SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
Amendment No. 1
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) JUNE 30, 1995
-----------------------------
STORAGE EQUITIES, INC.
----------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 1-8389 95-3551121
---------- ------ ----------
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification Number)
600 NORTH BRAND BLVD., GLENDALE, CALIFORNIA 91203-1241
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 244-8080
----------------
N/A
---
(Former name or former address, if changed since last report)
1
ITEM 5. OTHER EVENTS.
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a. Proposed Merger and Restructure
-------------------------------
Storage Equities, Inc. (the "Company") has entered into an Agreement and
Plan of Reorganization by and among Public Storage, Inc., Public Storage
Management, Inc. and the Company, dated as of June 30, 1995 (the "Agreement and
Plan of Reorganization"). The Agreement and Plan of Reorganization and the
related Agreement of Merger are filed as Exhibit 2 hereto and are incorporated
herein by this reference.
2
Pages
References
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b. Historical and Pro Forma Financial Statements
---------------------------------------------
Operating Companies to be Acquired
----------------------------------
Report of independent auditors 4
Combined Statements of Assets, Liabilities and Deficit
at December 31, 1994, 1993 and June 30, 1995 5
For the years ended December 31, 1994, 1993, 1992 and the
six months ended June 30, 1995 and 1994:
Combined Statements of Operations 6
Combined Statements of Cash Flows 7
Notes to Financial Statements 8
Real Estate Interests to be Acquired
------------------------------------
Report of independent auditors 12
Combined Summaries of Historical Information Relating to Real
Estate Interests to be Acquired for the years ended
December 31, 1994, 1993, 1992 and six months ended
June 30, 1995 and 1994 13
Notes to Combined Summaries of Historical Information relating to
Real Estate Interests to be Acquired 14
Pro Forma Consolidated Financial Statements 16
c. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations 46
-------------------------
3
REPORT OF INDEPENDENT AUDITORS
The Stockholder
Public Storage, Inc.
We have audited the accompanying combined statements of assets, liabilities
and deficit of the property management and advisory businesses of Public
Storage, Inc. (Operating Companies to be Acquired) as of December 31, 1994 and
1993 and the related combined statements of operations and cash flows for each
of the three years in the period ended December 31, 1994. These financial
statements are the responsibility of management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The accompanying financial statements of the Operating Companies to be
Acquired were prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission for inclusion in a Form
8-K of Storage Equities, Inc.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Operating Companies to be
Acquired at December 31, 1994 and 1993, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1994, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
July 10, 1995
4
OPERATING COMPANIES TO BE ACQUIRED
COMBINED STATEMENTS OF ASSETS, LIABILITIES AND DEFICIT
(IN THOUSANDS OF DOLLARS)
AS OF DECEMBER 31,
AS OF --------------------
JUNE 30,1995 1994 1993
------------ -------- --------
(unaudited)
Assets:
Cash (substantially restricted) $ 1,204 $ 1,388 $ 1,498
Receivables from affiliates 2,642 3,033 2,751
Other assets 88 202 559
-------- -------- --------
Total assets $ 3,934 $ 4,623 $ 4,808
======== ======== ========
Liabilities
Accounts payable $ 555 $ 1,167 $ 1,281
Interest payable 508 527 561
Senior Secured Notes due 2003
(net of $329, $359 and $519 of
issuance costs at June 30,
1995, December 31, 1994 and
1993, respectively) 67,671 70,141 74,481
-------- -------- --------
Total liabilities 68,734 71,835 76,323
-------- -------- --------
Deficit (64,800) (67,212) (71,515)
-------- -------- --------
Total liabilities and deficit $ 3,934 $ 4,623 $ 4,808
======== ======== ========
See Accompanying notes.
5
OPERATING COMPANIES TO BE ACQUIRED
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
SIX MONTHS ENDED
JUNE 30 YEARS ENDED DECEMBER 31,
------------------ -----------------------------
1995 1994 1994 1993 1992
------- ------- ------- ------- -------
(unaudited)
Revenues
Facility management fees,
primarily from affiliates $14,787 $13,620 $28,356 $26,012 $24,162
Advisory fee from affiliate 3,426 2,356 4,983 3,619 2,612
Merchandise operations 1,013 907 1,872 1,564 1,263
Interest income 61 55 199 2 31
------- ------- ------- ------- -------
Total revenues 19,287 16,938 35,410 31,197 28,068
------- ------- ------- ------- -------
Expenses
Cost of managing facilities 2,582 2,840 5,431 5,615 5,839
Cost of advisory services and
administrative expenses 1,090 817 1,850 1,410 975
Cost of merchandise 501 435 866 800 689
Interest expense 2,509 2,668 5,255 567 7,181
------- ------- ------- ------- -------
Total expenses 6,682 6,760 13,402 8,392 14,684
------- ------- ------- ------- -------
Excess of revenues over
expenses before
extraordinary item 12,605 10,178 22,008 22,805 13,384
Extraordinary items
Gain on retirement of debt - - - 14,440 3,311
------- ------- ------- ------- -------
Excess of revenues over
expenses $12,605 $10,178 $22,008 $37,245 $16,695
======= ======= ======= ======= =======
See Accompanying notes.
6
OPERATING COMPANIES TO BE ACQUIRED
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
SIX MONTHS ENDED
JUNE 30 YEARS ENDED DECEMBER 31,
-------------------- --------------------------------
1995 1994 1994 1993 1992
-------- ------- -------- -------- --------
(unaudited)
Cash flows from operating activities:
Excess of revenues over expenses $ 12,605 $10,178 $ 22,008 $ 37,245 $ 16,695
Adjustments to reconcile excess of
revenues over expenses to net cash
provided by operating activities:
Depreciation and amortization 55 279 522 71 1,495
Gain on retirement of debt - - - (14,440) (3,311)
Changes in working capital components (151) (59) (435) 8 (386)
-------- ------- -------- -------- --------
Total adjustments (96) 220 87 (14,361) (2,202)
-------- ------- -------- -------- --------
Net cash provided by operating activities 12,509 10,398 22,095 22,884 14,493
-------- ------- -------- -------- --------
Cash flows from financing activities:
Repurchase of debt - - - (42,905) (6,143)
Issuance of Senior Secured Notes, net of
issuance costs - - - 74,475 -
Principal payments on Senior Secured Notes (2,500) (2,250) (4,500) - -
Net distributions to affiliates (10,193) (4,292) (17,705) (53,277) (8,082)
-------- ------- -------- -------- --------
Net cash used in financing activities (12,693) (6,542) (22,205) (21,707) (14,225)
-------- ------- -------- -------- --------
Net increase (decrease) in cash (184) 3,856 (110) 1,177 268
Cash at beginning of period
(including restricted cash) 1,388 1,498 1,498 321 53
-------- ------- -------- -------- --------
Cash at end of period (including
restricted cash) $ 1,204 $ 5,354 $ 1,388 $ 1,498 $ 321
======== ======= ======== ======== ========
Supplemental disclosure:
Interest paid $ 2,498 $ 2,570 $ 5,129 $ 1,168 $ 5,962
======== ======= ======== ======== ========
Restricted cash $ 576 $ 1,008 $ - $ 1,111 $ -
======== ======= ======== ======== ========
See Accompanying notes.
7
OPERATING COMPANIES TO BE ACQUIRED
NOTES TO COMBINED FINANCIAL STATEMENTS
A. Basis of Presentation
The financial statements include the property management operations of
Public Storage Management, Inc. ("PSMI") and Public Storage Commercial
Properties Group, Inc. ("PSCP"), the advisory business of Public Storage
Adviser, Inc. ("Adviser") and merchandise sales operations of PSMI
(collectively "Operating Companies"). PSMI, PSCP and Adviser are
subsidiaries of Public Storage, Inc. ("PSI"). Under an Agreement and Plan
of Reorganization dated June 30, 1995, the Operating Companies, along with
real estate assets owned by PSI (other than its interest in Storage
Equities, Inc.) ("Real Estate Interests"), would be acquired by Storage
Equities, Inc. ("SEI"), a California corporation organized as a real estate
investment trust (the "Merger").
The accompanying financial statements have been prepared from the books and
records of the Operating Companies and present the assets, liabilities and
deficit of the Operating Companies as of December 31, 1994 and 1993 and
June 30, 1995, and the related revenues and expenses for the years ended
December 31, 1994, 1993, 1992 and the six months ended June 30, 1995 and
1994. Accordingly, these statements do not purport to represent the
financial position or results of operations of PSI or any of its
subsidiaries. The Combined Statements of Operations may not necessarily be
indicative of the revenues and expenses that would have resulted had the
Operating Companies operated as a stand-alone entity. Information
subsequent to December 31, 1994 is unaudited.
PSMI operated and managed, at June 30, 1995, pursuant to property
management agreements, 1,074 self-storage mini-warehouses, including 1,014
facilities owned by SEI, PSI or entities affiliated with PSI. It operated
all of the United States mini-warehouses operating under the "Public
Storage" name and all of those in which SEI has an interest.
PSCP operated and managed, at June 30, 1995, pursuant to property
management agreements, 45 commercial office buildings and light industrial
business parks, including 35 facilities owned by SEI, PSI or entities
affiliated with PSI, which operate under the Public Storage name in the
United States and all commercial facilities in which SEI has an interest.
The Adviser acts, pursuant to an advisory contract, as an investment
advisor to SEI. It advises SEI with respect to its investments and
administers the daily corporate operations of SEI for an advisory fee (see
Advisory Contract) and pays the salaries and expenses of the executive
officers, the acquisition staff of SEI and other corporate overhead,
including rent.
PSMI sells merchandise (primarily locks and boxes) to customers and tenants
at substantially all of the mini-warehouse facilities managed by PSMI.
These products are ancillary to renting storage space and are provided as a
convenience to the tenants.
B. Summary of Significant Accounting Policies
1. Method of Accounting. The financial statements are prepared in
accordance with generally accepted accounting principles.
2. Cash and cash equivalents. Cash and cash equivalents consist of
demand deposits and cash investments which are highly liquid
investments with a maturity of three months or less. Cash is invested
in commercial paper and US Government securities.
3. Depreciation and amortization. Depreciation expense represents
depreciation on equipment and is provided on a straight-line basis
over the estimated useful life of three years. Amortization expense
represents amortization of debt issuance costs and is provided on the
effective interest method over the life of the debt.
8
4. Allocated costs. Included in the accompanying Statements of
Operations are allocations of expenses for corporate overhead,
including salaries of support personnel, facilities and other
expenses, incurred by the Operating Companies. The personnel and
facilities subject to these allocations support other entities
affiliated with PSI. In management's opinion, the allocation
methodology, which is based on the estimated utilization of such
services and costs, provides a reasonable allocation of the costs that
were incurred by the Operating Companies.
5. Income taxes. The financial statements exclude the effects of income
taxes since they reflect a partial presentation (after allocated
costs).
6. Deficit. Deficit represents the excess of assets over liabilities and
reflects the effect of net distributions, capital transactions, and
loans between the Operating Companies and affiliated companies.
C. Long-term Debt
During 1992 and 1993, debt of PSMI was extinguished through a series of
purchases from unaffiliated note holders, resulting in "extraordinary"
gains from retirement of debt of $3.3 million and $14.4 million in 1992 and
1993, respectively.
In November 1993, PSMI issued $75 million in Senior Secured Notes due 2003
("Notes"). The Notes bear interest at 7.08%, with interest and principal
payments due semi-annually. The Notes are collateralized by cash flow
rights from the property management agreements for mini-warehouses and
other assets of PSI, including trademarks and marketable and non-marketable
securities of affiliates. The Notes have various restrictive covenants on
dividends, investments and additional indebtedness. As required by the
Notes, cash is segregated between the amount which must be invested
pursuant to the terms of the Notes (restricted cash) and an amount which
may be used to declare dividends or invested without restriction.
Restricted funds of $1.1 million, $1.0 million and $0.6 million are
included in cash as of December 31, 1993, June 30, 1994 and 1995,
respectively. In addition, the Notes contain various financial covenants.
PSMI is in compliance with all covenants.
As of December 31, 1994, the scheduled principal payments of the Notes were
as follows:
1995 $ 5,000,000
1996 5,750,000
1997 6,500,000
1998 7,250,000
1999 8,000,000
Thereafter 38,000,000
-----------
$70,500,000
===========
D. Management Agreements
The property management agreements generally provide for compensation equal
to six percent of the gross revenues of the mini-warehouse facilities
managed, and five percent of the gross revenues of the commercial
facilities managed. Management fees of $26,835,000, $24,554,000,
$22,656,000, $14,019,000 and $12,866,000 were earned on properties in which
PSI and SEI have an interest for the years ended December 31, 1994, 1993,
1992 and for the six months ended June 30, 1995 and 1994, respectively. The
management agreements, except as noted below, are cancelable by either
party upon sixty days notice.
For the property management fees, under the supervision of the property
owners, PSMI and PSCP coordinate 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. PSMI and PSCP assist and advise the property
owners in establishing policies for the hire, discharge and supervision of
employees for the operation of their facilities, including resident
managers, assistant managers, relief managers and billing and maintenance
personnel.
9
For the duration of the management agreements, PSMI grants to the property
owners a non-exclusive license to use two PSI service marks and related
designs, including the "Public Storage" name. Upon termination of the
management agreement, the property owner would no longer have the right to
use the service marks and related designs, except as described below.
In February 1995, the management agreements of sixteen companies (including
SEI) were amended to revise the termination provision. The management
agreements, as amended, provide that the agreements with respect to
properties directly owned by the sixteen companies will expire seven years
from the date modified, provided that on each anniversary of such
modification, it shall be automatically extended for one year (thereby
maintaining a seven year term) unless either party notifies the other that
the agreement is not being extended. With respect to properties in which
SEI has an interest, but are not wholly-owned by SEI, the management
agreements may be terminated upon sixty days notice by SEI and upon seven
years notice by the Operating Companies. The management agreements of the
sixteen companies may also be terminated by either party for cause, but if
terminated by the property owner, for cause, the property owner will retain
the rights to use the PSI service marks until the scheduled expiration
date.
Regardless of the termination provisions, all management agreements with
PSI affiliated entities are subject to termination upon the sale of the
facilities.
E. Advisory Contract
Pursuant to an advisory contract, the Adviser, for an advisory fee, directs
SEI, under the supervision of SEI's Board of Directors, with respect to its
investments and daily corporate operations. The contract provides for the
monthly payment of advisory fees equal to the sum of (i) 12.75% of SEI's
adjusted income (as defined, and after reduction for SEI's share of capital
improvements) per share of SEI common stock on the first 14,989,454 shares
outstanding and (ii) 6% of adjusted income per share on common shares in
excess of 14,989,454 of SEI common stock. The advisory contract provides
that, in computing the advisory fee, adjusted income will be reduced by
dividends paid on all SEI preferred stock and that the Adviser will also
receive an amount equal to 6% of such dividends.
The Adviser is not entitled to its advisory fee with respect to services
rendered during any quarter in which full cumulative dividends on SEI's
senior preferred stock have not been paid or declared and funds therefor
set aside for payment.
The Adviser is also entitled to a disposition fee equal to 20% of the total
net realized gain (as defined) from the disposition of SEI's investments.
Payment of the disposition fees is subject to limitations based on SEI's
distributions.
The advisory contract may be terminated at any time by either party upon
sixty days written notice. Except under certain conditions, upon
termination, the Adviser generally will be entitled to receive (i) an
amount equal to the accrued and unpaid portion of the disposition fee, (ii)
an amount equal to 20% of the total net unrealized gain (as defined), less
20% of unrealized losses (as defined) and (iii) an amount equal to 15% of
adjusted income (as defined) from October 1, 1991 to the date of
termination minus the advisory fee paid from October 1, 1991 to the date of
termination.
The Adviser pays the salaries and expenses of the executive officers, the
acquisition staff of SEI and other corporate overhead, including rent.
10
F. Contingencies
PSI and PSMI have entered into various operating leases including a lease
for the facilities utilized by personnel of the Operating Companies. Rent
of $748,000, $725,000, $777,000, $336,000 and $356,000 is included in the
Statements of Operations for the years ended December 31, 1994, 1993, and
1992 and the six months ended June 30, 1995 and 1994, respectively, related
to these leases.
Minimum lease payments due under these leases as of December 31, 1994 are:
1995 $841,000
1996 397,000
1997 129,000
1998 107,000
1999 5,000
In connection with the management of mini-warehouses, the Operating
Companies have established trust accounts to collect, from various property
owners, on a monthly basis, amounts for property tax payments. Payments of
the property tax bills which generally occur annually or semi-annually are
made from these accounts. Funds relating to these property tax impounds
held on behalf of non-affiliates and affiliates in the approximate amounts
of $913,000 and $1,000,000, respectively, at December 31, 1994 and $891,000
and $1,183,000, respectively, at December 31, 1993. The impounds are not
reflected in the accompanying Statement of Assets, Liabilities and Deficit.
The Operating Companies are involved in various legal proceedings arising
from the normal course of business. In the opinion of management, the
ultimate outcome of these proceedings will not have a material effect on
the Operating Companies' financial position, results of operations or its
liquidity.
11
REPORT OF INDEPENDENT AUDITORS
The Stockholder
Public Storage, Inc.
We have audited the accompanying combined summaries of historical information
relating to real estate interests to be acquired (the "Combined Summaries")
for each of the three years in the period ended December 31, 1994. The
Combined Summaries are the responsibility of management. Our responsibility
is to express an opinion on the Combined Summaries based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the Combined Summaries are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Combined Summaries. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall Combined
Summaries presentation. We believe that our audits provide a reasonable basis
for our opinion.
The accompanying Combined Summaries were prepared for the purpose of complying
with rule 3-14 of Regulation S-X of the Securities and Exchange Commission for
inclusion in a Form 8-K of Storage Equities, Inc.
In our opinion, the Combined Summaries present fairly the operating revenues
and specified expenses of the real estate interests to be acquired for each of
the three years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
July 10, 1995
12
COMBINED SUMMARIES OF HISTORICAL INFORMATION RELATING TO
REAL ESTATE INTERESTS TO BE ACQUIRED
(IN THOUSANDS OF DOLLARS)
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- --------------------------------
1995 1994 1994 1993 1992
-------- -------- -------- -------- --------
(UNAUDITED)
--------------------
Operating revenues:
Rental revenues $126,230 $118,899 $244,165 $221,938 $198,917
Interest income 1,424 1,823 3,719 4,602 5,986
-------- -------- -------- -------- --------
127,654 120,722 247,884 226,540 204,903
-------- -------- -------- -------- --------
Specified expenses:
Cost of operations 38,211 37,450 75,566 73,111 70,801
Management fees paid to affiliates 7,472 7,181 14,592 13,226 11,825
Depreciation 21,052 21,031 41,982 42,808 43,556
General and administrative 2,748 2,759 5,904 6,135 7,830
Interest expense 5,088 5,023 9,981 10,860 11,038
-------- -------- -------- -------- --------
74,571 73,444 148,025 146,140 145,050
-------- -------- -------- -------- --------
Excess of operating revenues
over specified expenses: $ 53,083 $ 47,278 $ 99,859 $ 80,400 $ 59,853
======== ======== ======== ======== ========
REAL ESTATE INTERESTS BEING ACQUIRED:
Excess of operating revenues
over specified expenses: $ 12,601 $ 11,120 $ 23,697 $ 18,773 $ 14,283
======== ======== ======== ======== ========
See Accompanying notes.
13
NOTES TO COMBINED SUMMARIES OF HISTORICAL INFORMATION
RELATING TO REAL ESTATE INTERESTS TO BE ACQUIRED
A. Background and Basis for Combination
The accompanying Combined Summaries of Historical Information Relating to
Real Estate Interests to be Acquired (the "Combined Summaries") include the
results of operations for the years ended December 31, 1994, 1993, and 1992
and the six months ended June 30, 1995 for the real estate assets in which
Storage Equities, Inc. ("SEI") proposes to acquire an interest ("Real
Estate Interests").
Under an Agreement and Plan of Reorganization dated June 30, 1995, the Real
Estate Interests, along with the Operating Companies of Public Storage,
Inc. (PSI), would be acquired by SEI.
B. Real Estate Interests
SEI is acquiring Real Estate Interests comprised of Real Estate Equity
Interests and ten notes receivable. Real Estate Equity Interests include
equity ownership in sixty-three REITs and partnerships which own 511 mini-
warehouse and 15 commercial facilities, all operated under the "Public
Storage" name.
Specifically, the Real Estate Equity Interests consists of:
. Class A, B, C and D shares of finite life REITs. These shares represent
between 15% and 30% of the economic interest in each entity;
. General and limited partner interests, on average, representing
approximately 25% of the economic interest in each entity; and
. Seven properties, consisting of six mini-warehouses and one business
park in which a 100% fee interest is being acquired.
Depreciation expense represents depreciation on the assets of the Real
Estate Equity Interests in which an interest is being acquired and is
typically provided on a straight line basis over the estimated useful life
of twenty five years.
The sixty-three REITs and partnerships in which SEI is acquiring an
interest have the following assets, liabilities, owner's equity and income
for the years ended December 31, 1994, 1993 and 1992 and the six months
ended June 30, 1995:
Six Months
Ended June Years ended December 31,
30, 1995 ------------------------------------
(unaudited) 1994 1993 1992
----------- ---------- ---------- ----------
(dollars in thousands)
Assets $1,248,071 $1,273,297 $1,312,289 $1,342,144
Liabilities 138,288 130,206 131,435 133,267
--------------------------------------------------
Owners' equity $1,109,783 $1,143,091 $1,180,854 $1,208,877
==================================================
Net income $ 52,023 $ 97,774 $ 78,635 $ 58,022
==================================================
14
C. Mortgage loans
Included in the Real Estate Interests are ten notes receivable with an
aggregate carrying amount of $8,141,000 at December 31, 1994 and which are
secured by mini-warehouse facilities. Four of the notes are subject to
underlying mortgage debt. Interest income and interest expense are
included in the Combined Summaries with respect to the notes receivable and
underlying mortgage debt, respectively.
The notes receivable have interest rates ranging from 7.0% to 14.5%
(weighted average of 11.8%) and mature from 1995 to 2013. The underlying
mortgages have interest rates ranging from 7.1% to 9.9% (weighted average
of 7.5%) and are due from 1997 to 2000.
D. Debt
SEI will assume approximately $4,807,000 (as of December 31, 1994) in debt
consisting of underlying debt related to four of the notes receivable and
mortgage debt secured by one facility. The debt bears interest at rates
ranging from 7.1% to 9.9%. The repayment of principal related to this debt
at December 31, 1994 is due as follows:
1995 $ 213,000
1996 231,000
1997 1,038,000
1998 2,633,000
1999 561,000
Thereafter 131,000
----------
$4,807,000
==========
E. Environmental Matters
The majority of the Real Estate Equity Interests were developed or acquired
prior to the time it was customary to conduct environmental assessments.
