10-Q 1 psa-20180930x10q.htm 10-Q psa-20180930 10Q

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, 2018

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 every Interactive Data File required to be submitted 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 such files).

[X]  Yes  [   ]  No

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



 

 

 

 

Large accelerated
filer

Accelerated
filer

Non-accelerated
filer

Smaller reporting company

Emerging growth company

[X]

[   ]

[   ]

[   ]

[   ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [   ]

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 29, 2018:

Common Shares of beneficial interest, $.10 par value per share – 174,364,490 shares

 

 


 

PUBLIC STORAGE



INDEX







 

 

PART I

FINANCIAL INFORMATION

Pages



 

 

Item 1.

Financial Statements (Unaudited)

 



 

 



Balance Sheets at September 30, 2018 and December 31, 2017



 

 



Statements of Income for the Three and Nine Months Ended
September 30, 2018 and 2017



 

 



Statements of Comprehensive Income for the Three and Nine Months Ended
September 30, 2018 and 2017



 

 



Statement of Equity for the Nine Months Ended September 30, 2018



 

 



Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017

5-6 



 

 



Condensed Notes to Financial Statements

7-29 



 

 

Item 2.

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

30-56 



 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

57 



 

 

Item 4.

Controls and Procedures

57 



 

 

PART II

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

 



 

 

Item 1.

Legal Proceedings

58 



 

 

Item 1A.

Risk Factors

58 



 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

58 



 

 

Item 6.

Exhibits

59 



 

 



 



 

 

 


 

 

PUBLIC STORAGE

BALANCE SHEETS

(Amounts in thousands, except share data)





 

 

 

 

 



September 30,

 

December 31,



2018

 

2017

ASSETS

 

(Unaudited)

 

 

 



 

 

 

 

 

Cash and equivalents

$

432,525 

 

$

433,376 

Real estate facilities, at cost:

 

 

 

 

 

Land

 

4,027,764 

 

 

3,947,123 

Buildings

 

11,108,129 

 

 

10,718,866 



 

15,135,893 

 

 

14,665,989 

Accumulated depreciation

 

(6,041,262)

 

 

(5,700,331)



 

9,094,631 

 

 

8,965,658 

Construction in process

 

253,719 

 

 

264,441 



 

9,348,350 

 

 

9,230,099 



 

 

 

 

 

Investments in unconsolidated real estate entities

 

619,405 

 

 

724,173 

Goodwill and other intangible assets, net

 

209,317 

 

 

214,957 

Other assets

 

138,343 

 

 

130,287 

Total assets

$

10,747,940 

 

$

10,732,892 



 

 

 

 

 



 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 



 

 

 

 

 

Notes payable

$

1,417,945 

 

$

1,431,322 

Accrued and other liabilities

 

409,973 

 

 

337,201 

    Total liabilities

 

1,827,918 

 

 

1,768,523 



 

 

 

 

 

Commitments and contingencies (Note 12)

 

 

 

 

 



 

 

 

 

 

Equity:

 

 

 

 

 

Public Storage shareholders’ equity:

 

 

 

 

 

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

 

 

 

 

 

161,000 shares issued (in series) and outstanding, (161,000 at

 

 

 

 

 

December 31, 2017), at liquidation preference

 

4,025,000 

 

 

4,025,000 

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

 

 

 

 

 

174,059,645 shares issued and outstanding  (173,853,370 shares at

 

 

 

 

 

December 31, 2017)

 

17,406 

 

 

17,385 

Paid-in capital

 

5,697,308 

 

 

5,648,399 

Accumulated deficit

 

(760,284)

 

 

(675,711)

Accumulated other comprehensive loss

 

(84,339)

 

 

(75,064)

Total Public Storage shareholders’ equity

 

8,895,091 

 

 

8,940,009 

Noncontrolling interests

 

24,931 

 

 

24,360 

  Total equity

 

8,920,022 

 

 

8,964,369 

Total liabilities and equity

$

10,747,940 

 

$

10,732,892 

 

 

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,



2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Self-storage facilities

$

666,616 

 

$

646,238 

 

$

1,943,359 

 

$

1,878,215 

Ancillary operations

 

39,752 

 

 

40,123 

 

 

118,461 

 

 

118,005 



 

706,368 

 

 

686,361 

 

 

