10-Q 1 psa-20130930x10q.htm 10-Q 414a93975d20482

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, 2013

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:  001-33519

PUBLIC STORAGE
(Exact name of registrant as specified in its charter)

Maryland

95-3551121

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer 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 at least the past 90 days.

 

[X]  Yes  [   ]  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

[X]  Yes  [   ]  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

Large Accelerated Filer [X]

Accelerated Filer

[   ]

Non-accelerated Filer

[   ]

Smaller Reporting Company [   ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

[   ]  Yes  [X]  No


 

Indicate the number of the registrant’s outstanding common shares of beneficial interest, as of November  4,  2013:

Common Shares of beneficial interest, $.10 par value per share – 172,066,884 shares

 


 

 

 

 

 

PUBLIC STORAGE

 

 

 

INDEX

 

 

 

 

 

 

PART I

FINANCIAL INFORMATION

Pages

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

Balance Sheets at September 30, 2013 and December 31, 2012

 

 

 

 

Statements of Income for the Three and Nine Months Ended September 30, 2013 and 2012

 

 

 

 

Statements of Comprehensive Income for the Three and Nine Months Ended

September 30, 2013 and 2012

 

 

 

 

Statement of Equity for the Nine Months Ended September 30, 2013

 

 

 

 

Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012

5-6 

 

 

 

 

Condensed Notes to Financial Statements

7-28 

 

 

 

Item 2.

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

29-56 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

56-57 

 

 

 

Item 4.

Controls and Procedures

58 

 

 

 

PART II

OTHER INFORMATION (Items 3, 4 and 5 are not applicable)

 

 

 

 

Item 1.

Legal Proceedings

59 

 

 

 

Item 1A.

Risk Factors

59 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

59 

 

 

 

Item 6.

Exhibits

59 

 

 

 

 

 

 


 

PUBLIC STORAGE

BALANCE SHEETS

 (Amounts in thousands, except share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

2013

 

2012

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

56,965 

 

$

17,239 

Real estate facilities, at cost:

 

 

 

 

 

Land

 

3,001,267 

 

 

2,863,464 

Buildings

 

8,532,067 

 

 

8,170,355 

 

 

11,533,334 

 

 

11,033,819 

Accumulated depreciation

 

(4,004,681)

 

 

(3,738,130)

 

 

7,528,653 

 

 

7,295,689 

Construction in process

 

46,039 

 

 

36,243 

 

 

7,574,692 

 

 

7,331,932 

 

 

 

 

 

 

Investments in unconsolidated real estate entities

 

766,489 

 

 

735,323 

Goodwill and other intangible assets, net

 

217,023 

 

 

209,374 

Loan receivable from unconsolidated real estate entity

 

420,441 

 

 

410,995 

Other assets

 

114,330 

 

 

88,540 

Total assets

$

9,149,940 

 

$

8,793,403 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

Borrowings on bank credit facility

$

 -

 

$

133,000 

Notes payable

 

100,118 

 

 

335,828 

Accrued and other liabilities

 

243,033 

 

 

201,711 

    Total liabilities

 

343,151 

 

 

670,539 

 

 

 

 

 

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Public Storage shareholders’ equity:

 

 

 

 

 

Preferred Shares, $0.01 par value, 100,000,000 shares authorized, 142,500

 

 

 

 

 

shares issued (in series) and outstanding, (113,500 at December 31, 2012),

 

 

 

 

 

at liquidation preference

 

3,562,500 

 

 

2,837,500 

Common Shares, $0.10 par value, 650,000,000 shares authorized,

 

 

 

 

 

171,760,994 shares issued and outstanding (171,388,286 shares at

 

 

 

 

 

December 31, 2012)

 

17,176 

 

 

17,139 

Paid-in capital

 

5,525,639 

 

 

5,519,596 

Accumulated deficit

 

(321,890)

 

 

(279,474)

Accumulated other comprehensive loss

 

(4,481)

 

 

(1,005)

Total Public Storage shareholders’ equity

 

8,778,944 

 

 

8,093,756 

Noncontrolling interests

 

27,845 

 

 

29,108 

  Total equity

 

8,806,789 

 

 

8,122,864 

Total liabilities and equity

$

9,149,940 

 

$

8,793,403 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

1


 

PUBLIC STORAGE

INCOME STATEMENTS

 (Amounts in thousands, except per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Self-storage facilities

$

477,978 

 

$

445,169 

 

$

1,369,219 

 

$

1,279,788 

Ancillary operations

 

33,979 

 

 

32,013 

 

 

99,016 

 

 

93,022 

 

 

511,957 

 

 

477,182 

 

 

1,468,235 

 

 

1,372,810 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

Self-storage cost of operations

 

136,751 

 

 

131,618 

 

 

409,881 

 

 

406,913 

Ancillary cost of operations

 

11,052 

 

 

9,857 

 

 

30,882 

 

 

29,156 

Depreciation and amortization

 