However, subsequent to their development or acquisition, many of the
properties have had environmental assessments completed. These assessments
did not indicate the requirement for significant remediation or further
assessments.
15
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements
were prepared to reflect the Merger transaction between SEI and PSMI. As a
condition to closing the Merger, the SEI Articles of Incorporation must be
amended to increase the number of authorized shares of, and reclassify, the
outstanding SEI Common Stock into Common Stock and Class B Common Stock. Prior
to the Merger, PSCP, the Adviser and Real Estate Interests will be combined
into PSMI. Upon consummation of the Merger, (i) PSMI will be merged with and
into SEI, which will be the surviving corporation, (ii) SEI will be renamed
"Public Storage, Inc.," and (iii) the capital stock of PSMI will be converted
into an aggregate of 30,000,000 shares of Common Stock and 7,000,000 shares of
Class B Common Stock, subject to post closing adjustment.
Immediately following the Merger, SEI will own the Operating
Companies and the Real Estate Interests, which include (1) the "Public
Storage" name, (2) seven wholly owned properties, (3) all inclusive deeds of
trust secured by ten mini-warehouses, (4) general and limited partnership
interests in 47 limited partnerships owning an aggregate of 286 mini-
warehouses and one commercial property, (5) equity interests in 16 REITs
which, exclusive of SEI's facilities, own an aggregate of 219 mini-warehouses
and 13 commercial properties, (6) property management contracts, exclusive of
SEI's facilities, for 604 mini-warehouses and 26 commercial properties (563 of
which collectively are owned by entities affiliated with PSI), and (7) a 95%
economic interest in a merchandise company which currently sells locks and
boxes to PSI's mini-warehouse tenants and others.
In addition to adjustments to reflect the proposed Merger, pro forma
adjustments were made to reflect the following transactions:
ISSUANCE OF PREFERRED AND COMMON STOCK:
. On February 15, 1994, SEI issued 5,484,000 shares of Common Stock in a
public offering. The net offering proceeds were approximately $76.5
million, which combined with the use of cash reserves were used to
repay debt, acquire real estate facilities, acquire mortgage notes
receivable and acquire additional minority interests.
. On June 30, 1994, SEI issued 1,200,000 shares of Adjustable Rate
Cumulative Preferred Stock, Series C (the "Series C Preferred Stock").
The aggregate net offering proceeds of the offering ($28.9 million)
were used to retire bank borrowings (borrowings which were used
primarily to acquire real estate facilities and minority interests in
real estate partnerships).
. On September 1, 1994, SEI issued 1,200,000 shares of 9.5% Cumulative
Preferred Stock, Series D (the "Series D Preferred Stock"). The
aggregate net offering proceeds of the offering ($29.0 million) were
used to acquire real estate facilities and minority interests in real
estate partnerships.
. On November 25, 1994, SEI issued 2,500,000 shares of Common Stock in a
public offering. The offering provided net proceeds of approximately
$33.8 million, which were utilized to repay borrowings on SEI's credit
facilities (borrowings which were used to fund the acquisition of real
estate facilities, minority interests and the cash portion of the PSP
VIII merger, see below).
. On February 1, 1995, SEI issued 2,195,000 shares of 10% Cumulative
Preferred Stock, Series E (the "Series E Preferred Stock"). The
aggregate net offering proceeds of $52.9 million were used to acquire
real estate facilities, minority interests in real estate partnerships
and retire bank borrowings (borrowings which were used to acquire real
estate facilities).
. On May 3, 1995, SEI issued 2,300,000 shares of 9.75% Cumulative
Preferred Stock, Series F (the "Series F Preferred Stock"). The
aggregate net offering proceeds of $55.5 million were used to acquire
real estate facilities, minority interests in real estate partnerships
and retire bank borrowings (borrowings which were used to acquire real
estate facilities).
. On May 31, 1995, SEI issued 5,482,200 shares of Common Stock in a
public offering. The aggregate net offering proceeds of $82.0 million
were used to acquire real estate facilities.
16
MERGERS:
. On September 30, 1994, SEI completed a merger transaction with Public
Storage Properties VIII, Inc. ("PSP VIII") whereby SEI acquired all of
the outstanding shares of PSP VIII's common stock for an aggregate cost
of $55,839,000, consisting of the issuance of 2,593,914 shares of SEI
Common Stock and $17,341,000 in cash.
. On February 28, 1995, SEI completed a merger transaction with Public
Storage Properties VI, Inc. ("PSP VI") whereby SEI acquired all of the
outstanding shares of PSP VI's common stock for an aggregate cost of
$65,343,000, consisting of the issuance of 3,147,015 shares of SEI
Common Stock and $21,427,000 in cash.
. On June 30, 1995, SEI completed a merger transaction with Public
Storage Properties VII, Inc. ("PSP VII") whereby SEI acquired all of
the outstanding shares of PSP VII's common stock for an aggregate cost
of $70,064,000 consisting of the issuance of approximately 3,517,272
shares of SEI Common Stock and $14,007,000 in cash.
The pro forma consolidated balance sheet at June 30, 1995 has been
prepared to reflect (i) the issuance and utilization of the remaining net
offering proceeds of the Common Stock issued on May 31, 1995, and (ii) the
proposed Merger with PSMI.
The pro forma consolidated statement of income for the six months
ended June 30, 1995 has been prepared assuming (i) the issuance of preferred
and Common Stock and the utilization of the proceeds therefrom, (ii) the
merger transactions with PSP VI and PSP VII, and (iii) the proposed Merger, as
if all such transactions were completed at the beginning of the period. The
pro forma consolidated statement of income for the year ended December 31,
1994 has been prepared assuming (i) the issuance of the Preferred and Common
Stock and the utilization of the proceeds therefrom, (ii) the merger
transactions with PSP VIII, PSP VI and PSP VII, and (iii) the proposed Merger,
as if all such transactions were completed on January 1, 1994.
The pro forma consolidated statement of cash flows for the six
months ended June 30, 1995 and year ended December 31, 1994 have been prepared
on the same basis as the pro forma consolidated statement of income for the
same period.
The pro forma adjustments are based upon available information and
upon certain assumptions as set forth in the notes to the pro forma
consolidated financial statements that SEI believes are reasonable in the
circumstances. The pro forma condensed consolidated financial statements and
accompanying notes should be read in conjunction with the historical
consolidated financial statements of SEI, the combined financial statements
of the "Operating Companies," and the combined summaries of historical
information relating to the operating revenues and specified expenses of "Real
Estate Interests." The following pro forma consolidated financial statements
do not purport to represent what SEI's results of operations would actually
have been if the transactions in fact had occurred at the beginning of the
respective periods or to project SEI's results of operations for any future
date or period.
17
INDEX TO PRO FORMA FINANCIAL INFORMATION
. Pro forma consolidated balance sheet at June 30, 1995................ 19
. Pro forma consolidated statements of income:
. For the six months ended June 30, 1995........................... 24
. For the year ended December 31, 1994............................. 25
. Pro forma consolidated statements of cash flows:
. For the six months ended June 30, 1995........................... 37
. For the year ended December 31, 1994............................. 38
18
STORAGE EQUITIES, INC.
CONSOLIDATED PRO FORMA BALANCE SHEET
JUNE 30, 1995
(UNAUDITED)
SEI PRE-MERGER
--------------------------------------------------
PRO FORMA
ADJUSTMENTS
FOR THE SEI OPERATING PRO FORMA SEI
ASSETS SEI ISSUANCE OF PRE-MERGER COMPANIES MERGER POST-MERGER
(HISTORICAL) EQUITY (1) (PRO FORMA) (HISTORICAL) ADJUSTMENTS(2) (PRO FORMA)
-------------- ------------ -------------- ------------ -------------- --------------
Cash and cash equivalents $ 89,759,000 $(84,673,000) $ 5,086,000 $ 1,204,000 $ - $ 6,290,000
Investments in real
estate entities 13,923,000 6,692,000 20,615,000 - 365,000,000 385,615,000
Real estate facilities,
net of accumulated
depreciation 994,006,000 130,361,000 1,124,367,000 - 19,943,000 1,144,310,000
Mortgage loans
receivable, primarily
from affiliates 14,352,000 (14,352,000) - - 7,987,000 7,987,000
Intangible assets - - - - 235,045,000 235,045,000
Other assets 4,817,000 - 4,817,000 2,730,000 - 7,547,000
-------------- ------------ -------------- ------------ ------------ --------------
Total assets $1,116,857,000 $ 38,028,000 $1,154,885,000 $ 3,934,000 $627,975,000 $1,786,794,000
============== ============ ============== ============ ============ ==============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Note payable to banks $ - $ - $ - $ - $ - $ -
Senior Notes - - - 67,671,000 329,000 68,000,000
Mortgage notes payable 58,497,000 44,716,000 103,213,000 - 4,706,000 107,919,000
-------------- ------------ -------------- ------------ ------------ --------------
Total debt 58,497,000 44,716,000 103,213,000 67,671,000 5,035,000 175,919,000
Accrued and other
liabilities 34,160,000 - 34,160,000 1,063,000 2,000,000 37,223,000
Minority interest 131,536,000 (6,688,000) 124,848,000 - - 124,848,000
Shareholders' equity:
Preferred Stock, $.01 par
value, 50,000,000 shares
authorized:
Senior Preferred Stock 277,650,000 - 277,650,000 - - 277,650,000
Convertible Preferred
Stock 57,500,000 - 57,500,000 - - 57,500,000
Common stock, $.10 par
value, 60,000,000
shares authorized
42,042,616 shares issued
and outstanding
(79,042,616 pro forma
shares issued and
outstanding)
Common Stock (72,042,616
issued and outstanding) 4,205,000 - 4,205,000 - 3,000,000 7,205,000
Class B (7,000,000
issued and outstanding) - - - - 700,000 700,000
Paid-in capital 561,985,000 - 561,985,000 - 552,440,000 1,114,425,000
Cumulative net income 202,236,000 - 202,236,000 - - 202,236,000
Cumulative distribution
paid (210,912,000) - (210,912,000) - - (210,912,000)
Deficit - - - (64,800,000) 64,800,000 -
-------------- ------------ -------------- ------------ ------------ --------------
Total shareholders'
equity 892,664,000 - 892,664,000 (64,800,000) 620,940,000 1,448,804,000
-------------- ------------ -------------- ------------ ------------ --------------
Total liabilities
and shareholders'
equity $1,116,857,000 $ 38,028,000 $1,154,885,000 $ 3,934,000 $627,975,000 $1,786,794,000
============== ============ ============== ============ ============ ==============
Book Value per share of
Common Stock $ 13.26 $ 13.26 $ 15.46
============== ============== ==============
See Accompanying Notes to Pro Forma Consolidated Balance Sheet.
19
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
June 30, 1995
(Unaudited)
1. Issuance of Common Stock
------------------------
On May 31, 1995, SEI issued 5,482,200 shares of its Common Stock raising
net offering proceeds of approximately $82.0 million. As of June 30, 1995,
SEI had not utilized substantially all of the net offering proceeds;
however, utilization of the proceeds therefrom is expected as follows:
Net offering proceeds:
Common Stock......................................................... $82,068,000
Less: Utilization of net offering proceeds as of June 30, 1995...... (4,209,000)
-----------
Remaining net offering proceeds at June 30, 1995.................. $77,859,000
===========
Uses:
Cash portion of real estate facilities pending
acquisition as of June 30, 1995 (see below)........................ $71,293,000
Acquisition of limited partnership units of unconsolidated
real estate entities (consisting of units in affiliated
partnerships which are not part of the Real Estate
Interests to be acquired).......................................... 6,692,000
Acquisition of minority interests (see below)........................ 6,688,000
Use of cash reserves................................................. (6,814,000)
-----------
$77,859,000
===========
The following pro forma adjustments were made to reflect the above transactions:
. Investment in real estate entities has been increased to reflect the cost of
the acquired limited partnership units in ten partnerships affiliated with
SEI (these acquisitions were completed on August 31, 1995)...................... $ 6,692,000
. Real estate facilities were increased to reflect the acquisition of
mini-warehouse facilities
Cash portion of acquisition cost.............................................. $ 71,293,000
Cancellation of mortgage notes receivable secured by acquired
mini-warehouses facilities.................................................. 14,352,000
Assumption of mortgage notes payable secured by acquired
mini-warehouse facilities................................................... 44,716,000
------------
$130,361,000
============
The pro forma adjustment to real estate facilities includes the pending
acquisition of 11 mini-warehouse facilities and two business parks with an
aggregate cost of approximately $44.2 million which have not been completed
as of August 31, 1995. These real estate facilities are owned by six limited
partnerships and the general partner is currently in the process of seeking
the approval of the limited partners of the partnerships to sell the
partnerships' real estate facilities to SEI for cash, the cancellation of
mortgage debt owed to SEI and the assumption of mortgage debt secured by the
facilities. There is no assurance that such transactions
20
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
June 30, 1995
(Unaudited)
will be approved by the limited partners of each of the partnerships and
therefore consummated; however, SEI believes, based on past experience, that
the approval of the limited partners is probable.
. Mortgage notes receivable were decreased to reflect the cancellation of
notes in connection with the acquisition of mini-warehouse facilities
securing such notes............................................................ $(14,352,000)
============
. Mortgage notes payable were increased to reflect the assumption of
such notes in connection with the acquisition of mini-warehouse
facilities..................................................................... $ 44,716,000
============
. Minority interest was decreased to reflect the acquisition of such
interests...................................................................... $ (6,688,000)
============
In July and August 1995, SEI completed cash tender offers to acquire limited
partnership units in PS Partners VI, Ltd., a limited partnership in which SEI
currently owns significant interests in and whose accounts are consolidated
with SEI. Pursuant to these tender offers, SEI acquired in aggregate $6.7
million of limited partnership units in the partnership. The acquisition of
units has the effect of reducing minority interest.
2. Merger Pro Forma Adjustments
----------------------------
The Merger will be accounted for using the purchase method of accounting
and the total purchase cost will be allocated to the acquired net assets;
first to the tangible and identifiable intangible assets and liabilities
acquired based upon their respective fair values, and the remainder will be
allocated to the excess of purchase cost over fair value of assets
acquired. Upon completion of the Merger, the outstanding shares of PSMI
capital stock will be converted into an aggregate of 30,000,000 shares of
Common Stock and 7,000,000 shares of Class B Common Stock, subject to
adjustment, and SEI will be renamed "Public Storage, Inc."
Immediately following the Merger, SEI will own the Operating Companies and
the Real Estate Interests, which include (1) the "Public Storage" name, (2)
seven wholly owned properties, (3) all inclusive deeds of trust secured by
ten mini-warehouses, (4) general and limited partnership interests in 47
limited partnerships owning an aggregate of 286 mini-warehouses and one
commercial property, (5) equity interests in 16 REITs which, exclusive of
SEI's facilities, own an aggregate of 219 mini-warehouses and 13 commercial
properties, (6) property management contracts, exclusive of SEI's
facilities, for 652 mini-warehouses and 29 commercial properties (611 of
which collectively are owned by entities affiliated with PSI), and (7) a
95% economic interest in a merchandise company which currently sells locks
and boxes to PSI's mini-warehouse tenants and others.
21
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
June 30, 1995
(Unaudited)
SEI has determined the purchase cost of the net assets to be acquired in the
Merger to be equal to the fair value of the securities issued combined with
direct costs of the Merger. The fair value of the Common Stock is based on the
average closing market prices on the NYSE for the thirty consecutive trading
days prior to the date the Merger Agreement was executed (June 30, 1995). The
fair value of the Class B Common Stock (which is not publicly traded) is based
on an independent appraisal. The aggregate purchase cost and its preliminary
allocation to the historical assets and liabilities is as follows:
Purchase cost:
-------------
Issuance of 30,000,000 shares of Common Stock (at $16.088 per share) (1)....................................... $482,640,000
Issuance of 7,000,000 shares of Class B Common Stock (at $10.50 per share)..................................... 73,500,000
Estimated direct costs and expenses of the Merger.............................................................. 2,000,000
------------
$558,140,000
============
Preliminary allocation of purchase cost:
----------------------------------------
Intangible assets attributable to the "Operating Companies".................................................... $235,045,000
Fair value of net assets acquired from the "Operating Companies"
Cash........................................................................................................ 1,204,000
Other assets................................................................................................ 2,730,000
Senior note payable (face amount of note at June 30, 1995).................................................. (68,000,000)
Accrued and other liabilities............................................................................... (1,063,000)
------------
Total fair value of net assets of the "Operating Companies"............................................... 169,916,000
------------
Fair value of real estate investments (including general and limited partnership interests and equity
interests in REITs)........................................................................................... 365,000,000
Fair value of fee simple interest in seven properties.......................................................... 19,943,000
Fair value of mortgage debt secured by properties acquired..................................................... (545,000)
Fair value of all-inclusive trust deeds:
Mortgage notes receivable.................................................................................... 7,987,000
Mortgage notes payable....................................................................................... (4,161,000)
------------
Total fair value of the net assets of the "Real Estate Interests"......................................... 388,224,000
------------
$558,140,000
============
----------
(1) Pursuant to the terms of the Merger, the number of shares of Common Stock
and Class B Common Stock to be issued as consideration for the Merger will
not be subjected to market price fluctuations. In addition, with respect to
the determination of the value of consideration to be paid for the
acquisition, market fluctuations subsequent to the announcement of the
proposed Merger were not taken into consideration.
22
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1995
(UNAUDITED)
The following pro forma adjustments have been made to reflect the Merger as of
June 30, 1995:
. Pro forma Merger adjustments:
----------------------------
. Investments in real estate entities has been increased to
reflect the fair value of real estate investments acquired
in the Merger.................................................. $365,000,000
============
. Real estate facilities has been increased to reflect the
fair value of the seven properties to be acquired in the
Merger......................................................... $ 19,943,000
============
. Mortgage loans receivable has been increased to reflect the
fair value of the all-inclusive trust deeds to be acquired
in the Merger.................................................. $ 7,987,000
============
. Intangible assets have been increased to reflect intangible
assets relating to the "Operating Companies"................... $235,045,000
============
. Secured notes has been adjusted by an amount to reflect the
face amount of the secured note at June 30, 1995............... $ 329,000
============
. Mortgage notes payable has been increased to reflect the
mortgage notes secured by all-inclusive trust deeds and
properties to be acquired in the Merger........................ $ 4,706,000
============
. Accrued and other liabilities has been increased for the
estimated costs and expenses of the Merger..................... $ 2,000,000
============
. Shareholders' equity has been increased to reflect
the following:
Issuance of 30,000,000 shares of Common Stock
($.10 par value per share)................................. $ 3,000,000
============
Issuance of 7,000,000 shares of Class B
Common Stock ($.10 par value per share).................... $ 700,000
============
. Paid-in capital has been increased to reflect the value
of issued shares of Common Stock and Class B Common Stock
in excess of par value (30,000,000 shares of Common Stock
at $16.088 per share and 7,000,000 shares of Class B Common
Stock at $10.50 per share less aggregate par value of
$3,700,000).................................................... $552,440,000
============
. Deficit has been eliminated to reflect the acquisition
of the net assets of the "Operating Companies"................. $ 64,800,000
============
23
STORAGE EQUITIES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
SEI
-----------------------------------------------------
PRO FORMA ADJUSTMENTS
-----------------------
ISSUANCE OF
PREFERRED & SEI
SEI COMMON REIT PRE-MERGER
(HISTORICAL) STOCK(1) MERGERS(2) (PRO FORMA)
------------ ----------- ---------- ------------
REVENUES:
Rental Income $88,068,000 $12,542,000 $8,465,000 $109,075,000
Facility management fees - - - -
Advisory fee income - - - -
Merchandise operations - - - -
Equity in earnings of
real estate entities - 383,000 - 383,000
Interest and other Income 3,042,000 (988,000) 25,000 2,079,000
----------- ----------- ---------- ------------
91,110,000 11,937,000 8,490,000 111,537,000
----------- ----------- ---------- ------------
EXPENSES:
Cost of operations 32,342,000 4,217,000 3,489,000 40,048,000
Cost of managing facilities - - - -
Cost of merchandise - - - -
Depreciation and
amortization 16,926,000 2,567,000 1,254,000 20,747,000
General and administrative 1,736,000 - 149,000 1,885,000
Advisory fee 3,426,000 397,000 213,000 4,036,000
Interest expense 3,214,000 957,000 1,017,000 5,188,000
----------- ----------- ---------- ------------
57,644,000 8,138,000 6,122,000 71,904,000
----------- ----------- ---------- ------------
Income before minority
interest in income and
gain on disposition of
real estate 33,466,000 3,799,000 2,368,000 39,633,000
Minority interest in
income (3,715,000) 145,000 - (3,570,000)
----------- ----------- ---------- ------------
Net Income $29,751,000 $ 3,944,000 $2,368,000 $ 36,063,000
=========== =========== ========== ============
Net income allocable to
preferred shareholders $13,308,000 $ 2,342,000 $ - $ 15,650,000
Net income allocable to
Class B Shareholders - - - -
Net income allocable to
Common Stock shareholders 16,443,000 1,602,000 2,368,000 20,413,000
----------- ----------- ---------- ------------
Net Income $29,751,000 $ 3,944,000 $2,368,000 $ 36,063,000
=========== =========== ========== ============
PER SHARE OF COMMON STOCK:
Net Income $ 0.50(3) $ 0.48(3)
=========== ============
Weighted Average Shares 32,707,556(3) 42,108,048(3)
=========== ============
RATIO OF EARNINGS TO
COMBINED FIXED CHARGES
AND PREFERRED STOCK
DIVIDENDS (7) 2.08 2.04
=========== ============
PSMI
--------------------------------------------------------------
COMBINED
OPERATING REAL ESTATE PSMI
COMPANIES INTERESTS PRO FORMA OPERATIONS
(HISTORICAL) (HISTORICAL)(4) ADJUSTMENTS(4) (PRO FORMA)
----------- --------------- -------------- -----------
REVENUES:
Rental Income $ - $ - $ 1,637,000 $ 1,637,000
Facility management fees 14,787,000 - 87,000 14,874,000
Advisory fee income 3,426,000 - 610,000 4,036,000
Merchandise operations 1,013,000 - - 1,013,000
Equity in earnings of
real estate entities - 12,601,000 (1,060,000) 11,541,000
Interest and other Income 61,000 - 398,000 459,000
----------- ----------- ----------- -----------
19,287,000 12,601,000 1,672,000 33,560,000
----------- ----------- ----------- -----------
EXPENSES:
Cost of operations - - 548,000 548,000
Cost of managing facilities 2,582,000 - (170,000) 2,412,000
Cost of merchandise 501,000 - - 501,000
Depreciation and
amortization - - 247,000 247,000
General and administrative 1,090,000 - (228,000) 862,000
Advisory fee - - - -
Interest expense 2,509,000 - 180,000 2,689,000
----------- ----------- ----------- -----------
6,682,000 - 577,000 7,259,000
----------- ----------- ----------- -----------
Income before minority
interest in income and
gain on disposition of
real estate 12,605,000 12,601,000 1,095,000 26,301,000
Minority interest in
income - - - -
----------- ----------- ----------- -----------
Net Income $12,605,000 $12,601,000 $ 1,095,000 $26,301,000
=========== =========== =========== ===========
Net income allocable to
preferred shareholders $ - $ - $ - $ -
Net income allocable to
Class B Shareholders - - - -
Net income allocable to
Common Stock shareholders 12,605,000 12,601,000 1,095,000 26,301,000
----------- ----------- ----------- -----------
Net Income $12,605,000 $12,601,000 $ 1,095,000 $26,301,000
=========== =========== =========== ===========
PER SHARE OF COMMON STOCK:
Net Income
Weighted Average Shares
RATIO OF EARNINGS TO
COMBINED FIXED CHARGES
AND PREFERRED STOCK
DIVIDENDS (7)
PRO FORMA SEI
MERGER POST-MERGER
ADJUSTMENTS(5) (PRO FORMA)
-------------- ------------
REVENUES:
Rental Income $ - $110,712,000
Facility management fees (6,307,000) 8,567,000
Advisory fee income (4,036,000) -
Merchandise operations - 1,013,000
Equity in earnings of
real estate entities (6,109,000) 5,815,000
Interest and other Income - 2,538,000
------------ ------------
(16,452,000) 128,645,000
------------ ------------
EXPENSES:
Cost of operations (6,307,000) 34,289,000
Cost of managing facilities - 2,412,000
Cost of merchandise - 501,000
Depreciation and
amortization 2,938,000 23,932,000
General and administrative - 2,747,000
Advisory fee (4,036,000) -
Interest expense - 7,877,000
------------ ------------
(7,405,000) 71,758,000
------------ ------------
Income before minority
interest in income and
gain on disposition
of real estate (9,047,000) 56,887,000
Minority interest in
income - (3,570,000)
------------ ------------
Net income $ (9,047,000) $ 53,317,000
============ ============
Net income allocable to
preferred shareholders $ - $ 15,650,000
Net income allocable to
Class B Shareholders - -
Net income allocable to
Common Stock shareholders (9,047,000) 37,667,000
------------ ------------
Net Income $ (9,047,000) $ 53,317,000
============ ============
PER SHARE OF COMMON STOCK:
Net Income $ 0.52(6)
============
Weighted Average Shares 72,108,048(6)
============
RATIO OF EARNINGS TO
COMBINED FIXED CHARGES
AND PREFERRED STOCK
DIVIDENDS (7) 2.66
============
See Accompanying Notes to Pro Forma Consolidated Statements of Income.
