SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2003
------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
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Commission File Number: 1-8389
PUBLIC STORAGE, INC.
--------------------
(Exact name of registrant as specified in its charter)
California 95-3551121
---------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
701 Western Avenue, Glendale, California 91201-2349
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 244-8080.
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of November 11, 2003:
Common Stock, $.10 Par Value - 126,878,839 shares
Depositary Shares Each Representing 1/1,000 of a Share of Equity Stock, Series
A, $.01 Par Value - 8,776,102 depositary shares (representing 8,776.102 shares
of Equity Stock, Series A)
Equity Stock, Series AA, $.01 Par Value - 225,000 shares
Equity Stock, Series AAA, $.01 Par Value - 4,289,544 shares
PUBLIC STORAGE, INC.
INDEX
Pages
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PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
September 30, 2003 and December 31, 2002 1
Condensed Consolidated Statements of Income for the
Three and Nine Months Ended September 30, 2003 and 2002 2
Condensed Consolidated Statement of Shareholders' Equity
for the Nine Months Ended September 30, 2003 3
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2003 and 2002 4 -5
Notes to Condensed Consolidated Financial Statements 6 -37
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 38 - 65
Item 2A. Risk Factors 65 - 69
Item 3. Quantitative and Qualitative Disclosures about Market Risk 69
Item 4. Controls and Procedures 69
PART II. OTHER INFORMATION (Items 2 through 5 are not applicable)
-----------------
Item 1. Legal Proceedings 70
Item 6. Exhibits and Reports on Form 8-K 70 - 77
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
September 30, December 31,
2003 2002
---------------- ---------------
(Unaudited)
ASSETS
Cash and cash equivalents.................................................... $ 45,303 $ 103,124
Real estate facilities, at cost:
Land...................................................................... 1,318,085 1,304,881
Buildings................................................................. 3,745,517 3,683,645
---------------- ---------------
5,063,602 4,988,526
Accumulated depreciation.................................................. (1,107,744) (987,546)
---------------- ---------------
3,955,858 4,000,980
Construction in process................................................... 90,094 87,516
Land held for development................................................. 12,236 17,807
Real estate facilities held for sale, net of accumulated depreciation..... 15,829 -
---------------- ---------------
4,074,017 4,106,303
Investment in real estate entities........................................... 335,972 329,679
Goodwill..................................................................... 78,204 78,204
Intangible assets, net....................................................... 112,940 117,893
Notes receivable, including amounts due from related parties................. 914 24,324
Other assets................................................................. 94,895 84,135
---------------- ---------------
Total assets................................................... $ 4,742,245 $ 4,843,662
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable................................................................ $ 82,302 $ 115,867
Accrued and other liabilities................................................ 151,992 129,327
---------------- ---------------
Total liabilities................................................... 234,024 245,194
Minority interest:
Preferred partnership interests........................................... 285,000 285,000
Other partnership interests............................................... 143,262 154,499
Commitments and contingencies
Shareholders' equity:
Cumulative Preferred Stock, $0.01 par value, 50,000,000 shares authorized,
5,758,486 shares issued (in series) and outstanding, (9,258,486 at
December 31, 2002) at liquidation preference............................
1,729,525 1,817,025
Common Stock, $0.10 par value, 200,000,000 shares authorized, 125,973,318
shares issued and outstanding (116,991,455 at December 31, 2002)........ 12,597 11,699
Equity Stock, Series A, $0.01 par value, 200,000,000 shares authorized,
8,776.102 shares issued and outstanding................................. - -
Class B Common Stock, $0.10 par value, no shares are issued and outstanding
(7,000,000 at December 31, 2002)........................................ - 700
Paid-in capital........................................................... 2,421,624 2,371,194
Cumulative net income..................................................... 2,280,690 2,030,007
Cumulative distributions paid............................................. (2,364,477) (2,071,656)
---------------- ---------------
Total shareholders' equity.......................................... 4,079,959 4,158,969
---------------- ---------------
Total liabilities and shareholders' equity..................... $ 4,742,245 $ 4,843,662
================ ===============
See accompanying notes.
1
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except net income per share amounts)
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------- -----------------------------
2003 2002 2003 2002
--------------- -------------- -------------- -------------
Revenues:
Rental income:
Self-storage facilities.............................. $ 206,856 $ 195,907 $ 593,345 $ 572,588
Commercial properties................................ 2,812 2,894 8,601 8,917
Containerized storage facilities..................... 10,355 8,935 27,713 23,351
Tenant reinsurance premiums.............................. 5,755 5,112 16,551 14,843
Interest and other income................................ 2,847 2,538 7,425 7,005
--------------- -------------- -------------- -------------
228,625 215,386 653,635 626,704
--------------- -------------- -------------- -------------
Expenses:
Cost of operations:
Self-storage facilities.............................. 70,981 62,734 206,655 180,898
Commercial properties................................ 1,253 1,074 3,491 3,272
Containerized storage facilities..................... 6,197 7,043 17,201 16,756
Tenant reinsurance................................... 2,917 2,387 8,631 7,203
Depreciation and amortization............................ 46,041 44,732 137,657 133,186
General and administrative............................... 4,642 3,968 13,321 12,273
Interest expense......................................... 296 969 1,121 3,284
--------------- -------------- -------------- -------------
132,327 122,907 388,077 356,872
--------------- -------------- -------------- -------------
Income before equity in earnings of real estate entities, minority
interest in income, discontinued operations and gain
(loss) on disposition of real estate investments........... 96,298 92,479 265,558 269,832
Equity in earnings of real estate entities (Note 6)........... 5,770 7,483 19,456 23,739
Minority interest in income:
Preferred partnership interests.......................... (6,726) (6,726) (20,179) (20,179)
Other partnership interests.............................. (4,418) (4,782) (12,403) (13,284)
--------------- -------------- -------------- -------------
Income before discontinued operations and gain (loss) on
disposition of real estate investments..................... 90,924 88,454 252,432 260,108
Discontinued operations (Note 4).............................. (1,224) (5,103) (2,556) (6,745)
Gain (loss) on disposition of real estate investments......... 47 - 807 (1,839)
--------------- -------------- -------------- -------------
Net income.................................................... $ 89,747 $ 83,351 $ 250,683 $ 251,524
=============== ============== ============== =============
Net income allocation:
- ---------------------
Allocable to preferred shareholders:
Based on distributions paid........................... $ 35,193 $ 37,928 $ 107,914 $ 111,704
Based on redemptions of preferred stock (Note 2)...... - 6,888 3,397 6,888
Allocable to Equity Stock, Series A...................... 5,375 5,375 16,126 16,126
Allocable to common shareholders (Restated - Note 2)..... 49,179 33,160 123,246 116,806
--------------- -------------- -------------- -------------
$ 89,747 $ 83,351 $ 250,683 $ 251,524
=============== ============== ============== =============
Per common share:
Net income per share - Basic (Restated - Note 2) (Note 4) $ 0.39 $ 0.27 $ 0.99 $ 0.95
=============== ============== ============== =============
Net income per share - Diluted (Restated - Note 2) (Note 4) $ 0.39 $ 0.27 $ 0.98 $ 0.94
=============== ============== ============== =============
Net income per depositary share of Equity Stock, Series A -
Basic and Diluted...................................... $ 0.61 $ 0.61 $ 1.84 $ 1.84
=============== ============== ============== =============
Weighted average common shares - Basic................... 125,528 123,341 124,740 122,707
=============== ============== ============== =============
Weighted average common shares - Diluted................. 126,802 124,784 125,987 124,539
=============== ============== ============== =============
Weighted average depositary shares of Equity Stock, Series A
- Basic and Diluted.................................... 8,776 8,776 8,776 8,776
=============== ============== ============== =============
See accompanying notes.
2
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands, except share data)
(Unaudited)
Preferred Stock Common Stock Stock Paid-in Capital
---------------- -------------- --------------- ---------------
Balances at December 31, 2002............................. $ 1,817,025 $ 11,699 $ 700 $ 2,371,194
Redemption of cumulative preferred stock, including redemption costs:
Series B (2,300,000 shares)............................ (57,500) - - (17)
Series C (1,200,000 shares)............................ (30,000) - - (18)
Issuance of common stock:
Exercise of Employee Stock Options (1,730,004 shares).. - 173 - 42,687
Stock option expense (Note 12) ........................ - - - 294
Conversion of Class B shares into Common Stock
(7,000,000 shares)................................... - 700 (700) -
To acquire minority interests (426,859 shares)......... - 43 - 13,467
Repurchase of common stock (175,000 shares)............... - (18) - (5,983)
Net income................................................ - - - -
Cash distributions:
Cumulative preferred stock (Note 10)................... - - - -
Equity Stock, Series A ($1.84 per depositary share).... - - - -
Common Stock ($1.35 per share)......................... - - - -
---------------- -------------- --------------- ---------------
Balances at September 30, 2003............................ $ 1,729,525 $ 12,597 $ - $ 2,421,624
================ ============== =============== ===============
Total
Cumulative Net Cumulative Shareholders'
Income Distributions Equity
-------------- -------------- --------------
Balances at December 31, 2002............................. $ 2,030,007 $ (2,071,656) $ 4,158,969
Redemption of cumulative preferred stock, including redemption costs:
Series B (2,300,000 shares)............................ - - (57,517)
Series C (1,200,000 shares)............................ - - (30,018)
Issuance of common stock:
Exercise of Employee Stock Options (1,730,004 shares).. - - 42,860
Stock option expense (Note 12) ........................ - - 294
Conversion of Class B shares into Common Stock
(7,000,000 shares)................................... - - -
To acquire minority interests (426,859 shares)......... - - 13,510
Repurchase of common stock (175,000 shares)............... - - (6,001)
Net income................................................ 250,683 - 250,683
Cash distributions:
Cumulative preferred stock (Note 10)................... - (107,914) (107,914)
Equity Stock, Series A ($1.84 per depositary share).... - (16,126) (16,126)
Common Stock ($1.35 per share)......................... - (168,781) (168,781)
-------------- -------------- --------------
Balances at September 30, 2003............................ $ 2,280,690 $ (2,364,477) $ 4,079,959
============== ============== ==============
See accompanying notes.
3
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
For the Nine Months Ended
September 30,
-------------------------------------
2003 2002
---------------- ----------------
Cash flows from operating activities:
Net income.............................................................. $ 250,683 $ 251,524
Adjustments to reconcile net income to net cash provided by operating
activities:
(Gain) loss on asset sales included in equity in earnings of real estate
investments (Note 6)............................................... (453) (2,724)
(Gain) loss on sale of real estate investments....................... (807) 1,839
Depreciation and amortization........................................ 137,657 133,186
Depreciation included in equity in earnings of real estate entities.. 20,353 19,717
Minority interest in income.......................................... 32,582 33,463
Depreciation, impairment charges and adjustments associated with
discontinued operations (Note 4) .................................. 3,316 8,103
Other................................................................ 11,855 14,997
---------------- ----------------
Total adjustments........................................... 204,503 208,581
---------------- ----------------
Net cash provided by operating activities............... 455,186 460,105
---------------- ----------------
Cash flows from investing activities:
Principal payments received on mortgage notes receivable............. 23,410 35,210
Capital improvements to real estate facilities....................... (20,470) (16,041)
Construction in process and acquisition of land held for development. (70,576) (77,408)
Acquisition of minority interests.................................... (9,867) (26,519)
Proceeds from the disposition of land and real estate facilities..... 12,655 5,322
Proceeds from the disposition of investments in real estate entities. 851 -
Investment in real estate entities................................... (26,728) (25,550)
Business combinations (Note 3)....................................... - (139,680)
Acquisition of real estate facilities................................ - (29,899)
Other investments.................................................... (7,821) (11,452)
---------------- ----------------
Net cash used in investing activities................... (98,546) (286,017)
---------------- ----------------
Cash flows from financing activities:
Repayments on revolving line of credit............................... - (25,000)
Principal payments on notes payable.................................. (33,835) (21,970)
Net proceeds from the issuance of common stock....................... 42,860 21,509
Net proceeds from the issuance of preferred stock.................... - 457,016
Repurchase of common stock........................................... (6,001) (381)
Redemption of preferred stock........................................ (87,535) (45,643)
Distributions paid to shareholders................................... (292,821) (293,517)
Distributions paid to holders of preferred partnership interests..... (20,179) (20,179)
Distributions paid to other partnership interests.................... (17,143) (19,015)
Investment by minority interests..................................... 193 -
---------------- ----------------
Net cash (used in) provided by financing activities..... (414,461) 52,820
---------------- ----------------
Net (decrease) increase in cash and cash equivalents...................... (57,821) 226,908
Cash and cash equivalents at the beginning of the period.................. 103,124 49,347
---------------- ----------------
Cash and cash equivalents at the end of the period........................ $ 45,303 $ 276,255
================ ================
See accompanying notes.
4
PUBLIC STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Continued)
(Unaudited)
For the Nine Months Ended
September 30,
-------------------------------------
2003 2002
---------------- ----------------
Supplemental schedule of non-cash investing and financing activities:
Acquisition of minority interest for consideration including common stock:
Real estate facilities............................................. $ (16,687) $ (39,318)
Minority Interest.................................................. (6,690) (25,105)
Issuance of common stock to acquire minority interest................ 13,510 37,904
Business combinations (Note 3):
Real estate facilities............................................... - (330,426)
Other assets......................................................... - (16,728)
Accrued and other liabilities........................................ - 23,891
Minority interest.................................................... - 14,806
Reduction in investment in real estate entities...................... - 160,236
Reduction in other assets............................................ - 8,541
Disposition of minority interests in exchange for other assets at a loss of
$1,839 (Note 9):
Other assets...................................................... - (1,450)
Minority interest................................................. - 3,289
Note received in exchange for sale of real estate...................... - (210)
Real estate sold in exchange for note.................................. - 210
Exchange of Series B Preferred Stock for Series T Preferred Stock:
Reduction in Series B Preferred Stock outstanding.................... - (2,150)
Increase in Series T Preferred Stock outstanding..................... - 2,150
Series J preferred Stock called for redemption :
Cumulative Preferred Stock........................................... - (150,018)
Accrued and other liabilities........................................ - 150,018
See accompanying notes.
5
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
1. Description of the Business
Public Storage, Inc. (the "Company") is a California corporation,
which was organized in 1980. We are a fully integrated, self-administered
and self-managed real estate investment trust ("REIT") whose principal
business activities include the acquisition, development, ownership and
operation of self-storage facilities which offer storage spaces for lease,
usually on a month-to-month basis, for personal and business use. In
addition, to a much lesser extent, we have interests in commercial
properties, containing commercial and industrial rental space, and
interests in facilities that lease storage containers.
At September 30, 2003, we had direct and indirect equity interests
in 1,411 storage facilities with 85.2 million net rentable square feet
located in 37 states operating under the "Public Storage" name. We also
have direct and indirect equity interests in approximately 16.4 million net
rentable square feet of commercial and industrial space located in 12
states.
2. Summary of Significant Accounting Policies
Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation have been included.
Operating results for the three and nine months ended September 30, 2003
are not necessarily indicative of the results that may be expected for the
year ended December 31, 2003. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 2002.
The consolidated financial statements include the accounts of the
Company and 33 controlled entities (the "Consolidated Entities").
Collectively, the Company and the Consolidated Entities own a total of
1,384 real estate facilities, consisting of 1,375 self-storage facilities,
six containerized storage facilities and three commercial properties. All
intercompany transactions between the Company and any of the Consolidated
Entities are eliminated in consolidation.
At September 30, 2003, we had equity investments in seven limited
partnerships in which we do not have a controlling interest. These limited
partnerships collectively own 36 self-storage facilities, which are managed
by the Company. In addition, at September 30, 2003, we own approximately
44% of the common equity of PS Business Parks, Inc. ("PSB"), which owns and
operates approximately 14.8 million net rentable square feet of commercial
space at September 30, 2003. We do not control these entities. Accordingly,
our investment in these limited partnerships and PSB (these entities are
referred to collectively as the "Unconsolidated Entities") are accounted
for using the equity method.
Certain amounts previously reported have been reclassified to
conform to the September 30, 2003 presentation, including Discontinued
Operations (see Note 4), and the application of the Securities and Exchange
Commission ("SEC") Observer's clarification of Emerging Issues Task Force
Topic D-42 (see "Net Income per Common Share" below).
6
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
Use of Estimates
----------------
The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
Income Taxes
------------
For all taxable years subsequent to 1980, the Company qualified
and intends to continue to qualify as a REIT, as defined in Section 856 of
the Internal Revenue Code. As a REIT, we are not taxed on that portion of
our taxable income which is distributed to our shareholders, provided that
we meet certain tests. We believe we will meet these tests during 2003 and,
accordingly, no provision for income taxes has been made in the
accompanying financial statements.
Financial Instruments
---------------------
The methods and assumptions used to estimate the fair value of
financial instruments are described below. We have estimated the fair value
of our financial instruments using available market information and
appropriate valuation methodologies. Considerable judgment is required in
interpreting market data to develop estimates of market value. Accordingly,
estimated fair values are not necessarily indicative of the amounts that
could be realized in current market exchanges.
For purposes of financial statement presentation, we consider all
highly liquid debt instruments with a maturity of three months or less to
be cash equivalents.
Due to the short period to maturity of our cash and cash
equivalents, accounts receivable, other assets, and accrued and other
liabilities, the carrying values as presented on the consolidated balance
sheets are reasonable estimates of fair value. The carrying amount of
mortgage notes receivable approximates fair value because the aggregate
mortgage notes receivable's applicable interest rates approximate current
market rates for similar loans.
Financial assets that are exposed to credit risk consist primarily
of cash and cash equivalents, accounts receivable, and notes receivable.
Cash equivalents, which consist of short-term investments, including
commercial paper, are only invested in entities with an investment grade
rating. Accounts receivable are not a significant portion of total assets
and are comprised of a large number of individual customers.
Real Estate Facilities
----------------------
Real estate facilities are recorded at cost. Costs associated with
the acquisition, development, construction and improvement of properties
are capitalized. Interest, property taxes, and other costs associated with
development are capitalized as building cost. Expenditures for repairs and
maintenance are charged to expense as incurred. Depreciation is computed
using the straight-line method over the estimated useful lives of the
buildings and improvements, which are generally between 5 and 25 years.
7
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
Evaluation of Asset Impairment
------------------------------
In August 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). In June
2001, the FASB issued Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142"). We adopted both of
these statements effective January 1, 2002.
With respect to goodwill, we evaluate impairment annually through
a two-step process. In the first step, if the fair value of the reporting
unit to which the goodwill applies is equal to or greater than the carrying
amount of the assets of the reporting unit, including the goodwill, the
goodwill is considered unimpaired and the second step is unnecessary. If,
however, the carrying amount is less than the fair value of the reporting
unit, the second step is performed. In this test, we compute the implied
fair value of the goodwill based upon the allocations that would be made to
the goodwill, other assets and liabilities of the reporting unit if a
business combination transaction were consummated at the fair value of the
reporting unit. An impairment loss is recorded to the extent that the
implied fair value of the goodwill is less than the goodwill's carrying
amount. Our evaluation identified no such impairments in our last annual
evaluation at December 31, 2002.
With respect to other long-lived assets, we evaluate such assets
on a quarterly basis. We first evaluate these assets for indicators of
impairment such as a) a significant decrease in the market price of a
long-lived asset, b) a significant adverse change in the extent or manner
in which a long-lived asset is being used or in its physical condition, c)
a significant adverse change in legal factors or the business climate that
could affect the value of the long-lived asset, d) an accumulation of costs
significantly in excess of the amount originally projected for the
acquisition or construction of the long-lived asset, or e) a current-period
operating or cash flow loss combined with a history of operating or cash
flow losses or a projection or forecast that demonstrates continuing losses
associated with the use of the long-lived asset. When any such indicators
of impairment are noted, we compare the carrying value of these assets to
the future estimated undiscounted cash flows attributable to these assets.
If the asset's recoverable amount is less than the carrying value of the
asset, then an impairment charge is booked for the excess of carrying value
over the asset's fair value.
Any long-lived assets which we expect to sell or otherwise dispose
of prior to their previously estimated useful life are stated at what we
estimate to be the lower of their estimated net realizable value or their
carrying value. Our evaluations identified one such impairment in our
discontinued operations during the second quarter of 2003, for which we
recorded a $750,000 real estate impairment charge in the quarter ended June
30, 2003 (see Note 4). We recorded an additional $1,274,000 in impairment
charges relative to certain containerized facilities that were identified
for closure in the third quarter of 2003 (See Note 4). No additional
impairments were identified from our evaluations as of September 30, 2003.
Accounting for Stock-Based Compensation
---------------------------------------
We utilize the Fair Value Method (described below) of accounting
for our employee stock options issued after December 31, 2001, and utilize
the APB 25 Method (described below) for employee stock options issued prior
to January 1, 2002. For the three and nine months ended September 30, 2003,
a total of $95,000 and $294,000, respectively, in compensation expense
($39,000 and $97,000 for the three and nine months ended September 30,
2002) with respect to stock options was included in general and
administrative expense. During the three months ended September 30, 2003, a
total of $371,000 in restricted stock compensation was included in general
and administrative expense. See Note 12 for a full discussion of our
accounting policies with respect to employee stock options and restricted
stock units.
8
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
Other Assets
------------
Other assets primarily consist of furniture, fixtures, equipment,
and other such assets associated with the containerized storage operations,
system development and computer software costs, assets associated with the
truck rental business, accounts receivable, and prepaid expenses.
Expenditures with respect to the containerized storage operations, system
development and computer software costs, and truck rental business are
included in "other investments" on the statements of cash flows. Accounts
receivable from customers are net of allowances for doubtful accounts.
Included in other assets with respect to the containerized storage
business is furniture, fixtures, and equipment (net of accumulated
depreciation) of $13,479,000 and $20,275,000 at September 30, 2003 and
December 31, 2002, respectively.
Included in depreciation and amortization expense and in
discontinued operations - depreciation and amortization for the three
months ended September 30, 2003 and 2002 is $2,288,000 and $2,049,000,
respectively, and $6,891,000 and $5,276,000, for the nine months ended
September 30, 2003 and 2002, respectively, related to other assets.
We reevaluated the historical results with respect to wear and
functional obsolescence of the containers and other assets used in the
containerized storage business. Based upon the results of this review, we
decreased the estimated useful lives with respect to these assets effective
January 1, 2003. As a result of this change, depreciation with respect to
the continuing containerized storage assets increased $378,000 and $978,000
for the three and nine months ended September 30, 2003 as compared to the
same periods in 2002.
Other assets at September 30, 2003 also include $27,206,000
($13,801,000 at December 31, 2002) in held to maturity debt securities
owned by STOR-Re Mutual Insurance Company, Inc. ("STOR-Re") (see Note 3)
stated at amortized cost.
Accrued and Other Liabilities
-----------------------------
Accrued and other liabilities consist primarily of trade payables,
real and personal property tax accruals, accrued interest, and losses and
loss adjustment liabilities, as discussed below.
STOR-Re (described in Note 3) provides limited property and
liability insurance coverage to the Company and affiliates of the Company.
This entity accrues liabilities for losses and loss adjustment expense,
which at September 30, 2003 totaled $27,336,000 ($22,911,000 at December
31, 2002). PS Insurance Company, Ltd., a wholly-owned subsidiary of the
Company, reinsures policies against claims for losses to goods stored by
tenants in our self-storage facilities. This entity accrues liabilities for
losses and loss adjustment expense, which at September 30, 2003 totaled
$1,335,000 ($2,135,000 at December 31, 2002).
9
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
These liabilities for losses and loss adjustment expenses include
an amount determined from loss reports and individual cases and an amount,
based on recommendations from an outside actuary using a frequency and
severity method, for losses incurred but not reported. Determining the
liability for unpaid losses and loss adjustment expense is based upon
estimates and requires considerable judgment. While we believe that the
amount provided for is adequate, the ultimate liability may be in excess of
or less than the amounts provided.
Intangible Assets and Goodwill
------------------------------
Intangible assets consist of property management contracts
($165,000,000) and the excess of acquisition cost over the fair value of
net tangible and identifiable intangible assets or "goodwill" ($94,719,000)
acquired in business combinations.
Our goodwill has an indeterminate life and, accordingly, is not
amortized. Our other intangibles are amortized on a straight-line basis
over a 25 year period.
Goodwill is net of accumulated amortization of $16,515,000 at
September 30, 2003 and December 31, 2002. At September 30, 2003, property
management contracts are net of accumulated amortization of $52,060,000
($47,107,000 at December 31, 2002). Included in depreciation and
amortization expense for each of the three and nine months ended September
30, 2003 and 2002 is $1,651,000 and $4,953,000, respectively, with respect
to the amortization of property management contracts.
Revenue and Expense Recognition
-------------------------------
Rental income, which is generally earned pursuant to
month-to-month leases for storage space, is recognized as earned. Tenant
reinsurance premiums are recognized as premiums are collected. Interest
income is recognized as earned. Equity in earnings of real estate entities
is recognized based on our ownership interest in the earnings of each of
the unconsolidated real estate entities.
We accrue for property tax expense based upon estimates and
historical trends. If these estimates are incorrect, our property tax
expense could be misstated.
Cost of operations, general and administrative expense, interest
expense, as well as television, yellow page, and other advertising
expenditures are expensed as incurred. Accordingly, the amounts incurred in
an interim period may not be indicative of the amounts to be incurred
during a full year.
Environmental Costs
-------------------
Our policy is to accrue environmental assessments and/or
remediation cost when it is probable that such efforts will be required and
the related cost can be reasonably estimated. Our current practice is to
conduct environmental investigations in connection with property
acquisitions. Although there can be no assurance, we are not aware of any
environmental contamination of any of our facilities, which individually or
in the aggregate would be material to our overall business, financial
condition, or results of operations.
10
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
Net Income per Common Share
---------------------------
Dividends paid to our preferred shareholders totaling $35,193,000
and $37,928,000 for the three months ended September 30, 2003 and 2002,
respectively, have been deducted from net income to arrive at net income
allocable to our common shareholders. Dividends paid to our preferred
shareholders totaling $107,914,000 and $111,704,000 for the nine months
ended September 30, 2003 and 2002, respectively, have been deducted from
net income to arrive at net income allocable to our common shareholders. In
addition, during the third quarter of 2003, we implemented the SEC's
clarification of Emerging Issues Task Force Topic D-42, as described below.
As a result of this implementation, we allocated an additional $3,397,000
for the nine months ended September 30, 2003 for the excess of the
redemption amount over the carrying amount of our Cumulative Preferred
Stock, Series B and C and $6,888,000 for the three and nine months ended
September 30, 2002 for such excess of our Cumulative Preferred Stock,
Series A and J. This implementation had no impact upon our reported net
income; however, the implementation did result in a reallocation of such
net income between our preferred and common shareholders.
Emerging Issues Task Force ("EITF") Topic D-42, "The Effect on the
Calculation of Earnings per Share for the Redemption or Induced Conversion
of Preferred Stock" provides, among other things, that any excess of (1)
the fair value of the consideration transferred to the holders of preferred
stock redeemed over (2) the carrying amount of the preferred stock should
be subtracted from net earnings to determine net earnings available to
common stockholders in the calculation of earnings per share.