96,537 

 

 

89,897 

 

 

278,475 

 

 

265,195 

General and administrative

 

17,650 

 

 

15,298 

 

 

49,988 

 

 

44,117 

 

 

261,990 

 

 

246,670 

 

 

769,226 

 

 

745,381 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

249,967 

 

 

230,512 

 

 

699,009 

 

 

627,429 

Interest and other income

 

5,608 

 

 

5,444 

 

 

16,705 

 

 

16,639 

Interest expense

 

(478)

 

 

(4,926)

 

 

(4,622)

 

 

(15,327)

Equity in earnings of unconsolidated real estate entities

 

14,269 

 

 

12,642 

 

 

39,013 

 

 

30,353 

Foreign currency exchange gain (loss)

 

16,094 

 

 

9,019 

 

 

9,281 

 

 

(2,481)

Gain on real estate sales

 

168 

 

 

193 

 

 

168 

 

 

1,456 

Income from continuing operations

 

285,628 

 

 

252,884 

 

 

759,554 

 

 

658,069 

Discontinued operations

 

 -

 

 

11,935 

 

 

 -

 

 

12,403 

Net income

 

285,628 

 

 

264,819 

 

 

759,554 

 

 

670,472 

Allocation to noncontrolling interests

 

(1,430)

 

 

(927)

 

 

(3,670)

 

 

(2,585)

Net income allocable to Public Storage shareholders

 

284,198 

 

 

263,892 

 

 

755,884 

 

 

667,887 

Allocation of net income to:

 

 

 

 

 

 

 

 

 

 

 

Preferred shareholders - distributions

 

(51,907)

 

 

(49,267)

 

 

(152,404)

 

 

(156,272)

Preferred shareholders - redemptions

 

 -

 

 

(11,350)

 

 

 -

 

 

(49,677)

Restricted share units 

 

(930)

 

 

(810)

 

 

(2,498)

 

 

(1,787)

Net income allocable to common shareholders

$

231,361 

 

$

202,465 

 

$

600,982 

 

$

460,151 

Net income per common share – basic

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

$

1.35 

 

$

1.12 

 

$

3.50 

 

$

2.63 

Discontinued operations

 

 -

 

 

0.07 

 

 

 -

 

 

0.07 

 

 

1.35 

 

 

1.19 

 

 

3.50 

 

 

2.70 

Net income per common share – diluted

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

$

1.34 

 

$

1.11 

 

$

3.48 

 

$

2.61 

Discontinued operations

 

 -

 

 

0.07 

 

 

 -

 

 

0.07 

 

 

1.34 

 

 

1.18 

 

 

3.48 

 

 

2.68 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

171,721 

 

 

170,576 

 

 

171,597 

 

 

170,460 

Diluted weighted average common shares outstanding

 

172,793 

 

 

171,700 

 

 

172,651 

 

 

171,558 

Cash dividends declared per common share

$

1.25 

 

$

1.10 

 

$

3.75 

 

$

3.30 

 

 

 

 

 

 

 

 

 

See accompanying notes.

2


 

PUBLIC STORAGE

STATEMENTS OF COMPREHENSIVE INCOME

 (Amounts in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

285,628 

 

$

264,819 

 

$

759,554 

 

$

670,472 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Aggregate foreign currency exchange gain

 

34,135 

 

 

21,081 

 

 

5,805 

 

 

5,162 

Adjust for foreign currency exchange (gain) loss included in net income

 

(16,094)

 

 

(9,019)

 

 

(9,281)

 

 

2,481 

Other comprehensive income (loss)

 

18,041 

 

 

12,062 

 

 

(3,476)

 

 

7,643 

Total comprehensive income

 

303,669 

 

 

276,881 

 

 

756,078 

 

 

678,115 

Allocation to noncontrolling interests

 

(1,430)

 

 

(927)

 

 

(3,670)

 

 

(2,585)

Comprehensive income allocable to Public Storage shareholders

$

302,239 

 

$

275,954 

 

$

752,408 

 

$

675,530 

 

 

 

 

 

 

 

 

See accompanying notes.

3


 

PUBLIC STORAGE

STATEMENT OF EQUITY

 (Amounts in thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Total

 

 

 

 

 

 

 

Cumulative

 

 

 

 

 

 

 

 

 

 

Other

 

Public Storage

 

 

 

 

 

 

Preferred

 

Common

 

Paid-in

 

Accumulated

 

Comprehensive

 

Shareholders’

 

Noncontrolling

 

Total

 

Shares

 

Shares

 

Capital

 

Deficit

 

Loss

 

Equity

 

Interests

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2012 

$

2,837,500 

 

$

17,139 

 

$

5,519,596 

 

$

(279,474)

 

$

(1,005)

 

$

8,093,756 

 

$

29,108 

 

$

8,122,864 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of 29,000,000 preferred depositary shares (Note 8)

 

725,000 

 

 

 -

 

 

(23,313)

 

 

