Attached files

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EX-32 - EX-32 - Public Storagepsa-20150630xex32.htm
EX-31.1 - EX-31.1 - Public Storagepsa-20150630xex311.htm
EX-31.2 - EX-31.2 - Public Storagepsa-20150630xex312.htm
EX-12 - EX-12 - Public Storagepsa-20150630ex12ef7d0df.htm

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

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

For the quarterly period ended June 30, 2015

or

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

For the transition period from ____________ to ____________.

Commission File Number:  001-33519

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

 

 

Maryland

95-3551121

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer Identification Number)

 

 

701 Western Avenue, Glendale, California

91201-2349

(Address of principal executive offices)

(Zip Code)

 

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

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

[X]  Yes  [   ]  No

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

[X]  Yes  [   ]  No

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

 

 

 

 

Large Accelerated Filer

[X]

Accelerated Filer

[   ]

Non-accelerated Filer

[   ]

Smaller Reporting Company

[   ]

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

[   ]  Yes  [X]  No


 

 

 

 

 

Indicate the number of the registrant’s outstanding common shares of beneficial interest, as of August 3, 2015:

Common Shares of beneficial interest, $.10 par value per share –  172,967,347 shares

 


 

 

 

 

 

 

 

 

 

 

 

 

 

PUBLIC STORAGE

 

 

 

INDEX

 

 

 

 

 

 

PART I

FINANCIAL INFORMATION

Pages

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

Balance Sheets at June 30, 2015 and December 31, 2014

 

 

 

 

Statements of Income for the Three and Six Months Ended June 30, 2015 and 2014

 

 

 

 

Statements of Comprehensive Income for the Three and Six Months Ended
June 30, 2015 and 2014

 

 

 

 

Statement of Equity for the Six Months Ended June 30, 2015

 

 

 

 

Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014

5-6 

 

 

 

 

Condensed Notes to Financial Statements

7-26 

 

 

 

Item 2.

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

27-52 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

52 

 

 

 

Item 4.

Controls and Procedures

52 

 

 

 

PART II

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

 

 

 

 

Item 1.

Legal Proceedings

53 

 

 

 

Item 1A.

Risk Factors

53 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

53 

 

 

 

Item 6.

Exhibits

54 

 

 

 

 

 

 

 


 

PUBLIC STORAGE

BALANCE SHEETS

(Amounts in thousands, except share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

2015

 

2014

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

20,256 

 

$

187,712 

Real estate facilities, at cost:

 

 

 

 

 

Land

 

3,517,310 

 

 

3,476,883 

Buildings

 

9,502,764 

 

 

9,386,352 

 

 

13,020,074 

 

 

12,863,235 

Accumulated depreciation

 

(4,668,557)

 

 

(4,482,520)

 

 

8,351,517 

 

 

8,380,715 

Construction in process

 

145,455 

 

 

104,573 

 

 

8,496,972 

 

 

8,485,288 

 

 

 

 

 

 

Investments in unconsolidated real estate entities

 

808,455 

 

 

813,740 

Goodwill and other intangible assets, net

 

216,312 

 

 

228,632 

Other assets

 

92,763 

 

 

103,304 

Total assets

$

9,634,758 

 

$

9,818,676 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

Borrowings on bank credit facility

$

11,000 

 

$

 -

Notes payable

 

47,683 

 

 

64,364 

Accrued and other liabilities

 

270,414 

 

 

247,141 

    Total liabilities

 

329,097 

 

 

311,505 

 

 

 

 

 

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Public Storage shareholders’ equity:

 

 

 

 

 

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

 

 

 

 

 

167,200 shares issued (in series) and outstanding, (173,000 at

 

 

 

 

 

December 31, 2014), at liquidation preference

 

4,180,000 

 

 

4,325,000 

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

 

 

 

 

 

172,664,710 shares issued and outstanding (172,445,554 shares at

 

 

 

 

 

December 31, 2014)

 

17,267 

 

 

17,245 

Paid-in capital

 

5,571,895 

 

 

5,561,530 

Accumulated deficit

 

(428,270)

 

 

(374,823)

Accumulated other comprehensive loss

 

(61,523)

 

 

(48,156)

Total Public Storage shareholders’ equity

 

9,279,369 

 

 

9,480,796 

Noncontrolling interests

 

26,292 

 

 

26,375 

  Total equity

 

9,305,661 

 

 

9,507,171 

Total liabilities and equity

$

9,634,758 

 

$

9,818,676 

 

 

 

 

See accompanying notes.

