UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2008.
-------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ----------------- to -----------------.
Commission File Number 0-9208
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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 shell company (as defined in
Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [ ] Accelerated Filer [ ]
Non-accelerated Filer [X] Smaller Reporting Company [ ]
The Registrant is a limited partnership and issues units representing ownership
of limited partner interests with a par value of $500.00 per unit. Number of
units outstanding at November 13, 2008: 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, 2008
and December 31, 2007 1
Condensed Statements of Income for the
Three and Nine Months Ended September 30, 2008 and 2007 2
Condensed Statement of Partners' Equity for the
Nine Months Ended September 30, 2008 3
Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 2008 and 2007 4
Notes to Condensed Financial Statements 5 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 14
Item 4. Controls and Procedures 15
PART II.OTHER INFORMATION (Items 2 - 5 not applicable)
-----------------
Item 1. Legal Proceedings 16
Item 1A.Risk Factors 16 - 19
Item 6. Exhibits 19
PUBLIC STORAGE PROPERTIES V, LTD.
CONDENSED BALANCE SHEETS
September 30, December 31,
2008 2007
--------------- ---------------
(Unaudited)
ASSETS
------
Cash and cash equivalents $ 1,266,000 $ 718,000
Rent and other receivables 94,000 121,000
Real estate facilities, at cost:
Buildings and equipment 19,292,000 19,045,000
Land 4,484,000 4,484,000
--------------- ---------------
23,776,000 23,529,000
Less accumulated depreciation (17,784,000) (17,501,000)
--------------- ---------------
5,992,000 6,028,000
Other assets 127,000 135,000
--------------- ---------------
Total assets $ 7,479,000 $ 7,002,000
=============== ===============
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
Accounts payable and accrued liabilities $ 475,000 $ 260,000
Deferred revenue 192,000 236,000
--------------- ---------------
Total liabilities 667,000 496,000
Commitments and contingencies (Note 6)
Partners' equity:
Limited partners' equity, $500 per unit, 44,000 units
authorized, issued and outstanding 5,058,000 4,831,000
General partners' equity 1,754,000 1,675,000
--------------- ---------------
Total partners' equity 6,812,000 6,506,000
--------------- ---------------
Total liabilities and partners' equity $ 7,479,000 $ 7,002,000
=============== ===============
See accompanying notes.
1
PUBLIC STORAGE PROPERTIES V, LTD.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
2008 2007 2008 2007
------------- ------------- ------------- -------------
REVENUES:
Rental income $ 2,663,000 $ 2,565,000 $ 7,802,000 $ 7,624,000
Other income 161,000 42,000 292,000 167,000
------------- ------------- ------------- -------------
2,824,000 2,607,000 8,094,000 7,791,000
------------- ------------- ------------- -------------
COSTS AND EXPENSES:
Cost of operations 621,000 644,000 1,974,000 1,980,000
Management fees paid to affiliates 159,000 153,000 465,000 455,000
Depreciation 107,000 85,000 283,000 260,000
Administrative 17,000 15,000 88,000 86,000
------------- ------------- ------------- -------------
904,000 897,000 2,810,000 2,781,000
------------- ------------- ------------- -------------
NET INCOME $ 1,920,000 $ 1,710,000 $ 5,284,000 $ 5,010,000
============= ============= ============= =============
Limited partners' share of net income $ 1,461,000 $ 1,254,000 $ 3,999,000 $ 3,288,000
General partners' share of net income 459,000 456,000 1,285,000 1,722,000
------------- ------------- ------------- -------------
$ 1,920,000 $ 1,710,000 $ 5,284,000 $ 5,010,000
============= ============= ============= =============
Limited partners' share of net income per unit
(44,000 units outstanding) $ 33.20 $ 28.50 $ 90.89 $ 74.73
============= ============= ============= =============
See accompanying notes.
2
PUBLIC STORAGE PROPERTIES V, LTD.
CONDENSED STATEMENT OF PARTNERS' EQUITY
(UNAUDITED)
Limited General Total Partners'
Partners' Partners' Equity
---------------- ---------------- ----------------
Balance at December 31, 2007 $ 4,831,000 $ 1,675,000 $ 6,506,000
Net income 3,999,000 1,285,000 5,284,000
Cash distributions (3,696,000) (1,282,000) (4,978,000)
Equity transfer (76,000) 76,000 -
---------------- ---------------- ----------------
Balance at September 30, 2008 $ 5,058,000 $ 1,754,000 $ 6,812,000
================ ================ ================
See accompanying notes.
