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 September 30, 2006
------------------
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 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 ]
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 November 13, 2006: 44,000
PUBLIC STORAGE PROPERTIES V, LTD.
INDEX
Pages
PART I. FINANCIAL INFORMATION (Item 3 not applicable)
---------------------
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets at September 30, 2006
and December 31, 2005 1
Condensed Statements of Income and Comprehensive Income
for the Three and Nine Months Ended September 30, 2006 and 2005 2
Condensed Statement of Partners' Equity for the
Nine Months Ended September 30, 2006 3
Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 2006 and 2005 4
Notes to Condensed Financial Statements 5-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-14
Item 4. Controls and Procedures 14-15
PART II. OTHER INFORMATION (Items 2 - 5 not applicable)
-----------------
Item 1. Legal Proceedings 16
Item 1A. Risk Factors 16-18
Item 6. Exhibits 19
PUBLIC STORAGE PROPERTIES V, LTD.
CONDENSED BALANCE SHEETS
September 30, December 31,
2006 2005
---------------- -------------------
(Unaudited)
ASSETS
------
Cash and cash equivalents $ 2,887,000 $ 2,370,000
Marketable securities of affiliate (cost basis of $347,000) 475,000 480,000
Rent and other receivables 69,000 79,000
Real estate facilities, at cost:
Buildings and equipment 18,435,000 18,029,000
Land 4,484,000 4,484,000
---------------- -------------------
22,919,000 22,513,000
Less accumulated depreciation (17,065,000) (16,831,000)
---------------- -------------------
5,854,000 5,682,000
Other assets 144,000 111,000
---------------- -------------------
Total assets $ 9,429,000 $ 8,722,000
================ ===================
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
Accounts payable and accrued liabilities $ 446,000 $ 166,000
Deferred revenue 216,000 207,000
Commitments and contingencies
Partners' equity:
Limited partners' equity, $500 per unit, 44,000 units
authorized, issued and outstanding 6,414,000 6,100,000
General partners' equity 2,225,000 2,116,000
Other comprehensive income 128,000 133,000
---------------- -------------------
Total partners' equity 8,767,000 8,349,000
---------------- -------------------
Total liabilities and partners' equity $ 9,429,000 $ 8,722,000
================ ===================
See accompanying notes.
1
PUBLIC STORAGE PROPERTIES V, LTD.
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- ------------------------------------
2006 2005 2006 2005
--------------- --------------- ---------------- ---------------
REVENUES:
Rental income $ 2,581,000 $ 2,432,000 $ 7,547,000 $ 7,130,000
Dividends from marketable securities of affiliate 13,000 10,000 34,000 272,000
Other income 62,000 29,000 172,000 86,000
--------------- --------------- ---------------- ---------------
2,656,000 2,471,000 7,753,000 7,488,000
--------------- --------------- ---------------- ---------------
COSTS AND EXPENSES:
Cost of operations 627,000 595,000 1,906,000 1,798,000
Management fees paid to affiliates 154,000 144,000 450,000 426,000
Depreciation 85,000 119,000 234,000 449,000
Administrative 33,000 35,000 118,000 105,000
--------------- --------------- ---------------- ---------------
899,000 893,000 2,708,000 2,778,000
--------------- --------------- ---------------- ---------------
Net income before gain 1,757,000 1,578,000 5,045,000 4,710,000
Gain on disposition of marketable securities of
affiliate - - - 22,534,000
----------------- --------------- ---------------- ---------------
NET INCOME: $ 1,757,000 $ 1,578,000 $ 5,045,000 $ 27,244,000
================= ================= ================ ===============
Limited partners' share of net income ($87.50
per unit in 2006 and $415.84 per unit in 2005) $ 3,850,000 $ 18,297,000
General partners' share of net income 1,195,000 8,947,000
--------------- --------------
$ 5,045,000 $ 27,244,000
=============== ==============
COMPREHENSIVE INCOME:
Net income $ 5,045,000 $ 27,244,000
Other comprehensive income:
Change in unrealized gain on marketable
equity securities of affiliate (5,000) 638,000
Realized gain on disposition of marketable
securities of affiliate - (22,534,000)
--------------- --------------
$ 5,040,000 $ 5,348,000
=============== ==============
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, 2005 $ 6,100,000 $ 2,116,000 $ 133,000 $ 8,349,000
Change in unrealized gain on marketable
securities of affiliate - - (5,000) (5,000)
Net income 3,850,000 1,195,000 - 5,045,000
Cash distributions (Note 3) (3,432,000) (1,190,000) - (4,622,000)
Equity transfer (104,000) 104,000 - -
------------------ ---------------- ------------------ -------------------
Balance at September 30, 2006 $ 6,414,000 $ 2,225,000 $ 128,000 $ 8,767,000
================== ================ ================== ===================
See accompanying notes.
