SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
---------- ----------
Commission File Number: 1-8389
--------
PUBLIC STORAGE, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-3551121
- ------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
701 Western Avenue, Glendale, California 91201-2394
- ---------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 244-8080.
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[ X ] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of November 4, 1997:
Common Stock, $.10 par value, 103,013,266 shares outstanding
- ------------------------------------------------------------
Class B Common Stock, $.10 Par Value - 7,000,000 shares
- -------------------------------------------------------
Equity Stock, Series A, $.01 Par Value - 225,000 shares
- -------------------------------------------------------
<PAGE>
PUBLIC STORAGE, INC.
INDEX
Pages
-----
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Condensed Consolidated Balance Sheets at
September 30, 1997 and December 31, 1996 1
Condensed Consolidated Statements of Income for the
Three and Nine Months Ended September 30, 1997 and 1996 2
Condensed Consolidated Statements of Shareholders Equity
for the Nine Months Ended September 30, 1997 3
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1997 and 1996 4- 5
Notes to Condensed Consolidated Financial Statements 6 - 14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15 - 26
PART II. OTHER INFORMATION (Items 1, 2, 3 , 4 and 5 are not applicable)
- --------------------------
Item 6. Exhibits and Reports on Form 8-K 27
<PAGE>
<TABLE>
<CAPTION>
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
September 30, December 31,
1997 1996
---------------- ----------------
ASSETS (Unaudited)
<S> <C> <C>
Cash and cash equivalents............................ $90,763 $ 26,856
Real estate facilities, at cost:
Land.............................................. 778,690 596,141
Buildings......................................... 2,072,900 1,589,357
---------------- ----------------
2,851,590 2,185,498
Accumulated depreciation.......................... (355,049) (297,655)
---------------- ----------------
2,496,541 1,887,843
Construction in process............................ 51,358 35,815
---------------- ----------------
2,547,899 1,923,658
Investment in real estate entities................... 231,962 350,190
Intangible assets, net............................... 215,272 222,253
Other assets......................................... 68,631 49,195
---------------- ----------------
Total assets........................... $3,154,527 $ 2,572,152
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable........................................ $100,349 $ 108,443
Accrued and other liabilities........................ 71,664 41,467
---------------- ----------------
Total liabilities........................... 172,013 149,910
Minority interest.................................... 190,695 116,805
Commitments and contingencies
Shareholders' equity:
Preferred Stock, $0.01 par value, 50,000,000
shares authorized, - 13,313,009 shares issued
and outstanding (13,421,580 issued and
outstanding at December 31, 1996), at
liquidation preference:
Cumulative Preferred Stock, issued in series 868,900 718,900
Convertible Preferred Stock................. 54,584 114,929
Common stock, $0.10 par value, 200,000,000 shares
authorized, 102,991,059 shares issued and
outstanding (88,362,026 at December 31, 1996)... 10,299 8,837
Class B Common Stock, $0.10 par value, 7,000,000
shares authorized and issued.................... 700 700
Paid-in capital................................... 1,847,745 1,454,387
Cumulative net income............................. 529,537 396,420
Cumulative distributions paid..................... (519,946) (388,736)
---------------- ----------------
Total shareholders' equity.................. 2,791,819 2,305,437
---------------- ----------------
Total liabilities and shareholders'equity. $3,154,527 $ 2,572,152
================ ================
</TABLE>
See accompanying notes.
1
<PAGE>
<TABLE>
<CAPTION>
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------ ----------- -------------
REVENUES:
Rental income:
<S> <C> <C> <C> <C>
Self-storage facilities................. $ 102,613 $ 70,434 $ 274,161 $ 195,295
Commercial properties................... 11,526 6,006 27,694 16,675
Portable self-storage................... 2,566 160 4,140 160
Equity in earnings of real estate entities. 4,431 5,559 14,681 15,649
Facility management fees................... 2,355 3,609 8,298 10,918
Interest and other income.................. 2,908 1,750 7,651 6,059
------------ ------------ ----------- -------------
126,399 87,518 336,625 244,756
------------ ------------ ----------- -------------
EXPENSES:
Cost of operations:
Self-storage facilities................. 29,852 20,859 82,746 58,835
Commercial properties................... 4,277 2,739 11,034 7,325
Portable self-storage................... 14,635 90 25,325 90
Cost of facility management................. 352 576 1,294 1,751
Depreciation and amortization .............. 23,847 16,819 64,375 47,553
General and administrative.................. 1,919 1,536 5,205 4,595
Interest expense............................ 2,262 2,080 5,821 6,893
------------ ------------ ----------- -------------
77,144 44,699 195,800 127,042
------------ ------------ ----------- -------------
Income before minority interest............... 49,255 42,819 140,825 117,714
Minority interest in income................... (2,707) (2,453) (7,708) (7,268)
------------ ------------ ----------- -------------
Net income.................................... $ 46,548 $ 40,366 $ 133,117 $ 110,446
============ ============ =========== =============
Net income allocation:
Allocable to preferred shareholders........ $ 18,316 $ 17,056 $ 68,134 $ 50,118
Allocable to common shareholders........... 28,232 23,310 64,983 60,328
------------ ------------ ----------- -------------
$ 46,548 $ 40,366 $ 133,117 $ 110,446
============ ============ =========== =============
PER COMMON SHARE:
Net income.................................... $ 0.27 $ 0.30 $ 0.67 $ 0.81
============ ============ =========== =============
Weighted average common shares outstanding.... 103,536 78,338 97,154 74,690
============ ============ =========== =============
</TABLE>
See accompanying notes.
2
<PAGE>
<TABLE>
<CAPTION>
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Nine Months Ended September 30, 1997
(Amounts in thousands except share data)
(Unaudited)
Preferred Stock
------------------------- Class B
Cumulative Common Common
Senior Convertible Stock Stock
------------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Balances at December 31, 1996........................... $ 718,900 $ 114,929 $ 8,837 $ 700
Issuance of preferred stock, Series J................... 150,000 - - -
Issuance of common stock:
In connection with mergers (7,681,432 shares) ..... - - 768 -
Public issuance (4,600,000 shares)................. - - 460 -
Conversion of 8.25% Convertible Preferred Stock into
common stock (93,585 shares).................... - (1,390) 9 -
Conversion of Mandatory Convertible Preferred
Stock, Series CC into common stock (2,184,250
shares)......................................... - (58,955) 218 -
Other (69,766 shares).............................. - - 7 -
Net income.............................................. - - - -
Cash distributions:
Cumulative Senior Preferred Stock.................... - - - -
Mandatory Convertible Preferred Stock, Series CC..... - - - -
8.25% Convertible Preferred Stock.................... - - - -
Common Stock......................................... - - - -
------------- ----------- ---------- ---------
Balances at September 30, 1997.......................... $868,900 $ 54,584 $ 10,299 $ 700
============= =========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Nine Months Ended September 30, 1997
(Amounts in thousands except share data)
(Unaudited)
Total
Paid-in Cumulative Cumulative Shareholders'
Capital Net Income Distributions Equity
----------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
Balances at December 31, 1996........................... $1,454,387 $ 396,420 $ (388,736) $ 2,305,437
Issuance of preferred stock, Series J................... (5,075) - - 144,925
Issuance of common stock:
In connection with mergers (7,681,432 shares) ..... 211,232 - - 212,000
Public issuance (4,600,000 shares)................. 126,239 - - 126,699
Conversion of 8.25% Convertible Preferred Stock into
common stock (93,585 shares).................... 1,381 - - -
Conversion of Mandatory Convertible Preferred
Stock, Series CC into common stock (2,184,250
shares)......................................... 58,737 - - -
Other (69,766 shares).............................. 844 - - 851
Net income.............................................. - 133,117 - 133,117
Cash distributions:
Cumulative Senior Preferred Stock.................... - - (49,399) (49,399)
Mandatory Convertible Preferred Stock, Series CC..... - - (15,328) (15,328)
8.25% Convertible Preferred Stock.................... - - (3,407) (3,407)
Common Stock......................................... - - (63,076) (63,076)
----------- ----------- -------------- -------------
Balances at September 30, 1997.......................... $1,847,745 $529,537 $(519,946) $2,791,819
=========== =========== ============== =============
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
<CAPTION>
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
For the Nine Months Ended
September 30,
------------------------------
1997 1996
------------- -------------
Cash flows from operating activities:
<S> <C> <C>
Net income.......................................................... $ 133,117 $ 110,446
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization..................................... 64,375 47,553
Depreciation included in equity in earnings of real estate 9,107 13,241
entities..........................................................
Minority interest in income....................................... 7,708 7,268
------------- -------------
Total adjustments............................................. 81,190 68,062
------------- -------------
Net cash provided by operating activities................. 214,307 178,508
------------- -------------
Cash flows from investing activities:
Capital improvements to real estate facilities.................... (24,309) (13,465)
Construction in process........................................... (53,085) (30,579)
Acquisition of real estate facilities............................. (50,172) (101,972)
Capital expenditures relating to portable self-storage operations
(included in other assets) ..................................... (15,393) -
Acquisition of interests in real estate entities.................. (43,257) (86,508)
Acquisition cost of business combinations......................... (120,986) (83,620)
Acquisition of minority interests................................. (20,967) (10,075)
Other............................................................. 897 (8,796)
------------- -------------
Net cash used in investing activities..................... (327,272) (335,015)
------------- -------------
Cash flows from financing activities:
Principal payments on notes payable............................... (8,094) (47,106)
Net proceeds from the issuance of preferred stock................. 144,925 163,133
Net proceeds from the issuance of common stock.................... 127,550 129,493
Distributions paid to shareholders................................ (130,125) (99,239)
Distributions from operations to minority interests in
consolidated real estate partnerships........................... (14,201) (15,976)
Net reinvestment by minority interests into real estate 3,346 2,023
partnerships......................................................
Contributions from minority interest in development joint venture. 47,087 -
Other............................................................. 6,384 3,971
------------- -------------
Net cash provided by financing activities................. 176,872 136,299
------------- -------------
Net increase (decrease) in cash and cash equivalents................... 63,907 (20,208)
Cash and cash equivalents at the beginning of the period............... 26,856 80,436
------------- -------------
Cash and cash equivalents at the end of the period..................... $ 90,763 $ 60,228
============= =============
</TABLE>
See accompanying notes.
