SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1996
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 July 31, 1996:
Common Stock, $.10 par value, 77,013,724 shares outstanding
- -----------------------------------------------------------
Class B Common Stock, $.10 Par Value - 7,000,000 shares
- -------------------------------------------------------
<PAGE>
PUBLIC STORAGE, INC.
INDEX
Pages
-----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets at
June 30, 1996 and December 31, 1995 1
Condensed Consolidated Statements of Income for the
Three and Six Months Ended June 30, 1996 and 1995 2
Condensed Consolidated Statement of Shareholders' Equity 3
Condensed Consolidated Statements of Cash Flows
for Six Months Ended June 30, 1996 and 1995 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 - 25
PART II. OTHER INFORMATION (Items 1, 2, 3 , 4 and 5 are not applicable)
Item 6. Exhibits and Reports on Form 8-K 26
<PAGE>
<TABLE>
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
<CAPTION>
June 30, December 31,
1996 1995
----------------- -----------------
(unaudited)
ASSETS
------
<S> <C> <C>
Cash and cash equivalents................................................ $ 19,827 $ 80,436
Real estate facilities, at cost:
Land.................................................................. 477,896 382,144
Buildings............................................................. 1,310,315 1,030,990
----------------- -----------------
1,788,211 1,413,134
Accumulated depreciation.............................................. (268,046) (241,966)
----------------- -----------------
1,520,165 1,171,168
Investment in real estate entities....................................... 408,965 416,216
Intangible assets, net................................................... 226,908 231,562
Mortgage notes receivable from affiliates................................ 25,960 23,699
Other assets............................................................. 20,971 14,380
----------------- -----------------
Total assets............................................... $ 2,222,796 $ 1,937,461
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Revolving line of credit................................................. $ 5,000 $ -
Notes payable............................................................ 116,070 158,052
Accrued and other liabilities............................................ 36,739 32,533
----------------- -----------------
Total liabilities............................................... 157,809 190,585
Minority interest........................................................ 125,917 112,373
Commitments and contingencies
Shareholders' equity:
Preferred Stock, $0.01 par value, 50,000,000 shares authorized, 13,509,805
shares issued, 13,447,280 outstanding (13,444,100 issued and outstanding at
December 31, 1995), at liquidation preference:
Cumulative Preferred Stock, issued in series.................... 618,900 450,150
Convertible Preferred Stock..................................... 115,672 85,970
Common stock, $0.10 par value, 200,000,000 shares authorized, 77,001,691
shares issued and outstanding (71,513,799 at December 31, 1995)....... 7,700 7,152
Class B Common Stock, $.10 par value, 7,000,000 shares authorized and
issued.............................................................. 700 700
Paid-in capital....................................................... 1,200,813 1,100,088
Cumulative net income................................................. 312,951 242,871
Cumulative distributions paid......................................... (317,666) (252,428)
----------------- -----------------
Total shareholders' equity...................................... 1,939,070 1,634,503
----------------- -----------------
Total liabilities and shareholders' equity................. $ 2,222,796 $ 1,937,461
================= =================
</TABLE>
See accompanying notes.
1
<PAGE>
<TABLE>
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, expect per share data)
(Unaudited)
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
Revenues:
Rental income
<S> <C> <C> <C> <C>
Mini-warehouse facilities................ $ 66,117 $ 41,650 $ 124,861 $ 79,375
Business park facilities................. 5,704 4,444 10,669 8,693
Equity in earnings of real estate entities.. 5,479 380 10,090 579
Facilities management fees.................. 3,549 - 7,309 -
Interest and other income................... 1,862 1,438 4,309 2,463
------------- ------------- ------------- -------------
82,711 47,912 157,238 91,110
------------- ------------- ------------- -------------
Expenses:
Cost of operations:
Mini-warehouse facilities................ 19,485 14,371 37,976 28,117
Business park facilities................. 2,392 2,164 4,586 4,225
Cost of facilities management................ 547 - 1,175 -
Depreciation and amortization ............... 16,142 8,779 30,734 16,926
General and administrative................... 1,698 645 3,059 1,736
Advisory fee ................................ - 1,816 - 3,426
Interest expense............................. 2,232 1,694 4,813 3,214
------------- ------------- ------------- -------------
42,496 29,469 82,343 57,644
------------- ------------- ------------- -------------
Income before minority interest................ 40,215 18,443 74,895 33,466
Minority interest in income.................... (2,476) (1,892) (4,815) (3,715)
------------- ------------- ------------- -------------
Net income..................................... $ 37,739 $ 16,551 $ 70,080 $ 29,751
============= ============= ============= =============
Net income allocation:
Allocable to preferred shareholders......... $ 17,896 $ 7,332 $ 33,062 $ 13,308
Allocable to common shareholders............ 19,843 9,219 37,018 16,443
------------- ------------- ------------- -------------
$ 37,739 $ 16,551 $ 70,080 $ 29,751
============= ============= ============= =============
Per common share:
Net income..................................... $ 0.27 $ 0.26 $ 0.51 $ 0.50
============= ============= ============= =============
Weighted average common shares outstanding..... 73,537 34,792 72,749 32,708
============= ============= ============= =============
</TABLE>
See accompanying notes.
2
<PAGE>
<TABLE>
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Six Months Ended June 30, 1996
(Amounts in thousands except share data)
(Unaudited)
<CAPTION>
Preferred Stock Class B
---------------
Cumulative Common Common Paid-in
Senior Convertible Stock Stock Capital
-------- -------- ------ ------ ----------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1995......................... $450,150 $85,970 $7,152 $700 $1,100,088
Issuance of Preferred Stock:
Series H (6,750 shares).......................... 168,750 - - - (5,617)
Mandatory Convertible, Series CC
(58,955 shares).................................. - 58,955 - - -
Issuance of Common Stock:
In connection with mergers (2,238,936 shares).... - - 224 - 46,892
Conversion of Mandatory Convertible
Participating Preferred Stock into Common
Stock (1,611,265 shares)....................... - (28,470) 161 - 27,799
Conversion of Convertible Preferred Stock into
Common Stock (52,527 shares)................... - (783) 5 - 778
In connection with a private offering
(1,500,000 shares)............................. - - 150 - 30,000
Other (85,164 shares)............................ - - 8 - 873
Net income............................................ - - - - -
Cash distributions:
Cumulative Senior Preferred Stock.................. - - - - -
Mandatory Convertible Preferred Stock, Series CC... - - - - -
8.25% Convertible Preferred Stock.................. - - - - -
Mandatory Convertible Participating Preferred
Stock............................................ - - - - -
Common Stock....................................... - - - - -
-------- -------- ------ ------ ----------
Balances at June 30, 1996............................. $618,900 $115,672 $7,700 $700 $1,200,813
======== ======== ====== ====== ==========
</TABLE>
<TABLE>
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Six Months Ended June 30, 1996
(Amounts in thousands except share data)
(Unaudited)
<CAPTION>
Total
Cumulative Cumulative Shareholders'
Net Income Distributions Equity
-------- --------- ----------
<S> <C> <C> <C>
Balances at December 31, 1995......................... $242,871 $(252,428) $1,634,503
Issuance of Preferred Stock:
Series H (6,750 shares).......................... - - 163,133
Mandatory Convertible, Series CC
(58,955 shares).................................. - - 58,955
Issuance of Common Stock:
In connection with mergers (2,238,936 shares).... - - 47,116
Conversion of Mandatory Convertible
Participating Preferred Stock into Common
Stock (1,611,265 shares)....................... - - (510)
Conversion of Convertible Preferred Stock into
Common Stock (52,527 shares)................... - - -
In connection with a private offering
(1,500,000 shares)............................. - - 30,150
Other (85,164 shares)............................ - - 881
Net income............................................ 70,080 - 70,080
Cash distributions:
Cumulative Senior Preferred Stock.................. - (27,091) (27,091)
Mandatory Convertible Preferred Stock, Series CC... - (1,916) (1,916)
8.25% Convertible Preferred Stock.................. - (2,355) (2,355)
Mandatory Convertible Participating Preferred
Stock............................................ - (1,700) (1,700)
Common Stock....................................... - (32,176) (32,176)
-------- --------- ----------
Balances at June 30, 1996............................. $312,951 $(317,666) $1,939,070
======== ========= ==========
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<CAPTION>
For the Six Months Ended
June 30,
-------------------------------
1996 1995
------------- -------------
Cash flows from operating activities:
<S> <C> <C>
Net income........................................................... $ 70,080 $ 29,751
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization (including amortization of
mortgage notes receivable discounts)............................. 30,687 16,859
Depreciation included in equity in earnings of real estate entities 8,826 -
Minority interest in income........................................ 4,815 3,715
------------- -------------
Total adjustments.............................................. 44,328 20,574
------------- -------------
Net cash provided by operating activities.................. 114,408 50,325
------------- -------------
Cash flows from investing activities:
Principal payments received on mortgage notes receivable from
affiliates....................................................... 795 311
Acquisition of real estate facilities.............................. (91,500) (61,980)
Acquisition cost of business combinations.......................... (53,706) (21,427)
Capital improvements to real estate facilities..................... (7,737) (3,306)
Construction in process............................................ (21,173) (3,400)
Acquisition of minority interests in consolidated real estate
partnerships..................................................... (4,588) (10,735)
Acquisition of mortgage notes receivable........................... (3,709) -
Acquisition of interests in real estate entities................... (70,862) -
Other.............................................................. (6,381) (1,031)
------------- -------------
Net cash used in investing activities...................... (258,861) (101,568)
------------- -------------
Cash flows from financing activities:
Net advance (pay downs) on note payable to banks................... 5,000 (25,447)
Net proceeds from the issuance of preferred stock.................. 163,133 108,377
Net proceeds from the issuance of common stock..................... 31,031 80,340
Principal payments on mortgage notes payable....................... (43,683) (5,418)
Distributions paid to shareholders................................. (65,238) (28,194)
Distributions from operations to minority interests in real estate
partnerships..................................................... (10,524) (9,107)
Net reinvestment by minority interests into real estate 480 1,151
partnerships.......................................................