24
STORAGE EQUITIES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
SEI
---------------------------------------------------------------------
PRO FORMA ADJUSTMENTS
------------------------------
ISSUANCE
OF PREFERRED & SEI
SEI COMMON REIT PRE-MERGER
(HISTORICAL) STOCK(1) MERGERS(2) (PRO FORMA)
------------ -------------- ----------- ------------
REVENUES:
Rental Income $141,845,000 $42,701,000 $30,672,000 $215,218,000
Facility management fees - - - -
Advisory fee income - - - -
Merchandise operations - - - -
Equity in earnings of real - 748,000 - 748,000
estate entities
Interest and other Income 5,351,000 (4,315,000) 218,000 1,254,000
------------ ----------- ----------- ------------
147,196,000 39,134,000 30,890,000 217,220,000
------------ ----------- ----------- ------------
EXPENSES:
Cost of operations 52,816,000 14,639,000 12,114,000 79,569,000
Cost of managing facilities - - - -
Cost of merchandise - - - -
Depreciation and amortization 28,274,000 7,917,000 4,780,000 40,971,000
General and administrative 2,631,000 - 433,000 3,064,000
Advisory fee 4,983,000 1,794,000 699,000 7,476,000
Interest expense 6,893,000 (1,135,000) 4,985,000 10,743,000
------------ ----------- ----------- ------------
95,597,000 23,215,000 23,011,000 141,823,000
------------ ----------- ----------- ------------
Income before minority
interest in income and
gain on disposition of
real estate 51,599,000 15,919,000 7,879,000 75,397,000
Minority interest in income (9,481,000) 2,563,000 - (6,918,000)
------------ ----------- ----------- ------------
42,118,000 18,482,000 7,879,000 68,479,000
Gain on disposition of real
estate - - 203,000 203,000
------------ ----------- ----------- ------------
Net Income $ 42,118,000 $18,482,000 $ 8,082,000 $ 68,682,000
============ =========== =========== ============
Net income allocable to
preferred shareholders $ 16,846,000 $14,360,000 $ - $ 31,206,000
Net income allocable to
Class B Shareholders - - - -
Net income allocable to
Common Stock shareholders 25,272,000 4,122,000 8,082,000 37,476,000
------------ ----------- ----------- ------------
Net Income $ 42,118,000 $18,482,000 $ 8,082,000 $ 68,682,000
============ =========== =========== ============
PER SHARE OF COMMON STOCK:
Net Income $ 1.05(3) $ 0.90(3)
============ ============
Weighted Average Shares 24,077,055(3) 41,844,644(3)
============ ============
RATIO OF EARNINGS TO
COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS (7) 2.22 1.93
============ ============
PSMI
-----------------------------------------------------------------
COMBINED
OPERATING REAL ESTATE PSMI
COMPANIES INTERESTS PRO FORMA OPERATIONS
(HISTORICAL) (HISTORICAL)(4) ADJUSTMENTS(4) (PRO FORMA)
------------ --------------- ------------- ------------
REVENUES:
Rental Income $ - $ - $ 3,152,000 $ 3,152,000
Facility management fees 28,356,000 - 576,000 28,932,000
Advisory fee income 4,983,000 - 2,493,000 7,476,000
Merchandise operations 1,872,000 - - 1,872,000
Equity in earnings of real
estate entities - 23,697,000 (2,085,000) 21,612,000
Interest and other Income 199,000 - 797,000 996,000
----------- ----------- ----------- -----------
35,410,000 23,697,000 4,933,000 64,040,000
----------- ----------- ----------- -----------
EXPENSES:
Cost of operations - - 1,023,000 1,023,000
Cost of managing facilities 5,431,000 - (529,000) 4,902,000
Cost of merchandise 866,000 - - 866,000
Depreciation and amortization - - 489,000 489,000
General and administrative 1,850,000 - (255,000) 1,595,000
Advisory fee - - - -
Interest expense 5,255,000 - 352,000 5,607,000
----------- ----------- ----------- -----------
13,402,000 - 1,080,000 14,482,000
----------- ----------- ----------- -----------
Income before minority
interest in income and
gain on disposition of
real estate 22,008,000 23,697,000 3,853,000 49,558,000
Minority interest in income - - - -
----------- ----------- ----------- -----------
22,008,000 23,697,000 3,853,000 49,558,000
Gain on disposition of real
estate - - - -
----------- ----------- ----------- -----------
Net Income $22,008,000 $23,697,000 $ 3,853,000 $49,558,000
=========== =========== =========== ===========
Net income allocable to
preferred shareholders $ - $ - $ - $ -
Net income allocable to
Class B Shareholders - - - -
Net income allocable to
Common Stock shareholders 22,008,000 23,697,000 3,853,000 49,558,000
----------- ----------- ----------- -----------
Net Income $22,008,000 $23,697,000 $ 3,853,000 $49,558,000
=========== =========== =========== ===========
PER SHARE OF COMMON STOCK:
Net Income
Weighted Average Shares
RATIO OF EARNINGS TO
COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS (7)
PRO FORMA SEI
MERGER POST-MERGER
ADJUSTMENTS(5) (PRO FORMA)
-------------- ------------
REVENUES:
Rental Income $ - $218,370,000
Facility management fees (12,937,000) 15,995,000
Advisory fee income (7,476,000) -
Merchandise operations - 1,872,000
Equity in earnings of real
estate entities (12,217,000) 10,143,000
Interest and other Income - 2,250,000
------------ ------------
(32,630,000) 248,630,000
------------ ------------
EXPENSES:
Cost of operations (12,937,000) 67,655,000
Cost of managing facilities - 4,902,000
Cost of merchandise - 866,000
Depreciation and amortization 5,876,000 47,336,000
General and administrative - 4,659,000
Advisory fee (7,476,000) -
Interest expense - 16,350,000
------------ ------------
(14,537,000) 141,768,000
------------ ------------
Income before minority
interest in income and
gain on disposition of
real estate (18,093,000) 106,862,000
Minority interest in income - (6,918,000)
------------ ------------
(18,093,000) 99,944,000
Gain on disposition of real
estate - 203,000
------------ ------------
Net Income $(18,093,000) $100,147,000
============ ============
Net income allocable to
preferred shareholders $ - $ 31,206,000
Net income allocable to
Class B Shareholders - -
Net income allocable to
Common Stock shareholders (18,093,000) 68,941,000
------------ ------------
Net Income $(18,093,000) $100,147,000
============ ============
PER SHARE OF COMMON STOCK:
Net Income $ 0.96(6)
Weighted Average Shares ============
71,844,644(6)
============
RATIO OF EARNINGS TO
COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS (7) 2.48
============
See Accompanying Notes to Pro Forma Consolidated Statement of Income.
25
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
1. Issuance of preferred and Common Stock
--------------------------------------
During 1994 and 1995, SEI issued shares of both its preferred and Common
Stock as follows:
. On February 15, 1994, SEI issued 5,484,000 shares of Common Stock in a
public offering. The net offering proceeds $76.5 million were used to
repay debt, to acquire real estate facilities, to acquire mortgage
notes receivable and to acquire additional minority interests.
. On June 30, 1994, SEI issued 1,200,000 shares of Series C Preferred
Stock. The aggregate net offering proceeds of the offering ($28.9
million) were used to retire bank borrowings (borrowings which were used
primarily to acquire real estate facilities and minority interests in
real estate partnerships).
. On September 1, 1994, SEI issued 1,200,000 shares of Series D Preferred
Stock. The aggregate net offering proceeds ($29.0 million) were used to
acquire real estate facilities and minority interests in real estate
partnerships.
. On November 25, 1994, SEI issued 2,500,000 shares of Common Stock
pursuant to a public offering. The aggregate offering proceeds ($33.8
million) were used to repay borrowings on SEI's credit facilities
(borrowings which were used to fund the acquisition of real estate
facilities, minority interests and the cash portion of the PSP VIII
merger, see Note 2 below).
. On February 1, 1995, SEI issued 2,195,000 shares of Series E Preferred
Stock. The aggregate net offering proceeds ($52.9 million) were used to
acquire real estate facilities, minority interests in real estate
partnerships and retire bank borrowings (borrowings which were used to
acquire real estate facilities).
. On May 3, 1995, SEI issued 2,300,000 shares of Series F Preferred Stock.
The aggregate net offering proceeds ($55.5 million) were used to repay
borrowings on SEI's credit facilities (borrowings which were used to fund
the acquisition of real estate facilities, minority interests and the
cash portion of the PSP VI merger).
. On May 31, 1995, SEI issued 5,482,200 shares of Common Stock pursuant to
a public offering. The aggregate net offering proceeds were $82.0
million, a portion of which has been utilized to repay borrowings on
SEI's credit facilities (borrowings which were used to fund the
acquisition of real estate facilities, and the cash portion of the PSP
VII merger). The remaining proceeds will be utilized to acquire
additional real estate facilities and minority interests. Currently
pending, are the acquisition of 11 mini-warehouse facilities and two
business parks with an aggregate acquisition cost of $44.2 million,
consisting of the cancellation of $7.9 million of mortgage notes
receivable, the assumption of $11.9 million of mortgage notes payable,
and cash totaling $24.4 million.
The following pro forma adjustments have been made to the pro forma
consolidated statements of income to reflect the above uses (the acquisition of
real estate facilities, minority interests and the repayment of bank
borrowings) of the proceeds as if the transactions were completed as of
January 1, 1994:
26
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
YEAR
SIX MONTHS ENDED
ENDED DECEMBER 31,
JUNE 30, 1995 1994
------------- -----------
. Rental income has been increased
to reflect the incremental
difference between the actual
rental income included in the
historical statement of operations
and the pro forma rental income as
if the acquired real estate
facilities were in operation for a
full period............................ $12,542,000 $42,701,000
=========== ===========
. Equity in earnings of real
estate entities has been increased
to reflect income with respect to
the acquisition of limited
partnership units in affiliated
unconsolidated partnerships. Such
acquisitions occurred subsequent
to June 30, 1995 and do not
represent limited partnership
units in either the PSP
Partnership or the partnerships
included in the Real Estate
Interests.............................. $ 383,000 $ 748,000
=========== ===========
. Interest and other income has
been decreased to reflect SEI's
cancellation of mortgage notes
receivable, in connection with the
acquisition of the above
properties, from which SEI
recognized interest income during
the year ended December 31, 1994.
A pro forma adjustment has been
made to eliminate such interest as
if the notes were canceled at the
beginning of the period (including
amortization of mortgage note
discounts totaling $67,000 in 1995
and $693,000 in 1994).................. $ (988,000) $(4,315,000)
=========== ===========
. Cost of operations has been
increased to reflect the
incremental difference between the
actual cost of operations included
in the historical statement of
income and the pro forma cost of
operations as if the real estate
facilities were in operation for a
full period............................ $ 4,217,000 $14,639,000
=========== ===========
. Depreciation has been increased
to reflect the incremental
difference between the actual
depreciation expense included in
the historical statements of
income and the pro forma
depreciation expense as if the
real estate facilities were in
operation for a full period............ $ 2,567,000 $ 7,917,000
=========== ===========
27
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
YEAR
SIX MONTHS ENDED
ENDED DECEMBER 31,
JUNE 30, 1995 1994
------------- ------------
. Interest expense has been
increased (decreased) to reflect
the following:
Interest expense was decreased to
eliminate the historical interest
expense related to the pay down
of the debt through the use of
net offering proceeds................ $ (293,000) $(1,097,000)
Mortgage notes payable were assumed
in connection with the acquisition
of the real estate facilities. An
adjustment was made to reflect the
interest expense as if the notes
were assumed at the beginning of
the period........................... 2,254,000 4,801,000
SEI typically uses its bank line
of credit to fund the cash
portion of real estate
acquisitions and subsequently
repays the borrowings with the
net proceeds of equity offerings.
In Note 2 below, a pro forma
adjustment has been made to
reflect the interest expense
relating the REIT Mergers (see
Note 2), assuming that SEI
borrowed on its bank line of
credit to fund the cash portion
of such mergers thus reflecting
the pro forma cost of capital to
finance the mergers. Accordingly,
a pro forma adjustment has been
made to offset that interest
expense to reflect the repayment
of bank borrowings with the net
proceeds of the above preferred
and Common Stock offerings........... (1,004,000) (4,839,000)
----------- -----------
Net increase (decrease) in
interest expense.................. $ 957,000 $(1,135,000)
=========== ===========
. Minority interest in income has
been decreased due to the
acquisition of such minority
interests by SEI........................ $ 145,000 $ 2,563,000
=========== ===========
. Advisory fees have been
increased to reflect the effect of
the above adjustments................... $ 397,000 $ 1,794,000
=========== ===========
28
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
2. REIT Mergers
------------
During 1994 and 1995, SEI completed merger transactions (collectively, the
"REIT Mergers") with PSP VIII (September 30, 1994), PSP VI (February 28,
1995), and PSP VII (June 30, 1995) (collectively the "PSP REITs"). The
following pro forma adjustments have been made assuming the merger
transactions with the PSP REITs were completed at the beginning of the year
ended December 31, 1994:
YEAR
SIX MONTHS ENDED
ENDED DECEMBER 31,
JUNE 30, 1995 1994
------------- ------------
. A pro forma adjustment has been
made to reflect the PSP REITs
historical rental income................ $8,465,000 $30,672,000
========== ===========
. A pro forma adjustment has been
made to reflect the PSP REITs
historical interest and other
income.................................. $ 25,000 $ 218,000
========== ===========
. A pro forma adjustment has been
made to reflect the PSP REITs
historical cost of operations........... $3,489,000 $12,114,000
========== ===========
. Depreciation and amortization
was adjusted as follows:
A pro forma adjustment has been
made to reflect the PSP REITs
historical depreciation............... $1,175,000 $ 3,960,000
As a result of the REIT Mergers,
the real estate facilities were
recorded by SEI at their fair
values (which were in excess of
the historical carrying value at
the PSP REITs). A pro forma
adjustment has been made to
reflect the incremental increase
in depreciation expense based upon
the allocation of the purchase
cost to buildings (straight-line
over 25 years)........................ 79,000 820,000
---------- -----------
$1,254,000 $ 4,780,000
========== ===========
29
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
YEAR
SIX MONTHS ENDED
ENDED DECEMBER 31,
JUNE 30, 1995 1994
------------- ------------
. General and administrative expense was adjusted
as follows:
A pro forma adjustment has been made to reflect
the PSP REITs historical general and
administrative expenses............................. $ 191,000 $ 633,000
A pro forma adjustment has been made to reduce
certain general and administrative expenses
which SEI has determined would be eliminated
as a result of the mergers. Such expenses
include the elimination of PSP REITs board of
directors fees, stock exchange listing fees,
audit and tax fees and certain administrative
expenses which will no longer be applicable......... (42,000) (200,000)
---------- ----------
$ 149,000 $ 433,000
========== ==========
. Interest expense has been increased as follows:
For the pro forma, additional borrowings on SEI's
bank lines of credit to consummate the merger
transactions has been assumed. The pro forma
interest expense was determined based on an
interest rate of 9.50%. (see adjustment to
interest expense included in Note 1):
PSP VIII ($20.7 million borrowings
outstanding from January 1, 1994
through September 30, 1994)......................... $ - $1,472,000
PSP VI ($21.4 million borrowings
outstanding from January 1, 1994
through February 28, 1995).......................... 339,000 2,036,000
PSP VII ($14.0 million borrowings
outstanding from January 1, 1994
through June 30, 1995).............................. 665,000 1,331,000
---------- ---------
subtotal......................................... 1,004,000 4,839,000
Historical interest expense of the PSP REITs........ 13,000 146,000
---------- ---------
Total adjustment to interest expense.............. $1,017,000 $4,985,000
========== ==========
. A pro forma adjustment has been made to reflect
the historical gain on the disposition of real
estate of the PSP REITs............................... $ - $ 203,000
========== ==========
. A pro forma adjustment has been made to the
advisory fee to reflect the above adjustments
combined with the effects of the operations of
the PSP REITs and the issuance of additional
shares of SEI's Common Stock.......................... $ 213,000 $ 699,000
========== ==========
30
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
3. Net income per share of Common Stock has been computed as follows:
-----------------------------------------------------------------
YEAR
SIX MONTHS ENDED
ENDED DECEMBER 31,
JUNE 30, 1995 1994
------------- ------------
Historical net income.................................. $ 29,751,000 $ 42,118,000
Less: Historical preferred stock dividends............. (13,308,000) (16,846,000)
------------ ------------
Income applicable to Common Stock shareholders......... $ 16,443,000 $ 25,272,000
============ ============
Historical weighted average shares of Common Stock..... 32,707,556 24,077,055
============ ============
Historical net income per share of Common Stock........ $ 0.50 $ 1.05
============ ============
Pro forma net income................................... $ 36,063,000 $ 68,682,000
Less: Pro forma preferred stock dividends(1)........... (15,650,000) (31,206,000)
------------ ------------
Income applicable to Common Stock shareholders......... $ 20,413,000 $ 37,476,000
============ ============
Pro forma weighted average shares of Common Stock(2)... 42,108,048 41,844,644
============ ============
Pro forma net income per share of Common Stock......... $ 0.48 $ 0.90
============ ============
(1) As adjusted to give effect to the issuance of the Series C, Series D,
Series E, and Series F Preferred Stock as if such stock were outstanding at
the beginning of the period. The dividend rate on the Series C Preferred
Stock is adjustable quarterly and is equal to the highest of the three
separate indices as published by the Federal Reserve Board, multiplied by
110%. However, the dividend rate will not be less than 6.75% per annum nor
greater than 10.75% per annum. At the date of issuance, the dividend rate
was equal to 8.15% per annum, which rate was used in the determination of
pro forma dividends applicable to the Series C Preferred Stock for the year
ended December 31, 1994. If the dividend rate used was 10.75% per annum,
the pro forma Preferred Stock dividends would have been approximately
$390,000 higher for the six months ended June 30, 1995 ($780,000 higher for
the year ended December 31, 1994). Accordingly, income applicable to common
shareholders would have been reduced by a like amount or approximately
$0.03 per common for the year ended December 31, 1994 ($0.01 for the six
months ended June 30, 1995).
(2) As adjusted to give effect to the issuance of additional shares of Common
Stock in connection with the acquisition of additional investments in real
estate entities, the public offering of Common Stock during 1994 and 1995,
and Common Stock issued in connection with the REIT Mergers.
31
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
4. Pro forma adjustments to the historical "Operating Companies" and "Real
-----------------------------------------------------------------------
Estate Interests":
------------------
The historical operations of the "Real Estate Interests" included in the
pro forma financial statements represents PSMI's equity interest in the
combined operations of such assets (based on the equity method of
accounting) as derived from the "Combined Summaries of Historical
Information Relating to Operating Revenues and Specified Expenses - Real
Estate Interests."
Included in these Combined Summaries financial statements are (i) the
operating results of the seven real estate facilities in which SEI will be
acquiring a fee simple interest pursuant to the Merger and (ii) all-
inclusive trust deeds. The following pro forma adjustments have been made
to reflect the operating results (i.e. rental income and operating
expenses) and the related interest income and expense with respect to the
all-inclusive deeds of trust and mortgage notes payable, the net amounts of
which are included in "Equity in earnings of real estate entities" in the
column titled "Real Estate Interests":
YEAR
SIX MONTHS ENDED
ENDED DECEMBER 31,
JUNE 30, 1995 1994
------------- ------------
. A pro forma adjustment has been
made to reflect the historical
rental income.......................... $ 1,637,000 $ 3,152,000
=========== ===========
. A pro forma adjustment has been
made to reflect the historical
interest income related to the
acquired all-inclusive deeds of
trust (mortgage notes receivable)...... $ 398,000 $ 797,000
=========== ===========
. A pro forma adjustment has been
made to reflect the historical
cost of operations..................... $ 548,000 $ 1,023,000
=========== ===========
. A pro forma adjustment has been
made to reflect the historical
depreciation and amortization.......... $ 247,000 $ 489,000
=========== ===========
. A pro forma adjustment has been
made to interest expense to
reflect:
the historical interest expense
related to the mortgage notes
payable secured by the real estate
facilities (which will be assumed
by SEI pursuant to the Merger)....... $ 21,000 $ 31,000
the historical interest expense
related to the mortgage notes
payable secured by all-inclusive
deeds of trust....................... 159,000 321,000
----------- -----------
Total adjustment to interest
expense........................... $ 180,000 $ 352,000
=========== ===========
. A pro forma adjustment has been
made to adjust the historical
Equity in earnings of real estate
entities to eliminate the net
property operations included in
the "Real Estate Interests" for
the above property operating
adjustments............................ $(1,060,000) $(2,085,000)
=========== ===========
32
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
In addition, the following pro forma adjustments have been made to reflect (i)
additional Facility management fees and Advisory fee income as a result of pro
forma adjustments made to the SEI historical financial statements which have a
corresponding effect on the "Operating Companies," and (ii) to eliminate
certain non-recurring costs and expenses included in the "Operating Companies."