1


 

PUBLIC STORAGE

STATEMENTS OF INCOME

(Amounts in thousands, except per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Self-storage facilities

$

551,028 

 

$

500,803 

 

$

1,081,665 

 

$

986,390 

Ancillary operations

 

41,603 

 

 

37,234 

 

 

80,360 

 

 

71,271 

 

 

592,631 

 

 

538,037 

 

 

1,162,025 

 

 

1,057,661 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

Self-storage cost of operations

 

147,826 

 

 

142,427 

 

 

309,068 

 

 

298,495 

Ancillary cost of operations

 

14,406 

 

 

8,127 

 

 

26,326 

 

 

26,578 

Depreciation and amortization

 

106,473 

 

 

106,443 

 

 

213,619 

 

 

215,464 

General and administrative

 

20,988 

 

 

15,377 

 

 

45,148 

 

 

34,366 

 

 

289,693 

 

 

272,374 

 

 

594,161 

 

 

574,903 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

302,938 

 

 

265,663 

 

 

567,864 

 

 

482,758 

Interest and other income

 

934 

 

 

1,000 

 

 

1,606 

 

 

3,402 

Interest expense

 

 -

 

 

(2,063)

 

 

 -

 

 

(5,543)

Equity in earnings of unconsolidated real estate entities

 

7,480 

 

 

14,135 

 

 

23,664 

 

 

28,739 

Foreign currency exchange loss

 

 -

 

 

(1,675)

 

 

 -

 

 

(4,023)

Gain on real estate sales

 

16,688 

 

 

1,219 

 

 

18,160 

 

 

1,219 

Net income

 

328,040 

 

 

278,279 

 

 

611,294 

 

 

506,552 

Allocation to noncontrolling interests

 

(1,635)

 

 

(1,445)

 

 

(3,108)

 

 

(2,522)

Net income allocable to Public Storage shareholders

 

326,405 

 

 

276,834 

 

 

608,186 

 

 

504,030 

Allocation of net income to:

 

 

 

 

 

 

 

 

 

 

 

Preferred shareholders

 

(61,449)

 

 

(57,672)

 

 

(125,004)

 

 

(110,179)

Preferred shareholders - redemptions (Note 8)

 

 -

 

 

 -

 

 

(4,784)

 

 

 -

Restricted share units 

 

(1,030)

 

 

(810)

 

 

(1,859)

 

 

(1,447)

Net income allocable to common shareholders

$

263,926 

 

$

218,352 

 

$

476,539 

 

$

392,404 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

1.53 

 

$

1.27 

 

$

2.76 

 

$

2.28 

Diluted

$

1.52 

 

$

1.26 

 

$

2.75 

 

$

2.27 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

172,629 

 

 

172,282 

 

 

172,575 

 

 

172,096 

Diluted weighted average common shares outstanding

 

173,387 

 

 

173,181 

 

 

173,377 

 

 

172,995 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

$

1.70 

 

$

1.40 

 

$

3.10 

 

$

2.80 

 

 

 

 

 

 

See accompanying notes.

2


 

PUBLIC STORAGE

STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

328,040 

 

$

278,279 

 

$

611,294 

 

$

506,552 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Aggregate foreign currency exchange income (loss)

 

17,049 

 

 

(6,228)

 

 

(13,367)

 

 

(8,091)

Adjust for foreign currency exchange loss

 

 

 

 

 

 

 

 

 

 

 

included in net income

 

 -

 

 

1,675 

 

 

 -

 

 

4,023 

Other comprehensive income (loss):

 

17,049 

 

 

(4,553)

 

 

(13,367)

 

 

(4,068)

Total comprehensive income

 

345,089 

 

 

273,726 

 

 

597,927 

 

 

502,484 

Allocation to noncontrolling interests

 

(1,635)

 

 

(1,445)

 

 

(3,108)

 

 

(2,522)

Comprehensive income allocable to

 

 

 

 

 

 

 

 

 

 

 

Public Storage shareholders

$

343,454 

 

$

272,281 

 

$

594,819 

 

$

499,962 

 

 

See accompanying notes.

