10-K 1 psa-20141231x10k.htm 10-K psa-20141231 10K

 

 

 

 

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, 2014.

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

Depositary Shares Each Representing 1/1,000 of a 6.375% Cumulative Preferred Share, Series Y $.01 par value

New York Stock Exchange

Depositary Shares Each Representing 1/1,000 of a 6.000% Cumulative Preferred Share, Series Z $.01 par value

New York Stock Exchange

Depositary Shares Each Representing 1/1,000 of a 5.875% Cumulative Preferred Share, Series A $.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]

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The aggregate market value of the voting and non-voting common shares held by non-affiliates of the Registrant as of June 30, 2014:  

Common Shares, $0.10 Par Value Per Share$24,958,344,000 (computed on the basis of $171.35 per share, which was the reported closing sale price of the Company's Common Shares on the New York Stock Exchange (the “NYSE”) on June 30, 2014).

As of February 19, 2015, there were 172,808,464 outstanding Common Shares, $.10 par value per share.


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 2015 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 (the “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 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 REITs, 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 (referred to herein as “the Company”, “the Trust”, “we”, “us”, or “our”), a Maryland REIT, was organized in 1980.

At December 31, 2014, our principal business activities were 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 (the “U.S.”).  We have direct and indirect equity interests in 2,250 self-storage facilities (146 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 Self Storage Europe Limited (“Shurgard Europe”) which owns 192 self-storage facilities (ten million net rentable square feet) located in seven countries in Western Europe operated under the “Shurgard” brand name.  We believe Shurgard Europe is the largest owner and operator of self-storage facilities in Western Europe.  We also wholly own one self-storage facility in the United Kingdom which is managed by Shurgard Europe

(iii)

Commercial:  We have a 42% equity interest in PS Business Parks, Inc. (“PSB”), a publicly held REIT which owns and operates 28.6 million net rentable square feet of commercial space.  We also wholly-own 1.3 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 also report 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 we use, including Internet advertising, signage, and banners, and offer the same service we doAs 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 13%, 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 2014 same-store revenues in the 20 Metropolitan Statistical Areas (each, an “MSA”, 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 Desktop and Mobile Websites:  The online marketing channel continues to grow in prominence, with approximately 60% of our move-ins in 2014 sourced through our websites, 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 websites.  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 websites to enhance their 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 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, 2014, we operated 2,250 self-storage facilities with 1.4 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 percentage of our facilities in close proximity to each other. 

We believe that we have significant market share and concentration in major metropolitan centers, which increase the cost effectiveness of our promotional programs relative to our competitors.  Our large market share in major metropolitan markets and well-recognized brand name improves our prominence 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, our highly visible facilities, and our facilities’ 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 facilities and by adding more self-storage space to existing facilities, (iv) participating in the growth of the commercial operations we have an interest in, primarily 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 (i) 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, (ii) attempting to maximize revenues through evaluating the appropriate balance between occupancy, rental rates, and promotional discounting and (iii) controlling operating costs.  We believe that our property management personnel, systems, our convenient shopping options for the customer, our economies of scale, and our 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 provides us an advantage in evaluating the potential of acquisition opportunities.  Self-storage owners decide whether to market their facilities for sale based upon many factors, including potential reinvestment returns, expectations of future growth, estimated value, the cost of debt financing, as well as personal considerations.  Our aggressiveness in competing for particular marketed facilities depends 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, how well the facility fits into our current geographic footprint, as well as our yield expectations.   During 2014, 2013 and 2012, we acquired 44, 121 and 24 facilities, respectively, from third parties for approximately $431 million, $1.2 billion and $226 million, respectively, primarily through large portfolio acquisitions.  We will continue to seek to acquire properties in 2015; however, there is significant competition to acquire existing facilities and there can be no assurance as to the level of facilities we may acquire

Develop new self-storage facilities and expansion of existing facilitiesThe development of new self-storage locations and the expansion of existing 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, 2014, we had a development pipeline to develop new self-storage facilities and, to a lesser extent, expand existing self-storage facilities, which will add approximately 3.5 million net rentable square feet of self-storage space.  The aggregate cost of these projects is estimated at $411 million, of which $105 million had been incurred at December 31, 2014, and the remaining costs will be incurred primarily in 2015.  Some of these projects are subject to significant contingencies such as entitlement approval.  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 projects that meet our risk-adjusted yield expectations and challenges in obtaining building permits for self-storage activities in certain municipalities.    

