
state Departments of Insurance and are subject to state governmental regulation
and supervision. This state governmental supervision could reduce our
profitability or limit our growth by increasing the costs of regulatory
compliance, limiting or restricting the products or services we provide or the
methods by which we provide products and services, or subjecting our businesses
to the possibility of regulatory actions or proceedings. The continued ability
of this affiliate to maintain these Limited Lines Self Storage Insurance Agent
licenses in the jurisdictions in which it is licensed depends on its compliance
with the rules and regulations promulgated from time to time by the regulatory
authorities in each of these jurisdictions. Furthermore, state insurance
departments conduct periodic examinations, audits and investigations of the
affairs of insurance agents.
In all jurisdictions, the applicable laws and regulations are subject
to amendment or interpretation by regulatory authorities. Generally, such
authorities are vested with relatively broad discretion to grant, renew and
revoke licenses and approvals and to implement regulations. Accordingly, this
affiliate may be precluded or temporarily suspended from carrying on some or all
of these activities or otherwise fined or penalized in a given jurisdiction. No
assurances can be given that our businesses can continue to be conducted in any
given jurisdiction as it has been conducted in the past. For the year ended
December 31, 2007, revenues from our tenant reinsurance business represented
approximately 1.4% of our 2007 revenues and 1.6% of revenues for the quarter
ended March 31, 2008.
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 U.S. 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 U.S. 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,
16
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 influence 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.
WE HAVE BECOME INCREASINGLY DEPENDENT UPON AUTOMATED PROCESSES AND THE
INTERNET AND ARE FACED WITH SYSTEM SECURITY 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.
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 PS. STOR-Re provided limited
property and liability insurance coverage to the Partnership, PS, and affiliates
of PS 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.
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.
17
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, 2008
PUBLIC STORAGE PROPERTIES, LTD.
BY: Public Storage
General Partner
BY: /s/ John Reyes
-------------------------
John Reyes
Senior Vice President and
Chief Financial Officer
18
Exhibit No. Exhibit Index
31.1 Rule 13a-14(a) Certification. Filed herewith.
31.2 Rule 13a-14(a) Certification. Filed herewith.
32 Section 1350 Certifications. Filed herewith.
19