10-Q 1 psp33q05_10q.txt PUBLIC STORAGE PROPERTIES, LTD. - 3RD QTR 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended September 30, 2005 ------------------ 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 0-8667 ------ PUBLIC STORAGE PROPERTIES, LTD. ------------------------------- (Exact name of registrant as specified in its charter) California 95-3196921 --------------------------------------- ------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) 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 the past 90 days. [X] Yes [ ] No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No The Registrant is a limited partnership and issues units representing ownership of limited partner interests, with a par value of $500.00 per unit. Number of units outstanding at November 14, 2005: 20,000 PUBLIC STORAGE PROPERTIES, LTD. INDEX Pages ----- PART I. FINANCIAL INFORMATION (Item 3 not applicable) --------------------- Item 1. Financial Statements Condensed Balance Sheets at September 30, 2005 and December 31, 2004 1 Condensed Statements of Income for the Three and Nine Months Ended September 30, 2005 and 2004 2 Condensed Statement of Partners' Equity for the Nine Months Ended September 30, 2005 3 Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2005 and 2004 4 Notes to Condensed Financial Statements 5-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-12 Item 2A. Risk Factors 12-14 Item 4. Controls and Procedures 14-15 PART II. OTHER INFORMATION (Items 2 - 5 not applicable) ----------------- Item 1. Legal Proceedings 16 Item 6. Exhibits 16 PUBLIC STORAGE PROPERTIES, LTD. CONDENSED BALANCE SHEETS
September 30, December 31, 2005 2004 ------------------ ----------------- (Unaudited) ASSETS ------ Cash and cash equivalents $ 1,792,000 $ 1,407,000 Rent and other receivables 80,000 35,000 Real estate facilities, at cost: Building, land improvements and equipment 9,590,000 9,574,000 Land 2,476,000 2,476,000 ------------------ ----------------- 12,066,000 12,050,000 Less accumulated depreciation (8,962,000) (8,823,000) ------------------ ----------------- 3,104,000 3,227,000 Other assets 34,000 28,000 ------------------ ----------------- Total assets $ 5,010,000 $ 4,697,000 ================== ================= LIABILITIES AND PARTNERS' EQUITY -------------------------------- Accounts payable and accrued liabilities $ 137,000 $ 42,000 Deferred revenue 163,000 183,000 Commitments and contingencies (Note 5) - - Partners' equity: Limited partners' equity, $500 per unit, 20,000 units authorized, issued and outstanding 3,497,000 3,321,000 General partners' equity 1,213,000 1,151,000 ------------------ ---------------- Total partners' equity 4,710,000 4,472,000 ------------------ ---------------- Total liabilities and partners' equity $ 5,010,000 $ 4,697,000 ================== =================
See accompanying notes. 1 PUBLIC STORAGE PROPERTIES, LTD. CONDENSED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------------------ ------------------------------------- 2005 2004 2005 2004 ------------------- --------------------- -------------------- ---------------- REVENUES: Rental income $ 1,749,000 $ 1,666,000 $ 5,140,000 $ 4,839,000 Other income 28,000 14,000 71,000 39,000 ------------------- --------------------- -------------------- ---------------- 1,777,000 1,680,000 5,211,000 4,878,000 ------------------- --------------------- -------------------- ---------------- COSTS AND EXPENSES: Cost of operations 347,000 327,000 1,049,000 1,035,000 Management fees paid to affiliate 105,000 100,000 308,000 290,000 Depreciation 45,000 69,000 139,000 214,000 Administrative 25,000 18,000 83,000 71,000 ------------------- --------------------- -------------------- ---------------- 522,000 514,000 1,579,000 1,610,000 ------------------- --------------------- -------------------- ---------------- NET INCOME: $ 1,255,000 $ 1,166,000 $ 3,632,000 $ 3,268,000 =================== ===================== ==================== ================ Limited partners' share of net income ($137.75 unit in 2005 and $123.45 per unit in 2004) 2,755,000 2,469,000 General partners' share of net income 877,000 799,000 -------------------- ---------------- $ 3,632,000 $ 3,268,000 ==================== ================
See accompanying notes. 2 PUBLIC STORAGE PROPERTIES, LTD. CONDENSED STATEMENT OF PARTNERS' EQUITY (UNAUDITED)
Total Limited General Partners' Partners' Partners' Equity -------------------- -------------------- ------------------- Balance at December 31, 2004 $ 3,321,000 $ 1,151,000 $ 4,472,000 Net income 2,755,000 877,000 3,632,000 Distributions (2,520,000) (874,000) (3,394,000) Equity transfer (59,000) 59,000 - -------------------- -------------------- ------------------- Balance at September 30, 2005 $ 3,497,000 $ 1,213,000 $ 4,710,000 ==================== ==================== ===================
See accompanying notes. 3 PUBLIC STORAGE PROPERTIES, LTD. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, ------------------------------------------------ 2005 2004 ------------------------ ---------------------- Cash flows from operating activities: Net income $ 3,632,000 $ 3,268,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 139,000 214,000 (Increase) decrease in rent and other receivables (45,000) 5,000 Increase in other assets (6,000) (22,000) Increase in accounts payable and accrued liabilities 95,000 61,000 Decrease in deferred revenue (20,000) (2,000) ------------------------ ---------------------- Total adjustments 163,000 256,000 ------------------------ ---------------------- Net cash provided by operating activities 3,795,000 3,524,000 ------------------------ ---------------------- Cash flows from investing activities: Additions to real estate facilities (16,000) (67,000) ------------------------ ---------------------- Net cash used in investing activities (16,000) (67,000) ------------------------ ---------------------- Cash flows from financing activities: Distributions paid to partners (3,394,000) (3,098,000) ------------------------ ---------------------- Net cash used in financing activities (3,394,000) (3,098,000) ------------------------ ---------------------- Net increase in cash and cash equivalents 385,000 359,000 Cash and cash equivalents at the beginning of the period 1,407,000 1,070,000 ------------------------ ---------------------- Cash and cash equivalents at the end of the period $ 1,792,000 $ 1,429,000 ======================== ======================
