Attached files

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EX-32 - EX-32 - Public Storagepsa-20160630xex32.htm
EX-31.2 - EX-31.2 - Public Storagepsa-20160630xex31_2.htm
EX-31.1 - EX-31.1 - Public Storagepsa-20160630xex31_1.htm
EX-12 - EX-12 - Public Storagepsa-20160630xex12.htm
EX-10.4 - EX-10.4 - Public Storagepsa-20160630xex10_4.htm
EX-10.3 - EX-10.3 - Public Storagepsa-20160630xex10_3.htm
EX-10.2 - EX-10.2 - Public Storagepsa-20160630xex10_2.htm
EX-10.1 - EX-10.1 - Public Storagepsa-20160630xex10_1.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, 2016

or

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

For the transition period from ____________ to ____________.

Commission File Number:  001-33519

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



 

Maryland

95-3551121

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer Identification Number)



 

701 Western Avenue, Glendale, California

91201-2349

(Address of principal executive offices)

(Zip Code)

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

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

[X]  Yes  [   ]  No

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

[X]  Yes  [   ]  No

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



 

 

 

Large Accelerated Filer

[X]

Accelerated Filer

[   ]

Non-accelerated Filer

[   ]

Smaller Reporting Company

[   ]

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

[   ]  Yes  [X]  No

Indicate the number of the registrant’s outstanding common shares of beneficial interest, as of August 3, 2016:

Common Shares of beneficial interest, $.10 par value per share – 173,401,388 shares

 


 

 













 

 

PUBLIC STORAGE



 

 

INDEX



 

 



 

 

PART I

FINANCIAL INFORMATION

Pages



 

 

Item 1.

Financial Statements (Unaudited)

 



 

 



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



 

 



Statements of Income for the Three and Six Months Ended June 30, 2016 and 2015



 

 



Statements of Comprehensive Income for the Three and Six Months Ended
June 30, 2016 and 2015



 

 



Statement of Equity for the Six Months Ended June 30, 2016



 

 



Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015

5-6 



 

 



Condensed Notes to Financial Statements

7-28 



 

 

Item 2.

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

29-53 



 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

53 



 

 

Item 4.

Controls and Procedures

54 



 

 

PART II

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

 



 

 

Item 1.

Legal Proceedings

55 



 

 

Item 1A.

Risk Factors

55 



 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

55 



 

 

Item 6.

Exhibits

55 



 

 





 


 

PUBLIC STORAGE

BALANCE SHEETS

 (Amounts in thousands, except share data)

(Unaudited)

 











 

 

 

 

 



June 30,

 

December 31,



2016

 

2015

ASSETS

 

 

 

 

 



 

 

 

 

 

Cash and cash equivalents

$

260,124 

 

$

104,285 

Real estate facilities, at cost:

 

 

 

 

 

Land

 

3,686,289 

 

 

3,564,810 

Buildings

 

9,884,371 

 

 

9,640,451 



 

13,570,660 

 

 

13,205,261 

Accumulated depreciation

 

(5,064,423)

 

 

(4,866,738)



 

8,506,237 

 

 

8,338,523 

Construction in process

 

228,103 

 

 

219,190 



 

8,734,340 

 

 

8,557,713 



 

 

 

 

 

Investments in unconsolidated real estate entities

 

696,069 

 

 

809,308 

Goodwill and other intangible assets, net

 

213,396 

 

 

211,458 

Other assets

 

93,208 

 

 

95,468 

Total assets

$

9,997,137 

 

$

9,778,232 



 

 

 

 

 



 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 



 

 

 

 

 

Senior unsecured notes

$

379,792 

 

$

263,940 

Mortgage notes

 

57,043 

 

 

55,076 

Preferred shares called for redemption (Note 7)

 

487,500 

 

 

 -

Accrued and other liabilities

 

305,769 

 

 

261,578 

    Total liabilities

 

1,230,104 

 

 

580,594 



 

 

 

 

 

