UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended June 30, 2009
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
----------------- -----------------
Commission File Number: 0-8667
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PUBLIC STORAGE PROPERTIES, LTD.
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(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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
[ ] 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] Smaller Reporting Company [ ]
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 August 13, 2009: 20,000.
PUBLIC STORAGE PROPERTIES, LTD.
INDEX
Pages
PART I. FINANCIAL INFORMATION (Item 3 not applicable)
---------------------
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets at June 30, 2009
and December 31, 2008 1
Condensed Statements of Income for the
Three and Six Months Ended June 30, 2009 and 2008 2
Condensed Statement of Partners' Equity for the
Six Months Ended June 30, 2009 3
Condensed Statements of Cash Flows for the
Six Months Ended June 30, 2009 and 2008 4
Notes to Condensed Financial Statements 5 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 15
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION (Items 2 - 5 not applicable)
-----------------
Item 1. Legal Proceedings 17
Item 1A. Risk Factors 17
Item 6. Exhibits 17
PUBLIC STORAGE PROPERTIES, LTD.
CONDENSED BALANCE SHEETS
June 30, December 31,
2009 2008
--------------- ---------------
(Unaudited)
ASSETS
------
Cash and cash equivalents $ 791,000 $ 802,000
Rent and other receivables 77,000 60,000
Real estate facilities, at cost:
Buildings, land improvements and equipment 10,180,000 10,125,000
Land 2,476,000 2,476,000
--------------- ---------------
12,656,000 12,601,000
Less accumulated depreciation (9,510,000) (9,441,000)
--------------- ---------------
3,146,000 3,160,000
Other assets 56,000 67,000
--------------- ---------------
Total assets $ 4,070,000 $ 4,089,000
=============== ===============
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
Accounts payable $ 99,000 $ 136,000
Deferred revenue 177,000 190,000
--------------- ---------------
Total liabilities 276,000 326,000
Commitments and contingencies (Note 6)
Partners' equity:
Limited partners' equity, $500 per unit, 20,000 units
authorized, issued and outstanding 2,817,000 2,794,000
General partners' equity 977,000 969,000
--------------- ---------------
Total partners' equity 3,794,000 3,763,000
--------------- ---------------
Total liabilities and partners' equity $ 4,070,000 $ 4,089,000
=============== ===============
See accompanying notes.
1
PUBLIC STORAGE PROPERTIES, LTD.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- ----------------------------------
2009 2008 2009 2008
-------------- -------------- -------------- --------------
REVENUES:
Rental income $ 1,840,000 $ 1,905,000 $ 3,698,000 $ 3,777,000
Other income 41,000 37,000 84,000 89,000
-------------- -------------- -------------- -------------
1,881,000 1,942,000 3,782,000 3,866,000
-------------- -------------- -------------- -------------
COSTS AND EXPENSES:
Cost of operations 369,000 413,000 764,000 799,000
Management fees paid to affiliate 111,000 114,000 222,000 226,000
Depreciation 35,000 40,000 69,000 69,000
Administrative 35,000 35,000 56,000 56,000
-------------- -------------- -------------- -------------
550,000 602,000 1,111,000 1,150,000
-------------- -------------- -------------- -------------
NET INCOME $ 1,331,000 $ 1,340,000 $ 2,671,000 $ 2,716,000
============== ============== ============== =============
Limited partners' share of net income $ 1,011,000 $ 1,020,000 $ 1,991,000 $ 2,089,000
General partners' share of net income 320,000 320,000 680,000 627,000
-------------- -------------- -------------- -------------
$ 1,331,000 $ 1,340,000 $ 2,671,000 $ 2,716,000
============== ============== ============== =============
Limited partners' share of net income per
unit (20,000 units outstanding) $ 50.55 $ 51.00 $ 99.55 $ 104.45
============== ============== ============== =============
See accompanying notes.
2
PUBLIC STORAGE PROPERTIES, LTD.
CONDENSED STATEMENT OF PARTNERS' EQUITY
(UNAUDITED)
Limited General Total Partners'
Partners' Partners' Equity
-------------------- --------------------- --------------------
Balance at December 31, 2008 $ 2,794,000 $ 969,000 $ 3,763,000
Net income 1,991,000 680,000 2,671,000
Cash distributions (1,960,000) (680,000) (2,640,000)
Equity transfer (8,000) 8,000 -
---------------- ---------------- ----------------
Balance at June 30, 2009 $ 2,817,000 $ 977,000 $ 3,794,000
================ ================ ================
See accompanying notes.
