SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1998
-------------
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 August 8 , 1998:
Common Stock, $.10 par value, 116,491,167 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
June 30, 1998 and December 31, 1997 1
Condensed Consolidated Statements of Income for the
Three and Six Months Ended June 30, 1998 and 1997 2
Condensed Consolidated Statements of Shareholders Equity
for the Six Months Ended June 30, 1998 3
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1998 and 1997 4 - 5
Notes to Condensed Consolidated Financial Statements 6 - 13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14 - 24
PART II. OTHER INFORMATION (Items 2, 3 , 4 and 5 are not applicable)
- --------------------------
Item 1. Legal Proceedings 25
Item 6. Exhibits and Reports on Form 8-K 25
<PAGE>
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------------- ---------------
(Unaudited)
ASSETS
------
<S> <C> <C>
Cash and cash equivalents.................................................... $ 182,707 $ 41,455
Real estate facilities, at cost:
Land...................................................................... 752,608 845,299
Buildings................................................................. 2,000,806 2,232,230
--------------- ---------------
2,753,414 3,077,529
Accumulated depreciation.................................................. (361,758) (378,248)
--------------- ---------------
2,391,656 2,699,281
Construction in process................................................... 69,542 42,635
--------------- ---------------
2,461,198 2,741,916
--------------- ---------------
Investment in real estate entities........................................... 470,772 225,873
Intangible assets, net....................................................... 208,288 212,944
Mortgage notes receivable from affiliates.................................... 47,937 21,807
Other assets................................................................. 62,613 67,650
--------------- ---------------
Total assets................................................... $ 3,433,515 $ 3,311,645
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Revolving line of credit..................................................... $ - $ 7,000
Notes payable................................................................ 86,255 96,558
Accrued and other liabilities................................................ 62,276 70,648
--------------- ---------------
Total liabilities................................................... 148,531 174,206
--------------- ---------------
Minority interest............................................................ 154,074 288,479
Commitments and contingencies
Shareholders' equity:
Preferred Stock, $0.01 par value, 50,000,000 shares authorized, 13,210,638
shares issued and outstanding (13,261,984 issued and outstanding at
December 31, 1997), at liquidation preference:
Cumulative Preferred Stock, issued in series........................ 868,900 868,900
Convertible Preferred Stock......................................... 52,027 53,308
Common stock, $0.10 par value, 200,000,000 shares authorized, 114,188,964
shares issued and outstanding (105,102,145 at December 31, 1997)........
11,420 10,511
Class B Common Stock, $0.10 par value, 7,000,000 shares authorized and
issued.................................................................. 700 700
Paid-in capital........................................................... 2,170,616 1,903,782
Cumulative net income..................................................... 680,632 575,069
Cumulative distributions paid............................................. (653,385) (563,310)
--------------- ---------------
Total shareholders' equity.......................................... 3,130,910 2,848,960
--------------- ---------------
Total liabilities and shareholders' equity..................... $ 3,433,515 $ 3,311,645
=============== ===============
</TABLE>
See accompanying notes.
1
<PAGE>
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
REVENUES:
Rental income:
<S> <C> <C> <C> <C>
Self-storage facilities............ $ 119,887 $ 89,113 $ 231,565 $ 171,490
Commercial properties.............. 1,715 8,571 19,396 16,168
Portable self-storage.............. 6,118 1,102 11,289 1,574
Equity earnings of real estate entities. 7,317 5,017 9,936 10,238
Facility management fee................. 1,652 2,891 3,417 5,943
Interest and other income............... 4,352 2,651 8,004 4,672
--------------- --------------- --------------- ---------------
141,041 109,345 283,607 210,085
--------------- --------------- --------------- ---------------
EXPENSES:
Cost of operations:
Self-storage facilities............ 35,892 26,284 70,838 52,775
Commercial properties.............. 654 3,573 6,502 6,757
Portable self-storage.............. 14,460 7,869 29,513 10,690
Cost of facility management............. 268 466 554 942
Depreciation and amortization.......... 25,192 20,703 53,411 40,490
General and administrative............. 2,226 1,655 4,562 3,274
Interest expense....................... 933 1,962 2,095 3,559
--------------- --------------- --------------- ---------------
79,625 62,512 167,475 118,487
--------------- --------------- --------------- ---------------
Income before minority interest........ 61,416 46,833 116,132 91,598
Minority interest in income............ (4,217) (2,582) (10,569) (5,029)
--------------- --------------- --------------- ---------------
NET INCOME................................ $ 57,199 $ 44,251 $ 105,563 $86,569
=============== =============== =============== ===============
NET INCOME ALLOCATION:
- ----------------------
Allocable to preferred shareholders..... $ 20,129 $ 30,668 $ 40,269 $49,818
Allocable to common shareholders........ 37,070 13,583 65,294 36,751
--------------- --------------- --------------- ---------------
$ 57,199 $ 44,251 $ 105,563 $86,569
=============== =============== =============== ===============
PER COMMON SHARE:
- -----------------
Net income per share - Basic............ $0.33 $0.14 $0.58 $0.39
=============== =============== =============== ===============
Net income per share - Diluted.......... $0.32 $0.14 $0.58 $0.39
=============== =============== =============== ===============
Weighted average common shares -
Basic.............................. 113,970 97,524 111,731 93,326
=============== =============== =============== ===============
Weighted average common shares -
Diluted............................ 114,430 98,046 112,246 93,883
=============== =============== =============== ===============
</TABLE>
See accompanying notes.
2
<PAGE>
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the six months ended June 30, 1998
(Amounts in thousands except share data)
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock
----------------------------
Class B
Cumulative Common Common
Senior Convertible Stock Stock
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balances at December 31, 1997........................ $ 868,900 $ 53,308 $ 10,511 $ 700
Issuance of common stock:
Public issuance (7,951,821 shares).............. - - 794 -
Conversion of 8.25% Convertible Preferred Stock
into common stock (86,249 shares)............ - (1,281) 9 -
Acquisition of investment in real estate
entities and minority interest from
affiliate (914,094 shares)................... - - 92 -
In connection with mergers (433,526 shares)..... - - 44 -
Exercise of stock options (191,429 shares)...... - - 19 -
Repurchase of Common Shares (490,300 shares) ....... - - (49) -
Net income........................................... - - - -
Cash distributions:
Cumulative Senior Preferred Stock................. - - - -
8.25% Convertible Preferred Stock................. - - - -
Common Stock...................................... - - - -
------------- ------------- ------------- -------------
Balances at June 30, 1998............................ $ 868,900 $ 52,027 $ 11,420 $ 700
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Total
Paid-in Cumulative Cumulative Shareholders'
Capital Net Income Distributions Equity
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Balances at December 31, 1997........................ $1,903,782 $ 575,069 $ (563,310) $ 2,848,960
Issuance of common stock:
Public issuance (7,951,821 shares).............. 233,731 - - 234,525
Conversion of 8.25% Convertible Preferred Stock
into common stock (86,249 shares)............ 1,272 - - -
Acquisition of investment in real estate
entities and minority interest from
affiliate (914,094 shares)................... 28,110 - - 28,202
In connection with mergers (433,526 shares)..... 13,773 - - 13,817
Exercise of stock options (191,429 shares)...... 2,890 - - 2,909
Repurchase of Common Shares (490,300 shares) ....... (12,942) - - (12,991)
Net income........................................... - 105,563 - 105,563
Cash distributions:
Cumulative Senior Preferred Stock................. - - (38,106) (38,106)
8.25% Convertible Preferred Stock................. - - (2,163) (2,163)
Common Stock...................................... - - (49,806) (49,806)
------------- ------------- ------------- --------------
Balances at June 30, 1998............................ $2,170,616 $ 680,632 $ (653,385) $ 3,130,910
============= ============= ============= ==============
</TABLE>
See accompanying notes.