Commitments and contingencies (Note 11)

 

 

 

 

 



 

 

 

 

 

Equity:

 

 

 

 

 

Public Storage shareholders’ equity:

 

 

 

 

 

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

 

 

 

 

 

147,700 shares issued (in series) and outstanding, (162,200 at

 

 

 

 

 

December 31, 2015), at liquidation preference

 

3,692,500 

 

 

4,055,000 

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

 

 

 

 

 

173,098,015 shares issued and outstanding  (172,921,241 shares at

 

 

 

 

 

December 31, 2015)

 

17,310 

 

 

17,293 

Paid-in capital

 

5,598,846 

 

 

5,601,506 

Accumulated deficit

 

(491,912)

 

 

(434,610)

Accumulated other comprehensive loss

 

(78,991)

 

 

(68,548)

Total Public Storage shareholders’ equity

 

8,737,753 

 

 

9,170,641 

Noncontrolling interests

 

29,280 

 

 

26,997 

  Total equity

 

8,767,033 

 

 

9,197,638 

Total liabilities and equity

$

9,997,137 

 

$

9,778,232 













 

 

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,



2016

 

2015

 

2016

 

2015



 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Self-storage facilities

$

594,387 

 

$

551,028 

 

$

1,168,973 

 

$

1,081,665 

Ancillary operations

 

39,801 

 

 

37,587 

 

 

77,001 

 

 

71,829 



 

634,188 

 

 

588,615 

 

 

1,245,974 

 

 

1,153,494 



 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

Self-storage cost of operations

 

157,687 

 

 

147,826 

 

 

317,550 

 

 

309,068 

Ancillary cost of operations

 

14,317 

 

 

13,271 

 

 

27,740 

 

 

24,041 

Depreciation and amortization

 

107,013 

 

 

106,473 

 

 

212,141 

 

 

213,619 

General and administrative

 

18,321 

 

 

20,988 

 

 

41,368 

 

 

45,148 



 

297,338 

 

 

288,558 

 

 

598,799 

 

 

591,876 



 

 

 

 

 

 

 

 

 

 

 

Operating income

 

336,850 

 

 

300,057 

 

 

647,175 

 

 

561,618 

Interest and other income

 

4,028 

 

 

3,815 

 

 

7,864 

 

 

7,852 

Interest expense

 

(1,378)

 

 

 -

 

 

(2,089)

 

 

 -

Equity in earnings of unconsolidated real estate entities

 

10,227 

 

 

7,480 

 

 

24,391 

 

 

23,664 

Foreign currency exchange gain (loss)

 

8,632 

 

 

 -

 

 

(2,322)

 

 

 -

Gain on real estate investment sales

 

 -

 

 

16,688 

 

 

689 

 

 

18,160 

Net income

 

358,359 

 

 

328,040 

 

 

675,708 

 

 

611,294 

Allocation to noncontrolling interests

 

(1,700)

 

 

(1,635)

 

 

(3,176)

 

 

(3,108)

Net income allocable to Public Storage shareholders

 

356,659 

 

 

326,405 

 

 

672,532 

 

 

608,186 

Allocation of net income to:

 

 

 

 

 

 

 

 

 

 

 

Preferred shareholders

 

(59,216)

 

 

(61,449)

 

 

(121,488)

 

 

(125,004)

Preferred shareholders - redemptions (Note 7)

 

(15,537)

 

 

 -

 

 

(26,873)

 

 

(4,784)

Restricted share units 

 

(1,131)

 

 

(1,030)

 

 

(2,061)

 

 

(1,859)

Net income allocable to common shareholders

$

280,775 

 

$

263,926 

 

$

522,110 

 

$

476,539 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

1.62 

 

$

1.53 

 

$

3.02 

 

$

2.76 

Diluted

$

1.61 

 

$

1.52 

 

$

3.00 

 

$

2.75 



 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

173,087 

 

 

172,629 

 

 

173,032 

 

 

172,575 

Diluted weighted average common shares outstanding

 

174,000 

 

 

173,387 

 

 

173,925 

 

 

173,377 



 

 

 

 

 

 

 

 

 

 

 















 

 

See accompanying notes.

