SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 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 October 30, 1998:
Common Stock, $.10 par value, 115,704,762 shares outstanding
- ------------------------------------------------------------
Class B Common Stock, $.10 Par Value - 7,000,000 shares
- -------------------------------------------------------
Equity Stock, Series A, $.01 Par Value - 225,000 shares
- -------------------------------------------------------
<PAGE>
PUBLIC STORAGE, INC.
INDEX
Pages
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Condensed Consolidated Balance Sheets at
September 30, 1998 and December 31, 1997 1
Condensed Consolidated Statements of Income for the
Three and Nine Months Ended September 30, 1998 and 1997 2
Condensed Consolidated Statements of Shareholders Equity
for the Nine Months Ended September 30, 1998 3
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1998 and 1997 4- 5
Notes to Condensed Consolidated Financial Statements 6 - 14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15 - 27
PART II. OTHER INFORMATION (Items 2, 3 and 4 are not applicable)
- --------------------------
Item 1. Legal Proceedings 28
Item 5. Other Information 28 - 29
Item 6. Exhibits and Reports on Form 8-K 29
<PAGE>
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
------ ----------------- -----------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents.................................................... $ 54,950 $ 41,455
Real estate facilities, at cost:
Land...................................................................... 797,110 845,299
Buildings................................................................. 2,137,179 2,232,230
----------------- -----------------
2,934,289 3,077,529
Accumulated depreciation.................................................. (385,647) (378,248)
----------------- -----------------
2,548,642 2,699,281
Construction in process................................................... 75,635 42,635
----------------- -----------------
2,624,277 2,741,916
----------------- -----------------
Investment in real estate entities........................................... 430,171 225,873
Intangible assets, net....................................................... 205,960 212,944
Mortgage notes receivable from affiliates.................................... 24,856 21,807
Other assets................................................................. 71,619 67,650
----------------- -----------------
Total assets................................................... $3,411,833 $ 3,311,645
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Revolving line of credit..................................................... $ - $ 7,000
Notes payable................................................................ 85,617 96,558
Accrued and other liabilities................................................ 77,380 70,648
----------------- -----------------
Total liabilities................................................... 162,997 174,206
----------------- -----------------
Minority interest............................................................ 150,532 288,479
Commitments and contingencies
Shareholders' equity:
Preferred Stock, $0.01 par value, 50,000,000 shares authorized,
11,129,650 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......................................... - 53,308
Common stock, $0.10 par value, 200,000,000 shares authorized,
115,713,762 shares issued and outstanding (105,102,145 at
December 31, 1997)......................................................
11,573 10,511
Class B Common Stock, $0.10 par value, 7,000,000 shares authorized and
issued.................................................................. 700 700
Paid-in capital........................................................... 2,172,115 1,903,782
Cumulative net income..................................................... 742,918 575,069
Cumulative distributions paid............................................. (697,902) (563,310)
----------------- -----------------
Total shareholders' equity.......................................... 3,098,304 2,848,960
----------------- -----------------
Total liabilities and shareholders' equity..................... $3,411,833 $ 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 Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
--------------- ---------------- --------------- ----------------
Revenues:
Rental income:
<S> <C> <C> <C> <C>
Self-storage facilities............ $ 129,385 $ 102,308 $ 360,950 $ 273,798
Portable self-storage.............. 6,780 2,566 18,069 4,140
Commercial properties ............. 1,833 11,526 21,229 27,694
Equity earnings of real estate entities. 6,662 4,414 16,598 14,652
Facility management fee................. 1,388 2,376 4,805 8,319
Interest and other income............... 3,921 2,817 11,925 7,489
--------------- ---------------- --------------- ----------------
149,969 126,007 433,576 336,092
--------------- ---------------- --------------- ----------------
Expenses:
Cost of operations:
Self-storage facilities............ 37,755 29,617 108,593 82,392
Portable self-storage.............. 13,713 14,635 43,226 25,325
Commercial properties.............. 685 4,277 7,187 11,034
Cost of facility management............. 226 358 780 1,300
Depreciation and amortization.......... 26,217 23,651 79,628 64,141
General and administrative............. 2,684 1,911 7,246 5,185
Interest expense....................... 831 2,262 2,926 5,821
--------------- ---------------- --------------- ----------------
82,111 76,711 249,586 195,198
--------------- ---------------- --------------- ----------------
Income before minority interest........ 67,858 49,296 183,990 140,894
Minority interest in income............ (5,572) (2,748) (16,141) (7,777)
--------------- ---------------- --------------- ----------------
Net income................................ $ 62,286 $ 46,548 $ 167,849 $133,117
=============== ================ =============== ================
Net income allocation:
Allocable to preferred shareholders..... $ 19,053 $ 18,316 $ 59,322 $68,134
Allocable to common shareholders........ 43,233 28,232 108,527 64,983
--------------- ---------------- --------------- ----------------
$ 62,286 $ 46,548 $ 167,849 $133,117
=============== ================ =============== ================
Per common share:
Net income per share - Basic............ $0.37 $0.27 $0.96 $0.67
=============== ================ =============== ================
Net income per share - Diluted.......... $0.37 $0.27 $0.95 $0.67
=============== ================ =============== ================
Weighted average common shares -
Basic................................ 116,421 102,964 113,311 96,586
=============== ================ =============== ================
Weighted average common shares -
Diluted.............................. 116,726 103,536 113,762 97,154
=============== ================ =============== ================
</TABLE>
See accompanying notes.
2
<PAGE>
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the nine months ended September 30, 1998
(Amounts in thousands except share data)
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock
---------------------------
Class B
Cumulative Common Common Paid-in
Senior Convertible Stock Stock Capital
------------- ------------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1997........................ $ 868,900 $ 53,308 $ 10,511 $ 700 $1,903,782
Issuance of common stock:
Public issuance (7,951,821 shares).............. - - 794 - 233,731
Conversion of 8.25% Convertible Preferred Stock
into common stock (3,589,552 shares)......... - (53,308) 359 - 52,949
Acquisition of investment in real estate
entities and minority interest from
affiliate (914,094 shares)................... - - 92 - 28,110
Acquisition of minority interests from third
parties (316,595 shares) .................... - - 31 - 7,965
In connection with mergers (433,526 shares)..... - - 44 - 13,773
Exercise of stock options (192,429 shares)...... - - 21 - 2,901
Repurchase of Common Shares (2,786,400 shares) ...... - - (279) - (71,096)
Net income........................................... - - - - -
Cash distributions:
Cumulative Senior Preferred Stock................. - - - - -
8.25% Convertible Preferred Stock................. - - - - -
Common Stock...................................... - - - - -
------------- ------------- ------------- ---------- -------------
Balances at September 30, 1998....................... $ 868,900 $ - $ 11,573 $ 700 $2,172,115
============= ============= ============= ========== =============
</TABLE>
<TABLE>
<CAPTION>
Total
Cumulative Cumulative Shareholders'
Net Income Distributions Equity
------------ -------------- ---------------
<S> <C> <C> <C>
Balances at December 31, 1997........................ $ 575,069 $ (563,310) $ 2,848,960
Issuance of common stock:
Public issuance (7,951,821 shares).............. - - 234,525
Conversion of 8.25% Convertible Preferred Stock
into common stock (3,589,552 shares)......... - - -
Acquisition of investment in real estate
entities and minority interest from
affiliate (914,094 shares)................... - - 28,202
Acquisition of minority interests from third
parties (316,595 shares) .................... - - 7,996
In connection with mergers (433,526 shares)..... - - 13,817
Exercise of stock options (192,429 shares)...... - - 2,922
Repurchase of Common Shares (2,786,400 shares) ...... - - (71,375)
Net income........................................... 167,849 - 167,849
Cash distributions:
Cumulative Senior Preferred Stock................. - (57,159) (57,159)
8.25% Convertible Preferred Stock................. - (2,163) (2,163)
Common Stock...................................... - (75,270) (75,270)
------------ -------------- ---------------
Balances at September 30, 1998....................... $ 742,918 $ (697,902) $ 3,098,304
============ ============== ===============
</TABLE>
See accompanying notes.
