-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HK0884SsOF3ruIf6zal+r/A8P/opKTn4kGksEhPPzE9roYR5wInZ5zfgayWjKQbD 0yHGDacTuHXcEADYhnLDKg== 0000202953-06-000004.txt : 20060515 0000202953-06-000004.hdr.sgml : 20060515 20060515135750 ACCESSION NUMBER: 0000202953-06-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20060331 FILED AS OF DATE: 20060515 DATE AS OF CHANGE: 20060515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUBLIC STORAGE PROPERTIES LTD CENTRAL INDEX KEY: 0000202953 STANDARD INDUSTRIAL CLASSIFICATION: LESSORS OF REAL PROPERTY, NEC [6519] IRS NUMBER: 953196912 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-08667 FILM NUMBER: 06839318 BUSINESS ADDRESS: STREET 1: 701 WESTERN AVE STREET 2: SUITE 200 CITY: GLENDALE STATE: CA ZIP: 91201-2397 BUSINESS PHONE: (818) 244-8080 MAIL ADDRESS: STREET 1: 701 WESTERN AVE STREET 2: SUITE 200 CITY: GLENDALE STATE: CA ZIP: 91201 10-Q 1 psp3q106.txt PSP3_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 March 31, 2006 --------------- 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 a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of "accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. Large Accelerated Filer [ ] Accelerated Filer [ ] Non-accelerated Filer [ X ] 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 May 15, 2006: 20,000
PUBLIC STORAGE PROPERTIES, LTD. INDEX Pages PART I. FINANCIAL INFORMATION (Item 3 not applicable) --------------------- Item 1. Financial Statements Condensed Balance Sheets at March 31, 2006 and December 31, 2005 1 Condensed Statements of Income for the Three Months Ended March 31, 2006 and 2005 2 Condensed Statement of Partners' Equity for the Three Months Ended March 31, 2006 3 Condensed Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005 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 4. Controls and Procedures 12 PART II. OTHER INFORMATION (Items 2 - 5 not applicable) ----------------- Item 1. Legal Proceedings 13 Item 1A. Risk Factors 13-15 Item 6. Exhibits 15
PUBLIC STORAGE PROPERTIES, LTD. CONDENSED BALANCE SHEETS
March 31, December 31, 2006 2005 ----------------- ------------------- (Unaudited) ASSETS ------ Cash and cash equivalents $ 1,505,000 $ 1,448,000 Rent and other receivables 133,000 69,000 Real estate facilities, at cost: Building, land improvements and equipment 9,634,000 9,622,000 Land 2,476,000 2,476,000 ----------------- ------------------- 12,110,000 12,098,000 Less accumulated depreciation (9,046,000) (9,004,000) ----------------- ------------------- 3,064,000 3,094,000 Other assets 103,000 71,000 ----------------- ------------------- Total assets $ 4,805,000 $ 4,682,000 ================== ================== LIABILITIES AND PARTNERS' EQUITY -------------------------------- Accounts payable $ 137,000 $ 88,000 Deferred revenue 194,000 163,000 Commitments and contingencies (Note 6) - - Partners' equity: Limited partners' equity, $500 per unit, 20,000 units authorized, issued and outstanding 3,322,000 3,290,000 General partners' equity 1,152,000 1,141,000 ----------------- ------------------- Total partners' equity 4,474,000 4,431,000 ----------------- ------------------- Total liabilities and partners' equity $ 4,805,000 $ 4,682,000 ================== ==================
See accompanying notes. 1 PUBLIC STORAGE PROPERTIES, LTD. CONDENSED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended March 31, ---------------------------------------- 2006 2005 ------------------ ----------------- REVENUES: Rental income $ 1,758,000 $ 1,681,000 Other income 34,000 20,000 ------------------ ----------------- 1,792,000 1,701,000 ------------------ ----------------- COSTS AND EXPENSES: Cost of operations 409,000 354,000 Management fees paid to affiliate 105,000 101,000 Depreciation 42,000 46,000 Administrative 35,000 28,000 ------------------ ----------------- 591,000 529,000 ------------------ ----------------- NET INCOME: $ 1,201,000 $ 1,172,000 ================== ================= Limited partners' share of net income ($45.10 per unit in 2006 and $44.70 per unit in 2005) 902,000 894,000 General partners' share of net income 299,000 278,000 ------------------ ----------------- $ 1,201,000 $ 1,172,000 ================== =================
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, 2005 $ 3,290,000 $ 1,141,000 $ 4,431,000 Net income 902,000 299,000 1,201,000 Distributions (860,000) (298,000) (1,158,000) Equity transfer (10,000) 10,000 - ------------------- ---------------- ------------------- Balance at March 31, 2006 $ 3,322,000 $ 1,152,000 $ 4,474,000 =================== =============== ==================
