UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
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[X] Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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For
the fiscal year ended December 31, 2009.
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[ ] Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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For
the transition period from to .
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Commission
File Number: 001-33519
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(Exact name of Registrant as
specified in its charter)
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(
State or other
jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification
Number)
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701
Western Avenue, Glendale,
California 91201-2349
(Address of principal executive
offices) (Zip
Code)
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(Registrant's telephone number,
including area code)
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Securities
registered pursuant to Section 12(b) of the
Act:
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Name
of each exchange
on
which registered
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Depositary
Shares Each Representing 1/1,000 of a 7.500% Cumulative Preferred Share,
Series V $.01 par value
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New
York Stock Exchange
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Depositary
Shares Each Representing 1/1,000 of a 6.500% Cumulative Preferred Share,
Series W $.01 par value
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New
York Stock Exchange
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Depositary
Shares Each Representing 1/1,000 of a 6.450% Cumulative Preferred Share,
Series X $.01 par value
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New
York Stock Exchange
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Depositary
Shares Each Representing 1/1,000 of a 6.250% Cumulative Preferred Share,
Series Z $.01 par value
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New
York Stock Exchange
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Depositary
Shares Each Representing 1/1,000 of a 6.125% Cumulative Preferred Share,
Series A $.01 par value
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New
York Stock Exchange
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Depositary
Shares Each Representing 1/1,000 of a 7.125% Cumulative Preferred Share,
Series B $.01 par value
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New
York Stock Exchange
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Depositary
Shares Each Representing 1/1,000 of a 6.600% Cumulative Preferred Share,
Series C $.01 par value
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New
York Stock Exchange
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Depositary
Shares Each Representing 1/1,000 of a 6.180% Cumulative Preferred Share,
Series D $.01 par value
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New
York Stock Exchange
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Depositary
Shares Each Representing 1/1,000 of a 6.750% Cumulative Preferred Share,
Series E $.01 par value
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New
York Stock Exchange
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Depositary
Shares Each Representing 1/1,000 of a 6.450% Cumulative Preferred Share,
Series F $.01 par value
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New
York Stock Exchange
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Depositary
Shares Each Representing 1/1,000 of a 7.000% Cumulative Preferred Share,
Series G $.01 par value
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New
York Stock Exchange
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Depositary
Shares Each Representing 1/1,000 of a 6.950% Cumulative Preferred Share,
Series H $.01 par value
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New
York Stock Exchange
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Depositary
Shares Each Representing 1/1,000 of a 7.250% Cumulative Preferred Share,
Series I $.01 par value
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New
York Stock Exchange
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Depositary
Shares Each Representing 1/1,000 of a 7.250% Cumulative Preferred Share,
Series K $.01 par value
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New
York Stock Exchange
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Depositary
Shares Each Representing 1/1,000 of a 6.750% Cumulative Preferred Share,
Series L $.01 par value
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New
York Stock Exchange
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Depositary
Shares Each Representing 1/1,000 of a 6.625% Cumulative Preferred Share,
Series M $.01 par value
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New
York Stock Exchange
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Depositary
Shares Each Representing 1/1,000 of a 7.000% Cumulative Preferred Share,
Series N $.01 par value
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New
York Stock Exchange
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Depositary
Shares Each Representing 1/1,000 of an Equity Share,
Series
A, $.01 par value
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New
York Stock Exchange
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Common
Shares, $.10 par
value
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New
York Stock Exchange
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Securities registered pursuant to
Section 12(g) of the Act: None (Title of
class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.Yes [X]No [ ]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.Yes [ ]No [X]
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
[X] No
[ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
[X] No
[ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
Accelerated Filer
[X] Accelerated
Filer
[ ] Non-accelerated
Filer [ ]Smaller
Reporting Company [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
[ ] No
[X]
The
aggregate market value of the voting and non-voting common shares held by
non-affiliates of the Registrant as of June 30, 2009:
Common
Shares, $0.10 Par Value - $8,811,049,000 (computed on the basis of $65.48 per
share which was the reported closing sale price of the Company's Common Shares
on the New York Stock Exchange on June 30, 2009).
Depositary
Shares Each Representing 1/1,000 of an Equity Share, Series A, $.01 Par Value -
$176,548,000 (computed on the basis of $24.94 per share which was the reported
closing sale price of the Depositary Shares each Representing 1/1,000 of an
Equity Share, Series A on the New York Stock Exchange on June 30,
2009).
As of
February 25, 2010, the number of outstanding Common Shares, $.10 par value, was
169,597,834 shares and the number of outstanding Depositary Shares Each
Representing 1/1,000 of an Equity Share, Series A, $.01 par value, was 8,377,193
(representing 8,377.193 Equity Shares, Series A).
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the definitive proxy statement to be filed in connection with the Annual
Meeting of Shareholders to be held in 2010 are incorporated by reference into
Part III of this Annual Report on Form 10-K.
PART I
Forward Looking
Statements
This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of the federal securities laws. All statements in this
document, other than statements of historical fact, are forward-looking
statements which may be identified by the use of the words
"expects," "believes,"
"anticipates," "plans," "would," "should," "may," "estimates"
and similar expressions. These forward-looking statements involve
known and unknown risks and uncertainties, which may cause Public Storage's
actual results and performance to be materially different from those expressed
or implied in the forward-looking statements. As a result, you should
not rely on any forward-looking statements in this report, or which management
may make orally or in writing from time to time, as predictions of future events
nor guarantees of future performance. We caution you not to place
undue reliance on forward-looking statements, which speak only as the date of
this report or as of the dates indicated in the statements. All of
our forward-looking statements, including those in this report, are qualified in
their entirety by this statement. We expressly disclaim any obligation to update
publicly or otherwise revise any forward-looking statements, whether as a result
of new information, new estimates, or other factors, events or circumstances
after the date of this document, except where expressly required by
law. Accordingly, you should use caution in relying on past
forward-looking statements to anticipate future results. Factors and
risks that may impact our future results and performance include, but are not
limited to, those described in Item 1A, "Risk Factors" and in our other filings
with the Securities and Exchange Commission (“SEC”).
General
Public
Storage was organized in 1980. Effective June 1, 2007, we reorganized
Public Storage, Inc. into Public Storage (referred to herein as “the Company”,
“the Trust”, “we”, “us”, or “our”), a Maryland real estate investment trust
(“REIT”). Our principal business activities include the acquisition,
development, ownership and operation of self-storage facilities which offer
storage spaces for lease, generally on a month-to-month basis, for personal and
business use. We are the largest owner and operator of self-storage
facilities in the United States (“U.S.”), and we have an equity interest in
Shurgard Europe, a private company that we believe is the largest owner and
operator of self-storage facilities in Europe and we have an equity interest in
PS Business Parks, Inc. whose business activities primarily include the
ownership and operations of commercial properties. At December 31,
2009, we operate within three reportable segments described below: (i) Domestic
Self-Storage, (ii) Europe Self-Storage and (iii) Commercial. See also
Note 11 to our December 31, 2009 consolidated financial statements for further
discussion with respect to our reportable segments.
The
Domestic Self-Storage segment, at December 31, 2009, includes our direct and
indirect equity interests in 2,010 self-storage facilities (127 million net
rentable square feet of space) located in 38 states within the U.S. operating
under the “Public Storage” brand name.
The
Europe Self-Storage segment, at December 31, 2009, comprises our 49% equity
interest in Shurgard Europe which owns 187 self-storage facilities (10 million
net rentable square feet of space) located in seven countries in Europe which
operate under the “Shurgard Storage Centers” brand name and manages one facility
located in the United Kingdom that we wholly own.
The
Commercial segment, at December 31, 2009, includes direct and indirect equity
interests in approximately 21 million net rentable square feet of commercial
space located in 11 states in the U.S., including our 41% ownership interest in
PS Business Parks, Inc. (“PSB”), a publicly traded REIT whose common stock
trades on the New York Stock Exchange under the symbol “PSB” (see “Investment in
PSB” under “Equity in Earnings of Real Estate Entities” included in Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” below for further information regarding our investment in
PSB). This commercial space is primarily operated under the “PS
Business Parks” brand name.
Certain
other activities, due to their insignificant scale and dissimilarity in
operating characteristics to our existing segments, are not allocated to any
segment. These activities include (i) the reinsurance of policies
against losses to goods stored by tenants in our self-storage facilities, (ii)
the sale of merchandise at our self-storage facilities and (iii) management of
self-storage facilities owned by third-party owners and entities that we have an
ownership interest in but are not consolidated. We previously had
truck rental and containerized storage operations, which we ceased operations in
2009.
We
significantly increased the scope and scale of our operations on August 22,
2006, when we merged with Shurgard Storage Centers, Inc. (“Shurgard” and the
merger referred to as the “Shurgard Merger”), a REIT which had an interest in
487 self-storage facilities located in the U.S. and an interest in 160
facilities in Europe. On March 31, 2008, we entered into a
transaction with an institutional investor (the transaction referred to as the
“Europe Transaction”) whereby the investor acquired a 51% equity interest in our
European operations (“Shurgard Europe”). Shurgard Europe held
substantially all of the operations in which we have an interest in
Europe. Since March 31, 2008, we own the remaining 49% interest
and are the managing member of Shurgard European Holdings LLC, a joint venture
formed to own Shurgard Europe’s operations.
For all
taxable years subsequent to 1980, we qualified and intend to continue to qualify
as a REIT, as defined in Section 856 of the Internal Revenue Code. As
a REIT, we do not incur federal or significant state tax on that portion of our
taxable income which is distributed to our shareholders, provided that we meet
certain tests. To the extent that we continue to qualify as a REIT,
we will not be subject to tax, with certain limited exceptions, on the taxable
income that is distributed to our shareholders.
We have
reported annually to the SEC on Form 10-K, which includes financial statements
certified by our independent registered public accountants. We have
also reported quarterly to the SEC on Form 10-Q, which includes unaudited
financial statements with such filings. We expect to continue such
reporting.
On our
website, www.publicstorage.com,
we make available, free of charge, our Annual Reports on Form 10-K, quarterly
reports on Form 10-Q, and current reports on Form 8-K, and all amendments to
those reports as soon as reasonably practicable after the reports and amendments
are electronically filed with or furnished to the SEC.
The Impact of Current
Economic Factors
The
recessionary trends experienced in 2008 and 2009, including the contraction in
economic activity and elevation in unemployment rates experienced in the U.S.
and Europe, have had a negative impact upon our business, and we have responded
with what we believe are short-term revisions to our long-term growth
strategies.
Operationally,
our occupancies and rental rates have come under pressure as demand for
self-storage space has softened. We have responded by reducing rental
rates, increasing promotional discounts, and increasing our marketing activities
to stimulate additional demand for our storage space and increase our market
share.
We have
shut down our development activities, both in the U.S. and Europe due to the
current level of risk inherent in development, uncertain consumer demand for
when such facilities open for operation, and to preserve capital. We
have increased our earnings yield or capitalization rate requirements with
respect to the acquisition of existing self-storage facilities. We
believe that existing self-storage properties may be marketed, at attractive
prices, due to financial or operating stress of their owners which may create
acquisition opportunities for us. We have taken advantage of capital
market dislocations with respect to our own securities through the repurchase of
our own preferred shares and our unsecured debt. While capital
markets have improved recently from the severe stress incurred in late 2008 and
early 2009, they are still relatively constrained and in flux compared to
historical norms. We believe under current capital market conditions
our ability to issue preferred securities at reasonable rates is
limited. Despite the difficult capital markets, we believe that we
are well-positioned with significant cash balances on hand, have an expectation
of continued internally generated cash flow that can be used for reinvestment,
and relatively modest debt maturities as described in Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of Operations –
Liquidity and Capital Resources.”
While we
believe that these actions are the appropriate response to the existing economic
environment, and that they will best position us to take advantage of the
current environment in the short-term and then resume our traditional growth
strategy in the future, there can be no assurance that we will be able to do
so.
See “Growth
and Investment Strategies” and “Financing
of the Company’s Growth Strategies” below for more information regarding
our traditional long-term strategy to grow the cash flows and equity values of
the Company.
Competition
Self-storage
facilities generally draw customers from residents within a three to five mile
radius. Many of our facilities operate within three to five miles of
well-located and well-managed competitors that seek the same group of customers
through many of the same marketing channels we use, including yellow page
advertising, Internet advertising, as well as signage and banners. As
a result, competition is significant and affects the occupancy levels, rental
rates, rental income and operating expenses of our facilities.
While
competition is significant, the self-storage industry remains fragmented in the
U.S. We believe that we own approximately 5% of the aggregate
self-storage square footage in the U.S., and that collectively the five largest
self-storage operators in the U.S. own only approximately 10% of the aggregate
self-storage space in the U.S., with the remaining 90% owned by numerous private
regional and local operators. This market fragmentation enhances the
advantage of our economies of scale and our brand relative to other operators
(see “Business Attributes – Economies of Scale” below), and could result in
potential growth in our platform through acquisitions over the long
term.
In
seeking investments, we compete with a wide variety of institutions and other
investors. The amount of funds available for real estate investments
greatly influences the competition for ownership interests in facilities and, by
extension, the yields that we can achieve on newly acquired
investments.
Business
Attributes
We
believe that we possess several primary business attributes that permit us to
compete effectively:
Centralized
information networks: Our facilities are part of comprehensive
centralized reporting and information networks which enable the management team
to identify changing market conditions and operating trends as well as analyze
customer data, and quickly change our properties’ pricing and promotional mix on
an automated basis.
National
Telephone Reservation System: We operate a
centralized telephone reservation system, which provides added customer service
and helps to maximize utilization of available self-storage
space. Customers calling either the toll-free telephone referral
system, (800) 44-STORE, or a storage facility, are directed to the national
reservation system. A representative discusses with the customer
space requirements, price and location preferences and also informs the customer
of other products and services provided by the Company and its
subsidiaries. We believe that the centralized telephone reservation
system enhances our ability to market storage space in the U.S. relative to
handling these calls at individual properties, because it allows us to more
effectively offer all spaces at all facilities in the vicinity of a customer and
to provide higher-quality selling efforts through dedicated sales
specialists. We also provide customers the opportunity to review
space availability and make reservations online through our website,
www.publicstorage.com.
Economies of
scale: We are the largest provider of self-storage space in the
U.S. As of December 31, 2009, we operated 2,010 self-storage
facilities in which we had an interest and managed 32 self-storage facilities
for third parties. These facilities are generally located in major
markets within 38 states in the U.S. At December 31, 2009, we had
over one million self-storage spaces rented. The size and scope of
our operations have enabled us to achieve high operating margins and a low level
of administrative costs relative to revenues through the centralization of many
functions with specialists, such as facility maintenance, employee compensation
and benefits programs, pricing of our product, as well as the development and
documentation of standardized operating procedures. We also believe
that our major market concentration provides managerial efficiencies stemming
from having a large number of facilities in close proximity to each
other.
We can
economically purchase large, prominent, well-placed yellow page ads that allow
us to reach the consumer more effectively than smaller operators. We
are also able to purchase and bid aggressively for multiple-keyword advertising
on national Internet search engines. In addition, we are able to
market efficiently using television as a media source. The
concentration of most of our properties in major metropolitan centers makes
various promotional and media programs, such as television, yellow pages, and
Internet keyword bidding, far more economical for us than for our
competitors.
Brand name
recognition: Our operations in the U.S. are conducted under the “Public
Storage” brand name, which we believe is the most recognized and established
name in the self-storage industry in the U.S. Our storage operations
within the U.S. are conducted in major markets in 38 states, giving us national
recognition and prominence. Our facilities tend to be highly visible
and located in heavily populated areas, improving the local awareness of our
brand. We believe that the “Shurgard” brand, used by Shurgard Europe,
is a similarly established and valuable brand.