See accompanying notes. 4 PUBLIC STORAGE PROPERTIES, LTD. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. DESCRIPTION OF THE BUSINESS Public Storage Properties, Ltd. (the "Partnership") is a publicly held limited partnership formed under the California Uniform Limited Partnership Act in November 1976. The Partnership raised $10,000,000 in gross proceeds by selling 20,000 units of limited partnership interest ("Units") in an interstate offering, which commenced in October 1977 and completed in January 1978. The general partners in the Partnership are Public Storage, Inc. ("PSI") and B. Wayne Hughes ("Hughes"). The Partnership was formed to engage in the business of developing and operating self-storage facilities for personal and business use. The Partnership owns nine self-storage facilities located in California. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation: ---------------------- The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal, recurring accruals) necessary for a fair presentation have been included. The results of operations for the three and nine months ended September 30, 2005 are not necessarily indicative of the results expected for the full year. These unaudited condensed financial statements should be read in conjunction with the financial statements and related notes appearing in the Partnership's Form 10-K for the year ended December 31, 2004. Use of Estimates: ----------------- The preparation of the condensed financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed financial statements and accompanying notes. Actual results could differ from those estimates. Allocation of Net Income: ------------------------- The general partners' share of net income consists of amounts attributable to their 1% capital contribution and an additional percentage of cash flow (as defined) which relates to the general partners' share of cash distributions as set forth in the Partnership Agreement (See "Ownership Interests by the General Partners" under Note 4). All remaining net income is allocated to the limited partners. Per unit data is based on the weighted average number of the limited partnership units (20,000) outstanding during the period. Cash and Cash Equivalents: -------------------------- For financial statement purposes, the Partnership considers all highly liquid financial instruments such as short-term treasury securities or investment grade short-term commercial paper to be cash equivalents. Income Taxes: ------------- Public Storage Properties, Ltd. is treated as a partnership for Federal income tax purposes with the taxable income of the entity allocated to each partner in accordance with the partnership agreement. Accordingly no Federal income tax expense is recorded by the Partnership. 5 PUBLIC STORAGE PROPERTIES, LTD. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) Real Estate Facilities and Evaluation of Asset Impairment: ---------------------------------------------------------- Real estate facilities are recorded at cost. Costs associated with the development, construction, renovation and improvement of properties are capitalized. Interest, property taxes, and other costs associated with the development incurred during the construction period are capitalized as building cost. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the buildings and improvements, which are generally between 5 and 25 years. Certain real estate facilities have been in service longer than 25 years, and accordingly the original development cost of such buildings are fully depreciated at September 30, 2005. We evaluate our real estate for impairment on a quarterly basis. We first evaluate these assets for indicators of impairment such as a) a significant decrease in the market price of real estate, b) a significant adverse change in the extent or manner in which real estate is being used or in its physical condition, c) a significant adverse change in legal factors or the business climate that could affect the value of the real estate, d) an accumulation of costs significantly in excess of the amount originally projected for the acquisition of or construction of the real estate, or e) a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of the real estate. When any such indicators of impairment are noted, we compare the carrying value of the real estate to the future estimated undiscounted cash flows attributable to the real estate. If the real estate's recoverable amount is less than the carrying value of the asset, then an impairment charge is booked for the excess of carrying value over the real estate's fair value. Our evaluations have identified no such impairments at September 30, 2005. Any real estate facility which we expect to sell or dispose of prior to its previously estimated useful life is stated at the lower of its estimated net realizable value, less cost to sell, or its carrying value. Revenue and Expense Recognition: -------------------------------- Rental