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, 1998
--------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to .
------------------ ----------------
Commission File Number: 1-8389
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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 April 30, 1998:
Common Stock, $.10 par value, 114,181,420 shares outstanding
- ------------------------------------------------------------
Class B Common Stock, $.10 Par Value - 7,000,000 shares
- -------------------------------------------------------
Equity Stock, Series A, $.01 Par Value - 225,000 shares
- -------------------------------------------------------
PUBLIC STORAGE, INC.
INDEX
Pages
-----
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Condensed Consolidated Balance Sheets at
March 31, 1998 and December 31, 1997 1
Condensed Consolidated Statements of Income for the
Three Months Ended March 31, 1998 and 1997 2
Condensed Consolidated Statements of Shareholders Equity
for the Three Months Ended March 31, 1998 3
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1998 and 1997 4 - 5
Notes to Condensed Consolidated Financial Statements 6 - 15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16 - 25
PART II. OTHER INFORMATION (Items 1, 2, 3 , 4 and 5 are not applicable)
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K 26
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
March 31, December 31,
ASSETS 1998 1997
------ ---------------- ----------------
(Unaudited)
Cash and cash equivalents.................................................... $ 243,190 $ 41,455
Real estate facilities, at cost:
Land...................................................................... 878,495 845,299
Buildings................................................................. 2,322,122 2,232,230
---------------- ----------------
3,200,617 3,077,529
Accumulated depreciation.................................................. (404,139) (378,248)
---------------- ----------------
2,796,478 2,699,281
Construction in process................................................... 62,057 42,635
---------------- ----------------
2,858,535 2,741,916
Investment in real estate entities........................................... 226,626 225,873
Intangible assets, net....................................................... 210,616 212,944
Mortgage notes receivable from affiliates.................................... 17,825 21,807
Other assets................................................................. 57,012 67,650
---------------- ----------------
Total assets................................................... $ 3,613,804 $ 3,311,645
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Revolving line of credit..................................................... $ - $ 7,000
Notes payable................................................................ 108,024 96,558
Accrued and other liabilities................................................ 68,466 70,648
---------------- ----------------
Total liabilities................................................... 176,490 174,206
Minority interest............................................................ 365,243 288,479
Commitments and contingencies
Shareholders' equity:
Preferred Stock, $0.01 par value, 50,000,000 shares authorized,
13,236,980 shares issued and outstanding (13,261,984 issued and
outstanding at December 31, 1997), at liquidation preference:
Cumulative Preferred Stock, issued in series........................ 868,900 868,900
Convertible Preferred Stock......................................... 52,685 53,308
Common stock, $0.10 par value, 200,000,000 shares authorized,
112,582,124 shares issued and outstanding (105,102,145 at December
31, 1997)............................................................... 11,259 10,511
Class B Common Stock, $0.10 par value, 7,000,000 shares authorized and 700 700
issued..................................................................
Paid-in capital........................................................... 2,123,124 1,903,782
Cumulative net income..................................................... 623,433 575,069
Cumulative distributions paid............................................. (608,030) (563,310)
---------------- ----------------
Total shareholders' equity.......................................... 3,072,071 2,848,960
---------------- ----------------
Total liabilities and shareholders' equity..................... $ 3,613,804 $ 3,311,645
================ ================
See accompanying notes.
1
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(Unaudited)
March 31, December 31,
1998 1997
---------------- ----------------
REVENUES:
Rental income:
Self-storage facilities............................ $ 111,678 $ 82,377
Commercial properties.............................. 17,681 7,597
Portable self-storage.............................. 5,171 472
Equity earnings of real estate entities................. 2,619 5,221
Facility management fee................................. 1,765 3,052
Interest and other income............................... 3,652 2,021
---------------- ----------------
142,566 100,740
EXPENSES:
Cost of operations:
Self-storage facilities............................ 34,946 26,491
Commercial properties.............................. 5,848 3,184
Portable self-storage.............................. 15,053 2,821
Cost of facility management............................. 286 476
Depreciation and amortization.......................... 28,219 19,787
General and administrative............................. 2,336 1,619
Interest expense....................................... 1,162 1,597
---------------- ----------------
87,850 55,975
---------------- ----------------
Income before minority interest........................ 54,716 44,765
Minority interest in income............................ (6,352) (2,447)
---------------- ----------------
NET INCOME................................................ $ 48,364 $ 42,318
================ ================
NET INCOME ALLOCATION:
---------------------
Allocable to preferred shareholders..................... $ 20,140 $ 19,150
Allocable to common shareholders........................ 28,224 23,168
---------------- ----------------
$ 48,364 $ 42,318
================ ================
PER COMMON SHARE:
----------------
Net income per share - Basic............................ $ 0.26 $ 0.26
================ ================
Net income per share - Diluted.......................... $ 0.26 $ 0.26
================ ================
Weighted average common shares - Basic.................. 109,466 89,086
================ ================
Weighted average common shares - Diluted................ 110,036 89,476
================ ================
See accompanying notes.
2
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the three months ended March 31, 1998
(Amounts in thousands except share data)
(Unaudited)
Preferred Stock
-------------------------- Class B
Cumulative Common Common
Senior Convertible Stock Stock
---------- ----------- ---------- ---------
Balances at December 31, 1997........................ $ 868,900 $ 53,308 $ 10,511 $ 700
Issuance of common stock:
Public issuance (6,369,603 shares).............. - - 637 -
Conversion of 8.25% Convertible Preferred Stock
into common stock (41,918 shares)............ - (623) 4 -
Acquisition of investment in real estate
entities and minority interest from
affiliate (853,700 shares)................... - - 85 -
Acquisition of investment in real estate
entities (60,394 shares)..................... - - 6 -
Exercise of stock options (154,364 shares)...... - - 16 -
Net income........................................... - - - -
Cash distributions:
Cumulative Senior Preferred Stock................. - - - -
8.25% Convertible Preferred Stock................. - - - -
Common Stock...................................... - - - -
---------- ----------- ---------- ---------
Balances at March 31, 1998........................... $ 868,900 $ 52,685 $ 11,259 $ 700
========== =========== ========== =========
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the three months ended March 31, 1998
(Amounts in thousands except share data)
(Unaudited)
Total
Paid-in Cumulative Cumulative Shareholders'
Capital Net Income Distributions Equity
----------- ----------- -------------- --------------
Balances at December 31, 1997........................ $1,903,782 $ 575,069 $ (563,310) $ 2,848,960
Issuance of common stock:
Public issuance (6,369,603 shares).............. 188,256 - 188,893
Conversion of 8.25% Convertible Preferred Stock
into common stock (41,918 shares)............ 619 - - -
Acquisition of investment in real estate
entities and minority interest from
affiliate (853,700 shares)................... 26,273 - - 26,358
Acquisition of investment in real estate
entities (60,394 shares)..................... 1,838 - - 1,844
Exercise of stock options (154,364 shares)...... 2,356 - - 2,372
Net income........................................... - 48,364 - 48,364
Cash distributions:
Cumulative Senior Preferred Stock................. - - (19,053) (19,053)
8.25% Convertible Preferred Stock................. - - (1,087) (1,087)
Common Stock...................................... - - (24,580) (24,580)
----------- ----------- -------------- --------------
Balances at March 31, 1998........................... $2,123,124 $ 623,433 $ (608,030) $ 3,072,071
=========== =========== ============== ==============
See accompanying notes.