3
<PAGE>
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
---------------------------------
1998 1997
--------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income........................................................... $ 105,563 $ 86,569
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization...................................... 53,411 40,490
Depreciation included in equity in earnings of real estate entities 6,639 6,697
Minority interest in income........................................ 10,569 5,029
--------------- ----------------
Total adjustments.............................................. 70,619 52,216
--------------- ----------------
Net cash provided by operating activities.................. 176,182 138,785
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Mortgage loans to affiliates...................................... (33,000) -
Principal payments received on mortgage loans to affiliates........ 4,375 556
Capital improvements to real estate facilities..................... (10,336) (15,040)
Construction in process............................................ (34,306) (16,942)
Investment in portable self-storage business....................... (10,655) (11,164)
Acquisition of minority interests in consolidated real estate
partnerships..................................................... (10,816) (10,416)
Proceeds from liquidation of real estate investments............... 10,275 -
Reduction in cash due to a change in accounting method with
respect to PS Business Parks, Inc. (Note 2)...................... (11,259) -
Refund of deposit on real estate purchase.......................... 12,500 -
Acquisition of investment in real estate entities.................. (46,041) (15,749)
Acquisition of real estate facilities.............................. (47,392) -
Acquisition cost of business combinations.......................... (10,014) (68,862)
Other.............................................................. 805 4,650
--------------- ----------------
Net cash used in investing activities...................... (185,864) (132,967)
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net paydown on revolving line of credit............................ (7,000) -
Principal payments on notes payable................................ (10,302) (4,327)
Net proceeds from the issuance of common stock..................... 237,434 127,282
Repurchase the Company's common stock.............................. (12,991) -
Reimbursement for properties contributed to development
joint venture.................................................... - 21,285
Distributions paid to shareholders................................. (90,075) (90,239)
Distributions from operations to minority interests in real estate
partnerships..................................................... (17,596) (9,522)
Net reinvestment by minority interests in consolidated real estate
partnerships..................................................... 3,864 1,764
Issuance of equity interest (minority interests) in consolidated
entity for cash.................................................. 47,600 -
--------------- ----------------
Net cash provided by financing activities............................... 150,934 46,243
--------------- ----------------
Net increase in cash and cash equivalents............................... 141,252 52,061
Cash and cash equivalents at the beginning of the period................ 41,455 26,856
--------------- ----------------
Cash and cash equivalents at the end of the period...................... $ 182,707 $ 78,917
=============== ================
</TABLE>
See accompanying notes.
4
<PAGE>
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
--------------------------------
1998 1997
--------------- ---------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
<S> <C> <C>
Acquisition of real estate facilities in exchange for the assumption of
notes payable and increase in minority interest........................ $ (18,753) $ -
Assumption of note payable in connection with the acquisition of real
estate facilities...................................................... 14,526 -
Cancellation of mortgage note receivable in connection with the
acquisition of real estate facilities.................................. 2,495 -
Assets and liabilities acquired with respect to business combinations:
Real estate facilities................................................. (81,295) (413,597)
Other assets........................................................... (294) (2,667)
Accrued and other liabilities.......................................... 2,366 11,342
Minority interest...................................................... 35,334 21,402
Reduction to investment in real estate entities:
In connection with business combination................................ 20,058 -
In connection with acquisition of real estate facilities............... 527 -
Acquisition of minority interest and real estate in exchange for common
stock:
Real estate facilities................................................. (9,400) -
Minority interest...................................................... (12,485) -
Issuance of common stock:
In connection with the conversion of 8.25% convertible preferred stock. 1,281 855
In connection with business combinations............................... 13,817 -
In connection with the conversion of mandatory convertible preferred
stock................................................................ - 58,955
To acquire interests in real estate entities........................... 17,133 212,000
To acquire minority interest in consolidated real estate entities...... 11,070 -
Conversion of 8.25% convertible preferred stock............................ (1,281) (855)
Conversion of mandatory convertible preferred stock........................ - (58,955)
Acquisition of investment in real estate entities for common stock......... (17,133) -
Increase in minority interest in connection with the acquisition of real
estate facilities...................................................... 1,205 -
Change in accounting method with respect to PS Business Parks, Inc. (Note 2):
Investments in real estate entities ................................... (219,224) -
Real estate facilities, net of accumulated depreciation................ 433,446 -
Other assets........................................................... 2,048 -
Accrued and other liabilities.......................................... (10,106) -
Notes payable ......................................................... (14,526) -
Minority interest...................................................... (202,897) -
</TABLE>
See accompanying notes.
5
<PAGE>
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
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
invests in real estate facilities primarily through the acquisition of
wholly-owned facilities combined with the acquisition of equity interests in
real estate entities owning real estate facilities. At June 30, 1998, the
Company had direct and indirect equity interests in 1,181 properties located in
38 states, including 1,083 self-storage facilities and 98 commercial properties.
All of the self-storage facilities are operated by the Company under the "Public
Storage" name, while the commercial properties are operated by PS Business
Parks, Inc., an affiliated public real estate investment trust and a related
partnership (the REIT and partnership collectively referred to as "PSPB").
In 1996 and 1997, the Company organized Public Storage Pickup and Delivery,
Inc. as a separate corporation and a related partnership (the corporation and
partnership are collectively referred to as "PSPUD") to operate a portable
self-storage business that rents storage containers to customers for storage
generally in central warehouses. At June 30, 1998, PSPUD operated 57 facilities
in 16 states.
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 six months ended June 30, 1998 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. 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, 1997.
The consolidated financial statements include the accounts of the Company,
PSPUD, and 21 controlled limited partnerships (the "Consolidated Entities").
Collectively, the Company and the Consolidated Entities own a total of 919 real
estate facilities, consisting of 918 self-storage facilities and one commercial
property.
At June 30, 1998, the Company also has equity investments in 27 other
affiliated limited partnerships whose principal business is the ownership of 165
self-storage facilities in aggregate which are managed by the Company. In
addition, the Company has an ownership interest in PSBP, which owns and operates
97 commercial properties. The Company's ownership interest in such real estate
entities is less than 50% of the total equity interest and the Company's
investments in these entities are accounted for using the equity method.
From the time of PSBP's formation through March 31, 1998, the Company
included the accounts of PSBP in its consolidated financial statements. During
the second quarter of 1998, the Company's ownership interest in PSBP was reduced
below 50%, and accordingly, the Company ceased to have a controlling interest in
PSBP. As a result, the Company, effective April 1, 1998, no longer includes the
accounts of PSBP in its consolidated financial statements and has accounted for
its investment during the three months ended June 30, 1998 using the equity
method. The income statement for the six months ended June 30, 1998 includes the
consolidated operating results of PSBP for the three months ended March 31, 1998
and the Company's equity in the income of PSBP for the three months ended June
30, 1998.
6
<PAGE>
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 1998 and,
accordingly, no provision for income taxes has been made in the accompanying
financial statements.
Financial instruments
---------------------
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.
Allowance for possible losses
-----------------------------
The Company has no allowance for possible losses relating to any of its
real estate investments, long-lived assets and 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 June 30,
1998, intangible assets are net of accumulated amortization of $24,438,000
($19,782,000 at December 31, 1997). Included in depreciation and amortization
expense for the three and six months ended June 30, 1998 and 1997 is $2,328,000
and $4,656,000, respectively, related to the amortization of intangible assets.
Revenue and 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. Advertising costs
are expensed as incurred.
Net income per common share
---------------------------
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and fully
diluted net income per share with basic and diluted net income per share. Unlike
primary net income per share, basic net income per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted net income per
share is very similar to the previously reported fully diluted net income per
share. All net income per share amounts for all periods have been presented and
where appropriate, restated to conform to Statement 128 requirements.
Diluted net income per common share is computed using the weighted average
common shares outstanding (adjusted for stock options). The Class B Common Stock
is not included in the determination of net income per common share because all
contingencies required for the conversion to common stock have not been
satisfied as of June 30, 1998. In addition, the inclusion of the Company's
convertible preferred stock in the determination of net income per common share
has been determined to be anti-dilutive.
In computing earnings per common share, preferred stock dividends totaling
$20,129,000 and $30,668,000 for the three months ended June 30, 1998 and 1997,
respectively, and $40,269,000 and $49,818,000 for the six months ended June 30,
1998 and 1997, respectively, reduced income available to common stockholders.
7
<PAGE>
Reclassifications
-----------------
Certain reclassifications have been made to the consolidated financial
statements for 1997 in order to conform to the 1998 presentation.
3. Business combinations
---------------------
On March 17, 1998, the Company, through PSBP, completed a merger
transaction with an affiliated public REIT whereby PSBP acquired all the
outstanding stock of the REIT which the Company did not previously own. The
aggregate acquisition cost of this merger was approximately $49.6 million,
consisting of the issuance of $34.8 million of PSBP common stock (classified as
minority interest on the Company's consolidated financial statements) and the
Company's pre-existing investment in the affiliated REIT totaling $14.8 million.
On May 8, 1998, the Company completed a merger transaction with an
affiliated public REIT whereby the Company acquired all the outstanding stock of
the REIT which it did not previously own in exchange for cash and common stock
of the Company. The aggregate acquisition cost of this merger was approximately
$22.3 million, consisting of $4.8 million in cash, $13.8 million in the
Company's common stock, and the Company's pre-existing investment in the
affiliated REIT totaling $3.7 million.
In January 1998, the Company acquired all of the limited partnership
interest in two affiliated partnerships. As a result of the Company's increased
ownership interest and control of the Partnership, the Company began to
consolidate the accounts of these partnerships. The total consideration of
$6,757,000 in this transaction consists of $5,206,000 of cash and the Company's
pre-existing investment of $1,551,000.