3
<PAGE>
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
----------------------------------
1998 1997
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income.................................................................. $ 167,849 $ 133,117
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................... 79,628 64,141
Depreciation included in equity in earnings of real estate entities......... 9,902 9,177
Minority interest in income................................................. 16,141 7,777
---------------- ---------------
Total adjustments.................................................... 105,671 81,095
---------------- ---------------
Net cash provided by operating activities........................ 273,520 214,212
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Mortgage loans made to affiliates........................................... (33,000) -
Principal payments received on mortgage notes to affiliates................. 27,456 897
Capital improvements to real estate facilities.............................. (19,257) (24,056)
Construction in process..................................................... (58,371) (18,465)
Investment in portable self-storage business................................ (7,649) (15,393)
Acquisition of minority interests in consolidated real estate partnerships.. (17,508) (20,967)
Proceeds from the disposition of real estate investments.................... 10,275 -
Reduction in cash due to the deconsolidation of PSBP (Note 2)............... (11,259) -
Refund of deposit on real estate purchase................................... 12,500 -
Investment in real estate entities.......................................... (74,964) (58,728)
Acquisition of real estate facilities....................................... (47,392) (50,172)
Acquisition cost of business combinations................................... (84,576) (120,986)
Other....................................................................... 2,846 4,777
---------------- ---------------
Net cash used in investing activities............................ (300,899) (303,093)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net paydowns on revolving line of credit.................................... (7,000) -
Principal payments on notes payable......................................... (10,940) (8,094)
Net proceeds from the issuance of preferred stock........................... - 144,925
Net proceeds from the issuance of common stock.............................. 237,447 127,550
Repurchase of the Company's common stock.................................... (71,375) -
Reimbursement for properties contributed to development joint venture....... - 21,284
Distributions paid to shareholders.......................................... (134,592) (130,125)
Distributions from operations to minority interests in real estate entities. (25,565) (14,201)
Net reinvestment by minority interests in consolidated real estate entities. 52,899 3,347
---------------- ---------------
Net cash provided by financing activities........................ 40,874 144,686
---------------- ---------------
Net increase in cash and cash equivalents..................................... 13,495 55,805
Cash and cash equivalents at the beginning of the period...................... 41,455 26,856
---------------- ---------------
Cash and cash equivalents at the end of the period............................ $ 54,950 $ 82,661
================ ===============
</TABLE>
See accompanying notes.
4
<PAGE>
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 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, increase in minority interest, cancellation of mortgage
note receivable, and reduction in investment.............................. $ (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.................................................... (225,202) (540,945)
Other assets.............................................................. (670) (3,097)
Accrued and other liabilities............................................. 3,793 16,640
Minority interest......................................................... 37,367 42,038
Reduction to investment in real estate entities:
In connection with business combination................................... 86,319 152,378
In connection with acquisition of real estate facilities.................. 527 -
Acquisition of minority interest and real estate in exchange for common
stock:
Real estate facilities.................................................... (19,475) -
Minority interest......................................................... (17,098) -
Accrued and unpaid dividends................................................. - (1,085)
Issuance of common stock:
In connection with the conversion of 8.25% convertible preferred stock.... 53,308 1,390
In connection with business combinations.................................. 13,817 212,000
In connection with the conversion of mandatory convertible preferred stock - 58,955
To acquire interests in real estate entities.............................. 17,133 -
To acquire minority interest in consolidated real estate entities......... 19,065 -
Conversion of 8.25% convertible preferred stock............................... (53,308) (1,390)
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 -
Effect of deconsolidation of PSBP (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
September 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
September 30, 1998, the Company had direct and indirect equity
interests in 1,191 properties located in 38 states, including 1,089
self-storage facilities, 99 commercial properties, and three industrial
facilities for use in the operations of Public Storage Pickup and
Delivery. 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 REIT, and its operating partnership (the REIT and partnership
collectively referred to as "PSBP").
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 leased central
warehouses. At September 30, 1998, PSPUD operated 48 facilities in 15
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 nine months ended September 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 22 controlled limited partnerships (the
"Consolidated Entities"). Collectively, the Company and the
Consolidated Entities own a total of 955 real estate facilities,
consisting of 951 self-storage facilities, one commercial property, and
three industrial facilities for use by PSPUD.
At September 30, 1998, the Company also has equity investments
in 26 other affiliated limited partnerships whose principal business is
the ownership of 138 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 98 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 consolidated the accounts of PSBP in its 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 second and third quarters of 1998 using the equity method.
The income statement for the nine months ended September 30, 1998
6
<PAGE>
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 second and third quarters of 1998. Accordingly, commercial
property operations for the periods after March 31, 1998 reflect the
commercial operations of facilities owned by the Company which have
both self-storage and commercial use combined at the same property
location.
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 September 30, 1998, intangible assets are net
of accumulated amortization of $26,766,000 ($19,782,000 at December 31,
1997). Included in depreciation and amortization expense for the three
and nine months ended September 30, 1998 and 1997 is $2,328,000 and
$6,984,000, 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 September
30, 1998. In addition, for periods prior to the July 1, 1998 conversion
7
<PAGE>
of the Company's convertible preferred stock into common stock (the
conversion is discussed in Note 8), the inclusion of the effect of the
assumed conversion of the Company's convertible preferred stock in the
determination of net income per common share was anti-dilutive.
In computing earnings per common share, preferred stock
dividends totaling $19,053,000 and $18,316,000 for the three months
ended September 30, 1998 and 1997, respectively, and $59,322,000 and
$68,134,000 for the nine months ended September 30, 1998 and 1997,
respectively, reduced income available to common stockholders.
Reclassifications
-----------------
Certain reclassifications have been made to the consolidated
financial statements for 1997 in order to conform to the 1998
presentation.
3. Business combinations
---------------------
Mergers with Affiliated REITS
-----------------------------
On March 17, 1998, the Company, through PSBP, completed a
merger transaction with an affiliated public REIT (Public Storage
Properties XI, Inc.) 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 (Public Storage Properties XX, Inc.)
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.
Affiliated Partnership Acquisitions
-----------------------------------
In January 1998, the Company acquired all of the limited
partnership interests in two affiliated partnerships. As a result of
the Company's increased ownership interest and control of the
partnerships, the Company began to consolidate the accounts of these
partnerships. The total consideration in these transactions of $6.8
million consists of $5.2 million of cash and the Company's pre-existing
investment of $1.6 million.
During the third quarter of 1998, the Company acquired a
limited partnership interest in an affiliated partnership for $74.6
million in cash. The acquisition of this interest increased the
Company's ownership in the partnership in excess of 50%. Because of the
Company's increased ownership interest and control of the partnership,
the Company began to consolidate the accounts of this partnership. The
total consideration in this transaction includes the $74.6 million cash
acquisition cost as well as the Company's pre-existing investment of
$66.2 million.
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:
8
<PAGE>
REIT Partnership
mergers acquisitions Total
------------- ------------ -----------
(Amounts in thousands)
Real estate facilities......... $ 73,971 $ 151,231 $ 225,202
Other assets................... 271 399 670
Accrued liabilities............ (2,280) (1,513) (3,793)
Minority interest.............. (34,830) (2,537) (37,367)
------------- ------------ -----------
$ 37,132 $ 147,580 $ 184,712
============= ============ ===========
The historical operating results of the above business
combinations prior to each respective acquisition date have not been
included in the Company's historical operating results. Pro forma
selected financial data for the nine months ended September 30, 1998
and 1997 as though the above business combinations had been effective
at the beginning of each period are as follows:
Nine Months Ended Nine Months Ended
(In thousands, except per share data) September 30, 1998 September 30, 1997
- ------------------------------------- ------------------ ------------------
Revenues .............................. $ 444,952 $ 355,923
Net income............................. $ 167,313 $ 131,787
Net income per common share (Basic).... $ 0.95 $ 0.66
Net income per common share (Diluted).. $ 0.95 $ 0.66
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:
9
<PAGE>
In thousands
Operating facilities, at cost:
Balance at December 31, 1997............................... $ 3,077,529
Property acquisitions
Business combinations (Note 3) .......................... 225,202
Other acquisitions...................................... 66,145
Newly opened development facilities......................... 25,371
Acquisition of minority interest........................... 19,475
Capital improvements........................................ 19,257
Property dispositions (Deconsolidation of PSBP)............ (498,690)
--------------
Balance at September 30, 1998.............................. 2,934,289
--------------
Accumulated depreciation:
Balance at December 31, 1997................................ (378,248)
Additions during the year................................... (72,644)
Property dispositions (Deconsolidation of PSBP)............ 65,245
--------------
Balance at September 30, 1998.............................. (385,647)
--------------
Construction in progress:
Balance at December 31, 1997................................ 42,635
Current development cost.................................... 58,371
Newly opened development facilities......................... (25,371)
--------------
Balance at September 30, 1998.............................. 75,635
--------------
Total real estate facilities, net at September 30, 1998....... $ 2,624,277
==============
Construction in progress at September 30, 1998 consists of 15
self-storage facilities, 3 expansions of existing self storage
facilities and 8 industrial facilities which could be utilized as
portable self-storage facilities. Newly opened development facilities
include 2 self storage facilities and 3 industrial facilities which are
for use by the Company's PSPUD operations. Interest capitalized during
the three and nine months ended September 30, 1998 was $997,000 and
$3,277,000, respectively, compared to $332,000 and $1,421,000 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 deconsolidation of PSBP.
