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 0-8908
PUBLIC STORAGE PROPERTIES IV, LTD.
(Exact name of Registrant as specified in its charter)
California 95-3192402
- ----------------------------------------- ------------------------
(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: 40,000.
PUBLIC STORAGE PROPERTIES IV, LTD.
INDEX
Pages
PART I. FINANCIAL INFORMATION (Item 3 not applicable)
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 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 13
Item 4. Controls and Procedures 14
PART II.OTHER INFORMATION (Items 2 - 5 not applicable)
Item 1. Legal Proceedings 15
Item 1A.Risk Factors 15 - 18
Item 6. Exhibits 18
PUBLIC STORAGE PROPERTIES IV, LTD.
CONDENSED BALANCE SHEETS
March 31, December 31,
2008 2007
-------------- --------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 1,085,000 $ 787,000
Rent and other receivables 59,000 85,000
Real estate facilities, at cost:
Buildings and equipment 19,951,000 19,939,000
Land 5,021,000 5,021,000
-------------- --------------
24,972,000 24,960,000
Less accumulated depreciation (18,316,000) (18,220,000)
-------------- --------------
6,656,000 6,740,000
Other assets 126,000 140,000
-------------- --------------
Total assets $ 7,926,000 $ 7,752,000
============== ==============
LIABILITIES AND PARTNERS' EQUITY
Accounts payable and accrued liabilities $ 264,000 $ 173,000
Deferred revenue 325,000 325,000
Total liabilities -------------- --------------
589,000 498,000
Commitments and contingencies (Note 6)
Partners' equity:
Limited partners' equity, $500 per unit,
40,000 units authorized, issued
and outstanding 5,448,000 5,386,000
General partners' equity 1,889,000 1,868,000
-------------- --------------
Total partners' equity 7,337,000 7,254,000
-------------- --------------
Total liabilities and partners' equity $ 7,926,000 $ 7,752,000
============== ==============
See accompanying notes.
1
PUBLIC STORAGE PROPERTIES IV, LTD.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
March 31,
----------------------------
2008 2007
------------- ------------
REVENUES:
Rental income $ 2,804,000 $ 2,808,000
Other income 98,000 65,000
Revenues from affiliate under
performance agreement 314,000 302,000
------------ ------------
3,216,000 3,175,000
------------ ------------
COSTS AND EXPENSES:
Cost of operations 740,000 749,000
Management fees paid to affiliate 168,000 168,000
Depreciation 96,000 104,000
Administrative 28,000 27,000
------------ ------------
1,032,000 1,048,000
------------ ------------
NET INCOME $ 2,184,000 $ 2,127,000
============ ============
Limited partners' share of net income $ 1,642,000 $ 1,599,000
General partners' share of net income 542,000 528,000
------------ ------------
$ 2,184,000 $ 2,127,000
============ ============
Limited partners' share of net income per unit
(40,000 units outstanding) $ 41.05 $ 39.98
============ ============
See accompanying notes.
2
PUBLIC STORAGE PROPERTIES IV, LTD.
CONDENSED STATEMENT OF PARTNERS' EQUITY
(UNAUDITED)
Limited General Total Partners'
Partners' Partners' Equity
------------- ------------- --------------
Balance at December 31, 2007 $ 5,386,000 $ 1,868,000 $ 7,254,000
Net income 1,642,000 542,000 2,184,000
Cash distributions (1,560,000) (541,000) (2,101,000)
Equity transfer (20,000) 20,000 -
------------- ------------- --------------
Balance at March 31, 2008 $ 5,448,000 $ 1,889,000 $ 7,337,000
============= ============= ==============
See accompanying notes.
3
PUBLIC STORAGE PROPERTIES IV, LTD.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
-------------------------------
2008 2007
------------ ------------
Cash flows from operating activities:
Net income $ 2,184,000 $ 2,127,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 96,000 104,000
Decrease in rent and other receivables 26,000 24,000
Decrease in other assets 14,000 75,000
Increase in accounts payable and accrued liabilities 91,000 141,000
Increase in deferred revenue - 6,000
------------ ------------
Total adjustments 227,000 350,000
------------ ------------
Net cash provided by operating activities 2,411,000 2,477,000
------------ ------------
Cash flows from investing activities:
Additions to real estate facilities (12,000) (29,000)
------------ ------------
Net cash used in investing activities (12,000) (29,000)
------------ ------------
Cash flows from financing activities:
Distributions paid to partners (2,101,000) (2,047,000)
------------ ------------
Net cash used in financing activities (2,101,000) (2,047,000)
------------ ------------
Net increase in cash and cash equivalents 298,000 401,000
Cash and cash equivalents at beginning of the period 787,000 2,525,000
------------ ------------
Cash and cash equivalents at end of the period $ 1,085,000 $ 2,926,000
============ ============
See accompanying notes.