The above mergers and acquisitions of affiliated partnership interests have
been accounted for as purchases; 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
-------------- -------------- --------------
(Amounts in thousands)
<S> <C> <C> <C>
Real estate facilities.................. $ 73,971 $ 7,324 $ 81,295
Other assets............................ 271 23 294
Accrued liabilities..................... (2,280) (86) (2,366)
Minority interest....................... (34,830) (504) (35,334)
-------------- -------------- --------------
$ 37,132 $ 6,757 $ 43,889
============== ============== ==============
</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 six
months ended June 30, 1998 and 1997 as though the above business combinations
had been effective at the beginning of each period are as follows:
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
(In thousands, except per share data) June 30, 1998 June 30, 1997
- ----------------------------------------------------------- ---------------- ----------------
<S> <C> <C>
Revenues .............................................. $ 286,747 $ 215,465
Net income............................................. $ 105,872 $ 86,870
Net income per common share (Basic).................... $ 0.59 $ 0.40
Net income per common share (Diluted).................. $ 0.58 $ 0.40
</TABLE>
8
<PAGE>
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.
4. Real estate facilities
----------------------
Activity in real estate facilities during 1998 is as follows:
In thousands
Operating facilities, at cost:
Balance at December 31, 1997............................. $ 3,077,529
Property acquisitions
Business combinations (Note 3) ........................ 81,295
Other acquisitions.................................... 66,145
Newly opened development facilities....................... 7,399
Acquisition of minority interest......................... 9,400
Capital improvements...................................... 10,336
Property dispositions (PSBP)............................. (498,690)
----------------
Balance at June 30, 1998................................. 2,753,414
----------------
Accumulated depreciation:
Balance at December 31, 1997.............................. (378,248)
Additions during the year................................. (48,755)
Property dispositions (PSBP)............................. 65,245
----------------
Balance at June 30, 1998................................. (361,758)
----------------
Construction in progress:
Balance at December 31, 1997.............................. 42,635
Current development cost.................................. 34,306
Newly opened development facilities....................... (7,399)
----------------
Balance at June 30, 1998................................. 69,542
----------------
Total real estate facilities, net at June 30, 1998 $ 2,461,198
================
Construction in progress at June 30, 1998 consists of 11 self-storage
facilities and 12 industrial facilities which could be utilized as portable
self-storage facilities. Operating facilities include 2 facilities opened in
June 1998 which are for use by the Company's PSPUD operations. The Company's
policy is to capitalize interest incurred on debt during the course of
construction of its self-storage facilities and industrial facilities. Interest
capitalized during the three and six months ended June 30, 1998 was $1,023,000
and $2,280,000, respectively, compared to $354,000 and $1,089,000 for the same
periods in 1997.
As discussed in Note 2, effective April 1, 1998, the Company ceased to have
a controlling interest in PSBP and, as a result, no longer includes the accounts
of PSBP in its consolidated financial statements. In the above table, operating
facilities and accumulated depreciation have been reduced to reflect the change
in accounting method.
5. Investment in real estate entities:
-----------------------------------
The Company's investment in real estate entities at June 30, 1998 consists
of (i) limited and general partnership interests in approximately 27 affiliated
partnerships which principally own self-storage facilities, (ii) the Company's
9
<PAGE>
ownership interest in a joint venture partnership established to develop and
operate self-storage facilities and (iii) the Company's ownership interest in
PSBP. Such interests are accounted for using the equity method of accounting.
In April 1997, the Company formed a joint venture partnership with a state
pension fund to participate in the development of approximately $220 million of
self-storage facilities. The Company expects that substantially all of its
self-storage facility development activities will be conducted in the joint
venture partnership until the $220 million is fully committed. At June 30, 1998,
the Company had 11 self-storage facilities under construction, upon approval of
the facilities by the joint venture partnership, these facilities will be
transferred to the partnership.
During the six months ended June 30, 1998, the Company recognized earnings
from its investments totaling $9,936,000. Included in equity in earnings of real
estate entities for the six months ended June 30, 1998 is the Company's share of
depreciation expense totaling $6,639,000. 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 June 30, 1998 are as
follows:
<TABLE>
<CAPTION>
For the six months ended June 30, 1998
------------------------------------------------------------------------------
Other Development
Equity Investments Joint Venture PSBP Total
------------------ ------------------ ------------------ ------------------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Rental income........................ $ 41,712 $ 1,886 $ 35,824 $ 79,422
Other income 992 237 875 2,104
------------------ ------------------ ------------------ ------------------
Total revenues................... 42,704 2,123 36,699 81,526
------------------ ------------------ ------------------ ------------------
Cost of operations................... 11,736 1,285 10,982 24,003
Depreciation......................... 5,318 638 6,556 12,512
Other expenses....................... 7,056 46 2,102 9,204
------------------ ------------------ ------------------ ------------------
Total expenses................... 24,110 1,969 19,640 45,719
------------------ ------------------ ------------------ ------------------
Net income before minority interest.. 18,594 154 17,059 35,807
Minority interest ................... - - (5,683) (5,683)
------------------ ------------------ ------------------ ------------------
Net income....................... $ 18,594 $ 154 $ 11,376 $ 30,124
================== ================== ================== ==================
At June 30, 1998:
-----------------
Real estate, net .................... $ 255,444 $ 114,246 $ 635,498 $1,005,188
Total assets......................... $ 307,746 $ 125,148 $ 675,766 $1,108,660
Total liabilities.................... $ 85,180 $ 8,147 $ 41,146 $ 134,473
Minority interest.................... $ - $ - $ 151,225 $ 151,225
Total equity......................... $ 222,566 $ 117,001 $ 483,395 $ 822,962
The Company's investment (book
value) at June 30, 1998.......... $ 209,741 $ 40,284 $ 220,747 $ 470,772
The Company's effective ownership
interest at June 30, 1998....... 36% 30% 39% 33%
</TABLE>
6. Revolving line of credit
------------------------
As of June 30, 1998, 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
10
<PAGE>
required to pay a quarterly commitment fee of 0.250% (per annum). 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
-----------------
In consolidation, the Company classifies ownership interests other than its
own in the net assets of each of the Consolidated Entities as minority interest
on the consolidated financial statements. Minority interest in income consists
of the minority interests' share of the operating results of the Company
relating to the consolidated operations of the Consolidated Entities.
During the six months ended June 30, 1998, the Company reduced minority
interest by approximately $12.5 million (the historical book value of such
interests in the underlying net assets of the partnerships) through the
acquisition of such interests for cash and through the issuance of common stock.
The excess of the cost over the underlying book value ($9.4 million) has been
allocated to real estate facilities in consolidation.
Minority interest was increased by $35.3 million in connection with
business combinations, representing the remaining partners' equity interests in
the aggregate net assets of the partnerships. Minority interest was increased
$47.6 million in connection with the issuance of common stock of PSBP in the
first quarter of 1998 and $1.2 million in connection with the acquisition of
real estate facilities by PSBP in the first quarter of 1998. Minority interest
was reduced by approximately $202.9 million as a result of the change in
accounting method with respect to PSBP.
8. Shareholders' equity
--------------------
Preferred stock
---------------
At June 30, 1998 and December 31, 1997, the Company had the following
series of Preferred Stock outstanding:
<TABLE>
<CAPTION>
At June 30, 1998 At December 31, 1997
----------------------------- ------------------------------
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 6,000 150,000,000
------------- ------------- ------------- -------------
Total Senior Preferred Stock.... 11,129,650 868,900,000 11,129,650 868,900,000
Convertible........................ 8.250% 2,080,988 52,027,000 2,132,334 53,308,000
------------- ------------- ------------- -------------
13,210,638 $920,927,000 13,261,984 $922,208,000
============= ============= ============= =============
</TABLE>
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
11
<PAGE>
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 June 30, 1998,
there were no dividends in arrears and the Debt Ratio was 2.5%.
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 - June
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.
On June 1, 1998, the Company exercised its option to redeem the Convertible
Preferred Stock for common stock at the conversion rate of 1.6835 shares of
common stock for each share of Convertible Preferred Stock. Pursuant to the
redemption, which was effective as of July 1, 1998, the Company issued 3,350,303
shares of common stock.
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 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 share of Common Stock or (ii) $2.20.
Common Stock
------------
During the first six months of 1998, the Company issued 7,951,821 shares of
common stock in public and private offerings, raising net proceeds of
approximately $234.5 million. In addition, the Company issued 433,526 shares of
common stock ($13.8 million) in connection with the merger with an affiliated
REIT, 86,249 shares ($1.3 million) in connection with Convertible Preferred
Stock conversions, 914,094 shares ($28.2 million) in connection with the
acquisition of partnership interests, and 191,429 shares ($2.9 million) in
connection with the exercise of stock options.