3
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
For the Three Months Ended
March 31,
-------------------------------------
1998 1997
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $48,364 $42,318
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 28,219 19,787
Depreciation included in equity in earnings of real 1,865
estate entities....................................... 3,629
Minority interest in income............................. 6,352 2,447
---------------- ----------------
Total adjustments................................... 36,436 25,863
---------------- ----------------
Net cash provided by operating activities....... 84,800 68,181
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal payments received on mortgage notes 3,982
receivable from affiliates............................ 288
Capital improvements to real estate facilities.......... (4,091) (6,292)
Construction in process................................. (19,422) (14,289)
Investment in portable self-storage business............ (4,804) (4,208)
Acquisition of minority interests in consolidated real (736)
estate partnerships................................... (9,837)
Acquisition of investment in real estate entities....... (8,361) (5,697)
Acquisition of real estate facilities................... (39,704) -
Acquisition cost of business combinations............... (5,206) -
Refunded deposits to acquire real estate................ 12,500 -
---------------- ----------------
Net cash used in investing activities........... (65,842) (40,035)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of borrowings on the line of credit........... (7,000) -
Principal payments on notes payable..................... (3,060) (534)
Net proceeds from the issuance of common stock.......... 191,266 127,134
Distributions paid to shareholders...................... (44,720) (52,019)
Distributions from operations to minority interests in
real estate partnerships.............................. (10,557) (4,792)
Net reinvestment by minority interests in consolidated
real estate partnerships.............................. 3,403 809
Issuance of equity interest (minority interests) in
consolidated entity for cash.......................... 47,600 -
Other................................................... 5,847 (164)
---------------- ----------------
Net cash provided by financing activities.................... 182,779 70,434
---------------- ----------------
Net increase in cash and cash equivalents.................... 201,737 98,580
Cash and cash equivalents at the beginning of the period..... 41,455 26,856
---------------- ----------------
Cash and cash equivalents at the end of the period........... $243,192 $125,436
================ ================
See accompanying notes.
4
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
(Continued)
For the Three Months Ended
March 31,
-------------------------------------
1998 1997
---------------- ----------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of real estate facilities in exchange for the
assumption of notes payable and increase in minority
interest................................................... $ (15,731) $ -
Business combination:
Real estate facilities..................................... (58,329) -
Other assets............................................... (140) -
Accrued and other liabilities.............................. 1,604 -
Minority interest.......................................... 504 -
Reduction to investment in real estate entities in connection
with business combination.................................. 16,325 -
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 the conversion of Convertible Preferred
Stock................................................... 623 620
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) (620)
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 -
See accompanying notes.
5
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
1. Description of the business
---------------------------
Public Storage, Inc. (the "Company") is a California corporation which
was organized in 1980. The Company is a fully integrated, self-administered
and self-managed real estate investment trust ("REIT") that acquires,
develops, owns and operates self-storage facilities which offer
self-storage spaces for lease, usually on a month-to-month basis, for
personal and business use. The Company, through a majority owned
subsidiary, also owns and operates commercial properties containing
commercial and industrial rental space.
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 in central warehouses. At March 31, 1998, PSPUD
operated 54 facilities in 16 states.
On January 2, 1997, the Company reorganized its commercial property
operations into a separate private REIT (the "Private REIT"). The Private
REIT contributed its assets to a newly created operating partnership (the
"Operating Partnership") in exchange for a general partnership interest and
limited partnership interests. The Company and certain partnerships in
which the Company has a controlling interest contributed substantially all
of their commercial properties to the Operating Partnership in exchange for
limited partnership interests or to the Private REIT in exchange for common
stock. On March 17, 1998, the Private REIT merged into Public Storage
Properties XI, Inc., an affiliated publicly traded REIT and the name of the
surviving corporation was changed to PS Business Parks, Inc. ("PSBP"). All
subsequent references to PSBP prior to March 17, 1998, refer to the private
REIT.
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, 1998, the Company had direct and indirect equity interests in
1,143 properties located in 38 states, including 1,077 self-storage
facilities and 66 commercial properties. All of these facilities are
operated by the Company under the "Public Storage" name.
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, 1998 are not necessarily
indicative of the results that may be expected for the year ended December
31, 1998. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on
Form 10-K for the year ended December 31, 1997.
The consolidated financial statements include the accounts of the
Company, PSPUD, PSBP, the Operating Partnership and twenty-one controlled
limited partnerships (the "Consolidated Entities"). Collectively, the
Company, PSBP and the Consolidated Entities own a total of 975 real estate
facilities, consisting of 909 self-storage facilities and 66 commercial
properties.
At March 31, 1998, the Company also has equity investments in 28 other
affiliated limited partnerships and one REIT owning in aggregate 168
self-storage facilities which are managed by the Company. The Company's
ownership interest in such real estate entities is less than 50% of the
total equity interest and the Company's investments in these entities are
accounted for using the equity method.
6
Income taxes
------------
For all taxable years subsequent to 1980, the Company qualified and
intends to continue to qualify as a REIT, as defined in Section 856 of the
Internal Revenue Code. As a REIT, the Company is not taxed on that portion
of its taxable income which is distributed to its shareholders provided
that the Company meets certain tests. The Company believes it will meet
these tests during 1998 and, accordingly, no provision for income taxes has
been made in the accompanying financial statements.
Financial instruments
---------------------
For purposes of financial statement presentation, the Company
considers all highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents.
Real estate facilities
----------------------
Real estate facilities are recorded at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
buildings and improvements, which are generally between 5 and 25 years.
Allowance for possible losses
-----------------------------
The Company has no allowance for possible losses relating to any of
its real estate investments, including mortgage notes receivable. The need
for such an allowance is evaluated by management by means of periodic
reviews of its investment portfolio.
Intangible assets
-----------------
Intangible assets consist of property management contracts
($165,000,000) and the cost over the fair value of net tangible and
identifiable intangible assets ($67,726,000) acquired in a 1995 merger with
an affiliate. Intangible assets are amortized by the straight-line method
over 25 years. At March 31, 1998, intangible assets are net of accumulated
amortization of $22,110,000 ($19,782,000 at December 31, 1997). Included in
depreciation and amortization expense for the three months ended March 31,
1998 is $2,328,000, related to the amortization of intangible assets.
Revenue and expense recognition
-------------------------------
Property rents are recognized as earned. Equity in earnings of real
estate entities are recognized based on the Company's ownership interest in
the earnings of each of the unconsolidated real estate entities.
Advertising costs are expensed as incurred.
Net income per common share
---------------------------
In 1997, the Financial Accounting Standards Board issued Statement No.
128, 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 and convertible
securities. Diluted net income per share is very similar to the previously
reported fully diluted net income per share. All net income per share
amounts for all periods have been presented and where appropriate, restated
to conform to Statement 128 requirements.
Diluted net income per common share is computed using the weighted
average common shares outstanding (adjusted for stock options). The Class B
Common Stock is not included in the determination of net income per common
share because all contingencies required for the conversion to common stock
have not been satisfied as of December 31, 1997. In addition, the inclusion
of the Company's convertible preferred stock in the determination of net
income per common share has been determined to be anti-dilutive.
In computing earnings per common share, preferred stock dividends
totaling $20,140,000 and $19,150,000 for the three months ended March 31,
1998 and 1997, respectively, reduced income available to common
stockholders.
7
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.
Statement 123's disclosure requirements are applicable to stock-based
awards granted in fiscal years beginning after December 15, 1994.
Reclassifications
-----------------
Certain reclassifications have been made to the consolidated financial
statements for 1997 in order to conform to the 1998 presentation.
3. Business combinations
---------------------
Merger with affiliated REIT
---------------------------
On March 17, 1998, the Company, through PSBP, completed a merger
transaction with an affiliated public REIT whereby PSBP acquired all the
outstanding stock of the REIT which the Company did not previously own. The
aggregate acquisition cost of this merger was approximately $49.6 million,
consisting of the issuance of $34.8 million of PSBP common stock
(classified as minority interest on the Company's consolidated financial
statements) and the Company's pre-existing investment in the affiliated
REIT totaling $14.8 million.
Affiliated Partnership Acquisitions
-----------------------------------
In January 1998, the Company acquired all of the limited partnership
interest in two affiliated partnerships. As a result of the Company's
increased ownership interest and control of the Partnership, the Company
began to consolidate the accounts of these partnerships. The total
consideration of $6,757,000 in this transaction consists of $5,206,000 of
cash and the company's pre-existing investment of $1,551,000.
