News Release
Public Storage, Inc.
701 Western Avenue
Glendale, CA 91201-2349
www.publicstorage.com
For Release: Immediately
Date: November 4, 2004
Contact: Mr. Harvey Lenkin
(818) 244-8080
PUBLIC STORAGE, INC. REPORTS RESULTS FOR THE THIRD QUARTER ENDED SEPTEMBER 30,
2004
Glendale, California - Harvey Lenkin, President of Public Storage, Inc. (NYSE
and PCX: PSA), announced today operating results for the quarter ended September
30, 2004.
Operating Results for the Quarter Ended September 30, 2004
- ----------------------------------------------------------
Net income for the three months ended September 30, 2004 was $97,515,000
compared to $89,747,000 for the same period in 2003, representing an increase of
$7,768,000 or 8.7%. This increase is primarily due to improved operations of our
Same Store self-storage facilities, improved operations of our newly developed
facilities as their occupancies have continued to increase and a decrease in
income allocable to minority interests as a result of our restructuring of $200
million of our Series N preferred partnership units. These items were partially
offset by the impact of lower equity in earnings from our investment in PS
Business Parks ("PSB"), primarily due to higher depreciation expense associated
with the acquisition of significant real estate assets by PSB during the fourth
quarter of 2003. In addition, net income for the three months ended September
30, 2004 was negatively impacted by casualty losses incurred as a result of the
recent hurricanes experienced in Florida and surrounding areas.
Net income allocable to our common shareholders (after allocating net income to
our preferred and equity shareholders) was $48,597,000 or $0.38 per common share
on a diluted basis (based on 128,826,000 weighted average diluted common
equivalent shares) for the three months ended September 30, 2004 compared to
$49,179,000 or $0.39 per common share on a diluted basis (based on 126,802,000
weighted average diluted common equivalent shares) for the same period in 2003,
representing a decrease of 1.2% in the aggregate or 2.6% on a per share basis.
The decrease to net income allocable to common shareholders and earnings per
common diluted share are due to the impact of the factors described above with
respect to net income combined with an increase in net income allocated to our
preferred shareholders.
For the three months ended September 30, 2004 and 2003, we allocated $40,471,000
and $35,193,000 of our net income respectively, to our preferred shareholders
based on distributions paid. For the three months ended September 30, 2004, we
recorded an additional allocation of net income to our preferred shareholders
and a corresponding reduction of net income allocation to our common
shareholders of $3,072,000 or $0.02 per common share with respect to our
redemption of our Series M and Series D Preferred stock, pursuant to Emerging
Issues Task Force Topic D-42 ("EITF Topic D-42").
Weighted average diluted shares increased from 126,802,000 for the three months
ended September 30, 2003 to 128,826,000 for the three months ended September 30,
2004 due primarily to the exercise of employee stock options.
Operating Results for the Nine Months Ended September 30, 2004
- --------------------------------------------------------------
Net income for the nine months ended September 30, 2004 was $258,942,000
compared to $250,683,000 for the same period in 2003, representing an increase
of $8,259,000 or 3.3%. This increase is primarily due to improved operations of
our Same Store self-storage facilities, improved operations of our newly
developed facilities as they have continued to increase their occupancies and a
decrease in income allocable to minority interests based upon ongoing
distributions as a result of our restructuring of $200 million of our Series N
preferred partnership units. This increase is partially offset by an increase in
the allocation of income to minority interest of $10,063,000 attributable to the
restructuring of our preferred partnership interests and increased general and
administrative expense attributable primarily to increased stock-based
compensation expense. Net income was also negatively impacted by decreased
equity in earnings from PSB, which is attributable primarily to increased
depreciation expense associated with PSB's acquisition of significant real
estate assets during the fourth quarter of 2003 and a gain recorded in the nine
months ended September 30, 2003. In addition, net income for the three months
ended September 30, 2004 was negatively impacted by casualty losses incurred as
a result of the recent hurricanes experienced in Florida and surrounding areas.
1
Net income allocable to our regular common shareholders (after allocating net
income to our preferred and equity shareholders) was $118,728,000 or $0.92 per
common share on a diluted basis (based on 128,545,000 weighted average diluted
common equivalent shares) for the nine months ended September 30, 2004 compared
to $123,246,000 or $0.98 per common share on a diluted basis (based on
125,987,000 weighted average diluted common equivalent shares) for the same
period in 2003, representing a decrease of 3.7% in the aggregate or 6.1% on a
per share basis. The decreases to our net income allocable to common
shareholders and earnings per common diluted share are primarily due to an
increase in net income allocated to our preferred shareholders based upon
distributions paid, and based upon redemptions of preferred stock (described
below), offset partially by the factors denoted above with respect to the
increase in net income.
For the nine months ended September 30, 2004 and 2003, we allocated $117,293,000
and $107,914,000 of our net income, respectively, to our preferred shareholders
based on their distributions. In addition, for the nine months ended September
30, 2004 and 2003, we allocated a total of $6,795,000 and $3,397,000 to our
preferred shareholders due to the application of EITF Topic D-42 with respect to
our redemption of our various series of our preferred stock.
Weighted average diluted shares increased from 125,987,000 for the nine months
ended September 30, 2003 to 128,545,000 for the nine months ended September 30,
2004 due primarily to the exercise of employee stock options.
Effects of Hurricanes
- ---------------------
During the third quarter of 2004, several of our facilities, primarily located
in Florida, incurred damage due to Hurricanes Charley, Frances, Ivan and Jeanne.
We currently estimate that the uninsured property damage sustained totals $3.7
million, consisting of $2.9 million of expenditures that will be capitalized and
$800,000 of repairs and maintenance.
Approximately $200,000 of the repairs and maintenance had been completed and
included in cost of operations as of September 30, 2004. We expect that the
remaining $600,000 will be completed and expensed as part of cost of operations
during the fourth quarter of 2004.