5. Investment in real estate entities:
-----------------------------------
The Company's investment in real estate entities at September
30, 1998 consists of (i) limited and general partnership interests in
approximately 26 affiliated partnerships which principally own
self-storage facilities, (ii) the Company's ownership interest in a
joint venture 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 joint
venture has opened a total of 19 facilities with a total cost of $92.4
million at September 30, 1998, and has 10 projects in process with an
aggregate cost at September 30, 1998 of $34.7 million ($13.8 million to
complete). The joint venture is currently reviewing the final 20
projects ($38.7 million incurred at September 30, 1998, with remaining
costs to complete of $54.1 million). Upon approval of these additional
20 facilities, the joint venture will be fully committed. These 20
10
<PAGE>
projects are currently being developed by the Company and the
construction costs will be transferred to the joint venture once they
have been approved. At September 30, 1998, included in construction in
process is approximately $24.7 million, and included in real estate
facilities is $14.0 million, with respect to these projects.
During the nine months ended September 30, 1998, the Company
recognized earnings from its investments totaling $16,598,000. Included
in equity in earnings of real estate entities for the nine months ended
September 30, 1998 is the Company's share of depreciation expense
totaling $9,902,000. 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 September
30, 1998 are as follows:
<TABLE>
<CAPTION>
For the nine months ended September 30, 1998
------------------------------------------------------------------------
Other Development
Equity Investments Joint Venture PSBP Total
------------------ ------------- ------------ -------------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Rental income........................ $ 48,959 $3,732 $ 61,459 $114,150
Other income 1,313 346 1,517 3,176
------------------ ------------- ------------ -------------
Total revenues................... 50,272 4,078 62,976 117,326
------------------ ------------- ------------ -------------
Cost of operations................... 16,267 2,293 18,361 36,921
Depreciation......................... 5,948 1,214 11,421 18,583
Other expenses....................... 6,341 56 3,374 9,771
------------------ ------------- ------------ -------------
Total expenses................... 28,556 3,563 33,156 65,275
------------------ ------------- ------------ -------------
Net income before minority interest.. 21,716 515 29,820 52,051
Minority interest ................... - - (8,696) (8,696)
------------------ ------------- ------------ -------------
Net income....................... $ 21,716 $515 $ 21,124 $43,355
================== ============= ============ =============
At September 30, 1998:
- ----------------------
Real estate, net .................... $ 169,887 $131,231 $644,694 $ 945,812
Total assets......................... 216,409 142,648 683,431 1,042,488
Total liabilities.................... 78,885 14,345 43,426 136,656
Minority interest.................... - - 152,611 152,611
Total equity......................... 137,524 128,303 487,394 753,221
The Company's investment (book
value) at September 30, 1998..... $156,102 $44,600 $229,469 $430,171
The Company's effective average
ownership interest at
September 30, 1998............... 37% 30% 39% 33%
</TABLE>
6. Revolving line of credit
------------------------
As of September 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 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.
11
<PAGE>
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 nine months ended September 30, 1998, the Company
reduced minority interest by approximately $17.1 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 ($19.5 million) has been allocated to real
estate facilities in consolidation.
Minority interest was increased by $37.4 million in connection
with business combinations, representing the remaining partners' equity
interest in the aggregate net assets (book value) 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 in the second quarter as a result of the
deconsolidation of PSBP.
8. Shareholders' equity
--------------------
Preferred stock
---------------
At September 30, 1998 and December 31, 1997, the Company had
the following series of Preferred Stock outstanding:
<TABLE>
<CAPTION>
At September 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% - - 2,132,334 53,308,000
------------ ------------- ------------ ------------
11,129,650 $868,900,000 13,261,984 $922,208,000
============ ============= ============ ============
</TABLE>
The Series A through Series J stock (collectively the "Senior
Preferred Stock") have general preference rights with respect to
liquidation and quarterly distributions. Holders of the Company's
preferred stock, except under certain conditions and as noted below,
will not be entitled to vote on most matters. In the event of a
cumulative arrearage equal to six quarterly dividends or failure to
maintain a Debt Ratio (as defined) of 50% or less, holders of all
outstanding series of preferred stock (voting as a single class without
regard to series) will have the right to elect two additional members
to serve on the Company's Board of Directors until events of default
have been cured. At September 30, 1998, there were no dividends in
arrears and the Debt Ratio was 2.5%.
12
<PAGE>
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 3,503,343 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 nine 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, 3,589,552 shares
($53.3 million) in connection with Convertible Preferred Stock
conversions, 1,230,689 shares ($36.2 million) in connection with the
acquisition of partnership interests, and 192,429 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 September 30, 1998 the
Company has repurchased a total of 2,786,400 shares of common stock at
an aggregate cost of approximately $71.4 million. From October 1, 1998
through November 4, 1998, the Company repurchased an additional 33,000
shares of common stock at an aggregate cost of approximately $902,000.
Class B Common Stock
--------------------
The Class B Common Stock will (i) not participate in
distributions until the later to occur of funds from operations ("FFO")
per Common Share as defined below, aggregating $1.80 during any period
of four consecutive calendar quarters, or January 1, 2000; thereafter,
the Class B Common Stock will participate in distributions (other than
liquidating distributions), at the rate of 97% of the per share
distributions on the Common Stock, provided that cumulative
distributions of at least $0.22 per quarter per share have been paid on
the Common Stock, (ii) not participate in liquidating distributions,
(iii) not be entitled to vote (except as expressly required by
California law) and (iv) automatically convert into Common Stock, on a
share for share basis, upon the later to occur of FFO per Common Share
aggregating $3.00 during any period of four consecutive calendar
quarters or January 1, 2003.
For these purposes, FFO means net income (loss) before (i)
gain (loss) on early extinguishment of debt, (ii) minority interest in
income and (iii) gain (loss) on disposition of real estate, adjusted as
follows: (i) plus depreciation and amortization, and (ii) less FFO
attributable to minority interest. FFO per Common Share means FFO less
preferred stock dividends (other than dividends on convertible
preferred stock) divided by the outstanding weighted average shares of
Common Stock assuming conversion of all outstanding convertible
securities and the Class B Common Stock.
13
<PAGE>
For these purposes, FFO per share of Common Stock (as defined)
was $2.01 for the four consecutive calendar quarters ended September
30, 1998.
Dividends
---------
The following summarizes dividends paid during the first nine
months of 1998:
Distributions
Per Share or Total
Depository Share Distributions
---------------- -------------
Series A.............................. $ 1.874 $ 3,420,000
Series B.............................. $ 1.725 4,116,000
Series C.............................. $ 1.265 1,518,000
Series D.............................. $ 1.783 2,139,000
Series E.............................. $ 1.875 4,116,000
Series F.............................. $ 1.827 4,203,000
Series G.............................. $ 1.664 11,484,000
Series H.............................. $ 1.584 10,695,000
Series I.............................. $ 1.617 6,468,000
Series J.............................. $ 1.500 9,000,000
Convertible........................... $ 1.032 2,163,000
-------------
59,322,000
Common................................ $ 0.660 75,270,000
-------------
Total dividends paid $134,592,000
=============
The dividend rate on the Series C Preferred Stock for the
third 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
-----------------
Proposed Merger With Storage Trust Realty.