4
<PAGE>
<TABLE>
<CAPTION>
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
(CONTINUED)
For the Nine Months Ended
September 30,
------------------------------
1997 1996
------------- -------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
<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)
Business combinations:
Real estate facilities.................................................. (540,945) (351,907)
Other assets............................................................ (3,097) (5,076)
Accrued and other liabilities........................................... 16,640 9,370
Minority interest....................................................... 42,038 20,139
Investment in real estate entities...................................... 152,378 82,113
Accrued construction in process............................................ (4,245) -
Accrued and unpaid dividends............................................... (1,085) -
Assumption of mortgage notes payable in connection with the acquisition of
real estate facilities.................................................. - 1,701
Cancellation of mortgage notes receivable in connection with the acquisition
of real estate facilities............................................... - 700
Issuance of Mandatory Convertible Preferred Stock, Series CC............... - 58,955
Issuance of common stock in connection with:
- business combinations................................................. 212,000 106,285
- conversions of 8.25% Convertible Preferred Stock...................... 1,390 936
- conversions of Mandatory Convertible Preferred Stock.................. 58,955 27,960
Conversion of 8.25% Convertible Preferred Stock into common stock.......... (1,390) (936)
Conversion of Series CC Convertible Preferred Stock into common stock...... (58,955) -
Conversion of Mandatory Convertible Preferred Stock into common stock...... - (28,470)
</TABLE>
See accompanying notes.
5
<PAGE>
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. Description of the business
---------------------------
Public Storage, Inc. (the "Company") is a California corporation
which was organized in 1980. The Company is a fully integrated,
self-administered and self-managed real estate investment trust ("REIT")
that acquires, develops, owns and operates self-storage facilities which
offer self-storage spaces for lease, usually on a month-to-month basis, for
personal and business use. The Company, to a lesser extent, also owns and
operates commercial properties containing commercial and industrial rental
space.
The Company invests in real estate facilities primarily through
the acquisition of wholly-owned facilities combined with the acquisition of
equity interests in real estate entities owning real estate facilities. At
September 30, 1997, the Company had direct and indirect equity interests in
1,127 properties located in 38 states, including 1,072 self-storage
facilities and 55 commercial properties.
2. Summary of significant accounting policies
------------------------------------------
Basis of presentation
---------------------
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results
could differ from estimates. In the opinion of management, all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation
have been included. Operating results for the three and nine months ended
September 30, 1997 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1997. For further information,
refer to the consolidated financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended
December 31, 1996.
The consolidated financial statements include the accounts of (i)
the Company, (ii) majority owned subsidiaries which are involved in the
sale of locks and boxes, rental of trucks and portable self-storage, and
the management and operation of commercial properties, and (iii)
twenty-three limited partnerships in which the Company has significant
economic interest (in excess of 50%) and is able to exercise significant
control (the "Consolidated Partnerships"). Collectively, the Company, the
majority owned subsidiaries, and the Consolidated Partnerships own a total
of 916 real estate facilities, consisting of 863 self-storage facilities
and 53 commercial properties.
The Company also has equity investments in 40 other affiliated
limited partnerships and two REITs owning in aggregate 211 real estate
facilities (209 self-storage facilities and 2 commercial properties) which
are managed by the Company. The Company's ownership interest in such real
estate entities is less than 50% of the total equity interest and,
accordingly, the Company's investments in these real estate entities are
accounted for using the equity method.
Income taxes
------------
For all taxable years subsequent to 1980, the Company qualified
and intends to continue to qualify as a REIT, as defined in Section 856 of
the Internal Revenue Code. As a REIT, the Company is not taxed on that
portion of its taxable income which is distributed to its shareholders
provided that the Company meets certain tests. The Company believes it will
meet these tests during 1997 and, accordingly, no provision for income
taxes has been made in the accompanying financial statements.
6
<PAGE>
Cash and cash equivalents
-------------------------
For purposes of financial statement presentation, the Company
considers all highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents.
Real estate facilities
----------------------
Real estate facilities are recorded at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of
the buildings and improvements, which are generally between 5 and 25 years.
The Company has no allowance for possible losses relating to any
of its real estate investments, including mortgage notes receivable. The
need for such an allowance is evaluated by management by means of periodic
reviews of its investment portfolio.
Intangible assets
-----------------
Intangible assets consist of property management contracts
($165,000,000) and the cost over the fair value of net tangible and
identifiable intangible assets ($67,726,000) acquired in a 1995 merger with
an affiliate. Intangible assets are amortized by the straight-line method
over 25 years. At September 30, 1997, intangible assets are net of
accumulated amortization of $17,454,000 ($10,473,000 at December 31, 1996).
Included in depreciation and amortization expense for the three and nine
months ended September 30, 1997 and 1996 is $2,326,000 and $6,981,000,
respectively, related to the amortization of intangible assets.
Revenue/expense recognition
---------------------------
Property rents are recognized as earned. Equity in earnings of
real estate entities are recognized based on the Company's ownership
interest in the earnings of each of the unconsolidated real estate
entities. Leasing commissions relating to the commercial property
operations are expensed as incurred.
Net income per common share
---------------------------
Net income per common share is computed using the weighted
average common shares outstanding (adjusted for stock options). The
inclusion of the Class B Common Stock in the determination of earnings per
common share is anti-dilutive and, accordingly, are not included in the
computation in either period. The Company's preferred stocks are not common
stock equivalents. Fully diluted earnings per common share are not
presented, as the assumed conversion of the Company's convertible preferred
stocks would be anti-dilutive.
In computing earnings per common share, preferred stock dividends
reduced income available to common stockholders. At the end of the first
quarter of 1997, the Company paid a non-recurring special dividend to the
holder of the Series CC Convertible Preferred Stock totaling $13.4 million.
As a result of this payment, the Company would not have been required to
pay quarterly dividends with respect to the Series CC Convertible Preferred
Stock until the quarter ended March 31, 1999. During the second quarter of
1997, the Series CC Convertible Preferred Stock converted into common
stock. Net income allocable to the Company's preferred stock for the nine
months ended September 30, 1997 reflects the special dividends paid to the
Series CC Convertible preferred stock of $13.4 million.
7
<PAGE>
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all
prior periods. Under the new requirements for calculating primary earnings
per share, the dilutive effects of stock options will be excluded. The
impact of the new standard will not have a material impact on either
primary or fully-diluted earnings per common share for the three and nine
months ended September 30, 1997 and 1996.
Reclassifications
-----------------
Certain reclassifications have been made to the consolidated
financial statements for 1996 in order to conform to the 1997 presentation.
3. Business combinations
---------------------
Mergers with affiliated REITs
-----------------------------
During the second quarter of 1997, the Company completed merger
transactions with six affiliated public REITs whereby the Company acquired
all the outstanding stock of the REITs which it did not previously own in
exchange for cash and common stock of the Company. The aggregate
acquisition cost of these mergers is summarized as follows:
<TABLE>
<CAPTION>
Merger consideration
-------------------------------------------------
Common Stock Pre-existing
Entity Date of merger Cash investment Total
---------------------------------------- -------------- -------------------------------------------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Public Storage Properties XIV, Inc. April 11, 1997 $ 34,450 $ 9,145 $ 19,977 $ 63,572
Public Storage Properties XV, Inc. April 11, 1997 29,764 8,883 18,137 56,784
Public Storage Properties XVI, Inc. June 24, 1997 41,060 10,804 22,225 74,089
Public Storage Properties XVII, Inc. June 24, 1997 34,590 15,793 25,862 76,245
Public Storage Properties XVIII, Inc. June 24, 1997 39,727 17,570 19,841 77,138
Public Storage Properties XIX, Inc. June 24, 1997 32,409 6,667 18,003 57,079
-------- ------- -------- --------
$212,000 $68,862 $124,045 $404,907
======== ======= ======== ========
</TABLE>
Affiliated Partnership Acquisitions
-----------------------------------
During the second quarter of 1997, the Company acquired a limited
partnership interest in an affiliated partnership for $22,500,000,
consisting of the issuance of the Company's Equity Stock, Series A to the
affiliated partnership. The acquisition of this interest, combined with the
Company's existing general partnership interest in the partnership,
significantly increased the Company's ownership interest and control of the
partnership and, as a result, the Company began to consolidate the accounts
of this partnership.
During the third quarter of 1997, the Company acquired a limited
partnership interest in an affiliated partnership for $57,004,000 in cash.
The acquisition of this interest increased the Company's ownership in the
partnership in excess of 50% (at September 30, 1997, the Company owned
approximately a 66% limited partnership interest in the partnership as well
as virtually all of the general partnership interest). Because of the
Company's increased ownership interest and control of the Partnership
through its general partnership interest, the Company began to consolidate
the accounts of this partnership. The total merger consideration of
$96,386,000 in this transaction includes the $52,124,000 cash acquisition
cost and the company's pre-existing investment of $44,262,000.
8
<PAGE>
Each of the above mergers with affiliated REITs and acquisition
of affiliated partnership interests has been accounted for as a purchase;
accordingly, allocations of the total acquisition cost to the net assets
acquired were made based on the fair value of such assets and liabilities
as of the dates of each respective transaction. The fair market values of
the assets and liabilities assumed with respect to the transactions are
summarized as follows:
<TABLE>
<CAPTION>
REIT Partnership
mergers acquisitions Total
------------- ------------- -------------
(In thousands)
<S> <C> <C> <C>
Real estate facilities................... $413,597 $127,348 $540,945
Investment in real estate entities....... - 15,929 15,929
Minority Interest........................ - (42,038) (42,038)
Other Assets 2,424 673 3,097
Accrued liabilities...................... (11,114) (5,526) (16,640)
------------- ------------- -------------
$404,907 $96,386 $501,293
============= ============= =============
</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. Pro forma selected
financial data for the nine months ended September 30, 1997 and 1996 as
though the above business combinations had been effective at the beginning
of each period are as follows:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
(In thousands, except per share data) September 30, 1997 September 30, 1996
-------------------------------------- ------------------ ------------------
<S> <C> <C>
Revenues............................................... $ 374,568 $ 298,141
Net income............................................. $ 136,144 $ 118,665
Net income per common share............................ $ 0.67 $ 0.83
</TABLE>
The pro forma data does not purport to be indicative of
operations that would have occurred had the business combinations occurred
at the beginning of each period or future results of operations of the
Company. Certain pro forma adjustments were made to the combined historical
amounts to reflect expected reductions in general and administrative
expenses combined with an estimated increase in depreciation and
amortization expense.
9
<PAGE>
4. Real estate facilities
----------------------
Activity in real estate facilities during 1997 is as follows:
<TABLE>
<CAPTION>
Number of
real estate Net rentable Net
facilities square feet carrying cost
------------- ------------ --------------
(Amounts in thousands, except number of facilities)
Operating Facilities
<S> <C> <C> <C>
Balance at December 31, 1996.................... 756 46,462 $2,185,498
Property acquisitions - mergers and business 149 9,084 540,945
combinations....................................