Complementary
ancillary operations: Through a taxable REIT subsidiary, we sell retail
items associated with the storage business and reinsure policies issued to our
tenants against lost or damaged goods stored by tenants in our storage
facilities. We believe these activities supplement and strengthen our
existing self-storage business by further meeting the needs of storage
customers.
Growth and Investment
Strategies
As
described more specifically in “The
Impact of Current Economic Factors” above, our growth strategies have
been revised in the short-run to respond to current market
conditions.
Over the
long-run, our growth strategies have consisted of: (i) improving the operating
performance of our existing self-storage properties, (ii) acquiring properties
that are owned or operated by others in the U.S., (iii) developing or
redeveloping existing U.S. real estate facilities, (iv) participating in the
growth of commercial facilities owned primarily by PSB, and (v) capitalizing on
the growth of facilities owned by Shurgard Europe in the European
market. In addition to certain revisions to these strategies
described below, our strategy has been revised in the short-run to take
advantage of dislocation in current capital markets.
Improve the
operating performance of existing properties: Demand for our self-storage
facilities has been negatively impacted over the past two years by the current
recessionary trends, and revenue and net operating income have both declined in
2009. Over the long-run we seek to increase the net cash flow
generated by our existing self-storage properties by a) regularly evaluating our
call volume, reservation activity, and move-in/move-out rates for each of our
properties relative to our marketing activities, b) evaluating market supply and
demand factors and, based upon these analyses, adjusting our marketing
activities and rental rates, c) attempting to maximize revenues through
evaluating the appropriate balance between occupancy, rental rates, and
promotional discounting and d) controlling expense levels. We believe
that our property management personnel and systems, combined with our national
telephone reservation system and media advertising programs will continue to
enhance our ability to meet these goals. See Item 7. “Management’s
Discussion and Analysis” below for further information regarding our expectation
in the short-run with respect to our operating results.
Acquire
properties owned or operated by others in the U.S.: Our long-run strategy
has included acquiring well-located facilities owned or operated by others in
the U.S. that fit well within our geographic profile, at generally attractive
pricing. We believe our presence in and knowledge of substantially
all of the major markets in the U.S. enhances our ability to identify attractive
acquisition opportunities and capitalize on the overall fragmentation in the
self-storage industry. Data on the rental rates and occupancy levels
of our existing facilities, which are often located in proximity to potential
acquisition candidates, provide us an advantage in evaluating the potential of
acquisition opportunities. In the short-run, we believe that there
may be more attractive opportunities for the acquisition of facilities from
distressed sellers who, due to the constrained credit environment and pressure
on cash flows due to the current difficult operating environment, face loan
covenant violations or cannot refinance their existing debt as it comes
due. The timing and amount of these opportunities will be at least
partially dependent upon whether the banks and other lenders elect to pursue
foreclosure, acceleration, or other remedies which would force a sale of the
properties of these distressed owners, rather than extending existing loans or
waiving covenant violations. It is our belief that opportunities in
2009 have been limited due at least in part to lenders’ desire to extend these
loans rather than foreclose. There can be no assurance that any such
opportunities may materialize in the future.
Development of
real estate facilities: We believe that in the long-run, development of
new storage locations and expansion of our existing self-storage facilities
represent an important part of our growth strategy. New locations can
be developed to meet customer needs and expand our geographic reach, generally
within our existing markets. In addition, existing facilities can be
expanded or enhanced to provide additional amenities such as climate control, to
better capitalize on increased population density in certain facilities’ local
market area. However, in light of current capital market
conditions, doubt as to the potential lease-up of new storage space in the face
of reduced demand, and the increased potential in the short-run for attractive
acquisitions of existing facilities described above, we substantially curtailed
our development pipeline. Accordingly, in 2009 our investment in the
development of real estate facilities was minimal, and we continue to have
nominal development pipeline at December 31, 2009. Shurgard Europe
has similarly reduced its development activities (see “Capitalize on the
Potential for Growth in Europe” below).
Participate in
the growth of commercial facilities primarily through our ownership in PS
Business Parks, Inc.: At December 31, 2009,
we had a 41% common equity interest in PSB and its operating partnership which
consisted of 5,801,606 shares of common stock and 7,305,355 limited partnership
units in the Operating Partnership. The limited partnership units are
convertible at our option, subject to certain conditions, on a one-for-one basis
into PSB common stock. At December 31, 2009, PSB owned and operated
approximately 19.6 million net rentable square feet of commercial space located
in eight states in the U.S. During 2009 and 2008, the recession in
the U.S. impacted PSB resulting in a decrease in new rental rates over expiring
rents, as well as declining occupancy levels in 2009 and in the last six months
of 2008. It is uncertain what impact the current recessionary trends
will have on PSB’s future occupancy levels and rental rents. PSB may
continue to experience downward pressure on its occupancy levels and rental
rates. Due to capital market dislocations and other factors, PSB did
not acquire any new commercial space in 2009 and 2008.
Capitalize on the
potential for growth in Europe: On March 31, 2008, we entered
into the Europe Transaction with an institutional investor whereby the investor
acquired a 51% interest in Shurgard Europe. Shurgard Europe held
substantially all of our operations in Europe. Since March 31, 2008,
we own the remaining 49% interest and are the managing member of Shurgard
European Holdings LLC, a new joint venture formed to own Shurgard Europe’s
operations.
We
believe that Shurgard Europe is the largest owner and operator of self-storage
facilities in Western Europe. At December 31, 2009, Shurgard Europe’s
operations comprise 187 facilities with an aggregate of approximately 10 million
net rentable square feet. The portfolio consists of 115 wholly owned
facilities and 72 facilities owned by two joint venture partnerships, in which
Shurgard Europe has a 20% equity interest.
Shurgard
Europe operates in seven markets in Western Europe: the French market
(principally Paris), the Swedish market (principally Stockholm), the United
Kingdom market (principally London), the Dutch market, the Belgian market, the
Danish market (principally Copenhagen) and the German market.
In
contrast to the U.S., the European self-storage industry is relatively
immature. In each of the markets that Shurgard Europe operates
customer awareness of the product is relatively low and ownership of
self-storage facilities remains fragmented. Although many European
consumers are not yet aware of the self-storage concept, they tend to live in
more densely populated areas in smaller living spaces (as compared to the U.S.)
that, we believe, should make self-storage an attractive option as product
knowledge and availability of additional self-storage facilities
grows. Most Europeans are familiar with the concept of storage only
as an ancillary service provided by moving companies, and more consumer
familiarity could result in a significant increase in demand in the
long-term.
In the
longer term, we believe that there is significant growth potential in Europe to
expand the number of facilities owned either through development, acquisition,
and consolidation, even if the density of self-storage in Europe does not
ultimately approach the levels in the U.S. However, ultimately
capitalizing on this opportunity will require a significant amount of capital to
develop new self-storage facilities in what could be a process extending through
a few decades in time frame, similar to the trajectory of the U.S. self-storage
industry since its inception in the mid 1960’s.
Shurgard
Europe, and its ability and wherewithal to take advantage of these
opportunities, has been impacted by the same economic trends that have
negatively impacted our domestic self-storage operations and capital
markets. In addition to the operating uncertainties that we face,
Shurgard Europe faces refinancing risk, as approximately $168 million (€117
million) and $153 million (€107 million) of debt owed by joint ventures matures
in July 2010 and May 2011, respectively, and approximately $561.7 million
(€391.9 million) in a loan payable to us becomes due in March
2013. Accordingly, Shurgard Europe has taken many of the same steps
that we have domestically, by curtailing its development
activities. At such time that public market capital or bank debt
becomes available to Shurgard Europe to refinance its existing debt and economic
trends improve, development and growth may recommence; however, there can be no
assurance that such development and growth will ultimately recommence and at
what levels.
Take advantage of
dislocation in capital markets: At December 31, 2009, we have
cash balances on hand of approximately $763.8 million. On
February 12, 2009, in accordance with an “any and all” tender offer, we
acquired $110.2 million (face amount) of our Senior Unsecured
Debt. In addition, during the fourth quarter of 2008 and the first
quarter of 2009, we acquired $352.7 million (face amount) of our preferred
shares and units on the open market and in privately negotiated transactions for
an aggregate acquisition cost of $237.4 million. There could be
opportunities for future acquisition of our own outstanding debt and equity
securities, particularly if there were a return to the same acute turbulence in
the credit and equity markets which occurred in late 2008 and early
2009. Any future such transactions will depend upon our evaluation of
the return of such investments relative to our other investment
alternatives. There can be no assurance that any future such
transactions will occur or the potential yield on such
transactions.
Financing of the Company’s
Growth Strategies
Impact of Current
Capital Markets: As described above in “The Impact of Current Economic
Factors”, one of our traditional sources of external capital is, through the
issuance of preferred securities and, although we have not attempted to issue
additional preferred securities over the past twelve months, we believe that we
could issue additional preferred securities on a limited basis. While
we expect continued improvement in the capital markets to issue preferred
securities, there can be no assurance as to when market conditions will improve
for preferred securities issuances at amounts and at rates that we will find
reasonable.
Overview of
financing strategy: Over the past three years we have funded
substantially all the cash portion of our acquisition and development activities
with permanent capital (predominantly retained cash flow and the net proceeds
from the issuance of preferred securities). We have elected to use
preferred securities as a form of leverage despite the fact that the dividend
rates of our preferred securities exceed the prevailing market interest rates on
conventional debt, because of certain benefits described in Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources.’’ Our present intention
is to continue to finance substantially all our growth with cash on hand ($763.8
million at December 31, 2009), internally generated cash flows and permanent
capital.
Borrowing:
We have in the past used our $300 million revolving line of credit as temporary
“bridge” financing, and repaid those amounts with permanent
capital. Our debt outstanding currently represents debt that was
assumed either in connection with property acquisitions or in connection with
the Shurgard Merger. When we have assumed such debt in the past, we
have generally prepaid such amounts except in cases where the nature of the loan
terms did not allow such prepayment, or where a prepayment penalty made it
economically disadvantageous to prepay. While it is not our present
intention to issue additional debt as a long-term financing strategy, we have
broad powers to borrow in furtherance of our objectives without a vote of our
shareholders. Our senior debt has an “A-” credit rating by Standard
and Poor’s combined with our low level of debt, we believe we could issue a
significant amount of unsecured debt, at attractive rates, in the current
markets. These powers are subject to a limitation on unsecured
borrowings in our Bylaws described in “Limitations on Debt” below.
Issuance of
securities in exchange for property: We have issued both our
common and preferred securities in exchange for real estate and other
investments in the past, most notably the issuance of 38,913,187 common shares
in connection with the Shurgard Merger in 2006. Future issuances will
be dependent upon our financing needs and capital market conditions at the time,
including the market prices of our equity securities.
Joint Venture
financing: We have historically formed and may form additional joint
ventures to facilitate the funding of future developments or
acquisitions.
Disposition of
properties: We historically have disposed of self-storage facilities only
because of condemnation proceedings, which compel us to sell. We do
not presently intend to sell any significant number of self-storage facilities
in the future, though there can be no assurance that we will not.
Investments in Real Estate
and Real Estate Entities
Investment
Policies and Practices with respect to our investments: Following are our
investment practices and policies which, though we do not anticipate any
significant alteration, can be changed by our Board of Trustees without a
shareholder vote:
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Our
investments primarily consist of direct ownership of self-storage
properties (the nature of our self-storage properties is described in Item
2, “Properties”), as well as partial interests in entities that own
self-storage properties.
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Our
partial ownership interests primarily reflect general and limited
partnership interests in entities that own self-storage facilities that
are managed by us under the “Public Storage” brand name in the U.S., as
well as storage facilities managed in Europe under the “Shurgard Storage
Centers” brand name which are owned by Shurgard
Europe.
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Additional
acquired interests in real estate (other than the acquisition of
properties from third parties) will include common equity interests in
entities in which we already have an
interest.
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To
a lesser extent, we have interests in existing commercial properties
(described in Item 2, “Properties”), containing commercial and industrial
rental space, primarily through our investment in
PSB.
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Facilities Owned by
Subsidiaries
In
addition to our direct ownership of 1,523 self-storage facilities in the U.S.
and one self-storage facility in London, England at December 31, 2009 with an
aggregate of approximately 98 million net rentable square feet, we have
controlling indirect interests in entities that own 468 self-storage facilities
in the U.S. with approximately 28 million net rentable square
feet. In addition to our self-storage space, we own approximately 1.8
million net rentable square feet of commercial space primarily located adjacent
to our self-storage facilities. Because of our controlling interest
in each of these entities, we consolidate the assets, liabilities, and results
of operations of these entities in our financial statements.
Facilities Owned by
Unconsolidated Entities
At
December 31, 2009, we had ownership interests in PSB, which owned approximately
19.6 million net rentable square feet of commercial space at December 31, 2009,
Shurgard Europe, which had ownership interests in 187 facilities with
approximately 10 million net rentable square feet of storage space, and certain
limited partnerships owning an aggregate of 19 self-storage facilities with
approximately 1 million net rentable square feet of storage
space. Collectively these entities are referred to as the
“Unconsolidated Entities.”
PSB,
which files financial statements with the SEC, and Shurgard Europe, have debt
and other obligations that are not included in our consolidated financial
statements. The limited partnerships have no significant amounts of
debt or other obligations. See Note 5 to our December 31, 2009
consolidated financial statements for further disclosure regarding the assets,
liabilities and operating results of the Unconsolidated Entities.
Limitations on
Debt
Without
the consent of holders of the various series of Senior Preferred Shares, we may
not take any action that would result in a ratio of ''Debt'' to ''Assets'' (the
''Debt Ratio'') in excess of 50%. As of December 31, 2009, the Debt
Ratio was approximately 4%. ''Debt'' means the liabilities (other
than ''accrued and other liabilities'' and “redeemable noncontrolling
interests'') that should, in accordance with U.S. generally accepted accounting
principles, be reflected on our consolidated balance sheet at the time of
determination. ''Assets'' means our total assets before a reduction
for accumulated depreciation and amortization that should, in accordance with
U.S. generally accepted accounting principles, be reflected on the consolidated
balance sheet at the time of determination.
Our bank
and senior unsecured debt agreements contain various customary financial
covenants, including limitations on the level of indebtedness and the
prohibition of the payment of dividends upon the occurrence of defined events of
default.
Employees
We have
approximately 4,900 employees in the U.S. at December 31, 2009 who render
services on behalf of the Company, primarily personnel engaged in property
operations. None of our employees in the U.S. are covered by a
collective bargaining agreement. We believe that our relations with
our employees are generally amicable.
Seasonality
We
experience minor seasonal fluctuations in the occupancy levels of self-storage
facilities with occupancies generally higher in the summer months than in the
winter months. We believe that these fluctuations result in part from
increased moving activity during the summer months.
Insurance
We have
historically carried customary property, earthquake, general liability and
workers compensation coverage through internationally recognized insurance
carriers, subject to customary levels of deductibles. The aggregate
limits on these policies of $75 million for property coverage and
$102 million for general liability are higher than estimates of maximum
probable loss that could occur from individual catastrophic events determined in
recent engineering and actuarial studies; however, in case of multiple
catastrophic events, these limits could be exhausted.
Our
tenant insurance program reinsures a program that provides insurance to
certificate holders against claims for property losses due to specific named
perils (earthquakes and floods are not covered by these policies) to goods
stored by tenants at our self-storage facilities for individual limits up to a
maximum of $5,000. We have third-party insurance coverage for claims paid
exceeding $1,000,000 resulting from any one individual event, to a limit of
$25,000,000. At December 31, 2009, there were approximately 585,000
certificate holders held by our tenants, participating in this program
representing aggregate coverage of approximately $1.3
billion. Because each certificate represents insurance of goods held
by a tenant at our self-storage facilities, the geographic concentration of this
$1.3 billion in coverage is dispersed throughout all of our U.S.
facilities. We rely on a third-party insurance company to provide the
insurance and are subject to licensing requirements and regulations in several
states.