See accompanying notes. 3 PUBLIC STORAGE PROPERTIES, LTD. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended ---------------------------------------- March 31, 2006 2005 Cash flows from operating activities: ------------------- ------------------ Net income $ 1,201,000 $ 1,172,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 42,000 46,000 (Increase) decrease in rent and other receivables (64,000) 5,000 (Increase) decrease in other assets (32,000) 13,000 Increase (decrease) in accounts payable and accrued liabilities 49,000 (32,000) Increase (decrease) in deferred revenue 31,000 (14,000) ------------------ ----------------- Total adjustments 26,000 18,000 ------------------ ----------------- Net cash provided by operating activities 1,227,000 1,190,000 ------------------ ----------------- Cash flows from investing activities: Additions to real estate facilities (12,000) (2,000) ------------------ ----------------- Net cash used in investing activities (12,000) (2,000) ------------------ ----------------- Cash flows from financing activities: Distributions paid to partners (1,158,000) (1,077,000) ------------------ ----------------- Net cash used in financing activities (1,158,000) (1,077,000) ------------------ ----------------- Net increase in cash and cash equivalents 57,000 111,000 Cash and cash equivalents at the beginning of the period 1,448,000 1,407,000 ------------------ ----------------- Cash and cash equivalents at the end of the period $ 1,505,000 $ 1,518,000 ================== =================
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 AND PARTNERSHIP MATTERS Use of Estimates: ----------------- The preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 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 income when collected. Interest income is recognized as earned. We accrue for property tax expense 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. Television, yellow page, and other advertising expenditures totaled $83,000 and $48,000 for the three months ended March 31, 2006 and 2005, respectively. 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 (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. 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. At March 31, 2006, all of the real estate facilities have been in service longer than 25 years, and accordingly the original development cost of such buildings are fully depreciated at March 31, 2006. 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 March 31, 2006. 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. Deferred revenue: ----------------- Deferred revenue totaling $194,000 for the three months ended March 31, 2006 ($163,000 for the year ended December 31, 2005), consists of prepaid rents, which are recognized when earned. Environmental Cost: ------------------- 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. 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. Recent Accounting Pronouncements and Guidance: ---------------------------------------------- As of May 12, 2006, there have been no recent accounting pronouncements and guidance, which were not effective for implementation prior to March 31, 2006, that would have a material impact upon reporting the operations or financial position of the Partnership. 6 PUBLIC STORAGE PROPERTIES, LTD. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) Segment Reporting: ------------------ The Partnership only has one reportable segment as defined within Statement of Financial Accounting Standards No. 131. 3. CASH DISTRIBUTIONS The Partnership Agreement requires that cash available for distribution (cash flow from all sources less cash necessary for any obligations or capital improvements) needs to be distributed at least quarterly. For the three months ended March 31, 2006, we paid distributions to the limited and general partners totaling $860,000 ($43.00 per unit) and $298,000, respectively. Future distribution rates may be adjusted to levels which are supported by operating cash flow after capital improvements and any other obligations. 4. PARTNERS' EQUITY 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. In 2002, BWH Marina Corporation II sold its interests to H-G Family Corporation. As such, Mr. Hughes continues to act as a general partner but receives no direct compensation or other consideration from the Partnership. The general partners have a 1% interest in the Partnership. In addition, the general partners have an 8% interest in cash distributions attributable to operations (exclusive of distributions attributable to sale and financing proceeds until the limited partners recover all of their initial investment). Thereafter, the general partners have a 25% interest in all cash distributions (including sale and financing proceeds). In 1985, the limited partners recovered all of their initial investment. All subsequent cash 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 the results of operations or distributions to partners. 