Participate in the growth of commercial facilities primarily through our ownership in PS Business Parks, Inc.:  Our investment in PSB provides diversification into another asset typePSB is a stand-alone public company traded on the NYSEDuring 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.  As of December 31, 2014, we have a 42% equity interest in PSB.

PSB seeks to grow its asset base in favorable markets as well as increase the cash flows from its existing portfolio.  From 2010 through 2014, PSB has acquired an aggregate total of 11.3 million rentable square feet in key markets for an aggregate purchase price of approximately $1.1 billion.  In 2014, PSB disposed of certain nonstrategic assets with an aggregate of 1.9 million rentable square feet in Arizona and Oregon, receiving net proceeds aggregating $212.2 million.  As of December 31, 2014, PSB owned and operated approximately 28.6 million net rentable square feet of commercial space, and had an enterprise value of approximately $4.0 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, 2014). 

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 192 facilities with approximately ten 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:  As a REIT, we generally distribute 100% of our taxable income to our shareholders, which relative to a taxable C corporation, limits the amount of cash flow from operations that we can retain for investments.  As a result, in order to grow our asset base, access to capital is important.  Historically we have primarily financed our investment activities with retained operating cash flow and net proceeds from the issuance of preferred and common securities.  Occasionally we use short-term bank debt as bridge financing when capital market conditions are not favorable to issue either preferred or common securities.  We are evaluating raising additional capital through the issuance of medium or long-term debt instruments, and may do so over the next twelve months. 

Permanent capital:  We 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.  However, rates and market conditions for the issuance of preferred securities can be volatile or inefficient from time to time, and the market coupon rate of our preferred securities is influenced by long-term interest rates.  During the early part of 2013, we issued preferred securities with coupon rates of 5.2%, but later in 2013, rates increased and market conditions for the issuance of common and preferred capital worsened.  As a result, in December 2013 we borrowed $750.1 million from banks to bridge finance our acquisition activities during that timeframe.   Subsequently, preferred share coupon rates and market conditions steadily improved, and by September 2014, we repaid our bridge financing, in part, from the issuance of preferred securities.  During 2014, we issued an aggregate of $762.5 million in preferred securities, with an average coupon rate of 6.11%.  Notwithstanding the recent market turbulence, we continue to view preferred capital as an important source of capital over the long-term. 

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 and $700 million due to Wells Fargo pursuant to a term loan which was used to fund our acquisitions of self-storage facilities in the fourth quarter of 2013.  We repaid the $750.1 million of bridge financing by September 30, 2014, in part, through the issuance of preferred securities.  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.  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 rates on preferred securities if we chose to.  Given the current low interest rate environment combined with having minimal debt outstanding at December 31, 2014, we may seek to raise capital through the issuance of a modest amount of medium to long-term debt.

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

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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, primarily to buy or develop self-storage facilities.

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 (the “Board”) 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 2,223 self-storage facilities in the U.S. and one self-storage facility in London, England at December 31, 2014, 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, 2014, we also had ownership interests in entities that we do not control or consolidate.  These entities include PSB, Shurgard Europe (each discussed above), and various limited partnerships that own an aggregate of 13 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, 2014 financial statements for further disclosure regarding the assets, liabilities and operating results of the Unconsolidated Real Estate Entities.

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Limitations on Debt

Without the consent of holders of the various series of 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, 2014, the Debt Ratio was approximately 0.5%. 

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, 2014.

Employees

We had approximately 5,300 employees in the U.S. at December 31, 2014 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, 2014, there were approximately 823,000 certificates held by our self-storage customers, representing aggregate coverage of approximately $2.2 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, 2014 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, weather, as well as governmental actions

The acquisition of existing properties is subject to risks that may adversely affect our growth and financial results.    We have acquired 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, 2014, we have a pipeline of development projects totaling $411 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.  Our self-storage facilities generate most of our revenue and earnings.  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 ability to raise capital to fund our activities may be adversely affected by challenging market conditions.  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.

