Public Storage 2014 Annual Report Download - page 58

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Tenant reinsurance operations: We reinsure policies offered through a non-affiliated insurance
company against losses to goods stored by tenants in the domestic self-storage facilities we operate. The
level of tenant reinsurance revenues is largely dependent upon the number of tenants that participate in the
insurance program and the average premium rates charged. Cost of operations primarily includes claims
paid that are not covered by our outside third-party insurers, as well as claims adjustment expenses. Tenant
reinsurance cost of operations for 2014 includes a $7.8 million accrual related to a legal settlement and a
$4.1 million reduction associated with the recognition of a deferred tax asset. The increase of $4.9 million
in ongoing cost of operations for 2014 as compared to 2013 is due primarily to an increase in exposure
associated with more insured tenants and, to a lesser extent, claims resulting from extreme weather
conditions in early 2014.
Tenant reinsurance revenue at our Same Store Facilities increased from $73.1 million in 2012, to
$78.4 million in 2013, and to $83.8 million in 2014, due to more insured tenants as a result of increased
occupancies and a higher proportion of tenants having insurance and, to a lesser extent, higher average
premium rates charged. The remaining increases in tenant reinsurance revenues are due primarily to the
acquisition of 189 self-storage facilities from third parties since January 1, 2012.
We expect continued increases in tenant insurance revenues in 2015 as the tenant insurance
revenues with respect to the facilities we acquired in 2014 are reflected for a full year, combined with the
acquisition of additional facilities in 2015.
Commercial operations: We also own and operate commercial facilities, primarily the leasing of
small retail storefronts and office space located on or near our existing self-storage facilities. We do not
expect any significant changes in revenues or profitability from our commercial operations.
Merchandise sales and other: We sell locks, boxes, and packing supplies at our self-storage
facilities, and the level of sales of these items is primarily impacted by the level of move-ins and other
customer traffic at our self-storage facilities. These amounts include, to a much lesser extent, the results of
our management of 41 self-storage facilities in the U.S. for third party owners and other partnerships that
we account for on the equity method. We do not expect any significant changes in revenues or profitability
from our merchandise sales and other in 2015.
Other Income and Expense Items
Interest and other income: Interest and other income was $4.9 million in 2014, $22.6 million in
2013 and $22.1 million in 2012, which included $1.5 million, $19.3 million and $18.7 million, respectively,
in interest received on a loan receivable from Shurgard Europe which was extinguished in 2014, as
described more fully in Note 5 to our December 31, 2014 financial statements.
The remainder of our interest and other income is comprised primarily of interest earned on cash
balances, trademark license fees from Shurgard Europe, as well as sundry other income items that are
received from time to time in varying amounts. Interest income on cash balances has been minimal,
because rates have been at historic lows of 0.1% or less, and we expect this trend to continue in the
foreseeable future. Future earnings from sundry other income items are not predictable.
Depreciation and amortization: Depreciation and amortization increased to $437.1 million for
2014 as compared to $387.4 million for 2013 and $357.8 million for 2012, due principally to the 189
facilities acquired from third parties since January 1, 2012. Included in depreciation and amortization is
amortization expense of tenant intangibles for facilities acquired from third parties, which is being
amortized relative to the expected future benefit of the customers in place for each period. Such
amortization expense totaled $48.4 million, $24.1 million and $10.5 million in 2014, 2013 and 2012,
respectively. Based upon the facilities we own at December 31, 2014, amortization expense with respect to
such intangibles is estimated at $22.3 million in 2015. The level of future depreciation and amortization
will primarily depend upon the level of acquisitions of facilities and the level of capital expenditures we
incur on our facilities.