5. RELATED PARTY TRANSACTIONS Management Agreement and Shared Expenses with PSI: -------------------------------------------------- The Partnership has a Management Agreement with PSI pursuant to which PSI operates the self-storage facilities for a fee equal to 6% of the facilities' gross revenue (as defined). For the three months ended March 31, 2006, the Partnership paid PSI $105,000 and $101,000, respectively, under this management agreement. The Management Agreement between the Partnership and PSI provides that the Management Agreement 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 and marketed jointly by PSI in order to take advantage of scale and other efficiencies. As a result, significant components of cost of operations, such as payroll costs, advertising and promotion, data processing and insurance expenses are shared and allocated among the properties using methodologies meant to fairly allocate such costs based upon the related activities. The total of such expenses, substantially all of which are included in Cost of Operations, amounted to $235,000 and $177,000 for the three months ended March 31, 2006 and 2005, respectively. 7 PUBLIC STORAGE PROPERTIES, LTD. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) Ownership Interest by the General Partners ------------------------------------------ PSI owns 6,169 Limited Partnership Units ("Units"), as to which PSI has sole voting and dispositive power. Hughes and members of his family (the "Hughes Family") own 6,105 Units. Hughes owns 6,025 Units, as to which Hughes has sole voting and dispositive power, through a wholly-owned corporation and Tamara Hughes Gustavson, an adult daughter of Hughes, owns 80 Units as to which Tamara Hughes Gustavson has sole voting and dispositive power. PSI has an option to acquire 25 of the Units held by Hughes and the 80 Units held by Tamara Hughes Gustavson. In addition, there are 196 Units owned by PS Orangeco Partnerships, Inc., a corporation in which Hughes Family owns approximately 48% of the voting stock, PSI owns 46% and members of PSI's management and related individuals own approximately 6%. Captive Insurance Activities with PSI ------------------------------------- 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, on the cost method, and has received no distributions during the three years ended December 31, 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 (collectively, this entity and STOR-Re are referred to as the "Captive Entities"). 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 Activities with PSI ------------------------- A corporation that reinsures policies against losses to goods stored by tenants in PSI's storage facilities was purchased by PSI from Mr. Hughes and members of his family (the "Hughes Family") on December 31, 2001. This corporation receives the premiums and bears the risks associated with the re-insurance. The Partnership receives an access fee from this corporation in return for providing tenant listings. This fee is based on number of spaces the Partnership has to rent. Included in other income on our income statement for these fees $14,000 and $9,000 for the three months ended March 31, 2006 and 2005, respectively. 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 of PSI receives the revenues and bears the cost of the activities. 8 PUBLIC STORAGE PROPERTIES, LTD. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 6. COMMITMENTS AND CONTINGENCIES Legal Proceedings: ------------------ Serrao v. Public Storage, Inc. (filed April 2003) (Superior Court of ----------------------------------------------------------------------- California - Orange County) --------------------------- The plaintiff in this case filed a suit against PSI on behalf of a putative class of renters who rented self-storage units from PSI. Plaintiff alleges that PSI 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, PSI cannot presently determine the potential damages, if any, or the ultimate outcome of this litigation. On November 3, 2003, the court granted our motion to strike the plaintiff's nationwide class allegations and to limit any putative class to California residents only. In August 2005, PSI filed a motion to remove the case to federal court, but the case has been remanded to the Superior Court. PSI is vigorously contesting the claims upon which this lawsuit is based, including class certification efforts. Brinkley v. Public Storage, Inc. (filed April, 2005) (Superior Court of ----------------------------------------------------------------------- California - Los Angeles County) -------------------------------- The Brinkley plaintiffs are suing PSI 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. PSI is vigorously contesting the claims and intends to resist any expansion beyond the named plaintiffs on the grounds of lack of commonality of claims. PSI does not believe that this matter will have any material adverse effect on the results of operations of the Partnership. Simas v. Public Storage, Inc. (filed January, 2006) (Superior Court of ----------------------------------------------------------------------- California - Orange County) --------------------------- The Simas plaintiffs bring this action against PSI on behalf of a purported class who bought insurance coverage at Company's facilities alleging that PSI does not have a license to offer, sell and/or transact storage insurance. The action was brought under California Business and Professions Code Section 17200. PSI filed a demurrer to the complaint. While the demurrer was