3
PUBLIC STORAGE PROPERTIES V, LTD.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
-----------------------------------
2008 2007
-------------- --------------
Cash flows from operating activities:
Net income $ 5,284,000 $ 5,010,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 283,000 260,000
Decrease in rent and other receivables 27,000 10,000
Decrease in other assets 8,000 15,000
Increase in accounts payable and accrued liabilities 215,000 147,000
Decrease in deferred revenue (44,000) (48,000)
-------------- --------------
Total adjustments 489,000 384,000
-------------- --------------
Net cash provided by operating activities 5,773,000 5,394,000
-------------- --------------
Cash flows from investing activities:
Additions to real estate facilities (247,000) (158,000)
-------------- --------------
Net cash used in investing activities (247,000) (158,000)
-------------- --------------
Cash flows from financing activities:
Distributions paid to partners (4,978,000) (6,756,000)
-------------- --------------
Net cash used in financing activities (4,978,000) (6,756,000)
-------------- --------------
Net increase (decrease) in cash and cash equivalents 548,000 (1,520,000)
Cash and cash equivalents at beginning of the period 718,000 2,495,000
-------------- --------------
Cash and cash equivalents at end of the period $ 1,266,000 $ 975,000
============== ==============
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,
formerly Public Storage, Inc., ("PS") and B. Wayne Hughes ("Hughes").
The Partnership was formed to engage in the business of developing and
operating self-storage facilities 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).
The accompanying unaudited condensed financial statements have been
prepared by us pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC") on the same basis as our audited annual
financial statements and, in our opinion reflect all adjustments
(consisting only of normal recurring adjustments) necessary to present
fairly the financial information set forth therein. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with U.S. generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although we
believe that the following disclosures, when read in conjunction with the
audited financial statements and notes thereto as of December 31, 2007, are
adequate to make the information presented not misleading.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PARTNERSHIP MATTERS
Use of Estimates:
------------------
The preparation of the financial statements in conformity with U.S.
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue and Expense Recognition:
--------------------------------
Rental income, which is generally earned pursuant to month-to-month
leases for storage space, is recognized as earned. Promotional discounts
are recognized as a reduction to rental income over the promotional period,
which is generally during the first month of occupancy. Late charges and
administrative fees are recognized as income when collected. Interest
income is recognized as earned.
We accrue for property tax 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.
Allocation of Net Income:
-------------------------
The general partners' share of net income consists of amounts
attributable to their 1% capital contribution and an additional percentage
of cash flow (as defined) which relates to the general partners' share of
cash distributions as set forth in the Partnership Agreement (Note 4). All
remaining net income is allocated to the limited partners.
5
PUBLIC STORAGE PROPERTIES V, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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 with remaining maturities of
three months or less at the date of acquisition to be cash equivalents.
Real Estate Facilities and Evaluation of Asset Impairment:
----------------------------------------------------------
Real estate facilities are recorded at cost. Costs associated with the
development, construction, renovation and improvement of properties are
capitalized. Interest, property taxes, and other costs associated with the
development incurred during the construction period are capitalized as
building cost. Expenditures for repairs and maintenance are charged to
expense as incurred. Depreciation is computed using the straight-line
method over the estimated useful lives of the buildings and improvements,
which are generally between 5 and 25 years. Certain real estate facilities
have been in service longer than 25 years, and accordingly the original
development cost of such buildings are fully depreciated at September 30,
2008.
We evaluate our real estate for impairment on a quarterly basis. We
first evaluate these assets for indicators of impairment such as a) a
significant decrease in the market price of real estate, b) a significant
adverse change in the extent or manner in which real estate is being used
or in its physical condition, c) a significant adverse change in legal
factors or the business climate that could affect the value of the real
estate, d) an accumulation of costs significantly in excess of the amount
originally projected for the acquisition of or construction of the real
estate, or e) a current-period operating or cash flow loss combined with a
history of operating or cash flow losses or a projection or forecast that
demonstrates continuing losses associated with the use of the real estate.
When any such indicators of impairment are noted, we compare the carrying
value of the real estate to the future estimated undiscounted cash flows
attributable to the real estate. If the real estate's recoverable amount is
less than the carrying value of the asset, then an impairment charge is
booked for the excess of carrying value over the real estate's estimated
fair value. Our evaluations have identified no such impairments at
September 30, 2008.
Any real estate facility, which we expect to sell or dispose of prior
to its previously estimated useful life is stated at the lower of its
estimated net realizable value, less cost to sell, or its carrying value.
Accounting for Casualty Losses:
-------------------------------
Our policy is to record casualty losses or gains in the period the
casualty occurs equal to the difference between (a) the book value of
assets destroyed and (b) insurance proceeds, if any, that we expect to
receive in accordance with our insurance contracts. Potential insurance
proceeds that are subject to uncertainties, such as interpretation of
deductible provisions of the governing agreements or the estimation of
costs of restoration, are treated as a contingent proceeds in accordance
with Statement of Financial Accounting Standards No. 5 ("SFAS 5"), and not
recorded until the uncertainties are satisfied.
Deferred Revenue:
-----------------
Deferred revenue totaling $192,000 at September 30, 2008 ($236,000 at
December 31, 2007), consists of prepaid rents, which are recognized when
earned.
6
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 and state income tax purposes with the taxable income of the entity
allocated to each partner in accordance with the partnership agreement.
Accordingly no federal or state income tax expense is recorded by the
Partnership.
Recent Accounting Pronouncements and Guidance:
----------------------------------------------
As of November 13, 2008, there have been no recent accounting
pronouncements and guidance, which were not effective for implementation
prior to September 30, 2008, that would have a material impact upon
reporting the operations or financial position of the Partnership.
