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 March 31, 1999
--------------
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 May 6, 1999:
Common Stock, $.10 par value, 128,537,968 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. Financial Statements
Condensed Consolidated Balance Sheets at
March 31, 1999 and December 31, 1998 1
Condensed Consolidated Statements of Income for the
Three Months Ended March 31, 1999 and 1998 2
Condensed Consolidated Statements of Shareholders' Equity
for the Three Months Ended March 31, 1999 3
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1999 and 1998 4 - 5
Notes to Condensed Consolidated Financial Statements 6 - 17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18 - 29
PART II. OTHER INFORMATION (Items 2, 3, 4 and 5 are not applicable)
-----------------
Item 1. Legal Proceedings 30
Item 6. Exhibits and Reports on Form 8-K 30
<PAGE>
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
-------------- --------------
(Unaudited)
ASSETS
------
<S> <C> <C>
Cash and cash equivalents.......................................... $ 102,575 $ 51,225
Real estate facilities, at cost:
Land.......................................................... 981,445 803,226
Buildings..................................................... 2,578,315 2,159,065
-------------- --------------
3,559,760 2,962,291
Accumulated depreciation...................................... (437,655) (411,176)
-------------- --------------
3,122,105 2,551,115
Construction in process....................................... 121,740 83,138
-------------- --------------
3,243,845 2,634,253
Investment in real estate entities................................. 451,846 450,513
Intangible assets, net............................................. 201,307 203,635
Notes receivable from affiliates................................... 39,490 5,415
Other assets....................................................... 71,428 58,863
-------------- --------------
Total assets......................................... $ 4,110,491 $ 3,403,904
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Notes payable...................................................... $ 180,845 $ 81,426
Accrued and other liabilities...................................... 88,872 63,813
-------------- --------------
Total liabilities.................................... 269,717 145,239
Minority interest.................................................. 156,941 139,325
Commitments and contingencies
Shareholders' equity:
Preferred Stock, $0.01 par value, 50,000,000 shares authorized,
11,138,850 shares issued and outstanding (11,129,650
issued and outstanding at December 31, 1998), at liquidation
preference:
Cumulative Preferred Stock, issued in series.............. 1,098,900 868,900
Common stock, $0.10 par value, 200,000,000 shares authorized,
128,306,569 shares issued and outstanding (115,965,945 at
December 31, 1998).......................................... 12,832 11,598
Class B Common Stock, $0.10 par value, 7,000,000 shares
authorized and issued....................................... 700 700
Paid-in capital............................................... 2,499,744 2,178,465
Cumulative net income......................................... 863,930 802,088
Cumulative distributions paid................................. (792,273) (742,411)
-------------- --------------
Total shareholders' equity................................ 3,683,833 3,119,340
-------------- --------------
Total liabilities and shareholders' equity........... $ 4,110,491 $ 3,403,904
============== ==============
</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
March 31,
------------------------------------
1999 1998
--------------- ---------------
REVENUES:
<S> <C> <C>
Rental income:
Self-storage facilities................................... $ 129,029 $ 111,678
Commercial properties..................................... 1,914 17,681
Portable self-storage..................................... 5,428 5,171
Equity earnings of real estate entities....................... 8,122 2,619
Facility management fee....................................... 1,414 1,765
Interest and other income..................................... 2,363 3,652
--------------- ---------------
148,270 142,566
EXPENSES:
Cost of operations:
Self-storage facilities................................... 40,629 34,946
Commercial properties..................................... 638 5,848
Portable self-storage..................................... 9,364 15,053
Cost of facility management................................... 255 286
Depreciation and amortization................................. 28,974 28,219
General and administrative.................................... 2,011 2,336
Interest expense.............................................. 1,204 1,162
--------------- ---------------
83,075 87,850
--------------- ---------------
Income before minority interest............................... 65,195 54,716
Minority interest in income................................... (3,353) (6,352)
--------------- ---------------
NET INCOME......................................................... $ 61,842 $ 48,364
=============== ===============
NET INCOME ALLOCATION:
----------------------
Allocable to preferred shareholders........................... $ 21,530 $ 20,140
Allocable to common shareholders.............................. 40,312 28,224
--------------- ---------------
$ 61,842 $ 48,364
=============== ===============
PER COMMON SHARE:
-----------------
Net income per share - Basic.................................. $ 0.34 $ 0.26
=============== ===============
Net income per share - Diluted................................ $ 0.34 $ 0.26
=============== ===============
Weighted average common shares - Basic........................ 118,624 109,466
=============== ===============
Weighted average common shares - Diluted...................... 119,014 110,036
=============== ===============
</TABLE>
See accompanying notes.
2
<PAGE>
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
Senior Class B
Preferred Common Common Paid-in
Stock Stock Stock Capital
---------- ------- -------- ------------
<S> <C> <C> <C> <C>
Balances at December 31, 1998.......................... $868,900 $11,598 $700 $2,178,465
Issuance of common stock:
In connection with merger (13,009,485 shares)....... - 1,301 - 345,922
Exercise of stock options (21,366 shares)........... - 2 - 311
Repurchase of common stock (690,227 shares) ........... - (69) - (17,509)
Issuance of preferred stock:
Public issuance (9,200 shares)...................... 230,000 - - (7,445)
Net income............................................. - - - -
Cash distributions:
Cumulative Senior Preferred Stock (including $553,000 - - - -
accrued at March 31, 1999)........................
Common Stock........................................ - - - -
---------- ------- -------- ------------
Balances at March 31, 1999............................. $1,098,900 $12,832 $700 $2,499,744
========== ======= ======== ============
</TABLE>
<TABLE>
<CAPTION>
Total
Cumulative Cumulative Shareholders'
Net Income Distributions Equity
------------ ------------- -------------
<S> <C> <C> <C>
Balances at December 31, 1998.......................... $802,088 $(742,411) $3,119,340
Issuance of common stock:
In connection with merger (13,009,485 shares)....... - - 347,223
Exercise of stock options (21,366 shares)........... - - 313
Repurchase of common stock (690,227 shares) ........... - - (17,578)
Issuance of preferred stock:
Public issuance (9,200 shares)...................... - - 222,555
Net income............................................. 61,842 - 61,842
Cash distributions:
Cumulative Senior Preferred Stock (including $553,000 - (21,530) (21,530)
accrued at March 31, 1999)........................
Common Stock........................................ - (28,332) (28,332)
------------ ------------- -------------
Balances at March 31, 1999............................. $863,930 $(792,273) $3,683,833
============ ============= =============
</TABLE>
See accompanying notes.
3
<PAGE>
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
-----------------------------------
1999 1998
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income...................................................... $ 61,842 $ 48,364
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization................................. 28,974 28,219
Depreciation included in equity earnings of real estate
entities.................................................... 4,129 1,865
Minority interest in income................................... 3,353 6,352
-------------- --------------
Total adjustments......................................... 36,456 36,436
-------------- --------------
Net cash provided by operating activities............. 98,298 84,800
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal payments received on notes receivable from
affiliates.................................................. 13,864 3,982
Notes receivable from affiliates.............................. (41,200) -
Capital improvements to real estate facilities................ (2,935) (4,091)
Construction in process....................................... (31,309) (19,422)
Acquisition of minority interests in consolidated real estate
partnerships................................................ (3,069) (736)
Acquisition of investment in real estate entities............. (22,802) (8,361)
Acquisition of real estate facilities......................... (5,255) (39,704)
Acquisition cost of business combinations..................... (103,646) (5,206)
Refunded deposits to acquire real estate...................... - 12,500
-------------- --------------
Net cash used in investing activities................. (196,352) (61,038)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of borrowings on the line of credit................. - (7,000)
Principal payments on notes payable........................... (581) (3,060)
Net proceeds from the issuance of common stock................ 313 191,266
Net proceeds from the issuance of preferred stock............. 222,555 -
Repurchase of common stock.................................... (17,578) -
Distributions paid to shareholders............................ (49,309) (44,720)
Distributions from operations to minority interests in real
estate entities............................................. (5,664) (10,557)
Net reinvestment (divestment) by minority interests in
consolidated real estate entities........................... (5,003) 51,003
Other......................................................... 4,671 1,043
-------------- --------------
Net cash provided by financing activities............ 149,404 177,975
-------------- --------------
Net increase in cash and cash equivalents.......................... 51,350 201,737
Cash and cash equivalents at the beginning of the period........... 51,225 41,455
-------------- --------------
Cash and cash equivalents at the end of the period................. $ 102,575 $ 243,192
============== ==============
</TABLE>
See accompanying notes.
4
<PAGE>
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
------------------------------------
1999 1998
--------------- ---------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Business combinations:
<S> <C> <C>
Real estate facilities...................................... $ (596,266) $ (58,329)
Construction in process..................................... (11,449)
Investment in real estate entities.......................... (356) -
Mortgage notes receivable................................... (6,739) -
Other assets................................................ (1,933) (140)
Accrued and other liabilities............................... 15,651 1,604
Minority interest........................................... 27,009 504
Notes payable............................................... 100,000 -
Reduction to investment in real estate entities in connection
with business combinations.................................... 23,214 16,325
Acquisition of real estate facilities in exchange for the
assumption of notes payable and increase in minority interest. - (15,731)
Acquisition of minority interest and real estate in exchange
for common stock:
Real estate facilities...................................... - (5,233)
Minority interest........................................... - (6,573)
Issuance of common stock:
In connection with a business combination................... 347,223 -
In connection with the conversion of Convertible Preferred
Stock..................................................... - 623
To acquire interests in real estate entities................ - 17,133
To acquire minority interest in consolidated real estate -
entities.................................................. 11,070
Conversion of 8.25% convertible preferred stock................. - (623)
Acquisition of investment in real estate entities............... - (17,133)
Assumption of note payable in connection with the acquisition
of real estate facilities..................................... - 14,526
Increase in minority interest in connection with the
acquisition of real estate facilities......................... - 1,205
</TABLE>
See accompanying notes.