We own a 49% equity interest in Shurgard Europe, with our investment having a $395 million book value at December 31, 2014.  As a result, we are exposed to additional risks related to international operations 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 Shurgard Europe, 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 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. 

13


 

 

·

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.  Many of Shurgard Europe’s employees participate in various national unions.    

·

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 total of €407.5 million in debt outstanding at December 31, 2014, of which €35.0 million is due annually in each of 2015, 2016 and 2017 and €100.0 million is due annually in each of 2021, 2024 and 2025.  If Shurgard Europe is not able to refinance its debt when due or otherwise service its debt obligations 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, 2014, B. Wayne Hughes, our former Chairman, and his family (together, the “Hughes Family”), which includes two members of the Board, owned approximately 15.5% 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.

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%

14


 

 

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.  These limits could discourage, delay or prevent a transaction involving a change in control of our company not approved by our Board.  

·

Similarly, current provisions of our declaration of trust and powers of our Board 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 PSB as a result of our substantial ownership interest in it. 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 not reasonable compared to similar arrangements among unrelated parties, we could be subject 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.  In addition, certain local and state governments have imposed a tax on self-storage rent which, while in most cases is paid by our customers, increases the cost of self-storage rental to our customers and can negatively impact our revenues.  Other local and state governments may impose a self-storage rent tax in the future. 

We are exposed to ongoing litigation and other legal and regulatory actions, which may divert management’s time and attention, require us to pay damages and expenses or restrict the operation of our business.

We are subject to the risk of legal claims and proceedings and regulatory enforcement actions in the ordinary course of our business and otherwise, and we could incur significant liabilities and substantial

15


 

 

legal fees as a result of these actions.  Resolution of these claims and actions may divert time and attention by our management and could involve payment of damages or expenses by us, all of which may be significant.  In addition, any such resolution could involve our agreement to terms that restrict the operation of our business.  The results of legal proceedings cannot be predicted with certainty.  We cannot guarantee losses incurred in connection with any current or future legal or regulatory proceedings or actions will not exceed any provisions we may have set aside in respect of such proceedings or actions or will not exceed any available insurance coverage.  The occurrence of any of these events could have a material adverse effect on us.

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, customer, and employee relationships.

We are heavily dependent upon automated information technology and Internet commerce, with more than 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 also maintain personally identifiable information about our employees.  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’ or employees’ confidential information could be compromised or misappropriated, due to a breach of our network security.  Such cybersecurity and 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 and could result in remedial and other costs, fines or lawsuits, which could be in excess of any available insurance that we have procured.  

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

At December 31, 2014, 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 currently operate in the Canadian self-storage market.   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, 2014, 2013 and 2012, we received $0.5 million, $0.5 million and $0.6 million, respectively, in reinsurance premiums attributable to the 

16


 

 

Canadian Self-Storage Facilities.  Because our right to earn these premiums may be qualified, there is no assurance that these premiums will continue.

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 NYSE, 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.

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 of 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 reinsurance 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, which could reduce our net income

ITEM 1B.Unresolved Staff Comments

None.

17


 

 

ITEM 2.Properties

At December 31, 2014, we had direct and indirect ownership interests in 2,250 self-storage facilities located in 38 states within the U.S. and 193 storage facilities located in seven Western European nations:

 

 

 

 

 

 

At December 31, 2014

 

Number of Storage Facilities (a)

 

Net Rentable Square Feet (in thousand)

U.S.:

 

 

 

California

 

 

 

Southern

245 

 

17,348 

Northern

174 

 

10,662 

Florida

268 

 

17,944 

Texas

257 

 

17,004 

Illinois

126 

 

7,952 

Washington

107 

 

7,049 

Georgia

91 

 

6,122 

North Carolina

84 

 

5,802 

Virginia

90 

 

5,440 

New York

65 

 

4,527 

Colorado

63 

 

