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 June 30, 2009
-------------
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
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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 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: 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 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 IV, LTD.
CONDENSED BALANCE SHEETS
June 30, December 31,
2009 2008
------------------- -------------------
(Unaudited)
ASSETS
------
Cash and cash equivalents $ 1,199,000 $ 1,139,000
Rent and other receivables 187,000 74,000
Real estate facilities, at cost:
Buildings and equipment 20,535,000 20,358,000
Land 5,021,000 5,021,000
------------------- -------------------
25,556,000 25,379,000
Less accumulated depreciation (18,851,000) (18,642,000)
------------------- -------------------
6,705,000 6,737,000
Other assets 99,000 124,000
------------------- -------------------
Total assets $ 8,190,000 $ 8,074,000
=================== ===================
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
Accounts payable and accrued liabilities $ 327,000 $ 270,000
Deferred revenue 276,000 297,000
------------------- -------------------
Total liabilities 603,000 567,000
Commitments and contingencies (Note 6)
Partners' equity:
Limited partners' equity, $500 per unit, 40,000 units
authorized, issued and outstanding 5,633,000 5,574,000
General partners' equity 1,954,000 1,933,000
------------------- -------------------
Total partners' equity 7,587,000 7,507,000
------------------- -------------------
Total liabilities and partners' equity $ 8,190,000 $ 8,074,000
=================== ===================
See accompanying notes.
1
PUBLIC STORAGE PROPERTIES IV, LTD.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
2009 2008 2009 2008
--------------- --------------- --------------- ---------------
REVENUES:
Rental income $ 2,786,000 $ 2,895,000 $ 5,572,000 $ 5,699,000
Other income 176,000 67,000 257,000 165,000
Revenues from affiliate under
performance agreement 345,000 321,000 675,000 635,000
--------------- --------------- --------------- ---------------
3,307,000 3,283,000 6,504,000 6,499,000
--------------- --------------- --------------- ---------------
COSTS AND EXPENSES:
Cost of operations 713,000 755,000 1,448,000 1,495,000
Management fees paid to affiliate 167,000 173,000 334,000 341,000
Depreciation 110,000 106,000 209,000 202,000
Administrative 42,000 43,000 69,000 71,000
--------------- --------------- --------------- ---------------
1,032,000 1,077,000 2,060,000 2,109,000
--------------- --------------- --------------- ---------------
NET INCOME $ 2,275,000 $ 2,206,000 $ 4,444,000 $ 4,390,000
=============== =============== =============== ===============
Limited partners' share of net income $ 1,759,000 $ 1,651,000 $ 3,319,000 $ 3,293,000
General partners' share of net income 516,000 555,000 1,125,000 1,097,000
--------------- --------------- --------------- ---------------
$ 2,275,000 $ 2,206,000 $ 4,444,000 $ 4,390,000
=============== =============== =============== ===============
Limited partners' share of net income per unit
(40,000 units outstanding) $ 43.98 $ 41.28 $ 82.98 $ 82.33
=============== =============== =============== ===============
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, 2008 $ 5,574,000 $ 1,933,000 $ 7,507,000
Net income 3,319,000 1,125,000 4,444,000
Cash distributions (3,240,000) (1,124,000) (4,364,000)
Equity transfer (20,000) 20,000 -
-------------- ------------- -----------------
Balance at June 30, 2009 $ 5,633,000 $ 1,954,000 $ 7,587,000
============== ============= =================
See accompanying notes.