3
PUBLIC STORAGE PROPERTIES, LTD.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
------------------------------------
2009 2008
--------------- ---------------
Cash flows from operating activities:
Net income $ 2,671,000 $ 2,716,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 69,000 69,000
Increase in rent and other receivables (17,000) (18,000)
Decrease (increase) in other assets 11,000 (2,000)
(Decrease) increase in accounts payable (37,000) 43,000
(Decrease) increase in deferred revenue (13,000) 5,000
--------------- ---------------
Total adjustments 13,000 97,000
--------------- ---------------
Net cash provided by operating activities 2,684,000 2,813,000
--------------- ---------------
Cash flows from investing activities:
Additions to real estate facilities (55,000) (205,000)
--------------- ---------------
Net cash used in investing activities (55,000) (205,000)
--------------- ---------------
Cash flows from financing activities:
Distributions paid to partners (2,640,000) (2,424,000)
--------------- ---------------
Net cash used in financing activities (2,640,000) (2,424,000)
--------------- ---------------
Net (decrease) increase in cash and cash equivalents (11,000) 184,000
Cash and cash equivalents at the beginning of the period 802,000 559,000
--------------- ---------------
Cash and cash equivalents at the end of the period $ 791,000 $ 743,000
=============== ===============
See accompanying notes.
4
PUBLIC STORAGE PROPERTIES, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
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
note 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, 2008, are
adequate to make the information presented not misleading. The Partnership
has evaluated subsequent events through August 13, 2009, which represents
the filing date of this Form 10-Q with the SEC. As of August 13, 2009,
there were no subsequent events which required recognition or disclosure.
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. Casualty losses or gains are recognized in the period the
casualty occurs, based upon the differential between the book value of
assets destroyed, and estimated insurance proceeds, if any, that we expect
to receive in accordance with our insurance contracts.
5
PUBLIC STORAGE PROPERTIES, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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.
Financial Instruments:
----------------------
The Partnership has estimated the fair value of its financial
instruments using available market information and appropriate valuation
methodologies. Considerable judgment is required in interpreting market
data to develop estimates of market value. Accordingly, estimated fair
values are not necessarily indicative of the amounts that could be realized
in current market exchanges.
For purposes of financial statement presentation, the Partnership
considers all highly liquid financial instruments such as short-term
treasury securities, money market funds with daily liquidity and a rating
in excess of AAA by Standard and Poor's, or investment grade short-term
commercial paper with remaining maturities of three months or less at the
date of acquisition to be cash equivalents.
Due to the short period to maturity and the underlying characteristics
of our cash and cash equivalents, other assets, and accrued and other
liabilities, the Partnership believes the carrying values as presented on
the condensed balance sheets are reasonable estimates of fair value.
Financial assets that are exposed to credit risk consist primarily of
cash and cash equivalents as well as rent and other receivables.
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 June 30, 2009, all of the
real estate facilities have been in service longer than 25 years, and
accordingly the original development costs of such buildings are fully
depreciated.
We evaluate our real estate for impairment on a quarterly basis. We
first evaluate these assets for indicators of impairment, and 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 June 30, 2009.
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.
6
PUBLIC STORAGE PROPERTIES, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Deferred Revenue:
-----------------
Deferred revenue totaling $177,000 at June 30, 2009 ($190,000 at
December 31, 2008), consists of prepaid rents, which are recognized as
rental income 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 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 August 13, 2009, there have been no recent accounting
pronouncements and guidance, which were not effective for implementation
prior to June 30, 2009, 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 each of the three months ended June 30, 2009 and 2008, we paid
distributions to the limited and general partners totaling $920,000 ($46.00
per unit) and $319,000, respectively. During the six months ended June 30,
2009, we paid distributions to the limited and general partners totaling
$1,960,000 ($98.00 per unit) and $680,000, respectively, and $1,800,000
($90.00 per unit) and $624,000, respectively, for the same period in 2008.