income, which is generally earned pursuant to month-to-month leases for storage space, is recognized as earned. Promotional discounts are recognized as a reduction to rental income over the promotional period, which is generally during the first month of occupancy. Late charges and administrative fees are recognized as rental income when collected. Property taxes are accrued based upon estimates and historical trends. If these estimates are incorrect, the timing of expense recognition could be affected. Cost of operations, general and administrative expense as well as television, yellow page and other advertising expenditures are expensed as incurred. Accordingly, the amounts incurred in an interim period may not be indicative of amounts to be incurred during a full year. Total advertising expenses were $54,000 and $164,000 for the three and nine months ended September 30, 2005, respectively, and $44,000 and $160,000 for the same periods in 2004, respectively. Environmental Costs: -------------------- The Partnership's policy is to accrue environmental assessments and/or remediation costs when it is probable that such efforts will be required and the related costs can be reasonably estimated. Although there can be no assurance, we are not aware of any environmental contamination at any of our facilities, which, individually or in the aggregate, would be material to our overall business, financial condition or results of operations. 6 PUBLIC STORAGE PROPERTIES, LTD. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 3. CASH DISTRIBUTIONS The Partnership Agreement requires that any cash available for distribution (cash flow from all sources less cash necessary for any obligations or capital improvement needs) be distributed at least quarterly. The Partnership paid distributions to the limited and general partners totaling $2,520,000 ($126.00 per unit) and $874,000, respectively, for the nine months ended September 30, 2005. Future distributions will be based on amounts supported by operating cash flow after capital improvements and any other necessary obligations. 4. RELATED PARTY TRANSACTIONS Management Agreement and Shared Expenses with PSI: -------------------------------------------------- The Partnership has a management agreement with PSI. Under the terms of the agreement, PSI operates the self-storage facilities for a fee equal to 6% of the facilities' gross revenue (as defined). For the three months ended September 30, 2005 and 2004, the Partnership paid PSI $105,000 and $100,000, respectively. For the nine months ended September 30, 2005 and 2004, the Partnership paid PSI $308,000 and $290,000, respectively, pursuant to this management agreement. The management agreement between the Partnership and PSI may be terminated without cause upon 60 days written notice by the Partnership or six months notice by PSI. The Partnership's facilities, along with facilities owned by PSI and its affiliates, are managed jointly by PSI in order to take advantage of scale and other efficiencies. Joint costs are allocated on a methodology meant to fairly allocate such costs. Such joint costs are principally comprised of i) payroll costs relating to supervisory, relief, and administrative personnel, ii) centralized corporate services such as the telephone reservation center and customer service iii) advertising expenditures including media advertising and yellow page costs, and iv) insurance including workers compensation, property, casualty, liability, and employee health coverage. The total of such expenses, which are primarily included in cost of operations, amounted to $172,000 and $534,000 for the three and nine months ended September 30, 2005, respectively, and $165,000 and $553,000 for the same periods in 2004, respectively. Ownership Interests by the General Partners: -------------------------------------------- PSI and Hughes are general partners of the Partnership. In 1995, Hughes contributed his ownership and rights to distributions from the Partnership to BWH Marina Corporation II, a corporation wholly-owned by Hughes. Hughes continues to act as a general partner of the Partnership. The general partners have a 1% interest in the Partnership. In addition, the general partners had an 8% interest in cash distributions attributable to operations (exclusive of distributions attributable to sale and financing proceeds) until the limited partners recovered all of their initial investment. Thereafter, the general partners have a 25% interest in all cash distributions (including sale and financing proceeds). During 1987, the limited partners recovered all of their initial investment. All subsequent distributions are being made 25.75% (including the 1% interest) to the general partners and 74.25% to the limited partners. Transfers of equity are made periodically to reconcile the partners' equity accounts to the provisions of the Partnership Agreement. These transfers have no effect on results of operations or distributions to partners. As of September 30, 2005, Hughes and members of his family own approximately 31% of the limited partnership units. PSI owns approximately 31% of the limited partnership units. Approximately 1% of the limited partnership units are owned by PS Orangeco Partnerships, Inc., a corporation in which Hughes and members of his family own approximately 48% of the voting stock, PSI owns 46% and members of PSI's management and related individuals own approximately 6%. 7 PUBLIC STORAGE PROPERTIES, LTD. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) Ownership in STOR-Re: --------------------- The Partnership has a 0.9% ownership interest in STOR-Re Mutual Insurance Corporation ("STOR-Re"), which was formed in 1994 as an association captive insurance company, and is controlled by PSI. The Partnership accounts for its investment in STOR-Re, which is included in other assets, using the cost method, and has not received any distributions during 2004 or for the nine months ended September 30, 2005. STOR-Re provides limited property and liability insurance coverage to the Partnership, PSI, and affiliates for losses occurring before April 1, 2004. STOR-Re was succeeded with respect to these activities for losses occurring after March 31, 2004 by a wholly owned subsidiary of PSI. Liabilities for losses and loss adjustment expenses include an amount determined from loss reports and individual cases and an amount, based on recommendations from an outside actuary that is a member of the American Academy of Actuaries, using a frequency and severity method, for losses incurred but not reported. Determining the liability for unpaid losses and loss adjustment expense is based upon estimates and while we believe that the amount is adequate, the ultimate loss may be in excess of or less than the amounts provided. The methods for making such estimates and for establishing the resulting liability are continually reviewed. Other Business Activities: -------------------------- A corporation that reinsures policies against losses to goods stored by tenants in the Partnership's storage facilities is owned by PSI. We believe that the availability of insurance reduces our potential liability to tenants for losses to their goods from theft or destruction. This corporation receives the premiums and bears the risks associated with the re-insurance of tenant goods. A subsidiary of PSI sells locks and boxes and rents trucks to the general public and tenants to be used in securing their spaces and moving their goods. The subsidiary receives the revenues and bears the cost of the activities. We believe that the availability of locks and boxes for sale and the rental of trucks promote the rental of spaces. 5. COMMITMENTS AND CONTINGENCIES Legal Proceedings: ------------------ Serrao v. Public Storage, Inc. (filed April 2003) (Superior Court - Orange --------------------------------------------------------------------------- County) ------- The plaintiff in this case filed a suit against Public Storage, Inc. on behalf of a putative class of renters who rented self-storage units from Public Storage, Inc. Plaintiff alleges that Public Storage, Inc. misrepresented the size of its storage units, has brought claims under California statutory and common law relating to consumer protection, fraud, unfair competition, and negligent misrepresentation, and is seeking monetary damages, restitution, and declaratory and injunctive relief. The claim in this case is substantially similar to those in Henriquez v. Public Storage, Inc., which was disclosed in prior reports. In January 2003, the plaintiff caused the Henriquez action to be dismissed. Based upon the uncertainty inherent in any putative class action, Public Storage, Inc. cannot presently determine the potential damages, if any, or the ultimate outcome of this litigation. On November 3, 2003, the court granted Public Storage, Inc.'s motion to strike the plaintiff's nationwide class allegations and to limit any putative class to California residents only. In August 2005, Public Storage, Inc. filed a motion to remove the 8 PUBLIC STORAGE PROPERTIES, LTD. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) case to federal court. There can be no assurance that this motion will be granted. Public Storage, Inc. is vigorously contesting the claims upon which this lawsuit is based including class certification efforts. Brinkley et al v. Public Storage, Inc. (filed April, 2005) (Superior court --------------------------------------------------------------------------- of California - Los Angeles County) ----------------------------------- The Brinkley plaintiffs are suing Public Storage, Inc. on behalf of a purported class of California property managers who claim that they were not compensated for all the hours they worked. The Brinkley suit is based upon California wage and hour laws. The maximum potential liability cannot be estimated, but would be increased if a class or classes are certified or, if claims are permitted to be brought on behalf of others under the California Unfair Business Practices Act. Public Storage, Inc. is vigorously contesting the claims and intends to resist any expansion beyond the named plaintiffs on the grounds of lack of commonality of claims. Public Storage, Inc. does not believe that this matter will have any material adverse effect on the results of operations of the Partnership. Inhan et al v. Public Storage, Inc (filed May, 2005) (United States --------------------------------------------------------------------------- District Court - Southern District of Florida) ---------------------------------------------- Inhan and a co-plaintiff are suing Public Storage, Inc. in Florida claiming they were not compensated for all hours worked under the Federal Fair Labor Standards Act. The suit is brought as a putative class action. The time to add additional parties in this action has expired and no additional parties have been added. Public Storage, Inc. vigorously contests the claims and although the maximum potential liability cannot be estimated, the fact that the time to add additional parties in this action has expired limits the maximum potential liability. As a result, we believe this matter is no longer potentially material and therefore will no longer report on it. Other Items ----------- PSI and the Partnership are parties to various claims, complaints, and other legal actions that have arisen in the normal course of business from time to time that are not described above. We believe that it is unlikely that the outcome of these other pending legal proceedings including employment and tenant claims, in the aggregate, will have a material adverse impact upon the operations or financial position of the Partnership. 