Property acquisitions - third party purchases... 4 631 50,172
Newly opened developed facilities............... 7 474 41,615
Acquisition of minority interest................ - - 8,555
Capital improvements............................ - - 24,309
Other........................................... - - 496
------------- ------------ --------------
Balance at September 30, 1997................... 916 56,651 2,851,590
------------- ------------ --------------
Accumulated depreciation:
Balance at December 31, 1996.................... (297,655)
Additions during the year....................... (57,394)
--------------
Balance at September 30, 1997................... (355,049)
--------------
Construction in progress:
Balance at December 31, 1996.................... 11 707 35,815
Expansion projects acquired in mergers........ - 39 773
Current development............................. 14 783 56,385
Newly opened developed facilities............... (7) (474) (41,615)
------------- ------------ --------------
Balance at September 30, 1997................... 18 1,055 51,358
------------- ------------ --------------
Total real estate facilities.................... 934 57,706 $2,547,899
============= ============ ==============
</TABLE>
The Company's policy is to capitalize interest incurred on debt
during the course of construction of its self-storage facilities. Interest
capitalized during the three and nine months ended September 30, 1997 was
$332,000 and $1,421,000, respectively, compared to $549,000 and $1,142,000,
respectively, for the same periods in 1996.
During the third quarter of 1997, the Company acquired three
commercial properties (585,000 square feet) for an aggregate cost of
approximately $43.3 million. The Company also purchased one facility with a
total of 46,000 square feet of self-storage and commercial space for an
aggregate acquisition cost of $6.8 million.
5. Investment in real estate entities
----------------------------------
The Company's investment in real estate entities at September 30,
1997 generally consists of limited and general partnership interests in
approximately 40 affiliated partnerships and common stock in 2 affiliated
REITs. Such interests consist of ownership interests ranging from 15% to
45% and are accounted for using the equity method of accounting.
10
<PAGE>
During the three and nine months ended September 30, 1997, the
Company recognized earnings from its investments totaling $4,431,000 and
$14,681,000, respectively. Included in equity in earnings of real estate
entities for the three and nine months ended September 30, 1997 is the
Company's share of depreciation expense totaling $2,422,000 and $9,107,000,
respectively. Summarized combined financial data (based on historical cost)
with respect to those unconsolidated real estate entities in which the
Company had an ownership interest at September 30, 1997 are as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
------------- ------------
(in thousands)
<S> <C> <C>
Rental income..................................... $ 83,709 $77,812
Total revenues.................................... 85,055 78,881
Cost of operations................................ 29,499 27,655
Depreciation...................................... 11,448 10,017
Net income........................................ 36,281 32,068
Total assets, net of accumulated depreciation..... $468,587 $461,293
Total debt........................................ 78,293 81,334
Total equity...................................... 367,907 363,291
</TABLE>
6. Revolving line of credit
------------------------
As of September 30, 1997, the Company had no borrowings on its
unsecured credit agreement with a group of commercial banks. The credit
agreement (the "Credit Facility") has a borrowing limit of $150.0 million
and an expiration date of July 31, 2001. The expiration date may be
extended by one year on each anniversary of the credit agreement. Interest
on outstanding borrowings is payable monthly. At the option of the Company,
the rate of interest charged is equal to (i) the prime rate or (ii) a rate
ranging from the London Interbank Offered Rate ("LIBOR") plus 0.40% to
LIBOR plus 1.10% depending on the Company's credit ratings and coverage
ratios, as defined. In addition, the Company is required to pay a quarterly
commitment fee of 0.250% (per annum) of the unused portion of the Credit
Facility. The Credit Facility allows the Company, at its option, to request
the group of banks to propose the interest rate they would charge on
specific borrowings not to exceed $50 million. However, in no case may the
interest rate proposal be greater than the amount provided by the Credit
Facility.
7. Minority interest
-----------------
The Company classifies ownership interests other than its own in
the net assets of each of the Consolidated Partnerships as minority
interest on the Company's consolidated financial statements. Minority
interest in income consists of such interests' share of the operating
results of the Company relating to the consolidated operations of the
Consolidated Partnerships.
11
<PAGE>
8. Shareholders' equity
--------------------
Preferred stock
---------------
At September 30, 1997 and December 31, 1996, the Company had the
following series of Preferred Stock outstanding:
<TABLE>
<CAPTION>
At September 30, 1997 At December 31, 1996
---------------------------- ----------------------------
Dividend Shares Carrying Shares Carrying
Series Rate Outstanding Amount Outstanding Amount
---------------------------------- ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Series A .......................... 10.000% 1,825,000 $ 45,625,000 1,825,000 $ 45,625,000
Series B .......................... 9.200% 2,386,000 59,650,000 2,386,000 59,650,000
Series C........................... Adjustable 1,200,000 30,000,000 1,200,000 30,000,000
Series D........................... 9.500% 1,200,000 30,000,000 1,200,000 30,000,000
Series E........................... 10.000% 2,195,000 54,875,000 2,195,000 54,875,000
Series F........................... 9.750% 2,300,000 57,500,000 2,300,000 57,500,000
Series G .......................... 8.875% 6,900 172,500,000 6,900 172,500,000
Series H .......................... 8.450% 6,750 168,750,000 6,750 168,750,000
Series I .......................... 8.625% 4,000 100,000,000 4,000 100,000,000
Series J .......................... 8.000% 6,000 150,000,000 - -
------------- ------------- ------------- -------------
Total Cumulative Senior Preferred
Stock........................ 11,129,650 868,900,000 11,123,650 718,900,000
------------- ------------- ------------- -------------
Convertible........................ 8.250% 2,183,359 54,584,000 2,238,975 55,974,000
Mandatory Convertible, Series CC. 13.000% - - 58,955 58,955,000
------------- ------------- ------------- -------------
Total Convertible Preferred Stock 2,183,359 54,584,000 2,297,930 114,929,000
------------- ------------- ------------- -------------
13,313,009 $923,484,000 13,421,580 $833,829,000
============= ============= ============= =============
The Series A through Series J stock (collectively the "Cumulative
Senior Preferred Stock") have general preference rights with respect to
liquidation and quarterly distributions. With respect to the payment of
dividends and amounts upon liquidation, all of the Company's Convertible
Preferred Stock ranks junior to the Cumulative Senior Preferred Stock and
any other shares of preferred stock of the Company ranking on a parity with
or senior to the Cumulative Senior Preferred Stock. The Convertible
Preferred Stock ranks senior to the common stock, any additional class of
common stock and any series of preferred stock expressly made junior to the
Convertible Preferred Stock.
Holders of the Company's preferred stock, except under certain
conditions and as noted above, will not be entitled to vote on most
matters. In the event of a cumulative arrearage equal to six quarterly
dividends or failure to maintain a Debt Ratio (as defined) of 50% or less,
holders of all outstanding series of preferred stock (voting as a single
class without regard to series) will have the right to elect two additional
members to serve on the Company's Board of Directors until events of
default have been cured. At September 30, 1997, there were no dividends in
arrears and the Debt Ratio was 3.2%.
Except under certain conditions relating to the Company's
qualification as a REIT, the Senior Preferred Stock are not redeemable
prior to the following dates: Series A - September 30, 2002, Series B -
March 31, 2003, Series C - September 30, 1999, Series D - September 30,
2004, Series E - January 31, 2005, Series F - April 30, 2005, Series G -
December 31, 2000, Series H - January 31, 2001, Series I - October 31,
2001, Series J - August 31, 2002. On or after the respective dates, each of
the series of Senior Preferred Stock will be redeemable at the option of
the Company, in whole or in part, at $25 per share (or depository share in
the case of the Series G, Series H, Series I and Series J), plus accrued
and unpaid dividends.
12
<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. On or after July 1, 1998, the Convertible Stock will be
redeemable for shares of the Company's common stock at the option of the
Company, in whole or in part, at a redemption price of 1.6835 shares of
common stock for each share of Convertible Stock (subject to adjustment in
certain circumstances), if for 20 trading days within any period of 30
consecutive trading days (including the last trading day of such period),
the closing price of the common stock on its principal trading market
exceeds $14.85 per share (subject to adjustment in certain circumstances).
The Convertible Preferred Stock is not redeemable for cash.
During the second quarter of 1997, all of the Series CC Preferred
Stock was converted into 2,184,250 shares of common stock.
In August 1997, the Company issued 6,000,000 depositary shares
(depositary shares, each representing 1/1,000 of a share) of its 8.00%
Series J preferred stock, raising net proceeds of approximately $144.9
million.
Equity Stock
------------
In June 1997, the Company contributed $22,500,000 (225,000
shares) of its Equity Stock, Series A ("Equity Stock") to a partnership in
which the Company is the general partner. As a result of this contribution,
the Company obtained a majority interest in the Partnership and began to
consolidate the accounts of the Partnership. The Equity Stock ranks on a
parity with Common Stock and junior to the Company's Cumulative Senior
Preferred Stock and Convertible Preferred Stock with respect to general
preference rights and has a liquidation amount of ten times the amount paid
to each Common Share up to a maximum of $100 per share. Quarterly
distributions per share on the Equity Stock are equal to the lesser of (i)
10 times the amount paid per Common Stock or (ii) $2.20.
Common Stock
------------
On March 18, 1997, the Company publicly issued 4,600,000 shares
of common stock, raising net proceeds of approximately $126.7 million.
An additional 7,681,000 shares of common stock were issued in
connection with mergers during the second quarter of 1997.
Class B Common Stock
The Class B Common Stock will (i) not participate in
distributions until the later to occur of funds from operations ("FFO") per
Common Share as defined below, aggregating $1.80 during any period of four
consecutive calendar quarters, or January 1, 2000; thereafter, the Class B
Common Stock will participate in distributions (other than liquidating
distributions), at the rate of 97% of the per share distributions on the
Common Stock, provided that cumulative distributions of at least $0.22 per
quarter per share have been paid on the Common Stock, (ii) not participate
in liquidating distributions, (iii) not be entitled to vote (except as
expressly required by California law) and (iv) automatically convert into
Common Stock, on a share for share basis, upon the later to occur of FFO
per Common Share aggregating $3.00 during any period of four consecutive
calendar quarters or January 1, 2003.
For these purposes, FFO means net income (loss) before (i) gain
(loss) on early extinguishment of debt, (ii) minority interest in income
and (iii) gain (loss) on disposition of real estate, adjusted as follows:
(i) plus depreciation and amortization, and (ii) less FFO attributable to
minority interest. FFO per Common Share means FFO less preferred stock
dividends (other than dividends on convertible preferred stock) divided by
the outstanding weighted average shares of Common Stock assuming conversion
of all outstanding convertible securities and the Class B Common Stock.
For these purposes, FFO per share of Common Stock (as defined)
was $1.86 for the four consecutive calendar quarters ended September 30,
1997.