5
<PAGE>
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
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 March 31, 1999, the Company had direct and indirect
equity interests in 1,435 properties located in 38 states, including 1,313
self-storage facilities, 115 commercial properties, and seven 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 are 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 March 31,
1999, PSPUD operated 42 facilities in 11 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 months ended March 31,
1999 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1999. 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, 1998.
The consolidated financial statements include the accounts of the
Company, PSPUD, and 22 controlled limited partnerships including an
operating partnership owning 213 of the properties acquired from Storage
Trust Realty, Inc. (collectively, the "Consolidated Entities").
Collectively, the Company and the Consolidated Entities own a total of
1,172 real estate facilities, consisting of 1,164 self-storage facilities,
one commercial property, and seven industrial facilities for use by PSPUD.
At March 31, 1999, the Company also has equity investments in 28
other affiliated limited partnerships whose principal business is the
ownership of 149 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 114 commercial properties. The Company does not
control these entities; accordingly, the Company's investments in these
entities are accounted for using the equity method.
6
<PAGE>
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 using the equity method.
The consolidated statement of income for the three months ended March 31,
1998 includes the consolidated operating results of PSBP. Accordingly,
commercial property operations for the periods after March 31, 1998 reflect
only the commercial property operations of facilities owned by the Company
which have both self-storage and commercial use combined at the same
property location.
Use of estimates
----------------
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 those estimates.
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 1999 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, including 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. Intangible assets
are amortized by the straight-line method over 25 years. At March 31, 1999,
intangible assets are net of accumulated amortization of $31,419,000
($29,091,000 at December 31, 1998). Included in depreciation and
amortization expense for the three months ended March 31, 1999 and 1998 is
$2,328,000 related to the amortization of intangible assets.
7
<PAGE>
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.
Environmental costs
-------------------
The Company's policy is to accrue environmental assessments and/or
remediation cost when it is probable that such efforts will be required and
the related costs can be reasonably estimated. The Company's current
practice is to conduct environmental investigations in connection with
property acquisitions. As a result of environmental investigations of its
properties, which commenced in 1995, the Company recorded an amount, which
in management's best estimate will be sufficient to satisfy anticipated
costs of known investigation and remediation requirements. Although there
can be no assurance, the Company is not aware of any environmental
contamination of any of its facilities which individually or in the
aggregate would be material to the Company's overall business, financial
condition, or results of operations.
Net income per common share
---------------------------
In 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earning 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 or convertible
securities that are convertible into common shares of the Company.
Diluted net income per common share is computed using the weighted
average common shares outstanding, plus the impact of 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 March 31, 1999. In addition, the
inclusion of the Company's convertible preferred stock in the determination
of net income per common share has been determined to be anti-dilutive for
the three months ended March 31, 1998.
In computing earnings per common share, preferred stock dividends
totaling $21,530,000 and $20,140,000 for the three months ended March 31,
1999 and 1998, respectively, reduced income available to common
shareholders.
Stock-based compensation
------------------------
In October 1995, the FASB issued SFAS No. 123 "Accounting for
Stock-Based Compensation" ("Statement 123") which provides companies an
alternative to accounting for stock-based compensation as prescribed under
APB Opinion No. 25 (APB 25). Statement 123 encourages, but does not require
companies to recognize expense for stock-based awards based on their fair
value at date of grant. Statement 123 allows companies to continue to
follow existing accounting rules (intrinsic value method under APB 25)
provided that pro-forma disclosures are made of what net income and
earnings per share would have been had the new fair value method been used.
The Company has elected to adopt the disclosure requirements of Statement
123 but will continue to account for stock-based compensation under APB 25.
Reclassifications
-----------------
Certain reclassifications have been made to the consolidated
financial statements for 1998 in order to conform to the 1999 presentation.
8
<PAGE>
3. Merger with Storage Trust Realty, Inc.
--------------------------------------
On March 12, 1999, the Company completed a merger transaction with
Storage Trust Realty, Inc. ("Storage Trust"). As a result of the merger,
the Company acquired interests in 215 self-storage facilities located in 16
states totaling approximately 12 million net rentable square feet. In the
merger, each share of beneficial interest of Storage Trust was exchanged
for 0.86 shares of the Company's common stock (approximately 13,009,485
shares of the Company's common stock were issued and approximately an
additional 1,011,963 shares were reserved for issuance upon conversion of
limited partnership units in Storage Trust's operating partnership). The
aggregate acquisition cost of the merger was approximately $574 million,
consisting of the issuance of the Company's common stock of approximately
$347 million, cash of approximately $104 million, the assumption of debt in
the amount of $100 million, and the Company's pre-existing investment in
Storage Trust of approximately $23 million.
The merger was structured as a tax-free transaction and accounted
for using the purchase method. Accordingly, allocations of the total
acquisition cost to the net assets acquired were made based upon the fair
value of such assets and liabilities assumed, as follows:
In thousands
---------------
Real estate facilities.................. $ 596,266
Construction in process................. 11,449
Investment in real estate entities...... 356
Mortgage note receivable................ 6,739
Other assets............................ 1,933
Accrued liabilities..................... (15,651)
Minority interest....................... (27,009)
---------------
$ 574,083
===============
The historical operating results of the above merger prior to the
date of the merger has not been included in the Company's historical
operating results. Pro forma selected financial data for the three months
ended March 31, 1999 and 1998 as though the above merger had been effective
at January 1, 1998 are as follows:
Three Months Ended Three Months Ended
(In thousands, except per share data) March 31, 1999 March 31, 1998
- --------------------------------------- ------------------ ------------------
Revenues............................... $165,414 $162,012
Net income............................. $65,771 $52,878
Net income per common share (Basic).... $0.34 $0.27
Net income per common share (Diluted).. $0.34 $0.27
The pro forma data does not purport to be indicative of operations
that would have occurred had the merger 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 (i)
expected reductions in general and administrative expenses, (ii) certain
significant acquisitions made by Storage Trust in 1998, (iii) estimated
increased interest costs to finance the cash portion of the acquisition
cost, and (iv) estimated increased depreciation expense.
9
<PAGE>
4. Real estate facilities
----------------------
Activity in real estate facilities during 1999 is as follows:
In thousands
---------------
Operating facilities, at cost
Balance at December 31, 1998...................... $ 2,962,291
Property acquisitions - merger with Storage Trust. 596,266
Facility contributed to joint venture............. (11,194)
Property acquisitions - third party purchases..... 5,255
Developed facility................................ 4,156
Acquisition of minority interest.................. 989
Partial condemnation of facility.................. (938)
Capital improvements.............................. 2,935
---------------
Balance at March 31, 1999......................... 3,559,760
---------------
Accumulated depreciation:
Balance at December 31, 1998...................... (411,176)
Additions during the year......................... (26,646)
Partial condemnation of facility.................. 167
---------------
Balance at March 31, 1999......................... (437,655)
---------------
Construction in progress:
Balance at December 31, 1998...................... 83,138
Current development............................... 31,309
Property acquisitions - merger with Storage Trust. 11,449
Developed facility................................ (4,156)
---------------
Balance at March 31, 1999......................... 121,740
---------------
Total real estate facilities...................... $ 3,243,845
===============
Construction in progress at March 31, 1999 consists of 32
self-storage facilities, 8 expansions of existing self-storage facilities,
and 8 industrial facilities which could be utilized as portable
self-storage facilities. The developed facility is an industrial facility.
The Company's policy is to capitalize interest incurred on debt during the
course of construction of its self-storage and industrial facilities.
Interest capitalized during the three months ended March 31, 1999 was
$958,000 compared to $1,257,000 for the same period in 1998.
5. Investment in real estate entities:
-----------------------------------
At March 31, 1999, the Company's investment in real estate
entities consists of (i) limited and general partnership interests in
approximately 27 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
an institutional investor (the "Joint Venture") to participate in the
development of approximately $220 million of self-storage facilities. The
Joint Venture has opened a total of 28 facilities with a total cost of $142
10
<PAGE>
million at March 31, 1999, and has 6 projects in process with an aggregate
cost incurred to date of approximately $22.4 million ($6.7 million
estimated to complete) at March 31, 1999.
The Joint Venture is currently reviewing an additional 15 projects
($30.5 million incurred at March 31, 1999, with remaining costs to complete
of $32.6 million). Upon approval of these additional 15 facilities, the
Joint Venture will be fully committed. These 15 projects include one
completed facility and two facilities for which construction has not yet
begun. At March 31, 1999, approximately $25.8 million is included in
construction in process and approximately $4.7 million is included in real
estate facilities with respect to these 15 projects; upon approval by the
joint venture, these construction costs will be transferred to the Joint
Venture.
