UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the period ended March 31, 2005
--------------
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 0-9208
------
PUBLIC STORAGE PROPERTIES V, LTD.
-------------------------------------
(Exact name of registrant as specified in its charter)
California 95-3292068
- ------------------------------------------------ -----------------------------
(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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
The Registrant is a limited partnership and issues units representing ownership
of limited partner interests with a par value of $500.00 per unit. Number of
units outstanding at May 16, 2005: 44,000.
PUBLIC STORAGE PROPERTIES V, LTD.
INDEX
Pages
-----
PART I. FINANCIAL INFORMATION (Item 3 not applicable)
---------------------
Item 1. Financial Statements
Condensed Balance Sheets at March 31, 2005
and December 31, 2004 1
Condensed Statements of Income and Comprehensive
Income for the Three Months Ended March 31, 2005 and 2004 2
Condensed Statement of Partners' Equity for the
Three Months Ended March 31, 2005 3
Condensed Statements of Cash Flows for the
Three Months Ended March 31, 2005 and 2004 4
Notes to Condensed Financial Statements 5-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-11
Item 2A. Risk Factors 12-14
Item 4. Controls and Procedures 14-15
PART II. OTHER INFORMATION (Items 2 - 5 not applicable)
-----------------
Item 1. Legal Proceedings 16
Item 6. Exhibits 16
PUBLIC STORAGE PROPERTIES V, LTD.
CONDENSED BALANCE SHEETS
March 31, December 31,
2005 2004
------------------- ---------------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 3,138,000 $ 1,359,000
Marketable securities of affiliate (cost of $347,000 at March 31, 2005
and $8,181,000 at December 31, 2004) 487,000 30,221,000
Rent and other receivables 112,000 103,000
Real estate facilities, at cost:
Buildings and equipment 17,929,000 17,917,000
Land 4,714,000 4,714,000
------------------- ---------------------
22,643,000 22,631,000
Less accumulated depreciation (16,504,000) (16,313,000)
------------------- ---------------------
6,139,000 6,318,000
Other assets 85,000 110,000
------------------- ---------------------
Total assets $ 9,961,000 $ 38,111,000
=================== =====================
LIABILITIES AND PARTNERS' EQUITY
Accounts payable and accrued liabilities $ 127,000 $ 175,000
Deferred revenue 239,000 246,000
Distributions payable 1,719,000 -
Commitments and contingencies (Note 5) - -
Partners' equity:
Limited partners' equity, $500 per unit, 44,000 units
authorized, issued and outstanding 5,744,000 11,620,000
General partners' equity 1,992,000 4,030,000
Other comprehensive income 140,000 22,040,000
------------------- ---------------------
Total partners' equity 7,876,000 37,690,000
------------------- ---------------------
Total liabilities and partners' equity $ 9,961,000 $ 38,111,000
=================== =====================
See accompanying notes.
1
PUBLIC STORAGE PROPERTIES V, LTD.
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended
March 31,
----------------------------------
2005 2004
----------------- ---------------
REVENUES:
Rental income $ 2,328,000 $ 2,234,000
Dividends from marketable securities of affiliate 251,000 251,000
Other income 26,000 20,000
----------------- ---------------
2,605,000 2,505,000
----------------- ---------------
COSTS AND EXPENSES:
Cost of operations 603,000 586,000
Management fees paid to affiliates 139,000 133,000
Depreciation 191,000 211,000
Administrative 33,000 28,000
----------------- ---------------
966,000 958,000
----------------- ---------------
Net income before gain $ 1,639,000 $ 1,547,000
Gain on disposition of marketable securities of affiliate
22,534,000 -
----------------- ---------------
NET INCOME: $ 24,173,000 $ 1,547,000
================= ===============
Limited partners' share of net income ($363.41 per
unit in 2005 and $25.14 per unit in 2004) $ 15,990,000 $ 1,106,000
General partners' share of net income 8,183,000 441,000
----------------- ---------------
$ 24,173,000 $ 1,547,000
================= ===============
COMPREHENSIVE INCOME:
Net income $ 24,173,000 $ 1,547,000
Other comprehensive income:
Change in unrealized gain on marketable equity
securities of affiliate 634,000 2,819,000
Realized gain on disposition of marketable
securities of affiliate (22,534,000) -
----------------- ---------------
$ 2,273,000 $ 4,366,000
================= ===============
See accompanying notes.