9 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ----------------------------------------------------------------------- OF OPERATIONS ------------- The following should be read in conjunction with the Partnership's condensed financial statements and notes thereto. FORWARD LOOKING STATEMENTS: When used within this document, the words "expects," "believes," "anticipates," "may," "should," "estimates," and similar expressions are intended to identify "forward-looking statements" within the meaning of that term in Section 27A of the Securities Exchange Act of 1933, as amended, and in Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors, which may cause the actual results and performance of the Partnership to be materially different from those expressed or implied in the forward looking statements. Such factors are described in "Risk Factors" (as discussed below) and include changes in general economic conditions and in the markets in which the Partnership operates and the impact of competition from new and existing storage and commercial facilities and other storage alternatives, which could impact rents and occupancy levels at the Partnership's facilities; the impact of the regulatory environment as well as national, state, and local laws and regulations, which could increase the Partnership's expense and reduce the Partnership's cash available for distribution; and economic uncertainty due to the impact of war or terrorism could adversely affect our business plan. We disclaim any obligation to publicly release the results of any revisions to these forward-looking statements reflecting new estimates, events or circumstances after the date of this report. CRITICAL ACCOUNTING POLICIES ---------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of financial statements and related disclosures in conformity with United States generally accepted accounting principles and our discussion and analysis of our financial condition and results of operations requires management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Note 2 to our consolidated financial statements summarize the significant accounting policies and methods used in the preparation of our consolidated financial statements and related disclosures. Management believes the following are critical accounting policies whose application has a material impact on our financial presentation. That is, they are both important to the portrayal of our financial condition and results, and they require management to make judgments and estimates about matters that are inherently uncertain. IMPAIRMENT OF LONG-LIVED ASSETS: Substantially all of our assets consist of real estate. On a quarterly basis we evaluate our real estate for impairment. The evaluation of real estate for impairment requires determining whether indicators of impairment exist, which is a subjective process. When any indicators of impairment are found, the evaluation then entails projections of future operating cash flows, which also involves significant judgment. We have identified no such impairments at September 30, 2005. However, future events, or facts and circumstances that currently exist that we have not yet identified, could cause us to conclude in the future that our real estate is impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations. ESTIMATED USEFUL LIVES OF LONG-LIVED ASSETS: Substantially all of our assets consist of depreciable, long-lived assets. We record depreciation expense with respect to these assets based upon their estimated useful lives. Any change in the estimated useful lives of those assets, caused by functional or economic obsolescence or other factors, could have a material adverse impact on our financial condition or results of operations. ACCRUALS FOR CONTINGENCIES: We are exposed to business and legal liability risks with respect to events that have occurred, but in accordance with accounting principles generally accepted in the United States, we have not accrued for such potential liabilities because the loss is either not probable or not estimable or because we are not aware of the event. Future events and the result of pending litigation could result in such potential losses becoming probable and estimable, which could have a material adverse impact on our financial condition or results of operations. Some of these potential losses of 10 which we are aware are described in Note 5 to the Partnership's unaudited condensed financial statements at September 30, 2005. ACCRUALS FOR OPERATING EXPENSES: We accrue for property tax expense and other operating expenses based upon estimates and historical trends and current and anticipated local and state government rules and regulations. If these estimates and assumptions are incorrect, our expenses could be misstated. Cost of operations, general and administrative expense, as well as television, yellow page, and other advertising expenditures are expensed as incurred. Accordingly, the amounts incurred in an interim period may not be indicative of the amounts to be incurred in a full year. RESULTS OF OPERATIONS -------------------------------------------------------------------------------- THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2004: Our net income for the three months ended September 30, 2005 was $1,255,000 compared to $1,166,000 for the three months ended September 30, 