Since
our business consists primarily of acquiring and operating real estate, we are
subject to the risks related to the ownership and operation of real estate that
can adversely impact our business and financial condition.
The value of our investments may be
reduced by general risks of real estate
ownership. Since we derive substantially all of
our income from real estate operations, we are subject to the general risks of
acquiring and owning real estate-related assets, including:
•
lack
of demand for rental spaces or units in a locale;
changes
in general economic or local conditions;
natural
disasters, such as earthquakes and floods; which could exceed the
aggregate limits of our insurance
coverage;
potential
terrorist attacks;
changes
in supply of or demand for similar or competing facilities in an area;
the
impact of environmental protection laws;
changes
in interest rates and availability of permanent mortgage funds which may
render the sale of a nonstrategic property difficult or unattractive
including the impact of the current turmoil in the credit markets;
increases
in insurance premiums, property tax assessments and other operating and
maintenance expenses;
transactional
costs and liabilities, including transfer
taxes;
adverse
changes in tax, real estate and zoning laws and regulations; and
tenant
and employment-related claims.
In
addition, we self-insure certain of our property loss, liability, and workers
compensation risks for which other real estate companies may use third-party
insurers. This results in a higher risk of losses that are not
covered by third-party insurance contracts, as described in Note 13 under
“Insurance and Loss Exposure” to our December 31, 2009 consolidated
financial statements.
There is significant competition
among self-storage facilities and from other storage
alternatives. Most of our properties are
self-storage facilities, which generated most of our revenue for the year ended
December 31, 2009. Local market conditions will play a significant
part in how competition will affect us. Competition in the market areas in which
many of our properties are located from other self-storage facilities and other
storage alternatives is significant and has affected the occupancy levels,
rental rates and operating expenses of most of our properties. Any
increase in availability of funds for investment in real estate may accelerate
competition. Further development of self-storage facilities may
intensify competition among operators of self-storage facilities in the market
areas in which we operate.
12
We may incur significant
environmental costs and liabilities. As an owner
and operator of real properties, under various federal, state and local
environmental laws, we are required to clean up spills or other releases of
hazardous or toxic substances on or from our properties. Certain
environmental laws impose liability whether or not the owner knew of, or was
responsible for, the presence of the hazardous or toxic
substances. In some cases, liability may not be limited to the value
of the property. The presence of these substances, or the failure to
properly remediate any resulting contamination, whether from environmental or
microbial issues, also may adversely affect the owner’s or operator’s ability to
sell, lease or operate its property or to borrow using its property as
collateral.
We have
conducted preliminary environmental assessments of most of our properties (and
intend to conduct these assessments in connection with property acquisitions) to
evaluate the environmental condition of, and potential environmental liabilities
associated with, our properties. These assessments generally consist
of an investigation of environmental conditions at the property (not including
soil or groundwater sampling or analysis), as well as a review of available
information regarding the site and publicly available data regarding conditions
at other sites in the vicinity. In connection with these property
assessments, our operations and recent property acquisitions, we have become
aware that prior operations or activities at some facilities or from nearby
locations have or may have resulted in contamination to the soil or groundwater
at these facilities. In this regard, some of our facilities are or
may be the subject of federal or state environmental investigations or remedial
actions. We have obtained, with respect to recent acquisitions, and
intend to obtain with respect to pending or future acquisitions, appropriate
purchase price adjustments or indemnifications that we believe are sufficient to
cover any related potential liability. Although we cannot provide any
assurance, based on the preliminary environmental assessments, we believe we
have funds available to cover any liability from environmental contamination or
potential contamination and we are not aware of any environmental contamination
of our facilities material to our overall business, financial condition or
results of operations.
There has
been an increasing number of claims and litigation against owners and managers
of rental properties relating to moisture infiltration, which can result in mold
or other property damage. When we receive a complaint concerning
moisture infiltration, condensation or mold problems and/or become aware that an
air quality concern exists, we implement corrective measures in accordance with
guidelines and protocols we have developed with the assistance of outside
experts. We seek to work proactively with our tenants to resolve
moisture infiltration and mold-related issues, subject to our contractual
limitations on liability for such claims. However, we can give no
assurance that material legal claims relating to moisture infiltration and the
presence of, or exposure to, mold will not arise in the future.