During 2001, 2002 and the nine months ended September 30, 2003, we
redeemed various series of our cumulative perpetual preferred stock. Our
interpretation of EITF Topic D-42, prior to the clarification, was that the
carrying amount of our preferred stock was equivalent to the liquidation
preference as recorded on our balance sheet. Each of the series of
preferred stock that was redeemed, was redeemed at the liquidation
preference. Accordingly, based upon our interpretation, the fair value of
the consideration given at redemption was equivalent to the carrying amount
on our balance sheet, resulting in no impact to net earnings available to
common stockholders in the calculation of earnings per share.
At the July 31, 2003 meeting of the EITF, the Securities and
Exchange Commission Observer clarified that for the purposes of applying
EITF Topic D-42, the carrying amount of the preferred stock should be
reduced by the issuance costs of the preferred stock, regardless of where
in the stockholders' equity section those costs were initially classified
on issuance. In our case, issuance costs were recorded as a reduction to
Paid-in Capital on our balance sheet at the time the related securities
were issued and were not considered as a reduction to the carrying value of
the preferred stock at the time of redemption.
Net income allocated to our common shareholders has been further
allocated among our two classes of common stock; our regular common stock
and our Equity Stock, Series A. The allocation among each class was based
upon the two-class method. Under the two-class method, earnings per share
for each class of common stock is determined according to dividends
declared (or accumulated) and participation rights in undistributed
earnings. Under the two-class method, the Equity Stock, Series A was
allocated net income of approximately $5,375,000 for each of the three
months ended September 30, 2003 and 2002 and $16,126,000 for each of the
nine months ended September 30, 2003 and 2002. The remaining $49,179,000
and $33,160,000 (as restated for the impact of EITF Topic D-42) for the
three months ended September 30, 2003 and 2002, respectively, was allocated
to the regular common shares. For the nine months ended September 30, 2003
and 2002, $123,246,000 and $116,806,000 (as restated for the impact of EITF
Topic D42), respectively, was allocated to the regular common shares.
Basic net income per share is computed using the weighted average
common shares (prior to the dilutive impact of stock options outstanding).
Diluted net income per common share is computed using the weighted average
common shares outstanding (adjusted for stock options and restricted stock
units outstanding). Weighted average common shares excludes shares owned by
the Consolidated Entities for the three and nine months ended September 30,
2003 and 2002, as these shares of common stock are eliminated in
consolidation (see Note 10).
11
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
Distributions per share of Class B common stock are equal to 97%
of the per share distribution paid to the Company's regular common
shareholders. As a result of this participation in distribution of
earnings, for purposes of computing net income per common share, the
Company includes 6,790,000 (7,000,000 x 97%) Class B common shares in the
weighted average common equivalent shares for the three months ended March
31, 2002.
As of March 31, 2002, the remaining contingency for the conversion
of the Class B common stock into regular common stock was satisfied (see
Note 10) and the Class B common stock converted into 7,000,000 shares of
common stock on January 1, 2003. As a result, beginning April 1, 2002,
7,000,000 Class B common shares are included in the weighted average common
equivalent shares.
3. Business Combinations
Development Joint Venture
-------------------------
On January 16, 2002, we acquired the remaining 70% interest we did
not own in a partnership (the "Development Joint Venture"). The aggregate
cost of this business combination was $268,209,000, consisting of our
pre-existing investment in the Development Joint Venture of $115,131,000
and cash of $153,078,000. This acquisition was completed in order to expand
the Company's real estate investments. The Development Joint Venture was
formed in April 1997 and was funded with equity capital consisting of 30%
from the Company and 70% from an institutional investor and owns 47
self-storage facilities. Prior to January 16, 2002, we accounted for our
investment in the Development Joint Venture using the equity method of
accounting.
STOR-Re Mutual Insurance Company, Inc. ("STOR-Re")
--------------------------------------------------
As a result of obtaining a controlling ownership interest,
effective July 1, 2002 we began consolidating STOR-Re. Accordingly, the
assets and liabilities and operating results subsequent to July 1, 2002 of
STOR-Re are included on our financial statements. Our investment in
STOR-Re, which was previously classified as an Other Asset, was
consolidated and the cash, other assets, and liabilities of STOR-Re are
included in our financial statements.
STOR-Re was formed in 1994 as an association captive insurance
company owned by the Company and its affiliates. STOR-Re provides limited
property and liability insurance to the Company and its affiliates. The
Company also utilizes other insurance carriers to provide property and
liability coverage in excess of STOR-Re's limitations.
Prior to July 1, 2002, the insurance premiums paid to STOR-Re were
included in property operating expenses. After June 30, 2002, the insured
liability costs incurred by STOR-Re with respect to the Company's and the
Consolidated Entities' facilities are presented as property operating
expenses. The insured liability costs incurred by STOR-Re are substantially
equivalent to the premiums paid by the Company and its affiliates;
accordingly, the consolidation of STOR-Re had no material impact upon the
Company's income statement. The net operating results of STOR-Re with
respect to its insurance services provided to the Unconsolidated Entities
are included in "Interest and other income."
Each of the transactions indicated above has been accounted for
using the purchase method. Accordingly, allocations of our acquisition cost
(consisting of our preexisting investment and the cost of acquisition of
interests acquired in connection with the transaction) was allocated to the
net assets acquired based upon the fair value of such assets and
liabilities assumed with respect to the transactions. Accordingly,
allocations of the total acquisition cost to the net assets acquired were
made based upon the fair value of such assets and liabilities assumed.
12
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
The historical operating results of the above acquisitions prior
to each respective acquisition date have not been included in the Company's
historical operating results. Pro forma data (unaudited) for the nine
months ended September 30, 2002 as though the business combinations above
had been effective as of January 1, 2002 are as follows (amounts in
thousands):
For the nine months ended
September 30, 2002
-------------------------
Revenues................................. $ 627,894
Net income............................... $ 251,300
Net income per common share (Basic)...... $ 0.95
Net income per common share (Diluted).... $ 0.94
The pro forma data does not purport to be indicative either of
results of operations that would have occurred had the transactions
occurred at January 1, 2002 or the future results of operations of the
Company. Certain pro forma adjustments were made to the combined historical
amounts to reflect (i) expected reductions in general and administrative
expenses, (ii) estimated increased interest expense from bank borrowings to
finance the cash portion of the acquisition cost and (iii) estimated
increase in depreciation expense.
4. Discontinued Operations
SFAS No. 144, which was adopted by the Company on January 1, 2002,
addresses accounting for discontinued operations. The Statement requires
the segregation of all disposed components of an entity with operations
that (i) can be distinguished from the rest of the entity and (ii) will be
eliminated from the ongoing operations of the entity in a disposal
transaction.
During 2002, we adopted a business plan that included the closure
of several non-strategic containerized storage facilities (the "Closed
Facilities"), representing components of our containerized storage
business. During the nine months ended September 30, 2003, we identified an
additional six facilities for closure, of which five were identified in the
three months ended September 30, 2003. These 28 facilities are collectively
referred to as the "Closed Facilities". The related assets of the Closed
Facilities (consisting primarily of storage containers) were deemed not
recoverable from future operations, and as a result an asset impairment
charge for the excess of these assets' net book value over their net
realizable value was recorded during the third and fourth quarters of 2002
totaling $6,187,000. In addition, lease termination costs, representing the
expected remaining lease liability following closure of the facilities,
were recorded in the amount of $2,447,000 during the latter half of 2002.
In the three months ended September 30, 2003, we recorded asset impairment
charges in the amount of $1,274,000 relating to the closure of the five
facilities during this period. There are no significant assets or
liabilities of the Closed Facilities, other than the remaining lease
liabilities.
Four self storage facilities that we owned in the Knoxville Market
(the "Knoxville Facilities") were disposed of on July 25, 2003 for
aggregate gross proceeds of $11.0 million. The Company financed a
substantial part of the buyer's consideration in exchange for a note
receivable from the buyer, and in accordance with generally accepted
accounting principles, the Company deferred the sale and the corresponding
gain of approximately $4.5 million until October 2003 at which time the
note receivable was collected in full.
On October 16, 2003, we sold a self-storage facility located in
Perrysburg, Ohio for $2.3 million in cash. A gain of approximately $1.1
million will be recognized from the sale of this property in the fourth
quarter of 2003. This facility and the Knoxville Facilities (collectively,
the "Sold Self-Storage Facilities") are reported as discontinued
operations.
In addition, during the fourth quarter of 2002, we sold a
commercial facility.
13
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
In accordance with SFAS No. 144, the historical operations of the
Closed Facilities (including the asset impairment and lease termination
costs), the Sold Self-Storage Facilities, and the sold commercial facility
are classified as discontinued operations. The rental income, cost of
operations, and depreciation expense with respect to these facilities for
each period presented are included in the line-item "Discontinued
Operations" on the income statement. In addition, the net book value
($15,829,000, which is net of $6,341,000 in accumulated depreciation and a
$750,000 impairment charge recorded in the second quarter of 2003) of the
Sold Self-Storage Facilities and an industrial facility previously used by
our containerized storage operations have been classified as "Real estate
facilities held for sale" on our September 30, 2003 balance sheet.
The following table summarizes the historical operations of the
Sold Self-Storage Facilities, the Closed Facilities and the sold commercial
property:
Discontinued Operations:
For the three months ended September 30, For the nine months ended September 30,
---------------------------------------- ----------------------------------------
2003 2002 Change 2003 2002 Change
------------ ----------- ----------- ----------- ---------- -----------
(Amounts in thousands)
Rental income (a):
Sold Self-storage Facilities.... $ 504 $ 479 $ 25 $ 1,448 $ 1,392 $ 56
Closed Facilities............... 1,281 5,651 (4,370) 5,862 15,692 (9,830)
Sold commercial facility........ - 39 (39) - 268 (268)
------------ ----------- ----------- ----------- ---------- -----------
Total rental income........ 1,785 6,169 (4,384) 7,310 17,352 (10,042)
------------ ----------- ----------- ----------- ---------- -----------
Cost of operations (a):
Sold Self-Storage Facilities.... 209 185 24 603 521 82
Closed Facilities............... 1,094 5,456 (4,362) 5,947 16,304 (10,357)
Sold commercial facility........ - 21 (21) - 67 (67)
------------ ----------- ----------- ----------- ---------- -----------
Total cost of operations... 1,303 5,662 (4,359) 6,550 16,892 (10,342)
------------ ----------- ----------- ----------- ---------- -----------
Depreciation expense (a):
Sold Self-Storage Facilities.... 142 140 2 424 422 2
Closed Facilities............... 290 652 (362) 868 1,905 (1,037)
Sold commercial facility........ - 27 (27) - 87 (87)
------------ ----------- ----------- ----------- ---------- -----------
Total depreciation ........ 432 819 (387) 1,292 2,414 (1,122)
------------ ----------- ----------- ----------- ---------- -----------
Asset impairment and lease termination
reserves (b):
Closed Facilities............... 1,274 4,791 (3,517) 2,024 4,791 (2,767)
------------ ----------- ----------- ----------- ---------- -----------
Net discontinued operations (c)... $ (1,224) $ (5,103) $ 3,879 $ (2,556) $ (6,745) $ 4,189
============ =========== =========== =========== ========== ===========
(a) These amounts represent the historical operations of the Sold Self-Storage
Facilities, the Closed Facilities and the sold commercial facility, and
include amounts previously classified as rental income, cost of operations,
and depreciation expense in the financial statements in prior periods.
(b) An impairment charge of $750,000 was recorded in the second quarter of 2003
with respect to a real estate facility held for sale at September 30, 2003,
which was previously used by the discontinued containerized storage
operations. Asset impairment charges with respect to the containerized
storage assets in the amount of $1,274,000 were recorded in the three and
nine months ended September 30, 2003, respectively. Asset impairment and
lease termination reserves in the amount of $4,791,000 were recorded in the
three and nine months ended September 30, 2002. In addition, during the
nine months ended September 30, 2002, $898,000 in container obsolescence
expense were charged to cost of operations.
14
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
(c) The net discontinued operations resulted in a reduction in our diluted and
basic earnings per share of approximately $0.01 and $0.04 per share for
each of the three months ended September 30, 2003 and 2002, respectively.
For each of the nine months ended September 30, 2003 and 2002 net
discontinued operations resulted in a reduction in our diluted and basic
earnings per share of approximately $0.02 and $0.05 per share,
respectively.
5. Real Estate Facilities
Activity in real estate facilities during the nine months ended
September 30, 2003 is as follows:
In thousands
---------------
Operating facilities, at cost:
Balance at December 31, 2002........................ $ 4,988,526
Transfer from construction in process............... 69,111
Disposition of real estate facilities............... (8,272)
Transfer to real estate held for sale (Note 4)...... (22,920)
Acquisition of minority interest.................... 16,687
Capital improvements................................ 20,470
---------------
Balance at September 30, 2003....................... 5,063,602
---------------
Accumulated depreciation:
Balance at December 31, 2002........................ (987,546)
Additions during the year........................... (127,105)
Transfer to real estate held for sale (Note 4)...... 6,341
Disposition of real estate facilities............... 566
---------------
Balance at September 30, 2003....................... (1,107,744)
---------------
Construction in process:
Balance at December 31, 2002........................ 87,516
Current development................................. 70,576
Transfer to operating facilities.................... (69,111)
Transfer from land held for development............. 1,113
---------------
Balance at September 30, 2003....................... 90,094
---------------
Land held for development:
Balance at December 31, 2002........................ 17,807
Disposition of land................................. (4,458)
Transfers to construction in progress............... (1,113)
---------------
Balance at September 30, 2003....................... 12,236
---------------
Real estate facilities held for sale (Note 4):
Balance at December 31, 2002........................ -
Transfer from land and buildings.................... 22,920
Impairment charge................................... (750)
Transfer from accumulated depreciation.............. (6,341)
---------------
Balance at September 30, 2003....................... 15,829
---------------
Total real estate facilities........................... $ 4,074,017
===============
During the nine months ended September 30, 2003, we opened 10
newly developed facilities (682,000 net rentable square feet) with an
aggregate cost of $65,796,000, and incurred additional development costs
amounting to $1,906,000 with respect to existing real estate facilities (of
which $602,000 related to expansion facilities). In addition, we completed
a conversion of industrial space, previously used by the discontinued
containerized storage operations, into 55,000 net rentable square feet of
self-storage space at an existing self-storage facility for a total cost of
$1,409,000.
15
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
During the nine months ended September 30, 2003, we sold two
self-storage facilities for $7,330,000, two parcels of land for $528,000
and three parcels of land held for development for $4,797,000. The two
self-storage facilities had been operated by the buyer pursuant to a lease
arrangement, with the lease income with respect to these facilities
included in "Interest and other income." An aggregate gain of $491,000 was
recorded from these sales.
Construction in process at September 30, 2003 consists primarily
of 13 self-storage facilities (934,000 net rentable square feet) and 31
expansion projects to existing self-storage facilities. In addition, we
have six parcels of land held for development with total costs of
approximately $12,236,000.
Our policy is to capitalize interest incurred on debt during the
course of construction of our self-storage facilities. Interest capitalized
during the three and nine months ended September 30, 2003 was $1,411,000
and $4,386,000, respectively compared to $1,374,000 and $4,646,000,
respectively for the same periods in 2002.
6. Investment in Real Estate Entities
At September 30, 2003, our investment in real estate entities
consists of our ownership interests in seven partnerships, which
principally own self-storage facilities, and our ownership interest in PSB.
These interests are non-controlling interests of less than 50% and are
accounted for using the equity method of accounting. Accordingly, earnings
are recognized based upon our ownership interest in each of the
partnerships. The accounting policies of these entities are similar to the
Company's.
For the three and nine months ended September 30, 2003, we
recognized earnings from our investments of $5,770,000 and $19,456,000,
respectively, as compared to $7,483,000 and $23,739,000, respectively for
the same periods in 2002. Equity in earnings of real estate entities
includes our pro-rata share of the net impact of gains on sale of real
estate assets and impairment charges relating to the impending sale of real
estate assets recorded by PSB. Our net pro-rata impact of these items
totaled net income of $453,000 for the nine months ended September 30, 2003
(none for the three months ended September 30, 2003), as compared to net
income of $483,000 and $2,724,000 for the three and nine months ended
September 30, 2002, respectively. See the condensed financial information
with respect to PSB below for further information regarding these items
recorded by PSB.
For the nine months ended September 30, 2003, we acquired
investments in the real estate entities totaling $272,000 as compared to
$338,000 for the nine months ended September 30, 2002. We received
distributions from our investments for the nine months ended September 30,
2003 and 2002, in the amount of $12,900,000 and $15,520,000, respectively.
The following table sets forth our investments in real estate
entities at September 30, 2003 and December 31, 2002, and our equity in
earnings of real estate entities for the three and nine months ended
September 30, 2003 and 2002 (amounts in thousands):
16
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
Equity in Earnings of Real Equity in Earnings of Real
Investments in Real Estate Estate Entities for the Estate Entities for the Nine
Entities at Three Months Ended September 30, Months Ended September 30,
September 30, December 31,
2003 2002 2003 2002 2003 2002
------------- ------------ --------------- -------------- ------------ ------------
PSB (a).................. $ 278,458 $ 273,790 $ 4,559 $ 5,900 $ 15,717 $ 19,000
Disposed Investments (b). - 525 - 8 10 247
Other Investments........ 57,514 55,364 1,211 1,575 3,729 4,492
------------- ------------ --------------- -------------- ------------ ------------
Total.................. $ 335,972 $ 329,679 $ 5,770 $ 7,483 $ 19,456 $ 23,739
============= ============ =============== ============== ============ ============
(a) Equity in earnings of real estate entities includes our pro-rata share of
the net impact of gains on sale of assets and impairment charges relating
to the impending sale of real estate assets recorded by PSB. Our net
pro-rata impact from these items totaled net income of $453,000 for the
nine months ended September 30, 2003, as compared to income of $483,000 and
$2,724,000 for the three and nine months ended September 30, 2002,
respectively.
(b) As described in Note 3, in the first quarter of 2002 we began consolidating
the results of the Development Joint Venture and as a result eliminated our
investment in the three months ended March 31, 2002. In addition, in the
second quarter of 2003, we disposed of an investment for cash of $851,000,
recognizing a gain on sale of approximately $316,000.
Investment in PSB
-----------------
On January 2, 1997, we reorganized our commercial property
operations into an entity now known as PS Business Parks, Inc., a REIT
traded on the American Stock Exchange, and an operating partnership
controlled by PS Business Parks, Inc. (collectively, the REIT and the
operating partnership are referred to as "PSB"). The Company and certain
partnerships in which the Company has a controlling interest have a 44%
common equity interest in PSB as of September 30, 2003. This 44% common
equity interest is comprised of the ownership of 5,418,273 shares of common
stock and 7,305,355 limited partnership units in the operating partnership;
these limited partnership units are convertible at our option, subject to
certain conditions, on a one-for-one basis into PSB common stock. Based
upon the closing price at September 30, 2003 ($37.74 per share of PSB
common stock), the shares and units had a market value of approximately
$480.2 million as compared to a book value of $278.5 million.
At September 30, 2003, PSB owned and operated approximately 14.8
million net rentable square feet of commercial space. In addition, PSB
manages approximately 1,196,000 net rentable square feet of commercial
space owned by the Company, the Consolidated Entities, and the
Unconsolidated Entities pursuant to property management agreements.
The following table sets forth the condensed statements of
operations for the nine months ended September 30, 2003 and for the same
period in 2002, and the condensed balance sheets of PSB at September 30,
2003 and December 31, 2002. The amounts below represent 100% of PSB's
balances and not our pro-rata share.
17
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
For the nine months ended September 30,
-----------------------------------------
2003 2002
------------------ -------------------
(Amounts in thousands)
Total revenue prior to gains on sale............. $ 146,126 $ 144,956
Gain on disposition of assets.................... 5,541 7,448
Impairment charges with respect to impending
sales of real estate.......................... (5,907) (900)
Cost of operations and other expenses............ (46,225) (46,114)
Depreciation and amortization.................... (43,186) (41,164)
Discontinued operations (a)...................... 5,636 4,048
Minority interest................................ (23,494) (24,256)
------------------ -------------------
Net income..................................... $ 38,491 $ 44,018
================== ===================
September 30, 2003 December 31, 2002
------------------ -------------------
(Amounts in thousands)
Total assets (primarily real estate)............. $ 1,162,327 $ 1,156,802
Total debt....................................... 69,844 70,279
Other liabilities................................ 36,666 36,902
Minority interest................................ 387,476 385,219
Shareholders' equity............................. $ 668,341 $ 664,402
(a) Includes income from discontinued operations totaling $3,340,000 and
$3,661,000 for the nine months ended September 30, 2003 and 2002,
respectively, and equity in income of discontinued joint venture totaling
$2,296,000 and $387,000 for the nine months ended September 30, 2003 and
2002, respectively. Included in discontinued operations is a gain on
disposition of assets of $1,376,000 for the nine months ended September 30,
2003 (none for the same period in 2002).
Other Investments
-----------------
The other investments consist primarily of an average 41% common
equity ownership, which we owned during each of the three and nine months
ended September 30, 2003 and 2002, in seven limited partnerships
(collectively, the "Other Investments") owning an aggregate of 36 storage
facilities. For the nine months ended September 30, 2003, we acquired
additional equity interests in these entities from third parties for a
total of $272,000, as compared to $338,000 for the same period in 2002.
In the second quarter of 2003, we disposed of an investment for
net proceeds of $851,000, and recognized a gain of $316,000, representing
the difference between the gross proceeds and the book value of this
investment.
The following table sets forth certain condensed financial
information (representing 100% of these entities' balances and not our
pro-rata share) with respect to Other Investments:
18
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
For the nine months ended September 30,
---------------------------------------
2003 2002
------------------ ------------------
(Amounts in thousands)
Total revenue........................................ $ 19,897 $ 19,960
Cost of operations and other expenses................ (6,862) (7,027)
Depreciation and amortization........................ (1,868) (1,903)
------------------ ------------------
Net income......................................... $ 11,167 $ 11,030
================== ==================
September 30, 2003 December 31, 2002
------------------ ------------------
(Amounts in thousands)
Total assets (primarily storage facilities).......... $ 56,671 $ 56,731
Total debt........................................... 2,355 5,450
Other liabilities.................................... 10,308 1,121
Partners' equity..................................... $ 44,008 $ 50,160
7. Revolving Line of Credit
We have a $200 million revolving line of credit (the "Credit
Agreement") that has a maturity date of October 31, 2004 and bears an
annual interest rate ranging from the London Interbank Offered Rate
("LIBOR") plus 0.45% to LIBOR plus 1.50% depending on our credit ratings
(currently LIBOR plus 0.45%). In addition, we are required to pay a
quarterly commitment fee ranging from 0.20% per annum to 0.30% per annum
depending on our credit ratings (currently the fee is 0.20% per annum). At
September 30, 2003 and at November 12, 2003, we had no outstanding
borrowings on our line of credit.
The Credit Agreement includes various covenants, the more
significant of which requires us to (i) maintain a balance sheet leverage
ratio of less than 0.50 to 1.00, (ii) maintain certain quarterly interest
and fixed-charge coverage ratios (as defined therein) of not less than 2.50
to 1.0 and 1.75 to 1.0, respectively, and (iii) maintain a minimum total
shareholders' equity (as defined therein). In addition, we are limited in
our ability to incur additional borrowings (we are required to maintain
unencumbered assets with an aggregate book value equal to or greater than
two times our unsecured recourse debt). We were in compliance with all the
covenants of the Credit Agreement at September 30, 2003.
8. Notes Payable
Notes payable at September 30, 2003 and December 31, 2002 consist
of the following:
19
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
Carrying Amount
-------------------------------
September 30, December 31,
2003 2002
------------- -------------
(Amounts in thousands)
Unsecured senior notes:
7.08% note due November 2003............................ $ 5,000 $ 10,000
7.47% note due January 2004............................. 14,600 29,300
7.66% note due January 2007............................. 44,800 56,000
Mortgage notes payable:
10.55% mortgage notes secured by real estate facilities,
principal and interest payable monthly, due August 2004 15,721 18,167
7.134% to 10.5% mortgage notes secured by real estate
facilities, principal and interest payable monthly, due
at varying dates between May 2004 and September 2028 1,911 2,400
------------- -------------
Total notes payable.............................. $ 82,032 $ 115,867
============= =============
All of our notes payable are fixed rate. The unsecured senior
notes require interest and principal payments to be paid semi-annually and
have various restrictive covenants, all of which have been met at September
30, 2003 and December 31, 2002. The 10.55% mortgage notes consist of five
notes, which are cross-collateralized by 19 properties and are due to a
life insurance company. Mortgage notes payable are secured by 24 real
estate facilities having an aggregate net book value of approximately $59.1
million at September 30, 2003 and $56.4 million at December 31, 2002.
At September 30, 2003, approximate principal maturities of notes
payable are as follows:
Unsecured
Senior Notes Mortgage Notes Total
------------ -------------- ----------
(in thousands)
2003 (remainder of).......... $ 5,000 $ 947 $ 5,947
2004......................... 25,800 15,065 40,865
2005......................... 11,200 156 11,356
2006......................... 11,200 170 11,370
2007......................... 11,200 185 11,385
Thereafter................... - 1,109 1,109
------------ -------------- ----------
$ 64,400 $ 17,632 $ 82,032
============ ============== ==========
Weighted average rate........ 7.6% 10.3% 8.2%
============ ============== ==========
9. Minority Interest
In consolidation, we classify ownership interests in the net
assets of each of the Consolidated Entities, other than our own, as
minority interest on the consolidated financial statements. Minority
interest in income consists of the minority interests' share of the
operating results of the Consolidated Entities.
Preferred Partnership Interests
-------------------------------
During 2000, one of our consolidated operating partnerships issued
preferred partnership units: March 17, 2000 - $240.0 million of 9.5% Series
N Cumulative Redeemable Perpetual Preferred Units and March 29, 2000 -
$75.0 million of 9.125% Series O Cumulative Redeemable Perpetual Preferred.
A portion of the 9.125% Series O Cumulative Redeemable Perpetual Preferred
($30 million) was repurchased by the Company in 2001.
20
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
For each of the three and nine months ended September 30, 2003 and
2002, the holders of the preferred units were paid distributions
aggregating approximately $6,726,000 and $20,179,000, respectively, and
received an equivalent allocation of minority interest in earnings.
The following table summarizes the preferred partnership units
outstanding at September 30, 2003 and December 31, 2002:
Earliest Distribution Units Carrying
Series Redemption Date (a) Rate Outstanding Amount
------ ------------------- ------------ ----------- ----------
(Amounts in thousands)
Series N............ March 17, 2005 9.500% 9,600 $240,000
Series O............ March 29, 2005 9.125% 1,800 45,000
----------- ----------
Total............... 11,400 $285,000
=========== ==========
(a) These preferred units are not redeemable during the first 5 years after
issuance; thereafter, at our option, we can call the units for redemption
at the issuance amount plus any unpaid distributions. The units are not
redeemable by the holder.