Segment Reporting:
------------------
The Partnership only has one reportable segment as defined within
Statement of Financial Accounting Standards No. 131.
3. CASH DISTRIBUTIONS
The Partnership Agreement requires that cash available for
distribution (cash flow from all sources less cash necessary for any
obligations or capital improvements) needs to be distributed at least
quarterly. During the three months ended September 30, 2008, we paid
distributions to the limited and general partners totaling $1,320,000
($30.00 per unit) and $458,000, respectively. During the nine months ended
September 30, 2008, we paid distributions to the limited and general
partners totaling $3,696,000 ($84.00 per unit) and $1,282,000,
respectively. Future distribution rates may be adjusted to levels which are
supported by operating cash flow after capital improvements and other
obligations.
4. PARTNERS' EQUITY
PS and Hughes are general partners of the Partnership. In 1995, Hughes
contributed his ownership and rights to distributions from the Partnership
to BWH Marina Corporation II, a corporation wholly-owned by Hughes. As
such, Hughes continues to act as a general partner of the Partnership but
does not directly receive any compensation, distributions or other
consideration from the Partnership.
The general partners have a 1% interest in the Partnership. In
addition, the general partners had an 8% interest in cash distributions
attributable to operations (exclusive of distributions attributable to sale
and financing proceeds) until the limited partners recovered all of their
investment. Thereafter, the general partners have a 25% interest in all
cash distributions (including sale and financing proceeds). During 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.
7
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 PS pursuant to which
PS 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 PS operates the Partnership's
business parks for a fee equal to 5% of the facilities gross income. For
the three months ended September 30, 2008 and 2007, the Partnership paid
$159,000 and $153,000, respectively, pursuant to these Management
Agreements. For the nine months ended September 30, 2008 and 2007, the
Partnership paid $465,000 and $455,000, respectively, pursuant to these
Management Agreements.
The Management Agreement between the Partnership and PS provides that
the Management Agreement may be terminated without cause upon 60 days
written notice by the Partnership or nine months notice by PS. 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 PS and
its affiliates, are managed jointly by PS in order to take advantage of
scale and other efficiencies. Joint costs are allocated on a methodology
meant to fairly allocate such costs. As a result, significant components of
cost of operations, such as payroll costs, advertising and promotion, data
processing and insurance expenses are shared and allocated among the
properties using methodologies meant to fairly allocate such costs based
upon the related activities. The total of such expenses, which are included
in cost of operations on the accompanying condensed statements of income,
amounted to $230,000 and $240,000 for the three months ended September 30,
2008 and 2007, respectively, and $841,000 and $861,000 for the nine months
ended September 30, 2008 and 2007, respectively.
Ownership Interest by the General Partners
------------------------------------------
In addition to the general partnership interests outlined in Note 4,
PS owns 14,609 Limited Partnership Units ("Units"), as to which PS 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; PS has an option to
acquire these 131 Units. PS intends to exercise its option to acquire these
Units before the end of 2008.
In addition, there are 7,415 Units owned by PS Orangeco Partnerships,
Inc., a corporation in which the Hughes Family owns approximately 48% of
the voting stock, PS owns 46% and members of PS' management and related
individuals own approximately 6%.
Captive Insurance Activities with PS
------------------------------------
The Partnership has a 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 PS. The
Partnership accounts for its investment in STOR-Re, which is included in
8
PUBLIC STORAGE PROPERTIES V, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
other assets on our accompanying condensed balance sheets, on the cost
method, and has received no distributions during the nine months ended
September 30, 2008.
STOR-Re provides limited property and liability insurance coverage to
the Partnership, PS, and affiliates for losses occurring before April 1,
2004. STOR-Re was succeeded with respect to these activities for losses
occurring after March 31, 2004 by a wholly owned subsidiary of PS
(collectively, this entity and STOR-Re are referred to as the "Captive
Entities"). Liabilities for losses and loss adjustment expenses include an
amount determined from loss reports and individual cases and an amount,
based on recommendations from an outside actuary that is a member of the
American Academy of Actuaries, using a frequency and severity method, for
losses incurred but not reported. Determining the liability for unpaid
losses and loss adjustment expense is based upon estimates and while we
believe that the amount is adequate, the ultimate loss may be in excess of
or less than the amounts provided. The methods for making such estimates
and for establishing the resulting liability are reviewed quarterly.
Other Activities with PS
------------------------
PS owns PS Insurance Company - Hawaii, Ltd. ("PSIC"), a corporation
that reinsures policies against losses to goods stored by tenants in the
Partnership's and PS' storage facilities. PSIC receives the premiums and
bears the risks associated with the re-insurance. The Partnership receives
a fee (an "Access Fee") from PSIC in return for providing access to the
tenants for the placement of insurance policies. This Access Fee is based
on the number of spaces the Partnership has to rent. Included in other
income on our accompanying statements of income for these Access Fees are
$151,000 and $22,000 for the three months ended September 30, 2008 and
2007, respectively, and $243,000 and $66,000 for the nine months ended
September 30, 2008 and 2007, respectively. Such Access Fees for the three
and nine months ended September 30, 2008 include additional Access Fees
paid by PSIC totaling $52,000 for amounts earned in the year ended December
31, 2007, and $35,000 for amounts earned in the six months ended June 30,
2008. These additional Access Fees were paid in the three months ended
September 30, 2008 as a result of a change in PSIC's accounting estimates
which determine such fees.