During the third quarter of 2004, we eliminated the net carrying value
($1,250,000) of damaged assets from our balance sheet and included the charge as
a reduction to our net income in the line item "Asset impairment charge due to
casualty loss from hurricanes." These assets will ultimately be replaced by the
above mentioned capital expenditures.
Included in cost of operations for tenant reinsurance is $1.5 million of
estimated losses from tenant claims against our reinsurance subsidiary as a
result of damages from the hurricanes. This subsidiary reinsures policies
against claims for losses to goods stored by tenants in our facilities.
Effects from the Redemption and Issuance of Preferred Securities
- ----------------------------------------------------------------
During the third quarter of 2004, distributions paid to our preferred
shareholders increased by approximately $5.3 million. This increase was due to
an increase in distributions paid to our preferred shareholders (approximately
$10.6 million during the three months ended September 30, 2004 as compared to
the same period in 2003) due to the issuance of approximately $743.8 million of
preferred stock over the past year, partially offset by a reduction in
distributions paid (approximately $5.3 million during the three months ended
September 30, 2004 as compared to the same period in 2003) due to the redemption
of approximately $316.3 million of our preferred stock over the past year. The
average annual dividend rate with respect to these newly issued securities is
approximately 6.5% annually as compared to the average dividend rate with
respect to the securities that were redeemed of approximately 8.5% annually.
As indicated above, during the three months ended September 30, 2004, we
redeemed approximately $86.3 million of our preferred stock. In connection with
those redemptions, and pursuant to EITF Topic D-42, we allocated additional net
income to our preferred shareholders and a corresponding reduction of net income
allocation to our common shareholders of $3,072,000 or $0.02 per common share.
This allocation represents the issuance costs of the redeemed securities that
were capitalized at the original issuance date.
We have approximately $197,375,000 in preferred securities that, at our option,
become redeemable in the remainder of 2004 and 2005, with an average coupon of
9.626%, as follows:
2
Earliest
Redemption Dividend Liquidation
Security Date Rate Value (000's)
- ------------------------------------- ---------- --------- -------------
Series E Preferred Stock 1/31/05 10.000% $ 54,875
Series N Preferred Units 3/17/05 9.500% 40,000
Series O Preferred Units 3/29/05 9.125% 45,000
Series F Preferred Stock 4/30/05 9.750% 57,500
--------- -------------
Total securities available for
redemption through 12/31/05 9.626% $ 197,375
========= =============
As a result of the upcoming redemptions of preferred securities noted in the
table above, we expect that the related charges with respect to the application
of EITF Topic D-42 will be approximately $1,929,000 in the fourth quarter of
2004 and $2,778,000 in the first quarter of 2005.
A portion of the net proceeds from the aforementioned issuance of the $743.8
million was utilized during the nine months ended September 30, 2004 to redeem
the $316.3 million of higher coupon rate preferred securities. The remaining net
proceeds from these issuances remains on-hand in our cash reserves earning
interest at nominal rates relative to the distribution requirement of the
preferred stock creating an arbitrage that has negatively impacted our net
income for the three and nine months ended September 30, 2004. We expect that
the negative impact will continue until such net proceeds are ultimately
deployed into the acquisition or development of real estate assets, the
redemption of higher rate preferred securities, scheduled principal payments on
debt or other corporate purposes. We estimate that earnings per common share was
negatively impacted by a total of $0.04 per share for the quarter ended
September 30, 2004 as compared to $0.01 per share for the same period in 2003 as
a result of excess cash balances, based upon the difference between an average
preferred coupon rate of 6.5% and the interest earned on the cash balances.
Funds from Operations
- ---------------------
For the three months ended September 30, 2004, funds from operations ("FFO")
decreased to $0.76 per common share on a diluted basis as compared to $0.79 for
the same period in 2003, representing a decrease of 3.8%. Funds from operations
per common share for the nine months ended September 30, 2004 decreased to $2.11
per common share on a diluted basis as compared to $2.14 for the same period in
2003, representing a decrease of 1.4%.
Funds from operations has been negatively impacted as a result of losses
sustained from the hurricanes, the application of EITF Topic D-42 in connection
with the redemption of preferred securities, the payment of a special
distribution to certain preferred unit holders in connection with the
restructure of the securities and asset impairment charges. The following table
provides a summary of the impact of these items that have occurred during the
three and nine months ended September 30, 2004 and 2003.
3
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ------------------------------
% %
2004 2003 Change 2004 2003 Change
----------- --------- -------- -------- --------- --------
Funds from operations per common share prior to
adjustments for the following items........... $ 0.81 $ 0.79 2.5% $ 2.28 $ 2.19 4.1%
Impact as a result of the excess redemption costs
over carrying value of preferred securities
(application of EITF Topic D-42):
In connection with the redemption of our
preferred stock........................... (0.02) - (0.05) (0.03)
In connection with PSB's redemption of
preferred stock through our pro-rata share
of equity in earnings..................... (0.01) - (0.02) -
In connection with the restructuring of our
preferred partnership units............... - - (0.02) -
Special distribution paid to preferred
unitholders in connection with restructuring - - (0.06) -
the terms of the units........................
Casualty loss from hurricanes................. (0.02) - (0.02) -
Real estate asset impairment charges through
our pro-rata share of PSB's earnings.......... - - - (0.02)
----------- --------- -------- -------- --------- --------
Funds from operations per common share, as
reported...................................... $ 0.76 $ 0.79 (3.8)% $ 2.11 $ 2.14 (1.4)%
=========== ========= ======== ======== ========= ========
During the three months ended September 30, 2004 and 2003, we incurred
stock-based compensation expense of approximately $1,001,000 and $825,000,
respectively. In addition, the increase in our average common share price during
the third quarter of 2004, as compared to the same period in 2003, resulted in
an increase in the weighted average shares outstanding from stock options when
applying the treasury method. The actual issuance of common stock in connection
with the exercise of employee stock options during the period and, to a lesser
extent, the increase in weighted average shares as a result of the change in
share price in conjunction with the treasury method, resulted in a
year-over-year increase of approximately 2,349,000 weighted average shares
outstanding for the purpose of computing FFO per common share for the quarter.
