10-Q 1 q202psi.txt PUBLIC STORAGE, INC. 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2002 ------------- 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: 1-8389 ------ PUBLIC STORAGE, INC. -------------------- (Exact name of registrant as specified in its charter) California 95-3551121 ---------------------------------------- ---------------------- (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 the number of shares outstanding of each of the issuer's classes of common stock, as of August 8, 2002: Common Stock, $.10 Par Value - 116,227,414 shares ------------------------------------------------- Class B Common Stock, $.10 Par Value - 7,000,000 shares ------------------------------------------------------- Depositary Shares Each Representing 1/1,000 of a Share of Equity Stock, Series ------------------------------------------------------------------------------ A, $.01 Par Value - 8,776,102 depositary shares (representing 8,776.102 shares ------------------------------------------------------------------------------ of Equity Stock, Series A) -------------------------- Equity Stock, Series AA, $.01 Par Value - 225,000 shares -------------------------------------------------------- Equity Stock, Series AAA, $.01 Par Value - 4,289,544 shares ----------------------------------------------------------- PUBLIC STORAGE, INC. INDEX Pages ----- PART I. FINANCIAL INFORMATION --------------------- Item 1. Financial Statements Condensed Consolidated Balance Sheets at June 30, 2002 and December 31, 2001 1 Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2002 and 2001 2 Condensed Consolidated Statements of Shareholders' Equity for the Six Months Ended June 30, 2002 3 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001 4 - 5 Notes to Condensed Consolidated Financial Statements 6 - 26 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 27 - 46 Item 2A. Risk Factors 47 - 49 Item 3. Quantitative and Qualitative Disclosures about Market Risk 50 PART II. OTHER INFORMATION (Items 2 and 3 are not applicable) ----------------- Item 1. Legal Proceedings 51 Item 4. Submission of Matters to a Vote of Security Holders 51 Item 5. Other Items 52 Item 6. Exhibits and Reports on Form 8-K 53 - 59 PUBLIC STORAGE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share data)
June 30, December 31, 2002 2001 -------------- -------------- (Unaudited) ASSETS ------ Cash and cash equivalents........................................................... $ 172,164 $ 49,347 Real estate facilities, at cost: Land........................................................................... 1,284,959 1,165,111 Buildings...................................................................... 3,601,859 3,265,943 -------------- -------------- 4,886,818 4,431,054 Accumulated depreciation....................................................... (903,452) (819,932) -------------- -------------- 3,983,366 3,611,122 Construction in process........................................................ 88,978 121,181 Land held for development...................................................... 21,548 30,001 -------------- -------------- Total real estate.......................................................... 4,093,892 3,762,304 Investment in real estate entities.................................................. 323,323 479,300 Goodwill............................................................................ 78,204 78,204 Intangible assets, net.............................................................. 121,195 124,497 Mortgage notes receivable from affiliates........................................... 24,361 59,344 Other assets........................................................................ 72,639 72,883 -------------- -------------- Total assets.......................................................... $ 4,885,778 $ 4,625,879 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Notes payable....................................................................... $ 122,399 $ 143,552 Line of credit borrowings........................................................... - 25,000 Accrued and other liabilities....................................................... 99,375 93,143 -------------- -------------- Total liabilities..................................................... 221,774 261,695 Minority interest: Preferred partnership interests................................................ 285,000 285,000 Other partnership interests.................................................... 170,657 169,601 Commitments and contingencies Shareholders' equity: Cumulative Preferred Stock, $0.01 par value, 50,000,000 shares authorized, 11,168,500 shares issued in series and outstanding (11,156,500 at December 31, 2001), at liquidation preference................................ 1,840,150 1,540,150 Common Stock, $0.10 par value, 200,000,000 shares authorized, 116,105,843 shares issued and outstanding (114,961,915 at December 31, 2001)............. 11,611 11,496 Equity Stock, Series A, $0.01 par value, 200,000,000 shares authorized, 8,776.102 shares issued and outstanding...................................... - - Class B Common Stock, $0.10 par value, 7,000,000 shares authorized and outstanding.............................................................. 700 700 Paid-in capital................................................................ 2,351,024 2,325,898 Cumulative net income.......................................................... 1,879,442 1,711,269 Cumulative distributions paid.................................................. (1,874,580) (1,679,930) -------------- -------------- Total shareholders' equity................................................ 4,208,347 3,909,583 -------------- -------------- Total liabilities and shareholders' equity............................ $ 4,885,778 $ 4,625,879 ============== ==============
See accompanying notes. 1 PUBLIC STORAGE, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands, except net income per share amounts) (Unaudited)
For the Three Months Ended For the Six Months Ended June 30, June 30, -------------------------------- -------------------------------- 2002 2001 2002 2001 ------------- ------------- ------------- ------------- Revenues: Rental income: Self-storage facilities.................. $ 188,687 $ 179,086 $ 377,594 $ 350,915 Commercial properties.................... 3,181 3,215 6,252 6,272 Containerized storage facilities......... 12,758 12,183 24,457 22,256 Tenant reinsurance............................ 5,156 - 9,731 - Interest and other income..................... 2,759 3,130 4,467 6,738 ------------- ------------- ------------- ------------- 212,541 197,614 422,501 386,181 ------------- ------------- ------------- ------------- Expenses: Cost of operations: Self-storage facilities.................. 59,905 54,599 118,500 111,073 Commercial properties.................... 1,130 882 2,244 1,832 Containerized storage facilities......... 11,243 11,055 20,561 20,528 Tenant reinsurance....................... 2,523 - 4,816 - Depreciation and amortization................ 46,052 41,323 90,049 80,945 General and administrative................... 4,305 5,000 8,305 10,584 Interest expense............................. 1,213 1,124 2,315 2,095 ------------- ------------- ------------- ------------- 126,371 113,983 246,790 227,057 ------------- ------------- ------------- ------------- Income before equity in earnings of real estate entities, minority interest and gain on disposition of real estate.................... 86,170 83,631 175,711 159,124 Equity in earnings of real estate entities (including the Company's pro-rata share of gain 9,814 16,256 on sale of real estate totaling $2,241 for the six months ended June 30, 2002)............... 7,000 19,086 Minority interest in income: Preferred partnership interests............... (6,727) (8,505) (13,453) (17,010) Other partnership interests................... (3,886) (3,167) (8,502) (6,360) ------------- ------------- ------------- ------------- Income before gain (loss) on disposition of real estate........................................ 82,557 81,773 170,012 154,840 Gain (loss) on disposition of real estate investments.................................. (1,839) - (1,839) 1,568 ------------- ------------- ------------- ------------- Net income...................................... $ 80,718 $ 81,773 $ 168,173 $ 156,408 ============= ============= ============= ============= Net income allocation: Allocable to preferred shareholders........... $ 37,936 $ 28,736 $ 73,776 $ 56,772 Allocable to Equity Stock, Series A........... 5,376 5,314 10,751 8,766 Allocable to common shareholders.............. 37,406 47,723 83,646 90,870 ------------- ------------- ------------- ------------- $ 80,718 $ 81,773 $ 168,173 $ 156,408 ============= ============= ============= ============= Per common share: Net income per share - Basic.................. $0.30 $0.40 $0.68 $0.73 ============= ============= ============= ============= Net income per share - Diluted................ $0.30 $0.39 $0.67 $0.73 ============= ============= ============= ============= Net income per depositary share of Equity Stock, Series A - Basic and Diluted............... $0.61 $0.61 $1.23 $1.23 ============= ============= ============= ============= Weighted average common shares - Basic........ 122,821 120,734 122,386 124,403 ============= ============= ============= ============= Weighted average common shares - Diluted...... 124,824 121,639 124,417 125,130 ============= ============= ============= ============= Weighted average depositary shares of Equity Stock, Series A - Basic and Diluted........ 8,776 8,676 8,776 7,156 ============= ============= ============= =============
See accompanying notes. 2 PUBLIC STORAGE, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollar amounts in thousands) (Unaudited)
Cumulative Class B Preferred Common Stock Common Stock Paid-in Stock Capital ------------- ------------- ------------- ------------- Balances at December 31, 2001.......................... $ 1,540,150 $ 11,496 $ 700 $ 2,325,898 Issuance of preferred stock, net of issuance costs: Series T (6,000 shares)............................. 150,000 - - (4,925) Series U (6,000 shares)............................. 150,000 - - (4,925) Issuance of Common Stock: Options exercised (621,132 shares).................. - 63 - 15,355 Acquisition of minority interest (533,796 shares - Note 7)........................................... 53 20,001 Repurchase of common stock (11,000 shares)............. - (1) - (380) Net income............................................. - - - - Cash distributions: Cumulative Senior Preferred Stock................... - - - - Equity Stock, Series A ($1.225 per share)........... - - - - Class B Common Stock ($0.873 per share)............. - - - - Common Stock ($0.90 per share)...................... - - - - ------------- ------------- ------------- ------------- Balances at June 30, 2002.............................. $ 1,840,150 $ 11,611 $ 700 $ 2,351,024 ============= ============= ============= =============
Total Cumulative Cumulative Shareholders' Net Income Distributions Equity ------------- -------------- -------------- Balances at December 31, 2001.......................... $ 1,711,269 $ (1,679,930) $ 3,909,583 Issuance of preferred stock, net of issuance costs: Series T (6,000 shares)............................. - - 145,075 Series U (6,000 shares)............................. - - 145,075 Issuance of Common Stock: Options exercised (621,132 shares).................. - - 15,418 Acquisition of minority interest (533,796 shares - Note 7)........................................... 20,054 Repurchase of common stock (11,000 shares)............. - - (381) Net income............................................. 168,173 - 168,173 Cash distributions: Cumulative Senior Preferred Stock................... - (73,776) (73,776) Equity Stock, Series A ($1.225 per share)........... - (10,751) (10,751) Class B Common Stock ($0.873 per share)............. - (6,111) (6,111) Common Stock ($0.90 per share)...................... - (104,012) (104,012) ------------- -------------- -------------- Balances at June 30, 2002.............................. $ 1,879,442 $ (1,874,580) $ 4,208,347 ============= ============== ==============
See accompanying notes. 3 PUBLIC STORAGE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited)
For the Six Months Ended June 30, --------------------------------- 2002 2001 -------------- -------------- Cash flows from operating activities: Net income.................................................................. $ 168,173 $ 156,408 Adjustments to reconcile net income to net cash provided by operating activities: Gain included in equity in earnings of real estate investments............ (2,241) - (Gain) loss on sale of real estate investments............................ 1,839 (1,568) Depreciation and amortization............................................. 90,049 80,945 Depreciation included in equity earnings of real estate entities.......... 12,896 11,214 Minority interest in income............................................... 21,955 23,370 Other..................................................................... 2,696 2,469 -------------- -------------- Total adjustments..................................................... 127,194 116,430 -------------- -------------- Net cash provided by operating activities......................... 295,367 272,838 -------------- -------------- Cash flows from investing activities: Principal payments received on mortgage notes receivable.................. 35,193 1,999 Business combinations (Note 3)............................................ (152,327) - Capital improvements to real estate facilities............................ (12,526) (12,132) Construction in process and acquisition of land held for development...... (49,112) (92,720) Acquisition of minority interests......................................... (13,055) (11,053) Proceeds from the disposition of real estate facilities................... 5,322 9,102 Acquisition of investment in real estate entities......................... (14,914) (21,909) Acquisition of real estate facilities..................................... (7,936) - Other investments......................................................... (1,054) (5,097) -------------- -------------- Net cash used in investing activities............................. (210,409) (131,810) -------------- -------------- Cash flows from financing activities: Net paydowns on revolving line of credit.................................. (25,000) - Principal payments on notes payable....................................... (21,153) (6,207) Net proceeds from the issuance of common stock............................ 15,418 2,253 Net proceeds from the issuance of preferred stock......................... 290,150 166,966 Net proceeds from the issuance of Equity Stock, Series A.................. - 72,130 Issuance of Put Option (Note 8)........................................... - 910 Repurchase of common stock................................................ (381) (275,483) Distributions paid to shareholders........................................ (194,650) (119,949) Distributions paid to minority interests.................................. (26,493) (26,938) Net (divestment) reinvestment of minority interests....................... (32) 6,584 -------------- -------------- Net cash provided by (used in) financing activities............... 37,859 (179,734) -------------- -------------- Net increase (decrease) in cash and cash equivalents........................... 122,817 (38,706) Cash and cash equivalents at the beginning of the period....................... 49,347 89,467 -------------- -------------- Cash and cash equivalents at the end of the period............................. $ 172,164 $ 50,761 ============== ==============
See accompanying notes. 4 PUBLIC STORAGE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited) (Continued)
Supplemental schedule of non-cash investing and financing activities: For the Six Months Ended June 30, --------------------------------- 2002 2001 -------------- -------------- Business combinations (Note 3): Real estate facilities.................................................... $ (330,426) $ - Other assets.............................................................. (2,175) - Accrued and other liabilities............................................. 5,232 - Minority interest......................................................... 14,806 - Reduction in investment in real estate entities........................... 160,236 - Note received in exchange for sale of real estate........................... (210) - Real estate sold in exchange for note....................................... 210 - Acquisition of minority interest for consideration including common stock: Real estate facilities.................................................... (20,640) - Minority Interest......................................................... (12,469) - Issuance of common stock to acquire interest in consolidated real estate entity.................................................................... 20,054 - Disposition of minority interests in exchange for other assets at a loss of $1,839 (Note 7) Other assets............................................................... (1,450) - Minority interest.......................................................... 3,289 -
See accompanying notes. 5 PUBLIC STORAGE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 (Unaudited) 1. Description of the business --------------------------- Public Storage, Inc. (the "Company") is a California corporation which was organized in 1980. We are a fully integrated, self-administered and self-managed real estate investment trust ("REIT") whose principal business activities include the acquisition, development, ownership and operation of self-storage facilities which offer storage spaces for lease, usually on a month-to-month basis, for personal and business use. In addition, to a much lesser extent, we have interests in commercial properties, containing commercial and industrial rental space, and interests in facilities that lease storage containers. We invest in real estate facilities by acquiring wholly owned facilities or by acquiring interests in real estate entities which own facilities. At June 30, 2002, we had direct and indirect equity interests in 1,397 self-storage facilities located in 37 states and operating under the "Public Storage" name. We also have direct and indirect equity interests in approximately 15.2 million net rentable square feet of commercial space. 2. Summary of significant accounting policies ------------------------------------------ Basis of presentation --------------------- The consolidated financial statements include the accounts of the Company and 35 controlled entities (the "Consolidated Entities"). Collectively, the Company and the Consolidated Entities own a total of 1,366 real estate facilities, consisting of 1,361 self-storage facilities and five commercial properties. At June 30, 2002, we had equity investments in eight limited partnerships in which we do not have a controlling interest. These limited partnerships collectively own 36 self-storage facilities, which are managed by the Company. In addition, we own approximately 44% of the common equity of PS Business Parks, Inc. ("PSB"), which owns and operates 14.8 million net rentable square feet of commercial space at June 30, 2002. We do not control these entities. Accordingly, our investments in these limited partnerships and PSB are accounted for using the equity method. Certain amounts previously reported have been reclassified to conform to the June 30, 2002 presentation. Use of estimates ---------------- The preparation of the consolidated 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 consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Income taxes ------------ For all taxable years subsequent to 1980, the Company qualified and intends to continue to qualify as a REIT, as defined in Section 856 of the Internal Revenue Code. As a REIT, we are not taxed on that portion of our taxable income, which is distributed to our shareholders, provided that we meet certain tests. We believe we will meet these tests during 2002 and, accordingly, no provision for income taxes has been made in the accompanying financial statements. 6 Financial instruments --------------------- The methods and assumptions used to estimate the fair value of financial instruments is described below. We have estimated the fair value of our financial instruments using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop estimates of market value. Accordingly, estimated fair values are not necessarily indicative of the amounts that could be realized in current market exchanges. For purposes of financial statement presentation, we consider all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Due to the short period to maturity of our cash and cash equivalents, accounts receivable, other assets, and accrued and other liabilities, the carrying values as presented on the consolidated balance sheets are reasonable estimates of fair value. The carrying amount of mortgage notes receivable approximates fair value because the aggregate mortgage notes receivable's applicable interest rates approximate market rates for these loans. Financial assets that are exposed to credit risk consist primarily of cash and cash equivalents, accounts receivable, and notes receivable. Cash and cash equivalents, which consist of short-term investments, including commercial paper, are only invested in entities with an investment grade rating. Notes receivable are substantially all secured by real estate facilities that we believe are valued in excess of the related note receivable. Accounts receivable are not a significant portion of total assets and are comprised of a large number of individual customers. Real estate facilities ---------------------- Real estate facilities are recorded at cost. Costs associated with the acquisition, development, construction and improvement of properties are capitalized. Interest, property taxes, and other costs associated with development 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. Evaluation of asset impairment ------------------------------ In October 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." In June 2001, the FASB issued Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). We adopted these statements effective January 1, 2002. We evaluate our long-lived assets on a quarterly basis for indicators of impairment. When indicators of impairment are detected in our evaluation, we evaluate the recoverability of such long-lived assets. We determine the assets' recoverable amount based upon a) the fair value of our goodwill or b) the estimated undiscounted cash flows of our other long-lived assets. An impairment charge is booked for the excess of book value (if any) over the asset's recoverable amount. We determine the recoverability of our goodwill in this manner on a quarterly basis regardless of the existence of indicators of impairment. The Company has determined at June 30, 2002 that no such impairments existed and, accordingly, no impairment charges have been recorded. 