10-Q 1 psa-20160930x10q.htm 10-Q psa-20160930 Q3

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

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

For the quarterly period ended September 30, 2016

or

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

For the transition period from ____________ to ____________.

Commission File Number:  001-33519

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



 

Maryland

95-3551121

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer Identification Number)



 

701 Western Avenue, Glendale, California

91201-2349

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code:  (818) 244-8080.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days.

[X]  Yes  [   ]  No

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

[X]  Yes  [   ]  No

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



 

 

 

Large Accelerated Filer

[X]

Accelerated Filer

[   ]

Non-accelerated Filer

[   ]

Smaller Reporting Company

[   ]

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

[   ]  Yes  [X]  No

Indicate the number of the registrant’s outstanding common shares of beneficial interest, as of October 31, 2016:

Common Shares of beneficial interest, $.10 par value per share –  173,440,267 shares

 


 

 













 

 

PUBLIC STORAGE



 

 

INDEX



 

 



 

 

PART I

FINANCIAL INFORMATION

Pages



 

 

Item 1.

Financial Statements (Unaudited)

 



 

 



Balance Sheets at September 30, 2016 and December 31, 2015



 

 



Statements of Income for the Three and Nine Months Ended September 30, 2016 and 2015



 

 



Statements of Comprehensive Income for the Three and Nine Months Ended
September 30, 2016 and 2015



 

 



Statement of Equity for the Nine Months Ended September 30, 2016



 

 



Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015

5-6 



 

 



Condensed Notes to Financial Statements

7-27 



 

 

Item 2.

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

28-52 



 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

52 



 

 

Item 4.

Controls and Procedures

53 



 

 

PART II

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

 



 

 

Item 1.

Legal Proceedings

54 



 

 

Item 1A.

Risk Factors

54 



 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

54 



 

 

Item 6.

Exhibits

54 



 

 





 


 

PUBLIC STORAGE

BALANCE SHEETS

 (Amounts in thousands, except share data)

 











 

 

 

 

 



September 30,

 

December 31,



2016

 

2015

ASSETS

 

(Unaudited)

 

 

 



 

 

 

 

 

Cash and cash equivalents

$

57,213 

 

$

104,285 

Real estate facilities, at cost:

 

 

 

 

 

Land

 

3,712,382 

 

 

3,564,810 

Buildings

 

9,973,859 

 

 

9,640,451 



 

13,686,241 

 

 

13,205,261 

Accumulated depreciation

 

(5,166,881)

 

 

(4,866,738)



 

8,519,360 

 

 

8,338,523 

Construction in process

 

261,372 

 

 

219,190 



 

8,780,732 

 

 

8,557,713 



 

 

 

 

 

Investments in unconsolidated real estate entities

 

697,040 

 

 

809,308 

Goodwill and other intangible assets, net

 

212,548 

 

 

211,458 

Other assets

 

118,236 

 

 

95,468 

Total assets

$

9,865,769 

 

$

9,778,232 



 

 

 

 

 



 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 



 

 

 

 

 

Senior unsecured notes

$

383,438 

 

$

263,940 

Mortgage notes

 

47,454 

 

 

55,076 

Accrued and other liabilities

 

345,734 

 

 

261,578 

    Total liabilities

 

776,626 

 

 

580,594 



 

 

 

 

 

Commitments and contingencies (Note 11)

 

 

 

 

 



 

 

 

 

 

Equity:

 

 

 

 

 

Public Storage shareholders’ equity:

 

 

 

 

 

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

 

 

 

 

 

160,700 shares issued (in series) and outstanding, (162,200 at

 

 

 

 

 

December 31, 2015), at liquidation preference

 

4,017,500 

 

 

4,055,000 

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

 

 

 

 

 

173,137,424 shares issued and outstanding  (172,921,241 shares at

 

 

 

 

 

December 31, 2015)

 

17,314 

 

 

17,293 

Paid-in capital

 

5,602,834 

 

 

5,601,506 

Accumulated deficit

 

(494,325)

 

 

(434,610)

Accumulated other comprehensive loss

 

(83,667)

 

 

(68,548)

Total Public Storage shareholders’ equity

 

9,059,656 

 

 

9,170,641 

Noncontrolling interests

 

29,487 

 

 

26,997 

  Total equity

 

9,089,143 

 

 

9,197,638 

Total liabilities and equity

$

9,865,769 

 

$

9,778,232 













 

 

See accompanying notes.