The combination of increased stock-based compensation expense and weighted
average shares outstanding had the impact of reducing FFO per common share by
approximately $0.02 per share for the three months ended September 30, 2004 as
compared to the same period in 2003.
FFO is a term defined by the National Association of Real Estate Investment
Trusts by which real estate investment trusts ("REITs") may be compared. FFO is
a supplemental non-GAAP financial disclosure and it is generally defined as net
income before depreciation and does not include gains or losses on the
disposition of real estate assets. FFO computations do not consider scheduled
principal payments on debt, capital improvements, distributions or other
obligations of the Company. FFO is not a substitute for the Company's cash flow
or net income as a measure of the Company's liquidity or operating performance
or its ability to pay dividends. FFO is presented because many analysts consider
FFO to be one measure of the performance of real estate companies. See the
attached reconciliation of net income to funds from operations included in the
selected financial data attached to this press release.
Property Operations
- -------------------
The Company derives substantially all of its revenues from the ownership and
management of self-storage facilities. In order to evaluate the performance of
the Company's overall self-storage portfolio, management analyzes the operating
performance of a consistent group of self-storage facilities.
These facilities consist of 1,271 self-storage facilities, representing
approximately 89% of the 1,421 self-storage facilities in which the Company has
an ownership interest (the 1,271 self-storage facilities are hereinafter
referred to as the "Same Store" facilities). The Same Store facilities have been
operated on a stabilized basis under the "Public Storage" name since January 1,
2002 and include 1,238 facilities that are consolidated by the Company and 33
facilities owned by unconsolidated entities in which the Company has an
investment.
4
Selected Operating Data for the Same Store
- ------------------------------------------
Facilities (1,271 Facilities):
- ------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------------- ---------------------------------------
Percentage Percentage
2004 2003 Change 2004 2003 Change
---------- ----------- ---------- ----------- ----------- -----------
(Dollar amounts in thousands, except weighted average data)
Revenues:
Rental income, net of discounts......... $ 192,582 $ 185,435 3.9% $ 563,121 $ 536,501 5.0%
Late charges and administrative fees
collected............................... 8,350 7,933 5.3% 24,873 22,371 11.2%
---------- ----------- ---------- ----------- ----------- -----------
Total revenues (a)...................... 200,932 193,368 3.9% 587,994 558,872 5.2%
Cost of operations:
Property taxes.......................... 18,281 17,531 4.3% 54,158 52,082 4.0%
Direct property payroll................. 14,796 14,560 1.6% 44,413 43,347 2.5%
Cost of managing facilities............. 5,976 5,793 3.2% 18,226 16,743 8.9%
Advertising and promotion............... 4,414 6,280 (29.7)% 15,621 16,589 (5.8)%
Utilities............................... 5,229 4,684 11.6% 14,621 13,334 9.7%
Repairs and maintenance................. 5,612 5,004 12.2% 16,958 14,034 20.8%
Telephone reservation center............ 2,793 2,843 (1.8)% 8,463 7,931 6.7%
Property insurance...................... 2,065 2,281 (9.5)% 6,916 6,541 5.7%
Other................................... 6,698 6,039 10.9% 20,701 17,981 15.1%
---------- ----------- ---------- ----------- ----------- -----------
Total cost of operations (a).............. 65,864 65,015 1.3% 200,077 188,582 6.1%
---------- ----------- ---------- ----------- ----------- -----------
Net operating income........................ $ 135,068 $ 128,353 5.2% $ 387,917 $ 370,290 4.8%
========== =========== ========== =========== =========== ===========
Gross margin................................ 67.2% 66.4% 1.2% 66.0% 66.3% (0.5)%
Weighted average for the period:
Square foot occupancy (b)................. 91.8% 92.0% (0.2)% 91.0% 88.7% 2.6%
Realized annual rent per occupied square foot
(c)....................................... $ 11.34 $ 10.89 4.1% $ 11.15 $ 10.90 2.3%
REVPAF (d)................................ $ 10.41 $ 10.02 3.9% $ 10.15 $ 9.67 5.0%
Weighted average at September 30:
Square foot occupancy..................... 91.9% 92.0% (0.1)%
In place annual rent per occupied square
foot (e).................................. $ 12.31 $ 11.81 4.2%
Total net rentable square feet (in thousands) 74,002 74,002 -
(a) See attachedreconciliation of these amounts to the Company's consolidated
self-storage revenues and operating expenses.
(b) Square foot occupancies represent weighted average occupancy levels over
the entire period.
(c) Realized annual rent per occupied square foot is computed by dividing
annualized rental income, net of discounts, by the weighted average
occupied square footage for the period. Realized rent per square foot takes
into consideration promotional discounts, bad debt costs, credit card fees
and other costs that reduce rental income from the contractual amounts due.
(d) Annualized revenue per available square foot ("REVPAF") represents
annualized rental income, net of discounts, divided by total available net
rentable square feet.
(e) In place annual rent per occupied square foot represents contractual rents
per occupied square foot without reductions for promotional discounts.
