10-K 1 psa-20131231x10k.htm 10-K 7fe66cae37964c5

 

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10‑K  

[X]  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 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)  

 

 

(818) 244‑8080

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Depositary Shares Each Representing 1/1,000 of a 5.200% Cumulative Preferred Share, Series W $.01 par value


New York Stock Exchange


Title of each class

Name of each exchange
on which registered

Depositary Shares Each Representing 1/1,000 of a 6.875% Cumulative Preferred Share, Series O $.01 par value

New York Stock Exchange

Depositary Shares Each Representing 1/1,000 of a 6.500% Cumulative Preferred Share, Series P   $.01 par value

New York Stock Exchange

Depositary Shares Each Representing 1/1,000 of a 6.500% Cumulative Preferred Share, Series Q $.01 par value

New York Stock Exchange

Depositary Shares Each Representing 1/1,000 of a 6.350% Cumulative Preferred Share, Series R $.01 par value

New York Stock Exchange

Depositary Shares Each Representing 1/1,000 of a 5.900% Cumulative Preferred Share, Series S   $.01 par value

New York Stock Exchange

Depositary Shares Each Representing 1/1,000 of a 5.750% Cumulative Preferred Share, Series T $.01 par value

New York Stock Exchange

Depositary Shares Each Representing 1/1,000 of a 5.625% Cumulative Preferred Share, Series U $.01 par value

New York Stock Exchange

Depositary Shares Each Representing 1/1,000 of a 5.375% Cumulative Preferred Share, Series V $.01 par value

New York Stock Exchange

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Depositary Shares Each Representing 1/1,000 of a 5.200% Cumulative Preferred Share, Series W $.01 par value

New York Stock Exchange

Depositary Shares Each Representing 1/1,000 of a 5.200% Cumulative Preferred Share, Series X $.01 par value

New York Stock Exchange

Common Shares, $.10 par value...............................................................................................................

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None (Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 

Yes [X]No [   ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes [   ]No [X]

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.

Yes [X]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).

Yes [X]No [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [X]

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 [   ]No [X]

The aggregate market value of the voting and non-voting common shares held by non-affiliates of the Registrant as of June 30, 2013:  

Common Shares, $0.10 Par Value – $22,171,992,000  (computed on the basis of $153.33 per share which was the reported closing sale price of the Company's Common Shares on the New York Stock Exchange on June 30, 2013).

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As of February 21, 2014, there were 172,120,701 outstanding Common Shares, $.10 par value.


DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement to be filed in connection with the Annual Meeting of Shareholders to be held in 2014 are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent described therein.

 

 

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PART I

ITEM 1.Business

Forward Looking Statements

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.    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 are based on current expectations and assumptions that are subject to risks and uncertainties, which may cause our actual results and performance to be materially different from those expressed or implied in the forward-looking statements.  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”) including:

·

general risks associated with the ownership and operation of real estate, including changes in demand, risks related to development of self-storage facilities, potential liability for environmental contamination, natural disasters and adverse changes in laws and regulations governing property tax, real estate and zoning;

·

risks associated with downturns in the national and local economies in the markets in which we operate, including risks related to current economic conditions and the economic health of our customers;  

·

the impact of competition from new and existing self-storage and commercial facilities and other storage alternatives;

·

difficulties in our ability to successfully evaluate, finance, integrate into our existing operations, and manage acquired and developed properties;

·

risks associated with international operations including, but not limited to, unfavorable foreign currency rate fluctuations, refinancing risk of affiliate loans from us, and local and global economic uncertainty that could adversely affect our earnings and cash flows;

·

risks related to our participation in joint ventures;

·

the impact of the regulatory environment as well as national, state, and local laws and regulations including, without limitation, those governing environmental, taxes and tenant insurance matters and real estate investment trusts (“REITs”), and risks related to the impact of new laws and regulations;

·

risk of increased tax expense associated either with a possible failure by us to qualify as a REIT, or with challenges to intercompany transactions with our taxable REIT subsidiaries;

·

changes in federal or state tax laws related to the taxation of REIT’s, which could impact our status as a REIT;

·

disruptions or shutdowns of our automated processes, systems and the Internet or breaches of our data security;

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·

risks associated with the self-insurance of certain business risks, including property and casualty insurance, employee health insurance and workers compensation liabilities;

·

difficulties in raising capital at a reasonable cost; and

·

economic uncertainty due to the impact of terrorism or war. 

These forward looking statements speak only as of 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 entirety 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 these forward looking statements, except as required by law.  Given these risks and uncertainties, 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. 

General

Public Storage was organized in 1980.  Effective June 1, 2007, we reorganized Public Storage, Inc. into Public Storage (referred to herein as “the Company”, “the Trust”, “we”, “us”, or “our”), a Maryland real estate investment trust (“REIT”). 

At December 31, 2013, our principal business activities are as follows:

(i)

Domestic Self-Storage: We acquire, develop, own, and operate self-storage facilities which offer storage spaces for lease on a month-to-month basis, for personal and business use.  We are the largest owner and operator of self-storage facilities in the United States (“U.S.”).  We have direct and indirect equity interests in 2,200 self-storage facilities (141 million net rentable square feet of space) located in 38 states within the U.S. operating under the “Public Storage” brand name. 

(ii)

European Self-Storage:  We have a 49% equity interest in Shurgard Europe, with an institutional investor owning the remaining 51% interest.  Shurgard Europe owns 187 self-storage facilities (10 million net rentable square feet of space) located in seven countries in Western Europe which operate under the “Shurgard” brand name and manages one facility we own in the United Kingdom.  We believe Shurgard Europe is the largest owner and operator of self-storage facilities in Western Europe. 

(iii)

Commercial:  We have a 42% equity interest in PS Business Parks, Inc. (“PSB”), a publicly held REIT which owns and operates 29.7 million net rentable square feet of commercial space.  We also wholly-own 1.4 million net rentable square feet of commercial space, substantially all of which is managed by PSB. 

In addition, we  reinsure policies against losses to goods stored by customers in our self-storage facilities, sell merchandise at our self-storage facilities and manage self-storage facilities owned by third-party owners.   

For all periods presented herein, we have elected to be treated as a REIT, as defined in the Internal Revenue Code.  As a REIT, we do not incur federal income tax on our REIT taxable income (generally, net rents and gains from real property, dividends, and interest) that is fully distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and if we meet certain organizational and operational rules.  We believe we met these requirements in all periods presented herein, and we expect to continue to elect and qualify as a REIT.   

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We report annually to the SEC on Form 10-K, which includes financial statements certified by our independent registered public accountants.  We have also reported quarterly to the SEC on Form 10-Q, which includes unaudited financial statements with such filings.  We expect to continue such reporting.

On our website, www.publicstorage.com, we make available, free of charge, our Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after the reports and amendments are electronically filed with or furnished to the SEC.

Competition

We believe that storage customers generally store their goods within a five mile radius of their home or business.  Most of our facilities compete with other nearby self-storage facilities that use the same marketing channels and offer the same service as us.  Generally, our competitors attract customers using the same marketing channels we use, including Internet advertising, signage, and banners.  As a result, competition is significant and affects the occupancy levels, rental rates, rental income and operating expenses of our facilities.

While competition is significant, the self-storage industry remains fragmented in the U.S.  We believe that we own approximately 6% of the aggregate self-storage square footage in the U.S., and that collectively the five largest self-storage operators in the U.S. own approximately 12%, with all other self-storage space owned by numerous private regional and local operators.  We believe this market fragmentation enhances the advantage of our brand name, as well as the economies of scale we enjoy with approximately 71% of our 2013 same-store revenues in the 20 Metropolitan Statistical Areas (“MSA’s”, as defined by the U.S. Census Bureau) with the highest population levels.   

Such fragmentation also provides opportunities for us to acquire additional facilities; however, we compete with a wide variety of institutions and other investors who also view self-storage facilities as attractive investments.  The amount of capital available for real estate investments greatly influences the competition for ownership interests in facilities and, by extension, the yields that we can achieve on newly acquired investments. 

Business Attributes

We believe that we possess several primary business attributes that permit us to compete effectively:

Centralized information networks:  Our centralized reporting and information network enables us to identify changing market conditions and operating trends as well as analyze customer data and quickly change each of our individual properties’ pricing and promotions  on an automated basis. 

Convenient shopping experience: Customers can conveniently shop the space available at our facilities, reviewing attributes such as facility location, size, amenities such as climate-control, as well as pricing, and learn about ancillary businesses through the following marketing channels: 

·

Our Website:  The online marketing channel continues to grow in prominence, with approximately 55% of our move-ins in 2013 sourced through our website, as compared to 36% in 2010.  In addition, we believe that many of our customers who directly call our call center, or who move-in to a facility on a walk-in basis, have already reviewed our pricing and space availability through our website.  We invest extensively in advertising on the Internet to attract potential customers, primarily through the use of search engines, and we regularly update and improve our website to enhance its productivity.  

·

Our Call Center:  Our call center is staffed by skilled sales specialists.  Customers reach our call center by calling our advertised toll-free telephone referral number, (800) 44-

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STORE, or telephone numbers provided on the Internet.  We believe giving customers the option to interact with a call center agent, despite the higher marginal cost relative to an internet reservation, enhances our ability to close sales with potential storage customers.       