A subsidiary of PS sells locks and boxes and rents trucks to the
general public and tenants to be used in securing their spaces and moving
their goods. The subsidiary of PS receives the revenues and bears the cost
of the activities.
6. COMMITMENTS AND CONTINGENCIES
Legal Proceedings:
------------------
Brinkley v. Public Storage, Inc. (filed April 2005) (Superior Court of
---------------------------------------------------------------------------
California - Los Angeles County)
--------------------------------
The plaintiff sued PS on behalf of a purported class of California
non-exempt employees based on various California wage and hour laws and
seeking monetary damages and injunctive relief. In May 2006, a motion for
class certification was filed seeking to certify five subclasses. Plaintiff
sought certification for alleged meal period violations, rest period
violations, failure to pay for travel time, failure to pay for mileage
reimbursement, and for wage statement violations. In October 2006, the
Court declined to certify three out of the five subclasses. The Court did,
however, certify subclasses based on alleged meal period and wage statement
violations. Subsequently, PS filed a motion for summary judgment seeking to
dismiss the matter in its entirety. On June 22, 2007, the Court granted the
PS' summary judgment motion as to the causes of action relating to the
subclasses certified and dismissed those claims. The only surviving claims
are those relating to the named plaintiff. The plaintiff has filed an
appeal to the Court's June 22, 2007 summary judgment ruling. On October 28,
2008, the Court of Appeals sustained the trial court's ruling.
9
PUBLIC STORAGE PROPERTIES V, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Other Items
-----------
PS and the Partnership are a party to various claims, complaints, and
other legal actions that have arisen in the normal course of business from
time to time, that are not described above. We believe that it is unlikely
that the outcome of these other pending legal proceedings including
employment and tenant claims, in the aggregate, will have a material
adverse effect upon the operations or financial position of the
Partnership.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
------------------------------------------------------------------------
OF OPERATIONS
-------------
The following should be read in conjunction with the Partnership's
condensed financial statements and notes thereto.
FORWARD LOOKING STATEMENTS: This Quarterly Report on Form 10-Q contains
forward-looking statements within the meaning of the federal securities laws.
All statements in this document, other than statements of historical fact, are
forward-looking statements which may be identified by the use of the words
"expects," "believes," "anticipates," "plans," "would," "should," "may,"
"estimates" and similar expressions. These forward-looking statements involve
known and unknown risks and uncertainties, which may cause Public Storage
Properties V, Ltd.'s (the "Partnership") actual results and performance to be
materially different from those expressed or implied in the forward-looking
statements. As a result, you should not rely on any forward-looking statements
in this report, or which management may make orally or in writing from time to
time, as predictions of future events nor guarantees of future performance. We
caution you not to place undue reliance on forward-looking statements, which
speak only as the date of this report or as of the dates indicated in the
statements. All of our forward-looking statements, including those in this
report, are qualified in their entirely by this statement. We expressly disclaim
any obligation to update publicly or otherwise revise any forward-looking
statements, whether as a result of new information, new estimates, or other
factors, events or circumstances after the date of this document, except where
expressly required by law. Accordingly, you should use caution in relying on
past forward-looking statements to anticipate future results.
Factors and risks that may impact our future results and performance
include, but are not limited to, those described in Item 1A, "Risk Factors" and
in our other filings with the Securities and Exchange Commission. ("SEC"). These
risks include, among others, the following:
o general risks associated with the ownership and operation of real estate
including changes in demand, potential liability for environmental
contamination, adverse changes in tax, real estate and zoning laws and
regulations, and the impact of natural disasters;
o risks associated with downturns in the local economies in the markets in
which we operate;
o the impact of competition from new and existing self-storage and commercial
facilities and other storage alternatives;
o the impact of the regulatory environment as well as national, state, and
local laws and regulations;
o disruptions or shutdowns of our automated processes and systems; and
o economic uncertainty due to the impact of war or terrorism.
The risks included here are not exhaustive as it is not possible for
management to predict all possible risk factors that may exist or emerge from
time to time. Investors should refer to our future reports and other information
filed from time to time with the SEC for additional information.
Overview
- --------
The self-storage industry is highly fragmented and is composed
predominantly of numerous local and regional operators. Competition in the
markets in which we operate is significant and has increased over the past
several years due to additional development of self-storage facilities. We
believe that the increase in competition has had a negative impact to the
Partnership's occupancy levels and rental rates in many markets. However, we
believe that the Partnership's affiliation with Public Storage ("PS") provides
several distinguishing characteristics that enable the Partnership to compete
effectively with other owners and operators.
