SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1995
---------------
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
----------
STORAGE EQUITIES, 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)
600 North Brand Blvd., Glendale, California 91203-1241
- --------------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 244-8080
----------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of August 9, 1995:
Common Stock, $.10 par value, 42,042,616 shares outstanding
- -------------------------------------------------------------
STORAGE EQUITIES, INC.
INDEX
Pages
-----
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Condensed Consolidated Balance Sheets at June 30, 1995
and December 31, 1994 1
Condensed Consolidated Statements of Income for the
Three and Six Months Ended June 30, 1995 and 1994 2
Condensed Consolidated Statement of Shareholders' Equity 3
Condensed Consolidated Statements of Cash Flows for
Six Months Ended June 30, 1995 and 1994 4 - 5
Notes to Condensed Consolidated Financial Statements 6 - 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15 - 28
PART II. OTHER INFORMATION (Items 1, 2 and 3 are not applicable)
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 30
STORAGE EQUITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1995 1994
--------------- -------------
(unaudited)
ASSETS
------
Cash and cash equivalents $ 89,759,000 $ 20,151,000
Real estate facilities, at cost,
net of accumulated depreciation
of $219,649,000 ($202,745,000 at
December 31, 1994) 994,006,000 764,973,000
Mortgage notes receivable from
affiliates 14,352,000 23,062,000
Other assets 18,740,000 12,123,000
-------------- -------------
Total assets $1,116,857,000 $ 820,309,000
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Note payable to banks $ - $ 25,447,000
Mortgage notes payable 58,497,000 51,788,000
Accrued and other liabilities 34,160,000 14,061,000
-------------- -------------
Total liabilities 92,657,000 91,296,000
Minority interest 131,536,000 141,227,000
Shareholders' equity:
Preferred Stock, $.01 par value,
50,000,000 shares authorized,
13,406,000 shares issued and
outstanding (8,911,000 shares
at December 31, 1994), at
liquidation preference:
Cumulative Senior Preferred Stock,
issued in series (Note 9) 277,650,000 165,275,000
Convertible preferred stock 57,500,000 57,500,000
Common stock, $.10 par value,
60,000,000 shares authorized,
42,042,616 shares issued and
outstanding (28,826,707 at
December 31, 1994) 4,205,000 2,883,000
Paid-in capital 561,985,000 372,361,000
Cumulative net income 202,236,000 172,485,000
Cumulative distributions paid (210,912,000) (182,718,000)
-------------- -------------
Total shareholders' equity 892,664,000 587,786,000
-------------- -------------
Total liabilities and
shareholders' equity $1,116,857,000 $ 820,309,000
============== =============
See notes to condensed consolidated financial statements.
1
STORAGE EQUITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
------------------------------ -------------------------------
1995 1994 1995 1994
------------ ---------- ------------ -----------
REVENUES:
Rental income $46,094,000 $33,948,000 $88,068,000 $65,247,000
Interest and other income 1,818,000 1,643,000 3,042,000 3,293,000
----------- ----------- ----------- -----------
47,912,000 35,591,000 91,110,000 68,540,000
----------- ----------- ----------- -----------
EXPENSES:
Cost of operations 16,535,000 12,762,000 32,342,000 24,688,000
Depreciation and amortization 8,779,000 6,730,000 16,926,000 13,541,000
General and administrative 645,000 640,000 1,736,000 1,380,000
Advisory fee 1,816,000 1,237,000 3,426,000 2,356,000
Interest expense 1,694,000 1,286,000 3,214,000 2,844,000
----------- ----------- ----------- -----------
29,469,000 22,655,000 57,644,000 44,809,000
----------- ----------- ----------- -----------
Income before minority
interest 18,443,000 12,936,000 33,466,000 23,731,000
Minority interest in income (1,892,000) (2,742,000) (3,715,000) (4,791,000)
----------- ----------- ----------- -----------
Net income $16,551,000 $10,194,000 $29,751,000 $18,940,000
=========== =========== =========== ===========
Allocation of net income:
- -------------------------
Net income allocable to
preferred shareholders $ 7,332,000 $ 3,649,000 $13,308,000 $ 7,298,000
Net income allocable to
common shareholders 9,219,000 6,545,000 16,443,000 11,642,000
----------- ----------- ----------- -----------
Net income $16,551,000 $10,194,000 $29,751,000 $18,940,000
=========== =========== =========== ===========
Net income per common share $ 0.26 $ 0.28 $ 0.50 $ 0.52
=========== =========== =========== ===========
Weighted average common
shares outstanding 34,792,185 23,887,332 32,707,556 22,436,885
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
2
STORAGE EQUITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Six Months Ended June 30, 1995
(Amounts in thousands, except share and per share data)
(Unaudited)
Preferred Stock
------------------------ Total
Cumulative Common Paid-in Cumulative Cumulative Shareholders'
Senior Convertible Stock Capital Net Income Distributions Equity
---------- ----------- ------ -------- ---------- ------------- -------------
Balances at December 31, 1994 $165,275 $57,500 $2,883 $372,361 $172,485 $(182,718) $587,786
Issuance of Cumulative
Preferred Stock:
Series E (2,195,000 shares) 54,875 - - (1,987) - - 52,888
Series F (2,300,000 shares) 57,500 - - (2,011) - - 55,489
Issuance of Common Stock:
In connection with mergers
(6,664,287 shares) - - 667 99,305 - - 99,972
Less: cost of issuance shares
in connection with mergers - - - (2,500) - - (2,500)
Public offerings (5,482,200
shares) - - 548 81,520 - - 82,068
Other (1,069,422 shares) - - 107 15,297 - - 15,404
Net income - - - - 29,751 - 29,751
Cash distributions:
Cumulative Senior
Preferred Stock: - - - - - - -
Series A ($1.250 per share) - - - - - (2,282) (2,282)
Series B ($1.150 per share) - - - - - (2,744) (2,744)
Series C ($1.066 per share) - - - - - (1,279) (1,279)
Series D ($1.188 per share) - - - - - (1,426) (1,426)
Series E ($1.042 per share) - - - - - (2,286) (2,286)
Series F ($0.400 per share) - - - - - (919) (919)
Convertible Preferred Stock
($1.031 per share) - - - - - (2,372) (2,372)
Common Stock ($.44 per share) - - - - - (14,886) (14,886)
-------- ------- ------ -------- -------- --------- --------
Balances at June 30, 1995 $277,650 $57,500 $4,205 $561,985 $202,236 $(210,912) $892,664
======== ======= ====== ======== ======== ========= ========
See notes to condensed consolidated financial statements.