3


 

PUBLIC STORAGE

STATEMENT OF EQUITY

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Total Public

 

 

 

 

 

 

 

Cumulative

 

 

 

 

 

 

 

 

 

 

Other

 

Storage

 

 

 

 

 

 

Preferred

 

Common

 

Paid-in

 

Accumulated

 

Comprehensive

 

Shareholders’

 

Noncontrolling

 

Total

 

Shares

 

Shares

 

Capital

 

Deficit

 

Loss

 

Equity

 

Interests

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2014

$

4,325,000 

 

$

17,245 

 

$

5,561,530 

 

$

(374,823)

 

$

(48,156)

 

$

9,480,796 

 

$

26,375 

 

$

9,507,171 

Redemption of 5,800 preferred shares (Note 8)

 

(145,000)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(145,000)

 

 

 -

 

 

(145,000)

Issuance of common shares in connection with

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

share-based compensation (219,156 shares)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Note 10)

 

 -

 

 

22 

 

 

10,466 

 

 

 -

 

 

 -

 

 

10,488 

 

 

 -

 

 

10,488 

Cash paid in lieu of common shares, net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

share-based compensation expense (Note 10)

 

 -

 

 

 -

 

 

(101)

 

 

 -

 

 

 -

 

 

(101)

 

 

 -

 

 

(101)

Net income

 

 -

 

 

 -

 

 

 -

 

 

611,294 

 

 

 -

 

 

611,294 

 

 

 -

 

 

611,294 

Net income allocated to noncontrolling interests

 -

 

 

 -

 

 

 -

 

 

(3,108)

 

 

 -

 

 

(3,108)

 

 

3,108 

 

 

 -

Distributions to equity holders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred shares (Note 8)

 

 -

 

 

 -

 

 

 -

 

 

(125,004)

 

 

 -

 

 

(125,004)

 

 

 -

 

 

(125,004)

Noncontrolling interests

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(3,191)

 

 

(3,191)

Common shares and restricted share units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($3.10 per share)

 

 -

 

 

 -

 

 

 -

 

 

(536,629)

 

 

 -

 

 

(536,629)

 

 

 -

 

 

(536,629)

Other comprehensive loss (Note 2)

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(13,367)

 

 

(13,367)

 

 

 -

 

 

(13,367)

Balances at June 30, 2015

$

4,180,000 

 

$

17,267 

 

$

5,571,895 

 

$

(428,270)

 

$

(61,523)

 

$

9,279,369 

 

$

26,292 

 

$

9,305,661 

 

 

See accompanying notes.

4


 

 

PUBLIC STORAGE

STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

2015

 

2014

Cash flows from operating activities:

 

 

 

 

 

Net income

$

611,294 

 

$

506,552 

Adjustments to reconcile net income to net cash provided

 

 

 

 

 

by operating activities:

 

 

 

 

 

Gain on real estate sales

 

(18,160)

 

 

(1,219)

Depreciation and amortization

 

213,619 

 

 

215,464 

Distributions received from unconsolidated real estate

 

 

 

 

 

entities less than equity in earnings

 

(7,303)

 

 

(2,953)

Foreign currency exchange loss

 

 -

 

 

4,023 

Other

 

26,584 

 

 

4,179 

Total adjustments

 

214,740 

 

 

219,494 

Net cash provided by operating activities

 

826,034 

 

 

726,046 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures to maintain real estate facilities 

 

(32,461)

 

 

(32,897)

Construction in process

 

(100,085)

 

 

(48,503)

Acquisition of real estate facilities and intangible assets

(87,783)

 

 

(32,030)

Proceeds from sale of real estate facilities

 

13,929 

 

 

1,289 

Disposition of portion of loan receivable from Shurgard Europe

 

 -

 

 

216,217 

Other

 

18,426 

 

 

(2,355)