pending, Plaintiffs amended the complaint to allege a national class and claims for unfair business practices, quasi-contract, common counts, and negligent and intentional misrepresentation. PSI is vigorously contesting the claims upon which this lawsuit is based, including any efforts for class certifications. Other Items ----------- PSI and the Partnership are a party to various claims, complaints, and other legal actions that have arisen in the normal course of business from time to time, that are not described above. We believe that it is unlikely that the outcome of these other pending legal proceedings including employment and tenant claims, in the aggregate, will have a material adverse effect 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," "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 Item 1A, "Risk Factors" in Part II of this Quarterly Report on Form 10-Q. These risks include, but are not limited to, the following: 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. Overview - -------- The self-storage industry is highly fragmented and is composed predominantly of numerous local and regional operators. Competition in the markets in which we operate is significant and has increased over the past several years due to additional development of self-storage facilities. We believe that the increase in competition has had a negative impact to the Partnership's occupancy levels and rental rates in many markets. However, we believe that the Partnership's affiliation with PSI provides several distinguishing characteristics that enable the Partnership to compete effectively with other owners and operators. PSI is the largest owner and operator of self-storage facilities in the United States. All of PSI's facilities are operated under the "Public Storage" brand name, which we believe is the most recognized and established name in the self-storage industry. Market concentration establishes PSI as one of the dominant providers of self-storage space in most markets in which PSI operates and enables PSI to use a variety of promotional activities, such as television advertising as well as targeted discounting and referrals, which are generally not economically viable to most of PSI's competitors. We will continue to focus our growth strategies on improving the operating performance of our existing self-storage properties primarily through increases in revenues achieved through the telephone reservation center and associated marketing efforts. We expect potential future increases in rental income to come primarily from increases in realized rent, although there can be no assurance. Critical Accounting Policies - ---------------------------- IMPAIRMENT OF REAL ESTATE 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 identified no such impairments at March 31, 2006. 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. 10 ACCRUALS FOR CONTINGENCIES We are exposed to business and legal liability risks with respect to events that have occurred, but in accordance with generally accepted accounting principles in the U.S., 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, which we are aware of, are described in Notes 5 and 6 to the Partnership's financial statements. 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, the timing of the recognition our expenses could be incorrect. Cost of operations, interest expense, general and administrative expense, as well as television, yellow page, and other advertising expenditures are expensed as incurred. Results of Operations - --------------------- THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THREE MONTHS ENDED MARCH 31, 2005: Our net income for the three months ended March 31, 2006 was $1,201,000 compared to $1,172,000 for the three months ended March 31, 2005, representing an increase of $29,000 or 2%. Rental income for the three months ended March 31, 2006 was $1,758,000 compared to $1,681,000 for the three months ended March 31, 2005, representing an increase of $77,000 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 90.0% and 90.5% for the three months ended March 31, 2006 and 2005, respectively. Annual realized rent for the three months ended March 31, 2006 increased to $15.23 occupied square foot compared to $14.48 per occupied square foot for the three months ended March 31, 2005. Cost of operations, including management fees paid to an affiliate, (see Note 5 to the unaudited condensed financial statements) for the three months ended March 31, 2006 was $514,000 compared to $455,000 for the three months ended March 31, 2005, representing an increase of $59,000 or 13%. The increase was primarily due to increases in advertising, repairs and maintenance and management fees, partially offset by a decrease in professional fees. Depreciation expense was $42,000 for the three months ended March 31, 2006 compared to $46,000 for the same period in 2005, a decrease of $4,000 or 9%. Liquidity and Capital Resources - ------------------------------- Cash generated from operations ($1,227,000 for the three months ended March 31, 2006) has been sufficient to meet all current obligations of the Partnership. 