13
<PAGE>
Dividends
---------
The following summarizes dividends paid during the first nine
months of 1997:
Distributions
Per Share or Total
Depository Share Distributions
---------------- -------------
Series A.............................. $ 1.875 $ 3,422,000
Series B.............................. $ 1.725 4,116,000
Series C.............................. $ 1.394 1,673,000
Series D.............................. $ 1.781 2,138,000
Series E.............................. $ 1.875 4,116,000
Series F.............................. $ 1.828 4,205,000
Series G.............................. $ 1.664 11,482,000
Series H.............................. $ 1.584 10,694,000
Series I.............................. $ 1.617 6,468,000
Convertible........................... $ 1.547 3,407,000
Series CC............................. $260.000 15,328,000
-------------
67,049,000
Common................................ $ 0.660 63,076,000
-------------
Total dividends paid $130,125,000
=============
At September 30, 1997, the Company accrued distributions with
respect to its Series J preferred stock for the period from the date of
issuance through September 30, 1997 totaling $1,085,000 which will be paid
on December 31, 1997.
The dividend rate on the Series C Preferred Stock for the third
quarter of 1997 was equal to 7.425% per annum. The dividend rate per annum
will be adjusted quarterly and will be equal to the highest of one of three
U.S. Treasury indices (Treasury Bill Rate, Ten Year Constant Maturity Rate,
or Thirty Year Constant Maturity Rate) multiplied by 110%. However, the
dividend rate for any dividend period will neither be less than 6.75% per
annum nor greater than 10.75%. The dividend rate for the quarter ending
December 31, 1997 will be equal to 7.194% per annum.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- ---------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Net income for the three months ended September 30, 1997 was
$46,548,000 compared to $40,366,000 for the same period in 1996,
representing an increase of $6,182,000 or 15%. The increase in net income
for the three months ended September 30, 1997 compared to the same period
in 1996 was primarily the result of improved property operations, the
acquisition of additional real estate facilities and partnership interests
during 1997 and 1996, offset partially by start-up operating losses
experienced in the Company's new portable self-storage business.
Net income allocable to common shareholders (net income after
deducting dividends to the Company's preferred shareholders of $18,316,000
and $17,056,000 for the three months ended September 30, 1997 and 1996,
respectively) was $28,232,000 or $0.27 per common share (based on
103,536,000 weighted average shares) for the three months ended September
30, 1997 compared to $23,310,000 or $0.30 per common share (based on
78,338,000 weighted average shares) for the same period in 1996,
representing a decrease of $0.03 per common share. This decrease is
principally due to operating losses generated from the portable
self-storage business which totaled $12,069,000 or $0.12 per common share
during the three months ended September 30, 1997.
Net income for the nine months ended September 30, 1997 was
$133,117,000 compared to $110,446,000 for the same period in 1996,
representing an increase of $22,671,000 or 21%. The increase in net income
for the nine months ended September 30, 1997 compared to the same periods
in 1996 were primarily the result of improved property operations, the
acquisition of additional real estate facilities and partnership interests
during 1997 and 1996, offset partially by start-up operating losses in its
new ancillary portable self-storage business.
Net income allocable to common shareholders (net income after
deducting dividends to the Company's preferred shareholders of ($68,134,000
and $50,118,000 for the nine months ended September 30, 1997 and 1996,
respectively ) was $64,983,000 or $0.67 per common share (based on
97,154,000 weighted average shares) for the nine months ended September 30,
1997 compared to $60,328,000 or $0.81 per common share (based on 74,690,000
weighted average shares) for the same period in 1996, representing a
decrease of $0.14 per common share. Similar to the three month period
comparisons, net income allocable to common shareholders has been
negatively impacted by losses generated from the Company's portable
self-storage business which totaled $21,185,000 or $0.22 per common share
for the nine months ended September 30, 1997. In addition, net income
allocable to the common shareholders for the nine months ended September
30, 1997 was negatively impacted by a special dividend totaling $13,412,000
paid to the Company's Series CC Convertible Preferred Stock during the
first quarter of 1997. As a result of the special dividend, the Company
would not have been required to pay another dividend with respect to this
stock until the quarter ended March 31, 1999. During the second quarter of
1997, the Series CC Convertible Preferred Stock converted into common stock
of the Company. Accordingly, all of the $13,412,000 ($0.14 per common
share) of dividends were treated during the nine months ended September 30,
1997 as an allocation of net income to the preferred shareholders in
determining the allocation of net income to the common shareholders. The
special dividend eliminated the quarterly dividend (fixed charges) of $1.9
million and resulting dilutive impact to the Company's common shareholders.
PROPERTY OPERATIONS: Rental income and cost of operations have
increased significantly for the three and nine months ended September 30,
1997 compared to the same periods in 1996 due to the Company's merger and
acquisition activities throughout 1996 and 1997. As a result of these
activities, the number of facilities included in the Company's consolidated
financial statements has increased from 665 at September 30, 1996 to 916 at
September 30, 1997.
15
<PAGE>
The Company's self-storage operations account for over 90% of the
total property operations and represent the largest comparison variances
from period to period. As a result the following table is presented to
further illustrate variances from period to period by (i) comparing the
operating results of self-storage facilities which were owned by the
Company throughout 1996 and 1997 and (ii) outlining operating results for
those self-storage facilities which were acquired by the Company in 1996
and 1997 whereby the operations represent partial results from the date the
facility was acquired through the end of the period.
SUMMARY OF SELF-STORAGE OPERATIONS
----------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1997 1996 Change 1997 1996 Change
------- ------- ------- ------- ------- -------
(dollar amounts in thousands, except per square foot data)
Rental income:
Pre-1996 acquisitions..........$.65,593 $ 61,566 6.5% $ 189,980 $ 179,074 6.1%
1996 and 1997 acquisitions.......37,020 8,868 317.5% 84,181 16,221 419.0%
------- ------- ------- ------- ------- -------
102,613 70,434 45.7% 274,161 195,295 40.4%
------- ------- ------- ------- ------- -------
Cost of operations:
Pre-1996 acquisitions............18,640 18,134 2.8% 56,467 53,825 4.9%
1996 and 1997 acquisitions.......11,212 2,725 311.4% 26,279 5,010 424.%
------- ------- ------- ------- ------- -------
29,852 20,859 43.1% 82,746 58,835 40.6%
------- ------- ------- ------- ------- -------
Net operating income:
Pre-1996 acquisitions............46,953 43,432 8.1% 133,513 125,249 6.6%
1996 and 1997 acquisitions.......25,808 6,143 320.1% 57,902 11,211 416.5%
------- ------- ------- ------- ------- -------
$ 72,761 $ 49,575 46.8% $ 191,415 $136,460 40.3%
======= ======= ======= ======= ======== =======
Net rentable square feet (at
the end of the period, in
000's):
Pre-1996 acquisitions............32,139 32,139 -% 32,139 32,139 -%
1996 and 1997 acquisitions.......19,864 6,036 229.1% 19,864 6,036 229.1%
Number of facilities (at the
end of the period):
Pre-1996 acquisitions...............547 547 -% 547 547 -%
1996 and 1997 acquisitions..........316 93 239.8% 316 93 239.8%
Pre-1996 acquisitions:
Annualized realized rent
per occupied square foot..........$8.76 $8.28 5.8% $8.64 $8.16 5.9%
Annualized scheduled rent
per square foot...................$9.24 $8.76 5.5% $9.24 $8.28 11.6%
Weighted average occupancy
for the period....................93.3% 92.6% 0.7% 91.4% 90.7% 0.7%
</TABLE>
The increases in rental income for the pre-1996 acquisitions for
the three and nine months ending September 30, 1997 compared to the same
periods in 1996 are due to increased realized rent per occupied square foot
combined with an increased weighted average occupancy level. The Company
believes that such improvements are principally the result of initiatives
undertaken during 1996 and 1997 consisting of:
* In the second half of 1996, the Company began to increase its
scheduled rents charged to new customers (prior to promotional
discounts) and to existing tenants where warranted.
* Commencing in early 1996, the Company began to experiment with a
telephone reservation system designed to provide added customer
service. Customers calling either the Company's toll-free
telephone referral system, (800) 44-STORE, or a self-storage
16
<PAGE>
facility are directed to the Company's reservation system where a
representative discusses with the customer space requirements,
price and location preferences and also informs the customer of
other products and services provided by the Company and its
subsidiaries. The national reservation center was not fully
operational for most of the Company's facilities until the fourth
quarter of 1996.
* Commencing in the latter part of the first quarter of 1997 the
Company began, in selected markets, to advertise on local
television offering a promotional rental rate of $1.00 for the
first month.
Rental income for the three and nine months ended September 30,
1997 are net of promotional discounts totaling $4,370,000 and $11,163,000,
respectively, compared to $1,347,000 and $1,929,000 for the same periods in
1996. In addition, included in cost of operations for the three and nine
months ended September 30, 1997 are costs associated with the telephone
reservation center and advertising totaling $2,209,000 and $5,003,000,
respectively, compared to $1,007,000 and $2,433,000 for the same periods in
1996.
DEVELOPMENT OF SELF-STORAGE FACILITIES During the first nine
months of 1997, the Company opened for operation seven newly constructed
self-storage facilities (474,000 square feet). At September 30, 1997, the
Company had sixteen self-storage facilities (approximately 930,000 square
feet) under development with an aggregate cost incurred to date of $41.3
million and total estimated cost to complete of $31 million. In addition,
two portable self-storage facilities (approximately 125,000 square feet)
were under development with an aggregate cost incurred to date of
approximately $1.8 million and total additional estimated costs to complete
of approximately $3.0 million. The Company currently has plans to develop
an additional 10 self-storage facilities (approximately 662,000 square
feet) and 10 portable self-storage facilities (approximately 758,000 square
feet) in various locations at an estimated cost of approximately $90.5
million (aggregate costs incurred to date of approximately $3.0 million).
The Company is evaluating the feasibility of developing
additional facilities in selected markets in which there are few, if any,
facilities to acquire at attractive prices and where the scarcity of other
undeveloped parcels of land or other impediments to development make it
difficult to construct additional competing facilities. Generally the
construction period takes 9 to 12 months followed by, in the case of
self-storage facilities, a 18 to 24 month fill-up process until the newly
constructed facility reaches a stabilized occupancy level of approximately
90%. Due to the timing of the deployment of capital to construct the
facilities and the relatively long "fill-up" period until the facilities
reach a stabilized occupancy level, the Company believes that its
development plans may create earnings dilution in the short-term.
In April 1997, the Company entered into an agreement with a joint
venture partner to develop approximately $220 million of self-storage
facilities (see "LIQUIDITY AND CAPITAL RESOURCES - DEVELOPMENT
ACTIVITIES").