During the three months ended March 31, 1999, the Company
recognized earnings from its investments totaling $8,122,000. Included in
equity in earnings of real estate entities for the three months ended March
31, 1999 is the Company's share of depreciation expense totaling
$4,129,000. 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 March 31, 1999 are as follows:
<TABLE>
<CAPTION>
For the three months ended March 31, 1999
---------------------------------------------------------------------
Other Development
Equity Investments Joint Venture PSBP Total
------------------ -------------- ---------- ---------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Rental income......................... $ 16,679 $ 2,742 $ 29,117 $ 48,538
Other income.......................... 405 137 134 676
------------------ -------------- ---------- ---------
Total revenues........................ 17,084 2,879 29,251 49,214
------------------ -------------- ---------- ---------
Cost of operations.................... 5,646 1,469 8,399 15,514
Depreciation.......................... 2,154 870 6,733 9,757
Other expenses........................ 1,648 33 1,711 3,392
------------------ -------------- ---------- ---------
Total expenses........................ 9,448 2,372 16,843 28,663
------------------ -------------- ---------- ---------
Net income before minority interest... 7,636 507 12,408 20,551
Minority interest .................... - - (2,966) (2,966)
------------------ -------------- ---------- ---------
Net income............................ $ 7,636 $ 507 $ 9,442 $ 17,585
================== ============== ========== =========
At March 31, 1999:
Real estate, net ..................... $ 167,940 $ 161,988 $ 722,349 $1,052,277
Total assets.......................... 215,387 172,967 729,614 1,117,968
Total liabilities..................... 75,725 13,544 81,673 170,942
Minority interest..................... - - 154,858 154,858
Total equity.......................... 139,662 159,423 493,083 792,168
The Company's investment (book value)
at March 31, 1999................... $ 167,079 $ 47,827 $ 236,940 $ 451,846
The Company's effective average
ownership interest at March 31, 1999 37% 30% 41% 34%
</TABLE>
6. Revolving line of credit
------------------------
As of March 31, 1999, the Company had no borrowings on its
unsecured credit agreement with a group of commercial banks. The credit
11
<PAGE>
agreement (the "Credit Facility") has a borrowing limit of $150 million and
an expiration date of July 31, 2001. The expiration date may be extended by
one year on each anniversary of the credit agreement. Interest on
outstanding borrowings is payable monthly. At the option of the Company,
the rate of interest charged is equal to (i) the prime rate or (ii) a rate
ranging from the London Interbank Offered Rate ("LIBOR") plus 0.40% to
LIBOR plus 1.10% depending on the Company's credit ratings and coverage
ratios, as defined. In addition, the Company is required to pay a quarterly
commitment fee of 0.250% (per annum) of the unused portion of the Credit
Facility. The Credit Facility allows the Company, at its option, to request
the group of banks to propose the interest rate they would charge on
specific borrowings not to exceed $50 million. However, in no case may the
interest rate proposal be greater than the amount provided by the Credit
Facility.
7. Minority interest
-----------------
In consolidation, the Company classifies ownership interests in
the net assets of each of the Consolidated Entities, other than its own, 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, except as described below with respect to
minority interest acquired in the merger with Storage Trust.
In connection with the merger with Storage Trust, minority
interest increased by approximately $27 million, reflecting the fair value
of 1,011,963 operating partnership units ("OP Units") in Storage Trust's
operating partnership owned by minority interests. OP Units are convertible
on a one-for-one basis (subject to certain limitations) into common shares
of the Company at the option of the unitholder. Minority interest in income
with respect to OP Units reflects the OP Units' share of the net income of
the Company, with net income allocated to minority interests with respect
to OP Units on a per unit basis equal to diluted earnings per common share.
In addition, during the three months ended March 31, 1999, the
Company reduced minority interest by approximately $2.1 million through the
acquisition of such interests for cash.
8. Shareholders' equity
--------------------
Preferred stock
---------------
At March 31, 1999 and December 31, 1998, the Company had the
following series of Preferred Stock outstanding:
12
<PAGE>
<TABLE>
<CAPTION>
At March 31, 1999 At December 31, 1998
---------------------------- --------------------------
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
Series K ....................... 8.250% 4,600 115,000,000 - -
Series L ....................... 8.250% 4,600 115,000,000 - -
------------ --------------- ----------- ------------
Total Cumulative Senior
Preferred Stock................. 11,138,850 $1,098,900,000 11,129,650 $868,900,000
============ =============== =========== ============
</TABLE>
On January 19, 1999, the Company issued 4.6 million depositary
shares (each representing 1/1,000 of a share) of its Preferred Stock,
Series K, raising net proceeds of approximately $111.3 million. On March
10, 1999, the Company issued 4.6 million depositary shares (each
representing 1/1,000 of a share) of its Preferred Stock, Series L, raising
net proceeds of approximately $111.3 million.
Holders of the Company's preferred stock will not be entitled to
vote on most matters, except under certain conditions and as noted above.
In the event of a cumulative arrearage equal to six quarterly dividends or
failure by the Company to maintain a Debt Ratio (as defined) of 50% or
less, the 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 all
events of default have been cured. At March 31, 1999, there were no
dividends in arrears and the Debt Ratio was 4.4%.
Except under certain conditions relating to the Company's
qualification as a REIT, the Senior Preferred Stock are not redeemable
prior to the following dates: Series A - September 30, 2002, Series B -
March 31, 2003, Series C - September 30, 1999, Series D - September 30,
2004, Series E - January 31, 2005, Series F - April 30, 2005, Series G -
December 31, 2000, Series H - January 31, 2001, Series I - October 31,
2001, Series J - August 31, 2002, Series K - January 19, 2004 and Series L
- March 10, 2004. 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 depositary share in the case of the
Series G, Series H, Series I, Series J, Series K and Series L), plus any
accrued and unpaid dividends.
Equity Stock
------------
The Company is authorized to issue 200,000,000 shares of Equity
Stock. The Articles of Incorporation provide that the Equity Stock may be
issued from time to time in one or more series and give the Board of
Directors broad authority to fix the dividend and distribution rights,
conversion and voting rights, redemption provisions and liquidation rights
of each series of 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
13
<PAGE>
Company obtained a controlling interest in the Partnership and began to
consolidate the accounts of the Partnership and therefore the equity stock
is eliminated in consolidation. 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 Common Stock or (ii) $2.20.
Common Stock
------------
During the three months ended March 31, 1999, the Company issued
13,009,485 shares of common stock in connection with the merger with
Storage Trust and 21,366 shares of common stock in connection with the
exercise of stock options.
In June 1998, the Company's 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.
During the quarter ended March 31, 1999, the Company repurchased a total of
690,227 shares, for a total aggregate cost of approximately $17.6 million.
Through March 31, 1999, the Company has repurchased a total of 3,509,627
shares of common stock (of the 10,000,000 shares authorized) at an
aggregate cost of approximately $89.9 million.
Class B Common Stock
--------------------
The Class B Common Stock will (i) not participate in distributions
until the later to occur of funds from operations ("FFO") per Common Share
as defined below, aggregating $1.80 during any period of four consecutive
calendar quarters, or January 1, 2000. Thereafter, the Class B Common Stock
will participate in distributions, other than liquidating distributions, at
the rate of 97% of the per share distributions on the Common Stock,
provided that cumulative distributions of at least $0.22 per quarter per
share have been paid on the Common Stock, (ii) not participate in
liquidating distributions, (iii) not be entitled to vote (except as
expressly required by California law) and (iv) automatically convert into
Common Stock, on a share for share basis, upon the later to occur of FFO
per Common Share aggregating $3.00 during any period of four consecutive
calendar quarters or January 1, 2003.
For these purposes, FFO means net income (loss) before (i) gain
(loss) on early extinguishment of debt, (ii) minority interest in income
and (iii) gain (loss) on disposition of real estate, adjusted as follows:
(i) plus depreciation and amortization, and (ii) less FFO attributable to
minority interest. FFO per Common Share means FFO less preferred stock
dividends (other than dividends on convertible preferred stock) divided by
the outstanding weighted average shares of Common Stock assuming conversion
of all outstanding convertible securities and the Class B Common Stock.
For these purposes, FFO per share of Common Stock (as defined) was
$2.21 for the four consecutive calendar quarters ended March 31, 1999.
Dividends
---------
The following summarizes dividends paid during the first three
months of 1999:
14
<PAGE>
Distributions Per
Share or
Depositary Share Total Distributions
------------------ -------------------
Series A.......................... $0.625 $1,140,000
Series B.......................... $0.575 1,372,000
Series C.......................... $0.422 506,000
Series D.......................... $0.594 713,000
Series E.......................... $0.625 1,372,000
Series F.......................... $0.609 1,401,000
Series G.......................... $0.555 3,828,000
Series H.......................... $0.528 3,565,000
Series I.......................... $0.539 2,156,000
Series J.......................... $0.500 3,000,000
Series K ......................... $0.418 1,924,000
-------------------
20,977,000
Common............................ $0.220 28,332,000
-------------------
Total dividends paid........... $49,309,000
===================
At March 31, 1999, the Company accrued distributions with respect
to the Series L preferred stock for the period from the date of issuance
through March 31, 1999 totaling $553,000 which will be paid on June 30,
1999.
The dividend rate on the Series C Preferred Stock for the first
quarter of 1999 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
June 30, 1999 will be equal to 6.75% per annum.