8
The above merger with an affiliated REIT and acquisitions of
affiliated partnership interests have been accounted for as a purchase;
accordingly, allocations of the total acquisition cost to the net assets
acquired were made based on the fair value of such assets and liabilities
as of the dates of each respective transaction. The fair market values of
the assets and liabilities assumed with respect to the transactions are
summarized as follows:
REIT Partnership
merger acquisitions Total
------------ ---------------- ------------
(Amounts in thousands)
Real estate facilities.................. $ 51,005 $ 7,324 $ 58,329
Other assets............................ 117 23 140
Minority interest - (504) (504)
Accrued liabilities..................... (1,518) (86) (1,604)
------------ ---------------- ------------
$ 49,604 $ 6,757 $ 56,361
============ ================ ============
The historical operating results of the above business combinations
prior to each respective acquisition date have not been included in the
Company's historical operating results. Pro forma selected financial data
for the three months ended March 31, 1998 and 1997 as though the above
business combinations had been effective at the beginning of each period
are as follows:
Three Months Ended Three Months Ended
(In thousands, except per share data) March 31, 1998 March 31, 1997
------------------------------------------------------ -------------------- -------------------
Revenues............................................... $ 143,812 $ 102,658
Net income............................................. $ 48,367 $ 42,307
Net income per common share (Basic).................... $ 0.26 $ 0.26
Net income per common share (Diluted).................. $ 0.26 $ 0.26
The pro forma data does not purport to be indicative of operations
that would have occurred had the business combinations occurred at the
beginning of each period or future results of operations of the Company.
Certain pro forma adjustments were made to the combined historical amounts
to reflect expected reductions in general and administrative expenses
combined with an estimated increase in depreciation and amortization
expense.
9
4. Real estate facilities
----------------------
Activity in real estate facilities during 1998 is as follows:
Number of real Net rentable Net carrying
estate facilities square feet cost
----------------- ------------ --------------
(Amounts in thousands, except number of facilities)
Operating Facilities
Balance at December 31, 1997.................... 955 60,258 $ 3,077,529
Property acquisitions - mergers and business
combinations................................. 17 1,131 58,329
Property acquisitions - third party purchases... 3 675 55,435
Acquisition of minority interest................ - - 5,233
Capital improvements............................ - - 4,091
----------------- ------------ --------------
Balance at March 31, 1998....................... 975 62,064 3,200,617
----------------- ------------ --------------
Accumulated depreciation:
Balance at December 31, 1997.................... (378,248)
Additions during the year....................... (25,891)
--------------
Balance at March 31, 1998....................... (404,139)
--------------
Construction in progress:
Balance at December 31, 1997.................... 42,635
Current development............................. 19,422
--------------
Balance at March 31, 1998....................... 62,057
--------------
Total real estate facilities.................... 975 62,064 $ 2,858,535
================= ============ ==============
In April 1997, the Company formed a joint venture partnership with a
state pension fund to participate in the development of approximately $220
million of self-storage facilities. The Company expects that substantially
all of its development activities will be conducted in the joint venture
partnership until the $220 million is fully committed. At March 31, 1998,
the Company had nine self-storage facilities under construction, upon
approval of the facilities by the joint venture partnership, these
facilities will be transferred to the partnership. The Company's investment
in the joint venture partnership is accounted for using the equity method.
At March 31, 1998, the Company was developing 12 facilities to be used
by its PSPUD operations. The total development cost at March 31, 1998 with
respect to these facilities was approximately $29.2 million.
The Company's policy is to capitalize interest incurred on debt during
the course of construction of its self-storage facilities and PSPUD
facilities. Interest capitalized during the three months ended March 31,
1998 was $1,257,000 compared to $735,000 for the same period in 1997.
During the first quarter of 1998, the Company, through PSBP, acquired
three commercial properties (approximately 675,000 square feet) for an
aggregate cost of $55.4 million.
5. Investment in real estate entities:
----------------------------------
The Company's investment in real estate entities at March 31, 1998
generally consists of limited and general partnership interests in
approximately 28 affiliated partnerships and common stock in one affiliated
REIT. Such interests are accounted for using the equity method of
accounting.
10
During the three months ended March 31, 1998, the Company recognized
earnings from its investments totaling $2,619,000. Included in equity in
earnings of real estate entities for the three months ended March 31, 1998
is the Company's share of depreciation expense totaling $1,865,000.
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, 1998 are as follows:
Three Months Ended March 31,
----------------------------
1998 1997
------------- -------------
(in thousands)
Rental income..................................... $ 21,936 $ 19,849
Total revenues.................................... 22,191 20,187
Cost of operations................................ 8,502 7,276
Depreciation...................................... 3,041 2,626
Net income........................................ 9,634 7,904
Total assets, net of accumulated depreciation..... $ 433,869 $ 324,737
Total debt........................................ 76,305 79,811
Total equity...................................... 343,367 233,578
6. Acquisition of partnership interests from affiliate:
----------------------------------------------------
In March 1998, the Company acquired partnership interests in a total
of 21 partnerships from an affiliate. The aggregate price for the interests
consisted of the issuance of 853,700 shares of the Company's common stock
and represented the acquisition of (i) minority interests ($9.2 million)
and (ii) investments in real estate entities ($17.1 million)
7. Revolving line of credit
------------------------
As of March 31, 1998, the Company had no borrowings on its unsecured
credit agreement with a group of commercial banks. The credit agreement
(the "Credit Facility") has a borrowing limit of $150.0 million and an
expiration date of July 31, 2001. The expiration date may be extended by
one year on each anniversary of the credit agreement. Interest on
outstanding borrowings is payable monthly. At the option of the Company,
the rate of interest charged is equal to (i) the prime rate or (ii) a rate
ranging from the London Interbank Offered Rate ("LIBOR") plus 0.40% to
LIBOR plus 1.10% depending on the Company's credit ratings and coverage
ratios, as defined. In addition, the Company is required to pay a quarterly
commitment fee of 0.250% (per annum) 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.
8. Minority interest
-----------------
In consolidation, the Company classifies ownership interests other
than its own in the net assets of each of the Consolidated Entities as
minority interest on the consolidated financial statements. Minority
11
interest in income consists of the minority interests' share of the
operating results of the Company relating to the consolidated operations of
the Consolidated Entities.
During the three months ended March 31, 1998, the Company reduced
minority interest by approximately $6.6 million through the acquisition of
such interests for cash and through the issuance of common stock. During
the same period minority interest increased by $35.3 million in connection
with business combinations.
9. Shareholders' equity
--------------------
Preferred stock
---------------
At March 31, 1998 and December 31, 1997, the Company had the following
series of Preferred Stock outstanding:
At March 31, 1998 At December 31, 1997
---------------------------- ----------------------------
Dividend Shares Carrying Shares Carrying
Series Rate Outstanding Amount Outstanding Amount
----------------------------------- ------------ ------------ ------------ ------------ ------------
Series A .......................... 10.000% 1,825,000 $ 45,625,000 1,825,000 $ 45,625,000
Series B .......................... 9.200% 2,386,000 59,650,000 2,386,000 59,650,000
Series C........................... Adjustable 1,200,000 30,000,000 1,200,000 30,000,000
Series D........................... 9.500% 1,200,000 30,000,000 1,200,000 30,000,000
Series E........................... 10.000% 2,195,000 54,875,000 2,195,000 54,875,000
Series F........................... 9.750% 2,300,000 57,500,000 2,300,000 57,500,000
Series G .......................... 8.875% 6,900 172,500,000 6,900 172,500,000
Series H .......................... 8.450% 6,750 168,750,000 6,750 168,750,000
Series I .......................... 8.625% 4,000 100,000,000 4,000 100,000,000
Series J .......................... 8.000% 6,000 150,000,000 6,000 150,000,000
Total Cumulative Senior Preferred
Stock........................ 11,129,650 868,900,000 11,129,650 868,900,000
------------ ------------ ------------ ------------
Convertible........................ 8.250% 2,107,330 52,685,000 2,132,334 53,308,000
------------ ------------ ------------ ------------
13,236,980 $921,585,000 13,261,984 $922,208,000
============ ============ ============ ============
The Series A through Series J stock (collectively the "Cumulative
Senior Preferred Stock") have general preference rights with respect to
liquidation and quarterly distributions. With respect to the payment of
dividends and amounts upon liquidation, all of the Company's Convertible
Preferred Stock ranks junior to the Cumulative Senior Preferred Stock and
any other shares of preferred stock of the Company ranking on a parity with
or senior to the Cumulative Senior Preferred Stock. The Convertible
Preferred Stock ranks senior to the common stock, any additional class of
common stock and any series of preferred stock expressly made junior to the
Convertible Preferred Stock.