Other.............................................................. 3,645 (851)
------------- -------------
Net cash provided by financing activities.................. 83,844 120,851
------------- -------------
Net (decrease) increase in cash and cash equivalents.................... (60,609) 69,608
Cash and cash equivalents at the beginning of the period................ 80,436 20,151
------------- -------------
Cash and cash equivalents at the end of the period...................... $ 19,827 $ 89,759
============= =============
</TABLE>
See accompanying notes.
4
<PAGE>
<TABLE>
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
(Continued)
<CAPTION>
For the Six Months Ended
June 30,
1996 1995
--------------- ---------------
Supplemental schedule of noncash investing and financing activities:
--------------------------------------------------------------------
<S> <C> <C>
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) $ (31,191)
Business combinations:
Real estate facilities.................................................. (249,044) (140,775)
Other assets............................................................ (4,780) (1,441)
Accrued and other liabilities........................................... 5,799 6,810
Minority interest....................................................... 20,139 -
Reduction to investment in real estate entities in connection with business
combinations............................................................ 63,308 -
Acquisition of partnership interests in real estate entities in exchange
for common stock........................................................ - (4,034)
Assumption of mortgage notes payable in connection with the acquisition of
real estate facilities.................................................. 1,701 12,127
Cancellation of mortgage notes receivable in connection with the
acquisition of real estate facilities................................... 700 8,466
Issuance of Convertible Preferred Stock.................................... 58,955 -
Issuance of common stock:
- in connection with mergers............................................ 47,116 99,972
- to acquire real estate facilities..................................... - 10,598
- to acquire partnership interests in real estate entities.............. - 4,034
- in connection with the conversion of Convertible Preferred Stock...... 28,743 -
Conversion of 8.25% Convertible Preferred Stock............................ (783) -
Conversion of Mandatory Convertible Preferred Stock........................ (28,470) -
Increase in accrued and other liabilities:
- accrued cash portion of merger costs.................................. 4,801 14,007
</TABLE>
See accompanying notes.
5
<PAGE>
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
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-service mini-warehouse 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 business park facilities containing commercial and industrial
rental space.
Prior to November 16, 1995, the Company's operations were managed,
pursuant to contractual arrangements, by Public Storage Advisers, Inc. (the
"Adviser"), the Company's investment advisor, by Public Storage Management,
Inc. ("PSMI"), its mini-warehouse property operator and by Public Storage
Commercial Properties Group, Inc. ("PSCP"), its business park facility
operator.
On November 16, 1995, in a series of mergers among PSMI and its
affiliates, culminating in the merger of PSMI into the Company (the "PSMI
Merger"), the Company became self-administered and self-managed and
acquired substantially all of the United States real estate operations of
PSMI. As a result of the PSMI Merger, the Company's name was changed from
Storage Equities, Inc. to Public Storage, Inc.
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
June 30, 1996, the Company had direct and indirect equity interests in
1,068 properties located in 37 states, including 1,033 mini-warehouse
facilities and 35 business parks. All of these facilities are operated by
the Company under the "Public Storage" name. In addition, the Company
operates real estate facilities on behalf of various ownership entities,
substantially all of which are partnerships and REITs in which the Company
has an ownership interest.
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. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three and six months ended June 30, 1996 are not necessarily indicative
of the results that may be expected for the year ended December 31, 1996.
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, 1995.
The consolidated financial statements include the accounts of the
Company, majority owned subsidiaries, and twenty-one limited partnerships
(the "Consolidated Partnerships") in which the Company has significant
economic interest and is able to exercise significant control through its
ownership of limited and general partnership interests.
The Company's aggregate cost of its interests in the Consolidated
Partnerships is less than the historical carrying amount of the underlying
net assets of the Consolidated Partnerships. In consolidation, the
difference between the Company's cost and the historical carrying value of
the underlying properties has been allocated to the real estate facilities
and is being amortized over the remaining lives of the real estate
facilities.
The Company also has equity investments in other affiliated limited
partnerships and REITs which principally own mini-warehouse facilities
managed by the Company. The Company's ownership interest in such real
estate entities is less than 50% of the total equity interest, accordingly,
the Company's investments in these real estate entities are accounted for
using the equity method.
6
<PAGE>
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
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 1996, accordingly, no provision for income taxes has
been made in the accompanying financial statements.
Allowance for possible losses
-----------------------------
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.
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.
Depreciation
------------
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.
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 the PSMI Merger.
Intangible assets are amortized straight-line over 25 years. At June 30,
1996, intangible assets are net of accumulated amortization of $5,818,000
($1,164,000 at December 31, 1995). Included in depreciation and
amortization expense for the three and six months ended June 30, 1996 is
$2,327,000 and $4,654,000, respectively, related to the amortization of
intangible assets (none for the three and six months ended June 30, 1995).
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
has been determined to be anti-dilutive (after giving effect to the pro
forma additional income required to satisfy certain contingencies required
for the Class B common stock to convert into common stock) and accordingly,
the conversion of the Class B common stock into common stock has not been
assumed.
The Company's preferred stocks were determined not to be common stock
equivalents. In computing earnings per common share, preferred stock
dividends reduced income available to common stockholders.
Fully diluted earnings per common are not presented, as the assumed
conversion of the Company's convertible preferred stock would be
anti-dilutive.
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 business park operations are expensed as
incurred.
7
<PAGE>
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
3. Business combinations
---------------------
During the first six months of 1996, the Company completed three
merger transactions with affiliated public REITs whereby the Company
acquired all the outstanding stock of the REITs in exchange for cash and
common stock of the Company. The mergers with Public Storage Properties IX,
Inc. ("Properties 9") and Public Storage Business Parks, Inc. ("PSBP") were
completed on March 26, 1996 and the merger with Storage Properties, Inc.
("SPI") was completed on June 27, 1996. Properties 9 owned and operated 14
mini-warehouses, PSBP owned and operated one business park and SPI owned
and operated 7 mini-warehouses. The aggregate acquisition cost of
Properties 9 was $47,563,000, consisting of the issuance of common stock -
$24,719,000, cash - $9,907,000 and the Company's pre-existing investment in
Properties 9 of $12,937,000. The aggregate acquisition cost of PSBP was
$11,305,000, consisting of the issuance of common stock - $5,249,000, cash
- $2,719,000 and the Company's pre-existing investment in PSBP of
$3,337,000. The aggregate acquisition cost of SPI was $23,748,000
consisting of the issuance of common stock - $17,148,000, cash - $4,801,000
(included in accrued and other liabilities at June 30, 1996) and the
Company's pre-existing investment in SPI of $1,799,000.
During the second quarter of 1996, the Company acquired all of the
limited partnership units of two affiliated partnerships for $58,955,000,
consisting of the issuance of the Company's Convertible Preferred Stock,
Series CC. The Company's acquisition in one of the partnerships increased
its ownership interest in the partnership to 100%, accordingly, the
partnership was dissolved and the partnership's 8 mini-warehouse facilities
became wholly-owned by the Company. The remaining partnership owns 15
mini-warehouses. During the first quarter of 1996, the Company acquired
approximately 64% of the limited partnership units of an affiliated
partnership which owns 28 mini-warehouse facilities for approximately
$41,080,000 in cash. The acquisition of interests in the two remaining
partnerships combined with the Company's existing general partnership
interest in the partnerships significantly increased the Company's
ownership interest and control of the partnerships and, as a result, the
Company began to consolidate the accounts of these partnerships for
financial statement purposes.
Each of the above transactions (mergers and acquisitions of
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
acquired and liabilities assumed with respect to the transactions are
summarized as follows:
<TABLE>
REIT Partnership
mergers acquisitions Total
------------ ------------------- ----------
(In thousands)
<S> <C> <C> <C>
Real estate facilities................. $82,234 $166,810 $249,044
Other assets........................... 3,963 817 4,780
Accrued and other liabilities.......... (3,581) (2,218) (5,799)
Minority interest...................... - (20,139) (20,139)
------------ ------------------- ----------
$82,616 $145,270 $227,886
============ =================== ==========
</TABLE>
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 and on a pro forma basis would not
materially effect reported revenues, net income or earnings per common
share.