3
PUBLIC STORAGE PROPERTIES V, LTD.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
-------------------------------------
2006 2005
--------------- -----------------
Cash flows from operating activities:
Net income $ 5,045,000 $ 27,244,000
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation 234,000 449,000
Decrease in rent and other receivables 10,000 38,000
Increase in other assets (33,000) (12,000)
Gain on disposition of marketable securities of affiliate - (22,534,000)
Increase in accounts payable and accrued liabilities 280,000 213,000
Increase (decrease) in deferred revenue 9,000 (30,000)
--------------- -----------------
Total adjustments 500,000 (21,876,000)
--------------- -----------------
Net cash provided by operating activities 5,545,000 5,368,000
Cash flow from investing activities:
Additions to real estate facilities (406,000) (61,000)
--------------- -----------------
Net cash used in investing activities (406,000) (61,000)
--------------- -----------------
Cash flow from financing activities:
Distributions paid to partners (4,622,000) (4,681,000)
--------------- -----------------
Net cash used in financing activities (4,622,000) (4,681,000)
--------------- -----------------
Net increase in cash and cash equivalents 517,000 626,000
Cash and cash equivalents at beginning of year 2,370,000 1,359,000
--------------- -----------------
Cash and cash equivalents at end of period $ 2,887,000 $ 1,985,000
=============== =================
Supplemental schedule of non-cash activities:
Change in fair market value of marketable securities
Marketable securities $ 5,000 $ (638,000)
Other comprehensive income $ (5,000) $ 638,000
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 5).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PARTNERSHIP MATTERS
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 and nine months ended September 30, 2006 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, 2005.
Use of Estimates:
-----------------
The preparation of the financial statements in conformity with
generally accepted accounting principles in the United States 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 expenses 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. Television, yellow page, and other advertising
expenditures totaled $54,000 and $243,000 for the three and nine months
ended September 30, 2006, respectively, compared to $68,000 and
$235,000, respectively, for the same periods in 2005.
5
PUBLIC STORAGE PROPERTIES V, 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 (44,000) outstanding during the period.
Cash and Cash Equivalents:
--------------------------
For financial statement purposes, the Partnership considers
all highly liquid financial instruments such as short-term treasury
securities or investment grade short-term commercial paper to be cash
equivalents.
Marketable Securities:
----------------------
In accordance with the Financial Accounting Standards Board's
Statement No. 130, "Recording Comprehensive Income," at each balance
sheet date, the Partnership reflects its marketable securities at
market value (based upon their closing price on the balance sheet
date), with the difference between the market value and historical cost
shown as "Other Comprehensive Income" in Partners' Equity. Adjustments
to market value are reflected as "Change in Unrealized Gain on
Marketable Equity Securities" on the Statement of Comprehensive Income.
When marketable securities are disposed of, comprehensive income is
adjusted to reflect the change in market value through the disposition
date. The realized gain is then reflected in net income, and as a
reduction to Other Comprehensive Income.
