-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GNLpHOkdwrXcSx2IAAOe7AvAqw5lO6q5LTYpA6lzOP3GHFhVYj22d19IbnPy8sC3 4zzedZ5i2cUn5LdmZtgDEQ== 0000318380-97-000043.txt : 19971117 0000318380-97-000043.hdr.sgml : 19971117 ACCESSION NUMBER: 0000318380-97-000043 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUBLIC STORAGE INC /CA CENTRAL INDEX KEY: 0000318380 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 953551121 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08389 FILM NUMBER: 97719651 BUSINESS ADDRESS: STREET 1: 701 WESTERN AVE STREET 2: STE 200 CITY: GLENDALE STATE: CA ZIP: 91201-2397 BUSINESS PHONE: 8182448080 MAIL ADDRESS: STREET 1: 701 WESTERN AVE STREET 2: SUITE 200 CITY: GLENDALE STATE: CA ZIP: 91201 FORMER COMPANY: FORMER CONFORMED NAME: STORAGE EQUITIES INC DATE OF NAME CHANGE: 19920703 10-Q 1 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 September 30, 1997 ------------------ 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 91201-2394 - ---------------------------------------- ----------------------- (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 November 4, 1997: Common Stock, $.10 par value, 103,013,266 shares outstanding - ------------------------------------------------------------ Class B Common Stock, $.10 Par Value - 7,000,000 shares - ------------------------------------------------------- Equity Stock, Series A, $.01 Par Value - 225,000 shares - ------------------------------------------------------- PUBLIC STORAGE, INC. INDEX Pages ----- PART I. FINANCIAL INFORMATION - ----------------------------- Item 1. Condensed Consolidated Balance Sheets at September 30, 1997 and December 31, 1996 1 Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 1997 and 1996 2 Condensed Consolidated Statements of Shareholders Equity for the Nine Months Ended September 30, 1997 3 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1997 and 1996 4- 5 Notes to Condensed Consolidated Financial Statements 6 - 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 - 26 PART II. OTHER INFORMATION (Items 1, 2, 3 , 4 and 5 are not applicable) - -------------------------- Item 6. Exhibits and Reports on Form 8-K 27
PUBLIC STORAGE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share data) September 30, December 31, 1997 1996 ---------------- ---------------- ASSETS (Unaudited) Cash and cash equivalents............................ $90,763 $ 26,856 Real estate facilities, at cost: Land.............................................. 778,690 596,141 Buildings......................................... 2,072,900 1,589,357 ---------------- ---------------- 2,851,590 2,185,498 Accumulated depreciation.......................... (355,049) (297,655) ---------------- ---------------- 2,496,541 1,887,843 Construction in process............................ 51,358 35,815 ---------------- ---------------- 2,547,899 1,923,658 Investment in real estate entities................... 231,962 350,190 Intangible assets, net............................... 215,272 222,253 Other assets......................................... 68,631 49,195 ---------------- ---------------- Total assets........................... $3,154,527 $ 2,572,152 ================ ================ LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable........................................ $100,349 $ 108,443 Accrued and other liabilities........................ 71,664 41,467 ---------------- ---------------- Total liabilities........................... 172,013 149,910 Minority interest.................................... 190,695 116,805 Commitments and contingencies Shareholders' equity: Preferred Stock, $0.01 par value, 50,000,000 shares authorized, - 13,313,009 shares issued and outstanding (13,421,580 issued and outstanding at December 31, 1996), at liquidation preference: Cumulative Preferred Stock, issued in series 868,900 718,900 Convertible Preferred Stock................. 54,584 114,929 Common stock, $0.10 par value, 200,000,000 shares authorized, 102,991,059 shares issued and outstanding (88,362,026 at December 31, 1996)... 10,299 8,837 Class B Common Stock, $0.10 par value, 7,000,000 shares authorized and issued.................... 700 700 Paid-in capital................................... 1,847,745 1,454,387 Cumulative net income............................. 529,537 396,420 Cumulative distributions paid..................... (519,946) (388,736) ---------------- ---------------- Total shareholders' equity.................. 2,791,819 2,305,437 ---------------- ---------------- Total liabilities and shareholders'equity. $3,154,527 $ 2,572,152 ================ ================
See accompanying notes. 1
PUBLIC STORAGE, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) For the Three Months Ended For the Nine Months Ended September 30, September 30, --------------------------- --------------------------- 1997 1996 1997 1996 ------------ ------------ ----------- ------------- REVENUES: Rental income: Self-storage facilities................. $ 102,613 $ 70,434 $ 274,161 $ 195,295 Commercial properties................... 11,526 6,006 27,694 16,675 Portable self-storage................... 2,566 160 4,140 160 Equity in earnings of real estate entities. 4,431 5,559 14,681 15,649 Facility management fees................... 2,355 3,609 8,298 10,918 Interest and other income.................. 2,908 1,750 7,651 6,059 ------------ ------------ ----------- ------------- 126,399 87,518 336,625 244,756 ------------ ------------ ----------- ------------- EXPENSES: Cost of operations: Self-storage facilities................. 29,852 20,859 82,746 58,835 Commercial properties................... 4,277 2,739 11,034 7,325 Portable self-storage................... 14,635 90 25,325 90 Cost of facility management................. 352 576 1,294 1,751 Depreciation and amortization .............. 23,847 16,819 64,375 47,553 General and administrative.................. 1,919 1,536 5,205 4,595 Interest expense............................ 2,262 2,080 5,821 6,893 ------------ ------------ ----------- ------------- 77,144 44,699 195,800 127,042 ------------ ------------ ----------- ------------- Income before minority interest............... 49,255 42,819 140,825 117,714 Minority interest in income................... (2,707) (2,453) (7,708) (7,268) ------------ ------------ ----------- ------------- Net income.................................... $ 46,548 $ 40,366 $ 133,117 $ 110,446 ============ ============ =========== ============= Net income allocation: Allocable to preferred shareholders........ $ 18,316 $ 17,056 $ 68,134 $ 50,118 Allocable to common shareholders........... 28,232 23,310 64,983 60,328 ------------ ------------ ----------- ------------- $ 46,548 $ 40,366 $ 133,117 $ 110,446 ============ ============ =========== ============= PER COMMON SHARE: Net income.................................... $ 0.27 $ 0.30 $ 0.67 $ 0.81 ============ ============ =========== ============= Weighted average common shares outstanding.... 103,536 78,338 97,154 74,690 ============ ============ =========== =============
See accompanying notes. 2
PUBLIC STORAGE, INC. CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY For the Nine Months Ended September 30, 1997 (Amounts in thousands except share data) (Unaudited) Preferred Stock ------------------------- Class B Cumulative Common Common Senior Convertible Stock Stock ------------- ----------- ---------- --------- Balances at December 31, 1996........................... $ 718,900 $ 114,929 $ 8,837 $ 700 Issuance of preferred stock, Series J................... 150,000 - - - Issuance of common stock: In connection with mergers (7,681,432 shares) ..... - - 768 - Public issuance (4,600,000 shares)................. - - 460 - Conversion of 8.25% Convertible Preferred Stock into common stock (93,585 shares).................... - (1,390) 9 - Conversion of Mandatory Convertible Preferred Stock, Series CC into common stock (2,184,250 shares)......................................... - (58,955) 218 - Other (69,766 shares).............................. - - 7 - Net income.............................................. - - - - Cash distributions: Cumulative Senior Preferred Stock.................... - - - - Mandatory Convertible Preferred Stock, Series CC..... - - - - 8.25% Convertible Preferred Stock.................... - - - - Common Stock......................................... - - - - ------------- ----------- ---------- --------- Balances at September 30, 1997.......................... $868,900 $ 54,584 $ 10,299 $ 700 ============= =========== ========== =========
PUBLIC STORAGE, INC. CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY For the Nine Months Ended September 30, 1997 (Amounts in thousands except share data) (Unaudited) Total Paid-in Cumulative Cumulative Shareholders' Capital Net Income Distributions Equity ----------- ----------- -------------- ------------- Balances at December 31, 1996........................... $1,454,387 $ 396,420 $ (388,736) $ 2,305,437 Issuance of preferred stock, Series J................... (5,075) - - 144,925 Issuance of common stock: In connection with mergers (7,681,432 shares) ..... 211,232 - - 212,000 Public issuance (4,600,000 shares)................. 126,239 - - 126,699 Conversion of 8.25% Convertible Preferred Stock into common stock (93,585 shares).................... 1,381 - - - Conversion of Mandatory Convertible Preferred Stock, Series CC into common stock (2,184,250 shares)......................................... 58,737 - - - Other (69,766 shares).............................. 844 - - 851 Net income.............................................. - 133,117 - 133,117 Cash distributions: Cumulative Senior Preferred Stock.................... - - (49,399) (49,399) Mandatory Convertible Preferred Stock, Series CC..... - - (15,328) (15,328) 8.25% Convertible Preferred Stock.................... - - (3,407) (3,407) Common Stock......................................... - - (63,076) (63,076) ----------- ----------- -------------- ------------- Balances at September 30, 1997.......................... $1,847,745 $529,537 $(519,946) $2,791,819 =========== =========== ============== =============
See accompanying notes. 3
PUBLIC STORAGE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) (UNAUDITED) For the Nine Months Ended September 30, ------------------------------ 1997 1996 ------------- ------------- Cash flows from operating activities: Net income.......................................................... $ 133,117 $ 110,446 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization..................................... 64,375 47,553 Depreciation included in equity in earnings of real estate 9,107 13,241 entities.......................................................... Minority interest in income....................................... 7,708 7,268 ------------- ------------- Total adjustments............................................. 81,190 68,062 ------------- ------------- Net cash provided by operating activities................. 214,307 178,508 ------------- ------------- Cash flows from investing activities: Capital improvements to real estate facilities.................... (24,309) (13,465) Construction in process........................................... (53,085) (30,579) Acquisition of real estate facilities............................. (50,172) (101,972) Capital expenditures relating to portable self-storage operations (included in other assets) ..................................... (15,393) - Acquisition of interests in real estate entities.................. (43,257) (86,508) Acquisition cost of business combinations......................... (120,986) (83,620) Acquisition of minority interests................................. (20,967) (10,075) Other............................................................. 897 (8,796) ------------- ------------- Net cash used in investing activities..................... (327,272) (335,015) ------------- ------------- Cash flows from financing activities: Principal payments on notes payable............................... (8,094) (47,106) Net proceeds from the issuance of preferred stock................. 144,925 163,133 Net proceeds from the issuance of common stock.................... 127,550 129,493 Distributions paid to shareholders................................ (130,125) (99,239) Distributions from operations to minority interests in consolidated real estate partnerships........................... (14,201) (15,976) Net reinvestment by minority interests into real estate 3,346 2,023 partnerships...................................................... Contributions from minority interest in development joint venture. 47,087 - Other............................................................. 6,384 3,971 ------------- ------------- Net cash provided by financing activities................. 176,872 136,299 ------------- ------------- Net increase (decrease) in cash and cash equivalents................... 63,907 (20,208) Cash and cash equivalents at the beginning of the period............... 26,856 80,436 ------------- ------------- Cash and cash equivalents at the end of the period..................... $ 90,763 $ 60,228 ============= =============