Net cash (used in) provided by investing activities

 

(187,974)

 

 

101,721 

Cash flows from financing activities:

 

 

 

 

 

Borrowings (repayments) on bank credit facility

 

11,000 

 

 

(50,100)

Repayments on term loan

 

 -

 

 

(378,000)

Repayments on notes payable

 

(16,282)

 

 

(18,768)

Issuance of preferred shares

 

 -

 

 

555,106 

Issuance of common shares

 

10,488 

 

 

30,491 

Redemption of preferred shares

 

(145,000)

 

 

 -

Distributions paid to Public Storage shareholders

 

(661,633)

 

 

(593,923)

Distributions paid to noncontrolling interests

 

(3,191)

 

 

(3,400)

Net cash used in financing activities

 

(804,618)

 

 

(458,594)

Net (decrease) increase in cash and cash equivalents

 

(166,558)

 

 

369,173 

Net effect of foreign exchange translation on cash and

 

 

 

 

 

cash equivalents

 

(898)

 

 

(359)

Cash and cash equivalents at the beginning of the period

 

187,712 

 

 

19,169 

Cash and cash equivalents at the end of the period

$

20,256 

 

$

387,983 

See accompanying notes.

5


 

 

PUBLIC STORAGE

STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

2015

 

2014

Supplemental schedule of non-cash investing and

 

 

 

 

 

financing activities:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment:

 

 

 

 

 

Real estate facilities, net of accumulated depreciation

$

(119)

 

$

(638)

Investments in unconsolidated real estate entities

 

12,588 

 

 

4,376 

Loan receivable from Shurgard Europe

 

 -

 

 

3,994 

Accumulated other comprehensive loss

 

(13,367)

 

 

(8,091)

 

 

 

 

 

 

Real estate acquired in exchange for assumption of notes payable

 

 -

 

 

(5,097)

Notes payable assumed in connection with acquisition of real estate

 

 -

 

 

5,097 

 

 

 

 

 

 

 

 

See accompanying notes.

6


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2015

(Unaudited)

 

1.Description of the Business

Public Storage (referred to herein as “the Company”, “we”, “us”, or “our”), a Maryland real estate investment trust, was organized in 1980.  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. 

At June 30, 2015, we have direct and indirect equity interests in 2,262 self-storage facilities (with approximately 147 million net rentable square feet) located in 38 states in the United States (“U.S.”) operating under the “Public Storage” name.  We also own one self-storage facility in London, England, and we have a 49% interest in Shurgard Europe, which owns 215 self-storage facilities (with approximately 11 million net rentable square feet) located in seven Western European countries, all operating under the “Shurgard” name.  We also have direct and indirect equity interests in approximately 30 million net rentable square feet of commercial space located in 10 states in the U.S. primarily owned and operated by PS Business Parks, Inc. (“PSB”) under the “PS Business Parks” name.  At June 30, 2015, we have an approximate 42% common equity interest in PSB.

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

2.Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim financial statements were prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) as defined in the Financial Accounting Standards Board (“FASB") Accounting Standards Codification (the “Codification”), including guidance with respect to interim financial information and in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X.  While they do not include all of the disclosures required by GAAP for complete financial statements, we believe that we have included all adjustments (consisting of normal and recurring adjustments) necessary for a fair presentation.  Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015 due to seasonality and other factors.  These interim financial statements should be read together with the audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

Consolidation and Equity Method of Accounting

We consider entities to be Variable Interest Entities (“VIEs”) when they have insufficient equity to finance their activities without additional subordinated financial support provided by other parties, or where the equity holders as a group do not have a controlling financial interest.  We have no investments or other involvement in any VIEs. 

We consolidate all entities that we control (these entities, for the period in which the reference applies, are referred to collectively as the “Subsidiaries”), and we eliminate intercompany transactions and balances.  We account for our investments in entities that we have significant influence over, but do not control, using the equity method of accounting (these entities, for the periods in which the reference applies, are referred to collectively as the “Unconsolidated Real Estate Entities”), eliminating intra-entity profits and losses and

7


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2015

(Unaudited)

 

amortizing any differences between the cost of our investment and the underlying equity in net assets against equity in earnings as if the Unconsolidated Real Estate Entity were a consolidated subsidiary.  When we obtain control of an Unconsolidated Real Estate Entity, we commence consolidating the entity and record a gain representing the differential between the book value and fair value of our preexisting equity interest.  All changes in consolidation status are reflected prospectively. 