In accordance with this policy, the Partnership has reflected
adjustments to unrealized gains for the change in market price,
representing a decrease in cumulative unrealized gains of $5,000 for
the nine months ended September 30, 2006, as compared to an increase in
the cumulative unrealized gains of $638,000 for the same period in
2005.
Marketable securities consist of 17,331 depositary shares of
Equity Stock, Series A, of Public Storage Inc., at both September 30,
2006 and December 31, 2005. The Partnership's marketable securities for
all periods have been designated as available-for-sale.
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 this
transaction, the Partnership recorded a realized gain of $22,534,000
during the first quarter of 2005, representing the difference between
the closing market price on March 31, 2005 and the weighted average
historical cost of the securities disposed. The limited and general
partner's share of this distribution totaled approximately $22,548,000
($512.45 per unit) and $7,820,000, respectively. The limited and
general partners' share of the realized gain attributable to this
transaction totaled approximately $14,793,000 ($336.20 per unit) and
$7,741,000, respectively.
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
6
PUBLIC STORAGE PROPERTIES V, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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 September 30, 2006.
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. Except
as noted below under "Accounting for Casualties," our evaluations have
identified no such impairments at September 30, 2006.
In October 2005, we sold a parcel of land for proceeds of
$1,024,000, resulting in a gain on sale of $794,000.
Any real estate facility, which we expect to sell or dispose
of prior to its previously estimated useful life is stated at the lower
of its estimated net realizable value, less cost to sell, or its
carrying value.
Accounting for Casualties:
--------------------------
Our policy is to record casualty losses or gains in the period
the casualty occurs equal to the differential between (a) the book
value of assets destroyed and (b) insurance proceeds, if any, that we
expect to receive in accordance with our insurance contracts. Potential
insurance proceeds that are subject to uncertainties, such as
interpretation of deductible provisions of the governing agreements or
the estimation of costs of restoration, are treated as a contingent
proceeds in accordance with Statement of Financial Accounting Standards
No. 5 ("SFAS 5"), and not recorded until the uncertainties are
satisfied.
During 2005, we sustained physical damage to our facilities as
a result of Hurricane Wilma, which occurred in the fourth quarter of
2005. We expect to receive no insurance proceeds and the net book value
of the destroyed assets was zero; therefore, no gain or loss was
recorded. We have incurred approximately $28,000 in costs to repair
damages to our facilities.
Deferred revenue:
-----------------
Deferred revenue totaling $216,000 at September 30, 2006
($207,000 at December 31, 2005), consists of prepaid rents, which are
recognized when earned.
7
PUBLIC STORAGE PROPERTIES V, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Environmental Cost:
-------------------
The Partnership's policy is to accrue environmental
assessments and/or remediation costs when it is probable that such
efforts will be required and the related costs can be reasonably
estimated. Although there can be no assurance, we are not aware of any
environmental contamination at any of our facilities, which,
individually or in the aggregate, would be material to our overall
business, financial condition or results of operations.
Income Taxes:
-------------
Public Storage Properties 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.
Accordingly no Federal income tax expense is recorded by the
Partnership.
Recent Accounting Pronouncements and Guidance:
----------------------------------------------
As of November 13, 2006, there have been no recent accounting
pronouncements and guidance, which were not effective for
implementation prior to September 30, 2006, 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. We paid distributions to the limited and general partners
totaling $3,432,000 ($78.00 per unit) and $1,190,000, respectively for
the nine months ended September 30, 2006. Future distribution rates may
be adjusted to levels which are supported by operating cash flow after
capital improvements and other obligations.
4. PARTNERS' EQUITY
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 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.
8
PUBLIC STORAGE PROPERTIES V, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
5. RELATED PARTY TRANSACTIONS
Management Agreements and Shared Expenses with Affiliates
---------------------------------------------------------
The Partnership has a management agreement with 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 parks are managed by PS Business Parks, L.P.