2
PUBLIC STORAGE PROPERTIES V, LTD.
CONDENSED STATEMENT OF PARTNERS' EQUITY
(UNAUDITED)
Other
Limited General Comprehensive Total Partners'
Partners' Partners' Income Equity
------------------ ----------------- -------------------- -----------------
Balance at December 31, 2004 $ 11,620,000 $ 4,030,000 $ 22,040,000 $ 37,690,000
Change in unrealized gain on marketable
securities of affiliate - - 634,000 634,000
Realized gain on disposition of marketable
securities of affiliate - - (22,534,000) (22,534,000)
Net income 15,990,000 8,183,000 - 24,173,000
Cash distributions accrued (Note 3) (1,276,000) (443,000) - (1,719,000)
Distribution of marketable securities of
affiliate (22,548,000) (7,820,000) - (30,368,000)
Equity transfer 1,958,000 (1,958,000) - -
------------------ ----------------- -------------------- -----------------
Balance at March 31, 2005 $ 5,744,000 $ 1,992,000 $ 140,000 $ 7,876,000
================== ================= ==================== =================
See accompanying notes.
3
PUBLIC STORAGE PROPERTIES V, LTD.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
------------------------------------------
2005 2004
----------------------- ------------------
Cash flows from operating activities:
Net income $ 24,173,000 $ 1,547,000
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation 191,000 211,000
(Increase) decrease in rent and other receivables (9,000) 31,000
Decrease (increase) in other assets 25,000 (13,000)
Gain on disposition of marketable securities of affiliate (22,534,000) -
(Decrease) increase in accounts payable and accrued liabilities (48,000) 151,000
(Decrease) increase in deferred revenue (7,000) 2,000
----------------------- ------------------
Total adjustments (22,382,000) 382,000
----------------------- ------------------
Net cash provided by operating activities 1,791,000 1,929,000
----------------------- ------------------
Cash flow from investing activities:
Additions to real estate facilities (12,000) (50,000)
----------------------- ------------------
Net cash used in investing activities (12,000) (50,000)
----------------------- ------------------
Cash flow from financing activities:
Distributions paid to partners - (1,719,000)
----------------------- ------------------
Net cash used in financing activities - (1,719,000)
----------------------- ------------------
Net increase in cash and cash equivalents 1,779,000 160,000
Cash and cash equivalents at beginning of period 1,359,000 1,367,000
----------------------- ------------------
Cash and cash equivalents at end of period $ 3,138,000 $ 1,527,000
======================= ==================
Supplemental schedule of non-cash activities:
Change in fair market value of marketable securities $ 634,000 $ 2,819,000
Accrued and unpaid distributions:
Distribution payable 1,719,000 -
Partners' equity - distributions to partners (1,719,000) -
See accompanying notes.
4
PUBLIC STORAGE PROPERTIES V, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF THE BUSINESS
Public Storage Properties V, Ltd. (the "Partnership") is a publicly
held limited partnership formed under the California Uniform Limited
Partnership Act in May 1978. The Partnership raised $22,000,000 in
gross proceeds by selling 44,000 units of limited partnership
interests ("Units") in an interstate offering, which commenced in
March 1979 and completed in October 1979. The general partners in the
Partnership are Public Storage, Inc. ("PSI") and B. Wayne Hughes
("Hughes").
The Partnership was formed to engage in the business of developing and
operating self-storage facilities offering storage space for personal
and business use. The Partnership owns 14 operating facilities located
in three states. A portion of one of the operating facilities was
developed as a business park and is operated, pursuant to a management
agreement, by PS Business Parks, L.P. (see Note 4). The Partnership
also owns a parcel of land in Florida.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
----------------------
The accompanying unaudited condensed financial statements have been
prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and
with instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal, recurring accruals) necessary for a fair
presentation have been included. The results of operations for the
three months ended March 31, 2005 are not necessarily indicative of
the results expected for the full year. These unaudited condensed
financial statements should be read in conjunction with the financial
statements and related notes appearing in the Partnership's Form 10-K
for the year ended December 31, 2004.