2

 


 

PUBLIC STORAGE

STATEMENTS OF COMPREHENSIVE INCOME

 (Amounts in thousands)

(Unaudited)

 









 

 

 

 

 

 

 

 

 

 

 



Three Months Ended June 30,

 

Six Months Ended June 30,



2016

 

2015

 

2016

 

2015



 

 

 

 

 

 

 

 

 

 

 

Net income

$

358,359 

 

$

328,040 

 

$

675,708 

 

$

611,294 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Aggregate foreign currency exchange income (loss)

 

(4,681)

 

 

17,049 

 

 

(11,824)

 

 

(13,367)

Adjust for foreign currency exchange (income) loss

 

 

 

 

 

 

 

 

 

 

 

included in net income

 

(6,537)

 

 

 -

 

 

1,381 

 

 

 -

Other comprehensive income (loss)

 

(11,218)

 

 

17,049 

 

 

(10,443)

 

 

(13,367)

Total comprehensive income

 

347,141 

 

 

345,089 

 

 

665,265 

 

 

597,927 

Allocation to noncontrolling interests

 

(1,700)

 

 

(1,635)

 

 

(3,176)

 

 

(3,108)

Comprehensive income allocable to

 

 

 

 

 

 

 

 

 

 

 

Public Storage shareholders

$

345,441 

 

$

343,454 

 

$

662,089 

 

$

594,819 









 

 

See accompanying notes.

3

 


 

PUBLIC STORAGE

STATEMENTS OF EQUITY

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Total

 

 

 

 

 

 

 

Cumulative

 

 

 

 

 

 

 

 

 

 

Other

 

Public Storage

 

 

 

 

 

 

Preferred

 

Common

 

Paid-in

 

Accumulated

 

Comprehensive

 

Shareholders’

 

Noncontrolling

 

Total

 

Shares

 

Shares

 

Capital

 

Deficit

 

Loss

 

Equity

 

Interests

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2015

$

4,055,000 

 

$

17,293 

 

$

5,601,506 

 

$

(434,610)

 

$

(68,548)

 

$

9,170,641 

 

$

26,997 

 

$

9,197,638 

Cumulative effect of a change in accounting

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

principle (Note 9)

 

 -

 

 

 -

 

 

789 

 

 

(789)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Balances at December 31, 2015, as adjusted

 

4,055,000 

 

 

17,293 

 

 

5,602,295 

 

 

(435,399)

 

 

(68,548)

 

 

9,170,641 

 

 

26,997 

 

 

9,197,638 

Issuance of 20,000 preferred shares (Note 7)

 

500,000 

 

 

 -

 

 

(16,322)

 

 

 -

 

 

 -

 

 

483,678 

 

 

 -

 

 

483,678 

Redemption of 34,500 preferred shares (Note 7)

 

(862,500)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(862,500)

 

 

 -

 

 

(862,500)

Issuance of common shares in connection with

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

share-based compensation (176,774 shares)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Note 9)

 

 -

 

 

17 

 

 

10,708 

 

 

 -

 

 

 -

 

 

10,725 

 

 

 -

 

 

10,725 

Cash paid in lieu of common shares, net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

share-based compensation expense (Note 9)

 

 -

 

 

 -

 

 

2,165 

 

 

 -

 

 

 -

 

 

2,165 

 

 

 -

 

 

2,165 

Contributions by noncontrolling interests

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

2,747 

 

 

2,747 

Net income

 

 -

 

 

 -

 

 

 -

 

 

675,708 

 

 

 -

 

 

675,708 

 

 

 -

 

 

675,708 

Net income allocated to noncontrolling interests

 -

 

 

 -

 

 

 -

 

 

(3,176)

 

 

 -

 

 

(3,176)

 

 