Subject to certain conditions, the Series N preferred units are
convertible into shares of 9.5% Series N Cumulative Preferred Stock, and
the Series O preferred units are convertible into shares of 9.125% Series O
Cumulative Preferred Stock of the Company.
Other Partnership Interests
---------------------------
The following table sets forth the minority interest at September
30, 2003 and December 31, 2002 as well as the distributions paid to
minority interest for the nine months ended September 30, 2003 and 2002
with respect to the other partnership interests (amounts in thousands):
Distributions to minority
interests for the nine months
Minority interest at ended September 30,
------------------------------ ------------------------------
September 30, December 31,
Description 2003 2002 2003 2002
------------- ------------- ------------ ------------- ------------
Consolidated Development Joint Venture...... $ 70,951 $ 75,432 $ 7,386 $ 7,384
Convertible Partnership Units.............. 6,400 6,274 320 321
Other consolidated partnerships............. 65,911 72,793 9,244 11,310
------------- ------------ ------------- ------------
Total other partnership interests........... $ 143,262 $ 154,499 $ 16,950 $ 19,015
============= ============ ============= ============
Income is allocated to the minority interests based upon their
pro-rata interest in the operating results of the Consolidated Entities.
The following table sets forth the income allocated to minority interest in
income with respect to the Other Partnership interests for the three and
nine months ended September 30, 2003 and 2002 (amounts in thousands):
21
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
Minority interest in income for Minority interest in income for
the three months ended the nine months ended September
September 30, 30,
-------------------------------- -------------------------------
Description 2003 2002 2003 2002
------------- -------------- -------------- -------------- -------------
Consolidated Development Joint Venture...... $ 1,292 $ 938 $ 2,905 $ 1,574
Convertible Partnership Units............... 86 81 233 243
Other consolidated partnerships............. 3,040 3,763 9,265 11,467
-------------- -------------- -------------- -------------
Total other partnership interests........... $ 4,418 $ 4,782 $ 12,403 $ 13,284
============== ============== ============== =============
Consolidated Development Joint Venture
--------------------------------------
In November 1999, we formed a development joint venture (the
"Consolidated Development Joint Venture") with a joint venture partner
(PSAC Storage Investors, LLC) whose partners include an institutional
investor and B. Wayne Hughes ("Mr. Hughes"), chairman of the Company, to
develop approximately $100 million of self-storage facilities and to
purchase $100 million of the Company's Equity Stock, Series AAA (see Note
10). In consolidation, the Equity Stock Series AAA and the related dividend
income have been eliminated.
At September 30, 2003, the Consolidated Development Joint Venture
was fully committed having completed construction on 22 self-storage
facilities for a total cost of approximately $108 million.
The Consolidated Development Joint Venture is funded solely with
equity capital consisting of 51% from the Company and 49% from PSAC Storage
Investors, LLC. The accounts of the Consolidated Development Joint Venture
are included in the Company's consolidated financial statements. The
accounts of PSAC Storage Investors, LLC are not included in the Company's
consolidated financial statements, as the Company has no ownership interest
in this entity. Minority interests primarily represent the total
contributions received from PSAC Storage Investors combined with the
accumulated net income allocated to PSAC Storage Investors, LLC, net of
cumulative distributions. The amounts included in our financial statements
with respect to the minority interest in the Consolidated Development Joint
Venture are denoted in the tables above.
The term of the Consolidated Development Joint Venture is 15
years; however, during the sixth year PSAC Storage Investors has the right
to cause an early termination of the partnership. If PSAC Storage Investors
exercises this right, we then have the option, but not the obligation, to
acquire their interest for an amount that will allow them to receive an
annual return of 10.75%. If the Company does not exercise its option to
acquire PSAC Storage Investors' interest, the partnership's assets will be
sold to third parties and the proceeds distributed to the Company and PSAC
Storage Investors in accordance with the partnership agreement. If PSAC
Storage Investors does not exercise its right to early termination during
the sixth year, the partnership will be liquidated 15 years after its
formation with the assets sold to third parties and the proceeds
distributed to the Company and PSAC Storage Investors in accordance with
the partnership agreement.
PSAC Storage Investors, LLC provides Mr. Hughes with a fixed yield
of approximately 8.0% per annum on his preferred non-voting interest
(representing an investment of approximately $64.1 million at September 30,
2003). In addition, Mr. Hughes receives 1% of the remaining cash flow of
PSAC Storage Investors, LLC (estimated to be less than $50,000 per year).
If PSAC Storage Investors, LLC does not elect to cause an early
termination, Mr. Hughes' 1% interest in residual cash flow can increase to
10%.
In consolidation, the Equity Stock, Series AAA owned by the joint
venture and the related dividend income have been eliminated. Minority
interests primarily represent the total contributions received from PSAC
Storage Investors combined with the accumulated net income allocated to
PSAC Storage Investors, net of cumulative distributions.
22
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
See Note 14, "Recent Accounting Pronouncements - Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity" for further discussion of the impact of recent accounting
pronouncements on the accounting for these interests.
Convertible Partnership Units
-----------------------------
As of September 30, 2003 and December 31, 2002, one of our
Consolidated Entities had approximately 237,935 convertible partnership
units ("Convertible Units") outstanding, representing a limited partnership
interest in the partnership. The Convertible Units are convertible on a
one-for-one basis (subject to certain limitations) into common shares of
the Company at the option of the unitholder. Minority interest in income
with respect to the Convertible Units reflects an allocation of net income
on a per unit basis equal to diluted earnings per common share.
Other Consolidated Partnerships
-------------------------------
At September 30, 2003, the Other Consolidated Partnerships
reflect common equity interests that the Company does not own in 25
entities owning an aggregate of 172 self-storage facilities.
On April 28, 2003 we acquired through a merger all of the
remaining limited partnership interest not currently owned by the Company
in PS Partners IV, Ltd., a partnership which is consolidated with the
Company. The acquisition cost was approximately $23,377,000, consisting of
the issuance of 426,859 shares of our common stock ($13,510,000) and cash
of approximately $9,867,000; this acquisition had the effect of reducing
minority interest by $6,690,000, with the excess of cost over underlying
book value ($16,687,000) allocated to real estate.
During 2002, we acquired minority interests in the Consolidated
Entities for an aggregate cash cost of $26,519,000 and issued an aggregate
of 1,091,608 shares ($37,904,000) of our common stock; these acquisitions
had the effect of reducing minority interest by $25,105,000, with the
excess of cost over underlying book value ($39,318,000) allocated to real
estate.
In addition, during the second quarter of 2002, we recorded the
pending sale of a partnership interest in the Consolidated Entities for an
aggregate of $1,450,000. We recorded a loss on sale of the interest in the
amount of $1,839,000. As a result of this pending sale, minority interest
increased by $3,289,000. This sale is subject to litigation; see Note 15.
The partnership agreements for the Other Consolidated Partnerships
have termination dates that cannot be unilaterally extended by the Company
and, upon termination of each partnership, the net assets of these entities
would be liquidated and paid to the minority interests and the Company
based upon their relative ownership interests. See Note 14, "Recent
Accounting Pronouncements - Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity" for further discussion
of the impact of recent accounting pronouncements on the accounting for
these interests.
10. Shareholders' Equity
Cumulative Preferred Stock
--------------------------
At September 30, 2003 and December 31, 2002, we had the following
series of Cumulative Preferred Stock outstanding:
23
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
At September 30, 2003 At December 31, 2002
--------------------------- ------------------------------
Earliest
Redemption Dividend Shares Carrying Shares Carrying
Series Date (a) Rate Outstanding Amount Outstanding Amount
------ ------------ ---------- ------------- ------------ ------------- -------------
(Dollar amount in thousands)
Series B March 31, 2003 (b) 9.200% - $ - 2,300,000 $ 57,500
Series C June 30, 2003 (b) Adjustable - - 1,200,000 30,000
Series D September 30, 2004 9.500% 1,200,000 30,000 1,200,000 30,000
Series E January 31, 2005 10.000% 2,195,000 54,875 2,195,000 54,875
Series F April 30, 2005 9.750% 2,300,000 57,500 2,300,000 57,500
Series K January 19, 2004 8.250% 4,600 115,000 4,600 115,000
Series L March 10, 2004 8.250% 4,600 115,000 4,600 115,000
Series M August 17, 2004 8.750% 2,250 56,250 2,250 56,250
Series Q January 19, 2006 8.600% 6,900 172,500 6,900 172,500
Series R September 28, 2006 8.000% 20,400 510,000 20,400 510,000
Series S October 31, 2006 7.875% 5,750 143,750 5,750 143,750
Series T January 18, 2007 7.625% 6,086 152,150 6,086 152,150
Series U February 19, 2007 7.625% 6,000 150,000 6,000 150,000
Series V September 30, 2007 7.500% 6,900 172,500 6,900 172,500
------------- ------------ ------------- -------------
Total Cumulative
Preferred Stock 5,758,486 $ 1,729,525 9,258,486 $ 1,817,025
============= ============ ============= =============
(a) Except under certain conditions relating to the Company's qualification as
a REIT, the Senior Preferred Stock outstanding at September 30, 2003 is not
redeemable prior to the dates indicated. On or after the dates indicated,
each series of Cumulative Senior Preferred Stock will be redeemable, at the
option of the Company, in whole or in part, at $25 per share (or depositary
share in the case of the Series K through Series V), plus accrued and
unpaid dividends.
(b) Series was redeemed on the date indicated.
On March 31, 2003, we redeemed all outstanding shares of our 9.20%
Cumulative Preferred Stock, Series B at a redemption price of $25 per share
for a total of $57,517,000 (including related redemption costs). On June
30, 2003, we redeemed all outstanding shares of our Cumulative Preferred
Stock, Series C at a redemption price of $25 per share for a total of
$30,018,000 (including related redemption costs).
In addition, on October 6, 2003, we issued $132.5 million of 6.50%
Cumulative Preferred Stock, Series W. On November 13, 2003, we issued
$120.0 million of our 6.45% Cumulative Preferred Stock, Series X (see Note
16).
During 2002, we issued our Series T, Series U and Series V
Cumulative Preferred Stock: Series T - issued on January 18, 2002, net
proceeds of $145,075,000, Series U - issued on February 19, 2002, net
proceeds of $145,075,000 and Series V - issued September 30, 2002, net
proceeds of $166,866,000.
During 2002, we redeemed our Series A and Series J Cumulative
Preferred Stock, at par, at a total cost of $45,643,000 and $150,018,000
(including related redemption costs), respectively.
On August 30, 2002, in a privately negotiated transaction, we
exchanged an aggregate of 86,000 shares (par value of $2,150,000) of our
Preferred Stock, Series B for 86 shares (representing 86,000 depositary
shares with a par value of $2,150,000) of our Preferred Stock, Series T.
24
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
The Series D through Series X Cumulative Preferred Stock
(collectively the "Cumulative Senior Preferred Stock") have general
preference rights with respect to liquidation and quarterly distributions.
Holders of the preferred stock, except under certain conditions and as
noted below, will not be entitled to vote on most matters. In the event of
a cumulative arrearage equal to six quarterly dividends or failure to
maintain a Debt Ratio (as defined) of 50% or less, holders of all
outstanding series of preferred stock (voting as a single class without
regard to series) will have the right to elect two additional members to
serve on the Company's Board of Directors until events of default have been
cured. At September 30, 2003, there were no dividends in arrears and the
Debt Ratio was 1.4%.
Equity Stock
------------
The Company is authorized to issue 200,000,000 shares of Equity
Stock. The Articles of Incorporation provide that the Equity Stock may be
issued from time to time in one or more series and gives the Board of
Directors broad authority to fix the dividend and distribution rights,
conversion and voting rights, redemption provisions and liquidation rights
of each series of Equity Stock.
Equity Stock, Series A
----------------------
At September 30, 2003, we had 8,776,102 depositary shares
outstanding, each representing 1/1,000 of a share of Equity Stock, Series A
("Equity Stock A"). The Equity Stock A ranks on a parity with common stock
and junior to the Cumulative Senior Preferred Stock with respect to general
preference rights and has a liquidation amount which cannot exceed $24.50
per share. Distributions with respect to each depositary share shall be the
lesser of: (i) five times the per share dividend on the Common Stock or
(ii) $2.45 per annum. We have no obligation to pay distributions on the
depositary shares if no distributions are paid to common shareholders.
Except in order to preserve the Company's federal income tax
status as a REIT, we may not redeem the depositary shares before March 31,
2010. On or after March 31, 2010, we may, at our option, redeem the
depositary shares at $24.50 per depositary share. If the Company fails to
preserve its federal income tax status as a REIT, the depositary shares
will be convertible at the option of the shareholder into .956 shares of
common stock. The depositary shares are otherwise not convertible into
common stock. Holders of depositary shares vote as a single class with our
holders of common stock on shareholder matters, but the depositary shares
have the equivalent of one-tenth of a vote per depositary share.
Equity Stock, Series AA
-----------------------
In June 1997, we contributed $22,500,000 (225,000 shares) of
equity stock, now designated as Equity Stock, Series AA ("Equity Stock AA")
to a partnership in which we are the general partner. The Company has a
controlling interest in the partnership and therefore consolidates the
accounts of the partnership. As a result, the Equity Stock AA is eliminated
in consolidation. The Equity Stock AA ranks on a parity with our common
stock and junior to the Cumulative Preferred Stock with respect to general
preference rights and has a liquidation amount of ten times the amount paid
to each common share up to a maximum of $100 per share. Quarterly
distributions per share on the Equity Stock AA are equal to the lesser of
(i) 10 times the amount paid per share of Common Stock or (ii) $2.20. We
have no obligation to pay distributions on these shares if no distributions
are paid to common shareholders.
If the Company determines that it is necessary to maintain its
status as a Real Estate Investment Trust, subject to certain limitations it
may cause the redemption of shares of Equity Stock, Series AA at a price of
$100 per share. The shares are not otherwise redeemable or convertible into
shares of any other class or series of the Company's capital stock. Other
than as required by law, the Equity Stock, Series AA has no voting rights.
25
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
Equity Stock, Series AAA
------------------------
In November 1999, we sold $100,000,000 (4,289,544 shares) of
Equity Stock, Series AAA ("Equity Stock AAA") to a newly formed joint
venture. We control the joint venture and consolidate the accounts of the
joint venture, and accordingly the Equity Stock AAA is eliminated in
consolidation. The Equity Stock AAA ranks on a parity with our common stock
and junior to the Cumulative Preferred Stock with respect to general
preference rights, and has a liquidation amount equal to 120% of the amount
distributed to each common share. Annual distributions per share are equal
to the lesser of (i) five times the amount paid per common share or (ii)
$2.1564. We have no obligation to pay distributions on these shares if no
distributions are paid to common stockholders.
Upon liquidation of the Consolidated Development Joint Venture, at
the Company's option either a) each share of Equity Stock, Series AAA shall
convert into 1.2 shares of our common stock or b) the Company can redeem
the Equity Stock, Series AAA at a per share amount equal to 120% of the
market price of our common stock. In addition, if the Company determines
that it is necessary to maintain its status as a Real Estate Investment
Trust, subject to certain limitations it may cause the redemption of shares
of Equity Stock, Series AAA at a per share amount equal to 120% of the
market price of our common stock. The shares are not otherwise redeemable
or convertible into shares of any other class or series of the Company's
capital stock. Other than as required by law, the Equity Stock, Series AAA
has no voting rights.
Common Stock
------------
At September 30, 2003, entities consolidated with the Company
owned 723,732 common shares of the Company. These shares continue to be
legally issued and outstanding. In the consolidation process, these shares
and the related balance sheet amounts have been eliminated. In addition,
these shares are not included in the computation of weighted average shares
outstanding.
The following chart reconciles the Company's legally issued and
outstanding shares of common stock and the reported outstanding shares of
common stock at September 30, 2003 and December 31, 2002:
Reconciliation of Common Shares
- -------------------------------- At september 30, At December 31,
Outstanding 2003 2002
- ----------- ---------------- ---------------
Legally issued and outstanding shares 126,697,050 117,540,187
Less - Shares owned by the
Consolidated Entities that are
eliminated in consolidation..... (723,732) (548,732)
---------------- ---------------
Reported issued and outstanding shares 125,973,318 116,991,455
================ ===============
The Company's Board of Directors authorized the repurchase from
time to time of up to 25,000,000 shares of the Company's common stock on
the open market or in privately negotiated transactions. During the second
quarter of 2003, we repurchased, through one of the Consolidated Entities,
175,000 shares for a total of $6,001,000. From the initial authorization
through September 30, 2003, we have repurchased a total of 21,672,020
shares of common stock at an aggregate cost of approximately $541.9
million.
26
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
Class B Common Stock
--------------------
The Class B Common Stock was converted into regular common stock
on January 1, 2003. For 2002, the Class B Common Stock participated in
distributions at the rate of 97% of the per share distributions on the
Common Stock.
Dividends
The following table summarizes dividends declared and paid during
the nine months ended September 30, 2003:
Distributions Per
Share or Depositary Total
Share Distributions
-------------------- ---------------
Preferred Stock:
Series B.............................. $0.554 $ 1,323,000
Series C.............................. $0.844 1,012,000
Series D.............................. $1.782 2,137,000
Series E.............................. $1.875 4,116,000
Series F.............................. $1.828 4,205,000
Series K.............................. $1.547 7,116,000
Series L ............................. $1.547 7,116,000
Series M.............................. $1.640 3,690,000
Series Q.............................. $1.613 11,126,000
Series R.............................. $1.500 30,600,000
Series S.............................. $1.477 8,490,000
Series T.............................. $1.430 8,700,000
Series U.............................. $1.430 8,580,000
Series V.............................. $1.406 9,703,000
---------------
107,914,000
Common Stock:
Equity Stock, Series A................ $1.838 16,126,000
Common ............................... $1.350 168,781,000
---------------
Total dividends.................... $ 292,821,000
===============
The dividend rate on the Series C Preferred Stock for the first
six months of 2003 was equal to 6.75% per annum. The Series B and Series C
were redeemed entirely on March 31, 2003 and June 30, 2003, respectively.
The dividend rate on the Common Stock was $0.45 per common share
for each of the quarters ended March 31, 2003, June 30, 2003, and September
30, 2003. The dividend rate on the Equity Stock, Series A was $0.6125 per
depositary share for each of the quarters ended March 31, 2003, June 30,
2003, and September 30, 2003.
11. Segment Information
Description of each reportable segment
--------------------------------------
Our reportable segments reflect significant operating activities
that are evaluated separately by management. We have four reportable
segments: self-storage operations, containerized storage operations,
commercial property operations, and tenant reinsurance operations.
27
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
The self-storage segment comprises the direct ownership,
development, and operation of traditional storage facilities, and the
ownership of equity interests in entities that own storage properties. The
containerized storage operations represent another segment. The commercial
property segment reflects our interest in the ownership, operation, and
management of commercial properties. The vast majority of the commercial
property operations are conducted through PSB, and to a much lesser extent
the Company and certain of its unconsolidated subsidiaries own commercial
space, managed by PSB, within facilities that combine storage and
commercial space for rent. The tenant reinsurance segment reflects the
operations of PS Insurance Company, Ltd., which reinsures policies against
losses to goods stored by tenants in our self-storage facilities.
Measurement of segment profit or loss
-------------------------------------
We evaluate performance and allocate resources based upon the net
segment income of each segment. Net segment income represents net income in
conformity with accounting principles generally accepted in the United
States and our significant accounting policies as denoted in Note 2, before
interest and other income, interest expense, corporate general and
administrative expense, and minority interest in income. The accounting
policies of the reportable segments are the same as those described in the
Summary of Significant Accounting Policies.
Interest and other income, interest expense, corporate general and
administrative expense, and minority interest in income are not allocated
to segments because management does not utilize them to evaluate the
results of operations of each segment.
Measurement of segment assets
-----------------------------
No segment data relative to assets or liabilities is presented,
because management does not consider the historical cost of the Company's
real estate facilities and investments in real estate entities in
evaluating the performance of operating management or in evaluating
alternative courses of action. The only other types of assets that might be
allocated to individual segments are trade receivables, payables, and other
assets which arise in the ordinary course of business, but they are also
not a significant factor in the measurement of segment performance.
Presentation of segment information
-----------------------------------
Our income statement provides most of the information required in
order to determine the performance of each of the Company's four segments.
The following tables reconcile the performance of each segment, in terms of
segment revenues and segment income, to our consolidated revenues and net
income. It further provides detail of the segment components of the income
statement item, "Equity in earnings of real estate entities."
The following table reconciles the performance of each segment, in
terms of segment revenues, to our consolidated revenues.
28
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
----------------------- ----------------------
2003 2002 Change 2003 2002 Change
---------- ----------- ---------- ----------- --------- ----------
(Dollar amounts in thousands)
Reconciliation of Revenues by Segment:
Self-storage property rentals................ $ 206,856 $ 195,907 $ 10,949 $ 593,345 $ 572,588 $ 20,757
Commercial property rentals.................. 2,812 2,894 (82) 8,601 8,917 (316)
Containerized storage........................ 10,355 8,935 1,420 27,713 23,351 4,362
Tenant re-insurance.......................... 5,755 5,112 643 16,551 14,843 1,708
Other items not allocated to segments:
Interest and other income.................. 2,847 2,538 309 7,425 7,005 420
---------- ----------- ---------- ----------- --------- ----------
Total revenues......................... $ 228,625 $ 215,386 $ 13,239 $ 653,635 $ 626,704 $ 26,931
========== =========== ========== =========== ========= ==========
The following table reconciles the performance of each segment to
our consolidated net income. It further provides detail of the segment
components of the income statement item, "Equity in earning of real estate
entities."
29
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
2003 2002 Change 2003 2002 Change
----------- ---------- ---------- ----------- ---------- ----------
(Amounts in thousands)
Reconciliation of Net Income by Segment:
Self-storage
Self-storage net operating income......... $ 135,875 $ 133,173 $ 2,702 $386,690 $ 391,690 $ (5,000)
Self-storage depreciation................. (43,613) (42,848) (765) (130,332) (127,234) (3,098)
Equity in earnings - self-storage property
operations............................. 1,607 1,600 7 4,724 5,081 (357)
Equity in earnings - depreciation
(self-storage) ........................ (436) (409) (27) (1,265) (958) (307)
Discontinued operations (Note 4) ......... 153 154 (1) 421 449 (28)
----------- ---------- ---------- ----------- ---------- ----------
Total self-storage segment net income. 93,586 91,670 1,916 260,238 269,028 (8,790)
----------- ---------- ---------- ----------- ---------- ----------
Commercial properties
Commercial properties..................... 1,559 1,820 (261) 5,110 5,645 (535)
Depreciation and amortization - commercial
properties............................. (590) (622) 32 (1,889) (1,991) 102
Equity in earnings - commercial property
operations............................. 16,148 16,394 (246) 48,339 49,050 (711)
Equity in earnings - depreciation
(commercial properties) ............... (6,779) (6,412) (367) (19,088) (18,759) (329)
Discontinued operations (Note 4) ......... - (9) 9 - 114 (114)
----------- ---------- ---------- ----------- ---------- ----------
Total commercial property segment net
income............................... 10,338 11,171 (833) 32,472 34,059 (1,587)
----------- ---------- ---------- ----------- ---------- ----------
Containerized storage
Containerized storage net operating income 4,158 1,892 2,266 10,512 6,595 3,917
Containerized storage depreciation........ (1,838) (1,262) (576) (5,436) (3,961) (1,475)
Discontinued operations (Note 4) ......... (1,377) (5,248) 3,871 (2,977) (7,308) 4,331
----------- ---------- ---------- ----------- ---------- ----------
Total containerized storage segment net
income (loss)........................ 943 (4,618) 5,561 2,099 (4,674) 6,773
----------- ---------- ---------- ----------- ---------- ----------
Tenant Reinsurance
Tenant reinsurance net income............ 2,838 2,725 113 7,920 7,640 280
----------- ---------- ---------- ----------- ---------- ----------
Other items not allocated to segments
-------------------------------------
Equity in earnings - general and
administrative and other............... (4,770) (3,690) (1,080) (13,254) (10,675) (2,579)
Interest and other income................. 2,847 2,538 309 7,425 7,005 420
General and administrative................ (4,642) (3,968) (674) (13,321) (12,273) (1,048)
Interest expense.......................... (296) (969) 673 (1,121) (3,284) 2,163
Minority interest in income............... (11,144) (11,508) 364 (32,582) (33,463) 881
Gain (loss) on disposition of real estate. 47 - 47 807 (1,839) 2,646
----------- ---------- ---------- ----------- ---------- ----------
Total other items not allocated to segments (17,958) (17,597) (361) (52,046) (54,529) 2,483
----------- ---------- ---------- ----------- ---------- ----------
Total consolidated net income........ $ 89,747 $ 83,351 $ 6,396 $250,683 $ 251,524 $ (841)
=========== ========== ========== =========== ========== ==========
30
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
12. Stock-Based Compensation
Stock Options
-------------
The Company has a 1990 Stock Option Plan (the "1990 Plan") which
provides for the grant of non-qualified stock options. The Company has a
1994 Stock Option Plan (the "1994 Plan"), a 1996 Stock Option and Incentive
Plan (the "1996 Plan") and a 2000 Non-Executive/Non-Director Stock Option
and Incentive Plan (the "2000 Plan"), each of which provides for the grant
of non-qualified options and incentive stock options. The 1990 Plan, the
1994 Plan, the 1996 Plan and the 2000 Plan are collectively referred to as
the "PSI Plans." Under the PSI Plans, the Company has granted non-qualified
options to certain directors, officers and key employees to purchase shares
of the Company's common stock at a price equal to the fair market value of
the common stock at the date of grant. Generally, options under the PSI
Plans vest over a three-year period from the date of grant at the rate of
one-third per year and expire (i) under the 1990 Plan, five years after the
date they became exercisable and (ii) under the 1994 Plan, the 1996 Plan
and the 2000 Plan, ten years after the date of grant. The 1996 Plan and the
2000 Plan also provide for the grant of restricted stock to officers, key
employees and service providers on terms determined by an authorized
committee of the Board of Directors.
Accounting principles generally accepted in the United States
permit, but do not require, companies to recognize compensation expense for
stock-based awards based on their fair value at date of grant, which is
then amortized as compensation expense over the vesting period (the "Fair
Value Method"). Companies can also elect to disclose, but not recognize as
an expense, stock option expense when stock options are granted to
employees at an exercise price equal to the market price at the date of
grant (the "APB 25 Method").
In any fiscal year beginning before December 15, 2003, companies
can change their accounting method from the APB 25 Method to the Fair Value
Method, and in doing so can elect between three different methods of
transition. The first is the prospective method, whereby the Company
applies the recognition provisions of the Fair Value Method to all stock
options granted after the beginning of the fiscal year in which the company
adopts the Fair Value Method. The second is the retroactive restatement
method, whereby the company restates all periods presented to reflect
compensation cost utilizing the fair value method for all periods. The
third is the modified prospective method, where the company applies the
Fair Value Method from the beginning of the current fiscal year with
respect to all options that vest during the year regardless of when they
were granted.