ITEM
1A. Risk
Factors
In
addition to the other information in our Annual Report on Form 10-K, you should
consider the risks described below that we believe may be material to investors
in evaluating the Company. This section contains forward-looking
statements, and in considering these statements, you should refer to the
qualifications and limitations on our forward-looking statements that are
described in Forward
Looking Statements at the beginning of Item 1.
Since
our business consists primarily of acquiring and operating real estate, we are
subject to the risks related to the ownership and operation of real estate that
can adversely impact our business and financial condition.
The value of our investments may be
reduced by general risks of real estate
ownership. Since we derive substantially all of
our income from real estate operations, we are subject to the general risks of
acquiring and owning real estate-related assets, including:
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lack
of demand for rental spaces or units in a locale;
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changes
in general economic or local conditions;
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natural
disasters, such as earthquakes and floods; which could exceed the
aggregate limits of our insurance
coverage;
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potential
terrorist attacks;
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changes
in supply of or demand for similar or competing facilities in an area;
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the
impact of environmental protection laws;
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changes
in interest rates and availability of permanent mortgage funds which may
render the sale of a nonstrategic property difficult or unattractive
including the impact of the current turmoil in the credit markets;
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increases
in insurance premiums, property tax assessments and other operating and
maintenance expenses;
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transactional
costs and liabilities, including transfer
taxes;
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adverse
changes in tax, real estate and zoning laws and regulations; and
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tenant
and employment-related claims.
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In
addition, we self-insure certain of our property loss, liability, and workers
compensation risks for which other real estate companies may use third-party
insurers. This results in a higher risk of losses that are not
covered by third-party insurance contracts, as described in Note 13 under
“Insurance and Loss Exposure” to our December 31, 2009 consolidated
financial statements.
There is significant competition
among self-storage facilities and from other storage
alternatives. Most of our properties are
self-storage facilities, which generated most of our revenue for the year ended
December 31, 2009. Local market conditions will play a significant
part in how competition will affect us. Competition in the market areas in which
many of our properties are located from other self-storage facilities and other
storage alternatives is significant and has affected the occupancy levels,
rental rates and operating expenses of most of our properties. Any
increase in availability of funds for investment in real estate may accelerate
competition. Further development of self-storage facilities may
intensify competition among operators of self-storage facilities in the market
areas in which we operate.
We may incur significant
environmental costs and liabilities. As an owner
and operator of real properties, under various federal, state and local
environmental laws, we are required to clean up spills or other releases of
hazardous or toxic substances on or from our properties. Certain
environmental laws impose liability whether or not the owner knew of, or was
responsible for, the presence of the hazardous or toxic
substances. In some cases, liability may not be limited to the value
of the property. The presence of these substances, or the failure to
properly remediate any resulting contamination, whether from environmental or
microbial issues, also may adversely affect the owner’s or operator’s ability to
sell, lease or operate its property or to borrow using its property as
collateral.
We have
conducted preliminary environmental assessments of most of our properties (and
intend to conduct these assessments in connection with property acquisitions) to
evaluate the environmental condition of, and potential environmental liabilities
associated with, our properties. These assessments generally consist
of an investigation of environmental conditions at the property (not including
soil or groundwater sampling or analysis), as well as a review of available
information regarding the site and publicly available data regarding conditions
at other sites in the vicinity. In connection with these property
assessments, our operations and recent property acquisitions, we have become
aware that prior operations or activities at some facilities or from nearby
locations have or may have resulted in contamination to the soil or groundwater
at these facilities. In this regard, some of our facilities are or
may be the subject of federal or state environmental investigations or remedial
actions. We have obtained, with respect to recent acquisitions, and
intend to obtain with respect to pending or future acquisitions, appropriate
purchase price adjustments or indemnifications that we believe are sufficient to
cover any related potential liability. Although we cannot provide any
assurance, based on the preliminary environmental assessments, we believe we
have funds available to cover any liability from environmental contamination or
potential contamination and we are not aware of any environmental contamination
of our facilities material to our overall business, financial condition or
results of operations.
There has
been an increasing number of claims and litigation against owners and managers
of rental properties relating to moisture infiltration, which can result in mold
or other property damage. When we receive a complaint concerning
moisture infiltration, condensation or mold problems and/or become aware that an
air quality concern exists, we implement corrective measures in accordance with
guidelines and protocols we have developed with the assistance of outside
experts. We seek to work proactively with our tenants to resolve
moisture infiltration and mold-related issues, subject to our contractual
limitations on liability for such claims. However, we can give no
assurance that material legal claims relating to moisture infiltration and the
presence of, or exposure to, mold will not arise in the future.
Delays in development and fill-up of
our properties would reduce our
profitability. From January 1, 2005, through
December 31, 2009, we opened 17 newly developed self-storage facilities in the
U.S. at a cost of approximately $142 million. Shurgard Europe
has developed and opened 55 facilities since January 1, 2005 at a cost of
approximately $426 million, and has two development projects under construction
with total estimated costs of $24 million. Delays in the rent-up
of newly developed storage space as a result of competition or other factors,
including the slowdown in the general economy which has negatively impacted
storage demand, would adversely impact our profitability. If we or
Shurgard Europe were to commence significant development of facilities,
construction delays due to weather, unforeseen site conditions, personnel
problems, and other factors, as well as cost overruns, would adversely affect
our profitability.
Property taxes can increase and
cause a decline in yields on investments. Each of
our properties is subject to real property taxes. These real property
taxes may increase in the future as property tax rates change and as our
properties are assessed or reassessed by tax authorities. Recent
local government shortfalls in tax revenue may cause pressure to increase tax
rates or assessment levels. Such increases could adversely impact our
profitability.
We must comply with the Americans
with Disabilities Act and fire and safety regulations, which can require
significant expenditures. All our properties must
comply with the Americans with Disabilities Act and with related regulations
(the “ADA”). The ADA has separate compliance requirements for “public
accommodations” and “commercial facilities,” but generally requires that
buildings be made accessible to persons with disabilities. Various
state laws impose similar requirements. A failure to comply with the
ADA or similar state laws could result in government imposed fines on us and
could award damages to individuals affected by the failure. In
addition, we must operate our properties in compliance with numerous local fire
and safety regulations, building codes, and other land use
regulations. Compliance with these requirements can require us to
spend substantial amounts of money, which would reduce cash otherwise available
for distribution to shareholders. Failure to comply with these
requirements could also affect the marketability of our real estate
facilities.
We incur liability from tenant and
employment-related claims. From time to time
we must resolve tenant claims and employment-related claims by corporate level
and field personnel.
Global
economic conditions could adversely affect our business, financial condition,
growth and access to capital.
There
continues to be global economic uncertainty, elevated levels of unemployment,
reduced levels of economic activity, and it is uncertain as to when economic
conditions will improve. These negative economic conditions in the
markets where we operate facilities, and other events or factors that adversely
affect disposable incomes, have and are likely to continue to adversely affect
our business.
As a
further result of the current global financial crisis, our ability to issue
preferred shares or borrow at reasonable rates has been and may continue to be
adversely affected by challenging credit market conditions. The
issuance of perpetual preferred securities historically has been a significant
source of capital to grow our business. While we currently believe
that we have sufficient working capital and capacity under our credit facilities
and our retained cash flow from operations to continue to operate our business
as usual, long-term continued turbulence in the credit markets and in the
national economy may adversely affect our access to capital and adversely impact
earnings growth that might otherwise result from the acquisition and development
of real estate facilities.
We
grow our business primarily through acquisitions of existing properties and are
subject to risks related to acquisitions that may adversely affect our growth
and financial results.
We grow
our business in large part through the acquisition of existing properties,
including acquisitions of businesses owned by other storage
operators. In addition to the general risks related to real estate
described above which may also adversely impact operations at acquired
properties, we are also subject to the following risks in connection with
property acquisitions and the integration of acquired properties into our
operations.
Any failure by us to manage
acquisitions and other significant transactions successfully could negatively
impact our financial results. If acquired facilities are not
properly integrated into our system, our financial results may
suffer.
Any failure to successfully
integrate acquired operations with our existing business could negatively impact
our financial results. To fully realize any anticipated benefits from an
acquisition, we must successfully complete the combination of the businesses of
Public Storage and acquired properties in a manner that permits cost savings to
be realized. It is possible that the integration process could result
in a decline in occupancy and/or rental rates, the disruption of ongoing
businesses or inconsistencies in standards, controls, procedures, practices,
policies and compensation arrangements that adversely affect our ability to
maintain relationships with tenants and employees or to achieve anticipated
benefits, particularly with large acquisitions.
Acquired properties are subject to
property tax reappraisals which may increase our property tax expense.
Facilities that we acquire are subject to property tax reappraisal, which
can increase property tax expense. There is a degree of uncertainty
involved in estimating the property tax expense of an acquired
property. In future acquisitions of properties, if actual property
tax expenses following reappraisal are significantly greater than we expected,
our operating results could be negatively impacted.
As a result of our ownership of 49%
of the international operations of Shurgard Europe with a book value of $272.3
million at December 31, 2009, and our loan to Shurgard Europe aggregating $561.7
million at December 31, 2009, we are exposed to additional risks related to
international businesses that may adversely impact our business and financial
results.
We have
limited experience in European operations, which may adversely impact our
ability to operate profitably in Europe. In addition, European
operations have specific inherent risks, including without limitation the
following:
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currency
risks, including currency fluctuations, which can impact the fair value of
our $272.3 million book value equity investment in Shurgard Europe, as
well as interest payments and the net proceeds to be received upon
repayment of our loan to Shurgard
Europe;
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• unexpected
changes in legislative and regulatory requirements;
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• potentially
adverse tax burdens;
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• burdens
of complying with different permitting standards, environmental and labor
laws and a wide variety of foreign
laws;
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• the
potential impact of collective
bargaining;
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• obstacles
to the repatriation of earnings and cash;
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• regional,
national and local political uncertainty;
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• economic
slowdown and/or downturn in foreign markets;
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• difficulties
in staffing and managing international operations;
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• reduced
protection for intellectual property in some countries;
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• inability
to effectively control less than wholly-owned partnerships and joint
ventures; and
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• the
importance of local senior management and the potential negative
ramifications of the departure of key
executives.
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Based
upon current market conditions and recent operating result trends of Shurgard
Europe, the following specific risks apply with respect to our investment in,
and loan to, Shurgard Europe:
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We have an obligation to loan
up to an additional €185 million ($265.2 million at December 31, 2009) to
Shurgard Europe, and provide additional equity contributions of up to
$66.4 million. We have a commitment, which expires March
31, 2010, to provide up to €185 million of additional loans to Shurgard
Europe under the same terms as the existing loans, to fund the possible
acquisition of Shurgard Europe’s joint venture partner’s interest in the
joint ventures and/or repay Shurgard Europe’s pro-rata share of the joint
venture debt. In addition, we are committed to provide up to
$66.4 million of additional equity contributions to Shurgard Europe to
fund certain other investing activities. While the acquisition
of the joint venture partners’ interests are subject to our approval,
Shurgard Europe has no obligation to acquire these interests, and any
other investing activities generally require our approval, these
commitments may require us to provide additional funds to Shurgard Europe
in amounts or under terms that we may not have otherwise agreed
to.
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Joint Ventures that Shurgard
Europe has a 20% interest in have significant refinancing
requirements. Shurgard Europe’s two joint ventures
collectively had approximately €224 million ($321 million) of outstanding
debt payable to third parties at December 31, 2009. These loans
are secured by the joint ventures’ respective facilities, and are not
guaranteed by Public Storage, Shurgard Europe, or any third
party. One of the joint venture loans, totaling €107 million
($153 million), is due May 2011 and the other joint venture loan,
totaling €117 million ($168 million), is due in July
2010.
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If
Shurgard Europe’s joint ventures were unable to refinance or otherwise repay
these loans when due, it is our expectation that the loans would be repaid
with each joint venture partner contributing their pro rata share towards
repayment. Shurgard Europe’s pro rata share, in the aggregate, would
be approximately €50 million ($72 million) which Shurgard Europe fund
either from available cash on hand or equity contributions from Public Storage
and our joint venture partner. Further, it is also possible that
Shurgard Europe’s joint venture partner would be unable to contribute its pro
rata share to repay the loans and may trigger, through its rights under the
related partnership documents, the liquidation of the partnership, which could
result in Shurgard Europe’s acquisition of its joint venture partner’s interest
or the sale of the properties to third parties, with potential loss or reduction
to our investment if the liquidation proceeds were not sufficient. If
Shurgard Europe were to acquire its joint venture partner’s interest by March
31, 2010, it could borrow on the aforementioned €185 million loan commitment we
have provided to fund the purchase of the joint venture partner’s interest and
repayment of the loans.
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Shurgard Europe’s ability to
refinance its $561.7 million loan from us, which is due in March 2013, may
be limited if current market conditions persist. We have
loaned Shurgard Europe €391.9 million ($561.7 million at December 31,
2009), and this loan is due in March 2013. If the currently
constrained capital market and bank loan availability persists, it is
likely that Shurgard Europe may be unable to refinance the entire
loan. If Shurgard Europe is unable to obtain financing to raise
funds to repay our loan, we may have to negotiate an equity or debt
contribution by our joint venture partner to Shurgard Europe, extend the
loan, or otherwise take steps under our lender
rights. Any of these steps could negatively impact our
investment and the liquidity of Shurgard
Europe.
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Shurgard Europe’s operating
trends are negative. Shurgard Europe’s same-store
revenue is down 3.6% in the year ended December 31, 2009 as compared to
2008 on a constant exchange rate basis. Shurgard Europe may
have continued reductions in same-store revenues, which will adversely
impact their operating results and, as a result, the value of our
investment in Shurgard Europe. Such reductions may negatively
impact Shurgard Europe’s liquidity and ability to repay its debt,
including the debt owed to Public Storage, due to declining interest
coverage ratios and other similar metrics upon which potential lenders
typically base their lending
decisions.
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We
are subject to risks related to our ownership of assets in joint venture
structures.
In
connection with our 2006 acquisition of Shurgard and the acquisition of a 51%
interest in Shurgard Europe by an institutional investor on March 31, 2008, we
have interests in several joint ventures. Joint ventures may present
additional risks, including without limitation, the following:
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Risks
related to the financial strength, common business goals and strategies
and cooperation of the venture
partner.
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The
inability to take some actions with respect to the joint venture
activities that we may believe are favorable, if our joint venture partner
does not agree.
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The
risk that we could lose our REIT status based upon actions of the joint
ventures if we are unable to effectively control these indirect
investments.
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The
risk that we may not control the legal entity that has title to the real
estate.
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The
risk that our investments in these entities may not be easily sold or
readily accepted as collateral by our lenders, or that lenders may view
assets held in joint ventures as less favorable as
collateral.
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The
risk that the joint ventures could take actions which may negatively
impact our preferred shares and debt ratings, to the extent that we could
not prevent these actions.
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The
risk that we may be constrained from certain activities of our own that we
would otherwise deem favorable, due to non-compete clauses in our joint
venture arrangements.
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The
risk that we will be unable to resolve disputes with our joint venture
partners.
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The Hughes Family could control us
and take actions adverse to other shareholders.