When we are general partner, we control the partnership unless the third-party limited partners can dissolve the partnership or otherwise remove us as general partner without cause, or if the limited partners have the right to participate in substantive decisions of the partnership. 

Collectively, at June 30, 2015, the Company and the Subsidiaries own 2,249 self-storage facilities in the U.S., one self-storage facility in London, England and four commercial facilities in the U.S.  At June 30, 2015, the Unconsolidated Real Estate Entities are comprised of PSB, Shurgard Europe, as well as limited partnerships that own an aggregate of 13 self-storage facilities in the U.S. (these limited partnerships, for the periods in which the reference applies, are referred to as the “Other Investments”).

Use of Estimates

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

Income Taxes

We have elected to be treated as a real estate investment trust (“REIT”), as defined in the Internal Revenue Code of 1986, as amended (the “Code”).  As a REIT, we do not incur federal income tax if we distribute 100% of our REIT taxable income (generally, net rents and gains from real property, dividends, and interest) each year, and if we meet certain organizational and operational rules.  We believe we will meet these REIT requirements in 2015, and that we have met them for all other periods presented herein.  Accordingly, we have recorded no federal income tax expense related to our REIT taxable income.

Our merchandise and tenant reinsurance operations are subject to corporate income tax and such taxes are included in ancillary cost of operations.  We also incur income and other taxes in certain states, which are included in general and administrative expense. 

We recognize tax benefits of uncertain income tax positions that are subject to audit only if we believe it is more likely than not that the position would ultimately be sustained assuming the relevant taxing authorities had full knowledge of the relevant facts and circumstances of our positions.  As of June 30, 2015, we had no tax benefits that were not recognized. 

Real Estate Facilities

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

We allocate the net acquisition cost of acquired operating self-storage facilities to the underlying land, buildings, identified intangible assets, and any noncontrolling interests that remain outstanding based upon their

8


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2015

(Unaudited)

 

respective individual estimated fair values.  Any difference between the net acquisition cost and the estimated fair value of the net tangible and intangible assets acquired is recorded as goodwill.    

Other Assets

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

Accrued and Other Liabilities

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

Cash Equivalents, Marketable Securities and Other Financial Instruments

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

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

Fair Value Accounting

As used herein, the term “fair value” is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  We prioritize the inputs used in measuring fair value based upon a three-tier hierarchy described in Codification Section 820-10-35.  Our estimates of fair value involve considerable judgement and are not necessarily indicative of the amounts that could be realized in current market exchanges.

We believe that, during all periods presented, the carrying values approximate the estimated fair values of our cash and cash equivalents, marketable securities, other assets, and accrued and other liabilities, based upon our evaluation of the underlying characteristics, market data, and short maturity of these financial instruments, which involved considerable judgement.  The characteristics of these financial instruments, market data, and other comparative metrics utilized in determining these fair values are “Level 2” inputs as the term is defined in Codification Section 820-10-35-47.

We estimate fair values in recording our business combinations, to evaluate real estate, investments in unconsolidated real estate entities, goodwill, and other intangible assets for impairment, and to determine the fair values of notes payable and receivable.  In estimating these fair values, we consider significant unobservable inputs such as market prices of land, market capitalization rates and earnings multiples for real estate facilities, projected levels of earnings, costs of construction, functional depreciation, and market interest

9


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2015

(Unaudited)

 

rates for debt securities with a similar time to maturity and credit quality, which are “Level 3” inputs as the term is defined in Codification Section 820-10-35-52. 

Currency and Credit Risk

Financial assets that are exposed to credit risk consist primarily of cash and cash equivalents, rents receivable from our tenants, loans receivable, and restricted cash.  Cash equivalents and marketable securities we invest in are either money market funds with a rating of at least AAA by Standard and Poor’s, commercial paper that is  rated A1 by Standard and Poor’s or deposits with highly rated commercial banks.