3,176 

 

 

 -

Distributions to equity holders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred shares (Note 7)

 

 -

 

 

 -

 

 

 -

 

 

(121,488)

 

 

 -

 

 

(121,488)

 

 

 -

 

 

(121,488)

Noncontrolling interests

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(3,640)

 

 

(3,640)

Common shares and restricted share units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($3.50 per share)

 

 -

 

 

 -

 

 

 -

 

 

(607,557)

 

 

 -

 

 

(607,557)

 

 

 -

 

 

(607,557)

Other comprehensive loss (Note 2)

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(10,443)

 

 

(10,443)

 

 

 -

 

 

(10,443)

Balances at June 30, 2016

$

3,692,500 

 

$

17,310 

 

$

5,598,846 

 

$

(491,912)

 

$

(78,991)

 

$

8,737,753 

 

$

29,280 

 

$

8,767,033 







 

 

See accompanying notes.

4

 


 

PUBLIC STORAGE

STATEMENTS OF CASH FLOWS

 (Amounts in thousands)

(Unaudited)

 









 

 

 

 

 



Six Months Ended June 30,



2016

 

2015

Cash flows from operating activities:

 

 

 

 

 

Net income

$

675,708 

 

$

611,294 

Adjustments to reconcile net income to net cash provided

 

 

 

 

 

by operating activities:

 

 

 

 

 

Gain on real estate investment sales

 

(689)

 

 

(18,160)

Depreciation and amortization

 

212,141 

 

 

213,619 

Equity in earnings of unconsolidated real estate entities

 

(24,391)

 

 

(23,664)

Distributions from retained earnings of unconsolidated

 

 

 

 

 

real estate entities

 

60,587 

 

 

16,361 

Foreign currency exchange loss

 

2,322 

 

 

 -

Other

 

39,036 

 

 

40,175 

Total adjustments

 

289,006 

 

 

228,331 

Net cash provided by operating activities

 

964,714 

 

 

839,625 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures to maintain real estate facilities 

 

(38,236)

 

 

(29,757)

Construction in process

 

(134,998)

 

 

(100,393)

Acquisition of real estate facilities and intangible assets

(184,657)

 

 

(87,783)

Distributions in excess of retained earnings from

 

 

 

 

 

unconsolidated real estate entities

 

67,420 

 

 

 -

Proceeds from sale of real estate investments

 

1,393 

 

 

13,929 

Other

 

1,283 

 

 

16,030 

Net cash used in investing activities

 

(287,795)

 

 

(187,974)

Cash flows from financing activities:

 

 

 

 

 

Borrowings on bank credit facility

 

 -

 

 

11,000 

Repayments on notes payable

 

(10,592)

 

 

(16,282)

Issuance of senior unsecured notes

 

113,620 

 

 

 -

Issuance of preferred shares

 

483,678 

 

 

 -

Issuance of common shares

 

10,725 

 

 

10,488 

Redemption of preferred shares

 

(375,000)

 

 

(145,000)

Cash paid upon vesting in lieu of issuing common shares

 

(13,304)

 

 

(13,591)

Contributions by noncontrolling interests

 

2,747 

 

 

 -

Distributions paid to Public Storage shareholders

 

(729,045)

 

 

(661,633)

Distributions paid to noncontrolling interests

 

(3,640)

 

 

(3,191)

Net cash used in financing activities

 

(520,811)

 

 

(818,209)

Net increase (decrease) in cash and cash equivalents

 

156,108 

 

 

(166,558)

Net effect of foreign exchange translation on cash and cash equivalents

 

(269)

 

 

(898)

Cash and cash equivalents at the beginning of the period

 

104,285 

 

 

187,712 

Cash and cash equivalents at the end of the period

$

260,124 

 

$

20,256 

 

See accompanying notes.