4
PUBLIC STORAGE PROPERTIES IV, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF THE BUSINESS
---------------------------
Public Storage Properties IV, Ltd., (the "Partnership") is a publicly
held limited partnership formed under the California Uniform Limited
Partnership Act in December 1977. The Partnership raised $20,000,000 in
gross proceeds by selling 40,000 units of limited partnership interest
("Units") in an interstate offering, which commenced in May 1978 and
completed in November 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 17 self-storage properties in California and Florida.
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.
5
PUBLIC STORAGE PROPERTIES IV, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Per unit data is based on the weighted average number of the limited
partnership units (40,000) 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.
Real Estate Facilities and Evaluation of Asset Impairment:
----------------------------------------------------------
Real estate facilities are recorded at cost. Costs associated with the
development, construction, renovation and improvement of properties are
capitalized. Interest, property taxes, and other costs associated with the
development incurred during the construction period are capitalized as
building cost. Expenditures for repairs and maintenance are charged to
expense as incurred. Depreciation is computed using the straight-line
method over the estimated useful lives of the buildings and improvements,
which are generally between 5 and 25 years. Certain real estate facilities
have been in service longer than 25 years, and accordingly the original
development cost of such buildings are fully depreciated at 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 carrying value of the asset, then an impairment charge is
booked for the excess of carrying value over the real estate's fair value.
Our evaluations have identified no such impairments at March 31, 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 $325,000 at March 31, 2008 and December 31,
2007, consists of prepaid rents, which are recognized when earned.
6
PUBLIC STORAGE PROPERTIES IV, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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 IV, 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 or state 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) needs to be distributed at least quarterly. During
the three months ended March 31, 2008, we paid distributions to the limited
and general partners totaling $1,560,000 ($39.00 per unit) and $541,000,
respectively. During the three months ended March 31, 2007, we paid
distributions to the limited and general partners totaling $1,520,000
($38.00 per unit) and $527,000, 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. As
such, Hughes continues to act as a general partner of the Partnership but
does not directly receive any compensation, distributions or other
consideration from the Partnership.
The general partners have a 1% interest in the Partnership. In
addition, the general partners had an 8% interest in cash distributions
attributable to operations (exclusive of distributions attributable to sale
and financing proceeds) until the limited partners recovered all of their
investment. Thereafter, the general partners have a 25% interest in all
cash distributions (including sale and financing proceeds). During 1986,
the limited partners recovered all of their initial investment. All
subsequent distributions are being made 25.75% (including the 1% interest)
to the general partners and 74.25% to the limited partners. Transfers of
equity are made periodically to reconcile the partners' equity accounts to
the provisions of the Partnership Agreement. These transactions have no
effect on the results of operations or distributions to partners.
7
PUBLIC STORAGE PROPERTIES IV, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
5. RELATED PARTY TRANSACTIONS
--------------------------
Management Agreements and Shared Expenses with Affiliates
---------------------------------------------------------
The Partnership has a 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 each of the three month periods
ended March 31, 2008 and 2007, the Partnership paid PS $168,000, 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.
A real estate facility owned by the Partnership (the 'Azusa Property')
is operated pursuant to a management and performance agreement (the
"Performance Agreement") with Public Storage Pickup and Delivery, LP
("PSPUD"), a subsidiary of PS. Following the commencement of the
Performance Agreement in March 2001, the facility was modified to include
self-storage and industrial space, with the cost of these improvements
entirely funded by PSPUD. The industrial space was constructed for use in
PSPUD's containerized storage operations. Under the Performance Agreement,
the Partnership is guaranteed to receive the same net operating income it
received with respect to the Azusa Property prior to the effective date of
the agreement, with an annual increase of the greater of a) 1% or b) the
percentage increase in net operating income achieved at the self-storage
facilities managed by PS in the market in which this facility is located
(the "Guaranteed Amounts"). Where the net operating income earned by the
Azusa Property is less than these Guaranteed Amounts, PSPUD supplements the
Partnership's income. Where the amount earned by the Azusa Property exceeds
the Guaranteed Amounts, the excess is remitted to PSPUD. The costs of all
capital improvements with respect to the Azusa Property are funded by
PSPUD. Included in the line item "Revenues from Affiliate under Performance
Agreement" on the Partnership's Statements of Income, is the
pre-depreciation net operating income with respect to the Azusa Property.