("PSBP") pursuant to a management contract. PSBP, an affiliate of PSI
operates the Partnership's business parks for a fee equal to 5% of the
facilities gross income. For the three months ended September 30, 2006
and 2005, the Partnership paid $154,000 and $144,000, respectively,
pursuant to these management agreements. For the nine months ended
September 30, 2006 and 2005, the Partnership paid $450,000 and
$426,000, respectively, pursuant to these management agreements. The
Management Agreement between the Partnership and PSI provides that the
Management Agreement 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 provides that the
Management Agreement 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.
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. 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, which are included in cost of operations in the
accompanying condensed statements of income, amounted to $244,000 and
$234,000 for the three months ended September 30, 2006 and 2005,
respectively, and $842,000 and $770,000 for the nine months ended
September 30, 2006 and 2005, respectively.
Ownership Interest by the General Partners
------------------------------------------
PSI owns 14,609 Limited Partnership Units ("Units"), as to
which PSI has sole voting and dispositive power.
Hughes and members of his family (the "Hughes Family") own
4,983 Units. Hughes owns 4,852 Units, as to which Hughes has sole
voting and dispositive power, through a wholly-owned corporation and
Tamara Hughes Gustavson, an adult daughter of Hughes, owns 131 Units as
to which Tamara Hughes Gustavson has sole voting and dispositive power;
PSI has an option to acquire these 131 Units.
In addition, there are 7,415 Units owned by PS Orangeco
Partnerships, Inc., a corporation in which Hughes Family owns
approximately 48% of the voting stock, PSI owns 46% and members of
PSI's management and related individuals own approximately 6%.
Captive Insurance Activities with PSI
-------------------------------------
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, on the cost method, and has received no distributions
during the three months ended December 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 (collectively, this entity and STOR-Re are referred
to as the "Captive Entities"). Liabilities for losses and loss
9
PUBLIC STORAGE PROPERTIES V, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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 PSI
-------------------------
A corporation that reinsures policies against losses to goods
stored by tenants in PSI's storage facilities was purchased by PSI from
the Hughes Family on December 31, 2001. This corporation receives the
premiums and bears the risks associated with the re-insurance. The
Partnership receives an access fee from this corporation in return for
providing tenant listings. This fee is based on number of spaces the
Partnership has to rent. Included in other income on our accompanying
statements of income for these fees are $22,000 and $13,000 for the
three months ended September 30, 2006 and 2005, respectively, ($66,000
and $39,000 for the nine months ended September 30, 2006 and 2005,
respectively).
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 of PSI receives the revenues and
bears the cost of the activities.
6. COMMITMENTS AND CONTINGENCIES
Legal Proceedings:
------------------
Serrao v. Public Storage, Inc. (filed April 2003) (Superior Court of
-----------------------------------------------------------------------
California - Orange County)
---------------------------
The plaintiff in this case filed a suit against PSI on behalf
of a putative class of renters who rented self-storage units from PSI
Plaintiff alleges that PSI 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, PSI cannot presently determine the potential damages, if any,
or the ultimate outcome of this litigation. On November 3, 2003, the
court granted PSI's motion to strike the plaintiff's nationwide class
allegations and to limit any putative class to California residents
only. In August 2005, PSI filed a motion to remove the case to federal
court, but the case has been remanded to the Superior Court. PSI is
vigorously contesting the claims upon which this lawsuit is based,
including class certification efforts.
10
PUBLIC STORAGE PROPERTIES V, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Brinkley v. Public Storage, Inc. (filed April, 2005) (Superior Court of
-----------------------------------------------------------------------
California - Los Angeles County)
--------------------------------
The plaintiff sued PSI 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. The maximum
potential liability cannot presently be estimated. PSI intends to
vigorously contest the substantive merits of the two remaining
subclasses that were certified.