10. Segment Information
-------------------
In July 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("FAS 131"), which establishes standards for the way that
public business enterprises report information about operating segments.
This statement is effective for financial statements for periods beginning
after December 15, 1997. The Company has adopted this standard effective
for the year ended December 31, 1998. For information regarding the
description of each reportable segment, policies relating to the
measurement of segment profit or loss, and segment assets, 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, 1998.
The Company's income statement provides most of the information
required in order to determine the performance of each of the Company's
three segments. The following tables reconcile the performance of each
segment, in terms of segment revenues and segment income, to the
consolidated revenues and net income of the Company. It further provides
detail of the segment components of the income statement item, "Equity in
earnings of real estate entities."
15
<PAGE>
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------
1999 1998 Change
----------- ----------- ----------
(Dollar amounts in thousands)
RECONCILIATION OF REVENUES BY SEGMENT:
- --------------------------------------
Self storage
- ------------
<S> <C> <C> <C>
Self-storage property rentals............................ $ 129,029 $ 111,678 $ 17,351
Facility management...................................... 1,414 1,667 (253)
Equity in earnings - self storage property operations.... 4,233 4,672 (439)
----------- ----------- ----------
Self storage segment revenues........................ 134,676 118,017 16,659
----------- ----------- ----------
Portable self storage ..................................... 5,428 5,171 257
- --------------------- ----------- ----------- ----------
Commercial properties
- ---------- ----------
Commercial property rentals.............................. 1,914 17,681 (15,767)
Facility management...................................... - 98 (98)
Equity in earnings - commercial property operations...... 8,456 126 8,330
----------- ----------- ----------
Commercial properties segment revenues.............. 10,370 17,905 (7,535)
----------- ----------- ----------
Other items not allocated to segments:
- --------------------------------------
Equity in earnings - Depreciation (self storage) ........ (1,458) (1,723) 265
Equity in earnings - Depreciation (commercial properties) (2,670) (40) (2,630)
Equity in earnings - general and administrative and other (439) (416) (23)
Interest and other income................................ 2,363 3,652 (1,289)
----------- ----------- ----------
Total other items not allocated to segments.......... (2,204) 1,473 (3,677)
----------- ----------- ----------
Total revenues....................................... $ 148,270 $ 142,566 $ 5,704
=========== =========== ==========
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------
1999 1998 Change
----------- ----------- ----------
(Dollar amounts in thousands)
RECONCILIATION OF NET INCOME BY SEGMENT:
- ----------------------------------------
Self storage
- ------------
<S> <C> <C> <C>
Self-storage properties ................................. $ 88,400 $ 76,732 $ 11,668
Facility management...................................... 1,159 1,393 (234)
Equity in earnings - self storage property operations.... 4,233 4,672 (439)
----------- ----------- ----------
Total self storage segment net income................ 93,792 82,797 10,995
----------- ----------- ----------
Portable self storage (3,936) (9,882) 5,946
- --------------------- ----------- ----------- ----------
Commercial properties
- ----------------------
Commercial properties.................................... 1,276 11,833 (10,557)
Facility management...................................... - 86 (86)
Equity in earnings - commercial property operations...... 8,456 126 8,330
----------- ----------- ----------
Total commercial property segment net income........ 9,732 12,045 (2,313)
----------- ----------- ----------
Other items not allocated to segments:
- --------------------------------------
Equity in earnings - depreciation (self-storage) ........ (1,458) (1,723) 265
Equity in earnings - depreciation (commercial properties) (2,670) (40) (2,630)
Equity in earnings - general and administrative and other (439) (416) (23)
Depreciation - self storage.............................. (28,550) (25,113) (3,437)
Depreciation - commercial properties..................... (424) (3,106) 2,682
Interest and other income................................ 2,363 3,652 (1,289)
General and administrative............................... (2,011) (2,336) 325
Interest expense......................................... (1,204) (1,162) (42)
Minority interest in income.............................. (3,353) (6,352) 2,999
----------- ----------- ----------
Total other items not allocated to segments.......... (37,746) (36,596) (1,150)
----------- ----------- ----------
Total net income .................................... $ 61,842 $ 48,364 13,478
=========== =========== ==========
</TABLE>
11. Subsequent Event
----------------
Effective April 30, 1999, the Company disposed of six properties
acquired in the merger with Storage Trust for an aggregate of approximately
$10.5 million and granted the acquiror an option exercisable in December
1999 to acquire an additional eight properties for an aggregate of
approximately $18.8 million. The Company is now leasing these eight
properties to the acquiror.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
The following discussion and analysis should be read in conjunction
with the Company's consolidated financial statements and notes thereto.
FORWARD LOOKING STATEMENTS: When used within this document, the words
"expects," "believes," "anticipates," "should," "estimates," and similar
expressions are intended to identify "forward-looking statements" within the
meaning of that term in Section 27A of the Securities Exchange Act of 1933, as
amended, and in Section 21F of the Securities Exchange Act of 1934, as amended.
Such forward-looking statements involve known and unknown risks, uncertainties,
and other factors, which may cause the actual results and performance of the
Company to be materially different from those expressed or implied in the
forward looking statements. Such factors include the impact of competition from
new and existing self-storage and commercial facilities which could impact rents
and occupancy levels at the Company's facilities; the Company's ability to
evaluate, finance, and integrate acquired and developed properties into the
Company's existing operations; the Company's ability to effectively compete in
the markets that it does business in; the impact of the regulatory environment
as well as national, state, and local laws and regulations including, without
limitation, those governing Real Estate Investment Trusts; the acceptance by
consumers of the Pickup and Delivery concept; the impact of general economic
conditions upon rental rates and occupancy levels at the Company's facilities;
and the availability of permanent capital at attractive rates.
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Net income for the three months ended March 31, 1999 was $61,842,000
compared to $48,364,000 for the same period in 1998, representing an increase of
$13,478,000 or 27.9%. The increase in net income was primarily the result of
improved property operations, the acquisition of additional real estate
investments during 1998 and 1999, and reduced operating losses from the Pickup
and Delivery portable self-storage business.
Net income allocable to the common shareholders was $40,312,000 or
$0.34 per common share on a diluted basis (based on 119,014,000 weighted average
diluted shares) for the three months ended March 31, 1999 compared to
$28,224,000 or $0.26 per common share on a diluted basis (based on 110,036,000
weighted average diluted shares) for the same period in 1998. In computing net
income per common share, dividends to the Company's preferred shareholders
($21,530,000 and $20,140,000 for the three months ended March 31, 1999 and 1998,
respectively) have been deducted from net income in determining net income
allocable to the Company's common shareholders. Net income allocable to the
common shareholders has been negatively impacted by operating losses generated
from the Company's portable self-storage business, which were $3,936,000 or
approximately $0.03 per common share on a diluted basis, for the three months
ended March 31, 1999 and $9,882,000, or approximately $0.09 per common share on
a diluted basis, for the three months ended March 31, 1998.
REAL ESTATE OPERATIONS
- --------------------------------------------------------------------------------
Rental income and cost of operations have increased for the three
months ended March 31, 1999 compared to the same period in 1998 due to the
Company's merger and acquisition activities throughout 1998 and 1999. This was
offset partially by the deconsolidation of PSBP whereby the accounts of PSBP,
effective April 1, 1998, were no longer consolidated with the Company's and the
Company began to account for its investment in PSBP using the equity method. As
a result of these items, the number of facilities included in the Company's
consolidated financial statements has increased from 975 at March 31, 1998 to
1,165 at March 31, 1999.
SELF-STORAGE OPERATIONS: The following table summarizes the operating
results (before depreciation) of (i) the 890 self-storage facilities that the
Company owned as of December 31, 1997 (the "Consistent Group") and (ii) all
other facilities for which operations were not reflected in the Company's
financial statements for the three months ended March 31, 1999 and the same
period in 1998 (the "Other Facilities"):
18
<PAGE>
SELF-STORAGE OPERATIONS: Three months ended
- ------------------------ March 31,
--------------------- Percentage
1999 1998 Change
-------- ---------- ---------
(Dollar amounts in thousands)
Rental income:
- --------------
Consistent Group......................... $117,446 $ 110,914 5.9%
Other Facilities......................... 11,583 764 1,416.1%
-------- ---------- ---------
129,029 111,678 15.5%
-------- ---------- ---------
Cost of operations:
- -------------------
Consistent Group......................... 36,785 34,646 6.2%
Other Facilities......................... 3,844 300 1,181.3%
-------- ---------- ---------
40,629 34,946 16.3%
-------- ---------- ---------
Net operating income:
- ---------------------
Consistent Group......................... 80,661 76,268 5.8%
Other Facilities......................... 7,739 464 1,567.9%
-------- ---------- ---------
$88,400 $76,732 15.2%
======== ========== =========
Consistent Group data:
- ----------------------
Gross margin............................. 68.7% 68.8% (0.1)%
Weighted average :
Occupancy............................. 90.9% 91.0% (0.1)%
Realized annual rent per square foot.. $9.83 $9.28 5.9%
Scheduled annual rent per square foot. $10.19 $9.80 4.0%
Number of facilities:
Consistent group......................... 890 890 -
Other Facilities......................... 274 19 1,342.1%
Net rentable sq. ft.:
Consistent group......................... 53,327 53,327 -
Other Facilities......................... 15,553 1,162 1,238.5%
Rental income for the three months ended March 31, 1999 is net of
promotional discounts totaling $4.2 million compared to $3.9 million for the
same period in 1998. In addition, included in cost of operations for the three
months ended March 31, 1999 are costs associated with the telephone reservation
center and advertising totaling $1.9 million, compared to $1.2 million for the
same period in 1998.