On June 12, 1998, the Company announced that the Board of Directors
authorized the repurchase from time to time of up to 10,000,000 shares of the
Company's common stock on the open market or in privately negotiated
transactions. Through June 30, 1998 the Company has repurchased a total of
490,300 shares of common stock at an aggregate cost of approximately $13.0
million. From July 1, 1998 through August 10, 1998, the Company repurchased an
additional 1,931,900 shares of common stock at an aggregate cost of
approximately $49.7 million.
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
12
<PAGE>
(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 $1.90
for the four consecutive calendar quarters ended June 30, 1998.
Dividends
---------
The following summarizes dividends paid during the first six months of
1998:
Distributions
Per Share or Total
Depository Share Distributions
------------------ ------------------
Series A.............................. $ 1.250 $ 2,280,000
Series B.............................. $ 1.150 2,744,000
Series C.............................. $ 0.844 1,012,000
Series D.............................. $ 1.188 1,426,000
Series E.............................. $ 1.250 2,744,000
Series F.............................. $ 1.218 2,802,000
Series G.............................. $ 1.109 7,656,000
Series H.............................. $ 1.056 7,130,000
Series I.............................. $ 1.078 4,312,000
Series J.............................. $ 1.000 6,000,000
Convertible........................... $ 1.032 2,163,000
------------------
40,269,000
Common................................ $ 0.440 49,806,000
------------------
Total dividends paid $90,075,000
==================
The dividend rate on the Series C Preferred Stock for the second quarter of
1998 was equal to 6.75% per annum. The dividend rate per annum will be adjusted
quarterly and will be equal to the highest of one of three U.S. Treasury indices
(Treasury Bill Rate, Ten Year Constant Maturity Rate, or Thirty Year Constant
Maturity Rate) multiplied by 110%. However, the dividend rate for any dividend
period will neither be less than 6.75% per annum nor greater than 10.75%. The
dividend rate for the quarter ending September 30, 1998 will be equal to 6.75%
per annum.
9. Subsequent Events
-----------------
On August 4, 1998, the Company made an offer to acquire Storage Trust
Realty for $25 per common share, or an aggregate of $407 million for the common
shares of Storage Trust Realty that the Company does not now own, plus the
assumption of approximately $163 million of Storage Trust debt.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- --------------------------------------------------------------------------------
OPERATIONS
- ----------
RESULTS OF OPERATIONS
---------------------
Net income for the three months ended June 30, 1998 was $57,199,000
compared to $44,251,000 for the same period in 1997, representing an increase of
$12,948,000 or 29.3%. Net income for the six months ended June 30, 1998 was
$105,563,000 compared to $86,569,000 for the same period in 1997, representing
an increase of $18,994,000 or 21.9%. The increases in net income for the three
and six months ended June 30, 1998 compared to the same periods in 1997 was
primarily the result of improved property operations and the acquisition of
additional real estate facilities and partnership interests during 1997 and
1998, offset partially by increased start-up operating losses in the portable
self-storage business.
Net income allocable to common shareholders was $37,070,000 or $0.32 per
common share on a diluted basis (based on 114,430,000 weighted average diluted
shares) for the three months ended June 30, 1998 compared to $13,583,000 or
$0.14 per common share on a diluted basis (based on 98,046,000 weighted average
diluted shares) for the same period in 1997. In computing net income per common
share, dividends to the Company's preferred shareholders ($20,129,000 and
$30,668,000 for the three months ended June 30, 1998 and 1997) have been
deducted from net income in determining net income allocable to the Company's
common shareholders.
Net income allocable to common shareholders was $65,294,000 or $0.58 per
common share on a diluted basis (based upon 112,246,000 weighted average diluted
shares) for the six months ended June 30, 1998 compared to $36,751,000 or $0.39
per common share on a diluted basis (based upon 93,883,000 weighted average
diluted shares) for the same period in 1997. In computing net income per common
share, dividends to the Company's preferred shareholders ($40,269,000 and
$49,818,000 for the six months ended June 30, 1998 and 1997, respectively) have
been deducted from net income in determining net income allocable to the
Company's common shareholders.
Net income allocable to common shareholders has been negatively impacted by
operating losses generated from the portable self-storage business of $8,342,000
or approximately $0.07 per common share on a diluted basis for the three months
ended June 30, 1998, compared to $6,767,000 or approximately $0.07 per common
share on a diluted basis for the same period in 1997. Losses on the portable
self-storage business for the six months ended June 30, 1998 were $18,224,000 or
approximately $0.16 per common share, compared to $9,116,000 or approximately
$0.10 per common share for the same period in 1997.
Net income allocable to common shareholders was reduced by $13,412,000 in
the three and six months ended June 30, 1997 as a result of a special dividend
on the Series CC Convertible Preferred Stock paid at the end of the first
quarter of 1997. 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.
REAL ESTATE OPERATIONS
----------------------
Rental income and cost of operations have increased for the six months
ended June 30, 1998 compared to the same period in 1997 due to the Company's
merger and acquisition activities throughout 1997 and 1998. As a result of these
activities, the number of facilities included in the Company's consolidated
financial statements has increased from 872 at June 30, 1997 to 919 at June 30,
1998.
14
<PAGE>
SELF-STORAGE OPERATIONS: 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. The following table outlines the historical
operating results of self-storage operations.
SUMMARY OF SELF-STORAGE OPERATIONS - HISTORICAL
-----------------------------------------------
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
---------------------------- --------------------------
1998 1997 Change 1998 1997 Change
----------- ----------- ------------ ------------- ------------ ----------
(Amounts in thousands, except per square foot data)
Rental income
<S> <C> <C> <C> <C> <C> <C>
Pre - 1997 Acquisitions......... $ 91,754 $ 84,793 8.2% $ 179,132 $ 167,018 7.3%
1997 and 1998 acquisitions 28,133 4,320 52,433 4,472
----------- ----------- ------------ ------------- ------------ ----------
119,887 89,113 34.5% 231,565 171,490 35.0%
----------- ----------- ------------ ------------- ------------ ----------
Cost of Operations
Pre - 1997 Acquisitions......... 27,381 25,184 8.7% 54,606 51,569 5.9%
1997 and 1998 acquisitions 8,511 1,100 16,232 1,206
----------- ----------- ------------ ------------- ------------ ----------
35,892 26,284 36.6% 70,838 52,775 34.2%
----------- ----------- ------------ ------------- ------------ ----------
Net operating income
Pre - 1997 Acquisitions......... 64,373 59,609 8.0% 124,526 115,449 7.9%
1997 and 1998 acquisitions 19,622 3,220 36,201 3,266
----------- ----------- ------------ ------------- ------------ ---------
$ 83,995 $ 62,829 33.7% $ 160,727 $ 118,715 35.4%
=========== =========== ============ ============= ============ ==========
Net rentable square feet (at
the end of the period, in 55,028 49,506 11.2% 55,028 49,506 11.2%
000's)...........................
Number of facilities (at the
end of the period)............... 918 822 11.7% 918 822 11.7%
PRE - 1997 ACQUISITIONS:
Weighted average annualized realized
rent per occupied square foot...... $9.36 $8.76 6.8% $9.24 $8.76 5.5%
Weighted average annualized
scheduled rent per square foot.... $9.72 $9.36 3.8% $9.60 $9.36 2.6%
Weighted average occupancy
for the period.................... 92.5% 91.4% 1.1% 91.8% 90.2% 1.6%
</TABLE>
Rental income for the three months ended June 30, 1998 are net of
promotional discounts totaling $4.0 million compared to $3.8 million for the
same period in 1997. Rental income for the six months ended June 30, 1998 are
net of promotional discounts totaling $7.7 million compared to $6.3 million for
the same period in 1997. In addition, included in cost of operations for the
three months ended June 30, 1998 are costs associated with the telephone
reservation center and advertising totaling $1,825,000, compared to $363,000 for
the same period in 1997. Included in cost of operations for the six months ended
June 30, 1998 are costs associated with the telephone reservation center and
advertising totaling $3,074,000, compared to $1,053,000 for the same period in
1997.
In 1997 and through June 30, 1998, the Company acquired a total of 197
storage facilities, of which 190 were existing mature facilities obtained from
affiliated entities and managed by the Company, 2 were newly developed
facilities and 5 were third party acquisitions of existing mature facilities.