1

 


 

PUBLIC STORAGE

STATEMENTS OF INCOME

 (Amounts in thousands, except per share amounts)

(Unaudited)

 











 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

Nine Months Ended



September 30,

 

September 30,



2016

 

2015

 

2016

 

2015



 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Self-storage facilities

$

623,157 

 

$

580,976 

 

$

1,792,130 

 

$

1,662,641 

Ancillary operations

 

39,991 

 

 

37,896 

 

 

116,992 

 

 

109,725 



 

663,148 

 

 

618,872 

 

 

1,909,122 

 

 

1,772,366 



 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

Self-storage cost of operations

 

165,905 

 

 

152,010 

 

 

483,455 

 

 

461,078 

Ancillary cost of operations

 

12,722 

 

 

12,676 

 

 

40,462 

 

 

36,715 

Depreciation and amortization

 

109,432 

 

 

106,082 

 

 

321,573 

 

 

319,701 

General and administrative

 

22,140 

 

 

23,573 

 

 

63,508 

 

 

68,721 



 

310,199 

 

 

294,341 

 

 

908,998 

 

 

886,215 



 

 

 

 

 

 

 

 

 

 

 

Operating income

 

352,949 

 

 

324,531 

 

 

1,000,124 

 

 

886,151 

Interest and other income

 

3,750 

 

 

3,659 

 

 

11,614 

 

 

11,509 

Interest expense

 

(1,221)

 

 

 -

 

 

(3,310)

 

 

 -

Equity in earnings of unconsolidated real estate entities

 

17,237 

 

 

12,603 

 

 

41,628 

 

 

36,267 

Foreign currency exchange loss

 

(3,665)

 

 

 -

 

 

(5,987)

 

 

 -

Gain on real estate investment sales

 

 -

 

 

343 

 

 

689 

 

 

18,503 

Net income

 

369,050 

 

 

341,136 

 

 

1,044,758 

 

 

952,430 

Allocation to noncontrolling interests

 

(1,745)

 

 

(1,568)

 

 

(4,921)

 

 

(4,676)

Net income allocable to Public Storage shareholders

 

367,305 

 

 

339,568 

 

 

1,039,837 

 

 

947,754 

Allocation of net income to:

 

 

 

 

 

 

 

 

 

 

 

Preferred shareholders

 

(57,178)

 

 

(61,062)

 

 

(178,666)

 

 

(186,066)

Preferred shareholders - redemptions (Note 7)

 

 -

 

 

(4,113)

 

 

(26,873)

 

 

(8,897)

Restricted share units 

 

(1,170)

 

 

(885)

 

 

(3,231)

 

 

(2,744)

Net income allocable to common shareholders

$

308,957 

 

$

273,508 

 

$

831,067 

 

$

750,047 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

1.78 

 

$

1.58 

 

$

4.80 

 

$

4.34 

Diluted

$

1.78 

 

$

1.58 

 

$

4.78 

 

$

4.32 



 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

173,108 

 

 

172,771 

 

 

173,057 

 

 

172,641 

Diluted weighted average common shares outstanding

 

173,848 

 

 

173,529 

 

 

173,899 

 

 

173,428 



 

 

 

 

 

 

 

 

 

 

 















 

 

See accompanying notes.

2

 


 

PUBLIC STORAGE

STATEMENTS OF COMPREHENSIVE INCOME

 (Amounts in thousands)

(Unaudited)

 









 

 

 

 

 

 

 

 

 

 

 



Three Months Ended September 30,

 

Nine Months Ended September 30,



2016

 

2015

 

2016

 

2015



 

 

 

 

 

 

 

 

 

 

 

Net income

$

369,050 

 

$

341,136 

 

$

1,044,758 

 

$

952,430 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

Aggregate foreign currency exchange loss

(8,341)

 

 

(5,914)

 

 

(20,165)

 

 

(19,281)

Adjust for aggregate foreign currency exchange

 

 

 

 

 

 

 

 

 

 

gain in equity in earnings of unconsolidated

 

 

 

 

 

 

 

 

 

 

 

real estate entities

 

 -

 

 

 -

 

 

(941)

 

 

 -

Adjust for aggregate foreign currency exchange

 

 

 

 

 

 

 

 

 

 

loss included in net income

 

3,665 

 

 

 -

 

 

5,987 

 

 

 -

Other comprehensive loss

 

(4,676)

 

 

(5,914)

 

 

(15,119)

 

 

(19,281)

Total comprehensive income

 

364,374 

 

 

335,222 

 

 

1,029,639 

 

 

933,149 

Allocation to noncontrolling interests

 

(1,745)

 

 

(1,568)

 

 

(4,921)

 

 

(4,676)

Comprehensive income allocable to

 

 

 

 

 

 

 

 

 

 

 

Public Storage shareholders

$

362,629 

 

$

333,654 

 

$

1,024,718 

 

$

928,473 









 

 

See accompanying notes.