At
December 31, 2009, B. Wayne Hughes, Chairman of the Board of Trustees and his
family (the “Hughes Family”) owned approximately 17.3% of our aggregate
outstanding common shares. Our declaration of trust permits the
Hughes Family to own up to 47.66% of our outstanding common shares and also
allows for cumulative voting in the election of
trustees. Consequently, the Hughes Family may significantly influence
matters submitted to a vote of our shareholders, including electing trustees,
amending our organizational documents, dissolving and approving other
extraordinary transactions, such as a takeover attempt, even though such actions
may not be favorable to other shareholders.
Certain
provisions of Maryland law and in our declaration of trust and bylaws may
prevent changes in control or otherwise discourage takeover attempts beneficial
to shareholders.
Certain
provisions of Maryland law may have the effect of deterring a third party from
making a proposal to acquire us or of impeding a change in control under
circumstances that otherwise could provide the holders of our shares with the
opportunity to realize a premium over the then-prevailing market price of our
shares. Currently, the Board has opted not to subject the Company to
the statutory limitations of either the business combination provisions or the
control share acquisitions provisions of Maryland law, but the Board may change
this option as to either statute in the future. If the Board chooses
to make them applicable to us, these provisions could delay, deter or prevent a
transaction or change of control that might involve a premium price for holders
of common shares or might otherwise be in their best
interest. Similarly, (1) limitations on removal of trustees in our
declaration of trust, (2) restrictions on the acquisition of our shares of
beneficial interest, (3) the power to issue additional common shares, preferred
shares or equity shares, (4) the advance notice provisions of our bylaws
and (5) the Board’s ability under Maryland law, without obtaining shareholder
approval, to implement takeover defenses that we may not yet have and to take,
or refrain from taking, other actions without those decisions being subject to
any heightened standard of conduct or standard of review, could have the same
effect of delaying, deterring or preventing a transaction or a change in control
that might involve a premium price for holders of the common shares or might
otherwise be in common shareholders’ best interest.
To
preserve our status as a REIT under the Code, our declaration of trust contains
limitations on the number and value of shares of beneficial interest that any
person may own. These ownership limitations generally limit the
ability of a person, other than the Hughes Family (as defined in our declaration
of trust) and other than “designated investment entities” (as defined in our
declaration of trust), to own more than 3% of our outstanding common shares or
9.9% of the outstanding shares of any class or series of preferred or equity
shares, in each case, in value or number of shares, whichever is more
restrictive, unless an exemption is granted by our board of
trustees. These limitations could discourage, delay or prevent a
transaction involving a change in control of our company not approved by our
board of trustees.
If
we failed to qualify as a REIT for income tax purposes, we would be taxed as a
corporation, which would substantially reduce funds available for payment of
dividends.
Investors
are subject to the risk that we may not qualify as a REIT for income tax
purposes. REITs are subject to a range of complex organizational and operational
requirements. As a REIT, we must distribute with respect to each year
at least 90% of our REIT taxable income to our shareholders (which may take into
account certain dividends paid in the subsequent year). Other
restrictions apply to our income and assets. Our REIT status is also
dependent upon the ongoing qualification of our affiliate, PSB, as a REIT, as a
result of our substantial ownership interest in that company.
For any
taxable year that we fail to qualify as a REIT and are unable to avail ourselves
of relief provisions set forth in the Code, we would be subject to federal
income tax at the regular corporate rates on all of our taxable income, whether
or not we make any distributions to our shareholders. Those taxes
would reduce the amount of cash available for distribution to our shareholders
or for reinvestment and would adversely affect our earnings. As a
result, our failure to qualify as a REIT during any taxable year could have a
material adverse effect upon us and our shareholders. Furthermore,
unless certain relief provisions apply, we would not be eligible to elect REIT
status again until the fifth taxable year that begins after the first year for
which we fail to qualify.
We have
also assumed, based on Shurgard Storage Center, Inc.’s public filings and due
diligence performed in connection with our acquisition of Shurgard, that
Shurgard qualified as a REIT through the date of the Shurgard Merger on August
22, 2006. However, if Shurgard failed to qualify as a REIT, we
generally would have succeeded to or incurred significant tax liabilities
(including the significant tax liability that would have resulted from the
deemed sale of assets by Shurgard to us as part of the Shurgard
Merger).
We
may pay some taxes, reducing cash available for shareholders.
Even if
we qualify as a REIT for federal income tax purposes, we are required to pay
some federal, foreign, state and local taxes on our income and
property. Since January 1, 2001, certain corporate subsidiaries of
the Company have elected to be treated as “taxable REIT subsidiaries” of the
Company for federal income tax purposes. A taxable REIT subsidiary is taxable as
a regular corporation and may be limited in its ability to deduct interest
payments made to us in excess of a certain amount. In addition, if we
receive or accrue certain amounts and the underlying economic arrangements among
our taxable REIT subsidiaries and us are not comparable to similar arrangements
among unrelated parties, we could be subject to a 100% penalty tax on those
payments in excess of amounts the Internal Revenue Service deems reasonable
between unrelated parties. To the extent that the Company is required
to pay federal, foreign, state or local taxes, we will have less cash available
for distribution to shareholders.
We
have become increasingly dependent upon automated processes, telecommunications,
and the Internet and are faced with system security risks.
We have
become increasingly centralized and dependent upon automated information
technology processes, and certain critical components of our operating systems
are dependent upon third party providers. As a result, we could be
severely impacted by a catastrophic occurrence, such as a natural disaster or a
terrorist attack, or a circumstance that disrupted operations at our third party
providers. Even though we believe we utilize appropriate duplication
and back-up procedures, a significant outage in our third party providers could
negatively impact our operations. In addition, a portion of our
business operations are conducted over the Internet, increasing the risk of
viruses that could cause system failures and disruptions of
operations. Experienced computer programmers may be able to penetrate
our network security and misappropriate our confidential information, create
system disruptions or cause shutdowns. Nearly half of our move-ins
comes from sales channels dependent upon telecommunications (telephone or
Internet).
We
have no interest in Canadian self-storage facilities owned by the Hughes
Family.
The
Hughes Family has ownership interests in, and operates, 52 self-storage
facilities in Canada under the name “Public Storage”, which name we license to
the Hughes Family for use in Canada on a non-exclusive basis. We
currently do not own any interests in these facilities nor do we own any
facilities in Canada. We have a right of first refusal to acquire the
stock or assets of the corporation engaged in the operation of the self-storage
facilities in Canada if the Hughes Family or the corporation agrees to sell
them. However, we have no ownership interest in the operations of
this corporation, have no right to acquire their stock or assets unless the
Hughes family decides to sell, and receive no benefit from the profits and
increases in value of the Canadian self-storage facilities. Although
we have no current plans to enter the Canadian self-storage market, if we choose
to do so without acquiring the Hughes Family interests in their Canadian
self-storage properties, our right to use the Public Storage name in Canada may
be shared with the Hughes Family unless we are able to terminate the license
agreement.
Through
our subsidiaries, we continue to reinsure risks relating to loss of goods stored
by tenants in the self-storage facilities in Canada in which the Hughes Family
has ownership interests. We acquired the tenant insurance business on
December 31, 2001 through our acquisition of PS Insurance Company, or
PSICH. For the years ended December 31, 2009 and 2008, PSICH received
$642,000 and $768,000, respectively, in reinsurance premiums attributable to the
Canadian Facilities. Since PSICH’s right to provide tenant
reinsurance to the Canadian Facilities may be qualified, there is no assurance
that these premiums will continue.
We
are subject to laws and governmental regulations and actions that affect our
operating results and financial condition.
Our
business is subject to regulation under a wide variety of U.S. federal, state
and local laws, regulations and policies including those imposed by the SEC, the
Sarbanes-Oxley Act of 2002 and New York Stock Exchange, as well as applicable
labor laws. Although we have policies and procedures designed to comply with
applicable laws and regulations, failure to comply with the various laws and
regulations may result in civil and criminal liability, fines and penalties,
increased costs of compliance and restatement of our financial
statements.
There can
also be no assurance that, in response to current economic conditions or the
current political environment or otherwise, laws and regulations will not be
implemented or changed in ways that adversely affect our operating results and
financial condition, such as current federal legislative proposals to expand
health care coverage costs or facilitate union activity or otherwise increase
operating costs.
Our
tenant insurance business is subject to governmental regulation which could
reduce our profitability or limit our growth.
We hold
Limited Lines Self Storage Insurance Agent licenses from a number of individual
state Departments of Insurance and are subject to state governmental regulation
and supervision. This state governmental supervision could reduce our
profitability or limit our growth by increasing the costs of regulatory
compliance, limiting or restricting the products or services we provide or the
methods by which we provide products and services, or subjecting our businesses
to the possibility of regulatory actions or proceedings. Our
continued ability to maintain these Limited Lines Self Storage Insurance Agent
licenses in the jurisdictions in which we are licensed depends on our compliance
with the rules and regulations promulgated from time to time by the regulatory
authorities in each of these jurisdictions. Furthermore, state
insurance departments conduct periodic examinations, audits and investigations
of the affairs of insurance agents.
In all
jurisdictions, the applicable laws and regulations are subject to amendment or
interpretation by regulatory authorities. Generally, such authorities
are vested with relatively broad discretion to grant, renew and revoke licenses
and approvals and to implement regulations. Accordingly, we may be
precluded or temporarily suspended from carrying on some or all of our
activities or otherwise fined or penalized in a given
jurisdiction. No assurances can be given that our businesses can
continue to be conducted in any given jurisdiction as it has been conducted in
the past. For the year ended December 31, 2009, revenues from our
tenant reinsurance business represented approximately 4% of our
revenues.
Terrorist
attacks and the possibility of wider armed conflict may have an adverse impact
on our business and operating results and could decrease the value of our
assets.
Terrorist
attacks and other acts of violence or war could have a material adverse impact
on our business and operating results. There can be no assurance that
there will not be further terrorist attacks against the U.S., the European
Community, or their businesses or interests. Attacks or armed
conflicts that directly impact one or more of our properties could significantly
affect our ability to operate those properties and thereby impair our operating
results. Further, we may not have insurance coverage for losses
caused by a terrorist attack. Such insurance may not be available, or
if it is available and we decide to obtain such terrorist coverage, the cost for
the insurance may be significant in relationship to the risk
overall. In addition, the adverse effects that such violent acts and
threats of future attacks could have on the U.S. economy could similarly have a
material adverse effect on our business and results of
operations. Finally, further terrorist acts could cause the U.S. to
enter into a wider armed conflict, which could further impact our business and
operating results.
Developments
in California may have an adverse impact on our business and financial
results.
We are
headquartered in, and approximately one-fifth of our properties in the U.S. are
located in California. The state of California and many local jurisdictions are
facing severe budgetary problems and deficits. Action that may be
taken in response to these problems, such as increases in property taxes on
commercial properties, changes to sales taxes, adoption of a proposed “Business
Net Receipts Tax” or other governmental efforts to raise revenues could
adversely impact our business and results of operations. In addition,
we could be adversely impacted by efforts to reenact legislation mandating
medical insurance for employees of California businesses and members of their
families.
ITEM
1B. Unresolved Staff
Comments
Not
applicable.
ITEM
2. Properties
At
December 31, 2009, we had direct and indirect ownership interests in 2,010 and
188 storage facilities located in 38 states within the U.S. and seven Western
European nations, respectively:
|
|
|
|
|
|
|
|
Number
of Storage Facilities (a)
|
|
|
Net
Rentable Square Feet (in thousands)
|
|
|
United
States:
|
|
|
|
|
|
|
|
California:
|
|
|
|
|
|
|
|
Southern
|
|
|
204 |
|
|
|
14,231 |
|
|
Northern
|
|
|
170 |
|
|
|
9,927 |
|
|
Texas
|
|
|
236 |
|
|
|
15,493 |
|
|
Florida
|
|
|
191 |
|
|
|
12,520 |
|
|
Illinois
|
|
|
123 |
|
|
|
7,800 |
|
|
Washington
|
|
|
91 |
|
|
|
6,028 |
|
|
Georgia
|
|
|
92 |
|
|
|
5,964 |
|
|
North
Carolina
|
|
|
69 |
|
|
|
4,775 |
|
|
Virginia
|
|
|
78 |
|
|
|
4,453 |
|
|
New
York
|
|
|
62 |
|
|
|
4,015 |
|
|
Colorado
|
|
|
59 |
|
|
|
3,713 |
|
|
New
Jersey
|
|
|
56 |
|
|
|
3,524 |
|
|
Maryland
|
|
|
56 |
|
|
|
3,290 |
|
|
Minnesota
|
|
|
44 |
|
|
|
2,990 |
|
|
Michigan
|
|
|
43 |
|
|
|
2,755 |
|
|
Arizona
|
|
|
37 |
|
|
|
2,259 |
|
|
South
Carolina
|
|
|
40 |
|
|
|
2,155 |
|
|
Missouri
|
|
|
37 |
|
|
|
2,136 |
|
|
Oregon
|
|
|
39 |
|
|
|
2,006 |
|
|
Indiana
|
|
|
31 |
|
|
|
1,926 |
|
|
Pennsylvania
|
|
|
28 |
|
|
|
1,867 |
|
|
Ohio
|
|
|
30 |
|
|
|
1,860 |
|
|
Nevada
|
|
|
24 |
|
|
|
1,561 |
|
|
Tennessee
|
|
|
27 |
|
|
|
1,528 |
|
|
Kansas
|
|
|
22 |
|
|
|
1,310 |
|
|
Massachusetts
|
|
|
19 |
|
|
|
1,179 |
|
|
Wisconsin
|
|
|
15 |
|
|
|
968 |
|
|
Other
states (12 states)
|
|
|
87 |
|
|
|
4,813 |
|
|
Total
–
U.S.
|
|
|
2,010 |
|
|
|
127,046 |
|
|
|
|
|
|
|
|
|
|
|
|
Europe
(b):
|
|
|
|
|
|
|
|
|
|
France
|
|
|
56 |
|
|
|
2,958 |
|
|
Netherlands
|
|
|
39 |
|
|
|
2,078 |
|
|
Sweden
|
|
|
30 |
|
|
|
1,614 |
|
|
Belgium
|
|
|
21 |
|
|
|
1,254 |
|
|
United
Kingdom
|
|
|
21 |
|
|
|
1,119 |
|
|
Germany
|
|
|
11 |
|
|
|
552 |
|
|
Denmark
|
|
|
10 |
|
|
|
550 |
|
|
Total
-
Europe
|
|
|
188 |
|
|
|
10,125 |
|
|
|
|
|
|
|
|
|
|
|
|
Grand
Total
|
|
|
2,198 |
|
|
|
137,171 |
|
(a) See
Schedule III: Real Estate and Accumulated Depreciation in the
Company’s 2009 financials, for a complete list of properties consolidated by the
Company.
(b) The
facilities located in Europe include one facility in the United Kingdom that we
wholly own, as well as the facilities in which Shurgard Europe has an ownership
interest.
Our
facilities are generally operated to maximize cash flow through the regular
review and adjustment of rents charged to our tenants. For the year
ended December 31, 2009, the weighted average occupancy level and the average
realized rent per occupied square foot for our self-storage facilities were
approximately 88% and $12.77, respectively, in the U.S. and 79% and $25.43,
respectively, in Europe.
At
December 31, 2009, 89 of our U.S. facilities were encumbered by an aggregate of
$227 million in secured notes payable.
We have
no specific policy as to the maximum size of any one particular self-storage
facility. However, none of our facilities involves, or is expected to
involve, 1% or more of our total assets, gross revenues or net
income.