EQUITY IN EARNINGS OF REAL ESTATE ENTITIES: At September 30,
1997, the Company had ownership interests in 40 limited partnerships and 2
REITs (collectively the "Unconsolidated Entities"). The Company's ownership
interest in these entities ranges from 15% to 45%, but generally averages
approximately 30%. Due to the Company's limited ownership interest and
control of these entities, the Company does not consolidate the accounts of
these entities for financial reporting purposes, and accounts for such
investments using the equity method.
Equity in earnings of real estate entities was $4,431,000 for the
three months ended September 30, 1997 as compared to $5,559,000 for the
same period in 1996. Equity in earnings of real estate entities was
$14,681,000 for the nine months ended September 30, 1997 as compared to
$15,649,000 for the same period in 1996. The decreases in earnings from
real estate entities from 1996 to 1997 reflect the Company's merger and
partnership acquisition activities in the last three months of 1996 (with
three affiliated REIT mergers and the acquisition of additional partnership
interests) and the first nine months of 1997 (with six additional
affiliated REIT mergers and the acquisition of additional partnership
interests). The merger and partnership acquisition activities resulted in
the elimination of investment in real estate entities and, after the
acquisitions, the associated equity earnings.
17
<PAGE>
Equity in earnings of real estate entities for the three and nine
months ended September 30, 1997 consists of the Company's pro rata share of
the Unconsolidated Entities based upon the Company's ownership interest for
the period. The following table summarizes the components of the Company's
equity in earnings of real estate entities:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1997 1996 Dollar Change 1997 1996 Dollar Change
-------------------------------------- -------------------------------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Self-storage operations $6,874 $10,100 $(3,226) $23,671 $28,511 $(4,840)
Commercial property 129 453 (324) 1,297 2,065 (768)
operations
Depreciation and
Amortization:
Self-storage facilities (2,379) (4,068) 1,689 (8,608) (12,294) 3,686
Commercial properties (43) (347) 304 (499) (947) 448
Other (150) (579) 429 (1,180) (1,686) 506
-------------------------------------- -------------------------------------
Total equity in earnings of
real estate entities $4,431 $5,559 $(1,128) $14,681 $15,649 $(968)
-------------------------------------- -------------------------------------
</TABLE>
Similar to the Company, the Unconsolidated Entities generate
substantially all of their income from their ownership of self-storage
facilities. In the aggregate, the Unconsolidated Entities own a total of
211 facilities at September 30, 1997, including 209 self-storage
facilities. The Company expects that its equity in earnings from
Unconsolidated Entities will generally decrease as a result of the
acquisition of additional interests in the Unconsolidated Entities by the
Company. The Company has in the past acquired, and may continue to seek to
acquire in the future, real estate facilities owned by or additional
interests in the Unconsolidated Entities.
PROPERTY MANAGEMENT OPERATIONS: The property management contracts
generally provide for compensation equal to 6%, in the case of the
self-storage facilities, and 5%, in the case of the commercial properties,
of gross revenues of the facilities managed. Under the supervision of the
property owners, the Company coordinates rental policies, rent collections,
marketing activities, the purchase of equipment and supplies, maintenance
activity, and the selection and engagement of vendors, suppliers and
independent contractors. In addition, the Company assists and advises the
property owners in establishing policies for the hire, discharge and
supervision of employees for the operation of these facilities, including
resident managers, assistant managers, relief managers and billing and
maintenance personnel.
Property management operations reflect the activities with
respect to the management of facilities owned by affiliated unconsolidated
entities. As a result, the revenues generated from its property management
operations are generally predictable and dependent upon the future growth
of rental income for these affiliated properties. The Company has in the
past acquired, and may continue to seek to acquire in the future, real
estate facilities owned by affiliated entities which are not consolidated
with the Company. The acquisition of such facilities reduces management fee
income to the Company and is offset by a corresponding reduction in the
cost of property operations.
During the three months ended September 30, 1997, the Company's
property management operations generated net operating income of $2,003,000
on revenues of $2,355,000 and expenses of $352,000 as compared to net
operating income of $3,033,000 on revenues of $3,609,000 and expenses of
$576,000 during the same period in 1996. During the nine months ended
September 30, 1997, the Company's property management operations generated
net operating income of $7,004,000 on revenues of $8,298,000 and expenses
of $1,294,000 compared to net operating income of $9,167,000 on revenues of
$10,918,000 and expenses of $1,751,000 during the same period in 1996. The
decreases in property management operations are due to the Company's
acquisition of facilities which it previously managed for third parties and
affiliated entities for a fee.
PORTABLE SELF-STORAGE BUSINESS:
In an effort to attract a wider variety of customers, to further
differentiate the Company from its competition and to generate new sources
of revenues, additional businesses are being developed by affiliates of the
Company to complement the Company's self-storage business. These products
18
<PAGE>
include the sale of locks, boxes and packing supplies and the rental of
trucks and other moving equipment through the implementation of (i) a
retail expansion program, (ii) a truck rental program and most
significantly (iii) a portable self storage business. The retail expansion
program and truck rental program results are presented in "interest and
other income," analyzed in the following section.
Public Storage Pickup & Delivery, Inc. ("PSPUD"), a subsidiary of
the Company, operates a portable self-storage business that rents storage
containers to customers for storage in a central warehouse and provides
related transportation services. During the third quarter of 1997, PSPUD
opened nine new facilities which combined with its previously opened
facilities increased the number of opened facilities to 43 as of September
30, 1997 (including a mature facility acquired in 1996). In October 1997,
PSPUD opened two additional facilities. These 45 facilities had a total of
29,350 occupied containers as of October 31, 1997.
PSPUD presently anticipates opening an additional 8 facilities
from November 1, 1997 through December 31, 1997. PSPUD has also identified
an additional 12 sites in existing markets for development of PSPUD
facilities at an aggregate estimated cost of $46.2 million.
Due to the start-up nature of this business, PSPUD incurred
operating losses totaling approximately $12.1 million and $21.2 million for
the three and nine months ended September 30, 1997, respectively. PSPUD
continues to expend funds in personnel, training, equipment, computer
software and professional fees in organizing this business. Until the
facilities are operating profitably, PSPUD's operations are expected to
adversely impact the Company's earnings, especially for the quarter ended
September 30, 1997 whose losses are expected to be higher than in
subsequent quarters. PSPUD currently expects subsequent quarters to produce
operating losses, but anticipates that losses in subsequent quarters will
be at a reduced level from the current quarter, although there can be no
assurance.
At October 31, 1997, PSPUD had 31 facilities that had been opened
since the beginning of the third quarter (excluding the mature facility
acquired in 1996 and two smaller facilities in peripheral markets) located
in 15 markets in 7 states. These 31 facilities had container capacity
ranging from 1,600 to 2,300 containers (averaging 2,200 containers).
Average monthly gross container rentals for the four months ended October
31, 1997 for the 31 facilities were 166 in July, 214 in August, 241 in
September and 247 in October and had average monthly move-outs during this
period of 71 in July, 113 in August, 135 in September and 124 in October.
The Company believes that the move-in activity was positively impacted by
the Company's marketing and advertising efforts which commenced during
August and September. However, there were markets in which marketing and
advertising effects had not commenced during this period. There can be no
assurance as to the level of PSPUD's expansion, level of net rentals, level
of move-outs or profitability.
The Company continues to believe that it should invest a portion
of its retained cash flow in PSPUD, which responds to a promising business
opportunity and complements the Company's existing operations through joint
use of a national telephone reservation system and a coordinated media
advertising program to increase consumer awareness of both traditional
mini-warehouses and portable self-storage. The Company's average
mini-warehouse occupancy level is higher than at any comparable period in
prior years, despite the promotion of the portable self-storage business in
the same markets. The Company believes that the combination of PSPUD and
traditional mini-warehouses allows for market strategies that promote both
businesses and most importantly meet consumer needs.
Included in the cost of operations of the portable self-storage
operations are certain start-up costs which the Company expects to be
non-recurring and only incidental to the opening of new facilities. These
costs are related to site acquisition, leasing activities, systems
development, and hiring and training of personnel. In addition, included in
cost of operations is $3,500,000 and $7,500,000 for the three and nine
months ended September 30, 1997, respectively, relating to marketing
activities, including television advertising, designed to enhance the
rental activities of PSPUD's facilities.
19
<PAGE>
INTEREST AND OTHER INCOME
As mentioned above, the Company has developed additional
businesses through affiliates, via a retail expansion program and a truck
rental program. The net results of these two businesses are presented along
with interest and other income, as "interest and other income." The
components of interest and other income are detailed as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1997 1996 Dollar Change 1997 1996 Dollar Change
------------------------------------ -----------------------------------
(Amounts in thousands)
Sales of Packaging Material and Truck Rental Income:
---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $1,538 $ 954 $ 584 $3,691 $2,191 $1,500
Costs of Operation (1,227) (585) (642) (2,929) (1,447) (1,482)
------------------------------------ -----------------------------------
Net Operating Income 311 369 (58) 762 744 18
Interest and Other Income 2,597 1,381 1,216 6,889 5,315 1,574
------------------------------------ -----------------------------------
Total Interest and Other Income $2,908 $1,750 $1,158 $7,651 $6,059 $1,592
==================================== ===================================
</TABLE>
Interest and other income principally consists of interest earned
on cash balances and interest related to mortgage notes receivable. The
increase in interest income for the three and nine months ended September
30, 1997 compared to the same periods in 1996 is primarily due to interest
income on excess cash balances. On March 18, 1997, the Company publicly
issued 4.6 million shares of common stock, raising net proceeds of
approximately $126.7 million. On August 28, 1997, it issued its Series J
Preferred Stock, raising net proceeds of approximately $144.9 million. The
effect of the timing of investing the funds from these offerings resulted
in higher average invested cash balances in 1997 as compared to 1996 and
1997.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization
expense has increased $7,028,000, to $23,847,000 for the three months ended
September 30, 1997 as compared to $16,819,000 for the same period in 1996.
Depreciation and amortization expense has increased $16,822,000, to
$64,375,000 for the nine months ended September 30, 1997 as compared to
$47,553,000 for the same period in 1996. These increases are principally
due to the acquisition of additional real estate facilities during 1996 and
1997.
MINORITY INTEREST IN INCOME: Minority interest in income
represents the income allocable to equity interests in the consolidated
entities which are not owned by the Company. Minority interest in income
for the three months ended September 30, 1997 was $2,707,000 compared to
$2,453,000 for the same period in 1996. Minority interest in income for the
nine months ended September 30, 1997 was $7,708,000 compared to $7,268,000
for the same period in 1996.