3

 


 

PUBLIC STORAGE

STATEMENTS OF EQUITY

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Total

 

 

 

 

 

 

 

Cumulative

 

 

 

 

 

 

 

 

 

 

Other

 

Public Storage

 

 

 

 

 

 

Preferred

 

Common

 

Paid-in

 

Accumulated

 

Comprehensive

 

Shareholders’

 

Noncontrolling

 

Total

 

Shares

 

Shares

 

Capital

 

Deficit

 

Loss

 

Equity

 

Interests

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2015

$

4,055,000 

 

$

17,293 

 

$

5,601,506 

 

$

(434,610)

 

$

(68,548)

 

$

9,170,641 

 

$

26,997 

 

$

9,197,638 

Cumulative effect of a change in accounting

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

principle (Note 9)

 

 -

 

 

 -

 

 

789 

 

 

(789)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Balances at December 31, 2015, as adjusted

 

4,055,000 

 

 

17,293 

 

 

5,602,295 

 

 

(435,399)

 

 

(68,548)

 

 

9,170,641 

 

 

26,997 

 

 

9,197,638 

Issuance of 33,000 preferred shares (Note 7)

 

825,000 

 

 

 -

 

 

(26,872)

 

 

 -

 

 

 -

 

 

798,128 

 

 

 -

 

 

798,128 

Redemption of 34,500 preferred shares (Note 7)

 

(862,500)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(862,500)

 

 

 -

 

 

(862,500)

Issuance of common shares in connection with

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

share-based compensation (216,183 shares)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Note 9)

 

 -

 

 

21 

 

 

14,170 

 

 

 -

 

 

 -

 

 

14,191 

 

 

 -

 

 

14,191 

Cash paid in lieu of common shares, net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

share-based compensation expense (Note 9)

 

 -

 

 

 -

 

 

13,241 

 

 

 -

 

 

 -

 

 

13,241 

 

 

 -

 

 

13,241 

Contributions by noncontrolling interests

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

3,177 

 

 

3,177 

Net income

 

 -

 

 

 -

 

 

 -

 

 

1,044,758 

 

 

 -

 

 

1,044,758 

 

 

 -

 

 

1,044,758 

Net income allocated to noncontrolling interests

 -

 

 

 -

 

 

 -

 

 

(4,921)

 

 

 -

 

 

(4,921)

 

 

4,921 

 

 

 -

Distributions to equity holders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred shares (Note 7)

 

 -

 

 

 -

 

 

 -

 

 

(178,666)

 

 

 -

 

 

(178,666)

 

 

 -

 

 

(178,666)

Noncontrolling interests

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(5,608)

 

 

(5,608)

Common shares and restricted share units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($5.30 per share)

 

 -

 

 

 -

 

 

 -

 

 

(920,097)

 

 

 -

 

 

(920,097)

 

 

 -

 

 

(920,097)

Other comprehensive loss (Note 2)

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(15,119)

 

 

(15,119)

 

 

 -

 

 

(15,119)

Balances at September 30, 2016

$

4,017,500 

 

$

17,314 

 

$

5,602,834 

 

$

(494,325)

 

$

(83,667)

 

$

9,059,656 

 

$

29,487 

 

$

9,089,143 







 

 

See accompanying notes.

4

 


 

PUBLIC STORAGE

STATEMENTS OF CASH FLOWS

 (Amounts in thousands)

(Unaudited)

 









 

 

 

 

 



Nine Months Ended September 30,



2016

 

2015

Cash flows from operating activities:

 

 

 

 

 

Net income

$

1,044,758 

 

$

952,430 

Adjustments to reconcile net income to net cash provided

 

 

 

 

 

by operating activities:

 

 

 

 

 

Gain on real estate investment sales

 

(689)

 

 

(18,503)

Depreciation and amortization

 

321,573 

 

 

319,701 

Equity in earnings of unconsolidated real estate entities

 

(41,628)

 

 

(36,267)

Distributions from retained earnings of unconsolidated

 

 

 

 

 

real estate entities

 

72,461 

 

 

26,050 

Foreign currency exchange loss

 

5,987 

 

 

 -

Other

 

77,578 

 

 

68,403 

Total adjustments

 

435,282 

 

 

359,384 

Net cash provided by operating activities

 

1,480,040 

 

 

1,311,814 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures to maintain real estate facilities 

 

(62,032)

 

 

(52,939)

Construction in process

 

(190,412)

 

 

(159,527)

Acquisition of real estate facilities and intangible assets

(257,650)

 

 

(104,915)

Distributions in excess of retained earnings from

 

 

 

 

 

unconsolidated real estate entities

 

67,420 

 

 

 -

Proceeds from sale of real estate investments

 

998 

 

 

15,013 

Other

 

(13,883)

 

 

16,282 

Net cash used in investing activities

 

(455,559)

 

 

(286,086)

Cash flows from financing activities:

 

 

 

 

 

Repayments on notes payable

 

(19,995)

 

 

(16,741)

Issuance of senior unsecured notes

 

113,620 

 

 

 -

Issuance of preferred shares

 

798,128 

 

 

 -

Issuance of common shares

 

14,191 

 

 

25,914 

Redemption of preferred shares

 