Description of
Self-Storage Facilities: Self-storage
facilities, which comprise the majority of our investments, are designed to
offer accessible storage space for personal and business use at a relatively low
cost. A user rents a fully enclosed space, securing the space with
their own lock, which is for the user's exclusive use and to which only the user
has access on an unrestricted basis during business hours. On-site
operation is the responsibility of property managers who are supervised by
district managers. Some self-storage facilities also include rentable
uncovered parking areas for vehicle storage. Storage facility spaces
are rented on a month-to-month basis. Rental rates vary according to
the location of the property, the size of the storage space, and other
characteristics that affect the relative attractiveness of each particular
space, such as whether the space has drive-up access or its proximity to
elevators. All of our self-storage facilities in the U.S. are
operated under the "Public Storage" brand name, while our facilities in Europe
are operated under the “Shurgard Storage Centers” brand name.
Users of
space in self-storage facilities include individuals from virtually all
demographic groups, as well as businesses. Individuals usually obtain
this space for storage of furniture, household appliances, personal belongings,
motor vehicles, boats, campers, motorcycles and other household
goods. Businesses normally employ this space for storage of excess
inventory, business records, seasonal goods, equipment and
fixtures.
Our
self-storage facilities generally consist of three to seven buildings containing
an aggregate of between 350 to 750 storage spaces, most of which have between 25
and 400 square feet and an interior height of approximately eight to 12
feet.
We
experience minor seasonal fluctuations in the occupancy levels of self-storage
facilities with occupancies generally higher in the summer months than in the
winter months. We believe that these fluctuations result in part from
increased moving activity during the summer months.
Our
self-storage facilities are geographically diversified and are located primarily
in or near major metropolitan markets in 38 states in the U.S. and seven Western
European nations. Generally our self-storage facilities are located
in heavily populated areas and close to concentrations of apartment complexes,
single family residences and commercial developments. However, there
may be circumstances in which it may be appropriate to own a property in a less
populated area, for example, in an area that is highly visible from a major
thoroughfare and close to, although not in, a heavily populated
area. Moreover, in certain population centers, land costs and zoning
restrictions may create a demand for space in nearby less populated
areas.
Competition
from other self-storage facilities as well as other forms of storage in the
market areas in which most of our properties are located in the U.S., and
certain of our properties in Western Europe, is significant and has affected the
occupancy levels, rental rates, and operating expenses of many of our
properties.
Since our
investments are primarily self-storage facilities, our ability to preserve our
investments and achieve our objectives is dependent in large part upon success
in this field. We believe that self-storage facilities, upon
stabilization, have attractive characteristics consisting of high profit
margins, a broad tenant base and low levels of capital expenditures to maintain
their condition and appearance. While we have seen a decrease in cash
flow generation at our same-store facilities in 2009 due primarily to the high
unemployment, historically, upon stabilization after an initial fill-up period,
the U.S. self-storage facilities we have an interest in have generally shown a
high degree of consistency in generating cash flows.
Commercial
Properties: In addition to our interests in 2,198 self-storage
facilities, we have an interest in PSB, which, as of December 31, 2009, owns and
operates approximately 19.6 million net rentable square feet of commercial space
in eight states. At December 31, 2009, the $326 million book value of
our investment in PSB represents approximately 3% of our total
assets. The $656 million market value of our investment in PSB at
December 31, 2009 represents approximately 7% of the book value of our total
assets. We also directly own 1.8 million net rentable square
feet of commercial space, primarily located at our existing self-storage
locations, comprised primarily of individual retail locations. This
space is managed for us by PSB.
The
commercial properties owned by PSB consist primarily of flex, multi-tenant
office and industrial space. Flex space is defined as buildings that
are configured with a combination of office and warehouse space and can be
designed to fit a wide variety of uses (including office, assembly, showroom,
laboratory, light manufacturing and warehouse space).
Environmental
Matters: Our policy is to accrue environmental assessments and estimated
remediation cost when it is probable that such efforts will be required and the
related costs can be reasonably estimated. Our current practice is to
conduct environmental investigations in connection with property
acquisitions. Although there can be no assurance, we are not aware of
any environmental contamination of any of our facilities, which individually or
in the aggregate would be material to our overall business, financial condition,
or results of operations.
ITEM
3. Legal
Proceedings
Brinkley v. Public Storage,
Inc. (filed April 2005) (Superior Court of California – Los Angeles
County)
The
plaintiff sued the Company on behalf of a purported class of California
non-exempt employees based on various California wage and hour
laws. Plaintiff sought certification for alleged meal period
violations, rest period violations, failure to pay for travel time, failure to
pay for mileage reimbursement, and for wage statement violations. The
Court certified subclasses based only on alleged meal period and wage statement
violations. In June 2007, the Court granted the Company’s summary
judgment motion as to the causes of action relating to the subclasses certified
and dismissed those claims. Plaintiff appealed. The Court
of Appeals sustained the dismissal. The California Supreme Court
granted review but deferred the matter pending disposition of a related issue in
another case.
Other
Items
We are a
party to various claims, complaints, and other legal actions that have arisen in
the normal course of business from time to time that are not described
above. We believe that it is unlikely that the outcome of these other
pending legal proceedings including employment and tenant claims, in the
aggregate, will have a material adverse impact upon our operations or financial
position.
PART II
ITEM
5. Market for Registrant’s
Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
Securities
|
a.
|
Market
Information of the Registrant’s Common
Equity:
|
Our
Common Shares (NYSE: PSA), including those of Public Storage, Inc. prior to our
reorganization in June 2007, have been listed on the New York Stock Exchange
since October 19, 1984. Our Depositary Shares each representing
1/1,000 of an Equity Share, Series A (NYSE:PSAA) (see section c. below),
including those of Public Storage, Inc. prior to our reorganization in June 2007
have been listed on the New York Stock Exchange since February 14,
2000.
The
following table sets forth the high and low sales prices of our Common Shares on
the New York Stock Exchange composite tapes for the applicable
periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
1st
|
|
$ |
94.98 |
|
|
$ |
65.66 |
|
|
|
2nd
|
|
|
98.01 |
|
|
|
78.85 |
|
|
|
3rd
|
|
|
102.48 |
|
|
|
75.00 |
|
|
|
4th
|
|
|
105.87 |
|
|
|
52.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
1st
|
|
|
79.88 |
|
|
|
45.35 |
|
|
|
2nd
|
|
|
68.97 |
|
|
|
53.32 |
|
|
|
3rd
|
|
|
79.47 |
|
|
|
61.35 |
|
|
|
4th
|
|
|
85.10 |
|
|
|
70.76 |
|
The
following table sets forth the high and low sales prices of our Depositary
Shares Each Representing 1/1,000 of an Equity Share, Series A on the New York
Stock Exchange composite tapes for the applicable periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
1st
|
|
$ |
26.00 |
|
|
$ |
24.14 |
|
|
|
2nd
|
|
|
26.33 |
|
|
|
25.05 |
|
|
|
3rd
|
|
|
26.50 |
|
|
|
24.50 |
|
|
|
4th
|
|
|
26.05 |
|
|
|
18.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
1st
|
|
|
25.00 |
|
|
|
21.38 |
|
|
|
2nd
|
|
|
25.40 |
|
|
|
21.39 |
|
|
|
3rd
|
|
|
25.68 |
|
|
|
24.17 |
|
|
|
4th
|
|
|
32.35 |
|
|
|
25.10 |
|
As of
February 15, 2010, there were approximately 18,788 holders of record of Common
Shares and approximately 9,190 holders of Depositary Shares Each Representing
1/1,000 of an Equity Share, Series A.
We have
paid quarterly distributions to our shareholders since 1981, our first full year
of operations. During 2009, we paid distributions to our common
shareholders of $0.55 per common share for each of the quarters ended March 31,
June 30, September 30 and December 31. Total distributions on common
shares for 2009 amounted to $370.4 million or $2.20 per share. During
2008, we paid distributions to our common shareholders of $0.55 per common share
for each of the quarters ended March 31, June 30 and September 30, and a
distribution of $1.15 per common share (including a $0.60 per share special
dividend) for the quarter ended December 31. Total distributions on
common shares for 2008 amounted to $470.8 million or $2.80 per
share. Included in these amounts are $101.0 million or $0.60 per
common share with respect to a special cash dividend paid in December
2008. During 2007, we paid distributions to our common shareholders
of $0.50 per common share for each of the quarters ended March 31, June 30,
September 30 and December 31. Total distributions on common shares
for 2007 amounted to $338.7 million or $2.00 per share.
Holders
of common shares are entitled to receive distributions when and if declared by
our Board of Trustees out of any funds legally available for that
purpose. In order to maintain our REIT status for federal income tax
purposes, we are generally required to pay dividends at least equal to 90% of
our real estate investment trust taxable income for the taxable year (for this
purpose, certain dividends paid in the subsequent year may be taken into
account). We intend to continue to pay distributions sufficient to permit us to
maintain our REIT status.
For
Federal income tax purposes, distributions to shareholders are treated as
ordinary income, capital gains, return of capital or a combination
thereof. For 2009, the dividends paid on common shares ($2.20 per
share), on all the various classes of preferred shares, and on our Equity
Shares, Series A were classified as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary
Income
|
|
|
100.0000 |
% |
|
|
100.0000 |
% |
|
|
98.5716 |
% |
|
|
100.0000 |
% |
|
Long-term
Capital Gain
|
|
|
0.0000 |
% |
|
|
0.0000 |
% |
|
|
1.4284 |
% |
|
|
0.0000 |
% |
|
Total
|
|
|
100.0000 |
% |
|
|
100.0000 |
% |
|
|
100.0000 |
% |
|
|
100.0000 |
% |
For 2008,
the dividends paid on common shares ($2.80 per share), on all the various
classes of preferred shares, and on our Equity Shares, Series A were classified
as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary
Income
|
|
|
99.9668 |
% |
|
|
99.6512 |
% |
|
|
99.8319 |
% |
|
|
100.0000 |
% |
|
Long-term
Capital Gain
|
|
|
0.0332 |
% |
|
|
0.3488 |
% |
|
|
0.1681 |
% |
|
|
0.0000 |
% |
|
Total
|
|
|
100.0000 |
% |
|
|
100.0000 |
% |
|
|
100.0000 |
% |
|
|
100.0000 |
% |
The
Company is authorized to issue 100,000,000 Equity Shares. Our
declaration of trust provides that the Equity Shares may be issued from time to
time in one or more series and gives the Board of Trustees broad authority to
fix the dividend and distribution rights, conversion and voting rights,
redemption provisions and liquidation rights of each series of Equity
Shares.
At
December 31, 2009, we had 8,377,193 Depositary Shares outstanding, each
representing 1/1,000 of an Equity Share, Series A. The Equity Shares,
Series A rank on a parity with our common shares and junior to the Senior
Preferred Shares with respect to distributions and liquidation and has a
liquidation amount which cannot exceed $24.50 per
share. Distributions with respect to each depositary share shall be
the lesser of: a) five times the per share dividend on the Common Shares or b)
$2.45 per annum. Except in order to preserve the Company’s Federal
income tax status as a REIT, we may not redeem the depositary shares before
March 31, 2010. If the Company fails to preserve its Federal income
tax status as a REIT, each depositary share will be convertible into 0.956 of
our common shares. The depositary shares are otherwise not
convertible into common shares. Holders of depositary shares vote as
a single class with our holders of common shares on shareholder matters, but the
depositary shares have the equivalent of one-tenth of a vote per depositary
share. We have no obligation to pay distributions on the depositary
shares if no distributions are paid to common shareholders. During
2009, 2008 and 2007, we paid quarterly distributions to the holders of the
Equity Shares, Series A of $0.6125 per share for each of the quarters ended
March 31, June 30, September 30 and December 31. Pursuant to our
option to redeem the security after March 31, 2010, on April 15, 2010, we will
be redeeming all of our outstanding shares of Equity Shares, Series A at a cash
redemption price of $24.50 per depositary share, or an aggregate of $205.2
million. Since the initial issuance of these securities, the annual
dividend paid has been $2.45 per depository share, representing an implied yield
of 10%.
In
November 1999, we sold $100,000,000 (4,289,544 shares) of Equity Shares, Series
AAA (“Equity Shares AAA”) to a newly formed joint venture. The Equity
Shares AAA ranks on a parity with common shares and junior to the Senior
Preferred Shares with respect to general preference rights, and has a
liquidation amount equal to 120% of the amount distributed to each common share.
Annual distributions per share are equal to the lesser of (i) five times the
amount paid per common share or (ii) $2.1564. We have no obligation to pay
distributions if no distributions are paid to common
shareholders. During 2009, 2008 and 2007, we paid quarterly
distributions to one of our wholly-owned subsidiaries, which is the holder of
the Equity Shares, Series AAA of $0.5391 per share for each of the quarters
ended March 31, June 30, September 30 and December 31.
|
d.
|
Common
Share Repurchases
|
Our Board
of Trustees has authorized the repurchase from time to time of up to 35,000,000
of our common shares on the open market or in privately negotiated
transactions. During 2007 and 2009, we did not repurchase any of our
common shares. During 2008, we repurchased 1,520,196 common shares
for approximately $111.9 million. From the inception of the
repurchase program through February 26, 2010, we have repurchased a total of
23,721,916 common shares at an aggregate cost of approximately
$679.1 million. Our common share repurchase program does not
have an expiration date and there are 11,278,084 common shares that may yet be
repurchased under our repurchase program as of December 31,
2009. During the year ended December 31, 2009, we did not
repurchase any of our common shares outside our publicly announced repurchase
program. Future levels of common share repurchases will be dependent
upon our available capital, investment alternatives, and the trading price of
our common shares.