3,954 

Maryland

61 

 

3,699 

New Jersey

57 

 

3,630 

Minnesota

47 

 

3,313 

Michigan

53 

 

2,916 

Arizona

43 

 

2,755 

South Carolina

43 

 

2,737 

Missouri

38 

 

2,236 

Oregon

39 

 

2,040 

Pennsylvania

29 

 

1,993 

Indiana

31 

 

1,926 

Ohio

31 

 

1,922 

Nevada

27 

 

1,818 

Tennessee

25 

 

1,691 

Kansas

27 

 

1,528 

Massachusetts

22 

 

1,310 

Wisconsin

15 

 

968 

Other states (12 states)

92 

 

5,278 

 

 

 

 

Total - U.S.

2,250 

 

145,564 

 

 

 

 

Europe (b):

 

 

 

France

55 

 

2,886 

Netherlands

40 

 

2,180 

Sweden

30 

 

1,623 

Belgium

21 

 

1,270 

UK

21 

 

1,025 

Germany

16 

 

892 

Denmark

10 

 

571 

 

 

 

 

Total - Europe

193 

 

10,447 

 

 

 

 

Grand Total

2,443 

 

156,011 

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(a)

See Schedule III:  Real Estate and Accumulated Depreciation in the Company’s 2014 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, 2014, the weighted average occupancy level and the average realized rent per occupied square foot for our self-storage facilities were approximately 93.0% and $14.81, respectively, in the U.S. and 85.0% and $25.92, respectively, in Europe. 

At December 31, 2014,  34 of our U.S. facilities with a net book value of $161 million were encumbered by an aggregate of $64 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-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 demand from 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 affects the occupancy levels, rental rates, rental income and operating expenses of our facilities. 

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, 2014, owns and operates approximately 28.6 million net rentable square feet of commercial space in eight states.  At December 31, 2014, the $412.1 million book value and $1.2 billion market value, respectively, of our investment in PSB represents approximately 4% and 12%, respectively, of our total assets.  We also directly own 1.3 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.

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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 of beneficial interest (the “Common Shares”) NYSE: PSA) have been listed on the NYSE since October 19, 1984.   The following table sets forth the high and low sales prices of our Common Shares on the NYSE composite tapes for the applicable periods.

 

 

 

 

 

 

Range

Year

Quarter

High 

Low

2013

1st

$
157.95 
$
144.35 

 

2nd

168.66 
145.04 

 

3rd

168.30 
149.46 

 

4th

176.68 
147.14 

 

 

 

 

2014

1st

172.11 
148.04 

 

2nd

176.72 
167.41 

 

3rd

178.26 
162.34 

 

4th

190.19 
165.05 

As of February 20, 2015, there were approximately 15,154 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 2014 we paid distributions to our common shareholders of $1.40 per common share for each of the quarters ended March 31, June 30, September 30 and December 31, representing an aggregate of $964.6 million or $5.60 per share.  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 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 2014, 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% 
99.7805% 
100.0000% 
91.2039% 

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

0.0000% 
0.2195% 
0.0000% 
8.7961% 

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

100.0000% 
100.0000% 
100.0000% 
100.0000% 

For 2013, the dividends paid on common shares and preferred shares were classified as follows:

 

 

 

 

 

 

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% 

 

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 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, 2014 and 2013.

d.

Common Share Repurchases

Our Board 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 24, 2015, 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, 2014.  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, 2014.

22


 

 

 

 

 

 

ITEM 6.Selected Financial Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

2014

 

2013

 

2012

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

2,195,404 

 

$

1,981,746 

 

$

1,842,504 

 

$

1,735,888 

 

$

1,631,294 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operations

 

618,720 

 

 

565,161 

 

 

555,904 

 

 

560,509 

 

 

545,921 

Depreciation and amortization

 

437,114 

 

 

387,402 

 

 

357,781 

 

 

357,969 

 

 

353,245 

General and administrative

 

71,459 

 

 

66,679 

 

 

56,837 

 

 

52,410 

 

 

38,487 

Asset impairment charges

 

 -

 

 

 -

 

 

 -

 