8
<PAGE>
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
4. Real estate facilities
----------------------
Activity in real estate facilities during 1996 consists of the
following:
<TABLE>
<CAPTION>
Number of
real estate Net rentable Net carrying
facilities square feet cost
---------------- ------------- ----------------
(in thousands, except number of facilities)
Operating facilities:
<S> <C> <C> <C>
Beginning balance - December 31, 1995.... 540 32,782 $ 1,163,189
Property acquisitions:
Business combinations.................. 73 4,555 249,044
Other facilities....................... 17 1,041 93,901
Development facility...................... 1 66 4,577
Acquisition of minority interest.......... - - 3,222
Capital improvements...................... - - 7,737
Depreciation expense...................... - - (26,080)
---------------- ------------- ----------------
Ending balance - June 30, 1996............ 631 38,444 1,495,590
---------------- ------------- ----------------
Construction in progress:
Beginning balance - December 31, 1995..... 2 120 7,979
Current development cost.................. 9 535 21,173
Newly opened development facility......... (1) (66) (4,577)
---------------- ------------- ----------------
Ending balance - June 30, 1996............ 10 589 24,575
---------------- ------------- ----------------
Total operating and development cost at June
30, 1996................................. 641 39,033 $ 1,520,165
================ ============= ================
</TABLE>
During the six months ended June 30, 1996, the Company was developing
11 mini-warehouse facilities (655,000 square feet) one of which was
completed and commenced operation during March 1996. The Company's policy
is to capitalize interest incurred on debt during the course of
construction of its mini-warehouse facilities. Interest capitalized during
the three and six months ended June 30, 1996, was $403,000 and $597,000,
respectively.
5. Investment in real estate entities
-----------------------------------
The Company's investment in real estate entities at June 30, 1996,
generally consists of limited and general partnership interests in
approximately 42 affiliated partnerships and common stock in 13 affiliated
REITs. Such interests consist generally of ownership interests ranging from
15% to 45% and are accounted for using the equity method of accounting.
Accordingly, earnings are recognized based upon the Company's ownership
interest in each of these entities. Provisions of the agreements of the
partnerships and REITs provide for the payment of preferred cash
distributions to certain investors in the entity (until certain specified
amounts have been paid) without regard to the pro rata interest of
investors in current earnings. The Company's ownership interests in such
entities generally represents interests which are not entitled to these
preferred cash distributions.
During the three and six months ended June 30, 1996, the Company
recognized earnings from its investments of $5,479,000 and $10,090,000,
respectively, and received cash distributions totaling $3,514,000 and
$7,140,000, respectively. Included in equity in earnings of real estate
entities for the three and six months ended June 30, 1996 is the Company's
share of depreciation expense totaling $4,332,000 and $8,826,000 (including
amortization totaling $1,958,000 and $4,052,000, respectively, representing
the amortization of the Company's cost basis over the underlying book value
of the Company's equity interest in each of the entities).
9
<PAGE>
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
During 1996, in connection with business combinations (Note 3) the
Company reduced its investment in affiliated entities by approximately
$63.3 million. The Company's pre-existing investment in three REITs which
were merged into the Company totaling $18,073,000 was eliminated and
included as part of the purchase price allocation with respect to the net
assets acquired by the Company. In addition, during 1996, the Company
acquired limited partnership interests in three affiliated limited
partnerships. As a result of these acquisitions, the Company's ownership
interest in one of the partnerships increased to 100%, accordingly, the
partnership was liquidated into the Company. The Company's pre-existing
investment in the partnership ($5,807,000) was eliminated and included as
part of the purchase price allocation with respect to the net assets
acquired by the Company. The Company's ownership interest in the remaining
two partnerships increased from less than 50% at December 31, 1995 to over
70%. As a result of the Company's significant ownership interest and
control in these two partnerships, the Company began to consolidate the
accounts of the partnerships and the Company's aggregate investment
($39,428,000 ) was eliminated in consolidation.
6. Mortgage notes receivable from affiliates
-----------------------------------------
At June 30, 1996, mortgage notes receivable balance of $25,960,000 is
net of related discounts totaling $356,000. The mortgage notes bear
interest at stated rates ranging from 7.4% to 14.0% and are secured by 14
mini-warehouse facilities owned by affiliated partnerships. All of the
notes are current as to the payment of principal and interest.
During the first six months of 1996, the Company canceled mortgage
notes which had a net carrying value of $700,000 as part of the acquisition
cost of the underlying real estate facility securing the mortgage note.
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 outsiders' share of the operating results of the
Company relating to the consolidated operations of the Consolidated
Partnerships.
During 1996, in connection with business combinations (Notes 3 and 5)
the Company began to consolidate the accounts of two partnerships. As a
result, minority interest was increased by $20,139,000, representing the
remaining partners' equity interests in the aggregate net assets of the two
partnerships.
During 1996, the Company acquired additional limited partnership
interests in existing Consolidated Partnerships for an aggregate cost of
$4,588,000. These transactions had the effect of reducing minority interest
by approximately $1,366,000 (the historical book value of such interests in
the underlying net assets of the partnerships). The excess of the
underlying book value over cost ($3,222,000) has been allocated to real
estate facilities in consolidation.
10
<PAGE>
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
8. Shareholders' equity
--------------------
Preferred stock
---------------
At June 30, 1996 and December 31, 1995, the Company had the following
series of Preferred Stock outstanding:
<TABLE>
<CAPTION>
Shares Outstanding Liquidation Amount
-------------------------- ----------------------------
Dividend June 30, December 31, June 30, December 31,
Series Rate 1996 1995 1996 1995
- --------------------------------------------- ---------------- -------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
Series A 10.00% 1,825,000 1,825,000 $ 45,625,000 $ 45,625,000
Series B 9.20% 2,386,000 2,386,000 59,650,000 59,650,000
Series C Adjustable 1,200,000 1,200,000 30,000,000 30,000,000
Series D 9.50% 1,200,000 1,200,000 30,000,000 30,000,000
Series E 10.00% 2,195,000 2,195,000 54,875,000 54,875,000
Series F 9.75% 2,300,000 2,300,000 57,500,000 57,500,000
Series G 8.875% 6,900 6,900 172,500,000 172,500,000
Series H 8.45% 6,750 - 168,750,000 -
-------------- -------------- ----------------- --------------
Senior Preferred Stock totals 11,119,650 11,112,900 618,900,000 450,150,000
-------------- -------------- ----------------- --------------
Convertible 8.25% 2,268,675 2,300,000 56,717,000 57,500,000
Mandatory Convertible - Series CC 13.00% 58,955 - 58,955,000 -
Mandatory Convertible Participating Variable - 31,200 - 28,470,000
-------------- -------------- ----------------- --------------
Convertible Preferred Stock totals 2,327,630 2,331,200 115,672,000 85,970,000
-------------- -------------- ----------------- --------------
13,447,280 13,444,100 $734,572,000 $536,120,000
============== ============== ================= ==============
</TABLE>
On January 25, 1996, the Company issued 6,750,000 depository shares
(depository shares, each representing 1/1,000 of a share) of its 8.45%
Series H Preferred Stock raising net proceeds of approximately $163.1
million.
In April 1996, in connection with the acquisition of limited
partnership interests (Note 3), the Company issued $58,955,000 (58,955
shares) of its Mandatory Convertible Preferred Stock, Series CC (the
"Series CC Preferred Stock"). The Series CC Preferred Stock ranks junior to
the Company's Cumulative Senior Preferred Stock with respect to general
preference rights and has a liquidation value of $1,000 per share. Other
significant terms of the Series CC Preferred Stock include: (i) quarterly
distributions equal to $32.50 per share, (ii) conversion, at anytime at the
option of the holder, into common stock of the Company at a conversion
price of $28.56 or 35.014 shares of common stock for each share of Series
CC Preferred Stock, and (iii) automatic conversion into common stock of the
Company on March 31, 2000 at the conversion price described above.
The Series A, Series B, Series C, Series D, Series E, Series F, Series
G, and Series H (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.
During the second quarter of 1996, the Mandatory Convertible
Participating Preferred Stock was exchanged into 1,611,265 shares of common
stock. Costs incurred in connection with the exchange have been charged to
Additional Paid in Capital.
11
<PAGE>
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. During the first six months of 1996, at the option of
shareholders, a total of 31,325 shares ($783,000 liquidation amount) of
Convertible Preferred Stock were converted into 52,527 common shares.
Common stock
------------
During 1996, the Company issued shares of its common as follows: (i)
2,238,936 shares ($47,116,000) in connection with the mergers, (ii) 52,527
shares ($783,000) in connection with the conversion of Convertible
Preferred Stock into common stock, (iii) 1,500,000 shares ($30,150,000) in
connection with an offering to institutional investors, (iv) 1,611,265
shares ($28,470,000) in connection with the conversion of the Mandatory
Convertible Preferred Stock, and (v) 85,164 shares ($881,000) in connection
with exercise of stock options. The shares of common stock issued in
connection with the mergers were issued at the prevailing market price at
the time of issuance.
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) (computed in
accordance with generally accepted accounting principles) 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 (including the Company's pro-rata
share of depreciation and amortization of unconsolidated equity interests
and amortization of assets acquired in the Merger, including property
management agreements and goodwill), and (ii) less FFO attributable to
minority interest.
For these purposes, 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
$1.78 for the four consecutive calendar quarters ended June 30, 1996.