 -

 

 

 -

 

 

701,687 

 

 

 -

 

 

701,687 

Issuance of common shares in connection with share-based compensation (372,708 shares) (Note 10)

 

 -

 

 

37 

 

 

20,445 

 

 

 -

 

 

 -

 

 

20,482 

 

 

 -

 

 

20,482 

Share-based compensation expense, net of cash paid in lieu of common shares (Note 10)

 

 -

 

 

 -

 

 

13,304 

 

 

 -

 

 

 -

 

 

13,304 

 

 

 -

 

 

13,304 

Acquisition of noncontrolling interests

 

 -

 

 

 -

 

 

(4,393)

 

 

 -

 

 

 -

 

 

(4,393)

 

 

(89)

 

 

(4,482)

Net income

 

 -

 

 

 -

 

 

 -

 

 

759,554 

 

 

 -

 

 

759,554 

 

 

 -

 

 

759,554 

Net income allocated to noncontrolling interests

 

 -

 

 

 -

 

 

 -

 

 

(3,670)

 

 

 -

 

 

(3,670)

 

 

3,670 

 

 

 -

Distributions to equity holders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred shares (Note 8)

 

 -

 

 

 -

 

 

 -

 

 

(152,404)

 

 

 -

 

 

(152,404)

 

 

 -

 

 

(152,404)

Noncontrolling interests

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(4,844)

 

 

(4,844)

Common shares and restricted share units ($3.75 per share)

 

 -

 

 

 -

 

 

 -

 

 

(645,896)

 

 

 -

 

 

(645,896)

 

 

 -

 

 

(645,896)

Other comprehensive loss (Note 2)

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(3,476)

 

 

(3,476)

 

 

 -

 

 

(3,476)

Balances at September 30, 2013 

$

3,562,500 

 

$

17,176 

 

$

5,525,639 

 

$

(321,890)

 

$

(4,481)

 

$

8,778,944 

 

$

27,845 

 

$

8,806,789 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

4


 

PUBLIC STORAGE

STATEMENTS OF CASH FLOWS

 (Amounts in thousands)
(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

2013

 

2012

Cash flows from operating activities:

 

 

 

 

 

Net income

$

759,554 

 

$

670,472 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Gain on real estate sales, including amounts in discontinued operations

 

(168)

 

 

(13,191)

Depreciation and amortization, including amounts in discontinued operations

 

278,475 

 

 

265,517 

Distributions received from unconsolidated real estate entities (less than) in excess of equity in earnings

 

(5,182)

 

 

3,119 

Foreign currency exchange (gain) loss

 

(9,281)

 

 

2,481 

Other

 

16,265 

 

 

27,357 

Total adjustments

 

280,109 

 

 

285,283 

Net cash provided by operating activities

 

1,039,663 

 

 

955,755 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures to maintain real estate facilities 

 

(55,883)

 

 

(58,642)

Construction in process

 

(78,578)

 

 

(5,265)

Acquisition of real estate facilities and intangibles (Note 3)

 

(392,380)

 

 

(143,827)

Acquisition of investments in unconsolidated real estate entities

 

(29,752)

 

 

 -

Proceeds from sale of other real estate investments

 

257 

 

 

15,973 

Other

 

9,674 

 

 

4,022 

Net cash used in investing activities

 

(546,662)

 

 

(187,739)

Cash flows from financing activities:

 

 

 

 

 

Repayments on bank credit facility

 

(133,000)

 

 

 -

Repayments on notes payable

 

(234,936)

 

 

(49,287)

Issuance of common shares

 

20,482 

 

 

21,007 

Issuance of preferred shares

 

701,687 

 

 

1,651,456 

Redemption of preferred shares

 

 -

 

 

(1,248,946)

Acquisition of noncontrolling interests

 

(4,482)

 

 

(20,876)

Distributions paid to Public Storage shareholders

 

(798,300)

 

 

(720,999)

Distributions paid to noncontrolling interests

 

(4,844)

 

 

(4,341)

Net cash used in financing activities

 

(453,393)

 

 

(371,986)

Net increase in cash and cash equivalents

 

39,608 

 

 

396,030 

Net effect of foreign exchange translation on cash and cash equivalents

 

118 

 

 

714 

Cash and cash equivalents at the beginning of the period

 

17,239 

 

 

139,008 

Cash and cash equivalents at the end of the period

$

56,965 

 

$

535,752 

 

See accompanying notes.