See accompanying notes. 4
PUBLIC STORAGE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) (UNAUDITED) (CONTINUED) For the Nine Months Ended September 30, ------------------------------ 1997 1996 ------------- ------------- SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Acquisition of real estate facilities in exchange for the cancellation of mortgage notes receivable, the assumption of mortgage notes payable, and issuance of common and preferred stock.............................. $ - $ (2,401) Business combinations: Real estate facilities.................................................. (540,945) (351,907) Other assets............................................................ (3,097) (5,076) Accrued and other liabilities........................................... 16,640 9,370 Minority interest....................................................... 42,038 20,139 Investment in real estate entities...................................... 152,378 82,113 Accrued construction in process............................................ (4,245) - Accrued and unpaid dividends............................................... (1,085) - Assumption of mortgage notes payable in connection with the acquisition of real estate facilities.................................................. - 1,701 Cancellation of mortgage notes receivable in connection with the acquisition of real estate facilities............................................... - 700 Issuance of Mandatory Convertible Preferred Stock, Series CC............... - 58,955 Issuance of common stock in connection with: - business combinations................................................. 212,000 106,285 - conversions of 8.25% Convertible Preferred Stock...................... 1,390 936 - conversions of Mandatory Convertible Preferred Stock.................. 58,955 27,960 Conversion of 8.25% Convertible Preferred Stock into common stock.......... (1,390) (936) Conversion of Series CC Convertible Preferred Stock into common stock...... (58,955) - Conversion of Mandatory Convertible Preferred Stock into common stock...... - (28,470)
See accompanying notes. 5 PUBLIC STORAGE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 1. Description of the business --------------------------- Public Storage, Inc. (the "Company") is a California corporation which was organized in 1980. The Company is a fully integrated, self-administered and self-managed real estate investment trust ("REIT") that acquires, develops, owns and operates self-storage facilities which offer self-storage spaces for lease, usually on a month-to-month basis, for personal and business use. The Company, to a lesser extent, also owns and operates commercial properties containing commercial and industrial rental space. The Company invests in real estate facilities primarily through the acquisition of wholly-owned facilities combined with the acquisition of equity interests in real estate entities owning real estate facilities. At September 30, 1997, the Company had direct and indirect equity interests in 1,127 properties located in 38 states, including 1,072 self-storage facilities and 55 commercial properties. 2. Summary of significant accounting policies ------------------------------------------ Basis of presentation --------------------- The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles 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 estimates. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. For further information, 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, 1996. The consolidated financial statements include the accounts of (i) the Company, (ii) majority owned subsidiaries which are involved in the sale of locks and boxes, rental of trucks and portable self-storage, and the management and operation of commercial properties, and (iii) twenty-three limited partnerships in which the Company has significant economic interest (in excess of 50%) and is able to exercise significant control (the "Consolidated Partnerships"). Collectively, the Company, the majority owned subsidiaries, and the Consolidated Partnerships own a total of 916 real estate facilities, consisting of 863 self-storage facilities and 53 commercial properties. The Company also has equity investments in 40 other affiliated limited partnerships and two REITs owning in aggregate 211 real estate facilities (209 self-storage facilities and 2 commercial properties) which are managed by the Company. The Company's ownership interest in such real estate entities is less than 50% of the total equity interest and, accordingly, the Company's investments in these real estate entities are accounted for using the equity method. 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, the Company is not taxed on that portion of its taxable income which is distributed to its shareholders provided that the Company meets certain tests. The Company believes it will meet these tests during 1997 and, accordingly, no provision for income taxes has been made in the accompanying financial statements. 6 Cash and cash equivalents ------------------------- For purposes of financial statement presentation, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Real estate facilities ---------------------- Real estate facilities are recorded at cost. 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. The Company has no allowance for possible losses relating to any of its real estate investments, including mortgage notes receivable. The need for such an allowance is evaluated by management by means of periodic reviews of its investment portfolio. Intangible assets ----------------- Intangible assets consist of property management contracts ($165,000,000) and the cost over the fair value of net tangible and identifiable intangible assets ($67,726,000) acquired in a 1995 merger with an affiliate. Intangible assets are amortized by the straight-line method over 25 years. At September 30, 1997, intangible assets are net of accumulated amortization of $17,454,000 ($10,473,000 at December 31, 1996). Included in depreciation and amortization expense for the three and nine months ended September 30, 1997 and 1996 is $2,326,000 and $6,981,000, respectively, related to the amortization of intangible assets. Revenue/expense recognition --------------------------- Property rents are recognized as earned. Equity in earnings of real estate entities are recognized based on the Company's ownership interest in the earnings of each of the unconsolidated real estate entities. Leasing commissions relating to the commercial property operations are expensed as incurred. Net income per common share --------------------------- Net income per common share is computed using the weighted average common shares outstanding (adjusted for stock options). The inclusion of the Class B Common Stock in the determination of earnings per common share is anti-dilutive and, accordingly, are not included in the computation in either period. The Company's preferred stocks are not common stock equivalents. Fully diluted earnings per common share are not presented, as the assumed conversion of the Company's convertible preferred stocks would be anti-dilutive. In computing earnings per common share, preferred stock dividends reduced income available to common stockholders. At the end of the first quarter of 1997, the Company paid a non-recurring special dividend to the holder of the Series CC Convertible Preferred Stock totaling $13.4 million. As a result of this payment, the Company would not have been required to pay quarterly dividends with respect to the Series CC Convertible Preferred Stock until the quarter ended March 31, 1999. During the second quarter of 1997, the Series CC Convertible Preferred Stock converted into common stock. Net income allocable to the Company's preferred stock for the nine months ended September 30, 1997 reflects the special dividends paid to the Series CC Convertible preferred stock of $13.4 million. 7 In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effects of stock options will be excluded. The impact of the new standard will not have a material impact on either primary or fully-diluted earnings per common share for the three and nine months ended September 30, 1997 and 1996. Reclassifications ----------------- Certain reclassifications have been made to the consolidated financial statements for 1996 in order to conform to the 1997 presentation. 3. Business combinations --------------------- Mergers with affiliated REITs ----------------------------- During the second quarter of 1997, the Company completed merger transactions with six affiliated public REITs whereby the Company acquired all the outstanding stock of the REITs which it did not previously own in exchange for cash and common stock of the Company. The aggregate acquisition cost of these mergers is summarized as follows:
Merger consideration ------------------------------------------------- Common Stock Pre-existing Entity Date of merger Cash investment Total ---------------------------------------- -------------- ------------------------------------------------- (Amounts in thousands) Public Storage Properties XIV, Inc. April 11, 1997 $ 34,450 $ 9,145 $ 19,977 $ 63,572 Public Storage Properties XV, Inc. April 11, 1997 29,764 8,883 18,137 56,784 Public Storage Properties XVI, Inc. June 24, 1997 41,060 10,804 22,225 74,089 Public Storage Properties XVII, Inc. June 24, 1997 34,590 15,793 25,862 76,245 Public Storage Properties XVIII, Inc. June 24, 1997 39,727 17,570 19,841 77,138 Public Storage Properties XIX, Inc. June 24, 1997 32,409 6,667 18,003 57,079 -------- ------- -------- -------- $212,000 $68,862 $124,045 $404,907 ======== ======= ======== ========
Affiliated Partnership Acquisitions ----------------------------------- During the second quarter of 1997, the Company acquired a limited partnership interest in an affiliated partnership for $22,500,000, consisting of the issuance of the Company's Equity Stock, Series A to the affiliated partnership. The acquisition of this interest, combined with the Company's existing general partnership interest in the partnership, significantly increased the Company's ownership interest and control of the partnership and, as a result, the Company began to consolidate the accounts of this partnership. During the third quarter of 1997, the Company acquired a limited partnership interest in an affiliated partnership for $57,004,000 in cash. The acquisition of this interest increased the Company's ownership in the partnership in excess of 50% (at September 30, 1997, the Company owned approximately a 66% limited partnership interest in the partnership as well as virtually all of the general partnership interest). Because of the Company's increased ownership interest and control of the Partnership through its general partnership interest, the Company began to consolidate the accounts of this partnership. The total merger consideration of $96,386,000 in this transaction includes the $52,124,000 cash acquisition cost and the company's pre-existing investment of $44,262,000. 8 Each of the above mergers with affiliated REITs and acquisition of affiliated partnership interests has been accounted for as a purchase; accordingly, allocations of the total acquisition cost to the net assets acquired were made based on the fair value of such assets and liabilities as of the dates of each respective transaction. The fair market values of the assets and liabilities assumed with respect to the transactions are summarized as follows:
REIT Partnership mergers acquisitions Total ------------- ------------- ------------- (In thousands) Real estate facilities................... $413,597 $127,348 $540,945 Investment in real estate entities....... - 15,929 15,929 Minority Interest........................ - (42,038) (42,038) Other Assets 2,424 673 3,097 Accrued liabilities...................... (11,114) (5,526) (16,640) ------------- ------------- ------------- $404,907 $96,386 $501,293 ============= ============= =============