 

2,186 

 

 

994 

 

 

1,127,293 

 

 

1,019,242 

 

 

970,522 

 

 

973,074 

 

 

938,647 

Operating income

 

1,068,111 

 

 

962,504 

 

 

871,982 

 

 

762,814 

 

 

692,647 

Interest and other income

 

4,926 

 

 

22,577 

 

 

22,074 

 

 

32,333 

 

 

29,017 

Interest expense

 

(6,781)

 

 

(6,444)

 

 

(19,813)

 

 

(24,222)

 

 

(30,225)

Equity in earnings of unconsolidated real estate entities

 

88,267 

 

 

57,579 

 

 

45,586 

 

 

58,704 

 

 

38,352 

Foreign currency exchange (loss) gain

 

(7,047)

 

 

17,082 

 

 

8,876 

 

 

(7,287)

 

 

(42,264)

Gain on real estate sales and debt retirement

 

2,479 

 

 

4,233 

 

 

1,456 

 

 

10,801 

 

 

827 

Income from continuing operations

 

1,149,955 

 

 

1,057,531 

 

 

930,161 

 

 

833,143 

 

 

688,354 

Discontinued operations

 

 -

 

 

 -

 

 

12,874 

 

 

3,316 

 

 

7,760 

Net income

 

1,149,955 

 

 

1,057,531 

 

 

943,035 

 

 

836,459 

 

 

696,114 

Net income allocated to noncontrolling equity interests

 

(5,751)

 

 

(5,078)

 

 

(3,777)

 

 

(12,617)

 

 

(24,076)

Net income allocable to Public Storage shareholders

$

1,144,204 

 

$

1,052,453 

 

$

939,258 

 

$

823,842 

 

$

672,038 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Common Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions

 

$
5.60 

 

 

$
5.15 

 

 

$
4.40 

 

 

$
3.65 

 

 

$
3.05 

Net income – Basic

 

$
5.27 

 

 

$
4.92 

 

 

$
3.93 

 

 

$
3.31 

 

 

$
2.36 

Net income – Diluted

 

$
5.25 

 

 

$
4.89 

 

 

$
3.90 

 

 

$
3.29 

 

 

$
2.35 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares – Basic

 

172,251 

 

 

171,640 

 

 

170,562 

 

 

169,657 

 

 

168,877 

Weighted average common shares – Diluted

 

173,138 

 

 

172,688 

 

 

171,664 

 

 

170,750 

 

 

169,772 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

9,818,676 

 

$

9,876,266 

 

$

8,793,403 

 

$

8,932,562 

 

$

9,495,333 

Total debt

$

64,364 

 

$

839,053 

 

$

468,828 

 

$

398,314 

 

$

568,417 

Total preferred equity

$

4,325,000 

 

$

3,562,500 

 

$

2,837,500 

 

$

3,111,271 

 

$

3,396,027 

Public Storage shareholders’ equity

$

9,480,796 

 

$

8,791,730 

 

$

8,093,756 

 

$

8,288,209 

 

$

8,676,598 

Permanent noncontrolling interests’ equity

$

26,375 

 

$

27,125 

 

$

29,108 

 

$

22,718 

 

$

32,336 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash flow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provided by operating activities

$

1,606,758 

 

$

1,430,339 

 

$

1,285,659 

 

$

1,203,452 

 

$

1,093,221 

Used in investing activities

$

(212,996)

 

$

(1,412,393)

 

$

(290,465)

 

$

(81,355)

 

$

(266,605)

Used in financing activities

$

(1,225,415)

 

$

(16,160)

 

$

(1,117,305)

 

$

(1,438,546)

 

$

(1,132,709)

 

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, 2014 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 not be reasonable when compared to 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


 

 

Accounting for acquired real estate facilities:    We estimate the fair values of the land, buildings and intangible assets acquired, for purposes of allocating the purchase price of facilities 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, (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 approximately 93% of our revenues for the year ended December 31, 2014, and also generated most of our net income and cash flow from operations.  A significant portion of management’s 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 2014, 2013 and 2012, we acquired 44, 121 and 24 facilities, respectively, from third parties for approximately $431 million, $1.2 billion and $226 million, respectively, primarily through large portfolio acquisitions.  We will continue to seek to acquire properties in 2015; however, there is significant competition to acquire existing facilities and there can be no assurance as to the level of facilities we may acquire. 