Use of Estimates:
-----------------
The preparation of the condensed financial statements in conformity
with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the
amounts reported in the condensed financial statements and
accompanying notes. Actual results could differ from those estimates.
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 (See "Ownership Interest by the General Partners" under 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 (44,000) outstanding during the period.
Cash and Cash Equivalents:
--------------------------
For financial statement purposes, the Partnership considers all highly
liquid investments with an original maturity of three months or less
to be cash equivalents.
5
PUBLIC STORAGE PROPERTIES V, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Marketable Securities:
----------------------
Marketable securities consisted of 533,334 shares of common stock at
December 31, 2004 (none at March 31, 2005) and 17,331 depositary
shares of Equity Stock, Series A, of Public Storage, Inc., at December
31, 2004 and March 31, 2005. The Partnership had designated its
portfolio of marketable securities as being available-for-sale. In
accordance with the Financial Accounting Standard Board's Statement
No. 130, "Reporting Comprehensive Income", the Partnership records the
marketable securities at fair value, at each balance sheet date, and
records a corresponding unrealized gain for the excess of the market
value over the cost of the marketable securities, with a corresponding
increase to Partnership equity.
On March 31, 2005, the Partnership distributed all of its holdings in
Public Storage, Inc. common stock on a pro rata basis to unitholders
of record as of January 1, 2005. As a result of the disposition of its
holdings of Public Storage, Inc. common stock, the Partnership
recorded a gain of $22,534,000 during the first quarter of 2005,
representing the difference between the March 31, 2005 market value of
the marketable securities and the historical cost (calculated using
weighted average cost).
Income Taxes:
-------------
Public Storage Properties V, Ltd. is treated as a partnership for
Federal income tax purposes with the taxable income of the entity
allocated to each partner in accordance with the partnership
agreement.
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, 2005.
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, 2005.
6
PUBLIC STORAGE PROPERTIES V, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Any real estate 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.
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
rental income when collected.
Property taxes are accrued 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. Accordingly, the amounts incurred in an interim
period may not be indicative of amounts to be incurred during a full
year. Total advertising expenses were $77,000 and $88,000 for the
three months ended March 31, 2005 and 2004, respectively.
Environmental Costs:
--------------------
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.
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 improvement needs) be distributed at least
quarterly. Future distribution rates will be adjusted to levels to
levels which are supported by operating cash flow after capital
improvements and any other necessary obligations.
On April 15, 2005, we paid a cash distribution to unitholders totaling
$1,719,000, representing cash available for distribution at March 31,
2005. At March 31, 2005, management decided to pay this distribution
to unitholders. Accordingly, we have accrued this distribution on our
March 31, 2005 condensed balance sheet.
4. RELATED PARTY TRANSACTIONS
Management Agreements and Shared Expenses with Public Storage, Inc.:
--------------------------------------------------------------------
The Partnership has a management agreement with PSI pursuant to which
PSI operates the Partnership's self-storage facilities for a fee equal
to 6% of the facilities' gross revenue (as defined). The Partnership's
business park is managed by PS Business Parks, L.P. ("PSBP") pursuant
to a management agreement. PSBP, an affiliate of PSI, operates the
Partnership's business park for a fee equal to 5% of the facility's
gross income. The Partnership paid $139,000 and $133,000 for the three
months ended March 31, 2005 and 2004, respectively, pursuant to the
management agreements.
The management agreement between the Partnership and PSI may be
terminated without cause upon 60 days written notice by the
Partnership or six months notice by PSI. The management agreement
between the Partnership and PSBP may be terminated (i) without cause
upon 60 days written notice by the Partnership and upon seven years
notice by PSBP and (ii) at any time by either party for cause.
7
PUBLIC STORAGE PROPERTIES V, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The Partnership's facilities, along with facilities owned by PSI and
its affiliates, are managed jointly by PSI in order to take advantage
of scale and other efficiencies. Joint costs are allocated on a
methodology meant to fairly allocate such costs. Such joint costs
include supervisory, relief, and administrative personnel costs,
television advertising expenses, yellow page advertising, data
processing and insurance. The total of such expenses, which are
primarily included in cost of operations, amounted to $234,000 and
$251,000 for the three months ended March 31, 2005 and 2004,
respectively.