ITEM
6. Selected Financial
Data
|
|
|
For
the year ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts
in thousands, except per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
income and ancillary operations
|
|
$ |
1,597,889 |
|
|
$ |
1,687,438 |
|
|
$ |
1,775,785 |
|
|
$ |
1,317,963 |
|
|
$ |
1,012,264 |
|
|
Interest
and other
income
|
|
|
29,813 |
|
|
|
36,155 |
|
|
|
11,417 |
|
|
|
31,799 |
|
|
|
16,447 |
|
|
|
|
|
1,627,702 |
|
|
|
1,723,593 |
|
|
|
1,787,202 |
|
|
|
1,349,762 |
|
|
|
1,028,711 |
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of operations (excluding depreciation)
|
|
|
522,939 |
|
|
|
555,618 |
|
|
|
631,154 |
|
|
|
471,725 |
|
|
|
352,343 |
|
|
Depreciation
and
amortization
|
|
|
340,233 |
|
|
|
411,981 |
|
|
|
619,598 |
|
|
|
435,496 |
|
|
|
193,167 |
|
|
General
and
administrative
|
|
|
35,735 |
|
|
|
62,809 |
|
|
|
59,749 |
|
|
|
84,661 |
|
|
|
21,115 |
|
|
Interest
expense
|
|
|
29,916 |
|
|
|
43,944 |
|
|
|
63,671 |
|
|
|
33,062 |
|
|
|
8,216 |
|
|
|
|
|
928,823 |
|
|
|
1,074,352 |
|
|
|
1,374,172 |
|
|
|
1,024,944 |
|
|
|
574,841 |
|
|
Income
from continuing operations before equity in earnings of real estate
entities, gain (loss) on disposition of real estate investments, gain on
early retirement of debt, casualty gain or loss, and foreign currency
exchange gain (loss) - net
|
|
|
698,879 |
|
|
|
649,241 |
|
|
|
413,030 |
|
|
|
324,818 |
|
|
|
453,870 |
|
|
Equity
in earnings of real estate entities
|
|
|
53,244 |
|
|
|
20,391 |
|
|
|
12,738 |
|
|
|
11,895 |
|
|
|
24,883 |
|
|
Gain
on disposition of real estate investments, early retirement of debt and
casualty gain or loss, net
|
|
|
37,540 |
|
|
|
336,020 |
|
|
|
5,212 |
|
|
|
2,177 |
|
|
|
1,182 |
|
|
Foreign
currency exchange gain (loss)
|
|
|
9,662 |
|
|
|
(25,362 |
) |
|
|
58,444 |
|
|
|
4,262 |
|
|
|
- |
|
|
Income
from continuing operations
|
|
|
799,325 |
|
|
|
980,290 |
|
|
|
489,424 |
|
|
|
343,152 |
|
|
|
479,935 |
|
|
Discontinued
operations and cumulative effect of change in accounting
principle
|
|
|
(8,869 |
) |
|
|
(6,418 |
) |
|
|
(2,346 |
) |
|
|
2,757 |
|
|
|
9,109 |
|
|
Net
income
|
|
|
790,456 |
|
|
|
973,872 |
|
|
|
487,078 |
|
|
|
345,909 |
|
|
|
489,044 |
|
|
Net
income allocated from (to) noncontrolling equity interests
|
|
|
44,165 |
|
|
|
(38,696 |
) |
|
|
(29,543 |
) |
|
|
(31,883 |
) |
|
|
(32,651 |
) |
|
Net
income allocable to Public Storage shareholders
|
|
$ |
834,621 |
|
|
$ |
935,176 |
|
|
$ |
457,535 |
|
|
$ |
314,026 |
|
|
$ |
456,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
$ |
2.20 |
|
|
$ |
2.80 |
|
|
$ |
2.00 |
|
|
$ |
2.00 |
|
|
$ |
1.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income –
Basic
|
|
$ |
3.48 |
|
|
$ |
4.19 |
|
|
$ |
1.18 |
|
|
$ |
0.33 |
|
|
$ |
1.98 |
|
|
Net
income –
Diluted
|
|
$ |
3.47 |
|
|
$ |
4.18 |
|
|
$ |
1.17 |
|
|
$ |
0.33 |
|
|
$ |
1.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares – Basic
|
|
|
168,358 |
|
|
|
168,250 |
|
|
|
169,342 |
|
|
|
142,760 |
|
|
|
128,159 |
|
|
Weighted
average common shares – Diluted
|
|
|
168,768 |
|
|
|
168,675 |
|
|
|
169,850 |
|
|
|
143,344 |
|
|
|
128,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
9,805,645 |
|
|
$ |
9,936,045 |
|
|
$ |
10,643,102 |
|
|
$ |
11,198,473 |
|
|
$ |
5,552,486 |
|
|
Total
debt
|
|
$ |
518,889 |
|
|
$ |
643,811 |
|
|
$ |
1,069,928 |
|
|
$ |
1,848,542 |
|
|
$ |
149,647 |
|
|
Public
Storage shareholders’
equity
|
|
$ |
8,928,407 |
|
|
$ |
8,708,995 |
|
|
$ |
8,763,129 |
|
|
$ |
8,208,045 |
|
|
$ |
4,817,009 |
|
|
Permanent
noncontrolling interests’ equity
|
|
$ |
132,974 |
|
|
$ |
358,109 |
|
|
$ |
500,127 |
|
|
$ |
499,178 |
|
|
$ |
253,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$ |
1,112,857 |
|
|
$ |
1,076,971 |
|
|
$ |
1,047,652 |
|
|
$ |
769,440 |
|
|
$ |
691,327 |
|
|
Net
cash provided by (used in) investing activities
|
|
$ |
(91,409 |
) |
|
$ |
340,018 |
|
|
$ |
(261,876 |
) |
|
$ |
(473,630 |
) |
|
$ |
(452,425 |
) |
|
Net
cash used in financing activities
|
|
$ |
(938,401 |
) |
|
$ |
(984,076 |
) |
|
$ |
(1,081,504 |
) |
|
$ |
(244,395 |
) |
|
$ |
(121,146 |
) |
|
(1)
|
The
significant increase in our revenues, cost of operations, depreciation and
amortization, and interest expense in 2006 and 2007, and the significant
increase in total assets, total debt and shareholders’ equity in 2006, is
due to our acquisition of Shurgard Storage Centers in August
2006. The significant decrease in our revenues, cost of
operations, depreciation and amortization, and interest expense in 2008,
and the significant decrease in total assets, total debt and other equity
in 2008, is due to our disposition of an interest in Shurgard Europe on
March 31, 2008. See Note 3 to our December 31, 2009
consolidated financial statements for further
information.
|
|
(2)
|
As
further discussed in Note 2 to our December 31, 2009 consolidated
financial statements, certain amounts have been restated as a result of
the application of certain new accounting standards on January 1, 2009,
which standards required retroactive
application.
|
|
ITEM
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
The
following discussion and analysis should be read in conjunction with our
consolidated financial statements and notes thereto.
Forward Looking
Statements: This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of the federal securities laws. All statements in this
document, other than statements of historical fact, are forward-looking
statements which may be identified by the use of the words
"expects," "believes,"
"anticipates," "plans," "would," "should," "may," "estimates"
and similar expressions. These forward-looking statements involve
known and unknown risks and uncertainties, which may cause Public Storage's
actual results and performance to be materially different from those expressed
or implied in the forward-looking statements. As a result, you should
not rely on any forward-looking statements in this report, or which management
may make orally or in writing from time to time, as predictions of future events
nor guarantees of future performance. We caution you not to place
undue reliance on forward-looking statements, which speak only as the date of
this report or as of the dates indicated in the statements. All of
our forward-looking statements, including those in this report, are qualified in
their entirety by this statement. We expressly disclaim any
obligation to update publicly or otherwise revise any forward-looking
statements, whether as a result of new information, new estimates, or other
factors, events or circumstances after the date of this document, except where
expressly required by law. Accordingly, you should use caution in
relying on past forward-looking statements to anticipate future
results.
Factors
and risks that may impact our future results and performance include, but are
not limited to, those described in Item 1A, "Risk Factors" and in our other
filings with the Securities and Exchange Commission. (“SEC”).
Critical
Accounting Policies
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
discusses our consolidated financial statements, which have been prepared in
accordance with United States (“U.S.”) generally accepted accounting principles
(“GAAP”). The preparation of our financial statements and related
disclosures in conformity with GAAP and our discussion and analysis of our
financial condition and results of operations requires management to make
judgments, assumptions and estimates that affect the amounts reported in our
consolidated financial statements and accompanying notes. The notes
to our December 31, 2009 consolidated financial statements, primarily Note 2,
summarize the significant accounting policies and methods used in the
preparation of our consolidated financial statements and related
disclosures.
Management
believes the following are critical accounting policies, the application of
which has a material impact on the Company’s financial
presentation. That is, they are both important to the portrayal of
our financial condition and results, and they require management to make
judgments and estimates about matters that are inherently
uncertain.
Qualification as
a REIT – Income Tax Expense: We believe that we have been
organized and operated, and we intend to continue to operate, as a qualifying
REIT under the Internal Revenue Code and applicable state laws. We
also believe that Shurgard, prior to merging with us, qualified as a
REIT. A REIT generally does not pay corporate level federal income
taxes on its REIT taxable income that is distributed to its shareholders, and
accordingly, we do not pay federal income tax on the share of our REIT taxable
income that is distributed to our shareholders.
We
therefore do not estimate or accrue any federal income tax expense for income
earned and distributed related to REIT operations. This estimate
could be incorrect, because due to the complex nature of the REIT qualification
requirements, the ongoing importance of factual determinations and the
possibility of future changes in our circumstances, we cannot be assured that we
actually have satisfied or will satisfy the requirements for taxation as a REIT
for any particular taxable year. For any taxable year that we fail or
have failed to qualify as a REIT and for which applicable relief provisions did
not apply, we would be taxed at the regular corporate rates on all of our
taxable income, whether or not we made or make any distributions to our
shareholders. Any resulting requirement to pay corporate income tax,
including any applicable penalties or interest, could have a material adverse
impact on our financial condition or results of operations. Unless
entitled to relief under specific statutory provisions, we also would not be
eligible to elect REIT status for any taxable year prior to the fifth taxable
year which begins after the first taxable year for which a REIT status was
terminated. There can be no assurance that we would be entitled to
any statutory relief. In addition, if Shurgard failed to qualify as a
REIT, we would succeed to significant tax liabilities.
Impairment of
Long-Lived Assets: Substantially all of our assets consist of
real estate which are long-lived assets. The evaluation of our
long-lived assets for impairment includes determining whether indicators of
impairment exist, which is a subjective process. When any indicators
of impairment are found, the evaluation of such long-lived assets then entails
projections of future operating cash flows, which also involves significant
judgment. Future events, or facts and circumstances that currently
exist, that we have not yet identified, could cause us to conclude in the future
that our long-lived assets are impaired. Any resulting impairment
loss could have a material adverse impact on our financial condition and results
of operations.
Estimated Useful
Lives of Long-Lived Assets: Substantially all of
our assets consist of depreciable or amortizable long-lived
assets. We record depreciation and amortization expense with respect
to these assets based upon their estimated useful lives. Any change
in the estimated useful lives of those assets, caused by functional or economic
obsolescence or other factors, could have a material adverse impact on our
financial condition or results of operations.
Accruals for
Contingencies: We are exposed to
business and legal liability risks with respect to events that have occurred,
but in accordance with GAAP, we have not accrued for certain potential
liabilities because the loss is either not probable or not estimable or because
we are not aware of the event. Future events and the results of
pending litigation could result in such potential losses becoming probable and
estimable, which could have a material adverse impact on our financial condition
or results of operations. Significant unaccrued losses that we have
determined are at least reasonably possible are described in Note 13 to our
December 31, 2009 consolidated financial statements.
Accruals for
Operating Expenses: Certain of our expenses are estimated
based upon assumptions regarding past and future trends, such as losses for
workers compensation and employee health plans, and estimated claims for our
tenant reinsurance program. Our property tax expense, which as a real
estate operator represents one of our largest expenses totaling approximately
$150 million in the year ended December 31, 2009, has significant estimated
components. Most notably, in certain jurisdictions we do not receive
tax bills for the current fiscal year until after our earnings are finalized,
and as a result, we must estimate tax expense based upon anticipated
implementation of regulations and trends. If these estimates and
assumptions were incorrect, our expenses could be misstated.
Valuation of
assets and liabilities acquired in business combinations: We have estimated the
fair value of real estate, intangible assets, debt, and the other assets and
other liabilities acquired in business combinations, most notably the Shurgard
Merger. We have acquired these assets, in certain cases, with
non-cash assets, most notably the 38.9 million shares that we issued to the
Shurgard shareholders. These estimates are based upon many
assumptions, including interest rates, market values of land and buildings in
the U.S. and Europe, estimated future cash flows from the tenant base in place
at the time of the merger, and the recoverability of certain
assets. We believe that the assumptions used were reasonable,
however, these assumptions were subject to a significant degree of judgment, and
others could use different assumptions and therefore come to materially
different conclusions as to the estimated values. If estimated values
had been different, our depreciation and amortization expense, interest expense,
gain on disposition of an interest in Shurgard Europe, investments in real
estate entities, real estate, debt, and intangible assets could be materially
different.
Overview
of Management’s Discussion and Analysis of Operations
Our
principal business activities include the acquisition, development, ownership
and operation of self-storage facilities which offer storage spaces for lease,
generally on a month-to-month basis, for personal and business
use. We are the largest owner and operator of self-storage facilities
in the U.S., and we have a 49% interest in Shurgard Europe, which we believe is
the largest owner and operator of self-storage facilities in
Europe.
We
currently operate within three reportable segments: (i) Domestic Self-Storage,
(ii) Europe Self-Storage and (iii) Commercial. The Domestic
Self-Storage segment comprises the direct and indirect ownership, development,
and operation of storage facilities in the U.S. Our Europe
Self-Storage segment comprises our equity interest in the self-storage
operations in Europe through our 49% ownership in Shurgard Europe and its
associated activities in seven countries in Western Europe. Our
Commercial segment includes our commercial property operations, directly and
through our 41% ownership interest in PS Business Parks, Inc. (“PSB”), a
publicly traded REIT whose common stock trades on the New York Stock Exchange
under the symbol “PSB” (as of December 31, 2009, PSB owned and operated
19.6 million rentable square feet of commercial space). See
“Investment in PSB” under “Equity in Earnings of Real Estate Entities” below for
information regarding transactions related to our investment in PSB recorded
during the year ended December 31, 2009. Our other activities not
allocated to any segment include (i) the reinsurance of policies against losses
to goods stored by tenants in our self-storage facilities, (ii) merchandise
sales at our self-storage facilities and (iii) management of self-storage
facilities owned by third-party owners and domestic facilities owned by the
affiliated entities that are not consolidated. During 2009, we
decided to terminate our containerized storage and truck rental
operations. Accordingly, the related results of operations have been
included in discontinued operations on our consolidated statements of
income.
Our
self-storage facilities in the U.S. comprise approximately 93% of our operating
revenue for the year ended December 31, 2009, and represent the primary driver
of growth in our net income and cash flows from operations. In
addition, most of our ancillary revenues are derived at our self-storage
facility locations, either from our existing self-storage customer base or from
the customer traffic within our self-storage facilities. Accordingly,
a large portion of management time and focus is placed upon maximizing revenues
and effectively managing expenses in our self-storage facilities.
The
self-storage industry is subject to general economic conditions, particularly
those that affect the disposable income and spending of consumers, as well as
those that affect moving trends. Due to the recessionary pressures in
the U.S. and Europe, demand for self-storage space was soft in 2009 and
continues to be soft. As a result, we are experiencing downward
pressure on occupancy levels, rental rates, and revenues in our self-storage
facilities.
An
important determinant of our long-term growth is the expansion of our asset base
and deployment of capital. Acquisitions of self-storage facilities
have been minimal over the past two years as we continue to monitor seller
expectations. However, we believe that there may be more
opportunities to acquire facilities from distressed sellers who, due to the
constrained credit environment and pressure on cash flows due to the current
difficult operating environment, face covenant violations or cannot refinance
their existing debt as it comes due. The timing and amount of these
opportunities will be at least partially dependent upon whether lenders elect to
pursue foreclosure, acceleration, or other remedies which could force a sale of
the properties. It is our belief that opportunities in 2009 have been
limited due at least in part to lenders’ desire to extend loans rather than
foreclose or accelerate. There can be no assurance that any such
opportunities will materialize in the future.
Historically
we have developed and redeveloped self-storage facilities. Our
development activities have substantially ceased due to the existing economic
environment and our belief that our capital can be more effectively put to use
in other ways.
On
February 12, 2009, we acquired $110.2 million (face amount) of our senior
unsecured debt. In addition, during the fourth quarter of 2008 and
the first quarter of 2009, we acquired $352.7 million (face amount) of our
preferred shares and units on the open market and in privately negotiated
transactions for an aggregate acquisition cost of $237.4
million. There could be opportunities for future acquisition of our
own outstanding debt and equity securities, particularly if there were a return
to the same acute turbulence in the credit and equity markets which occurred in
late 2008 and early 2009. Any future such transactions will depend
upon our evaluation of the return of such investments relative to our other
investment alternatives. There can be no assurance that any future
such transactions will occur or the potential yield on such
transactions.
We have
$763.8 million in cash and cash equivalents on hand at December 31, 2009, and
continue to evaluate opportunities to effectively deploy this
capital.