(862,500)

 

 

(145,000)

Cash paid upon vesting of restricted share units (Note 9)

 

(13,604)

 

 

(13,745)

Acquisition of noncontrolling interests

 

 -

 

 

(5,443)

Contributions by noncontrolling interests

 

3,177 

 

 

984 

Distributions paid to Public Storage shareholders

 

(1,098,763)

 

 

(1,017,326)

Distributions paid to noncontrolling interests

 

(5,608)

 

 

(5,487)

Net cash used in financing activities

 

(1,071,354)

 

 

(1,176,844)

Net decrease in cash and cash equivalents

 

(46,873)

 

 

(151,116)

Net effect of foreign exchange translation on cash and cash equivalents

 

(199)

 

 

(928)

Cash and cash equivalents at the beginning of the period

 

104,285 

 

 

187,712 

Cash and cash equivalents at the end of the period

$

57,213 

 

$

35,668 

 

See accompanying notes.

5

 


 

PUBLIC STORAGE

STATEMENTS OF CASH FLOWS

 (Amounts in thousands)

(Unaudited)

 





 

 

 

 

 



 

 

 

 

 



Nine Months Ended September 30,



2016

 

2015

Supplemental schedule of non-cash investing and

 

 

 

 

 

financing activities:

 

 

 

 

 



 

 

 

 

 

Foreign currency translation adjustment:

 

 

 

 

 

Real estate facilities, net of accumulated depreciation

$

1,014 

 

$

691 

Investments in unconsolidated real estate entities

 

13,074 

 

 

17,662 

Senior unsecured notes

 

5,878 

 

 

 -

Accumulated other comprehensive loss

 

(20,165)

 

 

(19,281)



 

 

 

 

 

Preferred shares called for redemption and reclassified to liabilities

 

 -

 

 

125,000 

Preferred shares called for redemption and reclassified from equity

 

 -

 

 

(125,000)



 

 

 

 

 

Real estate acquired in exchange for assumption of notes payable

(12,945)

 

 

(8,624)

Notes payable assumed in connection with acquisition of real estate

 

12,945 

 

 

8,624 



 

 

 

 

 

Accrued construction costs and capital expenditures:

 

 

 

 

 

Capital expenditures to maintain real estate facilities 

 

(5,747)

 

 

64 

Construction in process

 

(13,679)

 

 

(316)

Accrued and other liabilities

 

19,426 

 

 

252 





 

 

See accompanying notes.

6

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

 

1.Description of the Business

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

At September 30, 2016, we have direct and indirect equity interests in 2,319 self-storage facilities (with approximately 152 million net rentable square feet) located in 38 states in the United States (“U.S.”) operating under the “Public Storage” name.  We also own one self-storage facility in London, England and we have a 49% interest in Shurgard Europe, which owns 217 self-storage facilities (with approximately 12 million net rentable square feet) located in seven Western European countries, all operating under the “Shurgard” name.  We also have direct and indirect equity interests in approximately 29 million net rentable square feet of commercial space located in nine states in the U.S. primarily owned and operated by PS Business Parks, Inc. (“PSB”) under the “PS Business Parks” name.  At September 30, 2016, we have an approximate 42% common equity interest in PSB.

Disclosures of the number and square footage of facilities, as well as the number and coverage of tenant reinsurance policies (Note 11) are unaudited and outside the scope of our independent registered public accounting firm’s review of our financial statements in accordance with the standards of the Public Company Accounting Oversight Board (U.S.).

2.Summary of Significant Accounting Policies

Basis of Presentation

We have prepared the accompanying interim financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) as set forth in the Accounting Standards Codification (the “Codification”) of the Financial Accounting Standards Board (“FASB"), and in conformity with the rules and regulations of the Securities and Exchange Commission (“SEC”).  In our opinion, the interim financial statements presented herein reflect all adjustments, of a normal recurring nature, that are necessary to fairly present the interim financial statements.  Because they do not include all of the disclosures required by GAAP for complete annual financial statements, these interim financial statements should be read together with the audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

On our statement of cash flows for the nine months ended September 30, 2015, we reclassified the $13.7 million we paid for the restricted share units that we withheld upon their vesting for employee tax requirements from a reduction in cash flows from operating activities to a reduction in cash flows from financing activities.  This reclassification was in connection with a recently issued accounting pronouncement related to employee share-based payment accounting we early adopted effective January 1, 2016 (see “Recent Accounting Pronouncements and Guidance” below).

Consolidation and Equity Method of Accounting

We consider entities to be Variable Interest Entities (“VIEs”) when they have insufficient equity to finance their activities without additional subordinated financial support provided by other parties, or the equity holders as a group do not have a controlling financial interest.  We consolidate VIEs when we have (i) the power to direct the activities most significantly impacting economic performance, and (ii) either the obligation

7


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

 

to absorb losses or the right to receive benefits from the VIE.  We have no involvement with any material VIEs.  We consolidate all other entities when we control them through voting shares or contractual rights.  The entities we consolidate, for the period in which the reference applies, are referred to collectively as the “Subsidiaries”, and we eliminate intercompany transactions and balances. 