In 1998 and through March 31, 1999, the Company acquired a total of 274
self-storage facilities, of which 58 were existing mature facilities obtained
from affiliated entities and managed by the Company, one was a newly developed
facility, 2 were third party acquisitions of existing mature facilities, and 213
were acquired in connection with the Storage Trust merger. 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
the Company's stabilized self-storage facilities that it owned at March 31,
1999, excluding the 213 facilities acquired in the merger with Storage Trust,
assuming that the Company owned these facilities as of January 1, 1998:
19
<PAGE>
PRO FORMA SUMMARY OF SELF-STORAGE Three months ended
--------------------------------- March 31,
OPERATIONS: ---------------------
----------- 1999 1998 Change
--------- --------- -------
(Amounts in thousands)
Rental income................................ $ 125,007 $ 118,189 5.8%
Cost of operations........................... 39,193 37,069 5.7%
--------- --------- -------
Net operating income......................... $ 85,814 $ 81,120 5.8%
========= ========= =======
The above table excludes the property operations of the 213 properties
acquired in the Storage Trust merger and the Company's 7 newly developed
properties (one opened in 1998, two opened in 1997 and four opened in 1996)
which are in various stages of "fill-up." The aggregate development cost of
these seven properties totaled approximately $27.8 million.
COMMERCIAL PROPERTY OPERATIONS:. The following table sets forth the
commercial property operations included in the Company's financial statements:
COMMERCIAL PROPERTY OPERATIONS- Three months ended
------------------------------- March 31,
HISTORICAL ---------------------
---------- 1999 1998 Change
--------- --------- --------
(Amounts in thousands)
Rental income.............................. $ 1,914 $17,681 (89.2)%
Cost of operations......................... 638 5,848 (89.1)%
--------- --------- --------
Net operating income....................... $ 1,276 $11,833 (89.2)%
========= ========= ========
During the second quarter of 1998, the Company ceased to have a
controlling interest in PSBP. As a result, effective April 1, 1998, the Company
no longer includes the accounts of PSBP in its consolidated financial statements
and has accounted for its investment during the three months ended March 31,
1999 using the equity method (see "Equity in earnings of real estate entities").
The income statement for the three months ended March 31, 1998 includes the
consolidated operating results of PSBP. The significant decrease in rental
income and cost of operations for the three months ended March 31, 1999 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 Three months ended
------------------------------- March 31,
OPERATIONS: ---------------------
----------- 1999 1998 Change
--------- --------- --------
(Amounts in thousands)
Rental income.................................. $ 1,914 $ 1,746 9.6%
Cost of operations............................. 638 715 (10.7)%
--------- --------- --------
Net operating income........................... $ 1,276 $ 1,031 23.8%
========= ========= =======-
EQUITY IN EARNINGS OF REAL ESTATE ENTITIES: In addition to its
ownership of equity interests in PSBP, the Company had general and limited
partnership interests in 28 limited partnerships at March 31, 1999. (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 months ended
March 31, 1999 consists of the Company's pro rata share of the Unconsolidated
Entities based upon the Company's ownership interest for the period. In the
aggregate, the Unconsolidated Entities own a total of 263 real estate
facilities, 149 of which are self-storage facilities. The following table sets
20
<PAGE>
forth the significant components of the Company's equity in earnings of real
estate entities:
HISTORICAL SUMMARY: Three months ended
------------------- March 31,
-------------------- Dollar
1999 1998 Change
--------- --------- ---------
(Amounts in thousands)
Property operations:
PSBP................................... $ 8,422 $ - $ 8,422
Development Joint Venture.............. 346 - 346
Other investments - self storage....... 3,887 4,672 (785)
Other investments - commercial properties 34 126 (92)
--------- --------- ---------
12,689 4,798 7,891
--------- --------- ---------
Depreciation:
PSBP................................... (2,667) - (2,667)
Development Joint Venture.............. (261) - (261)
Other investments - self storage ...... (1,197) (1,723) 526
Other investments - commercial properties (3) (40) 37
--------- --------- ---------
(4,128) (1,763) (2,365)
--------- --------- ---------
Other: (1)
PSBP................................... (826) - (826)
Development Joint Venture.............. 22 - 22
Other investments...................... 365 (416) 781
--------- --------- ---------
(439) (416) (23)
--------- --------- ---------
Total equity in earnings of real estate
entities................................. $ 8,122 $ 2,619 $ 5,503
========= ========= =========
(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.
The increase in 1999 earnings compared to 1998 is principally the
result of the deconsolidation of PSBP whereby the accounts of PSBP, effective
April 1, 1998, were no longer consolidated with the Company's and the Company
began to account for its investment in PSBP using the equity method.
PORTABLE SELF-STORAGE OPERATIONS: At March 31, 1999, PSPUD operated 42
facilities in 11 states. Due to the start-up nature of the business, PSPUD
incurred operating losses totaling approximately $3,936,000 and $9,882,000 for
the three months ended March 31, 1999 and 1998, respectively, summarized as
follows.
PORTABLE SELF-STORAGE: Three months ended
---------------------- March 31,
-------------------- Dollar
1999 1998 Change
--------- --------- ---------
(Amounts in thousands)
Rental and other income ................ $ 5,428 $ 5,171 $257
--------- --------- ---------
Cost of operations:
Direct operating costs.............. 7,409 9,481 (2,072)
Marketing and advertising........... 422 3,558 (3,136)
Depreciation........................ 1,182 891 291
General and administrative.......... 351 1,123 (772)
--------- --------- ---------
Total cost of operations......... 9,364 15,053 (5,689)
--------- --------- ---------
Operating losses........................ $(3,936) $ (9,882) $ 5,946
========= ========= =========
Included in direct operating costs above are $2.8 million and $3.2
million, respectively, with respect to facility leases for the three months
ended March 31, 1999 and 1998, respectively.
The Company believes that the quarterly losses from the PSPUD
operations peaked during the third quarter of 1997. PSPUD's operating losses
were approximately $12.1 million for the third quarter of 1997, $10.5 million
21
<PAGE>
for the fourth quarter of 1997, $9.9 million for the first quarter of 1998, $8.3
million for the second quarter of 1998, $6.9 million for the third quarter of
1998, $5.9 million in the fourth quarter of 1998 and, $3.9 million in the first
quarter of 1999. The Company believes this trend of decreasing operating losses
will continue with increases in PSPUD's revenues.
Until the PSPUD facilities are operating profitably, PSPUD's operations
are expected to continue to adversely impact the Company's earnings and cash
flow. PSPUD believes that its business is likely to be more successful in
certain markets than in others. There can be no assurances as to the level of
PSPUD's expansion, level of gross rentals, level of move-outs or profitability.
PROPERTY MANAGEMENT OPERATIONS
- --------------------------------------------------------------------------------
At March 31, 1999, the Company managed 184 self-storage facilities (149
owned by Unconsolidated Entities and 35 owned by third parties) pursuant to
property management contracts. The property management contracts generally
provide for compensation equal to 6% of gross revenues of the facilities
managed.
PROPERTY MANAGEMENT OPERATIONS: Three months ended
------------------------------- March 31,
-------------------- Dollar
1999 1998 Change
--------- --------- ---------
(Amounts in thousands)
Facility management fees:
Self-storage................. $1,414 $1,667 $ (253)
Commercial properties........ - 98 (98)
--------- --------- ---------
1,414 1,765 (351)
--------- --------- ---------
Cost of operations:
Self-storage................. 255 274 (19)
Commercial properties........ - 12 (12)
--------- --------- ---------
255 286 (31)
--------- --------- ---------
Net operating income:
Self-storage................. 1,159 1,393 (234)
Commercial properties........ - 86 (86)
--------- --------- ---------
$1,159 $1,479 $ (320)
========= ========= =========
Since March 31, 1998, the Company completed several acquisitions of
self-storage facilities from affiliated entities and, as a result, self-storage
properties which were managed by the Company became owned facilities and the
related management fee income with respect to these facilities ceased. Since the
Company has acquired in the past, and may continue to seek to acquire in the
future, self-storage facilities owned by Unconsolidated Entities, the company's
facility management income and related cost of operations should continue to
decrease.
The decrease in property management operations with respect to
commercial properties for 1999 as compared to 1998 is due to the deconsolidation
of PSBP, which eliminated commercial properties management fee income and cost
of operations after April 1, 1998.
OTHER INCOME AND EXPENSE ITEMS
- --------------------------------------------------------------------------------
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:
22
<PAGE>
Three months ended
March 31,
--------------------
1999 1998 Change
--------- --------- ---------
(Amounts in thousands)
Sales of packaging material and truck
rental income:
Revenues............................. $ 2,135 $ 1,482 $ 653
Cost of operations................... 1,810 1,291 (519)
--------- --------- ---------
Net operating income............... 325 191 134
Interest and other income............... 2,038 3,461 (1,423)
--------- --------- ---------
Total interest and other income....... $ 2,363 $ 3,652 $ (1,289)
========= ========= =========
Interest and other income principally consists of interest earned on
cash balances and interest related to mortgage notes receivable. The decrease in
interest income for the three months ended March 31, 1999 compared to the same
periods in 1998 is primarily due to decreased interest income on excess cash
balances.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense
has increased $755,000 to $28,974,000 for the three months ended March 31, 1999
as compared to $28,219,000 for the same period in 1998. These increases are
principally due to the acquisition of additional real estate facilities during
1998 and 1999, offset partially by the deconsolidation of PSBP. Amortization
expense with respect to intangible assets totaled $2,328,000 for the three
months ended March 31, 1999 and 1998.