5

 


 

PUBLIC STORAGE

STATEMENTS OF CASH FLOWS

 (Amounts in thousands)

(Unaudited)

 





 

 

 

 

 



 

 

 

 

 



Six Months Ended June 30,



2016

 

2015

Supplemental schedule of non-cash investing and

 

 

 

 

 

financing activities:

 

 

 

 

 



 

 

 

 

 

Foreign currency translation adjustment:

 

 

 

 

 

Real estate facilities, net of accumulated depreciation

$

641 

 

$

(119)

Investments in unconsolidated real estate entities

 

8,682 

 

 

12,588 

Senior unsecured notes

 

2,232 

 

 

 -

Accumulated other comprehensive loss

 

(11,824)

 

 

(13,367)



 

 

 

 

 

Preferred shares called for redemption and reclassified to liabilities

 

487,500 

 

 

 -

Preferred shares called for redemption and reclassified from equity

 

(487,500)

 

 

 -



 

 

 

 

 

Real estate acquired in exchange for assumption of notes payable

(12,945)

 

 

 -

Notes payable assumed in connection with acquisition of real estate

 

12,945 

 

 

 -



 

 

 

 

 

Accrued construction costs and capital expenditures:

 

 

 

 

 

Capital expenditures to maintain real estate facilities 

 

(6,709)

 

 

(2,704)

Construction in process

 

(10,904)

 

 

308 

Accrued and other liabilities

 

17,613 

 

 

2,396 





 

 

See accompanying notes.

6

 


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2016

(Unaudited)

 

1.Description of the Business

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

At June 30,  2016, we have direct and indirect equity interests in 2,310 self-storage facilities (with approximately 151 million net rentable square feet) located in 38 states in the United States (“U.S.”) operating under the “Public Storage” name.  We also own one self-storage facility in London, England and we have a 49% interest in Shurgard Europe, which owns 217 self-storage facilities (with approximately 12 million net rentable square feet) located in seven Western European countries, all operating under the “Shurgard” name.  We also have direct and indirect equity interests in approximately 29 million net rentable square feet of commercial space located in nine states in the U.S. primarily owned and operated by PS Business Parks, Inc. (“PSB”) under the “PS Business Parks” name.  At June 30, 2016, we have an approximate 42% common equity interest in PSB.

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

2.Summary of Significant Accounting Policies

Basis of Presentation

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, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016 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, 2015.

Certain amounts previously reported in our June 30, 2015 financial statements have been reclassified to conform to the June 30, 2016 presentation.  We reclassified the revenues and cost of operations, net for our wholly-owned commercial facilities and property management operations as interest and other income (aggregates of approximately $4.0 million and $1.1 million for the three months ended June 30, 2015, respectively, and $8.5 million and $2.3 million for the six months ended June 30, 2015, respectively), rather than as ancillary revenues and ancillary cost of operations.  We also revised our reportable segment presentation in Note 10, including renaming (i) our “Domestic Self-Storage” segment to “Self-Storage Operations,” (ii) our “European Self-Storage” segment to “Investment in Shurgard Europe,” (iii) our “Commercial” segment to “Investment in PSB,” removing our commercial facilities’ operations from this segment, and (iv) presenting a new segment called “Ancillary Operations” reflecting the sale of merchandise at our self-storage facilities and reinsurance of policies covering losses to goods stored by our tenants at our facilities.  Each of these

7


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2016

(Unaudited)

 

reclassifications reflects changes to enhance the usefulness of this information based upon the relative significance of these activities to our aggregate operating results.

On our statement of cash flows for the six months ended June 30, 2015, we reclassified as cash flows from financing activities the $13.6 million we paid for the restricted share units that we withheld upon their vesting for tax requirements, in connection with a recently issued accounting pronouncement related to employee share-based payment accounting we early adopted effective January 1, 2016.  We previously included these amounts within operating activities (see “Recent Accounting Pronouncements and Guidance” below).