2004, representing an increase of $89,000 or 8%. Rental income for the three months ended September 30, 2005 was $1,749,000 compared to $1,666,000 for the three months ended September 30, 2004, representing an increase of $83,000 or 5%. The increase in rental income was a result of an increase in realized rent per square foot. Weighted average occupancy levels at the self-storage facilities were 91% and 93% for the three months ended September 30, 2005 and 2004, respectively. Annual realized rent for the three months ended September 30, 2005 increased to $14.92 occupied square foot compared to $13.93 per occupied square foot for the three months ended September 30, 2004. Cost of operations, including management fees paid to an affiliate, (see Note 4 to the unaudited condensed financial statements) for the three months ended September 30, 2005 was $452,000 compared to $427,000 for the three months ended September 30, 2004, representing an increase of $25,000 or 6%. The increase was primarily due to increases in advertising, utilities, repairs and maintenance and management fee expenses, partially offset by a decrease in payroll expense. Depreciation expense was $45,000 for the three months ended September 30, 2005 compared to $69,000 for the same period in 2004, a decrease of $24,000 or 35%. The decrease in depreciation expense is primarily related to the initial development costs of buildings for the Partnership's self-storage facilities becoming fully depreciated. NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2004: Our net income for the nine months ended September 30, 2005 was $3,632,000 compared to $3,268,000 for the nine months ended September 30, 2004, representing an increase of $364,000 or 11%. Rental income for the nine months ended September 30, 2005 was $5,140,000 compared to $4,839,000 for the nine months ended September 30, 2004, representing an increase of $301,000 or 6%. The increase in rental income was a result of an increase in realized rent per square foot. Weighted average occupancy levels at the self-storage facilities were 91% and 92% for the nine months ended September 30, 2005 and 2004, respectively. Annual realized rent for the nine months ended September 30, 2005 increased to $14.59 per occupied square foot compared to $13.73 per occupied square foot for the nine months ended September 30, 2004. Cost of operations, including management fees paid to an affiliate, (see Note 4 to the unaudited condensed financial statements) for the nine months ended September 30, 2005 was $1,357,000 compared to $1,325,000 for the nine months ended September 30, 2004, representing an increase of $32,000 or 2%. The increase was primarily due to increases in advertising, management fees and property tax expense, partially offset by a reduction in repairs and maintenance. Depreciation expense was $139,000 for the nine months ended September 30, 2005 compared to $214,000 for the same period in 2004, a decrease of $75,000 or 35%. The decrease in depreciation expense is primarily related to the initial development costs of buildings for the Partnership's self-storage facilities becoming fully depreciated. 11 LIQUIDITY AND CAPITAL RESOURCES -------------------------------------------------------------------------------- Cash generated from operations ($3,795,000 for the nine months ended September 30, 2005) has been sufficient to meet all current obligations of the Partnership. We paid distributions to the limited and general partners totaling $2,520,000 ($126.00 per unit) and $874,000, respectively, for the nine months ended September 30, 2005. Future distribution rates will be adjusted to levels which, are supported by operating cash flow after capital improvements and any other necessary obligations. The Partnership may borrow in the future with the intent of using the proceeds to finance distributions to the limited and general partners. ITEM 2A. RISK FACTORS ------------ In addition to the other information in our Form 10-Q and Annual Report on Form 10-K for the year ended December 31, 2004, you should consider the following factors in evaluating the Partnership: THE GENERAL PARTNERS HAVE A SIGNIFICANT DEGREE OF CONTROL OVER THE PARTNERSHIP AND COULD TAKE ACTIONS ADVERSE TO OTHER UNITHOLDERS. As of September 30, 2005, Hughes and members of his family own approximately 31% of the limited partnership units. PSI owns approximately 31% of the limited partnership units. Approximately 1% of the limited partnership units are owned by PS Orangeco Partnerships, Inc., a corporation in which Hughes and members of his family own approximately 48% of the voting stock, PSI owns 46% and members of PSI's management and related individuals own approximately 6%. As a result, the General Partners have a significant degree of control over matters submitted to a vote of our unitholders, including amending our organizational documents, dissolving the Partnership and approving other extraordinary transactions, and could take actions that may not be favorable to the other unitholders. INCREASES IN INTEREST RATES MAY ADVERSELY AFFECT THE VALUE OF PARTNERSHIP UNITS. One of the factors that influence the value of our partnership units is the annual rate of distributions that we pay as compared with interest rates. An increase in interest rates may lead purchasers of real estate partnership units to demand higher annual distribution rates, which could adversely affect the market price of our partnership units. DEVELOPMENTS IN CALIFORNIA MAY HAVE AN ADVERSE IMPACT ON OUR BUSINESS. All of our properties are located in California. California is facing serious budgetary problems. Action that may be taken in response to these problems, such as an increase