At June 30, 2015, due primarily to our investment in Shurgard Europe, our operating results and financial position are affected by fluctuations in currency exchange rates between the Euro, and to a lesser extent, other European currencies, against the U.S. Dollar. 

Goodwill and Other Intangible Assets

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

Goodwill totaled $174.6 million at June 30, 2015 and December 31, 2014.  The “Shurgard” trade name, which is used by Shurgard Europe pursuant to a fee-based licensing agreement, has a book value of $18.8 million at June 30, 2015 and December 31, 2014.  Goodwill and the “Shurgard” trade name have indefinite lives and are not amortized.

Acquired customers in place and leasehold interests in land are finite-lived and are amortized relative to the benefit of the customers in place or the benefit to land lease expense to each period.  At June 30, 2015, these intangibles had a net book value of $22.9 million ($35.2 million at December 31, 2014).  Accumulated amortization totaled $78.0 million at June 30, 2015 ($69.3 million at December 31, 2014), and amortization expense of $15.9 million and $24.8 million was recorded in the six months ended June 30, 2015 and 2014, respectively.  The estimated future amortization expense for our finite-lived intangible assets at June 30, 2015 is approximately $8.9 million in the remainder of 2015, $6.5 million in 2016 and $7.5 million thereafter.  During the six months ended June 30, 2015, intangibles were increased $3.6 million in connection with the acquisition of self-storage facilities (Note 3). 

Evaluation of Asset Impairment

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

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

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

10


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2015

(Unaudited)

 

exceeds the amount that would be allocated to goodwill if the reporting unit were acquired for estimated fair value.  

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

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

Revenue and Expense Recognition

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

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

Foreign Currency Exchange Translation

The local currency (primarily the Euro) is the functional currency for our interests in foreign operations.  The related balance sheet amounts are translated into U.S. Dollars at the exchange rates at the respective financial statement date, while amounts on our statements of income are translated at the average exchange rates during the respective period.  When financial instruments denominated in a currency other than the U.S. Dollar are expected to be settled in cash in the foreseeable future, the impact of changes in the U.S. Dollar equivalent are reflected in current earnings.  The Euro was translated at exchange rates of approximately 1.110 U.S. Dollars per Euro at June 30, 2015 (1.216 at December 31, 2014), and average exchange rates of 1.106 and 1.371 for the three months ended June 30, 2015 and 2014, respectively,  and average exchange rates of 1.116 and 1.371 for the six months ended June 30, 2015 and 2014, respectively.  Cumulative translation adjustments, to the extent not included in cumulative net income, are included in equity as a component of accumulated other comprehensive income (loss).

Comprehensive Income

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

Recent Accounting Pronouncements and Guidance

In May 2014, the FASB issued an accounting standard update (“ASU”) (ASU No. 2014-09), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.  ASU No. 2014-09 will replace most existing revenue recognition guidance in U.S.

11


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2015

(Unaudited)

 

GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method.  The new standard is effective for us on January 1, 2018Early adoption is permitted effective January 1, 2017.  We have not yet selected a transition method.  We do not believe the adoption of ASU No. 2014-09 will have a material impact on our results of operations or financial condition.

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810).”  The guidance in this ASU includes amendments to Topic 810, “Consolidation.”  The new guidance modifies the consolidation analysis for limited and general partnerships and entities that are involved with variable interest entities, particularly those that have fee arrangements and related party relationships.  Additionally, it provides a scope exception to the consolidation guidance for certain entities.  The amendments in ASU No. 2015-02 are effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period.  Early adoption is permitted.  We have not yet determined whether the adoption of ASU No. 2015-02 will have a material effect on our results of operations or financial condition.

 

Net Income per Common Share

Net income is allocated to (i) noncontrolling interests based upon their share of the net income of the Subsidiaries, (ii) preferred shareholders, to the extent redemption cost exceeds the related original net issuance proceeds (in accordance with the provisions of Codification Section 260-10-S99-2, an “EITF D-42 allocation”), and (iii) the remaining net income allocated to each of our equity securities based upon the dividends declared or accumulated during the period, combined with participation rights in undistributed earnings. 