Simas v. Public Storage, Inc. (filed January, 2006) (Superior Court of
-----------------------------------------------------------------------
California - Orange County)
---------------------------
The plaintiff brings this action against PSI on behalf of a
purported class who bought insurance coverage at PSI's facilities
alleging that PSI does not have a license to offer, sell and/or
transact storage insurance. The action was brought under California
Business and Professions Code Section 17200 and seeks retention,
monetary damages and injunctive relief. PSI filed a demurrer to the
complaint. While the demurrer was pending, Plaintiff amended the
complaint to allege a national class and claims for unfair business
practices, unjust enrichment, money had and received, and negligent and
intentional misrepresentation. PSI renewed its demurrer and moved to
strike the national class allegations. The Court dismissed all the
claims with leave to amend, except for the claim for unjust enrichment.
Based on this ruling, the Court held that the motion to strike was
moot. Plaintiff elected not to amend her complaint and is therefore
only proceeding with the claim for unjust enrichment. PSI is vigorously
contesting the claims upon which this lawsuit is based, including any
efforts for class certification.
Other Items
-----------
PSI 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.
11
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," "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 Item 1A, "Risk
Factors" in Part II of this Quarterly Report on Form 10-Q. These risks include,
but are not limited to, the following: 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.
Overview
- --------
The self-storage industry is highly fragmented and is composed
predominantly of numerous local and regional operators. Competition in the
markets in which we operate is significant and has increased over the past
several years due to additional development of self-storage facilities. We
believe that the increase in competition has had a negative impact to the
Partnership's occupancy levels and rental rates in many markets. However, we
believe that the Partnership's affiliation with PSI provides several
distinguishing characteristics that enable the Partnership to compete
effectively with other owners and operators.
PSI is the largest owner and operator of self-storage facilities in the
United States. All of PSI's facilities 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 PSI as one of the
dominant providers of self-storage space in most markets in which PSI operates
and enables PSI 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 of PSI's competitors.
We will continue to focus our growth strategies on improving the
operating performance of our existing self-storage properties primarily through
increases in revenues achieved through the telephone reservation center and
associated marketing efforts. We expect future increases in rental income to
come primarily from increases in realized rent, although there can be no
assurance.
Critical Accounting Policies
- ----------------------------
IMPAIRMENT OF REAL ESTATE
On a quarterly basis, we evaluate our real estate for impairment. The
evaluation of real estate for impairment requires determining whether indicators
of impairment exist, which is a subjective process. When any indicators of
impairment are found, the evaluation then entails projections of future
operating cash flows, which also involves significant judgment. We identified no
such impairments at September 30, 2006. 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.
12
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 generally accepted accounting
principles 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 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 our 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, the timing of the recognition of our expenses could be incorrect.
Cost of operations, interest expense, general and administrative expense, as
well as television, yellow page, and other advertising expenditures are expensed
as incurred.
Results of Operations
- ---------------------
THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2005:
Our net income for the three months ended September 30, 2006 was
$1,757,000 compared to $1,578,000 for the three months ended September 30, 2005,
representing an increase of $179,000 or 11%.
Rental income for the three months ended September 30, 2006 was
$2,581,000 compared to $2,432,000 for the three months ended September 30, 2005,
representing an increase of $149,000 or 6%. The increase in rental income is
attributable to increases in annualized realized rent per square foot at the
Partnership's self-storage facilities. Annualized realized rent per square foot
at the self-storage facilities for the three months ended September 30, 2006
increased to $14.32 per occupied square foot from $13.32 per occupied square
foot for the three months ended September 30, 2005. Weighted average square foot
occupancy levels at the self-storage facilities were 91% for each of the three
month periods ended September 30, 2006 and 2005.
Dividend income was $13,000 and $10,000 for the three months ended
September 30, 2006 and 2005, respectively.
Cost of operations (including management fees paid to affiliates-see
Note 5 to the condensed financial statements) for the three months ended
September 30, 2006 was $781,000 compared to $739,000 for the three months ended
September 30, 2005, representing an increase of $42,000 or 6%. The increase in
cost of operations was primarily due to increases in payroll, property
insurance, and management fees expenses partially offset by decreases in
advertising and promotion expenses.