3
STORAGE EQUITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
June 30,
-----------------------------
1995 1994
------------- ------------
Cash flows from operating activities:
Net income $ 29,751,000 $ 18,940,000
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization
(including amortization of
mortgage notes receivable
discounts) 16,859,000 130,035,000
Minority interest in income 3,715,000 4,791,000
Other (851,000) (282,000)
------------- ------------
Total adjustments 19,723,000 17,544,000
------------- ------------
Net cash provided by
operating activities 49,474,000 36,484,000
------------- ------------
Cash flows from investing activities:
Principal payments received
on mortgage notes receivable
from affiliates 311,000 5,283,000
Acquisitions of real estate
facilities (61,980,000) (59,820,000)
Acquisition cost of mergers (21,427,000) -
Capital improvements to
maintain real estate facilities (3,306,000) (2,298,000)
Construction in process (3,400,000) -
Acquisition of minority
interests in real estate
partnerships (10,735,000) (15,710,000)
Acquisition of mortgage notes
receivable - (4,020,000)
Other (1,031,000) (65,000)
------------- ------------
Net cash used in investing
activities (101,568,000) (76,630,000)
------------- ------------
Cash flows from financing activities:
Net pay downs on note payable
to banks (25,447,000) (35,770,000)
Net proceeds from the issuance
of preferred stock 108,377,000 28,900,000
Net proceeds from the issuance
of common stock 80,340,000 78,748,000
Principal payments on mortgage
notes payable (5,418,000) (4,568,000)
Distributions paid to
shareholders (28,194,000) (17,230,000)
Distributions from operations
to minority interest in real
estate partnerships (9,107,000) (12,085,000)
Reinvestment by minority
interests into real estate
partnerships 1,151,000 3,631,000
------------- ------------
Net cash provided by financing
activities 121,702,000 41,626,000
------------- ------------
Net increase in cash and cash
equivalents 69,608,000 1,480,000
Cash and cash equivalents at the
beginning of the period 20,151,000 10,532,000
------------- ------------
Cash and cash equivalents at the end of
the period $ 89,759,000 $ 12,012,000
============= ============
See notes to condensed consolidated financial statements.
4
STORAGE EQUITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(CONTINUED)
For the Six Months Ended
June 30,
-----------------------------
1995 1994
------------- ------------
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Cancellation of mortgage notes
receivable to acquire real
estate facilities $ 8,466,000 $ 5,001,000
Assumption of mortgage notes
payable upon the acquisition of
real estate facilities 12,127,000 5,913,000
Reduction in other assets -
deposits on real estate acquisitions - 4,350,000
Issuance of common stock:
- to acquire real estate facilities 10,598,000 -
- to acquire partnership
interests in real estate entities 4,034,000 -
- in connection with mergers 99,972,000 -
Acquisition of partnership interests
in real estate entities in exchange for
common stock (4,034,000) -
Acquisition of real estate facilities in
exchange for the cancellation of mortgage
notes receivable, the assumption of
mortgage notes payable, reduction in
deposits made to acquire real estate
facilities and issuance of common stock (31,191,000) (15,264,000)
Increase in accrued and other
liabilities - accrued cash portion
of merger cost 14,007,000 -
Merger acquisitions (Note 3):
Real estate facilities (140,775,000) -
Other assets (1,441,000) -
Accrued and other liabilities 6,810,000 -
See notes to condensed consolidated financial statements.
5
STORAGE EQUITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
1. Description of the business
---------------------------
Storage Equities, Inc. (the "Company") is a California corporation
that invests primarily in existing mini-warehouses which offer self-storage
spaces for lease, usually on a month-to-month basis, for personal and
business use. The Company, to a lesser extent, has also invested in business
park facilities containing commercial and industrial rental space.
At June 30, 1995, the Company had equity interests (through direct
ownership, as well as general and limited partnership interests) in 489
properties located in 37 states, including 450 mini-warehouse facilities, 19
business parks and 20 combination mini-warehouse/business park facilities.
In addition to the 235 properties owned wholly by the Company, an additional
238 properties owned by real estate partnerships have been included in the
consolidated financial statements (see below). All of these facilities are
operated under the "Public Storage" name.
As of June 30, 1995, the Company has invested in 211 properties
jointly through general partnerships (the "Joint Ventures") with PS Partners,
Ltd. ("PSP-1"); PS Partners II, Ltd. ("PSP-2"); PS Partners III, Ltd. ("PSP-
3"); PS Partners IV, Ltd. ("PSP-4"); PS Partners V, Ltd. ("PSP-5"); PS
Partners VI, Ltd. ("PSP-6"); and PS Partners VII, Ltd. ("PSP-7"). In
addition, the Company also owns limited partnership units and general
partnership interests in each of the above partnerships including PS Partners
VIII, Ltd. ("PSP-8"). These eight publicly-held partnerships (collectively
the "PSP Partnerships") are affiliates of the Company.
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. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and six months ended June 30, 1995 are not necessarily
indicative of the results that may be expected for the year ended December
31, 1995. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on
Form 10-K for year ended December 31, 1994.
6
STORAGE EQUITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
2. Summary of significant accounting policies (Cont'd.)
----------------------------------------------------
Basis of presentation (Cont'd.)
-------------------------------
The condensed consolidated financial statements include the accounts of
the Company and the PSP Partnerships. The Company through its direct
ownership interests in the Joint Ventures combined with its limited and
general partnership interests owns a significant economic interest in each of
the PSP Partnerships (Note 7). In addition, the Company is able to exercise
significant control over the PSP Partnerships through its (i) position as a
co-general partner, (ii) ownership of significant limited partnership
interests and (iii) ability to compel the sale of the properties held in the
Joint Ventures; such properties represent a significant majority of the PSP
Partnerships' investment portfolio.
The Company's aggregate cost of its interests in the PSP Partnerships
is less than the historical book value of such interests in the underlying
net assets of the PSP Partnerships. In consolidation, the difference between
the Company's cost and the historical carrying value of the underlying
properties has been allocated to the real estate facilities and is being
amortized over the remaining lives of the real estate facilities.
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.
Depreciation
------------
Depreciation is computed using the straight-line method over the
estimated useful lives of the buildings and improvements, which is generally
between 5 and 25 years. Leasing commissions relating to the business park
operations are expensed as incurred.
Under the terms of the joint venture agreements, depreciation with
respect to the Joint Ventures is allocated first to the PSP Partnerships to
the extent of their original capital contribution then to the Company to the
extent of its original capital contribution and thereafter pro rata based on
ownership interests in each respective Joint Venture.
7
STORAGE EQUITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
2. Summary of significant accounting policies (Cont'd.)
----------------------------------------------------
Net income per common share
---------------------------
Net income per common share is computed using the weighted average
common shares outstanding (adjusted for stock options). The Company's
preferred stock has been determined not to be common stock equivalents. In
computing earnings per common share, the preferred stock dividends reduced
income available to common stockholders. Fully diluted earnings per common
share are not presented, as the assumed conversion of the 8.25% Convertible
Preferred Stock would be anti-dilutive.
Revenue recognition
-------------------
Property rents are recognized as earned.
Interest income on mortgage notes receivable is recognized using the
effective rate of interest.
3. Acquisition of Public Storage Properties VI, Inc. ("Properties 6") and Public
-----------------------------------------------------------------------------
Storage Properties VII, Inc. ("Properties 7")
---------------------------------------------
On February 28, 1995 and June 30, 1995, the Company completed separate
merger transactions with Properties 6 and Properties 7, respectively,
whereby the Company acquired all the outstanding stock of Properties 6 and
Properties 7 in exchange for cash and common stock of the Company.
Properties 6 and Properties 7 were real estate investment trusts and
affiliates of the Company's investment adviser (Public Storage Advisers,
Inc., the "Adviser").