7 Statement No. 144 also addresses the accounting for long-lived assets that are likely to be disposed of before the end of their previously estimated useful life. Such assets are to be reported at the lower of their carrying amount or fair value, less cost to sell. Our evaluations have determined that there are no such impairments at June 30, 2002. Other assets ------------ Other assets primarily consist of furniture, fixtures, equipment, and other such assets associated with the containerized storage facilities business as well as accounts receivable, prepaid expenses, and other such assets of the Company. Included in other assets with respect to the containerized storage business is furniture, fixtures, and equipment (net of accumulated depreciation) of $29,986,000 and $30,699,000 at June 30, 2002 and December 31, 2001, respectively. Included in depreciation and amortization expense for the three months ended June 30, 2002 and 2001 is $1,614,000 and $1,550,000, respectively, and $3,227,000 and $2,889,000 for the six months ended June 30, 2002 and 2001, respectively, of depreciation of furniture, fixtures, and equipment of the containerized storage business. Intangible assets and goodwill ------------------------------ The Company conforms to SFAS 142 in accounting for its goodwill and other intangibles. Intangible assets consist of property management contracts ($165,000,000) and the excess of acquisition cost over the fair value of net tangible and identifiable intangible assets or "goodwill" ($94,719,000) acquired in business combinations. Prior to December 31, 2001, the Company amortized its goodwill using the straight-line method over a 25 year life. The Company's goodwill has an indeterminate life and, in accordance with the provisions of SFAS 142, amortization of goodwill ceased effective January 1, 2002. Our other intangibles continue to be amortized over a 25 year period. Goodwill is net of accumulated amortization of $16,515,000 at June 30, 2002 and December 31, 2001. At June 30, 2002, property management contracts are net of accumulated amortization of $43,805,000 ($40,503,000 at December 31, 2001). Included in depreciation and amortization expense for the three and six months ended June 30, 2002 and 2001 is $1,651,000 and $3,302,000, respectively, with respect to the amortization of property management contracts. In addition, included in depreciation and amortization expense for the three and six months ended June 30, 2001, is $677,000 and $1,354,000, respectively, relating to the amortization of goodwill. Revenue and expense recognition ------------------------------- Property rents are recognized as earned. Equity in earnings of real estate entities is recognized based on our ownership interest in the earnings of each of the unconsolidated real estate entities. Advertising costs are expensed as incurred. As described more fully in Note 10, compensation expense with respect to stock options granted after December 31, 2001 is recorded based upon the options' estimated fair value on the date of grant and their vesting period. 8 Environmental costs ------------------- Our policy is to accrue environmental assessments and/or remediation cost when it is probable that such efforts will be required and the related costs can be reasonably estimated. Our current practice is to conduct environmental investigations in connection with property acquisitions. Although there can be no assurance, we are not aware of any environmental contamination of any of our facilities which individually or in the aggregate would be material to our overall business, financial condition, or results of operations. Net income per common share --------------------------- Dividends paid to our preferred shareholders totaling $37,936,000 and $28,736,000 for the three months ended June 30, 2002 and 2001, respectively, and $73,776,000 and $56,772,000 for the six months ended June 30, 2002 and 2001, respectively, have been deducted from net income to arrive at net income allocable to our common shareholders. Net income allocated to our common shareholders has been further allocated among our two classes of common stock; our regular common stock and our Equity Stock, Series A. The allocation among each class was based upon the two-class method. Under the two-class method, earnings per share for each class of common stock is determined according to dividends declared (or accumulated) and participation rights in undistributed earnings. Under the two-class method, the Equity Stock, Series A was allocated net income of approximately $5,376,000 and $10,751,000, for the three and six months ended June 30, 2002, respectively, as compared to $5,314,000 and $8,766,000, respectively, for the same period in 2001. The remaining $37,406,000 and $83,646,000 for the three and six months ended June 30, 2002, respectively, and $47,723,000 and $90,870,000, for the three and six months ended June 30, 2001, respectively, was allocated to the regular common shares. Basic net income per share is computed using the weighted average common shares (prior to the dilutive impact of stock options outstanding). Diluted net income per common share is computed using the weighted average common shares outstanding (adjusted for stock options). Distributions per share of Class B common stock are equal to 97% of the per share distribution paid to the Company's regular common shares. As a result of this participation in distribution of earnings, for purposes of computing net income per common share, the Company includes 6,790,000 (7,000,000 x 97%) Class B common shares in the weighted average common equivalent shares for the three and six months ended June 30, 2001 and the three months ended March 31, 2002. As of March 31, 2002, the remaining contingency for the conversion of the Class B common stock into regular common stock has been satisfied (see Note 8) and the Class B common stock will convert into 7,000,000 shares of common stock on January 1, 2003. As a result, beginning April 1, 2002, the Company includes 7,000,000 Class B common shares in the weighted average common equivalent shares. 9 3. Business Combinations --------------------- Development Joint Venture ------------------------- On January 16, 2002, we acquired the remaining 70% interest we did not own in a partnership (the "Development Joint Venture"). The aggregate cost of this business combination was $268,209,000, consisting of our pre-existing investment in the Development Joint Venture of $115,131,000 and cash of $153,078,000. This acquisition was completed in order to expand the Company's real estate investments. The Development Joint Venture was formed in April 1997 and was funded with equity capital consisting of 30% from the Company and 70% from an institutional investor, and owns 47 storage facilities. Prior to January 16, 2002, we accounted for our investment in the Development Joint Venture using the equity method of accounting. Other Partnerships ------------------ As a result of obtaining a controlling ownership interest, we began to consolidate the accounts of two publicly-held limited partnerships owning 31 self-storage facilities in which we are the general partner, effective January 1, 2002. Our $45,105,000 investment at December 31, 2001 was allocated first to the $751,000 cash held by these entities, with the remaining $44,354,000 allocated to the other assets, liabilities, and minority interests of these entities as described in the table below. Previously, we accounted for our investment in these entities using the equity method of accounting. PS Insurance Company -------------------- On December 31, 2001, we acquired all of the capital stock of PS Insurance Company, Ltd. ("PS Insurance Company"), which reinsures policies against losses to goods stored by tenants in our self-storage facilities and which owned, and continues to own, 301,032 shares of the Company's common stock. The 301,032 shares owned by this entity are eliminated in consolidation. Each of the transactions indicated above has been accounted for using the purchase method. Accordingly, allocations of our acquisition cost (consisting of our preexisting investment and the cost of acquisition of interests acquired in connection with the transaction) was allocated to the net assets acquired based upon the fair value of such assets and liabilities assumed with respect to the transactions. Accordingly, allocations of the total acquisition cost to the net assets acquired were made based upon the fair value of such assets and liabilities assumed. The allocations were as follows with respect to the business combinations completed in the first quarter of 2002:
Development Other Joint Venture Partnerships Total ------------- ------------ ----------- (amounts in thousands) 2002 BUSINESS COMBINATIONS: Real estate facilities............... $ 269,898 $ 60,528 $ 330,426 Minority interests................... - (14,806) (14,806) Other assets......................... 1,122 1,053 2,175 Accrued and other liabilities........ (2,811) (2,421) (5,232) ------------- ------------ ----------- $ 268,209 $ 44,354 $ 312,563 ============= ============ ===========
10 The historical operating results of the above acquisitions prior to each respective acquisition date have not been included in the Company's historical operating results. Pro forma data (unaudited) for the six months ended June 30, 2002 and 2001 as though the business combinations above had been effective at the beginning of fiscal 2001 are as follows: For the Six Months Ended June 30, ------------------------------ 2002 2001 ---------- ---------- (in thousands except per share data) Revenues................................... $423,625 $415,708 Net income................................. $167,950 $158,021 Net income per common share (Basic)........ $0.68 $0.74 Net income per common share (Diluted)...... $0.67 $0.73 The pro forma data does not purport to be indicative either of results of operations that would have occurred had the transactions occurred at the beginning of fiscal 2001 or future results of operations of the Company. Certain pro forma adjustments were made to the combined historical amounts to reflect (i) expected reductions in general and administrative expenses, (ii) estimated increased interest expense from bank borrowings to finance the cash portion of the acquisition cost and (iii) estimated increase in depreciation expense. 11 4. Real estate facilities ---------------------- Activity in real estate facilities during 2002 is as follows: In thousands --------------- Operating facilities, at cost: Balance at December 31, 2001.................... $ 4,431,054 Developed facilities............................ 84,236 Property acquisitions: Business combinations (Note 3)............... 330,426 From third parties........................... 7,936 Acquisition of minority interests (Note 7)...... 20,640 Capital improvements............................ 12,526 --------------- Balance at June 30, 2002........................ 4,886,818 --------------- Accumulated depreciation: Balance at December 31, 2001.................... (819,932) Additions during the year....................... (83,520) --------------- Balance at June 30, 2002........................ (903,452) --------------- Construction in process: Balance at December 31, 2001.................... 121,181 Current development............................. 49,112 Transfers from land held for development........ 2,921 Developed facilities............................ (84,236) --------------- Balance at June 30, 2002........................ 88,978 --------------- Land held for development: Balance at December 31, 2001.................... 30,001 Dispositions.................................... (5,532) Transfer to construction in progress............ (2,921) --------------- Balance at June 30, 2002........................ 21,548 --------------- Total real estate facilities.................... $ 4,093,892 =============== During the six months ended June 30, 2002, we opened 10 newly developed facilities with approximately 864,000 aggregate net rentable square feet with an aggregate cost of $68,227,000, and expansions of storage facilities with an aggregate cost of $16,009,000. In addition, during the six months ended June 30, 2002, we acquired three self-storage facilities, in separate transactions, having an aggregate of approximately 157,000 net rentable square feet for $7,936,000 cash. During the six months ended June 30, 2002, we sold one plot of land for $5,532,000, consisting of $5,322,000 of cash and a note receivable in the amount of $210,000. No gain or loss was recorded on this sale. Construction in process at June 30, 2002 consists primarily of 19 storage facilities and 7 expansion projects to existing self-storage facilities. In addition, we have nine parcels of land held for development with total costs of approximately $21,548,000. Our policy is to capitalize interest incurred on debt during the course of construction of our self-storage facilities. Interest capitalized during the three and six months ended June 30, 2002 was $1,426,000 and $3,272,000, respectively compared to $2,109,000 and $4,219,000, respectively for the same periods in 2001. 12 5. Investment in real estate entities ---------------------------------- At June 30, 2002, our investment in real estate entities consist of ownership interests in eight partnerships, which principally own self-storage facilities, and our ownership interest in PSB (defined below). These interests are non-controlling interests of less than 50% and are accounted for using the equity method of accounting. Accordingly, earnings are recognized based upon our ownership interest in each of the partnerships. The accounting policies of these entities are similar to the Company's. The following table sets forth the Company's equity in earnings of real estate entities for the three and six months ended June 30, 2002 (amounts in thousands):
Equity in Earnings of Real Equity in Earnings of Real Estate Estate Entities for the Three Entities for the Six Months Ended Months ended June 30, June 30, ------------------------------ --------------------------------- 2002 2001 2002 2001 -------------- -------------- -------------- -------------- PSB (a)............................ $ 5,215 $ 5,876 $ 12,329 $ 11,661 Newly Consolidated Investments (b) - 2,512 223 4,634 Other Investments.................. 1,785 1,426 3,704 2,791 -------------- -------------- -------------- -------------- Total.......................... $ 7,000 $ 9,814 $ 16,256 $ 19,086 ============== ============== ============== ==============
(a) Included in equity in earnings for the six months ended June 30, 2002 is our pro rata share of PSB's gain on sale of real estate in the amount of $2,241,000. (b) As described in Note 3, in the first quarter of 2002 we began consolidating the results of the Development Joint Venture and two other partnerships, and as a result eliminated our preexisting investment in the three months ended March 31, 2002. The following table sets forth our investments in real estate entities at June 30, 2002 and December 31, 2001 (amounts in thousands), and our distributions received from the real estate entities in the six months ended June 30, 2002 and 2001:
Distributions from real estate Investments in Real Estate entities for the six months Entities at ended June 30, ------------------------------ --------------------------------- June 30, December 31, 2002 2001 2002 2001 -------------- -------------- -------------- -------------- PSB $ 270,238 $ 267,472 $ 9,563 $ 7,326 Newly Consolidated Investments (a) - 160,013 - 2,132 Other Investments................. 53,085 51,815 2,676 659 -------------- -------------- -------------- -------------- Total......................... $ 323,323 $ 479,300 $ 12,239 $ 10,117 ============== ============== ============== ==============
(a) As described in Note 3, in the first quarter of 2002 we began consolidating the results of the Development Joint Venture and two other partnerships, and as a result eliminated our preexisting investment in the three months ended June 30, 2002. In addition to the income recognized and distributions noted above, during the six months ended June 30, 2002, we invested a total of $242,000 in the Other Investments. 13 Following is a description of PSB, the Newly Consolidated Investments, and the Other Investments. Investment in PSB ----------------- At June 30, 2002, the Company and the Consolidated Entities have a 44% common equity interest in PS Business Parks, Inc., a REIT traded on the American Stock Exchange, and an operating partnership controlled by PS Business Parks, Inc. (collectively, the REIT and the operating partnership are referred to as "PSB"). This 44% common equity interest is comprised of the ownership of 5,418,273 shares of common stock and 7,305,355 limited partnership units in the operating partnership. These limited partnership units are convertible at our option, subject to certain conditions, on a one-for-one basis into PSB common stock. Based upon PSB's trading price at June 30, 2002 ($34.95), the shares and units had a market value of approximately $444.7 million. At June 30, 2002, PSB owned and operated 14.8 million net rentable square feet of commercial space located in nine states. PSB also manages the commercial space owned by the Company and the Consolidated Entities. Our pro-rata share of earnings and distributions from PSB, as well as our investment balance, are denoted in the tables above. The following table sets forth the condensed consolidated statements of operations and the condensed consolidated balance sheets of PSB. These amounts below represent 100% of PSB's balances and not our pro-rata share.
PSB For the six months ended --- June 30, ---------------------------------- 2002 2001 --------------- --------------- (Amounts in thousands) Total revenue........................................ $ 102,578 $ 80,557 Gain on disposition of real estate investments....... 5,391 15 Cost of operations and other expenses................ (33,017) (23,746) Depreciation and amortization........................ (28,290) (19,379) Minority interest.................................... (16,488) (13,152) --------------- --------------- Net income......................................... $ 30,174 $ 24,295 =============== =============== At June 30, At December 31, 2002 2001 --------------- --------------- Total assets (primarily real estate)................. $ 1,146,403 $ 1,169,955 Total debt........................................... 87,932 165,145 Other liabilities.................................... 36,852 45,188 Preferred equity and preferred minority interests.... 368,738 318,750 Common equity and common minority interest........... 652,881 640,872
Newly Consolidated Investments ------------------------------ As described in Note 3, effective in the first quarter of 2002, we began consolidating the results of the Development Joint Venture and two other partnerships, and as a result eliminated our preexisting investment of $160,236,000 ($160,013,000 at December 31, 2001). Prior to their respective dates of consolidation, these entities were accounted for on the equity method of accounting. The Company's operating results and investments with respect to these entities are included as the "Newly Consolidated Investments" in the tables above. 14 Other Investments ----------------- At June 30, 2002, the Other Investments consists primarily of an average 38% common equity ownership in eight limited partnerships (collectively, the "Other Investments") owning an aggregate of 36 storage facilities. During the six months ended June 30, 2002, we invested a total of $242,000 in the Other Investments. Our pro-rata share of earnings and distributions from these entities as well as our investment balances are denoted in the tables above. The following table sets forth certain condensed financial information (representing 100% of these entities' balances and not our pro-rata share) with respect to the Other Investments:
Other Investments For the six months ended ----------------- June 30, -------------------------------- 2002 2001 ------------- ------------- (Amounts in thousands) Total revenue........................... $ 13,428 $ 12,509 Cost of operations and other expenses... (4,893) (4,644) Depreciation and amortization........... (1,267) (1,276) ------------- ------------- Net income............................ $ 7,268 $ 6,589 ============= ============= Other Investments At June 30, At December 31, ----------------- 2002 2001 ------------- ------------- (Amounts in thousands) Total assets (primarily storage facilities) $ 61,731 $ 61,046 Total debt.............................. 8,323 11,357 Other liabilities....................... 1,267 1,233 Partners' equity........................ 52,141 48,456