·

Our Properties:  Customers can also shop at any one of our facilities.  Property managers access the same information that is available on our website and to our call center agents, and can inform the customer of storage alternatives at that site or our other nearby storage facilities.  Property managers are extensively trained to maximize the conversion of such “walk in” shoppers into customers. 

Economies of scale: We are the largest provider of self-storage space in the U.S.  As of December 31, 2013, we operated 2,200 self-storage facilities with over one million self-storage spaces.  These facilities are generally located in major markets within 38 states in the U.S.  The size and scope of our operations have enabled us to achieve high operating margins and a low level of administrative costs relative to revenues through the centralization of many functions, such as facility maintenance, employee compensation and benefits programs, revenue management, as well as the development and documentation of standardized operating procedures.  We also believe that our major market concentration provides managerial efficiencies stemming from having a large number of facilities in close proximity to each other. 

We believe our market share and concentration in major metropolitan centers makes various promotional and media programs more cost-beneficial for us than for our competitors.  As noted above, approximately 71% of our same-store revenues for 2013 were in the 20 MSA’s with the highest population levels.  Our large market share and well-recognized brand name increases the likelihood that our facilities will appear prominently in unpaid search results for “self-storage” on major online search engines, and enhances the efficiency of our bidding for paid multiple-keyword advertising.  We can use television advertising in many markets, while most of our competitors cannot do so cost-effectively. 

Brand name recognition: We believe that the “Public Storage” brand name is the most recognized and established name in the self-storage industry in the U.S, due to our national reach in major markets in 38 states, and our highly visible facilities, with their distinct orange colored doors and signage.  We believe the “Public Storage” name is one of the most frequently used search terms used by customers using Internet search engines for self-storage.  We believe that the “Shurgard” brand, used by Shurgard Europe, is a similarly established and valuable brand in Europe.  We believe that the awareness of our brand name results in a high percentage of potential storage customers considering our facilities, relative to other operators. 

Growth and Investment Strategies

Our growth strategies consist of: (i) improving the operating performance of our existing self-storage facilities, (ii) acquiring more facilities, (iii) developing new self-storage space, (iv) participating in the growth of commercial facilities, primarily through our investment in PSB, and (v) participating in the growth of Shurgard Europe.  While our long-term strategy includes each of these elements, in the short run the level of growth in our asset base in any period is dependent upon the cost and availability of capital, as well as the relative attractiveness of investment alternatives. 

Improve the operating performance of existing facilities: We seek to increase the net cash flow of our existing self-storage facilities by a) regularly analyzing our call volume, reservation activity, Internet activity, move-in/move-out rates and other market supply and demand factors and responding by adjusting our marketing activities and rental rates, b) attempting to maximize revenues through evaluating the appropriate balance between occupancy, rental rates, and promotional discounting and c) controlling operating costs.  We believe that our property management personnel, systems, our convenient shopping options for the customer, and our media and Internet advertising programs will continue to enhance our ability to meet these goals. 

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Acquire properties owned or operated by others in the U.S.: We seek to capitalize on the fragmentation of the self-storage business through acquiring attractively priced, well-located existing self-storage facilities.  We believe our presence in and knowledge of substantially all of the major markets in the U.S. enhances our ability to identify attractive acquisition opportunities.  Data on the rental rates and occupancy levels of our existing facilities provide us an advantage in evaluating the potential of acquisition opportunities.  The level of third-party acquisition opportunities available depends upon many factors, such as the motivation of potential sellers to liquidate their investments, as well as the financing available to self-storage owners.  We decide whether to pursue acquisition opportunities based upon many factors including our opinion as to the potential for future growth, the quality of construction and location, the cash flow we expect from the facility when operated on our platform and our yield expectations.   

During 2013, we acquired 121 facilities from third parties for approximately $1.2 billion, primarily through large portfolio acquisitions.  This volume was higher than in the preceding six years combinedWe will continue to seek to acquire properties in 2014While there were more sellers of self-storage facilities in 2013 due at least in part, we believe, to higher values and robust cash flows of self-storage facilities, it is uncertain as to the level of third party acquisitions we will complete in 2014.

Develop new self-storage space:  The development of new self-storage locations and the expansion of existing self-storage facilities has been an important source of growth.   Since the beginning of 2013, we have expanded our development efforts due in part to the significant increase in prices being paid for existing facilities, in many cases well above the cost of developing new facilities.  At December 31, 2013, we had a development pipeline of projects to expand existing self-storage facilities and develop new self-storage facilities, which will add approximately 1.8 million net rentable square feet of self-storage space.  The aggregate cost of these projects is estimated at $196 million, of which $52 million had been incurred at December 31, 2013, and the remaining costs will be incurred principally in 2014.  Some of these projects are subject to significant contingencies such as entitlement approval.  We expect to continue to seek additional development projects; however, due to the difficulty in finding projects that meet our risk-adjusted yield expectations, as well as the difficulty in obtaining building permits for self-storage activities in certain municipalities, it is uncertain as to how much additional development we will undertake in the future.    

Participate in the growth of commercial facilities primarily through our ownership in PS Business Parks, Inc.:  Our investment in PSB provides us diversification into another asset typePSB is a stand-alone public company traded on the New York Stock Exchange.  During the year ended December 31, 2013, we increased our investment in PSB by acquiring 1,356,748 shares of PSB common stock in open-market transactions and directly from PSB, for an aggregate cost of $105.0 million.

Over the past three years, PSB has been able to grow its portfolio through acquisitions.  In 2011 and 2012, PSB acquired an aggregate total of 6.8 million net rentable square feet of commercial space for an aggregate purchase price of approximately $605.0 million.  In 2013, PSB acquired 1.5 million net rentable square feet for an aggregate purchase price of $115.6 million.    As of December 31, 2013, PSB owned and operated approximately 29.7 million net rentable square feet of commercial space, and had an enterprise value of approximately $3.9 billion (based upon the trading price of PSB’s common stock combined with the liquidation value of its debt and preferred stock as of December 31, 2013). 

Participate in the growth of European self-storage through ownership in Shurgard Europe:  We believe Shurgard Europe is the largest self-storage company in Western Europe.  It owns and operates 187 facilities with approximately 10 million net rentable square feet in:  France (principally Paris), Sweden (principally Stockholm), the United Kingdom (principally London), the Netherlands, Denmark (principally Copenhagen), Belgium and Germany.  We own 49% of Shurgard Europe, with the other 51% owned by a large U.S. institutional investor. 

Customer awareness and availability of self-storage is significantly lower in Europe than in the U.S.  However, with more awareness and product supply, we believe there is potential for increased demand for storage space in Europe.  In the long run, we believe Shurgard Europe could capitalize on

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potential increased demand through the development of new facilities or, to a lesser extent, acquiring existing facilities. 

Financing of the Company’s Growth Strategies

Overview of financing strategy:  In order to grow our asset base, access to capital is important.  In general, we seek to finance our investment activities with retained cash flow and the issuance of preferred and common securities when market conditions are favorable, using bank debt as bridge financing when market conditions are not favorable. 

Permanent capitalWe have generally been able to raise capital through the issuance of preferred securities at an attractive cost of capital relative to the issuance of our common shares and, as a result, issuances of common shares have been minimal over the past several years.  During the years ended December 31, 2013 and 2012, we issued approximately $725.0 million and $1.7 billion, respectively, of preferred securities.  Currently, market conditions are much less favorable, with market coupon rates for our most recently issued series of preferred securities trading at approximately 6.5% (as compared to 5.2% for the preferred securities we issued in the first quarter of 2013).  We believe that market coupon rates for a new issuance of our preferred securities would need to be in the area of 6.5% and the amount of capital we could raise would most likely be much lower than what we raised in the first quarter of 2013. 

Bridge financing:  We have in the past used our $300 million revolving line of credit as temporary “bridge” financing and repaid such borrowings with permanent capital.  At December 31, 2013, we had approximately $50.1 million outstanding on our line of credit (none as of February 25, 2014).  On December 2, 2013, we borrowed $700 million from Wells Fargo pursuant to a term loan due in one year, in order to fund our acquisitions of self-storage facilities in the fourth quarter of 2013.  See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for more information. 

Borrowing through mortgage loans or senior debt:  Even though preferred securities have a higher coupon rate than long-term debt, we have generally not issued conventional debt due to refinancing risk associated with debt and other benefits of preferred securities described in more detail in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.” 

We have broad powers to borrow in furtherance of our objectives without a vote of our shareholders.  These powers are subject to a limitation on unsecured borrowings in our Bylaws described in “Limitations on Debt” below. Our senior debt has an “A” credit rating by Standard and Poor’s.  Notwithstanding our desire to continue to meet our capital needs with permanent capital, we believe this high rating, combined with our low level of debt, could allow us to issue a significant amount of unsecured debt at lower interest rates than the coupon on preferred securities if we chose to.  

Assumption of Debt: Substantially all of our mortgage debt outstanding was assumed in connection with real estate acquisitions.   When we have assumed debt in the past, we did so because the nature of the loan terms did not allow prepayment, or a prepayment penalty made it economically disadvantageous to prepay.      

Issuance of securities in exchange for property: We have issued both our common and preferred securities in exchange for real estate and other investments in the past.  Future issuances will be dependent upon our financing needs and capital market conditions at the time, including the market prices of our equity securities.

Joint Venture financing: We have used joint ventures with institutional investors and we may form additional joint ventures in the future.