11 The Partnership Agreement requires that cash available for distribution (cash flow from all sources less cash necessary for any obligations or capital improvement needs) be distributed at least quarterly. We paid distributions to the limited and general partners totaling $860,000 ($43.00 per unit) and $298,000, respectively, for the three months ended March 31, 2006. 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 does not anticipate issuing senior securities, making loans to other persons, investing in the securities of other issuers for the purpose of exercising control, underwriting the securities of other issuers, engaging in the purchase and sale of investments, offering securities in exchange for property, or repurchasing or otherwise reacquiring its outstanding securities. The partnership may consider borrowing money with the intent of using the proceeds for distribution to partners. 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 its 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 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. 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. During the first quarter of 2006, there were no significant changes in the Partnership's internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Partnership's internal control over financial reporting. 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings ------------------ The information set forth under the heading "Legal Proceedings" in Note 6 to the unaudited condensed financial statements in this Form 10-Q is incorporated by reference in this Item 1. Item 1A. 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, 2005, you should consider the following factors in evaluating the Partnership: THE GENERAL PARTNERS CONTROL THE PARTNERSHIP AS A GROUP. Public Storage Inc. and B. Wayne Hughes are general partners of the partnership. In the aggregate, Public Storage Inc., B. Wayne Hughes, and members of his family control approximately 62% of the limited partnership units of the partnership. As a result, this group controls any matters submitted to a vote of our unitholders, including amending our organizational documents, dissolving the partnership, or approving other such transactions. PUBLIC STORAGE'S PROPOSED ACQUISITION OF SHURGARD MAY SUBJECT THE PARTNERSHIP TO ADDITIONAL RISKS. Public Storage announced recently that it had entered into an agreement to acquire Shurgard Storage Centers, Inc. ("Shurgard"), a publicly held REIT that has interests in approximately 650 self-storage facilities located in the United States and Europe. There would be no change in the financial interests of the Partnership if this acquisition of Shurgard is completed. However, because the self-storage facilities of the Partnership and Public Storage are managed by Public Storage, and the self-storage facilities owned by Shurgard would also be managed by Public Storage, the merger could have potential negative impacts on the Partnership, as follows: o Difficulties in the integration of operations, technologies, and personnel of Shurgard could negatively impact the operations of the facilities managed by Public Storage, including the Partnership's. o Public Storage's management attention to the integration and acquisition of Shurgard could divert attention away from the operations of the existing self-storage portfolio that it manages, including the Partnership's properties. o Individual Partnership properties could experience a decrease in move-ins, reductions to rental rates, increases to promotional discounts, or other negative impacts to revenues in the short and/or long term due to the competitive impact of Public Storage commencing management of the former Shurgard facilities, particularly with respect to those facilities that are close to the Partnership's facilities. 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 natural disasters, such as earthquakes; o potential terrorist attacks; 13 o changes in supply of or demand for similar or competing facilities in an area; 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, which generated substantially all of our revenue for the year ended March 31, 2006. 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 our properties. Any increase in availability of funds for investment in real estate may accelerate competition. Further development of self-storage facilities may intensify competition among operators of self-storage facilities in the market areas in which we operate. We may incur significant environmental costs and liabilities. As an owner and operator of real properties, under various federal, state and local environmental laws, we are required to clean up spills or other releases of hazardous or toxic substances on or from our properties. Certain environmental laws impose liability whether or not the owner knew of, or was responsible for, the presence of the hazardous or toxic substances. In some cases, liability may not be