Depreciation expense was $85,000 for the three months ended September
30, 2006 compared to $119,000 for the same period in 2005, a decrease of $34,000
or 29%. Beginning with the first quarter of 2005, certain buildings have become
fully depreciated and, accordingly, depreciation expense declined during the
three months ended September 30, 2006 as compared to the same period in 2005.
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NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2005:
Our net income for the nine months ended September 30, 2006 was
$5,045,000 compared to $27,244,000 for the nine months ended September 30, 2005,
representing a decrease of $22,199,000. Net income decreased primarily due to a
gain on disposition of marketable securities of an affiliate totaling
$22,534,000 recorded for the nine months ended September 30, 2005.
Rental income for the nine months ended September 30, 2006 was
$7,547,000 compared to $7,130,000 for the nine months ended September 30, 2005,
representing an increase of $417,000 or 6%. The increase in rental income is
attributable to increases in annualized realized rent per square foot at the
Partnership's self-storage facilities. Annualized realized rent per square foot
at the self-storage facilities for the nine months ended September 30, 2006
increased to $13.94 per occupied square foot from $13.08 per occupied square
foot for the nine months ended September 30, 2005. Weighted average square foot
occupancy levels at the self-storage facilities were 91% for each of the nine
month periods ended September 30, 2006 and 2005.
Dividend income for the nine months ended September 30, 2006 was
$34,000 compared to $272,000 for the nine months ended September 30, 2005. At
March 31, 2005, we distributed all of our holdings of Public Storage, Inc.
common stock to unitholders of record as of January 1, 2005. Accordingly, the
Partnership's dividend income with respect to those securities that were
distributed to unitholders ceased on April 1, 2005.
Cost of operations (including management fees paid to affiliates-see
Note 5 to the condensed financial statements) for the nine months ended
September 30, 2006 was $2,356,000 compared to $2,224,000 for the nine months
ended September 30, 2005, representing an increase of $132,000 or 6%. The
increase in cost of operations was primarily due to increases in payroll,
property insurance, repairs and maintenance, and management fees expenses
partially offset by decreases in property taxes.
Depreciation expense was $234,000 for the nine months ended September
30, 2006 compared to $449,000 for the same period in 2005, a decrease of
$215,000 or 48%. Beginning with the first quarter of 2005, certain buildings
have become fully depreciated and, accordingly, depreciation expense declined
during the nine months ended September 30, 2006 as compared to the same period
in 2005.
Liquidity and Capital Resources
- -------------------------------
Cash generated from operations ($5,545,000 for the nine months ended
September 30, 2006) have been sufficient to meet all current obligations of the
Partnership.
The Partnership Agreement requires that cash available for distribution
(cash flow from all sources less cash necessary for any obligations or capital
improvement needs) be distributed at least quarterly. We paid distributions to
the limited and general partners totaling $3,432,000 ($78.00 per unit) and
$1,190,000, respectively, for the nine months ended September 30, 2006. Future
distribution rates will be adjusted to levels which are supported by operating
cash flow after capital improvements and any other necessary obligations.
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.
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
14
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.
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. During the third quarter of 2006, there were no significant changes
in the Partnership's internal controls over financial reporting that have
materially affected, or are reasonably likely to materially affect, the
Partnership's 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 6
to our condensed financial statements in this Form 10-Q is incorporated by
reference in this Item 1.
ITEM 1A. RISK FACTORS
------------
In addition to the other information in our Form 10-Q and Annual Report
on Form 10-K for the year ended December 31, 2005, you should consider the
following factors in evaluating the Partnership:
THE GENERAL PARTNERS CONTROL THE PARTNERSHIP AS A GROUP.
Public Storage Inc. and B. Wayne Hughes are general partners of the
partnership. In the aggregate, Public Storage Inc., B. Wayne Hughes, and members
of his family control approximately 61% of the limited partnership units of the
partnership. As a result, this group controls any matters submitted to a vote of
our unitholders, including amending our organizational documents, dissolving the
partnership, or approving other such transactions.