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Disposition of properties:  Generally, we have disposed of self-storage facilities only when compelled to do so through condemnation proceedings.  We do not presently intend to sell any significant number of self-storage facilities in the future, though there can be no assurance that we will not.

Investments in Real Estate and Unconsolidated Real Estate Entities

Investment Policies and Practices with respect to our investments: Following are our investment practices and policies which, though we do not anticipate any significant alteration, can be changed by our Board of Trustees without a shareholder vote:

·

Our investments primarily consist of direct ownership of self-storage facilities (the nature of our self-storage facilities is described in Item 2, “Properties”), as well as partial interests in entities that own self-storage facilities.

·

Our partial ownership interests primarily reflect general and limited partnership interests in entities that own self-storage facilities that are managed by us under the “Public Storage” brand name in the U.S., as well as storage facilities managed in Europe under the “Shurgard” brand name which are owned by Shurgard Europe.

·

Additional acquired interests in real estate (other than the acquisition of properties from third parties) will include common equity interests in entities in which we already have an interest.

·

To a lesser extent, we have interests in existing commercial properties (described in Item 2, “Properties”), containing commercial and industrial rental space, primarily through our investment in PSB.

Facilities Owned by Subsidiaries

In addition to our direct ownership of 2,172 self-storage facilities in the U.S. and one self-storage facility in London, England at December 31, 2013, we have controlling indirect interests in entities that own 14 self-storage facilities in the U.S.  Due to our controlling interest in each of these entities, we consolidate the assets, liabilities, and results of operations of these entities in our financial statements.

Facilities Owned by Unconsolidated Real Estate Entities

At December 31, 2013, we also had ownership interests in entities that we do not control or consolidate.  These entities include PSB, Shurgard Europe (discussed above), and various limited partnerships that own an aggregate of 14 self-storage facilities.  These entities are referred to collectively as the “Unconsolidated Real Estate Entities.”

PSB, which files financial statements with the SEC, and Shurgard Europe, have debt and other obligations that we do not consolidate in our financial statements.  None of the other Unconsolidated Real Estate Entities have significant amounts of debt or other obligations.  See Note 4 to our December 31, 2013 financial statements for further disclosure regarding the assets, liabilities and operating results of the Unconsolidated Real Estate Entities.

Limitations on Debt

Without the consent of holders of the various series of Senior Preferred Shares, we may not take any action that would result in our “Debt Ratio” exceeding 50%.  “Debt Ratio”, as defined in the related governing documents, represents generally the ratio of debt to total assets before accumulated depreciation and amortization on our balance sheet, in accordance with U.S. generally accepted accounting principles.  As of December 31, 2013, the Debt Ratio was approximately 6%. 

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Our bank and senior unsecured debt agreements contain various customary financial covenants, including limitations on the level of indebtedness and the prohibition of the payment of dividends upon the occurrence of defined events of default.  We believe we were in compliance with each of these covenants as of December 31, 2013.  

Employees

We have approximately 5,200 employees in the U.S. at December 31, 2013 which are engaged primarily in property operations. 

Seasonality

We experience minor seasonal fluctuations in the demand for self-storage space, with demand and rates generally higher in the summer months than in the winter months.  We believe that these fluctuations result in part from increased moving activity during the summer months.

Insurance

We have historically carried customary property, earthquake, general liability, employee medical insurance and workers compensation coverage through internationally recognized insurance carriers, subject to customary levels of deductibles.  The aggregate limits on these policies of approximately $75 million for property losses and $102 million for general liability losses are higher than estimates of maximum probable losses that could occur from individual catastrophic events determined in recent engineering and actuarial studies; however, in case of multiple catastrophic events, these limits could be exhausted.  

We reinsure a program that provides insurance to our customers from an independent third-party insurer.  This program covers tenant claims for losses to goods stored at our facilities as a result of specific named perils (earthquakes are not covered by this program), up to a maximum limit of $5,000 per storage unit.  We reinsure all risks in this program, but purchase insurance from an independent third party insurance company for aggregate claims between $5.0 million and $15.0 million per occurrence.  We are subject to licensing requirements and regulations in several states.  At December  31, 2013, there were approximately 759,000 certificates held by our self-storage customers, representing aggregate coverage of approximately $1.7 billion.

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ITEM 1A.  Risk Factors

In addition to the other information in our Annual Report on Form 10-K, you should consider the risks described below that we believe may be material to investors in evaluating the Company.  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 1.

We have significant exposure to real estate risk.

Since our business consists primarily of acquiring and operating real estate, we are subject to the risks related to the ownership and operation of real estate that can adversely impact our business and financial condition.  These risks include the following:  

Natural disasters or terrorist attacks could cause damage to our facilities, resulting in increased costs and reduced revenues.  Natural disasters, such as earthquakes, hurricanes and floods, or terrorist attacks could cause significant damage and require significant repair costs, and make facilities temporarily uninhabitable, reducing our revenues.  Damage and business interruption losses could exceed the aggregate limits of our insurance coverage.  In addition, because we self-insure a portion of our risks, losses below a certain level may not be covered by insurance.   See Note 13 to our December 31, 2013 financial statements for a description of the risks of losses that are not covered by third-party insurance contracts.  We may not have sufficient insurance coverage for losses caused by a terrorist attack, or such insurance may not be maintained, available or cost-effective.  In addition, significant natural disasters, terrorist attacks, threats of future terrorist attacks, or resulting wider armed conflicts could have negative impacts on the U.S. economy, reducing storage demand and impairing our operating results. 

Operating costs could increase.  We could be subject to increases in insurance premiums, increased or new property tax assessments or other taxes, repair and maintenance costs, payroll, utility costs, workers compensation, and other operating expenses due to various factors such as inflation, labor shortages, commodity and energy price increases. 

The acquisition of existing properties is subject to risks that may adversely affect our growth and financial results.    We have acquired material amounts of self-storage facilities from third parties in the past, and we expect to continue to do so in the future.    We face significant competition for suitable acquisition properties from other real estate investors.  As a result, we may be unable to acquire additional properties we desire or the purchase price for desirable properties may be significantly increased.    Failures or unexpected circumstances in integrating newly acquired properties into our operations or circumstances we did not detect during due diligence, such as environmental matters, needed repairs or deferred maintenance, or the effects of increased property tax following reassessment of a newly-acquired property, as well as the general risks of real estate investment, could jeopardize realization of the anticipated earnings from an acquisition. 

Development of self-storage facilities can subject us to risks.  At December 31, 2013, we have a pipeline of development projects totaling $196 million (subject to contingencies), and we expect to continue to seek additional development projects.  There are significant risks involved in developing self-storage facilities, such as delays or cost increases due to changes in or failure to meet government or regulatory requirements, weather issues, unforeseen site conditions, or personnel problems.  Self-storage space is generally not pre-leased, and rent-up of newly developed space can be delayed or ongoing cash flow yields can be reduced due to competition, reductions in storage demand, or other factors. 

There is significant competition among self-storage facilities and from other storage alternatives.  Most of our properties are self-storage facilities, which generated most of our revenue for the year ended December 31, 2013.  Competition in the local market areas in which many of our properties are located is significant and has affected our occupancy levels, rental rates and operating expenses.  If development of self-storage facilities by other operators were to increase, due to increases in availability of funds for investment or other reasons, competition with our facilities could intensify.

12


 

 

We may incur significant liabilities from environmental contamination or moisture infiltration.   Existing or future laws impose or may impose liability on us to clean up environmental contamination on or around properties that we currently or previously owned or operated, even if we were not responsible for or aware of the environmental contamination or even if such environmental contamination occurred prior to our involvement with the property.  We have conducted preliminary environmental assessments on most of our properties, which have not identified material liabilities.  These assessments, commonly referred to as “Phase 1 Environmental Assessments,” include an investigation (excluding soil or groundwater sampling or analysis) and a review of publicly available information regarding the site and other nearby properties.   

We are also subject to potential liability relating to moisture infiltration, which can result in mold or other damage to our or our customers’ property, as well as potential health concerns.  When we receive a complaint or otherwise become aware that an air quality concern exists, we implement corrective measures and seek to work proactively with our customers to resolve issues, subject to our contractual limitations on liability for such claims. 

We are not aware of any environmental contamination or moisture infiltration related liabilities that could be material to our overall business, financial condition, or results of operation.  However, we may not have detected all material liabilities, we could acquire properties with material undetected liabilities, or new conditions could arise or develop in the future.   Settling any such liabilities could negatively impact our earnings and cash available for distribution to shareholders, and could also adversely affect our ability to sell, lease, operate, or encumber affected facilities.

We incur liability from tenant and employment-related claims.  From time to time we have to make monetary settlements or defend actions or arbitration (including class actions) to resolve tenant or employment-related claims and disputes.

Economic conditions can adversely affect our business, financial condition, growth and access to capital.

Our revenues and operating cash flow can be negatively impacted by reductions in employment and population levels, household and disposable income, and other general economic factors that lead to a reduction in demand for rental space in each of the markets in which we operate our properties.   

Our ability to issue preferred shares or access other sources of capital, such as borrowing, has been in the past, and may in the future be, adversely affected by challenging market conditions.  The issuance of perpetual preferred securities historically has been a significant source of capital to grow our business.  If we were unable to issue preferred shares or borrow at reasonable rates, prospective earnings growth through expanding our asset base could be limited. 