12
<PAGE>
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
Dividends
---------
The following summarizes dividends paid during the first six months of
1996:
For the Six Months Ended
June 30, 1996
--------------------------------------
Distributions Per
Share or
Depository Share Total Distributions
---------------- -------------------
Series A $ 1.250 $ 2,282,000
Series B $ 1.150 2,744,000
Series C $ 0.874 1,048,000
Series D $ 1.188 1,426,000
Series E $ 1.250 2,744,000
Series F $ 1.218 2,803,000
Series G $ 1.094 7,825,000
Series H $ 0.921 6,219,000
Convertible $ 1.031 2,355,000
Series CC $ 32.500 1,916,000
Mandatory Convertible Participating $ 54.490 1,700,000
------------
33,062,000
Common $ 0.440 32,176,000
-----------
$65,238,000
===========
The dividend rate on the Series C Preferred Stock for the first and
second quarters of 1996 was equal to 6.75% and 7.24%, respectively, 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, and Thirty Year Constant Maturity
Rate) multiplied by 110%. However, the dividend rate for any dividend
period will not be less than 6.75% per annum nor greater than 10.75%. The
dividend rate for the quarter ending September 30, 1996 will be equal to
7.77% per annum.
Dividends on the Series H shares (issued January 25, 1996) and the
Series CC shares (issued April 1, 1996) have been pro-rated from the date
issued.
The Mandatory Convertible Participating Preferred Stock was issued in
connection with the acquisition of all of the limited partnership interests
in a real estate limited partnership in 1995. Dividends with respect to the
Mandatory Convertible Participating Preferred Stock varied depending on
operating results of the underlying real estate facilities of the
partnership. During June 1996, the Mandatory Convertible Participating
Preferred Stock was exchanged for common stock of the Company.
9. Proposed mergers and property acquisitions
------------------------------------------
In June 1996, the Company and Public Storage Properties X, Inc.
("Properties 10"), an affiliated publicly traded equity real estate
investment trust, agreed, subject to certain conditions, to merge. Upon the
merger, each outstanding share of Properties 10 common stock (other than
shares held by the Company) would be converted, at the election of the
shareholders of Properties 10, into either shares of the Company's common
stock with a market value of $20.92 or, with respect to up to 20% of the
Properties 10 common stock, $20.92 in cash. Properties 10 has 2,157,484
outstanding shares (the Company owns 452,094 shares) of common stock and an
estimated value of $45.1 million. The shares of Properties 10 held by the
Company will be canceled in the merger. The merger agreement is conditioned
on approval by the shareholders of Properties 10. Properties 10 owns 17
properties: 16 mini-warehouses (858,000 square feet) and one business park
(105,000 square feet). The Company expects that if approved the merger
would be completed by September 30, 1996.
13
<PAGE>
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
Additionally, in June 1996, the Company and Public Storage Properties
XII, Inc. ("Properties 12"), a publicly traded equity real estate
investment trust, agreed, subject to certain conditions, to merge. The
estimated value of the merger is approximately of $50.8 million. Properties
12 has 1,730,099 outstanding shares of common stock series A, 184,453
outstanding shares of common stock series B, and 522,618 outstanding shares
of common stock series C. The Company owns 29,300 shares of common stock
series A, 114,952 shares of common stock series B, and 358,934 shares of
common stock series C. Upon completion of the merger, each outstanding
share of common stock series A of Properties 12 (other than shares held by
the Company) would be converted, at the election of the shareholders of
Properties 12, into either shares of the Company's common stock with a
market value of $22.34 or, with respect to up to 20% of the Properties 12
common stock series A, $22.34 in cash. In addition, each share of
Properties 12 common stock series B and C (other than shares held by the
Company) will be converted into the right to receive $17.95 in the
Company's common stock, plus the estimated required REIT distributions
attributable to the Properties 12 common stock series B of $1.07 per share
The shares of Properties 12 common stock series A, B and C held by the
Company will be canceled in the merger. The merger is conditioned on
approval by the shareholders of Properties 12. Properties 12 owns 13
properties: 11 mini-warehouses (722,000 square feet) and two business parks
(127,000 square feet). The Company expects that if approved the merger
would be completed by September 30, 1996.
The Company has agreements in principle to acquire 23 mini-warehouses
(2,650,000 square feet) and 10 business park facilities (719,000 square
feet) from five limited partnerships which are not affiliated with the
Company. The Company currently manages on behalf of four of the
partnerships an aggregate of 16 mini-warehouses and 10 business parks. The
acquisition of the real estate assets from each of the limited partnerships
is subject to certain conditions, including the approval of the limited
partners in each of the partnerships. The aggregate acquisition cost is
approximately $79.9 million.
14
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations
- ----------
OVERVIEW: Since the beginning of fiscal 1995, the Company completed a
number of transactions which have significantly affected the financial
complexion of the Company.
* On November 16, 1995, the Company completed a merger transaction with
Public Storage Management, Inc. ("PSMI") with an aggregate cost of
$549.3 million (the "PSMI Merger"). In the PSMI Merger, the Company
acquired all the real estate operations of PSMI, principally including
(i) general and limited partnership interests in 47 limited
partnerships owning an aggregate of 286 mini-warehouses, (ii) shares
of common stock in 16 REITs owning an aggregate of 218 mini-warehouses
and 14 commercial properties (three of which have subsequently merged
with the Company), (iii) property management contracts, exclusive of
facilities owned by the Company, for 563 mini-warehouses and through
ownership of 95% economic interest in a subsidiary, 24 commercial
properties and (iv) a 95% economic interest in another subsidiary that
currently sells locks and boxes in mini-warehouses operated by the
Company.
* Since January 1, 1995, the Company completed five mergers with
affiliated REITs, two in 1995 with an aggregate cost of $135.4 million
and three in 1996 with an aggregate cost of $82.6 million.
* From January 1, 1995 through June 30, 1996, through various mergers
and acquisitions the number of real estate facilities included in the
Company's consolidated financial statements has increased from 387 at
the beginning of 1995 to facilities to 631 facilities at June 30,
1996.
The PSMI Merger not only doubled the size of the Company and
significantly expanded the Company's ownership interest in mini-warehouse
facilities it also provided the following benefits: (i) the Company became
a fully-integrated, self-advised and self-managed commercial real estate
company with expertise in development, construction, acquisition, operation
and leasing services, (ii) the Company is now able to expand its property
holdings without a proportionate increase in advisory and property
management fees, which would have resulted had its current advisory
contract and management agreements remained in effect, (iii) conflicts of
interest between the Company and its executive officers and directors who
were also affiliated with PSMI were reduced, and (iv) the Company
significantly increased it ownership interest in the real estate facilities
operated under the "Public Storage" name.
At June 30, 1996 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 (partnership 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 June 30, 1996:
<TABLE>
<CAPTION>
Number of Facilities in which the Net Rentable Square Footage
Company has an ownership interest (in thousands)
--------------------------------- -------------------------------
Mini- Business Mini- Business
warehouses Parks Total warehouses Parks Total
---------- ----- ----- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Wholly-owned facilities.................... 317 8 325 19,092 645 19,737
Facilities owned by Consolidated
Partnerships............................. 292 14 306 17,155 1,552 18,707
---------- ----- ----- ---------- ----- -----
Total consolidated facilities.......... 609 22 631 36,247 2,197 38,444
Facilities owned by Unconsolidated Entities 424 13 437 25,557 906 26,463
---------- ----- ----- ---------- ----- ------
Total facilities in which the Company
has an ownership interest ........... 1,033 35 1,068 61,804 3,103 64,907
========== ===== ===== ========== ===== ======
15
</TABLE>
<PAGE>
Results of Operations
---------------------
Net income for the three months ended June 30, 1996 was $37,739,000
compared to $16,551,000 for the same period in 1995, representing an
increase of $21,188,000. Net income allocable to common shareholders
increased to $19,843,000 for the three months ended June 30, 1996 from
$9,219,000 for the three months ended June 30, 1995. The increases in net
income and net income allocable to common shareholders were primarily the
result of improved property operations, the acquisition of additional real
estate facilities during 1996 and 1995, and the acquisition of additional
partnership interests during 1996 and 1995. Net income per common share was
$0.27 per share (based on weighted average shares outstanding of
73,537,000) for the three months ended June 30, 1996 compared to $0.26 per
share (based on weighted average shares outstanding of 34,792,000) for the
same period in 1995.
Net income for the six months ended June 30, 1996 was $70,080,000
compared to $29,751,000 for the same period in 1995, representing an
increase of $40,329,000. Net income allocable to common shareholders
increased to $37,018,000 for the six months ended June 30, 1996 from
$16,443,000 for the six months ended June 30, 1995. The increases in net
income and net income allocable to common shareholders were primarily the
result of improved property operations, the acquisition of additional real
estate facilities during 1996 and 1995, and the acquisition of additional
partnership interests during 1996 and 1995. Net income per common share was
$0.51 per share (based on weighted average shares outstanding of
72,749,000) for the six months ended June 30, 1996 compared to $0.50 per
share (based on weighted average shares outstanding of 32,708,000) for the
same period in 1995.