Minority interest in income increased in the three and nine month
periods compared to 1996 due to improved property operations and the
consolidation of investments which were previously accounted for on the
equity method during the 1996 periods. These effects were partially offset
by PSI's acquisition of additional minority interests, as well as minority
interests in the losses of PSPUD and the development joint venture.
20
<PAGE>
Supplemental Property Data
At September 30, 1997, the Company's investment portfolio
consists of (i) wholly-owned properties owned by the Company, (ii)
properties owned by real estate partnerships in which the Company has
significant ownership interests (the "Consolidated Partnerships"), and
(iii) properties owned by real estate entities (partnerships and REITs) in
which the Company's ownership interest and control are not sufficient to
warrant the consolidation of such entities (the "Unconsolidated Entities").
The following table summarizes the Company's investment in real estate
facilities as of September 30, 1997:
<TABLE>
<CAPTION>
Number of Facilities in which the Net Rentable Square Footage
Company has an ownership interest (in thousands)
---------------------------------- ----------------------------------
Self-Storage Commercial Self-Storage Commercial
Facilities Properties Total Facilities Properties Total
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Wholly-owned facilities (a) (b) 531 11 542 32,510 729 33,239
Facilities owned by Consolidated 332 42 374 19,521 3,891 23,412
---------------------------------- ----------------------------------
Partnerships
Total consolidated facilities 863 53 916 52,031 4,620 56,651
Facilities owned by Unconsolidated Entities 209 2 211 11,999 191 12,190
---------------------------------- ----------------------------------
Total facilities in which the Company
has an ownership interest 1,072 55 1,127 64,030 4,811 68,841
================================== ==================================
</TABLE>
(a) 35 commercial properties which were previously "wholly-owned" at
December 31, 1996 are now classified as "Facilities Owned by
Consolidated Partnerships." Pursuant to the restructuring of the
commercial properties operations, the Company and the Consolidated
Partnerships contributed substantially all of their commercial
properties to a newly created operating partnership, which is owned by
American Office Park Properties, Inc., the Company's majority owned
subsidiary and by the Company and its consolidated Partnerships.
(b) The Company subdivided 7 properties that combined self storage and
commercial property operations. These properties were previously
accounted for as self storage facilities. Net rentable square footage
of 529,000 relating to the commercial portion of these properties has
been reclassified from self-storage facilities to commercial
properties.
In order to evaluate how the Company's overall portfolio has
performed, management analyzes the operating performance of a consistent
group of self-storage facilities representing 951 (55.8 million net
rentable square feet) of the 1,072 self-storage facilities (herein referred
to as "Same Store" self-storage facilities) which have been operated under
the "Public Storage" name for at least the past three years. At September
30, 1997, the Company had ownership interests in a total of 1,072
mini-warehouse facilities. Of these 1,072 properties, 951 or 89% of the
mini-warehouses have been in operation and managed by Public Storage, Inc.
since January 1, 1993. The following table summarizes the operating results
of these 951 properties:
21
<PAGE>
Same Store mini-warehouse facilities (951 facilities):
------------------------------------------------------
(historical property operations)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------ ----------------------
1997 1996 Change 1997 1996 Change
---------- ----------- -------- --------- ---------- ---------
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Rental income.............. $122,309 $114,108 7.2% $353,561 $331,762 6.6%
Cost of operations......... 41,081 39,104 5.1% 123,634 116,170 6.4%
---------- ----------- -------- --------- ---------- ---------
Net operating income....... $ 81,228 $75,004 8.3% $229,927 $215,592 6.6%
========== =========== ======== ========= =========== =========
Gross profit margin........ 66.4% 65.7% 0.7% 65.0% 65.0% -
............................. .............. ............... .......... .............. .............. .........
Weighted Average:
Occupancy............ 93.7% 93.0% 0.7% 91.8% 91.4% 0.4%
Realized rent per
occupied sq. ft.
for period......... $9.36 $8.76 6.8% $9.24 $8.64 6.9%
Scheduled rent per
occupied sq. ft.
for period......... $9.96 $9.36 6.4% $9.84 $8.76 12.3%
</TABLE>
- --------------
1. Assumes payment of property management fees on all facilities,
including those facilities owned by the Company for which effective
November 16, 1995 no fee is paid.
2. Gross profit margin is computed by dividing property net operating
income (before depreciation expense) by rental revenues. Cost of
operations include a 6% management fee. The gross profit margin
excluding the facility management fee was 72.4% and 71.7% for the
three months ended September 30, 1997 and 1996, respectively. The
gross profit margin excluding the facility management fee was 71.0%
and 71.0% for the nine months ended September 30, 1997 and 1996,
respectively.
3. Realized rent per square foot represents the actual revenue earned per
occupied square foot. Management believes this is a more relevant
measure than the scheduled rental rates, since scheduled rates can be
discounted through the use of promotions.
Rental income for the Same Store facilities included promotional
discounts totaling $4.6 million and $13.2 million for the three and
nine months ended September 30, 1997, respectively, compared to $2.0
million and $3.0 million for the same periods ended September 30,
1996, respectively. The increase in promotional discounts is
principally due to promotional activities offered through the national
telephone reservation center combined with television advertising
which began in the second quarter in certain markets where the Company
offered a promotional $1.00 first month rent to customers.
Cost of operations for the three and nine months ended September
30, 1997 increased due to (i) advertising and promotion, which
increased $967,000 and $2,308,000, respectively, due primarily to the
Company's national telephone reservations center and television
advertising in certain markets and (ii) property taxes, which
increased $1,182,000 and $3,014,000, respectively, due primarily to
higher assessments in California, Illinois, and Texas.
As indicated above, in early 1996, the Company implemented a
national telephone reservation system designed to provide added
customer service for all the self-storage facilities under management
by the Company. The Company believes that the improved operating
results, as indicated in the above table, in large part are due to the
success of the national telephone reservation system. However, the
national telephone reservation system was not fully operational for
most of the self-storage facilities until the latter part of the
fourth quarter of 1996.
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company has operated and intends to continue to operate in a
self-sufficient manner without reliance on external sources of
financing to fund its ongoing operating needs. The Company believes
that funds internally generated from ongoing operations will continue
to be sufficient to enable it to meet its operating expenses, capital
improvements, debt service requirements and distributions to
shareholders for the foreseeable future. Over the past six years,
funds internally generated from ongoing operations were in excess of
the Company's operating needs, allowing the Company to retain cash
flow, which it used to acquire additional real estate investments or
make optional principal repayments on debt.
INTERNALLY GENERATED CASH FLOWS: The Company believes that
important measures of its performance as well as its liquidity are
cash provided by operations and funds from operations ("FFO") and the
ability of these measures to fund the Company's operating requirements
(i.e., capital improvements, principal payments on debt and
distribution requirements).
Net cash provided by operations (as determined in accordance with
generally accepted accounting principles) reflects the cash generated
from the Company's business before distributions to various equity
holders, including the preferred shareholders, capital expenditures or
mandatory principal payments on debt. Net cash provided by operations
has increased to $214,307,000 from $178,508,000 for the nine months
ended September 30, 1997 and 1996, respectively.
The following table summarizes the Company's ability to pay the
minority interests' distributions, its dividends to the preferred
shareholders and capital improvements to maintain the facilities
through the use of cash provided by operating activities. The
remaining cash flow is available to the Company to make both scheduled
and optional principal payments on debt, pay distributions to common
shareholders and for reinvestment.
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
-------------------------
1997 1996
------------ ----------
(in thousands)
<S> <C> <C>
Net income............................................................ $133,117 $110,446
Depreciation and amortization......................................... 64,375 47,553
Depreciation from unconsolidated real estate entities................. 9,107 13,241
Minority interest in income........................................... 7,708 7,268
------------ ----------
Net cash provided by operating activities....................... 214,307 178,508
Distributions from operations to minority interests (funds from
operations allocable to minority interests)......................... (14,201) (15,976)
------------ ----------
Cash from operations/FFO available to the Company's shareholders...... 200,106 162,532
Less: Preferred stock dividends..................................... (68,134) (50,118)
Add: Non-recurring payment of dividends with respect to the
Series CC Convertible Preferred..................................... 13,412 -
------------ ----------
Cash from operations/FFO available to common shareholders............. 145,384 112,414
Capital improvements to maintain facilities:
Self-storage facilities............................................. (21,505) (10,884)
Commercial properties............................................... (2,804) (2,581)
Add back: minority interest share of capital improvements............. 1,403 2,295
------------ ----------
Funds available for principal payments on debt, common dividends
and reinvestment.................................................... 122,478 101,244
Cash distributions to common shareholders............................. (63,076) (49,121)
------------ ----------
Funds available for principal payments on debt and investment......... $59,402 $52,123
============ ==========
</TABLE>
23
<PAGE>
See the consolidated statements of cash flows for the nine months
ended September 30, 1997 and 1996 for additional information regarding
the Company's investing and financing activities.
FFO increased to $200,106,000 for the nine months ended September
30, 1997 compared to $162,532,000 for the same period in 1996. FFO
applicable to the common shareholders (after deducting preferred stock
dividends) increased to $145,384,000 for the nine months ended
September 30, 1997 compared to $112,414,000 for the same period in
1996. FFO is used by many financial analysts in evaluating REITs. The
Company defines FFO as net income (loss) (computed in accordance with
GAAP) before (i) gain (loss) on disposition of real estate, adjusted
as follows: (i) plus depreciation and amortization, and (ii) less FFO
attributable to minority interest. The National Association of Real
Estate Investment Trusts, Inc. ("NAREIT") definition of FFO does not
specifically address the treatment of minority interest in the
determination of FFO. In the case of the Company, FFO represents
amounts attributable to its shareholders after deducting amounts
attributable to the minority interests. FFO does not take into
consideration scheduled principal payments on debt, capital
improvements, distributions and other obligations of the Company.
Accordingly, FFO is a supplemental performance measure and is not a
substitute for the Company's cash flow or net income (as discussed
above) as a measure of the Company's liquidity or operating
performance.
The Company accounts for its investments in the unconsolidated
affiliated entities using the equity method of accounting, and
accordingly, earnings are recognized based upon the Company's interest
in each of the partnerships and REITs. This interest is based on the
Company's share of the increase or decrease in the net assets of the
entities from their operations. Provisions of the partnerships' and
REITs' governing documents provide for the payment of preferred cash
distributions to other investors (until certain specified amounts have
been paid) without regard to the pro rata interest of all investors in
current earnings. As a result, actual cash distributions paid to the
Company for a period of time will be less than the Company's interest
in the entities' FFO. During the nine months ended September 30, 1997,
FFO distributed to the Company was approximately $9.0 million less
than the Company's share of FFO for such entities with such preferred
cash distributions. Preferred cash distributions paid to other
investors during each period have the effect of increasing the
Company's economic interest in each of the respective entities and
reducing the amount of future preference payments which must be paid
to other investors before cash distributions will be shared on a pro
rata basis with respect to each investor's actual interest. At
September 30, 1997, the aggregate future preference payments to other
investors is approximately $47.2 million and is expected to be paid
over approximately 10 years, with approximately 45% of the amount
being paid over the next 3 years.