Holders of the Company's preferred stock, except under certain
conditions and as noted above, will not be entitled to vote on most
matters. In the event of a cumulative arrearage equal to six quarterly
dividends or failure to maintain a Debt Ratio (as defined) of 50% or less,
holders of all outstanding series of preferred stock (voting as a single
class without regard to series) will have the right to elect two additional
members to serve on the Company's Board of Directors until events of
default have been cured. At March 31, 1998, there were no dividends in
arrears and the Debt Ratio was 3.0%.
Except under certain conditions relating to the Company's
qualification as a REIT, the Senior Preferred Stock are not redeemable
prior to the following dates: Series A - September 30, 2002, Series B -
March 31, 2003, Series C - September 30, 1999, Series D - September 30,
2004, Series E - January 31, 2005, Series F - April 30, 2005, Series G -
December 31, 2000, Series H - January 31, 2001, Series I - October 31,
2001, Series J - August 31, 2002. On or after the respective dates, each of
the series of Senior Preferred Stock will be redeemable at the option of
the Company, in whole or in part, at $25 per share (or depository share in
the case of the Series G, Series H, Series I and Series J), plus accrued
and unpaid dividends.
The Convertible Preferred Stock is convertible at any time at the
option of the holders of such stock into shares of the Company's common
12
stock at a conversion rate of 1.6835 shares of common stock for each share
of Convertible Preferred Stock, subject to adjustment in certain
circumstances. On or after July 1, 1998, the Convertible Stock will be
redeemable for shares of the Company's common stock at the option of the
Company, in whole or in part, at a redemption price of 1.6835 shares of
common stock for each share of Convertible Stock (subject to adjustment in
certain circumstances), if for 20 trading days within any period of 30
consecutive trading days (including the last trading day of such period),
the closing price of the common stock on its principal trading market
exceeds $14.85 per share (subject to adjustment in certain circumstances).
The Convertible Preferred Stock is not redeemable for cash.
Equity Stock
------------
In June 1997, the Company contributed $22,500,000 (225,000 shares) of
its Equity Stock, Series A ("Equity Stock") to a partnership in which the
Company is the general partner. As a result of this contribution, the
Company obtained a majority interest in the Partnership and began to
consolidate the accounts of the Partnership. The Equity Stock ranks on a
parity with Common Stock and junior to the Company's Cumulative Senior
Preferred Stock and Convertible Preferred Stock with respect to general
preference rights and has a liquidation amount of ten times the amount paid
to each Common Share up to a maximum of $100 per share. Quarterly
distributions per share on the Equity Stock are equal to the lesser of (i)
10 times the amount paid per Common Stock or (ii) $2.20.
Common Stock
------------
During the first quarter of 1998, the Company issued 6,369,603 shares
of common stock in public and private offerings, raising net proceeds of
approximately $188.9 million. In addition, the Company issued 154,364
common shares ($2.4 million) in connection with the exercise of stock
options.
A total of 914,094 shares of common stock were issued in connection
with the acquisition of investments in real estate entities and minority
interests during the first quarter of 1998.
Class B Common Stock
--------------------
The Class B Common Stock will (i) not participate in distributions
until the later to occur of funds from operations ("FFO") per Common Share
as defined below, aggregating $1.80 during any period of four consecutive
calendar quarters, or January 1, 2000; thereafter, the Class B Common Stock
will participate in distributions (other than liquidating distributions),
at the rate of 97% of the per share distributions on the Common Stock,
provided that cumulative distributions of at least $0.22 per quarter per
share have been paid on the Common Stock, (ii) not participate in
liquidating distributions, (iii) not be entitled to vote (except as
expressly required by California law) and (iv) automatically convert into
Common Stock, on a share for share basis, upon the later to occur of FFO
per Common Share aggregating $3.00 during any period of four consecutive
calendar quarters or January 1, 2003.
For these purposes, FFO means net income (loss) before (i) gain (loss)
on early extinguishment of debt, (ii) minority interest in income and (iii)
gain (loss) on disposition of real estate, adjusted as follows: (i) plus
depreciation and amortization, and (ii) less FFO attributable to minority
interest. FFO per Common Share means FFO less preferred stock dividends
(other than dividends on convertible preferred stock) divided by the
outstanding weighted average shares of Common Stock assuming conversion of
all outstanding convertible securities and the Class B Common Stock.
For these purposes, FFO per share of Common Stock (as defined) was
$1.97 for the four consecutive calendar quarters ended March 31, 1998.
13
Dividends
---------
The following summarizes dividends paid during the first three months
of 1998:
Distributions
Per Share or Total
Depository Share 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 1,4021,000
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
Convertible........................... $ 0.516 1,087,000
-------------
20,140,000
Common................................ $ 0.220 24,580,000
-------------
Total dividends paid $44,720,000
=============
The dividend rate on the Series C Preferred Stock for the first
quarter of 1998 was equal to 6.75% per annum. The dividend rate per annum
will be adjusted quarterly and will be equal to the highest of one of three
U.S. Treasury indices (Treasury Bill Rate, Ten Year Constant Maturity Rate,
or Thirty Year Constant Maturity Rate) multiplied by 110%. However, the
dividend rate for any dividend period will neither be less than 6.75% per
annum nor greater than 10.75%. The dividend rate for the quarter ending
June 30, 1998 will be equal to 6.75% per annum.
14
10. Subsequent Events
-----------------
Merger with Affiliated REIT
---------------------------
On May 7, 1998, the shareholders of Public Storage Properties XX, Inc.
("Properties 20") approved the merger with and into the Company. The merger
was completed on May 8, 1998. The estimated value of the Properties 20
merger is approximately $23.3 million. Properties 20 owns 7 self-storage
facilities (approximately 402,000 square feet) located in five states. At
December 31, 1997, the Company owned approximately 24% of Properties 20.
PSBP Property Acquisition and Equity Issuance Activities
----------------------------------------------------------
On May 4, 1998, PSBP purchased 14 properties (approximately 1.0
million rentable square feet) located in Beaverton, Oregon and 14
properties (approximately 1.3 million rentable square feet) located in the
Dallas, Texas area. The proeprties were acquired from Principal Mutual Life
Insurance Company, and insurance company, and its affiliated companies. The
aggregate purchase price was approximately $190.5 million in cash. The
acquisition contains approximately 2,265,000 rentable square feet and
contains approximately 15 acres of land in the Beaverton market for future
development. PSBP funded this acquistion by the issuance of the remaining
$105.0 million of common stock to be issued in connection with its January
1998 agreement with a group of institutional investors, and borrowings from
PSI.
PS Business Parks, Inc.
-----------------------
As a result of the issuance of additional shares of PSBP common stock
to the group of unaffiliated institutional investors, the Company believes
that its reduced ownership will no longer warrant the consolidation of PSBP
and the Operating Partnership effective June 30, 1998. The Company's
consolidated financial statements at March 31, 1998 include the following
summarized condensed financial data associated with the consolidation of
PSBP and the Operating Partnership:
(in thousands)
--------------
Three months ended March 31, 1998
---------------------------------
Rental income.................................... $ 14,353
Total revenues................................... 15,582
Cost of operations............................... 5,166
Depreciation..................................... 3,106
Net income before minority interest.............. 6,339
Net income after minority interest............... 3,292
At March 31, 1998
-----------------
Total assets, net of accumulated depreciation.... 459,366
Total minority interest.......................... 202,897
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- ------------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Net income for the three months ended March 31, 1998 was $48,364,000
compared to $42,318,000 for the same period in 1997, representing an
increase of $6,046,000 or 14%. The increase in net income for the three
months ended March 31, 1998 compared to the same period in 1997 was
primarily the result of improved property operations, the acquisition of
additional real estate facilities and partnership interests during 1998 and
1997, offset partially by start-up operating losses experienced in the
Company's new portable self-storage business.