3
PUBLIC STORAGE PROPERTIES IV, LTD.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
---------------------------------
2009 2008
-------------- --------------
Cash flows from operating activities:
Net income $ 4,444,000 $ 4,390,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 209,000 202,000
(Increase) decrease in rent and other receivables (113,000) 17,000
Decrease in other assets 25,000 24,000
Increase in accounts payable and accrued liabilities 57,000 225,000
Decrease in deferred revenue (21,000) (21,000)
-------------- --------------
Total adjustments 157,000 447,000
-------------- --------------
Net cash provided by operating activities 4,601,000 4,837,000
-------------- --------------
Cash flows from investing activities:
Additions to real estate facilities (177,000) (187,000)
-------------- --------------
Net cash used in investing activities (177,000) (187,000)
-------------- --------------
Cash flows from financing activities:
Distributions paid to partners (4,364,000) (4,256,000)
-------------- --------------
Net cash used in financing activities (4,364,000) (4,256,000)
-------------- --------------
Net increase in cash and cash equivalents 60,000 394,000
Cash and cash equivalents at the beginning of the period 1,139,000 787,000
-------------- --------------
Cash and cash equivalents at the end of the period $ 1,199,000 $ 1,181,000
============== ==============
See accompanying notes.
4
PUBLIC STORAGE PROPERTIES IV, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
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 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 IV, 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 (40,000) 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 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.
6
PUBLIC STORAGE PROPERTIES IV, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Any real estate facility, which we expect to sell or dispose
of prior to its previously estimated useful life, is stated at the
lower of its estimated net realizable value, less cost to sell, or its
carrying value.
Deferred Revenue:
-----------------
Deferred revenue totaling $276,000 at June 30, 2009 ($297,000
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 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 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) needs to be distributed at least
quarterly. During the three months ended June 30, 2009, we paid cash
distributions to the limited and general partners totaling $1,480,000
($37.00 per unit) and $514,000, respectively, and $1,600,000 ($40.00
per unit) and $555,000, respectively, for the same period in 2008.
During the six months ended June 30, 2009, we paid cash distributions
to the limited and general partners totaling $3,240,000 ($81.00 per
unit) and $1,124,000, respectively, and $3,160,000 ($79.00 per unit)
and $1,096,000, 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
7
PUBLIC STORAGE PROPERTIES IV, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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 transfers have no effect on the results of
operations or distributions to partners.
5. RELATED PARTY TRANSACTIONS
Management Agreements and Shared Expenses with Affiliates
---------------------------------------------------------
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 months ended June 30, 2009 and 2008, the
Partnership paid PS $167,000 and $173,000, respectively, under this
Management Agreement. For the six months ended June 30, 2009 and 2008,
the Partnership paid PS $334,000 and $341,000, respectively, under this
Management Agreement.
The Management Agreement between the Partnership and PS
provides that the Management Agreement may be terminated without cause
upon 60 days written notice by the Partnership or six months notice by
PS.
A real estate facility owned by the Partnership (the "Azusa
Property") is operated pursuant to a management and performance
agreement (the "Performance Agreement") with a subsidiary of PS (the
"PS Sub"). Following the commencement of the Performance Agreement in
March 2001, the facility was initially expanded to include industrial
space, and this industrial space was subsequently converted to
self-storage space. These improvements, along with any other subsequent
improvements or capital expenditures during the term of the Performance
Agreement, are entirely funded by the PS Sub. During the term of 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 Performance 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"). The Performance Agreement expires
on December 31, 2015, at which time the Partnership will commence
collecting the actual net operating income currently earned by the PS
Sub from operating the Azusa Property, and the Guaranteed Amounts will
no longer apply. The PS Sub recorded revenues of $1,026,000 and
$951,000 for the six months ended June 30, 2009 and 2008, respectively,
and cost of operations totaling $341,000 and $339,000 in the six months
ended June 30, 2009 and 2008, respectively, with respect to the
operation of the Azusa property. Capital expenditures for the Azusa
property totaled $4,000 and $1,000 in the six months ended June 30,
2009 and 2008, respectively. Average occupancy of the Azusa Property
was 89.2% and 81.1% during the six months ended June 30, 2009 and 2008,
respectively. The lower average occupancy during the six months ended
June 30, 2008 is primarily due to the fill-up of expanded self-storage
space which was completed at the Azusa property, and paid for by the PS
Sub, during 2006. Included in the line item "revenues from affiliate
under performance agreement" in the Partnership's accompanying
condensed statements of income, is the Guaranteed Amounts earned by the
Partnership under the Performance Agreement.