RETENTION OF OPERATING CASH FLOWS: Operating as a REIT, the
Company's ability to retain cash flow for reinvestment is restricted.
In order for the Company to maintain its REIT status, a substantial
portion of its operating cash flows must be used to make distributions
to its shareholders. Remaining cash flows must then be sufficient to
fund necessary capital improvements and scheduled debt service
requirements. Accordingly, the Company's ability to be self-sufficient
is predicated on its ability to generate sufficient operating cash
flows to satisfy its REIT distribution requirements, capital
improvement requirements, scheduled debt service requirements, and
provide funds for additional investments.
Over the past four years, the Company's distribution policy has
enabled it to retain significant funds (after capital improvements) to
make additional investments and debt reductions. During the first nine
months of 1997 and 1996, the Company distributed to common
shareholders approximately 43% and 44% of its FFO available to common
shareholders, respectively, allowing it to retain approximately $59.4
million and $52.1 million, respectively, after satisfying its capital
improvements and preferred stock dividend requirements.
DISTRIBUTION REQUIREMENTS: During the first nine months of 1997,
the Company paid dividends totaling $48,314,000 to the holders of the
Company's Senior Preferred Stock, $3,407,000 to the holders of the
Convertible Preferred Stock, $15,328,000 to the holders of the Series
CC Convertible Stock (which, in the quarter ended September 30, 1997
converted to common stock) and $63,076,000 to the holders of Common
Stock. The Company estimates the distribution requirements for fiscal
1997 with respect to Senior Preferred Stock and the Convertible
Preferred Stock to be approximately $88 million.
24
<PAGE>
CAPITAL IMPROVEMENT REQUIREMENTS: During 1997, the Company has
estimated approximately $30.6 million for capital improvements ($26.4
million for its self-storage and $4.2 million for its business park
facilities). The minority interests' share of the estimated capital
improvements is approximately $3.3 million. During the first nine
months of 1997, the Company incurred capital improvements of
approximately $24.3 million.
During 1995, the Company commenced a program to enhance its
visual icon and modernize the appearance of its self-storage
facilities, including modernization of signs, paint color schemes, and
rental offices. Included in the 1997 capital improvement estimate is
approximately $4.8 million with respect to these expenditures.
DEBT SERVICE REQUIREMENTS: The Company does not believe it has
any significant refinancing risks with respect to its mortgage debt,
all of which is at a fixed rate. The Company uses its $150.0 million
of bank credit facility (all of which was unused as of November 12,
1997) primarily to fund acquisitions and provide financial flexibility
and liquidity. At the option of the Company, the rate of interest
charged is equal to (i) the prime rate or (ii) a rate ranging from the
London Interbank Offered Rate ("LIBOR") plus 0.40% to LIBOR plus 1.10%
depending on the Company's credit ratings and coverage ratios, as
defined. In addition, the Company is required to pay a quarterly
commitment fee of 0.250% (per annum) of the unused portion of the
Credit Facility. The Credit Facility allows the Company, at its
option, to request the group of banks to propose the interest rate
they would charge on specific borrowings not to exceed $50 million.
However, in no case may the interest rate proposal be greater than the
amount provided by the Credit Facility.
At September 30, 1997, the Company had total outstanding notes
payable of approximately $100.3 million. Approximate principal
maturities of notes payable at September 30, 1997 are as follows:
<TABLE>
<CAPTION>
Fixed Rate
Mortgage Debt
7.08% Unsecured (Weighted average
Senior Notes rate of 10.3%) Total
------------------ ------------------ ------------------
<S> <C> <C> <C>
1997 (remainder of ) $ 3,250 $552 $3,802
1998 7,250 7,858 15,108
1999 8,000 6,382 14,382
2000 8,750 2,612 11,362
2001 9,500 2,899 12,399
Thereafter 19,750 23,546 43,296
------------------ ------------------ ------------------
$ 56,500 $ 43,849 $100,349
================== ================== ==================
</TABLE>
EXTERNAL FINANCING: Despite the Company's ability to retain a
portion of its internally generated cash flow, the Company's growth
strategies have required the Company to seek external financing. The
Company has an unsecured $150.0 million revolving credit facility with
a group of banks which it uses as a temporary source of acquisition
financing. The Company, however, seeks to ultimately finance all
acquisitions with permanent sources of capital. As a result, the
Company has raised capital through the public issuance of both common
and preferred stock which was used to repay borrowings and make
additional investments in real estate assets. The Company believes
that its size and financial flexibility enable it to access capital
for growth when appropriate. The Company's financial profile is
characterized by a low level of debt to total capitalization,
increasing net income, increasing cash flow from operations, and a
conservative dividend payout ratio with respect to the common stock.
The Company's credit ratings on its Senior Preferred Stock by each of
the three major credit agencies are Baa2 by Moody's and BBB+ by
Standard and Poors and Duff & Phelps.
The Company's portfolio of real estate facilities remains
substantially unencumbered. At September 30, 1997, the Company had
debt outstanding of $100.3 million and had consolidated real estate
facilities with a book value of $2.5 billion. The Company, however,
has been averse to financing its acquisitions with debt and generally
will only increase its mortgage borrowing through the assumption of
pre-existing debt on acquired real estate facilities.
Over the past three years the Company has funded substantially
all of its acquisitions with permanent capital (both common and
preferred stock). Unlike many other real estate companies, the Company
has elected to use preferred stock despite the fact that the coupon
rates of its preferred stock exceeds current rates on conventional
debt. The Company has chosen this alternative for the following
reasons: (i) the Company's perpetual preferred stock has no sinking
fund requirements, or maturity date and does not require redemption,
all of which eliminate any future refinancing risks, (ii) preferred
stock allows the Company to leverage the common stock without the
attendant interest rate or refinancing risks of debt, and (iii)
dividends on the preferred stock can be applied to the Company's REIT
distributions requirements, which have helped the Company to satisfy
these requirements.
25
<PAGE>
On March 18, 1997, the Company publicly issued 4.6 million shares
of common stock, raising net proceeds of approximately $126.7 million
and on August 28, 1997, the Company issued its Series J Preferred
Stock raising net proceeds of approximately $144.9 million. As of
October 31, 1997, substantially all of the net proceeds from these
offerings were utilized to acquire additional investment in real
estate assets as well as to make investments in the portable self
storage business.
MERGERS AND PROPERTY ACQUISITIONS: During the second quarter of
1997, the Company completed merger transactions with six affiliated
public REITs whereby the Company acquired all the outstanding stock of
the REITs which it did not previously own in exchange for cash and
common stock of the Company. In the mergers, the Company issued an
aggregate of 7.7 million shares of Common Stock and paid an additional
$68.9 million in cash.
During the third quarter of 1997, the Company acquired three
commercial properties (585,000 square feet) for a total aggregate cost
of approximately $43.3 million. The Company also purchased one
facility with a total of 46,000 square feet of self-storage and
commercial space for an aggregate acquisition cost of approximately
$6.8 million.
DEVELOPMENT ACTIVITIES: At September 30, 1997, the Company had
sixteen self-storage facilities (approximately 930,000 square feet)
under development with an aggregate cost incurred to date of $41.3
million and total estimated cost to complete of approximately $31
million. In addition, two portable self-storage facilities
(approximately 125,000 square feet) were under development with an
aggregate cost incurred to date of approximately $1.8 million and
total additional estimated costs to complete of $3.0 million. The
Company currently has plans to develop an additional 10 self-storage
facilities (approximately 662,000 square feet) and 10 portable
self-storage facilities (approximately 758,000 square feet) in various
locations at an estimated cost of approximately $90.5. The Company is
evaluating the feasibility of developing additional facilities in
selected markets in which there are few, if any, facilities to acquire
at attractive prices and where the scarcity of other undeveloped
parcels of land or other impediments to development make it difficult
to construct additional competing facilities.
In April 1997, the Company formed a joint venture partnership
with an unaffiliated partner to participate in the development of
approximately $220 million of self-storage facilities. At September
30, 1997, the joint venture was committed to develop 31 facilities
having an estimated development cost of $151 million and had completed
five facilities with an aggregate cost of $33 million. The venture is
funded solely with equity capital consisting of 30% from the Company
and 70% from the institutional investor.
REIT STATUS: The Company believes that it has operated, and
intends to continue to operate, in such a manner as to qualify as a
REIT under the Internal Revenue Code of 1986, but no assurance can be
given that it will at all times so qualify. To the extent that the
Company continues to qualify as a REIT, it will not be taxed, with
certain limited exceptions, on the taxable income that is distributed
to its shareholders.
As a REIT, the Company is not taxed on that portion of its
taxable income which is distributed to its shareholders provided that
at least 95% of its taxable income is so distributed prior to filing
of the Company's tax return. The Company has satisfied the REIT
distribution requirement since 1980.
26
<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
The Company filed a current report on Form 8-K dated August 25,
1997 pursuant to Item 5, which filed certain exhibits relating to
the Company's public offering of Depositary shares each representing
1/1,000 of a share of 8% Cumulative Preferred Stock, Series J.
27
<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: November 14, 1997
PUBLIC STORAGE, INC.
BY: /s/ John Reyes
---------------------------
John Reyes
Senior Vice President and
Chief Financial Officer
(Principal financial officer)
28
PUBLIC STORAGE, INC.