Basic net income per share is computed using the weighted average common shares outstanding.  Diluted net income per share is computed using the weighted average common shares outstanding, adjusted for the impact, if dilutive, of stock options outstanding (Note 10). 

The following table reflects net income allocable to common shareholders and the weighted average common shares and equivalents outstanding, as used in our calculations of basic and diluted net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

2015

 

2014

 

2015

 

2014

 

 

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income allocable to common shareholders

$

263,926 

 

$

218,352 

 

$

476,539 

 

$

392,404 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares and equivalents

 

 

 

 

 

 

 

 

 

 

 

 

outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

172,629 

 

 

172,282 

 

 

172,575 

 

 

172,096 

 

Net effect of dilutive stock options -

 

 

 

 

 

 

 

 

 

 

 

 

based on treasury stock method

 

758 

 

 

899 

 

 

802 

 

 

899 

 

Diluted weighted average common shares

 

 

 

 

 

 

 

 

 

 

 

 

outstanding

 

173,387 

 

 

173,181 

 

 

173,377 

 

 

172,995 

 

 

12


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2015

(Unaudited)

 

3.Real Estate Facilities

Activity in real estate facilities during the six months ended June 30, 2015 is as follows:  

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30, 2015

 

 

(Amounts in thousands)

 

Operating facilities, at cost:

 

 

 

Beginning balance

$

12,863,235 

 

Capital expenditures to maintain real estate facilities

32,461 

 

Acquisitions

 

84,229 

 

Dispositions

 

(19,320)

 

Newly developed facilities opened for operation

 

59,203 

 

Impact of foreign exchange rate changes

 

266 

 

Ending balance

 

13,020,074 

 

Accumulated depreciation:

 

 

 

Beginning balance

 

(4,482,520)

 

Depreciation expense

 

(194,776)

 

Dispositions

 

8,886 

 

Impact of foreign exchange rate changes

 

(147)

 

Ending balance

 

(4,668,557)

 

Construction in process:

 

 

 

Beginning balance

 

104,573 

 

Current development

 

100,085 

 

Newly developed facilities opened for operation

 

(59,203)

 

Ending balance

 

145,455 

 

Total real estate facilities at June 30, 2015

$

8,496,972 

During the six months ended June 30, 2015, we acquired eight self-storage facilities (560,000) net rentable square feet) and the leasehold interest in the land of one of our existing self-storage facilities, for a total cost of $87.8 million in cash.  Approximately $3.6 million of the total cost was allocated to intangible assets.  We completed expansion and development activities during the six months ended June 30, 2015, adding 558,000 net rentable square feet of self-storage space, at an aggregate cost of $59.2 million.  Construction in process at June 30, 2015 consists of projects to develop new self-storage facilities and expand existing self-storage facilities, which would add a total of 3.9 million net rentable square feet of storage space, for an aggregate estimated cost of approximately $479 million.  During the six months ended June 30, 2015, we sold one commercial facility and two self-storage facilities in connection with eminent domain proceedings, and recorded related gains on real estate sales totaling $18.2 million.

4.Investments in Unconsolidated Real Estate Entities

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

13


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2015

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Investments in Unconsolidated Real Estate Entities at

 

 

June 30, 2015

 

December 31, 2014

 

 

 

PSB

$

413,062 

 

$

412,115 

 

Shurgard Europe

 

388,792 

 

 

394,842 

 

Other Investments

 

6,601 

 

 

6,783 

 

Total

$

808,455 

 

$

813,740 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in Earnings of Unconsolidated Real Estate Entities for the

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

PSB

$

5,516 

 

$

4,315 

 

$

15,411 

 

$

9,652 

 

Shurgard Europe

 

1,355 

 

 

9,379 

 

 

7,091 

 

 

18,263 

 

Other Investments

 

609 

 

 

441 

 

 

1,162 

 

 

824 

 

Total

$

7,480 

 

$

14,135 

 

$

23,664 

 

$

28,739 

During the six months ended June 30, 2015 and 2014, we received cash distributions from our investments in the Unconsolidated Real Estate Entities totaling $16.4 million and $25.8 million, respectively.  At June 30, 2015, the cost of our investment in the Unconsolidated Real Estate Entities exceeds our pro rata share of the underlying equity by approximately $62 million  ($68 million at December 31, 2014).  This differential is being amortized as a reduction in equity in earnings of the Unconsolidated Real Estate Entities based upon allocations to the underlying net assets.  Such amortization was approximately $1.1 million and $1.0 million during the six months ended June 30, 2015 and 2014, respectively.  