in property taxes on commercial properties, could adversely impact our business and results of operations. In addition, we could be adversely impacted by efforts to reenact legislation mandating medical insurance for employees of California businesses and members of their families. WE HAVE BECOME INCREASINGLY DEPENDENT UPON AUTOMATED PROCESSES AND THE INTERNET AND ARE FACED WITH SECURITY SYSTEM RISKS. We have become increasingly centralized and dependent upon automated information technology processes. As a result, we could be severely impacted by a catastrophic occurrence, such as a natural disaster or a terrorist attack. In addition, a portion of our business operations are conducted over the internet, increasing the risk of viruses that could cause system failures and disruptions of operations. Experienced computer programmers may be able to penetrate our network security and misappropriate our confidential information, create system disruptions or cause shutdowns. 12 SINCE OUR BUSINESS CONSISTS PRIMARILY OF OPERATING REAL ESTATE, WE ARE SUBJECT TO REAL ESTATE OPERATING RISKS. THE VALUE OF OUR INVESTMENTS MAY BE REDUCED BY GENERAL RISKS OF REAL ESTATE OWNERSHIP. Since we derive substantially all of our income from real estate operations, we are subject to the general risks of owning real estate-related assets, including: o lack of demand for rental spaces or units in a locale; o changes in general economic or local conditions; o changes in supply of or demand for similar or competing facilities in an area; o natural disasters, such as earthquakes; o potential terrorists attacks; o the impact of environmental protection laws; o changes in interest rates and availability of permanent mortgage funds which may render the sale or financing of a property difficult or unattractive; and o changes in tax, real estate and zoning laws. THERE IS SIGNIFICANT COMPETITION AMONG SELF-STORAGE FACILITIES AND FROM OTHER STORAGE ALTERNATIVES. All of our properties are self-storage facilities. Local market conditions will play a significant part in how competition will affect us. Competition in the market areas in which many of our properties are located from other self-storage facilities and other storage alternatives is significant and has affected the occupancy levels, rental rates and operating expenses of some of our properties. Any increase in availability of funds for investment in real estate may accelerate competition. Fusther development of self-storage facilities may intensify competition among operators of self-storage facilities in the market areas in which we operate. WE MAY INCUR SIGNIFICANT ENVIRONMENTAL COSTS AND LIABILITIES. As an owner of real properties, under various Federal, state and local environmental laws, we are required to clean up spills or other releases of hazardous or toxic substances on or from our properties. Certain environmental laws impose liability whether or not the owner knew of, or was responsible for, the presence of the hazardous or toxic substances. In some cases, liability may not be limited to the value of the property. The presence of these substances, or the failure to properly remediate any resulting contamination, also may adversely affect the owner's or operator's ability to sell, lease or operate its property or to borrow using its property as collateral. We have conducted preliminary environmental assessments on the properties the Partnership has an interest in to evaluate the environmental condition of, and potential environmental liabilities associated with, our properties. These assessments generally consist of an investigation of environmental conditions at the property (not including soil or groundwater sampling or analysis), as well as a review of available information regarding the site and publicly available data regarding conditions at other sites in the vicinity. In connection with these property assessments, we have become aware that prior operations or activities at some facilities or from nearby locations have or may have resulted in contamination to the soil or groundwater at these facilities. In this regard, some of our facilities are or may be the subject of Federal or state environment investigations or remedial actions. Although we cannot provide any assurance, based on the preliminary environmental assessments, we believe we have funds available to cover any liability from environmental contamination or potential contamination and we are not aware of any environmental contamination of our facilities material to our overall business, financial condition or results of operation. There has been an increasing number of claims and litigation against owners and managers of rental properties relating to moisture infiltration, which can result in mold or other property damage. When we receive a complaint concerning moisture infiltration, condensation or mold problems and/or become aware that an air quality concern exists, we implement corrective measures in accordance with guidelines and protocols we have developed with the assistance of outside experts. We seek to work with our tenants to resolve moisture infiltration and mold-related issues, subject to our contractual limitations on liability for such claims. However, we can make no assurance that material legal 13 claims relating to moisture infiltration and the presence of, or exposure to, mold will not arise in the future. PROPERTY TAXES CAN INCREASE AND CAUSE A DECLINE IN YIELDS ON INVESTMENTS. Each of our properties is subject to real property taxes. These real property taxes may increase in the future as property tax rates change and as our properties are assessed or reassessed by tax authorities. Such increases could adversely