2,061,820 

 

 

1,996,220 



 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

Self-storage cost of operations

 

183,637 

 

 

173,315 

 

 

545,700 

 

 

516,488 

Ancillary cost of operations

 

11,907 

 

 

17,304 

 

 

33,648 

 

 

39,611 

Depreciation and amortization

 

124,516 

 

 

113,320 

 

 

362,272 

 

 

334,426 

General and administrative

 

27,429 

 

 

22,311 

 

 

90,278 

 

 

62,331 



 

347,489 

 

 

326,250 

 

 

1,031,898 

 

 

952,856 



 

 

 

 

 

 

 

 

 

 

 

Operating income

 

358,879 

 

 

360,111 

 

 

1,029,922 

 

 

1,043,364 

Interest and other income

 

7,020 

 

 

4,569 

 

 

18,892 

 

 

12,722 

Interest expense

 

(8,094)

 

 

(2,389)

 

 

(24,589)

 

 

(4,553)

Equity in earnings of unconsolidated real estate entities

 

17,771 

 

 

17,218 

 

 

90,529 

 

 

57,235 

Foreign currency exchange gain (loss)

 

2,612 

 

 

(13,446)

 

 

12,738 

 

 

(44,452)

Casualty loss

 

 -

 

 

(7,789)

 

 

 -

 

 

(7,789)

Gain on sale of real estate

 

1,401 

 

 

 -

 

 

1,825 

 

 

975 

Net income

 

379,589 

 

 

358,274 

 

 

1,129,317 

 

 

1,057,502 

Allocation to noncontrolling interests

 

(1,562)

 

 

(1,600)

 

 

(4,491)

 

 

(4,684)

Net income allocable to Public Storage shareholders

 

378,027 

 

 

356,674 

 

 

1,124,826 

 

 

1,052,818 

Allocation of net income to:

 

 

 

 

 

 

 

 

 

 

 

Preferred shareholders - distributions

 

(54,080)

 

 

(61,055)

 

 

(162,238)

 

 

(182,457)

Preferred shareholders - redemptions (Note 8)

 

 -

 

 

(14,692)

 

 

 -

 

 

(29,330)

Restricted share units 

 

(1,268)

 

 

(1,210)

 

 

(3,790)

 

 

(3,502)

Net income allocable to common shareholders

$

322,679 

 

$

279,717 

 

$

958,798 

 

$

837,529 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

1.85 

 

$

1.61 

 

$

5.51 

 

$

4.83 

Diluted

$

1.85 

 

$

1.61 

 

$

5.50 

 

$

4.81 



 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

173,975 

 

 

173,715 

 

 

173,933 

 

 

173,560 

Diluted weighted average common shares outstanding

 

174,348 

 

 

174,240 

 

 

174,240 

 

 

174,128 



 

 

 

 

 

 

 

 

 

 

 



 

 

See accompanying notes.

2

 


 

 

PUBLIC STORAGE

STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)





 

 

 

 

 

 

 

 

 

 

 



Three Months Ended September 30,

 

Nine Months Ended September 30,



2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

 

 

 

 

 

Net income

$

379,589 

 

$

358,274 

 

$

1,129,317 

 

$

1,057,502 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Aggregate foreign currency exchange gain (loss)

2,874 

 

 

(6,176)

 

 

3,463 

 

 

(24,219)

Adjust for aggregate foreign currency exchange

 

 

 

 

 

 

 

 

 

 

(gain) loss included in net income

 

(2,612)

 

 

13,446 

 

 

(12,738)

 

 

44,452 

Other comprehensive income (loss):

 

262 

 

 

7,270 

 

 

(9,275)

 

 

20,233 

Total comprehensive income

 

379,851 

 

 

365,544 

 

 

1,120,042 

 

 

1,077,735 

Allocation to noncontrolling interests

 

(1,562)

 

 

(1,600)

 

 

(4,491)

 

 

(4,684)

Comprehensive income allocable to

 

 

 

 

 

 

 

 

 

 

 

Public Storage shareholders

$

378,289 

 

$

363,944 

 

$

1,115,551 

 

$

1,073,051 



 



 

 

See accompanying notes.