The historical operating results of the above business combinations prior to each respective acquisition date have not been included in the Company's historical operating results. Pro forma selected financial data for the nine months ended September 30, 1997 and 1996 as though the above business combinations had been effective at the beginning of each period are as follows:
Nine Months Ended Nine Months Ended (In thousands, except per share data) September 30, 1997 September 30, 1996 -------------------------------------- ------------------ ------------------ Revenues............................................... $ 374,568 $ 298,141 Net income............................................. $ 136,144 $ 118,665 Net income per common share............................ $ 0.67 $ 0.83
The pro forma data does not purport to be indicative of operations that would have occurred had the business combinations occurred at the beginning of each period or future results of operations of the Company. Certain pro forma adjustments were made to the combined historical amounts to reflect expected reductions in general and administrative expenses combined with an estimated increase in depreciation and amortization expense. 9 4. Real estate facilities ---------------------- Activity in real estate facilities during 1997 is as follows:
Number of real estate Net rentable Net facilities square feet carrying cost ------------- ------------ -------------- (Amounts in thousands, except number of facilities) Operating Facilities Balance at December 31, 1996.................... 756 46,462 $2,185,498 Property acquisitions - mergers and business 149 9,084 540,945 combinations.................................... Property acquisitions - third party purchases... 4 631 50,172 Newly opened developed facilities............... 7 474 41,615 Acquisition of minority interest................ - - 8,555 Capital improvements............................ - - 24,309 Other........................................... - - 496 ------------- ------------ -------------- Balance at September 30, 1997................... 916 56,651 2,851,590 ------------- ------------ -------------- Accumulated depreciation: Balance at December 31, 1996.................... (297,655) Additions during the year....................... (57,394) -------------- Balance at September 30, 1997................... (355,049) -------------- Construction in progress: Balance at December 31, 1996.................... 11 707 35,815 Expansion projects acquired in mergers........ - 39 773 Current development............................. 14 783 56,385 Newly opened developed facilities............... (7) (474) (41,615) ------------- ------------ -------------- Balance at September 30, 1997................... 18 1,055 51,358 ------------- ------------ -------------- Total real estate facilities.................... 934 57,706 $2,547,899 ============= ============ ==============
The Company's policy is to capitalize interest incurred on debt during the course of construction of its self-storage facilities. Interest capitalized during the three and nine months ended September 30, 1997 was $332,000 and $1,421,000, respectively, compared to $549,000 and $1,142,000, respectively, for the same periods in 1996. During the third quarter of 1997, the Company acquired three commercial properties (585,000 square feet) for an aggregate cost of approximately $43.3 million. The Company also purchased one facility with a total of 46,000 square feet of self-storage and commercial space for an aggregate acquisition cost of $6.8 million. 5. Investment in real estate entities ---------------------------------- The Company's investment in real estate entities at September 30, 1997 generally consists of limited and general partnership interests in approximately 40 affiliated partnerships and common stock in 2 affiliated REITs. Such interests consist of ownership interests ranging from 15% to 45% and are accounted for using the equity method of accounting. 10 During the three and nine months ended September 30, 1997, the Company recognized earnings from its investments totaling $4,431,000 and $14,681,000, respectively. Included in equity in earnings of real estate entities for the three and nine months ended September 30, 1997 is the Company's share of depreciation expense totaling $2,422,000 and $9,107,000, respectively. Summarized combined financial data (based on historical cost) with respect to those unconsolidated real estate entities in which the Company had an ownership interest at September 30, 1997 are as follows:
Nine Months Ended September 30, ------------------------------- 1997 1996 ------------- ------------ (in thousands) Rental income..................................... $ 83,709 $77,812 Total revenues.................................... 85,055 78,881 Cost of operations................................ 29,499 27,655 Depreciation...................................... 11,448 10,017 Net income........................................ 36,281 32,068 Total assets, net of accumulated depreciation..... $468,587 $461,293 Total debt........................................ 78,293 81,334 Total equity...................................... 367,907 363,291
6. Revolving line of credit ------------------------ As of September 30, 1997, the Company had no borrowings on its unsecured credit agreement with a group of commercial banks. The credit agreement (the "Credit Facility") has a borrowing limit of $150.0 million and an expiration date of July 31, 2001. The expiration date may be extended by one year on each anniversary of the credit agreement. Interest on outstanding borrowings is payable monthly. At the option of the Company, the rate of interest charged is equal to (i) the prime rate or (ii) a rate ranging from the London Interbank Offered Rate ("LIBOR") plus 0.40% to LIBOR plus 1.10% depending on the Company's credit ratings and coverage ratios, as defined. In addition, the Company is required to pay a quarterly commitment fee of 0.250% (per annum) of the unused portion of the Credit Facility. The Credit Facility allows the Company, at its option, to request the group of banks to propose the interest rate they would charge on specific borrowings not to exceed $50 million. However, in no case may the interest rate proposal be greater than the amount provided by the Credit Facility. 7. Minority interest ----------------- The Company classifies ownership interests other than its own in the net assets of each of the Consolidated Partnerships as minority interest on the Company's consolidated financial statements. Minority interest in income consists of such interests' share of the operating results of the Company relating to the consolidated operations of the Consolidated Partnerships. 11 8. Shareholders' equity -------------------- Preferred stock --------------- At September 30, 1997 and December 31, 1996, the Company had the following series of Preferred Stock outstanding:
At September 30, 1997 At December 31, 1996 ---------------------------- ---------------------------- Dividend Shares Carrying Shares Carrying Series Rate Outstanding Amount Outstanding Amount ---------------------------------- ------------ ------------- ------------- ------------- ------------- Series A .......................... 10.000% 1,825,000 $ 45,625,000 1,825,000 $ 45,625,000 Series B .......................... 9.200% 2,386,000 59,650,000 2,386,000 59,650,000 Series C........................... Adjustable 1,200,000 30,000,000 1,200,000 30,000,000 Series D........................... 9.500% 1,200,000 30,000,000 1,200,000 30,000,000 Series E........................... 10.000% 2,195,000 54,875,000 2,195,000 54,875,000 Series F........................... 9.750% 2,300,000 57,500,000 2,300,000 57,500,000 Series G .......................... 8.875% 6,900 172,500,000 6,900 172,500,000 Series H .......................... 8.450% 6,750 168,750,000 6,750 168,750,000 Series I .......................... 8.625% 4,000 100,000,000 4,000 100,000,000 Series J .......................... 8.000% 6,000 150,000,000 - - ------------- ------------- ------------- ------------- Total Cumulative Senior Preferred Stock........................ 11,129,650 868,900,000 11,123,650 718,900,000 ------------- ------------- ------------- ------------- Convertible........................ 8.250% 2,183,359 54,584,000 2,238,975 55,974,000 Mandatory Convertible, Series CC. 13.000% - - 58,955 58,955,000 ------------- ------------- ------------- ------------- Total Convertible Preferred Stock 2,183,359 54,584,000 2,297,930 114,929,000 ------------- ------------- ------------- ------------- 13,313,009 $923,484,000 13,421,580 $833,829,000 ============= ============= ============= ============= The Series A through Series J stock (collectively the "Cumulative Senior Preferred Stock") have general preference rights with respect to liquidation and quarterly distributions. With respect to the payment of dividends and amounts upon liquidation, all of the Company's Convertible Preferred Stock ranks junior to the Cumulative Senior Preferred Stock and any other shares of preferred stock of the Company ranking on a parity with or senior to the Cumulative Senior Preferred Stock. The Convertible Preferred Stock ranks senior to the common stock, any additional class of common stock and any series of preferred stock expressly made junior to the Convertible Preferred Stock. Holders of the Company's 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 September 30, 1997, there were no dividends in arrears and the Debt Ratio was 3.2%. Except under certain conditions relating to the Company's qualification as a REIT, the Senior Preferred Stock are not redeemable prior to the following dates: Series A - September 30, 2002, Series B - March 31, 2003, Series C - September 30, 1999, Series D - September 30, 2004, Series E - January 31, 2005, Series F - April 30, 2005, Series G - December 31, 2000, Series H - January 31, 2001, Series I - October 31, 2001, Series J - August 31, 2002. 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 depository share in the case of the Series G, Series H, Series I and Series J), plus accrued and unpaid dividends. 12 The Convertible Preferred Stock is convertible at any time at the option of the holders of such stock into shares of the Company's common stock at a conversion rate of 1.6835 shares of common stock for each share of Convertible Preferred Stock, subject to adjustment in certain circumstances. On or after July 1, 1998, the Convertible Stock will be redeemable for shares of the Company's common stock at the option of the Company, in whole or in part, at a redemption price of 1.6835 shares of common stock for each share of Convertible Stock (subject to adjustment in certain circumstances), if for 20 trading days within any period of 30 consecutive trading days (including the last trading day of such period), the closing price of the common stock on its principal trading market exceeds $14.85 per share (subject to adjustment in certain circumstances). The Convertible Preferred Stock is not redeemable for cash. During the second quarter of 1997, all of the Series CC Preferred Stock was converted into 2,184,250 shares of common stock. In August 1997, the Company issued 6,000,000 depositary shares (depositary shares, each representing 1/1,000 of a share) of its 8.00% Series J preferred stock, raising net proceeds of approximately $144.9 million. Equity Stock ------------ In June 1997, the Company contributed $22,500,000 (225,000 shares) of its Equity Stock, Series A ("Equity Stock") to a partnership in which the Company is the general partner. As a result of this contribution, the Company obtained a majority interest in the Partnership and began to consolidate the accounts of the Partnership. The Equity Stock ranks on a parity with Common Stock and junior to the Company's Cumulative Senior Preferred Stock and Convertible 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 are equal to the lesser of (i) 10 times the amount paid per Common Stock or (ii) $2.20. Common Stock ------------ On March 18, 1997, the Company publicly issued 4,600,000 shares of common stock, raising net proceeds of approximately $126.7 million. An additional 7,681,000 shares of common stock were issued in connection with mergers during the second quarter of 1997. Class B Common Stock The Class B Common Stock will (i) not participate in distributions until the later to occur of funds from operations ("FFO") per Common Share as defined below, aggregating $1.80 during any period of four consecutive calendar quarters, or January 1, 2000; thereafter, the Class B Common Stock will participate in distributions (other than liquidating 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, (ii) not participate in liquidating distributions, (iii) not be entitled to vote (except as expressly required by California law) and (iv) automatically convert 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. For these purposes, FFO means net income (loss) before (i) gain (loss) on early extinguishment of debt, (ii) minority interest in income and (iii) gain (loss) on disposition of real estate, adjusted as follows: (i) plus depreciation and amortization, and (ii) less FFO attributable to minority interest. FFO per Common Share means FFO less preferred stock dividends (other than dividends on convertible preferred stock) divided by the outstanding weighted average shares of Common Stock assuming conversion of all outstanding convertible securities and the Class B Common Stock. For these purposes, FFO per share of Common Stock (as defined) was $1.86 for the four consecutive calendar quarters ended September 30, 1997. 