We have exposure to European operations through our ownership in Shurgard Europe.

As a result of our ownership of 49% of the equity in Shurgard Europe’s equity with a book value of $424.1 million at December 31, 2013, and our loan to Shurgard Europe totaling $428.1 million at December 31, 2013, we are exposed to additional risks related to the ownership and operation of international businesses that may adversely impact our business and financial results, including the following:

·

Currency risks:  Currency fluctuations can impact the fair value of our equity investment in, and loan to Shurgard Europe, as well as the related income we receive as well as future repatriation of cash.

·

Legislative, tax, and regulatory risks:  We are subject to complex foreign laws and regulations related to permitting and land use, the environment, labor, and other areas, as well as income, property, sales, value added and employment tax laws.  These laws can be difficult to apply or

13


 

 

interpret and can vary in each country or locality, and are subject to unexpected changes in their form and application due to regional, national, or local political uncertainty and other factors.  Such changes, or Shurgard’s failure to comply with these laws, could subject it to penalties or other sanctions, adverse changes in business processes, as well as potentially adverse income tax, property tax, or other tax burdens. 

·

Impediments to capital repatriation could negatively impact the realization of our investment in Shurgard Europe: Laws in Europe and the U.S. may create, impede or increase our cost to repatriate capital or earnings from Shurgard Europe. 

·

Risks of collective bargaining and intellectual property:  Collective bargaining, which is prevalent in certain areas in Europe, could negatively impact Shurgard Europe’s labor costs or operations. 

·

Potential operating and individual country risks:  Economic slowdowns or extraordinary political or social change in the countries in which it operates have posed, and could continue to pose, challenges or result in future reductions of Shurgard Europe’s operating cash flows.  

·

Impediments of Shurgard Europe’s joint venture structure:  Shurgard Europe’s significant decisions, involving activities such as borrowing money, capital contributions, raising capital from third parties, as well as selling or acquiring significant assets, require the consent of our joint venture partner.  As a result, Shurgard Europe may be precluded from taking advantage of opportunities that we would find attractive.  In addition, we could be unable to separately pursue such opportunities due to certain market exclusivity provisions of the Shurgard Europe joint venture agreement, and our 49% equity investment may not be easily sold or readily accepted as collateral by potential lenders to Public Storage due to the joint venture structure.  

·

Risks related to Shurgard Europe’s Debt:  Shurgard Europe has a term loan from a bank (the “Bank Loan”) with a balance of approximately €107.5 million ($148.0 million) at December 31, 2013 maturing in November 2014 and a loan due to us (the “Shareholder Loan”) totaling €311.0 million ($428.1 million) at December 31, 2013.  On January 28, 2014, our joint venture partner in Shurgard Europe acquired 51% of the Shareholder Loan at face value, using the proceeds from a bank loan (the “JV Partner Loan”), and the maturity date of the Shareholder Loan was extended to April 2019.  The JV Partner Loan matures in two years and is collateralized with our joint venture partner’s interests in the Shareholder Loan and their interest in Shurgard Europe.  Shurgard Europe will seek to refinance the Bank Loan.  If Shurgard Europe is not able to refinance its debt due to a constrained credit market, negative operating trends or other reasons, our equity investment in Shurgard Europe could be negatively impacted. 

The Hughes Family could control us and take actions adverse to other shareholders.  

At December 31, 2013, B. Wayne Hughes, our former Chairman, and his family, which includes two members of the board of trustees (the “Hughes Family”) owned approximately 15.8% of our aggregate outstanding common shares.  Our declaration of trust permits the Hughes Family to own up to 35.66% of our outstanding common shares while it generally restricts the ownership by other persons and entities to 3% of our outstanding common shares.  Consequently, the Hughes Family may significantly influence matters submitted to a vote of our shareholders, including electing trustees, amending our organizational documents, dissolving and approving other extraordinary transactions, such as a takeover attempt, resulting in an outcome that may not be favorable to other shareholders.

Takeover attempts or changes in control could be thwarted, even if beneficial to shareholders.

14


 

 

In certain circumstances, shareholders might desire a change of control or acquisition of us, in order to realize a premium over the then-prevailing market price of our shares or for other reasons.  However, the following could prevent, deter, or delay such a transaction:  

·

Provisions of Maryland law may impose limitations that may make it more difficult for a third party to negotiate or effect a business combination transaction or control share acquisition with Public Storage.  Currently, the Board has opted not to subject the Company to these provisions of Maryland law, but it could choose to do so in the future without shareholder approval.   

·

To protect against the loss of our REIT status due to concentration of ownership levels, our declaration of trust generally limits the ability of a person, other than the Hughes Family or “designated investment entities” (each as defined in our declaration of trust), to own, actually or constructively, more than 3% of our outstanding common shares or 9.9% of the outstanding shares of any class or series of preferred or equity shares, in either case unless a specific exemption is granted by our board of trustees.  These limits could discourage, delay or prevent a transaction involving a change in control of our company not approved by our board of trustees.

·

Similarly, current provisions of our declaration of trust and powers of our Board of Trustees could have the same effect, including (1) limitations on removal of trustees in our declaration of trust, (2) restrictions on the acquisition of our shares of beneficial interest, (3) the power to issue additional common shares, preferred shares or equity shares on terms approved by the Board without obtaining shareholder approval, (4) the advance notice provisions of our bylaws and (5) the Board’s ability under Maryland law, without obtaining shareholder approval, to implement takeover defenses that we may not yet have and to take, or refrain from taking, other actions that could have the effect of delaying, deterring or preventing a transaction or a change in control.

If we failed to qualify as a REIT, we would have to pay substantial income taxes.

REITs are subject to a range of complex organizational and operational requirements.  A qualifying REIT does not generally incur federal income tax on its net income that is distributed to its shareholders.  Our REIT status is also dependent upon the ongoing REIT qualification of our affiliate, PSB, as a REIT, as a result of our substantial ownership interest in that company. We believe that we are organized and have operated as a REIT and we intend to continue to operate to maintain our REIT status.

There can be no assurance that we qualify or will continue to qualify as a REIT.  The highly technical nature of the REIT rules, the ongoing importance of factual determinations, the possibility of unidentified issues in prior periods or changes in our circumstances, all could adversely affect our ability to comply.  For any taxable year that we fail to qualify as a REIT and statutory relief provisions did not apply, we would be taxed at the regular federal corporate rates on all of our taxable income and we also could be subject to penalties and interest.  We would generally not be eligible to seek REIT status again until the fifth taxable year after the first year of our failure to qualify. Any taxes, interest and penalties incurred would reduce the amount of cash available for distribution to our shareholders or for reinvestment and would adversely affect our earnings, which could have a material adverse effect.  

We may pay some taxes, reducing cash available for shareholders.

Even if we qualify as a REIT for federal income tax purposes, we may be subject to some federal, foreign, state and local taxes on our income and property.  Since January 1, 2001, certain corporate subsidiaries of the Company have elected to be treated as “taxable REIT subsidiaries” for federal income tax purposes, and are taxable as regular corporations and subject to certain limitations on intercompany transactions.  If tax authorities determine that amounts paid by our taxable REIT subsidiaries to us are greater than what would be paid under similar arrangements among unrelated parties, we could be subject

15


 

 

to a 100% penalty tax on the excess payments, and ongoing intercompany arrangements could have to change, resulting in higher ongoing tax payments.  To the extent the Company is required to pay federal, foreign, state or local taxes or federal penalty taxes due to existing laws or changes thereto, we will have less cash available for distribution to shareholders.

We are heavily dependent on computer systems, telecommunications and the Internet to process transactions, summarize results and manage our business and security breaches or a failure of such networks, systems or technology could adversely impact our business and customer relationships.

We are heavily dependent upon automated information technology and Internet commerce, with approximately half of our new customers coming from the telephone or over the Internet, and the nature of our business involves the receipt and retention of personal information about our customers.  We centrally manage significant components of our operations with our computer systems, including our financial information, and we also rely extensively on third-party vendors to retain data, process transactions and provide other systems services.  These systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer worms, viruses and other destructive or disruptive security breaches and catastrophic events.

As a result, our operations could be severely impacted by a natural disaster, terrorist attack or other circumstance that resulted in a significant outage at our systems or those of our third party providers, despite our use of back up and redundancy measures.  Further, viruses and other related risks could negatively impact our information technology processes.  Our or our customers’ confidential information could be compromised or misappropriated, due to a breach of our network security.  Such data security breaches as well as system disruptions and shutdowns could result in additional costs to repair or replace such networks or information systems and possible legal liability, including government enforcement actions and private litigation.  In addition, our customers could lose confidence in our ability to protect their personal information, which could cause them to discontinue leasing our self-storage facilities.  Such events could lead to lost future revenues and adversely affect our results of operations.

We have no ownership interest in Canadian self-storage facilities owned or operated by the Hughes Family.