YEAR
SIX MONTHS ENDED
ENDED DECEMBER 31,
JUNE 30, 1995 1994
------------- ------------
. A pro forma adjustment has made
to Facility management fees to
reflect the incremental increase
in management fees from properties
(only for properties which were
not previously managed by PSMI)
acquired by SEI during 1995 and
1994..................................... $ 87,000 $ 576,000
========= ==========
. A pro forma adjustment has been
made to the Advisory fee income to
reflect the adjustments (Notes 1
and 2) to SEI's advisory fee
expense in connection with the
issuance of Preferred and Common
Stock, the REIT Mergers, and
SEI's increased operating income......... $ 610,000 $2,493,000
========= ==========
. A pro forma adjustment has been
made to Cost of managing
facilities to eliminate certain
non-recurring costs and expenses......... $(170,000) $ (529,000)
========= ==========
. A pro forma adjustment has been
made to General and administrative
expense to eliminate certain
non-recurring costs and expenses......... $(228,000) $ (255,000)
========= ==========
33
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
5. Pro forma Merger adjustments:
----------------------------
YEAR
SIX MONTHS ENDED
ENDED DECEMBER 31,
JUNE 30, 1995 1994
------------- ---------------
. The "Operating Companies" have
included in Facility management
fee income fees paid by SEI for
the management of its real estate
facilities (likewise, SEI has
included such fees as part of Cost
of operations). As a result of
the Merger, this facility
management fee income and
operating expense will no longer
occur. Accordingly, pro forma
adjustments have been made to
decrease both Facility management
fees and cost of operations to
eliminate these property
management fees (the remaining
facility management fees represent
principally fees received from the
management of properties owned by
affiliated entities, which SEI
will acquire an interest in
pursuant to the acquisition of the
Real Estate Interests):
Facility management fee income........ $(6,307,000) $(12,937,000)
=========== ============
Cost of operations.................... $(6,307,000) $(12,937,000)
=========== ============
As a result of the Merger,
Advisory fee income and expense
will no longer occur.
Accordingly, a pro forma
adjustment has been made to each:
Advisory fee income................... $(4,036,000) $ (7,476,000)
========== ============
Advisory fee (expense)................ $(4,036,000) $ (7,476,000)
=========== ============
Included in the "Real Estate Interests"
are general and limited partnership
interests in limited partnerships and
equity interests in REITs. These
interests will be accounted for under
the equity method. The aggregate fair
value of these interests ($365
million) is in excess of the amount of
the underlying historical equity in
net assets of the investees by
approximately $305 million. SEI
attributes this difference to the fair
values of the underlying real estate
properties and has allocated the
difference to buildings. A pro forma
adjustment has been made to "Equity in
earnings of real estate entities" to
reflect additional depreciation
expense related to the allocated
difference to buildings (straight-line
over a 25 year life) as if the
investees were consolidated entities........ $(6,109,000) $(12,217,000)
=========== ============
. A pro forma adjustment has been
made to increase depreciation and
amortization to reflect the
amortization of the Intangible
assets ($235.0 million) over a 40
year life. See Note 3 to the Pro
Forma Consolidated Balance Sheet......... $ 2,938,000 $ 5,876,000
=========== ============
34
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
6. Pro forma net income per share of Common Stock has been computed as
-------------------------------------------------------------------
follows:
--------
YEAR
SIX MONTHS ENDED
ENDED DECEMBER 31,
JUNE 30, 1995 1994
------------- ------------
Pro forma net income.......................................... $ 53,317,000 $100,147,000
Less: Pro forma preferred stock dividends..................... (15,650,000) (31,206,000)
------------ ------------
Income allocable to common shareholders....................... 37,667,000 68,941,000
Less: Pro forma income allocable to Class B shareholders (1).. - -
------------ ------------
Income allocable to Common Stock shareholders................. $ 37,667,000 $ 68,941,000
============ ============
Pro forma weighted average shares of Common Stock (2)......... 72,108,048 71,844,644
============ ============
Pro forma net income per share of Common Stock................ $ 0.52 $ .96
============ ============
(1) The Class B Common Stock is (i) not entitled to participate in
distributions until the later to occur of FFO per Common Share reaching
$1.80 (during any period of four consecutive quarters) or the expiration of
four years after the Closing; thereafter, the Class B Common Stock will
participate in distributions (other than liquidating distribution) at the
rate of 97% of the per share distributions on the Common Stock provided
that cumulative distributions at the rate of at least $.22 per quarter per
share have been paid on the Common Stock, (ii) not entitled to liquidating
distributions, (iii) not be entitled to vote (except as expressly required
by California law) and (iv) automatically convertible into Common Stock, on
a share for share basis, upon the later to occur of FFO per Common Share
reaching $3.00 per share for any period of four consecutive quarters or the
expiration of seven years after the Closing. The inclusion of the Class B
Common Stock in the determination of earnings per share has been determined
to be anti-dilutive (after giving effect to the pro forma additional income
required to satisfy the above contingencies, and accordingly, the
conversion of Class B Common Stock into Common Stock has not been assumed.
For these purposes, FFO means net income (loss) (computed in accordance
with generally accepted accounting principles 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 (including SEI's pro rata share of
depreciation and amortization from unconsolidated equity interests and
amortization of assets acquired in the Merger), 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.
(2) As adjusted to give effect to the issuance of 30,000,000 additional
shares of Common Stock in connection with the Merger.
35
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
7. For purposes of these computations, earnings consists of net income before
minority interest in income, loss on early extinguishment of debt and gain
on disposition of real estate plus fixed charges (other than preferred
stock dividends) and less the portion of minority interest in income for
those consolidated minority interests which had no fixed charges during the
period. Fixed charges and preferred stock dividends consist of interest
expense and the dividend requirements of SEI's Series A, Series B, Series
C, Series D, Series E, Series F and Convertible Preferred Stock.
36
STORAGE EQUITIES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
SEI
-------------------------------------------------------------------
PRO FORMA ADJUSTMENTS
-----------------------------
ISSUANCE OF
PREFERRED & SEI
SEI COMMON REIT PRE-MERGER
(HISTORICAL) STOCK(1) MERGERS(2) (PRO FORMA)
------------- ------------ ----------- -------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Income $ 29,751,000 $ 3,944,000 $ 2,368,000 $ 36,063,000
Depreciation and
amortization 16,859,000 2,634,000 1,254,000 20,747,000
Minority Interest in income 3,715,000 (145,000) - 3,570,000
Less: Equity in earnings of
real estate entities - - - -
Distributions from real
estate entities - - - -
Other (851,000) - (61,000) (912,000)
------------- ------------ ----------- -------------
Total adjustments 19,723,000 2,489,000 1,193,000 23,405,000
------------- ------------ ----------- -------------
Cash provided by operating
activities 49,474,000 6,433,000 3,561,000 59,468,000
------------- ------------ ----------- -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Principal payments on
mortgage notes receivable 311,000 (311,000) - -
Acquisition of minority
interest (10,735,000) - - (10,735,000)
Acquisition of real estate
facilities (61,980,000) - - (61,980,000)
Construction in process (3,400,000) - - (3,400,000)
Purchase cost of the mergers (21,427,000) - - (21,427,000)
Capital expenditures (3,306,000) (522,000) (157,000) (3,985,000)
Other (1,031,000) - - (1,031,000)
------------- ------------ ----------- -------------
Cash (used in) provided by
investing activities (101,568,000) (833,000) (157,000) (102,558,000)
------------- ------------ ----------- -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on bank
debt (25,447,000) (8,636,000) (917,000) (35,000,000)
Principal payments on
senior notes - - - -
Proceeds from the issuance
of Common Stock 80,340,000 - - 80,340,000
Proceeds from the issuance
of Preferred Stock 108,377,000 - - 108,377,000
Principal payments on
mortgage debt (5,418,000) (411,000) - (5,829,000)
Distributions to
shareholders (28,194,000) (3,548,000) (2,240,000) (33,982,000)
Distributions to affiliates - - - -
Distribution to minority
interests (9,107,000) 386,000 - (8,721,000)
Reinvestment by minority
interests 1,151,000 (103,000) - 1,048,000
------------- ------------ ----------- -------------
Cash provided by (used in)
financing activities 121,702,000 (12,312,000) (3,157,000) 106,233,000
------------- ------------ ----------- -------------
Net increase (decrease) in
cash and cash equivalents 69,608,000 (6,712,000) 247,000 63,143,000
Cash and cash equivalents at
the beginning of the period 20,151,000 - 4,374,000 24,525,000
------------- ------------ ----------- -------------
Cash and cash equivalents
at the end of the period $ 89,759,000 $ (6,712,000) $ 4,621,000 $ 87,668,000
============= ============ =========== =============
FUNDS FROM OPERATIONS(5) $ 41,218,000 $ 51,659,000
============= =============
PSMI
------------------------------------------------------------------
COMBINED
OPERATING REAL ESTATE PSMI
COMPANIES INTERESTS PRO FORMA OPERATIONS
(HISTORICAL) (HISTORICAL)(3) ADJUSTMENTS(3) (PRO FORMA)
------------ --------------- -------------- ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Income $ 12,605,000 $ 12,601,000 $ 1,095,000 $ 26,301,000
Depreciation and
amortization 55,000 - 247,000 302,000
Minority Interest in income - - - -
Less: Equity in earnings of
real estate entities - (12,601,000) 1,060,000 (11,541,000)
Distributions from real
estate entities - 6,642,000 (1,307,000) 5,335,000
Other (151,000) - - (151,000)
------------ ------------ ----------- ------------
Total adjustments (96,000) (5,959,000) - (6,055,000)
------------ ------------ ----------- ------------
Cash provided by operating
activities 12,509,000 6,642,000 1,095,000 20,246,000
------------ ------------ ----------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Principal payments on
mortgage notes receivable - - 155,000 155,000
Acquisition of minority
interest - - - -
Acquisition of real estate
facilities - - - -
Construction in process - - - -
Purchase cost of the mergers - - - -
Capital expenditures - - (8,000) (8,000)
Other - - - -
------------ ------------ ----------- ------------
Cash (used in) provided by
investing activities - - 147,000 147,000
------------ ------------ ----------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on bank
debt - - - -
Principal payments on
senior notes (2,500,000) (2,500,000)
Proceeds from the issuance
of Common Stock - - - -
Proceeds from the issuance
of Preferred Stock - - - -
Principal payments on
mortgage debt - - (101,000) (101,000)
Distributions to
shareholders - - - -
Distributions to affiliates (10,193,000) - - (10,193,000)
Distribution to minority
interests - - - -
Reinvestment by minority
interests - - - -
------------ ------------ ----------- ------------
Cash provided by (used in)
financing activities (12,693,000) - (101,000) (12,794,000)
------------ ------------ ----------- ------------
Net increase (decrease) in
cash and cash equivalents (184,000) 6,642,000 1,141,000 7,599,000
Cash and cash equivalents at
the beginning of the period 1,388,000 - - 1,388,000
------------ ------------ ----------- ------------
Cash and cash equivalents
at the end of the period $ 1,204,000 $ 6,642,000 $ 1,141,000 $ 8,987,000
============ ============ =========== ===========
FUNDS FROM OPERATIONS(5)
PRO FORMA SEI
MERGER POST-MERGER
ADJUSTMENTS(4) (PRO FORMA)
-------------- -------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Income $ (9,047,000) $ 53,317,000
Depreciation and
amortization 2,938,000 23,987,000
Minority Interest in income - 3,570,000
Less: Equity in earnings of
real estate entities 6,109,000 (5,432,000)
Distributions from real
estate entities - 5,335,000
Other - (1,063,000)
------------ -------------
Total adjustments 9,047,000 26,397,000
------------ -------------
Cash provided by operating
activities - 79,714,000
------------ -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Principal payments on
mortgage notes receivable - 155,000
Acquisition of minority
interest - (10,735,000)
Acquisition of real estate
facilities - (61,980,000)
Construction in process - (3,400,000)
Purchase cost of the mergers - (21,427,000)
Capital expenditures - (3,993,000)
Other - (1,031,000)
------------ -------------
Cash (used in) provided by
investing activities - (102,411,000)
------------ -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on bank
debt - (35,000,000)
Principal payments on
senior notes (2,500,000)
Proceeds from the issuance
of Common Stock - 80,340,000
Proceeds from the issuance
of Preferred Stock - 108,377,000
Principal payments on
mortgage debt - (5,930,000)
Distributions to shareholders (13,200,000) (47,182,000)
Distributions to affiliates 10,193,000 -
Distribution to minority
interests - (8,721,000)
Reinvestment by minority
interests - 1,048,000
------------ -------------
Cash provided by (used in)
financing activities (3,007,000) 90,432,000
------------ -------------
Net increase (decrease) in
cash and cash equivalents (3,007,000) 67,735,000
Cash and cash equivalents at
the beginning of the period - 25,913,000
------------ -------------
Cash and cash equivalents
at the end of the period $ (3,007,000) $ 93,648,000
============ =============
FUNDS FROM OPERATIONS(5) $ 82,792,000
=============
See Accompanying Notes to Pro Forma Consolidated Statement of Cash Flows.
37
STORAGE EQUITIES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
SEI
----------------------------------------------------------------------
PRO FORMA ADJUSTMENTS
-------------------------------
ISSUANCE
OF PREFERRED SEI
SEI & COMMON REIT PRE-MERGER
(HISTORICAL) STOCK(1) MERGERS (2) (PRO FORMA)
------------- ------------- ------------ -------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 42,118,000 $ 18,482,000 $ 8,082,000 $ 68,682,000
Depreciation and
amortization 27,581,000 8,610,000 4,780,000 40,971,000
Minority interest in income 9,481,000 (2,563,000) - 6,918,000
Less: Equity interest
in earnings of real
estate entities - - - -
Distributions from real
estate entities - - - -
Gain on disposition of real
estate - - (203,000) (203,000)
Other 3,654,000 - (1,069,000) 2,585,000
------------- ------------- ------------ -------------
Total adjustments 40,716,000 6,047,000 3,508,000 50,271,000
------------- ------------- ------------ -------------
Cash provided by operating
activities 82,834,000 24,529,000 11,590,000 118,953,000
------------- ------------- ------------ -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Principal payments on
mortgage notes receivable 6,785,000 (1,387,000) - 5,398,000
Investment in real estate
partnerships (78,000) (6,692,000) - (6,770,000)
Acquisition of mortgage
notes receivable (4,020,000) - - (4,020,000)
Acquisition of minority
interests (51,711,000) (14,695,000) - (66,406,000)
Acquisition of real estate
facilities (93,026,000) (133,903,000) - (226,929,000)
Proceeds from insurance
settlement 1,666,000 - 800,000 2,466,000
Purchase cost of the mergers (20,972,000) - (35,435,000) (56,407,000)
Capital expenditures (8,312,000) (1,631,000) (2,331,000) (12,274,000)
------------- ------------- ------------ -------------
Cash (used in) provided by
investing activities (169,668,000) (158,308,000) (36,966,000) (364,942,000)
------------- ------------- ------------ -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on bank
debt (10,323,000) (22,995,000) 33,318,000 -
Proceeds from the issuance
of Common Stock 110,280,000 80,340,000 - 190,620,000
Proceeds from the issuance
of Preferred Stock 57,899,000 108,377,000 - 166,276,000
Principal payments on
mortgage debt (8,233,000) (1,479,000) - (9,712,000)
Distributions to
shareholders (38,095,000) (20,440,000) (7,299,000) (65,834,000)
Distributions to affiliates - - - -
Distribution to minority
interests (23,037,000) 5,468,000 - (17,569,000)
Reinvestment by minority
interests 7,962,000 (1,936,000) - 6,026,000
------------- ------------- ------------ -------------
Cash provided by (used in)
financing activities 96,453,000 147,335,000 26,019,000 269,807,000
------------- ------------- ------------ -------------
Net increase (decrease) in
cash and cash equivalents 9,619,000 13,556,000 643,000 23,818,000
Cash and cash equivalents
at the beginning of the
year 10,532,000 - 4,687,000 15,219,000
------------- ------------- ------------ -------------
Cash and cash equivalents
at the end of the year $ 20,151,000 $ 13,556,000 $ 5,330,000 $ 39,037,000
============= ============= ============ =============
FUNDS FROM OPERATIONS (5) $ 56,143,000 $ 98,799,000
============= =============
PSMI
------------------------------------------------------------------
COMBINED
OPERATING REAL ESTATE PRO FORMA PSMI
COMPANIES INTERESTS ADJUSTMENTS OPERATIONS
(HISTORICAL) (HISTORICAL)(3) (3) (PRO FORMA)
------------ --------------- ----------- ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 22,008,000 $ 23,697,000 $ 3,853,000 $ 49,558,000
Depreciation and
amortization 522,000 - 127,000 649,000
Minority interest in income - - - -
Less: Equity interest
in earnings of real
estate entities - (23,697,000) 2,085,000 (21,612,000)
Distributions from real
estate entities - 12,602,000 (2,574,000) 10,028,000
Gain on disposition of real
estate - - - -
Other (435,000) - - (435,000)
------------ ------------ ----------- ------------
Total adjustments 87,000 (11,095,000) (362,000) (11,370,000)
------------ ------------ ----------- ------------
Cash provided by operating
activities 22,095,000 12,602,000 3,491,000 38,188,000
------------ ------------ ----------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Principal payments on
mortgage notes receivable - - 292,000 292,000
Investment in real estate
partnerships - - - -
Acquisition of mortgage
notes receivable - - - -
Acquisition of minority
interests - - - -
Acquisition of real estate
facilities - - - -
Proceeds from insurance
settlement - - - -
Purchase cost of the mergers - - - -
Capital expenditures - - (44,000) (44,000)
------------ ------------ ----------- ------------
Cash (used in) provided by
investing activities - - 248,000 248,000
------------ ------------ ----------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on bank
debt - - - -
Proceeds from the issuance
of Common Stock - - - -
Proceeds from the issuance
of Preferred Stock - - - -
Principal payments on
mortgage debt (4,500,000) - (208,000) (4,708,000)
Distributions to
shareholders - - - -
Distributions to affiliates (17,705,000) - - (17,705,000)
Distribution to minority
interests - - - -
Reinvestment by minority
interests - - - -
------------ ------------ ----------- ------------
Cash provided by (used in)
financing activities (22,205,000) - (208,000) (22,413,000)
------------ ------------ ----------- ------------
Net increase (decrease) in
cash and cash equivalents (110,000) 12,602,000 3,531,000 16,023,000
Cash and cash equivalents
at the beginning of the
year 1,498,000 - - 1,498,000
------------ ------------ ----------- ------------
Cash and cash equivalents
at the end of the year $ 1,388,000 $ 12,602,000 $ 3,531,000 $ 17,521,000
============ ============ =========== ============
FUNDS FROM OPERATIONS (5)
PRO FORMA SEI
MERGER POST-MERGER
ADJUSTMENTS(4) (PRO FORMA)
-------------- ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $(18,093,000) $ 100,147,000
Depreciation and
amortization 5,876,000 47,496,000
Minority interest in income - 6,918,000
Less: Equity interest
in earnings of real
estate entities 12,217,000 (9,395,000)
Distributions from real
estate entities - 10,028,000
Gain on disposition of real
estate - (203,000)
Other - 2,150,000
------------ -------------
Total adjustments 18,093,000 56,994,000
------------ -------------
Cash provided by operating
activities - 157,141,000
------------ -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Principal payments on
mortgage notes receivable - 5,690,000
Investment in real estate
partnerships - (6,770,000)
Acquisition of mortgage
notes receivable - (4,020,000)
Acquisition of minority
interests - (66,406,000)
Acquisition of real estate
facilities - (226,929,000)
Proceeds from insurance
settlement - 2,466,000
Purchase cost of the mergers (2,000,000) (58,407,000)
Capital expenditures - (12,318,000)
------------ -------------
Cash (used in) provided by
investing activities (2,000,000) (366,694,000)
------------ -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on bank
debt - -
Proceeds from the issuance
of Common Stock - 190,620,000
Proceeds from the issuance
of Preferred Stock - 166,276,000
Principal payments on
mortgage debt - (14,420,000)
Distributions to
shareholders (25,500,000) (91,334,000)
Distributions to affiliates 17,705,000 -
Distribution to minority
interests - (17,569,000)
Reinvestment by minority
interests - 6,026,000
------------ -------------
Cash provided by (used in)
financing activities (7,795,000) 239,599,000
------------ -------------
Net increase (decrease) in
cash and cash equivalents (9,795,000) 30,046,000
Cash and cash equivalents
at the beginning of the
year - 16,717,000
------------ -------------
Cash and cash equivalents
at the end of the year $ (9,795,000) $ 46,763,000
============ =============
FUNDS FROM OPERATIONS (5) $ 158,016,000
=============
See Accompanying Notes to Pro Forma Consolidated Statement of Cash Flows.
38
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
1. Issuance of Preferred and Common Stock
--------------------------------------
During 1994 and 1995, SEI issued shares of both its preferred and Common
Stock (See Note 1 to the Pro Forma Consolidated Statements of Income).