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
March 31, 1999 was $3,353,000 compared to $6,352,000 for the same period in
1998.
The decrease in minority interest in income is primarily the result of
the 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 AND TRENDS
- --------------------------------------------------------------------------------
At March 31, 1999, there were approximately 51 ownership entities
owning in aggregate 1,313 self-storage facilities, including the facilities
which the Company owns and/or operates. At March 31, 1999, 149 of these
facilities were owned by the Unconsolidated Entities, in which the Company has
an ownership interest and uses the equity method of accounting. The remaining
1,164 facilities are owned by the Company and Consolidated Entities, many of
which were acquired through business combinations, including the merger with
Storage Trust, during 1999 and 1998. The following table summarizes the
Company's investment in real estate facilities as of March 31, 1999, excluding
the seven real estate facilities used in PSPUD's 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.................... 628 1 629 38,445 9 38,454
Facilities owned by Consolidated Entities.. 536 - 536 30,435 - 30,435
------------- ---------- --------- ----------- ----------- ---------
Total consolidated facilities.......... 1,164 1 1,165 68,880 9 68,889
Facilities owned by Unconsolidated Entities 149 114 263 8,634 11,269 19,903
------------- ---------- --------- ----------- ----------- ---------
Total facilities in which the
Company has an ownership interest.... 1,313 115 1,428 77,514 11,278 88,792
============= ========== ========= =========== =========== =========
</TABLE>
In order to evaluate how the Company's overall portfolio has performed,
management analyzes the operating performance of a consistent group of
self-storage facilities representing 984 (57.5 million net rentable square feet)
of the 1,313 self-storage facilities (herein referred to as "Same Store"
self-storage facilities). The 984 facilities represent a pool of properties,
23
<PAGE>
which have been operated under the "Public Storage" name, at a stabilized level,
by the Company since January 1, 1994. From time to time, the Company removes
facilities from the "Same Store" pool as a result of expansions or other
activities, which make such facilities' results not comparable to previous
periods. The Same Store group of properties includes 861 consolidated facilities
and 123 facilities owned by Unconsolidated Entities. The following table
summarizes the pre-depreciation historical operating results of the Same Store
self-storage facilities:
SAME STORE SELF-STORAGE FACILITIES: Three months ended
- ----------------------------------- March 31,
(historical property operations) ----------------------- Percentage
1999 1998 Change
--------- ---------- ----------
(Amounts in thousands,
except rent per square foot)
Rental income....................... $ 131,709 $ 124,211 6.0%
Cost of operations (includes an
imputed 6% property management fee)
(1)............................... 47,422 44,816 5.8%
--------- ---------- ----------
Net operating income................ $ 84,287 $ 79,395 6.2%
========= ========== ==========
Gross profit margin (2)............. 64.0% 63.9% 0.1%
WEIGHTED AVERAGE:
Occupancy......................... 91.3% 91.5% (0.2)%
Realized annual rent per sq. ft (3) $10.04 $ 9.44 6.4%
Scheduled annual rent per sq. ft (3) $10.45 $10.00 4.5%
- --------------------------------------------------------------------------------
1. Assumes payment of property management fees on all facilities,
including those facilities owned by the Company for which no fee is
paid. Cost of operations consists of the following:
Three months ended March 31, 1999 1998
---------------------------- ------- -------
Payroll expense $11,738 $11,044
Property taxes 12,656 12,487
Imputed 6% property management fees 7,903 7,453
Advertising 2,046 1,646
Telephone reservation center costs 1,991 1,358
Other 11,088 10,828
------- -------
$47,422 $44,816
======= =======
2. Gross profit margin is computed by dividing property net operating
income (before depreciation expense) by rental revenues. Cost of
operations includes a 6% management fee. The gross profit margin
excluding the facility management fee was 70.0%, and 69.9% for the
three months ended March 31, 1999 and 1998, respectively.
3. Realized rent per square foot as presented throughout this report
represents the actual revenue earned per occupied square foot.
Management believes this is a more relevant measure than the scheduled
rental rates, since scheduled rates can be discounted through the use
of promotions.
Rental income for the Same Store facilities included promotional
discounts totaling $4,143,000 for the three months ended March 31, 1999 compared
to $4,249,000 for the same period in 1998.
During the year ended December 31, 1998 as compared to the year ended
December 31, 1997, the Same Store facilities exhibited growth in rental income
and net operating income of 7.6% and 8.2%, respectively, as a result of
increased realized rents and occupancies. The Company does not expect to
maintain this growth rate in 1999 as it does not anticipate significant
increases in occupancies and anticipates smaller increases in realized rents
than it experienced in 1998.
24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
The Company believes that its internally generated net cash provided by
operating activities 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.
Operating as a real estate investment trust ("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
flow must be used to make distributions to its shareholders (see "REIT STATUS"
below). However, despite the significant distribution requirements, the Company
has been able to retain a significant amount of its operating cash flow. 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 generated is available to the
Company to make both scheduled and optional principal payments on debt and for
reinvestment.
For the three months ended
March 31,
---------------------------
1999 1998
------------ ------------
(Amounts in thousands)
Net income........................................... $ 61,842 $ 48,364
Depreciation and amortization........................ 28,974 28,219
Depreciation from Unconsolidated Entities............ 4,129 1,865
Minority interest in income.......................... 3,353 6,352
------------ ------------
Net cash provided by operating activities.......... 98,298 84,800
Distributions from operations to minority interests.. (5,664) (10,557)
------------ ------------
Cash from operations allocable to the Company's
shareholders....................................... 92,634 74,243
Less: preferred stock dividends...................... (21,530) (20,140)
------------ ------------
Cash from operations available to common
shareholders....................................... 71,104 54,103
Capital improvements to maintain facilities:......... (2,935) (4,090)
Add back: minority interest share of capital
improvements to maintain facilities................ 192 558
------------ ------------
Funds available for principal payments on debt,
common dividends and reinvestment.................. 68,361 50,571
Cash distributions to common shareholders............ (28,332) (24,580)
------------ ------------
Funds available for principal payments on debt
and reinvestment................................... $ 40,029 $ 25,991
============ ============
The Company expects to fund its growth strategies with cash on hand at
March 31, 1999, internally generated retained cash flows, proceeds from issuing
equity securities and borrowings under its $150 million credit facility. The
Company intends to repay amounts borrowed under the credit facility from
undistributed operating cash flow or, as market conditions permit and are
determined to be advantageous, from the public or private placement of equity
securities.
The Company's portfolio of real estate facilities remains substantially
unencumbered. At March 31, 1999, the Company had mortgage debt outstanding of
$34.8 million and had consolidated real estate facilities with a book value of
$3.2 billion. The Company has been reluctant to finance its acquisitions with
debt and generally will only increase its mortgage borrowing through the
assumption of pre-existing debt on acquired real estate facilities.
During the first quarter of 1999, the Company issued a total of 9.2
million depositary shares (each representing 1/1,000 of a share) of its
Preferred Stock, Series K and L, raising net proceeds of approximately $222.6
million. Proceeds of the offerings were utilized to pay related costs of $103.6
million in connection with the Storage Trust merger. The remaining proceeds will
be utilized to fund the Company's development activities, PSPUD activities and
acquisition activities.
25
<PAGE>
DISTRIBUTION REQUIREMENTS: The Company's conservative distribution
policy has been the principal reason for the Company's ability to retain
significant operating cash flows which have been used to make additional
investments and reduce debt. During the three months ended March 31, 1999 and
1998, the Company distributed to common shareholders approximately 39.8% and
45.4% of its cash available from operations allocable to common shareholders,
respectively.
During the three months ended March 31,1999, the Company paid dividends
totaling $20,977,000 to the holders of the Company's Senior Preferred Stock and
$28,332,000 to the holders of Common Stock. In addition, at March 31, 1999, the
Company accrued distributions with respect to the Series L preferred stock for
the period from the date of issuance through March 31, 1999 totaling $553,000
which will be paid on June 30, 1999. The Company estimates the regular
distribution requirements for fiscal 1999 with respect to Senior Preferred Stock
outstanding at December 31, 1998 to be approximately $76.2 million. With respect
to the preferred stock issued in January and March 1999, the annual distribution
requirement is approximately $19.0 million. Distributions with respect to the
common stock will be determined based upon the Company's REIT distribution
requirements after taking into consideration distributions to the Company's
preferred shareholders.
The Company expects to make a special cash distribution to common
shareholders in 1999 assuming a continuation of its increasing level of taxable
income.
CAPITAL IMPROVEMENT REQUIREMENTS: During 1999, the Company budgeted
approximately $20.1 million for capital improvements ($19.5 million for its
self-storage facilities and $0.6 million for its commercial space), excluding
amounts to be incurred with respect to the facilities acquired in the Storage
Trust merger. The minority interests' share of the budgeted capital improvements
is approximately $1.5 million. During the three months ended March 31, 1999, the
Company incurred capital improvements of approximately $2.9 million. In
addition, the Company expects to spend over the next 18 months approximately $15
million in property improvements to the properties acquired in the Storage Trust
merger.