We account for our investments in entities that we do not consolidate but have significant influence over using the equity method of accounting.  These entities, for the periods in which the reference applies, are referred to collectively as the “Unconsolidated Real Estate Entities”, eliminating intra-entity profits and losses and amortizing any differences between the cost of our investment and the underlying equity in net assets against equity in earnings as if the Unconsolidated Real Estate Entity were a consolidated subsidiary. 

When we begin consolidating an entity, we record a gain representing the differential between the book value and fair value of any preexisting equity interest.  All changes in consolidation status are reflected prospectively.

Collectively, at September 30, 2016, the Company and the Subsidiaries own 2,307 self-storage facilities in the U.S., one self-storage facility in London, England and three commercial facilities in the U.S.  At September 30, 2016, the Unconsolidated Real Estate Entities are comprised of PSB, Shurgard Europe, as well as limited partnerships that own an aggregate of 12 self-storage facilities in the U.S.

Use of Estimates

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

Income Taxes

We have elected to be treated as a REIT, as defined in the Internal Revenue Code of 1986, as amended (the “Code”).  As a REIT, we do not incur federal income tax if we distribute 100% of our REIT taxable income each year, 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 merchandise and tenant reinsurance operations are subject to corporate income tax and such taxes are included in ancillary cost of operations.  We also incur income and other taxes in certain states, which are included in general and administrative expense. 

We recognize tax benefits of uncertain income tax positions that are subject to audit only if we believe it is more likely than not that the position would ultimately be sustained assuming the relevant taxing authorities had full knowledge of the relevant facts and circumstances of our positions.  As of September 30, 2016, we had no tax benefits that were not recognized.

Real Estate Facilities

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

8


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

 

We allocate the net acquisition cost of acquired operating self-storage facilities to the underlying land, buildings, identified intangible assets, and any noncontrolling interests that remain outstanding based upon their respective individual estimated fair values.  Any difference between the net acquisition cost and the estimated fair value of the net tangible and intangible assets acquired is recorded as goodwill. 

Other Assets

Other assets primarily consist of rents receivable from our tenants, prepaid expenses and restricted cash.

Accrued and Other Liabilities

Accrued and other liabilities consist primarily of rents prepaid by our tenants, trade payables, property tax accruals, accrued payroll, accrued tenant reinsurance losses, and contingent loss accruals when probable and estimable.  We believe the fair value of our accrued and other liabilities approximates book value, due to the short period until repayment.  We disclose the nature of significant unaccrued losses that are reasonably possible of occurring and, if estimable, a range of exposure.

Cash Equivalents, Marketable Securities and Other Financial Instruments

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

Transfers of financial assets are recorded as sales when the asset is put presumptively beyond our and our creditors’ reach, there is no impediment to the transferee’s right to pledge or exchange the asset, we have surrendered effective control of the asset, we have no actual or effective right or requirement to repurchase the asset and, in the case of a transfer of a participating interest, there is no impediment to our right to pledge or exchange the participating interest we retain.

Fair Value

As used herein, the term “fair value” is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  Our estimates of fair value involve considerable judgment and are not necessarily indicative of the amounts that could be realized in current market exchanges.

We estimate the fair value of our cash and cash equivalents, marketable securities, other assets, debt, and other liabilities by applying a discount rate to the future cash flows of the financial instrument.  The discount rate is based upon quoted interest rates for securities that have similar characteristics such as credit quality and time to maturity; such quoted interest rates are referred to generally as “Level 2” inputs. 

Currency and Credit Risk

Financial instruments that are exposed to credit risk consist primarily of cash and cash equivalents, certain portions of other assets including rents receivable from our tenants and restricted cash.  Cash equivalents

9


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

 

we invest in are either money market funds with a rating of at least AAA by Standard and Poor’s, commercial paper that is  rated A1 by Standard and Poor’s or deposits with highly rated commercial banks.

At September 30, 2016, due primarily to our investment in Shurgard Europe (Note 4) and our senior unsecured notes denominated in Euros (Note 5), our operating results and financial position are affected by fluctuations in currency exchange rates between the Euro, and to a lesser extent, other European currencies, against the U.S. Dollar. 

Goodwill and Other Intangible Assets

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

Goodwill totaled $174.6 million at September 30, 2016 and December 31, 2015.  The “Shurgard” trade name, which is used by Shurgard Europe pursuant to a fee-based licensing agreement, has a book value of $18.8 million at September 30, 2016 and December 31, 2015.  Goodwill and the “Shurgard” trade name have indefinite lives and are not amortized.