limited to the value of the property. The presence of these substances, or the failure to properly remediate any resulting contamination, whether from environmental or microbial issues, also may adversely affect the owner's or operator's ability to sell, lease or operate its property or to borrow using its property as collateral. We have conducted preliminary environmental assessments on the Partnership's properties 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 proactively with our tenants to resolve moisture infiltration and mold-related issues, subject to our contractual limitations on liability for such claims. However, we can provide no assurance that material legal 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 our profitability. We must comply with the Americans with Disabilities Act and fire and safety regulations, which can require significant expenditures. All our properties must comply with the Americans with Disabilities Act and with related regulations (the "ADA"). The ADA has separate compliance requirements for "public accommodations" and "commercial facilities," but generally requires that buildings be made accessible to persons with disabilities. Various state laws impose similar requirements. 14 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 shareholders. 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. DEVELOPMENTS IN CALIFORNIA MAY HAVE AN ADVERSE IMPACT ON OUR BUSINESS AND OPERATING RESULTS AND COULD DECREASE THE VALUE OF OUR ASSETS. All of the Partnership's properties are located in California. California is facing 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, the Partnership could be adversely impacted by efforts to reenact legislation mandating medical insurance for employees of California businesses and members of their families. INCREASES IN INTEREST RATES MAY ADVERSELY AFFECT THE PRICE OF OUR PARTNERSHIP UNITS. One of the factors that influences the market price of our partnership units is the annual rate of distributions that we pay on the securities, as compared with interest rates. An increase in interest rates may lead purchasers of partnership units to demand higher annual distribution rates, which could adversely affect the market price of our partnership units. OUR OWNERSHIP INTEREST 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 provided limited property and liability insurance coverage to the Partnership, PSI, and affiliates of PSI for losses occurring prior to 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 amounts 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. Financial data with respect to STOR-Re is included in Note 5 to the Partnership's December 31, 2005 financial statements. Item 6. Exhibits Exhibits required by Item 601 of Regulation S-K are listed in the attached Exhibit Index, and are filed herewith or incorporated herein by reference. 15 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: May 15, 2006 PUBLIC STORAGE PROPERTIES, LTD. BY: Public Storage, Inc., General Partner BY: /s/ John Reyes ---------------- John Reyes Senior Vice President and Chief Financial Officer 16 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. 17 EX-31 2 psp3_ex311q106.txt PSP3_EXH_311 Exhibit 31.1 RULE 13a-14(a) or 15d-14(a) CERTIFICATION I, Ronald L. Havner, Jr., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Public Storage Properties, Ltd.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or person performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Ronald L. Havner, Jr. - ----------------------------- Name: Ronald L. Havner, Jr. Title: Chief Executive Officer of Public Storage, Inc., Corporate General Partner Date: May 15, 2006 EX-31 3 psp3_exh312q106.txt PSP3_EXH_312 Exhibit 31.2 RULE 13a-14(a) or 15d-14(a) CERTIFICATION I, John Reyes certify that: 1. I have reviewed this quarterly report on Form 10-Q of Public Storage Properties, Ltd.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or person performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ John Reyes -------------- Name: John Reyes Title: Chief Financial Officer of Public Storage, Inc., Corporate General Partner Date: May 15, 2006 EX-32 4 psp3_ex32q106.txt PSP3_EXH_32 Exhibit 32 CERTIFICATION OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Public Storage Properties, Ltd. (the "Partnership") for the quarter ended March 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Ronald L. Havner, Jr., as Chief Executive Officer of Public Storage, Inc., corporate general partner, and John Reyes, as Chief Financial Officer of Public Storage, Inc., corporate general partner, each hereby certifies, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. /s/ Ronald L. Havner, Jr. - ---------------------------- Name: Ronald L. Havner, Jr. Title: Chief Executive Officer of Public Storage, Inc., Corporate General Partner Date: May 15, 2006 /s/ John Reyes -------------- Name: John Reyes Title: Chief Financial Officer of Public Storage, Inc., Corporate General Partner Date: May 15, 2006 -----END PRIVACY-ENHANCED MESSAGE-----