Operating results
for 2009 as compared to 2008: Net income for the year ended December 31,
2009 was $790.5 million compared to $973.9 million for the same period in
2008, representing a decrease of $183.4 million. This decrease is
primarily due to (i) a gain of $344.7 million in the year ended December 31,
2008 related to our disposition of an interest in Shurgard Europe, (ii) a $37.9
million reduction in net operating income with respect to our Same Store
Facilities described below, and (iii) an impairment charge included in
discontinued operations with respect to intangible assets totaling $8.2 million
in the year ended December 31, 2009, partially offset by (iv) a $49.9 million
reduction in depreciation and amortization related to our domestic assets,
primarily representing reduced intangible amortization, (v) a foreign exchange
gain of $9.7 million during the year ended December 31, 2009 as compared to
a loss of $25.4 million during the same period in 2008, (vi) a gain on
disposition of $30.3 million related to an equity offering by PSB, and
(vii) a reduction in general and administrative expenses due to $27.9 million in
incentive compensation incurred in the year ended December 31, 2008 related to
our disposition of an interest in Shurgard Europe.
Revenues
for the Same Store Facilities decreased 3.2% or $46.1 million in the year ended
December 31, 2009 as compared to the same period in 2008, due to a 2.8%
reduction in realized rent per occupied square foot, combined with a 0.9%
reduction in average occupancies. Cost of operations for the Same
Store Facilities decreased 1.8% or $8.2 million in the year ended
December 31, 2009 as compared to the same period in 2008. Net
operating income for our Same Store Facilities decreased 3.9% or $37.9 million
for the year ended December 31, 2009 as compared to the same period in
2008.
For the
year ended December 31, 2009, net income allocable to our common shareholders
was $586.0 million or $3.47 per common share on a diluted basis compared to
$705.8 million or $4.18 per common share for the same period in 2008,
representing a decrease of $119.8 million or $0.71 per common share on a diluted
basis. These decreases are primarily due to the net impact of the
factors described above, offset by a $44.4 million reduction in earnings
allocated to our preferred unitholders and preferred shareholders in the
year ended December 31, 2009 as compared to the same period in 2008 associated
with the redemption of preferred securities occurring in both
periods.
Operating results
for 2008 as compared to 2007: Net income for the year ended December 31,
2008 was $973.9 million compared to $487.1 million for the same period in
2007, representing an improvement of $486.8 million. This
improvement is primarily due to a gain of $344.7 million recognized on the
disposition of a 51% interest in Shurgard Europe on March 31, 2008, improvements
in net operating income with respect to our domestic self-storage facilities and
a reduction in amortization of intangible assets, offset by a foreign currency
exchange loss of $25.4 million for the year ended December 31, 2008 as compared
to a foreign exchange gain of $58.4 million in 2007.
Comparisons
of our revenues and expenses for the year ended December 31, 2008 to the year
ended December 31, 2007 are significantly impacted by the acquisition by an
institutional investor of a 51% interest in Shurgard Europe on March 31, 2008,
which resulted in the deconsolidation of Shurgard Europe. Shurgard
Europe’s revenues and expenses after March 31, 2008 are excluded from our
statement of operations and, instead, our 49% equity share of Shurgard Europe’s
operating results are included in the line item “equity in earnings of real
estate entities” and we also record interest and other income with respect to
(i) the interest received on our intercompany loan from Shurgard Europe and (ii)
license fee income.
For the
year ended December 31, 2008, net income allocable to our common shareholders
was $705.8 million or $4.18 per common share on a diluted basis compared to
$199.0 million or $1.17 per common share for the same period in 2007,
representing an increase of $506.8 million or $3.01 per common share on a
diluted basis. These increases are primarily due to the net impact of
the factors described above, partially offset by a $33.9 million reduction
in earnings allocated to our preferred shareholders in the year ended December
31, 2008 associated with the repurchase of securities.
Self-Storage
Operations: Our self-storage operations are by far the largest component
of our operating activities, representing more than 90% of our revenues for the
years ended December 31, 2009, 2008 and 2007, respectively.
To
enhance year-over-year comparisons, the table that follows summarizes, and the
ensuing discussion describes, the operating results of three groups of
facilities that management analyzes: (i) the Same Store group, representing the
facilities in the Domestic Self-Storage Segment that we have owned and have been
operating on a stabilized basis since January 1, 2007, (ii) all other facilities
in the Domestic Self-Storage Segment, which are primarily those consolidated
facilities that we have not owned and operated at a stabilized basis since
January 1, 2007 such as newly acquired, newly developed, or recently expanded
facilities, and (iii) the facilities operated by Shurgard Europe which were
deconsolidated effective March 31, 2008.
|
Self-Storage
Operations
Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollar
amounts in thousands)
|
|
|
Rental
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same
Store
Facilities
|
|
$ |
1,389,515 |
|
|
$ |
1,435,630 |
|
|
|
(3.2 |
)% |
|
$ |
1,435,630 |
|
|
$ |
1,396,758 |
|
|
|
2.8 |
% |
|
Other
Facilities
|
|
|
100,777 |
|
|
|
88,665 |
|
|
|
13.7 |
% |
|
|
88,665 |
|
|
|
71,039 |
|
|
|
24.8 |
% |
|
Shurgard
Europe Facilities (a)
|
|
|
- |
|
|
|
54,722 |
|
|
|
(100.0 |
)% |
|
|
54,722 |
|
|
|
192,507 |
|
|
|
(71.6 |
)% |
|
Total
rental
income
|
|
|
1,490,292 |
|
|
|
1,579,017 |
|
|
|
(5.6 |
)% |
|
|
1,579,017 |
|
|
|
1,660,304 |
|
|
|
(4.9 |
)% |
|
Cost
of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same
Store
Facilities
|
|
|
454,613 |
|
|
|
462,796 |
|
|
|
(1.8 |
)% |
|
|
462,796 |
|
|
|
459,568 |
|
|
|
0.7 |
% |
|
Other
Facilities
|
|
|
32,315 |
|
|
|
31,640 |
|
|
|
2.1 |
% |
|
|
31,640 |
|
|
|
27,936 |
|
|
|
13.3 |
% |
|
Shurgard
Europe Facilities (a)
|
|
|
- |
|
|
|
24,654 |
|
|
|
(100.0 |
)% |
|
|
24,654 |
|
|
|
91,689 |
|
|
|
(73.1 |
)% |
|
Total
cost of operations
|
|
|
486,928 |
|
|
|
519,090 |
|
|
|
(6.2 |
)% |
|
|
519,090 |
|
|
|
579,193 |
|
|
|
(10.4 |
)% |
|
Net
operating income (b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same
Store
Facilities
|
|
|
934,902 |
|
|
|
972,834 |
|
|
|
(3.9 |
)% |
|
|
972,834 |
|
|
|
937,190 |
|
|
|
3.8 |
% |
|
Other
Facilities
|
|
|
68,462 |
|
|
|
57,025 |
|
|
|
20.1 |
% |
|
|
57,025 |
|
|
|
43,103 |
|
|
|
32.3 |
% |
|
Shurgard
Europe Facilities (a)
|
|
|
- |
|
|
|
30,068 |
|
|
|
(100.0 |
)% |
|
|
30,068 |
|
|
|
100,818 |
|
|
|
(70.2 |
)% |
|
Total
net operating income
|
|
|
1,003,364 |
|
|
|
1,059,927 |
|
|
|
(5.3 |
)% |
|
|
1,059,927 |
|
|
|
1,081,111 |
|
|
|
(2.0 |
)% |
|
Total
depreciation and amortization expense
|
|
|
(337,275 |
) |
|
|
(409,081 |
) |
|
|
(17.6 |
)% |
|
|
(409,081 |
) |
|
|
(617,028 |
) |
|
|
(33.7 |
)% |
|
Total
net
income
|
|
$ |
666,089 |
|
|
$ |
650,846 |
|
|
|
2.3 |
% |
|
$ |
650,846 |
|
|
$ |
464,083 |
|
|
|
40.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data
for Same Store and Other Facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average square foot occupancy during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same
Store Facilities
|
|
|
88.7 |
% |
|
|
89.5 |
% |
|
|
(0.9 |
)% |
|
|
89.5 |
% |
|
|
89.3 |
% |
|
|
0.2 |
% |
|
Other
Facilities
|
|
|
84.1 |
% |
|
|
79.0 |
% |
|
|
6.5 |
% |
|
|
79.0 |
% |
|
|
70.5 |
% |
|
|
12.1 |
% |
|
Realized
rents per occupied square foot during the period (c):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same
Store Facilities
|
|
$ |
12.71 |
|
|
$ |
13.08 |
|
|
|
(2.8 |
)% |
|
$ |
13.08 |
|
|
$ |
12.77 |
|
|
|
2.4 |
% |
|
Other
Facilities
|
|
$ |
13.62 |
|
|
$ |
14.01 |
|
|
|
(2.8 |
)% |
|
$ |
14.01 |
|
|
$ |
14.35 |
|
|
|
(2.4 |
)% |
|
Number
of facilities at period end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same
Store Facilities
|
|
|
1,899 |
|
|
|
1,899 |
|
|
|
- |
|
|
|
1,899 |
|
|
|
1,899 |
|
|
|
- |
|
|
Other
Facilities
|
|
|
92 |
|
|
|
91 |
|
|
|
1.1 |
% |
|
|
91 |
|
|
|
82 |
|
|
|
11.0 |
% |
|
Net
rentable square footage at period end (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same
Store Facilities
|
|
|
117,462 |
|
|
|
117,462 |
|
|
|
- |
|
|
|
117,462 |
|
|
|
117,462 |
|
|
|
- |
|
|
Other
Facilities
|
|
|
8,500 |
|
|
|
8,360 |
|
|
|
1.7 |
% |
|
|
8,360 |
|
|
|
7,198 |
|
|
|
16.1 |
% |
|
Square
foot occupancy at period end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same
Store Facilities
|
|
|
87.1 |
% |
|
|
87.1 |
% |
|
|
- |
|
|
|
87.1 |
% |
|
|
87.9 |
% |
|
|
(0.9 |
)% |
|
Other
Facilities
|
|
|
84.9 |
% |
|
|
80.0 |
% |
|
|
6.1 |
% |
|
|
80.0 |
% |
|
|
71.5 |
% |
|
|
11.9 |
% |
|
Self-Storage
Operations
Summary
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
place rents per occupied square foot at period end (d):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same
Store Facilities
|
|
$ |
13.46 |
|
|
$ |
14.02 |
|
|
|
(4.0 |
)% |
|
$ |
14.02 |
|
|
$ |
13.89 |
|
|
|
0.9 |
% |
|
Other
Facilities
|
|
$ |
14.65 |
|
|
$ |
15.14 |
|
|
|
(3.2 |
)% |
|
$ |
15.14 |
|
|
$ |
15.62 |
|
|
|
(3.1 |
)% |
|
|
(a)
|
Represents
the results with respect to Shurgard Europe’s properties for the periods
consolidated in our financial statements. As described in Note
3 to our December 31, 2009 consolidated financial statements, effective
March 31, 2008, we deconsolidated Shurgard Europe. See
also “Equity in Earnings of Real Estate Entities – Investment in Shurgard
Europe” for further analysis of the historical same store property
operations of Shurgard Europe.
|
|
|
(b)
|
See
“Net Operating Income or NOI”
below.
|
|
|
(c)
|
Realized
annual rent per occupied square foot is computed by annualizing the result
of dividing rental income (which excludes late charges and administrative
fees) by the weighted average occupied square feet for
period. Realized annual rent per occupied square foot takes
into consideration promotional discounts and other items that reduce
rental income from the contractual amounts due. Late charges and
administrative fees are excluded from the computation of realized annual
rent per occupied square foot. Exclusion of these amounts
provides a better measure of our ongoing level of revenue by excluding the
volatility of late charges, which are dependent principally upon the level
of tenant delinquency, and administrative fees, which are dependent
principally upon the absolute level of move-ins for a
period.
|
|
(d)
|
In
place annual rent per occupied square foot represents annualized
contractual rents per occupied square foot without reductions for
promotional discounts and excludes late charges and administrative
fees.
|
Net
income with respect to our self-storage operations increased by
$15.2 million during the year ended December 31, 2009, when compared
to the same period in 2008. This was due to a) declining amortization
of tenant intangible assets, b) a 1.8% reduction in cost of operations for the
Same Store facilities, and c) a $12.1 million increase in revenues with respect
to the Other Facilities, offset by d) a 3.2% decrease in revenues for our Same
Store facilities and e) the deconsolidation of the facilities owned by Shurgard
Europe effective April 1, 2008. Net income with respect to our
self-storage operations increased by $186.8 million during the year ended
December 31, 2008, when compared to 2007 due to decreased amortization of
tenant intangible assets and increased revenues for the Same Store facilities
and the Other Facilities, offset partially by the deconsolidation of Shurgard
Europe effective April 1, 2008.
Net Operating
Income
We refer
herein to net operating income (“NOI”) of our self-storage facilities, which is
a non-GAAP (generally accepted accounting principles) financial measure that
excludes the impact of depreciation and amortization
expense. Although depreciation and amortization are a component of
GAAP net income, we believe that NOI is a meaningful measure of operating
performance, because we utilize NOI in making decisions with respect to capital
allocations, property performance, and comparing period-to-period and
market-to-market property operating results. In addition, we believe
the investment community utilizes NOI in determining operating performance and
real estate values, and does not consider depreciation expense as it is based
upon historical cost. NOI is not a substitute for net operating
income after depreciation and amortization or net income in evaluating our
operating results. The following reconciles NOI generated by our
self-storage and Shurgard Europe segments to our consolidated net income in our
December 31, 2009 consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts
in thousands)
|
|
|
Net
operating income:
|
|
|
|
|
|
|
|
|
|
|
Same-store
facilities
|
|
$ |
934,902 |
|
|
$ |
972,834 |
|
|
$ |
937,190 |
|
|
Other
facilities
|
|
|
68,462 |
|
|
|
57,025 |
|
|
|
43,103 |
|
|
Shurgard
Europe
facilities
|
|
|
- |
|
|
|
30,068 |
|
|
|
100,818 |
|
|
Total
net operating income
|
|
|
1,003,364 |
|
|
|
1,059,927 |
|
|
|
1,081,111 |
|
|
Ancillary
operating revenue
|
|
|
107,597 |
|
|
|
108,421 |
|
|
|
115,481 |
|
|
Interest
and other income
|
|
|
29,813 |
|
|
|
36,155 |
|
|
|
11,417 |
|
|
Ancillary
cost of operations
|
|
|
(36,011 |
) |
|
|
(36,528 |
) |
|
|
(51,961 |
) |
|
Depreciation
and amortization
|
|
|
(340,233 |
) |
|
|
(411,981 |
) |
|
|
(619,598 |
) |
|
General
and administrative expense
|
|
|
(35,735 |
) |
|
|
(62,809 |
) |
|
|
(59,749 |
) |
|
Interest
expense
|
|
|
(29,916 |
) |
|
|
(43,944 |
) |
|
|
(63,671 |
) |
|
Equity
in earnings of real estate entities
|
|
|
53,244 |
|
|
|
20,391 |
|
|
|
12,738 |
|
|
Gains
on disposition of real estate investments and casualty losses,
net
|
|
|
33,426 |
|
|
|
336,020 |
|
|
|
5,212 |
|
|
Gain
on early debt retirement
|
|
|
4,114 |
|
|
|
- |
|
|
|
- |
|
|
Foreign
currency exchange gain (loss)
|
|
|
9,662 |
|
|
|
(25,362 |
) |
|
|
58,444 |
|
|
Discontinued
operations
|
|
|
(8,869 |
) |
|
|
(6,418 |
) |
|
|
(2,346 |
) |
|
Net
income of the Company
|
|
$ |
790,456 |
|
|
$ |
973,872 |
|
|
$ |
487,078 |
|
Same
Store Facilities
The “Same
Store Facilities” represents those 1,899 facilities that we have owned, and have
been operated on a stabilized basis, since January 1, 2007 and therefore provide
meaningful comparisons for 2007, 2008, and 2009. The following table
summarizes the historical operating results of these 1,899 facilities
(117.5 million net rentable square feet) that represent approximately 93%
of the aggregate net rentable square feet of our U.S. consolidated self-storage
portfolio at December 31, 2009.