6. Revolving line of credit ------------------------ Our $200 million revolving line of credit (the "Credit Agreement") has a maturity date of October 31, 2004 and bears an annual interest rate ranging from the London Interbank Offered Rate ("LIBOR") plus 0.45% to LIBOR plus 1.50% depending on our credit ratings (currently 0.45%). In addition, we are required to pay a quarterly commitment fee ranging from 0.20% per annum to 0.30% per annum depending on our credit ratings (currently the fee is 0.20% per annum). At June 30, 2002, we had no borrowings on our line of credit. The Credit Agreement includes various covenants, the more significant of which requires us to (i) maintain a balance sheet leverage ratio of less than 0.50 to 1.00, (ii) maintain certain quarterly interest and fixed-charge coverage ratios (as defined) of not less than 2.50 to 1.0 and 1.75 to 1.0, respectively, and (iii) maintain a minimum total shareholders' equity (as defined). In addition, we are limited in our ability to incur additional borrowings (we are required to maintain unencumbered assets with an aggregate book value equal to or greater than two times our unsecured recourse debt). We were in compliance with all the covenants of the Credit Agreement at June 30, 2002. 15 7. Minority interest ----------------- In consolidation, we classify ownership interests in the net assets of each of the Consolidated Entities, other than our own, as minority interest on the consolidated financial statements. Minority interest in income consists of the minority interests' share of the operating results of the Consolidated Entities. Preferred partnership interests ------------------------------- During 2000, one of our consolidated operating partnerships issued an aggregate $365.0 million of preferred partnership units: March 17, 2000, - $240.0 million of 9.5% Series N Cumulative Redeemable Perpetual Preferred Units, March 29, 2000 - $75.0 million of 9.125% Series O Cumulative Redeemable Perpetual Preferred Units, and August 11, 2000 - $50.0 million of 8.75% Series P Cumulative Redeemable Perpetual Preferred Units. In August 2001, we repurchased $30 million of the 9.125% Series O Cumulative Redeemable Perpetual Preferred Units and in October 2001, we repurchased all of the 8.75% Series P Cumulative Redeemable Perpetual Preferred Units. The units were repurchased at an amount equal to the original issuance price. For the six months ended June 30, 2002 and 2001, the holders of these preferred units were paid an aggregate of approximately $13,453,000 and $17,010,000, respectively, in distributions and received an equivalent allocation of minority interest in earnings. The decrease in distributions paid to the holders of these preferred units is attributable to repurchases of these units by the Company in August and October of 2001. The following table summarizes the preferred partnership units outstanding at June 30, 2002 and December 31, 2001: Distribution Units Carrying Series Rate Outstanding Amount ---------------------- ------------- ------------- ----------- (Amounts in thousands) Series N 9.500% 9,600 $ 240,000 Series O 9.125% 1,800 45,000 ------------- ----------- Total 11,400 $ 285,000 ============= =========== These preferred units are not redeemable during the first 5 years after issuance. Thereafter, at our option, we can call the units for redemption at the issuance amount plus any unpaid distributions. The units are not redeemable by the holder. Subject to certain conditions, the Series N preferred units are convertible into shares of 9.5% Series N Cumulative Preferred Stock, and the Series O preferred units are convertible into shares of 9.125% Series O Cumulative Preferred Stock of the Company. Other partnership interests --------------------------- The following table sets forth the minority interest at June 30, 2002 and December 31, 2001, as well as the distributions paid to minority interest for the six months ended June 30, 2002 and 2001 with respect to the other partnership interests (amounts in thousands): 16
Distributions to minority interests for the six months Minority interest at ended June 30, ---------------------------- ---------------------------- June 30, December 31, Description 2002 2001 2002 2001 -------------------------------------------- ----------- ----------- ----------- ----------- Consolidated Development Joint Venture...... $ 78,592 $ 82,879 $ 4,923 $ 3,865 Convertible OP Units........................ 6,367 6,418 213 104 Newly consolidated partnerships............. 18,371 - 1,355 - Other consolidated partnerships............. 67,327 80,304 6,581 6,855 ----------- ----------- ----------- ----------- Total other partnership interests........... $ 170,657 $ 169,601 $ 13,072 $ 10,824 =========== =========== =========== ===========
Income is allocated to the minority interests based upon their pro-rata interest in the operating results of the Consolidated Entities. The following table sets forth the income allocated to minority interest in income with respect to the Other Partnership interests for the six months ended June 30, 2002 and 2001 (amounts in thousands):
Minority interest in income for Minority interest in income for the three months ended June 30, the six months ended June 30, ---------------------------- ---------------------------- Description 2002 2001 2002 2001 -------------------------------------------- ----------- ----------- ----------- ----------- Consolidated Development Joint Venture...... $ 329 $ 113 $ 636 $ 225 Convertible OP Units....................... 73 99 162 187 Newly consolidated partnerships............. 775 - 1,631 - Other consolidated partnerships............. 2,709 2,955 6,073 5,948 ----------- ----------- ----------- ----------- Total other partnership interests........... $ 3,886 $ 3,167 $ 8,502 $ 6,360 =========== =========== =========== ===========
Following is a description of each of the Other Partnership Interests and a description of the other transactions affecting the minority interests in these entities. Consolidated Development Joint Venture: -------------------------------------- In November 1999, we formed a development joint venture (the "Consolidated Development Joint Venture") with a joint venture partner (PSAC Storage Investors, LLC) whose partners include an institutional investor and B. Wayne Hughes ("Mr. Hughes"), chairman and chief executive officer of the Company, to develop approximately $100 million of self-storage facilities and to purchase $100 million of the Company's Equity Stock, Series AAA (see Note 8). In consolidation, the Equity Stock, Series AAA and the related dividend income have been eliminated. At June 30, 2002, the Consolidated Development Joint Venture had completed construction on 22 storage facilities for a total cost of approximately $108 million. 17 The Consolidated Development Joint Venture is funded solely with equity capital consisting of 51% from the Company and 49% from PSAC Storage Investors. The accounts of the Consolidated Development Joint Venture are included in the Company's consolidated financial statements. The accounts of PSAC Storage Investors are not included in the Company's consolidated financial statements, as the Company has no ownership interest in this entity. Minority interests primarily represent the total contributions received from PSAC Storage Investors combined with the accumulated net income allocated to PSAC Storage Investors, net of cumulative distributions. The amounts included in our financial statements with respect to the minority interests in the Consolidated Development Joint Venture are denoted in the tables above. The term of the Consolidated Development Joint Venture is 15 years; however, during the sixth year PSAC Storage Investors has the right to cause an early termination of the partnership. If PSAC Storage Investors exercises this right, we then have the option, but not the obligation, to acquire their interest for an amount that will allow them to receive an annual return of 10.75%. If the Company does not exercise its option to acquire PSAC Storage Investors' interest, the partnership's assets will be sold to third parties and the proceeds distributed to the Company and PSAC Storage Investors in accordance with the partnership agreement. If PSAC Storage Investors does not exercise its right to early termination during the sixth year, the partnership will be liquidated 15 years after its formation with the assets sold to third parties and the proceeds distributed to the Company and PSAC Storage Investors in accordance with the partnership agreement. PSAC Storage Investors, LLC provides Mr. Hughes with a fixed yield of approximately 8.0% per annum on his preferred non-voting interest (representing an investment of approximately $64.1 million at June 30, 2002). In addition, Mr. Hughes can receive up to 1% of cash flow of PSAC Storage Investors, LLC (estimated to be less than $50,000 per year) if PSAC Storage Investors, LLC elects an early termination during the sixth year. If PSAC Storage Investors, LLC does not elect to cause an early termination, Mr. Hughes' 1% interest can increase to up to 10%. Convertible OP Units -------------------- As of June 30, 2002, one of our Consolidated Entities had approximately 237,935 operating partnership units ("Convertible OP Units") outstanding, representing a limited partnership interest in one of the Consolidated Entities. The Convertible OP Units are convertible on a one-for-one basis (subject to certain limitations) into common shares of the Company at the option of the unitholder. Minority interest in income with respect to Convertible OP Units reflects the Convertible OP Units' share of the net income of the Company, with net income allocated to minority interests with respect to weighted average outstanding Convertible OP Units on a per unit basis equal to diluted earnings per common share. During the six months ended June 30, 2002, no units were converted. The amounts included in our financial statements with respect to the minority interests with respect to the Convertible OP Units are denoted in the tables above. Newly Consolidated Partnerships ------------------------------- As described in Note 3, we began consolidating the results of two other partnerships owning 31 properties, and as a result, minority interest increased by $14,806,000 in the first quarter of 2002. The amounts included in our financial statements with respect to the minority interests in the Newly Consolidated Partnerships are denoted in the tables above. 18 Other Consolidated Partnerships ------------------------------- The minority interests in the Other Consolidated Partnerships at June 30, 2002 reflect the common equity interests that the Company doesn't own in 32 entities owning an aggregate of 500 real estate facilities. The amounts included in our financial statements with respect to the minority interests in the Other Consolidated Partnerships are denoted in the tables above. On April 19, 2002, we acquired through a merger all of the remaining minority interest we did not own in PS Partners V, Ltd. The acquisition cost consisted of 533,796 shares ($20,054,000) of Public Storage common stock and cash of approximately $12,815,000. This acquisition had the effect of reducing minority interest by $12,342,000, with the excess of cost over underlying book value ($20,527,000) allocated to real estate. In addition, during the six months ended June 30, 2002, we acquired minority interests in the Other Consolidated Partnerships for an aggregate cash cost of $240,000. These acquisitions had the effect of reducing minority interest by $127,000, with the excess of cost over underlying book value ($113,000) allocated to real estate. In the second quarter of 2002, we recorded the pending sale of a partnership interest in one of our Consolidated Entities for an aggregate of $1,450,000. We recorded a loss on sale of the interest in the amount of $1,839,000. As a result of this pending sale, minority interest increased by $3,289,000. 8. Shareholders' equity -------------------- Preferred stock --------------- At June 30, 2002 and December 31, 2001, we had the following series of Preferred Stock outstanding:
At June 30, 2002 At December 31, 2001 ---------------------------- ---------------------------- Dividend Shares Carrying Shares Carrying Series Rate Outstanding Amount Outstanding Amount ---------------- -------------- ------------ ------------ ------------ ------------ (Dollar amount in thousands) Series A 10.000% 1,825,000 $ 45,625 1,825,000 $ 45,625 Series B 9.200% 2,386,000 59,650 2,386,000 59,650 Series C Adjustable 1,200,000 30,000 1,200,000 30,000 Series D 9.500% 1,200,000 30,000 1,200,000 30,000 Series E 10.000% 2,195,000 54,875 2,195,000 54,875 Series F 9.750% 2,300,000 57,500 2,300,000 57,500 Series J 8.000% 6,000 150,000 6,000 150,000 Series K 8.250% 4,600 115,000 4,600 115,000 Series L 8.250% 4,600 115,000 4,600 115,000 Series M 8.750% 2,250 56,250 2,250 56,250 Series Q 8.600% 6,900 172,500 6,900 172,500 Series R 8.000% 20,400 510,000 20,400 510,000 Series S 7.875% 5,750 143,750 5,750 143,750 Series T 7.625% 6,000 150,000 - - Series U 7.625% 6,000 150,000 - - ------------ ------------ ------------ ------------ Total Senior Preferred Stock 11,168,500 $ 1,840,150 11,156,500 $ 1,540,150 ============ ============ ============ ============
19 We issued the Series T preferred stock on January 18, 2002, resulting in net proceeds from the issuance of approximately $145,075,000, and the Series U preferred stock on February 19, 2002, resulting in net proceeds from the issuance of approximately $145,075,000. The Series A through Series U preferred stock (collectively the "Senior Preferred Stock") have general preference rights with respect to liquidation and quarterly distributions. Holders of the preferred stock, except under certain conditions and as noted above, will not be entitled to vote on most matters. In the event of a cumulative arrearage equal to six quarterly dividends or failure to maintain a Debt Ratio (as defined) of 50% or less, holders of all outstanding series of preferred stock (voting as a single class without regard to series) will have the right to elect two additional members to serve on the Company's Board of Directors until events of default have been cured. At June 30, 2002, there were no dividends in arrears and the Debt Ratio was 2.1%. Except under certain conditions relating to the Company's qualification as a REIT, the Senior Preferred Stock is not redeemable prior to the following dates: Series A - September 30, 2002, Series B - June 30, 2003, Series C - June 30, 1999, Series D - September 30, 2004, Series E - January 31, 2005, Series F - April 30, 2005, Series J - August 31, 2002, Series K - January 19, 2004, Series L - March 10, 2004, Series M - August 17, 2004, Series Q - January 19, 2006, Series R - September 28, 2006, Series S - October 31, 2006, Series T - January 18, 2007 and Series U - February 19, 2007. On or after the respective dates, each of the series of Senior Preferred Stock will be redeemable at the option of the Company, in whole or in part, at $25 per share (or depositary share in the case of the Series J through Series U), plus accrued and unpaid dividends. Equity Stock ------------ The Company is authorized to issue 200,000,000 shares of Equity Stock. The Articles of Incorporation provide that the Equity Stock may be issued from time to time in one or more series and gives the Board of Directors broad authority to fix the dividend and distribution rights, conversion and voting rights, redemption provisions and liquidation rights of each series of Equity Stock. Equity Stock, Series A ---------------------- At June 30, 2002, we had 8,776,102 depositary shares outstanding, each representing 1/1,000 of a share of Equity Stock, Series A ("Equity Stock A"). The Equity Stock A ranks on a parity with common stock and junior to the Senior Preferred Stock with respect to general preference rights and has a liquidation amount which cannot exceed $24.50 per share. Distributions with respect to each depositary share shall be the lesser of: a) five times the per share dividend on the Common Stock or b) $2.45 per annum. Except in order to preserve the Company's federal income tax status as a REIT, we may not redeem the depositary shares before June 30, 2010. On or after June 30, 2010, we may, at our option, redeem the depositary shares at $24.50 per depositary share. If the Company fails to preserve its federal income tax status as a REIT, the depositary shares will be convertible into .956 shares of common stock. The depositary shares are otherwise not convertible into common stock. Holders of depositary shares vote as a single class with our holders of common stock on shareholder matters, but the depositary shares have the equivalent of one-tenth of a vote per depositary share. We have no obligation to pay distributions on the depositary shares if no distributions are paid to common shareholders. 20 Equity Stock, Series AA ----------------------- In June 1997, we contributed $22,500,000 (225,000 shares) of equity stock, now designated as Equity Stock, Series AA ("Equity Stock AA") to a partnership in which we are the general partner. The Company has a controlling interest in the partnership and therefore consolidates the accounts of the partnership. As a result, the Equity Stock AA is eliminated in consolidation. The Equity Stock AA ranks on a parity with Common Stock and junior to the Senior Preferred Stock with respect to general preference rights and has a liquidation amount of ten times the amount paid to each Common Share up to a maximum of $100 per share. Quarterly distributions per share on the Equity Stock AA are equal to the lesser of (i) 10 times the amount paid per Common Stock or (ii) $2.20. We have no obligation to pay distributions if no distributions are paid to common shareholders. Equity Stock, Series AAA ------------------------ In November 1999, we sold $100,000,000 (4,289,544 shares) of Equity Stock, Series AAA ("Equity Stock AAA") to a newly formed joint venture. We control the joint venture and consolidate the accounts of the joint venture, and accordingly the Equity Stock AAA is eliminated in consolidation. The Equity Stock AAA ranks on a parity with common stock and junior to the Senior Preferred Stock (as defined below) with respect to general preference rights, and has a liquidation amount equal to 120% of the amount distributed to each common share. Annual distributions per share are equal to the lesser of (i) five times the amount paid per common share or (ii) $2.1564. We have no obligation to pay distributions if no distributions are paid to common shareholders. Common Stock ------------ As previously announced, the Company's Board of Directors authorized the repurchase from time to time of up to 25,000,000 shares of the Company's common stock on the open market or in privately negotiated transactions. From the initial authorization through June 30, 2002, the Company has repurchased a total of 21,497,020 shares of common stock at an aggregate cost of approximately $535.9 million. During April 2001, we entered into an arrangement with a financial institution whereby we sold to the institution the right to require us to purchase from the institution on certain dates up to 1,000,000 shares of our common stock at a price of $26.26. In exchange, the financial institution paid us $910,000, the amount of which has been reflected as an increase to our paid-in capital. The Put Option expired in 2001 without being exercised. Class B Common Stock -------------------- The Class B Common Stock participates in distributions at the rate of 97% of the per share distributions on the Common Stock, provided that cumulative distributions of at least $0.22 per quarter per share have been paid on the Common Stock. The Class B Common Stock will not participate in liquidating distributions, not be entitled to vote (except as expressly required by California law) and automatically converts into Common Stock, on a share for share basis, upon the later to occur of FFO per common share aggregating $3.00 during any period of four consecutive calendar quarters or January 1, 2003. The financial condition of attaining FFO per common share was met on March 31, 2002, accordingly, on January 1, 2003, the Class B Common Stock will automatically convert into Common Stock on a share for share basis. 21 Dividends --------- The following summarizes dividends during the six months ended June 30, 2002: Distributions Per Share or Depositary Total Share Distributions ------------------- -------------- Preferred Stock: Series A.............................. $1.250 $ 2,280,000 Series B.............................. $1.150 2,744,000 Series C.............................. $0.844 1,012,000 Series D.............................. $1.188 1,426,000 Series E.............................. $1.250 2,744,000 Series F.............................. $1.219 2,802,000 Series J.............................. $1.000 6,000,000 Series K.............................. $1.031 4,744,000 Series L ............................. $1.031 4,744,000 Series M.............................. $1.094 2,460,000 Series Q.............................. $1.075 7,418,000 Series R.............................. $1.000 20,400,000 Series S.............................. $0.984 5,660,000 Series T.............................. $0.868 5,211,000 Series U.............................. $0.688 4,131,000 -------------- 73,776,000 Common Stock: Equity Stock, Series A................ $1.225 10,751,000 Common................................ $0.900 104,012,000 Class B Common ....................... $0.873 6,111,000 -------------- Total dividends.................... $194,650,000 ============== The dividend rate on the Series T and the Series U preferred stock was prorated from January 18, 2002 and February 19, 2002, the respective dates of issuance, through June 30, 2002. The dividend rate on the Series C Preferred Stock for the second quarter of 2002 was equal to 6.75% per annum. The dividend rate per annum will be adjusted quarterly and will be equal to the highest of one of three U.S. Treasury indices (Treasury Bill Rate, Ten Year Constant Maturity Rate, or Thirty Year Constant Maturity Rate) multiplied by 110%. However, the dividend rate for any dividend period will neither be less than 6.75% per annum nor greater than 10.75%. The dividend rate for the quarter ending September 30, 2002 will be equal to 6.75% per annum. 9. Segment Information ------------------- In July 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way that public business enterprises report information about operating segments. This statement is effective for financial statements for periods beginning after December 15, 1997. We adopted this standard effective for the year ended December 31, 1998. For information regarding the description of each reportable segment, policies relating to the measurement of segment profit or loss, and segment assets, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2001. 22 The following table reconciles the performance of each segment, in terms of segment revenues, of our consolidated revenues.