13 Dividends --------- The following summarizes dividends paid during the first nine months of 1997: Distributions Per Share or Total Depository Share Distributions ---------------- ------------- Series A.............................. $ 1.875 $ 3,422,000 Series B.............................. $ 1.725 4,116,000 Series C.............................. $ 1.394 1,673,000 Series D.............................. $ 1.781 2,138,000 Series E.............................. $ 1.875 4,116,000 Series F.............................. $ 1.828 4,205,000 Series G.............................. $ 1.664 11,482,000 Series H.............................. $ 1.584 10,694,000 Series I.............................. $ 1.617 6,468,000 Convertible........................... $ 1.547 3,407,000 Series CC............................. $260.000 15,328,000 ------------- 67,049,000 Common................................ $ 0.660 63,076,000 ------------- Total dividends paid $130,125,000 ============= At September 30, 1997, the Company accrued distributions with respect to its Series J preferred stock for the period from the date of issuance through September 30, 1997 totaling $1,085,000 which will be paid on December 31, 1997. The dividend rate on the Series C Preferred Stock for the third quarter of 1997 was equal to 7.425% 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 December 31, 1997 will be equal to 7.194% per annum. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - --------------------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- Net income for the three months ended September 30, 1997 was $46,548,000 compared to $40,366,000 for the same period in 1996, representing an increase of $6,182,000 or 15%. The increase in net income for the three months ended September 30, 1997 compared to the same period in 1996 was primarily the result of improved property operations, the acquisition of additional real estate facilities and partnership interests during 1997 and 1996, offset partially by start-up operating losses experienced in the Company's new portable self-storage business. Net income allocable to common shareholders (net income after deducting dividends to the Company's preferred shareholders of $18,316,000 and $17,056,000 for the three months ended September 30, 1997 and 1996, respectively) was $28,232,000 or $0.27 per common share (based on 103,536,000 weighted average shares) for the three months ended September 30, 1997 compared to $23,310,000 or $0.30 per common share (based on 78,338,000 weighted average shares) for the same period in 1996, representing a decrease of $0.03 per common share. This decrease is principally due to operating losses generated from the portable self-storage business which totaled $12,069,000 or $0.12 per common share during the three months ended September 30, 1997. Net income for the nine months ended September 30, 1997 was $133,117,000 compared to $110,446,000 for the same period in 1996, representing an increase of $22,671,000 or 21%. The increase in net income for the nine months ended September 30, 1997 compared to the same periods in 1996 were primarily the result of improved property operations, the acquisition of additional real estate facilities and partnership interests during 1997 and 1996, offset partially by start-up operating losses in its new ancillary portable self-storage business. Net income allocable to common shareholders (net income after deducting dividends to the Company's preferred shareholders of ($68,134,000 and $50,118,000 for the nine months ended September 30, 1997 and 1996, respectively ) was $64,983,000 or $0.67 per common share (based on 97,154,000 weighted average shares) for the nine months ended September 30, 1997 compared to $60,328,000 or $0.81 per common share (based on 74,690,000 weighted average shares) for the same period in 1996, representing a decrease of $0.14 per common share. Similar to the three month period comparisons, net income allocable to common shareholders has been negatively impacted by losses generated from the Company's portable self-storage business which totaled $21,185,000 or $0.22 per common share for the nine months ended September 30, 1997. In addition, net income allocable to the common shareholders for the nine months ended September 30, 1997 was negatively impacted by a special dividend totaling $13,412,000 paid to the Company's Series CC Convertible Preferred Stock during the first quarter of 1997. As a result of the special dividend, the Company would not have been required to pay another dividend with respect to this stock until the quarter ended March 31, 1999. During the second quarter of 1997, the Series CC Convertible Preferred Stock converted into common stock of the Company. Accordingly, all of the $13,412,000 ($0.14 per common share) of dividends were treated during the nine months ended September 30, 1997 as an allocation of net income to the preferred shareholders in determining the allocation of net income to the common shareholders. The special dividend eliminated the quarterly dividend (fixed charges) of $1.9 million and resulting dilutive impact to the Company's common shareholders. PROPERTY OPERATIONS: Rental income and cost of operations have increased significantly for the three and nine months ended September 30, 1997 compared to the same periods in 1996 due to the Company's merger and acquisition activities throughout 1996 and 1997. As a result of these activities, the number of facilities included in the Company's consolidated financial statements has increased from 665 at September 30, 1996 to 916 at September 30, 1997. 15 The Company's self-storage operations account for over 90% of the total property operations and represent the largest comparison variances from period to period. As a result the following table is presented to further illustrate variances from period to period by (i) comparing the operating results of self-storage facilities which were owned by the Company throughout 1996 and 1997 and (ii) outlining operating results for those self-storage facilities which were acquired by the Company in 1996 and 1997 whereby the operations represent partial results from the date the facility was acquired through the end of the period. SUMMARY OF SELF-STORAGE OPERATIONS ---------------------------------- Three Months Ended Nine Months Ended September 30, September 30, -------------------- -------------------- 1997 1996 Change 1997 1996 Change ------- ------- ------- ------- ------- ------- (dollar amounts in thousands, except per square foot data) Rental income: Pre-1996 acquisitions..........$.65,593 $ 61,566 6.5% $ 189,980 $ 179,074 6.1% 1996 and 1997 acquisitions.......37,020 8,868 317.5% 84,181 16,221 419.0% ------- ------- ------- ------- ------- ------- 102,613 70,434 45.7% 274,161 195,295 40.4% ------- ------- ------- ------- ------- ------- Cost of operations: Pre-1996 acquisitions............18,640 18,134 2.8% 56,467 53,825 4.9% 1996 and 1997 acquisitions.......11,212 2,725 311.4% 26,279 5,010 424.% ------- ------- ------- ------- ------- ------- 29,852 20,859 43.1% 82,746 58,835 40.6% ------- ------- ------- ------- ------- ------- Net operating income: Pre-1996 acquisitions............46,953 43,432 8.1% 133,513 125,249 6.6% 1996 and 1997 acquisitions.......25,808 6,143 320.1% 57,902 11,211 416.5% ------- ------- ------- ------- ------- ------- $ 72,761 $ 49,575 46.8% $ 191,415 $136,460 40.3% ======= ======= ======= ======= ======== ======= Net rentable square feet (at the end of the period, in 000's): Pre-1996 acquisitions............32,139 32,139 -% 32,139 32,139 -% 1996 and 1997 acquisitions.......19,864 6,036 229.1% 19,864 6,036 229.1% Number of facilities (at the end of the period): Pre-1996 acquisitions...............547 547 -% 547 547 -% 1996 and 1997 acquisitions..........316 93 239.8% 316 93 239.8% Pre-1996 acquisitions: Annualized realized rent per occupied square foot..........$8.76 $8.28 5.8% $8.64 $8.16 5.9% Annualized scheduled rent per square foot...................$9.24 $8.76 5.5% $9.24 $8.28 11.6% Weighted average occupancy for the period....................93.3% 92.6% 0.7% 91.4% 90.7% 0.7%
The increases in rental income for the pre-1996 acquisitions for the three and nine months ending September 30, 1997 compared to the same periods in 1996 are due to increased realized rent per occupied square foot combined with an increased weighted average occupancy level. The Company believes that such improvements are principally the result of initiatives undertaken during 1996 and 1997 consisting of: * In the second half of 1996, the Company began to increase its scheduled rents charged to new customers (prior to promotional discounts) and to existing tenants where warranted. * Commencing in early 1996, the Company began to experiment with a telephone reservation system designed to provide added customer service. Customers calling either the Company's toll-free telephone referral system, (800) 44-STORE, or a self-storage 16 facility are directed to the Company's reservation system where a representative discusses with the customer space requirements, price and location preferences and also informs the customer of other products and services provided by the Company and its subsidiaries. The national reservation center was not fully operational for most of the Company's facilities until the fourth quarter of 1996. * Commencing in the latter part of the first quarter of 1997 the Company began, in selected markets, to advertise on local television offering a promotional rental rate of $1.00 for the first month. Rental income for the three and nine months ended September 30, 1997 are net of promotional discounts totaling $4,370,000 and $11,163,000, respectively, compared to $1,347,000 and $1,929,000 for the same periods in 1996. In addition, included in cost of operations for the three and nine months ended September 30, 1997 are costs associated with the telephone reservation center and advertising totaling $2,209,000 and $5,003,000, respectively, compared to $1,007,000 and $2,433,000 for the same periods in 1996. DEVELOPMENT OF SELF-STORAGE FACILITIES During the first nine months of 1997, the Company opened for operation seven newly constructed self-storage facilities (474,000 square feet). At September 30, 1997, the Company had sixteen self-storage facilities (approximately 930,000 square feet) under development with an aggregate cost incurred to date of $41.3 million and total estimated cost to complete of $31 million. In addition, two portable self-storage facilities (approximately 125,000 square feet) were under development with an aggregate cost incurred to date of approximately $1.8 million and total additional estimated costs to complete of approximately $3.0 million. The Company currently has plans to develop an additional 10 self-storage facilities (approximately 662,000 square feet) and 10 portable self-storage facilities (approximately 758,000 square feet) in various locations at an estimated cost of approximately $90.5 million (aggregate costs incurred to date of approximately $3.0 million). The Company is evaluating the feasibility of developing additional facilities in selected markets in which there are few, if any, facilities to acquire at attractive prices and where the scarcity of other undeveloped parcels of land or other impediments to development make it difficult to