As of December 31, 2014, we had development and expansion projects which will add approximately 3.5 million net rentable square feet of storage space at a total cost of approximately $411 millionA total of $105 million in costs were incurred through December 31, 2014 with respect to these projects, with the remaining costs expected to be incurred primarily in 2015. 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 believe that our real estate development activities are beneficial to our business operations over the long run.  However, in the short run, due to the three to four year period that it takes to fill up newly developed storage space and reach a stabilized level of cash flows, our earnings will be diluted to the extent that earnings from those newly developed facilities are less than the cost of the capital that was required in order to fund the development cost.  We believe that this negative impact will grow in 2015 and beyond due to the resulting level of growth of unstabilized facilities in our portfolio.   

We also have equity investments in Shurgard Europe and PS Business Parks, Inc. (“PSB”).  We may invest further in these entities in the future. 

As of December 31, 2014, our capital resources totaled approximately $774 million, consisting of $188 million in cash, approximately $286 million of available borrowing capacity on our line of credit, and $300 million of expected retained operating cash flow for 2015.  Retained operating cash flow represents our expected cash flow provided by operating activities, after deducting estimated distributions to our shareholders and estimated maintenance capital expenditure requirements for 2015.

At December 31, 2014, we had capital commitments totaling approximately $356 million, consisting of $306 million of remaining spend on our development pipeline, $32 million in property

25


 

 

acquisitions, and approximately $18 million in maturities on notes payable.  In addition, we expect that our capital commitments will continue to grow during 2015 as we continue to seek additional development and acquisition opportunities.

See Liquidity and Capital Resources for further information regarding our capital requirements and anticipated sources of capital to fund such requirements.  

Results of Operations 

Operating results for 2014 as compared to 2013

For the year ended December 31, 2014, net income allocable to our common shareholders was $908.2 million or $5.25 per diluted common share, compared to $844.7 million or $4.89 per diluted common share for the same period in 2013, representing an increase of $63.5 million or $0.36 per diluted common share.  This increase is due primarily to (i) a $157.2 million increase in self-storage net operating income and (ii) our $36.5 million equity share of PSB’s gain on sale of real estate included in our equity in earnings of real estate entities, offset partially by (iii) a $49.7 million increase in depreciation and amortization expense associated with acquired facilities, (iv) a $24.1 million reduction associated with foreign currency exchange gains and losses, (v) an $28.3 million increase in earnings allocated to preferred shareholders due to the issuance of additional preferred shares, and (vi) a $17.7 million decrease in interest and other income due primarily to the disposition of 51% of our loan receivable from Shurgard Europe. 

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. 

Funds from Operations and Core Funds from Operations

Funds from Operations (“FFO”) and FFO per share are non-GAAP (generally accepted accounting principles) measures defined by the National Association of Real Estate Investment Trusts and are considered helpful measures of REIT performance by REITs and many REIT analysts.  FFO represents net income before real estate depreciation, gains and losses, and impairment charges, which are excluded because they are based upon historical real estate costs and assume that building values diminish ratable over time, while we believe that real estate values fluctuate due to market conditions.  FFO and FFO per share are not a substitute for net income or earnings per share.  FFO is not a substitute for GAAP net cash flow in evaluating our liquidity or ability to pay dividends, because it excludes financing activities presented on our statements of cash flows.  In addition, other REITs may compute these measures differently, so comparisons among REITs may not be helpful.

For the year ended December 31, 2014, FFO was $7.98 per diluted common share, as compared to $7.53 for the same period in 2013, representing an increase of 6.0%, or $0.45 per diluted common share.

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 19.3%, or $1.22 per diluted common share.