Net income allocable to common shareholders (net income after
deducting dividends to the Company's preferred shareholders of $20,140,000
and $19,150,000 for the three months ended March 31, 1998 and 1997,
respectively) was $28,224,000 or $0.26 per common share (based on
110,036,000 weighted average shares-diluted) for the three months ended
March 31, 1998 compared to $23,168,000 or $0.26 per common share (based on
89,476,000 weighted average shares-diluted) for the same period in 1997.
REAL ESTATE OPERATIONS
----------------------
Rental income and cost of operations have increased significantly for
the three months ended March 31, 1998 compared to the same period in 1997
due to the Company's merger and acquisition activities throughout 1997 and
1998. As a result of these activities, the number of facilities included in
the Company's consolidated financial statements has increased from 769 at
March 31, 1997 to 975 at March 31, 1998.
SELF-STORAGE OPERATIONS: The Company's self-storage operations account
for over 90% of the total property operations and represent the largest
comparison variances from period to period. As a result the following table
is presented to further illustrate variances from period to period by (i)
comparing the operating results of self-storage facilities which were owned
by the Company throughout 1997 and 1998 and (ii) outlining operating
results for those self-storage facilities which were acquired by the
Company in 1997 and 1998 whereby the operations represent partial results
from the date the facility was acquired through the end of the period.
Summary of Self-Storage Facility Operations Three Months Ended March 31,
---------------------------------------------
1998 1997 Change
-------------- ------------- -----------
(dollar amounts in thousands, except rents per square foot)
Rental income:
Pre-1997 acquisitions $ 83,536 $ 78,661 6.2%
1997 and 1998 acquisitions 28,142 3,716 657.3%
-------------- ------------- -----------
111,678 82,377 35.6%
-------------- ------------- -----------
Cost of operations:
Pre-1997 acquisitions 25,967 25,156 3.2%
1997 and 1998 acquisitions 8,979 1,335 572.6%
-------------- ------------- -----------
34,946 26,491 31.9%
-------------- ------------- -----------
Net operating income:
Pre-1997 acquisitions 57,569 53,505 7.6%
1997 and 1998 acquisitions 19,163 2,381 704.8%
-------------- ------------- -----------
$ 76,732 $ 55,886 37.3%
============== ============= ===========
Net rentable square feet, in thousands
(at the end of the period):
Pre-1997 acquisitions 41,384 41,384 -
1997 and 1998 acquisitions 13,105 2,153 508.7%
Number of facilities (at the end of the period):
Pre-1997 acquisitions 690 690 -
1997 and 1998 acquisitions 219 33 563.6%
Pre-1997 acquisitions:
Annualized realized rent per occupied square foot $ 9.00 $ 8.64 4.2%
(a)
Annualized scheduled rent per occupied square foot $ 9.48 $ 9.24 2.6%
(b)
Weighted average occupancy for the period 91.1% 89.1% 2.0%
- --------------------
(a) Realized rent per square foot represents the actual
revenue earned per occupied square foot after giving
effect to discounts through the use of promotions.
(b) Scheduled rent per square foot represents the posted
revenue per occupied square foot prior to giving effect
to discounts through the use of promotions.
16
The increases in rental income for the pre-1997 acquisitions for the
three months ending March 31, 1998 compared to the same periods in 1997 are
due to increased realized rent per occupied square foot combined with an
increased weighted average occupancy level. The Company believes that such
improvements are due to the national telephone reservation system which was
implemented during 1996 and the first part of 1997 and the media
advertising implemented during the second half of 1997.
Rental income for the three months ended March 31, 1998 are net of
promotional discounts totaling $3.7 million compared to $2.5 million for
the same period in 1997. In addition, included in cost of operations for
the three months ended March 31, 1998 are costs associated with the
telephone reservation center and advertising totaling $1,249,000, compared
to $690,000 for the same period in 1997.
DEVELOPMENT OF SELF-STORAGE FACILITIES: In April 1997, the Company
formed a joint venture partnership with a state pension fund to participate
in the development of approximately $220 million of self-storage
facilities. The Company expects that substantially all of its development
activities will be conducted in the joint venture partnership until the
$220 million is fully committed. At March 31, 1998, the joint venture
partnership had completed construction on eleven self-storage facilities
(approximately 637,000 net rentable square feet) with a total cost of
approximately $55.4 million, and had 15 facilities under construction
(approximately 948,000 net rentable square feet) with an aggregate cost
incurred to date of approximately $43.3 million and total additional
estimated cost to complete of $26.9 million. In addition, at March 31,
1998, the Company had nine facilities under construction (approximately
522,000 net rentable square feet) with an aggregate cost incurred to date
of approximately $20.7 million and total additional estimated cost to
complete of $20.4 million. Upon approval by the joint venture partnership,
the facilities under construction by the Company will be transferred to the
joint venture partnership. The partnership is funded solely with equity
capital consisting of 30% from the Company and 70% from the state pension
fund. The Company accounts for its investment in the joint venture
partnership using the equity method.
The Company is evaluating the feasibility of developing additional
facilities in selected markets in which there are few, if any, facilities
to acquire at attractive prices and where the scarcity of other undeveloped
parcels of land or other impediments to development make it difficult to
construct additional competing facilities. Generally the construction
period takes 9 to 12 months followed by, in the case of self-storage
facilities, a 18 to 24 month fill-up process until the newly constructed
facility reaches a stabilized occupancy level of approximately 90%. Due to
the timing of the deployment of capital to construct the facilities and the
relatively long "fill-up" period until the facilities reach a stabilized
occupancy level, the Company believes that its development plans may create
earnings dilution in the short-term.
COMMERCIAL PROPERTY OPERATIONS: The Company's commercial property
operations represent approximately 12% of the Company's operations (based
on total revenues generated during the first quarter of 1998). The
commercial properties are generally composed of multi-tenant
office/industrial space and to a lesser extent suburban office. Commercial
property rental income and cost of operations presented on the consolidated
statements of income reflect the operations of the 61 facilities owned by
the Company and the Consolidated Entities. The following table summarizes
the operating results (before depreciation) of these facilities for each of
the periods presented:
17
COMMERCIAL PROPERTY OPERATIONS:
-------------------------------
Three Months Ended March 31,
----------------------------
Percentage
1998 1997 Change
---- ---- --------
(Dollar amounts in thousands, except rents per
square foot)
Rental income:
Pre-1997 Acquisitions $ 7,978 $ 7,566 5.4%
1997 and 1998 Acquisitions 9,703 31 N/A
-------- --------- -----------
17,681 7,597 132.7%
-------- --------- -----------
Cost of operations:
Pre-1997 Acquisitions 3,254 3,156 3.1%
1997 and 1998 Acquisitions 2,594 28 N/A
-------- --------- -----------
5,848 3,184 83.7%
-------- --------- -----------
Net operating income:
Pre-1997 Acquisitions 4,724 4,410 7.1%
1997 and 1998 Acquisitions 7,109 3 N/A
-------- --------- -----------
11,833 4,413 168.1%
======== ========= ===========
Consistent Group data:
Gross margin.......... 59.2% 58.3% 0.9%
Weighted average occupancy 95.1% 94.7% 0.4%
Average realized annual rent per
square foot......... $ 8.76 $ 8.40 4.3%
Number of facilities (at the end of the
period):
Consistent group...... 35 35 -
Cumulative Post-1994 Acquisitions 31 - -
Net rentable square feet
(at the end of the period):
Consistent group...... 3,045 3,045 -
Cumulative Post-1994 Acquisitions 4,530 - -
As indicated in the above table, the Company's commercial property
operations have grown principally as a result of the addition of new
properties over the past year. The operating results of the consistent
group of properties over the past year has been improving, with net
operating income increasing principally due to improved realized rental
rates and declining operating expenses.
EQUITY IN EARNINGS OF REAL ESTATE ENTITIES: At March 31, 1998, the
Company had ownership interests in 28 limited partnerships and one REIT
(collectively 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 was $2,619,000 for the
three months ended March 31, 1998 as compared to $5,221,000 for the same
period in 1997. The decreases in earnings from real estate entities from
1997 to 1998 reflect the Company's merger and partnership acquisition
activities in the last nine months of 1997 (with six affiliated REIT
mergers and the acquisition of additional partnership interests) and the
first three months of 1998 (with one additional affiliated REIT merger and
the acquisition of additional partnership interests). The merger and
partnership acquisition activities resulted in the elimination of
investment in real estate entities and, after the acquisitions, the
associated equity in earnings.