PROPERTY OPERATIONS: Rental income and cost of operations has
increased significantly for the three and six months ended June 30, 1996
compared to the same periods in 1995. The following table summarizes the
operating results of the Company's mini-warehouse and business park
operations for the three and six months ended June 30, 1996 and 1995:
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
-------------------- --------------------
1996 1995 Change 1996 1995 Change
-------- -------- -------- -------- -------- --------
(dollar amounts in thousands)
Rental income:
<S> <C> <C> <C> <C> <C> <C>
Mini-warehouse........ $66,117 $41,650 58.7% $124,861 $79,375 57.3%
Business park......... 5,704 4,444 28.4% 10,669 8,693 22.7%
-------- -------- -------- -------- -------- --------
71,821 46,094 55.8% 135,530 88,068 53.9%
-------- -------- -------- -------- -------- --------
Cost of operations:
Mini-warehouse........ 19,485 14,371 35.6% 37,976 28,117 35.1%
Business park......... 2,392 2,164 10.5% 4,586 4,225 8.5%
-------- -------- -------- -------- -------- --------
21,877 16,535 32.3% 42,562 32,342 31.6%
-------- -------- -------- -------- -------- --------
Net operating income:
Mini-warehouse........ 46,632 27,279 70.9% 86,885 51,258 69.5%
Business park......... 3,312 2,280 45.3% 6,083 4,468 36.1%
-------- -------- -------- -------- -------- --------
$49,944 $29,559 69.0% $92,968 $55,726 66.8%
======== ======== ======== ======== ======== ========
Gross profit margin (a):
Mini-warehouse........ 70.5% 65.5% 7.6% 69.6% 64.6% 7.7%
Business park......... 58.1% 51.3% 13.3% 57.0% 51.4% 10.9%
Number of facilities (at
the end of the period):
Mini-warehouse........ 609 470 29.6% 609 470 29.6%
Business park......... 22 20 10.0% 22 20 10.0%
</TABLE>
(a) Gross profit margins are equal to net operating income divided by
rental income.
This increase in property operations for each of the three and six
months ended June 30, 1996 compared to the same periods in 1995 are
principally the result of the Company's merger and acquisition activities
throughout 1995 and 1996. As a result of these activities, the number of
facilities included in the Company's consolidated financial statements has
increased from 490 at the end of June 30, 1995 to 631 at the end of June
30, 1996.
16
<PAGE>
The Company's mini-warehouse operations account for over 90% of the
total property operations and represents 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 mini-warehouse facilities which were owned by the
Company throughout 1995 and 1996 and (ii) outlining operating results for
those mini-warehouse facilities which were acquired by the Company in 1995
and 1996 whereby the operations represent partial results from the date the
facility was acquired through the end of the period.
Summary of Mini-warehouse operations
------------------------------------
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- ---------------------------
1996 1995 Change 1996 1995 Change
--------- -------- -------- --------- -------- --------
(dollar amounts in thousands)
Rental income:
<S> <C> <C> <C> <C> <C> <C>
Pre-1995 acquisitions......... $39,077 $37,476 4.3% $76,980 $73,890 4.2%
1995 and 1996 acquisitions.... 27,040 4,174 547.8% 47,881 5,485 772.9%
--------- -------- -------- --------- -------- --------
66,117 41,650 58.7% 124,861 79,375 57.3%
--------- -------- -------- --------- -------- --------
Cost of operations:
Pre-1995 acquisitions......... 11,585 13,003 (10.9%) 23,701 26,324 (10.0%)
1995 and 1996 acquisitions.... 7,900 1,368 477.5% 14,275 1,793 696.2%
--------- -------- -------- --------- -------- --------
19,485 14,371 35.6% 37,976 28,117 35.1%
--------- -------- -------- --------- -------- --------
Net operating income:
Pre-1995 acquisitions......... 27,492 24,473 12.3% 53,279 47,566 12.0%
1995 and 1996 acquisitions.... 19,140 2,806 582.1% 33,606 3,692 810.2%
--------- -------- -------- --------- -------- --------
$46,632 $27,279 70.9% $86,885 $51,258 69.5%
========= ======== ======== ========= ========= ========
Net rentable square feet (at the
end of the period):
Pre-1995 acquisitions......... 22,106 22,106 -% 22,106 22,106 -%
1995 and 1996 acquisitions.... 14,141 3,274 331.9% 14,141 3,274 331.9%
Number of facilities (at the
end of the period):
Pre-1995 acquisitions......... 375 375 -% 375 375 -%
1995 and 1996 acquisitions.... 234 95 146.3% 234 95 146.3%
Pre-1995 acquisitions:
----------------------
Realized rent per occupied
square foot.................. $0.66 $0.64 3.1% $0.66 $0.64 3.1%
Weighted average occupancy
for the period............... 91.3% 90.1% 1.3% 90.2% 89.4% 0.9%
</TABLE>
The increases in rental income for the pre-1995 acquisitions for the
three and six months ending June 30, 1996 compared to the same periods in
1995 are due to increasing realized rent per occupied square foot combined
with an increased weighted average occupancy level.
The decreases in cost of operations for the pre-1995 acquisitions for
the three and six months ended June 30, 1996 compared to the same period in
1995 is principally the result of decreased property management fees. Prior
to the PSMI Merger in November, 1995, the Company's mini-warehouse
facilities were managed by PSMI for a fee. Fees from managing the Company's
mini-warehouse facilities totaled $2.5 million and $4.8 million for the
three and six months ended June 30, 1995, respectively, and are included in
cost of operations ($2.2 million and $4.4 million, respectively, relate to
pre-1995 acquisitions). As a result of the PSMI Merger, the Company became
self-managed and no longer incurs property management fees for the outside
management of its facilities. The Company, however, now incurs operating
costs relating to its own personnel managing the facilities which for the
three and six months ending June 30, 1996 totaled $522,000 and $1,052,000,
respectively ($307,000 and $649,000, respectively, relate to pre-1995
acquisitions).
17
<PAGE>
Equity in earnings of real estate entities: Equity in earnings of real
estate entities was $5,479,000 and $380,000 for the three months ended June
30, 1996 and 1995, respectively. Equity in earnings of real estate entities
was $10,090,000 and $579,000 for the six months ended June 30, 1996 and
1995, respectively.
For the 1995 periods, equity in earnings of real estate entities
principally consists of earnings from partnerships which are now
consolidated with the Company and, accordingly, are no longer included in
equity in earnings of real estate entities in 1996. The 1996 earnings
principally consists of earnings related to the interests acquired pursuant
to the PSMI Merger. The Company currently has ownership interests in 42
limited partnerships and 13 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.
Equity in earnings of real estate entities for three and six months
ended June 30, 1996 consists of the Company's pro rata share of earnings
(including the Company's share of depreciation expense - $2,374,000 and
$4,774,000, respectively) of the Unconsolidated Entities based upon the
Company's ownership interest in each for the period. In addition, equity in
earnings of real estate entities for three and six months ended June 30,
1996 includes amortization totaling $1,958,000 and $4,052,000,
respectively, representing the amortization of the Company's cost basis
over the underlying book value of the Company's equity interest in each of
the entities.
Similar to the Company, the Unconsolidated Entities generate
substantially all of their income from their ownership of mini-warehouse
facilities. In the aggregate, the Unconsolidated Entities own a total of
437 facilities at June 30, 1996, including 424 mini-warehouse facilities.
The following table summarizes operating data of the mini-warehouse
facilities owned by the Unconsolidated Entities:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------------- ---------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
Percentage change over prior period:
<S> <C> <C> <C> <C>
Rental income 5.7% 5.7% 5.5% 6.0%
Cost of operations (a) 3.4% 1.5% 5.7% 1.4%
Net operating income 6.9% 8.1% 5.4% 8.6%
Realized rent per occupied square foot....... $0.76 $0.73 $0.76 $0.73
Weighted average occupancy for the period.... 92.2% 90.8% 90.9% 89.7%
</TABLE>
(a) includes property management fees for each of the periods
presented.
The following summarizes combined operating data with respect to the
Unconsolidated Entities for the six months ended June 30, 1996:
Rental income...................................... $108,136,000
Total revenues..................................... 109,023,000
Cost of operations................................. 38,894,000
Depreciation....................................... 17,104,000
Net income......................................... 45,682,000
18
<PAGE>
The Company has in the past, and may continue to seek to acquire in
the future, real estate facilities owned by the Unconsolidated Entities.
During 1996, the Company made several acquisitions of entities which were
included in Unconsolidated Entities at December 31, 1995: (i) the Company
acquired a significant interest in a partnership and as a result began to
consolidate the accounts of the partnership as of January 1, 1996, (ii) on
March 26, 1996, pursuant to mergers, the Company acquired the net assets of
two affiliated REITs and on June 28, 1996 a similar merger was completed
with another affiliated REIT, and (iii) in April 1996, the Company acquired
all of the limited partnership interest in two partnerships which as of
April 1, 1996 have been consolidated with the Company.
Property Management Operations: In connection with the PSMI Merger,
the Company acquired property management contracts for mini-warehouse
facilities owned by affiliated entities and third party owners. In
addition, the Company acquired a 95% economic interest in a subsidiary
which manages commercial properties. These facilities constitute all of the
United States mini-warehouses and business parks doing business under the
"Public Storage" name and all those in which the Company has an interest,
which include all the facilities owned by the Consolidated Partnerships,
Unconsolidated Entities, and 75 facilities owned by third parties in which
the Company has no equity interest.