At December 31, 2013, the Hughes Family had ownership interests in, and operated, 54 self-storage facilities in Canada (the “Canadian Self-Storage Facilities”).  These facilities are operated under the “Public Storage” tradename, which we license to the Hughes Family for use in Canada on a royalty-free, non-exclusive basis.  We have a right of first refusal, subject to limitations, to acquire the stock or assets of the corporation engaged in the operation of the Canadian Self-Storage Facilities if the Hughes Family or the corporation agrees to sell them.  However, we do not benefit from profits or potential appreciation in value of the Canadian Self-Storage Facilities because we have no ownership interest in these facilities.  We do not operate in the Canadian self-storage market, and have no plans to do so.  However, if we choose to do so without acquiring the Hughes Family interests in the Canadian Self-Storage Facilities, we may have to share the use of the “Public Storage” name in Canada with the Hughes Family, unless we are able to terminate the license agreement. 

Through our subsidiaries, we reinsure risks relating to loss of goods stored by customers in the Canadian Self-Storage Facilities.  During the years ended December 31, 2013, 2012 and 2011, we received $0.5 million, $0.6 million and $0.6 million, respectively, in reinsurance premiums attributable to the Canadian Self-Storage Facilities.  Because our right to earn these premiums may be qualified, there is no assurance that these premiums will continue.

16


 

 

We are subject to laws and governmental regulations and actions that require us to incur compliance costs affecting our operating results and financial condition.

Our business is subject to regulation under a wide variety of U.S. federal, state and local laws, regulations and policies including those imposed by the SEC, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act and New York Stock Exchange, as well as applicable labor laws. Although we have policies and procedures designed to comply with applicable laws and regulations, failure to comply with the various laws and regulations may result in civil and criminal liability, fines and penalties, increased costs of compliance, restatement of our financial statements and could also affect the marketability of our real estate facilities.

The Patient Protection and Affordable Care Act as well as other healthcare reform legislation recently passed or being considered by Congress and state legislatures (collectively, the “Healthcare Legislation”) are expected to impact our business beginning in 2014.  Based on its current form, we believe that the Healthcare Legislation will at least moderately increase our costs; however, there could be a significant further negative impact to our costs and business depending upon how the various governmental agencies design and implement the specific regulations to implement the Patient Protection and Affordable Care Act, the nature of further legislation that may be passed at the national and local level, and other factors.

In response to current economic conditions or the current political environment or otherwise, laws and regulations could be implemented or changed in ways that adversely affect our operating results and financial condition, such as legislation that could facilitate union activity or that would otherwise increase operating costs.

All our properties must comply with the Americans with Disabilities Act and with related regulations and similar state law requirements, as well as various real estate and zoning laws and regulations, which are subject to change and could become more costly to comply with in the future.  Compliance with these requirements can require us to incur significant expenditures, which would reduce cash otherwise available for distribution to shareholders.  A failure to comply with these laws could lead to fines or possible awards of damages to individuals affected by the non-compliance.  Failure to comply with these requirements could also affect the marketability of our real estate facilities.

Our tenant insurance business is subject to governmental regulation which could reduce our profitability or limit our growth.

We hold Limited Lines Self-Service Storage Insurance Agent licenses from a number of individual state Departments of Insurance and are subject to state governmental regulation and supervision.  Our continued ability to maintain these Limited Lines Self-Service Storage Insurance Agent licenses in the jurisdictions in which we are licensed depends on our compliance with related rules and regulations.  The regulatory authorities in each jurisdiction generally have broad discretion to grant, renew and revoke licenses and approvals, to promulgate, interpret, and implement regulations, and to evaluate compliance with regulations through periodic examinations, audits and investigations of the affairs of insurance agents.  As a result of regulatory or private action in any jurisdiction, we may be temporarily or permanently suspended from continuing some or all of our reinsurance activities, or otherwise fined or penalized or suffer an adverse judgment.  For the year ended December 31, 2013, we recorded a total of $67.8 million in net income from our tenant reinsurance activities.

ITEM 1B.Unresolved Staff Comments

None.

17


 

 

ITEM 2.Properties

At December 31, 2013, we had direct and indirect ownership interests in 2,200 self-storage facilities located in 38 states within the U.S. and 188 storage facilities located in seven Western European nations:

 

 

 

 

At December 31, 2013

 

Number of Storage Facilities (a)

Net Rentable Square Feet (in thousands)

U.S.:

 

 

California:

 

 

Southern.........................................

244 
17,192 

Northern.........................................

173 
10,310 

Texas...............................................

254 
16,715 

Florida...........................................

247 
16,344 

Illinois.............................................

126 
7,904 

Georgia...........................................

107 
7,049 

Washington.....................................

91 
6,064 

North Carolina.............................

77 
5,272 

Virginia...........................................

87 
5,110 

New York.......................................

65 
4,527 

Colorado.........................................

63 
3,980 

New Jersey.....................................

56 
3,549 

Maryland.......................................

57 
3,404 

Minnesota.......................................

43 
2,931 

South Carolina.............................

52 
2,867 

Michigan.........................................

43 
2,755 

Arizona...........................................

40 
2,470 

Missouri.........................................

37 
2,136 

Oregon...........................................

39 
2,006 

Pennsylvania...............................

29 
1,993 

Indiana...........................................

31 
1,926 

Ohio...............................................

31 
1,922 

Nevada...........................................

27 
1,818 

Massachusetts.............................

25 
1,691 

Tennessee.......................................

27 
1,528 

Kansas...........................................

22 
1,310 

Wisconsin.......................................

15 
968 

Other states (12 states).................

92 
5,278 

Total – U.S......................................

2,200 
141,019 

 

 

 

Europe (b):

 

 

France.............................................

55 
2,886 

Netherlands.....................................

40 
2,180 

Sweden...........................................

30 
1,623 

Belgium...........................................

21 
1,270 

United Kingdom...........................

21 
1,025 

Germany.........................................

11 
571 

Denmark.........................................

10 
565 

Total - Europe...............................

188 
10,120 

 

 

 

Grand Total.....................................

2,388 
151,139 

 

18


 

 

(a)

See Schedule III:  Real Estate and Accumulated Depreciation in the Company’s 2013 financials, for a complete list of properties consolidated by the Company.

(b)

The facilities located in Europe include one facility in the United Kingdom that we wholly own, as well as the facilities owned by Shurgard Europe.

We seek to maximize our facilities’ cash flow through the regular review and adjustment of rents charged and promotions granted to our existing and new incoming customers, and controlling expenses.  For the year ended December 31, 2013, the weighted average occupancy level and the average realized rent per occupied square foot for our self-storage facilities were approximately 92.7% and $14.18, respectively, in the U.S. and 79.6% and $26.90, respectively, in Europe. 

At December 31, 2013,  45 of our U.S. facilities with a net book value of $224 million were encumbered by an aggregate of $89 million in secured notes payable. 

We have no specific policy as to the maximum size of any one particular self-storage facility.  However, none of our facilities involves, or is expected to involve, 1% or more of our total assets, gross revenues or net income.

Description of Self-Storage Facilities: Self-storage facilities, which comprise the majority of our investments, offer accessible storage space for personal and business use at a relatively low cost.  A user rents a fully enclosed space, securing the space with their lock, which is for the user's exclusive use and to which only the user has access on an unrestricted basis during business hours.  On-site operation is the responsibility of property managers who are supervised by district managers.  Some self-storage facilities also include rentable uncovered parking areas for vehicle storage.  Space is rented on a month-to-month basis and rental rates vary according to the location of the property, the size of the storage space and other characteristics that affect the relative attractiveness of each particular space, such as whether the space has “drive-up” access, its proximity to elevators, or if the space is climate controlled.  All of our self-storage facilities in the U.S. are operated under the "Public Storage" brand name, while our facilities in Europe are operated under the “Shurgard” brand name.

Users include individuals from virtually all demographic groups, as well as businesses.  Individuals usually store furniture, household appliances, personal belongings, motor vehicles, boats, campers, motorcycles and other household goods.  Businesses normally store excess inventory, business records, seasonal goods, equipment and fixtures.

Our self-storage facilities generally consist of between 350 to 750 storage spaces.  Most spaces have between 25 and 400 square feet and an interior height of approximately eight to 12 feet.

We experience minor seasonal fluctuations in the occupancy levels of self-storage facilities with occupancies generally higher in the summer months than in the winter months.  We believe that these fluctuations result in part from increased moving activity during the summer months and incremental demand from college students.

Our self-storage facilities are geographically diversified and are located primarily in or near major metropolitan markets in 38 states in the U.S.  Generally our self-storage facilities are located in heavily populated areas and close to concentrations of apartment complexes, single family residences and commercial developments. 

Competition from other self-storage facilities is significant and impacts the occupancy levels and rental rates for many of our properties.

We believe that self-storage facilities, upon achieving stabilized occupancy levels of approximately 90%, have attractive characteristics consisting of high profit margins, a broad tenant base and low levels of capital expenditures to maintain their condition and appearance.  Historically, upon 

19


 

 

reaching stabilization, our U.S. self-storage facilities have generally shown a high degree of stability in generating cash flows. 

Description of Commercial Properties: We have an interest in PSB, which, as of December 31, 2013, owns and operates approximately 29.7 million net rentable square feet of commercial space in eight states.  At December 31, 2013, the $424.5 million book value and $1.1 billion market value, respectively, of our investment in PSB represents approximately 4% and 11%, respectively of our total assets.  We also directly own 1.4 million net rentable square feet of commercial space managed primarily by PSB. 

The commercial properties owned by PSB consist primarily of flex, multi-tenant office and industrial space.  Flex space is defined as buildings that are configured with a combination of office and warehouse space and can be designed to fit a wide variety of uses (including office, assembly, showroom, laboratory, light manufacturing and warehouse space). 