Acquired customers in place and leasehold interests in land are finite-lived and are amortized relative to the benefit of the customers in place or the benefit to land lease expense to each period.  At September 30, 2016, these intangibles had a net book value of $19.1 million ($18.0 million at December 31, 2015).  Accumulated amortization totaled $51.6 million at September 30, 2016 ($66.4 million at December 31, 2015), and amortization expense of $15.8 million and $21.3 million was recorded in the nine months ended September 30, 2016 and 2015, respectively.  The estimated future amortization expense for our finite-lived intangible assets at September 30, 2016 is approximately $4.2 million in the remainder of 2016, $7.6 million in 2017 and $7.3 million thereafter.  During the nine months ended September 30, 2016, intangibles were increased $16.9 million in connection with the acquisition of self-storage facilities (Note 3). 

Evaluation of Asset Impairment

We evaluate our real estate and finite-lived intangible assets for impairment each quarter.  If there are indicators of impairment and we determine that the asset is not recoverable from future undiscounted cash flows to be received through the asset’s remaining life (or, if earlier, the expected disposal date), we record an impairment charge to the extent the carrying amount exceeds the asset’s estimated fair value or net proceeds from expected disposal. 

We evaluate our investments in unconsolidated real estate entities for impairment on a quarterly basis.  We record an impairment charge to the extent the carrying amount exceeds estimated fair value, when we believe any such shortfall is other than temporary.  

We evaluate goodwill for impairment annually and whenever relevant events, circumstances and other related factors indicate that fair value of the related reporting unit may be less than the carrying amount.  If we determine that the fair value of the reporting unit exceeds the aggregate carrying amount, no impairment charge is recorded.  Otherwise, we record an impairment charge to the extent the carrying amount of the goodwill exceeds the amount that would be allocated to goodwill if the reporting unit were acquired for estimated fair value. 

We evaluate the “Shurgard” trade name for impairment at least annually and whenever relevant events, circumstances and other related factors indicate that the fair value is less than the carrying amount.  When we conclude that it is likely that the asset is not impaired, we do not record an impairment charge and no further

10


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

 

analysis is performed.  Otherwise, we record an impairment charge to the extent the carrying amount exceeds the asset’s estimated fair value. 

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

Revenue and Expense Recognition

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

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

Foreign Currency Exchange Translation

The local currency (primarily the Euro) is the functional currency for our interests in foreign operations.  The related balance sheet amounts are translated into U.S. Dollars at the exchange rates at the respective financial statement date, while amounts on our statements of income are translated at the average exchange rates during the respective period.  When financial instruments denominated in a currency other than the U.S. Dollar are expected to be settled in cash in the foreseeable future, the impact of changes in the U.S. Dollar equivalent are reflected in current earnings.  The Euro was translated at exchange rates of approximately 1.121 U.S. Dollars per Euro at September 30, 2016 (1.091 at December 31, 2015), and average exchange rates of 1.116 and 1.112 for the three months ended September 30, 2016 and 2015, respectively, and average exchange rates of 1.116 and 1.115 for the nine months ended September 30, 2016 and 2015, respectively.  Cumulative translation adjustments, to the extent not included in cumulative net income, are included in equity as a component of accumulated other comprehensive income (loss).

Comprehensive Income

Total comprehensive income represents net income, adjusted for changes in other comprehensive income (loss) for the applicable period.  The aggregate foreign currency exchange gains and losses reflected on our statements of comprehensive income are primarily related to our investment in Shurgard Europe and our senior unsecured notes denominated in Euros.

Recent Accounting Pronouncements and Guidance

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which requires revenue to be based upon the consideration expected from customers for promised goods or services.  The new standard, effective on January 1, 2018, permits either the retrospective or cumulative effects transition method and allows for early adoption on January 1, 2017.  We do not believe this standard will have a material impact on our results of operations or financial condition, primarily because most of our revenue is from rental revenue, which this standard does not cover and because we do not provide any material associated services to our tenants.

11


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

 

In August, 2014, the FASB issued new accounting guidance, which is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern for a period of one year after the date that the financial statements are issued.  This guidance is effective for annual periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016.  Early adoption is permitted.  The Company anticipates no impact upon adoption of the new accounting guidance on its consolidated financial statements.



In February 2015, the FASB issued ASU 2015-02, Consolidation – Amendments to the Consolidation Analysis, which modifies (i) the criteria for and the analysis of the identification of consolidation of variable interest entities, particularly when fee arrangements and related party relationships are involved, and (ii) the consolidation analysis for partnerships.  We adopted this standard effective January 1, 2016, which did not change the consolidation status of any entities in which we have an interest; however, certain entities began to be considered VIE’s as a result of the change. 