PS is the largest owner and operator of self-storage facilities in the
United States ("U.S"). All of the PS facilities in the U.S. are operated under
the "Public Storage" brand name, which we believe is the most recognized and
11
established name in the self-storage industry. Market concentration establishes
PS as one of the dominant providers of self-storage space in most markets in
which PS operates and enables PS to use a variety of promotional activities,
such as television advertising as well as targeted discounting and referrals,
which are generally not economically viable to most competitors of PS, as well
as more substantial, well-placed yellow page advertisements than can many of its
competitors.
We will continue to focus our growth strategies on improving the operating
performance of our existing self-storage properties primarily through increases
in revenues achieved through the telephone reservation center and associated
marketing efforts. We expect future increases in rental income to come primarily
from increases in realized rent rather than increases in occupancy, although
there can be no assurance.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
IMPAIRMENT OF REAL ESTATE
Substantially all of our assets consist of real estate. On a quarterly
basis, we evaluate our real estate for impairment. The evaluation of real estate
for impairment requires determining whether indicators of impairment exist,
which is a subjective process. When any indicators of impairment are found, the
evaluation then entails projections of future operating cash flows, which also
involves significant judgment. We identified no such impairments at September
30, 2008. However, future events, or facts and circumstances that currently
exist, that we have not yet identified, could cause us to conclude in the future
that our real estate is impaired. Any resulting impairment loss could have a
material adverse impact on our financial condition and results of operations.
ESTIMATED USEFUL LIVES OF LONG-LIVED ASSETS
Substantially all of our assets consist of depreciable, long-lived assets.
We record depreciation expense with respect to these assets based upon their
estimated useful lives. Any change in the estimated useful lives of those
assets, caused by functional or economic obsolescence or other factors, could
have a material, adverse impact on our financial condition or results of
operations.
ACCRUALS FOR CONTINGENCIES
We are exposed to business and legal liability risks with respect to events
that have occurred, but in accordance with U.S. generally accepted accounting
principles, we have not accrued for such potential liabilities because the loss
is either not probable or not estimable or because we are not aware of the
event. Future events and the result of pending litigation could result in such
potential losses becoming probable and estimable, which could have a material,
adverse impact on our financial condition or results of operations. Some of
these potential losses, which we are aware of, are described in Notes 5 and 6 to
the Partnership's September 30, 2008 condensed financial statements.
ACCRUALS FOR OPERATING EXPENSES
We accrue for property tax expense and other operating expenses based upon
estimates and historical trends and current and anticipated local and state
government rules and regulations. If these estimates and assumptions are
incorrect, our expenses could be misstated. Cost of operations, general and
administrative expense, as well as television, yellow page, and other
advertising expenditures are expensed as incurred.
12
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2007:
The Partnership's net income for the three months ended September 30, 2008
was $1,920,000 compared to $1,710,000 for the three months ended September 30,
2007, representing an increase of $210,000 or 12.3%.
Rental income for the three months ended September 30, 2008 was $2,663,000
compared to $2,565,000 for the three months ended September 30, 2007,
representing an increase of $98,000 or 3.8%. The increase in rental income is
attributable to the increase in annualized realized rent per square foot to
$14.73 per occupied square foot for the three months ended September 30, 2008,
compared to $14.36 per occupied square foot for the same period in 2007. The
weighted average occupancy level increased slightly to 90.2% for the three
months ended September 30, 2008 from 89.5% for the same period in 2007.
Other income was $161,000 for the three months ended September 30, 2008, as
compared to $42,000 for the same period in 2007. Included in other income for
the three months ended September 30, 2008 are additional access fees paid by PS
Insurance Company - Hawaii, Ltd. ("PSIC"), a corporation owned by PS (described
more fully in Note 5 to the Partnership's September 30, 2008 condensed financial
statements), Included in other income on our accompanying statements of income
for these access fees are $151,000 and $22,000 for the three months ended
September 30, 2008 and 2007, respectively, and $243,000 and $66,000 for the nine
months ended September 30, 2008 and 2007, respectively. Such access fees for the
three and nine months ended September 30, 2008 include additional access fees
paid by PSIC totaling $52,000 for amounts earned in the year ended December 31,
2007, and $35,000 for amounts earned in the six months ended June 30, 2008.
These additional access fees were paid in the three months ended September 30,
2008 as a result of a change in PSIC's accounting estimates which determine such
fees.
Cost of operations (including management fees paid to affiliates-see Note 5
to the Partnership's condensed financial statements) for the three months ended
September 30, 2008 was $780,000 compared to $797,000 for the three months ended
September 30, 2007, representing a decrease of $17,000 or 2.1%. For the three
months ended September 30, 2008, advertising and promotion expenses decreased by
$15,000 or 18.1% compared to the same period in 2007. This decrease is due to a
significant reduction in television advertising as compared to the same period
in 2007. Professional fees and insurance expenses also decreased significantly
in the three months ended September 30, 2008 compared to the same period in
2007. The decreases in advertising and promotion, professional fees and
insurance expenses were partially offset by increases in payroll, utilities and
repairs and maintenance expenses.