The property management contracts generally provide for compensation
equal to 6%, in the case of the mini-warehouses, and 5%, in the case of the
business parks, 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.
During the three months ended June 30, 1996, the Company's property
management operations generated net operating income of $3,002,000 on
revenues of $3,549,000 and expenses of $547,000. During the six months
ended June 30, 1996, the Company's property management operations generated
net operating income of $6,134,000 on revenues of $7,309,000 and expenses
of $1,175,000. Because the Company has significant ownership interests in
all but 75 of the facilities it manages, the revenues generated from its
property management operations are generally predictable and are dependent
upon the future growth of rental income for those facilities the Company
manages.
As noted above, the Company has in the past, and may continue to seek
to acquire in the future, real estate facilities owned by the
Unconsolidated Entities. Acquisitions of such facilities will have the
affect of reducing management fee income with a corresponding reduction in
the cost of property operations.
Interest and other income: Interest and other income increased
$424,000, to $1,862,000 for the three months ended June 30, 1996 from
$1,438,000 for the same period in 1995. Interest and other income increased
$1,846,000, to $4,309,000 for the six months ended June 30, 1996 from
$2,463,000 for the same period in 1995.
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 six months ended June 30,
1996 compared to the same periods in 1995 is primarily due to interest
income on excess cash balances. From mid December 1995 through late January
1996, the Company, through two equity offerings, raised net proceeds of
approximately $330 million. Due to the timing to invest these proceeds into
real estate assets, cash balances in interest bearing accounts during the
three and six months ended June 30, 1996 on average were approximately $36
million and $80 million, respectively.
Depreciation and amortization: Depreciation and amortization expense
has increased from $8,779,000 for the three months ended June 30, 1995 to
$16,142,000 for the same period in 1996. Depreciation and amortization
expense has increased from $16,926,000 for the six months ended June 30,
1995 to $30,734,000 for the same period in 1996.
These increases are principally due to the acquisition of additional
real estate facilities during 1995 and 1996 combined with amortization of
intangible assets acquired in connection with the PSMI Merger. Amortization
expense with respect to intangible assets acquired in the PSMI Merger
totaled $2,327,000 and $4,654,000 for the three and six months ended June
30, 1996, respectively (none for the periods in 1995).
19
<PAGE>
General and administrative expense: General and administrative expense
was $1,698,000 for the three months ended June 30, 1996 and $645,000 the
same period in 1995. General and administrative expense was $3,059,000 for
the six months ended June 30, 1996 and $1,736,000 the same period in 1995.
The Company has experienced and expects to continue to experience
increased general and administrative costs during 1996 due to the
following: (i) the growth in the size of the Company has resulted in
increased expenses, (ii) the Company's property acquisition activities has
continued to expand, resulting in certain additional costs incurred in
connection with the acquisition of additional real estate facilities, and
(iii) pursuant to the PSMI Merger, the Company has become self-advised,
resulting in the Company internalizing management functions which
previously was provided by the Adviser. However, offsetting the expected
increases in general and administrative expenses will be the elimination of
advisory fee expense. General and administrative costs for each year
principally consist of state income taxes (for states in which the Company
is a non-resident), investor relation expenses, and certain costs incurred
in the acquisition and development of real estate facilities.
Advisory fee: During 1995, the Company's day-to-day operations were
performed by an adviser for a contractual fee which during the three and
six months ended June 30, 1995 amounted to $1,816,000 and $3,426,000,
respectively. Pursuant to the PSMI Merger, effective November 16, 1995, the
Company became self-advised and as a result will no longer incur advisory
fees.
Minority interest in income: Minority interest in income represents
the income allocable to equity interests in the Consolidated Partnerships
which are not owned by the Company. Minority interest in income for the
three months ended June 30, 1996 was $2,476,000 compared to $1,892,000 for
the same period in 1995, representing an increase of $584,000. This
increase is principally the result of the consolidation of additional
partnerships (and corresponding increase in minority interest) during the
first and second quarters of 1996. In determining income allocable to the
minority interest for the three months ended June 30, 1996 and 1995,
consolidated depreciation and amortization expense of approximately
$2,808,000 and $2,619,000, respectively, was allocated to the minority
interest.
Minority interest in income for the six months ended June 30, 1996 was
$4,815,000 compared to $3,715,000 for the same period in 1995, representing
an increase of $1,100,000. Similar to the second quarter comparisons, this
increase is principally a result of the consolidation of additional
partnerships. In determining income allocable to the minority interest for
the six months ended June 30, 1996 and 1995, consolidated depreciation and
amortization expense of approximately $5,709,000, and $5,392,000,
respectively, was allocated to the minority interest.
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 invest in the acquisition of
additional real estate investments or make optional principal repayments on
debt.
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 $125.0
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.
20
<PAGE>
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").
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 $114,408,000 from $50,325,000 for the six months ended June 30, 1996 and
1995, 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.
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
1996 1995
--------------- -----------
(in thousands)
<S> <C> <C>
Net Income............................................................ $70,080 $29,751
Depreciation and amortization......................................... 30,734 16,926
Depreciation from unconsolidated real estate investments.............. 8,826 -
Minority interest in income........................................... 4,815 3,715
Amortization of discounts on mortgage notes receivable................ (47) (67)
--------------- -----------
Net cash provided by operating activities....................... 114,408 50,325
Distributions from operations to minority interests (funds from
operations allocable to minority interests)......................... (10,524) (9,107)
--------------- -----------
Cash from operations/FFO available to the Company's shareholders...... 103,884 41,218
Less: preferred stock dividends..................................... (33,062) (13,308)
--------------- -----------
Cash from operations/FFO available to common shareholders............. 70,822 27,910
Capital improvements to maintain facilities:
Mini-warehouses..................................................... (6,327) (2,397)
Business parks...................................................... (1,410) (909)
Add back: minority interest share of capital improvements............. 1,480 859
--------------- -----------
Funds available for principal payments on debt, common dividends
and reinvestment.................................................... 64,565 25,463
Cash distributions to common shareholders............................. (32,176) (14,886)
--------------- -----------
Funds available for principal payments on debt and investment......... $32,389 $10,577
=============== ===========
</TABLE>
See the consolidated statements of cash flows for the six months ended
June 30, 1996 and 1995 for additional information regarding the Company's
investing and financing activities.
FFO increased to $103,884,000 for the six months ended June 30, 1996
compared to $41,218,000 for the same period in 1995. FFO applicable to the
common shareholders (after deducting preferred stock dividends) increased
to $70,822,000 for the six months ended June 30, 1996 compared to
$27,910,000 for the same period in 1995. 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.
21
<PAGE>
The Company accounts for the Unconsolidated Entities using the equity
method of accounting, and accordingly, earnings are recognized based upon
the Company's economic interest in each of the partnerships and REITs.
Provisions of the agreements of these partnerships and REITs 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, cash
distributions to be paid to the Company for a period of time will be less
than the Company's FFO, as defined, from these entities (distributable FFO
to the Company was approximately $8.8 million less than the FFO recognized
by the Company). 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 June 30, 1996, the aggregate future
preference payments to other investors is approximately $99.9 million and
is expected to be paid over approximately 15 years, with approximately 50%
of the amount being paid over the next 3.5 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 first six months of 1996
and 1995, the Company distributed to common shareholders approximately 46%
and 53% of its FFO available to common shareholders, respectively, allowing
it to retain approximately $32.4 million and $10.6 million, respectively,
after satisfying its capital improvements and preferred stock dividend
requirements.
Distribution requirements: During the first six months of 1996, the
Company paid dividends totaling $27,091,000 to the holders of the Company's
Senior Preferred Stock, $5,971,000 to the holders of the Convertible
Preferred Stock, and $32,176,000 to the holders of Common Stock. Dividends
with respect to the Senior Preferred Stock and the Convertible Preferred
Stock include pro-rated amounts for securities issued during 1996. The
Company estimates that the distribution requirements for fiscal 1996 with
respect to Senior Preferred Stock and the Convertible Preferred Stock to be
approximately $67.1 million.
Capital improvement requirements: During 1996, the Company has
budgeted approximately $17.1 million for capital improvements ($13.6
million for its mini-warehouse and $3.5 million for its business park
facilities). The minority interests' share of the budgeted capital
improvements is approximately $3.4 million. During the first six months of
1996, the Company incurred capital improvements of approximately $7.7
million.
During 1995, the Company commenced a program to enhance its visual
icon and modernize the appearance of its mini-warehouse facilities,
including modernization of signs, paint color schemes, and rental offices.
Included in the 1996 capital improvement budget is approximately $4.0
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 and nominal
interest rate risks associated with its variable rate mortgage debt. The
Company uses its $125.0 million of bank credit facility (all of which was
unused as of August 13, 1996) primarily to fund acquisitions and provide
financial flexibility and liquidity. The credit facility currently bears
interest at LIBOR plus 0.75%.