In February 2016, the FASB issued ASU 2016-02, Leases, which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting.  The new standard, effective on January 1, 2019, requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief and allows for early adoption on January 1, 2016.   We do not believe this standard will have a material impact on our results of operations or financial condition, because substantially all of our lease revenues are derived from month-to-month self-storage leases, and we do not have material amounts of lease expense.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting.  We early adopted this standard effective January 1, 2016.  Under this standard, a share-based compensation-related tax liability paid on behalf of employees in lieu of shares received is classified as a financing activity on the statement of cash flows, rather than as an operating activity as we had previously presented such amounts.  We applied this provision retrospectively.  The standard also allows a company to choose, with respect to recording share-based expense, between (i) recognizing forfeitures only as they occur or (ii) estimating future forfeitures in advance.  We chose to recognize forfeitures only as they occur, rather than estimating in advance, accordingly, effective January 1, 2016, under the modified retrospective transition method as required by the standard, we recorded a cumulative-effect adjustment of $789,000 to increase accumulated deficit and increase paid-in capital for the impact of estimated future forfeitures after December 31, 2015 (Note 9).

Net Income per Common Share

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

Basic and diluted per common share are each calculated based upon net income allocable to common shareholders presented on the face of our income statement, divided by (i) in the case of basic net income per common share, weighted average common shares, and (ii) in the case of diluted income per share, weighted average common shares adjusted for the impact, if dilutive, of stock options outstanding (Note 9).  The following table reconciles from basic to diluted common shares outstanding:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

12


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

 



 

Three Months Ended September 30,

 

Nine Months Ended September 30,



 

2016

 

2015

 

2016

 

2015



 

(Amounts in thousands)



 

 

 

 

 

 

 

 

 

 

 

 



Weighted average common shares and equivalents

 

 

 

 

 

 

 

 

 

 

 



outstanding:

 

 

 

 

 

 

 

 

 

 

 



Basic weighted average common

 

 

 

 

 

 

 

 

 

 

 



shares outstanding

 

173,108 

 

 

172,771 

 

 

173,057 

 

 

172,641 



Net effect of dilutive stock options -

 

 

 

 

 

 

 

 

 

 

 



based on treasury stock method

 

740 

 

 

758 

 

 

842 

 

 

787 



Diluted weighted average common

 

 

 

 

 

 

 

 

 

 

 



shares outstanding

 

173,848 

 

 

173,529 

 

 

173,899 

 

 

173,428 





3.Real Estate Facilities

Activity in real estate facilities during the nine months ended September 30, 2016 is as follows:  







 

 

 



 

 



 

Nine Months Ended



 

September 30, 2016



 

(Amounts in thousands)



Operating facilities, at cost:

 

 



Beginning balance

$

13,205,261 



Capital expenditures to maintain real estate facilities

67,779 



Acquisitions

 

253,661 



Newly developed facilities opened for operation

 

161,909 



Impact of foreign exchange rate changes

 

(2,369)



Ending balance

 

13,686,241 



Accumulated depreciation:

 

 



Beginning balance

 

(4,866,738)



Depreciation expense

 

(301,498)



Impact of foreign exchange rate changes

 

1,355 



Ending balance

 

(5,166,881)



Construction in process:

 

 



Beginning balance

 

219,190 



Current development

 

204,091 



Newly developed facilities opened for operation

 

(161,909)



Ending balance

 

261,372 



Total real estate facilities at September 30, 2016

$

8,780,732 

During the nine months ended September 30, 2016, we acquired 32 self-storage facilities (2,329,000 net rentable square feet), for a total cost of $270.6 million, consisting of $257.7 million in cash and the assumption of $12.9 million in mortgage debt.  Approximately $16.9 million of the total cost was allocated to intangible assets.  We completed development and redevelopment activities during the nine months ended September 30, 2016, adding 1,432,000 net rentable square feet of self-storage space, at an aggregate cost of $161.9 million.  Construction in process at September 30, 2016 consists of projects to develop new self-storage

13


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

 

facilities and redevelop existing self-storage facilities, which would add a total of 5.3 million net rentable square feet of storage space, for an aggregate estimated cost of approximately $688.2 million.  

4.Investments in Unconsolidated Real Estate Entities

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



 

 

 

 

 

 



 

Investments in Unconsolidated Real Estate Entities at



 

September 30, 2016

 

December 31, 2015



 



PSB

$

407,224 

 

$

414,450 



Shurgard Europe

 

283,329 

 

 

388,367 



Other Investments (a)

 

6,487 

 

 

6,491 



Total

$

697,040 

 

$

809,308 







 

 

 

 

 

 

 

 

 

 

 

 



 

Equity in Earnings of Unconsolidated Real Estate Entities for the



 

Three Months Ended September 30,

 

Nine Months Ended September 30,



 

2016

 

2015

 

2016

 

2015



 

 

 

 

 

 

 



PSB

$

10,118 

 

$

10,323 

 

$

25,318 

 

$

25,734 



Shurgard Europe

 