Depreciation expense was $107,000 and $85,000 for the three months ended
September 30, 2008 and 2007, respectively, representing an increase of $22,000
or 25.9%.
NINE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 2007:
The Partnership's net income for the nine months ended September 30, 2008
was $5,284,000 compared to $5,010,000 for the nine months ended September 30,
2007, representing an increase of $274,000 or 5.5%.
Rental income for the nine months ended September 30, 2008 was $7,802,000
compared to $7,624,000 for the nine months ended September 30, 2007,
representing an increase of $178,000 or 2.3%. The increase in rental income is
attributable to the increase in annualized realized rent per square foot to
$14.46 per occupied square foot for the nine months ended September 30, 2008,
compared to $14.13 per occupied square foot for the same period in 2007. This
increase was partially offset by a slight decrease in the weighted average
occupancy levels of 89.9% for the nine months ended September 30, 2008 compared
to 90.0% for the same period in 2007.
Other income was $292,000 for the nine months ended September 30, 2008, as
compared to $167,000 for the same period in 2007. Included in other income for
the nine months ended September 30, 2008 are additional access fees paid by PSIC
totaling $52,000 for amounts earned in the year ended December 31, 2007, and
$35,000 for amounts earned in the six months ended June 30, 2008, as noted
above.
13
Cost of operations (including management fees paid to affiliates-see Note 5
to the Partnership's condensed financial statements) for the nine months ended
September 30, 2008 was $2,439,000 compared to $2,435,000 for the nine months
ended September 30, 2007, representing an increase of $4,000 or 0.2%. The
increase in cost of operations reflects increases in advertising and promotion,
payroll and property tax expenses offset by decreases in repairs and
maintenance, professional fees and insurance expenses.
Depreciation expense was $283,000 and $260,000 for the nine months ended
September 30, 2008 and 2007, respectively, representing an increase of $23,000
or 8.8%.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash generated from operations ($5,773,000 for the nine months ended
September 30, 2008) has been sufficient to meet all current obligations of the
Partnership. Capital improvements totaled $247,000 and $158,000 for the nine
months ended September 30, 2008 and 2007, respectively.
The Partnership does not anticipate issuing senior securities, making loans
to other persons, investing in the securities of other issuers for the purpose
of exercising control, underwriting the securities of other issuers, engaging in
the purchase and sale of investments, offering securities in exchange for
property, or repurchasing or otherwise reacquiring its outstanding securities.
The Partnership may consider borrowing money with the intent of using the
proceeds for distribution to partners. As of September 30, 2008, the Partnership
has no debt and none of the Partnership's self-storage facilities are
encumbered.
DISTRIBUTIONS
The Partnership Agreement requires that cash available for distribution
(cash flow from all sources less cash necessary for any obligations or capital
improvement needs) be distributed at least quarterly. During the three months
ended September 30, 2008, we paid distributions to the limited and general
partners totaling $1,320,000 ($30.00 per unit) and $458,000, respectively.
During the nine months ended September 30, 2008 we paid distributions to the
limited and general partners totaling $3,696,000 ($84.00 per unit) and
$1,282,000, respectively. Future distribution rates may be adjusted to levels
which are supported by operating cash flow after capital improvements and any
other necessary obligations.
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ITEM 4. CONTROLS AND PROCEDURES
-----------------------
Public Storage, maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in reports PS files
and submits under the Securities Exchange Act of 1934, as amended, ("Exchange
Act") is recorded, processed, summarized and reported within the time periods
specified in accordance with SEC guidelines and that such information is
communicated to the Partnership's management, including Public Storage's Chief
Executive Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosure based on the definition of "disclosure controls
and procedures" in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures in
reaching that level of reasonable assurance.
As of the end of the fiscal quarter covered by this report, Public Storage
carried out an evaluation, under the supervision and with the participation of
the Partnership's management, including Public Storage's Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Partnership's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation,
Public Storage's Chief Executive Officer and Chief Financial Officer concluded
that the Partnership's disclosure controls and procedures were effective as of
September 30, 2008.
There have not been any changes in our internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the quarter to which this report relates that have
materially affected, or are reasonable likely to materially affect, our internal
control over financial reporting.
15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
The information set forth under the heading "Legal Matters" in Note 6 to
the Partnership's September 30, 2008 condensed financial statements in this Form
10-Q is incorporated by reference in this Item 1.
ITEM 1A. RISK FACTORS
------------
In addition to the other information in this Quarterly Report on Form 10-Q,
you should consider the risks described below that we believe may be material to
investors in evaluating the Partnership. This section contains forward-looking
statements, and in considering these statements, you should refer to the
qualifications and limitations on our forward-looking statements that are
described in Forward Looking Statements at the beginning of Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
THE GENERAL PARTNERS CONTROL THE PARTNERSHIP AS A GROUP.