construct additional competing facilities. Generally the construction period takes 9 to 12 months followed by, in the case of self-storage facilities, a 18 to 24 month fill-up process until the newly constructed facility reaches a stabilized occupancy level of approximately 90%. Due to the timing of the deployment of capital to construct the facilities and the relatively long "fill-up" period until the facilities reach a stabilized occupancy level, the Company believes that its development plans may create earnings dilution in the short-term. In April 1997, the Company entered into an agreement with a joint venture partner to develop approximately $220 million of self-storage facilities (see "LIQUIDITY AND CAPITAL RESOURCES - DEVELOPMENT ACTIVITIES"). EQUITY IN EARNINGS OF REAL ESTATE ENTITIES: At September 30, 1997, the Company had ownership interests in 40 limited partnerships and 2 REITs (collectively the "Unconsolidated Entities"). The Company's ownership interest in these entities ranges from 15% to 45%, but generally averages approximately 30%. Due to the Company's limited ownership interest and control of these entities, the Company does not consolidate the accounts of these entities for financial reporting purposes, and accounts for such investments using the equity method. Equity in earnings of real estate entities was $4,431,000 for the three months ended September 30, 1997 as compared to $5,559,000 for the same period in 1996. Equity in earnings of real estate entities was $14,681,000 for the nine months ended September 30, 1997 as compared to $15,649,000 for the same period in 1996. The decreases in earnings from real estate entities from 1996 to 1997 reflect the Company's merger and partnership acquisition activities in the last three months of 1996 (with three affiliated REIT mergers and the acquisition of additional partnership interests) and the first nine months of 1997 (with six additional affiliated REIT mergers and the acquisition of additional partnership interests). The merger and partnership acquisition activities resulted in the elimination of investment in real estate entities and, after the acquisitions, the associated equity earnings. 17 Equity in earnings of real estate entities for the three and nine months ended September 30, 1997 consists of the Company's pro rata share of the Unconsolidated Entities based upon the Company's ownership interest for the period. The following table summarizes the components of the Company's equity in earnings of real estate entities:
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- 1997 1996 Dollar Change 1997 1996 Dollar Change -------------------------------------- ------------------------------------- (Amounts in thousands) Self-storage operations $6,874 $10,100 $(3,226) $23,671 $28,511 $(4,840) Commercial property 129 453 (324) 1,297 2,065 (768) operations Depreciation and Amortization: Self-storage facilities (2,379) (4,068) 1,689 (8,608) (12,294) 3,686 Commercial properties (43) (347) 304 (499) (947) 448 Other (150) (579) 429 (1,180) (1,686) 506 -------------------------------------- ------------------------------------- Total equity in earnings of real estate entities $4,431 $5,559 $(1,128) $14,681 $15,649 $(968) -------------------------------------- -------------------------------------
Similar to the Company, the Unconsolidated Entities generate substantially all of their income from their ownership of self-storage facilities. In the aggregate, the Unconsolidated Entities own a total of 211 facilities at September 30, 1997, including 209 self-storage facilities. The Company expects that its equity in earnings from Unconsolidated Entities will generally decrease as a result of the acquisition of additional interests in the Unconsolidated Entities by the Company. The Company has in the past acquired, and may continue to seek to acquire in the future, real estate facilities owned by or additional interests in the Unconsolidated Entities. PROPERTY MANAGEMENT OPERATIONS: The property management contracts generally provide for compensation equal to 6%, in the case of the self-storage facilities, and 5%, in the case of the commercial properties, of gross revenues of the facilities managed. Under the supervision of the property owners, the Company coordinates rental policies, rent collections, marketing activities, the purchase of equipment and supplies, maintenance activity, and the selection and engagement of vendors, suppliers and independent contractors. In addition, the Company assists and advises the property owners in establishing policies for the hire, discharge and supervision of employees for the operation of these facilities, including resident managers, assistant managers, relief managers and billing and maintenance personnel. Property management operations reflect the activities with respect to the management of facilities owned by affiliated unconsolidated entities. As a result, the revenues generated from its property management operations are generally predictable and dependent upon the future growth of rental income for these affiliated properties. The Company has in the past acquired, and may continue to seek to acquire in the future, real estate facilities owned by affiliated entities which are not consolidated with the Company. The acquisition of such facilities reduces management fee income to the Company and is offset by a corresponding reduction in the cost of property operations. During the three months ended September 30, 1997, the Company's property management operations generated net operating income of $2,003,000 on revenues of $2,355,000 and expenses of $352,000 as compared to net operating income of $3,033,000 on revenues of $3,609,000 and expenses of $576,000 during the same period in 1996. During the nine months ended September 30, 1997, the Company's property management operations generated net operating income of $7,004,000 on revenues of $8,298,000 and expenses of $1,294,000 compared to net operating income of $9,167,000 on revenues of $10,918,000 and expenses of $1,751,000 during the same period in 1996. The decreases in property management operations are due to the Company's acquisition of facilities which it previously managed for third parties and affiliated entities for a fee. PORTABLE SELF-STORAGE BUSINESS: In an effort to attract a wider variety of customers, to further differentiate the Company from its competition and to generate new sources of revenues, additional businesses are being developed by affiliates of the Company to complement the Company's self-storage business. These products 18 include the sale of locks, boxes and packing supplies and the rental of trucks and other moving equipment through the implementation of (i) a retail expansion program, (ii) a truck rental program and most significantly (iii) a portable self storage business. The retail expansion program and truck rental program results are presented in "interest and other income," analyzed in the following section. Public Storage Pickup & Delivery, Inc. ("PSPUD"), a subsidiary of the Company, operates a portable self-storage business that rents storage containers to customers for storage in a central warehouse and provides related transportation services. During the third quarter of 1997, PSPUD opened nine new facilities which combined with its previously opened facilities increased the number of opened facilities to 43 as of September 30, 1997 (including a mature facility acquired in 1996). In October 1997, PSPUD opened two additional facilities. These 45 facilities had a total of 29,350 occupied containers as of October 31, 1997. PSPUD presently anticipates opening an additional 8 facilities from November 1, 1997 through December 31, 1997. PSPUD has also identified an additional 12 sites in existing markets for development of PSPUD facilities at an aggregate estimated cost of $46.2 million. Due to the start-up nature of this business, PSPUD incurred operating losses totaling approximately $12.1 million and $21.2 million for the three and nine months ended September 30, 1997, respectively. PSPUD continues to expend funds in personnel, training, equipment, computer software and professional fees in organizing this business. Until the facilities are operating profitably, PSPUD's operations are expected to adversely impact the Company's earnings, especially for the quarter ended September 30, 1997 whose losses are expected to be higher than in subsequent quarters. PSPUD currently expects subsequent quarters to produce operating losses, but anticipates that losses in subsequent quarters will be at a reduced level from the current quarter, although there can be no assurance. At October 31, 1997, PSPUD had 31 facilities that had been opened since the beginning of the third quarter (excluding the mature facility acquired in 1996 and two smaller facilities in peripheral markets) located in 15 markets in 7 states. These 31 facilities had container capacity ranging from 1,600 to 2,300 containers (averaging 2,200 containers). Average monthly gross container rentals for the four months ended October 31, 1997 for the 31 facilities were 166 in July, 214 in August, 241 in September and 247 in October and had average monthly move-outs during this period of 71 in July, 113 in August, 135 in September and 124 in October. The Company believes that the move-in activity was positively impacted by the Company's marketing and advertising efforts which commenced during August and September. However, there were markets in which marketing and advertising effects had not commenced during this period. There can be no assurance as to the level of PSPUD's expansion, level of net rentals, level of move-outs or profitability. The Company continues to believe that it should invest a portion of its retained cash flow in PSPUD, which responds to a promising business opportunity and complements the Company's existing operations through joint use of a national telephone reservation system and a coordinated media advertising program to increase consumer awareness of both traditional mini-warehouses and portable self-storage. The Company's average mini-warehouse occupancy level is higher than at any comparable period in prior years, despite the promotion of the portable self-storage business in the same markets. The Company believes that the combination of PSPUD and traditional mini-warehouses allows for market strategies that promote both businesses and most importantly meet consumer needs. Included in the cost of operations of the portable self-storage operations are certain start-up costs which the Company expects to be non-recurring and only incidental to the opening of new facilities. These costs are related to site acquisition, leasing activities, systems development, and hiring and training of personnel. In addition, included in cost of operations is $3,500,000 and $7,500,000 for the three and nine months ended September 30, 1997, respectively, relating to marketing activities, including television advertising, designed to enhance the rental activities of PSPUD's facilities. 19 INTEREST AND OTHER INCOME As mentioned above, the Company has developed additional businesses through affiliates, via a retail expansion program and a truck rental program. The net results of these two businesses are presented along with interest and other income, as "interest and other income." The components of interest and other income are detailed as follows:
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- 1997 1996 Dollar Change 1997 1996 Dollar Change ------------------------------------ ----------------------------------- (Amounts in thousands) Sales of Packaging Material and Truck Rental Income: --------------------------------------------------- Revenues $1,538 $ 954 $ 584 $3,691 $2,191 $1,500 Costs of Operation (1,227) (585) (642) (2,929) (1,447) (1,482) ------------------------------------ ----------------------------------- Net Operating Income 311 369 (58) 762 744 18 Interest and Other Income 2,597 1,381 1,216 6,889 5,315 1,574 ------------------------------------ ----------------------------------- Total Interest and Other Income $2,908 $1,750 $1,158 $7,651 $6,059 $1,592 ==================================== ===================================