Three months ended Six months ended June 30, June 30, ----------------------- ------------------------ 2002 2001 Change 2002 2001 Change ----------- ----------- ----------- ----------- ----------- ----------- (Dollar amounts in thousands) RECONCILIATION OF REVENUES BY SEGMENT: Self-storage property rentals..................... $ 188,687 $ 179,086 $ 9,601 $ 377,594 $ 350,915 $ 26,679 Containerized storage............................. 12,758 12,183 575 24,457 22,256 2,201 Tenant re-insurance............................... 5,156 - 5,156 9,731 - 9,731 Commercial property rentals....................... 3,181 3,215 (34) 6,252 6,272 (20) Other items not allocated to segments: Interest and other income....................... 2,759 3,130 (371) 4,467 6,738 (2,271) ----------- ----------- ----------- ----------- ----------- ----------- Total revenues............................. $ 212,541 $ 197,614 $ 14,927 $ 422,501 $ 386,181 $ 36,320 =========== =========== =========== =========== =========== ===========
The following table reconciles the performance of each segment, in terms of segment income, of our consolidated net income. It further provides detail of the segment components of the income statement item, "Equity in earnings of real estate entities." 23
Three months ended Six months ended June 30, June 30, ----------------------- ------------------------ 2002 2001 Change 2002 2001 Change ----------- ----------- ----------- ----------- ----------- ----------- (Dollar amounts in thousands) RECONCILIATION OF NET INCOME BY SEGMENT: Self-storage ------------ Self-storage property net operating income...... $ 128,782 $ 124,487 $ 4,295 $ 259,094 $ 239,842 $ 19,252 Depreciation and amortization - self-storage.... (43,300) (38,923) (4,377) (84,668) (76,309) (8,359) Equity in earnings - self-storage property operations................................... 1,806 5,691 (3,885) 3,900 10,848 (6,948) Equity in earnings - depreciation (self-storage) (279) (1,827) 1,548 (549) (3,379) 2,830 ----------- ----------- ----------- ----------- ----------- ----------- Total self-storage segment net income....... 87,009 89,428 (2,419) 177,777 171,002 6,775 ----------- ----------- ----------- ----------- ----------- ----------- Containerized storage --------------------- Containerized storage operations................ 1,515 1,128 387 3,896 1,728 2,168 Containerized storage depreciation.............. (2,051) (1,739) (312) (3,952) (3,266) (686) ----------- ----------- ----------- ----------- ----------- ----------- Total containerized storage segment net income.................................... (536) (611) 75 (56) (1,538) 1,482 ----------- ----------- ----------- ----------- ----------- ----------- Tenant re-insurance............................... 2,633 - 2,633 4,915 - 4,915 ------------------- ----------- ----------- ----------- ----------- ----------- ----------- Commercial properties ---------------------- Commercial property net operating income........ 2,051 2,333 (282) 4,008 4,440 (432) Depreciation and amortization - commercial properties................................... (701) (661) (40) (1,429) (1,370) (59) Equity in earnings - commercial property operations................................... 16,135 12,392 3,743 31,558 24,038 7,520 Equity in earnings - depreciation (commercial property operations)......................... (6,246) (4,112) (2,134) (12,347) (7,835) (4,512) ----------- ----------- ----------- ----------- ----------- ----------- Total commercial property segment net income 11,239 9,952 1,287 21,790 19,273 2,517 ----------- ----------- ----------- ----------- ----------- ----------- Other items not allocated to segments ------------------------------------- Equity in earnings - general and administrative and other.................................... (4,416) (2,330) (2,086) (8,547) (4,586) (3,961) Interest and other income....................... 2,759 3,130 (371) 4,467 6,738 (2,271) General and administrative...................... (4,305) (5,000) 695 (8,305) (10,584) 2,279 Interest expense................................ (1,213) (1,124) (89) (2,315) (2,095) (220) Gain (loss) on sale of real estate investments, including the Company's share of PSB's gain on sale........................... (1,839) - (1,839) 402 1,568 (1,166) Minority interest in income..................... (10,613) (11,672) 1,059 (21,955) (23,370) 1,415 ----------- ----------- ----------- ----------- ----------- ----------- Total other items not allocated to segments. (19,627) (16,996) (2,631) (36,253) (32,329) (3,924) ----------- ----------- ----------- ----------- ----------- ----------- Total net income .......................... $ 80,718 $ 81,773 $ (1,055) $ 168,173 $ 156,408 $ 11,765 =========== =========== =========== =========== =========== ===========
24 10. Stock Options ------------- The Company has a 1990 Stock Option Plan (the "1990 Plan") which provides for the grant of non-qualified stock options. The Company has a 1994 Stock Option Plan (the "1994 Plan"), a 1996 Stock Option and Incentive Plan (the "1996 Plan") and a 2000 Non-Executive/Non-Director Stock Option and Incentive Plan (the "2000 Plan"), each of which provides for the grant of non-qualified options and incentive stock options. (The 1990 Plan, the 1994 Plan, the 1996 Plan and the 2000 Plan are collectively referred to as the "PSI Plans"). Under the PSI Plans, the Company has granted non-qualified options to certain directors, officers and key employees to purchase shares of the Company's common stock at a price equal to the fair market value of the common stock at the date of grant. Generally, options under the Plans vest over a three-year period from the date of grant at the rate of one-third per year and expire (i) under the 1990 Plan, five years after the date they became exercisable and (ii) under the 1994 Plan, the 1996 Plan and the 2000 Plan, ten years after the date of grant. The 1996 Plan and the 2000 Plan also provide for the grant of restricted stock to officers, key employees and service providers on terms determined by an authorized committee of the Board of Directors; no shares of restricted stock have been granted. In October 1995, the Financial Accounting Standards Board issued Statement No. 123 "Accounting for Stock-Based Compensation" ("FAS 123") which encourages, but does not require, companies to recognize compensation expense for stock-based awards based on their fair value at date of grant, which is then amortized as compensation expense over the vesting period (the "Fair Value Method"). Companies could also elect the method prescribed by APB Opinion No. 25 (APB 25). APB Opinion No. 25 generally does not require the recognition of stock option expense when stock options are granted to employees at an exercise price equal to the market price at the date of grant (the "APB 25 Method"). Companies that elected the APB 25 Method must make pro-forma disclosures of what net income and earnings per share would have been had the Fair Value Method been used. Until December 31, 2001, we elected to adopt the disclosure requirements of FAS 123 but continued to account for stock-based compensation under APB 25. As of January 1, 2002, we have adopted the Fair Value Method of accounting for stock options. As required by the transition requirements of FAS 123, we will recognize compensation expense in our income statement using the Fair Value Method only with respect to stock options issued after January 1, 2002, but continue to disclose the pro-forma impact of utilizing the Fair Value Method on stock options issued prior to January 1, 2002. Included in the Company's income statement for the six months ended June 30, 2002 is approximately $58,000 in stock option compensation expense related to options granted after January 1, 2002. With respect to stock options granted prior to December 31, 2001, the Company would have reported net income of approximately $166,134,000 and $154,401,000 for the six months ended June 30, 2002 and 2001, respectively, and reported diluted earnings per share of $0.66 and $0.71, respectively, had we utilized the Fair Value Method for options granted prior to December 31, 2001. 25 11. Legal Matters ------------- HENRIQUEZ V. PUBLIC STORAGE, INC. (FILED JUNE 2002). The plaintiff in this case is suing the Company on behalf of a purported class of renters who rented self-storage units from the Company. Plaintiff alleges that the Company misrepresents the size of its units and seeks damages and injunctive and declaratory relief under California statutory and common law relating to consumer protection, unfair competition, fraud and deceit and negligent misrepresentation. The Company does not currently believe that the outcome of this litigation will have any material adverse effect. However, the Company cannot presently determine the potential total damages, if any, or the ultimate outcome of the litigation. The Company intends to vigorously contest the claims in this case. 26 Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations --------------------- The following discussion and analysis should be read in conjunction with our consolidated 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 21F 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 Company to be materially different from those expressed or implied in the forward looking statements. Such factors described herein in Item 2A, "Risk Factors", include the impact of competition from new and existing storage and commercial facilities which could impact rents and occupancy levels at the Company's facilities; the risk of terrorist attacks; the Company's ability to evaluate, finance, and integrate acquired and developed properties into the Company's existing operations; the Company's ability to effectively compete in the markets in which it does business; the impact of the regulatory environment as well as national, state, and local laws and regulations including, without limitation, those governing real estate investment trusts; the acceptance by consumers of the containerized storage concept; the impact of general economic conditions upon rental rates and occupancy levels at the Company's facilities; and the availability of permanent capital at attractive rates. CRITICAL ACCOUNTING POLICIES QUALIFICATION AS A REIT -INCOME TAX EXPENSE: We believe that we have been organized and operated, and we intend to continue to operate, as a qualifying REIT under the Internal Revenue Code and applicable state laws. A qualifying REIT generally does not pay corporate level income taxes on its taxable income that is distributed to its shareholders, and accordingly, we do not pay or record as an expense income tax on the share of our taxable income that is distributed to shareholders. Given the complex nature of the REIT qualification requirements, the ongoing importance of factual determinations and the possibility of future changes in our circumstances, we cannot provide any assurance that we actually have satisfied or will satisfy the requirements for taxation as a REIT for any particular taxable year. For any taxable year that we fail or failed to qualify as a REIT and applicable relief provisions did not apply, we would be taxed at the regular corporate rates on all of our taxable income, whether or not we made or make any distributions to our shareholders. Any resulting requirement to pay corporate income tax, including any applicable penalties or interest, could have a material adverse impact on our financial condition or results of operations. Unless entitled to relief under specific statutory provisions, we also would be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost. There can be no assurance that we would be entitled to any statutory relief. IMPAIRMENT OF LONG LIVED ASSETS: Substantially all of the Company's assets consist of long-lived assets, including real estate, the assets associated with the containerized storage business, goodwill, and other intangible assets. We quarterly evaluate our long-lived assets for impairment. The Company has determined at December 31, 2001 that no such impairments existed and, accordingly, no impairment charges have been recorded. No further indicators of impairment have been detected since December 31, 2001. Future events could cause us to conclude that our long-lived assets are 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 the Company's 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 obsolescense or other factors, could have a material adverse impact on our financial condition or results of operations. 27 Results of Operations -------------------------------------------------------------------------------- Net income for the three months ended June 30, 2002 was $80,718,000 compared to $81,773,000 for the same period in 2001, representing a decrease of $1,055,000 or 1.3%. The decrease in net income was primarily the result of a decrease in property operations for the stabilized facilities in which the Company had an interest, a loss on disposition of real estate investments, and increased depreciation expense resulting primarily from newly developed and acquired facilities. The impact of these items was partially offset by earnings generated by the acquisition of additional real estate investments during 2001 and 2002, the earnings generated by the acquisition of the tenant reinsurance business, and a decrease in income allocated to minority interests due to the repurchase of preferred operating partnership units during 2001. Net income allocable to our regular common shareholders (after allocating net income to our preferred and Equity Stock, Series A shareholders), was $37,406,000 or $0.30 per common share on a diluted basis (based on 124,824,000 weighted average diluted common equivalent shares) for the three months ended June 30, 2002 compared to $47,723,000 or $0.39 per common share on a diluted basis (based on 121,639,000 weighted average diluted common equivalent shares) for the same period in 2001, representing a decrease of 21.6% in the aggregate or 23.1% on a per share basis. Weighted average diluted shares increased from 121,639,000 for the three months ended June 30, 2001 to 124,824,000 for the three months ended June 30, 2002 due primarily to a share increase of approximately 1,098,000 in the dilutive impact of employee stock options outstanding computed using the treasury stock method, the issuance of approximately 1,138,733 shares on December 31, 2001 in connection with the acquisition of the tenant reinsurance business and the issuance of 533,796 shares in April 2002 in connection with the acquisition of partnership interests. During the three months ended June 30, 2002 and 2001, we allocated $37,936,000 and $28,736,000 of our net income (based on distributions paid), respectively, to our preferred shareholders, representing an increase of 32.0%. This increase is due to additional issuances of preferred stock in both the first quarter of 2002 and throughout 2001, offset partially by the retirement of several series of our higher coupon preferred stock in 2001. In addition, during the three months ended June 30, 2002 and 2001, we allocated $5,376,000 and $5,314,000 of our net income, respectively, to our Equity Stock, Series A shareholders, representing an increase of 1.2%. Net income for the six months ended June 30, 2002 was $168,173,000 compared to $156,408,000 for the same period in 2001, representing an increase of $11,765,000 or 7.5%. The increase in net income was primarily the result of the earnings generated by the acquisition of additional real estate investments during 2001 and 2002, the earnings generated by the acquisition of the tenant reinsurance business in 2001, reduced general and administrative expense, and a decrease in income allocated to minority interests due to the repurchase of preferred operating partnership units during 2001. The impact of these items was partially offset a decrease in property operations for the stabilized facilities in which the Company had an interest and increased depreciation expense resulting primarily from new property additions. Net income allocable to our regular common shareholders (after allocating net income to our preferred and Equity Stock, Series A shareholders), was $83,646,000 or $0.67 per common share on a diluted basis (based on 124,417,000 weighted average diluted common equivalent shares) for the six months ended June 30, 2002 compared to $90,870,000 or $0.73 per common share on a diluted basis (based on 125,130,000 weighted average diluted common equivalent shares) for the same period in 2001, representing a decrease of 7.9% in the aggregate or 8.2% on a per share basis. Weighted average diluted shares outstanding decreased from 125,130,000 for the six months ended June 30, 2001 to 124,417,000 for the six months ended June 30, 2002, which includes the impact of share repurchases offset partially by an increase in the dilutive impact of stock options outstanding, the issuance of approximately 1,138,733 shares on December 31, 2001 in connection with the acquisition of the tenant reinsurance business and the issuance of 533,796 shares in April 2002 in connection with the acquisition of partnership interests. 28 During the six months ended June 30, 2002 and 2001, we allocated $73,776,000 and $56,772,000 of our net income (based on distributions paid), respectively, to our preferred shareholders, representing an increase of 30.0%. This increase is due to additional issuances of preferred stock in both the first quarter of 2002 and throughout 2001, offset partially by the retirement of several series of our higher coupon preferred stock in 2001. In addition, during the six months ended June 30, 2002 and 2001, we allocated $10,751,000 and $8,766,000 of our net income, respectively, to our Equity Stock, Series A shareholders, representing an increase of 22.6%. This increase is due to additional issuance of Equity Stock, Series A in 2001. Real Estate Operations -------------------------------------------------------------------------------- SELF - STORAGE OPERATIONS: Our self-storage operations are by far the largest component of our operations, representing approximately 89% of our total revenues generated during the first six months of 2002. As a result of significant acquisitions and development of self-storage facilities, year over year comparisons as presented on the consolidated statements of income with respect to our self-storage operations are not meaningful. To enhance year over year comparisons, the following table summarizes, and the ensuing discussion describes, the operating results of (i) 1,154 self-storage facilities that are reflected in the financial statements on a stabilized basis since January 1, 2000 (the "Consistent Group"), (ii) 107 facilities that were acquired after January 1, 2000 and were owned at June 30, 2002 (the "Acquired Facilities"), (iii) 38 facilities that were owned prior to January 1, 2000 but were not stabilized (the "Expansion Facilities"), (iv) 62 development facilities that were opened after January 1, 1998 (the "Developed Facilities") and (v) a facility that was disposed of since January 1, 2001 (the "Disposed Facility"):
Self - storage operations summary: Three months ended June 30, Six months ended June 30, ---------------------------------- ------------------------------------ ------------------------------------ Percentage Percentage 2002 200 Change 2002 2001 Change ----------- ---------- ----------- ----------- ---------- ----------- (Dollar amounts in thousands) Rental income (a): Consistent Group (b)................ $ 160,302 $ 166,941 (4.0)% $ 322,815 $ 327,449 (1.4)% Acquired Facilities (c)............. 18,231 4,685 289.1% 34,880 9,215 278.5% Expansion Facilities (d)............ 4,498 4,107 9.5% 9,076 8,582 5.8% Developed Facilities (e)............ 5,656 3,176 78.1% 10,823 5,319 103.5% Disposed Facility (f)............... - 177 (100.0)% - 350 (100.0)% ----------- ---------- ----------- ----------- ---------- ----------- Total rental income............... 188,687 179,086 5.4% 377,594 350,915 7.6% ----------- ---------- ----------- ----------- ---------- ----------- Cost of operations: Consistent Group.................... 49,740 47,607 4.5% 98,765 97,619 1.2% Acquired Facilities................. 5,572 1,002 456.1% 10,493 3,094 239.1% Expansion Facilities................ 1,653 2,784 (40.6)% 3,317 4,839 (31.5)% Developed Facilities................ 2,940 3,116 (5.6)% 5,925 5,341 10.9% Disposed Facility................... - 90 (100.0)% - 180 (100.0)% ----------- ---------- ----------- ----------- ---------- ----------- Total cost of operations............ 59,905 54,599 9.7% 118,500 111,073 6.7% ----------- ---------- ----------- ----------- ---------- ----------- Net operating income (before depreciation): Consistent Group.................... 110,562 119,334 (7.4)% 224,050 229,830 (2.5)% Acquired Facilities................. 12,659 3,683 243.7% 24,387 6,121 298.4% Expansion Facilities................ 2,845 1,323 115.0% 5,759 3,743 53.9% Developed Facilities................ 2,716 60 NA 4,898 (22) NA Disposed Facility................... - 87 (100.0)% - 170 (100.0)% ----------- ---------- ----------- ----------- ---------- ----------- Total net operating income.......... 128,782 124,487 3.5% 259,094 239,842 8.0% Depreciation.......................... 43,300 38,923 11.2% 84,668 76,309 11.0% ----------- ---------- ----------- ----------- ---------- ----------- Operating Income.................... $ 85,482 $ 85,564 (0.1)% $ 174,426 $ 163,533 6.7% =========== ========== =========== =========== ========== =========== Number of self-storage facilities (at end of period):............................... 1,361 1,262 7.8% 1,361 1,262 7.8% Net rentable square feet (at end of period - in thousands):............................ 82,597 76,365 8.2% 82,597 76,365 8.2%
29 (a) Rental income includes late charges and administrative fees. Rental income does not include retail sales or truck rental income generated at the facilities. (b) The Consistent Group includes 1,154 facilities with 67,126,000 net rentable square feet that were owned and operated at a mature, stabilized occupancy level since January 1, 2000. See below for discussion of Consistent Group operating results. (c) The Acquired Facilities includes 107 facilities with 6,305,000 net rentable square feet that were acquired through business combinations or from third parties after January 1, 2000 and still owned as of June 30, 2002. Substantially all of these facilities were mature, stabilized facilities at the time of their acquisition. (d) The Expansion Facilities includes 38 facilities with 4,425,000 net rentable square feet that, while owned for the periods presented, had operating results that were not comparable due to expansions in their net rentable square feet or their conversion into Combination Facilities. Such construction activities can cause a drop in revenue levels, as existing capacity is made unavailable in order to accommodate construction activities. We completed construction on projects with a total cost of $16,009,000 in the first six months of 2002, $84,948,000 in the year ended December 31, 2001, and $12,206,000 in the year ended December 31, 2000 with respect to these expansions (e) The Developed Facilities includes 62 facilities with 4,741,000 net rentable square feet that were developed and opened since January 1, 1998 at a total cost of $394.8 million. These facilities were all still owned as of June 30, 2002. (f) The Disposed Facility includes a facility that was disposed of during 2001, after being condemned by a government agency. SELF - STORAGE OPERATIONS - CONSISTENT GROUP OF FACILITIES At June 30, 2002, we owned 1,154 facilities with approximately 67,126,000 net rentable square feet that operated at a stabilized level of operations since January 1, 2000. We have increased the number of facilities included in the Consistent Group of Facilities from 909 at December 31, 2001 to 1,154 facilities. As a result of the change in the Consistent Group of Facilities, the relative weighting of markets has changed. Accordingly, comparisons should not be made between information presented prior to 2002 for the Consistent Group of Facilities of 909 facilities and this current pool of 1,154 facilities in order to identify trends in occupancies, realized rents per square foot, or operating results. Revenues and expenses with respect to the Consistent Group properties are set forth in the above Self-Storage Operations table. The following table sets forth additional operating data with respect to the Consistent Group of facilities:
SELECTED OPERATING DATA FOR THE CONSISTENT GROUP OF FACILITIES (1,154 FACILITIES): Three months ended June 30, Six months ended June 30, ------------ ------------------------------- ------------------------------- Percentage Percentage 2002 2001 Change 2002 2001 Change -------- -------- ---------- -------- -------- ---------- (Dollar amounts in thousands, except rents per square foot) Weighted average: Occupancy (a)......................... 86.3% 90.0% (3.7)% 84.9% 89.0% (4.1)% Realized annual rent per square foot $ 11.07 $ 11.05 0.2% $ 11.32 $ 10.96 3.3% (b)...................................... Late charges and administrative fees..... $ 5,161 $ 5,774 (10.6)% $10,222 $ 11,572 (11.7)% Promotional Discounts.................... $ 5,226 $ 1,835 184.8% $ 6,225 $ 4,468 39.3% Gross margin............................. 69.0% 71.5% (2.5)% 69.4% 70.2% (0.8)%
(a) Occupancies in the above table represent weighted average occupancy levels over the entire three and six month periods. Comparisons should not be made between the occupancies of this Consistent Group of Facilities of 1,154 facilities and the occupancies for the 909 Consistent Group of Facilities presented previously in order to evaluate trends in occupancies. (b) Realized annual rent per square foot is computed by dividing annualized rental income, including late charges and administrative fees, by the weighted average occupied square footage for the period. 30 The Consistent Group's net operating income decreased 7.4% in the quarter ended June 30, 2002 as compared to the same period in 2001. The decrease was due to a decrease of 4.0% in rental income combined with an increase of 4.5% in cost of operations. The 4.0% decrease in rental income for the second quarter is attributable to a 3.7% decrease in the weighted average occupancy level offset partially by a 0.2% increase in realized annual rent per square foot. During each of 1999 and 2000, the Consistent Group of facilities' occupancy levels averaged approximately 92% and 91%, respectively. These relatively high occupancy levels were attained and sustained through a variety of promotional activities offering new tenants move-in discounts aggregating approximately $18 million per year. During 2001, the Company changed its marketing strategy to aggressively increase rental rates and reduce the amount of discounts offered at the risk of lower occupancy levels. As a result of this strategy, rental income for 2001 was approximately 6.9% higher than the prior year. However, this improvement in rental income came at the expense of declining occupancy levels in 2001. During the first nine months of 2001, average occupancy levels were approximately 1.9% below those of 2000 for the same period, which we believed to be a manageable reduction. However, during the fourth quarter of 2001 and through February 2002 there was a rapid decline in occupancy levels which caused the year-over-year reduction to increase to 4.7% as of the end of February 2002. This reduction in occupancy level coincided with a reduction in call volume to our national telephone reservation center. We believe that these reductions were attributable to the absence of any significant discounts offered to tenants, as well as to general economic conditions. In the second half of March 2002, we reduced rental rates charged to new incoming tenants and began a national television campaign. The national television campaign, which offered a significant promotional discount, was run from the second half of March 2002 through the first half of May 2002, resulting in increased move-in activity during April and May 2002 compared to the prior year. However, in the absence of significant promotional discounts from mid-May through the end of July 2002, rental activity during June and July decreased and the occupancy level at July 31, 2002 for the Consistent Group of facilities was approximately 5.5% less than at July 31, 2001. During the third quarter of 2002, we have reinstated a discount program and we are advertising on television in selected markets in an effort to enhance move-in activity and improve occupancy levels. The up front cost of these marketing activities are expected to adversely impact the Company's net operating income during the third quarter of 2002. No assurance can be provided as to the impact of these efforts on our realized rents, occupancy levels, or net income of the Company. Cost of operations includes all direct and indirect costs of operating, marketing and managing the facilities. The following table summarizes major operating expenses with respect to the Consistent Group (dollar amounts in thousands):
Three months ended June 30, Six months ended June 30, ------------------------------------ --------------------------------------- Percentage Percentage 2002 2001 Change 2002 2001 Change ---------- ---------- ---------- ---------- ---------- ---------- Property payroll expense.......... $ 14,385 $ 13,180 9.1% $ 28,639 $ 27,021 6.0% Property taxes.................... 13,880 13,350 4.0% 29,307 28,223 3.8% Repairs and maintenance........... 3,501 3,943 (11.2)% 6,224 7,412 (16.0)% Advertising and promotion......... 4,088 3,956 3.3% 6,715 6,554 2.5% Telephone reservation center costs 2,343 2,395 (2.2)% 4,410 5,143 (14.3)% Management, office, insurance, utilities, and other expenses .... 11,543 10,783 7.0% 23,470 23,266 0.9% ---------- ---------- ---------- ---------- ---------- ---------- Total cost of operations ....... $ 49,740 $ 47,607 4.5% $ 98,765 $ 97,619 1.2% ========== ========== ========== ========== ========== ==========
Increases in property payroll expense for the three and six months ended June 30, 2002 as compared to the same periods in 2001 are due primarily to increased compensation to property managers and supervisory personnel. Included in advertising and promotion is $1,383,000 and $904,000 in television advertising for the three months ended June 30, 2002 and 2001, respectively; and $1,930,000 and $904,000 in television advertising for the six months ended June 30, 2002 and 2001, respectively. 31 SELF-STORAGE OPERATIONS - ACQUIRED FACILITIES As of June 30, 2002, we had 107 facilities with 6,305,000 net rentable square feet that we acquired in 2000, 2001 and the first half of 2002 in connection with third-party acquisitions and business combinations. The operations of these facilities are included in the above table under the caption "Acquired Facilities." In August 2001, we acquired one operating self-storage facility for an aggregate cost of $3,503,000. Included in the table above, is rental income and cost of operations of $105,000 and $35,000, respectively, for the three months ended June 30, 2002 and $200,000 and $74,000, respectively, for the six months ended June 30, 2002, with respect to this facility. During 2002, we acquired 47 self-storage facilities in connection with the acquisition of the Development Joint Venture (described in Note 3 to the Company's financial statements). Included in the table above, is rental income and cost of operations of $8,588,000 and $2,874,000, respectively, for the three months ended June 30, 2002 and $15,344,000 and $5,016,000, respectively, for the six months ended June 30, 2002, with respect to these facilities, representing the operating results of these properties from January 16, 2002 through June 30, 2002. Effective January 1, 2002, we began consolidating the accounts of two partnerships (described in Note 3 to the Company's financial statements) owning 31 self-storage facilities. Included in the table above, is rental income and cost of operations of $4,514,000 and $1,000,000, respectively, for the three months ended June 30, 2002 and $9,395,000 and $2,178,000, respectively, for the six months ended June 30, 2002, with respect to these facilities. During the first half of 2002, we acquired three additional self-storage facilities, in separate transactions, for an aggregate cost of $7,936,000. Included in the table above, is rental income and cost of operations of $176,000 and $78,000, respectively, for the three months ended June 30, 2002 and $282,000 and $135,000, respectively, for the six months ended June 30, 2002, with respect to these facilities. Rental income and cost of operations for the Acquired Facilities increased significantly in the first half of 2002 as compared to the same period in 2001 due to the aforementioned acquisitions of facilities. SELF-STORAGE OPERATIONS - EXPANSION FACILITIES Throughout the three-year period ended December 31, 2001, the Company has expanded certain real estate facilities that it previously owned or converted them to facilities that combine self-storage and containerized storage at the same location ("Combination Facilities"). Such construction activities can cause a drop in revenue levels, as existing capacity is made unavailable in order to accommodate construction activities. Primarily as a result of these expansion activities, 38 of these facilities with 4,425,000 net rentable square feet at June 30, 2002 (which includes the expanded space that has been completed) had results that were not comparable. The operating results for these facilities are presented in the Self-Storage Operations table above under the caption, "Expansion Facilities." We completed construction on projects with a total cost of $16,009,000 in the first half of 2002, $84,948,000 in the year ended December 31, 2001, and $12,206,000 in the year ended December 31, 2000 with respect to these expansions. SELF-STORAGE OPERATIONS - DEVELOPED FACILITIES Since January 1, 1998, we have opened 62 newly developed self-storage facilities with 4,741,000 net rentable square feet and a total cost of approximately $394.8 million. These facilities' operating results are reflected in the Self-storage Operations table under the caption, "Developed Facilities." Unlike many other forms of real estate, we are unable to pre-lease our newly developed facilities due to the nature of our tenants. Accordingly, at the time a newly developed facility first opens for operation the facility is entirely vacant generating no rental income. It has generally taken approximately 24 months for a newly developed facility to fill up and reach a targeted occupancy level of approximately 90% (the "Stabilization Period"). However, we believe that for the same reasons that our consistent group of facilities' occupancies have declined in the first six months of 2002 relative to the prior year, the rate of fill-up of our newly developed facilities has likewise declined. At June 30, 2002, the Developed Facilities had an average occupancy level of approximately 56%. 32 Property operating expenses are substantially fixed. The rental revenue of a newly developed facility will generally not cover its property operating expenses (excluding depreciation) until the facility has reached an occupancy level of approximately 30%. However, at that occupancy level, the rental revenues from the facility are still not sufficient to cover related depreciation expense and cost of capital with respect to the facility's development cost (our blended cost of capital is approximately 9.0%). During construction of the facility, we capitalize interest costs and include such cost as part of the overall development cost of the facility. Once the facility is opened for operation interest is no longer capitalized. Due to the relationship between the generation of rental income and immediate recognition of expenses upon opening of a facility, our development activities have had a negative impact on our net income. We estimate that our net income has been negatively impacted as a result of our development activities by approximately $13,593,000 and $12,221,000 for the six months ended June 30, 2002 and 2001 and $7,415,000 and $5,487,000 for the three months ended June 30, 2002 and 2001, primarily representing the difference between the revenues of the Developed Facilities and the related costs denoted above. These amounts include depreciation expense of approximately $3,585,000 and $2,683,000 for the six months ended June 30, 2002 and 2001, respectively and $1,971,000 and $1,167,000 for the three months ended June 30, 2002 and 2001, respectively. We continue to develop facilities, despite the short-term earnings dilution experienced during the Stabilization Period and recent occupancy declines in 2002 relative to 2001, because we believe that the ultimate returns on developed facilities are favorable. In addition, we believe that it is advantageous for us to continue to expand our asset base and benefit from the resultant increased critical mass, with facilities that will improve our portfolio's overall average construction and location quality. We expect that over at least the next 24 months, the Developed Facilities will continue to have a negative impact to our earnings. Furthermore, the 37 facilities in our development pipeline described in "Liquidity and Capital Resources - Acquisition and Development of Facilities" that will be opened for operation over the next 12 - 24 months will also negatively impact our earnings until they reach a stabilized occupancy level. COMMERCIAL PROPERTY OPERATIONS: Commercial property operations included in the consolidated financial statements include commercial space owned by the Company and Consolidated Entities, comprised of five wholly-owned commercial facilities, as well as a portion of certain facilities that combine self-storage and commercial space at the same location. Our investment in PSB is accounted for on the equity method of accounting, and accordingly our share of PSB's earnings is reflected as "Equity in earnings of real estate entities" in our condensed consolidated statements of income. The following table sets forth the historical commercial property amounts included in the financial statements. We have owned substantially all of these facilities on a stabilized basis since January 1, 2001.
COMMERCIAL PROPERTY OPERATIONS Three months ended June 30, Six months ended June 30, ------------------------------ --------------------------------- --------------------------------- Percentage Percentage 2002 2001 Change 2002 2001 Change --------- -------- ---------- --------- -------- ---------- (Amounts in thousands) Rental income.................... $ 3,181 $ 3,215 (1.1)% $ 6,252 $ 6,272 (0.3)% Cost of operations............... 1,130 882 28.1% 2,244 1,832 22.5% Net operating income prior to depreciation................... 2,051 2,333 (12.1)% 4,008 4,440 (9.7)% Depreciation..................... (701) (661) 6.1% (1,429) (1,370) 4.3% --------- -------- ---------- --------- -------- ---------- Net income....................... $ 1,350 $ 1,672 (19.3)% $ 2,579 $ 3,070 (16.0)% ========= ======== ========== ========= ======== ==========
CONTAINERIZED STORAGE FACILITIES OPERATIONS: At June 30, 2002, Public Storage Pickup and Delivery ("PSPUD") operated 51 facilities. PSPUD incurred operating losses of $536,000 and $56,000 in the three and six months ended June 30, 2002, respectively, as compared to operating losses of $611,000 and $1,538,000 in the same period in 2001, summarized as follows: 33
CONTAINERIZED STORAGE FACILITIES Three months ended June 30, Six months ended June 30, -------------------------------- --------------------------------- --------------------------------- 2002 2001 Change 2002 2001 Change --------- -------- ---------- --------- -------- ---------- (Amounts in thousands) Rental and other income $ 12,758 $ 12,183 $ 575 $ 24,457 $22,256 $ 2,201 Cost of Operations: Direct operating costs......... 10,279 9,460 819 18,520 17,141 1,379 Facility lease expense......... 964 1,595 (631) 2,041 3,387 1,346 --------- -------- ---------- --------- -------- ---------- Total cost of operations.... 11,243 11,055 188 20,561 20,528 33 Operating income prior to depreciation................... 1,515 1,128 387 3,896 1,728 2,168 Depreciation (a)................. (2,051) (1,739) (312) (3,952) (3,266) (686) --------- -------- ---------- --------- -------- ---------- Operating income (loss).......... $ (536) $ (611) $ 75 $ (56) $(1,538) $ 1,482 ========= ======== ========== ========= ======== ==========
(a) Depreciation for the three and six months ended June 30, 2002 includes $437,000 and $725,000, respectively, as compared to $189,000 and $377,000 for the same periods in 2001, with respect to real estate assets. For the three months ended June 30, 2002 PSPUD's operating loss decreased to $536,000 from $611,000 for the same period in 2001. For the six months ended June 30, 2002, PSPUD's operating loss decreased to $56,000 from $1,538,000 for the same period in 2001. These improvements primarily include lower facility lease expense and higher rental and other income as denoted in the table above, offset by $1,020,000 in direct operating expenses relating to container obsolescence for the three months ended June 30, 2002. The decrease in facility lease expense for the three and six months ended June 30, 2002 as compared to the same periods in 2001 is attributable to our development of facilities that combine self-storage and containerized storage space in the same location ("Combination Facilities"), with certain leased facilities being replaced by wholly-owned facilities. As a result of the opening of these newly developed combination facilities throughout 2001 and 2002, the number of leased facilities decreased from 25 at December 31, 2000 to 15 at June 30, 2002. No assurance can be made regarding PSPUD's level of gross rentals, level of move-outs, or ongoing profitability. TENANT REINSURANCE OPERATIONS: As previously announced, on December 31, 2001, the Company acquired PS Insurance Company, Ltd. ("PS Insurance"). Effective January 1, 2002, the operations of PS Insurance are included in the income statement under "Revenues - tenant reinsurance" and "Cost of operations - tenant reinsurance." The tenant reinsurance business earned $5,156,000 and $9,731,000 in revenues for the three and six months ended June 30, 2002, respectively, and incurred $2,523,000 and 4,816,000 in expenses, respectively, for a net operating profit of $2,633,000 and $4,915,000, respectively. EQUITY IN EARNINGS OF REAL ESTATE ENTITIES: In addition to our ownership of equity interests in PSB, we had general and limited partnership interests in eight limited partnerships at June 30, 2002. PSB and the limited partnerships are collectively referred to as the "Unconsolidated Entities." Due to our limited ownership interest and control of these entities, we do not consolidate the accounts of these entities for financial reporting purposes, and account for such investments using the equity method. Equity in earnings of real estate entities consists of our pro rata share of the Unconsolidated Entities net income based upon our ownership interest for the period. Similar to the Company, the Unconsolidated Entities (other than PSB) generate substantially all of their income from their ownership of self-storage facilities, which we manage. PSB is an equity real estate investment trust specializing in the ownership, management, acquisition, development and redevelopment of business parks containing principally office "flex" space. In the aggregate, at June 30, 2002 the Unconsolidated Entities own a total of 36 storage facilities and PSB has interest 14.8 million net rentable square feet of commercial space located in nine states. See Note 5 to the Company's June 30, 2002 financial statements for further discussion of the nature and operating results of the Unconsolidated Entities. The following table sets forth the significant components of equity in earnings of real estate entities: 34
HISTORICAL SUMMARY ------------------ Three months ended Six months ended June 30, June 30, ------------------------ Dollar ----------------------- Dollar 2002 2001 Change 2002 2001 Change ---------- ---------- ----------- ---------- ---------- ---------- (Amounts in thousands) Property operations: PSB........................ $ 16,135 $ 12,392 $ 3,743 $ 31,558 $ 24,038 $ 7,520 Other investments held at June 30, 2002, primarily self-storage............ 1,806 1,681 125 3,612 3,166 446 Newly Consolidated Investments (1)........... - 4,010 (4,010) 288 7,682 (7,394) ---------- ---------- ----------- ---------- ---------- ---------- 17,941 18,083 (142) 35,458 34,886 572 ---------- ---------- ----------- ---------- ---------- ---------- Depreciation: PSB........................ (6,246) (4,112) (2,134) (12,347) (7,835) (4,512) Other investments held at June 30, 2002, primarily self-storage............ (279) (427) 148 (484) (567) 83 Newly Consolidated Investments (1)........... - (1,400) 1,400 (65) (2,812) 2,747 ---------- ---------- ----------- ---------- ---------- ---------- (6,525) (5,939) (586) (12,896) (11,214) (1,682) ---------- ---------- ----------- ---------- ---------- ---------- Other: (2) PSB (3).................... (4,674) (2,404) (2,270) (6,882) (4,542) (2,340) Other investments held at June 30, 2002, primarily self-storage............ 258 172 86 576 192 384 Newly Consolidated Investments (1)........... - (98) 98 - (236) 236 ---------- ---------- ----------- ---------- ---------- ---------- (4,416) (2,330) (2,086) (6,306) (4,586) (1,720) ---------- ---------- ----------- ---------- ---------- ---------- Total equity in earnings of real estate entities......... $ 7,000 $ 9,814 $ (2,814) $ 16,256 $ 19,086 $ (2,830) ========== ========== =========== ========== ========== ==========
(1) Amounts include equity in earnings recorded for the Development Joint Venture and two additional partnerships prior to their respective dates of consolidation (see Note 3 to the Company's June 30, 2002 Financial Statements for further discussion). (2) "Other" reflects our share of general and administrative expense, interest expense, interest income, and other non-property, non-depreciation related operating results of these entities. (3) Amounts for the six months ended June 30, 2002 for PSB include our pro-rata share of a gain on sale recorded by PSB in the amount of $2,241,000. The decrease in equity in earnings of real estate entities is due primarily to a decrease of $2,512,000 and $4,411,000 for the three and six months ended June 30, 2002, respectively, caused by the consolidation of the Development Joint Venture and two additional partnerships (as discussed in Note 3 to the Company's financial statements), partially offset by our pro-rata share of PSB's gain on sale of real estate investments totaling $2,241,000. On January 16, 2002, we acquired our Partner's 70% ownership interest in the Development Joint Venture. As a result, we began consolidating the operating results of the Development Joint Venture and no further equity in earnings will be recorded with respect to this entity for periods after January 16, 2002. Effective January 1, 2002 (see Note 3 to the Company's financial statements), we began consolidating the operating results of two other partnerships and no longer record equity in these entity's earnings with respect to our investments in these partnerships. Our earnings with respect to these investments is included in the table above in the line "Disposed Investments." No further equity in earnings will be recorded with respect to these partnerships for periods after their respective dates of consolidation. 