3

 


 

 

 PUBLIC STORAGE

STATEMENT OF EQUITY

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

(Unaudited)





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Total

 

 

 

 

 

 



Cumulative

 

 

 

 

 

 

 

 

 

 

Other

 

Public Storage

 

 

 

 

 



Preferred

 

Common

 

Paid-in

 

Accumulated

 

Comprehensive

 

Shareholders’

 

Noncontrolling

 

Total



Shares

 

Shares

 

Capital

 

Deficit

 

Loss

 

Equity

 

Interests

 

Equity

Balances at December 31, 2017

$

4,025,000 

 

$

17,385 

 

$

5,648,399 

 

$

(675,711)

 

$

(75,064)

 

$

8,940,009 

 

$

24,360 

 

$

8,964,369 

Issuance of common shares in connection with

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

share-based compensation (206,275 shares) (Note 10)

 -

 

 

21 

 

 

7,922 

 

 

 -

 

 

 -

 

 

7,943 

 

 

 -

 

 

7,943 

Share-based compensation expense, net of cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

paid in lieu of common shares (Note 10)

 -

 

 

 -

 

 

40,987 

 

 

 -

 

 

 -

 

 

40,987 

 

 

 -

 

 

40,987 

Contributions by noncontrolling interests

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,342 

 

 

1,342 

Net income

 

 -

 

 

 -

 

 

 -

 

 

1,129,317 

 

 

 -

 

 

1,129,317 

 

 

 -

 

 

1,129,317 

Net income allocated to noncontrolling interests

 

 -

 

 

 -

 

 

 -

 

 

(4,491)

 

 

 -

 

 

(4,491)

 

 

4,491 

 

 

 -

Distributions to equity holders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred shares (Note 8)

 

 -

 

 

 -

 

 

 -

 

 

(162,238)

 

 

 -

 

 

(162,238)

 

 

 -

 

 

(162,238)

Noncontrolling interests

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(5,262)

 

 

(5,262)

Common shares and restricted share units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($6.00 per share)

 

 -

 

 

 -

 

 

 -

 

 

(1,047,161)

 

 

 -

 

 

(1,047,161)

 

 

 -

 

 

(1,047,161)

Other comprehensive loss (Note 2)

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(9,275)

 

 

(9,275)

 

 

 -

 

 

(9,275)

Balances at September 30, 2018

$

4,025,000 

 

$

17,406 

 

$

5,697,308 

 

$

(760,284)

 

$

(84,339)

 

$

8,895,091 

 

$

24,931 

 

$

8,920,022 



 



 

 

See accompanying notes.

4

 


 

 

PUBLIC STORAGE

STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)



 

 

 

 

 



Nine Months Ended September 30,



2018

 

2017

Cash flows from operating activities:

 

 

 

 

 

Net income

$

1,129,317 

 

$

1,057,502 

Adjustments to reconcile net income to net cash flows

 

 

 

 

 

from operating activities:

 

 

 

 

 

Gain on real estate investment sales

 

(1,825)

 

 

(975)

Assets damaged due to hurricanes

 

 -

 

 

3,286 

Depreciation and amortization

 

362,272 

 

 

334,426 

Equity in earnings of unconsolidated real estate entities

 

(90,529)

 

 

(57,235)

Distributions from retained earnings of unconsolidated

 

 

 

 

 

real estate entities

 

94,325 

 

 

39,887 

Foreign currency exchange (gain) loss

 

(12,738)

 

 

44,452 

Share-based compensation expense

 

51,836 

 

 

25,505 

Other

 

45,678 

 

 

55,671 

Total adjustments

 

449,019 

 

 

445,017 

Net cash flows from operating activities

 

1,578,336 

 

 

1,502,519 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures to maintain real estate facilities 

 

(92,530)

 

 

(84,797)

Construction in process

 

(256,592)

 

 

(240,482)

Acquisition of real estate facilities and intangible assets

(107,775)

 

 

(81,676)

Distributions in excess of retained earnings from

 

 

 

 

 

unconsolidated real estate entities

 

91,927 

 

 

 -

Proceeds from sale of real estate investments

 

3,390 

 

 

5,596 

Net cash flows from investing activities

 

(361,580)

 

 

(401,359)

Cash flows from financing activities:

 

 

 

 

 

Repayments on notes payable

 

(1,329)

 

 

(1,267)

Issuance of notes payable

 

 -

 

 