5
Analysis of Same Store Results for the three months ended September 30, 2004
- ----------------------------------------------------------------------------
During the third quarter of 2004, net operating income for the Same Store
facilities increased 5.2% as compared to the same period in 2003, due to the
following:
o REVPAF increased 3.9% from $10.02 per square foot in the third quarter
of 2003 to $10.41 in the third quarter of 2004. This was attributable
primarily to a 4.1% increase in realized annual rent per occupied
square foot from $10.89 for the three months ended September 30, 2003
to $11.34 for the same period in 2004, offset by a 0.2% decline in
average occupancy.
o The impact of the increase in REVPAF was partially offset by a 1.3%
increase in operating expenses from $65.0 million in the third quarter
of 2003 to $65.9 million in the third quarter of 2004. This increase in
cost of operations is primarily due to 1) increased repairs and
maintenance expense due to our desire to continue to address
maintenance at our facilities and improve their "rent ready" condition,
2) increases in property taxes and 3) increases in cost of managing
facilities. These impacts were offset partially by a decrease in
advertising and promotional expense, which was due primarily to a
$1,356,000 (40.2%) decrease in media advertising as we have reduced the
both the volume and number of markets for our media programs in the
third quarter of 2004 as compared to the same period in 2003.
Analysis of Same Store Results for the nine months ended September 30, 2004
- ---------------------------------------------------------------------------
During the nine months ended September 30, 2004, net operating income for the
Same Store facilities increased 4.8% as compared to the same period in 2003, due
to the following:
o REVPAF increased 5.0% from $9.67 per square foot in the nine months
ended September 30, 2003 to $10.15 in the nine months ended September
30, 2004. This was attributable primarily to a 2.6% increase in
weighted average occupancy levels, combined with a 2.3% increase in
realized annual rent per occupied square foot from $10.90 for the nine
months ended September 30, 2003 to $11.15 for the same period in 2004.
o The impact of the increase in REVPAF was offset by a 6.1% increase in
operating expenses from $188.6 million in the first nine months of 2003
to $200.1 million in the same period in 2004. This increase is
primarily due to 1) higher repairs and maintenance as we continue to
address maintenance at our facilities and improve their "rent ready"
condition and 2) an increase in direct property payroll and cost of
management attributable to higher wage rates and increased incentives
to property personnel. These impacts were offset partially by a
decrease in advertising and promotional expense, which was due
primarily to a $762,000 (9.4%) decrease in media advertising as we have
reduced both the volume and number of markets for our media programs
during the second and third quarters of 2004 as compared to the same
periods in 2003.
Outlook
- -------
The growth in rental income during the remainder of 2004 will depend upon
various factors, among which will be our ability to stabilize and maintain high
occupancy levels and increase rental rates charged to new and existing
customers. The following table summarizes additional selected financial data
with respect to our Same Store facilities:
6
Three Months Ended
----------------------------------------------------------- Full
March 31 June 30 September 30 December 31 Year
------------- ----------- ------------ ------------- ---------
Media advertising expense (in 000's):
2003..................................... $ 1,760 $ 2,987 $ 3,369 $ 1,148 $ 9,264
2004..................................... $ 3,366 $ 1,975 $ 2,013
REVPAF:
2003..................................... $ 9.33 $ 9.65 $ 10.02 $ 9.93 $ 9.73
2004..................................... $ 9.87 $ 10.16 $ 10.41
Weighted average realized annual rent per occupied square foot for the period:
2003..................................... $ 10.99 $ 10.81 $ 10.89 $ 10.95 $ 10.91
2004..................................... $ 11.02 $ 11.11 $ 11.34
Weighted average occupancy levels for the period:
2003..................................... 84.9% 89.2% 92.0% 90.7% 89.2%
2004..................................... 89.6% 91.4% 91.8%
Weighted average occupancy at October 31:
2003..................................... 91.8%
2004..................................... 91.5%
Media advertising expense during the month of October (in 000's):
2003..................................... $ 616
2004..................................... $ -
Development and Acquisition Activity
- ------------------------------------
During the third quarter of 2004, we opened two newly developed self-storage
facilities (123,000 net rentable square feet), at a total cost of approximately
$14,666,000. In addition, we completed one conversion of space at a former
containerized storage facility at a total cost of $1,583,000, adding 51,000 net
rentable square feet of self-storage space. We also completed an expansion of an
existing real estate facility at a total cost of $3,533,000, adding an aggregate
of 61,000 net rentable square feet.
At September 30, 2004, there are 37 projects that are in construction or are
expected to begin construction generally within the next year, comprised of
eight newly developed self-storage facilities (603,000 net rentable square feet)
with total estimated cost of $75.8 million, 12 projects (463,000 net rentable
square feet) which expand existing self-storage facilities and enhance their
visual appeal for a total estimated cost of $35.1 million, and 17 projects
(1,192,000 net rentable square feet) to convert space at former containerized
storage facilities into self-storage space for a total estimated cost of $40.7
million. These projects will be fully funded by the Company. Opening dates for
these facilities are estimated to be through the next 12 to 24 months. The
development of these facilities is subject to various risks and contingencies.
In the third quarter of 2004, we acquired four facilities, in separate
transactions from third parties, consisting of 288,000 net rentable square feet,
for an aggregate cost of approximately $17.5 million in cash. Two of these
facilities were acquired by our Acquisition Joint Venture, in which we have a
30% interest, for an aggregate of $9.2 million in cash. During October 2004, we
acquired 32 facilities at a total cost of $121.5 million, including
post-acquisition costs of computer, signage and other efforts in conforming
these facilities to Public Storage visual and operating standards. The
consideration for these acquisitions consisted of the assumption of $39.5
million of debt, the issuance of $25.0 million of 6.25% Series Z Preferred Units
and $57.0 million in cash. The facilities are located in Minnesota, Texas and
Wisconsin and contain 2,002,000 net rentable square feet of space (14,873
rentable units). In addition, we have contracts to acquire 11 additional
existing self-storage facilities at an aggregate cost of approximately $124.9
million, consisting of a combination of cash and assumption of debt. Each of
these contracts is subject to significant contingencies, and there is no
assurance that any of these facilities will be acquired.