Ownership in Public Storage Stock:
----------------------------------
Marketable securities at March 31, 2005 consist of 17,331 shares of
Equity Stock, Series A, of Public Storage, Inc., a publicly traded
real estate investment trust and a general partner with a significant
ownership interest in the Partnership.
Ownership Interests by the General Partners:
--------------------------------------------
PSI and Hughes are general partners of the Partnership. In 1995,
Hughes contributed his ownership and rights to distributions from the
Partnership to BWH Marina Corporation II, a corporation wholly-owned
by Hughes. 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 initial investment. Thereafter, the
general partners have a 25% interest in all cash distributions
(including sale and financing proceeds). During 1987, 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 results of operations or distributions to
partners.
As of March 31, 2005, Hughes and members of his family own 11.3% of
the limited partnership units. PSI owns 33.2% of the limited
partnership units. An additional 16.9% of the limited partnership
units are owned by PS Orangeco Partnerships, Inc., a corporation in
which Hughes and members of his family own approximately 48% of the
voting stock, PSI owns 46% and members of PSI's management and related
individuals own approximately 6%.
Based on their pro rata ownership interests, PSI and its affiliates
received 308,083 shares of common stock and Hughes received 71,134
shares of common stock in connection with the distribution of common
stock described in Note 2.
Ownership in STOR-Re:
---------------------
The Partnership has a 1.4% ownership interest in STOR-Re Mutual
Insurance Corporation ("STOR-Re"), which was formed in 1994 as an
association captive insurance company, and is controlled by PSI. The
Partnership accounts for its investment in STOR-Re, which is included
in other assets, using the cost method, and has not received any
distributions during 2004 or for the nine months ended March 31, 2005.
STOR-Re provides limited property and liability insurance coverage to
the Partnership, PSI, and affiliates for losses occurring before April
1, 2004. STOR-Re was succeeded with respect to these activities for
losses occurring after March 31, 2004 by a wholly owned subsidiary of
PSI. Liabilities for losses and loss adjustment expenses include an
amount determined from loss reports and individual cases and an
amount, based on recommendations from an outside actuary that is a
member of the American Academy of Actuaries, using a frequency and
severity method, for losses incurred but not reported. Determining the
liability for unpaid losses and loss adjustment expense is based upon
estimates and while we believe that the amount is adequate, the
ultimate loss may be in excess of or less than the amounts provided.
The methods for making such estimates and for establishing the
resulting liability are continually reviewed.
8
PUBLIC STORAGE PROPERTIES V, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Other Business Activities
-------------------------
A corporation that reinsures policies against losses to goods stored
by tenants in the Partnership's storage facilities was purchased by
PSI from Mr. Hughes and members of his family (the "Hughes Family") on
December 31, 2001. We believe that the availability of insurance
reduces our potential liability to tenants for losses to their goods
from theft or destruction. This corporation receives the premiums and
bears the risks associated with the re-insurance of tenant goods.
A subsidiary of PSI sells locks and boxes and rents trucks to the
general public and tenants to be used in securing their spaces and
moving their goods. The subsidiary receives the revenues and bears the
cost of the activities. We believe that the availability of locks and
boxes for sale and the rental of trucks promote the rental of spaces.
5. COMMITMENTS AND CONTINGENCIES
Legal Proceedings:
------------------
Serrao v. Public Storage, Inc. (filed April 2003) (Superior Court -
----------------------------------------------------------------------
Orange County)
--------------
The plaintiff in this case filed a suit against Public Storage, Inc.
on behalf of a putative class of renters who rented self-storage units
from Public Storage, Inc. Plaintiff alleges that Public Storage, Inc.
misrepresented the size of its storage units, has brought claims under
California statutory and common law relating to consumer protection,
fraud, unfair competition, and negligent misrepresentation, and is
seeking monetary damages, restitution, and declaratory and injunctive
relief.
The claim in this case is substantially similar to those in Henriquez
v. Public Storage, Inc., which was disclosed in prior reports. In
January 2003, the plaintiff caused the Henriquez action to be
dismissed.