Delays in development and fill-up of
our properties would reduce our
profitability. From January 1, 2005, through
December 31, 2009, we opened 17 newly developed self-storage facilities in the
U.S. at a cost of approximately $142 million. Shurgard Europe
has developed and opened 55 facilities since January 1, 2005 at a cost of
approximately $426 million, and has two development projects under construction
with total estimated costs of $24 million. Delays in the rent-up
of newly developed storage space as a result of competition or other factors,
including the slowdown in the general economy which has negatively impacted
storage demand, would adversely impact our profitability. If we or
Shurgard Europe were to commence significant development of facilities,
construction delays due to weather, unforeseen site conditions, personnel
problems, and other factors, as well as cost overruns, would adversely affect
our profitability.
Property taxes can increase and
cause a decline in yields on investments. Each of
our properties is subject to real property taxes. These real property
taxes may increase in the future as property tax rates change and as our
properties are assessed or reassessed by tax authorities. Recent
local government shortfalls in tax revenue may cause pressure to increase tax
rates or assessment levels. Such increases could adversely impact our
profitability.
13
We must comply with the Americans
with Disabilities Act and fire and safety regulations, which can require
significant expenditures. All our properties must
comply with the Americans with Disabilities Act and with related regulations
(the “ADA”). The ADA has separate compliance requirements for “public
accommodations” and “commercial facilities,” but generally requires that
buildings be made accessible to persons with disabilities. Various
state laws impose similar requirements. A failure to comply with the
ADA or similar state laws could result in government imposed fines on us and
could award damages to individuals affected by the failure. In
addition, we must operate our properties in compliance with numerous local fire
and safety regulations, building codes, and other land use
regulations. Compliance with these requirements can require us to
spend substantial amounts of money, which would reduce cash otherwise available
for distribution to shareholders. Failure to comply with these
requirements could also affect the marketability of our real estate
facilities.
We incur liability from tenant and
employment-related claims. From time to time
we must resolve tenant claims and employment-related claims by corporate level
and field personnel.
There
continues to be global economic uncertainty, elevated levels of unemployment,
reduced levels of economic activity, and it is uncertain as to when economic
conditions will improve. These negative economic conditions in the
markets where we operate facilities, and other events or factors that adversely
affect disposable incomes, have and are likely to continue to adversely affect
our business.
As a
further result of the current global financial crisis, our ability to issue
preferred shares or borrow at reasonable rates has been and may continue to be
adversely affected by challenging credit market conditions. The
issuance of perpetual preferred securities historically has been a significant
source of capital to grow our business. While we currently believe
that we have sufficient working capital and capacity under our credit facilities
and our retained cash flow from operations to continue to operate our business
as usual, long-term continued turbulence in the credit markets and in the
national economy may adversely affect our access to capital and adversely impact
earnings growth that might otherwise result from the acquisition and development
of real estate facilities.
We
grow our business primarily through acquisitions of existing properties and are
subject to risks related to acquisitions that may adversely affect our growth
and financial results.
We grow
our business in large part through the acquisition of existing properties,
including acquisitions of businesses owned by other storage
operators. In addition to the general risks related to real estate
described above which may also adversely impact operations at acquired
properties, we are also subject to the following risks in connection with
property acquisitions and the integration of acquired properties into our
operations.
Any failure by us to manage
acquisitions and other significant transactions successfully could negatively
impact our financial results. If acquired facilities are not
properly integrated into our system, our financial results may
suffer.
Any failure to successfully
integrate acquired operations with our existing business could negatively impact
our financial results. To fully realize any anticipated benefits from an
acquisition, we must successfully complete the combination of the businesses of
Public Storage and acquired properties in a manner that permits cost savings to
be realized. It is possible that the integration process could result
in a decline in occupancy and/or rental rates, the disruption of ongoing
businesses or inconsistencies in standards, controls, procedures, practices,
policies and compensation arrangements that adversely affect our ability to
maintain relationships with tenants and employees or to achieve anticipated
benefits, particularly with large acquisitions.
Acquired properties are subject to
property tax reappraisals which may increase our property tax expense.
Facilities that we acquire are subject to property tax reappraisal, which
can increase property tax expense. There is a degree of uncertainty
involved in estimating the property tax expense of an acquired
property. In future acquisitions of properties, if actual property
tax expenses following reappraisal are significantly greater than we expected,
our operating results could be negatively impacted.