----------------------------------------------
The Company and Storage Trust Realty ("Storage Trust"), a New
York Stock Exchange listed REIT, have entered into an Agreement and
Plan of Merger among Storage Trust, the Company and Newco Merger
Subsidiary, Inc., a subsidiary of the Company ("PSI Sub"), dated as of
November 12, 1998 (the "Merger Agreement"). Storage Trust is a fully
integrated, self-managed and self-administered REIT headquartered in
Columbia, Missouri, engaged in the management and ownership of 237
self-storage stores located in 16 states totaling approximately 12.5
million net rentable square feet and 109,000 units. Under the Merger
Agreement, PSI Sub would be merged into Storage Trust, and each share
of beneficial interest of Storage Trust would be exchanged for 0.86
shares of the Company's common stock. This exchange ratio implies an
enterprise value for Storage Trust of approximately $600 million,
including the assumption of approximately $192 million of indebtedness.
Upon the effectiveness of the merger, the Company's board of directors
would be expanded by one seat and Mr. Daniel C. Staton, Storage Trust's
Chairman of the Board, would be elected as a new member of the
Company's board of directors. The merger has been structured as a tax
free transaction. The transaction is expected to be completed in the
first quarter of 1999. The transaction is subject to the approval of
the shareholders of Storage Trust and customary regulatory approvals
and other conditions.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
Forward Looking Statements
--------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations contains "forward looking" statements that
involve risks and uncertainties and are based upon a number of
assumptions. Actual results and trends may differ materially depending
upon a number of factors. Information regarding these factors is
contained in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 and in the reports for the quarterly
periods on Form 10-Q for the quarters ended March 31, 1998 and June 30,
1998.
Results of Operations
---------------------
Net income for the three months ended September 30, 1998 was
$62,286,000 compared to $46,548,000 for the same period in 1997,
representing an increase of $15,738,000 or 33.8%. Net income for the
nine months ended September 30, 1998 was $167,849,000 compared to
$133,117,000 for the same period in 1997, representing an increase of
$34,732,000 or 26.1%. The increases in net income for the three and
nine months ended September 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. The variance in the three month periods
also reflects a decrease in startup operating losses on the Company's
Pickup and Delivery business, while the variance in the nine month
periods also reflects an increase in such losses.
Net income allocable to common shareholders was $43,233,000 or
$0.37 per common share on a diluted basis (based on 116,726,000
weighted average diluted shares) for the three months ended September
30, 1998 compared to $28,232,000 or $0.27 per common share on a diluted
basis (based on 103,536,000 weighted average diluted shares) for the
same period in 1997. In computing net income per common share,
dividends to the Company's preferred shareholders ($19,053,000 and
$18,316,000 for the three months ended September 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 was $108,527,000
or $0.95 per common share on a diluted basis (based upon 113,762,000
weighted average diluted shares) for the nine months ended September
30, 1998 compared to $64,983,000 or $0.67 per common share on a diluted
basis (based upon 97,154,000 weighted average diluted shares) for the
same period in 1997. In computing net income per common share,
dividends to the Company's preferred shareholders ($59,322,000 and
$68,134,000 for the nine months ended September 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 $6,933,000 or approximately $0.06 per common
share on a diluted basis for the three months ended September 30, 1998,
compared to $12,069,000 or approximately $0.12 per common share on a
diluted basis for the same period in 1997. Losses on the portable
self-storage business for the nine months ended September 30, 1998 were
$25,157,000 or approximately $0.22 per common share, compared to
$21,185,000 or approximately $0.22 per common share for the same period
in 1997.
Net income allocable to common shareholders was reduced by
$13,412,000 in the nine months ended September 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
nine months ended September 30, 1998 compared to the same period in
15
<PAGE>
1997 due to the Company's merger and acquisition activities throughout
1997 and 1998. As a result of these activities, the number of self
storage facilities included in the Company's consolidated financial
statements has increased from 863 at September 30, 1997 to 951 at
September 30, 1998.
SELF-STORAGE OPERATIONS: The Company's self-storage operations
account for the vast majority 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 Nine months ended
September 30, September 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... $ 94,656 $ 88,195 7.3% $ 273,788 255,213 7.3%
1997 and 1998 acquisitions 34,729 14,113 87,162 18,585
------------- ------------- -------- ------------ ------------ --------
129,385 102,308 26.5% 360,950 273,798 31.8%
------------- ------------- -------- ------------ ------------ --------
Cost of Operations (before
depreciation)
Pre - 1997 Acquisitions... 27,705 25,736 7.7% 82,312 77,305 6.5%
1997 and 1998 acquisitions 10,050 3,881 26,281 5,087
------------- ------------- -------- ------------ ------------ --------
37,755 29,617 27.5% 108,593 82,392 31.8%
------------- ------------- -------- ------------ ------------ --------
Net operating income
Pre - 1997 Acquisitions... 66,951 62,459 7.2% 191,476 177,908 7.6%
1997 and 1998 acquisitions 24,679 10,232 60,881 13,498
------------- ------------- -------- ------------ ------------ --------
$ 91,630 $ 72,691 26.1% $ 252,357 $ 191,406 31.8%
============= ============= ======== ============ ============ ========
Net rentable square feet (at the
end of the period, in 000's).... 57,061 52,031 9.7% 57,061 52,031 9.7%
Number of facilities (at the end
of the period).................. 951 863 10.2% 951 863 10.2%
PRE - 1997 ACQUISITIONS:
Weighted average annualized
realized rent per occupied
square foot..................... $9.60 $8.88 8.1% $9.36 $8.76 6.8%
Weighted average annualized
scheduled rent per square foot.. $9.72 $9.36 3.8% $9.72 $9.36 3.8%
Weighted average occupancy for
the period...................... 93.2% 93.3% (0.1%) 92.3% 91.2% 1.1%
</TABLE>
Rental income for the three months ended September 30, 1998 is
net of promotional discounts totaling $3.7 million compared to $4.0
million for the same period in 1997. Rental income for the nine months
ended September 30, 1998 is net of promotional discounts totaling $11.4
million compared to $10.3 million for the same period in 1997. In
addition, included in cost of operations for the three months ended
September 30, 1998 are costs associated with the telephone reservation
center and advertising totaling $2.0 million, compared to $1.2 million
for the same period in 1997. Included in cost of operations for the
nine months ended September 30, 1998 are costs associated with the
telephone reservation center and advertising totaling $5.0 million,
compared to $2.2 million for the same period in 1997.
In 1997 and through September 30, 1998, the Company acquired a
total of 230 self-storage facilities, of which 221 were existing mature
facilities obtained from affiliated entities and managed by the
Company, 4 were newly developed facilities and 5 were third party
16
<PAGE>
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:
Pro forma summary of self-storage operations:
---------------------------------------------
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------- --------------------------
1998 1997 Change 1998 1997 Change
------------- ------------- -------- ------------ ------------ --------
Pro forma Pro forma
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Rental income................. $128,469 $119,466 7.5% $371,274 $345,268 7.5%
Cost of operations............ 37,386 34,923 7.1% 111,733 105,589 5.8%
------------- ------------- -------- ------------ ------------ --------
Net operating income.......... $ 91,083 $ 84,543 7.7% $259,541 $ 239,679 8.3%
============= ============= ======== ============ ============ ========
</TABLE>
The above table excludes the property operations of the
Company's newly developed properties (2 opened in 1998, 2 opened in
1997 and 4 opened in 1996) which are in various stages of "fill-up."
The aggregate development cost of these 8 facilities totaled
approximately $37 million. The historical property operations with
respect to these facilities are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------- --------------------------
1998 1997 Change 1998 1997 Change
------------- ------------- -------- ------------ ------------ --------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Rental income................. $ 916 $ 651 40.7% $ 2,449 $ 1,332 83.9%
Cost of operations............ 369 277 33.2% 917 723 26.8%
------------- ------------- -------- ------------ ------------ --------
Net operating income.......... $ 547 $ 374 46.3% $ 1,532 $ 609 151.6%
============= ============= ======== ============ ============ ========
</TABLE>
Through September 30, 1998, the majority of the Company's
self-storage development activities have been conducted within 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% and the Company's lack of control, 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."