Based upon the uncertainty inherent in any putative class action,
Public Storage, Inc. cannot presently determine the potential damages,
if any, or the ultimate outcome of this litigation. On November 3,
2003, the court granted Public Storage, Inc.'s motion to strike the
plaintiff's nationwide class allegations and to limit any putative
class to California residents only. Public Storage, Inc. is vigorously
contesting the claims upon which this lawsuit is based including class
certification efforts.
Other Items
-----------
PSI and the Partnership are parties 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 impact upon the operations or financial position of
the Partnership.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
The following should be read in conjunction with the Partnership's
condensed financial statements and notes thereto.
FORWARD LOOKING STATEMENTS: When used within this document, the words
"expects," "believes," "anticipates," "may," "should," "estimates," and similar
expressions are intended to identify "forward-looking statements" within the
meaning of that term in Section 27A of the Securities Exchange Act of 1933, as
amended, and in Section 21E of the Securities Exchange Act of 1934, as amended.
Such forward-looking statements involve known and unknown risks, uncertainties,
and other factors, which may cause the actual results and performance of the
Partnership to be materially different from those expressed or implied in the
forward looking statements. Such factors are described in "Risk Factors" (as
discussed below) and include changes in general economic conditions and in the
markets in which the Partnership operates and the impact of competition from
new and existing storage and commercial facilities and other storage
alternatives, which could impact rents and occupancy levels at the
Partnership's facilities; the impact of the regulatory environment as well as
national, state, and local laws and regulations, which could increase the
Partnership's expense and reduce the Partnership's cash available for
distribution; and economic uncertainty due to the impact of war or terrorism
could adversely affect our business plan. We disclaim any obligation to
publicly release the results of any revisions to these forward-looking
statements reflecting new estimates, events or circumstances after the date of
this report.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
IMPAIRMENT OF LONG-LIVED ASSETS: 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 have
identified no such impairments at March 31, 2005. 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
accounting principles generally accepted in the United States, 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 outcome 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 of which we are aware are described in Note 5 to the Partnership's
financial statements.
ACCRUALS FOR OPERATING EXPENSES: We accrue for property tax expense and
other operating expenses based upon estimates and historical trends and current
and anticipated local and state government rules and regulations. If these
estimates and assumptions are incorrect, 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.
Accordingly, the amounts incurred in an interim period may not be indicative of
the amounts to be incurred in a full year.
10
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31,
2004:
Our net income for the three months ended March 31, 2005 was $24,173,000
compared to $1,547,000 for the three months ended March 31, 2004, representing
an increase of $22,626,000. Net income increased primarily due to a gain on
disposition of marketable securities of an affiliate totaling $22,534,000.
Rental income for the three months ended March 31, 2005 was $2,328,000
compared to $2,234,000 for the three months ended March 31, 2004, representing
an increase of $94,000 or 4%. The increase in rental income is attributable to
increases in annualized realized rent per square foot and weighted average
square foot occupancy at the Partnership's self-storage facilities. Annualized
realized rent per square foot at the self-storage facilities for the three
months ended March 31, 2005 increased to $12.96 per occupied square foot from
$12.70 per occupied square foot for the three months ended March 31, 2004.
Weighted average square foot occupancy levels at the self-storage facilities
were 90% and 88% for the three months ended March 31, 2005 and 2004,
respectively.
At March 31, 2005, we distributed all of our holdings of Public Storage,
Inc. common stock to shareholders of record as of January 1, 2005, and we
recognized a gain on disposition of $22,534,000.
Dividends from holdings in marketable securities of our affiliate amounted
to $251,000 for each of the three month periods ended March 31, 2005 and 2004
which included $240,000 with respect to our Public Storage, Inc. common stock
holdings. Based on the disposition of the marketable securities at March 31,
2005, we expect the dividends on the Public Storage, Inc. common stock holdings
to end on April 1, 2005.
Cost of operations (including management fees paid to affiliates-see Note
4 to the financial statements) for the three months ended March 31, 2005 was
$742,000 compared to $719,000 for the three months ended March 31, 2004,
representing an increase of $23,000 or 3%. The increase in cost of operations
is primarily due to increases in repairs and maintenance and utilities.