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
7
PUBLIC STORAGE PROPERTIES, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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 (the "Management
Agreement") with PS pursuant to which PS operates the self-storage
facilities for a fee equal to 6% of the facilities' gross revenue (as
defined). For the three and six months ended June 30, 2009, the Partnership
paid PS $111,000 and $222,000, respectively, and $114,000 and $226,000 for
the same periods in 2008, 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. Joint costs are allocated on a
methodology meant to fairly allocate such costs based upon the related
activities. 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
$204,000 and $230,000 for the three months ended June 30, 2009 and 2008,
respectively. For the six months ended June 30, 2009 and 2008, the total of
such expenses were $402,000 and $413,000, respectively.
Ownership Interest by the General Partners
------------------------------------------
PS owns 6,274 Limited Partnership Units ("Units"), as to which PS has
sole voting and dispositive power.
At December 31, 2008, Hughes and members of his family (the "Hughes
Family") owned 6,105 Units. Hughes owned 6,025 Units, as to which Hughes
had sole voting and dispositive power, through a wholly-owned corporation
and Tamara Hughes Gustavson, an adult daughter of Hughes, owned 80 Units as
to which Tamara Hughes Gustavson had sole voting and dispositive power. On
January 1, 2009, PS exercised its option to acquire 25 of the Units held by
Hughes and the 80 Units held by Tamara Hughes Gustavson for a cost of
approximately $20,000. At June 30, 2009, Hughes owns 6,000 Units.
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 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
8
PUBLIC STORAGE PROPERTIES, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Partnership accounts for its investment in STOR-Re, which is included in
other assets on our accompanying condensed balance sheets, on the cost
method, and has received no distributions during the six months ended June
30, 2009 or 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.
Other Activities with PS
------------------------
PS Insurance Company - Hawaii, Ltd. ("PSIC"), a corporation that
reinsures policies against losses to goods stored by tenants in the
Partnership's and PS' storage facilities. PSIC receives the premiums and
bears the risks associated with the re-insurance. The Partnership receives
a fee (an "Access Fee") from PSIC in return for providing tenant listings.
This Access Fee is based on the number of spaces the Partnership has to
rent. Included in other income on our accompanying condensed statements of
income for these Access Fees are $39,000 and $30,000 for the three months
ended June 30, 2009 and 2008, respectively, and $79,000 and $60,000 for the
six months ended, June 30, 2009 and 2008, respectively.
A subsidiary of PS sells locks and boxes 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 the
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. The plaintiff has filed an
appeal to the Court's June 22, 2007 summary judgment ruling. On October 28,
2008, the Court of Appeals sustained the trial court's ruling. The
plaintiff filed a petition for review with the California Supreme Court,
which was granted but further action in this matter was deferred pending
consideration and disposition of a related issue in Brinker Restaurant
Corp. v. Superior Court which is currently pending before the California
Supreme Court.
9
PUBLIC STORAGE PROPERTIES, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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.
10
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 document 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" in
the Public Storage Properties, Ltd. Annual Report on Form 10-K for the year
ended December 31, 2008 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, including
property 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, including risks related to current economic
conditions;
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 including, without limitation, those
governing environmental, tax and tenant insurance matters, and risks
related to the impact of new laws and regulations;
o disruptions or shutdowns of our automated processes and systems or
breaches of our data security; 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.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our financial statements, which have been prepared in
accordance with United States ("U.S.") generally accepted accounting principles
("GAAP"). The preparation of our financial statements and related disclosures in
11
conformity with GAAP and our discussion and analysis of our financial condition
and results of operations requires management to make judgments, assumptions and
estimates that affect the amounts reported in our condensed financial statements
and accompanying notes. The notes to the Partnership's June 30, 2009 condensed
financial statements, primarily Note 2, summarize the significant accounting
policies and methods used in the preparation of our condensed financial
statements and related disclosures.
Management believes the following are critical accounting policies the
application of which has a material impact on the Partnership's financial
presentation. That is, they are both important to the portrayal of our financial
condition and results, and they require management to make judgments and
estimates about matters that are inherently uncertain.
IMPAIRMENT OF 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 includes 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 June 30, 2009. 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 the Partnership's
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 GAAP, 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 June 30, 2009 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.
OVERVIEW OF MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
- --------------------------------------------------------------
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.
PS is the largest owner and operator of self-storage facilities in the 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.