Pro forma adjustments have been made to the pro forma consolidated
statements of income to reflect the uses of the proceeds as if the
transactions were completed at the beginning of the year ended December 31,
1994. Similarly, the following pro forma adjustments were made to reflect
the effect on net cash provided by operating activities:
SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1995 1994
------------- -------------
"Net income" was adjusted to reflect
the overall effect of the above
offerings and the use of the net
proceeds therefrom on the pro forma
consolidated net income................ $ 3,944,000 $ 18,482,000
=========== =============
"Depreciation and amortization" has
been increased to reflect the
incremental difference between the
actual depreciation expense included
in the historical statements of
operations and the pro forma
depreciation expense as if the
facilities were in operation for a
full period (including a pro forma
adjustment for the amortization of
mortgage note receivable discounts
totaling $67,000 and $693,000 in 1995
and 1994, respectively - See Note 1 to
the Pro Forma Consolidated Statements
of Income)............................. $ 2,634,000 $ 8,610,000
=========== =============
"Minority interest in income" has been
adjusted to reflect similar
adjustments to the pro forma
consolidated statements of income...... $ (145,000) $ (2,563,000)
=========== =============
The following pro forma adjustments
have been made to cash flows from
investing and financing activities:
"Principal payments on mortgage
notes receivable" was decreased to
reflect the elimination of
historical payments relating to the
canceled mortgage notes (which were
canceled in connection with the
acquisition of real estate
facilities)......................... $ (311,000) $ (1,387,000)
=========== =============
"Investment in real estate entities
has been increased to reflect the
acquisition of limited partnership
units in unconsolidated affiliated
partnerships........................ $ - $ (6,692,000)
=========== =============
"Acquisitions of minority interests
in real estate partnerships" was
increased to reflect the
acquisitions of such interests,
which occurred subsequent to the
period.............................. $ - $ (14,695,000)
=========== =============
"Acquisitions of real estate
facilities" was increased to
reflect the acquisitions of real
estate facilities, which occurred
subsequent to the period............ $ - $(133,903,000)
=========== =============
"Capital improvements to real estate
facilities" was increased to
reflect the estimated additional
capital improvements which would
have been incurred during the
period for the acquired real estate
facilities.......................... $ (522,000) $ (1,631,000)
=========== =============
39
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1995 1994
------------- -------------
"Net proceeds (pay downs) from note
payable to bank" has been adjusted
to reflect the pro forma use of the
offering proceeds to pay down the
historical borrowings on SEI's
credit facilities during the year
ended December 31, 1994............. $ - $ (22,995,000)
=========== =============
"Net proceeds from the issuance of
Common Stock" was increased to
reflect the net proceeds from the
issuance of Common Stock on May
31, 1995, which occurred
subsequent to the period............ $ - $ 80,340,000
=========== =============
"Net proceeds from the issuance of
preferred stock" was increased to
reflect the net proceeds from the
issuance of Series E and Series F
Preferred Stock, which occurred
subsequent to the period............ $ - $ 108,377,000
=========== =============
"Principal payments on bank debt"
has been decreased to reflect
additional principal payments
with the use of the net proceeds
of the issuance of Preferred and
Common Stock........................ $(8,636,000) $ -
=========== =============
"Principal payments on mortgage
notes payable" was increased to
reflect the payments which would
have been made during the period
with respect to the mortgage notes
payable which were assumed in
connection with the acquisition of
real estate facilities.............. $ (411,000) $ (1,479,000)
=========== =============
"Distributions paid to shareholders"
has been increased to reflect the
additional distributions which
would have been paid to the holders
of the Common Stock, Series C,
Series D, Series E and Series F
Preferred Stock issued during 1994
and 1995, as if the common and
preferred stock were outstanding
for the entire period............... $(3,548,000) $ (20,440,000)
=========== =============
"Distributions from operations to
minority interest in real estate
partnerships" has been adjusted
to reflect the reduction in
distributions to minority interests
which would have resulted in
connection with the acquisition of
minority interests by SEI, assuming
SEI had completed such acquisitions
at the beginning of the period...... $ 386,000 $ 5,468,000
=========== =============
"Reinvestment by minority interests
into real estate partnerships" has
been adjusted to reflect the
reduction which would have
resulted in connection with the
acquisition of minority interests
by SEI, assuming SEI had completed
such acquisitions at the beginning
of the period....................... $ (103,000) $ (1,936,000)
=========== =============
40
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
2. REIT Mergers
------------
During 1994 and 1995, SEI completed the REIT Mergers. The following pro
forma adjustments have been made assuming the merger transactions with the
PSP REITs were completed at the beginning of the year ended December 31,
1994 to reflect the effect on net cash provided by operating activities:
SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1995 1994
------------- -------------
An adjustment has been made to reflect
the pro forma increase in net income
as a result of the PSP REIT merger
transaction............................ $2,368,000 $ 8,082,000
========== ============
An adjustment has been made to reflect
the pro forma increase in depreciation
as a result of the PSP REIT merger
transaction............................ $1,254,000 $ 4,780,000
========== ============
An adjustment has been made to reflect
the historical gain on disposition of
real estate of the PSP REITs........... $ - $ (203,000)
========== ============
A pro forma adjustment has been made to
reflect the PSP REITs' historical net
change in other assets and liabilities
during the period...................... $ (61,000) $ (1,069,000)
========== ============
In addition, pro forma adjustments were
made to cash flows from investing and
financing activities as follows:
A pro forma adjustment has been made to
reflect the PSP REITs' historical
proceeds from insurance settlements.... $ - $ 800,000
========== ============
"Purchase cost of mergers" has been
adjusted to reflect the cash portion
of the purchase price, including costs
and expense ($21.4 million for PSP VI
and $14.0 million for PSP VII)......... $ - $(35,435,000)
========== ============
A pro forma adjustment has been made to
reflect the PSP REITs' historical
capital improvements................... $ (157,000) $ (2,331,000)
========== ============
Net proceeds (pay downs) from note
payable to bank has been adjusted to
reflect:
. the historical activity of
the PSP REITs................... $ (917,000) $ -
. the pro forma borrowings to
consummate the REIT Mergers..... - 33,318,000
---------- ------------
$ (917,000) $ 33,318,000
========== ============
41
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1995 1994
------------- -------------
Distributions paid to shareholders has
been increased to reflect the pro
forma distributions which would have
been paid as a result of each of the
REIT Mergers (assuming the historical
distribution rate of $.44 and $.85 per
share of Common Stock for the Six
months ended June 30, 1995 and year
ended December 31, 1994):
PSP VIII:
--------
. Historical distributions
prior to merging with SEI....... $ - $ (2,949,000)
. Pro forma adjustment to
eliminate historical
distribution prior to merging
with SEI........................ - 2,949,000
. Pro forma distributions assuming
merger occurred at the beginning
of fiscal 1994 based on
2,593,914 shares issued in the
merger........................... (571,000) (2,205,000)
. Less amounts included in the SEI
historical distributions........ 571,000 571,000
------------ ------------
Pro forma adjustment for PSP
VIII........................ - (1,634,000)
------------ ------------
PSP VI:
------
. Historical distributions
prior to merging with SEI....... (1,221,000) (4,886,000)
. Pro forma adjustment to
eliminate historical
distribution prior to merging
with SEI........................ 1,221,000 4,886,000
. Pro forma distributions
assuming merger occurred at
the beginning of fiscal 1994
based on 3,147,015 shares
issued in the merger............ (1,385,000) (2,675,000)
. Less amounts included in the
SEI historical distributions.... 693,000 -
------------ ------------
Pro forma adjustment for
PSP VI...................... (692,000) (2,675,000)
------------ ------------
PSP VII:
-------
. Historical distributions
prior to merging with SEI....... (2,132,000) (4,271,000)
. Pro forma adjustment to
eliminate historical
distribution prior to merging
with SEI........................ 2,132,000 4,271,000
. Pro forma distributions
assuming merger occurred at
the beginning of fiscal 1994
based on 3,517,272 shares
issued in the merger............ (1,548,000) (2,990,000)
. Less amounts included in the
SEI historical distributions.... - -
------------ ------------
Pro forma adjustment for
PSP VII..................... (1,548,000) (2,990,000)
------------ ------------
Total pro forma adjustment..... $(2,240,000) $ (7,299,000)
============ ============
42
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
3. Pro forma adjustments to the historical "Operating Companies" and "Real
-----------------------------------------------------------------------
Estate Interests":
------------------
The following pro forma adjustments have been made to the Pro Forma
Consolidated Statements of Cash Flows corresponding to the adjustments made
to the respective Pro Forma Consolidated Statements of Income (See Note 4
to the Pro Forma Consolidated Statements of Income).
SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1995 1994
------------- -------------
An adjustment has been made to reflect
the pro forma increase in net income
as a result of the pro forma
adjustments to the Pro Forma
Consolidated Statements of Income...... $ 1,095,000 $ 3,853,000
=========== ===========
An adjustment has been made to reflect
the pro forma increase in depreciation
and amortization....................... $ 247,000 $ 127,000
=========== ===========
An adjustment has been made to
eliminate the historical property and
all-inclusive trust deed operating
results included in equity in earnings
of real estate entities" included in
the "Real Estate Interests." See Note
4 to the Pro Forma Consolidated
Statements of Income................... $ 1,060,000 $ 2,085,000
=========== ===========
An adjustment has been made to
eliminate the historical property and
all-inclusive trust deeds cash flow
which is included in real estate
entities included in the "Real Estate
Interests." See Note 4 to the Pro
Forma Consolidated Statements of
Income................................. $(1,307,000) $(2,574,000)
=========== ===========
In addition, pro forma adjustments were
made to cash flows from investing and
financing activities as follows:
A pro forma adjustment has been made
to reflect the historical principal
payments on the mortgage notes
receivable secured by all-inclusive
deeds of trust...................... $ 155,000 $ 292,000
=========== ===========
A pro forma adjustment has been made
to reflect historical capital
improvements on the seven
properties to be acquired in the
Merger.............................. $ (8,000) $ (44,000)
=========== ===========
A pro forma adjustment has been made
to reflect the historical principal
payments on the mortgage notes
payable secured by all-inclusive
deeds of trusts..................... $ (101,000) $ (208,000)
=========== ===========
43
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
4. Pro forma Merger adjustments:
-----------------------------
The following pro forma adjustments have been made to the Pro Forma
Consolidated Statements of Cash Flows corresponding to the adjustments made
to the respective Pro Forma Consolidated Statements of Income (See Note 5
to the Pro Forma Consolidated Statements of Income).
SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1995 1994
------------- -------------
An adjustment has been made to reflect
the pro forma decrease in net income
as a result of the pro forma
adjustments to the Pro Forma
Consolidated Statements of Income...... $ (9,047,000) $(18,093,000)
============ ============
An adjustment has been made to reflect
the pro forma increase in depreciation
and amortization....................... $ 2,938,000 $ 5,876,000
============ ============
An adjustment has been made to adjust
historical depreciation included in
the "Equity in earnings of real estate
entities" included in the "Real Estate
Interests" to reflect the depreciation
of the difference between the fair
value of the acquired interests and
the underlying carrying value on each
of the investees books................. $ 6,109,000 $ 12,217,000
============ ============
In addition, pro forma adjustments were
made to cash flows from investing and
financing activities as follows:
A pro forma adjustment has been made to
Purchase cost of mergers to reflect
the cash portion of the Merger (direct
costs and expense of the Merger)....... $ - $ (2,000,000)
============ ============
A pro forma adjustment has been made to
eliminate the historical Distributions
to affiliates included in the
"Operating Companies".................. $ 10,193,000 $ 17,705,000
============ ============
A pro forma adjustment has been made to
reflect the distributions to the
shares of Common Stock to be issued
pursuant to the Merger (distributions
are based on historical distributions
per share of Common Stock at $.44 per
share for the first six months of 1995
and $.85 per share for fiscal 1994).... $(13,200,000) $(25,500,000)
============ ============
44
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
5. Funds from operations:
----------------------
FFO means net income (loss) (computed in accordance with GAAP) before
(i) 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 (including SEI's pro-rata share of
depreciation and amortization of unconsolidated equity interests and
amortization of assets acquired in the Merger), and (ii) less FFO
attributable to minority interests. FFO is a supplemental performance
measure for equity REITs used by industry analysts. FFO does not take into
consideration principal payments on debt, capital improvements,
distributions and other obligations of SEI. Accordingly, FFO is not a
substitute for SEI's net cash provided by operating activities or net
income as a measure of SEI's liquidity or operating performance or ability
to pay distributions.
45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEI HISTORICAL
The following discussion and analysis should be read in conjunction with
the consolidated financial statements of SEI appearing in SEI's Annual Report on
Form 10-K for the year ended December 31, 1994, as amended (the "1994 10-K"),
and Quarterly Report on Form 10-Q for the period ended June 30, 1995.
Results of Operations
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.
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).
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.
46
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.
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%.
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). As a
result interest income from cash balances increased by approximately $691,000.
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.
47
"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. See Table on page 51. In determining income allocable to
the minority 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.
The acquisition of these partnership interests has provided the Company
with increased liquidity through cash distributions from the PSP Partnerships.
From January 1, 1995 through August 31, 1995, SEI acquired additional
partnership interests in the PSP Partnerships of approximately $17.0 million and
has no plans to acquire any significant additional interests during the
remainder of 1995.
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.
Year ended December 31, 1994 compared to year ended December 31, 1993. Net
---------------------------------------------------------------------
income in 1994 was $42,118,000 compared to $28,036,000 in 1993, representing an
increase of $14,082,000. Net income per share of Common Stock was $1.05 per
share in 1994 compared to $.98 in 1993, representing an increase of $.07 per
share. In determining net income per common share, preferred stock dividends
($16,846,000 and $10,888,000 in 1994 and 1993, respectively) reduced income
allocable to the Common Stock. The increase was primarily the result of improved
property operations at SEI's Same Store mini-warehouses, the acquisition of
additional real estate facilities during 1994, 1993 and 1992, and the
acquisition of additional partnership interests.
During 1994, property net operating income improved compared to 1993.
Rental income increased $32,642,000, or 30%, from $109,203,000 in 1993 to
$141,845,000 in 1994, cost of operations increased $10,700,000, or 25%, from
$42,116,000 in 1993 to $52,816,000 in 1994, and property depreciation expense
increased $3,175,000 from $24,924,000 in 1993 to $28,099,000 in 1994, or 13%,
resulting in a net increase in property operating income of $18,767,000, or 45%.
Property net operating income prior to the reduction of depreciation increased
by $21,942,000, or 33%. These increases were the result of improved property
operations for the Same Store mini-warehouses, the acquisition of a total of 123
additional mini-warehouse facilities and one business park facility during 1994,
1993 and 1992, and improved property operations at SEI's business park
facilities.
Property net operating income for the Same Store mini-warehouses increased
by $2,583,000, or 6.7%, from $38,383,000 in 1993 to $40,966,000 in 1994.
Property net operating income prior to the reduction of depreciation for the
Same Store mini-warehouses increased by $3,634,000, or 6.6%, from $55,266,000 in
1993 to $58,900,000 in 1994. These increases continue the upward trend of
improved operations at these facilities over the past three years as net cash
flow increased by approximately 9.7% in 1993, and 6.1% in 1992 compared to the
respective prior year. These increases are principally due to increased
occupancy levels combined with an increase in average rental rates. Weighted
average occupancy levels were 90.3% for the Same Store mini-warehouse facilities
for the year ended December 31, 1994 compared to 89.5% for the same period in
1993. Realized monthly rent per square foot for these facilities was $.59 and
$.56 for the year ended December 31, 1994 and 1993, respectively.
From January 1, 1992 through December 31, 1994, SEI acquired a total of 123
mini-warehouse facilities, 23 of which were acquired pursuant to a merger
transaction on September 30, 1994. During 1994 and 1993 these newly acquired
mini-warehouses contributed approximately $22,831,000 and $5,812,000 of property
net operating income prior to the reduction of depreciation, respectively.
48
Property net operating income with respect to SEI's business park
operations improved by $2,668,000 from a net operating loss of $429,000 in 1993
to net operating income of $2,239,000 in 1994. Property net operating income
prior to the reduction of depreciation with respect to SEI's business park
operations improved by $1,289,000 from $6,009,000 in 1993 to $7,298,000 in 1994.
These improvements are principally due to the improved performance of SEI's
business park facility located in Culver City, California, where property net
operating income increased by approximately $511,000 combined with the 1994
acquisition of a facility located in Monterey Park, California which provided
property net operating income of $710,000 in 1994. Weighted average occupancy
levels were 95.3% for the business park facilities for the year ended December
31, 1994 compared to 93.1% for the same period in 1993.
Interest and other income decreased from $5,477,000 in 1993 to $5,351,000
in 1994. The decrease is primarily attributable to the cancellation of mortgage
notes receivable totaling $24,441,000 (face amount) during 1994 in connection
with the acquisition of the underlying real estate facilities securing the
mortgage notes.
Interest expense increased from $6,079,000 in 1993 to $6,893,000 in 1994,
representing an increase of $814,000. This increase is primarily attributable
to the overall increase in average debt outstanding in 1994 compared to 1993 as
a result of increased borrowings on its bank credit facilities in 1994 compared
to 1993. SEI principally uses its credit facilities to finance the acquisition
of real estate investments which are subsequently repaid with the net proceeds
from the sale of SEI's securities. The weighted average annual interest on the
credit facility and the mortgage notes outstanding at December 31, 1994 was
approximately 7.3% and 9.3%, respectively. Also during the third and fourth
quarters of 1994, SEI wrote-off $700,000 of debt issuance costs and $300,000 of
fees to establish the new bank credit facility.
Advisory fees increased by $1,364,000 from $3,619,000 in 1993 to $4,983,000
in 1994. 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 common and preferred stock during
1994 and 1993.
Year ended December 31, 1993 compared to year ended December 31, 1992. Net
---------------------------------------------------------------------
income in 1993 was $28,036,000 compared to $15,123,000 in 1992, representing an
increase of $12,913,000. Net income per share of Common Stock was $.98 in 1993
compared to $.90 in 1992, representing an increase of $.08 per share. Net
income in 1992 included a gain on the partial condemnation by a governmental
authority of a mini-warehouse facility of $398,000 or $.02 per share of Common
Stock. In addition, in determining net income per common share, preferred stock
dividends ($10,888,000 and $812,100 in 1993 and 1992, respectively) reduced
income allocable to Common Stock.
Income before gain on disposition of real estate was $28,036,000 in 1993
compared to $14,725,000 in 1992, representing an increase of $13,311,000, or
90%. The increase was primarily the result of improved property operations for
properties owned throughout 1993 and 1992, the acquisition of additional real
estate facilities during 1993 and 1992, the acquisition of additional
partnership interests, increased interest income and reduced interest expense.
During 1993, property net operating income (rental income less cost of
operations and expense) improved compared to 1992. Rental income increased
$13,317,000, or 13.9%, from $95,886,000 in 1992 to $109,203,000 in 1993, cost of
operations increased $3,768,000, or 9.8%, from $38,348,000 in 1992 to
$42,116,000 in 1993, and depreciation expense increased $2,888,000 from
$22,036,000 in 1992 to $24,924,000 in 1993, resulting in a net increase in
property operating income of $6,661,000, or 18.8%. Property net operating
income prior to the reduction for depreciation increased by $9,549,000, or
16.6%. These increases were the result of (i) improved property operations at
the "Same Store" facilities and (ii) the acquisition of 11 additional mini-
warehouse facilities during 1992 (four of which were acquired on December 30,
1992) and 41 additional mini-warehouse facilities during 1993 (13 of which were
acquired on December 30, 1993) partially offset by reduced property operations
at SEI's business park facilities.
Property net operating income for the "Same Store" facilities increased by
$4,535,000, or 13.4%, from $33,848,000 in 1992 to $38,383,000 in 1993. Property
net operating income prior to the reduction of depreciation expense for the
"Same Store" facilities increased by $4,893,000, or 9.7%, from $50,373,000 in
1992
49
to $55,266,000 in 1993. These increases continue the upward trend of
improved operations at these facilities over the past three years as net
operating income prior to reduction for depreciation expense increased by
approximately 6.1% in 1992 compared to 1991 and 2.0% in 1991 compared to 1990.
These increases are principally due to increased occupancy levels combined with
a slight increase in average rental rates.
The real estate facilities which were acquired during 1993 and 1992
contributed approximately $4,209,000 and $635,000 of property net operating
income in 1993 and 1992, respectively ($5,812,000 and $959,000 of property net
operating income prior to the reduction for depreciation expense in 1993 and
1992, respectively).
Property net operating income with respect to SEI's business park
operations decreased by $1,448,000 from $1,019,000 in 1992 to a net operating
loss of $429,000 in 1993. Property net operating income prior to the reduction
of depreciation expense with respect to SEI's business park operations decreased
by $197,000, or 3.2%, from $6,206,000 in 1992 to $6,009,000 in 1993. These
decreases are principally due to the performance of SEI's business park facility
located in Culver City, California, where property net operating income
decreased by approximately $590,000 due to a decline in occupancy and increased
expenses. SEI's business park facility manager, PSCP, has been actively
marketing the facility and has improved occupancy and property operations at the
facility in 1994.
Weighted average occupancy levels were 89% for the mini-warehouse
facilities and 93% for the business park facilities in 1993 compared to 86% for
the mini-warehouse facilities and 90% for the business park facilities in 1992.
Interest and other income increased from $1,562,000 in 1992 to $5,477,000
in 1993 for a net increase of $3,915,000. The increase is primarily
attributable to the acquisition of mortgage notes receivable totaling
$61,088,000 (face amount). The mortgage notes bear interest at stated rates
ranging from 6.125% to 11.97% and effective interest rates ranging from 10.00%
to 14.74%. The overall average outstanding mortgage notes receivable balance
for the year ended December 31, 1993 was approximately $54,453,000 generating an
overall average effective yield of 11.04%.
Interest expense decreased from $9,834,000 in 1992 to $6,079,000 in 1993
for a net decrease of $3,755,000. The decrease in interest expense is primarily
attributable to overall decreases in average debt outstanding as mortgage notes
payable were reduced by $19,141,000 during 1993 combined with reduced average
borrowings on SEI's credit facilities during 1993 as compared to 1992. The
weighted average interest on the mortgage notes outstanding at December 31, 1993
was approximately 10.0%.
"Minority interest in income" represents the income allocable to equity
(partnership) interests in the PSP Partnerships (whose accounts are consolidated
with SEI) which are not owned by SEI. Since 1990, SEI has acquired portions of
these equity interests through its acquisition of limited and general
partnership interests in the PSP Partnerships. As reflected in the following
table, 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 SEI's share of the consolidated
PSP Partnerships' income:
50
For the Six Months
Ended June 30, For the Year Ended December 31,
------------------------- -----------------------------------------
1995 1994 1994 1993 1992
----------- ------------ ----------- ----------- -----------
Combined net income of the
consolidated PSP Partnerships $ 9,163,000 $ 8,055,000 $17,150,000 $12,237,000 $ 9,722,000
SEI's share of net income of
the consolidated PSP
Partnerships resulting from
partnership interests
acquired since 1990 (5,448,000) (3,264,000) (7,669,000) (4,946,000) (2,827,000)
----------- ------------ ----------- ----------- -----------
Remaining "Minority interest
in income" as reflected in
the SEI's consolidated
financial statements $ 3,715,000 $ 4,791,000 $ 9,481,000 $ 7,291,000 $ 6,895,000
=========== =========== =========== =========== ===========
Advisory fees increased by $1,007,000 from $2,612,000 in 1992 to $3,619,000
in 1993. 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 stock during 1993 (See
Note 9 to SEI's financial statements for a description of the contract).