Accordingly, the Company has knowledge of the historical operations of the
existing mature facilities obtained from affiliates prior to when the Company
acquired the facilities. The following table summarizes the pro forma operating
results of all of the Company's self-storage facilities, excluding the
development facilities summarized in the table which follows, assuming that the
Company owned all of the facilities as of January 1, 1997:
15
<PAGE>
PRO FORMA SUMMARY OF SELF-STORAGE OPERATIONS:
---------------------------------------------
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
----------------------------- --------------------------
1998 1997 Change 1998 1997 Change
----------- ----------- ------------ ------------- ------------ ----------
Pro forma Pro forma
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Rental income................. $ 119,464 $ 110,168 8.4% $ 233,118 $ 217,033 7.4%
Cost of operations............ 35,749 33,257 7.5% 71,258 67,724 5.2%
----------- ----------- ------------ ------------- ------------ ----------
Net operating income.......... $ 83,715 $ 76,911 8.8% $ 161,860 $ 149,309 8.4%
=========== =========== ============ ============= ============ ==========
</TABLE>
The above table excludes the property operations of the Company's newly
developed properties (2 opened in 1997 and 4 opened in 1996) which are in
various stages of "fill-up." The aggregate development cost of the facilities
totaled $23 million. The historical property operations with respect to these
facilities are as follows:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
----------------------------- --------------------------
1998 1997 Change 1998 1997 Change
----------- ----------- ------------ ------------- ------------ ----------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Rental income................. $ 822 $ 425 93.4% $ 1,533 $ 681 125.1%
Cost of operations............ 267 235 13.6% 547 445 22.9%
----------- ----------- ------------ ------------- ------------ ----------
Net operating income.......... $ 555 $ 190 192.1% $ 986 $ 236 317.8%
=========== =========== ============ ============= ============ ==========
</TABLE>
Substantially all of the Company's self-storage development activities are
conducted through the Development Joint Venture, a partnership created in April
1997 between the Company and a state pension plan to fund the development of
approximately $220 million of self-storage facilities. The Development Joint
Venture is funded solely with equity capital consisting of 30% from the Company
and 70% from the state pension fund. Due to the Company's ownership in the
Development Joint Venture being less than 50%, the operations of the Development
Joint Venture are not consolidated with the Company's. The Company accounts for
its investment using the equity method, accordingly, its pro rata share of the
operations of the Development Joint Venture are reflected in "Equity earnings
from real estate entities."
As of June 30, 1998, the Development Joint Venture had 15 self-storage
facilities operating and 12 facilities under development. The six facilities
(364,000 net rentable square feet) which have been developed and opened by the
Development Joint Venture or the Company between January 1, 1996 and April 1,
1997 have average occupancies of 91% at June 30, 1998. The 12 facilities
(699,000 net rentable square feet) which opened between April 1,1997 and June 1,
1998 have been open an average of 8 months, and have average occupancies of 59%.
These statistics exclude three development properties opened at the end of June,
1998.
COMMERCIAL PROPERTY OPERATIONS: The Company's commercial property
operations principally consist of the operations of PSBP, an affiliated real
estate investment trust. The following table sets forth the historical
commercial property amounts included in the Company's financial statements:
16
<PAGE>
COMMERCIAL PROPERTY OPERATIONS - HISTORICAL
-------------------------------------------
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
----------------------------- --------------------------
1998 1997 Change 1998 1997 Change
----------- ----------- ------------ ------------- ------------ ----------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Rental income................. $ 1,715 $ 8,571 (80.0)% $ 19,396 $ 16,168 20.0%
Cost of operations............ 654 3,573 (81.7)% 6,502 6,757 (3.8)%
----------- ----------- ------------ ------------- ------------ ----------
Net operating income.......... $ 1,061 $ 4,998 (78.8)% $ 12,894 $ 9,411 37.0%
=========== =========== ============ ============= ============ ==========
</TABLE>
During the second quarter of 1998, the Company's ownership interest in PSBP
was reduced below 50%, and accordingly, the Company ceased to have a controlling
interest in PSBP. As a result, effective April 1, 1998, the Company no longer
includes the accounts of PSBP in its consolidated financial statements and has
accounted for its investment during the three months ended June 30, 1998 using
the equity method (see "Equity in earnings of real estate entities"). The income
statement for the six months ended June 30, 1998 includes the consolidated
operating results of PSBP for the three months ended March 31, 1998. The
significant decrease in rental income and cost of operations for the three
months ended June 30, 1998 reflects the Company's change in accounting method
for its investment in PSBP.
The following table summarizes the pro forma commercial operations of the
Company assuming that the operations of PSBP were not consolidated with the
Company's accounts (i.e., as if the Company had consistently used the equity
method of accounting for its investment in PSBP):
PRO FORMA SUMMARY OF COMMERCIAL OPERATIONS:
-------------------------------------------
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
----------------------------- --------------------------
1998 1997 Change 1998 1997 Change
----------- ----------- ------------ ------------- ------------ ----------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Rental income................. $1,715 $1,656 3.6% $3,381 $3,172 6.6%
Cost of operations............ 654 634 3.2% 1,334 1,317 1.3%
----------- ----------- ------------ ------------- ------------ ----------
Net operating income.......... $1,061 $1,022 3.8% $2,047 $1,855 10.4%
=========== =========== ============ ============= ============ ==========
</TABLE>
EQUITY IN EARNINGS OF REAL ESTATE ENTITIES: In addition to its ownership of
12,105,428 common shares and operating partnership units in PSBP, the Company
had general and limited partnership interests in 27 limited partnerships at June
30, 1998 (PSBP and the limited partnerships are collectively referred to as the
"Unconsolidated Entities"). 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 for the three and six months
ended June 30, 1998 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 sets forth the significant components of the
Company's equity in earnings of real estate entities.
17
<PAGE>
HISTORICAL SUMMARY:
-------------------
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
----------------------------- --------------------------
1998 1997 Change 1998 1997 Change
----------- ----------- ------------ ------------- ------------ ----------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Property operations:
PSBP..................... $7,444 $ - $7,444 $7,444 $ - $7,444
Development Joint Venture 119 (18) 137 180 (18) 198
Other partnerships....... 5,829 8,701 (2,872) 10,668 17,965 (7,297)
----------- ----------- ------------ ------------- ------------ ----------
13,392 8,683 4,709 18,292 17,947 345
----------- ----------- ------------ ------------- ------------ ----------
Depreciation:
PSBP..................... (2,395) - (2,395) (2,395) - (2,395)
Development Joint Venture (111) (12) (99) (191) (12) (179)
Other partnerships....... (2,267) (3,056) 789 (4,053) (6,685) 2,632
----------- ----------- ------------ ------------- ------------ ----------
(4,773) (3,068) (1,705) (6,639) (6,697) 58
----------- ----------- ------------ ------------- ------------ ----------
Other: (1)
PSBP..................... (501) - (501) (501) - (501)
Development Joint Venture 27 18 9 58 18 40
Other partnerships....... (828) (616) (212) (1,274) (1,030) (244)
----------- ----------- ------------ ------------- ------------ ----------
(1,302) (598) (704) (1,717) (1,012) (705)
----------- ----------- ------------ ------------- ------------ ----------
Total equity in earnings of
real estate entities....... $7,317 $5,017 $2,300 $9,936 $10,238 ($302)
=========== =========== ============ ============= ============ ==========
</TABLE>
(1) "Other" reflects the Company's share of general and administrative expense,
interest expense, interest income, and other non-property, non-depreciation
related operating results of these entities.
Equity in earnings of real estate entities increased $2,300,000 in the
three months ended June 30, 1998 from the same period in 1997. This increase
includes the impact of the Company's change in accounting method for its
investment in PSBP, where the Company's share of earnings of PSBP after March
31, 1998 is reflected in equity in earnings of real estate entities. This
increase was partially offset by the impact of affiliated REIT mergers and the
acquisition of partnership interests which occurred in 1997 and 1998 resulting
in the consolidation of additional ownership entities.
Equity in earnings of real estate entities decreased $302,000 in the six
months ended June 30, 1998 from the same period in 1997. This decrease reflects
the aforementioned REIT mergers and acquisitions of partnership interests in
1997 and 1998, offset by the impact of the change in accounting method with
respect to PSBP.
PORTABLE SELF-STORAGE BUSINESS: Public Storage Pick-up & Delivery,
("PSPUD") incurred approximately $8.3 million of operating losses during the
second quarter of 1998 compared to operating losses of approximately $6.8
million during the second quarter of 1997. As previously announced, the Company
believes that the quarterly losses from the PSPUD operations peaked during the
third quarter of 1997. Operating losses of PSPUD were approximately $12.1
million for the third quarter of 1997, $10.5 million for the fourth quarter of
1997, and $9.9 million for the first quarter of 1998. The Company believes this
trend of decreasing operating losses will continue as PSPUD's revenues continue
to increase.
The number of occupied containers at PSPUD's facilities increased from
41,645 at April 30, 1998 to 56,597 at July 31, 1998. The occupancy levels of
facilities open for more than thirteen months (the same group of facilities
reported in the last quarter) ranged from 20% to 82% (averaging 47%) at April
30, 1998 compared with 22% to 94% (averaging 57%) at July 31, 1998.
The rate of fill-up varies from facility to facility. As with
mini-warehouses, the Company believes that the portable self-storage business
experiences some seasonal fluctuations in occupancy levels with occupancies
generally higher in the summer months than the winter months. There can be no
assurances as to the level of PSPUD's expansion, level of gross rentals, level
of move-outs or profitability.