992,129 

Issuance of preferred shares

 

 -

 

 

561,177 

Issuance of common shares

 

7,943 

 

 

34,754 

Redemption of preferred shares

 

 -

 

 

(922,500)

Cash paid upon vesting of restricted share units

 

(10,849)

 

 

(12,409)

Acquisition of noncontrolling interests

 

 -

 

 

(14,425)

Contributions by noncontrolling interests

 

1,342 

 

 

1,066 

Distributions paid to Public Storage shareholders

 

(1,209,399)

 

 

(1,227,597)

Distributions paid to noncontrolling interests

 

(5,262)

 

 

(5,540)

Net cash flows from financing activities

 

(1,217,554)

 

 

(594,612)

Net cash flows from operating, investing, and financing activities

 

(798)

 

 

506,548 

Net effect of foreign exchange translation

 

(143)

 

 

(165)

(Decrease) increase in cash, equivalents, and restricted cash

$

(941)

 

$

506,383 

 

 

 

 

 

 



See accompanying notes.

5

 


 

 

PUBLIC STORAGE

STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)







 

 

 

 

 



 

 

 

 

 



Nine Months Ended September 30,



2018

 

2017



 

 

 

 

 

Cash, equivalents, and restricted cash at beginning of the period:

 

 

 

 

 

Cash and equivalents

$

433,376 

 

$

183,688 

Restricted cash included in other assets

 

22,677 

 

 

28,885 



$

456,053 

 

$

212,573 



 

 

 

 

 

Cash, equivalents, and restricted cash at end of the period:

 

 

 

 

 

Cash and equivalents

$

432,525 

 

$

694,233 

Restricted cash included in other assets

 

22,587 

 

 

24,723 



$

455,112 

 

$

718,956 



 

 

 

 

 

Supplemental schedule of non-cash investing and

 

 

 

 

 

financing activities:

 

 

 

 

 



 

 

 

 

 

Foreign currency translation adjustment:

 

 

 

 

 

Real estate facilities, net of accumulated depreciation

$

170 

 

$

(595)

Investments in unconsolidated real estate entities

 

9,045 

 

 

(19,613)

Notes payable

 

(12,821)

 

 

44,262 

Accumulated other comprehensive gain (loss)

 

3,463 

 

 

(24,219)



 

 

 

 

 

Accrued development costs and capital expenditures:

 

 

 

 

 

Capital expenditures to maintain real estate facilities 

 

(877)

 

 

2,272 

Construction in process

 

(10,819)

 

 

(10,527)

Accrued and other liabilities

 

11,696 

 

 

8,255 



 



 

See accompanying notes.

6

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(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, 2018, we have direct and indirect equity interests in 2,418 self-storage facilities (with approximately 161 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 Self Storage SA (“Shurgard Europe”), which owns 227 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 seven states in the U.S. primarily owned and operated by PS Business Parks, Inc. (“PSB”) under the “PS Business Parks” name.  At September 30, 2018, we have an approximate 42% common equity interest in PSB.

See Note 13 ‘Subsequent Events” for further information on an initial global offering of Shurgard Europe’s shares.

Disclosures of the number and square footage of facilities, as well as the number and coverage of tenant reinsurance policies (Note 12) 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 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, 2017.

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 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. 

 

7

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 

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.  Equity in earnings of unconsolidated real estate entities represents our pro-rata share of the earnings of the Unconsolidated Real Estate Entities. 

When we begin consolidating an entity, we reflect our preexisting equity interest at book value.  All changes in consolidation status are reflected prospectively.

Collectively, at September 30, 2018, the Company and the Subsidiaries own 2,418 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, 2018, the Unconsolidated Real Estate Entities are comprised of PSB and Shurgard Europe.

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, 2018, 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 acquire, develop, construct, renovate and improve facilities, including interest and property taxes incurred during the construction period.  We allocate the net acquisition cost of acquired real estate facilities to the underlying land, buildings, and identified intangible assets based upon their respective individual estimated fair values. 

Costs associated with dispositions of real estate, as well as repairs and maintenance costs, are expensed 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, 2018

(Unaudited)

 

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 equivalents which are restricted from general corporate use are included in other assets.  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.