Properties 6 owned and operated 22 mini-warehouse facilities and one
combination mini-warehouse/business park facility (approximately 1,453,000
square feet). Pursuant to the merger, the Company acquired all of the
outstanding stock of Properties 6 for an aggregate cost of $65,342,000
consisting of the issuance of 3,147,015 shares of the Company's common stock
(with an aggregate value of $43,915,000) and $21,427,000 in cash. The merger
has 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 February 28, 1995. The fair market
values of the assets acquired and liabilities assumed are summarized as
follows:
8
STORAGE EQUITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
3. Acquisition of Public Storage Properties VI, Inc. ("Properties 6") and Public
-----------------------------------------------------------------------------
Storage Properties VII, Inc. ("Properties 7") (Cont'd.)
-------------------------------------------------------
At February 28, 1995
--------------------
Real estate facilities $66,475,000
Other assets 279,000
Accrued and other liabilities (1,412,000)
-----------
$65,342,000
===========
Properties 7 owned and operated 34 mini-warehouse facilities, three
business parks, and one combination mini-warehouse/business park facility
(approximately 2,014,000 square feet). Pursuant to the merger, the Company
acquired all of the outstanding stock of Properties 7 for an aggregate cost
of $70,064,000 consisting of the issuance of 3,517,272 shares of the
Company's common stock (with an aggregate value of $56,057,000) and
$14,007,000 in cash. The merger has 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 June 30, 1995. The fair market values of the assets acquired and
liabilities assumed are summarized as follows:
At June 30, 1995
----------------
Real estate facilities $74,300,000
Other assets 1,162,000
Accrued and other liabilities (5,398,000)
-----------
$70,064,000
===========
The historical operating results of Properties 6 (prior to February 28,
1995) and Properties 7 have not been included in the Company's historical
operating results. Pro forma data (unaudited) for the six months ended June
30, 1995 and 1994 as though the merger transactions had been effective at the
beginning of each period are as follows:
For the Six Months Ended
June 30,
-------------------------
1995 1994
----------- -----------
Revenues $99,600,000 $80,227,000
Net income 32,313,000 22,298,000
Net income per common share $ 0.51 $ 0.52
9
STORAGE EQUITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
3. Acquisition of Public Storage Properties VI, Inc. ("Properties 6") and Public
-----------------------------------------------------------------------------
Storage Properties VII, Inc. ("Properties 7") (Cont'd)
------------------------------------------------------
The pro forma data does not purport to be indicative either of results
of operations that would have occurred had the purchase been made at the
beginning of each period or future results of operations of the Company.
Certain pro forma adjustments were made to the combined historical amounts to
reflect (i) expected reductions in general and administrative expenses, (ii)
estimated increased interest expense from bank borrowings to finance the cash
portion of the acquisition cost, (iii) estimated increase in depreciation and
amortization expense, and (iv) estimated increased advisory fee expense.
4. Real estate facilities
----------------------
In addition to the 61 facilities acquired in connection with the
mergers, the Company acquired 27 mini-warehouse facilities (approximately
1,669,946 square feet) for an aggregate cost of $81,765,000 during the six
months ended June 30, 1995, consisting of the cancellation of mortgage notes
receivable totaling $8,466,000, the assumption of mortgage notes payable
totaling $12,127,000, and cash totaling $61,172,000. At December 31, 1994,
affiliates of Adviser, had participation interests of up to 25% in 21 mini-
warehouse facilities owned by the Company. During the first six months of
1995, the Company acquired these participation interests from such affiliates
for $10,598,000 in common stock of the Company and cash totaling $808,000.
The cost of these participation interests has been included in real estate
facilities as part of the acquisition cost of the respective facilities.
Several mini-warehouse facilities which were acquired during 1995 were
acquired directly from affiliates of the Adviser (principally private limited
partnerships whose limited partners are unrelated to the Company and whose
general partners are affiliates of the Adviser). The aggregate acquisition
cost of these real estate facilities was approximately $38,262,000. In
addition, one mini-warehouse facility was acquired from an unrelated third
party subject to participation interests owned by an affiliate of the Adviser
(the participation interest was purchased prior to the acquisition). The
aggregate acquisition cost of this facility was approximately $1,868,000.
During 1995, the Company began construction of two mini-warehouse
facilities. Included in real estate facilities at June 30, 1995 is
approximately $3,400,000 of costs related to the construction in process.
10
STORAGE EQUITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
5. Mortgage notes receivable from affiliates
-----------------------------------------
At June 30, 1995, mortgage notes receivable balance of $14,352,000 is
net of related discounts totaling $525,000. The mortgage notes bear interest
at stated rates ranging from 8.5% to 11.97% (effective interest rates ranging
from 10% to 14.8%) and are secured by 8 mini-warehouse facilities.
During 1995, the Company canceled mortgage notes which had a net
carrying value of $8,466,000, as part of the acquisition cost of the
underlying real estate facility securing the mortgage note. See Note 4.
6. Minority interest
-----------------
Minority interest consists principally of equity interests in the PSP
Partnerships which are not owned by the Company consisting of limited
partnership interests owned by unaffiliated third parties.
During 1995, pursuant to cash tender offers, the Company acquired
approximately 23.9% and 12.9% of the limited partnership units in PSP-1 and
PSP-8 for an aggregate cost of approximately $10,735,000. These transactions
had the effect of reducing minority interest by approximately $5,450,000 (the
historical book value of such interests in the underlying net assets of the
partnerships).
Minority interest in income consists of the minority interests' share
of the operating results of the Company relating to the consolidated
operations of the PSP Partnerships. In determining income allocable to the
minority interests for the six months ended June 30, 1995 and 1994
consolidated depreciation and amortization expense of approximately
$5,392,000 and $7,294,000, respectively, was allocated to the minority
interest ($2,619,000 and $3,241,000 for the three months ended June 30, 1995
and 1994, respectively).
7. Advisory and management contracts
---------------------------------
Pursuant to an advisory contract, the Company paid the Adviser advisory
fees of approximately $3,426,000 and $2,356,000 for the six months ended June
30, 1995 and 1994, respectively ($1,816,000 and $1,237,000 for the three
months ended June 30, 1995 and 1994, respectively). The Adviser advises the
Company with respect to its investments and administers the daily corporate
operations of the Company.
Public Storage Management, Inc. ("PSMI") and Public Storage Commercial
Properties Group, Inc. ("PSCP"), also affiliates of the Company's Adviser,
operate all of the Company's real property investments pursuant to a Property
Management Agreement for a fee which is equal to 6% of the gross revenues of
the mini-warehouse spaces operated and 5% of the gross revenues of the
business park facilities operated. Management fees relating to the Company's
real estate
11
STORAGE EQUITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
7. Advisory and management contracts (Cont'd)
------------------------------------------
facilities, which are included in cost of operations, amounted to
$5,205,000 and $3,840,000 for the six months ended June 30, 1995 and 1994,
respectively ($2,774,000 and $2,004,000 for the three months ended June 30,
1995 and 1994, respectively).
8. Shareholders' equity
--------------------
Common stock
------------
During 1995, the Company issued shares of its common as follows: (i)
25,000 shares ($190,000) in connection with exercise of stock options, (ii)
40,000 shares ($582,000) to directors/officers of the Company for cash,
(iii) 747,355 shares ($10,598,000) to acquire participation interests in
mini-warehouse facilities owned by the Company (see Note 4), (iv) 257,067
shares ($4,034,000) to acquire the participation interests in mini-
warehouses owned by affiliates of the Adviser, (v) 5,482,200 shares
($82,068,000) in a public offering, and (vi) 6,664,287 shares ($99,972,000)
in connection with the mergers (Note 3). All the shares of common stock,
with the exception of the shares issued in connection with the exercise of
stock options, were issued at the prevailing market price at the time of
issuance. In connection with the issuance of common shares pursuant to the
mergers, the Company incurred related costs and expenses of approximately
$2,500,000.