Exhibit 11 - Statement Re: Computation of Earnings Per Share
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
--------------------------------- --------------------------------
PRIMARY EARNINGS PER SHARE: 1997 1996 1997 1996
- --------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $46,548 $40,366 $133,117 $110,446
Less: Preferred Stock dividends:
10% Cumulative Preferred Stock, Series A (1,141) (1,141) (3,422) (3,423)
9.20% Cumulative Preferred Stock, Series B (1,372) (1,372) (4,116) (4,116)
Variable Rate Preferred Stock, Series C (557) (582) (1,673) (1,630)
9.50% Cumulative Preferred Stock, Series D (712) (712) (2,138) (2,138)
10.0% Cumulative Preferred Stock, Series E (1,372) (1,372) (4,116) (4,116)
9.75% Cumulative Preferred Stock, Series F (1,402) (1,402) (4,205) (4,205)
8.875% Cumulative Preferred Stock, Series G (3,827) (3,827) (11,482) (11,652)
8.45% Cumulative Preferred Stock, Series H (3,564) (3,564) (10,694) (9,783)
8.625% Cumulative Preferred Stock, Series I (2,156) - (6,468) -
8.000% Cumulative Preferred Stock, Series J (1,085) - (1,085) -
8.25% Convertible Preferred Stock (1,128) (1,168) (3,407) (3,523)
Mandatory Convertible Participating Preferred Stock - - - (1,700)
Mandatory Convertible Preferred Stock, Series CC - (1,916) (15,328) (3,832)
------------ ------------ ------------ ------------
Total preferred dividends (18,316) (17,056) (68,134) (50,118)
------------ ------------ ------------ ------------
Net income allocable to common shareholders $28,232 $23,310 $64,983 $60,328
============ ============ ============ ============
Weighted Average common and common equivalent shares outstanding:
102,964 78,052 96,586 74,440
Weighted average common shares outstanding
Net effect of dilutive stock options - based on
treasury stock method using average market price 572 286 568 250
------------ ------------ ------------ ------------
Total 103,536 78,338 97,154 74,690
============ ============ ============ ============
Primary earnings per common and common equivalent
share $0.27 $0.30 $0.67 $0.81
============ ============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
--------------------------------- --------------------------------
Fully-diluted Earnings per Common and Common
Equivalent Share: 1997 1996 1997 1996
- --------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income allocable to common shareholders per
Primary calculation above $28,232 $23,310 $64,983 $60,328
Add dividends paid to holders of Convertible Preferred Stocks:
* 8.25% Convertible Preferred Stock 1,128 1,168 3,407 3,523
* Mandatory Convertible Participating
Preferred Stock - - - 1,700
* Series CC Preferred Stock - 1,916 1,916 3,832
------------ ------------ ------------ ------------
Net income allocable to common shareholders for
purposes of determining Fully-diluted Earnings per
Common and Common Equivalent Share $29,360 $26,394 $70,306 $69,383
------------ ------------ ------------ ------------
Weighted average common and common equivalent shares
outstanding 103,536 78,338 97,154 74,690
Proforma weighted average common shares
assuming conversion of Convertible
Preferred Stock:
* 8.25% Convertible Preferred Stock 3,717 3,814 3,690 3,837
* Mandatory Convertible Participating
Preferred Stock - - - 985
* Series CC Preferred Stock (1) - 2,064 688 1,376
------------ ------------ ------------ ------------
Weighted average common and common equivalent
shares for purposes of computation
of Fully-diluted Earnings per Common
and Common Equivalent Share 107,253 84,216 101,532 80,888
------------ ------------ ------------ ------------
Fully-diluted Earnings per Common and Common
Share (2)
$0.27 $0.31 $0.69 $0.86
============ ============ ============ ============
</TABLE>
(1) The 1997 three and nine month earnings per common share have been
negatively impacted by a non-recurring special dividend on preferred stock
totaling $13,412,000 ($0.14 per common share.) At the end of the first
quarter of 1997, the Company paid a special dividend totaling $13,412,000
to its Series CC Convertible Preferred Stock. As a result of the special
dividend, the Company would not have to pay another dividend with respect
to this stock until the quarter ended March 31, 1999. During the second
quarter of 1997, the Series CC Convertible Preferred Stock converted into
common stock of the Company. Accordingly, all of the $13,412,000 of
dividends were treated in the second quarter of 1997 as an allocation of
net income to the preferred shareholders in determining the allocation of
net income to the common shareholders.
(2) Such amounts are anti-dilutive and are not presented in the Company's
consolidated financial statements.
In addition, the Company has 7,000,000 shares of Class B Common Stock which
are convertible into shares of the Company's Common Stock subject to
certain contingencies such as the passage of time and the attainment of
certain earnings milestone by the Company. The assumption of such earnings
and the pro forma conversion of the Class B Common Stock into Common Stock
in the above computations would have resulted in an increase in the
fully-diluted earnings per common share, and accordingly, is anti-dilutive.
<TABLE>
<CAPTION>
EXHIBIT 12 - STATEMENT RE: COMPUTATION OF RATIO OF
EARNINGS TO FIXED CHARGES
Nine Months Ended
September 30,
---------------------------
1997 1996
---------- ----------
<S> <C> <C>
Net income $133,117 $110,446
Add: Minority interest in income 7,708 7,268
Less: Gain on disposition of real estate - -
Less: Minority interests in income which
do not have fixed charges (6,770) (6,451)
---------- ----------
Income from continuing operations 134,055 111,263
Interest expense 5,821 6,893
---------- ----------
Total Earnings Available to Cover Fixed Charges $ 139,876 $ 118,156
========== ==========
Total Fixed Charges - Interest expense $ 7,242 $ 8,035
========== ==========
Total Preferred Stock dividends $ 68,134 $ 50,118
========== ==========
Total Combined Fixed Charges and Preferred Stock
dividends $ 75,376 $ 58,153
========== ==========
Ratio of Earnings to Fixed Charges 19.31 14.71
========== ==========
Ratio of Earnings to Combined Fixed Charges and
Preferred Stock dividends 1.86 2.03
========== ==========
Ratio of Earnings to Combined Fixed Charges and
Preferred Stock dividends (A) 2.26
===========
(A) Supplemental ratio after elimination of $13,412,000 of non-recurring special
dividends paid to the Series CC Preferred Stock.
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT 12 - STATEMENT RE: COMPUTATION OF RATIO OF
EARNINGS TO FIXED CHARGES
For the Year Ended December 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(Amounts in thousands, except ratios)
<S> <C> <C> <C> <C> <C>
Net income $ 153,549 $ 70,386 $ 42,118 $ 28,036 $ 15,123
Add: Minority interest in income 9,363 7,137 9,481 7,291 6,895
Less: Gain on disposition of real estate - - - - (398)
Less: Minority interests in income which
do not have fixed charges (8,273) (4,700) (5,906) (737) (694)
---------- ---------- ---------- ---------- ----------
Income from continuing operations 154,639 72,823 45,693 34,590 20,926
Interest expense 8,482 8,508 6,893 6,079 9,834
---------- ---------- ---------- ---------- ----------
Total Earnings Available to Cover Fixed Charges $ 163,121 $ 81,331 $ 52,586 $ 40,669 $ 30,760
========== ========== ========== ========== ==========
Total Fixed Charges - Interest expense $ 10,343 $ 8,815 $ 6,893 $ 6,079 $ 9,834
========== ========== ========== ========== ==========
Total Preferred Stock dividends $ 68,599 $ 31,124 $ 16,846 $ 10,889 $ 812
========== ========== ========== ========== ==========
Total Combined Fixed Charges and Preferred Stock
dividends $ 78,942 $ 39,939 $ 23,739 $ 16,968 $ 10,646
========== ========== ========== ========== ==========
Ratio of Earnings to Fixed Charges 15.77 9.23 7.63 6.69 3.13
========== ========== ========== ========== ==========
Ratio of Earnings to Combined Fixed Charges and
Preferred Stock dividends 2.07 2.04 2.22 2.40 2.89
========== ========== ========== ========== ==========
Ratio of Earnings to Combined Fixed Charges and
Preferred Stock dividends (A)
(A) Supplemental ratio after elimination of $13,412,000 of non-recurring special
dividends paid to the Series CC Preferred Stock.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------------------
1997 1996 1996
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF RATIO OF FUNDS FROM OPERATIONS
("FFO") TO FIXED CHARGES:
- -------------------------------------------------------------
<S> <C> <C> <C>
FFO $ 200,106 $ 162,532 $ 224,384
Interest expense 5,821 6,893 8,482
---------- ---------- ----------
Adjusted FFO available to cover fixed charges $ 205,927 $ 169,425 $ 232,866
========== ========== ==========
Total Fixed Charges - Interest expense $ 7,242 $ 8,035 $ 10,343
========== ========== ==========
Total Preferred Stock dividends $ 68,134 $ 50,118 $ 68,599
========== ========== ==========
Total Combined Fixed Charges and Preferred Stock dividends $ 75,376 $ 58,153 $ 78,942
========== ========== ==========
Ratio of FFO to Fixed Charges 28.44 21.09 22.51
========== ========== ==========
Ratio of FFO to Combined Fixed Charges and Preferred Stock
dividends 2.73 2.91 2.95
========== ========== ==========
Ratio of FFO to Combined Fixed Charges and Preferred
Stock dividends (A) 3.32
==========
(A) Supplemental ratio after elimination of $13,412,000 of non-recurring special
dividends paid to the Series CC Preferred Stock.
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------
1995 1994 1993 1992
---------- ---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF RATIO OF FUNDS FROM OPERATIONS
("FFO") TO FIXED CHARGES:
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
FFO $ 105,086 $ 56,143 $ 35,830 $ 21,133
Interest expense 8,508 6,893 6,079 9,834
---------- ---------- ---------- ----------
Adjusted FFO available to cover fixed charges $ 113,594 $ 63,036 $ 41,909 $ 30,967
========== ========== ========== ==========
Total Fixed Charges - Interest expense $ 8,815 $ 6,893 $ 6,079 $ 9,834
========== ========== ========== ==========
Total Preferred Stock dividends $ 31,124 $ 16,846 $ 10,889 $ 812
========== ========== ========== ==========
Total Combined Fixed Charges and Preferred Stock dividends $ 39,939 $ 23,739 $ 16,968 $ 10,646
========== ========== ========== ==========
Ratio of FFO to Fixed Charges 12.88 9.15 6.89 3.15
========== ========== ========== ==========
Ratio of FFO to Combined Fixed Charges and Preferred Stock
dividends 2.84 2.66 2.47 2.91
========== ========== ========== ==========
Ratio of FFO to Combined Fixed Charges and Preferred
Stock dividends (A)
(A) Supplemental ratio after elimination of $13,412,000 of non-recurring special
dividends paid to the Series CC Preferred Stock.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000318380
<NAME> Public Storage, Inc.
<MULTIPLIER> 1
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Sep-30-1997
<EXCHANGE-RATE> 1
<CASH> 90,763,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 90,763,000
<PP&E> 2,851,590,000
<DEPRECIATION> (355,049,000)
<TOTAL-ASSETS> 3,154,527,000
<CURRENT-LIABILITIES> 71,664,000
<BONDS> 100,349,000
0
923,484,000
<COMMON> 10,999,000
<OTHER-SE> 1,857,336,000
<TOTAL-LIABILITY-AND-EQUITY> 3,154,527,000
<SALES> 0
<TOTAL-REVENUES> 336,625,000
<CGS> 0
<TOTAL-COSTS> 120,399,000
<OTHER-EXPENSES> 69,580,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,821,000
<INCOME-PRETAX> 133,117,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 133,117,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 133,117,000
<EPS-PRIMARY> .67
<EPS-DILUTED> .67
</TABLE>