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 equivalents, marketable securities, other assets, debt, and other liabilities by discounting the related future cash flows at a rate 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 equivalents, certain portions of other assets including rents receivable from our tenants and restricted cash.  Cash equivalents we invest in are either money market funds with a rating of at least AAA by Standard & Poor’s, commercial paper that is rated A1 by Standard & Poor’s or deposits with highly rated commercial banks.

At September 30, 2018, due primarily to our investment in Shurgard Europe (Note 4) and our notes payable denominated in Euros (Note 6), 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, 2018 and December 31, 2017.  The “Shurgard” trade name, which is used by Shurgard Europe pursuant to a fee-based licensing agreement, has a book value of

 

9

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 

$18.8 million at September 30, 2018 and December 31, 2017.  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 assets 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, 2018, these intangibles had a net book value of $15.9 million ($21.5 million at December 31, 2017).  Accumulated amortization totaled $29.0 million at September 30, 2018 ($31.0 million at December 31, 2017), and amortization expense of $12.7 million and $11.9 million was recorded in the nine months ended September 30, 2018 and 2017, respectively.  The estimated future amortization expense for our finite-lived intangible assets at September 30, 2018 is approximately $3.3 million in the remainder of 2018, $6.3 million in 2019 and $6.3 million thereafter.  During the nine months ended September 30, 2018, intangibles increased $7.1 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 other indefinite-lived intangible assets, such as 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 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.

Casualty Loss

We record casualty losses for a) the book value of assets destroyed and b) incremental repair, clean-up, and other costs associated with the casualty.  Insurance proceeds are recorded as a reduction in casualty loss when all uncertainties of collection are satisfied.  During the three and nine months ended September 30, 2017, we incurred casualty losses totaling $7.8 million, comprised of $3.3 million in book value of assets damaged and $4.5 million in repairs and maintenance incurred in connection with Hurricanes Harvey and Irma. 

 

10

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 

Revenue and Expense Recognition

Revenues from self-storage facilities, which are primarily composed of rental income earned pursuant to month-to-month leases, 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.  

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 (including advertising expenditures), general and administrative expense, and interest expense 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 1.160 U.S. Dollars per Euro at September 30, 2018 (1.198 at December 31, 2017), and average exchange rates of 1.162 and 1.175 for the three months ended September 30, 2018 and 2017, respectively, and average exchange rates of 1.194 and 1.113 for the nine months ended September 30, 2018 and 2017, 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 comprised primarily of foreign currency exchange gains and losses on our investment in Shurgard Europe and our 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 (Topic 606), which requires revenue to be based upon the consideration expected from customers for promised goods or servicesIn February 2017, the FASB issued ASU 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, which provides guidance with respect to the sale of real estate facilities.  The new standards permit either the retrospective or cumulative effects transition method.  We adopted the new standards effective January 1, 2018 utilizing the modified retrospective transition method applied to open contracts.  The new standards did not have a material impact on our results of operations or financial condition, primarily because most of our revenue is from rental revenue from self-storage facilities, and included in self-storage facilities revenue on our statements of income, which the new standards do not address, and because we do not provide any material products and services to our customers or sell material amounts of our real estate facilities.  The remainder of our revenues are composed of elements that are either covered by the new standards but not impacted, or are not covered by the new standards.

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

 

11

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 

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 effective January 1, 2019 with a cumulative effect through December 31, 2018 recorded through retained earnings.  The Company is currently assessing the impact of the guidance on our financial statements.  However, 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 May 2017, the FASB issued ASU 2017-09, Stock Compensation: Scope of Modification Accounting, to increase clarity and consistency of practice and reduce cost and complexity when modifying the terms of share-based awardsWe prospectively adopted this guidance effective January 1, 2018, with no material impact on our financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash, which primarily requires the statement of cash flows to explain not only the change in cash and equivalents, but also the change in restricted cash.  The standard is effective on January 1, 2018, with early adoption permitted and requires the use of the retrospective transition method. The Company early adopted the new guidance during the fourth quarter of 2017 and, accordingly, net cash flows from investing activities decreased by $4,162,000 for the nine months ended September 30, 2017 as compared to the current presentation on the statement of cash flows.