12
The self-storage industry is not immune to the recessionary pressures in
the general economic environment. Demand for self-storage space in the U.S. has
softened and, as a result, the Partnership is experiencing downward pressure on
occupancy levels, rental rates and revenue growth.
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 any 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 that we will experience such
increases.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED JUNE 30, 2009 AS COMPARED TO THREE MONTHS ENDED JUNE 30,
2008:
The Partnership's net income for the three months ended June 30, 2009 was
$1,331,000, as compared to $1,340,000 for the same period in 2008, representing
a decrease of $9,000 or 0.7%. Property net operating income (rental income less
cost of operations, management fees paid to an affiliate and depreciation
expense) decreased $13,000 or 0.1% from $1,338,000 for the three months ended
June 30, 2008 to $1,325,000 for the three months ended June 30, 2009.
Rental income for the three months ended June 30, 2009 was $1,840,000, as
compared to $1,905,000 for the three months ended June 30, 2008, representing a
decrease of $65,000 or 3.4%. The decrease in rental income was primarily a
result of a 3.0% decrease in realized rent per square foot. Annualized realized
rent for the three months ended June 30, 2009 decreased to $15.67 per occupied
square foot, as compared to $16.17 per occupied square foot for the three months
ended June 30, 2008. Weighted average occupancy levels at the self-storage
facilities were 91.4% and 91.6% for the three months ended June 30, 2009 and
2008, respectively.
We believe that demand for self-storage space has been negatively impacted
by general economic conditions, the slow down in housing sales and moving
activity, as well as increased competition. Based upon certain comparative June
30, 2009 key operating metrics for the Partnership's self-storage facilities - a
0.5% decline in square foot occupancy from 91.6% at June 30, 2008 to 91.1% at
June 30, 2009, and 4.8% lower in place annual rent per occupied square foot from
$17.81 at June 30, 2008 to $16.96 at June 30, 2009, we expect that the revenue
decline for the Partnership's facilities for the three months ending September
30, 2009, as compared to the same period in 2008 will approximate 5%. The
Partnership's operating strategy will be to continue to focus on maintaining
occupancy levels by adjusting rental rates, promotional discounts and marketing
activities. It is unclear to us how much the above mentioned factors will impact
our revenues beyond the third quarter of 2009.
Other income was $41,000 for the three months ended June 30, 2009, as
compared to $37,000 for the three months ended June 30, 2008, representing an
increase of $4,000 or 10.8%. Included in other income are access fees paid by PS
Insurance Company - Hawaii, Ltd. ("PSICH"), a corporation owned by PS (described
more fully in Note 5 to the Partnership's June 30, 2009 condensed financial
statements), totaling $39,000 and $30,000 for the three months ended June 30,
2009 and 2008, respectively. Other income for the three months ended June 30,
2009 as compared to the same period in 2008 reflects a decline in interest
income on cash balances. While the Partnership had higher average cash balances,
interest rates were significantly lower in the three months ended June 30, 2009
as compared to the same period in 2008. The Partnership has $791,000 in cash on
hand at June 30, 2009 invested primarily in money-market funds, which earn
nominal rates of interest in the current interest rate environment.
Cost of operations, including management fees paid to an affiliate, (see
Note 5 to the Partnership's June 30, 2009 condensed financial statements) for
the three months ended June 30, 2009 was $480,000 compared to $527,000 for the
three months ended June 30, 2008, representing a decrease of $47,000 or 8.9%, as
decreases in repairs and maintenance, advertising and promotion, and payroll
expenses, were partially offset by increases in property tax expense.
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Depreciation expense was $35,000 and $40,000 for the three months ended
June 30, 2009 and 2008, respectively, representing a decrease of $5,000 or
12.5%. The decrease in depreciation expense is primarily related to fully
depreciated capital improvements on the buildings for the Partnership's
self-storage facilities.
Administrative expense was $35,000 for each of the three months ended June
30, 2009 and 2008.
SIX MONTHS ENDED JUNE 30, 2009 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 2008:
The Partnership's net income for the six months ended June 30, 2009 was
$2,671,000, as compared to $2,716,000 for the same period in 2008, representing
a decrease of $45,000 or 1.7%. Property net operating income (rental income less
cost of operations, management fees paid to an affiliate and depreciation
expense) decreased $40,000 or 1.5% from $2,683,000 for the six months ended June
30, 2008 to $2,643,000 for the six months ended June 30, 2009.