5


 

PUBLIC STORAGE

STATEMENTS OF CASH FLOWS

 (Amounts in thousands)
(Unaudited)

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

2013

 

2012

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment:

 

 

 

 

 

Real estate facilities, net of accumulated depreciation

$

(9)

 

$

(643)

Investments in unconsolidated real estate entities

 

3,768 

 

 

(6,701)

Intangible assets

 

 -

 

 

(3)

Loan receivable from unconsolidated real estate entity

 

(9,446)

 

 

2,899 

Accumulated other comprehensive income

 

5,805 

 

 

5,162 

 

 

 

 

 

 

Preferred shares called for redemption and reclassified:

 

 

 

 

 

To liabilities

 

 -

 

 

367,325 

From equity

 

 -

 

 

(367,325)

Consolidation of entities previously accounted for under the equity method of accounting:

 

 

 

 

 

Real estate facilities

 

 -

 

 

(10,403)

Investments in unconsolidated real estate entities

 

 -

 

 

3,072 

Intangible assets

 

 -

 

 

(949)

Noncontrolling interests

 

 -

 

 

8,224 

 

 

 

 

See accompanying notes.

6


 

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

September 30, 2013

(Unaudited)

 

1.Description of the Business

Public Storage (referred to herein as “the Company”, “we”, “us”, or “our”), a Maryland real estate investment trust, was organized in 1980.  Our principal business activities include the acquisition, development, ownership and operation of self-storage facilities which offer storage spaces for lease, generally on a month-to-month basis, for personal and business use. 

 

At September 30, 2013, we have direct and indirect equity interests in 2,110 self-storage facilities (with approximately 135 million net rentable square feet) located in 38 states in the United States (“U.S.”) operating under the “Public Storage” name.  In Europe, we own one self-storage facility in London, England and we have a 49% interest in Shurgard Europe, which owns 187 self-storage facilities (with approximately 10 million net rentable square feet) located in seven Western European countries, all operating under the “Shurgard” name.  We also have direct and indirect equity interests in approximately 30 million net rentable square feet of commercial space located in 11 states in the U.S. primarily owned and operated by PS Business Parks, Inc. (“PSB”) under the “PS Business Parks” name.  At September 30, 2013, we have an approximate 43% common equity interest in PSB.

Disclosures of the number and square footage of properties, as well as the number and coverage of tenant reinsurance policies are unaudited and outside the scope of our independent registered public accounting firm’s review of our financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).

2.Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim financial statements were prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) as defined in the Financial Accounting Standards Board Accounting Standards Codification (the “Codification”), including guidance with respect to interim financial information, and in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X.  While they do not include all of the disclosures required by GAAP for complete financial statements, we believe that we have included all adjustments (consisting of normal and recurring adjustments) necessary for a fair presentation.  Operating results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013 due to seasonality and other factors.  These interim financial statements should be read together with the audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

Certain amounts previously reported in our December 31, 2012 and September 30, 2012 financial statements have been reclassified to conform to the September 30, 2013 presentation 1) for discontinued operations, 2) to separately present construction in process, and 3) to reflect credit card fees as part of cost of operations rather than as a reduction to revenues. 

Consolidation and Equity Method of Accounting

We consider entities to be Variable Interest Entities (“VIEs”) when they have insufficient equity to finance their activities without additional subordinated financial support provided by other parties, or where the equity holders as a group do not have a controlling financial interest.  We have no investments or other involvement in any VIEs. 

7


 

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

September 30, 2013

(Unaudited)

 

We consolidate all entities that we control (these entities, for the period in which the reference applies, are referred to collectively as the “Subsidiaries”), and we eliminate intercompany transactions and balances.  We account for our investments in entities that we have significant influence over, but do not control, using the equity method of accounting (these entities, for the periods in which the reference applies, are referred to collectively as the “Unconsolidated Real Estate Entities”).  When we obtain control of an Unconsolidated Real Estate Entity, we commence consolidating the entity and record a gain representing the differential between the book value and fair value of our preexisting equity interest.  All changes in consolidation status are reflected prospectively.

When we are general partner, we control the partnership unless the third-party limited partners can dissolve the partnership or otherwise remove us as general partner without cause, or if the limited partners have the right to participate in substantive decisions of the partnership. 

Collectively, at September 30, 2013, the Company and the Subsidiaries own 2,096 self-storage facilities in the U.S., one self-storage facility in London, England and six commercial facilities in the U.S.  At September 30, 2013, the Unconsolidated Real Estate Entities are comprised of PSB, Shurgard Europe, as well as limited partnerships that own an aggregate of 14 self-storage facilities in the U.S. (these limited partnerships, for the periods in which the reference applies, are referred to as the “Other Investments”).

Use of Estimates

The financial statements and accompanying notes reflect our estimates and assumptions.  Actual results could differ from those estimates and assumptions.

Income Taxes

We have elected to be treated as a real estate investment trust (“REIT”), as defined in the Internal Revenue Code.  As a REIT, we do not incur federal income tax if we distribute 100% of our REIT taxable income (generally, net rents and gains from real property, dividends, and interest) each year, and if we meet certain organizational and operational rules.  We believe we will meet these REIT requirements in 2013, and that we have met them for all other periods presented herein.  Accordingly, we have recorded no federal income tax expense related to our REIT taxable income.

Our merchandise and tenant reinsurance operations are subject to corporate income tax and such taxes are included in ancillary cost of operations.  We also incur income and other taxes in certain states, which are included in general and administrative expense. 