18
<PAGE>
FACILITY MANAGEMENT OPERATIONS: The property management contracts generally
provide for compensation equal to 6% of gross revenues of the self-storage
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 June 30, 1998, the Company's property
management operations generated net operating income of $1,384,000 on revenues
of $1,652,000 and expenses of $268,000 as compared to net operating income of
$2,425,000 on revenues of $2,891,000 and expenses of $466,000 during the same
period in 1997. During the six months ended June 30, 1998, the Company's
property management operations generated net operating income of $2,863,000 on
revenues of $3,417,000 and expenses of $554,000 as compared to net operating
income of $5,001,000 on revenues of $5,943,000 and expenses of $942,000 during
the same period in 1997. 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, as well as the Company's change in
accounting method with respect to its investment in PSBP.
INTEREST AND OTHER INCOME: 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 June 30, Six months ended June 30,
------------------------------------------ -----------------------------------------
1998 1997 Dollar Change 1998 1997 Dollar Change
----------- ----------- ------------- ------------- ------------ -------------
(Amounts in thousands)
Sales of Packaging Material and Truck Rental Income:
----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues........................... $ 2,189 $ 1,303 $ 886 $ 3,671 $ 2,153 $ 1,518
Cost of operations................. (1,842) (1,183) (659) (3,133) (1,702) (1,431)
----------- ----------- ------------- ------------- ------------ -------------
Net operating income.......... 347 120 227 538 451 87
Interest and other income.......... 4,005 2,531 1,474 7,466 4,221 3,245
----------- ----------- ------------- ------------- ------------ -------------
Total interest and other income.. $ 4,352 $ 2,651 $ 1,701 $ 8,004 $ 4,672 $ 3,332
=========== =========== ============= ============= ============ =============
</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 six months ended June 30, 1998 compared to the
same periods in 1997 is primarily due to increased interest income on excess
cash balances.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense has
increased $4,489,000, to $25,192,000 for the three months ended June 30, 1998 as
compared to $20,703,000 for the same period in 1997. Depreciation and
amortization expense has increased $12,921,000, to $53,411,000 for the six
months ended June 30, 1998 as compared to $40,490,000 for the same period in
1997. These increases are principally due to the acquisition of additional real
estate facilities during 1997 and 1998, offset partially by the Company's change
in accounting method with respect to its investment in PSBP.
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
June 30, 1998 was $4,217,000 compared to $2,582,000 for the same period in 1997.
Minority interest in income for the six months ended June 30, 1998 was
$10,569,000 compared to $5,029,000 for the same period in 1997.
19
<PAGE>
The increases in minority interest in income are the result of the
Company's acquisition of sufficient ownership interest (but not 100% ownership)
and control in fourteen partnerships allowing the inclusion of the accounts of
these partnerships in the Company's consolidated financial statements combined
with improved property operations for those partnership already consolidated
with the Company whereby the minority interest participate in the improved
operations through increased earnings. However, these increases are partially
offset by the effect of the Company's change in accounting method with respect
to its investment in PSBP whereby the minority interest with respect to PSBP was
removed from the Company's consolidated financial statements.
SUPPLEMENTAL PROPERTY DATA
At June 30, 1998, 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 PS Business Parks Inc.) in which the Company's
ownership interest and control are not sufficient to warrant the consolidation
of such entities (the "Unconsolidated Entities"). The following table summarizes
the Company's investment in real estate facilities as of June 30, 1998,
excluding two real estate facilities utilized by the Company's PSPUD operations:
<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 595 1 596 36,261 9 36,270
Facilities owned by Consolidated
Partnerships 323 - 323 18,767 - 18,767
------------- ---------- ----------- ------------ ---------- ---------
Total consolidated facilities 918 1 919 55,028 9 55,037
Facilities owned by Unconsolidated Entities 165 97 262 9,592 10,208 19,800
------------- ---------- ----------- ------------ ---------- ---------
Total facilities in which the Company has
an ownership interest 1,083 98 1,181 64,620 10,217 74,837
============= ========== =========== ============ ========== =========
</TABLE>
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 985 (57.6 million net rentable square feet)
of the 1,083 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 June 30, 1998, the Company had
ownership interests in a total of 1,083 mini-warehouse facilities. Of these
1,083 properties, 985 or 91% of the mini-warehouses have been in operation and
managed by Public Storage, Inc. since January 1, 1994. The following table
summarizes the operating results of these 985 properties:
20
<PAGE>
SAME STORE MINI-WAREHOUSE FACILITIES (985 FACILITIES):
------------------------------------------------------
(historical property operations)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
------------------------------------------ ------------------------------------------
1998 1997 Change 1998 1997 Change
------------ ------------ ------------ ------------ ------------ -------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Rental income............... $130,887 $120,205 8.9% $255,192 $236,883 7.7%
Cost of operations (includes
an imputed 6% property
management fee)........... 45,394 41,946 8.2% 90,262 85,231 5.9%
------------ ------------ ------------ ------------ ------------ -------------
Net operating income........ $85,493 $78,259 9.2% $164,930 $151,652 8.8%
============ ============ ============ ============ ============ =============
Gross profit margin (1)..... 65.3% 65.1% 0.2% 64.6% 64.0% 0.6%
......................................................................................................................
Weighted Average:
- -----------------
Occupancy during the
period................. 92.8% 91.8% 1.0% 92.1% 90.7% 1.4%
Annualized realized rent
per sq. ft. for $9.82 $9.08 8.1% $9.56 $9.00 6.2%
period.(2).............
Annualized scheduled rent
per sq. ft. for period. $10.32 $9.84 4.9% $10.08 $9.84 2.4%
</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
(which excludes depreciation expense) by rental revenues. Cost of
operations include a 6% management fee. The gross profit margin excluding
the property management fee was 71.3% and 71.1% for the three months ended
June 30, 1998 and 1997, respectively; and 70.6% and 70.0% for the six
months ended June 30, 1998 and 1997, respectively.
3. Realized rent per square foot represents the actual revenue earned per
occupied square foot during the period - annualized. 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 $4.2 for the three months ended June 30, 1998, compared to $5.4 million
for the same period in 1997. Rental income for the Same Store facilities
included promotional discounts totaling $8.4 for the six months ended June 30,
1998, compared to $8.8 million for the same period in 1997. Promotional
discounts are attributable to promotional activities offered through the
national telephone reservation center.
Cost of operations for the three months ended June 30, 1998 increased due
to (i) advertising and promotion, which increased $1.5 million due primarily to
the Company's national telephone reservations center and television advertising
in certain markets and (ii) property taxes, which increased $0.8 million, due
primarily to higher assessments. Cost of operations for the six months ended
June 30, 1998 increased due to (i) advertising and promotion, which increased
$2.5 million due primarily to the Company's national telephone reservations
center and television advertising in certain markets and (ii) property taxes,
which increased $1.6 million, due primarily to higher assessments.
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.
21
<PAGE>
INTERNALLY GENERATED CASH FLOWS: The Company believes that important
measures of its performance as well as its liquidity are cash provided by
operations and funds from operations ("FFO") 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 $176,182,000 from $138,785,000 for
the six months ended June 30, 1998 and 1997, respectively.
The following table summarizes the Company's ability to pay the minority
interests' distributions, its dividends to the preferred shareholders and
capital improvements to maintain the facilities through the use of cash provided
by operating activities. The remaining cash flow is available to the Company to
make both scheduled and optional principal payments on debt, pay distributions
to common shareholders and for reinvestment.
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
-----------------------------------------
1998 1997
------------------- ------------------
(Amounts in thousands)
<S> <C> <C>
Net income................................................... $ 105,563 $ 86,569
Depreciation and amortization................................ 53,411 40,490
Depreciation from unconsolidated real estate
investments................................................ 6,639 6,697
Minority interest in income.................................. 10,569 5,029
------------------- ------------------
Net cash provided by operating activities.................. 176,182 138,785
Distributions from operations to minority interests
(funds from operations allocable to minority
interests) ................................................ (17,596) (9,522)
Cash from operations/FFO available to the Company's
shareholders............................................... 158,586 129,263
Less: preferred stock dividends (A).......................... (40,269) (36,406)
------------------- ------------------
Cash from operations/FFO available to common
shareholders............................................... 118,317 92,857
Capital improvements to maintain facilities.................. (10,336) (15,040)
Add back: minority interest share of capital
improvements............................................... 915 775
------------------- ------------------
Funds available for principal payments on debt, common
dividends and reinvestment................................. 108,896 78,592
Cash distributions to common shareholders.................... (49,806) (40,421)
------------------- ------------------
Funds available for principal payments on debt and
investment................................................. $ 59,090 $ 38,171
=================== ==================
</TABLE>
(A) 1997 amount excludes $13,412 non-recurring payment of dividends with
respect to Series CC Convertible Preferred Stock.