Consolidation and Equity Method of Accounting

We consider entities to be Variable Interest Entities (“VIEs”) when they have insufficient equity to finance their activities without additional subordinated financial support provided by other parties, or the equity holders as a group do not have a controlling financial interest.  We consolidate VIEs when we have (i) the power to direct the activities most significantly impacting economic performance, and (ii) either the obligation to absorb losses or the right to receive benefits from the VIE.  We have no involvement with any material VIEs.  We consolidate all other entities when we control them through voting shares or contractual rights.  The entities we consolidate, for the period in which the reference applies, are referred to collectively as the “Subsidiaries”, and we eliminate intercompany transactions and balances. 

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

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

Collectively, at June 30, 2016, the Company and the Subsidiaries own 2,298 self-storage facilities in the U.S., one self-storage facility in London, England and three commercial facilities in the U.S.  At June 30, 2016, the Unconsolidated Real Estate Entities are comprised of PSB, Shurgard Europe, as well as limited partnerships that own an aggregate of 12 self-storage facilities in the U.S. (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 REIT, as defined in the Internal Revenue Code of 1986, as amended (the “Code”).  As a REIT, we do not incur federal income tax if we distribute 100% of our REIT taxable income each year, and if we meet certain organizational and operational rules.  We believe we have met these REIT requirements for all periods presented herein.  Accordingly, we have recorded no federal income tax expense related to our REIT taxable income.

8


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2016

(Unaudited)

 

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, 2016, we had no tax benefits that were not recognized.

Real Estate Facilities

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

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

Other Assets

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

Accrued and Other Liabilities

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

Cash Equivalents, Marketable Securities and Other Financial Instruments

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

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

9


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2016

(Unaudited)

 



Fair Value

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

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

Currency and Credit Risk

Financial instruments that are exposed to credit risk consist primarily of cash and cash equivalents, certain portions of other assets including rents receivable from our tenants and restricted cash.  Cash equivalents 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, 2016, due primarily to our investment in Shurgard Europe (Note 4) and our senior unsecured notes denominated in Euros (Note 5), our operating results and financial position are affected by fluctuations in currency exchange rates between the Euro, and to a lesser extent, other European currencies, against the U.S. Dollar. 

Goodwill and Other Intangible Assets

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

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

Acquired customers in place and leasehold interests in land are finite-lived and are amortized relative to the benefit of the customers in place or the benefit to land lease expense to each period.  At June 30, 2016, these intangibles had a net book value of $19.9 million ($18.0 million at December 31, 2015).  Accumulated amortization totaled $51.9 million at June 30, 2016 ($66.4 million at December 31, 2015), and amortization expense of $10.5 million and $15.9 million was recorded in the six months ended June 30, 2016 and 2015, respectively.  The estimated future amortization expense for our finite-lived intangible assets at June 30, 2016 is approximately $7.5 million in the remainder of 2016, $5.6 million in 2017 and $6.8 million thereafter.  During the six months ended June 30, 2016, intangibles were increased $12.5 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

10


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2016

(Unaudited)

 

to be received through the asset’s remaining life (or, if earlier, the expected disposal date), we record an impairment charge to the extent the carrying amount exceeds the asset’s estimated fair value or net proceeds from expected disposal. 

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

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

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

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

Revenue and Expense Recognition

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

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

Foreign Currency Exchange Translation

The local currency (primarily the Euro) is the functional currency for our interests in foreign operations.  The related balance sheet amounts are translated into U.S. Dollars at the exchange rates at the respective financial statement date, while amounts on our statements of income are translated at the average exchange rates during the respective period.  When financial instruments denominated in a currency other than the U.S. Dollar are expected to be settled in cash in the foreseeable future, the impact of changes in the U.S. Dollar equivalent are reflected in current earnings.  The Euro was translated at exchange rates of approximately 1.110 U.S. Dollars per Euro at June 30, 2016 (1.091 at December 31, 2015), and average exchange rates of 1.129 and 1.106 for the three months ended June 30, 2016 and 2015, respectively, and an average exchange rate of 1.116 for the each of six month periods ended June 30, 2016 and 2015.  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).