The following tables reconcile diluted earnings per share to FFO per share, and sets forth the computation of FFO per share:

 

 

 

 

 

 

 

 

 

 

26


 

 

 

 

Year Ended December 31,

 

 

2014

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Diluted Earnings per Share to FFO per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings per Share

 

$

5.25 

 

$

4.89 

 

$

3.90 

Eliminate amounts per share excluded from FFO:

 

 

 

 

 

 

 

 

 

Depreciation and amortization, including

 

 

 

 

 

 

 

 

 

amounts from investments and excluding

 

 

 

 

 

 

 

 

 

amounts allocated to noncontrolling

 

 

 

 

 

 

 

 

 

interests and restricted share unitholders

 

 

2.96 

 

 

2.66 

 

 

2.50 

Gains on sale of real estate investments,

 

 

 

 

 

 

 

 

 

including our equity share from

 

 

 

 

 

 

 

 

 

investments, and other

 

 

(0.23)

 

 

(0.02)

 

 

(0.09)

FFO per share

 

$

7.98 

 

$

7.53 

 

$

6.31 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Computation of FFO per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income allocable to common shareholders

 

$

908,176 

 

$

844,731 

 

$

669,694 

Eliminate items excluded from FFO:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

437,114 

 

 

387,402 

 

 

358,103 

Depreciation from unconsolidated

 

 

 

 

 

 

 

 

 

real estate investments

 

 

79,413 

 

 

75,458 

 

 

75,648 

Depreciation allocated to noncontrolling

 

 

 

 

 

 

 

 

 

interests and restricted share unitholders

 

 

(3,638)

 

 

(3,976)

 

 

(4,730)

Gains on sale of real estate investments,

 

 

 

 

 

 

 

 

 

including our equity share from

 

 

 

 

 

 

 

 

 

investments, and other

 

 

(39,083)

 

 

(4,104)

 

 

(14,719)

FFO allocable to common shares

 

$

1,381,982 

 

$

1,299,511 

 

$

1,083,996 

Diluted weighted average common shares

 

 

173,138 

 

 

172,688 

 

 

171,664 

FFO per share

 

$

7.98 

 

$

7.53 

 

$

6.31 

We also present “Core FFO per share,” a non-GAAP measure that represents FFO per share excluding the impact of (i) foreign currency exchange gains and losses, (ii) certain other items such as legal settlements, recognition of deferred tax assets, costs associated with the acquisition of real estate facilities, and facility closure charges.  We believe Core FFO per share is a helpful measure used by investors and REIT analysts to understand our performance.  However, Core FFO per share is not a substitute for net income per share.  Because other REITs may not compute Core FFO per share in the same manner as we do, may not use the same terminology, or may not present such a measure, Core FFO per share may not be comparable among REITs.

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

27


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

Year Ended December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage

 

 

 

 

 

 

 

Percentage

 

 

 

 

 

 

 

 

 

2014

 

2013

 

Change

 

2013

 

2012

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FFO per share

 

 

 

$

7.98 

 

$

7.53 

 

6.0% 

 

$

7.53 

 

$

6.31 

 

19.3% 

Eliminate the per share impact of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

items excluded from Core FFO:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Foreign currency exchange loss (gain)

 

0.04 

 

 

(0.10)

 

 

 

 

(0.10)

 

 

(0.05)

 

 

    Application of EITF D-42

 

 

 

 

 -

 

 

 -

 

 

 

 

 -

 

 

0.40 

 

 

    Other items

 

 

 

 

0.07 

 

 

0.01 

 

 

 

 

0.01 

 

 

0.02 

 

 

Core FFO per share

 

 

 

$

8.09 

 

$

7.44 

 

8.7% 

 

$

7.44 

 

$

6.68 

 

11.4% 

Real Estate Operations

Self-Storage Operations: 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, 2012, and (ii) all other facilities, which are newly acquired, newly developed, or recently expanded facilities (the “Non Same Store Facilities”).