35 Other Income and Expense Items -------------------------------------------------------------------------------- INTEREST AND OTHER INCOME: Interest in other income includes (i) the net operating results from our property management operations, (ii) merchandise sales and consumer truck rentals and (iii) interest income. Interest and other income has decreased in the three and six months ended June 30, 2002 as compared to the same period in 2001 primarily as a result of lower interest rates earned on outstanding invested cash balances. This decrease also includes a reduction in property management operations. Beginning in the first quarter of 2002, the Company began consolidating the operations of the Development Joint Venture and two other partnerships, as described in Note 3 to the Company's financial statements. As a result, property management operations with respect to the 78 self-storage properties owned by these entities will no longer be recorded after their respective dates of consolidation. At June 30, 2002, the Company manages 31 facilities for third parties and 36 facilities on behalf of the Unconsolidated Entities for a fee, and the net results of these operations are included in "Interest and Other Income." DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense has increased $4,729,000 to $46,052,000 for the three months ended June 30, 2002 as compared to $41,323,000 for the same period in 2001. Depreciation and amortization expense has increased $9,104,000 to $90,049,000 for the six months ended June 30, 2002 as compared to $80,945,000 for the same period in 2001. These increases are principally due to the acquisition and development of additional real estate facilities during 2001 and 2002. Amortization expense with respect to intangible assets and goodwill totaled $1,651,000 and $2,328,000 for the three months ended June 30, 2002 and 2001, respectively. Amortization expense with respect to intangible assets totaled $3,302,000 and $4,656,000 for the six months ended June 30, 2002 and 2001, respectively. Included in depreciation and amortization expense for the three months ended June 30, 2002 and 2001 is $1,614,000 and $1,550,000, respectively, and $3,227,000 and $2,889,000 for the six months ended June 30, 2002 and 2001, respectively, of depreciation of furniture, fixtures, and equipment of the containerized storage business. GENERAL AND ADMINISTRATIVE: General and administrative expense for the three months ended June 30, 2002 decreased to $4,305,000 as compared to $5,000,000 for the same period in 2001. General and administrative expense for the six months ended June 30, 2002 decreased to $8,305,000 as compared to $10,584,000 for the same period in 2001. General and administrative expense principally consists of state income taxes, investor relation expenses, certain overhead associated with the acquisition and development of real estate facilities, and overhead associated with the containerized storage business. The decrease in general and administrative expense is due to decreased expenses associated with lease terminations on leased containerized storage facilities which were replaced by newly-developed facilities, decreased severance costs, and decreased overhead relating to the development of self-storage facilities, offset by increases in other areas. These three areas accounted for an approximately $746,000 and $2,683,000 decrease in general and administrative costs for the three and six months ended June 30, 2002, respectively as compared to the same period last year. Beginning January 1, 2002, the Company expenses the fair value of stock options in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). As indicated by FAS 123, the estimated fair value of stock options issued after January 1, 2002 will be expensed over their vesting period. The total of such expense included in the Company's general and administrative expense was approximately $58,000 for the three and six months ended June 30, 2002. Based upon stock options granted between January 1, 2002 and June 30, 2002, the total expected annual expense is approximately $166,000. In addition, pro-forma disclosures of the impact of stock options issued prior to January 1, 2002 (which are not expensed on the Company's income statement per the transition provisions of FAS 123) are presented in the Company's notes to the financial statements. 36 INTEREST EXPENSE: Interest expense was $1,213,000 and $1,124,000 for the three months ended June 30, 2002 and 2001, respectively, and $2,315,000 and $2,095,000 for the six months ended June 30, 2002 and 2001, respectively. Capitalized interest expense $1,426,000 and $2,109,000 for the three months ended June 30, 2002 and 2001, respectively, and $3,272,000 and $4,219,000 for the six months ended June 30, 2002 and 2001, respectively. In addition, the Company incurred $412,000 in interest on borrowing on its line of credit in the six months ended June 30, 2002 as compared to $189,000 for the same period in 2001. The increase in interest expense in 2002 compared to 2001 is principally the result of a reduction in the amount of capitalized interest and an increase in interest expense on the Company's line of credit, offset by lower interest expense on notes payable due to principal payments. MINORITY INTEREST IN INCOME - PREFERRED PARTNERSHIP INTERESTS: Minority interest in income - preferred partnership interests represents the income allocable to holders of our preferred partnership units. During 2000, one of our operating partnerships issued $365 million of preferred operating partnership units. For the three and six months ended June 30, 2002, the holders of these preferred units were paid in aggregate approximately $6,727,000 and $13,453,000, respectively, as compared to $8,505,000 and $17,010,000, respectively, for the same periods in 2001, in distributions and received a corresponding allocation of minority interest in earnings. The decrease in the three months ended June 30, 2002 as compared to the same period in 2001 is due to our repurchase, during the latter half of 2001, of $80 million of these preferred operating partnership units. MINORITY INTEREST IN INCOME - OTHER PARTNERSHIP INTERESTS: Minority interest in income - common equity represents the income allocable to equity interests in the Consolidated Entities which are not owned by the Company, other than preferred unitholders. Minority interest in income - common equity increased from $3,167,000 for the three months ended June 30, 2001 to $3,886,000 for the three months ended June 30, 2002. Minority interest in income - common equity increased from $6,360,000 for the six months ended June 30, 2001 to $8,502,000 for the six months ended June 30, 2002. These minority interests include depreciation of $2,283,000 and $4,538,000 for the three and six months ended June 30, 2002 as compared to $1,810,000 and $3,568,000 for the same periods in 2001. Income allocated to the minority interests is summarized as follows (in thousands):
Minority interest in income for Minority interest in income for the three months ended June 30, the six months ended June 30, -------------------------------- -------------------------------- Description 2002 2001 2002 2001 -------------------------------------------- -------------- ------------- -------------- ------------- Consolidated Development Joint Venture...... $ 329 $ 113 $ 636 $ 225 Convertible OP Units........................ 73 99 162 187 Newly consolidated partnerships............. 775 - 1,631 - Other consolidated partnerships............. 2,709 2,955 6,073 5,948 -------------- ------------- -------------- ------------- Total other partnership interests........... $ 3,886 $ 3,167 $ 8,502 $ 6,360 ============== ============= ============== =============
The increase in minority interest in income with respect to the Consolidated Development Joint Venture is due to an increase in income with respect to the properties owned by this entity. Included in minority interest in income for the Consolidated Development Joint Venture is depreciation expense of $804,000 and $1,550,000, for the three and six months ended June 30, 2002, respectively, as compared to $481,000 and $858,000, respectively, for the same periods in 2001. We expect that minority interest in income with respect to the Consolidated Development Joint Venture will continue to increase as the properties owned by this entity, substantially all of which are newly developed facilities in the fill-up stage, continue to increase their occupancy to a stabilized occupancy level and increase the earnings of this entity. The increase in minority interest in income is also attributable to the consolidation of two partnerships (described in Note 3 to the Company's financial statements) effective January 1, 2002. For the three and six months ended June 30, 2002, a total of $775,000 and $1,631,000 in income was allocated to the minority interests with respect to these two newly consolidated partnerships as noted in the table above under "Newly Consolidated Partnerships" (including $210,000 and $330,000, respectively, in depreciation expense). 37 On April 19, 2002, the Company acquired through a merger all of the remaining limited partnership interest not currently owned by the Company in PS Partners V, Ltd., a partnership which is consolidated with the Company. The acquisition cost consisted of approximately 533,796 shares of ($20,054,000) Public Storage common stock and approximately $12,815,000 in cash. Minority interest in income for the six months ended June 30, 2002 with respect to these interests was approximately $161,000 and $625,000, respectively, (including $73,000 and $345,000, respectively, in depreciation expense), representing their share of the earnings from January 1, 2002 through the date of acquisition. These amounts are included in the table above under "Other Consolidated Partnerships". Supplemental Property Data and Trends -------------------------------------------------------------------------------- At June 30, 2002, there were approximately 43 ownership entities owning in aggregate 1,397 storage facilities, including the facilities which we own and/or operate. At June 30, 2002, 36 of these facilities were owned by the Unconsolidated Entities, entities in which we have an ownership interest and use the equity method for financial statement presentation. The remaining 1,361 facilities are owned by the Company and the Consolidated Entities. The following table summarizes our investment in real estate facilities as of June 30, 2002:
Net Rentable Square Footage of Storage Number of Facilities Storage Facilities (in thousands) ------------------ ------------------ Consolidated facilities: Wholly-owned by the company................. 808 50,314 Owned by Controlled Entities................ 553 32,283 ------------------ ------------------ 1,361 82,597 Facilities owned by Unconsolidated Entities.... 36 2,186 ------------------ ------------------ Total facilities in which the Company has an ownership interest.......................... 1,397 84,783 ================== ==================
In addition to the Company's interest in storage facilities noted above, the Company and the Consolidated Entities own five commercial facilities with an aggregate of 385,000 net rentable square feet. The Company and the entities it controls also have a 44% common interest in PSB, which at June 30, 2002 owned and operated 14.8 million net rentable square feet of commercial space. SAME STORE OPERATING RESULTS The Company derives substantially all of its revenues from the ownership and management of self-storage facilities. In order to evaluate the performance of the Company's overall storage facility portfolio, management analyzes the operating performance of a consistent group of self-storage facilities. We have increased the number of facilities included in the "Same Store" pool from 945 at December 31, 2001 to 1,260 facilities (which at June 30, 2002 includes 32 facilities that are owned by unconsolidated entities in which the Company has an interest). As a result of the change in the Same Store pool, the relative weighting of markets has changed. Accordingly, comparisons should not be made between information presented previously for the Same Store pool of 945 facilities and this current pool of 1,260 facilities in order to identify trends in occupancies, realized rents per square foot, or operating results. 38 The following table summarizes the pre-depreciation historical operating results of the Same Store self-storage facilities: SAME STORE SELF-STORAGE FACILITIES (1,260 FACILITIES, 73.1 MILLION NET RENTABLE SQUARE FEET) (historical property operations)
Three months ended Six months ended June 30, June 30, ------------------------- Percentage ------------------------ Percentage 2002 2001 Change 2002 2001 Change ---------- ---------- ---------- ---------- ---------- ---------- (Amounts in thousands, except rent per square foot) Rental income (1) (2)............ $ 178,911 $ 185,482 (3.5)% $ 359,897 $ 364,211 (1.2)% Cost of operations (2).......... 54,935 52,466 4.7% 108,939 107,622 1.2% ---------- ---------- ---------- ---------- ---------- ---------- Net operating income (2)......... $ 123,976 $ 133,016 (6.8)% $ 250,958 $ 256,589 (2.2)% ========== ========== ========== ========== ========== ========== Gross profit margin.............. 69.3% 71.7% (2.4)% 69.7% 70.5% (0.8)% Weighted Average: Occupancy (3).................. 86.4% 90.0% (3.6)% 85.0% 89.1% (4.1)% Annualized realized rent per sq. ft for the period (4)... $ 11.34 $ 11.30 0.4% $ 11.59 $ 11.21 3.4%
1. Rental income includes late charges and administrative fees of $5,669,000 and $6,338,000 for the three months ended June 30, 2002 and 2001, respectively, and $11,233,000 and $12,709,000 for the six months ended June 30, 2002 and 2001, respectively. Rental income is net of discounts offered to new tenants. Discounts totaled $5,824,000 and $2,063,000 for the three months ended June 30, 2002 and 2001, respectively. Discounts totaled $6,926,000 and $5,006,000 for the six months ended June 30, 2002 and 2001, respectively. 2. Historical property operations excludes the sale of locks, boxes, and packing supplies, tenant re-insurance revenues and truck rental revenues. 3. Occupancies indicated in the above table represent the weighted average physical occupancy levels over the entire three and six month periods. 4. Realized annual rent per square foot is computed by annualizing rental income including late charges and administrative fees divided by weighted average occupied square footage for the period. The Same Store net operating income decreased 6.8% in the quarter ended June 30, 2002 as compared to the same period in 2001. This decrease in Same Store net operating income is the first quarterly decrease that we have had for at least the past 10 years. The decrease was due to a decrease of 3.5% in rental income combined with an increase of 4.7% in cost of operations. The 3.5% decrease in rental income for the second quarter is attributable to a 3.6% decrease in the weighted average occupancy level partially offset by a 0.4% increase in realized rent per occupied square foot during the period. During each of 1999 and 2000, the Same Store facilities' occupancy levels averaged approximately 92%. These relatively high occupancy levels were attained and sustained through a variety of promotional activities offering new tenants move-in discounts aggregating approximately $20 million per year. During 2001, the Company changed its marketing strategy to aggressively increase rental rates and reduce the amount of discounts offered at the risk of lower occupancy levels. As a result of this strategy, rental income for 2001 was approximately 7.4% higher than the prior year. However, this improvement in rental income came at the expense of declining occupancy levels in 2001. During the first nine months of 2001, average occupancy levels were approximately 1.8% below those of 2000 for the same period, which we believed to be a manageable reduction. However, during the fourth quarter of 2001 and through February 2002 there was a rapid decline in occupancy levels which caused the year-over-year reduction to increase to 4.7% as of the end of February 2002. This reduction in occupancy level coincided with a reduction in call volume to our national telephone reservation center. We believe that these reductions were attributable to the absence of any significant discounts offered to tenants, as well as to general economic conditions. 39 In the second half of March 2002, we reduced rental rates charged to new incoming tenants and began a national television campaign. The national television campaign, which offered a significant promotional discount, was run from the second half of March 2002 through the first half of May 2002, resulting in increased move-in activity during April and May 2002 compared to the prior year. However, in the absence of significant promotional discounts from mid-May through the end of July 2002, rental activity during June and July decreased and the occupancy level at July 31, 2002 for our Same Store facilities was approximately 5.5% less than at July 31, 2001. During the third quarter of 2002, we have reinstated a discount program and we are advertising on television in selected markets in an effort to enhance move-in activity and improve occupancy levels. The up front cost of these marketing activities are expected to adversely impact the Company's net operating income during the third quarter of 2002. No assurance can be provided as to the impact of these efforts on our realized rents, occupancy levels, or net income of the Company. Cost of operations includes all direct and indirect costs of operating, marketing and managing the facilities, and is analyzed as follows:
Three months ended June 30, Six months ended June 30, -------------------------------------- ----------------------------------------- Percentage Percentage 2002 2001 Change 2002 2001 Change ----------- ----------- ----------- ----------- ----------- ----------- (Amounts in thousands) Property payroll expense.......... $ 15,795 $ 14,434 9.4% $ 31,436 $ 29,593 6.2% Property taxes.................... 15,379 14,824 3.7% 32,397 31,270 3.6% Repairs and maintenance........... 3,846 4,343 (11.4)% 6,895 8,173 (15.6)% Advertising and promotion......... 4,532 4,324 4.8% 7,362 7,175 2.6% Telephone reservation center costs 2,566 2,624 (2.2)% 4,830 5,634 (14.3)% Management, office, insurance, utilities, and other expenses.. 12,817 11,917 7.6% 26,019 25,777 0.9% ----------- ----------- ----------- ----------- ----------- ----------- Total cost of operations .... $ 54,935 $ 52,466 4.7% $ 108,939 $ 107,622 1.2% =========== =========== =========== =========== =========== ===========
Increases in property payroll expense for the three and six months ended June 30, 2002 as compared to the same periods in 2001 are due primarily to increased compensation to property managers and supervisory personnel. Included in advertising and promotion is $1,529,000 and $954,000 in television advertising for the three months ended June 30, 2002 and 2001, respectively; and $2,075,000 and $955,000 in television advertising for the six months ended June 30, 2002 and 2001, respectively. The following table summarizes Same Store operating trends by region for the six months ended June 30, 2002 and 2001 (Dollar amounts in thousands): 40
Northern Southern Other California California Texas Florida Illinois states Total ---------- ---------- ------- -------- -------- -------- -------- Rental income: -------------- 2002 $44,963 $60,536 $32,155 $31,192 $27,620 $163,431 $359,897 2001 $47,099 $60,144 $32,585 $31,011 $28,142 $165,230 $364,211 % change (4.5)% 0.7% (1.3)% 0.6% (1.9)% (1.1)% (1.2)% Cost of operations: ------------------- 2002 $10,345 $13,524 $12,246 $10,419 $10,943 $51,462 $108,939 2001 $9,966 $12,828 $12,576 $10,686 $10,921 $50,645 $107,622 % change 3.8% 5.4% (2.6)% (2.5)% 0.2% 1.6% 1.2% Net operating income: --------------------- 2002 $34,618 $47,012 $19,909 $20,773 $16,677 $111,969 $250,958 2001 $37,133 $47,316 $20,009 $20,325 $17,221 $114,585 $256,589 % change (6.8)% (0.6)% (0.5)% 2.2% (3.2)% (2.3)% (2.2)% Weighted avg. occupancy: ------------------------ 2002 85.3% 86.9% 84.7% 85.2% 83.5% 84.7% 85.0% 2001 92.5% 91.6% 89.5% 86.7% 89.1% 88.1% 89.1% % change (7.2)% (4.7)% (4.8)% (1.5)% (5.6)% (3.4)% (4.1)% Weighted avg. annualized realized rents per occupied sq. ft.: ------------------------------------------------------------- 2002 $15.33 $15.69 $8.61 $10.44 $12.64 $10.50 $11.59 2001 $14.86 $14.87 $8.34 $10.31 $12.17 $10.29 $11.21 % change 3.2% 5.5% 3.2% 1.3% 3.9% 2.0% 3.4% Number of facilities: --------------------- 127 143 142 123 86 639 1,260
Liquidity and Capital Resources -------------------------------------------------------------------------------- We believe that our internally generated net cash provided by operating activities will continue to be sufficient to enable us to meet our operating expenses, capital improvements, debt service requirements and distributions to shareholders for the foreseeable future. Operating as a real estate investment trust ("REIT"), our ability to retain cash flow for reinvestment is restricted. In order for us to maintain our REIT status, a substantial portion of our operating cash flow must be used to make distributions to our shareholders (see "Requirement to Pay Distributions" below). However, despite the significant distribution requirements, we have been able to retain a significant amount of our operating cash flow. The following table summarizes our ability to fund distributions to the minority interest, capital improvements to maintain our facilities, and distributions to our shareholders through the use of cash provided by operating activities. The remaining cash flow generated is available to make both scheduled and optional principal payments on debt and for reinvestment. 41
For the six months ended June 30, -------------------------- 2002 2001 ---------- ---------- (Amount in thousands) Net cash provided by operating activities............................. $295,367 $272,838 Allocable to minority interests (Preferred Units)..................... (13,453) (17,010) Allocable to minority interests (common equity)....................... (13,040) (9,928) ---------- ---------- Cash from operations allocable to our shareholders.................... 268,874 245,900 Capital improvements to maintain our facilities: Storage facilities.................................................. (12,019) (11,752) Commercial properties............................................... (507) (380) Add back: minority interest share of capital improvements to maintain facilities........................................................ 478 211 ---------- ---------- Remaining operating cash flow available for distributions to our 256,826 233,979 shareholders....................................................... Distributions paid: Preferred stock dividends........................................... (73,776) (56,772) Equity Stock, Series A dividends.................................... (10,751) (8,766) Distributions to Common and Class B shareholders (a)................ (110,123) (54,411) ---------- ---------- Cash available for principal payments on debt and reinvestment........ $62,176 $114,030 ========== ==========