Preferred stock
---------------
At June 30, 1995 and December 31, 1994, the Company had the following
Series of Preferred Stock outstanding:
Shares Outstanding Liquidation Preference
------------------------------- --------------------------------
Dividend June 30, December 31, June 30, December 31,
Series Rate 1995 1994 1995 1994
---------- --------- ---------- ------------ ------------ -------------
A 10.00% 1,825,000 1,825,000 $ 45,625,000 $ 45,625,000
B 9.20% 2,386,000 2,386,000 59,650,000 59,650,000
C Adjustable 1,200,000 1,200,000 30,000,000 30,000,000
D 9.50% 1,200,000 1,200,000 30,000,000 30,000,000
E 10.00% 2,195,000 - 54,875,000 -
F 9.75% 2,300,000 - 57,500,000 -
Convertible 8.25% 2,300,000 2,300,000 57,500,000 57,500,000
---------- --------- ------------ ------------
13,406,000 8,911,000 $335,150,000 $222,775,000
========== ========= ============ ============
12
9. Shareholders' equity (Cont'd.)
------------------------------
On February 1, 1995, the Company issued 2,195,000 shares of its 10.0%
Cumulative Preferred Stock, Series E (the "Series E Preferred Stock") in
connection with a public offering raising net proceeds of approximately
$52,888,000.
On May 3, 1995, the Company issued 2,300,000 shares of its 9.75%
Cumulative Preferred Stock, Series F (the "Series F Preferred Stock") in
connection with a public offering raising net proceeds of approximately
$55,489,000.
The Series A, Series B, Series C, Series D, Series E and Series F
(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, the
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. In addition, the payment of advisory fees
is subordinated to the payment of quarterly dividends to the Cumulative
Senior Preferred Stock.
Dividends
---------
Dividends for the second quarter of 1995 totaled $8,428,000 ($.220 per
quarter for each common share) to common shareholders, $1,141,000 ($.625 per
quarter for each preferred share) to holders of the Series A Preferred Stock,
$1,372,000 ($.575 per quarter for each preferred share) to holders of the
Series B Preferred Stock, $629,000 ($.525 per quarter for each preferred
share) to holders of the Series C Preferred Stock, $713,000 ($.594 per
quarter for each preferred share) to holders of the Series D Preferred Stock,
$1,372,000 ($.625 per quarter for each preferred share) to holders of the
Series E Preferred Stock, $919,000 ($.400 per quarter for each preferred
share) to holders of the Series F Preferred Stock and $1,186,000 ($.516 per
quarter for each preferred share) to holders of the Convertible Preferred
Stock.
The dividend rate on the Series C Preferred Stock for the second
quarter of 1995 was equal to 8.393% 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,
and Thirty Year Constant Maturity Rate) multiplied by 110%. However, the
dividend rate for any dividend period will not be less than 6.75% per annum
nor greater than 10.75% per annum. The dividend rate with respect to the
third quarter of 1995 will be equal to 7.249% per annum.
13
10. Proposed Merger and Restructure
-------------------------------
The Company has entered into an Agreement and Plan of
Reorganization by and among PSI, PSMI and the Company, dated as of June 30,
1995, pursuant to which PSMI would be merged into the Company. Prior to the
merger, substantially all of the United States real estate interests of PSI,
together with the Adviser and PSCP, will be combined into PSMI. In the
merger, the outstanding capital stock of PSMI would be converted into an
aggregate of 30,000,000 shares of Common Stock of the Company (subject to
certain adjustments) and 7,000,000 shares of newly created Class B Common
Stock of the Company. The merger was approved by a special committee of
disinterested directors of the Company and by the Company's Board of
Directors. The merger is subject to a number of conditions, including
approval by the Company's common shareholders and delivery of a fairness
opinion from Robertson, Stephens & Company, L.P. The Company's Form 8-K
dated June 30, 1995 (filed July 19 ,1995) is incorporated herein by this
reference.
11. Events subsequent to June 30, 1995
----------------------------------
In July 1995, the Company completed a cash tender offer for up to
45% of the 150,000 outstanding limited partnership units in PSP-6 at $281 per
unit. The Company acquired 19,088 units (representing approximately 13% of
the total units) of PSP-6 for a total cost of approximately $5.4 million
(including related costs and expenses). The Company has commenced another
tender offer for units in PSP-6 at the same price.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- --------------------------------------------------------------------------
OPERATIONS
- ----------
RESULTS OF OPERATIONS
---------------------
Three months ended June 30, 1995 compared to the three months ended
-------------------------------------------------------------------
June 30, 1994
-------------
Net income for the three months ended June 30, 1995 was $16,551,000
compared to $10,194,000 for the same period in 1994, representing an increase
of $6,357,000. Net income allocable to common shareholders increased to
$9,219,000 for the three months ended June 30, 1995 from $6,545,000 for the
three months ended June 30, 1994. The increase in net income and net income
allocable to common shareholders were primarily the result of improved
property operations, the acquisition of additional real estate facilities
during 1995 and 1994, and the acquisition of additional partnership interests
during 1995 and 1994. Net income per common share was $0.26 per share (based
on weighted average shares outstanding of 34,792,185) for the three months
ended June 30, 1995 compared to $0.28 per share (based on weighted average
shares outstanding of 23,887,332) for the same period in 1994. The decrease
in net income per share was principally due to increasing depreciation
expense allocable to the common stock shareholders, including depreciation
allocable to the limited partnership interests acquired by the Company.
During the three months ended June 30, 1995, property net operating
income (rental income less cost of operations and depreciation expense)
improved compared to the same period in 1994. Rental income increased
$12,146,000 or 36% from $33,948,000 for the three months ended June 30, 1994
to $46,094,000 for the same period in 1995, cost of operations increased
$3,773,000 or 30% from $12,762,000 for the three months ended June 30, 1994
to $16,535,000 for the same period in 1995 and depreciation expense increased
by $2,115,000 from $6,642,000 for the three months ended June 30, 1994 to
$8,757,000 for the same period in 1995, resulting in a net increase in
property net operating income of $6,258,000 or 43%. Property net operating
income prior to the reduction for depreciation expense increased by
$8,373,000 or 40% from $21,186,000 for the three months ended June 30, 1994
to $29,559,000 for the same period in 1995.
The Company generally analyzes the operating results of its real estate
portfolio in three different categories; (i) mini-warehouse properties owned
since December 31, 1991 (referred to as "Same Stores"), consisting of 246
mini-warehouses, (ii) mini-warehouse facilities acquired subsequent to
December 31, 1991 (referred to as "Newly Acquired"), consisting of 208 mini-
warehouses, and (iii) 19 business park facilities. The Company's revenues are
generated principally through the operation of its real estate facilities.
The Company's core business, however, is the operation of mini-warehouse
facilities which, during the six months ended June 30, 1995, represented
approximately 90% of the Company's property operations (based on 1995 rental
income).