Environmental Matters:  We accrue environmental assessments and estimated remediation cost when it is probable that such efforts will be required and the related costs can be reasonably estimated.  Our current practice is to conduct environmental investigations in connection with property acquisitions.  Although there can be no assurance, we are not aware of any environmental contamination of any of our facilities, which individually or in the aggregate would be material to our overall business, financial condition, or results of operations.

ITEM 3.Legal Proceedings

We are a party to various legal proceedings and subject to various claims and complaints; however, we believe that the likelihood of these contingencies resulting in a material loss to the Company, either individually or in the aggregate, is remote.

ITEM 4.Mine Safety Disclosures

Not applicable.

20


 

 

PART II

ITEM 5.Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

a.

Market Information of the Registrant’s Common Equity:

Our Common Shares (NYSE: PSA) have been listed on the New York Stock Exchange since October 19, 1984.   The following table sets forth the high and low sales prices of our Common Shares on the New York Stock Exchange composite tapes for the applicable periods.

 

 

 

 

 

 

Range

Year

Quarter

High 

Low

2012

1st

$
141.48 
$
129.04 

 

2nd

146.49 
129.77 

 

3rd

152.68 
137.86 

 

4th

148.17 
135.07 

 

 

 

 

2013

1st

157.95 
144.35 

 

2nd

168.66 
145.04 

 

3rd

168.30 
149.46 

 

4th

176.68 
147.14 

 

As of February 15, 2014, there were approximately 16,043 holders of record of our Common Shares.  Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.

b.

Dividends

We have paid quarterly distributions to our shareholders since 1981, our first full year of operations.  During 2013 we paid distributions to our common shareholders of $1.25 per common share for each of the quarters ended March 31, June 30, September 30 and $1.40 per common share for the quarter ended December 31, representing an aggregate of $884.2 million or $5.15 per share.  During 2012 we paid distributions to our common shareholders of $1.10 per common share for each of the quarters ended March 31, June 30, September 30 and December 31, representing an aggregate of $751.2 million or $4.40 per share. 

Holders of common shares are entitled to receive distributions when and if declared by our Board of Trustees out of any funds legally available for that purpose.  As a REIT, we do not incur federal income tax on our REIT taxable income (generally, net rents and gains from real property, dividends, and interest) that is fully distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and if we meet certain organizational and operational rules.  We believe we have met these requirements in all periods presented herein, and we expect to continue to elect and qualify as a REIT.  

For Federal income tax purposes, distributions to shareholders are treated as ordinary income, capital gains, return of capital or a combination thereof.  For 2013, the dividends paid on common shares and preferred shares were classified as follows:

 

 

 

 

 

21


 

 

 

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter

Ordinary Income.....................

100.0000% 
100.0000% 
99.8273% 
99.9543% 

Long-term Capital Gain...........

0.0000% 
0.0000% 
0.1727% 
0.0457% 

Total.........................................

100.0000% 
100.0000% 
100.0000% 
100.0000% 

For 2012, the dividends paid on common shares ($4.40 per share) and on all the various classes of preferred shares were classified as ordinary income.

c.

Equity Shares

We are authorized to issue 100,000,000 equity shares from time to time in one or more series and our Board of Trustees has broad authority to fix the dividend and distribution rights, conversion and voting rights, redemption provisions and liquidation rights of each series of equity shares.  We had no equity shares outstanding for any period in the years ended December 31, 2013 and 2012.

d.

Common Share Repurchases

Our Board of Trustees has authorized management to repurchase up to 35,000,000 of our common shares on the open market or in privately negotiated transactions.  From the inception of the repurchase program through February 25, 2014, we have repurchased a total of 23,721,916 common shares (all purchased prior to 2010) at an aggregate cost of approximately $679.1 million.  Our common share repurchase program does not have an expiration date and there are 11,278,084 common shares that may yet be repurchased under our repurchase program as of December 31, 2013.  We have no current plans to repurchase shares; however, future levels of common share repurchases will be dependent upon our available capital, investment alternatives, and the trading price of our common shares. 

e.

Preferred Share Redemptions

We had no preferred redemptions during the year ended December 31, 2013.

22


 

 

 

 

 

 

ITEM 6.Selected Financial Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

1,981,746 

 

$

1,842,504 

 

$

1,735,888 

 

$

1,631,294 

 

$

1,607,395 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operations

 

565,161 

 

 

555,904 

 

 

560,509 

 

 

545,921 

 

 

536,555 

Depreciation and amortization

 

387,402 

 

 

357,781 

 

 

357,969 

 

 

353,245 

 

 

339,003 

General and administrative

 

66,679 

 

 

56,837 

 

 

52,410 

 

 

38,487 

 

 

35,735 

Asset impairment charges

 

 -

 

 

 -

 

 

2,186 

 

 

994 

 

 

 -

 

 

1,019,242 

 

 

970,522 

 

 

973,074 

 

 

938,647 

 

 

911,293 

Operating income

 

962,504 

 

 

871,982 

 

 

762,814 

 

 

692,647 

 

 

696,102 

Interest and other income

 

22,577 

 

 

22,074 

 

 

32,333 

 

 

29,017 

 

 

29,813 

Interest expense

 

(6,444)

 

 

(19,813)

 

 

(24,222)

 

 

(30,225)

 

 

(29,916)

Equity in earnings of unconsolidated real estate entities

 

57,579 

 

 

45,586 

 

 

58,704 

 

 

38,352 

 

 

53,244 

Foreign currency exchange gain (loss)

 

17,082 

 

 

8,876 

 

 

(7,287)

 

 

(42,264)

 

 

9,662 

Gain on real estate sales and debt retirement

 

4,233 

 

 

1,456 

 

 

10,801 

 

 

827 

 

 

37,540 

Income from continuing operations

 

1,057,531 

 

 

930,161 

 

 

833,143 

 

 

688,354 

 

 

796,445 

Discontinued operations

 

 -

 

 

12,874 

 

 

3,316 

 

 

7,760 

 

 

(5,989)

Net income

 

1,057,531 

 

 

943,035 

 

 

836,459 

 

 

696,114 

 

 

790,456 

Net income allocated (to) from noncontrolling equity interests

 

(5,078)

 

 

(3,777)

 

 

(12,617)

 

 

(24,076)

 

 

44,165 

Net income allocable to Public Storage shareholders

$

1,052,453 

 

$

939,258 

 

$

823,842 

 

$

672,038 

 

$

834,621 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Common Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions

 

$
5.15 

 

 

$
4.40 

 

 

$
3.65 

 

 

$
3.05 

 

 

$
2.20 

Net income – Basic

 

$
4.92 

 

 

$
3.93 

 

 

$
3.31 

 

 

$
2.36 

 

 

$
3.48 

Net income – Diluted

 

$
4.89 

 

 

$
3.90 

 

 

$
3.29 

 

 

$
2.35 

 

 

$
3.47 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares – Basic

 

171,640 

 

 

170,562 

 

 

169,657 

 

 

168,877 

 

 

168,358 

Weighted average common shares – Diluted

 

172,688 

 

 

171,664 

 

 

170,750 

 

 

169,772 

 

 

168,768 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

9,876,266 

 

$

8,793,403 

 

$

8,932,562 

 

$

9,495,333 

 

$

9,805,645 

Total debt

$

839,053 

 

$

468,828 

 

$

398,314 

 

$

568,417 

 

$

518,889 

Total preferred equity

$

3,562,500 

 

$

2,837,500 

 

$

3,111,271 

 

$

3,396,027 

 

$

3,399,777 

Public Storage shareholders’ equity

$

8,791,730 

 

$

8,093,756 

 

$

8,288,209 

 

$

8,676,598 

 

$

8,928,407 

Permanent noncontrolling interests’ equity

$

27,125 

 

$

29,108 

 

$

22,718 

 

$

32,336 

 

$

132,974 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash flow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provided by operating activities

$

1,430,339 

 

$

1,285,659 

 

$

1,203,452 

 

$

1,093,221 

 

$

1,112,857 

Used in investing activities

$

(1,412,393)

 

$

(290,465)

 

$

(81,355)

 

$

(266,605)

 

$

(91,409)

Used in financing activities

$

(16,160)

 

$

(1,117,305)

 

$

(1,438,546)

 

$

(1,132,709)

 

$

(938,401)

 

23


 

 

 

ITEM 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our financial statements and notes thereto.

Critical Accounting Policies

Our MD&A discusses our financial statements, which have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”).  Our financial statements are affected by our judgments, assumptions and estimates.  The notes to our December 31, 2013 financial statements, primarily Note 2, summarize our significant accounting policies.

We believe the following are our critical accounting policies, because they have a material impact on the portrayal of our financial condition and results, and they require us to make judgments and estimates about matters that are inherently uncertain.

Income Tax Expense:  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 on our REIT taxable income (generally, net rents and gains from real property, dividends, and interest) that is fully distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and if we meet certain organizational and operational rules.  We believe we have met these REIT requirements for all periods presented herein.  Accordingly, we have recorded no federal income tax expense related to our REIT taxable income.

Our evaluation that we have met the REIT requirements could be incorrect, because compliance with the tax rules requires factual determinations, and circumstances we have not identified could result in noncompliance with the tax requirements in current or prior years.  For any taxable year that we fail to qualify as a REIT and for which applicable statutory relief provisions did not apply, we would be taxed at the regular corporate rates on all of our taxable income for at least that year and the ensuing four years, we could be subject to penalties and interest, and our net income would be materially different from the amounts estimated in our financial statements. 