Property Operating Trends
The following table illustrates property operating trends for the last
three years:
Six Months
Ended June 30, Year Ended December 31,
---------------- ------------------------
1995 1994 1994 1993 1992
------ ------ ----- ---- ----
Change in property net operating income
("NOI") over prior year for the "Same
Store" facilities:
After reductions for depreciation.... 4.0% 10.1% 6.7% 13.4% 8.2%
Prior to reductions for depreciation. 4.6% 8.3% 6.6% 9.7% 6.1%
Change in NOI over prior year for all
properties:
After reductions for depreciation.... 43.2% 39.3% 44.5% 18.8% 7.3%
Prior to reductions for depreciation. 37.4% 29.3% 32.7% 16.6% 5.3%
Weighted average occupancy levels for
the year for "Same Store" facilities(1) 89.3% 89.3% 90.3% 89.5% 86.8%
Realized monthly rent per square foot
for "Same Store" facilities(1)(2)...... $ .60 $ .58 $ .59 $ .56 $ .55
Gross Profit Margin (loss):(3)
Mini-warehouse facilities............ 46.5% 45.1% 46.5% 49.0% 42.2%
Business park facilities(4).......... 22.0% 12.8% 15.1% (3.3)% 7.8%
Overall for all facilities........... 44.1% 41.4% 43.0% 38.6% 37.0%
Pre-depreciation operating margin:(5)
Mini-warehouse facilities............ 64.6% 63.7% 64.1% 63.5% 61.9%
Business park facilities(4).......... 51.4% 50.1% 49.1% 45.9% 47.8%
Overall for all facilities........... 63.3% 62.2% 62.8% 61.4% 60.0%
---------
(1) Results for the six months ended June 30, 1995 are not necessarily
indicative of the results that may be expected for the year ended December
31, 1995. SEI experiences minor seasonal fluctuations in the occupancy
levels of
51
mini-warehouses with occupancies and property performance
generally higher in the summer months than in the winter months.
(2) Realized rent per foot represents the actual revenue earned per occupied
square foot. Management believes this is a more relevant measure than the
posted rental rates, since posted rates can be discounted through the use of
promotions.
(3) Gross Profit Margin is computed by dividing NOI (rental income less cost of
operations and depreciation) by gross revenues.
(4) Decrease in Gross Profit Margin and pre-depreciation operating margin, in
1993, is principally due to the reductions in property operations at the
Culver City and Lakewood facilities as discussed above.
(5) Pre-depreciation operation margin is computed by dividing NOI prior to the
reduction of depreciation expense by gross revenues.
Trends in property operations are due to:
. Increasing occupancy levels due to the reduced construction from mid-
1980's levels and promotion of SEI's facilities.
. Increasing realized rents per square foot of mini-warehouse space due
to increased demand and reduced need for promotional discounting of
mini-warehouse space due to improved occupancy.
. Increasing revenues due to increasing realized rents and occupancy
levels offset in part by modest increase in expenses (approximately 2%
for the first six months of 1995, 5% in 1994, 1% in 1993, and 3% in
1992 on Same Store facilities) including increases in payroll offset
by reductions in promotional expenditures.
Liquidity and Capital Resources
Capital Structure. SEI's financial profile is characterized by a low level
-----------------
of debt, increasing net income, increasing 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 and
development opportunities and to provide financial flexibility.
Since 1992 SEI 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 SEI.
. The public issuance of approximately $197 million of Common Stock.
. The issuance of approximately $138.4 million of Common Stock in 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 reinvestment.
As a result of these transactions, SEI's capitalization has increased.
Shareholders' equity increased from $188.1 million on December 31, 1991 to
$892.7 million on June 30, 1995. The increased equity combined with reductions
in total debt has resulted in an improvement in SEI's debt to equity ratio from
55.4% at December 31, 1991 to 6.6% at June 30, 1995. SEI's ratio of debt to
total assets also decreased from 19.0% at December 31, 1991 to 5.2% at June 30,
1995.
52
SEI 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. SEI uses its bank credit facility primarily to fund acquisitions
and provide financial flexibility and liquidity. The $125 million unsecured
credit facility bears interest at LIBOR plus .75% to 1.50%, depending upon
interest coverage. At June 30, 1995, SEI had no borrowings under this facility.
SEI anticipates that its net cash provided by operating activities will
continue to be sufficient over at least the next 12 months to provide for
capital improvements, debt service requirements and distributions to
shareholders and minority interests. Net cash provided by operating activities
was $79.2 million, $59.5 million and $44.0 million for 1994, 1993 and 1992,
respectively ($49.5 million and $36.5 million for the six months ended June 30,
1995 and 1994, respectively).
Funds Available for Principal Payments and Investment. SEI 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.
The following table summarizes SEI's ability to pay the minority interests'
distributions, its distributions to the preferred and Common Stock shareholders
and fund capital improvements to maintain the facilities through the use of
funds provided by operating activities. The remaining funds are available to
make both scheduled and optional principal payments on debt and for investment.
Six Months Ended
June 30, Year Ended December 31,
------------------ ----------------------------
1995 1994 1994 1993 1992
-------- -------- -------- -------- --------
(In thousands)
Net income............................... $ 29,751 $ 18,940 $ 42,118 $ 28,036 $ 15,123
Depreciation and amortization............ 16,926 13,541 28,274 24,998 22,405
Minority interest in income.............. 3,715 4,791 9,481 7,291 6,895
Gain on disposition of real estate....... - - - - (398)
Amortization of discounts on mortgage
notes receivable........................ (67) (506) (693) (848) -
-------- -------- -------- -------- --------
Funds provided by operating activities... 50,325 36,766 79,180 59,477 44,025
FFO allocable to minority interests...... (9,107) (12,085) (23,037) (23,647) (22,892)
-------- -------- -------- -------- --------
FFO...................................... 41,218 24,681 56,143 35,830 21,133
Less: preferred stock dividends.......... (13,308) (7,298) (16,846) (10,888) (812)
-------- -------- -------- -------- --------
FFO allocable to Common Stock............ 27,910 17,383 39,297 24,942 20,321
Capital improvements to maintain
facilities:
Mini-warehouses...................... (2,397) (1,468) (6,360) (3,520) (3,541)
Business parks....................... (909) (830) (1,952) (2,915) (1,612)
Add back: minority interest share of
capital improvements to maintain
facilities.............................. 859 849 2,948 2,935 2,975
-------- -------- -------- -------- --------
Funds available for principal payments,
distributions on Common Stock and
investment.............................. 25,463 15,934 33,933 21,442 18,143
Cash distributions to Common Stock....... (14,886) (9,931) (21,249) (14,728) (13,424)
-------- -------- -------- -------- --------
Funds available for principal payments
and investment.......................... $ 10,577 $ 6,003 $ 12,684 $ 6,714 $ 4,719
======== ======== ======== ======== ========
The increases in funds provided by operating activities and funds available
for principal payments and investment over the past three years is primarily due
to (i) increasing property net operating income at the Same Store mini-
warehouses, (ii) the acquisition of limited and general partnership interests in
certain 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 Stock as FFO allocable to the Common Stock has increased over the
same period at a rate greater than the increase in number of common shares.
53
The significant increase in capital improvements in 1994 compared to 1993
for the mini-warehouse facilities is due to the acquisition of new facilities in
1994 and 1993 combined with approximately $800,000 of non-recurring expense to
upgrade certain facilities in Texas to provide for climate controlled storage
units.
FFO increased to $56,143,000 for the year ended December 31, 1994 compared
to $35,830,000 in 1993 and $21,133,000 in 1992. FFO has increased to
$41,218,000 for the six months ended June 30, 1995 from $24,681,000 for the same
period in 1994. FFO allocable to Common Stock increased to $39,297,000 for the
year ended December 31, 1994 compared to $24,942,000 in 1993 and $20,321,000 in
1992. FFO allocable to the Common Stock has increased to $27,910,000 for the
six months ended June 30, 1995 compared to $17,383,000 for the same period in
1994. Funds from operations is a supplemental performance measure for equity
real estate investment trusts used by industry analysts. Funds from operations
does not take into consideration scheduled principal payments on debt, capital
improvements, distributions and other obligations of SEI. Accordingly, funds
from operations is not a substitute for SEI's cash flow (either from operating,
investing or financing activities) or net income as a measure of SEI's liquidity
or operating performance.
During 1995, SEI 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 1994, SEI incurred capital improvements of approximately $8.3 million.
SEI believes that it is not subject to any significant refinancing risks.
During 1993 and 1994, SEI either repaid or extended the maturities of its
mortgage notes such that in no year, until 1999, will there be more than $9.0
million of principal payments on mortgage notes becoming due and payable.
Net cash used in investing activities increased from $21.0 million in 1992
to $137.4 million in 1993 to $169.6 million in 1994. This increase is
principally due to the acquisition of additional real estate facilities and
minority interests. Net cash provided by financing activities increased from
net cash uses of $21.1 million in 1992 to net cash provided of $80.1 million in
1993 and $100.00 million in 1994. This increase is principally due to the
issuance of both common and preferred stock in 1993 and 1994 partially offset by
increased distributions to SEI's shareholders.
In March 1995, SEI acquired two parcels of land located in Atlanta, Georgia
on which SEI is currently developing mini-warehouse facilities. One facility
opened in late August 1995 and the other is scheduled to open in December 1995.
The estimated aggregate cost of these facilities is approximately $8.0 million.
SEI 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.
54
OPERATING COMPANIES TO BE ACQUIRED
The following discussion should be read in conjunction with the Combined
Financial Statements of the Operating Companies to be Acquired and notes
thereto. The Combined Financial Statements include the property management
operations of PSMI and PSCP, the advisory business of the Adviser and
merchandise operations of PSMI (collectively "Operating Companies").
Description of Businesses Included
PSMI operated and managed, pursuant to property management agreements,
1,074 self-storage mini-warehouses at June 30, 1995. PSCP operated and managed,
pursuant to management agreements, 45 commercial office buildings and light
industrial business parks at June 30, 1995. These facilities constitute all of
the United States mini-warehouses and business parks doing business under the
"Public Storage" name and all those in which SEI has an interest. The property
management agreements generally provide for compensation equal to six percent,
in the case of PSMI, of the gross revenues of the facilities managed, and five
percent, in the case of PSCP, of the gross revenues of the facilities managed.
For the property management fees, under the supervision of the property owners,
PSMI and PSCP coordinate 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.
PSMI and PSCP assist and advise the property owners in establishing policies for
the hire, discharge and supervision of employees for the operation of their
facilities, including resident managers, assistant managers, relief managers and
billing and maintenance personnel.
The Adviser acts, pursuant to an advisory contract, as an investment
advisor to SEI. It advises SEI with respect to its investments and administers
the daily corporate operations of SEI for an advisory fee. The advisory fee is
equal to (i) 12.75% of SEI's adjusted income (as defined, and after a reduction
for SEI's share of capital improvements) per share of Common Stock on the first
14,989,454 common shares, (ii) 6% of the adjusted income per share on common
shares in excess of 14,989,454, and (iii) 6% of all dividends paid on SEI
preferred stock. The Adviser pays the salaries and expenses of SEI's executive
officers, facility acquisition staff and rent.
Merchandise operations consists of the sale of locks and boxes to customers
and tenants at substantially all the mini-warehouse facilities managed by PSMI.
These products are ancillary to renting storage space and are provided as a
convenience to the tenants. This activity is not part of the rental activity of
the mini-warehouse facilities.
Results of Operations
Six months ended June 30, 1995 compared to six months ended June 30, 1994:
-------------------------------------------------------------------------
Net income of the Operating Companies for the six months ended June 30, 1995 was
$12,605,000 compared to $10,178,000 for the same period in 1994, representing an
increase of $2,427,000, or 24%.
During the six months ended June 30, 1995, net income increased as revenues
increased 14% while expenses remained constant. Revenues for the six months
ended June 30, 1995 were $19,287,000 compared to $16,938,000 in 1994. This
increase of $2,349,000, or 14%, is primarily due to increases in mini-warehouse
facility management fees of $1,167,000 and in advisory fees of $1,070,000,
resulting from higher revenues from facilities, due principally to higher
occupancies at mini-warehouse facilities (89.1% in 1995 compared to 87.8% in
1994) and higher monthly realized rental rates ($0.70 in 1995 compared to $0.67
in 1994). In addition to improved property operations, advisory fees increased
due to SEI's acquisition of additional properties and larger capital base.
Cost and expenses remained stable between periods with increases in
advisory and administrative expenses offset by decreases in costs of managing
facilities and interest expense. Advisory and administrative expenses increased
due to the expansion of the acquisition staff due to increased property
acquisition and development activities at SEI. Cost of managing facilities
decreased due to a reduction of bonus expenses and depreciation charges offset
in part by the incurrence of non-recurring legal expenses. As a result, net
operating income (revenues less expenses before interest income and expense) was
$15,053,000 in 1995 compared to
55
$12,791,000 in 1994, an increase of $2,262,000 or 18%. Details of the changes in
revenues and operating income for each operating segment are discussed below.
Year ended December 31, 1994 compared to year ended December 31, 1993: Net
---------------------------------------------------------------------
income of the Operating Companies for the year ended December 31, 1994 was
$22,008,000 compared to $37,245,000 for 1993. The decrease of $15,237,000 is
primarily the result of $14,440,000 in extraordinary gains from the retirement
of debt in early 1993 which did not occur in 1994.
Revenues and net operating income improved in 1994, primarily as a result
of increased revenues associated with higher occupancies and rental rates at the
facilities, while expenses (before interest) grew modestly at 4%. Revenues for
1994 were $35,410,000 compared to $31,197,000 in 1993. This increase of
$4,213,000, or 14%, is primarily due to increases in mini-warehouse facility
management fees ($2,344,000) and advisory fees ($1,364,000) resulting from
higher revenues from facilities, due principally to higher occupancies and
monthly realized rental rates at mini-warehouse facilities (89.0% compared to
86.6% and $0.68 per square foot to $0.64 per square foot for 1994 and 1993,
respectively). In addition to improved property operations, advisory fees
increased due to SEI's acquisition of additional properties and issuance of
additional capital.
Cost and expenses (before interest) were $8,147,000 in 1994 compared to
$7,825,000 in 1993, a $322,000 increase. This increase is attributable to an
increase in advisory services cost related from an expansion of the acquisition
staff due to increased property acquisition activities at SEI. Cost of
merchandise activities also increased reflecting costs associated with increased
sales. These costs were partially offset by a decline in costs of managing
facilities due to reductions in non-salary expenses. As a result, net operating
income was $27,064,000 in 1994 compared to $23,370,000 in 1993, an increase of
$3,694,000, or 16%, primarily related to the higher revenues and modest
increases in operating expenses. Details of the changes in revenues and
operating income for each operating segment are discussed below.
The Operating Companies issued $75 million of notes in late 1993. The
interest expense for 1994 was $5,255,000 (representing a full year of interest
expense) compared to $567,000 in 1993 (representing interest expense on debt
outstanding for one month).
During 1992 and 1993, PSMI and PSI extinguished debt of PSMI through a
series of purchases from unaffiliated note holders. In November 1993, PSMI
issued $75 million in Senior Secured Notes due 2003. Due to the timing of the
debt retired and the subsequent issuance of new debt, interest expense in 1993
was significantly lower than in 1992 and in 1994 when debt was outstanding for
the entire year.
Year ended December 31, 1993 compared to year ended December 31, 1992: Net
---------------------------------------------------------------------
income of the Operating Companies for the year ended December 31, 1993 was
$37,245,000 compared to $16,695,000 for 1992. The increase of $20,550,000
results from improvement in net operating income, gain on retirement of debt and
lower interest expense. Extraordinary gains related to the retirement of debt
in early 1993 and 1992 were $14,440,000 and $3,311,000, respectively. In
addition, as discussed above, interest expense was $567,000 in 1993, compared to
$7,181,000 in 1992. The impact of the changes related to gains on debt and
interest expense accounts for $17,743,000 of the improvement in net income for
1993 compared to 1992.
Revenues and net operating income improved in 1993, primarily as a result
of increased revenues associated with higher occupancies and rental rates at the
mini-warehouse facilities. Revenues for the year of 1993 were $31,197,000
compared to $28,068,000 in 1992. This increase of $3,129,000 or 11% is
primarily due to increases in mini-warehouse facility management fees
($1,850,000) and advisory fees ($1,007,000) resulting from higher revenues from
facilities, due principally to higher occupancies and monthly realized rental
rates at mini-warehouse facilities (86.6% compared to 82.3% and $0.64 per square
foot to $0.63 per square foot for 1993 and 1992, respectively). In addition to
improved property operations, advisory fees increased due to SEI's acquisition
of additional properties and issuance of additional capital.
Cost and expenses (before interest) were $7,825,000 in 1993 compared to
$7,503,000 in 1992, as an increase of $322,000 or 4%. The increase is due to
the incurrence of non-recurring legal fees in 1993 associated with the advisory
services. This increase was partially offset by a decrease in cost of managing
facilities due to a favorable comparison to 1992 which includes $450,000 in non-
recurring expenses for computer consulting,
56
professional services, donations and third party management costs. Operating
income was $23,370,000 in 1993 compared to $20,534,000 in 1992, an increase of
$2,836,000, or 14%. Details of the changes in revenues and net operating income
for each of the segments are discussed below.
As reflected in the table below, the four operating segments contained in
the financial statements are profitable with consistent overall growth. Each of
the operating segments is dependent upon the growth and profitability of the
mini-warehouse and commercial facilities. The following compares the revenues
and operating income (excluding interest income and expense) for the four
operating segments for the years ended December 31, 1994, 1993 and 1992 and the
six-month periods ended June 30, 1995 and 1994.
Six months ended
June 30, Years ended December 31,
--------------------- --------------------------------
1995 1994 1994 1993 1992
------- ------- ------- ------- -------
(In thousands)
Revenues:
Facilities management fees, primarily
from affiliates:
Mini-warehouse facilities................. $13,768 $12,639 $26,383 $24,088 $22,218
Commercial facilities..................... 1,019 981 1,973 1,924 1,944
Advisory fees from affiliate.............. 3,426 2,356 4,983 3,619 2,612
Merchandise operations.................... 1,013 907 1,872 1,564 1,263
------- ------- ------- ------- -------
$19,226 $16,883 $35,211 $31,195 $28,037
======= ======= ======= ======= =======
Net operating income:
Facilities management, primarily
from affiliates:
Mini-warehouse facilities................. $11,579 $10,088 $21,368 $18,947 $16,906
Commercial facilities..................... 626 692 1,557 1,450 1,417
Advisory services......................... 2,336 1,539 3,133 2,209 1,637
Merchandise operations.................... 512 472 1,006 764 574
------- ------- ------- ------- -------
Net operating income...................... $15,053 $12,791 $27,064 $23,370 $20,534
======= ======= ======= ======= =======
The compound growth rates of revenues and net operating income for the
period 1992 through 1994 are as follows:
Growth rates 1992-1994
-------------------------------
1994 operating Net operating
Operating segment margin(1) Revenues income
--------------------------------------------------------------------------------------------------
Facilities management, primarily from
affiliates:
Mini-warehouse facilities.......................... 81% 9% 12%
Commercial facilities.............................. 79% 1% 5%
Advisory services.................................... 63% 38% 38%
Merchandise operations............................... 54% 22% 32%
-----------
(1) Operating margin is defined as net operating income (revenues less related
cost of operation) divided by revenues for each operating segment.
Each of the above operating segments, except Merchandise operations, has
cost structures consisting primarily of fixed costs. As such, an increase in
revenues generally results in a corresponding increase in the operating income
of such segment.
Property Management. PSMI is the largest operator of mini-warehouses in
-------------------
the United States. All of the facilities operated by PSMI and PSCP are operated
under the "Public Storage" trademark which carries strong name recognition.
57
Operating income from property management services has consistently
increased resulting from increasing management fees while expenses have remained
relatively constant. The increase in management fees is the result of an
increase in the number of facilities under management and an increase in
property level revenues resulting from increased property occupancies and rental
rates.
The following table shows property information for mini-warehouse and
commercial facilities under management. Average management fees paid per
facility under management increased between 3% and 9% per annum resulting from
an increase in occupancies and rental rates of properties managed.
Six months ended
June 30, Year ended December 31,
-------------------- --------------------------------
1995 1994 1994 1993 1992
-------- -------- -------- -------- --------
Mini-warehouse facilities
-------------------------
Number of facilities under management
at end of period....................... 1,074 1,046 1,067 1,040 1,020
Square feet under management at end
of period (in millions)................ 62.9 61.6 62.3 60.2 60.1
Rental revenues (in millions)............ $ 233.7 $ 217.0 $ 447.2 $ 407.0 $ 377.9
Average per facility under management:
Rental revenues.................... $218,600 $207,500 $424,700 $395,600 $367,300
Management fees incurred........... $ 12,800 $ 12,100 $ 24,700 $ 23,200 $ 21,800
Weighted average occupancy......... 89.1% 87.8% 89.0% 86.6% 82.3%
Realized monthly rental rate
per sq. ft (1).................. $ 0.70 $ 0.67 $ 0.68 $ 0.64 $ 0.63
Six months ended
June 30, Year ended December 31,
-------------------- --------------------------------
1995 1994 1994 1993 1992
-------- -------- -------- -------- --------
Commercial facilities (2)
-------------------------
Number of facilities under management
at end of period....................... 78 78 78 78 80
Square feet under management at end
of period (in millions)................ 5.2 5.2 5.2 5.2 5.3
Rental revenues (in millions)............ $ 20.3 $ 20.0 $ 39.6 $ 38.1 $ 38.7
Average per facility under management:
Rental revenues.................... $260,300 $256,400 $507,100 $487,400 $484,100
Management fees incurred........... $ 13,000 $ 12,600 $ 25,300 $ 24,700 $ 24,300
Weighted average occupancy......... 94.4% 93.6% 94.0% 90.6% 85.2%
Realized monthly rental rate
per sq. ft (1)................... $ 0.69 $ 0.68 $ 0.68 $ 0.66 $ 0.72
----------
(1) Realized rent per square foot represents the actual revenue earned per
occupied square foot. Management believes this is a more relevant measure
than posted rental rates, since posted rates can be discounted through the
use of promotions.
(2) Includes the commercial operations at mini-warehouse facilities (33
facilities at June 30, 1995).
Trends in property operations are due to:
. Increasing occupancy levels due to the decreased levels of new supply in
the industry, growth in demand and promotion of the facilities by PSMI
and PSCP.
. Increasing realized rents per square foot of mini-warehouse space due to
increased demand facilitating price increases and reduced promotional
discounting of mini-warehouse space.
The rental revenues of the facilities are typically higher in the second
and third quarters primarily because of the timing of rental rate increases and
because mini-warehouse facilities tend to experience greater occupancy during
the spring and summer months reflecting the moving patterns of individual users.
58
The facilities managed by the Operating Companies are located in or near
major metropolitan markets in 38 states. Geographic diversity reduces the
impact of regional economic downturns on the Operating Companies and provides a
greater degree of stability to management fees earned. No single facility
accounted for more than .5% of management fees earned in 1994.