15
Property net operating income for the Same Store facilities increased
by $281,000 or 2.7% from $10,415,000 for the three months ended June 30, 1994
to $10,696,000 for the three months ended June 30, 1995. Property net
operating income prior to the reduction for depreciation expense for the Same
Store facilities increased by $581,000 or 4.0% from $14,694,000 for the three
months ended June 30, 1994 to $15,275,000 for the three months ended June 30,
1995. These increases are principally due to increased average rental rates.
Weighted average occupancy levels were 90% for the Same Store facilities for
each of the three months ended June 30, 1995 and 1994. Realized monthly rent
per square foot for these facilities was $0.60 and $0.58 for the three months
ended June 30, 1995 and 1994, respectively. Property operating expenses prior
to the reduction for depreciation increased by $95,000 or 1% from $8,223,000
for the three months ended June 30, 1994 to $8,318,000 for the three months
ended June 30, 1995.
The Newly Acquired facilities contributed approximately $9,030,000 and
$3,474,000 of property net operating income for the three months ended June
30, 1995 and 1994, respectively ($11,969,000 and $4,612,000 of property net
operating income prior to the reduction for depreciation expense for the
three months ended June 30, 1995 and 1994, respectively). These increases
reflect the acquisition of 85 and 71 mini-warehouses in 1995 and 1994,
respectively. Property net operating income for Newly Acquired facilities
which were owned throughout each of the three months ended June 30, 1995 and
1994 (52 facilities), were $2,727,000 and $2,449,000 respectively,
representing an increase of $278,000 or 11% ($3,582,000 and $3,297,000 of
property net operating income prior to the reduction for depreciation expense
for the three months ended June 30, 1995 and 1994, respectively, representing
an increase of $285,000 or 9%). These increases are principally due to
increased weighted average occupancy levels combined with an increase in
average rental rates. Weighted average occupancy levels were 89% for these 52
facilities for the three months ended June 30, 1995 compared to 88% for the
same period in 1994. Realized monthly rent per square foot for these
facilities was $0.65 and $0.63 for the three months ended June 30, 1995 and
1994, respectively. Property operating expenses for these 52 facilities
(prior to the reduction for depreciation) decreased by $33,000 or 1.8% from
$1,830,000 for the three months ended June 30, 1994 to $1,797,000 for the
three months ended June 30, 1995.
Property net operating income of the Company's business park operations
increased by $421,000 from $655,000 for the three months ended June 30, 1994
to $1,076,000 for the same period in 1995. Property net operating income
prior to the reduction for depreciation expense with respect to the Company's
business park operations increased by $435,000 from $1,880,000 for the three
months ended June 30, 1994 to $2,315,000 for the same period in 1995. The
increase is due principally to the acquisition of a business park facility
during the second quarter of 1994 which contributed approximately $194,000 to
the increase in the property net operating income. Weighted average occupancy
levels were 96% for the business park facilities for the three months ended
June 30, 1995 compared to 94% for the same period in 1994. The monthly
average realized rent per square foot for the business park facilities was
$0.73 and $0.69 for the three months ended June 30 1995 and 1994,
respectively.
16
Interest and other income increased from $1,643,000 for the three
months ended June 30, 1994 to $1,818,000 for the same period in 1995 for a
net increase of $175,000. The increase is primarily attributable to increased
interest income on cash balances invested in short-term interest bearing
securities partially offset with reduced interest income from mortgage notes
receivable.
On May 31, 1994, the Company completed a public offering of its common
stock raising net proceeds of approximately $82 million. Throughout the month
of June 1995, the net proceeds remained invested in short-term interest
bearing securities (with weighted average yields of approximately 5.6% per
annum). As a result interest income from cash balances increased by
approximately $668,000. SEE LIQUIDITY AND CAPITAL RESOURCES.
The Company canceled approximately $8,466,000 and $24,441,000 of
mortgage notes receivable during 1995 and 1994, respectively, in connection
with the acquisition of real estate facilities securing such notes. As a
result, interest income from mortgage notes receivable decreased from
$1,352,000 to $494,000 for the three months ended June 30, 1994 and 1995,
respectively, as the average outstanding mortgage notes receivable balance
was significantly lower ($15,911,000) during the three months ended June 30,
1995 compared to the same period in 1994 ($48,109,000).
Depreciation and amortization expense was $8,779,000 and $6,730,000 for
the three months ended June 30, 1995 and 1994, respectively, representing an
increase of $2,049,000 which is due to the acquisition of additional
properties in 1994 and 1995. Net income allocable to the common shareholders
includes net depreciation and amortization expense of approximately
$6,133,000 ($0.18 per common share) and $3,232,000 ($0.14 per common share)
for the three months ended June 30, 1995 and 1994, respectively. This
increase is due to increased depreciation from the acquisition of real estate
facilities combined with increased allocations of depreciation from the
consolidated PSP Partnerships to the Company's shareholders. During 1994 and
1995, the Company acquired additional partnership interests in the PSP
Partnerships (see below) and as a result an increasing amount of depreciation
expense from the existing real estate portfolio has been allocated to the
Company rather than to the minority interest.
"Minority interest in income" represents the income allocable to
equity (partnership) interests in the PSP Partnerships (whose accounts are
consolidated with the Company) which are not owned by the Company. Since
1990, the Company has acquired portions of these equity interests through its
acquisition of limited and general partnership interests in the PSP
Partnerships. These acquisitions have resulted in reductions to the "Minority
interest in income" from what it would otherwise have been in the absence of
such acquisitions, and accordingly, have increased the Company's share of the
consolidated PSP Partnerships' income. In determining income allocable to the
minority interest for the three months ended June 30, 1995 and 1994
consolidated depreciation and amortization expense of approximately
$2,619,000 and $3,241,000, respectively, was allocated to the minority
interest. The decrease in
17
depreciation allocated to the minority interest was principally the result of
the acquisition of limited partnership units by the Company.
The acquisition of these partnership interests has provided the Company
with increased liquidity through cash distributions from the PSP
Partnerships. The Company has and expects to continue to acquire additional
partnership interests in the PSP Partnerships during 1995.
Advisory fees increased by $579,000 from $1,237,000 for the three
months ended June 30, 1994 to $1,816,000 for the same period in 1995. The
advisory fee, which is based on a contractual computation, increased as a
result of increased adjusted net income (as defined) per common share
combined with the issuance of additional preferred and common stock during
1994 and 1995.
Six months ended June 30, 1995 compared to the six months ended June 30,
------------------------------------------------------------------------
1994
----
Net income for the six months ended June 30, 1995 was $29,751,000
compared to $18,940,000 for the same period in 1994, representing an increase
of $10,811,000. Net income allocable to common shareholders increased to
$16,443,000 for the six months ended June 30, 1995 from $11,642,000 for the
six months ended June 30, 1994. The increase in net income and net income
allocable to common shareholders were primarily the result of improved
property operations for the Same Store facilities, the acquisition of
additional real estate facilities during 1995 and 1994, and the acquisition
of additional partnership interests during 1995 and 1994. Net income per
common share was $.50 per share (based on weighted average shares outstanding
of 32,707,556) for the six months ended June 30, 1995 compared to $.52 per
share (based on weighted average shares outstanding of 22,436,885) for the
same period in 1994. The decrease in net income per share was principally due
to increasing depreciation expense allocable to the common stock
shareholders, including depreciation allocable to the limited partnership
interests acquired by the Company.