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:
17
<PAGE>
Commercial Property Operations - Historical
-------------------------------------------
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------- --------------------------
1998 1997 Change 1998 1997 Change
------------- ------------- -------- ------------ ------------ ---------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Rental income................. $ 1,833 $11,526 (84.1)% $ 21,229 $ 27,694 (23.3)%
Cost of operations............ 685 4,277 (84.0)% 7,187 11,034 (34.9)%
------------- ------------- -------- ------------ ------------ ---------
Net operating income.......... $ 1,148 $ 7,249 (84.2)% $ 14,042 $ 16,660 (15.7)%
============= ============= ======== ============ ============ =========
</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 second and third quarters of 1998 using the
equity method (see "Equity in earnings of real estate entities"). The
income statement for the nine months ended September 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 and nine months ended September 30, 1998
reflects the Company's deconsolidation of 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 Nine months ended
September 30, September 30,
---------------------------- --------------------------
1998 1997 Change 1998 1997 Change
------------- ------------- -------- ------------ ------------ ---------
Pro forma Pro forma
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Rental income................. $1,833 $1,734 5.7% $5,369 $5,073 5.8%
Cost of operations............ 685 693 (1.2%) 2,076 2,160 (3.9%)
------------- ------------- -------- ------------ ------------ ---------
Net operating income.......... $1,148 $1,041 10.3% $3,293 $2,913 13.0%
============= ============= ======== ============ ============ =========
</TABLE>
EQUITY IN EARNINGS OF REAL ESTATE ENTITIES: In addition to its
ownership of 12,459,328 common shares and operating partnership units
in PSBP, the Company had general and limited partnership interests in
26 limited partnerships at September 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
nine months ended September 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.
18
<PAGE>
Historical summary:
-------------------
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------- --------------------------
1998 1997 Change 1998 1997 Change
------------- ------------- -------- ------------ ------------ ---------
( Amounts in thousands)
Property operations:
<S> <C> <C> <C> <C> <C> <C>
PSBP..................... $7,437 $ - $7,437 $14,881 $ - $14,881
Development Joint Venture 252 58 194 432 40 392
Other partnerships....... 3,061 7,004 (3,943) 13,729 24,969 (11,240)
------------- ------------- -------- ------------ ------------ ---------
10,750 7,062 3,688 29,042 25,009 4,033
------------- ------------- -------- ------------ ------------ ---------
Depreciation:
PSBP..................... (2,423) - (2,423) (4,818) - (4,818)
Development Joint Venture (173) (58) (115) (364) (70) (294)
Other partnerships....... (667) (2,422) 1,755 (4,720) (9,107) 4,387
------------- ------------- -------- ------------ ------------ ---------
(3,263) (2,480) (783) (9,902) (9,177) (725)
------------- ------------- -------- ------------ ------------ ---------
Other: (1)
PSBP..................... (275) - (275) (776) - (776)
Development Joint Venture 29 25 4 87 43 44
Other partnerships....... (579) (193) (386) (1,853) (1,223) (630)
------------- ------------- -------- ------------ ------------ ---------
(825) (168) (657) (2,542) (1,180) (1,362)
------------- ------------- -------- ------------ ------------ ---------
Total equity in earnings of
real estate entities....... $6,662 $4,414 $2,248 $16,598 $14,652 $1,946
============= ============= ======== ============ ============ =========
</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
$2,248,000 and $1,946,000 in the three and nine months ended September
30, 1998 from the same periods in 1997. These increases include the
impact of the Company's deconsolidation of PSBP, where the Company's
share of earnings of PSBP after March 31, 1998 is reflected in equity
in earnings of real estate entities. These impacts 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.
PORTABLE SELF-STORAGE BUSINESS: Public Storage Pick-up &
Delivery ("PSPUD") incurred approximately $6.9 million of operating
losses during the third quarter of 1998 compared to operating losses of
approximately $12.1 million for the same period in 1997. The Company
believes that the quarterly losses from the PSPUD operations peaked
during the third quarter of 1997. Operating losses of PSPUD were
approximately $10.5 million for the fourth quarter of 1997, $9.9
million for the first quarter of 1998, $8.3 million for the second
quarter of 1998, and $6.9 million for the third quarter of 1998. The
Company believes this trend of decreasing operating losses will
continue with increases in PSPUD's revenues.
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
19
<PAGE>
acquisition of such facilities reduces management fee income to the
Company and is offset by a corresponding reduction in the cost of
property operations.
During the three months ended September 30, 1998, the
Company's property management operations generated net operating income
of $1,162,000 on revenues of $1,388,000 and expenses of $226,000 as
compared to net operating income of $2,018,000 on revenues of
$2,376,000 and expenses of $358,000 during the same period in 1997.
During the nine months ended September 30, 1998, the Company's property
management operations generated net operating income of $4,025,000 on
revenues of $4,805,000 and expenses of $780,000 as compared to net
operating income of $7,019,000 on revenues of $8,319,000 and expenses
of $1,300,000 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 deconsolidation of PSBP.
INTEREST AND OTHER INCOME: The Company operates additional
businesses through affiliates, including retail sales of locks, boxes,
and packing supplies as well as the rental of trucks. The net results
of these two businesses are presented along with interest and other
income, as "interest and other income." The components of interest and
other income are detailed as follows:
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
---------------------------------- ----------------------------------
1998 1997 Dollar Charge 1998 1997 Dollar Charge
---------- ------- ------------- --------- --------- -------------
(Amounts in thousands)
Sales of Packaging Material and Truck
Rentals:
<S> <C> <C> <C> <C> <C> <C>
Revenues............................. $2,572 $1,538 $1,034 $6,243 $3,691 $2,552
Cost of operations................... (1,764) (1,227) (537) (4,897) (2,944) (1,953)
---------- ------- ------------- --------- --------- -------------
Net operating income....... 808 311 497 1,346 747 599
Interest and other income............ 3,113 2,506 607 10,579 6,742 3,837
---------- ------- ------------- --------- --------- -------------
Total interest and other income.. $3,921 $2,817 $1,104 $11,925 $7,489 $4,436
========== ======= ============= ========= ========= =============
</TABLE>
Interest and other income principally consists of interest
earned on cash balances and interest related to mortgage notes
receivable. The increase in interest income for the three and nine
months ended September 30, 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 $2,566,000, to $26,217,000 for the three months
ended September 30, 1998 as compared to $23,651,000 for the same period
in 1997. Depreciation and amortization expense has increased
$15,487,000, to $79,628,000 for the nine months ended September 30,
1998 as compared to $64,141,000 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.
GENERAL AND ADMINISTRATIVE EXPENSE: General and administrative
expense has increased $773,000, to $2,684,000 for the three months
ended September 30, 1998 as compared to $1,911,000 for the same period
in 1997. General and administrative expense has increased $2,061,000,
to $7,246,000 for the nine months ended September 30, 1998 as compared
to $5,185,000 for the same period in 1997. These increases are due to
the growth in the size of the Company.
MINORITY INTEREST IN INCOME: Minority interest in income
represents the income allocable to equity interests in the consolidated
entities which are not owned by the Company. Minority interest in
income for the three months ended September 30, 1998 was $5,572,000
compared to $2,748,000 for the same period in 1997. Minority interest
in income for the nine months ended September 30, 1998 was $16,141,000
compared to $7,777,000 for the same period in 1997.
The increases in minority interest in income are primarily the
result of the Company's acquisition of sufficient ownership interest
(but not 100% ownership) and control in affiliated partnerships
allowing the inclusion of the accounts of these partnerships in the
Company's consolidated financial statements combined with improved
property operations for those partnerships already consolidated with
the Company whereby the minority interest participate in the improved
operations through increased earnings. However, these increases are
20
<PAGE>
partially offset in the nine-month period by the effect of the
Company's deconsolidation of PSBP whereby the minority interest with
respect to PSBP after March 31, 1998 was removed from the Company's
consolidated financial statements.