We recognize tax benefits of uncertain income tax positions that are subject to audit only if we believe it is more likely than not that the position would be sustained (including the impact of appeals, as applicable), assuming the relevant taxing authorities had full knowledge of the relevant facts and circumstances of our positions.  As of September 30, 2013, we had no tax benefits that were not recognized. 

Real Estate Facilities

Real estate facilities are recorded at cost.  We capitalize all costs incurred to develop, construct, renovate and improve properties, including interest and property taxes incurred during the construction period.  We expense internal and external transaction costs associated with acquisitions or dispositions of real estate, as well as repairs and maintenance costs, as incurred.  We depreciate buildings and improvements on a straight-line basis over estimated useful lives ranging generally between 5 to 25 years.

8


 

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

September 30, 2013

(Unaudited)

 

We allocate the net acquisition cost of acquired operating self-storage facilities (consisting of the cash paid to third parties for their interests, the fair value of any existing investment, and the fair value of any liabilities assumed) to the underlying land, buildings, identified intangible assets, and remaining noncontrolling interests based upon their respective individual estimated fair values.  Any difference between the net acquisition cost and the estimated fair value of the net tangible and intangible assets acquired is recorded as goodwill.    

Other Assets

Other assets primarily consist of prepaid expenses, accounts receivable, land held for sale and restricted cash. 

Accrued and Other Liabilities

Accrued and other liabilities consist primarily of trade payables, property tax accruals, tenant prepayments of rents, accrued interest payable, accrued payroll, accrued tenant reinsurance losses, casualty losses, and contingent loss accruals which are accrued when probable and estimable.  We disclose the nature of significant unaccrued losses that are reasonably possible of occurring and, if estimable, a range of exposure.

Cash Equivalents and Marketable Securities

Cash equivalents represent highly liquid financial instruments such as money market funds with daily liquidity or short-term commercial paper or treasury securities maturing within three months of acquisition.  Cash and cash equivalents which are restricted from general corporate use are included in other assets.  Commercial paper not maturing within three months of acquisition, which we intend and have the capacity to hold until maturity, are included in marketable securities and accounted for using the effective interest method. 

Fair Value Accounting

As used herein, the term “fair value” is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  We prioritize the inputs used in measuring fair value based upon a three-tier hierarchy described in Codification Section 820-10-35. 

We believe that, during all periods presented, the carrying values approximate the fair values of our cash and cash equivalents, marketable securities, other assets, and accrued and other liabilities, based upon our evaluation of the underlying characteristics, market data, and short maturity of these financial instruments, which involved considerable judgment.  The estimated fair values are not necessarily indicative of the amounts that could be realized in current market exchanges.  The characteristics of these financial instruments, market data, and other comparative metrics utilized in determining these fair values are “Level 2” inputs as the term is defined in Codification Section 820-10-35-47.

We use significant judgment to estimate fair values in recording our business combinations, to evaluate real estate, investments in unconsolidated real estate entities, goodwill, and other intangible assets for impairment, and to determine the fair values of notes payable and receivable.  In estimating fair values, we consider significant unobservable inputs such as market prices of land, market capitalization rates and earnings multiples for real estate facilities, projected levels of earnings, costs of construction, functional depreciation, and market interest rates for debt securities with a similar time to maturity and credit quality, which are “Level 3” inputs as the term is defined in Codification Section 820-10-35-52.   We believe that, during all periods presented, the carrying values approximate the fair values of our notes payable and loan receivable.

9


 

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

September 30, 2013

(Unaudited)

 

 

Currency and Credit Risk

Financial assets that are exposed to credit risk consist primarily of cash and cash equivalents, accounts receivable, loans receivable, and restricted cash.  Cash equivalents and marketable securities we invest in are either money market funds with a rating of at least AAA by Standard and Poor’s, commercial paper that is  rated A1 by Standard and Poor’s or deposits with highly rated commercial banks.

At September 30, 2013, due primarily to our investment in and loan receivable from Shurgard Europe, our operating results and financial position are affected by fluctuations in currency exchange rates between the Euro, and to a lesser extent, other European currencies, against the U.S. Dollar.

Goodwill and Other Intangible Assets

Intangible assets are comprised of goodwill, the “Shurgard” trade name, acquired tenants in place, and leasehold interests in land.

Goodwill totaled $174.6 million at September 30, 2013 and December 31, 2012.  The “Shurgard” trade name, which is used by Shurgard Europe pursuant to a fee-based licensing agreement, has a book value of $18.8 million at September 30, 2013 and December 31, 2012.  Goodwill and the “Shurgard” trade name have indefinite lives and are not amortized.