22
<PAGE>
At June 30, 1996, the Company had total outstanding notes payable of
approximately $116.1 million. Approximate principal maturities of notes
payable at June 30, 1996 are as follows:
<TABLE>
<CAPTION>
Mortgage Debt
------------------
7.08%
Unsecured Variable
Senior Notes Fixed Rate (1) Rate (2) Total (3)
------------ -------------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C>
1996 (remainder of).......... $ 2,875 $ 4,124 $ 9 $ 7,008
1997......................... 6,500 4,810 804 12,114
1998......................... 7,250 7,900 - 15,150
1999 ........................ 8,000 6,484 - 14,484
2000......................... 8,750 2,721 - 11,471
Thereafter................... 29,250 26,593 - 55,843
------------ -------------- -------- ---------
$62,625 $52,632 $813 $116,070
============ ============== ======== =========
</TABLE>
(1) Weighted average rate of 10.25% at June 30, 1996.
(2) Weighted average rate of 7.38% at June 30, 1996.
(3) Weighted average rate of 8.5% at June 30, 1996.
External Financing: The Company intends to continue to expand its
asset and capital base through the acquisition of real estate assets and
interests in real estate assets from both unaffiliated and affiliated
parties through direct purchases, mergers, tender offers or other
transactions. The Company expects to fund these transactions with
internally generated retained cash flows and borrowings under its $125.0
million credit facility. The Company intends to repay amounts borrowed
under the credit facility from undistributed operating cash flow or, as
market conditions permit and are determined to be advantageous, from the
public or private placement of securities. The Company issued for cash
$163.1 million of its Series H Preferred Stock in January 1996 and $30.2
million of Common Stock in June 1996. The proceeds were used to repay debt
and make additional real estate investments.
In April 1996, the Company acquired all of the limited partnership
interest in two partnerships in which the Company had previously acquired
the general partnership interests. These limited partnership interests were
acquired from an institutional investor in exchange for $58,955,000 of the
Company's Convertible Preferred Stock, Series CC ("Series CC").
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 were upgraded at the
beginning of 1996 by each of the three major credit agencies (Baa2 by
Moody's and BBB+ by Standard and Poors and Duff & Phelps). Security ratings
are not recommendations to buy, sell or hold securities, may be subject to
revision or withdrawal at any time and should be evaluated independently of
any other rating.
The Company's portfolio of real estate facilities remains
substantially unencumbered. At June 30, 1996, the Company had mortgage debt
outstanding of $53.4 million and had consolidated real estate facilities
with a book value of $1.5 billion. The Company, however, has been adverse
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.
23
<PAGE>
Mergers and property acquisitions: In March 26, 1996, the Company
completed the mergers with Public Storage Properties IX, Inc. ("Properties
9") and PS Business Parks, Inc. ("PSBP"). In the mergers, the Company
issued an aggregate of 1.4 million shares of Common Stock and paid an
additional $12.6 million in cash. Properties 9 owned and operated 14
mini-warehouses (953,000 square feet). PSBP owned and operated a single
business park (173,000 square feet).
Additionally, on June 28, 1996 the Company completed the merger with
Storage Properties, Inc. ("SPI"). In the merger the Company issued an
aggregate of 822,000 shares of Common Stock and paid an additional
$4,801,000 in cash. SPI owned and operated seven mini-warehouses (399,000
square feet).
In June 1996, the Company and Public Storage Properties X, Inc.
("Properties 10"), an affiliated publicly traded equity real estate
investment trust, agreed, subject to certain conditions, to merge. Upon the
merger, each outstanding share of Properties 10 common stock (other than
shares held by the Company) would be converted, at the election of the
shareholders of Properties 10, into either shares of the Company's common
stock with a market value of $20.92 or, with respect to up to 20% of the
Properties 10 common stock, $20.92 in cash. Properties 10 has 2,157,484
outstanding shares (the Company owns 452,094 shares) of common stock and an
estimated value of $45.1 million. The shares of Properties 10 held by the
Company will be canceled in the merger. The merger agreement is conditioned
on approval by the shareholders of Properties 10. Properties 10 owns 17
properties: 16 mini-warehouses (858,000 square feet) and one business park
(105,000 square feet). The Company expects that if approved the merger
would be completed by September 30, 1996.
Additionally, in June 1996, the Company and Public Storage Properties
XII, Inc. ("Properties 12"), a publicly traded equity real estate
investment trust, agreed, subject to certain conditions, to merge. The
estimated value of the merger is approximately of $50.8 million. Properties
12 has 1,730,099 outstanding shares of common stock series A, 184,453
outstanding shares of common stock series B, and 522,618 outstanding shares
of common stock series C. The Company owns 29,300 shares of common stock
series A, 114,952 shares of common stock series B, and 358,934 shares of
common stock series C. Upon completion of the merger, each outstanding
share of common stock series A of Properties 12 (other than shares held by
the Company) would be converted, at the election of the shareholders of
Properties 12, into either shares of the Company's common stock with a
market value of $22.34 or, with respect to up to 20% of the Properties 12
common stock series A, $22.34 in cash. In addition, each share of
Properties 12 common stock series B and C (other than shares held by the
Company) will be converted into the right to receive $17.95 in the
Company's common stock, plus the estimated required REIT distributions
attributable to the Properties 12 common stock series B of $1.07 per share
The shares of Properties 12 common stock series A, B and C held by the
Company will be canceled in the merger. The merger is conditioned on
approval by the shareholders of Properties 12. Properties 12 owns 13
properties: 11 mini-warehouses (722,000 square feet) and two business parks
(127,000 square feet). The Company expects that if approved the merger
would be completed by September 30, 1996.
The Company has agreements in principle to acquire 23 mini-warehouses
(2,650,000 square feet) and 15 business park facilities (719,000 square
feet) from five limited partnerships which are not affiliated with the
Company. The Company currently manages on behalf of four of the
partnerships an aggregate of 16 mini-warehouses and 15 business parks. The
acquisition of the real estate assets from each of the limited partnerships
is subject to certain conditions, including the approval of the limited
partners in each of the partnerships. The aggregate acquisition cost is
approximately $79.9 million.
Development Activities: Historically, the Company only acquired
interests in existing/operating real estate facilities. However, from June
1995 through June 1996, the Company began construction on 12 mini-warehouse
facilities, one of which began operations in August 1995 and another in
March 1996. At June 30, 1996, the Company had ten mini-warehouses under
development with an aggregate cost incurred to date of approximately $24.6
million and total additional estimated cost to complete of $19.0 million.
24
<PAGE>
The Company currently has plans to develop an additional 8
mini-warehouses (504,000 square feet) in various locations at an estimated
cost of approximately $26.9 million. The Company is evaluating the
feasibility of developing additional mini-warehouses 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 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
employment of the 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.
Other activities: In August 1996, a subsidiary of the Company acquired
a company engaged in the portable self-storage business in Southern
California. The subsidiary is evaluating the feasibility of expanding this
business.
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.
25
<PAGE>
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
No reports on Form 8-K were filed by the Company during the
quarter ended June 30, 1996.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
DATED: August 13, 1996
PUBLIC STORAGE, INC.
BY: /s/ Ronald L. Havner, Jr.
-------------------------
Ronald L. Havner, Jr.
Senior Vice President and
Chief Financial Officer
(Principal financial officer)
BY: /s/ John Reyes
-------------------------
John Reyes
Vice President and Controller
(Principal accounting officer)
27
<TABLE>
PUBLIC STORAGE, INC.
Exhibit 11 - Statement Re: Computation of Earnings Per Share
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
Primary Earnings Per Share: 1996 1995 1996 1995
- --------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $37,739 $16,551 $70,080 $29,751
Less: Preferred Stock dividends:
10% Cumulative Preferred Stock, Series A (1,141) (1,141) (2,282) (2,282)
9.20% Cumulative Preferred Stock, Series B (1,372) (1,372) (2,744) (2,744)
Variable Rate Preferred Stock, Series C (542) (629) (1,048) (1,279)
9.50% Cumulative Preferred Stock, Series D (713) (713) (1,426) (1,426)
10.0% Cumulative Preferred Stock, Series E (1,372) (1,372) (2,744) (2,286)
9.75% Cumulative Preferred Stock, Series F (1,402) (919) (2,803) (919)
8.875% Cumulative Preferred Stock, Series G (3,827) - (7,825) -
8.45% Cumulative Preferred Stock, Series H (3,565) - (6,219) -
8.25% Convertible Preferred Stock (1,171) (1,186) (2,355) (2,372)
Mandatory Convertible Participating Preferred Stock (875) - (1,700) -
Series CC (1,916) - (1,916) -
---------- ---------- ---------- ----------
Total preferred dividends (17,896) (7,332) (33,062) (13,308)
---------- ---------- ---------- ----------
Net income allocable to common shareholders $19,843 $9,219 $37,018 $16,443
========== ========== ========= ==========
Weighted Average common and common equivalent shares
- ----------------------------------------------------
outstanding:
------------
Weighted average common shares outstanding 73,306 34,666 72,518 32,616
Net effect of dilutive stock options - based on
treasury stock method using average market price 231 126 231 92
---------- ---------- ---------- ----------
Total 73,537 34,792 72,749 32,708
========== ========== ========= ==========
Primary earnings per common and common equivalent share $0.27 $0.26 $0.51 $0.50
========== ========== ========= ==========
</TABLE>
Exhibit 11
<PAGE>
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
-------------------------- ------------------------
Fully-diluted Earnings per Common and
Common Equivalent Share: 1996 1995 1996 1995
------------------------ -------------- -------------- -------------- --------------
Net income allocable to common shareholders per
<S> <C> <C> <C> <C>
Primary calculation above $19,843 $9,219 $37,018 $16,443
Add dividends paid to holders of Convertible
Preferred Stocks:
* 8.25% Convertible Preferred Stock 1,171 1,186 2,355 2,372
* Mandatory Convertible Participating
Preferred Stock 875 - 1,700 -
* Series CC Preferred Stock 1,916 - 1,916 -
-------------- -------------- -------------- --------------
Net income allocable to common shareholders for
purposes of determining Fully-diluted Earnings
per Common and Common Equivalent Share $23,805 $10,405 $42,989 $18,815
============== ============== ============== ==============
Weighted average common and common
equivalent shares outstanding 73,537 34,792 72,749 32,708
Proforma weighted average common shares
assuming conversion of Convertible Preferred
Stock:
* 8.25% Convertible Preferred Stock 3,847 3,872 3,860 3,872
* Mandatory Convertible Participating
Preferred Stock 1,346 - 1,477 -
* Series CC Preferred Stock 2,064 - 1,032 -
-------------- -------------- -------------- --------------
Weighted average common and common
equivalent shares for purposes of computation
of Fully-diluted Earnings per Common
and Common Equivalent Share 80,794 38,664 79,118 36,580
============== ============== ============== ==============
Fully-diluted Earnings per Common and
Common Share(1) $0.29 $0.26 $0.54 $0.50
============== ============== ============== ==============
</TABLE>
(1) 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.