8
PUBLIC STORAGE PROPERTIES IV, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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 included
in cost of operations on our accompanying condensed statements of
income, amounted to $462,000 and $501,000 for the three months ended
June 30, 2009 and 2008, respectively, and $915,000 and $953,000 for the
six months ended June 30, 2009 and 2008, respectively.
Ownership Interest by the General Partners
------------------------------------------
In addition to the general partnership interests outlined in
Note 4, PS owns 11,671 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 6,198 Units. Hughes owned 5,892 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 306 Units as to which Tamara Hughes Gustavson had sole
voting and dispositive power. On January 1, 2009, PS exercised its
option to acquire the 306 Units held by Tamara Hughes Gustavson for a
cost of approximately $136,000. At June 30, 2009, Hughes owns 5,892
Units.
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 1.8% 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 in 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. ("PSICH"), a corporation
that reinsures policies against losses to goods stored by tenants in
the Partnership's and PS' storage facilities. PSICH receives the
9
PUBLIC STORAGE PROPERTIES IV, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
premiums and bears the risks associated with the re-insurance. The
Partnership receives a fee (an "Access Fee") from PSICH 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
$76,000 and $58,000 for the three months ended June 30, 2009 and 2008,
respectively and $152,000 and $116,000 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.
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 IV, 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 IV, 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 $2,275,000, as compared to $2,206,000 for the same period in 2008,
representing an increase of $69,000 or 3.1%. Property net operating income
(rental income less cost of operations, management fees paid to an affiliate and
depreciation expense) decreased $65,000 or 3.5% from $1,861,000 for the three
months ended June 30, 2008 to $1,796,000 for the three months ended June 30,
2009.
Rental income for the three months ended June 30, 2009 was $2,786,000
as compared to $2,895,000 for the three months ended June 30, 2008, representing
a decrease of $109,000 or 3.8%. The decrease in rental income is attributable
primarily to a 3.3% decrease in annualized realized rent for the three months
ended June 30, 2009 to $15.10 per occupied square foot, as compared to $15.62
per occupied square foot for the same period in 2008. Additionally, weighted
average occupancy levels at the self-storage facilities decreased slightly to
90.5% for the three months ended June 30, 2009, as compared to 91.2% for the
same period in 2008. These amounts exclude the property operated pursuant to the
management and performance agreement with a subsidiary of PS (the "PS Sub"). See
Note 5 to the Partnership's June 30, 2009 condensed financial statements for
additional information.
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 1.5% decline in square foot occupancy from 92.2% at
June 30, 2008 to 90.8% at June 30, 2009, and 6.2% lower in place annual rent per
occupied square foot from $17.82 at June 30, 2008 to $16.71 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 8%. 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 $176,000 for the three months ended June 30, 2009, as
compared to $67,000 for the three months ended June 30, 2008, representing an
increase of $109,000 or 162.7%. 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 $76,000 and $58,000 for the three months ended
June 30, 2009 and 2008, respectively. Included in other income for the three
months ended June 30, 2009 is $97,000 in nonrecurring income in settlement of a
contractual issue. Interest income on cash balances for the three months ended
June 30, 2009 declined as compared to the same period in 2008. 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 $1,199,000 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.
Revenues from Affiliates under the Performance Agreement increased
$24,000 or 7.5% to $345,000 for the three months ended June 30, 2009 from
$321,000 for the three months ended June 30, 2008. See Note 5 to the
Partnership's June 30, 2009 condensed financial statements for further
discussion of the nature of these revenues.
13
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 $880,000 compared to $928,000 for
the three months ended June 30, 2008, representing a decrease of $48,000 or
5.2%, as reductions in advertising and promotion, repairs and maintenance,
payroll expenses, and eviction costs, were partially offset by increases in
property tax, utilities and professional fees expenses.
Depreciation expense was $110,000 and $106,000 for the three months
ended June 30, 2009 and 2008, respectively, representing an increase of $4,000.
Administrative expense was $42,000 and $43,000 for the three months
ended June 30, 2009 and 2008, respectively.