|
SAME
STORE FACILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
(Dollar
amounts in thousands, except weighted average amounts)
|
|
|
Rental
income
|
|
$ |
1,324,747 |
|
|
$ |
1,375,484 |
|
|
|
(3.7 |
)% |
|
$ |
1,375,484 |
|
|
$ |
1,339,637 |
|
|
|
2.7 |
% |
|
Late
charges and admin fees collected
|
|
|
64,768 |
|
|
|
60,146 |
|
|
|
7.7 |
% |
|
|
60,146 |
|
|
|
57,121 |
|
|
|
5.3 |
% |
|
Total
revenues (a)
|
|
|
1,389,515 |
|
|
|
1,435,630 |
|
|
|
(3.2 |
)% |
|
|
1,435,630 |
|
|
|
1,396,758 |
|
|
|
2.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
taxes
|
|
|
139,776 |
|
|
|
135,825 |
|
|
|
2.9 |
% |
|
|
135,825 |
|
|
|
132,411 |
|
|
|
2.6 |
% |
|
Direct
property payroll
|
|
|
94,262 |
|
|
|
94,303 |
|
|
|
0.0 |
% |
|
|
94,303 |
|
|
|
93,152 |
|
|
|
1.2 |
% |
|
Media
advertising
|
|
|
19,795 |
|
|
|
19,853 |
|
|
|
(0.3 |
)% |
|
|
19,853 |
|
|
|
20,917 |
|
|
|
(5.1 |
)% |
|
Other
advertising and promotion
|
|
|
20,079 |
|
|
|
18,235 |
|
|
|
10.1 |
% |
|
|
18,235 |
|
|
|
18,778 |
|
|
|
(2.9 |
)% |
|
Utilities
|
|
|
34,636 |
|
|
|
36,411 |
|
|
|
(4.9 |
)% |
|
|
36,411 |
|
|
|
35,094 |
|
|
|
3.8 |
% |
|
Repairs
and maintenance
|
|
|
38,356 |
|
|
|
42,696 |
|
|
|
(10.2 |
)% |
|
|
42,696 |
|
|
|
43,332 |
|
|
|
(1.5 |
)% |
|
Telephone
reservation center
|
|
|
11,040 |
|
|
|
12,580 |
|
|
|
(12.2 |
)% |
|
|
12,580 |
|
|
|
12,642 |
|
|
|
(0.5 |
)% |
|
Property
insurance
|
|
|
9,761 |
|
|
|
11,391 |
|
|
|
(14.3 |
)% |
|
|
11,391 |
|
|
|
13,498 |
|
|
|
(15.6 |
)% |
|
Other
cost of management
|
|
|
86,908 |
|
|
|
91,502 |
|
|
|
(5.0 |
)% |
|
|
91,502 |
|
|
|
89,744 |
|
|
|
2.0 |
% |
|
Total
cost of operations (a)
|
|
|
454,613 |
|
|
|
462,796 |
|
|
|
(1.8 |
)% |
|
|
462,796 |
|
|
|
459,568 |
|
|
|
0.7 |
% |
|
Net
operating income (b)
|
|
|
934,902 |
|
|
|
972,834 |
|
|
|
(3.9 |
)% |
|
|
972,834 |
|
|
|
937,190 |
|
|
|
3.8 |
% |
|
Depreciation
and amortization expense (c)
|
|
|
(301,647 |
) |
|
|
(344,905 |
) |
|
|
(12.5 |
)% |
|
|
(344,905 |
) |
|
|
(447,245 |
) |
|
|
(22.9 |
)% |
|
Net
income
|
|
$ |
633,255 |
|
|
$ |
627,929 |
|
|
|
0.8 |
% |
|
$ |
627,929 |
|
|
$ |
489,945 |
|
|
|
28.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin (before depreciation and amortization expense)
|
|
|
67.3 |
% |
|
|
67.8 |
% |
|
|
(0.7 |
)% |
|
|
67.8 |
% |
|
|
67.1 |
% |
|
|
1.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average for the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Square
foot occupancy (d)
|
|
|
88.7 |
% |
|
|
89.5 |
% |
|
|
(0.9 |
)% |
|
|
89.5 |
% |
|
|
89.3 |
% |
|
|
0.2 |
% |
|
Realized
annual rent per occupied square foot (e)(f)
|
|
$ |
12.71 |
|
|
$ |
13.08 |
|
|
|
(2.8 |
)% |
|
$ |
13.08 |
|
|
$ |
12.77 |
|
|
|
2.4 |
% |
|
REVPAF
(f)(g)
|
|
$ |
11.28 |
|
|
$ |
11.71 |
|
|
|
(3.7 |
)% |
|
$ |
11.71 |
|
|
$ |
11.40 |
|
|
|
2.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Square
foot occupancy
|
|
|
87.1 |
% |
|
|
87.1 |
% |
|
|
- |
|
|
|
87.1 |
% |
|
|
87.9 |
% |
|
|
(0.9 |
)% |
|
In
place annual rent per occupied square foot (h)
|
|
$ |
13.46 |
|
|
$ |
14.02 |
|
|
|
(4.0 |
)% |
|
$ |
14.02 |
|
|
$ |
13.89 |
|
|
|
0.9 |
% |
|
Total
net rentable square feet (in thousands)
|
|
|
117,462 |
|
|
|
117,462 |
|
|
|
- |
|
|
|
117,462 |
|
|
|
117,462 |
|
|
|
- |
|
|
Number
of facilities
|
|
|
1,899 |
|
|
|
1,899 |
|
|
|
- |
|
|
|
1,899 |
|
|
|
1,899 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Revenues
and cost of operations do not include ancillary revenues and expenses
generated at the facilities with respect to tenant reinsurance, retail
sales and truck rentals. “Other costs of management” included
in cost of operations principally represents all the indirect costs
incurred in the operations of the facilities. Indirect costs
principally include supervisory costs and corporate overhead cost incurred
to support the operating activities of the
facilities.
|
(b) See
“Net Operating Income” above.
|
|
(c)
|
Depreciation
and amortization expense for the years ended December 31, 2009 and 2008
decreased, as compared to the year prior, primarily due to a reduction in
amortization expense related to intangible assets that we obtained in the
Shurgard Merger.
|
(d) Square
foot occupancies represent weighted average occupancy levels over the entire
period.
|
(e)
|
Realized
annual rent per occupied square foot is computed by annualizing the result
of dividing rental income (which excludes late charges and administrative
fees) by the weighted average occupied square feet for the
period. Realized annual rent per occupied square foot takes
into consideration promotional discounts and other items that reduce
rental income from the contractual amounts
due.
|
|
(f)
|
Late
charges and administrative fees are excluded from the computation of
realized annual rent per occupied square foot and
REVPAF. Exclusion of these amounts provides a better measure of
our ongoing level of revenue, by excluding the volatility of late charges,
which are dependent principally upon the level of tenant delinquency, and
administrative fees, which are dependent principally upon the absolute
level of move-ins for a period.
|
|
(g)
|
Realized
annual rent per available foot or “REVPAF” is computed by dividing rental
income (which excludes late charges and administrative fees) by the total
available net rentable square feet for the
period.
|
|
(h)
|
In
place annual rent per occupied square foot represents annualized
contractual rents per occupied square foot without reductions for
promotional discounts and excludes late charges and administrative
fees.
|
Revenues
generated by our Same Store facilities decreased approximately 3.2% for the year
ended December 31, 2009 compared to the same period in 2008. This
decrease was primarily caused by lower rental income as a result of lower
average realized annual rental rates per occupied square foot combined with
lower average occupancy levels. For 2009, average realized annual
rental rates per occupied square foot were 2.8% lower and average occupancy
levels were 0.9% lower as compared to the same period in 2008, resulting in a
3.7% reduction in rental income.
Revenues
generated by our Same Store facilities increased approximately 2.8% for the year
ended December 31, 2008 compared to the same period in 2007. This
increase was primarily caused by higher rental income as a result of higher
average realized annual rental rates per occupied square foot combined with
higher average occupancy levels. For 2008, average realized annual
rental rates per occupied square foot were 2.4% higher and average occupancy
levels were 0.2% higher as compared to the same period in 2008, resulting in a
2.7% increase in rental income.
Our
operating strategy is to maintain occupancy levels for our Same Store facilities
at approximately 90% throughout the year. In order to achieve this
strategy, we adjusted rental rates and promotional discounts offered to new
tenants as well as the frequency of television advertising, increasing or
decreasing each, depending on traffic patterns of new tenants renting space
offset by existing tenants vacating. We experience seasonal
fluctuations in the occupancy levels with occupancies generally higher in the
summer months than in the winter months. Consequently, rates charged
new tenants are typically higher in the summer months than in the winter
months.
Over the
past two years, demand for self-storage space has been negatively impacted by
recessionary pressures, including increased unemployment, reduced housing sales,
and reduced moving activity, in each of the markets in which we
operate.
As
indicated in the table below, during the first three quarters of 2008, we
generated relatively strong year-over-year revenue growth. Beginning
in September 2008, we began to experience a notable decline in year-over-year
move-ins that continued through October 2008, which we believe reflected general
economic conditions. To offset the decline in new rentals, we
significantly reduced rental rates, increased promotional discounts to new
incoming tenants, and increased marketing efforts. We believe these
actions have stabilized move-in volumes on a year-over-year basis; however, we
have not yet been able to restore rental rates to the levels experienced in the
prior year. We believe overall demand for self-storage space in
virtually all of our markets in which we operate has decreased due to current
economic conditions, and coupled with an increase in the number of self-storage
operators over the past 10 years, will continue to foster a very difficult
operating environment, at least in the near term. In addition,
increased move-out activity beginning in August 2008 exacerbated the downward
pressure on occupancy levels created by reduced demand. In March
2009, the increase in move-out activity began to subside to more normalized
levels.
|
|
|
Same
Store Year-over-Year Change
|
|
|
|
|
|
|
|
Realized
rent
per
occupied
square
foot
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2008
|
|
|
3.4 |
% |
|
|
3.0 |
% |
|
|
0.3 |
% |
|
June
30, 2008
|
|
|
3.4 |
% |
|
|
3.0 |
% |
|
|
0.4 |
% |
|
September
30, 2008
|
|
|
2.5 |
% |
|
|
1.9 |
% |
|
|
0.6 |
% |
|
December
31, 2008
|
|
|
1.5 |
% |
|
|
1.9 |
% |
|
|
(0.5 |
)% |
|
For
entire year: 2008
|
|
|
2.7 |
% |
|
|
2.4 |
% |
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2009
|
|
|
(1.2 |
)% |
|
|
(0.2 |
)% |
|
|
(1.0 |
)% |
|
June
30, 2009
|
|
|
(4.0 |
)% |
|
|
(2.9 |
)% |
|
|
(1.1 |
)% |
|
September
30, 2009
|
|
|
(5.2 |
)% |
|
|
(4.2 |
)% |
|
|
(1.0 |
)% |
|
December
31, 2009
|
|
|
(4.3 |
)% |
|
|
(3.8 |
)% |
|
|
(0.5 |
)% |
|
For
entire year: 2009
|
|
|
(3.7 |
)% |
|
|
(2.8 |
)% |
|
|
(0.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based
upon our evaluation of certain comparative key operating metrics as of December
31, 2009, we believe that revenue for the three months ending March 31, 2010
will be lower than the same period in 2009. Our operating strategy
will be to continue to focus on maintaining occupancy levels by adjusting rental
rates, promotional discounts and marketing activities. It is unclear
to us how much the above mentioned factors will impact our revenues beyond the
first quarter of 2010.
From a
geographic standpoint, we are experiencing the greatest year-over-year revenue
declines in our Southeast markets, located in North and South Carolina, Georgia,
and Florida, as well as the West Coast, which includes Seattle, Portland, San
Francisco and Los Angeles. See Analysis of Regional Trends table that
follows.
Cost of
operations (excluding depreciation and amortization) decreased by 1.8% in 2009
as compared to 2008, and increased by 0.7% in 2008 as compared to
2007. The decrease in 2009 as compared to 2008 was due to reduced
utilities, repairs and maintenance, telephone reservation center, property
insurance and other cost of management which were offset in part by increases in
property taxes and other advertising and promotion expenses. The
small increase in 2008 as compared to 2007 was due primarily to higher property
tax and utilities expenses which were partially offset by lower property
insurance expense.
Property
tax expense increased 2.9% in 2009 as compared to 2008, and 2.6% in 2008 as
compared to 2007. These increases are primarily due to increases in
assessments of property values and to a lesser degree increases in tax
rates. We expect property tax expense growth of approximately 3.5% in
2010.
Direct
property payroll expense was flat in 2009 as compared to 2008 and increased by
1.2% in 2008 as compared to 2007. The increase in 2008 reflects
higher hours incurred due to adjustments in staffing levels, offset by lower
incentive pay and stagnant growth in average wage rates. For 2010, we
expect moderate growth trends in payroll.
Media
advertising for the Same Store Facilities was flat in 2009 as compared to 2008
and decreased 5.1% in 2008 as compared to 2007. Media advertising
primarily includes the cost of advertising on television and will vary depending
on a number of factors, including our occupancy levels and
demand. Other advertising and promotion is comprised
principally of yellow page and internet advertising, which increased 10.1%
during 2009 as compared to 2008, and decreased 2.9% during 2008 as compared to
2007. Our future spending on yellow page, media, and internet
advertising expenditures will be driven in part by demand for our self-storage
spaces, our current occupancy levels, and the relative efficacy of each type of
advertising. Media advertising in particular can be volatile and
increase or decrease significantly in the short-term.
Utility
expenses decreased 4.9% in 2009 as compared to 2008, and increased 3.8% in 2008
as compared to 2007. The increase in 2008 was due primarily to higher
electrical costs, which we believe in part was caused by rapid increase in
energy prices, and in particular oil, used by local utility companies to produce
electricity during 2008. Similarly, the decrease utility expense
experienced in 2009, was due primarily to reduced year-over-year energy
prices. It is difficult to estimate future utility cost levels
because utility costs are dependent upon changes in demand driven by weather and
temperature, as well as fuel prices, both of which are volatile and not
predictable.
Repairs
and maintenance expenditures decreased 10.2% in 2009 as compared to 2008 and
1.5% in 2008 as compared to 2007. Repairs and maintenance
expenditures are dependent upon several factors, such as weather, the timing of
periodic needs throughout our portfolio, inflation, and random events and
accordingly are difficult to project from year to year. Due to severe
weather, we expect snow removal expenses to be approximately $2 million higher
in the three months ending March 31, 2010 as compared to the same period in
2009. However, we expect overall repairs and maintenance expenditures
to grow moderately in 2010.
Telephone
reservation center costs decreased 12.2% in 2009 as compared to 2008 and were
flat in 2008 compared to 2007. The reduction in 2009 was primarily
due to lower call volumes, resulting in less staffing hours, as well as a shift
from our California to our Arizona call center, resulting in lower average
compensation rates. We expect future increases in our telephone
reservation center to be based primarily upon general inflation.
Insurance
expense decreased 14.3% in 2009 as compared to 2008 and 15.6% in 2008 as
compared to 2007. These declines reflect significant decreases in
property insurance resulting primarily from the softer insurance markets as lack
of hurricane activity and additional competition from insurance providers has
benefited us. We expect insurance expense to be down slightly in 2010
as compared to 2009.