7
Containerized Storage Business
- ------------------------------
As previously announced, management adopted a business plan in 2002 that
included the closure of non-strategic containerized storage facilities. During
2003 and 2004, additional facilities were identified as non-strategic and
scheduled for closure. Collectively, these facilities are referred to as the
"Closed Facilities" and the operations, impairment charges and closure reserves
with respect to these Closed Facilities for current and prior periods are
included in the Company's income statement in the line item, "Discontinued
Operations." Substantially all of the Closed Facilities had ceased all
operations as of September 30, 2004, with the operations of seven facilities
identified as non-strategic during the third quarter 2004 expected to cease by
the end of the first quarter 2005. During the quarter ended September 30, 2004,
asset impairment charges totaling $1,406,000 ($0.01 per common share) were
recorded for facilities that were identified during the quarter for closure as
compared to $1,274,000 ($0.01 per common share) for the same period in 2003.
Issuance and Redemption of Preferred Stock
- ------------------------------------------
As previously announced, on September 13, 2004, we issued 4,600,000 depositary
shares ($115.0 million) representing interests in our 6.60% Cumulative Preferred
Stock, Series C (NYSE:PSAPrC) in a public offering at an issuance price of $25
per share, receiving net proceeds of approximately $111.2 million.
On August 17, 2004, we redeemed all of the outstanding shares (total liquidation
value of $56.3 million) of our 8.75% Cumulative Preferred Stock, Series M, at
$25 per share plus accrued dividends. On September 30, 2004, we redeemed all of
the outstanding shares (total liquidation value of $30.0 million) of our 9.50%
Cumulative Preferred Stock, Series D, at $25 per share plus accrued dividends.
Repurchases of Common Stock
- ---------------------------
As previously reported, the Board of Directors has authorized the repurchase of
up to 25,000,000 shares of the Company's common stock. There have been no
additional repurchases of common shares in the quarter ended September 30, 2004
through November 4, 2004.
Distributions Declared
- ----------------------
On November 4, 2004, the Board of Directors declared a quarterly distribution of
$0.45 per regular common share and $0.6125 per share on the depositary shares
each representing 1/1,000 of a share of Equity Stock, Series A. Distributions
were also declared with respect to the Company's various series of preferred
stock. All the distributions are payable on December 31, 2004 to shareholders of
record as of December 15, 2004.
Third Quarter Conference Call
- -----------------------------
A conference call is scheduled for Friday, November 5, 2004, at 9 a.m. (PST) to
discuss these results. The participant toll free number is (877) 516-1540
(conference ID number 1178425). A simultaneous audio web cast may be accessed by
using the link at www.publicstorage.com under "Investor Relations" (conference
ID number 1178425). An instant replay of the conference call may be accessed
through December 4, 2004 by calling (800) 642-1687 and through December 6, 2004
by using the link at www.publicstorage.com under "Investor Relations." Both
forms of replay utilize conference ID number 1178425.
Public Storage, Inc. is a fully integrated, self-administered and self-managed
real estate investment trust that primarily acquires, develops, owns and
operates self-storage facilities. The Company's headquarters is located in
Glendale, California. The Company's self-storage properties are located in 37
states. At September 30, 2004 the Company had interests in 1,421 storage
facilities with approximately 86.2 million net rentable square feet (815,000
rentable units).
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 21E 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 are described in Item 1A to the Company's Annual Report on Form
10-K for the year ended December 31, 2003, "Risk Factors," and include changes
in general economic conditions and in the market in which the Company operates
and the impact of competition from new and existing storage and commercial
facilities and other storage alternatives, which could impact rents and
occupancy levels at the Company's facilities; difficulties in the Company's
ability to evaluate, finance and integrate acquired and developed properties
into the Company's existing operations and to fill up those properties, which
could adversely affect the Company's profitability; 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,
which could increase the Company's expense and reduce the Company's cash
available for distribution; consumers' failure to accept the containerized
storage concept which would reduce the Company's profitability; difficulties in
raising capital at reasonable rates, which would impede the Company's ability to
grow; delays in the development process, which could adversely affect the
Company's profitability; and economic uncertainty due to the impact of war or
terrorism could adversely affect our business plan. We disclaim any obligation
to publicly release the results of any revisions to these forward-looking
statements reflecting new estimates, events or circumstances after the date of
this report.
8
More information about Public Storage, Inc. is available on the Internet. The
Company's Form 10-Q for the quarter ended September 30, 2004, which will be
certified by the Company's CEO, President, and Chief Financial Officer, will be
posted to our website, www.publicstorage.com, when it is filed with the
Securities and Exchange Commission.
Additional financial data attached.
PUBLIC STORAGE, INC.
SELECTED FINANCIAL DATA
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -----------------------------
2004 2003 2004 2003
-------------- --------------- ------------- --------------
(In thousands, except per share data)
Revenues:
Rental income:
Self-storage facilities (a).................... $ 219,908 $ 206,856 $ 639,025 $ 593,345
Commercial properties (a)...................... 2,707 2,712 8,064 8,299
Containerized storage facilities (a)........... 5,048 6,672 15,099 18,495
Tenant reinsurance premiums...................... 6,210 5,755 18,266 16,551
Interest and other income........................ 3,300 2,847 7,240 7,425
-------------- --------------- ------------- --------------
237,173 224,842 687,694 644,115
-------------- --------------- ------------- --------------
Expenses:
Cost of operations:
Self-storage facilities (a).................... 74,075 70,977 224,119 206,655
Commercial properties (a)...................... 1,031 1,234 3,200 3,415
Containerized storage facilities (a)........... 3,073 3,823 8,741 10,713
Tenant reinsurance............................. 4,204 2,917 11,089 8,631
Depreciation and amortization (a)................ 44,375 45,435 135,515 135,770
General and administrative (b)................... 5,527 4,642 15,983 13,321
Interest expense................................. - 296 100 1,121
-------------- --------------- ------------- --------------
132,285 129,324 398,747 379,626
-------------- --------------- ------------- --------------
Income from continuing operations before equity in
- ------------------------------------------------------------
earnings of real estate entities, minority interest
in income, asset impairment charge and gain on
disposition of real estate investments......... 104,888 95,518 288,947 264,489
Equity in earnings of real estate entities (c)....... 3,184 5,770 11,646 19,456
Asset impairment charge due to casualty loss from hurricanes (1,250) - (1,250) -
Gain on disposition of real estate investments....... 1,286 47 1,286 807
Minority interest in income:
Allocable to preferred minority interests:
Based upon ongoing distributions (d)............. (5,176) (6,726) (16,907) (20,179)
Special distributions and restructuring allocation (d) - - (10,063) -
Other partnership interests ........................ (4,345) (4,418) (12,928) (12,403)
-------------- --------------- ------------- --------------
Income from continuing operations.................... 98,587 90,191 260,731 252,170
Discontinued operations - containerized storage (a) (1,126) (649) (1,931) (2,060)
Discontinued operations -self-storage and commercial (a) 54 205 142 573
-------------- --------------- ------------- --------------
Net income $ 97,515 $ 89,747 $ 258,942 $ 250,683
============== =============== ============= ==============
Net income allocation:
Allocable to preferred shareholders..............