28


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self-Storage Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summary

Year Ended December 31,

 

Year Ended December 31,

 

 

 

 

 

Percentage

 

 

 

 

 

 

 

Percentage

 

2014

 

2013

 

Change

 

2013

 

2012

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollar amounts in thousands)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities

$

1,836,676 

 

$

1,743,182 

 

5.4% 

 

$

1,743,182 

 

$

1,653,145 

 

5.4% 

Non Same Store Facilities 

 

213,206 

 

 

106,701 

 

99.8% 

 

 

106,701 

 

 

65,720 

 

62.4% 

Total rental income

 

2,049,882 

 

 

1,849,883 

 

10.8% 

 

 

1,849,883 

 

 

1,718,865 

 

7.6% 

Cost of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities

 

498,640 

 

 

489,177 

 

1.9% 

 

 

489,177 

 

 

496,217 

 

(1.4)%

Non Same Store Facilities

 

68,258 

 

 

34,909 

 

95.5% 

 

 

34,909 

 

 

21,424 

 

62.9% 

Total cost of operations

 

566,898 

 

 

524,086 

 

8.2% 

 

 

524,086 

 

 

517,641 

 

1.2% 

Net operating income (a):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities

 

1,338,036 

 

 

1,254,005 

 

6.7% 

 

 

1,254,005 

 

 

1,156,928 

 

8.4% 

Non Same Store Facilities

 

144,948 

 

 

71,792 

 

101.9% 

 

 

71,792 

 

 

44,296 

 

62.1% 

Total net operating income

 

1,482,984 

 

 

1,325,797 

 

11.9% 

 

 

1,325,797 

 

 

1,201,224 

 

10.4% 

Total depreciation and amortization expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities

 

(312,995)

 

 

(316,178)

 

(1.0)%

 

 

(316,178)

 

 

(326,258)

 

(3.1)%

Non Same Store Facilities

 

(121,074)

 

 

(68,445)

 

76.9% 

 

 

(68,445)

 

 

(28,713)

 

138.4% 

Total depreciation and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

amortization expense

 

(434,069)

 

 

(384,623)

 

12.9% 

 

 

(384,623)

 

 

(354,971)

 

8.4% 

Total net income

$

1,048,915 

 

$

941,174 

 

11.4% 

 

$

941,174 

 

$

846,253 

 

11.2% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of facilities at period end:

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities

 

1,982 

 

 

1,982 

 

 -

 

 

1,982 

 

 

1,982 

 

 -

Non Same Store Facilities

 

256 

 

 

205 

 

24.9% 

 

 

205 

 

 

83 

 

147.0% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Facilities

 

125,435 

 

 

125,435 

 

 -

 

 

125,435 

 

 

125,435 

 

 -

Non Same Store Facilities

 

19,439 

 

 

14,852 

 

30.9% 

 

 

14,852 

 

 

6,202 

 

139.5% 

(a)

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

Net income from our Self-Storage operations has increased 11.4% in 2014 as compared to 2013 and 11.2% in 2013 as compared to 2012.  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.

Same Store Facilities

The Same Store Facilities represent those facilities that have been owned and operated on a stabilized basis since January 1, 2012 and therefore provide meaningful comparisons for 2012, 2013 and 2014.  The following table summarizes the historical operating results of these 1,982 facilities (125.4 million net rentable square feet) that represent approximately 87% of the aggregate net rentable square feet of our U.S. consolidated self-storage portfolio at December 31, 2014.

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Selected Operating Data for the Same Store Facilities (1,982 facilities)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

Year Ended December 31,

 

 

 

 

 

Percentage

 

 

 

 

 

 

 

Percentage

 

2014

 

2013

 

Change

 

2013

 

2012

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollar amounts in thousands, except weighted average amounts)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

$

1,748,211 

 

$

1,657,412 

 

5.5% 

 

$

1,657,412 

 

$

1,571,022 

 

5.5% 

Late charges and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

administrative fees

 

88,465 

 

 

85,770 

 

3.1% 

 

 

85,770 

 

 

82,123 

 

4.4% 

Total revenues (a)

 

1,836,676 

 

 

1,743,182 

 

5.4% 

 

 

1,743,182 

 

 

1,653,145 

 

5.4% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property taxes

 

168,297 

 

 

162,903 

 

3.3% 

 

 

162,903 

 

 

155,403 

 

4.8% 

On-site property manager