18
Equity in earnings of real estate entities for the three months ended
March 31, 1998 consists of the Company's pro rata share of the
Unconsolidated Entities based upon the Company's ownership interest for the
period. The following table summarizes the components of the Company's
equity in earnings of real estate entities:
Three Months Ended March 31,
------------------------------------
1998 1997 Dollar Change
----------- --------- -------------
(Amounts in thousands)
Self-storage operations $ 4,672 $ 8,635 $(3,963)
Commercial property operations 126 629 (503)
Depreciation and Amortization:
Self-storage facilities (1,723) (3,401) 1,678
Commercial properties (40) (228) 188
Other (416) (414) (2)
----------- --------- -------------
Total equity in earnings of
real estate entities $ 2,619 $ 5,221 $(2,602)
=========== ========= =============
Similar to the Company, the Unconsolidated Entities generate
substantially all of their income from their ownership of self-storage
facilities. In the aggregate, the Unconsolidated Entities own a total of
168 self-storage facilities at March 31, 1998. The Company expects that its
equity in earnings from Unconsolidated Entities will generally decrease as
a result of the acquisition of additional interests in the Unconsolidated
Entities by the Company. The Company has in the past acquired, and may
continue to seek to acquire in the future, real estate facilities owned by
or additional interests in the Unconsolidated Entities.
PROPERTY MANAGEMENT OPERATIONS: The property management contracts
generally provide for compensation equal to 6%, in the case of the
self-storage facilities, and 5%, in the case of the commercial properties,
of gross revenues of the facilities managed. Under the supervision of the
property owners, the Company coordinates rental policies, rent collections,
marketing activities, the purchase of equipment and supplies, maintenance
activity, and the selection and engagement of vendors, suppliers and
independent contractors. In addition, the Company assists and advises the
property owners in establishing policies for the hire, discharge and
supervision of employees for the operation of these facilities, including
resident managers, assistant managers, relief managers and billing and
maintenance personnel.
Property management operations reflect the activities with respect to
the management of facilities owned by affiliated unconsolidated entities.
As a result, the revenues generated from its property management operations
are generally predictable and dependent upon the future growth of rental
income for these affiliated properties. The Company has in the past
acquired, and may continue to seek to acquire in the future, real estate
facilities owned by affiliated entities which are not consolidated with the
Company. The acquisition of such facilities reduces management fee income
to the Company and is offset by a corresponding reduction in the cost of
property operations.
During the three months ended March 31, 1998, the Company's property
management operations generated net operating income of $1,479,000 on
revenues of $1,765,000 and expenses of $286,000 as compared to net
operating income of $2,576,000 on revenues of $3,052,000 and expenses of
$476,000 during the same period in 1997. The decreases in property
management operations are due to the Company's acquisition of facilities
which it previously managed for third parties and affiliated entities for a
fee.
PORTABLE SELF-STORAGE BUSINESS: Public Storage Pickup & Delivery,
Inc., a subsidiary of the Company and a related partnership (collectively
referred to as "PSPUD") operates a portable self-storage business that
rents storage containers to customers for storage in a central warehouse.
During the first quarter of 1998, PSPUD opened five new facilities which
combined with its previously opened facilities increased the number of
opened facilities to 54 as of March 31, 1998 (including a mature facility
acquired in 1996). These 54 facilities had a total of 42,284 occupied
containers as of March 31, 1998.
19
PSPUD presently anticipates opening an additional two facilities
during the second quarter of 1998. PSPUD has also identified an additional
18 sites in existing markets for development of PSPUD facilities at an
aggregate estimated cost of $78.2 million.
Due to the start-up nature of this business, PSPUD incurred operating
losses totaling approximately $9.9 million for the three months ended March
31, 1998 compared to $2.3 million for the same period in 1997. The
operating losses have been trending downward since the third quarter of
1997. During the third and fourth quarters of 1997, operating losses for
PSPUD were approximately $12.1 million and $10.5 million, respectively.
PSPUD continues to expend funds in personnel, training, equipment, computer
software and professional fees in organizing this business. Until the
facilities are operating profitably, PSPUD's operations are expected to
adversely impact the Company's earnings. PSPUD currently expects subsequent
quarters to produce operating losses, but anticipates that losses in
subsequent quarters will be at a reduced level from the current quarter,
although there can be no assurance.
PSPUD's facilities (excluding two smaller facilities in peripheral
markets) are located in 25 greater metropolitan areas in 16 states and had
a total of 41,645 occupied containers at April 30, 1998. These facilities
consist of the mature facility, 20 facilities that have been open for less
than ten months and 31 facilities that have been open between ten and
eighteen months. The capacity of these 32 facilities open for more than ten
months ranges from 1,600 to 3,500 containers (averaging 2,300), and as of
April 30, 1998 these facilities had occupancy levels ranging from 20% to
82% (averaging 47%).
The Company continues to believe that it should invest a portion of
its retained cash flow in PSPUD, which responds to a promising business
opportunity in at least certain markets and complements the Company's
existing operations through joint use of a national telephone reservation
system and a coordinated media advertising program to increase consumer
awareness of both traditional mini-warehouses and portable self-storage.
The Company's average mini-warehouse occupancy level is higher than at any
comparable period in prior years, despite the promotion of the portable
self-storage business in the same markets. The Company believes that the
combination of PSPUD and traditional mini-warehouses allows for market
strategies that promote both businesses and most importantly meets consumer
needs.
Included in the cost of operations of the portable self-storage
operations are certain start-up costs which the Company expects to be
non-recurring and only incidental to the opening of new facilities. These
costs are related to site acquisition, leasing activities, systems
development, and hiring and training of personnel. In addition, included in
cost of operations is $3,558,000 for the three months ended March 31, 1998
relating to marketing activities, including television advertising,
designed to enhance the rental activities of PSPUD's facilities.
INTEREST AND OTHER INCOME
As mentioned above, the Company has developed additional businesses
through affiliates, via a retail expansion program and a truck rental
program. The net results of these two businesses are presented along with
interest and other income, as "interest and other income." The components
of interest and other income are detailed as follows:
Three Months Ended March 31,
------------------------------------
1998 1997 Dollar Change
------------------------------------
(Amounts in thousands)
Sales of Packaging Material and Truck
Rental Income:
Revenues $1,482 $ 850 $ 632
Costs of Operation (1,291) (519) (772)
--------- ------------ -----------
Net Operating Income 191 331 (140)
Interest and Other Income 3,461 1,690 1,771
--------- ------------ -----------
Total Interest and Other Income $3,652 $2,021 $1,631
========= ============ ===========
Interest and other income principally consists of interest earned on
cash balances and interest related to mortgage notes receivable. The
increase in interest income for the three months ended March 31, 1998
compared to the same periods in 1997 is primarily due to interest income on
excess cash balances.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense
has increased $8,432,000, to $28,219,000 for the three months ended March
31, 1998 as compared to $19,787,000 for the same period in 1997. These
increases are principally due to the acquisition of additional real estate
facilities during 1997 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
20
months ended March 31, 1998 was $6,352,000 compared to $2,447,000 for the
same period in 1997.
Minority interest in income increased in the three month period ended
March 31, 1998 compared to the same period in 1997 due to improved property
operations and the consolidation of investments which were previously
accounted for on the equity method during the 1997 period. These effects
were partially offset by PSI's acquisition of additional minority
interests, as well as minority interests in the losses of PSPUD and the
development joint venture.