In addition, our taxable REIT subsidiaries are taxable as regular corporations.  To the extent that amounts paid to us by our taxable REIT subsidiaries are determined by the taxing authorities to be in excess of amounts that would be paid under similar arrangements among unrelated parties, we could be subject to a 100% penalty tax on the excess payments.  Such a penalty tax could have a material adverse impact on our net income.

Impairment of Long-Lived Assets:  The analysis of impairment of our long-lived assets involves identification of indicators of impairment, projections of future operating cash flows, and estimates of fair values, all of which require significant judgment and subjectivity.  Others could come to materially different conclusions.  In addition, we may not have identified all current facts and circumstances that may affect impairment.  Any unidentified impairment loss, or change in conclusions, could have a material adverse impact on our net income.

Accrual for Uncertain and Contingent Liabilities:  We accrue for certain contingent and other liabilities that have significant uncertain elements, such as property taxes, workers compensation claims, tenant reinsurance claims, as well as other legal claims and disputes involving customers, employees, governmental agencies and other third parties.  Such liabilities we are aware of are estimated based upon many factors such as assumptions of past and future trends and our evaluation of likely outcomes.  However, the estimates of known liabilities could be incorrect or we may not be aware of all such liabilities, in which case our accrued liabilities and net income could be misstated. 

24


 

 

Recording the fair value of acquired real estate facilities:    In accounting for facilities acquired from third parties, we estimate the fair values of the land, buildings and intangible assets acquired.  Such estimates are based upon many assumptions and judgments, including i) expected rates of return and capitalization rates on real estate assets, ii) estimated costs to replace acquired buildings and equipment in their current state, iii) comparisons of the acquired underlying land parcels to recent land transactions, and iv) future cash flows from the real estate and the existing tenant base.  Others could come to materially different conclusions as to the estimated fair values, which would result in different depreciation and amortization expense, gains and losses on sale of real estate assets, and real estate and intangible assets.

MD&A Overview

Our domestic self-storage facilities generated 93% of our revenues for the year ended December 31, 2013, and also generated most of our net income and cash flow from operations.  A significant portion of management time is devoted to maximizing cash flows from our existing self-storage facilities, as well as seeking additional investments in self-storage facilities. 

Most of our facilities compete with other well-managed and well-located competitors and we are subject to general economic conditions, particularly those that affect the spending habits of consumers and moving trends.  We believe that our centralized information networks, national telephone and online reservation system, the brand name “Public Storage,” and our economies of scale enable us to meet such challenges effectively.   

During 2013, we acquired 121 self-storage facilities for approximately $1.2 billion, substantially more than we had acquired in total in 2010, 2011 and 2012 (an aggregate of 77 facilities for $546 million).  In 2013, we took advantage of a significant increase in properties being marketed for sale, which we believe was primarily driven by easier access to capital in the current low interest rate environment and improved property valuations.  We expect to continue to seek to acquire additional self-storage facilities from third parties.  There is significant competition to acquire existing facilities and there can be no assurance that we will be able to acquire additional facilities at prices we will find attractive. 

As of December 31 2013, we had development and expansion projects which will add approximately 1.8 million net rentable square feet of storage space at $196 million.  We expect to continue to seek additional development projects; however, the level of future development may be limited due to various constraints such as difficulty in finding available sites that meet our risk-adjusted yield expectations, as well as challenges in obtaining building permits for self-storage activities in certain municipalities.    

We also have equity investments in Shurgard Europe and PS Business Parks, Inc. (“PSB”).  During the year ended December 31, 2013, we increased our ownership interest in PSB by acquiring 1,356,748 shares of PSB common stock in open-market transactions and directly from PSB, for an aggregate cost of $105.0 million.  We may invest further in these entities in the future. 

As of December 31, 2013, our capital commitments for 2014 exceed our expected capital resources.  As of December 31, 2013, our capital resources consist of (i) approximately $250 million of available borrowing capacity on our revolving line of credit, (ii) $216.2 million of cash proceeds from the sale of 51% of a loan we have provided to Shurgard Europe which we received in January 2014, and (iii) $250 million of expected 2014 retained operating cash flow.  Retained operating cash flow represents our expected 2014 cash flow provided by operating activities, after deducting estimated 2014 distributions to our common and preferred shareholders, and estimated 2014 capital expenditure requirements.

At December 31, 2013, we had estimated 2014 capital commitments of $726.2 million of debt maturities, and approximately $145 million of remaining spend on our development pipeline.  In addition, we expect that our capital commitments will continue to grow during 2014 as we continue to seek additional development and acquisition opportunities.

25


 

 

We believe we have a variety of possibilities to bridge the gap between our capital resources and commitments which may include raising capital through the issuance of common or preferred securities, issuing debt, expanding the borrowing capacity of our credit facility, or entering into joint venture arrangements to acquire or develop facilities.  See Liquidity and Capital Resources for further information regarding our 2014 capital requirements.  

Results of Operations 

Operating results for 2013 as compared to 2012

For the year ended December 31, 2013, net income allocable to our common shareholders was $844.7 million or $4.89 per diluted common share, compared to $669.7 million or $3.90 per diluted common share for the same period in 2012, representing an increase of $175.0 million or $0.99 per diluted common share.  This increase is due primarily to (i) a $124.6 million increase in self-storage net operating income, (ii) a $68.9 million reduction in income allocated to preferred shareholders due to redemptions, including our equity share of PSB, (iii) an $8.2 million increase from foreign currency exchange gains, offset partially by (iv) a $29.6 million increase in depreciation and amortization associated with acquired real estate facilities. 

Operating results for 2012 as compared to 2011

For the year ended December 31, 2012, net income allocable to our common shareholders was $669.7 million or $3.90 per diluted common share, compared to $561.7 million or $3.29 per diluted common share for the same period in 2011, representing an increase of $108.0 million or $0.61 per diluted common share.  This increase is due to (i) a $102.5 million increase in self-storage net operating income, (ii) a $19.6 million reduction in distributions to preferred shareholders due primarily to lower average coupon rates, and (iii) a $16.2 million increase resulting from foreign currency exchange gains and losses in translating our Euro-denominated loan receivable from Shurgard Europe into U.S. Dollars, offset partially by (iv) a $36.3 million decrease due to the application of EITF D-42 to our, and our equity share of PSB’s, redemptions of preferred securities.

Funds from Operations and Core Funds from Operations

Funds from Operations (“FFO”) is a non-GAAP term defined by the National Association of Real Estate Investment Trusts, and generally represents net income before depreciation, gains and losses, and impairment charges with respect to real estate assets.  We present FFO and FFO per share because we consider FFO to be an important measure of the performance of real estate companies, as do many analysts in evaluating our Company.  We believe that FFO is a helpful measure of a REIT’s performance since FFO excludes depreciation, which is included in computing net income and assumes the value of real estate diminishes predictably over time.  We believe that real estate values fluctuate due to market conditions and in response to inflation.  FFO computations do not consider scheduled principal payments on debt, capital improvements, distributions and other obligations of the Company.  FFO and FFO per share is not a substitute for our cash flow or net income per share as a measure of our liquidity or operating performance or our ability to pay dividends.  Because other REITs may not compute FFO in the same manner, FFO may not be comparable among REITs.

For the year ended December 31, 2013, FFO was $7.53 per diluted common share, as compared to $6.31 for the same period in 2012, representing an increase of $1.22 per diluted common share.

For the year ended December 31, 2012, FFO was $6.31 per diluted common share, as compared to $5.67 for the same period in 2011, representing an increase of $0.64 per diluted common share.

The following table reconciles net income to FFO and FFO per diluted common share:

 

26


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

2013

 

2012

 

2011

 

 

(Amounts in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,057,531 

 

$

943,035 

 

$

836,459 

Adjust for amounts not included in FFO:

 

 

 

 

 

 

 

 

 

Depreciation and amortization, including discontinued

 

 

 

 

 

 

 

 

 

operations

 

 

387,402 

 

 

358,103 

 

 

358,525 

Depreciation from unconsolidated real estate

 

 

 

 

 

 

 

 

 

investments

 

 

75,458 

 

 

75,648 

 

 

64,677 

Gains on sale of real estate investments, including our equity share

 

 

(4,120)

 

 

(14,778)

 

 

(12,797)

FFO allocable to equity holders

 

 

1,516,271 

 

 

1,362,008 

 

 

1,246,864 

Less allocation of FFO to:

 

 

 

 

 

 

 

 

 

Noncontrolling equity interests

 

 

(7,275)

 

 

(6,828)

 

 

(15,539)

Preferred shareholders - distributions

 

 

(204,312)

 

 

(205,241)

 

 

(224,877)

Preferred shareholders - redemptions

 

 

 -

 

 

(61,696)

 

 

(35,585)

Restricted share unitholders

 

 

(5,173)

 

 

(4,247)

 

 

(2,817)

FFO allocable to common shares

 

$

1,299,511 

 

$

1,083,996 

 

$

968,046 

Diluted weighted average common shares

 

 

172,688 

 

 

171,664 

 

 

170,750 

FFO per share

 

$

7.53 

 

$

6.31 

 

$

5.67 

In addition to FFO, we often discuss “Core FFO” per share which is also a non-GAAP measure that represents FFO per share, adjusted to exclude the impact of (i) foreign currency exchange gains and losses, representing gains of $17.1 million and $8.9 million in 2013 and 2012, respectively, and a loss of $7.3 million for 2011, (ii) the impact of EITF D-42, including our equity share from PSB, representing charges totaling $68.9 million and $32.6 million for 2012 and 2011, respectively, (none for 2013) and (iii) other items.  We believe Core FFO is a helpful measure in understanding our ongoing earnings and cash flow.  We also believe that the analyst community, likewise, reviews our Core FFO and Core FFO per share (or similar measures using different terminology).  Core FFO is not a substitute for net income, earnings per share or cash flow from operations.  Because other REITs may not compute Core FFO in the same manner as we do, may not use the same terminology, or may not present such a measure, Core FFO may not be comparable among REITs.