Acquired tenants in place and leasehold interests in land are finite-lived and are amortized relative to the benefit of the tenants in place or the land lease expense to each period.  At September 30, 2013, these intangibles have a net book value of $23.6 million ($15.9 million at December 31, 2012).  Accumulated amortization totaled $24.0 million at September 30, 2013 ($24.8 million at December 31, 2012), and amortization expense of $9.8 million and $7.3 million was recorded in the nine months ended September 30, 2013 and 2012, respectively.  During the nine months ended September 30, 2013, intangibles were increased $17.5 million in connection with the acquisition of self-storage facilities.    

Evaluation of Asset Impairment

We evaluate our real estate, finite-lived intangible assets, investments in unconsolidated real estate entities, and loan receivable from Shurgard Europe for impairment on a quarterly basis.  We evaluate indefinite-lived assets (including goodwill) for impairment on an annual basis, or more often if there are indicators of impairment.

In evaluating our real estate assets and finite-lived intangible assets for impairment, if there are indicators of impairment, and we determine that the asset is not recoverable from future undiscounted cash flows, an impairment charge is recorded for any excess of the carrying amount over the asset’s estimated fair value.  For long-lived assets that we expect to dispose of prior to the end of their estimated useful lives, we record an impairment charge for any excess of the carrying value of the asset over the expected net proceeds from disposal.

Prior to January 1, 2013, we evaluated the “Shurgard” trade name for impairment through a quantitative analysis, and we would record impairment charges to the extent quantitatively estimated fair value was less than the carrying amount.  Beginning January 1, 2013, if we determine, based upon the relevant events and circumstances and other such qualitative factors, that it is more likely than not that the asset is unimpaired, we do not record an impairment charge and no further analysis is performed.  Otherwise, we record an

10


 

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

September 30, 2013

(Unaudited)

 

impairment charge for any excess of carrying amount over quantitatively assessed fair value.  The change made on January 1, 2013, which is not expected to have a material impact upon our net income, resulted from our adoption of the Financial Accounting Standards Board’s (the “FASB’s”) Accounting Standards Update No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment.”

In evaluating goodwill for impairment, we first evaluate, based upon the relevant events and circumstances and other such qualitative factors, whether the fair value of the reporting unit that the goodwill pertains to is greater than its aggregate carrying amount.  If based upon this evaluation it is more likely than not that the fair value of the reporting unit is in excess of its aggregate carrying amount, no impairment charge is recorded and no further analysis is performed.  Otherwise, we estimate the goodwill’s implied fair value based upon what would be allocated to goodwill if the reporting unit were acquired at estimated fair value in a transaction accounted for as a business combination, and record an impairment charge for any excess of book value over the goodwill’s implied fair value. 

For our investments in unconsolidated real estate entities, if we determine that a decline in the estimated fair value of the investments below carrying amount is other than temporary, we record an impairment charge for any excess of carrying amount over the estimated fair value. 

For our loan receivable from Shurgard Europe, if we determine that it is probable we will be unable to collect all amounts due based on the terms of the loan agreement, we record an impairment charge for any excess of book value over the present value of expected future cash flows.

No impairments were recorded in any of our evaluations for any period presented herein.

Revenue and Expense Recognition

Rental income, which is generally earned pursuant to month-to-month leases for storage space, as well as late charges and administrative fees, are recognized as earned.  Promotional discounts reduce rental income over the promotional period.  Ancillary revenues and interest and other income are recognized when earned.  Equity in earnings of unconsolidated real estate entities represents our pro-rata share of the earnings of the Unconsolidated Real Estate Entities. 

We accrue for property tax expense based upon actual amounts billed and, in some circumstances, estimates and historical trends when bills or assessments have not been received from the taxing authorities or such bills and assessments are in dispute.  If these estimates are incorrect, the timing and amount of expense recognition could be incorrect.  Cost of operations, general and administrative expense, interest expense, as well as television and other advertising expenditures are expensed as incurred. 

Foreign Currency Exchange Translation

The local currency (primarily the Euro) is the functional currency for our interests in foreign operations.  The related balance sheet amounts are translated into U.S. Dollars at the exchange rates at the respective financial statement date, while amounts on our statements of income are translated at the average exchange rates during the respective period.  The Euro was translated at exchange rates of approximately 1.352 U.S. Dollars per Euro at September 30, 2013 (1.322 at December 31, 2012), and average exchange rates of 1.324 and 1.251 for the three months ended September 30, 2013 and 2012, respectively, and average exchange rates of 1.317 and 1.282 for the nine months ended September 30, 2013 and 2012, respectively.  Cumulative translation adjustments, to the extent not included in cumulative net income, are included in equity as a component of accumulated other comprehensive income (loss).

11


 

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

September 30, 2013

(Unaudited)

 

 

Comprehensive Income (Loss)

Total comprehensive income (loss) represents net income, adjusted for changes in other comprehensive income (loss) for the applicable period.  The aggregate foreign currency exchange gains and losses reflected on our statements of comprehensive income are comprised primarily of foreign currency exchange gains and losses on our investment in, and loan receivable from, Shurgard Europe.