THE PARTNERSHIP MAY BE SUBJECT TO ADDITIONAL RISKS AS A RESULT OF
PUBLIC STORAGE'S MERGER WITH SHURGARD STORAGE CENTERS, INC.
In August 2006, Public Storage completed the previously announced
acquisition of Shurgard Storage Centers, Inc. ("Shurgard"), a publicly held REIT
that has interests in approximately 650 self-storage facilities located in the
United States and Europe.
No change in the financial interests of the Partnership occurred as a
result of the Shurgard acquisition. However, because the self-storage facilities
of the Partnership and Public Storage are managed by Public Storage, and the
self-storage facilities owned by Shurgard are also being managed by Public
Storage since completion of the merger, the merger could have the following
potential negative impacts on the Partnership:
o Difficulties in the integration of operations, technologies, and
personnel of Shurgard could negatively impact the operations of the
facilities managed by Public Storage, including the Partnership's.
o Public Storage's management attention to the integration and
acquisition of Shurgard could divert attention away from the operations
of the existing self-storage portfolio that it manages, including the
Partnership's properties.
o Individual Partnership properties could experience a decrease in
move-ins, reductions to rental rates, declines in occupancy rates,
increases to promotional discounts, or other negative impacts to
revenues in the short and/or long term due to the competitive impact of
Public Storage commencing management of the former Shurgard facilities,
particularly with respect to those facilities that are close to the
Partnership's facilities.
SINCE OUR BUSINESS CONSISTS PRIMARILY OF OPERATING REAL ESTATE, WE ARE
SUBJECT TO REAL ESTATE OPERATING RISKS.
The value of our investments may be reduced by general risks of real
estate ownership. Since we derive substantially all of our income from real
estate operations, we are subject to the general risks of owning real
estate-related assets, including:
o lack of demand for rental spaces or units in a locale;
o changes in general economic or local conditions;
o natural disasters, such as earthquakes;
16
o potential terrorist attacks;
o changes in supply of or demand for similar or competing facilities in
an area;
o the impact of environmental protection laws;
o changes in interest rates and availability of permanent mortgage funds
which may render the sale or financing of a property difficult or
unattractive; 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,
which generated substantially all of our revenue for the nine months ended
September 30, 2006. Local market conditions will play a significant part in how
competition will affect us. Competition in the market areas in which many of our
properties are located from other self-storage facilities and other storage
alternatives is significant and has affected the occupancy levels, rental rates
and operating expenses of our properties. Any increase in availability of funds
for investment in real estate may accelerate competition. Further development of
self-storage facilities may intensify competition among operators of
self-storage facilities in the market areas in which we operate.
We may incur significant environmental costs and liabilities. As an
owner and operator of real properties, under various federal, state and local
environmental laws, we are required to clean up spills or other releases of
hazardous or toxic substances on or from our properties. Certain environmental
laws impose liability whether or not the owner knew of, or was responsible for,
the presence of the hazardous or toxic substances. In some cases, liability may
not be limited to the value of the property. The presence of these substances,
or the failure to properly remediate any resulting contamination, whether from
environmental or microbial issues, also may adversely affect the owner's or
operator's ability to sell, lease or operate its property or to borrow using its
property as collateral.
We have conducted preliminary environmental assessments on the
Partnership's properties to evaluate the environmental condition of, and
potential environmental liabilities associated with, our properties. These
assessments generally consist of an investigation of environmental conditions at
the property (not including soil or groundwater sampling or analysis), as well
as a review of available information regarding the site and publicly available
data regarding conditions at other sites in the vicinity. In connection with
these property assessments, we have become aware that prior operations or
activities at some facilities or from nearby locations have or may have resulted
in contamination to the soil or groundwater at these facilities. In this regard,
some of our facilities are or may be the subject of federal or state environment
investigations or remedial actions. Although we cannot provide any assurance,
based on the preliminary environmental assessments, we believe we have funds
available to cover any liability from environmental contamination or potential
contamination and we are not aware of any environmental contamination of our
facilities material to our overall business, financial condition or results of
operation.