For periods prior to December 31, 2001, we utilized the APB 25
Method of accounting for employee stock options. As of January 1, 2002, we
adopted the Fair Value Method, and have elected to use the prospective
method of transition described above. Accordingly, we recognize
compensation expense in our income statement using the Fair Value Method
only with respect to stock options issued after January 1, 2002.
For the three and nine months ended September 30, 2003, we
recorded $95,000 and $294,000, respectively, in stock option compensation
expense ($39,000 and $97,000 for the three and nine months ended September
30, 2002) related to options granted after January 1, 2002. The fair value
of each option grant is estimated on the date of the grant using the
Black-Scholes option pricing model. The estimated average value of stock
options granted in the first nine months of 2003 was based upon an
estimated life of 5 years, a risk-free rate of 4.0%, an expected dividend
yield of 7%, and expected volatility of 0.176.
31
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
If we had recorded stock option expense applying the Fair Value
Method to all awards, we would have recognized an additional $714,000 and
$1,041,000 for the three months ended September 30, 2003 and 2002,
respectively, and $2,123,000 and $3,080,000 in stock option compensation
expense for the nine months ended September 30, 2003 and 2002,
respectively. Diluted earnings per share would have been $0.96 and $0.91
for the nine months ended September 30, 2003 and 2002, respectively. Basic
earnings per share would have been $0.97 and $0.93 for the nine months
ended September 30, 2003 and 2002, respectively. Diluted earnings per share
would have been $0.38 and $0.26 for the three months ended September 30,
2003 and 2002, respectively. Basic earnings per share for the same periods
would have been $0.39 and $0.26.
Restricted Stock Units
----------------------
Restricted stock units vest over a five-year period from the date
of grant at the rate of one-fifth per year. The employee is entitled to
receive per-unit dividends on the outstanding restricted stock units equal
to the per-share dividends received by the common shares. Upon vesting, the
employee receives either regular common shares equal to the number of
vested restricted stock units in exchange for the units or, at the
employee's option, the equivalent in cash. The total value of each
restricted stock unit grant, based upon the market price of the Company's
common stock at the date of grant, is amortized over the vesting period as
compensation expense. Any changes in the market price of the Company's
common stock price are reflected prospectively as adjustments to
compensation expense with respect to unvested restricted stock units over
the applicable remaining service period. Dividends paid on restricted stock
units are accounted for as dividends on common stock. Outstanding
restricted stock units are included on a one-for-one basis in the Company's
diluted weighted average shares, less a reduction for the treasury stock
method applied to the average cumulative measured but unrecognized
compensation expense during the period.
During the third quarter of 2003, the Company granted 197,000
shares of restricted stock units to employees of the Company. The fair
market value of the grant was approximately $7.4 million based upon a
closing price of $37.74 per common share on the date of grant. A total of
$371,000 in restricted stock expense was recorded in the three months ended
September 30, 2003, representing the applicable amortization of the 197,000
share grant.
13. Related Party Transactions
Relationships and transactions with the Hughes Family
-----------------------------------------------------
B. Wayne Hughes, Chairman of the Board, and his family (the
"Hughes Family") have ownership interests in, and operate, approximately 38
self-storage facilities in Canada under the name "Public Storage." We
currently do not own any interests in these facilities nor do we own any
facilities in Canada. The Hughes Family owns approximately 37% of our
common stock outstanding at September 30, 2003. We have a right of first
refusal to acquire the stock or assets of the corporation engaged in the
operation of the 38 self-storage facilities in Canada if the Hughes family
or the corporation agrees to sell them. However, we have no interest in the
operations of this corporation, have no right to acquire this stock or
assets unless the Hughes family decides to sell, and receive no benefit
from the profits and increases in value of the Canadian self-storage
facilities.
Our personnel have been engaged in the supervision and the
operation of these 38 self-storage facilities and currently provide certain
administrative services for the Canadian owners, and certain other
services, primarily tax services, with respect to certain other Hughes
Family interests. The Hughes Family and the Canadian owners reimburse us at
cost for these services. There may be conflicts of interest in allocating
the time of our personnel between our properties, the Canadian properties,
and certain other Hughes Family interests. We are in the process of
eliminating the sharing of Company personnel with the Canadian entities and
expect this process to be completed by December 31, 2003.
32
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
PS Business Parks, Inc.
-----------------------
Ronald L. Havner Jr., our vice-chairman and chief executive
officer, is also chairman of PSB and was CEO until August 12, 2003. Mr.
Havner's compensation is allocated between the Company and PSB. This
allocation was approved by the audit committee of the Company's Board of
Directors.
Pursuant to a cost-sharing and administrative services agreement,
PSB reimburses the Company for certain administrative services. PSB's share
of these costs totaled approximately $85,000 for each of the three month
periods ended September 30, 2003 and 2002 and $255,000 for each of the nine
months ended September 30, 2003 and 2002, and were computed in accordance
with a methodology intended to fairly allocate these costs.
PSB manages certain of the commercial facilities owned by the
Company pursuant to management agreements for a management fee equal to 5%
of revenues. The Company paid a total of $140,000 and $439,000, for the
three and nine months ended September 30, 2003, respectively, as compared
to $152,000 and $454,000, respectively, for the same periods in 2002, in
management fees with respect to PSB's property management services.
STOR-Re, an entity that is consolidated with the Company and is
partially owned by PSB, provides limited property and liability insurance
to PSB at commercially competitive rates. PSB and the Company utilize
unaffiliated insurance carriers to provide property and liability insurance
in excess of STOR-Re's limitations.
In June 2002, we sold an undeveloped parcel of land at cost to
PSB for an aggregate of $1,100,000 cash.
Consolidated Development Joint Venture with a partner including Mr. Hughes
--------------------------------------------------------------------------
In November 1999, we formed the Consolidated Development Joint
Venture with a joint venture partner whose partners include an
institutional investor and Mr. Hughes. This transaction is discussed more
fully in Note 9.
14. Recent Accounting Pronouncements
Accounting for Certain Financial Instruments with Characteristics of both
---------------------------------------------------------------------------
Liabilities and Equity
----------------------
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 - "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS 150"). This
statement prescribes reporting standards for financial instruments that
have characteristics of both liabilities and equity. This standard
generally indicates that certain financial instruments that give the issuer
a choice of settling an obligation with a variable number of securities or
settling an obligation with a transfer of assets, any mandatorily
redeemable security, and certain put options and forward purchase
contracts, should be classified as a liability on the balance sheet. With
the exception of minority interests, described below, we implemented this
Statement on July 1, 2003, and the adoption had no impact on our financial
statements.
The provisions of SFAS 150 indicate certain minority interests in
consolidated entities are to be classified as liabilities at fair value.
However, on October 29, 2003, the FASB decided to defer indefinitely the
implementation of SFAS 150 as it relates to these minority interests.
33
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
Assuming the FASB had not deferred the implementation of SFAS 150
as it relates to minority interests, the impact on the Company's balance
sheet at September 30, 2003 would have been to reclassify the Company's
minority interests described in Note 9 as the "Consolidated Development
Joint Venture and the "Other Consolidated Partnerships", as liabilities at
their estimated fair value. Such adoption would reduce the Company's common
minority interest by $136,862,000, and increase liabilities by
$305,290,000, representing the estimated settlement value of these minority
interests at September 30, 2003.
FASB Interpretation No. 46 - Consolidation of Variable Interest Entities
In January 2003, the Financial Accounting Standards Board issued
FASB Interpretation No. 46 - "Consolidation of Variable Interest Entities,
an interpretation of Accounting Research Bulletin No. 51." This
interpretation explains how to identify variable interest entities and how
an enterprise assesses its interests in a variable interest entity to
decide whether to consolidate that entity. In general, a variable interest
entity is a corporation, partnership, trust, or any other legal structure
used for business purposes that either (a) does not have equity investors
with voting rights, or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities.
This statement is applicable at the beginning of the Company's quarter
ended December 31, 2003. We are in the process of evaluating the impact of
the adoption of this Interpretation but do not believe it will have a
significant impact on our financial statements.
15. Commitments and Contingencies
Legal Matters
-------------
Serrao v. Public Storage, Inc. (Filed April 2003) (Superior Court - Orange
---------------------------------------------------------------------------
County)
-------
The plaintiff in this case filed a suit against the Company on
behalf of a putative class of renters who rented self-storage units from
the Company. Plaintiff alleges that the Company misrepresented the size of
its storage units, has brought claims under California statutory and common
law relating to consumer protection, fraud, unfair competition, and
negligent misrepresentation, and is seeking monetary damages, restitution,
and declaratory and injunctive relief.
The claim in this case is substantially similar to those in
Henriquez v. Public Storage, Inc., which was disclosed in prior reports. In
January 2003, the plaintiff caused the Henriquez action to be dismissed.
Based upon the uncertainty inherent in any putative class action, the
Company cannot presently determine the potential damages, if any, or the
ultimate outcome of this litigation. The Company is vigorously contesting
the claims upon which this lawsuit is based.
Salaam, et. Al V. Public Storage, Inc. (filed February 2000) (Superior
---------------------------------------------------------------------------
Court - Los Angeles County)
---------------------------
The plaintiffs in this case are suing the Company on behalf of a
purported class of California resident property managers who claim that
they were not compensated for all the hours they worked. The named
plaintiffs have indicated that their claims total less than $20,000 in
aggregate. This maximum potential liability cannot be estimated, but can
only be increased if a class is certified or if claims are permitted to be
brought on behalf of the others under the California Unfair Business
Practices Act. The plaintiffs' motion for class certification was denied in
August 2002; the plaintiffs have appealed this denial. This denial does not
deal with the claim under the California Unfair Business Practices Act.
34
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
The Company is continuing to vigorously contest the claims in this
case and intends to resist any expansion beyond the named plaintiffs on the
grounds of lack of commonality of claims. The Company's resistance will
include opposing the plaintiffs' appeal of the court's denial of class
certification and opposing the claim on behalf of others under the
California Unfair Business Practices Act. The Company cannot presently
determine the potential damages, if any, or the ultimate outcome of this
litigation.
Gustavson et al. v. Public Storage, Inc. (Filed June 2003) (Superior
---------------------------------------------------------------------------
Court - Los Angeles County)
---------------------------
In November 2002, a shareholder of the Company made a demand on
the Board of Directors that challenged the fairness of the Company's
acquisition of PS Insurance Company, Ltd. ("PSIC") and demanded that the
Board recover the profits earned by PSIC from November 1995 through
December 2001 and that the entire purchase price paid by the Company for
PSIC in excess of PSIC's net assets be returned to the Company.
The contract to acquire PSIC was approved by the independent
directors of the Company in March 2001, and the transaction was closed in
December 2001. PSIC was formerly owned by B. Wayne Hughes, currently the
Chairman of the Board (and in 2001 also the Chief Executive Officer) of the
Company, B. Wayne Hughes, Jr., currently a director (and in 2001 also an
officer) of the Company and Tamara H. Gustavson, who in 2001 was an officer
of the Company. In exchange for the Hughes family's shares in PSIC, the
Company issued to them 1,439,765 shares of common stock (or a net of
1,138,733 shares, after taking into account 301,032 shares held by PSIC).
The shareholder has threatened litigation against the Hughes
family and the directors of the Company arising out of this transaction and
alleged a pattern of deceptive disclosures with respect to PSIC since 1995.
In December 2002, the Board held a special meeting to authorize an inquiry
by its independent directors to review the fairness to the Company's
shareholders of its acquisition of PSIC and the ability of the Company to
have started its own tenant reinsurance business in 1995. The Company
believes that, prior to the effectiveness in 2001 of the federal REIT
Modernization Act and corresponding California legislation that authorized
the creation and ownership of "taxable REIT subsidiaries," the ownership by
the Company of a reinsurance business relating to its tenants would have
jeopardized the Company's status as a REIT and that other REITs faced
similar concerns about tenant insurance programs.
In June 2003, the Hughes family filed a complaint for declaratory
relief relating to the Company's acquisition of PSIC naming the Company as
defendant. The Hughes family is seeking that the court make (i) a binding
declaration that the Company either is not entitled to recover profits or
other moneys earned by PSIC from November 1995 through December 2001; or
alternatively the amounts that the Hughes family should be ordered to
surrender to the Company if the court determines that the Company is
entitled to recover any such profits or moneys; and (ii) a binding
declaration either that the Company cannot establish that the acquisition
agreement was not just and reasonable as to the Company at the time it was
authorized, approved or ratified; or alternatively the amounts that the
Hughes family should surrender to the Company, if the court determines that
the agreement was not just and reasonable to the Company at that time. The
Hughes family is not seeking any payments from the Company. In the event of
a determination that the Hughes family is obligated to pay certain amounts
to the Company, the complaint states that they have agreed to be bound by
that determination to pay such amounts to the Company.
In July 2003 the Company filed an answer to the Hughes family's
complaint requesting a final judicial determination of the Company's rights
of recovery against the Hughes family in respect of PSIC. The Company
believes that the lawsuit by the Hughes family will ultimately resolve
matters relating to PSIC and will not have any financially adverse effect
on the Company (other than the costs and other expenses relating to the
lawsuit).
35
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
Sale of Partnership Units
-------------------------
In February 2000, the Company entered into a settlement of
litigation arising out of a 1997 tender offer for limited partnership units
in two affiliated partnerships. Under the settlement agreement, the Company
agreed to sell to the plaintiff units representing a 4% interest in each of
the partnerships for a total payment of approximately $1,523,000. The
plaintiff failed to tender the full purchase price at the scheduled
closing, and the settlement collapsed.
In September 2000, the plaintiff amended its complaint to add a
claim for breach of the settlement agreement seeking specific enforcement
and a claim seeking damages for unfair and deceptive trade practices in
connection with the alleged breach. By amending the complaint the Company
believes the plaintiff elected to abandon its underlying claims in the
litigation. The Company asserted affirmative defenses including the
material breach by the plaintiff. Cross motions for summary judgment were
filed by the parties. In July 2002, the court granted plaintiff's motion
for summary judgment as to its claim for breach of the settlement agreement
and granted the Company's motion for summary judgment to dismiss
plaintiff's claim for unfair and deceptive trade practices.
In March 2003, the court granted plaintiff's motion to compel the
sale of the units to the plaintiff. The Company is appealing the court's
decision. If the Company is compelled to sell the units to plaintiff, the
Company would incur a loss of approximately $1,839,000, which has been
accrued as a loss on sale of real estate investments in the Company's
income statement for the nine months ended September 30, 2002.
Other Items
-----------
The Company is a party to various claims, complaints, and other
legal actions that have arisen in the normal course of business from time
to time, including emplyment and tenant claims that are not described
above. We believe that it is unlikely that the outcome of these other
pending legal proceedings, in the aggregate, will have a material adverse
effect upon the operations or financial position of the Company.
Insurance and Loss Exposure
---------------------------
Our facilities have historically carried comprehensive insurance,
including fire, earthquake, liability and extended coverage through
STOR-Re, one of the Consolidated Entities, and insures portions of these
risks through nationally recognized insurance carriers. STOR-Re also
insures affiliates of the Company.
We believe that the Company, STOR-Re, and its affiliates' maximum
aggregate annual exposure for losses that are below the deductibles set
forth in the third-party insurance contracts, assuming multiple significant
events occur, is approximately $30,000,000. In addition, if losses exhaust
the third-party insurers' limit of coverage of $125,000,000 for property
coverage and $101,000,000 for general liability, our exposure could be
greater. These limits are higher than estimates of maximum probable losses
that could occur from individual catastrophic events (i.e., earthquake and
wind damage) determined in recent engineering and actuarial studies.
PSIC reinsures policies against claims for losses to goods stored
by tenants at our self-storage facilities. PSIC reinsures its risks with
third-party insures from any individual event that exceeds a loss of
$500,000 up to the policy limit of $10,000,000. Losses that are not covered
by the third-party insurers are accrued as cost of operations of the tenant
reinsurance operations.
36
PUBLIC STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
Development of Real Estate Facilities
-------------------------------------
We currently have 44 projects in our development pipeline,
including 13 newly developed self-storage facilities, expansions to 15
existing self-storage facilities and 16 conversions from industrial space
into self-storage space, with total estimated development costs of
$167,252,000, of which $90,094,000 has been spent at September 30, 2003.
Development of these facilities is subject to contingencies.
16. Subsequent Events
The Knoxville Facilities were disposed of on July 25, 2003 for
aggregate gross proceeds of $11.0 million. The Company financed a
substantial part of the buyer's consideration in exchange for a note
receivable from the buyer, and in accordance with generally accepted
accounting principles, the Company deferred the sale and the corresponding
gain on these properties. The note receivable was collected in full in
October 2003, and a gain of approximately $4.5 million will be recognized
from the sale of these properties in the fourth quarter of 2003.
On October 16, 2003, we sold a self-storage facility located in
Perrysburg, Ohio for $2.3 million. A gain of approximately $1.1 million
will be recognized from the sale of this property in the fourth quarter of
2003.
On October 6, 2003, we completed a public offering of 5,300,000
depositary shares ($25 stated value per depositary share) each representing
1/1,000 of a share of 6.500% Cumulative Preferred Stock, Series W, raising
net proceeds of approximately $128.3 million. The Series W Preferred Stock
has general preference rights over the Common Stock with respect to
distributions and liquidation proceeds. Except in certain conditions
relating to the Company's qualification as a REIT, the Series W preferred
stock is not redeemable prior to October 6, 2008. After October 6, 2008,
the Series W preferred stock will be redeemable at the option of the
Company, in whole or in part, at $25 per depository share, plus accrued and
unpaid dividends.
On November 13, 2003, we issued in a public offering 4,800,000
(which includes the underwriters' exercise of an additional 400,000
depositary shares to cover over-allotments) depositary shares ($25 stated
value per depositary share) each representing 1/1,000 of a share of 6.450%
Cumulative Preferred Stock, Series X. Total net proceeds of the offering
were $116.2 million. The Series X preferred stock will have general
preference rights over the Common Stock with respect to distributions and
liquidation proceeds. Except in certain conditions relating to the
Company's qualification as a REIT, the Series X preferred stock will not be
redeemable prior to November 13, 2008. After November 13, 2008, the Series
X preferred stock will be redeemable at the option of the Company, in whole
or in part, at $25 per depository share, plus accrued and unpaid dividends.
37
Item 2. Management's Discussion and Analysis of Financial Condition and
- -----------------------------------------------------------------------------
Results of Operations
- ---------------------
The following discussion and analysis should be read in conjunction
with our consolidated financial statements and notes thereto.
FORWARD LOOKING STATEMENTS: When used within this document, the words
"expects," "believes," "anticipates," "should," "estimates," and similar
expressions are intended to identify "forward-looking statements" within the
meaning of that term in Section 27A of the Securities Exchange Act of 1933, as
amended, and in Section 21F of the Securities Exchange Act of 1934, as amended.
Such forward-looking statements involve known and unknown risks, uncertainties,
and other factors, which may cause the actual results and performance of the
Company to be materially different from those expressed or implied in the
forward looking statements. Such factors are described in Item 2A, "Risk
Factors" and include changes in general economic conditions and in the markets
in which the Company operates and the impact of competition from new and
existing storage and commercial facilities and other storage alternatives, which
could impact rents and occupancy levels at the Company's facilities;
difficulties in the Company's ability to evaluate, finance and integrate
acquired and developed properties into the Company's existing operations and to
fill up those properties, which could adversely affect the Company's
profitability; the impact of the regulatory environment as well as national,
state, and local laws and regulations including, without limitation, those
governing Real Estate Investment Trusts, which could increase the Company's
expense and reduce the Company's cash available for distribution; consumers'
failure to accept the containerized storage concept which would reduce the
Company's profitability; difficulties in raising capital at reasonable rates,
which would impede the Company's ability to grow; delays in the development
process, which could adversely affect the Company's profitability; and economic
uncertainty due to the impact of war or terrorism could adversely affect our
business plan. We disclaim any obligation to publicly release the results of any
revisions to these forward-looking statements reflecting new estimates, events
or circumstances after the date of this report.
CRITICAL ACCOUNTING PLICIES
QUALIFICATION AS A REIT - INCOME TAX EXPENSE: We believe that we have
been organized and operated, and we intend to continue to operate, as a
qualifying Real Estate Investment Trust ("REIT") under the Internal Revenue Code
and applicable state laws. A qualifying REIT generally does not pay corporate
level income taxes on its taxable income that is distributed to its
shareholders, and accordingly, we do not pay or record as an expense income tax
on the share of our taxable income that is distributed to shareholders.
Given the complex nature of the REIT qualification requirements, the
ongoing importance of factual determinations and the possibility of future
changes in our circumstances, we cannot provide any assurance that we actually
have satisfied or will satisfy the requirements for taxation as a REIT for any
particular taxable year. For any taxable year that we fail or have failed to
qualify as a REIT and applicable relief provisions did not apply, we would be
taxed at the regular corporate rates on all of our taxable income, whether or
not we made or make any distributions to our shareholders. Any resulting
requirement to pay corporate income tax, including any applicable penalties or
interest, could have a material adverse impact on our financial condition or
results of operations. Unless entitled to relief under specific statutory
provisions, we also would be disqualified from taxation as a REIT for the four
taxable years following the year during which qualification was lost. There can
be no assurance that we would be entitled to any statutory relief.
IMPAIRMENT OF LONG LIVED ASSETS: Substantially all of our assets
consist of long-lived assets, including real estate, assets associated with the
containerized storage business, goodwill, and other intangible assets. We
evaluate our goodwill for impairment on an annual basis, and on a quarterly
basis evaluate our other long-lived assets for impairment. As described in Note
2 to the consolidated financial statements, the evaluation of goodwill for
impairment entails valuation of the reporting unit to which goodwill is
allocated, which involves significant judgment in the area of projecting
earnings, determining appropriate price-earnings multiples, and discount rates.
In addition, the evaluation of other long-lived assets for impairment requires
determining whether indicators of impairment exist, which is a subjective
process. When any indicators of impairment are found, the evaluation of such
long-lived assets then entails projections of future operating cash flows, which
also involves significant judgment. We identified one such impairment during the
second quarter of 2003 and no additional impairments were identified as of
September 30, 2003, see Note 4 to the consolidated financial statements. Future
events, or facts and circumstances that currently exist, that we have not yet
identified, could cause us to conclude in the future that other long lived
assets are impaired. Any resulting impairment loss could have a material adverse
impact on our financial condition and results of operations.
38
ESTIMATED USEFUL LIVES OF LONG-LIVED ASSETS: Substantially all of our
assets consist of depreciable, long-lived assets. We record depreciation expense
with respect to these assets based upon their estimated useful lives. Any change
in the estimated useful lives of those assets, caused by functional or economic
obsolescence or other factors, could have a material adverse impact on our
financial condition or results of operations.
ESTIMATED LEVEL OF RETAINED RISK LIABILITIES: As described in Notes 2
and 15 to the consolidated financial statements, we retain certain risks with
respect to property perils, legal liability, and other such risks. In connection
with our retention of these risks, we accrue losses based upon our estimated
level of losses incurred using certain actuarial assumptions followed in the
insurance industry and based upon our experience. While we believe that the
amounts of the accrued losses are adequate, the ultimate liability may be in
excess of or less than the amounts provided.
ACCRUALS FOR CONTINGENCIES: We are exposed to business and legal
liability risks with respect to events that have occurred, but in accordance
with accounting principles generally accepted in the United States, we have not
accrued for such potential liabilities because the loss is either not probable
or not estimable or because we are not aware of the event. Future events and the
result of pending litigation could result in such potential losses becoming
probable and estimable, which could have a material adverse impact on our
financial condition or results of operations. Some of these potential losses,
which we are aware of, are described in Note 15 to the consolidated financial
statements.
ACCRUALS FOR OPERATING EXPENSES: We accrue for property tax expense and
other operating expenses based upon estimates and historical trends and current
and anticipated local and state government rules and regulations. If these
estimates and assumptions are incorrect, our expenses could be misstated. Cost
of operations, interest expense, general and administrative expense, as well as
television, yellow page, and other advertising expenditures are expensed as
incurred. Accordingly, the amounts incurred in an interim period may not be
indicative of the amounts to be incurred in a full year.
39
Results of Operations
- ---------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
Net income for the three months ended September 30, 2003 was
$89,747,000 compared to $83,351,000 for the same period in 2002, representing an
increase of $6,396,000 or 7.7%. This increase is primarily due to the reduction
in losses from discontinued operations combined with increased operations from
our newly developed self-storage facilities and containerized storage business.
These effects were partially offset by a reduction in our Consistent Group
operating results (as discussed below) and increased depreciation expense
resulting primarily from new property additions.
Net income allocable to our regular common shareholders (after
allocating net income to our preferred and equity shareholders) was $49,179,000
or $0.39 per common share on a diluted basis (based on 126,802,000 weighted
average diluted common equivalent shares) for the three months ended September
30, 2003 compared to $33,160,000 (as restated for the application of EITF Topic
D-42) or $0.27 per common share (as restated) on a diluted basis (based on
124,784,000 weighted average diluted common equivalent shares) for the same
period in 2002, representing an increase of 44.4% on a per share basis. The
increase in net income allocable to common shareholders and earnings per common
diluted share is due to the impact of the factors described above with respect
to net income, combined with a reduction in the amount of income allocated to
our preferred shareholders.
During the three months ended September 30, 2003 and 2002, we allocated
$35,193,000 and $37,928,000 of our net income, respectively, to our preferred
shareholders based on actual distributions paid. In addition, during the third
quarter of 2003, we implemented the Securities and Exchange Commission's
clarification of Emerging Issues Task Force ("EITF") Topic D-42, "The Effect on
the Calculation of Earnings per Share for the Redemption or Induced Conversion
of Preferred Stock". This implementation resulted in an additional allocation of
net income to our preferred shareholders for the third quarter of 2002 and a
corresponding reduction of net income allocation to our common shareholders
totaling $6,888,000. Prior year allocations of net income have been restated to
reflect this change. The $6,888,000 additional allocation of net income to our
preferred shareholders represents the excess of the redemption amount over the
carrying amount of the preferred stock securities that we redeemed during the
period.
EITF Topic D-42 provides, among other things, that any excess of (1)
the fair value of the consideration transferred to the holders of preferred
stock redeemed over (2) the carrying amount of the preferred stock should be
subtracted from net earnings to determine net earnings available to common
stockholders in the calculation of earnings per share. During 2001, 2002 and for
the nine months ended September 30, 2003, we redeemed various series of our
perpetual preferred stock. Our interpretation of EITF Topic D-42 was that the
carrying amount of our preferred stock was equivalent to the liquidation
preference as recorded on our balance sheet. Each of the series of preferred
stock that was redeemed, was redeemed at the liquidation preference.
Accordingly, based upon our interpretation, the fair value of the consideration
given at redemption was equivalent to the carrying amount on our balance sheet
resulting in no impact to net earnings available to common stockholders in the
calculation of earnings per share.