During the six months ended June 30, 1995, property net operating
income (rental income less cost of operations and depreciation expense)
improved compared to the same period in 1994. Rental income increased
$22,821,000 or 35% from $65,247,000 for the six months ended June 30, 1994 to
$88,068,000 for the same period in 1995, cost of operations increased
$7,654,000 or 31% from $24,688,000 for the six months ended June 30, 1994 to
$32,342,000 for the same period in 1995 and depreciation expense increased by
$3,451,000 from $13,453,000 for the six months ended June 30, 1994 to
$16,904,000 for the same period in 1995, resulting in a net increase in
property net operating income of $11,716,000 or 43%. Property net operating
income prior to the reduction for depreciation expense increased by
$15,167,000 or 37% from $40,559,000 for the six months ended June 30, 1994 to
$55,726,000 for the same period in 1995.
18
Property net operating income for the Same Store facilities increased
by $785,000 or 4.0% from $19,758,000 for the six months ended June 30, 1994
to $20,543,000 for the six months ended June 30, 1995. Property net operating
income prior to the reduction for depreciation expense for the Same Store
facilities increased by $1,302,000 or 4.6% from $28,484,000 for the six
months ended June 30, 1994 to $29,786,000 for the six months ended June 30,
1995. These increases are principally due to increased average rental rates.
Weighted average occupancy levels were 89% for the Same Store facilities for
each of the six months ended June 30, 1995 and 1994. Realized monthly rent
per square foot for these facilities was $.60 and $.58 for the six months
ended June 30, 1995 and 1994, respectively. Property operating expenses prior
to the reduction for depreciation increased by $286,000 or 2% from
$16,503,000 for the six months ended June 30, 1994 to $16,789, 000 for the
six months ended June 30, 1995.
The Newly Acquired facilities contributed approximately $16,364,000 and
$6,420,000 of property net operating income for the six months ended June 30,
1995 and 1994, respectively ($21,472,000 and $8,457,000 of property net
operating income prior to the reduction for depreciation expense for the six
months ended June 30, 1995 and 1994, respectively). These increases reflect
the acquisition of 85 and 71 mini-warehouses in 1995 and 1994, respectively.
Property net operating income for Newly Acquired facilities which were owned
throughout each of the six months ended June 30, 1995 and 1994 (52
facilities), were $5,314,000 and $4,955,000 respectively, representing an
increase of $359,000 or 7% ($6,997,000 and $6,542,000 of property net
operating income prior to the reduction for depreciation expense for the six
months ended June 30, 1995 and 1994, respectively, representing an increase
of $455,000 or 7%). These increases are principally due to increased weighted
average occupancy levels combined with an increase in average rental rates.
Weighted average occupancy levels were 88% for these 52 facilities for the
six months ended June 30, 1995 compared to 87% for the same period in 1994.
Realized monthly rent per square foot for these facilities was $0.65 and
$0.63 for the six months ended June 30, 1995 and 1994, respectively.
Property operating expenses for these 52 facilities (prior to the reduction
for depreciation) increased by $89,000 or 2.5% from $3,542,000 for the six
months ended June 30, 1994 to $3,631,000 for the six months ended June 30,
1995.
Property net operating income with respect to the Company's business
park operations increased by $987,000 from $928,000 for the six months ended
June 30, 1994 to $1,915,000 for the same period in 1995. Property net
operating income prior to the reduction for depreciation expense with respect
to the Company's business park operations increased by $850,000 from
$3,618,000 for the six months ended June 30, 1994 to $4,468,000 for the same
period in 1995. The increase is due principally to the acquisition of a
business park facility during the second quarter of 1994 which contributed
approximately $469,000 to the increase in the property net operating income.
Weighted average occupancy levels were 96% for the business park facilities
for the six months ended June 30, 1995 compared to 95% for the same period in
1994. The monthly average realized rent per square foot for the business park
facilities was $0.73 and $0.68 for the six months ended June 30 1995 and
1994, respectively.
19
Interest and other income decreased from $3,293,000 for the six months
ended June 30, 1994 to $3,042,000 for the same period in 1995 for a net
decrease of $251,000. The decrease is primarily attributable to the reduction
in interest income from mortgage notes receivable partially offset by
increased interest income on the cash balances. The Company canceled
approximately $8,466,000 and $24,441,000 of mortgage notes receivable during
1995 and 1994, respectively, in connection with the acquisition of real
estate facilities securing such notes. As a result, interest income from the
mortgage notes receivable decreased from $2,641,000 to $1,120,000 for the six
months ended March 31, 1994 and 1995, respectively, as the average
outstanding mortgage notes receivable balance was significantly lower
($18,950,000) during the six months ended June 30, 1995 compared to the same
period in 1994 ($48,055,000). As of June 30, 1995, the mortgage notes bear
interest at stated rates ranging from 8.5% to 11.97% and effective interest
rates ranging from 10.0% to 14.8%.
As noted above, on May 31, 1995, the Company completed a public
offering of its common stock raising net proceeds of approximately $82
million. Throughout the month of June 1995, the net proceeds remained
invested in short-term interest bearing securities (with weighted average
yields of approximately 5.6% per annum). SEE LIQUIDITY AND CAPITAL RESOURCES.
Depreciation and amortization expense was $16,926,000 and $13,541,000
for the six months ended June 30, 1995 and 1994, respectively, representing
an increase of $3,385,000 which is due to the acquisition of additional
properties in 1994 and 1995. Net income allocable to the common shareholders
includes net depreciation and amortization expense of approximately
$11,467,000 ($0.35 per common share) and $5,741,000 ($0.26 per common share)
for the six months ended June 30, 1995 and 1994, respectively. This increase
is due to increased depreciation from the acquisition of real estate
facilities combined with increased allocations of depreciation from the
consolidated PSP Partnerships to the Company's shareholders. During 1994 and
1995, the Company acquired additional partnership interests in the PSP
Partnerships (see below) and as a result an increasing amount of depreciation
expense from the existing real estate portfolio has been allocated to the
Company rather than to the minority interest.
General and administrative expense was $1,736,000 and $1,380,000 for
the six months ended June 30, 1995 and 1994, respectively, representing an
increase of $356,000. This increase is due to the growth in the Company's
capital base combined with certain costs incurred in connection with the
acquisition of additional real estate facilities.
"Minority interest in income" represents the income allocable to
equity (partnership) interests in the PSP Partnerships (whose accounts are
consolidated with the Company) which are not owned by the Company. Since
1990, the Company has acquired portions of these equity interests through its
acquisition of limited and general partnership interests in the PSP
Partnerships. These acquisitions have resulted in reductions to the "Minority
interest in income" from what it would otherwise have been in the absence of
such acquisitions, and accordingly, have increased the Company's share of the
consolidated PSP Partnerships' income. In determining income allocable to the
minority
20
interest for the six months ended June 30, 1995 and 1994 consolidated
depreciation and amortization expense of approximately $5,392,000 and
$7,294,000, respectively, was allocated to the minority interest. The
decrease in depreciation allocated to the minority interest was principally
the result of the acquisition of limited partnership units by the Company.
Advisory fees increased by $1,070,000 from $2,356,000 for the six
months ended June 30, 1994 to $3,426,000 for the same period in 1995. The
advisory fee, which is based on a contractual computation, increased as a
result of increased adjusted net income (as defined) per common share
combined with the issuance of additional preferred and common stock during
1994 and 1995.