The four states in which the largest concentration of facilities (mini-
warehouse and commercial facilities combined) are located and their operating
trends are as follows:
WEIGHTED AVERAGE OCCUPANCIES
--------------------------------------------
At
June 30, Six months
1995 ended June 30, Year Ended December 31,
% of ---------------- --------------------------
Total 1995 1994 1994 1993 1992
----------------------------------------------------------
California 30% 87.7% 85.5% 86.3% 84.5% 82.2%
Texas 12% 89.1% 88.3% 89.4% 88.2% 87.5%
Florida 7% 86.9% 88.6% 89.0% 87.6% 84.0%
Illinois 5% 91.7% 88.9% 90.8% 84.1% 74.0%
Other 46% 90.9% 90.1% 91.3% 88.9% 82.3%
----------------------------------------------------------
Total 100% 89.5% 88.3% 89.4% 87.1% 82.6%
==========================================================
WEIGHTED AVERAGE REALIZED MONTHLY RENT
PER SQUARE FOOT (1)
--------------------------------------------
At
June 30, Six months
1995 ended June 30, Year Ended December 31,
% of ---------------- --------------------------
Total 1995 1994 1994 1993 1992
----------------------------------------------------------
California 30% $0.81 $0.80 $0.81 $0.78 $0.79
Texas 12% 0.56 0.54 0.55 0.53 0.52
Florida 7% 0.66 0.65 0.66 0.58 0.58
Illinois 5% 0.67 0.64 0.65 0.62 0.62
Other 46% 0.66 0.63 0.62 0.60 0.56
----------------------------------------------------------
Total 100% $0.70 $0.67 $0.68 $0.64 $0.63
==========================================================
---------
(1) Realized rent per square foot represents the actual revenue earned per
occupied square foot. Management believes this is a more relevant measure
than posted rental rates, since posted rates can be discounted through the
use of promotions.
Most of the facilities managed by PSMI and PSCP are owned by SEI, PSI or
entities affiliated with PSI. Of the 1,119 facilities operated by PSMI and
PSCP, 70 are operated under management contracts with third parties who are not
affiliated with SEI or PSI. These 70 properties accounted for management fees
of $1,521,000, $1,458,000 and $1,506,000 in 1994, 1993 and 1992, respectively,
representing approximately 5% of all management fees earned in those periods.
Approximately 30% of the management fees from third-party contracts are earned
on 26 properties owned by a single owner. These 26 properties have been under
management since 1988.
Cost of managing facilities consists primarily of salaries and wages and
the related expenses of senior property management personnel as noted below:
Six months ended
June 30, Year ended December 31,
----------------- ---------------------------
1995 1994 1994 1993 1992
(In thousands)
Salaries and wages.... $1,957 $2,147 $4,011 $4,127 $3,925
Other expenses........ 625 693 1,420 1,488 1,914
====== ====== ====== ====== ======
Total............. $2,582 $2,840 $5,431 $5,615 $5,839
====== ====== ====== ====== ======
Salaries and wages include base salaries and bonuses of property management
personnel. The base salaries have remained relatively constant except for an
increase of $227,000 in 1994 related to an increase in the
59
number of regional management personnel resulting from an increase in the number
of properties under management. This increase in base salary was offset by
reduced bonus expense in 1994 compared to 1993 of approximately $300,000.
Bonus expense included in salaries and wages reflects incentive bonuses
based on the achievement of specific goals. Included in salaries and wages for
the years ended December 31, 1994, 1993, 1992 and the six months ended June 30,
1995 and 1994 are bonuses of $804,000, $1,103,000, $816,000, $158,000 and
$364,000, respectively.
Other expenses have declined each year due to expense controls. Included in
other expenses for the year ended December 31, 1992 are non-recurring expense of
approximately $450,000 for computer consulting, professional services, donations
and costs associated with the management of third-party properties. The
decrease in other expense from the six months ended June 30, 1995 is partially
the result of a $220,000 decrease in depreciation and amortization of computer
hardware and software costs as compared to 1994 levels partially offset by non-
recurring legal expenses in 1995 associated with the management of commercial
facilities.
Advisory Services. The Adviser's fees increased at a compound annual rate
-----------------
of 38% from 1992 through 1994. This reflects the improvement of SEI's cash flow
from operations and an increase in the capital base of SEI. The improvement in
SEI's cash flow from operations resulted from improved property operating
results. SEI's overall property operating trends have shown consistent
improvement with growth in net operating income prior to reductions for
depreciation over the same period in the prior year on same stores of 6.1%,
9.7%, 6.6% and 4.6% for the years 1992, 1993, 1994 and the six months ended June
30, 1995, respectively.
In addition, since 1992, SEI has acquired additional assets with the
proceeds from the issuance of additional capital stock, primarily Common Stock
and preferred stock. This growth in SEI has resulted in increased advisory
fees. Specifically, between 1992 and June 30, 1995, SEI issued $335 million in
preferred stock, $197 million in Common Stock, and $138 million Common Stock in
connection with mergers.
Cost of advisory services and administrative expenses consists of salaries
and expenses of SEI's executive officers and acquisition staff and corporate
expenses including rent. Cost of advisory services and administrative expenses
increased in 1993 due to the incurrence of non-recurring legal expenses and
increased in 1994 due to the expansion of the acquisition staff.
Merchandise Operations. Operating income from Merchandise Operations,
----------------------
which accounts for less than 4% of the 1994 operating income of the Operating
Companies, increased due to price increases, an increase in the number of
facilities at which merchandise is offered (from 900 at December 31, 1992 to 975
facilities at June 30, 1995) and the introduction of boxes to the product line
in 1993 (available at 206 facilities at June 30, 1995). Inventory of $75,000 is
included in other assets at June 30, 1995 relating to Merchandise Operations.
Liquidity and Capital Resources
The Operating Companies financial profile is characterized by $68.0 million
of fixed rate, fully amortizing debt and an increasing level of funds available
for principal payments, distributions and investment.
The Operating Companies have $68.0 million of notes outstanding as of June
30, 1995. The notes bear interest at a fixed rate of 7.08% and are fully
amortizing through the year 2003. Assumption of the notes is subject to the
lenders' consent. Principal payments for the next five years and thereafter are
as follows:
1995 (July-December)... $ 2,500,000
1996................... 5,750,000
1997................... 6,500,000
1998................... 7,250,000
1999................... 8,000,000
Thereafter............. 38,000,000
-----------
$68,000,000
===========
60
Cash provided by operating activities for the Operating Companies were
$14.5 million, $22.9 million, $22.1 million and $12.5 million for the years of
1992, 1993 and 1994 and six months ended June 30, 1995, respectively. These
cash flows have been sufficient to cover capital expenditures and debt service
requirements.
The Operating Companies believe that important measures of performance, as
well as liquidity, are funds from operations (FFO) and earnings before
interests, taxes, depreciation and amortization (EBITDA). FFO and EBITDA are
supplemental performance measures for real estate investment trusts used by
industry analysts. FFO and EBITDA does not take into consideration scheduled
principal payments on debt, capital improvements, distributions or other
obligations. Accordingly, FFO and EBITDA are not a substitute for cash flow
from operations or net income as a measure of the Company's liquidity or
operating performance.
The following table summarizes the Operating Companies FFO and EBITDA:
Six months ended
June 30, Years ended December 31,
----------------- -----------------------------
1995 1994 1994 1993 1992
------- ------- ------- -------- -------
(in thousands)
Net income......................... $12,605 $10,178 $22,008 $ 37,245 $16,695
Depreciation and amortization...... 55 279 522 71 1,495
Gains on extinguishment of debt.... - - - (14,440) (3,311)
------- ------- ------- -------- -------
Funds available for principal
payments, distributions and
investment (FFO).................. 12,660 10,457 22,530 22,876 14,879
------- ------- ------- -------- -------
Interest expense................... 2,509 2,668 5,255 567 7,181
------- ------- ------- -------- -------
Earnings before interest, taxes,
depreciation and amortization
(EBITDA)......................... $15,169 $13,125 $27,785 $ 23,443 $22,060
======= ======= ======= ======== =======
Capital expenditures related to the Operating Companies have been and are
expected to continue to be insignificant.
61
REAL ESTATE INTERESTS
The following discussion should be read in conjunction with the Combined
Summaries of Historical Information relating to Real Estate Interests to be
Acquired and notes thereto.
Real Estate Interests consist of equity interests in 63 REITs and
partnerships which own 511 mini-warehouses and 15 commercial facilities
(including the seven properties in which a fee interest is being acquired), all
operated under the "Public Storage" name, none of which SEI currently has an
interest in, and 10 mortgage notes receivable secured by mini-warehouse
facilities. When combined with SEI's facilities, they represent substantially
all the mini-warehouse and commercial facilities operated in the United States
under the "Public Storage" name. These Real Estate Interests consist of:
. Series A, B, C and D shares of finite life REITs. These shares
represent between 15% and 30% of the economic interest in each entity;
. General and limited partner capital and incentive compensation interests
representing on average approximately 25% of the economic
interest in each entity;
. Seven properties, consisting of fee interest in six mini-warehouses and
one business park and notes receivable.
Results of Operations
Six months ended June 30, 1995 compared to the six months ended June 30,
------------------------------------------------------------------------
1994: The excess of operating revenues over specified expenses in the aggregate
----
of ownership entities in which Real Estate Interests are being acquired for the
six months ended June 30, 1995 was $53,083,000 compared to $47,278,000 for the
same period in 1994, representing an increase of 12%. The excess of operating
revenues over specified expenses for the Real Estate Interests which SEI is
acquiring was $12,601,000 for the six months ended June 30, 1995 compared to
$11,120,000 for the six months ended June 30, 1994, an improvement of $1,481,000
or 13%. The improved results reflect the general improvement of the 526 mini-
warehouse and commercial facilities owned by the ownership entities in which SEI
is acquiring an interest, primarily due to higher occupancies and rental rates
of the mini-warehouses. Occupancies of the mini-warehouse improved from 87.6%
for the first six months of 1994 to 89.6% in the first six months of 1995, and
realized rental rates improved from $0.70 per square feet to $0.73 per square
feet for the comparable periods.
Year ended December 31, 1994 compared to the year ended December 31, 1993:
-------------------------------------------------------------------------
The excess of operating revenues over specified expenses in the aggregate of
ownership entities in which Real Estate Interests are being acquired for the
year ended December 31, 1994 was $99,859,000 compared to $80,400,000 for 1993,
representing an increase of 24%. The excess of operating revenues over
specified expenses for the Real Estate Interests which SEI is acquiring was
$23,697,000 for 1994 compared to $18,773,000 for the same period in 1993, an
improvement of $4,924,000 or 26%. During 1994, two mini-warehouses were opened
by the ownership entities in which SEI is acquiring an interest. The
improvement is also reflective of the general improvement of the 524 mini-
warehouse and commercial facilities operated in both 1994 and 1993 due to
improved occupancies and rental rates. Occupancies for the mini-warehouses
improved from 85.3% in 1993 to 88.9% in 1994 while realized rental rates
improved to $0.71 per square foot from $0.68 per square foot in 1993.
Year ended December 31, 1993 compared to the year ended December 31, 1992:
-------------------------------------------------------------------------
The excess of operating revenues over specified expenses in the aggregate of
ownership entities in which Real Estate Interests are being acquired for the
year ended December 31, 1993 was $80,400,000 compared to $59,853,000 for 1992,
representing an increase of 34%. The excess of operating revenues over
specified expenses for the Real Estate Interests which SEI is acquiring was
$18,773,000 for 1993 compared to $14,283,000 for 1992, an improvement of 31%.
This improvement reflects the opening of one mini-warehouse in 1993 and the
general improvement of the mini-warehouse and commercial facilities.
Occupancies at the mini-warehouses improved to 85.3% from 79.1% in 1992.
Realized rental rates improved to $0.68 per square foot in 1993 from $0.65 per
square foot in 1992.
62
The following presents the combined operating trends of the Real Estate
Interests which consist of 526 facilities and the notes receivable:
Six months ended
June 30, Years ended December 31,
------------------- ---------------------------
1995 1994 1994 1993 1992
------------------- ---------------------------
(dollars in thousands)
Aggregate of ownership entities
-------------------------------
in which Real Estate Interests are
----------------------------------
being acquired:
---------------
Operating revenues in excess of
specified expenses:
After depreciation expense -
operating income............. $53,083 $47,278 $ 99,859 $ 80,400 $ 59,853
Before depreciation expense.. 74,135 68,309 141,841 122,208 103,409
Real Estate Interests being acquired:
-------------------------------------
Operating revenues in excess of
specified expenses:
After depreciation expense -
operating income............. $12,601 $11,120 $ 23,697 $ 18,773 $ 14,283
Before depreciation expense... 17,378 16,045 33,196 28,609 24,317
The growth in net operating income of the Real Estate Interests is due to
improved operations of the mini-warehouses and commercial facilities. The
following table illustrates the operating trends of the mini-warehouse and
commercial facilities for the last three years and the six months ended June
30, 1995 and 1994:
Six months ended
June 30, Years ended December 31,
------------------------- -----------------------------------
1995 1994 1994 1993 1992
------------------------- -----------------------------------
MINI-WAREHOUSES
---------------
Number of facilities............. 511 509 511 509 508
Weighted average occupancy
for period...................... 89.6% 87.6% 88.9% 85.3% 79.1%
Realized monthly rent per
square foot..................... $ 0.73 $ 0.70 $ 0.71 $ 0.68 $ 0.65
Rental revenues (in thousands)... $117,779 $110,566 $227,647 $205,715 $183,576
Property net operating income
(in thousands)(2)............... 75,985 69,686 145,315 127,407 108,277
Gross profit margin(3)........... 64.5% 63.0% 63.8% 61.9% 59.0%
Capital expenditures to maintain
facilities (in thousands)....... $ 1,883 $ 1,534 $ 4,707 $ 4,543 $ 4,387
Rentable square feet (in
millions)....................... 29.7 29.6 29.7 29.6 29.5
COMMERCIAL FACILITIES(1)
------------------------
Number of facilities............. 33 33 33 33 32
Weighted average occupancy for
period.......................... 94.2% 92.9% 93.5% 91.3% 84.0%
Realized monthly rent per
square foot..................... $ 0.78 $ 0.78 $ 0.77 $ 0.79 $ 0.80
Rental revenues (in thousands)... $ 8,451 $ 8,333 $ 16,518 $ 16,223 $ 15,341
Property net operating income
(in thousands)(2)............... 4,562 4,582 8,692 8,194 8,014
Gross profit margin(3)........... 54.0% 55.0% 52.6% 50.5% 52.2%
Capital expenditures to maintain
facilities (in thousands)....... $ 529 $ 697 $ 1,301 $ 1,241 $ 1,385
Rentable square feet (in
millions)....................... 1.9 1.9 1.9 1.9 1.9
-----------------------
(1) Includes the commercial operations at 18 mini-warehouse facilities
(2) Property net operating income is Rental revenues less costs of operations
before depreciation expense.
(3) Gross profit margin is computed by dividing Property net operating income
by Rental revenues.
63
All the mini-warehouses included in the Real Estate Interests have
essentially the same operating, physical and location characteristics. These
characteristics include high average occupancies compared to relatively low
break-even occupancy requirements, geographic diversity, concentration in major
metropolitan cities, and increasing realized rents and occupancies.
Substantially all of these facilities were developed by PSI and have an average
age of 9.5 years.
64
Most facilities operate at consistently high occupancy levels, with over 80% of
the 526 facilities operating at 85% occupancy or better at June 30, 1995. The
following table reflects the occupancy distribution as of June 30, 1995:
OCCUPANCY DISTRIBUTION
AT JUNE 1995
[Bar chart appears here illustrating the occupancy distribution at June 1995]
Occupancy Percentage No. of Facilities
-------------------- -----------------
0% - 50% 1
50% - 55% 2
55% - 60% 1
60% - 65% 1
65% - 70% 11
70% - 75% 8
75% - 80% 21
80% - 85% 44
85% - 90% 115
90% - 95% 195
95% - 100% 127
The facilities of the ownership entities are located in the major metropolitan
markets in 38 states. Geographic diversity reduces the impact from regional
economic downturns and provides a greater degree of stability to revenues. The
following table illustrates the geographic diversity of the facilities at June
30, 1995 as measured by rentable square feet:
GEOGRAPHIC DIVERSITY OF REAL ESTATE INTERESTS
(based on rentable square feet at June 30, 1995)
[Pie chart appears here which illustrates by region the geographic diversity of
the facilities at June 30, 1995 based on rentable square feet]
South Western 27%
North Western 18%
North Eastern 18%
Mid Western 17%
South Central 10%
South Eastern 10%
65
The four states in which the largest concentration of facilities (mini-
warehouse and commercial facilities combined) are located and their operating
trends are as follows:
WEIGHTED AVERAGE OCCUPANCIES
-------------------------------------------------------------------
At Six months
June 30, ended June 30, Year Ended December 31,
1995 ------------------- ---------------------------------
% of Total 1995 1994 1994 1993 1992
------------------------------------ -----------------------------------
California 32% 87.1% 84.2% 85.2% 82.8% 79.3%
Texas 9 88.8% 89.2% 90.1% 88.6% 88.7%
Illinois 8 91.7% 88.3% 90.7% 83.4% 71.7%
Florida 6 87.3% 89.8% 89.9% 87.0% 83.6%
Other 45 92.0% 90.1% 91.5% 87.6% 78.6%
------------------------------------ -----------------------------------
Total 100% 89.8% 87.9% 89.2% 85.7% 79.4%
==================================== ===================================
WEIGHTED AVERAGE REALIZED MONTHLY RENT PER SQUARE FOOT
-------------------------------------------------------------------
At Six months
June 30, ended June 30, Year Ended December 31,
1995 ------------------- ---------------------------------
% of Total 1995 1994 1994 1993 1992
------------------------------------ -----------------------------------
California 32% $0.81 $0.81 $0.81 $0.79 $0.79
Texas 9 0.63 0.62 0.62 0.61 0.58
Illinois 8 0.67 0.64 0.65 0.62 0.62
Florida 6 0.74 0.70 0.71 0.70 0.64
Other 45 0.71 0.67 0.67 0.64 0.59
------------------------------------ -----------------------------------
Total 100% $0.73 $0.71 $0.71 $0.69 $0.66
==================================== ===================================
Trends in property operations are due to:
. increasing occupancy levels due to the decreased levels of new supply
in the industry and promotion of the facilities by PSMI and PSCP.
. increasing realized rents per square foot of mini-warehouse space due
to increased demand and reduced need for promotional discounting of
mini-warehouse space due to improved occupancy.
The rental revenues of the facilities are typically higher in the second
and third quarters primarily because of the timing of rental rate increases and
because mini-warehouse facilities tend to experience greater occupancy during
the spring and summer months reflecting the moving patterns of individual users.
The Real Estate Interests encompass in excess of 295,000 rental spaces
throughout 38 states and 79 major metropolitan markets No single facility
generates more than .7% of revenues or has more than .6% of the rentable square
footage. No single tenant occupies more than .1% of the rentable square footage
or accounts for more than .1% of the revenue.
Liquidity and Capital Resources. The Real Estate Interests in which SEI
is acquiring an interest are characterized by low leverage and an increasing
level of funds available for principal payments, distributions and investments.
66
The REITs and partnerships in which SEI is acquiring an interest have
relatively low overall debt, with 54 of the 63 entities owning 426 of the 526
properties having no debt. As of December 31, 1994, nine of the entities have
debt totaling $94 million which matures through 2002.
Debt maturities for the next five years and thereafter are as follows:
1995................. $11,036,000
1996................. 4,543,000
1997................. 4,352,000
1998................. 28,727,000
1999................. 24,113,000
Thereafter........... 21,167,000
-----------
$93,938,000
===========
Cash provided by operating activities for the Real Estate Interests are
$103.4 million, $123.2 million, $141.8 and $74.1 million for the years of 1992,
1993 and 1994 and six months ended June 30, 1995, respectively. These cash flows
have been sufficient to cover capital expenditures and debt service
requirements.
PSI believes that important measures of performance, as well as liquidity,
are funds from operations (FFO) and earnings before interests, taxes,
depreciation and amortization (EBITDA). FFO and EBITDA are supplemental
performance measures for real estate investment trusts used by industry
analysts. FFO and EBITDA does not take into consideration scheduled principal
payments on debt, capital improvements, distributions or other obligations.
Accordingly, FFO and EBITDA are not a substitute for cash flow from operations
or net income as a measure of the Company's liquidity or operating performance.
The following tables summarizes the Real Estate Interests' FFO and EBITDA:
FFO
----------------------------------------------------------
Six months ended
June 30, Years ended December 31,
-------------------- ----------------------------------
1995 1994 1994 1993 1992
-------- -------- --------- --------- --------
(In thousands)
Operating revenues in excess of specified expenses.. $ 53,083 $ 47,278 $ 99,859 $ 80,400 $ 59,853
Depreciation and amortization....................... 21,052 21,031 41,982 42,808 43,556
-------- -------- --------- --------- --------
Funds provided by operations (FFO).................. 74,135 68,309 141,841 123,208 103,409
FFO attributable to other equity interest........... (56,757) (52,264) (108,645) (94,599) (79,092)
-------- -------- --------- --------- --------
Funds available for principal payments,
distributions and investment (FFO to be acquired).. $ 17,378 $ 16,045 $ 33,196 $ 28,609 $ 24,317
======== ======== ========= ========= ========
EBITDA
----------------------------------------------------------
Six months ended
June 30, Years ended December 31,
-------------------- ----------------------------------
1995 1994 1994 1993 1992
-------- -------- --------- --------- --------
(In thousands)
Funds from operations............................... $ 74,135 $ 68,309 $ 141,841 $ 123,208 $103,409
Interest expense.................................... 5,088 5,023 9,981 10,860 11,038
-------- -------- --------- --------- --------
Earnings before interest, taxes, depreciation
and amortization (EBITDA).......................... 79,223 73,332 151,822 134,068 114,447
EBITDA attributable to other equity interests....... (60,443) (56,084) (115,932) (102,498) (87,012)
-------- -------- --------- --------- --------
EBITDA to be acquired............................... $ 18,780 $ 17,248 $ 35,890 $ 31,570 $ 27,435
======== ======== ========= ========= ========
Percentage increase in EBITDA over prior year....... 8.9% 14.3% 13.7% 15.1% 18.5%
======== ======== ========= ========= ========
67
FFO and EBITDA attributable to other equity interests represents the FFO
and EBITDA attributable to owners other than the interests to be acquired by
SEI. Prior to the merger, SEI has a de minimis interest in four of the sixty-
three entities which is included in the lines "attributable to other equity
interests".
Capital expenditures to maintain facilities for the Real Estate Interests
being acquired by SEI were $1,310,000, $1,351,000 and $1,295,000 for the years
ended December 31, 1994, 1993 and 1992, respectively, and $541,000 and $490,000
for the six months ended June 30, 1995 and 1994, respectively.
In connection with the acquisition of the notes receivable and seven
properties (100% fee interest being acquired), SEI will assume approximately
$4,706,000 in debt consisting of underlying debt related to four of the notes
receivable and mortgage debt secured by one of the facilities. This debt bears
interest at rates ranging from 7.1% to 9.9% and with maturity dates ranging
through the year 2000. SEI believes the cash flow from the Real Estate Interests
being acquired will be sufficient to meet the repayment requirements of the debt
being assumed.