At the July 31, 2003 meeting of the EITF, the Securities and Exchange
Commission Observer clarified that for the purposes of applying EITF Topic D-42,
the carrying amount of the preferred stock should be reduced by the issuance
costs of the preferred stock, regardless of where in the stockholders' equity
section those costs were initially classified on issuance. In the case of the
Company, issuance costs were recorded as a reduction to Paid-in Capital on our
balance sheet at the time the related securities were issued and were not
considered as a reduction to the carrying value of the preferred stock at the
time of redemption. As indicated above, the clarification and resulting
implementation resulted in a $6,888,000 reduction to our reported net income
allocable to our common shareholders for the three months ended September 30,
2002.
In addition, during each of the three months ended September 30, 2003
and 2002, we allocated $5,375,000 of our net income to our Equity Stock, Series
A shareholders.
40
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
Net income for the nine months ended September 30, 2003 was
$250,683,000 compared to $251,524,000 for the same period in 2002, representing
a decrease of $841,000 or 0.3%. This decrease in net income is primarily a
result of a reduction in our Same Store operating results (as discussed below),
increased depreciation expense resulting primarily from new property additions,
and a decrease in equity in earnings of real estate entities. The decrease in
equity in earnings of real estate entities is primarily due to a reduction in
our pro rata share of the earnings of PS Business Parks, Inc. ("PSB"), caused
primarily by the net impact of a gain on sale offset by an asset impairment
charge with respect to impending real estate sales recorded by PSB in the nine
months ended September 30, 2003, as compared to a gain on sale recorded by PSB
in the nine months ended September 30, 2002. Our net pro rata share of such
items recorded by PSB for the nine months ended September 30, 2003 was $453,000
as compared to $2,724,000 in the same period in 2002, representing a decrease of
$2,271,000. These decreases were offset partially by improved results of our
containerized storage operations, a reduction in losses from discontinued
operations, the impact of a loss on sale of real estate assets recorded in the
nine months ended September 30, 2002 and lower interest expense resulting
primarily from lower average debt balances.
Net income allocable to our regular common shareholders (after
allocating net income to our preferred and equity shareholders), was
$123,246,000 or $0.98 per common share on a diluted basis (based on 125,987,000
weighted average diluted common equivalent shares) for the nine months ended
September 30, 2003 compared to $116,806,000 (as restated for the aforementioned
application of EITF Topic D-42) or $0.94 per common share (as restated) on a
diluted basis (based on 124,539,000 weighted average diluted common equivalent
shares) for the same period in 2002, representing an increase of 4.3% on a per
share basis. The increase in net income allocable to common shareholders and
diluted earnings per share is due to a reduction in income allocated to our
preferred shareholders, as described below, offset partially by a reduction in
net income as described above.
During the nine months ended September 30, 2003 and 2002, we allocated
$107,914,000 and $111,704,000 of our net income (based on distributions paid),
respectively, to our preferred shareholders, representing a decrease of 3.4%.
This decrease is due to the redemption of several series of our higher coupon
preferred stock in 2002 and 2003, offset partially by the issuance of additional
preferred securities throughout 2002. In addition, for the nine months ended
September 30, 2003 and 2002, we allocated an additional $3,397,000 and
$6,888,000, respectively, in net income to our preferred shareholders relating
to the application of EITF Topic D-42. The allocation of net income to our
preferred and common shareholders for the nine month periods have been restated
to reflect the application of EITF Topic D-42 during the third quarter of 2003.
In addition, during each of the nine months ended September 30, 2003
and 2002, we allocated $16,126,000 of our net income to our Equity Stock, Series
A shareholders.
Real Estate Operations
- ----------------------
SELF-STORAGE OPERATIONS: Our self-storage operations are by far the
largest component of our operations, representing approximately 91% of our total
revenues generated for the nine months ended September 30, 2003. As a result of
acquisitions and development of self-storage facilities, year over year
comparisons as presented on the consolidated statements of income with respect
to our self-storage operations are not meaningful.
To enhance year over year comparisons, the following table summarizes,
and the ensuing discussion describes, the operating results of (i) 1,164
self-storage facilities that are reflected in the financial statements on a
stabilized basis since January 1, 2001 (the "Consistent Group"), (ii) 95
facilities that were acquired since January 1, 2000 ( the "Acquired
Facilities"), (iii) 35 facilities that were owned prior to January 1, 2001 but
were not stabilized due primarily to expansions in their net rentable square
footage (the "Expansion Facilities") and (iv) 76 newly-developed facilities that
were opened after January 1, 1999 (the "Developed Facilities"):
41
Self - storage operations summary: Three months ended September 30, Nine months ended September 30,
- ---------------------------------- -------------------------------------- --------------------------------------
Percentage Percentage
2003 2002 Change 2003 2002 Change
------------ ---------- ----------- ----------- ----------- ----------
(Dollar amounts in thousands)
Rental income (a):
Consistent Group (b)................ $ 173,242 $ 168,175 3.0% $ 500,959 $ 496,826 0.8%
Acquired Facilities (c)............. 17,005 15,420 10.3% 48,611 42,749 13.7%
Expansion Facilities (d)............ 5,678 5,349 6.2% 15,942 15,169 5.1%
Developed Facilities (e)............ 10,931 6,963 57.0% 27,833 17,844 56.0%
------------ ---------- ----------- ----------- ----------- ----------
Total rental income............... 206,856 195,907 5.6% 593,345 572,588 3.6%
------------ ---------- ----------- ----------- ----------- ----------
Cost of operations:
Consistent Group.................... 58,867 52,338 12.5% 171,118 152,816 12.0%
Acquired Facilities................. 5,522 4,641 19.0% 15,726 12,565 25.2%
Expansion Facilities................ 1,919 2,035 (5.7)% 6,244 5,602 11.5%
Developed Facilities................ 4,673 3,720 25.6% 13,567 9,915 36.8%
------------ ---------- ----------- ----------- ----------- ----------
Total cost of operations............ 70,981 62,734 13.1% 206,655 180,898 14.2%
------------ ---------- ----------- ----------- ----------- ----------
Net operating income (before depreciation):
Consistent Group.................... 114,375 115,837 (1.3)% 329,841 344,010 (4.1)%
Acquired Facilities................. 11,483 10,779 6.5% 32,885 30,184 8.9%
Expansion Facilities................ 3,759 3,314 13.4% 9,698 9,567 1.4%
Developed Facilities................ 6,258 3,243 93.0% 14,266 7,929 79.9%
------------ ---------- ----------- ----------- ----------- ----------
Total net operating income.......... 135,875 133,173 2.0% 386,690 391,690 (1.3)%
Depreciation.......................... (43,613) (42,848) 1.8% (130,332) (127,234) 2.4%
------------ ---------- ----------- ----------- ----------- ----------
Operating Income.................... $ 92,262 $ 90,325 2.1% $ 256,358 $ 264,456 (3.1%)
============ ========== =========== =========== =========== ==========
Number of self-storage facilities (at end
of period):............................. 1,370 1,360 0.7% 1,370 1,360 0.7%
Net rentable square feet (at end of period
- - in thousands):........................ 82,716 81,908 1.0% 82,716 81,908 1.0%
(a) Rental income includes late charges and administrative fees and is net of
promotional discounts given. Rental income does not include retail sales or
truck rental income generated at the facilities.
(b) The Consistent Group includes 1,164 facilities containing 67,666,000 net
rentable square feet that have been owned prior to January 1, 2001, and
operated at a mature, stabilized occupancy level since December 31, 2000.
(c) The Acquired Facilities includes 95 facilities containing 5,642,000 net
rentable square feet that were acquired after January 1, 2000, that were
substantially all mature, stabilized facilities at the time of their
acquisition.
(d) The Expansion Facilities includes 35 facilities containing 3,805,000 net
rentable square feet (of which 817,000 square feet is industrial space
developed for containerized storage activities). These facilities were
owned since January 1, 2002, however, operating results are not comparable
throughout the periods presented due primarily to expansions in their net
rentable square feet or their conversion into Combination Facilities. Such
construction activities can cause a drop in revenue levels, as existing
capacity is made unavailable in order to accommodate construction
activities. During the three years ended December 31, 2002 and the nine
months ended September 30, 2003, we completed construction on expansion
projects to these facilities with a total cost of $121.5 million.
(e) The Developed Facilities includes 76 facilities containing 5,603,000 net
rentable square feet (of which 840,000 square feet is industrial space
initially developed for use in containerized storage activities, see
"Containerized Storage" and "Discontinued Operations"). These facilities
were developed and opened since January 1, 1999 at a total cost of $489.7
million.
42
For the nine months ended September 30, 2003, we have increased the
number of facilities included in the Consistent Group pool of facilities from
1,152 at December 31, 2002 to 1,164 facilities. The increase in the Consistent
Group's pool of facilities is due to (i) the inclusion of 18 facilities that
were in the Acquired Facilities pool at December 31, 2002, offset by (ii) the
reduction of the four facilities in Knoxville, Tennessee and the facility in
Perrysburg, Ohio that are in discontinued operations (see Note 4 to the
consolidated financial statements for more information on discontinued
operations), and (iii) one facility that was removed because its net rentable
square feet was being significantly expanded.
As a result of the change in the Consistent Group pool, the relative
weighting of markets has changed. Accordingly, comparisons should not be made
between information presented in 2002 for the Consistent Group pool of 1,152
facilities and this current pool of 1,164 facilities in order to identify trends
in occupancies, realized rents per square foot, or operating results.
The Consistent Group consists of facilities that have operated at a
stabilized level of operations since January 1, 2001. This group of facilities
contains approximately 67,666,000 net rentable square feet, representing
approximately 82% of the aggregate net rentable square feet of our self-storage
portfolio. Revenues and operating expenses with respect to this group of
properties are set forth in the above Self-Storage Operations table under the
caption, "Consistent Group." The following table sets forth additional operating
data with respect to the Consistent Group of facilities:
CONSISTENT GROUP Three Months Ended September 30, Nine Months Ended September 30,
- ---------------- --------------------------------------- ---------------------------------------
Percentage Percentage
2003 2002 Change 2003 2002 Change
----------- ----------- ---------- ------------- ------------ ----------
(Dollar amounts in thousands, except rents per square foot)
Base rental income......................... $ 178,164 $ 167,247 6.5% $ 515,689 $ 491,918 4.8%
Promotional discounts...................... (11,844) (4,720) 150.9% (34,779) (11,122) 212.7%
----------- ----------- ---------- ------------- ------------ ----------
Adjusted base rental income............. 166,320 162,527 2.3% 480,910 480,796 0.0%
Late charges and administrative fees
collected.................................. 6,922 5,649 22.5% 20,049 16,030 25.1%
----------- ----------- ---------- ------------- ------------ ----------
Total rental income..................... 173,242 168,175 3.0% 500,959 496,826 0.8%
Cost of operations:
Property taxes........................ 15,951 15,229 4.7% 47,414 45,181 4.9%
Direct property payroll............... 14,305 12,744 12.2% 42,977 37,633 14.2%
Cost of managing facilities........... 5,291 4,620 14.5% 15,303 14,262 7.3%
Advertising and promotion............. 5,747 4,138 38.9% 15,071 10,956 37.6%
Utilities............................. 4,136 4,072 1.6% 11,850 11,485 3.2%
Repairs and maintenance............... 4,462 3,788 17.8% 12,666 10,768 17.6%
Telephone reservation center.......... 2,592 2,509 3.3% 7,232 6,972 3.7%
Property insurance.................... 2,054 1,342 53.1% 5,904 4,293 37.5%
Other................................. 4,329 3,896 11.1% 12,701 11,266 12.7%
----------- ----------- ---------- ------------- ------------ ----------
Total cost of operations................ 58,867 52,338 12.5% 171,118 152,816 12.0%
----------- ----------- ---------- ------------- ------------ ----------
Net operating income before depreciation... 114,375 115,837 (1.3)% 329,841 344,010 (4.1)%
Depreciation............................... (34,841) (34,619) 0.6% (106,802) (106,494) 0.3%
----------- ----------- ---------- ------------- ------------ ----------
Operating income........................... $ 79,534 $ 81,218 (2.1)% $ 223,039 $ 237,516 (6.1)%
=========== =========== ========== ============= ============ ==========
Gross margin (before depreciation)......... 66.0% 68.9% (4.2)% 65.8% 69.2% (54.9)%
Weighted average for the period:
Square foot occupancy (a)............... 91.9% 85.7% 7.2% 88.6% 85.2% 4.0%
Realized annual rent per occupied
square foot (b)....................... $ 10.70 $ 11.21 (4.5)% $ 10.70 $ 11.12 (3.8)%
REVPAR (c).............................. $ 9.83 $ 9.61 2.3% $ 9.48 $ 9.47 0.1%
Weighted average at September 30:
Square foot occupancy................... 91.9% 85.7% 7.2%
In place annual rent per occupied
square foot (d)...................... $ 11.57 $ 11.66 (0.8)%
Posted annual rent per square foot (e).. $ 11.98 $ 11.59 3.4%
Total net rentable square feet (in
thousands)................................. 67,666 67,666 0.0%
43
(a) Square foot occupancies represent weighted average occupancy levels over
the entire period.
(b) Realized annual rent per occupied square foot is computed by annualizing
the result of dividing adjusted base rental income by the weighted average
occupied square footage for the period. Realized rents per square foot take
into consideration promotional discounts, bad debt costs, credit card fees
and other costs which reduce rental income from the contractual amounts
due.
(c) Annualized revenue per available square foot ("REVPAR") represents
annualized adjusted base rental income divided by total available net
rentable square feet.
(d) In place annual rent per occupied square foot represents contractual rents
per occupied square foot without reductions for promotional discounts.
(e) Posted annual rent per square foot represents the rents charged to new
tenants prior to any promotional discounts.
During the three and nine months ended September 30, 2003, net
operating income (prior to depreciation) for the Consistent Group facilities
decreased 1.3% and 4.1%, respectively, as compared to the same periods in 2002.
These decreases are primarily attributable to increased promotional discounts
combined with increased cost of operations.
During fiscal 2002, we struggled to regain occupancy levels that were
below the levels that were experienced in the prior year. The reduction in our
occupancy levels resulted in a reduction in our rental income that negatively
impacted property net operating income and the overall net income of the
Company.
At the end of July 2002, the average occupancy level for the Consistent
Group of facilities was 85.7% as compared to 91.2% at the end of July 2001,
representing a reduction of 6.0%. Beginning in mid-August 2002 and through the
remainder of 2002, we reinstated a promotional discount program and advertised
on television in selected markets in an effort to enhance move-in activity and
improve occupancy levels. This program had a positive impact on move-in activity
throughout the third and fourth quarters of 2002 and stabilized our occupancy
levels. By the end of December 2002, the average occupancy level for the
Consistent Group of facilities was 84.3% as compared to 85.3% at the end of
December 2001, representing a reduction of 1.2% and improvement in the negative
spread from July 2002.
During the first quarter of 2003, we continued advertising on
television and offering promotional discounts to new incoming tenants. In
addition, we reduced rental rates charged to new incoming tenants in many of our
markets. These activities continued to have a positive impact on our
occupancies. At the end of March 2003, the average occupancy level for the
Consistent Group of facilities was 85.3% as compared to 83.4% at the end of
March 2002, representing an increase of 2.3%. Although our average occupancy
level was now higher than 2002, the level at March 31, 2003 was still well below
levels we had experienced in years prior to 2002. In order to maintain the
positive occupancy spread over 2002 and to regain to higher levels experienced
in years prior to 2002, we continued to enhance move-in activity by advertising
on television and offering promotional discounts to new incoming tenants
throughout the third quarter of 2003. At the end of September 2003, the average
occupancy level for the Consistent Group of facilities was 91.9% as compared to
85.7% at the end of September 2002, representing an increase of 7.2%.
The increase in occupancy levels has come at a significant cost.
Television advertising expense for the third quarter of 2003 was $2,880,000 as
compared to $1,933,000 in the third quarter of 2002. In addition, promotional
discounts totaled $11,844,000 for the third quarter of 2003 as compared to
$4,720,000 for the third quarter of 2002.
Total rental income increased 3.0% for the three months ended September
30, 2003 as compared to the same period in 2002, which is attributable to a 2.3%
increase in REVPAR combined with a 22.5% increase in late charges and
administrative fees collected. REVPAR increased due to a 7.2% increase in
average square foot occupancy, offset partially by a 4.5% reduction in realized
annual rent per occupied square foot due primarily to increases in promotional
discounts.
44
Total rental income increased 0.8% for the nine months ended September
30, 2003 as compared to the same period , which is attributable to a 0.1%
increase in REVPAR combined with a 25.1% increase in late charges and
administrative fees collected. REVPAR increased due to a 4.0% increase in
average square foot occupancy, offset partially by a 3.8% reduction in realized
annual rent per occupied square foot due primarily to increases in promotional
discounts.
Total operating expenses increased 12.5% for the three months ended
September 30, 2003 as compared to the same period in 2002. This increase was due
primarily to increases in payroll, advertising and promotion, property tax, and
repairs and maintenance costs. Direct property payroll increased 12.2% in the
three months ended September 30, 2003 as compared to the same period in 2002 due
primarily to increased incentives paid to and hours worked by property operating
personnel. Advertising and promotion increased 38.9% in the three months ended
September 30, 2003 as compared to the same period in 2002 primarily due to an
increase in television advertising expense from $1,933,000 in the three months
ended September 30, 2002 to $2,880,000 for the same period in 2003. Repairs and
maintenance cost have increased 17.8% for the three months ended September 30,
2003, as compared to the same period in 2002, as a result of costs to remedy
mold issues at several facilities in Southern states combined with a general
increase in cost that we expect will continue at least over the next 12 months
to address deferred maintenance at our facilities.
Total operating expenses increased 12.0% for the nine months ended
September 30, 2003 as compared to the same period in 2002. This increase was due
to increases in payroll, advertising and promotion, property tax, and repairs
and maintenance costs. Direct property payroll increased 14.2% due primarily to
increased incentives paid to and hours worked by property operating personnel.
Advertising and promotion increased 37.6% primarily due to an increase in
television advertising from $3,876,000 in the nine months ended September 30,
2002 to $7,102,000 for the same period in 2003. Repairs and maintenance have
increased 17.6% in the nine months ended September 30, 2003 as compared to the
same period in 2002 due to costs to remedy mold issues in several facilities in
Southern states, increased snow removal expenses, as well as a general increase
in costs that we expect will continue at least over the next 12 months to
address deferred maintenance at our facilities.
The following table summarizes additional selected financial data with
respect to the Consistent Group of Facilities:
45
For the three months ended
------------------------------------------------------------------------
March 31, June 30, September 30, December 31, Full Year
------------- -------------- ------------- -------------- --------------
(Amounts in thousands, except for per square foot amounts)
Total rental income:
2003............ $ 161,133 $ 166,584 $ 173,242
2002............ $ 165,371 $ 163,279 $ 168,175 $ 161,314 $ 658,140
Promotional discounts given:
2003............ $ 9,970 $ 12,965 $ 11,844
2002............ $ 1,024 $ 5,378 $ 4,720 $ 7,301 $ 18,423
Total cost of operations:
2003............ $ 54,274 $ 58,010 $ 58,867
2002............ $ 50,062 $ 50,416 $ 52,338 $ 57,711 $ 210,527
Television advertising expense:
2003............ $ 1,503 $ 2,719 $ 2,880
2002............ $ 540 $ 1,403 $ 1,933 $ 3,912 $ 7,788
REVPAR:
2003............ $ 9.15 $ 9.45 $ 9.83
2002............ $ 9.47 $ 9.34 $ 9.61 $ 9.19 $ 9.40
Weighted average realized annual rent per occupied
square foot for the period:
2003............ $ 10.79 $ 10.61 $ 10.70
2002............ $ 11.34 $ 10.83 $ 11.21 $ 10.81 $ 11.05
Weighted average occupancy levels for the period:
2003............ 84.8% 89.1% 91.9%
2002............ 83.5% 86.3% 85.7% 85.0% 85.1%
Weighted average occupancy at October 31,
2003............ 91.5%
2002............ 85.8%
We are pleased with the occupancy gains that we have achieved thus far
this year. In particular, we were pleased that we had an increase in tenants in
the third quarter of about 400 customers, a quarter which typically results in a
decline in tenants due to seasonal trends. For comparison, we had a net
reduction of tenants of 9,015 in the third quarter of 2002 and 8,998 in the
third quarter of 2001.
Despite our occupancy gains, our expectations are significantly
moderated by our experience that on average approximately 25% to 30% of our new
customers will move out within the first 60 to 90 days. Our current occupancy
levels have been achieved in large part by the elevated move-in activity
experienced over the past two quarters. As a result, during the third quarter of
2003, a total of 162,000 tenants moved out of our consistent group of facilities
as compared to 140,000 tenants for the third quarter of 2002. We expect that our
move-out activity will continue at these higher levels, putting pressure on our
occupancy levels. Compounding the pressure on our occupancies will be the normal
seasonal increase in move-out activity that we have historically experienced in
the fourth quarter.
Our elevated level of move-outs has made it more important to continue
to generate a high level of move-ins in order to maintain occupancy levels. We
have not been able to demonstrate that we can generate the high level of
move-ins necessary to sustain high occupancy levels without the use of media
and/or promotional discounts. Accordingly, we expect to remain aggressive with
promotional and media programs at least through the fourth quarter of 2003 and,
as a result, the up front costs of these marketing activities, and the increases
in discounts, are expected to continue to adversely impact our operating income
during at least the remainder of 2003.
We are working towards a goal of a high level of sustainable occupancy,
characterized by a less volatile tenant base that is not as heavily weighted
towards recent move-ins, thereby mitigating the level of move-outs. If we can
achieve this goal, it will allow for fewer promotional discounts and a reduction
in advertising and other customer acquisition costs. In furtherance of these
goals, we are continuously evaluating our call volume, reservation activity, and
move-in/move-out rates for each of our markets relative to our marketing
activities and rental rates. In addition, we are evaluating market supply and
demand factors and based upon these analyses we are continuing to adjust our
marketing activities. There can be no assurance that we will achieve our goals.
46
Analysis of Regional Trends
---------------------------
The following table sets forth regional trends in our consistent group
of facilities:
CONSISTENT GROUP OPERATING TRENDS BY REGION:
Three months ended September 30, Nine months ended September 30,
--------------------------------------- ---------------------------------------
Percentage Percentage
2003 2002 Change 2003 2002 Change
------------ ----------- ----------- ----------- ----------- -----------
(Dollar amounts in thousands)
Rental income:
Southern California (120 facilities) $ 29,002 $ 26,822 8.1% $ 84,293 $ 79,270 6.3%
Northern California (108 facilities) 19,984 19,346 3.3% 58,585 57,853 1.3%
Texas (140 facilities).......... 16,051 15,779 1.7% 46,569 47,152 (1.2)%
Florida (108 facilities)........ 14,618 13,863 5.4% 42,160 41,300 2.1%
Illinois (82 facilities)........ 13,134 13,552 (3.1)% 37,934 39,969 (5.1)%
Georgia (56 facilities)......... 6,158 5,981 3.0% 17,725 17,689 0.2%
All other states (550 facilities) 74,295 72,832 2.0% 213,693 213,593 0.0%
------------ ----------- ----------- ----------- ----------- -----------
Total rental income................. 173,242 168,175 3.0% 500,959 496,826 0.8%
------------ ----------- ----------- ----------- ----------- -----------
Cost of operations:
Southern California.............. 6,543 6,530 0.2% 19,982 18,116 10.3%
Northern California.............. 5,178 4,882 6.1% 15,462 13,876 11.4%
Texas............................ 7,519 6,510 15.5% 20,981 18,604 12.8%
Florida.......................... 5,883 4,966 18.5% 16,679 14,200 17.5%
Illinois......................... 5,288 4,778 10.7% 16,302 15,135 7.7%
Georgia.......................... 2,180 1,876 16.2% 6,455 5,536 16.6%
All other states................. 26,276 22,796 15.3% 75,257 67,349 11.7%
------------ ----------- ----------- ----------- ----------- -----------
Total cost of operations............ 58,867 52,338 12.5% 171,118 152,816 12.0%
------------ ----------- ----------- ----------- ----------- -----------
Net operating income (before depreciation):
Southern California.............. 22,459 20,292 10.7% 64,311 61,154 5.2%
Northern California.............. 14,806 14,464 2.4% 43,123 43,977 (1.9)%
Texas............................ 8,532 9,269 (8.0)% 25,588 28,548 (10.4)%
Florida.......................... 8,735 8,897 (1.8)% 25,481 27,100 (6.0)%
Illinois......................... 7,846 8,774 (10.6)% 21,632 24,834 (12.9)%
Georgia.......................... 3,978 4,105 (3.1)% 11,270 12,153 (7.3)%
All other states................. 48,019 50,036 (4.0)% 138,436 146,244 (5.3)%
------------ ----------- ----------- ----------- ----------- -----------
Total net operating income.......... $ 114,375 $ 115,837 (1.3)% $ 329,841 $ 344,010 (4.1)%
------------ ----------- ----------- ----------- ----------- -----------
Weighted average occupancy:
Southern California.............. 91.9% 86.6% 6.1% 90.3% 86.7% 4.2%
Northern California.............. 90.7% 84.7% 7.1% 88.7% 85.1% 4.2%
Texas............................ 92.2% 84.5% 9.1% 88.8% 84.6% 5.0%
Florida.......................... 92.5% 85.1% 8.7% 89.9% 85.2% 5.5%
Illinois......................... 92.0% 85.5% 7.6% 87.5% 84.3% 3.8%
Georgia.......................... 92.6% 85.2% 8.7% 89.7% 84.2% 6.5%
All other states................. 92.0% 86.5% 6.4% 88.0% 85.5% 2.9%
------------ ----------- ----------- ----------- ----------- -----------
Total weighted average occupancy.... 91.9% 85.7% 7.2% 88.6% 85.2% 4.0%
------------ ----------- ----------- ----------- ----------- -----------
47
CONSISTENT GROUP OPERATING TRENDS BY REGION: (Continued)
Three months ended September 30, Nine months ended September 30,
--------------------------------------- ---------------------------------------
Percentage Percentage
2003 2002 Change 2003 2002 Change
------------ ----------- ----------- ----------- ----------- -----------
(Dollar amounts in thousands)
REVPAR:
Southern California.............. $14.93 $13.83 8.0% $14.45 $13.66 5.8%
Northern California.............. 13.20 12.81 3.0% 12.89 12.79 0.8%
Texas............................ 7.13 7.05 1.1% 6.89 7.02 (1.9)%
Florida.......................... 9.01 8.59 4.9% 8.63 8.53 1.2%
Illinois......................... 10.20 10.64 (4.1)% 9.85 10.46 (5.8)%
Georgia.......................... 7.26 7.19 1.0% 6.95 7.11 (2.3)%
All other states................. 9.08 8.98 1.1% 8.72 8.79 (0.8)%
------------ ----------- ----------- ----------- ----------- -----------
Total REVPAR:....................... $9.83 $9.61 2.3% $9.48 $9.47 0.1%
------------ ----------- ----------- ----------- ----------- -----------
Realized annual rent per occupied square foot:
Southern California.............. $16.24 $15.96 1.8% $16.00 $15.75 1.6%
Northern California.............. 14.56 15.13 (3.8)% 14.53 15.03 (3.3)%
Texas............................ 7.73 8.34 (7.3)% 7.76 8.30 (6.5)%
Florida.......................... 9.74 10.10 (3.6)% 9.60 10.01 (4.1)%
Illinois......................... 11.09 12.44 (10.9)% 11.26 12.41 (9.3)%
Georgia.......................... 7.84 8.44 (7.1)% 7.74 8.44 (8.3)%
All other states................. 9.87 10.38 (4.9)% 9.91 10.29 (3.7)%
------------ ----------- ----------- ----------- ----------- -----------
Total realized annual rent per occupied
square foot:...................... $10.70 $11.21 (4.5)% $10.70 $11.12 (3.8)%
------------ ----------- ----------- ----------- ----------- -----------
Self-Storage Operations - Acquired Facilities
The "Acquired Facilities," at September 30, 2003, are comprised of 95
self-storage facilities containing 5,642,000 net rentable square feet that were
acquired in 2000, 2001, and 2002. These facilities were substantially all
mature, stabilized facilities at the time of their acquisition. The following
table summarizes operating data with respect to these 95 facilities:
48
ACQUIRED FACILITIES
- -------------------
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------- ------------------------------------
2003 2002 Change 2003 2002 Change
------------ ------------ --------- ----------- ---------- -----------
(Dollar amounts in thousands)
Rental income (a):
Self-storage facilities acquired in 2002 (a) $ 15,615 $ 14,246 $ 1,369 $ 44,776 $ 39,356 $ 5,420
Self-storage facility acquired in 2001 (b).. 149 121 28 418 322 96
Self-storage facilities acquired in 2000 (c) 1,241 1,053 188 3,417 3,071 346
------------ ------------ --------- ----------- ---------- -----------
Total rental income....................... 17,005 15,420 1,585 48,611 42,749 5,862
------------ ------------ --------- ----------- ---------- -----------
Cost of operations:
Self-storage facilities acquired in 2002 (a) 4,866 4,118 748 13,938 11,085 2,853
Self-storage facility acquired in 2001 (b).. 47 39 8 130 118 12
Self-storage facilities acquired in 2000 (c) 609 484 125 1,658 1,362 296
------------ ------------ --------- ----------- ---------- -----------
Total cost of operations.................. 5,522 4,641 881 15,726 12,565 3,161
------------ ------------ --------- ----------- ---------- -----------
Net operating income before depreciation:
- ----------------------------------------
Self-storage facilities acquired in 2002 (a) 10,749 10,128 621 30,838 28,271 2,567
Self-storage facility acquired in 2001 (b).. 102 82 20 288 204 84
Self-storage facilities acquired in 2000 (c) 632 569 63 1,759 1,709 50
------------ ------------ --------- ----------- ---------- -----------
Net operating income...................... 11,483 10,779 704 32,885 30,184 2,701
Depreciation.................................. (3,549) (3,252) (297) (9,004) (8,401) (603)
------------ ------------ --------- ----------- ---------- -----------
Operating Income............................ $ 7,934 $ 7,527 $ 407 $ 23,881 $ 21,783 $ 2,098
============ ============ ========= =========== ========== ===========
Weighted average square foot occupancy during the
period:
Self-storage facilities acquired in 2002 (a) 92.6% 86.2% 7.4% 89.4% 85.0% 5.2%
Self-storage facility acquired in 2001 (b).. 96.7% 74.1% 30.5% 91.4% 62.0% 47.4%
Self-storage facilities acquired in 2000 (c) 91.3% 70.9% 28.8% 82.6% 67.7% 22.0%
------------ ------------ ---------- ----------- ---------- -----------
92.5% 84.6% 9.3% 88.8% 83.0% 7.0%
============ ============ ========== =========== ========== ===========
Number of self-storage facilities (at end of
period)........................................ 95 95 - 95 95 -
Net rentable square feet (in thousands, at end of
period)..................................... 5,642 5,642 - 5,642 5,642 -
Cumulative acquisition cost (at end of period). $ 405,684 $ 405,684 $ - $405,684 $405,684 $ -
(a) The 2002 acquisitions includes 47 properties acquired on January 16, 2002
from an affiliated development joint venture at a total cost of
$269,898,000, 31 properties acquired on January 1, 2002 in connection with
business combinations with two affiliated partnerships at a total cost of
$60,528,000, and nine facilities acquired from third parties at a total
cost of $30,117,000.