21
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Capital structure
-----------------
The Company's financial profile is characterized by a low level of
debt to total capitalization, increasing net income, increasing cash flow
from operations, increasing funds from operations ("FFO") and a
conservative dividend payout ratio with respect to its common stock. These
attributes reflect management's desire to "match" asset and liability
maturities, to minimize refinancing risks and to retain capital to take
advantage of acquisition opportunities and to provide financial
flexibility.
Since 1992 the Company has taken a variety of steps to enhance its
capital structure, including:
. The public issuance of approximately $335 million of Preferred
Stock. The Preferred Stock does not require redemption or sinking
fund payments by the Company.
. The public issuance of approximately $197 million of common stock.
. The issuance of approximately $138.4 million of common stock in
connection with the mergers with Public Storage Properties VIII,
Inc., Public Storage Properties VI, Inc., and Public Storage
Properties VII, Inc.
. The retention of approximately $34.7 million of funds available for
debt payments or investment.
The Company does not believe it has any significant refinancing risks
with respect to its mortgage debt and nominal interest rate risks
associated with its variable rate mortgage debt which had a principal
balance of $16.7 million at June 30, 1995. During the second quarter of
1995, the Company replaced its $115 million credit facility with a $125
million credit facility. The Company uses the credit facility primarily to
fund acquisitions and provide financial flexibility and liquidity. The new
credit facility (i) is unsecured, (ii) provides for interest rates ranging
from LIBOR plus .75% to LIBOR plus 1.50%, based upon interest coverage
levels attained by the Company, and (iii) matures in April 1998, with two
one-year extensions. At June 30, 1995, the Company had no borrowings under
the credit facility.
As a result of these transactions, the Company's capitalization has
increased. Shareholders' equity increased from $188,112,500 on December 31,
1991 to $892,664,000 on June 30, 1995. The increased equity combined with
reductions in total debt has resulted in an improvement in the Company's
debt to equity ratio from 55% at December 31, 1991 to 6.6% at June 30,
1995. The Company's ratio of debt to total assets also decreased from 19%
at December 31, 1991 to 5.2% at June 30, 1995.
Funds Available for Principal Payments and Investment:
------------------------------------------------------
The Company believes that important measures of its performance as
well as its liquidity are funds available for principal payments and
investment and funds provided by operating activities.
22
The Company believes that its rental revenues, distributions from real
estate partnership interests and interest income will be sufficient over at
least the next 12 months to meet the Company's operating expenses, capital
improvements, debt service requirements and distributions to shareholders.
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
from $36,484,000 to $49,474,000 for the six months ended June 30, 1994 and
1995, 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 funds 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
investment.
23
For the Six Months Ended June 30,
---------------------------------
1995 1994
--------------- ------------
Net Income $ 29,751,000 $ 18,940,000
Depreciation and amortization 16,926,000 13,541,000
Minority interest in income 3,715,000 4,791,000
Amortization of discounts on
mortgage notes receivable (67,000) (506,000)
--------------- ------------
Funds provided by operating
activities 50,325,000 36,766,000
Distributions from operations to
minority interests (9,107,000) (12,085,000)
--------------- ------------
Funds from operations allocable
to the Company's shareholders 41,218,000 24,681,000
Less: preferred stock dividends (13,308,000) (7,298,000)
--------------- ------------
Funds from operations available
to common shareholders 27,910,000 17,383,000
Capital improvements to maintain
facilities:
Mini-warehouses (2,397,000) (1,468,000)
Business parks (909,000) (830,000)
Add back: minority interest share
of capital improvements to
maintain facilities 859,000 849,000
--------------- ------------
Funds available for principal
payments on debt, common
dividends and reinvestment 25,463,000 15,934,000
Cash distributions to common
shareholders (14,886,000) (9,931,000)
--------------- ------------
Funds available for principal
payments on debt and investment $ 10,577,000 $ 6,003,000
=============== ============
24
The increases in cash provided by operating activities and funds
available for principal payments on debt, common dividends and investment
over the past three years is primarily due to (i) increasing property net
operating income at the Same Store facilities, (ii) the acquisition of
limited and general partnership interests in the PSP Partnerships and (iii)
the leverage created through the issuance of preferred stock and the
utilization of the net proceeds in real estate investments which have
provided net cash flows in excess of the preferred stock dividend
requirements. These factors have improved the cash flow position of the
common shareholders as FFO applicable to the common shareholders has
increased over the same period at a rate greater than the increase in
number of common shares. See the consolidated statements of cash flows for
the each of the six months ended June 30, 1995 and 1994 for additional
information regarding the Company's investing and financing activities.
FFO increased to $41,218,000 for the six months ended June 30, 1995
compared to $24,681,000 for the same period in 1994 ($22,684,000 for the
three months ended June 30, 1995 compared to $13,426,000 for the same
period in 1994). FFO applicable to the common shareholders (after deducting
preferred stock dividends) increased to $27,910,000 for the six months
ended June 30, 1995 compared to $17,383,000 for the same period in 1994
($15,353,000 for the three months ended June 30, 1995 compared to
$9,777,000 for the same period in 1994). FFO is defined by the National
Association of Real Estate Investment Trusts, Inc. ("NAREIT") as net income
(computed in accordance with generally accepted accounting principles),
excluding gains (or losses) from debt restructuring and sales of property,
plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. NAREIT has recently adopted
revisions to the definition of funds from operations which will become
effective in 1996. The most material impact of the new guidelines will be
(i) amortization of deferred financing costs will be treated as an
expense - i.e. it will no longer be treated as an add-back to net income
and (ii) certain gains on sales of land will be included in funds from
operations if deemed to be recurring. These changes will have no impact on
the way the Company currently computes its FFO. FFO is a supplemental
performance measure for equity real estate investment trusts used by
industry analysts. FFO does not take into consideration scheduled principal
payments on debt, capital improvements, distributions and other obligations
of the Company. Accordingly, FFO is not a substitute for the Company's cash
flow or net income (as discussed above) as a measure of the Company's
liquidity or operating performance.
On May 31, 1995, the Company issued 5,482,200 shares of its common
stock in a public offering, raising net proceeds of approximately $82
million to be invested into real estate assets. Due to the timing of
investing in real estate assets, the net proceeds remained substantially
invested in interest bearing accounts throughout June 1995. The interest
bearing accounts generated yields which were less than the cash yields
generated by the Company's portfolio of real estate assets. Approximately
$75 million and $33 million remained invested in interest bearing accounts
at June 30, 1995 and July 31, 1995, respectively. The Company expects that
substantially all the remaining net proceeds will be invested into real
estate assets by the end of the third quarter.
25
During 1995, the Company has budgeted approximately $8 million for
capital improvements ($2 million of which is directly attributable to the
minority interest in respect of its ownership interest) to maintain its
facilities. During the first six months of 1995, the Company incurred
capital improvements of approximately $3.3 million. The Company believes
that it is not subject to any significant refinancing risks. During 1993
and 1994, the Company either repaid or extended the maturities of its
mortgage notes such that in no year, until 1999, will there be more than
$9 million of principal payments on mortgage notes becoming due and
payable.
The Company believes its geographically diverse portfolio has resulted
in a relatively stable and predictable investment portfolio with increasing
overall property performance over the past four years.