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 is 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 net income 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 10).  The following table reconciles from basic to diluted common shares outstanding (amounts in thousands):



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

 

 

 

 

 

 



Weighted average common shares and equivalents

 

 

 

 

 

 

 

 

 

 

 



outstanding:

 

 

 

 

 

 

 

 

 

 

 



Basic weighted average common

 

 

 

 

 

 

 

 

 

 

 



shares outstanding

 

173,975 

 

 

173,715 

 

 

173,933 

 

 

173,560 



Net effect of dilutive stock options -

 

 

 

 

 

 

 

 

 

 

 



based on treasury stock method

 

373 

 

 

525 

 

 

307 

 

 

568 



Diluted weighted average common

 

 

 

 

 

 

 

 

 

 

 



shares outstanding

 

174,348 

 

 

174,240 

 

 

174,240 

 

 

174,128 





3.Real Estate Facilities



Activity in real estate facilities during the nine months ended September 30, 2018 is as follows:

 

12

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 







 

 

 



 

 



 

Nine Months Ended



 

September 30, 2018



 

(Amounts in thousands)



Operating facilities, at cost:

 

 



Beginning balance

$

14,665,989 



Capital expenditures to maintain real estate facilities

93,407 



Acquisitions

 

100,632 



Dispositions

 

(1,686)



Developed or redeveloped facilities opened for operation

278,133 



Impact of foreign exchange rate changes

 

(582)



Ending balance

 

15,135,893 



Accumulated depreciation:

 

 



Beginning balance

 

(5,700,331)



Depreciation expense

 

(341,464)



Dispositions

 

121 



Impact of foreign exchange rate changes

 

412 



Ending balance

 

(6,041,262)



Construction in process:

 

 



Beginning balance

 

264,441 



Current development

 

267,411 



Developed or redeveloped facilities opened for operation

(278,133)



Ending balance

 

253,719 



Total real estate facilities at September 30, 2018

$

9,348,350 

During the nine months ended September 30, 2018, we acquired 16 self-storage facilities (1.0 million net rentable square feet), for a total cost of $107.8 million in cash, of which $7.1 million was allocated to intangible assets.  We completed development and redevelopment activities costing $278.1 million during the nine months ended September 30, 2018, adding 2.4 million net rentable square feet of self-storage space.  Construction in process at September 30, 2018 consists of projects to develop new self-storage facilities and redevelop existing self-storage facilities, which will build 5.4 million net rentable square feet of storage space at an aggregate estimated cost of approximately $596.4 million.  During the nine months ended September 30, 2018, we sold portions of real estate facilities in connection with eminent domain proceedings for $3.4 million in cash proceeds and recorded a related gain on sale of real estate of approximately $1.8 million.

4.Investments in Unconsolidated Real Estate Entities

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

 

13

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 





 

 

 

 

 

 



 

Investments in Unconsolidated Real Estate Entities at



 

September 30, 2018

 

December 31, 2017



 



PSB

$

433,809 

 

$

400,133 



Shurgard Europe

 

185,596 

 

 

324,040 



Total

$

619,405 

 

$

724,173 









 

 

 

 

 

 

 

 

 

 

 

 



 

Equity in Earnings of Unconsolidated Real Estate Entities for the



 

Three Months Ended September 30,

 

Nine Months Ended September 30,



 

2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

 



PSB

$

13,008 

 

$

9,261 

 

$

73,451 

 

$

35,694 



Shurgard Europe

 

4,763 

 

 

7,243 

 

 

17,078 

 

 

19,484 



Legacy Institutional

 

 

 

 

 

 

 

 

 

 

 



Partnership

 

 -

 

 

714 

 

 

 -

 

 

2,057 



Total

$

17,771 

 

$

17,218 

 

$

90,529 

 

$

57,235 



During the nine months ended September 30, 2018 and 2017, we received cash distributions from our investments in the Unconsolidated Real Estate Entities totaling $186.3 million and $39.9 million, respectively.  For the nine months ended September 30, 2018, $91.9 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, 2018, the cost of our investment in the Unconsolidated Real Estate Entities exceeds our pro rata share of the underlying equity by approximately $66.8 million ($67.3 million at December 31, 2017).  This differential is being amortized as a reduction to equity in earnings of the Unconsolidated Real Estate Entities based upon allocations to the underlying net assets.  Such amortization was approximately $1.1 million and $1.0 million during the nine months ended September 30, 2018 and 2017, respectively.  