The following table reconciles FFO per share to Core FFO per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

Year Ended December 31,

 

 

 

 

 

 

 

 

 

 

 

 

Percentage

 

 

 

 

 

 

 

Percentage

 

 

 

 

 

 

2013

 

2012

 

Change

 

2012

 

2011

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FFO per share

$

7.53 

 

$

6.31 

 

19.3% 

 

$

6.31 

 

$

5.67 

 

11.3% 

Eliminate the per share impact of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

items excluded from Core FFO:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency exchange (gain) loss

 

(0.10)

 

 

(0.05)

 

 

 

 

(0.05)

 

 

0.04 

 

 

Application of EITF D-42

 

 -

 

 

0.40 

 

 

 

 

0.40 

 

 

0.19 

 

 

Other items

 

0.01 

 

 

0.02 

 

 

 

 

0.02 

 

 

0.03 

 

 

Core FFO per share

$

7.44 

 

$

6.68 

 

11.4% 

 

$

6.68 

 

$

5.93 

 

12.6% 

 

27


 

 

Real Estate Operations

Self-Storage Operations: Our self-storage operations represent 93% of our revenues for the year ended December 31, 2013.  Our self-storage operations are analyzed in two groups: (i) the Same Store Facilities, representing the facilities that we have owned and operated on a stabilized basis since January 1, 2011, and (ii) all other facilities, which are newly acquired, newly developed, or recently expanded facilities (the “Non Same Store Facilities”). 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-Storage Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summary

Year Ended December 31,

 

Year Ended December 31,

 

 

 

 

 

 

 

Percentage

 

 

 

 

 

 

 

Percentage

 

2013

 

2012

 

Change

 

2012

 

2011

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollar amounts in thousands)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities

$

1,703,294 

 

$

1,616,798 

 

5.3% 

 

$

1,616,798 

 

$

1,544,543 

 

4.7% 

Non Same Store Facilities 

 

146,589 

 

 

102,067 

 

43.6% 

 

 

102,067 

 

 

77,256 

 

32.1% 

Total rental income

 

1,849,883 

 

 

1,718,865 

 

7.6% 

 

 

1,718,865 

 

 

1,621,799 

 

6.0% 

Cost of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities

 

478,978 

 

 

485,460 

 

(1.3)%

 

 

485,460 

 

 

496,569 

 

(2.2)%

Non Same Store Facilities

 

45,108 

 

 

32,181 

 

40.2% 

 

 

32,181 

 

 

26,544 

 

21.2% 

Total cost of operations

 

524,086 

 

 

517,641 

 

1.2% 

 

 

517,641 

 

 

523,113 

 

(1.0)%

Net operating income (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities

 

1,224,316 

 

 

1,131,338 

 

8.2% 

 

 

1,131,338 

 

 

1,047,974 

 

8.0% 

Non Same Store Facilities

 

101,481 

 

 

69,886 

 

45.2% 

 

 

69,886 

 

 

50,712 

 

37.8% 

Total net operating income

 

1,325,797 

 

 

1,201,224 

 

10.4% 

 

 

1,201,224 

 

 

1,098,686 

 

9.3% 

Depreciation and amortization expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities

 

(305,270)

 

 

(314,428)

 

(2.9)%

 

 

(314,428)

 

 

(322,467)

 

(2.5)%

Non Same Store Facilities

 

(79,353)

 

 

(40,543)

 

95.7% 

 

 

(40,543)

 

 

(32,848)

 

23.4% 

Total depreciation and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

amortization expense

 

(384,623)

 

 

(354,971)

 

8.4% 

 

 

(354,971)

 

 

(355,315)

 

(0.1)%

Total net income

$

941,174 

 

$

846,253 

 

11.2% 

 

$

846,253 

 

$

743,371 

 

13.8% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of facilities at period end:

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities

 

1,949 

 

 

1,949 

 

 -

 

 

1,949 

 

 

1,949 

 

 -

Non Same Store Facilities

 

238 

 

 

116 

 

105.2% 

 

 

116 

 

 

89 

 

30.3% 

Net rentable square footage at period end (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities

 

122,823 

 

 

122,823 

 

 -

 

 

122,823 

 

 

122,823 

 

 -

Non Same Store Facilities

 

17,464 

 

 

8,814 

 

98.2% 

 

 

8,814 

 

 

6,638 

 

32.8% 

(a)

See “Net Operating Income below for further information regarding this non-GAAP measure.

Net income from our Self-Storage operations has increased 11.2% in 2013 as compared to 2012 and 13.8% in 2012 as compared to 2011.  These increases are due to improvements in our Same Store Facilities, as well as the acquisitions of new facilities and the fill-up of unstabilized facilities.

28


 

 

Same Store Facilities

The Same Store Facilities represent those facilities that have been owned and operated on a stabilized basis since January 1, 2011 and therefore provide meaningful comparisons for 2011, 2012 and 2013.  The following table summarizes the historical operating results of these 1,949 facilities (122.8 million net rentable square feet) that represent approximately 88% of the aggregate net rentable square feet of our U.S. consolidated self-storage portfolio at December 31, 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Operating Data for the Same Store Facilities (1,949 facilities)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

Year Ended December 31,

 

 

 

 

 

 

 

Percentage

 

 

 

 

 

 

 

Percentage

 

2013

 

2012

 

Change

 

2012

 

2011

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollar amounts in thousands, except weighted average amounts)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

$

1,619,533 

 

$

1,536,517 

 

5.4% 

 

$

1,536,517 

 

$

1,465,038 

 

4.9% 

Late charges and administrative fees

 

83,761 

 

 

80,281 

 

4.3% 

 

 

80,281 

 

 

79,505 

 

1.0% 

Total revenues (a)

 

1,703,294 

 

 

1,616,798 

 

5.3% 

 

 

1,616,798 

 

 

1,544,543 

 

4.7% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property taxes

 

160,027 

 

 

152,191 

 

5.1% 

 

 

152,191 

 

 

147,806 

 

3.0% 

On-site property manager payroll

 

97,563 

 

 

98,326 

 

(0.8)%

 

 

98,326 

 

 

101,445 

 

(3.1)%

Supervisory payroll

 

33,766 

 

 

33,306 

 

1.4% 

 

 

33,306 

 

 

32,187 

 

3.5% 

Repairs and maintenance

 

39,401 

 

 

40,079 

 

(1.7)%

 

 

40,079 

 

 

45,406 

 

(11.7)%

Utilities

 

36,387 

 

 

36,370 

 

0.0% 

 

 

36,370 

 

 

37,873 

 

(4.0)%

Advertising and selling expense

 

27,083 

 

 

38,871 

 

(30.3)%

 

 

38,871 

 

 

42,846 

 

(9.3)%

Other direct property costs

 

49,340 

 

 

50,361 

 

(2.0)%

 

 

50,361 

 

 

53,725 

 

(6.3)%

Allocated overhead

 

35,411 

 

 

35,956 

 

(1.5)%

 

 

35,956 

 

 

35,281 

 

1.9% 

Total cost of operations (a)

 

478,978 

 

 

485,460 

 

(1.3)%

 

 

485,460 

 

 

496,569 

 

(2.2)%

Net operating income (b)

 

1,224,316 

 

 

1,131,338 

 

8.2% 

 

 

1,131,338 

 

 

1,047,974 

 

8.0% 

Depreciation and amortization expense

 

(305,270)

 

 

(314,428)

 

(2.9)%

 

 

(314,428)

 

 

(322,467)

 

(2.5)%

Net income

$

919,046 

 

$

816,910 

 

12.5% 

 

$

816,910 

 

$

725,507 

 

12.6% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin (before depreciation and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

amortization)

 

71.9% 

 

 

70.0% 

 

2.7% 

 

 

70.0% 

 

 

67.9% 

 

3.1% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average for the period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Square foot occupancy (c)

 

93.3% 

 

 

91.9% 

 

1.5% 

 

 

91.9% 

 

 

91.3% 

 

0.7% 

Realized annual rental income per:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Occupied square foot (d)

$

14.13 

 

$

13.61 

 

3.8% 

 

$

13.61 

 

$

13.06 

 

4.2% 

Available square foot

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(“REVPAF”) (d)

$

13.19 

 

$

12.51 

 

5.4% 

 

$

12.51 

 

$

11.93 

 

4.9% 

Weighted average at December 31:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Square foot occupancy

 

91.8% 

 

 

91.4% 

 

0.4%