Based on distributions paid.................... $ 40,471 $ 35,193 $ 117,293 $ 107,914
Based on redemptions of preferred stock........ 3,072 - 6,795 3,397
Allocable to equity shareholders, Series A....... 5,375 5,375 16,126 16,126
Allocable to common shareholders................. 48,597 49,179 118,728 123,246
-------------- --------------- ------------- --------------
$ 97,515 $ 89,747 $ 258,942 $ 250,683
============== =============== ============= ==============
Per common share:
Net income per share - Basic..................... $0.38 $0.39 $0.93 $0.99
============== =============== ============= ==============
Net income per share - Diluted................... $0.38 $0.39 $0.92 $0.98
============== =============== ============= ==============
Weighted average common shares - Basic (e)....... 128,085 125,528 127,635 124,740
============== =============== ============= ==============
Weighted average common shares - Diluted (e)..... 128,826 126,802 128,545 125,987
============== =============== ============= ==============
9
(a) The historical operations of five self-storage facilities that the Company
disposed of in the fourth quarter of 2003 and one commercial facility sold
in October 2004 are classified as "Discontinued operations - self-storage
and commercial." In addition, the historical operations of the 39 closed
containerized storage facilities are included in "Discontinued operations -
containerized storage". Included in "Discontinued operations -
containerized storage" for each of the three and nine months ended
September 30, 2003 are asset impairment charges of $1,274,000. Also, during
the nine months ended September 30, 2003 a $750,000 impairment charge on a
real estate facility previously used by the containerized storage
operations was recorded and is reported in discontinued operations. For the
three months ended September 30, 2004, asset impairment charges of
$1,406,000 are included in "Discontinued operations - containerized
storage." For the nine months ended September 30, 2004, "Discontinued
operations - containerized storage" includes asset impairment charges of
$1,575,000 related to the closure of eight facilities in 2004 and lease
termination charges of $416,000 recorded during the quarter ended June 30,
2004.
(b) The increase in general and administrative expense for the three and nine
months ended September 30, 2004 is primarily due to an increase in
stock-based compensation expense from $825,000 and $1,259,000 for the three
and nine months ended September 30, 2003, respectively, to $1,001,000 and
$2,983,000 for the same periods, respectively, in 2004. In addition, these
increases also include severance to terminated employees totaling $581,000
and $1,191,000 for the three and nine months ended September 30, 2004,
respectively, as compared to $45,000 and $525,000 for the same periods in
2003.
(c) The decrease in equity in earnings of real estate entities for the three
months ended September 30, 2004 as compared to the same period in 2003 is
due primarily to a reduction in our share of PSB's earnings, which is due
to higher depreciation due to PSB's significant asset acquisitions in the
fourth quarter of 2003. The decrease in equity in earnings for the three
and nine months ended September 30, 2004 also includes our $1,228,000 and
$2,171,000 share of EITF Topic D-42 charges recorded by PSB. The decrease
in equity in earnings for the nine months September 30, 2004 also includes
the net impact of PSB's impairment charges and gains on sale of real estate
for the nine months ended September 30, 2003, of which our pro-rata share
was net income totaling $453,000.
(d) As previously reported, in the first quarter of 2004 the holders of $200
million of the Series N preferred units agreed, in exchange for a special
distribution of $8 million, to a reduction in the distribution rate on
their preferred units from 9.50% per year to 6.40% per year, effective
March 22, 2004. This $8 million special distribution was reflected as
minority interest in income. In addition, in accordance with the SEC's
clarification of the EITF Topic D-42, the $2,063,000 in costs incurred when
the $200 million in units were originally issued is reflected as minority
interest in income for the quarter ended March 31, 2004. The change in the
ongoing distribution rate reduced preferred minority interest by
approximately $1,550,000 in the quarter ended September 30, 2004 as
compared to the same quarter in 2003.
(e) The increase in weighted average common share - basic was due primarily to
the issuance of an aggregate of 4,482,000 shares of common stock in
connection with the exercise of employee stock options since January 1,
2003.
10
PUBLIC STORAGE, INC.