DEBT SERVICE REQUIREMENTS: The Company does not believe it has any
significant refinancing risks with respect to its mortgage debt, all of which is
fixed rate. At March 31, 1999, the Company had total outstanding notes payable
of approximately $180,845,000. In connection with the March 1999 merger with
Storage Trust, the Company assumed $100 million of notes payable.
Approximate principal maturities of notes payable at March 31, 1999 are as
follows:
Unsecured Fixed Rate
Senior Notes Mortgage Debt Total
------------- ------------- -------------
(Amounts in thousands)
1999 (remainder of)............ $ 8,000 $ 5,817 $ 13,817
2000........................... 8,750 2,622 11,372
2001........................... 9,500 2,910 12,410
2002........................... 24,450 3,229 27,679
2003........................... 35,900 3,584 39,484
Thereafter..................... 59,400 16,683 76,083
------------- ------------- -------------
$146,000 $ 34,845 $ 180,845
============= ============= =============
Weighted Average Rate 7.4% 10.4% 8.0%
============= ============= =============
REPURCHASES OF THE COMPANY'S COMMON STOCK: As previously announced, the
Company's 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. In the quarter ended March 31, 1999, the
Company repurchased a total of 690,227 shares, for a total aggregate cost of
approximately $17.6 million. Cumulatively since the repurchase announcement,
through March 31, 1999, the Company has repurchased a total of 3,509,627 shares
of common stock at an aggregate cost of approximately $89.9 million.
26
<PAGE>
DEVELOPMENT OF SELF-STORAGE FACILITIES: 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 joint venture is funded solely with equity capital consisting of
30% from the Company and 70% from the institutional investor. The Company's
share of the cost of the real estate in the joint venture is approximately $49.4
million at March 31, 1999.
During the quarter ended March 31, 1999, the joint venture opened three
new self storage facilities that it had developed (approximately 191,000 net
rentable sq. ft.). In addition, one project that was completed by the Company in
August 1998 was contributed to the joint venture in the quarter ended March 31,
1999. As of March 31, 1999, the joint venture had 28 operating facilities, with
1,711,000 net rentable square feet and total development costs of approximately
$142.3 million. As of March 31, 1999, the joint venture is developing 6
additional projects (approximately 409,000 net rentable square feet) that were
in process, with total costs incurred of $22.4 million and estimated remaining
costs to complete of $6.7 million.
The joint venture is reviewing the final 15 projects (approximately
959,000 net rentable sq. ft), and upon approval the joint venture will be fully
committed. These projects are currently being developed (one of these 15
projects has already been opened, and construction has not yet begun on two of
these projects) by the Company until they are approved by the joint venture. As
of March 31, 1999, the Company has incurred total development costs of $30.5
million (estimated remaining costs to complete of $32.7 million) with respect to
these 15 projects.
Excluding the aforementioned 15 properties that are being reviewed by
the joint venture and the aforementioned 6 properties that the joint venture was
developing, the Company is developing 20 additional self storage facilities
(1,199,000 net rentable square feet) with total incurred costs at March 31, 1999
of $30.2 million (estimated remaining costs to complete of $56.0 million), and
has identified 23 additional self-storage facilities for development (1,321,000
net rentable square feet), with total estimated costs of approximately $93.9
million. These projects are subject to significant contingencies.
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, provided that at least 95% of its taxable
income is so distributed prior to filing of the Company's tax return. The
Company has satisfied the REIT distribution requirement since 1980.
FUNDS FROM OPERATIONS: Total funds from operations or "FFO" increased
to $92,634,000 for the three months ended March 31, 1999 compared to $74,243,000
for the same period in 1998. FFO available to common shareholders (after
deducting preferred stock dividends) increased to $71,104,000 for the three
months ended March 31, 1999 compared to $54,103,000 for the same period in 1998.
FFO means net income or (loss) (computed in accordance with generally accepted
accounting principles) before: (i) gain or (loss) on early extinguishment of
debt, (ii) minority interest in income and (iii) gain or (loss) on the
disposition of real estate, adjusted as follows: (i) plus depreciation and
amortization (including the Company's pro-rata share of depreciation and
amortization of unconsolidated equity interests and amortization of assets
acquired in a merger, including property management agreements and goodwill),
and (ii) less FFO attributable to minority interest.
FFO is a supplemental performance measure for equity REITs as defined
by the National Association of Real Estate Investment Trusts, Inc. ("NAREIT").
The NAREIT definition does not specifically address the treatment of minority
interest in the determination of FFO or the treatment of the amortization of
property management agreements and goodwill. In the case of the Company, FFO
represents amounts attributable to its shareholders after deducting amounts
attributable to the minority interests and before deductions for the
amortization of property management agreements and goodwill. FFO is presented
because management, as well as many industry analysts consider FFO to be one
measure of the performance of the Company and it is used in establishing the
terms of the Class B Common Stock. FFO does not take into consideration capital
27
<PAGE>
improvements, scheduled principal payments on debt, distributions and other
obligations of the Company. Accordingly, FFO 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. FFO is not comparable to similarly
entitled items reported by other REITs that do not define it exactly as the
Company defines it.
IMPACT OF YEAR 2000
-------------------
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.
The Company has two phases in its process with respect to each of its
systems; i) assessment, whereby the Company evaluates whether the system is Y2K
compliant and identifies the plan of action with respect to remediating any Y2K
issues identified and ii) implementation, whereby the Company completes the plan
of action prepared in the assessment phase and verifies that Y2K compliance has
been achieved.
Many of the Company's critical applications, relative to the direct
management of properties, 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 completed by June 1999.
The Company expects the implementation of any required solutions to be completed
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 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 cost of the Company's year 2000 compliance activities (which
primarily consists of the costs of new systems) is estimated at approximately
$4.3 million, of which approximately $3.5 million has been incurred to date.
These costs are capitalized. The Company's year 2000 compliance efforts have not
resulted in any significant deferrals in other information system projects.
The costs of the projects and the date on which the Company expects to
achieve Year 2000 Compliance 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
28
<PAGE>
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.
29
<PAGE>
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
-----------------
ANDERSON V. PUBLIC STORAGE, INC., San Francisco Superior Court (filed September
19, 1997)
GRANT V. PUBLIC STORAGE, INC., San Diego Superior Court (filed October 6, 1997)
WREN V. PUBLIC STORAGE, INC., San Francisco Superior Court (filed October 16,
1997)
Each of the plaintiffs in these cases is suing the Company on behalf of
a purported class of California tenants who rented storage spaces from the
Company and contends that the Company's fees for late payments under its rental
agreements for storage space constitutes unlawful "penalties" under the
liquidated damages provisions of California law and under California's unfair
business practices act. None of the plaintiffs has assigned any dollar amount to
the claims.
In February 1998, the lower court dismissed the Anderson case, but in
May 1999 the court of appeal reversed the lower court's dismissal of the
plantiff's claim under the California unfair business practices act and affirmed
the dismissal under the liquidated damages provisions of California law. The
Company is continuing to vigorously contest the claims in all three legal
proceedings.
In addition, the Company is a party to various claims, complaints and
other legal actions that have arisen in the normal course of business from time
to time. The Company believes the outcome of these pending legal proceedings, in
the aggregate, will not have a material adverse effect on the operations or
financial position of the Company.
Item 6 Exhibits and Reports on Form 8-K
--------------------------------
(a) The following Exhibits are included herein:
( 3) Amendment to Bylaws Adopted on May 6, 1999
(11) Statement re: Computation of Earnings per Share
(12) Statement re: Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated January 13,
1999, pursuant to Item 5, which filed certain exhibits relating to
the Company's public offering of Depositary Shares each representing
1/1,000 of a share of 8 1/4% Cumulative Preferred Stock, Series K.
The Company filed a Current Report on Form 8-K dated March 4, 1999,
pursuant to Item 5, which filed certain exhibits relating to the
Company's public offering of Depositary Shares each representing
1/1,000 of a share of 8 1/4% Cumulative Preferred Stock, Series L.
30
<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: May 17, 1999
PUBLIC STORAGE, INC.
BY: /s/ John Reyes
--------------
John Reyes
Senior Vice President and Chief Financial Officer
(Principal financial officer and duly authorized
officer)
31
AMENDMENT TO BYLAWS OF PUBLIC STORAGE, INC.
ADOPTED BY THE SHAREHOLDERS OF PUBLIC STORAGE, INC.
ON MAY 6, 1999
RESOLVED: That Article IV, Section 3 of the corporation's Bylaws is
hereby amended to read as follows:
"Section 3. Number and Qualification of Directors. The number of
directors of the corporation shall be not less than eight (8) nor more
than fifteen (15). The exact number of directors shall be ten (10)
until changed, within the limits specified above, by a bylaw amending
this Section 3, duly adopted by the board of directors or by the
shareholders. The indefinite number of directors may be changed, or a
definite number fixed without provision for an indefinite number, by a
duly adopted amendment to the articles of incorporation or by an
amendment to this bylaw duly adopted by the vote or written consent of
holders of a majority of the outstanding shares entitled to vote;
subject, however, to such additional voting requirement or limitation
as is imposed under applicable law in the case of an amendment reducing
the number of directors to a number less than five (5)."