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
$4,444,000, as compared to $4,390,000 for the same period in 2008, representing
an increase of $54,000 or 1.2%. Property net operating income (rental income
less cost of operations, management fees paid to an affiliate and depreciation
expense) decreased $80,000 or 2.2% from $3,661,000 for the six months ended June
30, 2008 to $3,581,000 for the six months ended June 30, 2009.
Rental income for the six months ended June 30, 2009 was $5,572,000 as
compared to $5,699,000 for the six months ended June 30, 2008, representing a
decrease of $127,000 or 2.2%. The decrease in rental income is attributable
primarily to a 2.3% decrease in annualized realized rent for the six months
ended June 30, 2009 to $15.16 per occupied square foot, as compared to $15.51
per occupied square foot for the same period in 2008. Additionally, weighted
average occupancy levels at the self-storage facilities decreased slightly to
90.1% for the six months ended June 30, 2009, as compared to 90.4% for the same
period in 2008. These amounts exclude the property operated pursuant to the
management and performance agreement with a subsidiary of PS (the "PS Sub"). See
Note 5 to the Partnership's June 30, 2009 condensed financial statements for
additional information.
Other income was $257,000 for the six months ended June 30, 2009, as
compared to $165,000 for the six months ended June 30, 2008, representing an
decrease of $92,000 or 55.8%%. 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 $152,000 and $116,000 for the six months ended
June 30, 2009 and 2008, respectively. Included in other income for the six
months ended June 30, 2009 is $97,000 in nonrecurring income in settlement of a
contractual issue. Interest income on cash balances for the six months ended
June 30, 2009 declined as compared to the same period in 2008. 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. The Partnership has $1,199,000 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.
Revenues from Affiliates under the Performance Agreement increased
$40,000 or 6.3% to $675,000 for the six months ended June 30, 2009 from $635,000
for the six months ended June 30, 2008. See Note 5 to the Partnership's June 30,
2009 condensed financial statements for further discussion of the nature of
these revenues.
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 $1,782,000 compared to $1,836,000 for
the six months ended June 30, 2008, representing a decrease of $54,000 or 2.9%,
as reductions in repairs and maintenance, advertising and promotion, insurance
and eviction costs, were partially offset by increases in property tax,
professional fees and utilities expenses.
Depreciation expense was $209,000 and $202,000 for the six months ended
June 30, 2009 and 2008, respectively, representing an increase of $7,000.
14
Administrative expense was $69,000 and $71,000 in the six months ended
June 30, 2009 and 2008, respectively, representing a decrease of $2,000 or 2.8%.
This decrease is due to lower allocated expenses.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At June 30, 2009, the Partnership had cash of $1,199,000 as compared to
total liabilities of $603,000. Cash generated from operations ($4,601,000 for
the six months ended June 30, 2009) has been sufficient to meet all current
obligations of the Partnership. Capital improvements totaled $177,000 and
$187,000 in the six months ended June 30, 2009 and 2008, respectively. Capital
improvements are budgeted at $414,000 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.
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 cash distributions to the limited and general
partners totaling $1,480,000 ($37.00 per unit) and $514,000, respectively, and
$1,600,000 ($40.00 per unit) and $555,000, respectively, for the same period in
2008. During the six months ended June 30, 2009, we paid cash distributions to
the limited and general partners totaling $3,240,000 ($81.00 per unit) and
$1,124,000, respectively, and $3,160,000 ($79.00 per unit) and $1,096,000,
respectively, for the same period in 2008. Future distribution rates will be
adjusted to levels which are supported by operating cash flow after capital
improvements and any other necessary obligations.
15
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.
16
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 IV, 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.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: August 13, 2009
PUBLIC STORAGE PROPERTIES IV, LTD.
BY: Public Storage
General Partner
BY: /s/ John Reyes
-------------------------
John Reyes
Senior Vice President and
Chief Financial Officer
18
Exhibit No. Exhibit Index
31.1 Rule 13a-14(a) Certification. Filed herewith.
31.2 Rule 13a-14(a) Certification. Filed herewith.
32 Section 1350 Certifications. Filed herewith.
19