Interest and other income principally consists of interest earned on cash balances and interest related to mortgage notes receivable. The increase in interest income for the three and nine months ended September 30, 1997 compared to the same periods in 1996 is primarily due to interest income on excess cash balances. On March 18, 1997, the Company publicly issued 4.6 million shares of common stock, raising net proceeds of approximately $126.7 million. On August 28, 1997, it issued its Series J Preferred Stock, raising net proceeds of approximately $144.9 million. The effect of the timing of investing the funds from these offerings resulted in higher average invested cash balances in 1997 as compared to 1996 and 1997. DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense has increased $7,028,000, to $23,847,000 for the three months ended September 30, 1997 as compared to $16,819,000 for the same period in 1996. Depreciation and amortization expense has increased $16,822,000, to $64,375,000 for the nine months ended September 30, 1997 as compared to $47,553,000 for the same period in 1996. These increases are principally due to the acquisition of additional real estate facilities during 1996 and 1997. MINORITY INTEREST IN INCOME: Minority interest in income represents the income allocable to equity interests in the consolidated entities which are not owned by the Company. Minority interest in income for the three months ended September 30, 1997 was $2,707,000 compared to $2,453,000 for the same period in 1996. Minority interest in income for the nine months ended September 30, 1997 was $7,708,000 compared to $7,268,000 for the same period in 1996. Minority interest in income increased in the three and nine month periods compared to 1996 due to improved property operations and the consolidation of investments which were previously accounted for on the equity method during the 1996 periods. These effects were partially offset by PSI's acquisition of additional minority interests, as well as minority interests in the losses of PSPUD and the development joint venture. 20 Supplemental Property Data At September 30, 1997, the Company's investment portfolio consists of (i) wholly-owned properties owned by the Company, (ii) properties owned by real estate partnerships in which the Company has significant ownership interests (the "Consolidated Partnerships"), and (iii) properties owned by real estate entities (partnerships and REITs) in which the Company's ownership interest and control are not sufficient to warrant the consolidation of such entities (the "Unconsolidated Entities"). The following table summarizes the Company's investment in real estate facilities as of September 30, 1997:
Number of Facilities in which the Net Rentable Square Footage Company has an ownership interest (in thousands) ---------------------------------- ---------------------------------- Self-Storage Commercial Self-Storage Commercial Facilities Properties Total Facilities Properties Total ---------------------------------- ---------------------------------- Wholly-owned facilities (a) (b) 531 11 542 32,510 729 33,239 Facilities owned by Consolidated 332 42 374 19,521 3,891 23,412 ---------------------------------- ---------------------------------- Partnerships Total consolidated facilities 863 53 916 52,031 4,620 56,651 Facilities owned by Unconsolidated Entities 209 2 211 11,999 191 12,190 ---------------------------------- ---------------------------------- Total facilities in which the Company has an ownership interest 1,072 55 1,127 64,030 4,811 68,841 ================================== ==================================
(a) 35 commercial properties which were previously "wholly-owned" at December 31, 1996 are now classified as "Facilities Owned by Consolidated Partnerships." Pursuant to the restructuring of the commercial properties operations, the Company and the Consolidated Partnerships contributed substantially all of their commercial properties to a newly created operating partnership, which is owned by American Office Park Properties, Inc., the Company's majority owned subsidiary and by the Company and its consolidated Partnerships. (b) The Company subdivided 7 properties that combined self storage and commercial property operations. These properties were previously accounted for as self storage facilities. Net rentable square footage of 529,000 relating to the commercial portion of these properties has been reclassified from self-storage facilities to commercial properties. In order to evaluate how the Company's overall portfolio has performed, management analyzes the operating performance of a consistent group of self-storage facilities representing 951 (55.8 million net rentable square feet) of the 1,072 self-storage facilities (herein referred to as "Same Store" self-storage facilities) which have been operated under the "Public Storage" name for at least the past three years. At September 30, 1997, the Company had ownership interests in a total of 1,072 mini-warehouse facilities. Of these 1,072 properties, 951 or 89% of the mini-warehouses have been in operation and managed by Public Storage, Inc. since January 1, 1993. The following table summarizes the operating results of these 951 properties: 21 Same Store mini-warehouse facilities (951 facilities): ------------------------------------------------------ (historical property operations)
Three months ended Nine months ended September 30, September 30, ------------------------ ---------------------- 1997 1996 Change 1997 1996 Change ---------- ----------- -------- --------- ---------- --------- (dollar amounts in thousands) Rental income.............. $122,309 $114,108 7.2% $353,561 $331,762 6.6% Cost of operations......... 41,081 39,104 5.1% 123,634 116,170 6.4% ---------- ----------- -------- --------- ---------- --------- Net operating income....... $ 81,228 $75,004 8.3% $229,927 $215,592 6.6% ========== =========== ======== ========= =========== ========= Gross profit margin........ 66.4% 65.7% 0.7% 65.0% 65.0% - ............................. .............. ............... .......... .............. .............. ......... Weighted Average: Occupancy............ 93.7% 93.0% 0.7% 91.8% 91.4% 0.4% Realized rent per occupied sq. ft. for period......... $9.36 $8.76 6.8% $9.24 $8.64 6.9% Scheduled rent per occupied sq. ft. for period......... $9.96 $9.36 6.4% $9.84 $8.76 12.3%
- -------------- 1. Assumes payment of property management fees on all facilities, including those facilities owned by the Company for which effective November 16, 1995 no fee is paid. 2. Gross profit margin is computed by dividing property net operating income (before depreciation expense) by rental revenues. Cost of operations include a 6% management fee. The gross profit margin excluding the facility management fee was 72.4% and 71.7% for the three months ended September 30, 1997 and 1996, respectively. The gross profit margin excluding the facility management fee was 71.0% and 71.0% for the nine months ended September 30, 1997 and 1996, respectively. 3. Realized rent per square foot represents the actual revenue earned per occupied square foot. Management believes this is a more relevant measure than the scheduled rental rates, since scheduled rates can be discounted through the use of promotions. Rental income for the Same Store facilities included promotional discounts totaling $4.6 million and $13.2 million for the three and nine months ended September 30, 1997, respectively, compared to $2.0 million and $3.0 million for the same periods ended September 30, 1996, respectively. The increase in promotional discounts is principally due to promotional activities offered through the national telephone reservation center combined with television advertising which began in the second quarter in certain markets where the Company offered a promotional $1.00 first month rent to customers. Cost of operations for the three and nine months ended September 30, 1997 increased due to (i) advertising and promotion, which increased $967,000 and $2,308,000, respectively, due primarily to the Company's national telephone reservations center and television advertising in certain markets and (ii) property taxes, which increased $1,182,000 and $3,014,000, respectively, due primarily to higher assessments in California, Illinois, and Texas. As indicated above, in early 1996, the Company implemented a national telephone reservation system designed to provide added customer service for all the self-storage facilities under management by the Company. The Company believes that the improved operating results, as indicated in the above table, in large part are due to the success of the national telephone reservation system. However, the national telephone reservation system was not fully operational for most of the self-storage facilities until the latter part of the fourth quarter of 1996. 22 LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Company has operated and intends to continue to operate in a self-sufficient manner without reliance on external sources of financing to fund its ongoing operating needs. The Company believes that funds internally generated from ongoing operations will continue to be sufficient to enable it to meet its operating expenses, capital improvements, debt service requirements and distributions to shareholders for the foreseeable future. Over the past six years, funds internally generated from ongoing operations were in excess of the Company's operating needs, allowing the Company to retain cash flow, which it used to acquire additional real estate investments or make optional principal repayments on debt. INTERNALLY GENERATED CASH FLOWS: The Company believes that important measures of its performance as well as its liquidity are cash provided by operations and funds from operations ("FFO") and the ability of these measures to fund the Company's operating requirements (i.e., capital improvements, principal payments on debt and distribution requirements). Net cash provided by operations (as determined in accordance with generally accepted accounting principles) reflects the cash generated from the Company's business before distributions to various equity holders, including the preferred shareholders, capital expenditures or mandatory principal payments on debt. Net cash provided by operations has increased to $214,307,000 from $178,508,000 for the nine months ended September 30, 1997 and 1996, respectively. The following table summarizes the Company's ability to pay the minority interests' distributions, its dividends to the preferred shareholders and capital improvements to maintain the facilities through the use of cash provided by operating activities. The remaining cash flow is available to the Company to make both scheduled and optional principal payments on debt, pay distributions to common shareholders and for reinvestment.
For the Nine Months Ended September 30, ------------------------- 1997 1996 ------------ ---------- (in thousands) Net income............................................................ $133,117 $110,446 Depreciation and amortization......................................... 64,375 47,553 Depreciation from unconsolidated real estate entities................. 9,107 13,241 Minority interest in income........................................... 7,708 7,268 ------------ ---------- Net cash provided by operating activities....................... 214,307 178,508 Distributions from operations to minority interests (funds from operations allocable to minority interests)......................... (14,201) (15,976) ------------ ---------- Cash from operations/FFO available to the Company's shareholders...... 200,106 162,532 Less: Preferred stock dividends..................................... (68,134) (50,118) Add: Non-recurring payment of dividends with respect to the Series CC Convertible Preferred..................................... 13,412 - ------------ ---------- Cash from operations/FFO available to common shareholders............. 145,384 112,414 Capital improvements to maintain facilities: Self-storage facilities............................................. (21,505) (10,884) Commercial properties............................................... (2,804) (2,581) Add back: minority interest share of capital improvements............. 1,403 2,295 ------------ ---------- Funds available for principal payments on debt, common dividends and reinvestment.................................................... 122,478 101,244 Cash distributions to common shareholders............................. (63,076) (49,121) ------------ ---------- Funds available for principal payments on debt and investment......... $59,402 $52,123 ============ ==========