6,362 

 

 

1,616 

 

 

14,304 

 

 

8,707 



Other Investments (a)

 

757 

 

 

664 

 

 

2,006 

 

 

1,826 



Total

$

17,237 

 

$

12,603 

 

$

41,628 

 

$

36,267 



(a)

At September 30, 2016 and December 31, 2015, the “Other Investments” include an average 26% common equity ownership in limited partnerships that collectively own 12 self-storage facilities.  In the nine months ended September 30, 2016, we sold one of the Other Investments resulting in a $689,000 gain on real estate investment sales on our income statement.  In the nine months ended September 30, 2016, the Other Investments had $11.8 million in self-storage revenues, $3.5 million in self-storage operating expenses, $396,000 in depreciation expense, and $50,000 in general and administrative and other expenses (amounts represent 100% of the operations of these entities, not our pro rata share).

During the nine months ended September 30, 2016 and 2015, we received cash distributions from our investments in the Unconsolidated Real Estate Entities totaling $139.9 million and $26.1 million, respectively.  For the nine months ended September 30, 2016, $67.4 million of the distributions received exceeded the retained earnings of the Unconsolidated Real Estate Entities and are presented as an investing activity on our statement of cash flows.  At September 30, 2016, the cost of our investment in the Unconsolidated Real Estate Entities exceeds our pro rata share of the underlying equity by approximately $57.0 million ($62.0 million at December 31, 2015).  This differential is being amortized as a reduction in equity in earnings of the Unconsolidated Real Estate Entities based upon allocations to the underlying net assets.  Such amortization was approximately $1.3 million and $2.8 million during the nine months ended September 30, 2016 and 2015, respectively.  

14


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

 

Investment in PSB

PSB is a REIT traded on the New York Stock Exchange.  We have an approximate 42% common equity interest in PSB as of September 30, 2016 and December 31, 2015, comprised of our ownership of 7,158,354 shares of PSB’s common stock and 7,305,355 limited partnership units (“LP Units”) in an operating partnership controlled by PSB.  The LP Units are convertible at our option, subject to certain conditions, on a one-for-one basis into PSB common stock.  Based upon the closing price at September 30, 2016 ($113.57 per share of PSB common stock), the shares and units we owned had a market value of approximately $1.6 billion

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





 

 

 

 

 



September 30,

 

December 31,



2016

 

2015



(Amounts in thousands)



 

 

 

 

 

Total assets (primarily real estate)

$

1,999,784 

 

$

2,186,658 

Debt

 

60,000 

 

 

250,000 

Other liabilities

 

83,093 

 

 

76,059 

Equity:

 

 

 

 

 

Preferred stock

 

920,000 

 

 

920,000 

Common equity and LP units

 

936,691 

 

 

940,599 







 

 

 

 

 



2016

 

2015



(Amounts in thousands)

For the nine months ended September 30,

 

 

 

 

 

Total revenue

$

289,661 

 

$

278,995 

Costs of operations

 

(92,440)

 

 

(92,251)

Depreciation and amortization

 

(74,886)

 

 

(79,243)

General and administrative

 

(11,982)

 

 

(10,172)

Other items

 

(4,956)

 

 

(9,623)

Gain on sale of facilities

 

 -

 

 

28,235 

Net income

 

105,397 

 

 

115,941 

Allocations to preferred shareholders and

 

 

 

 

 

restricted share unitholders

 

(41,885)

 

 

(48,090)

Net income allocated to common shareholders

 

 

 

 

 

and LP Unitholders

$

63,512 

 

$

67,851 



 

 

 

 

 





Investment in Shurgard Europe

For all periods presented, we had a 49% equity investment in Shurgard Europe and our joint venture partner owns the remaining 51% interest.  Our equity in earnings of Shurgard Europe is comprised of our 49% share of Shurgard Europe’s net income, plus 49% of the trademark license fees that Shurgard Europe pays to us for the use of the “Shurgard” trademark.  The remaining 51% of the license fees paid to us are classified as interest and other income on our income statement.

Changes in foreign currency exchange rates caused our investment in Shurgard Europe to decrease by approximately $13.1 million and $17.7 million in the nine months ended September 30, 2016 and 2015, respectively.  Included in our equity in earnings of Shurgard Europe for the nine months ended September 30,

15


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

 

2016, is an increase of $941,000 for the recognition of accumulated comprehensive income, representing a decrease to equity rather than an increase to investments in unconsolidated real estate entities.

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





 

 

 

 

 

 



September 30,

 

December 31,

 



2016

 

2015

 



 

(Amounts in thousands)

 



 

 

 

 

 

 

Total assets (primarily self-storage facilities)

$

1,344,034 

 

$

1,476,632 

 

Total debt to third parties

 

722,030 

 

 

662,336 

 

Other liabilities

 

130,158 

 

 

110,522 

 

Equity

 

491,846