(b) The 2001 acquisition was acquired from a third party at a cost of
$3,503,000.
(c) The 2000 acquisitions are comprised of seven facilities acquired from third
parties at a total cost of $41,638,000.
Rental income and cost of operations for the Acquired Facilities have
increased significantly in the three and nine months ended September 30, 2003 as
compared to the same periods in 2002, due primarily to the acquisition of new
facilities in 2002.
Similar to our Consistent Group of facilities, the Acquired Facilities
have experienced operating difficulties over the past year. Marketing and
promotional strategies, as described above with respect to our Consistent Group,
were employed in 2003 to enhance the occupancy levels and rental income of the
Acquired Facilities.
Self-Storage Operations - Expansion Facilities
Since January 1, 2000, we expanded 35 self-storage facilities or
converted them to Combination Facilities (defined below). These activities
caused a drop in revenue levels, as existing capacity was made unavailable in
order to accommodate construction activities and, as a result, the operating
results are not comparable. At September 30, 2003, the weighted average
occupancy level was approximately 86% as compared to 70% one year earlier. The
operating results for these facilities are presented in the Self-Storage
Operations table above under the caption, "Expansion Facilities."
49
Depreciation expense with respect to the expansion facilities was
$1,626,000 and $4,667,000 for the three and nine months ended September 30,
2003, respectively, as compared to $1,566,000 and $4,616,000, respectively, for
the same periods in 2002. These 35 facilities contain approximately 3,805,000
net rentable square feet at September 30, 2003 (which includes the expanded
space, and 817,000 square feet of industrial space developed for containerized
storage activities - see "Containerized Storage" and "Discontinued Operations").
The aggregate construction costs to complete these expansions totaled
approximately $121,510,000.
A portion of the 817,000 net rentable square feet of industrial space
included in these facilities was previously used by the discontinued
containerized storage operations. As described under "Liquidity and Capital
Resources," we are converting a portion of this industrial space into
traditional self-storage units.
Self-Storage Operations - Developed Facilities
Since January 1, 1999, we have opened 59 newly developed self-storage
facilities and 17 facilities that were developed to contain both self-storage
and containerized storage at the same location ("Combination Facilities"). These
newly developed facilities have an aggregate of 5,603,000 net rentable square
feet (of which 840,000 net rentable square feet is industrial space initially
developed for containerized storage activities - see "Containerized Storage" and
"Discontinued Operations"). Aggregate development cost for these 76 facilities
was approximately $489,690,000. The operating results of the self-storage
facilities and Combination Facilities are reflected in the Self-Storage
Operations table under the caption, "Developed Facilities."
50
The following table sets forth the operating results and selected
operating data with respect to the Developed Facilities:
DEVELOPED FACILITIES
- --------------------
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------- -----------------------------------
2003 2002 Change 2003 2002 Change
----------- ------------ ---------- ----------- ----------- ----------
(Dollar amounts in thousands)
Rental income:
Self-storage facilities............ $ 7,990 $ 5,087 $ 2,903 $ 20,261 $ 13,106 $ 7,155
Combination Facilities............. 2,941 1,876 1,065 7,572 4,738 2,834
----------- ------------ ---------- ----------- ----------- ----------
Total rental income.............. 10,931 6,963 3,968 27,833 17,844 9,989
----------- ------------ ---------- ----------- ----------- ----------
Cost of operations:
Self-storage facilities............ 3,650 2,439 1,211 9,972 6,501 3,471
Combination Facilities............. 1,023 1,281 (258) 3,595 3,414 181
----------- ------------ ---------- ----------- ----------- ----------
Total cost of operations......... 4,673 3,720 953 13,567 9,915 3,652
----------- ------------ ---------- ----------- ----------- ----------
Net operating income before depreciation:
- ----------------------------------------
Self-storage facilities............ 4,340 2,648 1,692 10,289 6,605 3,684
Combination Facilities............. 1,918 595 1,323 3,977 1,324 2,653
----------- ------------ ---------- ----------- ----------- ----------
Net operating income............. 6,258 3,243 3,015 14,266 7,929 6,337
Depreciation......................... (3,557) (3,371) (186) (9,859) (7,723) (2,136)
----------- ------------ ---------- ----------- ----------- ----------
Operating Income................... $ 2,701 $ (128) $ 2,829 $ 4,407 $ 206 $ 4,201
=========== ============ ========== =========== =========== ==========
Weighted average square foot occupancies
for the period:
Self-storage facilities............ 79.3% 57.5% 37.9% 69.1% 55.8% 23.8%
Combination Facilities............. 86.7% 54.3% 59.7% 75.4% 47.3% 59.4%
----------- ------------ ---------- ----------- ----------- ----------
Total............................ 85.4% 56.7% 50.6% 74.0% 53.5% 38.3%
=========== ============ ========== =========== =========== ==========
Self-storage facilities, at end of
period:
Number of facilities............... 59 47 12
Net rentable square feet........... 3,742 2,951 791
Total development cost............. $ 334,104 $ 255,194 $ 78,910
Combination Facilities, at end of period:
Number of facilities............... 17 17 -
Net rentable square feet (a)....... 1,861 1,844 17
Total development cost (a)......... $ 155,586 $ 154,177 $ 1,409
(a) During the second quarter of 2003, we completed the conversion of a
facility used in our containerized storage operations to a self-storage
facility, at an aggregate cost of $1,409,000. As a result of this
conversion a total of 38,000 net rentable square feet of industrial space
was converted into 55,000 net rentable square feet of traditional
self-storage space.
The following table summarizes operating data for the 59 newly
developed self-storage facilities that opened since January 1, 1999:
51
DEVELOPED SELF-STORAGE FACILITIES
- ---------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------------- -----------------------------------
2003 2002 Change 2003 2002 Change
------------ ------------ ----------- ----------- ------------ ---------
(Dollar Amounts in thousands)
Rental income:
- --------------
Self-storage facilities opened in 2003...... $ 533 $ - $ 533 $ 726 $ - $ 726
Self-storage facilities opened in 2002...... 1,960 475 1,485 4,611 620 3,991
Self-storage facilities opened in 2001...... 1,822 1,256 566 4,618 3,252 1,366
Self-storage facilities opened in 2000 and 1999 3,675 3,356 319 10,306 9,234 1,072
------------ ------------ ----------- ----------- ------------ ---------
Total rental income....................... 7,990 5,087 2,903 20,261 13,106 7,155
------------ ------------ ----------- ----------- ------------ ---------
Cost of operations:
- -------------------
Self-storage facilities opened in 2003...... 364 - 364 674 - 674
Self-storage facilities opened in 2002...... 966 465 501 2,642 748 1,894
Self-storage facilities opened in 2001...... 962 759 203 2,676 2,139 537
Self-storage facilities opened in 2000 and 1999 1,358 1,215 143 3,980 3,614 366
------------ ------------ ----------- ----------- ------------ ---------
Total cost of operations.................. 3,650 2,439 1,211 9,972 6,501 3,471
------------ ------------ ----------- ----------- ------------ ---------
Net operating income before depreciation:
- -----------------------------------------
Self-storage facilities opened in 2003...... 169 - 169 52 - 52
Self-storage facilities opened in 2002...... 994 10 984 1,969 (128) 2,097
Self-storage facilities opened in 2001...... 860 497 363 1,942 1,113 829
Self-storage facilities opened in 2000 and 1999 2,317 2,141 176 6,326 5,620 706
------------ ------------ ----------- ----------- ------------ ---------
Net operating income........................ 4,340 2,648 1,692 10,289 6,605 3,684
Depreciation.................................. (2,447) (2,206) (241) (6,549) (4,761) (1,788)
------------ ------------ ----------- ----------- ------------ ---------
Operating income............................ $ 1,893 $ 442 $ 1,451 $ 3,740 $ 1,844 $ 1,896
============ ============ =========== =========== ============ =========
Weighted average square foot occupancy during the
- -------------------------------------------------
period:
- -------
Self-storage facilities opened in 2003...... 44.9% - - 31.1% - -
Self-storage facilities opened in 2002...... 72.6% 22.9% 46.8% 55.7% 17.3% 45.1%
Self-storage facilities opened in 2001...... 84.6% 47.0% 80.0% 68.5% 41.7% 64.3%
Self-storage facilities opened in 2000 and 1999 93.5% 82.2% 13.7% 88.4% 76.9% 15.0%
------------ ------------ ---------- ----------- ------------ ---------
79.3% 57.5% 37.9% 69.1% 55.8% 23.8%
------------ ------------ ---------- ----------- ------------ ---------
Number of facilities:
- ---------------------
Self-storage facilities opened in 2003...... 8 - 8
Self-storage facilities opened in 2002...... 16 12 4
Self-storage facilities opened in 2001...... 12 12 -
Self-storage facilities opened in 2000 and 1999 23 23 -
----------- ------------ ---------
59 47 12
=========== ============ =========
Cumulative Development Cost:
- ----------------------------
Self-storage facilities opened in 2003...... $ 65,796 $ - $ 65,796
Self-storage facilities opened in 2002...... 93,413 80,299 13,114
Self-storage facilities opened in 2001...... 66,905 66,905 -
Self-storage facilities opened in 2000 and 1999 107,990 107,990 -
----------- ------------ ---------
$ 334,104 $ 255,194 $ 78,910
=========== ============ =========
52
Unlike many other forms of real estate, we are unable to pre-lease our
newly developed facilities due to the nature of our tenants. Accordingly, at the
time a newly developed facility first opens for operations, the facility is
entirely vacant, generating no rental income. Historically, we estimated that on
average it took approximately 24 months for a newly developed facility to fill
up and reach a targeted occupancy level of approximately 90%. We believe that
the current economic environment has extended the fill-up period beyond 24
months notwithstanding our marketing efforts to enhance the fill-up process.
Similar to our Consistent Group of facilities, the newly developed
self-storage facilities participated in promotional discounting and advertising
activities to enhance occupancy levels. During the three months ended September
30, 2003, the newly developed self-storage facilities had a weighted average
occupancy level of approximately 79.3%.
Property operating expenses are substantially fixed, consisting
primarily of payroll, property taxes, utilities, and marketing costs. The rental
revenue of a newly developed facility will generally not cover its property
operating expenses (excluding depreciation) until the facility has reach an
occupancy level of approximately 30% to 34%. However, at that occupancy level,
the rental revenues from the facility are still not sufficient to cover the
related depreciation expense and cost of capital with respect to the facility's
development cost. During construction of the self-storage facility, we
capitalize interest costs and include such cost as part of the overall
development cost of the facility. Once the facility is opened for operations,
interest is no longer capitalized.
Due to the relationship between the generation of rental income and
immediate recognition of expenses upon opening of a facility, our development
activities have had a negative impact on our net income. We estimate that our
net income has been negatively impacted by approximately $24,009,000 and
$22,549,000, in the nine months ended September 30, 2003 and 2002, respectively,
as a result of the difference between the revenues generated by the Developed
Facilities and the operating expenses, depreciation, and cost of capital with
respect to these facilities as described above. These amounts include
approximately $9,859,000 and $7,723,000, in the nine months ended September 30,
2003 and 2002, respectively, in depreciation expense.
We continue to develop facilities, despite the short-term earnings
dilution experienced during the fill-up period, because we believe that the
ultimate returns on developed facilities are favorable. In addition, we believe
that it is advantageous for us to continue to expand our asset base and benefit
from the resultant increased critical mass with facilities that will improve our
portfolio's overall average construction and location quality.
We expect that over at least the next 24 months, the Developed
Facilities will continue to have a negative impact to our earnings, however, to
a much lesser degree than experienced in 2002. We have a current development
pipeline of 44 projects, including new developments, expansions to existing
self-storage facilities and remodeling projects primarily to improve the visual
appeal of certain properties, with total estimated costs of $167,300,000.
Following completion of our development pipeline, we expect our ongoing
development expenditures to approximate $75,000,000 per year. We expect to open
10 newly developed storage facilities in the fourth quarter of 2003, at a total
cost of proximately $82.2 million. Our earnings will continue to be negatively
impacted by these future newly developed facilities and expansions until they
reach a stabilized occupancy level.
COMMERCIAL PROPERTY OPERATIONS: Commercial property operations included
in our consolidated financial statements include commercial space owned by the
Company and entities consolidated by the Company. We have a much larger interest
in commercial properties through our ownership interest in PSB. Our investment
in PSB is accounted for on the equity method of accounting, and accordingly our
share of PSB's earnings is reflected as "Equity in earnings of real estate
entities," see below.
Our commercial operations are comprised of 992,000 net rentable square
feet of commercial space operated at certain of the self-storage facilities, and
three stand-alone commercial facilities having a total of 195,000 net rentable
square feet. In addition, we own an industrial building with 67,000 net rentable
square feet that was opened in 2001. This facility was previously used by the
containerized storage operations, and is now classified as "real estate
facilities held for sale" on our September 30, 2003 balance sheet.
The following table sets forth the historical commercial property
amounts included in the financial statements:
53
Commercial Property Operations
- ------------------------------
(excluding discontinued operations):
- ------------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------- -----------------------------------
2003 2002 Change 2003 2002 Change
----------- ---------- ---------- ----------- ---------- ----------
Rental income $ 2,812 $ 2,894 $ (82) $ 8,601 $ 8,917 $ (316)
Cost of operations................... (1,253) (1,074) 179 (3,491) (3,272) (219)
----------- ---------- ---------- ----------- ---------- ----------
Net operating income............... 1,559 1,820 (261) 5,110 5,645 (535)
Depreciation......................... (590) (622) 32 (1,889) (1,991) 102
----------- ---------- ---------- ----------- ---------- ----------
Operating income................... $ 969 $ 1,198 $ (229) $ 3,221 $ 3,654 $ (433)
=========== ========== ========== =========== ========== ==========
The decrease in rental income for the nine months ended September 30,
2003 as compared to the same period in 2002 is due primarily to a vacancy in one
of the three stand-alone commercial facilities, which caused a reduction in
rental income of approximately $217,000.
During 2002, we sold one of our commercial facilities to a third party
for an aggregate $3.9 million in cash. The historical operations with respect to
this facility are classified as "Discontinued Operations" in our income
statement and are not included in the above table.
CONTAINERIZED STORAGE OPERATIONS: In August 1996, Public Storage Pickup
& Delivery ("PSPUD"), a subsidiary of the Company, made its initial entry into
the containerized storage business through its acquisition of a single facility
operator located in Irvine, California. At September 30, 2003, PSPUD operated 27
facilities in 11 states, which are located in major markets in which we have
significant market presence with respect to our traditional self-storage
facilities. During 2002, we reevaluated our operational strategy and closed 22
of the 55 containerized storage facilities that were open at January 1, 2002. As
of September 30, 2003, all of the 22 facilities have been closed. In addition,
during 2003, we decided to close an additional six containerized storage
facilities. These 28 facilities are herein referred to as the "Closed
Facilities." As of September 30, 2003 five of the Closed Facilities remained
open, but are expected to close by January 31, 2004. The operations with respect
to the Closed Facilities, including historical operating results for previous
periods, are not included in the table below and instead are included in
Discontinued Operations. PSPUD's operations, which exclude the Closed
Facilities, are reflected on the table below:
Containerized Storage
(excluding discontinued operations)
For the three months ended For the nine months ended
September 30, September 30,
-------------------------------------- --------------------------------
2003 2002 Change 2003 2002 Change
------------ ---------- ----------- --------- ---------- ----------
(Amounts in thousands)
Rental and other income ............ $10,355 $8,935 $1,420 $27,713 $23,351 $4,362
------------ ---------- ----------- --------- ---------- ----------
Cost of operations:
Direct operating costs.......... 5,834 6,644 (810) 16,093 15,633 460
Facility lease expense.......... 363 399 (36) 1,108 1,123 (15)
------------ ---------- ----------- --------- ---------- ----------
Total cost of operations..... 6,197 7,043 (846) 17,201 16,756 445
------------ ---------- ----------- --------- ---------- ----------
Operating income prior to
depreciation.................. 4,158 1,892 2,266 10,512 6,595 3,917
Depreciation expense (a)............ (1,838) (1,262) (576) (5,436) (3,961) (1,475)
------------ ---------- ----------- --------- ---------- ----------
Operating income.................... $ 2,320 $ 630 $1,690 $ 5,076 $ 2,634 $2,442
============ ========== =========== ========= ========== ==========
(a) Depreciation expense principally relates to the depreciation related to the
containers; however, depreciation expense for the three and nine months
ended September 30, 2003 includes $573,000 and $1,427,000, respectively,
with respect to real estate facilities. Depreciation expense for the three
and nine months ended September 30, 2002 includes $375,000 and $930,000,
respectively, with respect to real estate facilities.
54
Rental and other income includes monthly rental charges to customers
for storage of the containers, service fees charged for pickup and delivery of
containers to customers' homes. Rental income increased to $6,998,000 and
$19,798,000 for the three and nine months ended September 30, 2003,
respectively, from $6,177,000 and $17,023,000, respectively, for the same
periods in 2002 primarily as a result of higher per container rents and an
increase in the number of occupied containers, which is attributable partially
to the effect of certain closures of facilities that represented consolidations
of facilities in existing markets. At September 30, 2003, there were
approximately 41,747 occupied containers in the 27 facilities that are reflected
in these "ongoing" operations.
Direct operating costs principally includes payroll, equipment lease
expense, utilities and vehicle expenses (fuel and insurance).
Depreciation expense with respect to the containers and other non-real
estate assets of the containerized storage operations increased $978,000 for the
nine months ended September 30, 2003 as compared to the same period in 2002 due
primarily to reduced estimated useful lives of the containers and other assets
of the containerized storage operations. We reevaluated the historical results
with respect to wear and functional obsolescence of these assets. Based upon the
results of this review, we decreased the estimated useful lives with respect to
these assets effective January 1, 2003.
At September 30, 2003, five of the 27 containerized storage facilities
are leased from third parties. The remaining 22 facilities were operated in
facilities owned by the Company, comprised of 17 Combination Facilities with an
aggregate of 894,000 square feet of industrial space (this square footage is a
component of the total net rentable square footage of the Expansion Facilities
and the Developed Facilities in the table above) and five industrial facilities
having an aggregate of 420,000 net rentable square feet.
There can be no assurance as to the level of the containerized storage
business's expansion, level of gross rentals, level of move-outs or
profitability. We continue to evaluate the business operations, and additional
facilities may be closed.
See "Discontinued Operations" below for a discussion of operating
results of the Closed Facilities.
TENANT REINSURANCE OPERATIONS: On December 31, 2001, we acquired PS
Insurance Company, Ltd. ("PS Insurance") from a related party. PS Insurance
reinsures policies against losses to goods stored by tenants in our self-storage
facilities. The operations of PS Insurance are included in the income statement
under "Revenues - tenant reinsurance premiums" and "Cost of operations - tenant
reinsurance."
TENANT REINSURANCE OPERATIONS
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------ -----------------------------------
2003 2002 Change 2003 2002 Change
---------- ---------- --------- ----------- ---------- ---------
(Amounts in thousands)
Tenant reinsurance revenues........... $ 5,755 $ 5,112 $ 643 $ 16,551 $ 14,843 $ 1,708
Cost of operations................... (2,917) (2,387) (530) (8,631) (7,203) (1,428)
---------- ---------- --------- ----------- ---------- ---------
Operating income................... $ 2,838 $ 2,725 $ 113 $ 7,920 $ 7,640 $ 280
========== ========== ========= =========== ========== =========
The level of tenant reinsurance revenues is largely dependent upon our
occupancy level and move-in activity. At September 30, 2003, approximately 38%
of our tenant base has such policies. New insurance business comes from tenants
who sign up for insurance as they move into our self-storage facilities.
Cost of operations for the tenant reinsurance operations has increased
in the three and nine months ended September 30, 2003 as compared to the same
periods in 2002, due primarily to increased customer claims attributable to a
larger tenant base as well as an increase in claims.
55
We have outside third-party insurance coverage for losses from any
individual event that exceeds a loss of $500,000, to a limit of $10,000,000.
Losses below these amounts are recorded as cost of operations for the tenant
reinsurance operations.
EQUITY IN EARNINGS OF REAL ESTATE ENTITIES: In addition to our
ownership of equity interests in PSB, we had general and limited partnership
interests in seven limited partnerships at September 30, 2003 (PSB and the
limited partnerships are collectively referred to as the "Unconsolidated
Entities"). Due to our limited ownership interest and limited control of these
entities, we do not consolidate the accounts of these entities for financial
reporting purposes, and account for such investments using the equity method.
Equity in earnings of real estate entities for the three and nine
months ended September 30, 2003 and 2002 consists of our pro rata share of the
Unconsolidated Entities based upon our ownership interest for the period. The
following table sets forth the significant components of equity in earnings of
real estate entities:
For the three months ended For the nine months ended
September 30, September 30,
---------------------------------- --------------------------------------
2003 2002 Change 2003 2002 Change
--------- --------- -------- ---------- ---------- ----------
(Amounts in thousands)
Property operations:
PSB $16,148 $16,394 $(246) $48,339 $49,050 $(711)
Disposed investments (1)............... - 8 (8) 10 312 (302)
Other investments (2).................. 1,607 1,592 15 4,714 4,769 (55)
--------- --------- -------- ---------- ---------- ----------
17,755 17,994 (239) 53,063 54,131 (1,068)
--------- --------- -------- ---------- ---------- ----------
Depreciation:
PSB.................................... (6,779) (6,412) (367) (19,088) (18,759) (329)
Disposed investments (1)............... - - - - (65) 65
Other investments (2).................. (436) (409) (27) (1,265) (893) (372)
--------- --------- -------- ---------- ---------- ----------
(7,215) (6,821) (394) (20,353) (19,717) (636)
--------- --------- -------- ---------- ---------- ----------
Other: (3)
PSB (4)................................ (4,810) (4,082) (728) (13,534) (11,291) (2,243)
Disposed investments (1)............... - - - - - -
Other investments (2).................. 40 392 (352) 280 616 (336)
--------- --------- -------- ---------- ---------- ----------
(4,770) (3,690) (1,080) (13,254) (10,675) (2,579)
--------- --------- -------- ---------- ---------- ----------
Total equity in earnings of real estate
entities.................................. $5,770 $7,483 $(1,713) $19,456 $23,739 $(4,283)
========= ========= ======== ========== ========== ==========
(1) Amounts include our pro-rata share of the earnings for the Development
Joint Venture. On January 16, 2002, we acquired a controlling interest in
this partnership and began to consolidate the operations of this
partnership, and no longer account for our interest in this partnership
using the equity method (see Note 3 to the consolidated financial
statements). Amounts also include income with respect to an investment that
was disposed of in the second quarter of 2003.