See the consolidated statements of cash flows for the six months ended June
30, 1998 and 1997 for additional information regarding the Company's investing
and financing activities.
FFO increased to $158,586,000 for the six months ended June 30, 1998
compared to $129,263,000 for the same period in 1997. FFO applicable to the
common shareholders (after deducting preferred stock dividends) increased to
$118,317,000 for the six months ended June 30, 1998 compared to $92,857,000 for
the same period in 1997. 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.
22
<PAGE>
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 six months of 1998 and 1997,
the Company distributed to common shareholders approximately 45.7% and 51.4% of
its FFO available to common shareholders, respectively, allowing it to retain
approximately $59.1 million and $38.2 million, respectively, after satisfying
its capital improvements and dividend requirements.
DISTRIBUTION REQUIREMENTS: During the first six months of 1998, the Company
paid dividends totaling $38,106,000 to the holders of the Company's Senior
Preferred Stock, $2,163,000 to the holders of the Convertible Preferred Stock,
and $49,806,000 to the holders of Common Stock. On June 1, 1998, the Company
exercised its option to redeem the Convertible Preferred Stock for common stock,
and the redemption was effective July 1, 1998. Distribution requirements for
fiscal 1998 with respect to the Senior Preferred Stock and Convertible Preferred
Stock (prior to the redemption) will be approximately $78 million.
CAPITAL IMPROVEMENT REQUIREMENTS: During 1998, the Company has budgeted
approximately $23.0 million for capital improvements for its self-storage
facilities. The minority interests' share of the estimated capital improvements
is approximately $3.5 million. During the first six months of 1998, the Company
incurred capital improvements of approximately $10.3 million, of which $857,000
was for PSBP in the first quarter of 1998 and the remainder was for all of the
Company's other facilities.
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. At June 30, 1998, the Company had total outstanding notes
payable of $86.3 million. Approximate principal maturities of notes payable at
June 30, 1998 are as follows:
Fixed Rate
Mortgage Debt
7.08% Unsecured (Weighted average
Senior Notes rate of 10.0%) Total
----------------- -------------------- ------------
(Amounts in thousands)
1998 (remainder of) $ 3,625 $ 1,117 $ 4,742
1999 8,000 6,398 14,398
2000 8,750 2,622 11,372
2001 9,500 2,910 12,410
2002 9,750 3,229 12,979
Thereafter 10,000 20,354 30,354
----------------- -------------------- ------------
$ 49,625 $ 36,630 $ 86,255
================= ==================== ============
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.
23
<PAGE>
The Company's portfolio of real estate facilities remains substantially
unencumbered. At June 30, 1998, the Company had debt outstanding of $86.3
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.
During the first six months of 1998, the Company issued 7,951,821 shares of
common stock, respectively, in public and private offerings, raising net
proceeds of approximately $234.5 million. An additional 914,094 shares of common
stock were issued in connection with the acquisition of investments in real
estate entities during the first quarter of 1998, and 433,526 shares were issued
in connection with the merger of an affiliated REIT with the Company in May
1998.
REPURCHASES OF THE COMPANY'S COMMON STOCK: June 12, 1998, the Company
announced that the Board of Directors authorized the repurchase from time to
time of up to 10,000,000 shares of the Company's common stock on the open market
or in privately negotiated transactions. Through June 30, 1998 the Company has
repurchased a total of 490,300 shares of common stock at an aggregate cost of
$13.0 million. In the third quarter through August 10, 1998, the Company
repurchased an additional 1,931,900 shares of common stock at an aggregate cost
of approximately $49.7 million.
MERGER PROPOSAL FOR STORAGE TRUST, INC.: On August 4, 1998, the Company
made an offer to acquire Storage Trust Realty for $25 per common share, or an
aggregate of $407 million for the common shares of Storage Trust Realty that the
Company does not now own, plus the assumption of approximately $163 million in
Storage Trust debt.
DEVELOPMENT ACTIVITIES: In April 1997, the Company formed a joint venture
partnership with a state pension fund to participate in the development of
approximately $220 million of self-storage facilities. The Company expects that
substantially all of its self-storage development activities will be conducted
in the joint venture partnership until the $220 million is fully committed. The
partnership is expected to be fully committed by the end of August 1998. At June
30, 1998, the joint venture partnership had completed construction on 15
self-storage facilities (approximately 895,000 net rentable square feet) with a
total cost of approximately $77.8 million, and had 12 facilities under
construction (approximately 766,000 net rentable square feet) with an aggregate
cost incurred to date of approximately $38.1 million and total additional
estimated cost to complete of $18.0 million. In addition, at June 30, 1998, the
Company had 11 facilities under construction (approximately 662,000 net rentable
square feet) with an aggregate cost incurred to date of approximately $26.7
million and total additional estimated cost to complete of $26.5 million. Upon
approval by the joint venture partnership, the facilities under construction by
the Company will be transferred to the joint venture partnership. The
partnership is funded solely with equity capital consisting of 30% from the
Company and 70% from the state pension fund.
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.
24
<PAGE>
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
-----------------
Public Storage, Inc. v AT&T Corporation, et. al., U. S. District Court
------------------------------------------------
for Central District of California ( Filed May 20, 1998)
The Company is seeking declaratory and injunctive relief and
indemnification against a group of long-distance and local telephone
carrier defendants and others. Certain of the defendants are demanding
payments, aggregating in excess of $3 million from the Company for
unauthorized, fraudulent long-distance telephone calls placed by
unknown third parties through the Company's telephone lines. The
Company believes that it is not liable for these charges and that
these charges are in any event covered by insurance, although the
insurance carrier has not yet acknowledged coverage.
Except as described above and in the Company's 1997 Annual Report
on Form 10-K, there are no material proceedings involving the Company
or its subsidiaries.
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 April 23,
1998, pursuant to Item 5, which filed certain exhibits relating
to the Company's public offering of 1,582,218 shares of common
stock.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: August 14, 1998
PUBLIC STORAGE, INC.
BY: /s/ John Reyes
-------------------------
John Reyes
Senior Vice President and
Chief Financial Officer
(Principal financial officer)
26
PUBLIC STORAGE, INC.
Exhibit 11 - Statement Re: Computation of Earnings Per Share
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
-------------------------------- --------------------------------
Earnings Per Share: 1998 1997 1998 1997
- --------------------------------------------------------- ---------------- ------------- ---------------- --------------
(Amounts in thousand, except per share data)
<S> <C> <C> <C> <C>
Net income $57,199 $44,251 $ 105,563 $86,569
Less: Preferred Stock dividends:
10% Cumulative Preferred Stock, Series A (1,140) (1,141) (2,280) (2,282)
9.20% Cumulative Preferred Stock, Series B (1,372) (1,372) (2,744) (2,744)
Adjustable Rate Preferred Stock, Series C (506) (572) (1,012) (1,116)
9.50% Cumulative Preferred Stock, Series D (713) (713) (1,426) (1,426)
10.0% Cumulative Preferred Stock, Series E (1,372) (1,372) (2,744) (2,744)
9.75% Cumulative Preferred Stock, Series F (1,401) (1,402) (2,802) (2,803)
8.875% Cumulative Preferred Stock, Series G (3,828) (3,827) (7,656) (7,655)
8.45% Cumulative Preferred Stock, Series H (3,565) (3,565) (7,130) (7,130)
8.625% Cumulative Preferred Stock, Series I (2,156) (2,156) (4,312) (4,312)
8.00% Cumulative Preferred Stock, Series J (3,000) - (6,000) -
8.25% Convertible Preferred Stock (1,076) (1,136) (2,163) (2,278)
Convertible Preferred Stock, Series CC - (13,412) - (15,328)
---------------- ------------- ---------------- --------------
Total preferred dividends (20,129) (30,668) (40,269) (49,818)
---------------- ------------- ---------------- --------------
Net income allocable to common shareholders $37,070 $13,583 $65,294 $36,751
================ ============= ================ ==============
Weighted average common shares outstanding:
Basic - weighted average common shares outstanding
113,970 97,524 111,731 93,326
Net effect of dilutive stock options - based on
treasury stock method using average market price 460 522 515 557
---------------- ------------- ---------------- --------------
Diluted weighted average common shares outstanding
114,430 98,046 112,246 93,883
================ ============= ================ ==============
Basic earnings per common share $0.33 $0.14 $0.58 $0.39
================ ============= ================ ==============
Diluted earnings per common share $0.32 $0.14 $0.58 $0.39
================ ============= ================ ==============
</TABLE>
Exhibit 11
<PAGE>
PUBLIC STORAGE, INC.