23 See the consolidated statements of cash flows for the nine months ended September 30, 1997 and 1996 for additional information regarding the Company's investing and financing activities. FFO increased to $200,106,000 for the nine months ended September 30, 1997 compared to $162,532,000 for the same period in 1996. FFO applicable to the common shareholders (after deducting preferred stock dividends) increased to $145,384,000 for the nine months ended September 30, 1997 compared to $112,414,000 for the same period in 1996. FFO is used by many financial analysts in evaluating REITs. The Company defines FFO as net income (loss) (computed in accordance with GAAP) before (i) gain (loss) on disposition of real estate, adjusted as follows: (i) plus depreciation and amortization, and (ii) less FFO attributable to minority interest. The National Association of Real Estate Investment Trusts, Inc. ("NAREIT") definition of FFO does not specifically address the treatment of minority interest in the determination of FFO. In the case of the Company, FFO represents amounts attributable to its shareholders after deducting amounts attributable to the minority interests. FFO does not take into consideration scheduled principal payments on debt, capital improvements, distributions and other obligations of the Company. Accordingly, FFO is a supplemental performance measure and is not a substitute for the Company's cash flow or net income (as discussed above) as a measure of the Company's liquidity or operating performance. The Company accounts for its investments in the unconsolidated affiliated entities using the equity method of accounting, and accordingly, earnings are recognized based upon the Company's interest in each of the partnerships and REITs. This interest is based on the Company's share of the increase or decrease in the net assets of the entities from their operations. Provisions of the partnerships' and REITs' governing documents provide for the payment of preferred cash distributions to other investors (until certain specified amounts have been paid) without regard to the pro rata interest of all investors in current earnings. As a result, actual cash distributions paid to the Company for a period of time will be less than the Company's interest in the entities' FFO. During the nine months ended September 30, 1997, FFO distributed to the Company was approximately $9.0 million less than the Company's share of FFO for such entities with such preferred cash distributions. Preferred cash distributions paid to other investors during each period have the effect of increasing the Company's economic interest in each of the respective entities and reducing the amount of future preference payments which must be paid to other investors before cash distributions will be shared on a pro rata basis with respect to each investor's actual interest. At September 30, 1997, the aggregate future preference payments to other investors is approximately $47.2 million and is expected to be paid over approximately 10 years, with approximately 45% of the amount being paid over the next 3 years. RETENTION OF OPERATING CASH FLOWS: Operating as a REIT, the Company's ability to retain cash flow for reinvestment is restricted. In order for the Company to maintain its REIT status, a substantial portion of its operating cash flows must be used to make distributions to its shareholders. Remaining cash flows must then be sufficient to fund necessary capital improvements and scheduled debt service requirements. Accordingly, the Company's ability to be self-sufficient is predicated on its ability to generate sufficient operating cash flows to satisfy its REIT distribution requirements, capital improvement requirements, scheduled debt service requirements, and provide funds for additional investments. Over the past four years, the Company's distribution policy has enabled it to retain significant funds (after capital improvements) to make additional investments and debt reductions. During the first nine months of 1997 and 1996, the Company distributed to common shareholders approximately 43% and 44% of its FFO available to common shareholders, respectively, allowing it to retain approximately $59.4 million and $52.1 million, respectively, after satisfying its capital improvements and preferred stock dividend requirements. DISTRIBUTION REQUIREMENTS: During the first nine months of 1997, the Company paid dividends totaling $48,314,000 to the holders of the Company's Senior Preferred Stock, $3,407,000 to the holders of the Convertible Preferred Stock, $15,328,000 to the holders of the Series CC Convertible Stock (which, in the quarter ended September 30, 1997 converted to common stock) and $63,076,000 to the holders of Common Stock. The Company estimates the distribution requirements for fiscal 1997 with respect to Senior Preferred Stock and the Convertible Preferred Stock to be approximately $88 million. 24 CAPITAL IMPROVEMENT REQUIREMENTS: During 1997, the Company has estimated approximately $30.6 million for capital improvements ($26.4 million for its self-storage and $4.2 million for its business park facilities). The minority interests' share of the estimated capital improvements is approximately $3.3 million. During the first nine months of 1997, the Company incurred capital improvements of approximately $24.3 million. During 1995, the Company commenced a program to enhance its visual icon and modernize the appearance of its self-storage facilities, including modernization of signs, paint color schemes, and rental offices. Included in the 1997 capital improvement estimate is approximately $4.8 million with respect to these expenditures. DEBT SERVICE REQUIREMENTS: The Company does not believe it has any significant refinancing risks with respect to its mortgage debt, all of which is at a fixed rate. The Company uses its $150.0 million of bank credit facility (all of which was unused as of November 12, 1997) primarily to fund acquisitions and provide financial flexibility and liquidity. At the option of the Company, the rate of interest charged is equal to (i) the prime rate or (ii) a rate ranging from the London Interbank Offered Rate ("LIBOR") plus 0.40% to LIBOR plus 1.10% depending on the Company's credit ratings and coverage ratios, as defined. In addition, the Company is required to pay a quarterly commitment fee of 0.250% (per annum) of the unused portion of the Credit Facility. The Credit Facility allows the Company, at its option, to request the group of banks to propose the interest rate they would charge on specific borrowings not to exceed $50 million. However, in no case may the interest rate proposal be greater than the amount provided by the Credit Facility. At September 30, 1997, the Company had total outstanding notes payable of approximately $100.3 million. Approximate principal maturities of notes payable at September 30, 1997 are as follows:
Fixed Rate Mortgage Debt 7.08% Unsecured (Weighted average Senior Notes rate of 10.3%) Total ------------------ ------------------ ------------------ 1997 (remainder of ) $ 3,250 $552 $3,802 1998 7,250 7,858 15,108 1999 8,000 6,382 14,382 2000 8,750 2,612 11,362 2001 9,500 2,899 12,399 Thereafter 19,750 23,546 43,296 ------------------ ------------------ ------------------ $ 56,500 $ 43,849 $100,349 ================== ================== ==================
EXTERNAL FINANCING: Despite the Company's ability to retain a portion of its internally generated cash flow, the Company's growth strategies have required the Company to seek external financing. The Company has an unsecured $150.0 million revolving credit facility with a group of banks which it uses as a temporary source of acquisition financing. The Company, however, seeks to ultimately finance all acquisitions with permanent sources of capital. As a result, the Company has raised capital through the public issuance of both common and preferred stock which was used to repay borrowings and make additional investments in real estate assets. The Company believes that its size and financial flexibility enable it to access capital for growth when appropriate. The Company's 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. The Company's credit ratings on its Senior Preferred Stock by each of the three major credit agencies are Baa2 by Moody's and BBB+ by Standard and Poors and Duff & Phelps. The Company's portfolio of real estate facilities remains substantially unencumbered. At September 30, 1997, the Company had debt outstanding of $100.3 million and had consolidated real estate facilities with a book value of $2.5 billion. The Company, however, has been averse to financing its acquisitions with debt and generally will only increase its mortgage borrowing through the assumption of pre-existing debt on acquired real estate facilities. Over the past three years the Company has funded substantially all of its acquisitions with permanent capital (both common and preferred stock). Unlike many other real estate companies, the Company has elected to use preferred stock despite the fact that the coupon rates of its preferred stock exceeds current rates on conventional debt. The Company has chosen this alternative for the following reasons: (i) the Company's perpetual preferred stock has no sinking fund requirements, or maturity date and does not require redemption, all of which eliminate any future refinancing risks, (ii) preferred stock allows the Company to leverage the common stock without the attendant interest rate or refinancing risks of debt, and (iii) dividends on the preferred stock can be applied to the Company's REIT distributions requirements, which have helped the Company to satisfy these requirements. 25 On March 18, 1997, the Company publicly issued 4.6 million shares of common stock, raising net proceeds of approximately $126.7 million and on August 28, 1997, the Company issued its Series J Preferred Stock raising net proceeds of approximately $144.9 million. As of October 31, 1997, substantially all of the net proceeds from these offerings were utilized to acquire additional investment in real estate assets as well as to make investments in the portable self storage business. MERGERS AND PROPERTY ACQUISITIONS: During the second quarter of 1997, the Company completed merger transactions with six affiliated public REITs whereby the Company acquired all the outstanding stock of the REITs which it did not previously own in exchange for cash and common stock of the Company. In the mergers, the Company issued an aggregate of 7.7 million shares of Common Stock and paid an additional $68.9 million in cash. During the third quarter of 1997, the Company acquired three commercial properties (585,000 square feet) for a total aggregate cost of approximately $43.3 million. The Company also purchased one facility with a total of 46,000 square feet of self-storage and commercial space for an aggregate acquisition cost of approximately $6.8 million. DEVELOPMENT ACTIVITIES: At September 30, 1997, the Company had sixteen self-storage facilities (approximately 930,000 square feet) under development with an aggregate cost incurred to date of $41.3 million and total estimated cost to complete of approximately $31 million. In addition, two portable self-storage facilities (approximately 125,000 square feet) were under development with an aggregate cost incurred to date of approximately $1.8 million and total additional estimated costs to complete of $3.0 million. The Company currently has plans to develop an additional 10 self-storage facilities (approximately 662,000 square feet) and 10 portable self-storage facilities (approximately 758,000 square feet) in various locations at an estimated cost of approximately $90.5. The Company is evaluating the feasibility of developing additional facilities in selected markets in which there are few, if any, facilities to acquire at attractive prices and where the scarcity of other undeveloped parcels of land or other impediments to development make it difficult to construct additional competing facilities. In April 1997, the Company formed a joint venture partnership with an unaffiliated partner to participate in the development of approximately $220 million of self-storage facilities. At September 30, 1997, the joint venture was committed to develop 31 facilities having an estimated development cost of $151 million and had completed five facilities with an aggregate cost of $33 million. The venture is funded solely with equity capital consisting of 30% from the Company and 70% from the institutional investor. REIT STATUS: The Company believes that it has operated, and intends 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 it will at all times so qualify. To the extent that the Company continues to qualify as a REIT, it will not be taxed, with certain limited exceptions, on the taxable income that is distributed to its shareholders. As a REIT, the Company is not taxed on that portion of its taxable income which is distributed to its shareholders provided that at least 95% of its taxable income is so distributed prior to filing of the Company's tax return. The Company has satisfied the REIT distribution requirement since 1980. 26 PART II. OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K -------------------------------- (a) The following Exhibits are included herein: (11) Statement re: Computation of Earnings per Share (12) Statement re: Computation of Ratio of Earnings to Fixed Charges (27) Financial Data Schedule (b) Reports on Form 8-K The Company filed a current report on Form 8-K dated August 25, 1997 pursuant to Item 5, which filed certain exhibits relating to the Company's public offering of Depositary shares each representing 1/1,000 of a share of 8% Cumulative Preferred Stock, Series J. 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATED: November 14, 1997 PUBLIC STORAGE, INC. BY: /s/ John Reyes --------------------------- John Reyes Senior Vice President and Chief Financial Officer (Principal financial officer) 28 EX-11 2 STATEMENT PUBLIC STORAGE, INC. Exhibit 11 - Statement Re: Computation of Earnings Per Share