SELECTED FINANCIAL DATA
September 30, December 31,
2004 2003
----------------- -----------------
(Unaudited)
(In thousands, except share and per
share data)
ASSETS
Cash and cash equivalents .................................... $ 475,280 $ 204,833
Operating real estate facilities:
Land and building, at cost................................. 5,237,590 5,125,498
Accumulated depreciation................................... (1,276,379) (1,153,059)
----------------- -----------------
3,961,211 3,972,439
Construction in process....................................... 40,686 69,620
Real estate facility held for sale, net of accumulated depreciation 2,914 -
Land held for development..................................... 7,580 12,236
----------------- -----------------
4,012,391 4,054,295
Investment in real estate entities............................ 335,478 336,696
Goodwill...................................................... 78,204 78,204
Intangible assets, net........................................ 106,336 111,289
Mortgage notes receivable, including amounts from affiliates.. 487 100,510
Other assets.................................................. 69,737 82,242
----------------- -----------------
Total assets........................................... $ 5,077,913 $ 4,968,069
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable................................................. $ 35,260 $ 76,030
Preferred stock called for redemption......................... - 115,000
Accrued and other liabilities................................. 161,559 131,103
----------------- -----------------
Total liabilities...................................... 196,819 322,133
Minority interest - preferred................................. 285,000 285,000
Minority interest - other..................................... 118,767 141,137
Commitments and contingencies
Shareholders' equity:
Preferred Stock, $0.01 par value, 50,000,000 shares authorized,
6,175,186 shares issued (in series) and outstanding (5,763,986 at December
31, 2003), at liquidation preference:
Cumulative Preferred Stock, issued in series............. 2,157,025 1,867,025
Common Stock, $0.10 par value, 200,000,000 shares authorized,
128,316,807 shares issued and outstanding (126,986,734 at December
31, 2003).................................................. 12,832 12,699
Equity Stock, Series A, $0.01 par value, 200,000,000 shares
authorized, - -
8,776.102 shares issued and outstanding .................
Paid-in capital............................................ 2,452,978 2,438,632
Cumulative net income...................................... 2,625,602 2,366,660
Cumulative distributions paid.............................. (2,771,110) (2,465,217)
----------------- -----------------
Total shareholders' equity............................... 4,477,327 4,219,799
----------------- -----------------
Total liabilities and shareholders' equity............. $ 5,077,913 $ 4,968,069
================= =================
11
Public Storage, Inc.
Selected Financial Data
Computation of Funds from Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
2004 2003 2004 2003
------------- ----------- ------------ -----------
(Amounts in thousands, except per share data)
Computation of Funds from Operations (FFO) allocable to Common
Stock
Net income...................................................... $ 97,515 $ 89,747 $ 258,942 $ 250,683
Add back - depreciation and amortization.................... 44,375 45,435 135,515 135,770
Add back - depreciation and amortization included in
Discontinued Operations..................................... 331 1,038 1,105 3,179
Add back - our pro-rata share of depreciation from equity
investments................................................. 8,521 7,215 25,055 20,353
Eliminate - depreciation with respect to non-real estate
assets...................................................... (1,030) (1,530) (3,256) (4,852)
Eliminate - our pro-rata share of PS Business Parks, Inc.'s
gain on sale of real estate................................. (136) - (62) (3,052)
Eliminate - gain on sale of real estate assets.............. (1,286) (47) (1,286) (807)
Add back - minority interest share of income................ 9,521 11,144 39,898 32,582
------------- ----------- ------------ -----------
Consolidated FFO................................................ 157,811 153,002 455,911 433,856
Allocable to preferred minority interest:
Based upon ongoing distributions (a)........................ (5,176) (6,726) (16,907) (20,179)
Special distribution and Topic D-42 allocation (a).......... - - (10,063) -
Allocable to minority interest - other partnership interests.... (5,902) (5,925) (17,779) (17,143)
------------- ----------- ------------ -----------
Remaining FFO allocable to our shareholders..................... 146,733 140,351 411,162 396,534
Less: allocations to preferred and equity stock shareholders:
Senior Preferred distributions.............................. (40,471) (35,193) (117,293) (107,914)
Issuance costs on redeemed preferred shares................. (3,072) - (6,795) (3,397)
Equity Stock, Series A distributions........................ (5,375) (5,375) (16,126) (16,126)
------------- ----------- ------------ -----------
(48,918) (40,568) (140,214) (127,437)
------------- ----------- ------------ -----------
Remaining FFO allocable to Common Stock (b)..................... $ 97,815 $ 99,783 $ 270,948 $ 269,097
============= =========== ============ ============
Weighted average shares:
Regular common shares....................................... 128,085 125,528 127,635 124,740
Weighted average stock options and restricted stock units
outstanding using treasury method (c)....................... 741 1,274 910 1,247
------------- ----------- ------------ -----------
Weighted average common shares for purposes of computing
fully-diluted FFO per common share.............................. 128,826 126,802 128,545 125,987
============= =========== ============ ============
FFO per common share (a) (b) (c) (d) (e)........................ $ 0.76 $ 0.79 $ 2.11 $ 2.14
============= =========== ============ ============
(a) As previously reported, in the first quarter of 2004 the holders of $200
million of the Series N preferred units agreed, in exchange for a special
distribution of $8 million, to a reduction in the distribution rate on
their preferred units from 9.50% per year to 6.40% per year, effective
March 22, 2004. This $8 million special distribution was reflected as
minority interest in income. In addition, in accordance with the SEC's
clarification of the EITF Topic D-42, the $2,063,000 in costs incurred when
the $200 million in units were originally issued is reflected as minority
interest in income for the quarter ended March 31, 2004. The change in the
ongoing distribution rate reduced preferred minority interest by
approximately $1,550,000 in the quarter ended September 30, 2004 as
compared to the same quarter in 2003.
12
(b) Funds from operations ("FFO") is a term defined by the National Association
of Real Estate Investment Trusts ("NAREIT") by which real estate investment
trusts ("REITs") may be compared. It is generally defined as net income
before depreciation and gains and losses on real estate assets. FFO is
presented because many analysts consider FFO to be one measure of the
performance of real estate companies. FFO computations do not consider
scheduled principal payments on debt, capital improvements, distribution,
and other obligations of the Company. FFO is not a substitute for the
Company's cash flow or net income as a measure of the Company's liquidity
or operating performance or its ability to pay dividends.