Rental income for the six months ended June 30, 2009 was $3,698,000, as
compared to $3,777,000 for the six months ended June 30, 2008, representing a
decrease of $79,000 or 2.1%. The decrease in rental income was primarily a
result of a slight decrease in realized rent per square foot. Annual realized
rent for the six months ended June 30, 2009 decreased 1.9% to $15.66 per
occupied square foot, as compared to $15.96 per occupied square foot for the six
months ended June 30, 2008. Weighted average occupancy levels at the
self-storage facilities were 91.8% for each of the six months ended June 30,
2009 and 2008.
Other income was $84,000 for the six months ended June 30, 2009, as
compared to $89,000 for the six months ended June 30, 2008, representing a
decrease of $5,000 or 5.6%. Included in other income are access fees paid by
PSICH, totaling $79,000 and $60,000 for the six months ended June 30, 2009 and
2008, respectively. Other income for the six months ended June 30, 2009 as
compared to the same period in 2008 reflects a decline in interest income on
cash balances. While the Partnership had higher average cash balances, interest
rates were significantly lower in the six months ended June 30, 2009 as compared
to the same period in 2008.
Cost of operations, including management fees paid to an affiliate, (see
Note 5 to the Partnership's June 30, 2009 condensed financial statements) for
the six months ended June 30, 2009 was $986,000 compared to $1,025,000 for the
six months ended June 30, 2008, representing a decrease of $39,000 or 3.8%, as
decreases in repairs and maintenance, utilities, eviction costs and payroll
expenses, were partially offset by increases in advertising and promotion and
property tax expenses.
Depreciation expense was $69,000 for each of the six months ended June 30,
2009 and 2008.
Administrative expense was $56,000 for each of the six months ended June
30, 2009 and 2008.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At June 30, 2009, the Partnership had cash of $791,000 as compared to total
liabilities of $276,000. Cash generated from operations ($2,684,000 for the six
months ended June 30, 2009) has been sufficient to meet all current obligations
of the Partnership. Capital improvements totaled $55,000 and $205,000 in the six
months ended June 30, 2009 and 2008, respectively. Capital improvements are
budgeted at $176,000 for the year ending December 31, 2009.
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. As the capital and credit markets are
currently constrained and in flux, there can be no assurance that the
Partnership would be able to access any such borrowings in order to do so, if
such a course of action were otherwise deemed necessary.
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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. During the three months
ended June 30, 2009, we paid distributions to the limited and general partners
totaling $920,000 ($46.00 per unit) and $319,000, respectively. During the six
months ended June 30, 2009, we paid distributions to the limited and general
partners totaling $1,960,000 ($98.00 per unit) and $680,000, respectively.
Future distribution rates will be adjusted to levels which are supported by
operating cash flow after capital improvements and any other necessary
obligations.
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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.
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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 Partnership's June 30, 2009 condensed financial statements in this Form
10-Q is incorporated by reference in this Item 1.
ITEM 1A. RISK FACTORS
------------
The risk factors set forth below update the corresponding risk factor in
Part I, "Item 1A. Risk Factors" in the Public Storage Properties, Ltd. Annual
Report on Form 10-K for the year ended December 31, 2008. In addition to the
risk factor below, you should carefully consider the other risk factors
discussed in the Partnership's Annual Report on Form 10-K for the year ended
December 31, 2008, which could materially affect the Partnership's business,
financial position and results of operations.
THE PARTNERSHIP IS SUBJECT TO GOVERNMENTAL REGULATIONS AND ACTIONS THAT AFFECT
ITS OPERATING RESULTS AND FINANCIAL CONDITION.
The Partnership's business is subject to regulation under a wide variety of
U.S. federal, state and local laws, regulations and policies. There can be no
assurance that, in response to current economic conditions or the current
political environment or otherwise, laws and regulations will not be implemented
or changed in ways that adversely affect the Partnership's operating results and
financial condition, such as current federal legislative proposals to expand
health care coverage costs or facilitate union activity or otherwise increase
operating costs.
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: August 13, 2009
PUBLIC STORAGE PROPERTIES, LTD.
BY: Public Storage
General Partner
BY: /s/ John Reyes
-------------------------
John Reyes
Senior Vice President and
Chief Financial Officer
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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.
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