(2) Amounts include equity in earnings recorded for investments that have been
held consistently throughout each of the three and nine months ended
September 30, 2003 and 2002.
(3) "Other" reflects our share of general and administrative expense, interest
expense, interest income, and other non-property, non-depreciation related
operating results of these entities.
(4) "Other" with respect to PSB also includes our pro-rata share of gains on
sale of real estate assets and impairment charges relating to impending
sales of real estate. Our net pro-rata share of these items totaled income
of $483,000 and $2,724,000 for the three and nine months ended September
30, 2002, respectively, and $453,000 for the nine months ended September
30, 2003 (none for the three months ended September 30, 2003).
The decrease in equity in earnings of real estate entities for the
three months ended September 30, 2003 as compared to 2002 is primarily due to a
reduction in our pro-rata share of PSB's earnings. PSB's earnings declined
primarily due to gains recorded in the three months ended September 30, 2002, of
which our pro rata share was $483,000, as compared to no such gain recorded in
the three months ended September 30, 2003, representing a reduction in our net
income of $483,000.
56
The decrease in equity in earnings of real estate entities for the nine
months ended September 30, 2003 as compared to the same period in 2002 is
primarily due to a reduction in our pro-rata share of PSB's earnings, caused
primarily by the net impact of a gain on sale offset by an asset impairment
charge with respect to impending real estate sales recorded by PSB in the nine
months ended September 30, 2003, as compared to a gain on sale recorded by PSB
in the nine months ended September 30, 2002. Our net pro-rata share of such
items recorded by PSB for the nine months ended September 30, 2003 was $453,000
as compared to $2,724,000 in the same period in 2002, representing a reduction
in our net income of $2,271,000.
Equity in earnings of PSB represents our pro-rata share (an average of
approximately 44% for the three and nine months ended September 30, 2003 and
2002) of the earnings of PSB. As of September 30, 2003, we owned 5,418,273
common shares and 7,305,355 operating partnership units (units which are
convertible into common shares on a one-for-one basis) in PSB. At September 30,
2003, PSB owned and operated 14.8 million net rentable square feet of commercial
space located in nine states. PSB also manages approximately 1,222,000 net
rentable square feet of commercial space owned by the Company, the Consolidated
Entities, and the Unconsolidated Entities at September 30, 2003 pursuant to
property management agreements.
Accordingly, our future equity income from PSB will be dependent
entirely upon PSB's operating results. PSB's filings and selected financial
information can be accessed through the Securities and Exchange Commission, and
on its website, www.psbusinessparks.com.
On January 16, 2002, we acquired the remaining 70% ownership interest
in the Development Joint Venture for cash totaling approximately $153,078,000.
As a result, we began consolidating the operating results of the Development
Joint Venture and no further equity in earnings will be recorded with respect to
this entity for periods after January 16, 2002. Our earnings with respect to
this entity is included in the table above in the line-item "Disposed
Investments."
The "Other Investments" includes our equity in earnings with respect to
our pro-rata share of earnings with respect to seven limited partnerships, for
which we held an approximately consistent level of equity interest during each
of the nine months ended September 30, 2003 and 2002. These limited partnerships
were formed by the Company during the 1980's. The Company is the general partner
in each limited partnership, and manages each of these facilities for a
management fee that is included in "interest and other income." The limited
partners consist of numerous individual investors, including the Company, which
throughout the 1990's acquired units of limited partnership interests in these
limited partnerships in various transactions.
Our future earnings with respect to the "Other investments" will be
dependent upon the operating results of the 36 self-storage facilities
(2,186,000 net rentable square feet) that these entities own. The operating
characteristics of these facilities are similar to those of the Company's
self-storage facilities, and are subject to the same operational issues as the
Consistent Group of self-storage facilities as discussed above. See Note 6 to
the consolidated financial statements for the operating results of these
entities for the nine months ended September 30, 2003 and 2002.
Other Income and Expense Items
- ------------------------------
INTEREST AND OTHER INCOME: Interest in other income includes (i) the
net operating results from our property management operations, (ii) merchandise
sales and consumer truck rentals and (iii) interest income.
Interest and other income has increased to $2,847,000 and $7,425,000
for the three and nine months ended September 30, 2003, respectively, from
$2,538,000 and $7,005,000, respectively, for the same periods in 2002. This
increase reflects improved operating results on our merchandise and truck rental
operations, offset partially by reduced interest on notes receivable due to
principal payments and a reduction in average interest rates on outstanding cash
balances. In addition, interest and other income for the nine months ended
September 30, 2003 reflects a reduction from the same period in 2002 due to a
reduction in property management operations due to the consolidation of the
Development Joint Venture, as described in Note 3 to the consolidated financial
statements.
57
DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense
was $46,041,000 and $137,657,000 for the three and nine months ended September
30, 2003, respectively, as compared to $44,732,000 and $133,186,000,
respectively for the same periods in 2002. Depreciation and amortization
included in discontinued operations amounted to $432,000 and $1,292,000 for the
three and nine months ended September 30, 2003 as compared to $819,000 and
$2,414,000 for the same periods in 2002.
Included in depreciation expense and in depreciation expense -
discontinued operations with respect to our real estate facilities was
$42,534,000 and $127,105,000 for the three and nine months ended September 30,
2003, respectively, as compared to $41,851,000 and $125,371,000 for the same
periods in 2002, respectively. The increase in such depreciation is principally
the result of property acquisitions and newly developed facilities opened for
operation. Included in depreciation and amortization expense and in depreciation
expense - discontinued operations for the three and nine months ended September
30, 2003 is $2,288,000 and $6,891,000, respectively, as compared to $2,049,000
and $5,276,000 for the same periods in 2002, respectively, with respect to other
assets, principally depreciation of equipment and containers associated with the
containerized storage operations, which has increased as discussed in
Containerized Storage Operations above. Included in depreciation and
amortization expense for each of the three and nine month periods ended
September 30, 2003 and 2002 is $1,651,000 and $4,953,000, respectively, with
respect to the amortization of property management contracts.
GENERAL AND ADMINISTRATIVE: General and administrative expense for the
three months ended September 30, 2003 increased 17.0% to $4,642,000 as compared
to $3,968,000 for the same period in 2002. General and administrative expense
for the nine months ended September 30, 2003 increased 8.5% to $13,321,000 as
compared to $12,273,000 for the same period in 2002. General and administrative
expense principally consists of state income taxes, investor relation expenses,
certain overhead associated with the acquisition and development of real estate
facilities, corporate payroll, and overhead associated with the containerized
storage business. The increase in general and administrative expense for the
three and nine-month periods is due primarily to the impact of stock option and
restricted stock expense, as described below.
Beginning January 1, 2002, we began to expense the fair value of stock
options in accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). As indicated by SFAS
123, the estimated fair value of stock options issued after January 1, 2002 will
be expensed over their vesting period. The total of such expense included in
general and administrative expense was approximately $95,000 and $294,000 for
the three and nine months ended September 30, 2003, respectively ($39,000 and
$97,000 for the three and nine months ended September 30, 2002, respectively).
Based upon stock options granted between January 1, 2002 and September 30, 2003,
the total expected annual expense for 2003 is approximately $400,000. In
addition, pro-forma disclosures of the impact of stock options issued prior to
January 1, 2002 (which are not expensed per the transition provisions of SFAS
123) are presented in Note 12 to the consolidated financial statements. The
impact of stock option expense will continue to increase in the future to the
extent that additional stock options are granted.
In addition, in the three months ended September 30, 2003, the Company
granted 197,000 restricted stock units, and recognized $371,000 in restricted
stock unit compensation expense during the three months ended September 30,
2003. Based upon the price of the Company's common stock at the date of grant
($37.74), the Company expects restricted stock expense to amount to
approximately $371,000 per quarter throughout the remaining vesting period of
this grant (five years). To the extent that additional restricted stock units
are granted, restricted stock unit compensation expense may increase. Changes in
the market price of the Company's common stock price will be reflected
prospectively as compensation expense with respect to unvested restricted stock
units over the applicable remaining service period; accordingly, increases or
decreases in the Company's common stock price will increase or decrease future
restricted stock unit compensation expense.
INTEREST EXPENSE: Interest expense was $296,000 and $969,000 for the
three months ended September 30, 2003 and 2002, respectively. Interest expense
was $1,121,000 and $3,284,000 for the nine months ended September 30, 2003 and
2002, respectively. Interest capitalized during the three and nine months ended
September 30, 2003 was $1,411,000 and $4,386,000, respectively, compared to
$1,374,000 and $4,646,000, respectively, for the same periods in 2002. The
decrease in interest expense in 2003 compared to 2002 is principally the result
of lower interest expense on notes payable due to scheduled principal
repayments.
58
MINORITY INTEREST IN INCOME: Minority interest in income represents the
income allocable to equity interests in the Consolidated Entities, which are not
owned by the Company. The following table summarizes minority interest in income
for the three and nine months ended September 30, 2003 and 2002 (amounts in
thousands):
For the three months ended September 30, For the nine months ended September 30,
----------------------------------------- ---------------------------------------
Description 2003 2002 Change 2003 2002 Change
----------- ------------ ---------- -------- --------- --------- ---------
Preferred partnership interests......... $ 6,726 $ 6,726 $ - $ 20,179 $ 20,179 $ -
Consolidated Development Joint Venture (a) 1,292 938 354 2,905 1,574 1,331
Convertible Partnership Units (b)....... 86 81 5 233 243 (10)
Acquired minority interests (c) ........ - 340 (340) 415 2,318 (1,903)
Other minority interests (d)............ 3,040 3,423 (383) 8,850 9,149 (299)
------------ ---------- -------- --------- --------- ---------
Total minority interests in income.. $ 11,144 $ 11,508 $ (364) $ 32,582 $ 33,463 $ (881)
============ ========== ======== ========= ========= =========
(a) These amounts reflect income allocated to the minority interests in the
Consolidated Development Joint Venture. Included in minority interest in
income is $889,000 and $2,554,000 in depreciation expense for the three and
nine months ended September 30, 2003, respectively, as compared to $836,000
and $2,386,000, respectively, for the same periods in 2002.
(b) These amounts reflect the minority interests represented by the Convertible
Partnership Units (see Note 9 to the consolidated financial statements).
Included in minority interest in income is $66,000 and $253,000 in
depreciation expense for the three and nine months ended September 30,
2003, respectively, as compared to $71,000 and $250,000, respectively, for
the same periods in 2002.
(c) These amounts reflect income allocated to minority interests that the
Company acquired since December 31, 2001 and are no longer outstanding at
September 30, 2003. Included in minority interest in income is $216,000 in
depreciation expense for the nine months ended September 30, 2003 (none for
the three months ended September 30, 2003), as compared to $403,000 and
$1,781,000, respectively, for the three and nine months ended September 30,
2002.
(d) These amounts reflect income allocated to minority interests that were
outstanding consistently throughout the three and nine months ended
September 30, 2003 and 2002. Included in minority interest in income is
$552,000 and $1,717,000 in depreciation expense for the three and nine
months ended September 30, 2003, respectively, as compared to $450,000 and
$1,881,000 for the same periods in 2002.
Minority interest in income - preferred partnership interests
represents the income allocable to holders of our preferred partnership units.
Throughout the periods ending September 30, 2003 and 2002, we had outstanding
$240,000,000 of our 9.5% Series N Cumulative Redeemable Perpetual Preferred
Units which were issued on March 17, 2000, and $45,000,000 of our 9.125% Series
O Cumulative Redeemable Perpetual Preferred Units which were issued on March 29,
2000. For each of the three and nine months ended September 30, 2003 and 2002,
the holders of these preferred units were paid aggregate distributions of
approximately $6,726,000 and $20,179,000, respectively, and received a
corresponding allocation of minority interest in earnings. We estimate that
during the year ended December 31, 2003 the preferred units will be allocated
$26,906,000 in income. These preferred units are not redeemable during the first
5 years; thereafter, at our option, we can call the units for redemption at the
issuance amount plus any unpaid distributions.
The increase in minority interest in income with respect to the
Consolidated Development Joint Venture is due to an increase in income with
respect to the properties owned by this entity. We expect that minority interest
in income with respect to the Consolidated Development Joint Venture will
continue to increase as the properties owned by this entity, substantially all
of which are newly developed facilities in the fill-up stage, continue to
increase their occupancy to a stabilized occupancy level and increase the
earnings of this entity.
The acquired minority interests reflects interests in the consolidated
entities that the Company acquired since January 1, 2002 and are therefore no
longer outstanding. There will be no further income allocated to these
interests.
59
Other minority interests reflect income allocated to minority interests
that have maintained a consistent level of interest throughout the three and
nine months ended September 30, 2003 and 2002, comprised of investments in the
Consolidated Entities and the Convertible Partnership Units described in Note 9
to the Company's financial statements. The level of income allocated to these
interests in the future is dependent upon the operating results of the storage
facilities that these entities own, as well as any minority interests that the
Company acquires in the future.
DISCONTINUED OPERATIONS: During the first quarter of 2003, we entered
into a business plan to exit the Knoxville, Tennessee market, and listed our
four self-storage facilities (the "Knoxville Facilities") in this market for
sale. In addition, in October 2003, we sold a self-storage facility located in
Perrysburg, Ohio. Accordingly, the current and prior period operations for these
five facilities (collectively, the "Sold Self-Storage Facilities"), have been
reclassified into the line-item "Discontinued Operations" on our income
statement. For additional information on the disposal of the Sold Self-Storage
Facilities, please see Note 16 to the consolidated financial statements.
During 2002, we adopted a business plan that included the closure of
several non-strategic containerized storage facilities (the "Closed
Facilities"), representing components of our containerized storage business. The
related assets of the Closed Facilities (consisting primarily of storage
containers) were deemed not recoverable from future operations, and as a result
an asset impairment charge for the excess of these assets' net book value over
their fair value was recorded in the latter half of 2002 totaling $6,187,000. In
addition, lease termination costs, representing the expected remaining lease
liability following closure of the facilities, were recorded in the amount of
$2,447,000 during the latter half of 2002. Also, during 2002, we sold one of our
commercial facilities to a third party.
The following table summarizes the historical operations of the Sold
Self-Storage Facilities, the Closed Facilities, and the sold commercial
facility:
DISCONTINUED OPERATIONS:
For the three months ended September 30, For the nine months ended September 30,
---------------------------------------- ---------------------------------------
2003 2002 Change 2003 2002 Change
------------ ---------- -------- ----------- --------- ----------
(Amounts in thousands)
Rental income (a):
Sold Self-Storage Facilities.... $ 504 $ 479 $ 25 $ 1,448 $ 1,392 $ 56
Closed Facilities............... 1,281 5,651 (4,370) 5,862 15,692 (9,830)
Sold commercial facility........ - 39 (39) - 268 (268)
------------ ---------- -------- ----------- --------- ----------
Total rental income........ 1,785 6,169 (4,384) 7,310 17,352 (10,042)
------------ ---------- -------- ----------- --------- ----------
Cost of operations (a):
Sold Self-Storage Facilities.... 209 185 24 603 521 82
Closed Facilities............... 1,094 5,456 (4,362) 5,947 16,304 (10,357)
Sold commercial facility........ - 21 (21) - 67 (67)
------------ ---------- -------- ----------- --------- ----------
Total cost of operations... 1,303 5,662 (4,359) 6,550 16,892 (10,342)
------------ ---------- -------- ----------- --------- ----------
Depreciation expense (a):
Sold Self-Storage Facilities.... 142 140 2 424 422 2
Closed Facilities............... 290 652 (362) 868 1,905 (1,037)
Sold commercial facility........ - 27 (27) - 87 (87)
------------ ---------- -------- ----------- --------- ----------
Total depreciation ........ 432 819 (387) 1,292 2,414 (1,122)
------------ ---------- -------- ----------- --------- ----------
Asset impairment and lease termination charges (b):
Closed Facilities............... 1,274 4,791 (3,517) 2,024 4,791 (2,767)
------------ ---------- -------- ----------- --------- ----------
Net discontinued operations....... $ (1,224) $ (5,103) $ 3,879 $ (2,556) $ (6,745) $ 4,189
============ ========== ======== =========== ========= ==========
(a) These amounts represent the historical operations of the Sold Self-Storage
Facilities, the Closed Facilities and the sold commercial facility, and
include amounts previously classified as rental income, cost of operations,
and depreciation expense in the financial statements in prior periods. Cost
of operations for the nine months ended September 30, 2002 includes
$898,000 in container obsolescence charges.
60
(b) An impairment charge of $750,000 was recorded in the second quarter of 2003
with respect to a real estate facility held for sale at September 30, 2003,
which was previously used by the discontinued containerized storage
operations. An impairment charge of $750,000 was recorded in the second
quarter of 2003 with respect to a real estate facility held for sale at
September 30, 2003, which was previously used by the discontinued
containerized storage operations. Asset impairment charges in the amount of
$1,274,000 were recorded in the three and nine months ended September 30,
2003. Asset impairment and lease termination reserves in the amount of
$4,791,000 were recorded in the three and nine months ended September 30,
2002.
As of September 30, 2003, 23 of the 28 Closed Facilities were closed.
We expect that the remaining facilities will be closed by December 31, 2003 and
will continue to generate operating losses until final closure. These losses
will include the remaining lease obligations on the closed facilites, which, at
September 30, 2003, amount to approximately $672,000.
GAIN (LOSS) IN DISPOSITION OF REAL ESTATE: During the first quarter of
2003, we disposed of two self-storage facilities and a parcel of land for an
aggregate of $7,713,000 in cash, and recognized a gain on disposition of
$14,000. During the second quarter of 2003, we disposed of two additional
parcels of land for an aggregate of $4,147,000, recognizing a gain on
disposition of $430,000, and disposed of an investment in real estate entities
for an aggregate of $851,000, for a gain of approximately $316,000. During the
third quarter of 2003, we disposed of a parcel of land for $795,000 in cash, and
recognized a gain on disposition of $47,000. During the nine months ended
September 30, 2002, we recorded a loss of $1,839,000 on the pending sale of
minority interests.
The Knoxville Facilities were disposed of on July 25, 2003 for
aggregate gross proceeds of $11.0 million. The Company financed a substantial
part of the buyer's consideration in exchange for a note receivable from the
buyer, and in accordance with generally accepted accounting principles, the
Company deferred the sale and the corresponding gain on these properties. The
note receivable was collected in full in October 2003, and a gain of
approximately $4.5 million will be recognized from the sale of this property in
the fourth quarter of 2003. In addition, on October 16, 2003, we sold a
self-storage facility located in Perrysburg, Ohio for $2.3 million. A gain of
approximately $1.1 million will be recognized from the sale of this property in
the fourth quarter of 2003.
Liquidity and Capital Resources
- -------------------------------
We believe that our internally generated net cash provided by operating
activities will continue to be sufficient to enable us to meet our operating
expenses, capital improvements, debt service requirements and distributions to
shareholders for the foreseeable future.
Operating as a real estate investment trust ("REIT"), our ability to
retain cash flow for reinvestment is restricted. In order for us to maintain our
REIT status, a substantial portion of our operating cash flow must be
distributed to our shareholders (see "REQUIREMENT TO PAY DISTRIBUTIONS" below).
However, despite the significant distribution requirements, we have been able to
retain a significant amount of our operating cash flow. The following table
summarizes our ability to fund distributions to the minority interest, capital
improvements to maintain our facilities, and distributions to our shareholders
through the use of cash provided by operating activities. The remaining cash
flow generated is available to fund principal payments on debt and reinvestment
opportunities.
61
For the nine months ended
September 30,
--------------------------------
2003 2002
------------- -------------
(amounts in thousands)
Net cash provided by operating activities.................. $ 455,186 $ 460,105
Allocable to minority interest (Preferred Units)........... (20,179) (20,179)
Allocable to minority interest (common equity)............. (17,143) (19,015)
------------- -------------
Cash from operations allocable to our shareholders......... 417,864 420,911
Capital improvements to maintain our facilities............ (20,470) (16,041)
Add back: minority interest share of capital improvements
to maintain facilities................................. 504 659
------------- -------------
Remaining operating cash flow available for distributions to
our shareholders....................................... 397,898 405,529
Distributions paid:
Preferred stock dividends................................ (107,914) (111,704)
Equity Stock, Series A dividends......................... (16,126) (16,126)
Distributions to Common and Class B shareholders (a)..... (168,781) (165,687)
------------- -------------
Cash available for principal payments on debt and reinvestment $ 105,077 $ 112,012
============= =============
(a) The 7,000,000 shares of Class B common stock converted into 7,000,000
regular common shares on January 1, 2003.
Our financial profile is characterized by a low level of debt to total
capitalization and a conservative dividend payout ratio with respect to the
common stock. We expect to fund our growth strategies with internally generated
retained cash flows and proceeds from issuing equity securities. In general, our
current strategy is to continue to finance our growth with permanent capital;
either common or preferred equity. We have in the past used our $200 million
line of credit as temporary "bridge" financing and repaid borrowings with
internally generated cash flows and proceeds from the placement of permanent
capital. At September 30, 2003, we had no borrowings on our line of credit.
Over the past three years, we have funded substantially all of our
acquisitions with permanent capital (both common and preferred securities). We
have elected to use preferred securities as a form of leverage despite the fact
that the dividend rates of our preferred securities exceed the prevailing market
interest rates on conventional debt. We have chosen this method of financing for
the following reasons: (i) under the REIT structure, a significant amount of
operating cash flow needs to be distributed to our shareholders, making it
difficult to repay debt with operating cash flow alone, (ii) our perpetual
preferred stock has no sinking fund requirement or maturity date and does not
require redemption, all of which eliminate any future refinancing risks, (iii)
after the end of a non-call period, we have the option to redeem the preferred
stock at any time, which in 2002 and 2001 enabled us to effectively refinance
higher coupon preferred stock with new preferred stock at lower rates, (iv)
preferred stock does not contain onerous covenants, thus allowing us to maintain
significant financial flexibility, and (v) dividends on the preferred stock can
be applied to our REIT distribution requirements.
Our credit ratings on each of our series of Cumulative Preferred Stock
by each of the three major credit agencies are "Baa2" by Moody's and BBB+ by
both Standard & Poor's and Fitch IBCA.
Our portfolio of real estate facilities remains substantially
unencumbered. At September 30, 2003, we had mortgage debt outstanding of $17.6
million and unsecured long-term debt in the amount of $64.4 million, and had
unencumbered real estate facilities with a book value of approximately $4.0
billion.
We believe that our size and financial flexibility enables us to access
capital when appropriate.
62
RECENT ISSUANCE OF PREFERRED STOCK AND PROJECTED REDEMPTION OF
PREFERRED STOCK: On October 6, 2003, we completed a public offering of 5,300,000
depositary shares ($25 stated value per depositary share) each representing
1/1,000 of a share of 6.500% Cumulative Preferred Stock, Series W, raising net
proceeds of approximately $128.3 million. On November 13, 2003, we issued in a
public offering 4,800,000 (which includes the underwriters' exercise of an
additional 400,000 depositary shares to cover over-allotments) depositary shares
($25 stated value per depositary share), each representing 1/1,000 of a share of
6.45% Cumulative Preferred Stock, Series X. Total net proceeds of the offering
were $116.2 million.
We expect to use the net proceeds of these two issuances to fund the
redemption our 8.25% Series K Cumulative Preferred Stock ($115 million) which is
redeemable on January 19, 2004, and our 8.25% Series L Cumulative Preferred
Stock ($115 million) which is redeemable on March 10, 2004. .
REQUIREMENT TO PAY DISTRIBUTIONS: We have operated, and intend to
continue to operate, in such a manner as to qualify as a REIT under the Internal
Revenue Code of 1986, but no assurance can be given that we will at all time so
qualify. To the extent that the Company continues to qualify as a REIT, we will
not be taxed, with certain limited exceptions, on the taxable income that is
distributed to our shareholders, provided that at least 90% of our taxable
income is so distributed prior to filing of the Company's tax return. We have
satisfied the REIT distribution requirement since 1980.
During the nine months ended September 30, 2003 and 2002, we paid cash
dividends totaling $107,914,000 and $111,704,000, respectively, to the holders
of our Cumulative Preferred Stock. We estimate that the distribution
requirements with respect to our Preferred Stock outstanding at October 31, 2003
for the remainder of 2003 (after redemption of the Series C Senior Preferred
Stock and issuance of the Series W and X Senior Preferred Stock) to be
approximately $39.3 million.
During each of the nine months ended September 30, 2003 and 2002, we
paid cash dividends totaling $20,179,000 to the holders of our preferred
partnership units. We estimate that the remaining distribution requirement for
2003 with respect to the preferred partnership units outstanding at September
30, 2003 to be approximately $6.7 million.
During each of the nine months ended September 30, 2003 and 2002, we
paid cash dividends totaling $16,126,000 to the holders of our Equity Stock,
Series A. With respect to the depositary shares of Equity Stock, Series A, we
have no obligation to pay distributions if no distributions are paid to the
common shareholders. To the extent that we do pay common distributions in any
year, the holders of the depositary shares receive annual distributions equal to
the lesser of (i) five times the per share dividend on the common stock or (ii)
$2.45. The depositary shares are noncumulative, and have no preference over our
common stock either as to dividends or in liquidation. With respect to the
Equity Stock, Series A outstanding at September 30, 2003, we estimate the total
regular distribution for the remainder of 2003 to be approximately $5.4 million
assuming that dividends of at least $0.49 per share per year are paid to the
common shareholders.
During the nine months ended September 30, 2003, we paid dividends
totaling $168,781,000 ($1.35 per common share) to the holders of our common
stock. Based upon shares outstanding at September 30, 2003 and a quarterly
distribution of $0.45 per share, which was declared by the Board of Directors on
November 6, 2003 and payable on December 31, 2003, we estimate dividend payments
with respect to our common stock of approximately $56.7 million for the fourth
quarter of 2003.
CAPITAL IMPROVEMENT REQUIREMENTS: For 2003, we have budgeted
approximately $30 million for capital improvements. During the nine months ended
September 30, 2003, we incurred capital improvements of approximately $20.5
million. We expect that the level of capital improvement requirements will
increase substantially in 2004 and over the next few years, to take advantage of
potential opportunities to improve the visual and functional characteristics of
our facilities.
63
DEBT SERVICE REQUIREMENTS: We do not believe we have any significant
refinancing risks with respect to our notes payable, all of which are fixed
rate. At September 30, 2003, we had total outstanding notes payable of
approximately $82.0 million. See Note 8 to the consolidated financial statements
for approximate principal maturities of such borrowings. We anticipate that our
retained operating cash flow will continue to be sufficient to enable us to make
schedule principal payments. It is our current intention to fully amortize our
debt as opposed to refinance debt maturities with additional debt.
ACQUISITIONS OF INTERESTS IN SELF-STORAGE FACILITIES: On January 16,
2002, we acquired the remaining 70% interest in the Development Joint Venture
for approximately $153,078,000 in cash. The Development Joint Venture was formed
in April 1997 with equity capital consisting of 30% from the Company and 70%
from an institutional investor, which owns 47 storage facilities opened since
1997. This transaction was principally financed with the capital raised through
the issuance of our 7.625% Cumulative Preferred Stock, Series T.