SUPPLEMENTAL PROPERTY DATA
At September 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"),
(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") and (iv) three properties for
the use of PSPUD. The following table summarizes the Company's
investment in real estate facilities as of September 30, 1998,
excluding the three real estate facilities for use 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 597 1 598 36,350 9 36,359
Facilities owned by Consolidated Partnerships 354 - 354 20,711 - 20,711
-------------- ---------- ----------- ----------- ------------ --------
Total consolidated facilities 951 1 952 57,061 9 57,070
Facilities owned by Unconsolidated Entities 138 98 236 7,896 10,334 18,230
-------------- ---------- ----------- ----------- ------------ --------
Total facilities in which the Company has
an ownership interest (A) 1,089 99 1,188 64,957 10,343 75,300
============== ========== =========== =========== ============ ========
</TABLE>
(A) Excludes three industrial facilities the Company owns
which are for use by the Company's PSPUD operations.
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 1,089 self-storage facilities
(herein referred to as "Same Store" self-storage facilities) which have
been operated under the "Public Storage" name for at least the past
three years. At September 30, 1998, the Company had ownership interests
in a total of 1,089 mini-warehouse facilities. Of these 1,089
properties, 985 or 90% 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:
21
<PAGE>
Same Store mini-warehouse facilities (985 facilities):
------------------------------------------------------
(historical property operations)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
--------------------------------------- ------------------------------------
1998 1997 Change 1998 1997 Change
---------- ----------- ------ --------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Rental income............... $135,397 $125,344 8.0% $390,589 $362,226 7.8%
Cost of operations (includes
an imputed 6% property
management fee)........... 45,560 42,249 7.8% 135,822 127,480 6.5%
---------- ----------- ------ --------- --------- ------
Net operating income (1).... $ 89,837 $ 83,095 8.1% $254,767 $234,746 8.5%
========== =========== ====== ========= ========= ======
Gross profit margin (2)..... 66.4% 66.3% 0.1% 65.2% 64.8% 0.4%
- -----------------------------------------------------------------------------------------------------------------
Weighted Average:
Occupancy during the
period.............. 93.6% 93.6% 0.0% 92.6% 91.6% 1.0%
Annualized realized rent
per sq. ft. for
period.(3)............. $10.08 $9.24 9.1% $9.72 $9.12 6.6%
Annualized scheduled rent
per sq. ft. for period.. $10.32 $9.84 4.9% $10.20 $9.84 3.7%
</TABLE>
1. Assumes payment of property management fees on all facilities,
including those facilities owned by the Company for which 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 72.4% and 72.3%
for the three months ended September 30, 1998 and 1997,
respectively; and 71.2% and 70.8% for the nine months ended
September 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 $3.6 million for the three months ended
September 30, 1998, compared to $4.8 million for the same period in
1997. Rental income for the Same Store facilities included promotional
discounts totaling $12.0 million for the nine months ended September
30, 1998, compared to $13.6 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 September 30,
1998 increased due to (i) advertising and promotion, which increased
$779,000 due primarily to the Company's national telephone reservations
center and television advertising in certain markets, (ii) property
taxes, which increased $622,000, due primarily to higher assessments
and (iii) management fees, which increased $535,000, due to increased
rental income. Cost of operations for the nine months ended September
30, 1998 increased due to (i) advertising and promotion, which
increased $3.3 million due primarily to the Company's national
telephone reservations center and television advertising in certain
markets and (ii) property taxes, which increased $2.2 million, due
primarily to higher assessments and (iii) management fees, which
increased $1.7 million, due to increased rental income.
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.
22
<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 $273,520,000 from $214,212,000 for the
nine months ended September 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 Nine Months Ended September 30,
---------------------------------------
1998 1997
----------------- --------------------
(Amounts in thousands)
<S> <C> <C>
Net income.................................................. $ 167,849 $ 133,117
Depreciation and amortization............................... 79,628 64,141
Depreciation from unconsolidated real estate
investments............................................... 9,902 9,177
Minority interest in income................................. 16,141 7,777
----------------- --------------------
Net cash provided by operating activities................. 273,520 214,212
Distributions from operations to minority interests
(funds from operations allocable to minority
interests) ............................................... (25,565) (14,106)
----------------- --------------------
Cash from operations/FFO available to the Company's
shareholders.............................................. 247,955 200,106
Less: preferred stock dividends (A)......................... (59,322) (54,722)
----------------- --------------------
Cash from operations/FFO available to common
shareholders.............................................. 188,633 145,384
Capital improvements to maintain facilities................. (19,257) (24,056)
Add back: minority interest share of capital
improvements.............................................. 1,582 1,403
----------------- --------------------
Funds available for principal payments on debt, common
dividends and reinvestment................................ 170,958 122,731
Cash distributions to common shareholders................... (75,270) (63,076)
----------------- --------------------
Funds available for principal payments on debt and
investment................................................ $ 95,688 $ 59,655
================= ====================
</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 nine
months ended September 30, 1998 and 1997 for additional information
regarding the Company's investing and financing activities.
FFO increased to $247,955,000 for the nine months ended
September 30, 1998 compared to $200,106,000 for the same period in
1997. FFO applicable to the common shareholders (after deducting
preferred stock dividends) increased to $188,633,000 for the nine
months ended September 30, 1998 compared to $145,384,000 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.
23
<PAGE>
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.
RETENTION OF OPERATING CASH FLOWS: Operating as a REIT, the
Company's ability to retain cash flow for reinvestment is restricted.
In order for the Company to maintain its REIT status, a substantial
portion of its operating cash flows must be used to make distributions
to its shareholders. Remaining cash flows must then be sufficient to
fund necessary capital improvements and scheduled debt service
requirements. Accordingly, the Company's ability to be self-sufficient
is predicated on its ability to generate sufficient operating cash
flows to satisfy its REIT distribution requirements, capital
improvement requirements, scheduled debt service requirements, and
provide funds for additional investments.
Over the past four years, the Company's distribution policy
has enabled it to retain significant funds (after capital improvements)
to make additional investments and debt reductions. During the first
nine months of 1998 and 1997, the Company distributed to common
shareholders approximately 44.0% and 51.4% of its FFO available to
common shareholders, respectively, allowing it to retain approximately
$95.7 million and $59.7 million, respectively, after satisfying its
capital improvements and dividend requirements.
DISTRIBUTION REQUIREMENTS: During the first nine months of
1998, the Company paid dividends totaling $57,159,000 to the holders of
the Company's Senior Preferred Stock, $2,163,000 to the holders of the
Convertible Preferred Stock, and $75,270,000 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
nine months of 1998, the Company incurred capital improvements of
approximately $19.3 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 September 30, 1998, the Company had
total outstanding notes payable of $85.6 million. Approximate principal
maturities of notes payable at September 30, 1998 are as follows:
Fixed Rate
Mortgage Debt
7.08% Unsecured (Weighted
Senior Notes average rate of 10.4%) Total
------------ ---------------------- ----------
(Amounts in thousands)
1998 (remainder of) $ 3,625 $ 565 $ 4,190
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 20,268 30,268
------------ ---------------------- ---------
$ 49,625 $ 35,992 $ 85,617
============= ====================== =========
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
24
<PAGE>
conservative dividend payout ratio with respect to the common stock.
The Company's credit ratings on its Senior Preferred Stock by each of
the three major credit agencies are Baa2 by Moody's and BBB+ by
Standard and Poors and Duff & Phelps.
The Company's portfolio of real estate facilities remains
substantially unencumbered. At September 30, 1998, the Company had debt
outstanding of $85.6 million and had consolidated real estate
facilities with a book value of $2.6 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 nine 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. An additional
1,230,689 shares of common stock were issued in connection with the
acquisition of partnership interests, 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: 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 September 30, 1998 the Company has repurchased a
total of 2,786,400 shares of common stock at an aggregate cost of $71.4
million. In the fourth quarter through November 4, 1998, the Company
repurchased an additional 33,000 shares of common stock at an aggregate
cost of approximately $902,000.
DEVELOPMENT ACTIVITIES: As previously announced, in April
1997, the Company and an institutional investor formed a joint venture
partnership for the purpose of developing up to $220 million of
self-storage facilities. The venture will be funded solely with equity
capital consisting of 30% from the Company and 70% from the
institutional investor. The Company has invested approximately $44.6
million in the joint venture at September 30, 1998.