For the Three Months Ended For the Nine Months Ended September 30, September 30, --------------------------------- -------------------------------- PRIMARY EARNINGS PER SHARE: 1997 1996 1997 1996 - --------------------------------------------- ------------ ------------ ------------ ------------ Net income $46,548 $40,366 $133,117 $110,446 Less: Preferred Stock dividends: 10% Cumulative Preferred Stock, Series A (1,141) (1,141) (3,422) (3,423) 9.20% Cumulative Preferred Stock, Series B (1,372) (1,372) (4,116) (4,116) Variable Rate Preferred Stock, Series C (557) (582) (1,673) (1,630) 9.50% Cumulative Preferred Stock, Series D (712) (712) (2,138) (2,138) 10.0% Cumulative Preferred Stock, Series E (1,372) (1,372) (4,116) (4,116) 9.75% Cumulative Preferred Stock, Series F (1,402) (1,402) (4,205) (4,205) 8.875% Cumulative Preferred Stock, Series G (3,827) (3,827) (11,482) (11,652) 8.45% Cumulative Preferred Stock, Series H (3,564) (3,564) (10,694) (9,783) 8.625% Cumulative Preferred Stock, Series I (2,156) - (6,468) - 8.000% Cumulative Preferred Stock, Series J (1,085) - (1,085) - 8.25% Convertible Preferred Stock (1,128) (1,168) (3,407) (3,523) Mandatory Convertible Participating Preferred Stock - - - (1,700) Mandatory Convertible Preferred Stock, Series CC - (1,916) (15,328) (3,832) ------------ ------------ ------------ ------------ Total preferred dividends (18,316) (17,056) (68,134) (50,118) ------------ ------------ ------------ ------------ Net income allocable to common shareholders $28,232 $23,310 $64,983 $60,328 ============ ============ ============ ============ Weighted Average common and common equivalent shares outstanding: 102,964 78,052 96,586 74,440 Weighted average common shares outstanding Net effect of dilutive stock options - based on treasury stock method using average market price 572 286 568 250 ------------ ------------ ------------ ------------ Total 103,536 78,338 97,154 74,690 ============ ============ ============ ============ Primary earnings per common and common equivalent share $0.27 $0.30 $0.67 $0.81 ============ ============ ============ ============
For the Three Months Ended For the Nine Months Ended September 30, September 30, --------------------------------- -------------------------------- Fully-diluted Earnings per Common and Common Equivalent Share: 1997 1996 1997 1996 - --------------------------------------------- ------------ ------------ ------------ ------------ Net income allocable to common shareholders per Primary calculation above $28,232 $23,310 $64,983 $60,328 Add dividends paid to holders of Convertible Preferred Stocks: * 8.25% Convertible Preferred Stock 1,128 1,168 3,407 3,523 * Mandatory Convertible Participating Preferred Stock - - - 1,700 * Series CC Preferred Stock - 1,916 1,916 3,832 ------------ ------------ ------------ ------------ Net income allocable to common shareholders for purposes of determining Fully-diluted Earnings per Common and Common Equivalent Share $29,360 $26,394 $70,306 $69,383 ------------ ------------ ------------ ------------ Weighted average common and common equivalent shares outstanding 103,536 78,338 97,154 74,690 Proforma weighted average common shares assuming conversion of Convertible Preferred Stock: * 8.25% Convertible Preferred Stock 3,717 3,814 3,690 3,837 * Mandatory Convertible Participating Preferred Stock - - - 985 * Series CC Preferred Stock (1) - 2,064 688 1,376 ------------ ------------ ------------ ------------ Weighted average common and common equivalent shares for purposes of computation of Fully-diluted Earnings per Common and Common Equivalent Share 107,253 84,216 101,532 80,888 ------------ ------------ ------------ ------------ Fully-diluted Earnings per Common and Common Share (2) $0.27 $0.31 $0.69 $0.86 ============ ============ ============ ============
(1) The 1997 three and nine month earnings per common share have been negatively impacted by a non-recurring special dividend on preferred stock totaling $13,412,000 ($0.14 per common share.) At the end of the first quarter of 1997, the Company paid a special dividend totaling $13,412,000 to its Series CC Convertible Preferred Stock. As a result of the special dividend, the Company would not have to pay another dividend with respect to this stock until the quarter ended March 31, 1999. During the second quarter of 1997, the Series CC Convertible Preferred Stock converted into common stock of the Company. Accordingly, all of the $13,412,000 of dividends were treated in the second quarter of 1997 as an allocation of net income to the preferred shareholders in determining the allocation of net income to the common shareholders. (2) Such amounts are anti-dilutive and are not presented in the Company's consolidated financial statements. In addition, the Company has 7,000,000 shares of Class B Common Stock which are convertible into shares of the Company's Common Stock subject to certain contingencies such as the passage of time and the attainment of certain earnings milestone by the Company. The assumption of such earnings and the pro forma conversion of the Class B Common Stock into Common Stock in the above computations would have resulted in an increase in the fully-diluted earnings per common share, and accordingly, is anti-dilutive. EX-12 3 STATEMENT
EXHIBIT 12 - STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Nine Months Ended September 30, --------------------------- 1997 1996 ---------- ---------- Net income $133,117 $110,446 Add: Minority interest in income 7,708 7,268 Less: Gain on disposition of real estate - - Less: Minority interests in income which do not have fixed charges (6,770) (6,451) ---------- ---------- Income from continuing operations 134,055 111,263 Interest expense 5,821 6,893 ---------- ---------- Total Earnings Available to Cover Fixed Charges $ 139,876 $ 118,156 ========== ========== Total Fixed Charges - Interest expense $ 7,242 $ 8,035 ========== ========== Total Preferred Stock dividends $ 68,134 $ 50,118 ========== ========== Total Combined Fixed Charges and Preferred Stock dividends $ 75,376 $ 58,153 ========== ========== Ratio of Earnings to Fixed Charges 19.31 14.71 ========== ========== Ratio of Earnings to Combined Fixed Charges and Preferred Stock dividends 1.86 2.03 ========== ========== Ratio of Earnings to Combined Fixed Charges and Preferred Stock dividends (A) 2.26 =========== (A) Supplemental ratio after elimination of $13,412,000 of non-recurring special dividends paid to the Series CC Preferred Stock.
EXHIBIT 12 - STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES For the Year Ended December 31, ------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- (Amounts in thousands, except ratios) Net income $ 153,549 $ 70,386 $ 42,118 $ 28,036 $ 15,123 Add: Minority interest in income 9,363 7,137 9,481 7,291 6,895 Less: Gain on disposition of real estate - - - - (398) Less: Minority interests in income which do not have fixed charges (8,273) (4,700) (5,906) (737) (694) ---------- ---------- ---------- ---------- ---------- Income from continuing operations 154,639 72,823 45,693 34,590 20,926 Interest expense 8,482 8,508 6,893 6,079 9,834 ---------- ---------- ---------- ---------- ---------- Total Earnings Available to Cover Fixed Charges $ 163,121 $ 81,331 $ 52,586 $ 40,669 $ 30,760 ========== ========== ========== ========== ========== Total Fixed Charges - Interest expense $ 10,343 $ 8,815 $ 6,893 $ 6,079 $ 9,834 ========== ========== ========== ========== ========== Total Preferred Stock dividends $ 68,599 $ 31,124 $ 16,846 $ 10,889 $ 812 ========== ========== ========== ========== ========== Total Combined Fixed Charges and Preferred Stock dividends $ 78,942 $ 39,939 $ 23,739 $ 16,968 $ 10,646 ========== ========== ========== ========== ========== Ratio of Earnings to Fixed Charges 15.77 9.23 7.63 6.69 3.13 ========== ========== ========== ========== ========== Ratio of Earnings to Combined Fixed Charges and Preferred Stock dividends 2.07 2.04 2.22 2.40 2.89 ========== ========== ========== ========== ========== Ratio of Earnings to Combined Fixed Charges and Preferred Stock dividends (A) (A) Supplemental ratio after elimination of $13,412,000 of non-recurring special dividends paid to the Series CC Preferred Stock.
Nine Months Ended September 30, ------------------------------------------ 1997 1996 1996 ---------- ---------- ---------- SUPPLEMENTAL DISCLOSURE OF RATIO OF FUNDS FROM OPERATIONS ("FFO") TO FIXED CHARGES: - ------------------------------------------------------------- FFO $ 200,106 $ 162,532 $ 224,384 Interest expense 5,821 6,893 8,482 ---------- ---------- ---------- Adjusted FFO available to cover fixed charges $ 205,927 $ 169,425 $ 232,866 ========== ========== ========== Total Fixed Charges - Interest expense $ 7,242 $ 8,035 $ 10,343 ========== ========== ========== Total Preferred Stock dividends $ 68,134 $ 50,118 $ 68,599 ========== ========== ========== Total Combined Fixed Charges and Preferred Stock dividends $ 75,376 $ 58,153 $ 78,942 ========== ========== ========== Ratio of FFO to Fixed Charges 28.44 21.09 22.51 ========== ========== ========== Ratio of FFO to Combined Fixed Charges and Preferred Stock dividends 2.73 2.91 2.95 ========== ========== ========== Ratio of FFO to Combined Fixed Charges and Preferred Stock dividends (A) 3.32 ========== (A) Supplemental ratio after elimination of $13,412,000 of non-recurring special dividends paid to the Series CC Preferred Stock.
For the Year Ended December 31, --------------------------------------------- 1995 1994 1993 1992 ---------- ---------- ---------- ---------- SUPPLEMENTAL DISCLOSURE OF RATIO OF FUNDS FROM OPERATIONS ("FFO") TO FIXED CHARGES: - ------------------------------------------------------------- FFO $ 105,086 $ 56,143 $ 35,830 $ 21,133 Interest expense 8,508 6,893 6,079 9,834 ---------- ---------- ---------- ---------- Adjusted FFO available to cover fixed charges $ 113,594 $ 63,036 $ 41,909 $ 30,967 ========== ========== ========== ========== Total Fixed Charges - Interest expense $ 8,815 $ 6,893 $ 6,079 $ 9,834 ========== ========== ========== ========== Total Preferred Stock dividends $ 31,124 $ 16,846 $ 10,889 $ 812 ========== ========== ========== ========== Total Combined Fixed Charges and Preferred Stock dividends $ 39,939 $ 23,739 $ 16,968 $ 10,646 ========== ========== ========== ========== Ratio of FFO to Fixed Charges 12.88 9.15 6.89 3.15 ========== ========== ========== ========== Ratio of FFO to Combined Fixed Charges and Preferred Stock dividends 2.84 2.66 2.47 2.91 ========== ========== ========== ========== Ratio of FFO to Combined Fixed Charges and Preferred Stock dividends (A) (A) Supplemental ratio after elimination of $13,412,000 of non-recurring special dividends paid to the Series CC Preferred Stock.
EX-27 4 FDS -
5 0000318380 Public Storage, Inc. 1 US 9-Mos Dec-31-1997 Jan-01-1997 Sep-30-1997 1 90,763,000 0 0 0 0 90,763,000 2,851,590,000 (355,049,000) 3,154,527,000 71,664,000 100,349,000 0 923,484,000 10,999,000 1,857,336,000 3,154,527,000 0 336,625,000 0 120,399,000 69,580,000 0 5,821,000 133,117,000 0 133,117,000 0 0 0 133,117,000 .67 .67
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