Exhibit 3
PUBLIC STORAGE, INC.
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
-----------------------------------------
EARNINGS PER SHARE: 1999 1998
- ---------------------------------------------------------------- ------------------ ------------------
<S> <C> <C>
Net income...................................................... $ 61,842,000 $ 48,364,000
Less: Preferred Stock dividends:
10% Cumulative Preferred Stock, Series A..................... (1,140,000) (1,140,000)
9.20% Cumulative Preferred Stock, Series B................... (1,372,000) (1,372,000)
Adjustable Rate Preferred Stock, Series C.................... (506,000) (506,000)
9.50% Cumulative Preferred Stock, Series D................... (713,000) (713,000)
10.0% Cumulative Preferred Stock, Series E................... (1,372,000) (1,372,000)
9.75% Cumulative Preferred Stock, Series F................... (1,401,000) (1,401,000)
8.875% Cumulative Preferred Stock, Series G.................. (3,828,000) (3,828,000)
8.45% Cumulative Preferred Stock, Series H................... (3,565,000) (3,565,000)
8.625% Cumulative Preferred Stock, Series I.................. (2,156,000) (2,156,000)
8.00% Cumulative Preferred Stock, Series J................... (3,000,000) (3,000,000)
8.25% Cumulative Preferred Stock, Series K................... (1,924,000) -
8.25% Cumulative Preferred Stock, Series L................... (553,000) -
8.25% Convertible Preferred Stock............................ - (1,087,000)
------------------ ------------------
Net income allocable to common shareholders..................... $ 40,312,000 $ 28,224,000
================== ==================
Weighted average common shares outstanding:
Basic - weighted average common shares outstanding........... 118,624,000 109,466,000
Net effect of dilutive stock options - based on treasury
stock method using average market price.................... 390,000 570,000
------------------ ------------------
Diluted weighted average common shares outstanding......... 119,014,000 110,036,000
================== ==================
Basic earnings per common share................................. $0.34 $0.26
================== ==================
Diluted earnings per common share............................... $0.34 $0.26
================== ==================
</TABLE>
Exhibit 11
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
---------------------------------
EARNINGS PER SHARE: 1999 1998
- ----------------------------------------------------------------------------------- -------------- --------------
<S> <C> <C>
Net income allocable to common shareholders...................................... $ 40,312,000 $ 28,224,000
Add dividends paid to holders of Convertible Preferred Stocks:
*8.25% Convertible Preferred Stock....................................... - 1,087,000
-------------- --------------
Net income allocable to common shareholders for purposes of determining Diluted
Earnings per Share, assuming conversion of anti-dilutive securities........... $ 40,312,000 $ 29,311,000
============== ==============
Diluted weighted average common shares outstanding............................... 119,014,000 110,036,000
Pro forma weighted average common shares assuming conversion of Convertible
Preferred Stock:
*8.25% Convertible Preferred Stock....................................... - 3,562,000
-------------- --------------
Weighted average common shares for purposes of computation of Diluted Earnings per
Share, assuming conversion of anti-dilutive securities........................ 119,014,000 113,598,000
============== ==============
Diluted Earnings per Common Share, assuming conversion of anti-dilutive securities
(1)........................................................................... $ 0.34 $ 0.26
============== ==============
</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>
Three Months Ended
March 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net income................................................ $ 61,842 $ 48,364
Add: Minority interest in income....................... 3,353 6,352
Less: Minority interests in income which do not have
fixed charges......................................... (3,103) (6,044)
------------ ------------
Income from continuing operations......................... 62,092 48,672
Interest expense....................................... 1,204 1,162
------------ ------------
Total Earnings Available to Cover Fixed Charges........... $ 63,296 $ 49,834
============ ============
Total Fixed Charges - Interest expense (including capitalized
interest).............................................. $ 2,162 $ 2,419
============ ============
Total Preferred Stock dividends........................... $ 21,530 $ 20,140
============ ============
Total Combined Fixed Charges and Preferred Stock dividends $ 23,692 $ 22,559
============ ============
Ratio of Earnings to Fixed Charges........................ 29.28x 20.60x
============ ============
Ratio of Earnings to Combined Fixed Charges and Preferred
Stock dividends....................................... 2.67x 2.21x
============ ============
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------
(Amounts in thousands, except ratios)
<S> <C> <C> <C> <C> <C>
Net income................................................ $ 227,019 $ 178,649 $ 153,549 $ 70,386 $ 42,118
Add: Minority interest in income....................... 20,290 11,684 9,363 7,137 9,481
Less: Minority interests in income which do not have
fixed charges......................................... (15,853) (10,375) (8,273) (4,700) (5,906)
----------- ----------- ----------- ----------- ----------
Income from continuing operations......................... 231,456 179,958 154,639 72,823 45,693
Interest expense....................................... 4,507 6,792 8,482 8,508 6,893
----------- ----------- ----------- ----------- ----------
Total Earnings Available to Cover Fixed Charges........... $ 235,963 $ 186,750 $ 163,121 $ 81,331 $ 52,586
=========== =========== =========== =========== ==========
Total Fixed Charges - Interest expense (including capitalized
interest).............................................. $ 7,988 $ 9,220 $ 10,343 8,815 $ 6,893
=========== =========== =========== =========== ==========
Total Preferred Stock dividends........................... $ 78,375 $ 88,393 $ 68,599 $ 31,124 $ 16,846
=========== =========== =========== =========== ==========
Total Combined Fixed Charges and Preferred Stock dividends $ 86,363 $ 97,613 $ 78,942 $ 39,939 $ 23,739
=========== =========== =========== =========== ==========
Ratio of Earnings to Fixed Charges........................ 29.54x 20.25x 15.77x 9.23x 7.63x
=========== =========== =========== =========== ==========
Ratio of Earnings to Combined Fixed Charges and Preferred
Stock dividends....................................... 2.73x 1.91x 2.07x 2.04x 2.22x
=========== =========== =========== =========== ==========
</TABLE>
Exhibit 12
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1999 1998
---------- ----------
SUPPLEMENTAL DISCLOSURE OF RATIO OF FUNDS FROM OPERATIONS
- -------------------------------------------------------------
("FFO") TO FIXED CHARGES:
- --------------------------
<S> <C> <C>
FFO............................................................. $ 92,634 $ 74,243
Interest expense................................................ 1,204 1,162
---------- ----------
Adjusted FFO available to cover fixed charges................... $ 93,838 $ 75,405
========== ==========
Total Fixed Charges - Interest expense (including capitalized
interest)................................................... $ 2,162 $ 2,419
========== ==========
Total Preferred Stock dividends................................. $ 21,530 $ 20,140
========== ==========
Total Combined Fixed Charges and Preferred Stock dividends...... $ 23,692 $ 22,559
========== ==========
Ratio of FFO to Fixed Charges................................... 43.40x 31.17x
========== ==========
Ratio of FFO to Combined Fixed Charges and Preferred Stock
dividends................................................... 3.96x 3.34x
========== ==========
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF RATIO OF FUNDS FROM OPERATIONS
- -------------------------------------------------------------
("FFO") TO FIXED CHARGES:
- --------------------------
<S> <C> <C> <C> <C> <C>
FFO............................................................. $ 336,363 $ 272,234 $ 224,476 $ 105,199 $ 56,143
Interest expense................................................ 4,507 6,792 8,482 8,508 6,893
---------- ---------- ---------- ---------- ----------
Adjusted FFO available to cover fixed charges................... $ 340,870 $ 279,026 $ 232,958 $ 113,707 $ 63,036
========== ========== ========== ========== ==========
Total Fixed Charges - Interest expense (including capitalized
interest)................................................... $ 7,988 $ 9,220 $ 10,343 $ 8,815 $ 6,893
========== ========== ========== ========== ==========
Total Preferred Stock dividends................................. $ 78,375 $ 88,393 $ 68,599 $ 31,124 $ 16,846
========== ========== ========== ========== ==========
Total Combined Fixed Charges and Preferred Stock dividends...... $ 86,363 $ 97,613 $ 78,942 $ 39,939 $ 23,739
========== ========== ========== ========== ==========
Ratio of FFO to Fixed Charges................................... 42.67x 30.26x 22.52x 12.90x 9.15x
========== ========== ========== ========== ==========
Ratio of FFO to Combined Fixed Charges and Preferred Stock
dividends................................................... 3.95x 2.86x 2.95x 2.85x 2.66x
========== ========== ========== ========== ==========
</TABLE>
Exhibit 12
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000318380
<NAME> Public Storage, Inc.
<MULTIPLIER> 1
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Mar-31-1999
<EXCHANGE-RATE> 1
<CASH> 102,575,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 102,575,000
<PP&E> 3,681,500,000
<DEPRECIATION> (437,655,000)
<TOTAL-ASSETS> 4,110,491,000
<CURRENT-LIABILITIES> 88,872,000
<BONDS> 0
0
1,098,900,000
<COMMON> 13,532,000
<OTHER-SE> 2,571,401,000
<TOTAL-LIABILITY-AND-EQUITY> 4,110,491,000
<SALES> 0
<TOTAL-REVENUES> 148,270,000
<CGS> 0
<TOTAL-COSTS> 50,886,000
<OTHER-EXPENSES> 30,985,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,204,000
<INCOME-PRETAX> 61,842,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 61,842,000
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.34
</TABLE>