During the nine months ended September 30, 1998, the joint
venture opened 12 new self storage facilities that it had developed
(approximately 709,000 net rentable sq. ft.). As of September 30, 1998,
the joint venture was committed to developing 10 additional projects
(approximately 658,000 net rentable square feet) that were in process,
with total costs incurred of $34.7 million and estimated remaining
costs to complete of $13.8 million.
The joint venture is currently reviewing the final 20 projects
($38.7 million incurred at September 30, 1998, with remaining costs to
complete of $54.1 million). Upon approval of these additional 20
facilities, the joint venture will be fully committed. These 20
projects are currently being developed by the Company and the
construction costs will be transferred to the joint venture once they
have been approved. At September 30, 1998, included in construction in
process is approximately $24.7 million, and included in real estate
facilities is $14.0 million, with respect to these projects.
The Company has identified 49 additional self storage
development projects (2,847,000 net rentable square feet) with total
estimated development costs of approximately $179 million. Most of
these projects have already been approved by the Board of Directors,
but their development is subject to significant contingencies. The
Company will fund this development through cash flow from operations,
borrowings on its line of credit, the issuance of additional equity
securities, or other means.
25
<PAGE>
SUBSEQUENT EVENT - PROPOSED MERGER WITH STORAGE TRUST REALTY:
The Company and Storage Trust Realty ("Storage Trust"), a New York
Stock Exchange listed REIT, have entered into an Agreement and Plan of
Merger among Storage Trust, the Company and Newco Merger Subsidiary,
Inc., a subsidiary of the Company ("PSI Sub"), dated as of November 12,
1998 (the "Merger Agreement"). Storage Trust is a fully integrated,
self-managed and self-administered REIT headquartered in Columbia,
Missouri, engaged in the management and ownership of 237 self-storage
stores located in 16 states totaling approximately 12.5 million net
rentable square feet and 109,000 units. Under the Merger Agreement, PSI
Sub would be merged into Storage Trust, and each share of beneficial
interest of Storage Trust would be exchanged for 0.86 shares of the
Company's common stock. This exchange ratio implies an enterprise value
for Storage Trust of approximately $600 million, including the
assumption of approximately $192 million of indebtedness. Upon the
effectiveness of the merger, the Company's board of directors would be
expanded by one seat and Mr. Daniel C. Staton, Storage Trust's Chairman
of the Board, would be elected as a new member of the Company's board
of directors. The merger has been structured as a tax free transaction.
The transaction is expected to be completed in the first quarter of
1999. The transaction is subject to the approval of the shareholders of
Storage Trust and customary regulatory approvals and other conditions.
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 beginning with its taxable year for 1981.
IMPACT OF THE YEAR 2000 ISSUE:
The Company has completed an assessment of all of its hardware
and software applications to identify susceptibility to what is
commonly referred to as the "Y2K Issue" whereby certain computer
programs have been written using two digits rather than four to define
the applicable year. Any of the Company's computer programs or hardware
with the Y2K Issue that have date-sensitive applications or embedded
chips may recognize a date using "00" as the year 1900 rather than the
year 2000, resulting in miscalculations or system failure causing
disruptions of operations.
Many of the Company's critical applications, relative to the
direct management of properties and the Company's Pickup and Delivery
logistics systems, have recently been replaced and the Company believes
they are already Year 2000 compliant. The Company has an implementation
in process on the remaining critical applications, including its
general ledger and related systems, that are believed to have Y2K
issues. The Company expects the implementation to be complete by June
1999. Contingency plans have been developed for use in case the
Company's implementations are not completed on a timely basis. While
the Company presently believes that the impact of the Y2K Issue on its
systems can be mitigated, if the Company's plan for ensuring Year 2000
Compliance and the related contingency plans were to fail, be
insufficient, or not be implemented on a timely basis, Company
operations could be materially impacted.
Certain of the Company's other non-computer related systems
that may be impacted by the Y2K Issue, such as security systems, are
currently being evaluated, and the Company expects the evaluation to be
complete by June 1999. The Company expects the implementation of any
required solutions to be complete in advance of December 31, 1999. The
Company has not fully evaluated the impact of lack of Year 2000
compliance on these systems, but has no reason to believe that lack of
compliance would materially impact the Company's operations.
The Company exchanges electronic data with certain outside
vendors in the banking and payroll processing areas. The Company has
been advised by these vendors that their systems are or will be Year
2000 compliant, but has requested a Year 2000 compliance certification
from these entities. The Company is not aware of any other vendors,
suppliers, or other external agents with a Y2K Issue that would
26
<PAGE>
materially impact the Company's results of operations, liquidity, or
capital resources. However, the Company has no means of ensuring that
external agents will be Year 2000 compliant, and there can be no
assurance that the Company has identified all such external agents. The
inability of external agents to complete their Year 2000 compliance
process in a timely fashion could materially impact the Company. The
effect of non-compliance by external agents is not determinable.
The total cost of the Company's year 2000 compliance activities
(which primarily consists of the costs of new systems) is estimated at
approximately $3.6 million, of which $2.4 million has been incurred to
date. These costs are capitalized.
The costs of the projects and the date on which the Company
believes that it will be Year 2000 compliant are based upon
management's best estimates, and were derived utilizing numerous
assumptions of future events. There can be no assurance that these
estimates will be achieved, and actual results could differ materially
from those anticipated. There can be no assurance that the company has
identified all potential Y2K Issues either within the Company or at
external agents. In addition, the impact of the Y2K issue on
governmental entities and utility providers and the resultant impact on
the Company, as well as disruptions in the general economy, may be
material but cannot be reasonably determined or quantified.
27
<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
District Court has dismissed the Company's claims
against the long-distance and local carrier
defendants, and the Company is evaluating its
alternatives. The Company believes that these charges
are covered by insurance, although the insurance
carrier has not acknowledged coverage.
Except as described above and in the
Company's 1997 Annual Report on Form 10-K, there are
no material pending legal proceedings involving the
Company or its subsidiaries.
Item 5. Other Information
-----------------
(a) PROPOSED MERGER. The Company and Storage
Trust Realty ("Storage Trust"), a New York Stock
Exchange listed REIT, have entered into an Agreement
and Plan of Merger among Storage Trust, the Company
and Newco Merger Subsidiary, Inc., a subsidiary of
the Company ("PSI Sub"), dated as of November 12,
1998 (the "Merger Agreement"). Storage Trust is a
fully integrated, self-managed and self-administered
REIT headquartered in Columbia, Missouri, engaged in
the management and ownership of 237 self-storage
stores located in 16 states totaling approximately
12.5 million net rentable square feet and 109,000
units. Under the Merger Agreement, PSI Sub would be
merged into Storage Trust, and each share of
beneficial interest of Storage Trust would be
exchanged for 0.86 shares of the Company's common
stock. This exchange ratio implies an enterprise
value for Storage Trust of approximately $600
million, including the assumption of approximately
$192 million of indebtedness. Upon the effectiveness
of the merger, the Company's board of directors would
be expanded by one seat and Mr. Daniel C. Staton,
Storage Trust's Chairman of the Board, would be
elected as a new member of the Company's board of
directors. The merger has been structured as a tax
free transaction. The transaction is expected to be
completed in the first quarter of 1999. The
transaction is subject to the approval of the
shareholders of Storage Trust and customary
regulatory approvals and other conditions. For
further information regarding the merger, see the
Merger Agreement which is referenced as Exhibit 2
28
<PAGE>
hereto and is incorporated herein by this reference
and the Company's and Storage Trust's joint press
release dated November 12, 1998 which is referenced
as Exhibit 99 hereto and is incorporated herein by
this reference.
(b) Revised Deadlines for Receipt of
Shareholder Proposals for Consideration at 1999
Annual Meeting. The Company expects to hold its 1999
Annual Meeting of Shareholders in May 1999. Any
proposal that a shareholder wishes to submit for
inclusion in the Company's Proxy Statement for the
1999 Annual Meeting of Shareholders ("1999 Proxy
Statement") pursuant to Securities and Exchange
Commission Rule 14a-8 must be received by the Company
no later than January 1, 1999. In addition, notice of
any proposal that a shareholder wishes to propose for
consideration at the 1999 Annual Meeting of
Shareholders, but does not seek to include in the
Company's 1999 Proxy Statement pursuant to Rule
14a-8, must be delivered to the Company no later than
March 1, 1999 if the proposing shareholder wishes for
the Company to describe the nature of the proposal in
its 1999 Proxy Statement as a condition to exercising
its discretionary authority to vote proxies on the
proposal. Any shareholder proposals or notices
submitted to the Company in connection with the 1999
Annual Meeting of Shareholders should be addressed
to: Sarah Hass, Secretary, Public Storage, Inc., 701
Western Avenue, Glendale, California 91201-2397.