SUPPLEMENTAL PROPERTY DATA
At March 31, 1998, the Company's investment portfolio consists of (i)
wholly-owned properties owned by the Company, (ii) properties owned by real
estate partnerships in which the Company has significant ownership
interests (the "Consolidated Partnerships"), and (iii) properties owned by
real estate entities (partnerships and REITs) in which the Company's
ownership interest and control are not sufficient to warrant the
consolidation of such entities (the "Unconsolidated Entities"). The
following table summarizes the Company's investment in real estate
facilities as of March 31, 1998:
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
---------- ---------- ----- ---------- ---------- -----
Wholly-owned facilities 586 1 587 35,722 9 35,731
Facilities owned by Consolidated 323 65 388 18,767 7,566 26,333
---------- ---------- ----- ---------- -------- -----
Partnerships
Total consolidated facilities 909 66 975 54,489 7,575 62,064
Facilities owned by Unconsolidated Entities 168 - 168 9,739 - 9,739
---------- ---------- ----- ---------- -------- -----
Total facilities in which the Company
has an ownership interest 1,077 66 1,143 64,228 7,575 71,803
========== ========== ====== ========= ======== ======
In order to evaluate how the Company's overall portfolio has
performed, management analyzes the operating performance of a consistent
group of self-storage facilities representing 985 (57.6 million net
rentable square feet) of the 1,077 self-storage facilities (herein referred
to as "Same Store" self-storage facilities) which have been operated under
the "Public Storage" name for at least the past three years. At March 31,
1998, the Company had ownership interests in a total of 1,077
mini-warehouse facilities. Of these 1,077 properties, 985 or 91% of the
mini-warehouses have been in operation and managed by Public Storage, Inc.
since January 1, 1994. The following table summarizes the operating results
of these 985 properties:
21
Same Store mini-warehouse facilities (985 facilities):
------------------------------------------------------
(historical property operations)
Three months ended March 31,
----------------------------
1998 1997 Change
---- ---- ------
(dollar amounts in thousands, except per square
foot amounts)
Rental income...................... $124,305 $116,678 6.5%
Cost of operations (1)............. 44,868 43,285 3.7%
-------- -------- ----
Net operating income............... $79,437 $73,393 8.2%
======= ======= ===
Gross profit margin (2)............ 63.9% 62.9% 1.0%
...........................................................................................
Weighted Average:
Occupancy.................... 91.4% 89.5% 1.9%
Annualized realized rent per
sq. ft. for period (3)..... $9.48 $9.00 5.3%
Annualized scheduled rent per
sq. ft. for period......... $9.96 $9.72 2.5%
1. Assumes payment of property management fees on all facilities,
including those facilities owned by the Company for which
effective November 16, 1995 no fee is paid.
2. Gross profit margin is computed by dividing property net operating
income (before depreciation expense) by rental revenues. Cost of
operations include a 6% management fee. The gross profit margin
excluding the facility management fee was 69.9% and 68.9% for the
three months ended March 31, 1998 and 1997, respectively.
3. Realized rent per square foot represents the actual revenue earned
per occupied square foot. Management believes this is a more
relevant measure than the scheduled rental rates, since scheduled
rates can be discounted through the use of promotions.
Rental income for the Same Store facilities included promotional
discounts totaling $4.3 for the three months ended March 31, 1998, compared
to $3.5 million for the same period in 1997. The increase in promotional
discounts is principally due to promotional activities offered through the
national telephone reservation center.
Cost of operations for the three months ended March 31, 1998 increased
due to (i) advertising and promotion, which increased $1,098,000 due
primarily to the Company's national telephone reservations center and
television advertising in certain markets and (ii) property taxes, which
increased $770,000, due primarily to higher assessments.
As indicated above, in early 1996, the Company implemented a national
telephone reservation system designed to provide added customer service for
all the self-storage facilities under management by the Company. The
Company believes that the improved operating results, as indicated in the
above table, in large part are due to the success of the national telephone
reservation system.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company has operated and intends to continue to operate in a
self-sufficient manner without reliance on external sources of financing to
fund its ongoing operating needs. The Company believes that funds
internally generated from ongoing operations will continue to be sufficient
to enable it to meet its operating expenses, capital improvements, debt
service requirements and distributions to shareholders for the foreseeable
future. Over the past six years, funds internally generated from ongoing
operations were in excess of the Company's operating needs, allowing the
Company to retain cash flow, which it used to acquire additional real
estate investments or make optional principal repayments on debt.
INTERNALLY GENERATED CASH FLOWS: The Company believes that important
measures of its performance as well as its liquidity are cash provided by
operations and funds from operations ("FFO") and the ability of these
22
measures to fund the Company's operating requirements (i.e., capital
improvements, principal payments on debt and distribution requirements).
Net cash provided by operations (as determined in accordance with
generally accepted accounting principles) reflects the cash generated from
the Company's business before distributions to various equity holders,
including the preferred shareholders, capital expenditures or mandatory
principal payments on debt. Net cash provided by operations has increased
to $84,800,000 from $68,181,000 for the three months ended March 31, 1998
and 1997, respectively.
The following table summarizes the Company's ability to pay the
minority interests' distributions, its dividends to the preferred
shareholders and capital improvements to maintain the facilities through
the use of cash provided by operating activities. The remaining cash flow
is available to the Company to make both scheduled and optional principal
payments on debt, pay distributions to common shareholders and for
reinvestment.
For the Three Months Ended March 31,
------------------------------------
1998 1997
----------------- --------------------
(in thousands)
Net Income................................................... $ 48,364 $ 42,318
Depreciation and amortization................................ 28,219 19,787
Depreciation from unconsolidated real estate investments..... 1,865 3,629
Minority interest in income.................................. 6,352 2,447
----------------- --------------------
Net cash provided by operating activities.............. 84,800 68,181
Distributions from operations to minority interests (funds
from operations allocable to minority interests) .......... (10,557) (4,792)
----------------- --------------------
Cash from operations/FFO available to the Company's 74,243 63,389
shareholders
Less: preferred stock dividends.............................. (20,140) (19,150)
----------------- --------------------
Cash from operations/FFO available to common shareholders.... 54,103 44,239
Capital improvements to maintain facilities.................. (4,090) (6,292)
Add back: minority interest share of capital improvements.... 558 398
----------------- --------------------
Funds available for principal payments on debt, common
dividends and reinvestment................................. 50,571 38,345
Cash distributions to common shareholders.................... (24,580) (19,457)
----------------- --------------------
Funds available for principal payments on debt and investment $ 25,991 $ 18,888
================= ====================
See the consolidated statements of cash flows for the three months
ended March 31, 1998 and 1997 for additional information regarding the
Company's investing and financing activities.
FFO increased to $74,243,000 for the three months ended March 31, 1998
compared to $63,389,000 for the same period in 1997. FFO applicable to the
common shareholders (after deducting preferred stock dividends) increased
to $54,103,000 for the three months ended March 31, 1998 compared to
$44,239,000 for the same period in 1997. FFO is used by many financial
analysts in evaluating REITs. The Company defines FFO as net income (loss)
(computed in accordance with GAAP) before (i) gain (loss) on disposition of
real estate, adjusted as follows: (i) plus depreciation and amortization,
and (ii) less FFO attributable to minority interest. The National
Association of Real Estate Investment Trusts, Inc. ("NAREIT") definition of
FFO does not specifically address the treatment of minority interest in the
determination of FFO. In the case of the Company, FFO represents amounts
attributable to its shareholders after deducting amounts attributable to
the minority interests. FFO does not take into consideration scheduled
principal payments on debt, capital improvements, distributions and other
obligations of the Company. Accordingly, FFO is a supplemental performance
measure and is not a substitute for the Company's cash flow or net income
(as discussed above) as a measure of the Company's liquidity or operating
performance.
RETENTION OF OPERATING CASH FLOWS: Operating as a REIT, the Company's
ability to retain cash flow for reinvestment is restricted. In order for
the Company to maintain its REIT status, a substantial portion of its
operating cash flows must be used to make distributions to its
shareholders. Remaining cash flows must then be sufficient to fund
necessary capital improvements and scheduled debt service requirements.
Accordingly, the Company's ability to be self-sufficient is predicated on
its ability to generate sufficient operating cash flows to satisfy its REIT
distribution requirements, capital improvement requirements, scheduled debt
service requirements, and provide funds for additional investments.