Public Storage is a general partner and beneficially owns approximately
33.5% of our outstanding limited partnership units. In addition, B. Wayne
Hughes, General Partner of the Partnership, and Chairman of PS and members of
his family beneficially own 28.2% of the limited partnership units. As a result,
the General Partners, as a group, control matters submitted to a vote of our
unitholders, including amending our organizational documents, dissolving the
Partnership and approving other such transactions.
SINCE OUR BUSINESS CONSISTS PRIMARILY OF OPERATING REAL ESTATE, WE ARE
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;
o potential terrorist attacks;
o changes in supply of or demand for similar or competing facilities in an
area;
o the impact of environmental protection laws;
o changes in interest rates and availability of permanent mortgage funds
which may render the sale or financing of a property difficult or
unattractive;
o increases in insurance premiums, property tax assessments and other
operating and maintenance expenses;
o adverse changes in tax, real estate and zoning laws and regulations; and
o tenant and employment-related claims.
16
There is significant competition among self-storage facilities and from
other storage alternatives. All of our properties are self-storage facilities,
which generated substantially all of our revenue for the nine month period ended
September 30, 2008. Local market conditions will play a significant part in how
competition will affect us. Competition in the market areas in which many of our
properties are located from other self-storage facilities and other storage
alternatives is significant and has affected the occupancy levels, rental rates
and operating expenses of our properties. Any increase in availability of funds
for investment in real estate may accelerate competition. Further development of
self-storage facilities may intensify competition among operators of
self-storage facilities in the market areas in which we operate.
We may incur significant environmental costs and liabilities. As an owner
and operator of real properties, under various federal, state and local
environmental laws, we are required to clean up spills or other releases of
hazardous or toxic substances on or from our properties. Certain environmental
laws impose liability whether or not the owner knew of, or was responsible for,
the presence of the hazardous or toxic substances. In some cases, liability may
not be limited to the value of the property. The presence of these substances,
or the failure to properly remediate any resulting contamination, whether from
environmental or microbial issues, also may adversely affect the owner's or
operator's ability to sell, lease or operate its property or to borrow using its
property as collateral.
We have conducted preliminary environmental assessments on the
Partnership's properties to evaluate the environmental condition of, and
potential environmental liabilities associated with, our properties. These
assessments generally consist of an investigation of environmental conditions at
the property (not including soil or groundwater sampling or analysis), as well
as a review of available information regarding the site and publicly available
data regarding conditions at other sites in the vicinity. In connection with
these property assessments, we have become aware that prior operations or
activities at some facilities or from nearby locations have or may have resulted
in contamination to the soil or groundwater at these facilities. In this regard,
some of our facilities are or may be the subject of federal or state environment
investigations or remedial actions. Although we cannot provide any assurance,
based on the preliminary environmental assessments, we believe we have funds
available to cover any liability from environmental contamination or potential
contamination and we are not aware of any environmental contamination of our
facilities material to our overall business, financial condition or results of
operation.
There has been an increasing number of claims and litigation against owners
and managers of rental properties relating to moisture infiltration, which can
result in mold or other property damage. When we receive a complaint concerning
moisture infiltration, condensation or mold problems and/or become aware that an
air quality concern exists, we implement corrective measures in accordance with
guidelines and protocols we have developed with the assistance of outside
experts. We seek to work proactively with our tenants to resolve moisture
infiltration and mold-related issues, subject to our contractual limitations on
liability for such claims. However, we can provide no assurance that material
legal claims relating to moisture infiltration and the presence of, or exposure
to, mold will not arise in the future.
Property taxes can increase and cause a decline in cash flows and
profitability. Each of our properties is subject to real property taxes. These
taxes may increase in the future as property tax rates or assessed property
values change, and any such rate or assessment changes could increase tax
expense and adversely impact our cash flow and profitability. In particular, we
believe the Partnership's nine California properties are assessed at amounts
significantly lower than their current fair value, due primarily to
long-standing statutory limits on annual increases to assessed values. There is
a risk that these assessments could be increased to fair value in certain
circumstances, such as i) changes in laws, regulations, or changes in
interpretations thereof, or ii) changes in ownership of the Partnership's
limited partner units or general partner units that could constitute a change in
control (as that termed is defined by the applicable law) of the underlying
properties.
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
17
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.
We incur liability from tenant and employment-related claims. From time to
time we must resolve tenant claims and employment-related claims by corporate
level and field personnel.
PUBLIC STORAGE'S ACQUISITION OF SHURGARD OR OTHER POTENTIAL ACQUISITIONS OR
DEVELOPMENT OF PROPERTIES MAY SUBJECT THE PARTNERSHIP TO ADDITIONAL RISKS.
In August 2006, Public Storage completed the acquisition of Shurgard
Storage Centers, Inc. ("Shurgard"), a publicly held REIT that had interests in
approximately 646 self-storage facilities located in the United States ("U.S.")
and Europe and acquires and develops other real estate facilities as part of its
ongoing operations. Such acquisitions, including the Shurgard merger, do not
change the financial interests of the Partnership. However, because the
self-storage facilities of the Partnership and Public Storage are managed by
Public Storage, together with the newly acquired self-storage facilities,
individual Partnership properties may experience a decrease in move-ins,
reductions to rental rates, increases to promotional discounts, or other
negative impacts to revenues in the short and/or long term due to the
competitive impact of Public Storage management of the newly acquired
facilities, particularly with respect to those facilities that are close to the
Partnership's facilities.