Depreciation expense was $191,000 for the three months ended March 31,
2005 compared to $211,000 for the same period in 2004, a decrease of $20,000 or
9%. Beginning with the first quarter of 2005, certain buildings have become
fully depreciated and, accordingly, depreciation expense declined during the
three months ended March 31, 2005 as compared to the same period in 2004.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------------------------------------------------------
Cash flows from operating activities for the three months ended March 31,
2005 have been sufficient to meet all current obligations of the Partnership.
Dividends from holdings in marketable securities of our affiliate amounted
to $251,000 for each of the three month periods ended March 31, 2005 and 2004
which included $240,000 with respect to our Public Storage, Inc. common stock
holdings. Based on the disposition of the marketable securities at March 31,
2005, we expect the dividends on the Public Storage, Inc. common stock holdings
to end on April 1, 2005.
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. At March 31, 2005, the
Partnership accrued, but did not pay, cash distributions to the limited and
general partners. On April 15, 2005, we paid a cash distribution to unitholders
totaling $1,719,000, representing cash available for distribution at March 31,
2005. Future distribution rates will be adjusted to levels to levels which are
supported by operating cash flow after capital improvements and any other
necessary obligations.
The Partnership may borrow in the future with the intent of using the
proceeds to finance distributions to the limited and general partners.
11
ITEM 2A. RISK FACTORS
------------
In addition to the other information in our Form 10-Q and Annual Report on
Form 10-K for the year ended December 31, 2004, you should consider the
following factors in evaluating the Partnership:
THE GENERAL PARTNERS HAVE A SIGNIFICANT DEGREE OF CONTROL OVER
THE PARTNERSHIP.
As of March 31, 2005, Hughes and members of his family own 11.3% of the
limited partnership units. PSI owns 33.2% of the limited partnership units. An
additional 16.9% of the limited partnership units are owned by PS Orangeco
Partnerships, Inc., a corporation in which Hughes and members of his family own
approximately 48% of the voting stock, PSI owns 46% and members of PSI's
management and related individuals own approximately 6%. As a result, the
General Partners have a significant degree of control over matters submitted to
a vote of our unitholders, including amending our organizational documents,
dissolving the Partnership and approving other extraordinary transactions.
COMPLIANCE WITH SECTION 404 OF THE SARBANES-OXLEY ACT
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we will be
required to include, in our annual report beginning December 31, 2006, our
assessment of the effectiveness of our internal control over financial
reporting and our audited financial statements as of that date. Furthermore,
our independent registered public accounting firm will be required to attest to
whether our assessment of the effectiveness of our internal control over
financial reporting is fairly statement in all material respects and separately
report on whether it believes we maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006.
As of March 31, 2005, PSI, our General Partner, has not completed our
assessment of the effectiveness of our internal control over financial
reporting. PSI believes we will meet the requirements of Section 404, however,
if PSI fails to timely complete their assessment, or if our independent
registered public accounting firm cannot timely attest to their assessment, we
could be subject to regulatory sanctions and a loss of public confidence in our
internal control. In addition, any failure to implement new or improved
controls, or difficulties encountered in their implementation, could have an
adverse effect on our operating results or cause us to fail to timely meet our
regulatory reporting obligations.
INCREASES IN INTEREST RATES MAY ADVERSELY AFFECT THE VALUE OF PARTNERSHIP
UNITs.
One of the factors that influence the value of our partnership units is
the annual rate of distributions that we pay as compared with interest rates.
An increase in interest rates may lead purchasers of real estate partnership
units to demand higher annual distribution rates, which could adversely affect
the market price of our partnership units.
DEVELOPMENTS IN CALIFORNIA MAY HAVE AN ADVERSE IMPACT ON OUR BUSINESS.
Most of our properties are located in California. California is facing
serious 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, we could
be adversely impacted by efforts to reenact legislation mandating medical
insurance for employees of California businesses and members of their families.
WE HAVE DEVELOPED A DEPENDENCY UPON AUTOMATED PROCESSES AND THE INTERNET.
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.
12
SINCE OUR BUSINESS CONSISTS PRIMARILY OF ACQUIRING AND OPERATING REAL
ESTATE, WE ARE SUBJECT TO REAL ESTATE OPERATING RISKS.