Exhibit 11
<TABLE>
PUBLIC STORAGE, INC.
EXHIBIT 12 - STATEMENT RE: COMPUTATION OF RATIO OF
EARNINGS TO FIXED CHARGES
<CAPTION>
Six Months Ended
June 30, For the Year Ended December 31,
--------------------- ---------------------------------------
1996 1995 1995 1994 1993
--------- ----------- ------------ ------------ -----------
(Amounts in thousands, except ratios)
Net income $70,080 $29,751 $70,386 $42,118 $28,036
<S> <C> <C> <C> <C> <C>
Add: Minority interest in income 4,815 3,715 7,137 9,481 7,291
Less: Gain on disposition of real estate - - - - -
Less: Minority interests in income which do not have
fixed charges (3,326) (2,377) (4,700) (5,906) (737)
--------- ----------- ------------ ------------ -----------
Income from continuing operations 71,569 31,089 72,823 45,693 34,590
Interest expense 4,813 3,715 8,508 6,893 6,079
--------- ----------- ------------ ------------ -----------
Total Earnings Available to Cover Fixed Charges $76,382 $34,804 $81,331 $52,586 $40,669
========= =========== ============ ============ ===========
Total Fixed Charges - Interest expense $4,813 $3,715 $8,508 $6,893 $6,079
========= =========== ============ ============ ===========
Preferred Stock dividends:
Series A $2,282 $2,282 $4,563 $4,563 $4,563
Series B 2,744 2,744 5,488 5,339 4,147
Series C 1,048 1,279 2,364 1,250 -
Series D 1,426 1,426 2,850 950 -
Series E 2,744 2,286 5,030 - -
Series F 2,803 919 3,721 - -
Series G 7,825 - 638 - -
Series H 6,219 - - - -
Series CC 1,916
Convertible 2,355 2,372 4,744 4,744 2,179
Convertible Participating 1,700 - 1,726 - -
--------- ----------- ------------ ------------ -----------
Total Preferred Stock dividends $33,062 $13,308 31,124 $16,846 $10,889
========= =========== ============ ============ ===========
Total Combined Fixed Charges and Preferred Stock dividends $37,875 $17,023 $39,632 $23,739 $16,968
========= =========== ============ ============ ===========
Ratio of Earnings to Fixed Charges 15.87 9.37 9.56 7.63 6.69
========= =========== ============ ============ ===========
Ratio of Earnings to Combined Fixed Charges and
Preferred Stock dividends 2.02 2.05 2.05 2.22 2.40
========= =========== ============ ============ ===========
</TABLE>
<TABLE>
PUBLIC STORAGE, INC.
EXHIBIT 12 - STATEMENT RE: COMPUTATION OF RATIO OF
EARNINGS TO FIXED CHARGES
<CAPTION>
For the Year Ended December 31,
--------------------------
1992 1991
------------ -----------
Net income $15,123 $11,954
<S> <C> <C>
Add: Minority interest in income 6,895 6,693
Less: Gain on disposition of real estate (398) -
Less: Minority interests in income which do not have
fixed charges (694) (501)
------------ -----------
Income from continuing operations 20,926 18,146
Interest expense 9,834 10,621
------------ -----------
Total Earnings Available to Cover Fixed Charges $30,760 $28,767
============ ===========
Total Fixed Charges - Interest expense $9,834 $10,621
============ ===========
Preferred Stock dividends:
Series A $ 812 $ -
Series B - -
Series C - -
Series D - -
Series E - -
Series F - -
Series G - -
Series H - -
Series CC
Convertible - -
Convertible Participating - -
------------ -----------
Total Preferred Stock dividends $ 812 $ -
============ ===========
Total Combined Fixed Charges and Preferred Stock dividends $10,646 $10,621
============ ===========
Ratio of Earnings to Fixed Charges 3.13 2.71
============ ===========
Ratio of Earnings to Combined Fixed Charges and
Preferred Stock dividends 2.89 2.71
============ ===========
</TABLE>
EXHIBIT 12
<PAGE>
<TABLE>
<CAPTION>
PUBLIC STORAGE, INC.
EXHIBIT 12 - STATEMENT RE: COMPUTATION OF RATIO OF
EARNINGS TO FIXED CHARGES
Six Months Ended
June 30, For the Year Ended December 31,
--------------------- ---------------------------------------
1996 1995 1995 1994 1993
--------- ----------- ------------ ------------ -----------
(Amounts in thousands, except ratios)
Supplemental disclosure of Ratio of Funds
- -------------------------------------------
from Operations ("FFO") to fixed charges:
--------------------------------------------
<S> <C> <C> <C> <C> <C>
FFO $103,884 $41,218 $105,086 $56,143 $35,830
Interest expense 4,813 3,715 8,508 6,893 6,079
--------- ----------- ------------ ------------ -----------
Adjusted FFO available to cover fixed charges $108,697 $44,933 $113,594 $63,036 $41,909
========= =========== ============ ============ ===========
Total Fixed Charges - Interest expense $4,813 $3,715 $8,508 $6,893 $6,079
========= =========== ============ ============ ===========
Total Preferred Stock dividends $33,062 $13,308 $31,124 $16,846 $10,889
========= =========== ============ ============ ===========
Total Combined Fixed Charges and Preferred Stock
dividends $37,875 $17,023 $39,632 $23,739 $16,968
========= =========== ============ ============ ===========
Ratio of FFO to Fixed Charges 22.58 12.10 13.35 9.15 6.89
========= =========== ============ ============ ===========
Ratio of FFO to Combined Fixed Charges and Preferred
Stock dividends 2.87 2.64 2.87 2.66 2.47
========= =========== ============ ============ ===========
</TABLE>
<TABLE>
<CAPTION>
PUBLIC STORAGE, INC.
EXHIBIT 12 - STATEMENT RE: COMPUTATION OF RATIO OF
EARNINGS TO FIXED CHARGES
For the Year Ended December 31,
-------------------------------
1992 1991
------------ -----------
Supplemental disclosure of Ratio of Funds
- -------------------------------------------
from Operations ("FFO") to fixed charges:
--------------------------------------------
<S> <C> <C>
FFO $21,133 $17,176
Interest expense 9,834 10,621
------------ -----------
Adjusted FFO available to cover fixed charges $30,967 $27,797
============ ===========
Total Fixed Charges - Interest expense $9,834 $10,621
============ ===========
Total Preferred Stock dividends $ 812 $ -
============ ===========
Total Combined Fixed Charges and Preferred Stock
dividends $10,646 $10,621
============ ===========
Ratio of FFO to Fixed Charges 3.15 2.62
============ ===========
Ratio of FFO to Combined Fixed Charges and Preferred
Stock dividends 2.91 2.62
============ ===========
</TABLE>
EXHIBIT 12
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000318380
<NAME> Public Storage, Inc.
<MULTIPLIER> 1
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 19,827,000
<SECURITIES> 0
<RECEIVABLES> 25,960,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 45,787,000
<PP&E> 1,788,211,000
<DEPRECIATION> (268,046,000)
<TOTAL-ASSETS> 2,222,796,000
<CURRENT-LIABILITIES> 36,739,000
<BONDS> 121,070,000
0
734,572,000
<COMMON> 8,400,000
<OTHER-SE> 1,196,098,000
<TOTAL-LIABILITY-AND-EQUITY> 2,222,796,000
<SALES> 0
<TOTAL-REVENUES> 157,238,000
<CGS> 0
<TOTAL-COSTS> 43,737,000
<OTHER-EXPENSES> 33,793,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,813,000
<INCOME-PRETAX> 70,080,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 70,080,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 70,080,000
<EPS-PRIMARY> .51
<EPS-DILUTED> .51
</TABLE>