Investment in PSB

PSB is a REIT traded on the New York Stock Exchange.  We have an approximate 42% common equity interest in PSB as of June 30, 2015 and December 31, 2014, comprised of our ownership of 7,158,354 shares of PSB’s common stock and 7,305,355 limited partnership units (“LP Units”) in an operating partnership controlled by PSBThe LP Units are convertible at our option, subject to certain conditions, on a one-for-one basis into PSB common stock.  Based upon the closing price at June 30, 2015 ($72.15 per share of PSB common stock), the shares and units we owned had a market value of approximately $1.0 billion. 

Included in equity in earnings of unconsolidated real estate entities is our $5.0 million share of gains on sale of facilities recorded by PSB for the six months ended June 30, 2015 (none in the three months ended June 30, 2015 or in the three and six months ended June 30, 2014).

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

14


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2015

(Unaudited)

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

2015

 

2014

 

 

 

 

 

 

 

(Amounts in thousands)

 

 

 

 

 

 

Total assets (primarily real estate)

$

2,239,619 

 

$

2,227,114 

Debt

 

250,000 

 

 

250,000 

Other liabilities

 

70,014 

 

 

68,905 

Equity:

 

 

 

 

 

Preferred stock

 

995,000 

 

 

995,000 

Common equity and units

 

924,605 

 

 

913,209 

 

 

 

 

 

 

 

 

 

2015

 

2014

 

 

 

 

 

 

 

(Amounts in thousands)

For the six months ended June 30,

 

 

 

 

 

Total revenue

$

185,543 

 

$

189,638 

Costs of operations

 

(61,803)

 

 

(64,979)

Depreciation and amortization

 

(53,258)

 

 

(56,736)

General and administrative

 

(6,896)

 

 

(5,850)

Other items

 

(6,409)

 

 

(6,622)

Gain on sale of facilities

 

12,487 

 

 

 -

Net income

 

69,664 

 

 

55,451 

Allocations to preferred shareholders and

 

 

 

 

 

restricted share unitholders

 

(30,384)

 

 

(30,313)

Net income allocated to common shareholders

 

 

 

 

 

and LP Unitholders

$

39,280 

 

$

25,138 

 

 

 

 

 

 

 

 

Investment in Shurgard Europe

For all periods presented, we had a 49% equity investment in Shurgard Europe and our joint venture partner owns the remaining 51% interest.  In addition, Shurgard Europe pays a license fee to us for the use of the “Shurgard” trademark and paid us interest on a shareholder loan until it was repaid in July 2014 (see Note 5).   

Changes in foreign currency exchange rates caused our investment in Shurgard Europe to decrease by approximately $12.6 million and $4.4 million during the six months ended June 30, 2015 and 2014, respectively.

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

15


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2015

(Unaudited)

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

2015

 

2014

 

 

 

 

 

 

 

 

(Amounts in thousands)

 

 

 

 

 

 

Total assets (primarily self-storage facilities)

$

1,503,889 

 

$

1,404,246 

Total debt to third parties

 

673,972 

 

 

500,767 

Other liabilities

 

113,046 

 

 

180,546 

Equity

 

716,871 

 

 

722,933 

 

 

 

 

 

 

Exchange rate of Euro to U.S. Dollar

 

1.110 

 

 

1.216 

 

 

 

 

 

 

 

 

 

2015

 

2014

 

(Amounts in thousands)

For the six months ended June 30,

 

 

 

 

 

Self-storage and ancillary revenues

$

112,683 

 

$

128,567 

Self-storage and ancillary cost of operations

 

(44,244)

 

 

(51,814)

Depreciation and amortization

 

(29,339)

 

 

(31,586)

General and administrative

 

(9,987)

 

 

(7,431)