(a) Distributions to common shareholders include the Company's regular common distribution of $0.90 and $0.44 per common share for the six months ended June 30, 2002 and 2001, respectively. Our financial profile is characterized by a low level of debt to total capitalization, increasing net income, increasing cash flow from operations, and a conservative dividend payout ratio with respect to the common stock. We expect to fund our growth strategies with cash on hand at June 30, 2002, internally generated retained cash flows, and proceeds from issuing equity securities. In general, our current strategy is to continue to finance our growth with permanent capital; either common or preferred equity. We have in the past used our $200 million line of credit as temporary "bridge" financing, and repaid those amounts with internally generated cash flows and proceeds from the placement of permanent capital. As of June 30, 2002, we had no outstanding borrowings on the line of credit. Over the past three years we have funded substantially all of our acquisitions with permanent capital (both common and preferred securities). We have elected to use preferred securities as a form of leverage despite the fact that the dividend rates of our preferred securities exceed the prevailing market interest rates on conventional debt. We have chosen this method of financing for the following reasons: (i) under the REIT structure, a significant amount of operating cash flow needs to be distributed to our shareholders making it difficult to repay debt with operating cash flow alone, (ii) our perpetual preferred stock has no sinking fund requirement, or maturity date and does not require redemption, all of which eliminate any future refinancing risks, (iii) after the end of a non-call period, we have the option to redeem the preferred stock at any time, which in 2001 enabled us to effectively refinance higher coupon preferred stock with new preferred stock at lower rates, (iv) preferred stock does not contain onerous covenants, thus allowing us to maintain significant financial flexibility, and (v) dividends on the preferred stock can be applied to our REIT distribution requirements. Our credit ratings on each of our series of Cumulative Preferred Stock by each of the three major credit agencies are "Baa2" by Moody's and BBB+ by both Standard & Poor's and Fitch IBCA. 42 Our portfolio of real estate facilities remains substantially unencumbered. At June 30, 2002, we had mortgage debt outstanding of $22.2 million and unsecured debt in the amount of $100.2 million, and had consolidated real estate facilities with a book value of $4.1 billion. We have not financed our acquisitions with debt and generally our borrowing has increased through the assumption of pre-existing debt on acquired real estate facilities. We believe that our size and financial flexibility enables us to access capital when appropriate. During 2001 and in the first quarter of 2002, we raised a total of $1.1 billion through the issuance of preferred securities, and $74.8 million through the issuance of our Equity Stock, Series A. In 2001, we redeemed for cash $441.3 million in cumulative preferred stock and $80.0 million in preferred operating partnership units, allowing us to take advantage of favorable rate spreads. We have completed the following issuances of equity during 2002: o On January 18, 2002, we completed a public offering of 6,000,000 depositary shares ($25 stated value per depositary share) each representing 1/1,000 of a share of 7.625% Cumulative Preferred Stock, Series T, raising net proceeds of approximately $145.1 million. o On February 19, 2002, we completed a public offering of 6,000,000 depositary shares ($25 stated value per depositary share) each representing 1/1,000 of a share of 7.625% Cumulative Preferred Stock, Series U, raising net proceeds of approximately $145.1 million. It is our intent to call for redemption our 10% Senior Preferred Stock Series A, which becomes redeemable on September 30, 2002. The aggregate redemption amount for this security is $25 per share or approximately $45.6 million, plus accrued dividends. The Company intends to fund the redemption with working capital (cash reserves totaled $172,164,000 at June 30, 2002). REQUIREMENT TO PAY DISTRIBUTIONS: We have operated, and intend to continue to operate, in such a manner as to qualify as a REIT under the Internal Revenue Code of 1986, but no assurance can be given that we will at all times so qualify. To the extent that the Company continues to qualify as a REIT, we will not be taxed, with certain limited exceptions, on the taxable income that is distributed to our shareholders, provided that at least 90% of our taxable income is so distributed to our shareholders prior to filing of the Company's tax return. We have satisfied the REIT distribution requirement since 1980. During the six months ended June 30, 2002 and 2001, we paid cash dividends totaling $73,776,000 and $56,772,000, respectively, to the holders of our Senior Preferred Stock. The amounts paid in 2002 include an aggregate of $9,342,000 with respect to the Series T and Series U Preferred Stock, which reflects a payment for a partial period from the date of their respective issuances. We estimate the regular annual distribution requirements with respect to our Preferred Stock outstanding at June 30, 2002 to be approximately $151.7 million, which includes $4.6 million for our Senior Preferred Stock, Series A, which we anticipate redeeming on September 30, 2002. During the six months ended June 30, 2002 and 2001, we paid cash dividends totaling $13,453,000 and $17,010,000, respectively, to the holders of our preferred operating partnership units. The annual distribution requirement with respect to the preferred operating partnership units outstanding at June 30, 2002 is estimated at $26.9 million. During the six months ended June 30, 2002 and 2001, we paid cash dividends totaling $10,751,000 and $8,766,000, respectively, to the holders of Equity Stock, Series A. With respect to the Equity Stock, Series A outstanding at June 30, 2002, we estimate the total annual regular distribution to be approximately $21.5 million assuming that dividends of at least $0.49 per share per year are paid to the common shareholders. 43 With respect to the depositary shares of Equity Stock, Series A, we have no obligation to pay distributions if no distributions are paid to the common shareholders. To the extent that we do pay common distributions in any year, the holders of the depositary shares receive annual distributions equal to the lesser of (i) five times the per share dividend on the common stock or (ii) $2.45. The depositary shares are noncumulative, and have no preference over our Common Stock either as to dividends or in liquidation. During the six months ended June 30, 2002, we paid dividends totaling $110,123,000 ($0.90 per common share) to the holders of our common stock and Class B common stock. Based upon shares outstanding at August 1, 2002 and a quarterly distribution of $0.45 per share which was declared by the Board of Directors on August 9, 2002 and payable on September 30, 2002, we estimate dividend payments with respect to our common stock and Class B common stock of approximately $55.3 million for the third quarter of 2002. To the extent that the Company continues to qualify as a REIT, we will not be taxed, with certain limited exceptions, on the taxable income that is distributed to our shareholders, provided that at least 90% of our taxable income is so distributed to our shareholders prior to filing the Company's tax return. Accordingly, for the remainder of 2002, distributions with respect to the Common Stock and Equity Stock, Series A will be determined based upon our estimated REIT taxable income taking into consideration distributions to the preferred shareholders. We anticipate that, at a minimum, quarterly distributions per common share will remain at $0.45 per common share (regular quarterly common distributions were increased from $0.22 per common share during the first two quarters of 2001). Over the past several years, in addition to the regular quarterly dividends paid to our common shareholder, we also paid special distributions. These special distributions were necessary to meet our distribution requirements in order to maintain our REIT tax status. It is unlikely that any special distribution will be required to enable the Company to meet its distribution requirements in 2002. CAPITAL IMPROVEMENT REQUIREMENTS: For 2002, we have budgeted approximately $31 million for capital improvements. During the three months ended June 30, 2002, we incurred capital improvements of approximately $12.5 million. DEBT SERVICE REQUIREMENTS: We do not believe we have any significant refinancing risks with respect to our notes payable, all of which is fixed rate. At June 30, 2002, we had total outstanding notes payable of approximately $122.4 million. Approximate principal maturities of notes payable at June 30, 2002 are as follows:
Unsecured Senior Notes Mortgage debt Total -------------- -------------- -------------- (amounts in thousands) 2002 (remainder of).......... $ 4,875 $ 1,952 $ 6,827 2003......................... 35,900 3,585 39,485 2004......................... 25,800 15,063 40,863 2005......................... 11,200 156 11,356 2006......................... 11,200 170 11,370 Thereafter................... 11,200 1,298 12,498 -------------- -------------- -------------- $ 100,175 $ 22,224 $ 122,399 ============== ============== ============== Weighted average rate........ 7.5% 10.2% 8.0% ============== ============== ==============
ACQUISITION OF INTERESTS IN SELF-STORAGE FACILITIES: On January 16, 2002, we acquired the remaining 70% interest in the Development Joint Venture for approximately $153,078,000 in cash. The Development Joint Venture was formed in April 1997 with equity capital consisting of 30% from the Company and 70% from an institutional investor, and owns 47 storage facilities opened since 1997. On April 19, 2002, the Company acquired through a merger all of the remaining limited partnership interest not currently owned by the Company in PS Partners V, Ltd., a partnership which is consolidated with the Company. The acquisition cost consisted of approximately 533,796 shares of Public Storage common stock and approximately $12,815,000 in cash. 44 ACQUISITION OF SELF-STORAGE FACILITIES FROM THIRD PARTIES: In the six months ended June 30, 2002, we acquired three self-storage facilities from third parties for an aggregate acquisition cost of $7,936,000. During 2000 and 2001, we acquired an aggregate of 15 real estate facilities, substantially all of which were self-storage facilities, for an aggregate of $70.6 million. Our low level of third-party acquisitions in recent years is not indicative of either the supply of facilities offered for sale or our ability to finance the acquisitions, but is primarily due to prices sought by sellers and our lack of desire to pay such prices. During the remainder of 2002, we will continue to seek to acquire additional self-storage facilities from third parties, however, it is difficult to estimate the level of third-party acquisitions. DEVELOPMENT OF SELF-STORAGE FACILITIES: In November 1999, we formed a second joint venture partnership for the development of approximately $100 million of self-storage facilities. The venture is funded solely with equity capital consisting of 51% from us and 49% from the joint venture partner, and has completed its development activities. At June 30, 2002, the second development joint venture owns 22 facilities (approximately 1,413,000 net rentable square feet) with a total development cost of approximately $108 million. The Company anticipates that the cost of development of self-storage facilities for the year ended December 31, 2002 and beyond will be approximately $125 million to $150 million per year. At June 30, 2002, the Company has a "pipeline" of 37 identified projects comprised of new and expansion self-storage facilities. Total estimated costs with respect to these facilities is approximately $250.0 million, of which $89.0 million has been spent, with opening dates estimated through the fourth quarter of 2003. The development and fill-up of these storage facilities is subject to significant contingencies such as obtaining appropriate governmental approvals. We estimate that the amount remaining to be spent of approximately $161 million on these 37 projects in the pipeline will be incurred over approximately the next 24 months. We have acquired the land for 26 of the projects in the pipeline, which have an aggregate estimated cost of $172.0 million and costs incurred through June 30, 2002 of approximately $85.0 million. The remaining 11 facilities represent identified sites where we have an agreement in place to acquire the land, generally within one year. However, there are no assurances that we will acquire and/or development the land. The following table sets forth our development pipeline and a range of estimated opening dates for these projects (Dollar amounts in thousands):
Number Total Estimated Total Cost Estimated time of Cost of Incurred Frames of Facility Facilities Development through June 30,2002 Openings ---------- ----------- -------------------- ------------------ Development - land acquired at 6/30/02 -------------------------------------- Self-storage facilities............... 7 $ 30,251 $ 8,927 Q3 '02 - Q2 `03 Expansions of existing self-storage facilities........................ 19 141,777 76,073 Q3 '02 - Q1 `03 ---------- ----------- -------------------- Total............................ 26 172,028 85,000 ---------- ----------- -------------------- Potential development - land to be acquired after 6/30/02 Self-storage facilities............... 11 77,962 3,978 Q2 '03 - Q4 `03 ---------- ----------- -------------------- Totals........................... 37 $ 249,990 $ 88,978 ========== =========== ====================
REPURCHASES OF THE COMPANY'S COMMON STOCK: As previously announced, the Company's Board of Directors authorized the repurchase from time to time of up to 25,000,000 shares of the Company's common stock on the open market or in privately negotiated transactions. From the initial authorization through June 30, 2002, the Company has repurchased a total of 21,497,020 shares of common stock at an aggregate cost of approximately $535.9 million. There have been no substantial repurchases of the Company's common stock since May 2001. 45 FUNDS FROM OPERATIONS: Total funds from operations or "FFO" increased to $262,951,000 for the six months ended June 30, 2002 compared to $240,542,000 for the same period in 2001. FFO available to common shareholders (after deducting preferred stock dividends) was $189,175,000 for the six months ended June 30, 2002 compared to $183,770,000 for the same period in 2001. FFO is defined as net income or (loss) (computed in accordance with generally accepted accounting principles) before: (i) gain or (loss) on early extinguishment of debt, (ii) minority interest in income and (iii) gain or (loss) on the disposition of real estate, adjusted as follows: (a) plus depreciation and amortization (including our pro-rata share of depreciation and amortization of unconsolidated equity interests and amortization of assets acquired in a merger, including property management agreements and goodwill), and (b) less FFO attributable to minority interest. FFO is a supplemental performance measure for equity REITs as defined by the National Association of Real Estate Investment Trusts, Inc. ("NAREIT"). The NAREIT definition does not specifically address the treatment of minority interest in the determination of FFO or the treatment of the amortization of property management agreements and goodwill. In our case, FFO represents amounts attributable to our shareholders after deducting amounts attributable to the minority interests and before deductions for the amortization of property management agreements and goodwill. FFO is presented because management, as well as many industry analysts, consider FFO to be one measure of our performance and it is used in establishing the terms of the Class B Common Stock. FFO does not take into consideration capital improvements, scheduled principal payments on debt, distributions and our other obligations. Accordingly, FFO is not a substitute for cash flow or net income (as discussed above) as a measure of our liquidity or operating performance. FFO is not comparable to similarly entitled items reported by other REITs that do not define it exactly as we have defined it. 46 ITEM 2A. Risk Factors ---------------------- In addition to the other information in our Form 10-Q and our Form 10-K for the year ended December 31, 2001, you should consider the following factors in evaluating the Company: THE HUGHES FAMILY COULD CONTROL US. At June 30, 2002, the Hughes family owned approximately 33.8% of our outstanding shares of common stock (approximately 37.6% upon conversion of our class B common stock). Consequently, the Hughes family could control matters submitted to a vote of our shareholders, including electing directors, amending our organizational documents, dissolving and approving other extraordinary transactions, such as a takeover attempt. PROVISIONS IN OUR ORGANIZATIONAL DOCUMENTS MAY PREVENT CHANGES IN CONTROL. Restrictions in our organizational documents may further limit changes in control. Unless our board of directors waives these limitations, no shareholder may own more than (1) 2.0% of our outstanding shares of our common stock or (2) 9.9% of the outstanding shares of each class or series of our preferred or equity stock. Our organizational documents in effect provide, however, that the Hughes family may continue to own the shares of our common stock held by them at the time of a 1995 reorganization. These limitations are designed, to the extent possible, to avoid a concentration of ownership that might jeopardize our ability to qualify as a REIT. These limitations, however, also make a change of control significantly more difficult (if not impossible) even if it would be favorable to the interests of our public shareholders. These provisions will prevent future takeover attempts not approved by our board of directors even if a majority of our public shareholders deem it to be in their best interests because they would receive a premium for their shares over the shares' then market value or for other reasons. WE WOULD INCUR ADVERSE TAX CONSEQUENCES IF WE FAIL TO QUALIFY AS A REIT. You will be subject to the risk that we may not qualify as a REIT. As a REIT, we must distribute at least 90% of our REIT taxable income to our shareholders, which include not only holders of our common stock and equity stock but also holders of our preferred stock. Failure to pay full dividends on the preferred stock would prevent us from paying dividends on our common stock and could jeopardize our qualification as a REIT. For any taxable year that we fail to qualify as a REIT and the relief provisions do not apply, we would be taxed at the regular corporate rates on all of our taxable income, whether or not we make any distributions to our shareholders. Those taxes would reduce the amount of cash available for distribution to our shareholders or for reinvestment. As a result, our failure to qualify as a REIT during any taxable year could have a material adverse effect upon us and our shareholders. Furthermore, unless certain relief provisions apply, we would not be eligible to elect REIT status again until the fifth taxable year that begins after the first year for which we fail to qualify. WE MAY PAY SOME TAXES. Even if we qualify as a REIT for federal income tax purposes, we are required to pay some federal, state and local taxes on our income and property. Several corporate subsidiaries of Public Storage have elected to be treated as "taxable REIT subsidiaries" of Public Storage for federal income tax purposes since January 1, 2001. A taxable REIT subsidiary is a fully taxable corporation and is limited in its ability to deduct interest payments made to us. In addition, we will be subject to a 100% penalty tax on some payments that we receive if the economic arrangements among our tenants, our taxable REIT subsidiaries and us are not comparable to similar arrangements among unrelated parties. To the extent that Public Storage or any taxable REIT subsidiary is required to pay federal, state or local taxes, we will have less cash available for distribution to shareholders. 47 WE WOULD INCUR A CORPORATE LEVEL TAX IF WE SELL CERTAIN ASSETS. We will generally be subject to a corporate level tax on any net built-in gain if before November 2005 we sell any of the assets we acquired in a November 1995 reorganization. WE AND OUR SHAREHOLDERS ARE SUBJECT TO FINANCING RISKS. Debt increases the risk of loss. In making real estate investments, we may borrow money, which increases the risk of loss. At June 30, 2002, our debt of $122.4 million was approximately 2.5% of our total assets. Certain securities have a liquidation preference over our common stock and Equity Stock, Series A. If we liquidated, holders of our preferred securities would be entitled to receive liquidating distributions, plus any accrued and unpaid distributions, before any distribution of assets to the holders of our common stock and Equity Stock, Series A. Holders of preferred securities are entitled to receive, when declared by our board of directors, cash distributions in preference to holders of our common stock and Equity Stock, Series A. SINCE OUR BUSINESS CONSISTS PRIMARILY OF ACQUIRING AND 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 potential terrorist 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. Most of our properties are self-storage facilities, which generated 89% of our total revenues during the first half of 2002. Competition in the market areas in which many of our properties are located is significant and has affected the occupancy levels, rental rates and operating expenses of some of our properties. Average occupancy levels of the Same Store Facilities has decreased from 89.1% for the six months ended June 30, 2001 to 85.0% for the six months ended June 30, 2002. 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, 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. 48 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 environment 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 operation. PUBLIC STORAGE HAS NO INTEREST IN CANADIAN MINI-WAREHOUSES. The Hughes family has ownership interests in, and operates, approximately 38 mini-warehouses in Canada under the name "Public Storage". Public Storage personnel are engaged, at the expense of the Canadian owners, in the supervision of the operation of these properties. Public Storage has a right of first refusal to acquire the stock or assets of the corporation engaged in these operations if the Hughes family or the corporation agree to sell them. However, Public Storage has no interest in the operations of this corporations, has no right to acquire this stock or assets unless the Hughes family decides to sell and receives no benefit from the profits and increases in value of the Canadian mini-warehouses. There may be conflicts of interest in allocating the time of Public Storage personnel between Public Storage's properties and the Canadian properties. OUR PORTABLE SELF-STORAGE BUSINESS HAS INCURRED OPERATING LOSSES. Public Storage Pickup & Delivery was organized in 1996 to operate a portable self-storage business. We own all of the economic interest of Pickup & Delivery. Since Pickup & Delivery will operate profitably only if it can succeed in the relatively new field of portable self-storage, we cannot provide any assurance as to its profitability. Pickup & Delivery incurred operating losses of $5,135,000 in 2000 and $2,218,000 in 2001. Pickup & Delivery had an operating losses totaling approximately $536,000 and $56,000 for the three and six months ended June 30, 2002, respectively, as compared to $611,000 and $1,538,000 for the same periods in 2001. 49 Item 3. Qualitative and Quantitative Disclosures about Market Risk ------------------------------------------------------------------- To limit our exposure to market risk, we principally finance our operations and growth with permanent equity capital, consisting of either common or preferred stock. At June 30, 2002, our debt as a percentage of total shareholders' equity (based on book values) was 2.9%. Our preferred stock is not redeemable by the holders. Except under certain conditions relating to our qualification as a REIT, we may not redeem the Senior Preferred Stock prior to the following dates: Series A - September 30, 2002, Series B - March 31, 2003, Series C - June 30, 1999, Series D - September 30, 2004, Series E - January 31, 2005, Series F - April 30, 2005, Series J - August 31, 2002, Series K - January 19, 2004, Series L - March 10, 2004, Series M - August 17, 2004, Series Q - January 19, 2006, Series R - September 28, 2006, Series S - October 31, 2006, Series T - January 18, 2007 and Series U - February 19, 2007. On or after the respective dates, each of the series of Senior Preferred Stock will be redeemable at our option, in whole or in part, at $25 per share (or depositary share in the case of the Series J through Series U), plus accrued and unpaid dividends. Our market risk sensitive instruments include notes payable, which totaled $122.4 million at June 30, 2002. Substantially all of the Company's notes payable bear interest at fixed rates. See "Item 2" - Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources for approximate principal maturities of the notes payable as of June 30, 2002. 50 PART II. OTHER INFORMATION Item 1. Legal Proceedings -------------------------- HENRIQUEZ V. PUBLIC STORAGE, INC. (FILED JUNE 2002). The plaintiff in this case is suing the Company on behalf of a purported class of renters who rented self-storage units from the Company. Plaintiff alleges that the Company misrepresents the size of its units and seeks damages and injunctive and declaratory relief under California statutory and common law relating to consumer protection, unfair competition, fraud and deceit and negligent misrepresentation. The Company does not currently believe that the outcome of this litigation will have any material adverse effect. However, the Company cannot presently determine the potential total damages, if any, or the ultimate outcome of the litigation. The Company intends to vigorously contest the claims in this case. Item 4. Submission of Matters to a Vote of Security Holders ------------------------------------------------------------ The Company held an annual meeting of shareholders on May 9, 2002. Proxies for the annual meeting were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934. The annual meeting involved the following two matters: A. Election of Directors:
Total Common Stock Total Equity Stock, Series A ---------------------------------------- ------------------------------------------- Name Total Votes For Total Votes Withheld Total Votes For Total Votes Withheld ------------------------ ----------------- -------------------- ----------------- -------------------- B. Wayne Hughes 81,642,883 17,890,891 826,679 12,233 Harvey Lenkin 81,618,360 17,915,414 827,519 11,392 Marvin M. Lotz 81,625,888 17,907,886 827,364 11,548 B. Wayne Hughes, Jr. 82,199,905 17,333,872 818,059 20,853 Robert J. Abernethy 97,505,439 2,028,335 834,903 4,009 Dann V. Angeloff 97,022,708 2,511,066 834,705 4,207 William C. Baker 97,459,206 2,074,568 834,772 4,139 Thomas J. Barrack, Jr. 81,969,973 17,563,802 826,448 12,464 Uri P. Harkham 78,281,371 21,252,403 826,672 12,239 Daniel C. Staton 97,305,995 2,227,779 835,061 3,851
There was no solicitation in opposition to the management's nominees to the Board of Directors listed in the proxy statement. B. Adoption of amendment to the certificates of determination of the various series of Preferred Stock of the Company to reclassify the shares of each of the series into redesignated series of Preferred Stock upon approval by the holders of 66 2/3% of the shares affected series.