(c) During the three months ended September 30, 2004 and 2003, we incurred
stock based compensation expense of approximately $1,001,000 and $825,000,
respectively. In addition, the increase in our average common share price
during the third quarter of 2004, as compared to the same period in 2003,
resulted in an increase in the weighted average shares outstanding from
stock options when applying the treasury method. This increase, and to a
greater extent, the actual issuance of common stock in connection with the
exercise of employee stock options during the period, resulted in a
year-over-year increase of approximately 2,349,000 weighted average shares
outstanding for the purpose of computing FFO per common share. The
combination of increased compensation expense and weighted average shares
outstanding had the impact of reducing FFO per common share by
approximately $0.02 per share for the three months ended September 30, 2004
as compared to the same period in 2003.
(d) FFO per share was negatively affected by dilution relating to the 82 newly
developed facilities opened by the Company or the Consolidated Development
Joint Venture since January 1, 2000. Based upon an average cost of capital
of 8%, this dilution amounted to approximately $0.03 and $0.10 for the
three and nine months ended September 30, 2004, respectively, as compared
to $0.03 and $0.11, respectively, for the same periods in 2003.
(e) We have significant uninvested cash balances, primarily from the issuance
of preferred securities. These cash balances negatively impact our funds
from operations per share, because the earnings on the cash balances are
substantially less than the corresponding dividend rate. Our funds from
operations per share were negatively impacted by a total of $0.04 per share
for the quarter ended September 30, 2004 as compared to $0.01 per share for
the same period in 2003 as a result of excess cash balances, based upon the
difference between an average preferred coupon rate of 6.5% and the
interest earned on the cash balances.
13
Public Storage, Inc.
Selected Financial Data
Computation of Funds Available for Distribution
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------------
2004 2003 2004 2003
------------ ----------- ------------ ------------
(Amounts in thousands, except per share data)
Computation of Funds Available for Distribution ("FAD"):
FFO allocable to Common Stock (a)........................ $ 97,815 $ 99,783 $ 270,948 $ 269,097
Add: Stock-based compensation expense.................... 709 466 2,115 665
Impact of application of EITF Topic D-42.............. 3,072 - 8,858 3,397
Our share of PSB's EITF Topic D-42 charges............ 1,228 - 2,171 -
Real estate impairment charge......................... - - - 750
Our share of PSB's real estate impairment charges..... - - - 2,599
Less: Capital expenditures to maintain facilities........ (10,653) (10,656) (20,297) (20,470)
------------ ----------- ------------ ------------
Funds available for distribution ("FAD") (b)............. $ 92,171 $ 89,593 $ 263,795 $ 256,038
============ =========== ============ ============
Distribution to common shareholders...................... $ 57,719 $ 56,644 $ 172,474 $ 168,781
============ =========== ============ ============
Distribution payout ratio (b)............................ 62.6% 63.2% 65.4% 65.9%
============ =========== ============ ============
(a) Funds from operations ("FFO") is a term defined by the National Association
of Real Estate Investment Trusts ("NAREIT") by which real estate investment
trusts ("REITs") may be compared. It is generally defined as net income
before depreciation and gains and losses on real estate assets. FFO
computations do not consider scheduled principal payments on debt, capital
improvements, distributions, and other obligations of the Company. FFO is
not a substitute for the Company's cash flow or net income as a measure of
the Company's liquidity or operating performance or its ability to pay
dividends.
(b) Funds available for distribution ("FAD") represents FFO, plus 1) impairment
charges with respect to real estate assets, 2) the non-cash portion of
stock-based compensation expense, and 3) income allocation to preferred
equity holders in accordance with EITF Topic D-42, less capital
expenditures. The distribution payout ratio is computed by dividing the
distribution paid by FAD. FAD is presented because many analysts consider
it to be a measure of the performance of real estate companies. FAD is not
a substitute for the Company's cash flow or net income as a measure of the
Company's liquidity, operating performance, or its ability to pay
dividends.
14
Public Storage, Inc.
Selected Financial Data
Reconciliation of Same Store Revenues and Cost of Operations
To Consolidated Self-storage Rental Income and Cost of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------- ------------- -------------
(Amounts in thousands)
Revenues for the 1,271 Same Store facilities.......... $ 200,932 $ 193,368 $ 587,994 $ 558,872
Less - revenues for the Same Store facilities
accounted for on the equity method of accounting
(a)............................................... (6,434) (6,140) (18,828 (17,754)
Add: revenues for non-Same Store facilities (b)... 25,410 19,628 69,859 52,227
------------ ------------- ------------- -------------
Consolidated self-storage revenues.................... $ 219,908 $ 206,856 $ 639,025 $ 593,345
============ ============= ============= =============
Cost of operations for the 1,271 Same Store facilities $ 65,864 $ 65,015 $ 200,077 $ 188,582
Less - cost of operations for Same Store
facilities accounted for on the equity method of
accounting (a).................................... (1,717) (1,736) (5,109) (5,099)
Add: cost of operations for other than Same Store
facilities (b).................................... 9,928 7,698 29,151 23,172
------------ ------------- ------------- -------------
Consolidated self-storage cost of operations...... $ 74,075 $ 70,977 $ 224,119 $ 206,655
============ ============= ============= =============
(a) At September 30, 2004, the Company has a noncontrolling ownership interest
in 33 of the Same Store facilities. The revenues and cost of operations
earned while the Company does not have a controlling ownership interest are
not included in the Company's consolidated self-storage rental income and
cost of operations. Instead, the Company records its share of the net
operating results in its income statements as "Equity in earnings of real
estate entities."
(b) The Company consolidates the operating results of additional self-storage
facilities that are not Same Store facilities. Such facilities are not
included in the Same Store pool either because they were not stabilized for
the entire period from January 1, 2002 through September 30, 2004, or
because the Company acquired these facilities from third parties after
December 31, 2001.
15