23
Over the past four years, the Company's distribution policy has
enabled it to retain significant funds (after capital improvements) to make
additional investments and debt reductions. During the first three months
of 1998 and 1997, the Company distributed to common shareholders
approximately 45.4% and 43.9% of its FFO available to common shareholders,
respectively, allowing it to retain approximately $26.0 million and $18.9
million, respectively, after satisfying its capital improvements and
preferred stock dividend requirements.
DISTRIBUTION REQUIREMENTS: During the first three months of 1998, the
Company paid dividends totaling $19,053,000 to the holders of the Company's
Senior Preferred Stock, $1,087,000 to the holders of the Convertible
Preferred Stock, and $24,580,000 to the holders of Common Stock. The
Company estimates the distribution requirements for fiscal 1998 with
respect to Senior Preferred Stock and the Convertible Preferred Stock to be
approximately $80 million. If the Company excercises its option to convert
the Convertible Preferred Stock, the distribution requirements with respect
to the Senior Preferred and Convertible Preferred Stock wiil be
approximately $78 million.
CAPITAL IMPROVEMENT REQUIREMENTS: During 1998, the Company has
budgeted approximately $27.4 million for capital improvements ($22.9
million for its self-storage and $4.5 million for its business park
facilities). The minority interests' share of the estimated capital
improvements is approximately $3.8 million. During the first three months
of 1998, the Company incurred capital improvements of approximately $4.1
million.
DEBT SERVICE REQUIREMENTS: The Company does not believe it has any
significant refinancing risks with respect to its mortgage debt, all of
which is at a fixed rate. The Company uses its $150.0 million of bank
credit facility (all of which was unused as of November 12, 1997) primarily
to fund acquisitions and provide financial flexibility and liquidity. At
the option of the Company, the rate of interest charged is equal to (i) the
prime rate or (ii) a rate ranging from the London Interbank Offered Rate
("LIBOR") plus 0.40% to LIBOR plus 1.10% depending on the Company's credit
ratings and coverage ratios, as defined. In addition, the Company is
required to pay a quarterly commitment fee of 0.250% (per annum) of the
unused portion of the Credit Facility. The Credit Facility allows the
Company, at its option, to request the group of banks to propose the
interest rate they would charge on specific borrowings not to exceed $50
million. However, in no case may the interest rate proposal be greater than
the amount provided by the Credit Facility.
At March 31, 1998, the Company had total outstanding notes payable of
approximately $108 million. Approximate principal maturities of notes
payable at March 31, 1998 are as follows:
Fixed Rate
Mortgage Debt
7.08% Unsecured (Weighted
Senior Notes average rate of 9.6%) Total
--------------- ---------------------- --------
1998 (remainder of) $ 7,250 $ 5,006 $ 12,256
1999 8,000 6,662 14,662
2000 8,750 2,906 11,656
2001 9,500 3,216 12,716
2002 9,750 3,560 13,310
Thereafter 10,000 33,424 43,424
--------- --------- ---------
$ 53,250 $ 54,774 $ 108,024
========= ========= =========
EXTERNAL FINANCING: Despite the Company's ability to retain a portion
of its internally generated cash flow, the Company's growth strategies have
required the Company to seek external financing. The Company has an
unsecured $150.0 million revolving credit facility with a group of banks
which it uses as a temporary source of acquisition financing. The Company,
however, seeks to ultimately finance all acquisitions with permanent
sources of capital. As a result, the Company has raised capital through the
public issuance of both common and preferred stock which was used to repay
borrowings and make additional investments in real estate assets. The
Company believes that its size and financial flexibility enable it to
access capital for growth when appropriate. The Company's financial profile
is characterized by a low level of debt to total capitalization, increasing
net income, increasing cash flow from operations, and a conservative
dividend payout ratio with respect to the common stock. The Company's
credit ratings on its Senior Preferred Stock by each of the three major
credit agencies are Baa2 by Moody's and BBB+ by Standard and Poors and Duff
& Phelps.
24
The Company's portfolio of real estate facilities remains
substantially unencumbered. At March 31, 1998, the Company had debt
outstanding of $108 million and had consolidated real estate facilities
with a book value of $2.9 billion. The Company, however, has been averse to
financing its acquisitions with debt and generally will only increase its
mortgage borrowing through the assumption of pre-existing debt on acquired
real estate facilities.
Over the past three years the Company has funded substantially all of
its acquisitions with permanent capital (both common and preferred stock).
Unlike many other real estate companies, the Company has elected to use
preferred stock despite the fact that the coupon rates of its preferred
stock exceeds current rates on conventional debt. The Company has chosen
this alternative for the following reasons: (i) the Company's perpetual
preferred stock has no sinking fund requirements, or maturity date and does
not require redemption, all of which eliminate any future refinancing
risks, (ii) preferred stock allows the Company to leverage the common stock
without the attendant interest rate or refinancing risks of debt, and (iii)
dividends on the preferred stock can be applied to the Company's REIT
distributions requirements, which have helped the Company to satisfy these
requirements.
During the first quarter of 1998, the Company issued 6,369,603 shares
of common stock in public and private offerings, raising net proceeds of
approximately $188.9 million. An additional 914,094 shares of common stock
were issued in connection with the acquisition of investments in real
estate entities during the first quarter of 1998.
MERGERS AND PROPERTY ACQUISITIONS: On March 17, 1998, PSBP completed a
merger transaction with an affiliated public REIT whereby PSBP acquired all
the outstanding stock of the REIT which it did not previously own. The
aggregate acquisition cost of this merger was approximately $49.6 million,
consisting of the issuance of $34.8 million of PSBP common stock
(classified as minority interest on the Company's consolidated financial
statements) and the Company's pre-existing investment in the affiliated
REIT totaling $14.8 million.
During the first quarter of 1998, the Company, through PSBP, acquired
three commercial properties (675,000 square feet) for a total aggregate
cost of $55.4 million.
DEVELOPMENT ACTIVITIES: In April 1997, the Company formed a joint
venture partnership with a state pension fund to participate in the
development of approximately $220 million of self-storage facilities. The
Company expects that substantially all of its development activities will
be conducted in the joint venture partnership until the $220 million is
fully committed. At March 31, 1998, the joint venture partnership had
completed construction on eleven self-storage facilities (approximately
637,000 net rentable square feet) with a total cost of approximately $55.4
million, and had 15 facilities under construction (approximately 948,000
net rentable square feet) with an aggregate cost incurred to date of
approximately $43.3 million and total additional estimated cost to complete
of $26.9 million. In addition, at March 31, 1998, the Company had nine
facilities under construction (approximately 522,000 net rentable square
feet) with an aggregate cost incurred to date of approximately $20.7
million and total additional estimated cost to complete of $20.4 million.
Upon approval by the joint venture partnership, the facilities under
construction by the Company will be transferred to the joint venture
partnership. The partnership is funded solely with equity capital
consisting of 30% from the Company and 70% from the state pension fund. The
Company accounts for its investment in the joint venture partnership using
the equity method.
REIT STATUS: The Company believes that it has operated, and intends to
continue to operate, in such a manner as to qualify as a REIT under the
Internal Revenue Code of 1986, but no assurance can be given that it will
at all times so qualify. To the extent that the Company continues to
qualify as a REIT, it will not be taxed, with certain limited exceptions,
on the taxable income that is distributed to its shareholders.
As a REIT, the Company is not taxed on that portion of its taxable
income which is distributed to its shareholders provided that at least 95%
of its taxable income is so distributed prior to filing of the Company's
tax return. The Company has satisfied the REIT distribution requirement
since 1980.
25
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
--------------------------------
(a) The following Exhibits are included herein:
(11) Statement re: Computation of Earnings per Share
(12) Statement re: Computation of Ratio of Earnings
to Fixed Charges
(27) Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated
January 15, 1998, pursuant to Item 5, which filed
certain exhibits relating to the Company's public
offering of 2,845,000 shares of common stock.
The Company filed a Current Report on Form 8-K dated
February 10, 1998, pursuant to Item 5, which filed
certain exhibits relating to the Company's public
offering of 904,710 shares of common stock.
26
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 14, 1998
PUBLIC STORAGE, INC.
BY: /s/ John Reyes
-----------------
John Reyes
Senior Vice President and
Chief Financial Officer
(Principal financial officer)
27