Discontinued Operations

Discontinued operations represent the net income of those facilities that have been disposed of as of September 30, 2013, or which we plan to dispose of within a year.    

Net Income per Common Share

Net income is allocated to (i) noncontrolling interests based upon their share of the net income of the Subsidiaries and (ii) preferred shareholders, when a preferred security is called for redemption, to the extent redemption cost exceeds the related original net issuance proceeds (an “EITF D-42 allocation.”), with (iii) the remaining net income allocated to each of our equity securities based upon the dividends declared or accumulated during the period, combined with participation rights in undistributed earnings. 

Basic net income per share, basic net income from discontinued operations per share, and basic net income from continuing operations per share are computed using the weighted average common shares outstanding.  Diluted net income per share, diluted net income from discontinued operations per share, and diluted net income from continuing operations per share are computed using the weighted average common shares outstanding, adjusted for the impact, if dilutive, of stock options outstanding (Note 10). 

The following table reflects our calculations of basic and diluted net income per share, basic and diluted net income from discontinued operations per share, and basic and diluted net income from continuing operations per share:

12


 

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

September 30, 2013

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Amounts in thousands)

 

Net income allocable to common shareholders from continuing operations and discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income allocable to common shareholders

$

231,361 

 

$

202,465 

 

$

600,982 

 

$

460,151 

 

Eliminate: Discontinued operations

 

 

 

 

 

 

 

 

 

 

 

 

allocable to common shareholders 

 

 -

 

 

(11,935)

 

 

 -

 

 

(12,403)

 

Net income from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

allocable to common shareholders

$

231,361 

 

$

190,530 

 

$

600,982 

 

$

447,748 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares and equivalents outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

171,721 

 

 

170,576 

 

 

171,597 

 

 

170,460 

 

Net effect of dilutive stock options - based

 

 

 

 

 

 

 

 

 

 

 

 

on treasury stock method

 

1,072 

 

 

1,124 

 

 

1,054 

 

 

1,098 

 

Diluted weighted average common shares outstanding

 

172,793 

 

 

171,700 

 

 

172,651 

 

 

171,558 

 

 

Recent Accounting Pronouncements and Guidance

In January 2013, we adopted ASU No. 2013-02, Reporting Amounts Classified out of Accumulated Other Comprehensive Income,” (ASU No. 2013-02”) which requires enhanced disclosures, in one place in our notes to financial statements, about items reclassified out of accumulated other comprehensive income.  The adoption of ASU No. 2013-02 had no impact on our financial condition or results of operations.

 

13


 

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

September 30, 2013

(Unaudited)

 

3.Real Estate Facilities

Activity in real estate facilities is as follows:

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30, 2013

 

 

(Amounts in thousands)

 

Operating facilities, at cost:

 

 

 

Beginning balance

$

11,033,819 

 

Capital expenditures to maintain real estate facilities

 

55,883 

 

Acquisitions

 

374,947 

 

Disposition

 

(89)

 

Newly developed facilities opened for operation

 

68,782 

 

Impact of foreign exchange rate changes

 

(8)

 

Ending balance

 

11,533,334 

 

Accumulated depreciation:

 

 

 

Beginning balance

 

(3,738,130)

 

Depreciation expense

 

(266,568)

 

Impact of foreign exchange rate changes

 

17 

 

Ending balance

 

(4,004,681)

 

Construction in process:

 

 

 

Beginning balance

 

36,243 

 

Current development

 

78,578 

 

Newly developed facilities opened for operation

 

(68,782)

 

Ending balance

 

46,039 

 

Total real estate facilities at September 30, 2013

$

7,574,692 

During the nine months ended September 30, 2013, we acquired 32 operating self-storage facilities from third parties (2,492,000 net rentable square feet of storage space) for $392.4 million in cash, with  $374.9 million allocated to real estate facilities and $17.5 million allocated to intangible assets.  We completed expansions to existing self-storage facilities during the nine months ended September 30, 2013, adding 502,000 net rentable square feet of self-storage space, at an aggregate cost of $68.8 million.  Construction in process at September 30, 2013, consists of projects to develop new self-storage facilities and expand existing self-storage facilities, which would add a total of 1.6 million net rentable square feet of storage space, for an aggregate estimated cost of approximately $188 million.    

4.Investments in Unconsolidated Real Estate Entities

The following table sets forth our investments in, and equity earnings of, the Unconsolidated Real Estate Entities (amounts in thousands):

14


 

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

September 30, 2013

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

December 31, 2012

 

 

 

 

 

 

 

 

Investments in Unconsolidated Real Estate Entities

 

PSB

$

342,497 

 

$

316,078 

 

Shurgard Europe

 

416,339 

 

 

411,107 

 

Other Investments

 

7,653 

 

 

8,138 

 

Total

$

766,489 

 

$

735,323 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2013

 

2012

 

2013

 

2012

 

Equity in Earnings of Unconsolidated Real Estate Entities

 

 

 

 

 

 

 

PSB

$

4,861 

 

$

2,801 

 

$

14,147 

 

$

5,427 

 

Shurgard Europe

 

8,953 

 

 

9,442 

 

 

23,644 

 

 

23,764 

 

Other Investments

 

455 

 

 

399 

 

 

1,222 

 

 

1,162 

 

Total

$

14,269 

 

$

12,642 

 

$

39,013 

 

$

30,353 

 

 During the nine months ended September 30, 2013 and 2012, we received cash distributions from our investments in the Unconsolidated Real Estate Entities totaling $33.8 million and $22.1 million, respectively. 