Distributions
-------------
Over the past three years, the Company has established a conservative
distribution policy that is, among other things, supported by its cash flow
from operations (after capital expenditures and debt service), availability
of cash to make such distributions and the Company's ability to maintain
its REIT status. The Company's policy is also conservative with respect to
FFO. The Company's conservative distribution policy permits it after
funding its distributions and capital improvements, to retain significant
funds to make additional investments and debt reductions. For the six
months ended June 30, 1995 and 1994, the Company distributed to common
shareholders 53%, and 57% of its FFO available to common shareholders,
respectively. Distributions to shareholders during the first six months of
1995 were as follows:
For the Six Months Ended
June 30, 1995
---------------------------------------------
Distributions Per Share Total Distributions
----------------------- -------------------
Series A $1.250 $ 2,282,000
Series B $1.150 2,744,000
Series C $1.066 1,279,000
Series D $1.188 1,426,000
Series E $1.042 2,286,000
Series F $0.400 919,000
Convertible $1.031 2,372,000
-----------
13,308,000
Common $0.440 14,886,000
-----------
$28,194,000
===========
Dividends with respect to the Series E and Series F Preferred Stock
are pro rated from the date of issuance (February 1, 1995 and May 3, 1995,
respectively). The annual distribution requirement with respect to the
Series E and Series F Preferred stock are $2.50 and $2.44 per share,
respectively. The dividend rate on the Series C Preferred Stock is adjusted
quarterly such that the dividend rate per annum will be equal to the
highest of one of three U.S. Treasury indices (Treasury Bill Rate, Ten Year
Constant Maturity Rate, and Thirty Year Constant Maturity Rate) multiplied
by 110%. However, the dividend rate for any dividend period will not be
less than 6.75% per annum nor greater than 10.75% per annum. The
26
dividend rate with respect to the second quarter of 1995 was equal to
8.393% per annum and is 7.249% per annum for the third quarter of 1995.
REIT Distribution Requirement
-----------------------------
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.
Increasing Ownership of Real Estate Assets
------------------------------------------
The Company's growth strategies have focused on improving the
operating performance of its existing properties (as discussed above) and
on increasing its ownership of mini-warehouses through additional
investments.
During 1995, the Company acquired 84 mini-warehouse facilities, three
business park facilities and one combination mini-warehouse/business park
facility for an aggregate cost of $222,540,000. The acquisitions were
financed through a combination of the issuance of equity securities,
cancellation of mortgage notes receivable, assumption of debt and payment of
cash. Sixty-one of these facilities were acquired pursuant to merger
transactions.
On February 28, 1995, the Company completed a merger transaction with
Public Storage Properties VI, Inc. ("Properties 6") whereby the Company
acquired all the outstanding stock of Properties 6 in exchange for cash and
common stock of the Company. In the merger, Properties 6 was merged with and
into the Company, and the outstanding Properties 6 common stock (2,716,223
shares) was converted into an aggregate of approximately (i) 3,147,015
shares of the Company's common stock (with a value of approximately
$43,915,000) and (ii) $21,427,000 in cash. Properties 6, a real estate
investment trust and an affiliate of the Company's investment adviser, owned
and operated 22 mini-warehouse facilities and one combination mini-
warehouse/business park facility prior to the merger.
On June 30, 1995, the Company completed a merger transaction with
Public Storage Properties VII, Inc. ("Properties 7") whereby the Company
acquired all the outstanding stock of Properties 7 in exchange for cash and
common stock of the Company. In the merger, Properties 7 was merged with and
into the Company, and the outstanding Properties 7 common stock (3,806,491
shares) was converted into an aggregate of approximately (i) 3,517,272
shares of the Company's common stock (with a value of approximately
$56,057,000) and (ii) $14,007,000 in cash. Properties 7, a real estate
investment trust and an affiliate of the Company's investment adviser, owned
and operated 34 mini-warehouse facilities, three business park facilities
and one combination mini-warehouse/business park facility prior to the
merger.
In March 1995, the Company acquired two parcels of land located in
Atlanta, Georgia on which the Company is currently developing mini-warehouse
facilities. One of the facilities is scheduled to open in late August 1995
and the other is schedule to open in December 1995. The estimated aggregate
cost of these facilities is approximately $8 million.
27
Future Transactions
-------------------
The Company intends to continue to expand its asset and capital base
through the acquisition of real estate assets and interests in real estate
assets from unaffiliated parties and affiliates of the Adviser through
direct purchases, mergers, tender offers or other transactions. The Company
expects to fund these transactions with borrowings under its $125 million
credit facility combined with undistributed operating cash flow. The
Company intends to repay amounts borrowed under the credit facility from
undistributed operating cash flow or from the public or private placement
of securities.
Proposed Merger and Restructure
-------------------------------
The Company has entered into an Agreement and Plan of Reorganization
by and among PSI, PSMI and the Company, dated as of June 30, 1995. The
Company's Form 8-K dated June 30, 1995 (filed July 19, 1995) is
incorporated herein by this reference.
28
PART II. OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company held a special meeting of shareholders on June 14, 1995.
Proxies for the special meeting were solicited pursuant to Regulation 14
under the Securities Exchange Act of 1934. The special meeting involved
the approval of Agreement and Plan of Reorganization between the Company
and Public Storage Properties VII, Inc. described in the Joint Proxy
Statement and Prospectus dated April 28, 1995 - approval of this proposal
required the affirmative vote of the holders of a majority of the shares of
the Company's Common Stock voting (provided that the total votes cast
represented a majority of all shares of Common Stock entitled to vote), and
this proposal was approved by the following vote:
For Against Abstain
---------- ------- -------
21,791,422 496,604 432,992
Item 5 Other Information
-----------------
On May 22, 1995, the Company entered into a $125 million Amended and
Restated Credit Agreement with a group of banks, which replaces the Credit
Agreement dated as of September 2,1994, as amended. The Amended and
Restated Credit Agreement is attached hereto as Exhibit 10 and is
incorporated herein by this reference.
29
Item 6 Exhibits and Reports on Form 8-K
--------------------------------
(a) The following Exhibits are included herein:
(10) Amended and Restated Credit Agreement by and among the Company,
Wells Fargo Bank, National Association as agent, and the
financial institutions as party thereto dated as of May 22, 1995
(11) Statement re: Computation of Earnings per Share
(12) Statement re: Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
(b) Form 8-K
The Company filed a Current Report on Form 8-K dated April 25, 1995
(filed April 26, 1995), pursuant to Item 5, which filed certain
exhibits relating to the Company's public offering of the Series F
Preferred Stock.
The Company filed a Current Report on Form 8-K dated May 22, 1995
(filed May 22, 1995), pursuant to Item 5, which filed certain exhibits
relating to the Company's public offering of Common Stock.
The Company filed a Current Report on Form 8-K dated June 30, 1995
(filed July 19, 1995), pursuant to Item 5, which filed the following
exhibits and financial information relating to the Company's proposed
merger with PSMI:
-Agreement and Plan of Reorganization by and among PSI, PSMI and
the Company dated as of June 30, 1995
-Historical Financial Statements of Operating Companies to be
Acquired
-Combined Summaries of Historical Information Relating to Real
Estate Interests to be Acquired
-Pro Forma Consolidated Financial Statements
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: August 11, 1995
STORAGE EQUITIES, INC.
BY: /s/ Ronald L. Havner, Jr.
--------------------------------
Ronald L. Havner, Jr.
Vice President and
Chief Financial Officer
31