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, 2018 and December 31, 2017, 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, 2018 ($127.09 per share of PSB common stock), the shares and units we owned had a market value of approximately $1.8 billion.  At September 30, 2018, the adjusted tax basis of our investment in PSB approximates book value.    

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

 

14

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 







 

 

 

 

 

 



 

2018

 

2017



 

(Amounts in thousands)



For the nine months ended September 30,

 

 

 

 

 



Revenues

$

309,391 

 

$

300,342 



Costs of operations

 

(95,910)

 

 

(92,962)



Depreciation and amortization

 

(73,505)

 

 

(70,465)



General and administrative

 

(7,099)

 

 

(7,019)



Other items

 

1,575 

 

 

(1,131)



Gains on sale of real estate

 

85,283 

 

 

5,074 



Net income before allocation to preferred shareholders

 

 

 

 

 



and restricted share unitholders

 

219,735 

 

 

133,839 



Allocations to preferred shareholders and

 

 

 

 

 



restricted share unitholders

 

(40,513)

 

 

(45,954)



Net income allocated to common shareholders

 

 

 

 

 



and LP Unitholders

$

179,222 

 

$

87,885 



 

 

 

 

 

 



 

 

 

 

 

 



 

 



 

September 30,

 

December 31,



 

2018

 

2017



 

(Amounts in thousands)



 

 

 

 

 

 



 

 

 

 

 

 



Total assets (primarily real estate)

$

2,063,377 

 

$

2,100,159 



Preferred stock called for redemption

 

 -

 

 

130,000 



Other liabilities

 

85,978 

 

 

80,223 



Equity:

 

 

 

 

 



Preferred stock

 

959,750 

 

 

959,750 



Common equity and LP units

 

1,017,649 

 

 

930,186 



Investment in Shurgard Europe

For all periods presented, we owned 31,268,459 shares of Shurgard Europe representing 49% of the shares outstanding and our joint venture partner owned the remaining sharesSee Note 13 “Subsequent Events” for further information on an initial global offering of Shurgard Europe’s common shares. Our equity in earnings of Shurgard Europe is comprised of our 49% share of Shurgard Europe’s net income and 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 are classified as interest and other income on our income statement. 

During the three months ended September 30, 2018, Shurgard Europe paid a cash dividend to its shareholders, of which our equity share was $145.4 million. 

Changes in foreign currency exchange rates decreased our investment in Shurgard Europe by approximately $9.0 million and increased it by $19.6 million in the nine months ended September 30, 2018 and 2017, respectively

 

15

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 

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.  Our equity earnings in Shurgard Europe are based upon our acquired book basis under GAAP, while Shurgard’s separate financial statements are presented in accordance with International Financial Reporting Standards (“IFRS”).  For Shurgard Europe, the primary difference between IFRS and GAAP is the use of fair value accounting for its real estate under IFRS, while GAAP presents real estate at historical cost.  Net income is affected by the corresponding periodic changes in the fair value of real estate under IFRS, as compared to the recognition of periodic depreciation expense under GAAP, combined with the related net impact upon deferred income tax expense. 





 

 

 

 

 

 

 



 

2018

 

2017

 



 

(Amounts in thousands)

 



For the nine months ended September 30,

 

 

 

 

 

 



Self-storage and ancillary revenues

$

213,746 

 

$

194,973 

 



Self-storage and ancillary cost of operations

 

(78,242)

 

 

(72,233)

 



Depreciation and amortization

 

(55,429)

 

 

(45,194)

 



General and administrative

 

(8,729)

 

 

(8,971)

 



Interest expense on third party debt 

 

(16,860)

 

 

(15,465)

 



Trademark license fee payable to Public Storage

 

(2,139)

 

 

(1,947)

 



Income tax expense

 

(18,618)

 

 

(12,622)

 



Gain on real estate investment sale

 

1,969 

 

 

 -

 



Other, net (a)

 

(2,984)

 

 

(725)

 



 

 

 

 

 

 

 



Net income

$

32,714 

 

$

37,816 

 



Average exchange rates of Euro to the U.S. Dollar

 

1.194 

 

 

1.113 

 



 

 

 

 

 

 

 



         (a) Amounts for the nine months ended September 30, 2018 include $2,971,000 in incremental

 



              costs incurred with respect to Shurgard Europe's initial global offering.  See Note 13.