Investment in PSB

PSB is a REIT traded on the New York Stock Exchange.  We have an approximate 43% common equity interest in PSB as of September 30, 2013,  comprised of our ownership of 6,208,354 shares of PSB’s common stock, which includes 406,748 shares that we purchased in open-market transactions at an average cost of $73.15 per share during the three months ended September 30, 2013 and 7,305,355 limited partnership units in an operating partnership controlled by PSB  (41% as of December 31, 2012, comprised of our ownership of 5,801,606 shares of PSB’s common stock and 7,305,355 limited partnership units at December 31, 2012).  The limited partnership units are convertible at our option, subject to certain conditions, on a one-for-one basis into PSB common stock.  Based upon the closing price at September 30, 2013 ($74.62 per share of PSB common stock), the shares and units we owned had a market value of approximately $1.0 billion

The following table sets forth selected financial information of PSB.  The amounts represent all of PSB’s balances and not our pro-rata share.

15


 

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

September 30, 2013

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

2012

 

 

 

 

 

 

 

 

 

(Amounts in thousands)

 

For the nine months ended September 30,

 

 

 

 

 

 

Total revenue

$

266,299 

 

$

257,813 

 

Costs of operations

 

(88,005)

 

 

(85,126)

 

Depreciation and amortization

 

(80,187)

 

 

(81,326)

 

General and administrative

 

(7,404)

 

 

(6,925)

 

Other items

 

(12,391)

 

 

(15,541)

 

Net income

 

78,312 

 

 

68,895 

 

Net income allocated to preferred unitholders, preferred shareholders

 

 

 

 

 

 

and restricted stock unitholders (a)

 

(44,185)

 

 

(55,815)

 

Net income allocated to common shareholders and common

 

 

 

 

 

 

unitholders

$

34,127 

 

$

13,080 

 

 

 

 

 

 

 

 

(a)      Includes EITF D-42 allocations to preferred equity holders of $17.3 million during the nine months ended September 30, 2012 related to PSB’s redemption of preferred securities.

 

 

September 30,

 

December 31,

 

 

2013

 

2012

 

 

 

 

 

 

 

 

 

(Amounts in thousands)

 

 

 

 

 

 

 

 

Total assets (primarily real estate)

$

2,136,025 

 

$

2,151,817 

 

Debt

 

340,000 

 

 

468,102 

 

Other liabilities

 

75,114 

 

 

69,454 

 

Equity:

 

 

 

 

 

 

Preferred stock and units

 

995,000 

 

 

885,000 

 

Common equity and units

 

725,911 

 

 

729,261 

 

Investment in Shurgard Europe

For all periods presented, we had a  49% equity investment in Shurgard Europe.    

Changes in foreign currency exchange rates caused our investment in Shurgard Europe to decrease approximately $3.8 million and increase approximately $6.7 million during the nine months ended September 30, 2013 and 2012, respectively. 

We classify 49% of interest income and trademark license fees received from Shurgard Europe as equity in earnings of unconsolidated real estate entities and the remaining 51% as interest and other income, as set forth in the following table:

16


 

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

September 30, 2013

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

2013

 

2012

 

 

 

 

 

 

 

 

 

(Amounts in thousands)

 

 

 

 

 

 

 

 

Our 49% equity share of:

 

 

 

 

 

 

Shurgard Europe’s net income

$

9,024 

 

$

9,444 

 

Interest income and trademark license fee 

 

14,620 

 

 

14,320 

 

 

 

 

 

 

 

 

Total equity in earnings of Shurgard Europe

$

23,644 

 

$

23,764 

The following table sets forth selected consolidated financial information of Shurgard Europe based upon all of Shurgard Europe’s balances for all periods rather than our pro rata share.  Such amounts are based upon our historical acquired book basis.

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

2012

 

 

 

 

 

 

 

 

For the nine months ended September 30,

(Amounts in thousands)

 

Self-storage and ancillary revenues

$

182,688 

 

$

182,315 

 

Self-storage and ancillary cost of operations

 

(74,040)

 

 

(73,616)

 

Depreciation and amortization

 

(44,980)

 

 

(46,067)

 

General and administrative

 

(8,783)

 

 

(10,141)

 

Interest expense on third party debt 

 

(3,920)

 

 

(6,290)

 

Trademark license fee payable to Public Storage