There has been an increasing number of claims and litigation against
owners and managers of rental properties relating to moisture infiltration,
which can result in mold or other property damage. When we receive a complaint
concerning moisture infiltration, condensation or mold problems and/or become
aware that an air quality concern exists, we implement corrective measures in
accordance with guidelines and protocols we have developed with the assistance
of outside experts. We seek to work proactively with our tenants to resolve
moisture infiltration and mold-related issues, subject to our contractual
limitations on liability for such claims. However, we can provide no assurance
that material legal claims relating to moisture infiltration and the presence
of, or exposure to, mold will not arise in the future.
Property taxes can increase and cause a decline in yields on
investments. Each of our properties is subject to real property taxes. These
real property taxes may increase in the future as property tax rates change and
as our properties are assessed or reassessed by tax authorities. Such increases
could adversely impact our profitability.
We must comply with the Americans with Disabilities Act and fire and
safety regulations, which can require significant expenditures. All our
properties must comply with the Americans with Disabilities Act and with related
regulations (the "ADA"). The ADA has separate compliance requirements for
"public accommodations" and "commercial facilities," but generally requires that
17
buildings be made accessible to persons with disabilities. Various state laws
impose similar requirements. A failure to comply with the ADA or similar state
laws could result in government imposed fines on us and the award of damages to
individuals affected by the failure. In addition, we must operate our properties
in compliance with numerous local fire and safety regulations, building codes,
and other land use regulations. Compliance with these requirements can require
us to spend substantial amounts of money, which would reduce cash otherwise
available for distribution to shareholders. Failure to comply with these
requirements could also affect the marketability of our real estate facilities.
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.
Developments in California may have an adverse impact on our business
and operating results and could decrease the value of our assets.
A majority of the Partnership's properties are located in California.
California is facing budgetary problems. Action that may be taken in response to
these problems, such as an increase in property taxes on commercial properties,
could adversely impact our business and results of operations. In addition, the
Partnership could be adversely impacted by efforts to reenact legislation
mandating medical insurance for employees of California businesses and members
of their families.
Increases in interest rates may adversely affect the price of our
partnership units.
One of the factors that influences the market price of our partnership
units is the annual rate of distributions that we pay on the securities, as
compared with interest rates. An increase in interest rates may lead purchasers
of partnership units to demand higher annual distribution rates, which could
adversely affect the market price of our partnership units.
Our ownership interest 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 provided limited
property and liability insurance coverage to the Partnership, PSI, and
affiliates of PSI for losses occurring prior to April 1, 2004. Liabilities for
losses and loss adjustment expenses include an amount determined from loss
reports and individual cases and an amount, based on recommendations from an
outside actuary that is a member of the American Academy of Actuaries, using a
frequency and severity method, for losses incurred but not reported. Determining
the liability for unpaid losses and loss adjustment expense is based upon
estimates and while we believe that the amount is adequate, the ultimate loss
may be in excess of or less than the amounts provided, which may result in a
reduction in the value of the Partnership's investment or could result in future
payments to STOR-Re if its reserves were determined to be inadequate. Financial
data with respect to STOR-Re is included in Note 5 to the Partnership's December
31, 2005 financial statements.
18
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.
19
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: November 14, 2006
PUBLIC STORAGE PROPERTIES V, LTD.
BY: Public Storage, Inc.
General Partner
BY: /s/ John Reyes
----------------
John Reyes
Senior Vice President and
Chief Financial Officer
20
Exhibit No. Exhibit Index
- ----------- -------------------
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
Filed herewith.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
Filed herewith.
32 Section 1350 Certification of Chief Executive Officer and Chief
Financial Officer. Filed herewith.
21