The Partnership recorded a total of $314,000 and $302,000 in revenue with
respect to the Performance Agreement for the three months ended March 31,
2008 and 2007, respectively.
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. 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 the
accompanying condensed statements of income, amounted to $366,000 and
$448,000 for the three months ended March 31, 2008 and 2007, respectively.
Ownership Interest by the General Partners
------------------------------------------
In addition to the general partnership interests outlined in Note 4, PS
owns 11,365 Limited Partnership Units ("Units"), as to which PS has sole
voting and dispositive power.
Hughes and members of his family (the "Hughes Family") own 6,198 Units.
Hughes owns 5,892 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 306 Units as to which Tamara Hughes
Gustavson has sole voting and dispositive power; PS has an option to
acquire these 306 Units.
8
PUBLIC STORAGE PROPERTIES IV, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
In addition, there are 7,299 Units owned by PS Orangeco Partnerships,
Inc., a corporation in which 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 1.7% 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.
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 $58,000 and $28,000
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,
9
PUBLIC STORAGE PROPERTIES IV, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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 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 current
reports on Form 8-K 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.
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
11
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 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.
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 $2,184,000 compared to $2,127,000 for the three months ended March 31,
2007, representing an increase of $57,000 or 2.7%.
12
Rental income for the three months ended March 31, 2008 was $2,804,000
compared to $2,808,000 for the three months ended March 31, 2007,
representing a decrease of $4,000. The decrease in rental income is
attributable primarily to a slight decrease in weighted average occupancy
levels at the self-storage facilities from 90% in the three months ended
March 31, 2007 to 89% for the three months ended March 31, 2008. This
decrease was mostly offset by an increase in the annualized realized rent
per square foot to $15.41 per occupied square foot for the three months
ended March 31, 2008, compared to $15.38 per occupied square foot for the
same period in 2007. These amounts exclude the property operated pursuant
to the management and performance agreement with Public Storage Pickup and
Delivery, LP ("PSPUD"), a subsidiary of PS. See Note 5 to the Partnership's
March 31, 2008 condensed financial statements for additional information.
Revenues from Affiliates under the Performance Agreement increased
$12,000 or 4% to $314,000 in the three months ended March 31, 2008 from
$302,000 for the same period in 2007. See Note 5 to the Partnership's March
31, 2008 condensed financial statements for further discussion of the
nature of these revenues.
Cost of operations (including management fees paid to affiliate - see
Note 5 to the Partnership's March 31, 2008 condensed financial statements)
for the three months ended March 31, 2008 was $908,000 compared to $917,000
for the three months ended March 31, 2007, representing a decrease of
$9,000, which was primarily the result of decreases in advertising and
promotion and payroll expenses, partially offset by an increase in property
tax expense.
Depreciation expense was $96,000 for the three months ended March 31,
2008 compared to $104,000 for the same period in 2007, a decrease of $8,000
or 7.7%.
Liquidity and Capital Resources
-------------------------------
Cash generated from operations ($2,411,000 for the three months ended
March 31, 2008) has been sufficient to meet all current obligations of the
Partnership. Capital improvements totaled $12,000 and $29,000 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 $1,560,000
($39.00 per unit) and $541,000, respectively, for the three months ended
March 31, 2008. During the three months ended March 31, 2007, we paid
distributions totaling $1,520,000 ($38.00 per unit) and $527,000,
respectively. Future distribution rates may 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.
14
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.
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Public Storage is general partner and beneficially owns approximately
29.2% 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 33.7% 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
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subject to real estate operating risks.
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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.
15
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 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.
16
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.
Public Storage's acquisition of Shurgard or other potential
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acquisitions or development of properties may subject the Partnership to
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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
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governmental regulation which could reduce our profitability or limit our
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growth.
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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 1.5% of our 2007 revenues
and 1.8% of revenues for the quarter ended March 31, 2008.
Terrorist attacks and the possibility of wider armed conflict may have
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an adverse impact on our business and operating results and could decrease
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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.
17
Developments in California may have an adverse impact on our business
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and operating results and could decrease the value of our assets.
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Twelve of the Partnership's properties are located in California.
California is facing budgetary problems. Action that may be taken in
response to these problems, such as an increase in property taxes on
commercial properties, could adversely impact our business and results of
operations. In addition, the Partnership could be adversely impacted by
efforts to reenact legislation mandating medical insurance for employees of
California businesses and members of their families.
Increases in interest rates may adversely affect the price of our
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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
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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.
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The Partnership has a 1.7% 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.
18
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 IV, LTD.
BY: Public Storage
General Partner
BY: /s/ John Reyes
------------------------
John Reyes
Senior Vice President and
Chief Financial Officer
19
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.
20