SOME OF OUR REVENUES INVOLVE BUSINESSES THAT ARE SUBJECT TO GOVERNMENTAL
REGULATION WHICH COULD REDUCE OUR PROFITABILITY OR LIMIT OUR GROWTH.
We receive revenues related to the offering of insurance products to our
tenants. These products are offered through an affiliate of PS, which holds
Limited Lines Self Storage Insurance Agent licenses from a number of individual
state Departments of Insurance and are subject to state governmental regulation
and supervision. This state governmental supervision could reduce our
profitability or limit our growth by increasing the costs of regulatory
compliance, limiting or restricting the products or services we provide or the
methods by which we provide products and services, or subjecting our businesses
to the possibility of regulatory actions or proceedings. The continued ability
of this affiliate to maintain these Limited Lines Self Storage Insurance Agent
licenses in the jurisdictions in which it is licensed depends on its compliance
with the rules and regulations promulgated from time to time by the regulatory
authorities in each of these jurisdictions. Furthermore, state insurance
departments may investigate insurance activities.
In all jurisdictions, the applicable laws and regulations are subject to
amendment or interpretation by regulatory authorities. Generally, such
authorities are vested with relatively broad discretion to grant, renew and
revoke licenses and approvals and to implement regulations. Accordingly, this
affiliate may be precluded or temporarily suspended from carrying on some or all
of these activities or otherwise fined or penalized in a given jurisdiction. No
assurances can be given that our businesses can continue to be conducted in any
given jurisdiction as it has been conducted in the past. For the year ended
December 31, 2007, revenues from our tenant reinsurance business represented
approximately 1.5% of our 2007 revenues. For the three and nine months ended
September 30, 2009, revenues from our tenant reinsurance business represented
approximately 5.3% and 3.0% of revenues, respectively.
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 U.S. or its businesses or interests.
Attacks or armed conflicts that directly impact one or more of our properties
could significantly affect our ability to operate those properties and thereby
impair our operating results. Further, we may not have insurance coverage for
losses caused by a terrorist attack. Such insurance may not be available, or if
it is available and we decide to obtain such terrorist coverage, the cost for
the insurance may be significant in relationship to the risk overall. In
addition, the adverse effects that such violent acts and threats of future
attacks could have on the U.S. economy could similarly have a material adverse
18
effect on our business and results of operations. Finally, further terrorist
acts could cause the U.S. to enter into a wider armed conflict, which could
further impact our business and operating results.
DEVELOPMENTS IN CALIFORNIA MAY HAVE AN ADVERSE IMPACT ON OUR BUSINESS AND
OPERATING RESULTS AND COULD DECREASE THE VALUE OF OUR ASSETS.
Nine 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 influence the market price of our partnership units
is the annual rate of distributions that we pay on the securities, as compared
with interest rates. An increase in interest rates may lead purchasers of
partnership units to demand higher annual distribution rates, which could
adversely affect the market price of our partnership units.
WE HAVE BECOME INCREASINGLY DEPENDENT UPON AUTOMATED PROCESSES AND THE
INTERNET AND ARE FACED WITH SYSTEM SECURITY RISKS.
We have become increasingly centralized and dependent upon automated
information technology processes. As a result, we could be severely impacted by
a catastrophic occurrence, such as a natural disaster or a terrorist attack. In
addition, a portion of our business operations are conducted over the Internet,
increasing the risk of viruses that could cause system failures and disruptions
of operations. Experienced computer programmers may be able to penetrate our
network security and misappropriate our confidential information, create system
disruptions or cause shutdowns.
OUR OWNERSHIP INTEREST IN STOR-RE MAY LOSE VALUE OR BECOME A LIABILITY.
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 PS. STOR-Re provided limited property
and liability insurance coverage to the Partnership, PS, and affiliates of PS
for losses occurring prior to April 1, 2004. Liabilities for losses and loss
adjustment expenses include an amount determined from loss reports and
individual cases and an amount, based on recommendations from an outside actuary
that is a member of the American Academy of Actuaries, using a frequency and
severity method, for losses incurred but not reported. Determining the liability
for unpaid losses and loss adjustment expense is based upon estimates and while
we believe that the amount is adequate, the ultimate loss may be in excess of or
less than the amounts provided, which may result in a reduction in the value of
the Partnership's investment or could result in future payments to STOR-Re if
its reserves were determined to be inadequate.
ITEM 6. EXHIBITS
--------
Exhibits required by Item 601 of Regulation S-K are listed in the attached
Exhibit Index, and are filed herewith or incorporated herein by reference.
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 13, 2008
PUBLIC STORAGE PROPERTIES V, LTD.
BY: Public Storage
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) Certification. Filed herewith.
31.2 Rule 13a-14(a) Certification. Filed herewith.
32 Section 1350 Certifications. Filed herewith.
21