For Against Abstain No Vote ------------ ------------ ------------ ------------ Votes cast with respect with the proposal for the amendment to the certificates of determination of the various series of Preferred Stock of the Company to reclassify the shares of each of the series into redesignated series of Preferred Stock upon approval by the holders of 66 2/3% of the shares affected series. Common Stock 85,999,472 4,754,296 679,531 8,100,497 Equity Stock, Series A 434,578 17,508 6,949 379,896 Total Common Stock and Equity Stock, Series A 86,434,050 4,771,804 686,480 8,480,393
51 Item 5. Other Information -------------------------- SALE OF PARTNERSHIP UNITS: In February 2000, the Company entered into a settlement of litigation arising out of a 1997 tender offer for limited partnership units in two affiliated partnerships. Under the settlement agreement, the Company agreed to sell to the plaintiff units representing a 4% interest in each of the partnerships for a total payment of approximately $1,523,000. The plaintiff failed to tender the full purchase price at the scheduled closing and the settlement collapsed. In September 2000, the plaintiff amended its complaint to add a claim for breach of the settlement agreement seeking specific enforcement and a claim seeking damages for unfair and deceptive trade practices in connection with the alleged breach. By amending the complaint the Company believes the plaintiff elected to abandon its underlying claims in the litigation. The Company asserted affirmative defenses including the material breach by the plaintiff. Cross motions for summary judgment were filed by the parties. In July 2002, the court granted plaintiff's motion for summary judgment as to its claim for breach of the settlement agreement and granted the Company's motion for summary judgment to dismiss plaintiff's claim for unfair and deceptive trade practices. The Company is evaluating its options in this action. If the Company sells the units to plaintiff as contemplated by the settlement agreement, the Company would incur a loss of approximately $1,839,000, which has been accrued as a loss on sale of real estate investments in the Company's income statement for the three and six months ended June 30, 2002. 52 Item 6. Exhibits and Reports on Form 8-K ----------------------------------------- (a) Exhibits: 3.1 Restated Articles of Incorporation. Filed with Registrant's Registration Statement No. 33-54557 and incorporated herein by reference. 3.2 Certificate of Determination for the 10% Cumulative Preferred Stock, Series A. Filed with Registrant's Registration Statement No. 33-54557 and incorporated herein by reference. 3.3 Certificate of Determination for the 9.20% Cumulative Preferred Stock, Series B. Filed with Registrant's Registration Statement No. 33-54557 and incorporated herein by reference. 3.4 Amendment to Certificate of Determination for the 9.20% Cumulative Preferred Stock, Series B. Filed with Registrant's Registration Statement No. 33-56925 and incorporated herein by reference. 3.5 Certificate of Determination for the 8.25% Convertible Preferred Stock. Filed with Registrant's Registration Statement No. 33-54557 and incorporated herein by reference. 3.6 Certificate of Determination for the Adjustable Rate Cumulative Preferred Stock, Series C. Filed with Registrant's Registration Statement No. 33-54557 and incorporated herein by reference. 3.7 Certificate of Determination for the 9.50% Cumulative Preferred Stock, Series D. Filed with Registrant's Form 8-A/A Registration Statement relating to the 9.50% Cumulative Preferred Stock, Series D and incorporated herein by reference. 3.8 Certificate of Determination for the 10% Cumulative Preferred Stock, Series E. Filed with Registrant's Form 8-A/A Registration Statement relating to the 10% Cumulative Preferred Stock, Series E and incorporated herein by reference. 3.9 Certificate of Determination for the 9.75% Cumulative Preferred Stock, Series F. Filed with Registration's Form 8-A/A Registration Statement relating to the 9.75% Cumulative Preferred Stock, Series F and incorporated herein by reference. 3.10 Certificate of Determination for the Convertible Participating Preferred Stock. Filed with Registrant's Registration Statement No. 33-63947 and incorporated herein by reference. 3.11 Certificate of Amendment of Articles of Incorporation, Filed with Registrant's Registration Statement No. 33-63947 and incorporated herein by reference. 3.12 Certificate of Determination for the 8-7/8% Cumulative Preferred Stock, Series G. Filed with Registration's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8-7/8% Cumulative Preferred Stock, Series G and incorporated herein by reference. 3.13 Certificate of Determination for the 8.45% Cumulative Preferred Stock, Series H. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8.45% Cumulative Preferred Stock, Series H and incorporated herein by reference. 3.14 Certificate of Determination for the Convertible Preferred Stock, Series CC. Filed with Registrant's Registration Statement No. 333-03749 and incorporated herein by reference. 53 3.15 Certificate of Correction of Certificate of Determination for the Convertible Participating Preferred Stock. Filed with Registrant's Registration Statement No. 333-08791 and incorporated herein by reference. 3.16 Certificate of Determination for 8-5/8% Cumulative Preferred Stock, Series I. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8-5/8% Cumulative Preferred Stock, Series I and incorporated herein by reference. 3.17 Certificate of Amendment of Articles of Incorporation. Filed with Registrant's Registration Statement No. 333-18395 and incorporated herein by reference. 3.18 Certification of Determination for Equity Stock, Series A. Filed with Registrant's Form 10-Q for the quarterly period ended June 30, 1997 and incorporated herein by reference. 3.19 Certificate of Determination for Equity Stock, Series AA. Filed with Registrant's Form 10-Q for the quarterly period ended September 30, 1999 and incorporated herein by reference. 3.20 Certificate Decreasing Shares Constituting Equity Stock, Series A. Filed with Registrant's Form 10-Q for the quarterly period ended September 30, 1999 and incorporated herein by reference. 3.21 Certificate of Determination for Equity Stock, Series A. Filed with Registrant's Form 10-Q for the quarterly period ended September 30, 1999 and incorporated herein by reference. 3.22 Certification of Determination for 8% Cumulative Preferred Stock, Series J. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8% Cumulative Preferred Stock, Series J and incorporated herein by reference. 3.23 Certificate of Correction of Certificate of Determination for the 8.25% Convertible Preferred Stock. Filed with Registrant's Registration Statement No. 333-61045 and incorporated herein by reference. 3.24 Certification of Determination for 8-1/4% Cumulative Preferred Stock, Series K. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8-1/4% Cumulative Preferred Stock, Series K and incorporated herein by reference. 3.25 Certificate of Determination for 8-1/4% Cumulative Preferred Stock, Series L. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8-1/4% Cumulative Preferred Stock, Series L and incorporated herein by reference. 3.26 Certificate of Determination for 8.75% Cumulative Preferred Stock, Series M. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8.75% Cumulative Preferred Stock, Series M and incorporated herein by reference. 3.27 Certificate of Determination for Equity Stock, Series AAA. Filed with Registrant's Current Report on Form 8-K dated November 15, 1999 and incorporated herein by reference. 3.28 Certification of Determination for 9.5% Cumulative Preferred Stock, Series N. Filed with Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference. 3.29 Certification of Determination for 9.125% Cumulative Preferred Stock, Series O. Filed with Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000 and incorporated herein by reference. 54 3.30 Certificate of Determination for 8.75% Cumulative Preferred Stock, Series P. Filed with Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000 and incorporated herein by reference. 3.31 Certificate of Determination for 8.600% Cumulative Preferred Stock, Series Q. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8.600% Cumulative Preferred Stock, Series Q and incorporated herein by reference. 3.32 Amendment to Certificate of Determination for Equity Stock, Series A. Filed with Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001 and incorporated herein by reference. 3.33 Certificate of Determination for 8.000% Cumulative Preferred Stock, Series R. Filed with Registrant's Form 8-A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8.000% Cumulative Preferred Stock, Series R and incorporated herein by reference. 3.34 Certificate of Determination for 7.875% Cumulative Preferred Stock, Series S. Filed with Registrant's Form 8-A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 7.875% Cumulative Preferred Stock, Series S and incorporated herein by reference. 3.35 Certificate of Determination for 7.625% Cumulative Preferred Stock, Series T. Filed with Registrant's Form 8-A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 7.625% Cumulative Preferred Stock, Series T and incorporated herein by reference. 3.36 Certificate of Determination for 7.625% Cumulative Preferred Stock, Series U. Filed with Registrant's Form 8-A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 7.625% Cumulative Preferred Stock, Series U and incorporated herein by reference. 3.37 Bylaws, as amended. Filed with Registrant's Registration Statement No. 33-64971 and incorporated herein by reference. 3.38 Amendment to Bylaws adopted on May 9, 1996. Filed with Registrant's Registration Statement No. 333-03749 and incorporated herein by reference. 3.39 Amendment to Bylaws adopted on June 26, 1997. Filed with Registrant's Registration Statement No. 333-41123 and incorporated herein by reference. 3.40 Amendment to Bylaws adopted on January 6, 1998. Filed with Registrant's Registration Statement No. 333-41123 and incorporated herein by reference. 3.41 Amendment to Bylaws adopted on February 10, 1998. Filed with Registrant's Current Report on Form 8-K dated February 10, 1998 and incorporated herein by reference. 3.42 Amendment to Bylaws adopted on March 4, 1999. Filed with Registrant's Current Report on Form 8-K dated March 4, 1999 and incorporated herein by reference. 3.43 Amendment to Bylaws adopted on May 6, 1999. Filed with Registrant's Form 10-Q for the quarterly period ended March 31, 1999 and incorporated herein by reference. 10.1 Second Amended and Restated Management Agreement by and among Registrant and the entities listed therein dated as of November 16, 1995. Filed with PS Partners, Ltd.'s Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference. 55 10.2 Amended Management Agreement between Registrant and Public Storage Commercial Properties Group, Inc. dated as of February 21, 1995. Filed with Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. 10.3 Loan Agreement between Registrant and Aetna Life Insurance Company dated as of July 11, 1988. Filed with Registrant's Current Report on Form 8-K dated July 14, 1988 and incorporated herein by reference. 10.4 Amendment to Loan Agreement between Registrant and Aetna Life Insurance Company dated as of September 1, 1993. Filed with Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. 10.5 Second Amended and Restated Credit Agreement by and among Registrant, Wells Fargo Bank, National Association, as agent, and the financial institutions party thereto dated as of February 25, 1997. Filed with Registrant's Registration Statement No. 333-22665 and incorporated herein by reference. 10.6 Note Assumption and Exchange Agreement by and among Public Storage Management, Inc., Public Storage, Inc., Registrant and the holders of the notes dated as of November 13, 1995. Filed with Registrant's Registration Statement No. 33-64971 and incorporated herein by reference. 10.7 Registrant's 1990 Stock Option Plan. Filed with Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. 10.8* Registrant's 1994 Stock Option Plan. Filed with Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference. 10.9* Registrant's 1996 Stock Option and Incentive Plan. Filed with registrant's Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference. 10.10 Deposit Agreement dated as of December 13, 1995, among Registrant, The First National Bank of Boston, and the holders of the depositary receipts evidencing the Depositary Shares Each Representing 1/1,000 of a Share of 8-7/8 Cumulative Preferred Stock, Series G. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8-7/8 Cumulative Preferred Stock, Series G and incorporated herein by reference. 10.11 Deposit Agreement dated as of January 25, 1996, among Registrant, The First National Bank of Boston, and the holders of the depositary receipts evidencing the Depositary Shares Each Representing 1/1,000 of a Share of 8.45% Cumulative Preferred Stock, Series H. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8.45% Cumulative Preferred Stock, Series H and incorporated herein by reference. 10.12** Employment Agreement between Registrant and B. Wayne Hughes dated as of November 16, 1995. Filed with Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference. 10.13 Deposit Agreement dated as of November 1, 1996, among Registrant, The First National Bank of Boston, and the holders of the depositary receipts evidencing the Depositary Shares Each Representing 1/1,000 of a Share of 8-5/8% Cumulative Preferred Stock, Series I. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8-5/8% Cumulative Preferred Stock, Series I and incorporated herein by reference. 56 10.14 Limited Partnership Agreement of PSAF Development Partners, L. P. between PSAF Development, Inc. and the Limited Partner dated as of April 10, 1997. Filed with Registrant's Form 10-Q for the quarterly period ended March 31, 1997 and incorporated herein by reference. 10.15 Deposit Agreement dated as of August 28, 1997 among Registrant, The First National Bank of Boston, and the holders of the depositary receipts evidencing the Depositary Shares Each Representing 1/1,000 of a Share of 8% Cumulative Preferred Stock, Series J. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8% Cumulative Preferred Stock, Series J and incorporated herein by reference. 10.16 Agreement of Limited Partnership of PS Business Parks, L. P. dated as of March 17, 1998. Filed with PS Business Parks, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998 and incorporated herein by reference. 10.17 Deposit Agreement dated as of January 19, 1999 among Registrant, BankBoston, N. A. and the holders of the depositary receipts evidencing the Depositary Shares Each Representing 1/1,000 of a Share of 8-1/4% Cumulative Preferred Stock, Series K. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8-1/4% Cumulative Preferred Stock, Series K and incorporated herein by reference. 10.18 Agreement and Plan of Merger among Storage Trust Realty, Registrant and Newco Merger Subsidiary, Inc. dated as of November 12, 1998. Filed with Registrant's Registration Statement No. 333-68543 and incorporated herein by reference. 10.19 Amendment No. 1 to Agreement and Plan of Merger among Storage Trust Realty, Registrant, Newco Merger Subsidiary, Inc. and STR Merger Subsidiary, Inc. dated as of January 19, 1999. Filed with Registrant's Registration Statement No. 333-68543 and incorporated herein by reference. 10.20 Amended and Restated Agreement of Limited Partnership of Storage Trust Properties, L. P., dated as of March 12, 1999. Filed with Registrant's Form 10-Q for the quarterly period ended June 30, 1999 and incorporated herein by reference. 10.21* Storage Trust Realty 1994 Share Incentive Plan. Filed with Storage Trust Realty's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference. 10.22 Amended and Restated Storage Trust Realty Retention Bonus Plan effective as of November 12, 1998. Filed with Registrant's Registration Statement No. 333-68543 and incorporated herein by reference. 10.23 Deposit Agreement dated as of March 10, 1999 among Registrant, Bank Boston, N.A. and the holders of the depositary receipts evidencing the Depositary Shares Each Representing 1/1,000 of a Share of 8-1/4% Cumulative Preferred Stock, Series L. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8-1/4% Cumulative Preferred Stock, Series L and incorporated herein by reference. 10.24 Note Purchase Agreement and Guaranty Agreement with respect to $100,000,000 of Senior Notes of Storage Trust Properties, L.P. Filed with Storage Trust Realty's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference. 57 10.25 Deposit Agreement dated as of August 17, 1999 among Registrant, Bank Boston, N.A. and the holders of the depositary receipts evidencing the Depositary Shares Each Representing 1/1,000 of a Share of 8.75% Cumulative Preferred Stock, Series M. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8.75% Cumulative Preferred Stock, Series M and incorporated herein by reference. 10.26 Limited Partnership Agreement of PSAC Development Partners, L.P. among PS Texas Holdings, Ltd., PS Pennsylvania Trust and PSAC Storage Investors, L.L.C. dated as November 15, 1999. Filed with Registrant's Current Report on Form 8-K dated November 15, 1999 and incorporated herein by reference. 10.27 Agreement of Limited Liability Company of PSAC Storage Investors, L.L.C. dated as of November 15, 1999. Filed with Registrant's Current Report on Form 8-K dated November 15, 1999 and incorporated herein by reference. 10.28 Deposit Agreement dated as of January 14, 2000 among Registrant, BankBoston, N.A. and the holders of the depositary receipts evidencing the Depositary Shares Each Representing 1/1,000 of a Share of Equity Stock, Series A. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of Equity Stock, Series A and incorporated herein by reference. 10.29 Amended and Restated Agreement of Limited Partnership of PSA Institutional Partners, L.P. among PS Texas Holdings, Ltd. and the Limited Partners dated as of March 29, 2000. Filed with Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference. 10.30 Amended and Restated Agreement of Limited Partnership of PSA Institutional Partners, L.P. among PS Texas Holdings, Ltd. and the Limited Partners dated as of August 11, 2000. Filed with Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000 and incorporated herein by reference. 10.31* Registrant's 2000 Non-Executive/Non-Director Stock Option and Incentive Plan. Filed with Registrant's Registration Statement No. 333-52400 and incorporated herein by reference. 10.32 Deposit Agreement dated as of January 19, 2001 among Registrant, Fleet National Bank and the holders of the depositary receipts evidencing the Depositary Shares Each Representing 1/1,000 of a Share of 8.600% Cumulative Preferred Stock, Series Q. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8.600% Cumulative Preferred Stock, Series Q and incorporated herein by reference. 10.33* Registrant's 2001 Non-Executive/Non-Director Stock Option and Incentive Plan. Filed with Registrant's Registration Statement No. 333-59218 and incorporated herein by reference. 10.34* Registrant's 2001 Stock Option and Incentive Plan. Filed with Registrant's Registration Statement No. 333-59218 and incorporated herein by reference. 10.35 Deposit Agreement dated as of September 28, 2001 among Registrant, Fleet National Bank and the holders of the depositary receipts evidencing the Depositary Shares Each Representing 1/1,000 of a Share of 8.000% Cumulative Preferred Stock, Series R. Filed with Registrant's Form 8-A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8.000% Cumulative Preferred Stock, Series R and incorporated herein by reference. 58 10.36 Deposit Agreement dated as of October 31, 2001 among Registrant, Fleet National Bank and the holders of the depositary receipts evidencing the Depositary Shares Each Representing 1/1,000 of a Share of 7.875% Cumulative Preferred Stock, Series S. Filed with Registrant's Form 8-A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 7.875% Cumulative Preferred Stock, Series S and incorporated herein by reference. 10.37 Credit Agreement by and among Registrant, Wells Fargo Bank, National Association, as agent, and the financial institutions party thereto dated as of November 1, 2001. Filed with Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001 and incorporated herein by reference. 10.38 Deposit Agreement dated as of January 18, 2002 among Registrant, Fleet National Bank and the holders of the depositary receipts evidencing the Depositary Shares Each Representing 1/1,000 of a Share of 7.625% Cumulative Preferred Stock, Series T. Filed with Registrant's Form 8-A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 7.625% Cumulative Preferred Stock, Series T and incorporated herein by reference. 10.39 Deposit Agreement dated as of February 19, 2002 among Registrant, Fleet National Bank and the holders of the depositary receipts evidencing the Depositary Shares Each Representing 1/1,000 of a Share of 7.625% Cumulative Preferred Stock, Series U. Filed with Registrant's Form 8-A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 7.625% Cumulative Preferred Stock, Series U and incorporated herein by reference. 11 Statement Re Computation of Ratio of Earnings Per Share. Filed herewith. 12 Statement Re Computation of Ratio of Earnings to Fixed Charges. Filed herewith. 99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith. -------------------- * Compensatory benefit plan. ** Management contract. (b) Reports on Form 8-K: None. 59 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: August 14, 2002 PUBLIC STORAGE, INC. BY: /s/ John Reyes -------------- John Reyes Senior Vice President and Chief Financial Officer (Principal financial officer and duly authorized officer) 60