impact the Partnership's profitability. WE MUST COMPLY WITH THE AMERICANS WITH DISABILITIES ACT AND FIRE AND SAFETY REGULATIONS, WHICH CAN REQUIRE SIGNIFICANT EXPENDITURES. All our properties must comply with the Americans with Disabilities Act and with related regulations (the "ADA"). The ADA has separate compliance requirements for "public accommodations" and "commercial facilities," but generally requires that buildings be made accessible to persons with disabilities. Various state laws impose similar requirements. A failure to comply with the ADA or similar state laws could result in government imposed fines on us and the award of damages to individuals affected by the failure. In addition, we must operate our properties in compliance with numerous local fire and safety regulations, building codes, and other land use regulations. Compliance with these requirements can require us to spend substantial amounts of money, which would reduce cash otherwise available for distribution to partners. Failure to comply with these requirements could also affect the marketability of our real estate facilities. TERRORIST ATTACKS AND THE POSSIBILITY OF WIDER ARMED CONFLICT MAY HAVE AN ADVERSE IMPACT ON OUR BUSINESS AND OPERATING RESULTS AND COULD DECREASE THE VALUE OF OUR ASSETS. Terrorist attacks and other acts of violence or war, such as those that took place on September 11, 2001, could have a material adverse impact on our business and operating results. There can be no assurance that there will not be further terrorist attacks against the United States or its businesses or interests. Attacks or armed conflicts that directly impact one or more of our properties could significantly affect our ability to operate those properties and thereby impair our operating results. Further, we may not have insurance coverage for losses caused by a terrorist attack. Such insurance may not be available, or if it is available and we decide to obtain such terrorist coverage, the cost for the insurance may be significant in relationship to the risk overall. In addition, the adverse effects that such violent acts and threats of future attacks could have on the U.S. economy could similarly have a material adverse effect on our business and results of operations. Finally, further terrorist acts could cause the United States to enter into a wider armed conflict, which could further impact our business and operating results. OUR OWNERSHIP IN STOR-RE MAY LOSE VALUE OR BECOME A LIABILITY. The Partnership has a 0.9% ownership interest in STOR-Re Mutual Insurance Corporation ("STOR-Re"), which was formed in 1994 as an association captive insurance company, and is controlled by PSI. STOR-Re provides limited property and liability coverage to the Partnership, PSI and affiliates of PSI for losses occurring before April 1, 2004. Liabilities for losses and loss adjustment expenses include an amount determined from loss reports and individual cases and an amount, based on recommendations from an outside actuary that is a member of the American Academy of Actuaries, using a frequency and severity method, for losses incurred but not reported. Determining the liability for unpaid losses and loss adjustment expense is based upon estimates and while we believe that the amount is adequate, the ultimate loss may be in excess of or less than the amount provided, which may result in a reduction in the value of the Partnership's investment or could result in future payments to STOR-Re if its reserves were determined to be inadequate. ITEM 4. CONTROLS AND PROCEDURES ----------------------- Public Storage, Inc. maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports the Partnership files and submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in accordance with SEC guidelines and that such information is communicated to the Partnership's management, including Public Storage, Inc.'s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure based on the definition of "disclosure controls and procedures" in Rule 13a-15(e) of the Exchange Act. In designing and evaluating the disclosure controls and 14 procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures in reaching that level of reasonable assurance. At the end of the period covered by this report, Public Storage, Inc. carried out an evaluation, under the supervision and with the participation of the Partnership's management, including Public Storage, Inc.'s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Partnership's disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Partnership's disclosure controls and procedures were effective. There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 15 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ----------------- The information set forth under the heading "Legal Proceedings" in Note 5 to the unaudited condensed financial statements in this Form 10-Q is incorporated by reference in this Item 1. ITEM 6. EXHIBITS -------- Exhibits required by Item 601 of Regulation S-K are filed herewith or incorporated herein by reference and are listed in the attached Exhibit Index. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATED: November 14, 2005 PUBLIC STORAGE PROPERTIES, LTD. BY: Public Storage, Inc., General Partner BY: /s/ John Reyes John Reyes Senior Vice President and Chief Financial Officer 17 EXHIBIT NO. EXHIBIT INDEX ------------ ------------------------------------------------------------------- 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.Filed herewith. 31.2 Rule 13a-14(a)/15d-14(a)Certification of Chief Financial Officer. Filed herewith. 32 Section 1350 Certification of Chief Executive Officer and Chief Financial Officer. Filed herewith. 18