11


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2016

(Unaudited)

 

Comprehensive Income

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

Recent Accounting Pronouncements and Guidance

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

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

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

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting.  We early adopted this standard effective January 1, 2016.  Under this standard, a share-based compensation-related tax liability paid on behalf of employees in lieu of shares received is classified as a financing activity on the statement of cash flows, rather than as an operating activity as we had previously presented such amounts.  We applied this provision retrospectively.  The standard also allows a company to choose, with respect to recording share-based expense, between (i) recognizing forfeitures only as they occur or (ii) estimating future forfeitures in advance.  We chose to recognize forfeitures only as they occur, rather than estimating in advance, accordingly, effective January 1, 2016, under the modified retrospective transition method as required by the standard, we recorded a cumulative-effect adjustment of $0.8 million to increase accumulated deficit and increase paid-in capital for the impact of estimated future forfeitures after December 31, 2015 (Note 9).

12


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2016

(Unaudited)

 

Net Income per Common Share

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

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



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 



 

Three Months Ended June 30,

 

Six Months Ended June 30,



 

2016

 

2015

 

2016

 

2015



 

(Amounts in thousands)



 

 

 

 

 

 

 

 

 

 

 

 



Weighted average common shares and equivalents

 

 

 

 

 

 

 

 

 

 

 



outstanding:

 

 

 

 

 

 

 

 

 

 

 



Basic weighted average common

 

 

 

 

 

 

 

 

 

 

 



shares outstanding

 

173,087 

 

 

172,629 

 

 

173,032 

 

 

172,575 



Net effect of dilutive stock options -

 

 

 

 

 

 

 

 

 

 

 



based on treasury stock method

 

913 

 

 

758 

 

 

893 

 

 

802 



Diluted weighted average common

 

 

 

 

 

 

 

 

 

 

 



shares outstanding

 

174,000 

 

 

173,387 

 

 

173,925 

 

 

173,377 





3.Real Estate Facilities

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

13


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2016

(Unaudited)

 







 

 

 



 

 



 

Six Months Ended



 

June 30, 2016



 

(Amounts in thousands)



Operating facilities, at cost:

 

 



Beginning balance

$

13,205,261 



Capital expenditures to maintain real estate facilities

44,945 



Acquisitions

 

185,150 



Newly developed facilities opened for operation

 

136,989 



Impact of foreign exchange rate changes

 

(1,685)



Ending balance

 

13,570,660 



Accumulated depreciation:

 

 



Beginning balance

 

(4,866,738)



Depreciation expense

 

(198,729)



Impact of foreign exchange rate changes

 

1,044 



Ending balance

 

(5,064,423)



Construction in process:

 

 



Beginning balance

 

219,190 



Current development

 

145,902 



Newly developed facilities opened for operation

 

(136,989)



Ending balance

 

228,103 



Total real estate facilities at June 30, 2016

$

8,734,340 

During the six months ended June 30, 2016, we acquired 24 self-storage facilities (1,703,000 net rentable square feet), for a total cost of $197.6 million, consisting of $184.7 million in cash and the assumption of $12.9 million in mortgage debt.  Approximately $12.5 million of the total cost was allocated to intangible assets.  We completed expansion and development activities during the six months ended June 30, 2016, adding 1,269,000 net rentable square feet of self-storage space, at an aggregate cost of $137.0 million.  Construction in process at June 30, 2016 consists of projects to develop new self-storage facilities and expand existing self-storage facilities, which would add a total of 4.9 million net rentable square feet of storage space, for an aggregate estimated cost of approximately $630.7 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):

14


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2016

(Unaudited)

 



 

 

 

 

 

 



 

Investments in Unconsolidated Real Estate Entities at



 

June 30, 2016

 

December 31, 2015



 



PSB

$

407,954 

 

$

414,450 



Shurgard Europe

 

281,674 

 

 

388,367 



Other Investments (A)

 

6,441 

 

 