The value of our investments may be reduced by general risks of real
estate ownership. Since we derive substantially all of our income from real
estate operations, we are subject to the general risks of owning real
estate-related assets, including:
o lack of demand for rental spaces or units in a locale;
o changes in general economic or local conditions;
o changes in supply of or demand for similar or competing
facilities in an area;
o natural disasters, such as earthquakes;
o potential terrorists attacks;
o the impact of environmental protection laws;
o changes in interest rates and availability of permanent mortgage
funds which may render the sale or financing of a property
difficult or unattractive; and
o changes in tax, real estate and zoning laws.
There is significant competition among self-storage facilities and from
other storage alternatives. Most of our properties are self-storage facilities.
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 some 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
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, 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 properties
the Partnership has an interest in 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 with our tenants to resolve moisture
infiltration and mold-related issues, subject to our contractual limitations on
liability for such claims. However, we can make no assurance that material
legal claims relating to moisture infiltration and the presence of, or exposure
to, mold will not arise in the future.
13
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 the Partnership's 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 Partners. Failure to comply
with these requirements could also affect the marketability of our real estate
facilities.
TERRORIST ATTACKS AND THE POSSIBILITY OF WIDER ARMED CONFLICT MAY HAVE AN
ADVERSE IMPACT ON OUR BUSINESS AND OPERATING RESULTS AND COULD DECREASE THE
VALUE OF OUR ASSETS.
Terrorist attacks and other acts of violence or war, such as those that
took place on September 11, 2001, could have a material adverse impact on our
business and operating results. There can be no assurance that there will not
be further terrorist attacks against the United States or its businesses or
interests. Attacks or armed conflicts that directly impact one or more of our
properties could significantly affect our ability to operate those properties
and thereby impair our operating results. Further, we may not have insurance
coverage for losses caused by a terrorist attack. Such insurance may not be
available, or if it is available and we decide to obtain such terrorist
coverage, the cost for the insurance may be significant in relationship to the
risk overall. In addition, the adverse effects that such violent acts and
threats of future attacks could have on the U.S. economy could similarly have a
material adverse effect on our business and results of operations. Finally,
further terrorist acts could cause the United States to enter into a wider
armed conflict, which could further impact our business and operating results.
OUR OWNERSHIP IN STOR-RE MAY LOSE VALUE OR BECOME A LIABILITY.
The Partnership has a 1.4% ownership interest in STOR-Re Mutual Insurance
Corporation ("STOR-Re"), which was formed in 1994 as an association captive
insurance company, and is controlled by PSI. STOR-Re provides limited property
and liability coverage to the Partnership, PSI and affiliates of PSI for losses
occurring before 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 amount 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 4. CONTROLS AND PROCEDURES
-----------------------
Public Storage, Inc. maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in reports the
Partnership files and submits under the Exchange Act, is recorded, processed,
summarized and reported within the time periods specified in accordance with
SEC guidelines and that such information is communicated to the Partnership's
management, including its Chief Executive Officer and Chief Financial Officer,
to allow timely decisions regarding required disclosure based on the definition
of "disclosure controls and procedures" in Rule 13a-15(e) of the Exchange Act.
In designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired
control objectives 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.
14
At the end of the period covered by this report, Public Storage, Inc.
carried out an evaluation, under the supervision and with the participation of
the Partnership's management, including Public Storage, Inc.'s Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Partnership's disclosure controls and procedures. Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Partnership's disclosure controls and procedures were
effective.
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 fiscal quarter to which this report relates that has
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
The information set forth under the heading "Legal Matters" in Note 5 to the
unaudited condensed financial statements in this Form 10-Q is incorporated by
reference in this Item 1.
ITEM 6. EXHIBITS
---------
(a) The following Exhibits are included herein:
31.1 Certification by Ronald L. Havner, Jr. pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification by John Reyes pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
16
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 16, 2005
PUBLIC STORAGE PROPERTIES V, LTD.
BY: Public Storage, Inc.
General Partner
BY: /s/ John Reyes
----------------
John Reyes
Senior Vice President and
Chief Financial Officer
17