Exhibit 11 - Statement Re: Computation of Earnings Per Share
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
-------------------------------- --------------------------------
Diluted Earnings per Share, assuming conversion of
anti-dilutive securities: 1998 1997 1998 1997
- --------------------------------------------------------- ---------------- ------------- ---------------- --------------
(Amounts in thousand, except per share data)
<S> <C> <C> <C> <C>
Net income allocable to common shareholders per
calculation above $37,070 $13,583 $65,294 $36,751
Add back applicable dividends paid to
holders of Convertible Preferred Stocks:
* 8.25% Convertible Preferred Stock 1,076 1,136 2,163 2,278
* Series CC Preferred Stock - - - 1,916
---------------- ------------- ---------------- --------------
Netincome allocable to common shareholders
for purposes of determining Diluted
Earnings per Share, assuming conversion
of anti-dilutive securities $38,146 $14,719 $67,457 $40,945
================ ============= ================ ==============
Diluted weighted average common shares outstanding 114,430 98,046 112,246 93,883
Pro forma weighted average common shares
assuming conversion of Convertible
Preferred Stock:
* 8.25% Convertible Preferred Stock 3,530 3,718 3,555 3,721
* Series CC Preferred Stock - - - 1,092
---------------- ------------- ---------------- --------------
Weighted average common shares for purposes of
computation of Diluted Earnings per Share, assuming
conversion of anti-dilutive securities 117,960 101,764 115,801 98,696
================ ============= ================ ==============
Diluted Earnings per Common Share, assuming conversion
of anti-dilutive securities (1) $0.32 $0.14 $0.58 $0.41
================ ============= ================ ==============
</TABLE>
(1) Such amounts are anti-dilutive and are not presented in the Company's
consolidated financial statements.
In addition, the Company has 7,000,000 shares of Class B Common Stock which
are convertible into shares of the Company's Common Stock subject to the
attainment of certain earnings milestone by the Company. As these earnings
milestones have not been met, the conversion has not been assumed.
Exhibit 11
PUBLIC STORAGE, INC.
EXHIBIT 12 - STATEMENT RE: COMPUTATION OF RATIO OF
EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
1998 1997
--------------- --------------
(Amounts in thousands, except ratios)
<S> <C> <C>
Net income 105,563 $ 86,569
Add: Minority interest in income 10,569 5,001
Less: Minority interests in income which
do not have fixed charges (7,112) (4,371)
--------------- --------------
Income from continuing operations 109,020 87,199
Interest expense 2,095 3,559
--------------- --------------
Total Earnings Available to Cover Fixed Charges $ 111,115 $ 90,758
=============== ==============
Total Fixed Charges - Interest expense $ 4,375 $ 4,648
=============== ==============
Total Preferred Stock dividends $ 40,269 $49,818
=============== ==============
Total Combined Fixed Charges and Preferred
Stock dividends $ 44,644 $ 54,466
=============== ==============
Ratio of Earnings to Fixed Charges 25.40 19.53
=============== ==============
Ratio of Earnings to Combined Fixed Charges and
Preferred Stock dividends 2.49 1.67
=============== ==============
Ratio of Earnings to Combined Fixed Charges and
Preferred Stock dividends (A) 2.21
==============
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- ------------ ------------- -------------- ------------
(Amounts in thousands, except ratios)
<S> <C> <C> <C> <C> <C>
Net income $ 178,649 $ 153,549 $ 70,386 $ 42,118 $ 28,036
Add: Minority interest in income 11,684 9,363 7,137 9,481 7,291
Less: Minority interests in income which
do not have fixed charges (10,375) (8,273) (4,700) (5,906) (737)
--------------- ------------ ------------- -------------- ------------
Income from continuing operations 179,958 154,639 72,823 45,693 34,590
Interest expense 6,792 8,482 8,508 6,893 6,079
--------------- ------------ ------------- -------------- ------------
Total Earnings Available to Cover Fixed Charges $ 186,750 $ 163,121 $ 81,331 $ 52,586 $ 40,669
=============== ============ ============= ============== ============
Total Fixed Charges - Interest expense $ 9,220 $ 10,343 $ 8,815 $ 6,893 $ 6,079
=============== ============ ============= ============== ============
Total Preferred Stock dividends $ 88,393 $ 68,599 $ 31,124 $ 16,846 $ 10,889
=============== ============ ============= ============== ============
Total Combined Fixed Charges and Preferred
Stock dividends $ 97,613 $ 78,942 $ 39,939 $ 23,739 $ 16,968
=============== ============ ============= ============== ============
Ratio of Earnings to Fixed Charges 20.25 15.77 9.23 7.63 6.69
=============== ============ ============= ============== ============
Ratio of Earnings to Combined Fixed Charges and
Preferred Stock dividends 1.91 2.07 2.04 2.22 2.40
=============== ============ ============= ============== ============
Ratio of Earnings to Combined Fixed Charges and
Preferred Stock dividends (A) 2.22
===============
</TABLE>
(A) Supplemental ratio after elimination of $13,412 of non-recurring special
dividends paid to the Series CC Convertible Preferred Stock in 1997.
Exhibit 12
<PAGE>
PUBLIC STORAGE, INC.
EXHIBIT 12 - STATEMENT RE: COMPUTATION OF RATIO OF
EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
1998 1997
--------------- --------------
(Amounts in thousands, except ratios)
Supplemental disclosure of Ratio of Funds
- -------------------------------------------
from Operations ("FFO") to fixed charges:
- --------------------------------------------
<S> <C> <C>
FFO $ 158,586 $ 129,263
Interest expense 2,095 3,559
--------------- --------------
Adjusted FFO available to cover fixed charges $ 160,681 $ 132,822
=============== ==============
Total Fixed Charges - Interest expense $ 4,375 $ 4,648
=============== ==============
Total Preferred Stock dividends $ 40,269 $ 49,818
=============== ==============
Total Combined Fixed Charges and Preferred
Stock dividends $ 44,644 $ 54,466
=============== ==============
Ratio of FFO to Fixed Charges 36.73 28.58
=============== ==============
Ratio of FFO to Combined Fixed Charges and
Preferred Stock dividends 3.60 2.44
=============== ==============
Ratio of FFO to Combined Fixed Charges
and Preferred Stock dividends (A) 3.24
==============
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- ------------ ------------- -------------- ------------
(Amounts in thousands, except ratios)
Supplemental disclosure of Ratio of Funds
- -------------------------------------------
from Operations ("FFO") to fixed charges:
- --------------------------------------------
<S> <C> <C> <C> <C> <C>
FFO $ 272,234 $ 224,476 $ 105,199 $ 56,143 $ 35,830
Interest expense 6,792 8,482 8,508 6,893 6,079
--------------- ------------ ------------- -------------- ------------
Adjusted FFO available to cover fixed charges $ 279,026 $ 232,958 $ 113,707 $ 63,036 $ 41,909
=============== ============ ============= ============== ============
Total Fixed Charges - Interest expense $ 9,220 $ 10,343 $ 8,815 $ 6,893 $ 6,079
=============== ============ ============= ============== ============
Total Preferred Stock dividends $ 88,393 $ 68,599 $ 31,124 $ 16,846 $ 10,889
=============== ============ ============= ============== ============
Total Combined Fixed Charges and Preferred
Stock dividends $ 97,613 $ 78,942 $ 39,939 $ 23,739 $ 16,968
=============== ============ ============= ============== ============
Ratio of FFO to Fixed Charges 30.26 22.52 12.90 9.15 6.89
=============== ============ ============= ============== ============
Ratio of FFO to Combined Fixed Charges and
Preferred Stock dividends 2.86 2.95 2.85 2.66 2.47
=============== ============ ============= ============== ============
Ratio of FFO to Combined Fixed Charges
and Preferred Stock dividends (A) 3.31
===============
</TABLE>
(A) Supplemental ratio after elimination of $13,412 nonrecurring special
dividends paid to the Series CC Preferred Stock in 1997.
Exhibit 12
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000318380
<NAME> Public Storage, Inc.
<MULTIPLIER> 1
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Jun-30-1998
<EXCHANGE-RATE> 1
<CASH> 182,707,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 182,707,000
<PP&E> 2,822,956,000
<DEPRECIATION> (361,758,000)
<TOTAL-ASSETS> 3,433,515,000
<CURRENT-LIABILITIES> 62,276,000
<BONDS> 0
0
920,927,000
<COMMON> 12,120,000
<OTHER-SE> 2,197,863,000
<TOTAL-LIABILITY-AND-EQUITY> 3,433,515,000
<SALES> 0
<TOTAL-REVENUES> 283,607,000
<CGS> 107,407,000
<TOTAL-COSTS> 107,407,000
<OTHER-EXPENSES> 57,973,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,095,000
<INCOME-PRETAX> 105,563,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 105,563,000
<EPS-PRIMARY> 0.58
<EPS-DILUTED> 0.58
</TABLE>