68
SEI PRO FORMA
The following is a discussion of operations after giving effect to (i)
the issuance and investment of approximately $500 million of additional
capital through the issuance of preferred stock and Common Stock in public
offerings and the issuance of Common Stock in connection with the mergers of
Public Storage Properties VI, VII and VIII, Inc., and (ii) the proposed merger
of PSMI with and into SEI, including the acquisition of the Real Estate
Interests; all as if such transactions were completed at the beginning of
1994. This discussion is based on the unaudited Pro-Forma Balance Sheet as of
June 30, 1995 and the Statements of Income for the six-month period ended June
30, 1995 and the year ended December 31, 1994. Upon completion of the Merger,
including the acquisition of the Real Estate Interests, SEI will be a fully
integrated, self-advised and self-managed REIT. SEI will acquire the "Public
Storage" name and trademark, proprietary operating systems, property
management agreements on over 1,100 facilities and equity interest in over 500
geographically diversified facilities.
Operating Results - SEI Historical compared to SEI Pre-Merger Pro Forma
Six months ended June 30, 1995. Pre-Merger pro forma net income for the
------------------------------
six months ended June 30, 1995 was $36,063,000 compared to the historical net
income of $29,751,000, representing an increase of $6,312,000. Pro forma net
income allocable to the Common Stock increased to $20,413,000 for the six
months ended June 30, 1995 compared to historical net income allocable to the
Common Stock shareholders of $16,443,000 for the same period, representing an
increase of $3,970,000. The increases in net income and net income allocable
to the Common Stock were the result of (i) the additional issuances of equity
securities during 1995, and the use of the proceeds therefrom to acquire
additional real estate assets, and (ii) the merger transactions with Public
Storage Properties VI, Inc. (completed February 28, 1995) and Public Storage
Properties VII, Inc., (completed June 30, 1995), as if such transactions were
completed at the beginning of the period. Pre-Merger pro forma net income per
share of Common Stock was $.48 per share (based on weighted average shares
outstanding of 42,108,048) for the six months ended June 30, 1995 compared to
the historical net income per share of Common Stock of $.50 (based on weighted
average shares of Common Stock outstanding of 32,707,556) for the same period.
The decrease in net income per share of Common Stock is principally due to
additional depreciation expense as a result of the acquisition of additional
real estate facilities combined with additional preferred stock dividends.
During 1995, SEI issued in public offerings shares of its Series E
Preferred Stock (February 1, 1995, net proceeds of $52.9 million), Series F
Preferred Stock (May 3, 1995, net proceeds of $55.5 million) and Common Stock
(May 31, 1995, net proceeds of $82.0 million). The aggregate net proceeds
have been used to fund the cash portion of the acquisition cost of real estate
facilities, limited partnership units in the PSI limited partnerships and
mergers.
During the first six months of 1995, SEI acquired 88 real estate
facilities (including 61 real estate facilities acquired in connection with
the mergers of Public Storage Properties VI, Inc. and Public Storage
Properties VII, Inc.). Since June 30, 1995, SEI acquired an additional 23
real estate facilities and is currently in the process of acquiring an
additional 13 real estate facilities. Rental income, cost of operations and
depreciation expense all increased compared to the respective historical
amounts due to the operating results of real estate facilities acquired during
1995 (including those real estate facilities in which SEI is currently in the
process of acquiring). These transactions increased SEI's capitalization by
approximately $250 million and resulted in an increase in its wholly-owned
property portfolio from 143 to 267.
The consideration for the above real estate facilities included
cancellation of mortgage notes receivable, assumption of mortgage debt and
cash. As a result, interest income decreased related to the canceled mortgage
notes receivable and interest expense increased to reflect additional interest
expense on the assumed mortgage debt.
69
Year Ended December 31, 1994. Pre-Merger pro forma net income for the
----------------------------
year ended December 31, 1994 was $68,682,000 compared to the historical net
income of $42,118,000, representing an increase of $26,564,000. Pre-Merger
pro forma net income allocable to the Common Stock increased to $37,476,000
for the year ended December 31, 1994 compared to historical net income
allocable to Common Stock of $25,272,000 for the same period, representing an
increase of $12,204,000. The increases in net income and net income allocable
to the Common Stock were the result of (i) the additional issuances of equity
capital during 1994 and 1995, and the use of the proceeds therefrom to acquire
additional real estate assets, and (ii) the merger transactions with Public
Storage Properties VI, Public Storage Properties VII, Inc. and Public Storage
Properties VIII, Inc. Pre-Merger pro forma net income per share of Common
Stock was $.90 per share (based on weighted average shares outstanding of
41,844,644) for the year ended December 31, 1994 compared to the historical
net income per share of $1.05 (based on weighted average shares of Common
Stock outstanding of 24,077,055) for the same period. The decrease in net
income per share of Common Stock is principally due to additional depreciation
expense as a result of the acquisition, of additional real estate facilities
combined with additional preferred stock dividends.
In addition to the public offering of equity securities during 1995, SEI
issued in public offerings during 1994 shares of its Series C Preferred Stock
(June 30, 1994, net proceeds of $28.9 million), Series D Preferred Stock
(September 1, 1994, net proceeds of $29.0 million) and Common Stock (February
15, 1994 and November 25, 1994, aggregate net proceeds of $110.3 million).
The aggregate net proceeds have been used to fund the cash portion of the
acquisition cost of real estate facilities, limited partnership units in the
PSI limited partnerships and mergers with Public Storage Properties VI, VII
and VIII. These transactions increased SEI's capitalization by approximately
$500 million and resulted in an increase in its wholly owned property
portfolio from 71 to 267.
During 1994, SEI acquired 71 mini-warehouse facilities and one business
park facility (including 23 facilities acquired in the merger with Public
Storage Properties VIII, Inc.). Rental income, cost of operations and
depreciation expense all increased compared to the respective historical
amounts due to the operating results of real estate facilities acquired during
1994 and 1995 (including those real estate facilities in which SEI is
currently in the process of acquiring).
The consideration for the above real estate facilities included
cancellation of mortgage notes receivable, assumption of mortgage debt and
cash. As a result, interest income decreased related to the canceled mortgage
notes receivable and interest expense increased to reflect additional interest
expense on the assumed mortgage debt.
Throughout 1994 and 1995, pursuant to cash tender offers, SEI acquired
limited partnership units in each of the PSI limited 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 SEI's share of the consolidated PSI limited
partnerships' income. As a result of these acquisitions, minority interest in
income decreased from $9,481,000 to $6,918,000.
Operating Results - SEI Pre-Merger Pro Forma compared to Post-Merger
Pro Forma
Upon consummation of the Merger, (i) PSMI will be merged with and into
SEI, which will be the surviving corporation, (ii) SEI will be renamed "Public
Storage, Inc.," and (iii) the capital stock of PSMI will be converted into an
aggregate of 30,000,000 shares of Common Stock and 7,000,000 shares of Class B
Common Stock, subject to adjustment.
Immediately following the Merger, SEI will become self managed and self
advised, and will own the Operating Companies and the Real Estate Interests,
which include (1) the "Public Storage" name, (2) seven wholly owned
properties, (3) all inclusive deeds of trust secured by ten mini-
70
warehouses, (4) general and limited partnership interests in 47 limited
partnerships owning an aggregate of 286 mini-warehouses and one commercial
property, (5) equity interests in 16 REITs which, exclusive of SEI's facilities,
own an aggregate of 219 mini-warehouses and 13 commercial properties, (6)
property management contracts, exclusive of SEI's facilities, for 604 mini-
warehouses and 26 commercial properties (563 of which collectively are owned by
entities affiliated with PSI), and (7) a 95% economic interest in a merchandise
company which currently sells locks and boxes to mini-warehouse tenants and
others.
Six months ended June 30, 1995. Post-Merger pro forma net income for the
------------------------------
six months ended June 30, 1995 was $53,317,000 compared to the Pre-Merger pro
forma net income of $36,063,000, representing an increase of $17,254,000 or
48%. Post-Merger pro forma net income allocable to Common Stock increased to
$37,667,000 for the six months ended June 30, 1995 compared to the Pre-Merger
pro forma net income allocable to Common Stock of $20,413,000 for the same
period or an increase of 85%. Post-Merger pro forma net income per share of
Common Stock was $.52 per share or 8% higher (based on weighted average shares
outstanding of 72,108,048) for the six months ended June 30, 1995 compared to
the Pre-Merger pro forma net income per share of $.48 (based on weighted
average shares outstanding of 42,108,048) for the same period. The lower
increase in per share income of 8% compared to the 85% increase in net income
allocable to the Common Stock is due to the significant increase (71%) in the
number of shares of Common Stock issued as a result of the Merger.
The Post-Merger pro forma net income increased as a result of (i)
property operations of the seven wholly owned properties, (ii) interest income
and expense related to the all-inclusive deeds of trust, (iii) equity in
earnings of limited partnerships and REITs, (iv) facility management fees and
operating expenses relating to the property management contracts, (v) the
elimination of the advisory fee as a result of becoming self advised offset in
part by additional administrative costs, reflecting primarily executive
compensation and rent previously paid for by the Adviser and (vi) operating
results of the merchandise company.
Year ended December 31, 1994. Post-Merger pro forma net income for the
----------------------------
year ended December 31, 1994 was $100,147,000 compared to the Pre-Merger pro
forma net income of $68,682,000, representing an increase of $31,465,000, or
46%. Post-Merger pro forma net income allocable to Common Stock increased to
$68,941,000 for the year ended December 31, 1994 compared to the Pre-Merger
pro forma net income allocable to Common Stock of $37,476,000 for the same
period, an increase of 84%. Post-Merger pro forma net income per share of
Common Stock was $.96 per share or 7% higher (based on weighted average shares
outstanding of 71,844,644) for the year ended December 31, 1994 compared to
the Pre-Merger pro forma net income per share of $.90 (based on weighted
average shares outstanding of 41,844,644) for the same period. The lower
increase in per share income of 7% compared to 84% increase in net income
allocable to Common Stock is due to the significant increase in the number of
shares to be issued as a result of the Merger.
Similar to the six months ended June 30, 1995, Post-Merger pro forma net
income increased as a result of (i) property operations of the seven wholly
owned properties, (ii) interest income and expense related to the all-
inclusive deeds of trust, (iii) equity in earnings of real estate entities
with respect to the acquired partnership and equity interests in limited
partnerships and REITs, respectively, (iv) facility management fees and
operating expenses relating to the property management contracts, (v) the
elimination of the advisory fee as a result of becoming self-advised, offset
in part by additional administrative costs, reflecting primarily executive
compensation and rent previously paid for by the Adviser, and (vi) operating
results of the merchandise company.
71
Liquidity and Capital Resources
Capital Structure. The following table summarizes SEI's capital
-----------------
structure on an historic and pro forma (pre- and post-Merger) basis at June
30, 1995:
At
June 30, 1995
----------------------------------------
SEI SEI
SEI Pre-Merger Post-Merger
(Historical) (Pro Forma) (Pro Forma)
----------- ----------- -----------
(In thousands, except per share data)
Line of credit with banks...... $ - $ - $ -
Senior notes................... - - 68,000
Mortgage notes payable......... 58,497 103,213 107,919
---------- ---------- ----------
Total debt................. 58,497 103,213 175,919
Minority interest.............. 131,536 124,848 124,848
Shareholders' equity:
Senior Preferred Stock......... 277,650 277,650 277,650
Convertible Preferred Stock.... 57,500 57,500 57,500
Common Stock................... 557,514 557,514 1,112,954
Class B Common Stock........... - - 700
---------- ---------- ----------
Total shareholders' equity... 892,664 892,664 1,448,804
---------- ---------- ----------
Total capitalization........... $1,082,697 $1,120,725 $1,749,571
========== ========== ==========
Book value per share of
Common Stock................. $13.26 $13.26 $15.46
========== ========== ==========
Comparison of Historical vs. Post-Merger Pro Forma Capitalization.
-----------------------------------------------------------------
. Total shareholders' equity will increase by approximately $556.1
million or 62%, which will be directly attributable to the Common
Stock issued in the Merger.
. Total debt will increase from the historical amount of $58.5 million
at June 30, 1995 to $175.9 million. The increase in debt is
principally the result of (i) mortgage debt ($44.7 million) either
assumed or estimated to be assumed in connection with property
acquisitions subsequent to June 30, 1995 combined with the assumption
of (ii) senior notes payable ($68.0 million) to be assumed in
connection with the Merger and (iii) mortgage debt of $4.7 million in
connection with the Merger.
. Preferred stock as a percentage of total shareholders' equity will
decrease from approximately 31% (historical) at June 30, 1995 to
approximately 19% on a Post-Merger pro forma basis at June 30, 1995.
. SEI's debt to equity ratio will increase from 7% (historical) to 12%
(Post-Merger), however, its ratio of earnings to fixed charges
(interest expense and preferred stock dividends) improves from 2.22
for 1994 to 2.48 on a Post-Merger pro forma basis for the same
period due to the overall reduction in leverage (debt and preferred
stock to total capitalization) from 36% to a Post-Merger pro-forma
of 29% of total capitalization.
72
Funds available for principal payments and investment. SEI anticipates
-----------------------------------------------------
that funds provided by operating activities will continue to be sufficient
over at least the next 12 months to provide for capital improvements, debt
service requirements and distributions to shareholders.
The following table summarizes SEI's ability to pay the minority
interests' distributions, its distributions to the preferred and Common Stock
shareholders and fund capital improvements to maintain the facilities through
the use of funds provided by operating activities. The remaining funds are
available to make both scheduled and optional principal payments on debt, pay
distributions on Common Stock and for investment.
Six Months Ended June 30, 1995 Year Ended December 31, 1994
------------------------------------------- -------------------------------------------
SEI SEI SEI SEI
SEI Pre-Merger Post-Merger SEI Pre-Merger Post-Merger
(Historical) (Pro Forma) (Pro Forma) (Historical) (Pro Forma) (Pro Forma)
------------ ----------- ------------ ------------ ----------- -----------
(amounts in thousands)
Net income........................ $ 29,751 $ 36,063 $ 53,317 $ 42,118 $ 68,682 $100,147
Depreciation and amortization..... 16,926 20,747 23,987 28,274 40,971 47,496
Depreciation from unconsolidated
real estate entities............. - - 10,639 - - 21,227
Minority interest in income....... 3,715 3,570 3,570 9,481 6,918 6,918
Less: Gain on disposition of
real estate...................... - - - - (203) (203)
Amortization of discounts on
mortgage notes receivable........ (67) - - (693) - -
-------- -------- -------- -------- -------- --------
Funds provided by operating
activities....................... 50,325 60,380 91,513 79,180 116,368 175,585
FFO allocable to minority
interests........................ (9,107) (8,721) (8,721) (23,037) (17,569) (17,569)
-------- -------- -------- -------- -------- --------
FFO............................... 41,218 51,659 82,792 56,143 98,799 158,016
Less: preferred stock dividends... (13,308) (15,650) (15,650) (16,846) (31,206) (31,206)
-------- -------- -------- -------- -------- --------
FFO allocable to Common Stock..... 27,910 36,009 67,142 39,297 67,593 126,810
Capital improvements to
-----------------------
maintain facilities:
--------------------
Mini-warehouses................. (2,397) (3,076) (3,084) (6,360) (10,322) (10,366)
Business parks.................. (909) (909) (909) (1,952) (1,952) (1,952)
Add back: minority
interest share of capital
improvements to maintain
facilities....................... 859 800 800 2,948 2,455 2,455
-------- -------- -------- -------- -------- --------
Funds available for
principal payments,
distributions on Common
Stock and investment............. 25,463 32,824 63,949 33,933 57,774 116,947
Cash distributions on
Common Stock..................... (14,886) (18,332) (31,532) (21,249) (34,628) (60,128)
-------- -------- -------- -------- -------- --------
Funds available for
principal payments and
investment....................... $ 10,577 $ 14,492 $ 32,417 $ 12,684 $ 23,146 $ 56,819
======== ======== ======== ======== ======== ========
For the six months ended June 30, 1995, Post-Merger pro forma FFO was
$82,792,000 compared to the Pre-Merger FFO of $51,659,000, representing an
increase of $31,133,000. Post-Merger pro forma FFO allocable to Common Stock
(after deducting preferred stock dividends) was $67,142,000 compared to the
Pre-Merger amount of $36,009,000 for the six months ended June 30, 1995.
Post-Merger pro forma weighted average shares of Common Stock outstanding
during the period was 72,108,048 compared to Pre-Merger weighted average
shares of Common Stock of 42,108,048. Historically, SEI's FFO allocable to
Common Stock was $27,910,000 for the six months ended June 30, 1995
(32,707,556 weighted average shares of Common Stock outstanding).
For the year ended December 31, 1994, Post-Merger pro forma FFO was
$158,016,000 compared to the Pre-Merger pro forma FFO of $98,799,000,
representing an increase of $59,217,000. Post-Merger pro forma FFO allocable
to Common Stock (after deducting preferred stock dividends) was $126,810,000
compared to the Pre-Merger amount of $67,593,000 for the year ended December
31, 1994. Post-Merger pro forma weighted average shares of Common Stock
outstanding during the period was 71,844,644 compared to Pre-Merger weighted
average shares of Common Stock outstanding of
73
41,844,644. Historically, SEI's FFO applicable to Common Stock was $39,297,000
for the year ended December, 31, 1994 (24,077,055 weighted average shares of
Common Stock outstanding).
On a historical basis, for the six months ended June 30,1995 and the year
ended December 31, 1994, SEI retained $10.6 million and $12.7 million,
respectively, of funds to make principal payments on debt and additional
investments. On a Post-Merger, pro forma basis for the six months ended June
30, 1995 and the year ended December 31, 1994, SEI would have retained $32.4
million and $56.8 million, respectively, to make principal payments on debt
and additional investments. After considering distributions paid to other
investors related to the Real Estate Interests, SEI would have retained $23.5
million and $40.1 million on a Post Merger pro forma basis for the six months
ended June 30, 1995 and the year ended December 31, 1994, respectively.
SEI will be accounting for the Real Estate Interest using the equity
method of accounting, and accordingly, earnings will be recognized based upon
SEI's interest in each of the partnerships and REITs. The interest for a
period is based upon SEI's share of the increase or decrease in the net assets
of the entities. Provisions of these partnerships and REITs, however,
provide for the payment of preferred cash distributions to other investors
(until certain specified amounts have been paid) without regard to the pro
rata interest of all investors in current earnings. As a result, actual cash
distributions to be paid to SEI for a period of time will be less than SEI's
FFO from these entities. On a pro forma basis, FFO distributable to SEI
during 1994 and the six months ended June 30, 1995 would have been
approximately $16.7 million and $8.9 million, respectively, less than FFO.
Preferred cash distributions paid to other investors during each period have
the effect of increasing SEI's economic interest in each of the respective
entities and reducing the amount of future preference payments which must be
paid to other investors before cash distributions will be shared on a pro rata
basis with respect to each investor's actual interest. The aggregate future
preference payments to other investors is approximately $130 million and is
expected to be paid over approximately 15 years, with approximately 50% of the
amount being paid over the next 3.5 years.
SEI's Post-Merger pro forma debt at June 30, 1995 is estimated to be
$175,919,000. Approximate principal maturities are as follows:
1995 (July 1995 - December 1995)........... $ 1,341,000
1996....................................... 15,913,000
1997....................................... 11,109,000
1998....................................... 11,476,000
1999....................................... 23,948,000
Thereafter................................. 112,132,000
------------
Total...................................... $175,919,000
============
SEI's low leverage, substantially unencumbered asset base and its $125
million line of credit provide it with a significant degree of financial
flexibility (both historically and pro forma, post-merger).
74
Distributions. SEI has a conservative distribution policy that is, among
-------------
other things, supported by FFO allocable to Common Stock and SEI's requirement
to maintain its REIT status. SEI's conservative distribution policy permits
it, after funding its distributions and capital improvements, to retain
significant funds to make additional investments and debt reductions. During
1992, 1993, 1994 and the first six months of 1995, SEI distributed to Common
Stock shareholders 66%, 59%, 54% and 53% of its FFO allocable to Common Stock,
respectively, allowing it to retain approximately $35 million after capital
improvements and preferred stock dividend requirements. Historical
distributions to shareholders during 1994 and the first six months of 1995
were as follows:
Six Months Ended June 30, Year Ended December 31,
1995 1994
----------------------------- -----------------------------
Distributions Total Distributions Total
Per Share Distributions Per Share Distributions
------------- ------------- ------------- --------------
Series A Preferred Stock............. $1.250 $ 2,282,000 $2.500 $ 4,563,000
Series B Preferred Stock............. 1.150 2,744,000 2.300 5,340,000
Series C Preferred Stock............. 1.066 1,279,000 1.042 1,250,000
Series D Preferred Stock............. 1.188 1,426,000 0.792 950,000
Series E Preferred Stock............. 1.042 2,286,000 - -
Series F Preferred Stock............. 0.400 919,000 - -
Convertible Preferred Stock.......... 1.031 2,372,000 2.063 4,743,000
----------- -----------
13,308,000 16,846,000
Common Stock......................... 0.440 14,886,000 0.850 21,249,000
----------- -----------
$28,194,000 $38,095,000
=========== ===========
On a Post-Merger, pro forma basis, SEI's distributions to Common Stock
shareholders would have been approximately 47% of its FFO available to Common
Stock shareholders for both the year ended December 31, 1994 and the six
months ended June 30, 1995.
As a REIT, SEI 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 in any year is so distributed prior to filing of SEI's tax return with
respect to such year. SEI has satisfied the REIT distribution requirement
since 1980. SEI has satisfied the REIT distribution requirement for 1992, 1993
and 1994 by attributing distributions in 1993, 1994 and 1995 to the prior
year's taxable income. SEI may be required, over each of the next several
years, to attribute distributions made after the close of the taxable year to
the prior year, but shareholders will be treated for federal income tax
purposes as having received such distributions in the taxable years in which
they are actually made.
As a result of the Merger with PSMI, SEI's taxable income will increase
substantially. Further, as a result of: (i) the lack of distributions on the
Class B Common Stock for a minimum of four years and (ii) the taxable income-
related to PSMI (approximately $38 million in 1994) exceeding the
distributions on the Common Stock issued ($.88/share or $26.4 million/year),
SEI's overall level of distributions may have to increase.
Future Transactions. SEI 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 PSI through
direct purchases, merger, tender offers or other transactions.
75
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
---------------------------------
c. Exhibits.
--------
2. Agreement and Plan of Reorganization by and among Public Storage,
Inc., Public Storage Management, Inc. and Storage Equities, Inc.
dated as of June 30, 1995 (the "Agreement and Plan of
Reorganization"), and form of Agreement of Merger between Storage
Equities, Inc. and Public Storage Management, Inc. (Exhibit A to
the Agreement and Plan of Reorganization).
23. Consent of Ernst & Young LLP.
76
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 hereunto duly authorized.
STORAGE EQUITIES, INC.
Date: September 7, 1995 By: /s/ Harvey Lenkin
------------------------ -----------------------------
Harvey Lenkin
President
77