Item 6 Exhibits and Reports on Form 8-K
--------------------------------
(a) The following Exhibits are included herein:
(2) Agreement and Plan of Merger by and among
Storage Trust Realty, Public Storage, Inc., and
Newco Merger Subsidiary, Inc. dated as of
November 12, 1998. Filed with Storage Trust's
Current Report on Form 8-K dated November 12,
1998 and incorporated herein by reference.
(11) Statement re: Computation of Earnings per Share
(12) Statement re: Computation of Ratio of Earnings
to Fixed Charges
(27) Financial Data Schedule
(99) Public Storage, Inc.'s and Storage Trust
Realty's joint press release dated November 12,
1998. Filed with Storage Trust's Current Report
on Form 8-K dated November 12, 1998 and
incorporated herein by reference.
(b) Reports on Form 8-K
None.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: November 13, 1998
PUBLIC STORAGE, INC.
BY: /s/ John Reyes
---------------
John Reyes
Senior Vice President and
Chief Financial Officer
(Principal financial officer)
30
PUBLIC STORAGE, INC.
Exhibit 11 - Statement Re: Computation of Earnings Per Share
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
--------------------------------- ------------------------------
Earnings Per Share: 1998 1997 1998 1997
- ------------------------------------------------ ---------------- --------------- --------------- -------------
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
Net income $ 62,286 $ 46,548 $ 167,849 $ 133,117
Less: Preferred Stock dividends:
10% Cumulative Preferred Stock, Series A (1,140) (1,141) (3,420) (3,422)
9.20% Cumulative Preferred Stock, Series B (1,372) (1,372) (4,116) (4,116)
Adjustable Rate Preferred Stock, Series C (506) (557) (1,518) (1,673)
9.50% Cumulative Preferred Stock, Series D (713) (712) (2,139) (2,138)
10.0% Cumulative Preferred Stock, Series E (1,372) (1,372) (4,116) (4,116)
9.75% Cumulative Preferred Stock, Series F (1,401) (1,402) (4,203) (4,205)
8.875% Cumulative Preferred Stock, Series G (3,828) (3,827) (11,484) (11,482)
8.45% Cumulative Preferred Stock, Series H (3,565) (3,564) (10,695) (10,694)
8.625% Cumulative Preferred Stock, Series I (2,156) (2,156) (6,468) (6,468)
8.00% Cumulative Preferred Stock, Series J (3,000) (1,085) (9,000) (1,085)
8.25% Convertible Preferred Stock - (1,128) (2,163) (3,407)
Convertible Preferred Stock, Series CC - - - (15,328)
---------------- --------------- --------------- -------------
Total preferred dividends (19,053) (18,316) (59,322) (68,134)
---------------- --------------- --------------- -------------
Net income allocable to common shareholders $ 43,233 $ 28,232 $ 108,527 $ 64,983
================ =============== =============== ==============
Weighted average common shares outstanding:
Basic - weighted average common shares outstanding 116,421 102,964 113,311 96,586
Net effect of dilutive stock options - based on
treasury stock method using average market price 305 572 451 568
---------------- --------------- --------------- -------------
Diluted weighted average common shares outstanding 116,726 103,536 113,762 97,154
================ =============== =============== ==============
Basic earnings per common share $0.37 $0.27 $0.96 $0.67
================ =============== =============== ==============
Diluted earnings per common share $0.37 $0.27 $0.95 $0.67
================ =============== =============== ==============
</TABLE>
Exhibit 11
<PAGE>
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 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 $ 43,233 $ 28,232 $ 108,527 $ 64,983
Add back applicable dividends paid to holders of
Convertible Preferred Stocks:
8.25% Convertible Preferred Stock - 1,128 2,163 3,407
Series CC Preferred Stock - - - 1,916
---------------- --------------- --------------- -------------
Net income allocable to common shareholders for
purposes of determining Diluted Earnings per Share,
assuming conversion of anti-dilutive securities $ 43,233 $ 29,360 $ 110,690 $ 70,306
================ =============== =============== ==============
Diluted weighted average common shares outstanding 116,726 103,536 113,762 97,154
Pro forma weighted average common shares assuming
conversion of Convertible Preferred Stock:
8.25% Convertible Preferred Stock - 3,689 2,357 3,717
Series CC Preferred Stock - - - 688
---------------- --------------- --------------- -------------
Weighted average common shares for purposes of
computation of Diluted Earnings per Share, assuming
conversion of anti-dilutive securities 116,726 107,225 116,119 101,559
================ =============== =============== ==============
Diluted Earnings per Common Share, assuming conversion
of anti-dilutive securities (1) $0.37 $0.27 $0.95 $0.69
================ =============== =============== ==============
</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>
Nine Months Ended
September 30,
-------------------------------
1998 1997
-------------- ---------------
<S> <C> <C>
Net income $ 167,849 $ 133,117
Add: Minority interest in income 16,141 7,777
Less: Minority interests in income which do not
have fixed charges (12,282) (6,770)
-------------- ---------------
Income from continuing operations 171,708 134,124
Interest expense 2,926 5,821
-------------- ---------------
Total Earnings Available to Cover Fixed Charges $ 174,634 $ 139,945
============== ===============
Total Fixed Charges - Interest expense $ 6,203 $ 7,242
============== ===============
Total Preferred Stock dividends $ 59,322 $ 68,134
============== ===============
Total Combined Fixed Charges and Preferred Stock
dividends $ 65,525 $ 75,376
============== ===============
Ratio of Earnings to Fixed Charges 28.15 19.32
============== ===============
Ratio of Earnings to Combined Fixed Charges and
Preferred Stock dividends 2.67 1.86
============== ===============
Ratio of Earnings to Combined Fixed Charges and
Preferred Stock dividends (A) 2.26
===============
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ---------------- -------------- --------------- ------------
(Amounts in thousands, except ratios)
(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>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1998 1997
------------ --------------
Supplemental disclosure of Ratio of Funds from Operations
("FFO") to fixed charges:
<S> <C> <C>
FFO $ 247,955 $ 200,106
Interest expense 2,926 5,821
------------ --------------
Adjusted FFO available to cover fixed charges $ 250,881 $ 205,927
============ ==============
Total Fixed Charges - Interest expense $ 6,203 $ 7,242
============ ==============
Total Preferred Stock dividends $ 59,322 $ 68,134
============ ==============
Total Combined Fixed Charges and Preferred Stock dividends $ 65,525 $ 75,376
============ ==============
Ratio of FFO to Fixed Charges 40.45 28.44
============ ==============
Ratio of FFO to Combined Fixed Charges and Preferred Stock
dividends 3.83 2.73
============ ==============
Ratio of FFO to Combined Fixed Charges and Preferred
Stock dividends (A) 3.32
==============
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------- ------------- ------------- -----------
(Amounts thousands, expt ratios)
Supplemental disclosure of Ratio of Funds from
Operations ("FFO") 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.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000318380
<NAME> Public Storage, Inc.
<MULTIPLIER> 1
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-30-1998
<EXCHANGE-RATE> 1
<CASH> 54,950,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 54,950,000
<PP&E> 3,009,924,000
<DEPRECIATION> (385,647,000)
<TOTAL-ASSETS> 3,411,833,000
<CURRENT-LIABILITIES> 77,380,000
<BONDS> 0
0
868,900,000
<COMMON> 12,273,000
<OTHER-SE> 2,217,131,000
<TOTAL-LIABILITY-AND-EQUITY> 3,411,833,000
<SALES> 0
<TOTAL-REVENUES> 433,576,000
<CGS> 159,786,000
<TOTAL-COSTS> 159,786,000
<OTHER-EXPENSES> 86,874,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,926,000
<INCOME-PRETAX> 167,849,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 167,849,000
<EPS-PRIMARY> 0.96
<EPS-DILUTED> 0.95
</TABLE>