6,491 



Total

$

696,069 

 

$

809,308 







 

 

 

 

 

 

 

 

 

 

 

 



 

Equity in Earnings of Unconsolidated Real Estate Entities for the



 

Three Months Ended June 30,

 

Six Months Ended June 30,



 

2016

 

2015

 

2016

 

2015



 

 

 

 

 

 

 



PSB

$

7,869 

 

$

5,516 

 

$

15,200 

 

$

15,411 



Shurgard Europe

 

1,706 

 

 

1,355 

 

 

7,942 

 

 

7,091 



Other Investments (A)

 

652 

 

 

609 

 

 

1,249 

 

 

1,162 



Total

$

10,227 

 

$

7,480 

 

$

24,391 

 

$

23,664 



(A)

At June 30, 2016 and December 31, 2015, the “Other Investments” include an average 26% common equity ownership in limited partnerships that collectively own 12 self-storage facilities.  In the six months ended June 30, 2016, we sold one of the Other Investments resulting in a $0.7 million gain on real estate investment sales on our income statement.

During the six months ended June 30, 2016 and 2015, we received cash distributions from our investments in the Unconsolidated Real Estate Entities totaling $128.0 million and $16.4 million, respectively.  For the six months ended June 30, 2016, $67.4 million of the distributions received exceeded the retained earnings of the Unconsolidated Real Estate Entities and are presented as an investing activity on our statement of cash flows.  At June 30, 2016, the cost of our investment in the Unconsolidated Real Estate Entities exceeds our pro rata share of the underlying equity by approximately $59 million ($62 million at December 31, 2015).  This differential is being amortized as a reduction in equity in earnings of the Unconsolidated Real Estate Entities based upon allocations to the underlying net assets.  Such amortization was approximately $0.9 million and $1.1 million during the six months ended June 30, 2016 and 2015, 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, 2016 and December 31, 2015, comprised of our ownership of 7,158,354 shares of PSB’s common stock and 7,305,355 limited partnership units (“LP Units”) in an operating partnership controlled by PSB.  The LP Units are convertible at our option, subject to certain conditions, on a one-for-one basis into PSB common stock.  Based upon the closing price at June 30, 2016 ($106.08 per share of PSB common stock), the shares and units we owned had a market value of approximately $1.5 billion. 

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

15


 

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

June 30, 2016

(Unaudited)

 





 

 

 

 

 



June 30,

 

December 31,



2016

 

2015



(Amounts in thousands)



 

 

 

 

 

Total assets (primarily real estate)

$

1,982,082 

 

$

2,186,658 

Debt

 

54,000 

 

 

250,000 

Other liabilities

 

74,335 

 

 

76,059 

Equity:

 

 

 

 

 

Preferred stock

 

920,000 

 

 

920,000 

Common equity and LP units

 

933,747 

 

 

940,599 







 

 

 

 

 



2016

 

2015



(Amounts in thousands)

For the six months ended June 30,

 

 

 

 

 

Total revenue

$

192,191 

 

$

185,543 

Costs of operations

 

(61,644)

 

 

(61,803)

Depreciation and amortization

 

(50,255)

 

 

(53,258)

General and administrative

 

(9,012)

 

 

(6,896)

Other items

 

(4,877)

 

 

(6,409)

Gain on sale of facilities

 

 -

 

 

12,487 

Net income

 

66,403 

 

 

69,664 

Allocations to preferred shareholders and

 

 

 

 

 

restricted share unitholders

 

(27,924)

 

 

(30,384)

Net income allocated to common shareholders

 

 

 

 

 

and LP Unitholders

$

38,479 

 

$

39,280 



 

 

 

 

 





Investment in Shurgard Europe

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

Changes in foreign currency exchange rates caused our investment in Shurgard Europe to decrease by approximately $8.7 million and $12.6 million in the six months ended June 30, 2016 and 2015, respectively.  Included in our equity in earnings of Shurgard Europe for the six months ended June 30, 2016, is a