On April 28, 2003 we acquired, through a merger, all of the remaining
limited partnership interest not currently owned by the Company in PS Partners
IV, Ltd., a partnership which is consolidated with the Company. The acquisition
cost was approximately $23,377,000, consisting of the issuance of 426,859 shares
of our common stock ($13,510,000) and cash of approximately $9,867,000 million.
DEVELOPMENT OF SELF-STORAGE FACILITIES: We anticipate that the cost of
development of new self-storage facilities and expansions to existing
self-storage facilities for the year ended December 31, 2003 and beyond will be
approximately $75 million per year. We have utilized two development joint
ventures in the past 5 years; we acquired our partner's interest in January 2002
for one of the development joint ventures, and the other joint venture is fully
committed. However, we believe that it is unlikely that we will form a
development joint venture to fund our current pipeline described below.
We currently have a development "pipeline" of 44 self-storage
facilities, combination facilities, and expansions to existing self-storage
facilities with an aggregate estimated cost of approximately $167.3 million.
Approximately $90.1 million of development cost has been incurred as of
September 30, 2003. We have acquired the land for 41 of these projects, which
have an aggregate estimated cost of approximately $155.4 million, and costs
incurred as of September 30, 2003 of approximately $89.2 million. The remaining
three facilities represent identified sites where we have an agreement in place
to acquire the land, generally within one year. We anticipate that the
development of these projects will be funded solely by the Company.
The development and fill-up of these storage facilities is subject to
significant contingencies such as obtaining appropriate governmental approvals.
We estimate that the amount remaining to be spent of approximately $77.2 million
will be incurred over the next 24 months. The following table sets forth certain
information with respect to our development pipeline.
DEVELOPMENT PIPELINE SUMMARY
- ----------------------------------------------------------------------------------------------------------------------
Total
Number Net estimated Costs incurred
of rentable development through Costs to
projects sq. ft. costs 9/30/03 complete
-------- --------- ------------ -------------- -----------
(Amounts in thousands)
Facilities currently under construction:
Self-storage facilities 10 748 $ 87,278 $ 72,581 $ 14,697
Expansions to existing self-storage
facilities 11 407 32,237 12,681 19,556
Conversion of industrial space 7 318 10,528 3,177 7,351
-------- --------- ------------ -------------- -----------
28 1,473 130,043 88,439 41,604
Expansions of existing self-storage
facilities awaiting construction 13 558 25,381 755 24,626
Self storage facilities awaiting
construction and land has not yet been 3 186 11,828 900 10,928
acquired
-------- --------- ------------ -------------- -----------
Total Development Pipeline 44 2,217 $ 167,252 $ 90,094 $ 77,158
======== ========= ============ ============== ===========
64
Included in the 24 "expansions of existing self-storage facilities" are
16 projects associated with the conversion of industrial space, previously used
by the discontinued containerized facility operations, into self-storage space.
The total amount of self-storage space to come on line from these 16 conversions
is approximately 876,000 net rentable square feet of traditional self-storage
space.
In addition to the above projects, we have five parcels of land held
for development with total costs of approximately $12,236,000 at September 30,
2003. These parcels will either be developed or sold.
REPURCHASE OF THE COMPANY'S COMMON STOCK: The Company's Board of
Directors authorized the repurchase from time to time of up to 25,000,000 shares
of our common stock on the open market or in privately negotiated transactions.
From the initial authorization through September 30, 2003, we have repurchased a
total of 21,672,020 shares of common stock at an aggregate cost of approximately
$541.9 million.
Item 2A. Risk Factors
- -----------------------
In addition to the other information in our Form 10-Q and our Form 10-K
for the year ended December 31, 2002, you should consider the following factors
in evaluating the Company:
THE HUGHES FAMILY COULD CONTROL US AND TAKE ACTIONS ADVERSE TO OTHER
SHAREHOLDERS.
At September 30, 2003, the Hughes family owned approximately 37% of our
outstanding shares of common stock. Consequently, the Hughes family could
control matters submitted to a vote of our shareholders, including electing
directors, amending our organizational documents, dissolving and approving other
extraordinary transactions, such as a takeover attempt, even though such actions
may be favorable to the other common shareholders.
PROVISIONS IN OUR ORGANIZATIONAL DOCUMENTS MAY PREVENT CHANGES IN CONTROL.
Restrictions in our organizational documents may further limit changes
in control. Unless our board of directors waives these limitations, no
shareholder may own more than (1) 2.0% of our outstanding shares of our common
stock or (2) 9.9% of the outstanding shares of each class or series of our
preferred or equity stock. Our organizational documents in effect provide,
however, that the Hughes family may continue to own the shares of our common
stock held by them at the time of the 1995 reorganization. These limitations are
designed, to the extent possible, to avoid a concentration of ownership that
might jeopardize our ability to qualify as a real estate investment trust or
REIT. These limitations, however, also may make a change of control
significantly more difficult (if not impossible) even if it would be favorable
to the interests of our public shareholders. These provisions will prevent
future takeover attempts not approved by our board of directors even if a
majority of our public shareholders deem it to be in their best interests
because they would receive a premium for their shares over the shares' then
market value or for other reasons.
WE WOULD INCUR ADVERSE TAX CONSEQUENCES IF WE FAIL TO QUALIFY AS A REIT.
You will be subject to the risk that we may not qualify as a REIT. As a
REIT, we must distribute at least 90% of our REIT taxable income to our
shareholders, including not only holders of our common stock and equity stock
but also holders of our preferred stock. Failure to pay full dividends on the
preferred stock would prevent us from paying dividends on our common stock and
could jeopardize our qualification as a REIT.
For any taxable year that we fail to qualify as a REIT and the relief
provisions do not apply, we would be taxed at the regular corporate rates on all
of our taxable income, whether or not we make any distributions to our
shareholders. Those taxes would reduce the amount of cash available for
distribution to our shareholders or for reinvestment. As a result, our failure
to qualify as a REIT during any taxable year could have a material adverse
effect upon us and our shareholders. Furthermore, unless certain relief
provisions apply, we would not be eligible to elect REIT status again until the
fifth taxable year that begins after the first year for which we fail to
qualify.
65
WE MAY PAY SOME TAXES, REDUCING CASH AVAILABLE FOR SHAREHOLDERS.
Even if we qualify as a REIT for Federal income tax purposes, we are
required to pay some federal, state and local taxes on our income and property.
Several corporate subsidiaries of the Company have elected to be treated as
"taxable REIT subsidiaries" of the Company for federal income tax purposes since
January 1, 2001. A taxable REIT subsidiary is a fully taxable corporation and is
limited in its ability to deduct interest payments made to us. In addition, we
will be subject to a 100% penalty tax on some payments that we receive if the
economic arrangements among our tenants, our taxable REIT subsidiaries and us
are not comparable to similar arrangements among unrelated parties. To the
extent that the Company or any taxable REIT subsidiary is required to pay
federal, state or local taxes, we will have less cash available for distribution
to shareholders.
WE WOULD INCUR A CORPORATE LEVEL TAX IF WE SELL CERTAIN ASSETS.
We will generally be subject to a corporate level tax on any net
built-in gain if before November 2005 we sell any of the assets we acquired in
the November 1995 reorganization.
WE AND OUR SHAREHOLDERS ARE SUBJECT TO FINANCING RISKS.
Debt increases the risk of loss. In making real estate investments, we
may borrow money, which increases the risk of loss. At September 30, 2003, our
debt of $82.0 million was approximately 1.7% of our total assets.
Certain securities have a liquidation preference over our common stock
and Equity Stock, Series A. If we liquidated, holders of our preferred
securities would be entitled to receive liquidating distributions, plus any
accrued and unpaid distributions, before any distribution of assets to the
holders of our common stock and Equity Stock, Series A. Holders of preferred
securities are entitled to receive, when declared by our board of directors,
cash distributions in preference to holders of our common stock and Equity
Stock, Series A.
SINCE OUR BUSINESS CONSISTS PRIMARILY OF ACQUIRING AND OPERATING REAL ESTATE, WE
ARE SUBJECT TO REAL ESTATE OPERATING RISKS.
The value of our investments may be reduced by general risks of real
estate ownership. Since we derive substantially all of our income from real
estate operations, we are subject to the general risks of owning real
estate-related assets, including:
o lack of demand for rental spaces or units in a locale;
o changes in general economic or local conditions;
o potential terrorist attacks;
o changes in supply of or demand for similar or competing facilities in
an area;
o the impact of environmental protection laws;
o changes in interest rates and availability of permanent mortgage funds
which may render the sale or financing of a property difficult or
unattractive; and
o changes in tax, real estate and zoning laws.
66
There is significant competition among self-storage facilities and from
other storage alternatives. Most of our properties are self-storage facilities,
which generated 91% of our revenue for the nine months ended September 30, 2003.
Local market conditions will play a significant part in how competition will
affect us. Competition in the market areas in which many of our properties are
located from other self-storage facilities and other storage alternatives is
significant and has affected the occupancy levels, rental rates and operating
expenses of some of our properties. Any increase in availability of funds for
investment in real estate may accelerate competition. Further development of
self-storage facilities may intensify competition among operators of
self-storage facilities in the market areas in which we operate. As discussed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Self-Storage Operations, the realized rent per occupied square foot
of the Consistent Group of facilities declined 3.8% in the nine months ended
September 30, 2003 as compared to the same period in 2002. Such competition
could have been a factor in this decline.
We may incur significant environmental costs and liabilities. As an
owner and operator of real properties, under various federal, state and local
environmental laws, we are required to clean up spills or other releases of
hazardous or toxic substances on or from our properties. Certain environmental
laws impose liability whether or not the owner knew of, or was responsible for,
the presence of the hazardous or toxic substances. In some cases, liability may
not be limited to the value of the property. The presence of these substances,
or the failure to properly remediate any resulting contamination, whether from
environmental or microbial issues, also may adversely affect the owner's or
operator's ability to sell, lease or operate its property or to borrow using its
property as collateral.
We have conducted preliminary environmental assessments of most of our
properties (and intend to conduct these assessments in connection with property
acquisitions) to evaluate the environmental condition of, and potential
environmental liabilities associated with, our properties. These assessments
generally consist of an investigation of environmental conditions at the
property (not including soil or groundwater sampling or analysis), as well as a
review of available information regarding the site and publicly available data
regarding conditions at other sites in the vicinity. In connection with these
property assessments, our operations and recent property acquisitions, we have
become aware that prior operations or activities at some facilities or from
nearby locations have or may have resulted in contamination to the soil or
groundwater at these facilities. In this regard, some of our facilities are or
may be the subject of federal or state environment investigations or remedial
actions. We have obtained, with respect to recent acquisitions, and intend to
obtain with respect to pending or future acquisitions, appropriate purchase
price adjustments or indemnifications that we believe are sufficient to cover
any related potential liability. Although we cannot provide any assurance, based
on the preliminary environmental assessments, we believe we have funds available
to cover any liability from environmental contamination or potential
contamination and we are not aware of any environmental contamination of our
facilities material to our overall business, financial condition or results of
operation.
There have been an increasing number of claims and litigation against
owners and managers of rental properties relating to moisture infiltration,
which can result in mold or other property damage. When we receive a complaint
concerning moisture infiltration, condensation or mold problems and/or
becomeaware that an air quality concern exists, we implement corrective measures
in accordance with guidelines and protocols we have developed with the
assistance of outside experts. We seek to work proactively with our tenants to
resolve moisture infiltration and mold-related issues, subject to our
contractual limitations on liability for such claims, However, we can make no
assurancethat material legal claims relating to moisture infiltration and the
presence of, or exposure to mold will not arise in the future.
Delays in development and fill-up of our properties would reduce our
profitability: Since January 1, 1999, we have opened 59 newly developed self
storage facilities and 17 facilities that combine self-storage and containerized
storage space at the same location, with aggregate development costs of $489.7
million. In addition, at September 30, 2003 the Company had 44 projects in
development that are expected to begin construction generally by December 31,
2003. These 44 projects have total estimated costs of $167,252,000. Construction
delays due to weather, unforeseen site conditions, personnel problems, and other
factors, as well as cost overruns, would adversely affect the Company's
profitability. Delays in the rent-up of newly developed facilities as a result
of competition or other factors would also adversely impact the Company's
profitability.
67
Property taxes can increase and cause a decline in yields on
investments. Each of our properties is subject to real property taxes. These
real property taxes may increase in the future as property tax rates change and
as our properties are assessed or reassessed by tax authorities. Such increases
could adversely impact the Company's profitability.
We must comply with the Americans with Disabilities Act and fire and
safety regulations, which can require significant expenditures: All our
properties must comply with the Americans with Disabilities Act and with related
regulations (the "ADA"). The ADA has separate compliance requirements for
"public accomodations" and "commercial facilities," but generally requires that
buildings be made accessible to persons with disabilities. Various state laws
impose similar requirements. A failure to comply with the ADA or similar state
laws could result in government imposed fines on us and the award of damages to
individuals affected by the failure. In addition, we must operate our properties
in compliance with numerous local fire and safety regulations, building codes,
and other land use regulations. Compliance with these requirements can require
us to spend substantial amounts of money, which would reduce cash otherwise
available for distribution to shareholders. Failure to comply with these
requirements could also affect the marketability of our real estate facilities.
WE HAVE NO INTEREST IN CANADIAN SELF-STORAGE FACILITIES OWNED BY THE HUGHES
FAMILY AND HAVE POTENTIAL CONFLICTS OF INTEREST WITH RESPECT TO SERVICES
PROVIDED TO THE HUGHES FAMILY
B. Wayne Hughes, Chairman of the Board, and his family (the "Hughes
Family") have ownership interests in, and operate, approximately 38 self-storage
facilities in Canada under the name "Public Storage." We currently do not own
any interests in these facilities nor do we own any facilities in Canada. The
Hughes Family owns approximately 37% of our common stock outstanding at
September 30, 2003. We have a right of first refusal to acquire the stock or
assets of the corporation engaged in the operation of the 38 self-storage
facilities in Canada if the Hughes family or the corporation agrees to sell
them. However, we have no interest in the operations of this corporation, have
no right to acquire this stock or assets unless the Hughes family decides to
sell, and receive no benefit from the profits and increases in value of the
Canadian self-storage facilities.
Our personnel are engaged in the supervision and the operation of these
38 self-storage facilities and in providing certain administrative services for
the Canadian owners, and certain other services, primarily tax services, with
respect to certain other Hughes Family interests. The Hughes Family and the
Canadian owners reimburse us at cost for these services. There may be conflicts
of interest in allocating the time of our personnel between our properties, the
Canadian properties, and certain other Hughes Family interests. The Company is
in the process of eliminating the sharing of Company personnel with the Canadian
entities.
OUR CONTAINERIZED STORAGE BUSINESS HAS INCURRED OPERATING LOSSES.
Public Storage Pickup & Delivery ("PSPUD") was organized in 1996 to
operate a containerized storage business. We own all of the economic interest of
PSPUD. Since PSPUD will operate profitably only if it can succeed in the
relatively new field of containerized storage, we cannot provide any assurance
as to its profitability. PSPUD incurred operating losses of $10,058,000 in 2002
and generated a profit of $2,099,000 for the nine months ended September 30,
2003. PSPUD closed 28 facilities that were deemed not strategic to the Company's
business plan during 2002 and 2003.
The operating loss for 2002 includes a write-down for impaired assets
totaling $6,937,000 ($750,000 of which relates to continuing operations) and
lease termination charges of $2,447,000. The operating profit for the nine
months ended September 30, 2003, includes shut-down cost and write-down for
impaired real estate assets totaling $2,024,000.
TERRORIST ATTACKS AND THE POSSIBILITY OF WIDER ARMED CONFLICT MAY HAVE AN
ADVERSE IMPACT ON OUR BUSINESS AND OPERATING RESULTS AND COULD DECREASE THE
VALUE OF OUR ASSETS.
Terrorist attacks and other acts of violence or war, such as those that
took place on September 11, 2001, could have a material adverse impact on our
business and operating results. There can be no assurance that there will not be
further terrorist attacks against the United States or its businesses or
interests. Attacks or armed conflicts that directly impact one or more of our
properties could significantly affect our ability to operate those properties
and thereby impair our operating results. Further, we may not have insurance
coverage for losses caused by a terrorist attack. Such insurance may not be
available, or if it is available and we decide to obtain such terrorist
coverage, the cost for the insurance may be significant in relationship to the
risk overall. In addition, the adverse effects that such violent acts and
threats of future attacks could have on the U.S. economy could similarly have a
material adverse effect on our business and results of operations. Finally,
further terrorist acts could cause the United States to enter into a wider armed
conflict which could further impact our business and operating results.
RECENTLY ENACTED TAX LEGISLATION COULD ADVERSELY AFFECT THE PRICE OF OUR STOCK.
Recently enacted tax legislation generally reduces the maximum tax rate
for dividends payable to individuals to 15% through 2008. Dividends payable by
REITs, however, generally continue to be taxed at the normal rate applicable to
the individual recipient, rather than the preferential rates applicable to other
dividends. Although this legislation does not adversely affect the taxation of
REITs or dividends paid by REITs, the more favorable rates applicable to regular
corporate dividends could cause investors who are individuals to perceive
investments in REITs to be relatively less attractive than investments in the
stocks of non-REIT corporations that pay dividends, which could adversely affect
the value of the stock of REITs, including our common stock.
68
DEVELOPMENTS IN CALIFORNIA MAY HAVE AN ADVERSE IMPACT ON OUR BUSINESS.
We are headquartered in, and approximately one-quarter of our
properties are located in, California. California is facing serious budgetary
problems. Actions that may be taken in response to these problems, such as an
increae in property taxes on commercial properties, could adversely impact our
business and results of operations. In addition, we could be adversely impacted
by the recently enacted legislation mandating medical insurance for California
businesses.
Item 3. Qualitative and Quantitative Disclosures about Market Risk
- -------------------------------------------------------------------
To limit our exposure to market risk, we principally finance our
operations and growth with permanent equity capital, consisting of either common
or preferred stock. At September 30, 2003, our debt as a percentage of total
shareholders' equity (based on book values) was 2.0%.
Our preferred stock is not redeemable by the holders. Except under
certain conditions relating to our qualification as a REIT, we may not redeem
the Senior Preferred Stock prior to the following dates: Series D - June 30,
2004, Series E - January 31, 2005, Series F - April 30, 2005, Series K - January
19, 2004, Series L - March 10, 2004, Series M - August 17, 2004, Series Q -
January 19, 2006, Series R - September 28, 2006, Series S - October 31, 2006,
Series T - January 18, 2007, Series U - February 19, 2007, Series V - September
30, 2007, Series W - October 6, 2008, and Series X - November 13, 2008. On or
after the respective dates, each of the series of Senior Preferred Stock will be
redeemable at our option, in whole or in part, at $25 per share (or depositary
share in the case of the Series K through Series X), plus accrued and unpaid
dividends.
Our market risk sensitive instruments include notes payable, which
totaled $82.0 million at September 30, 2003. Substantially all of the Company's
notes payable bear interest at fixed rates. See Note 8 to the consolidated
financial statements at September 30, 2003 for approximate principal maturities
of the notes payable at September 30, 2003.
Item 4. Controls and Procedures
- --------------------------------
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in reports the
Company files and submits under the Exchange Act, is recorded, processed,
summarized and reported within the time periods specified in accordance with SEC
guidelines and that such information is communicated to the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
to allow timely decisions regarding required disclosure based on the definition
of "disclosure controls and procedures" in Rules 13a-15(e) of the Exchange Act.
In designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures in
reaching that level of reasonable assurance. Also, the Company has investments
in certain unconsolidated entities. As the Company does not control or manage
these entities, its disclosure controls and procedures with respect to such
entities are substantially more limited than those it maintains with respect to
its consolidated subsidiaries.
As of the end of the fiscal quarter covered by this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
the Company's Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as such term is
defined in Rules 13a - 15(e) and 15d - 15(e) under the Securities Act of 1934 as
amended as of the end of the period covered by this report). Based upon this
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of such period, the Company's disclosure controls
and procedures were effective.
There have not been any changes in our internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that has
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
69
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is a party to the actions described under "Item 3. Legal
Proceedings" in the Company's 2002 annual report on Form 10-K and Part II - Item
1 to the Form 10-Q for the quarters ended March 31, 2003 and June 30, 2003.
There have been no material developments in the actions described in the
Company's 2002 annual report on Form 10-K and Part II - Item 1 to the Form 10-Q
for the quarter ended March 31, 2003 and June 30, 2003.
The Company is a party to various claims, complaints, and other legal
actions that have arisen in the normal course of business from time to time. The
Company believes that the outcome of these other pending legal proceedings, in
the aggregate, will not have a material adverse effect upon the operations or
financial portion of the Company.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
3.1 Restated Articles of Incorporation. Filed with Registrant's
Registration Statement No. 33-54557 and incorporated herein by
reference.
3.2 Certificate of Determination for the 10% Cumulative Preferred Stock,
Series A. Filed with Registrant's Registration Statement No. 33-54557
and incorporated herein by reference.
3.3 Certificate of Determination for the 9.20% Cumulative Preferred Stock,
Series B. Filed with Registrant's Registration Statement No. 33-54557
and incorporated herein by reference.
3.4 Amendment to Certificate of Determination for the 9.20% Cumulative
Preferred Stock, Series B. Filed with Registrant's Registration
Statement No. 33-56925 and incorporated herein by reference.
3.5 Certificate of Determination for the 8.25% Convertible Preferred Stock.
Filed with Registrant's Registration Statement No. 33-54557 and
incorporated herein by reference.
3.6 Certificate of Determination for the Adjustable Rate Cumulative
Preferred Stock, Series C. Filed with Registrant's Registration
Statement No. 33-54557 and incorporated herein by reference.
3.7 Certificate of Determination for the 9.50% Cumulative Preferred Stock,
Series D. Filed with Registrant's Form 8-A/A Registration Statement
relating to the 9.50% Cumulative Preferred Stock, Series D and
incorporated herein by reference.
3.8 Certificate of Determination for the 10% Cumulative Preferred Stock,
Series E. Filed with Registrant's Form 8-A/A Registration Statement
relating to the 10% Cumulative Preferred Stock, Series E and
incorporated herein by reference.
3.9 Certificate of Determination for the 9.75% Cumulative Preferred Stock,
Series F. Filed with Registrant's Form 8-A/A Registration Statement
relating to the 9.75% Cumulative Preferred Stock, Series F and
incorporated herein by reference.
3.10 Certificate of Determination for the Convertible Participating
Preferred Stock. Filed with Registrant's Registration Statement No.
33-63947 and incorporated herein by reference.
3.11 Certificate of Amendment of Articles of Incorporation. Filed with
Registrant's Registration Statement No. 33-63947 and incorporated
herein by reference.
70
3.12 Certificate of Determination for the 8-7/8% Cumulative Preferred Stock,
Series G. Filed with Registrant's Form 8-A/A Registration Statement
relating to the Depositary Shares Each Representing 1/1,000 of a Share
of 8-7/8% Cumulative Preferred Stock, Series G and incorporated herein
by reference.
3.13 Certificate of Determination for the 8.45% Cumulative Preferred Stock,
Series H. Filed with Registrant's Form 8-A/A Registration Statement
relating to the Depositary Shares Each Representing 1/1,000 of a Share
of 8.45% Cumulative Preferred Stock, Series H and incorporated herein
by reference.
3.14 Certificate of Determination for the Convertible Preferred Stock,
Series CC. Filed with Registrant's Registration Statement No. 333-03749
and incorporated herein by reference.
3.15 Certificate of Correction of Certificate of Determination for the
Convertible Participating Preferred Stock. Filed with Registrant's
Registration Statement No. 333-08791 and incorporated herein by
reference.
3.16 Certificate of Determination for 8-5/8% Cumulative Preferred Stock,
Series I. Filed with Registrant's Form 8-A/A Registration Statement
relating to the Depositary Shares Each Representing 1/1,000 of a Share
of 8-5/8% Cumulative Preferred Stock, Series I and incorporated herein
by reference.
3.17 Certificate of Amendment of Articles of Incorporation. Filed with
Registrant's Registration Statement No. 333-18395 and incorporated
herein by reference.
3.18 Certificate of Determination for Equity Stock, Series A. Filed with
Registrant's Form 10-Q for the quarterly period ended June 30, 1997 and
incorporated herein by reference.
3.19 Certificate of Determination for Equity Stock, Series AA. Filed with
Registrant's Form 10-Q for the quarterly period ended September 30,
1999 and incorporated herein by reference.
3.20 Certificate Decreasing Shares Constituting Equity Stock, Series A.
Filed with Registrant's Form 10-Q for the quarterly period ended
September 30, 1999 and incorporated herein by reference.
3.21 Certificate of Determination for Equity Stock, Series A. Filed with
Registrant's Form 10-Q for the quarterly period ended September 30,
1999 and incorporated herein by reference.
3.22 Certificate of Determination for 8% Cumulative Preferred Stock, Series
J. Filed with Registrant's Form 8-A/A Registration Statement relating
to the Depositary Shares Each Representing 1/1,000 of a Share of 8%
Cumulative Preferred Stock, Series J and incorporated herein by
reference.
3.23 Certificate of Correction of Certificate of Determination for the 8.25%
Convertible Preferred Stock. Filed with Registrant's Registration
Statement No. 333-61045 and incorporated herein by reference.
3.24 Certificate of Determination for 8-1/4% Cumulative Preferred Stock,
Series K. Filed with Registrant's Form 8-A/A Registration Statement
relating to the Depositary Shares Each Representing 1/1,000 of a Share
of 8-1/4% Cumulative Preferred Stock, Series K and incorporated herein
by reference.
3.25 Certificate of Determination for 8-1/4% Cumulative Preferred Stock,
Series L. Filed with Registrant's Form 8-A/A Registration Statement
relating to the Depositary Shares Each Representing 1/1,000 of a Share
of 8-1/4% Cumulative Preferred Stock, Series L and incorporated herein
by reference.
3.26 Certificate of Determination for 8.75% Cumulative Preferred Stock,
Series M. Filed with Registrant's Form 8-A/A Registration Statement
relating to the Depositary Shares Each Representing 1/1,000 of a Share
of 8.75% Cumulative Preferred Stock, Series M and incorporated herein
by reference.
3.27 Certificate of Determination for Equity Stock, Series AAA. Filed with
Registrant's Current Report on Form 8-K dated November 15, 1999 and
incorporated herein by reference.
71
3.28 Certificate of Determination for 9.5% Cumulative Preferred Stock,
Series N. Filed with Registrant's Annual Report on Form 10-K for the
year ended December 31, 1999 and incorporated herein by reference.
3.29 Certificate of Determination for 9.125% Cumulative Preferred Stock,
Series O. Filed with Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2000 and incorporated herein by
reference.
3.30 Certificate of Determination for 8.75% Cumulative Preferred Stock,
Series P. Filed with Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2000 and incorporated herein by
reference.
3.31 Certificate of Determination for 8.600% Cumulative Preferred Stock,
Series, Q. Filed with Registrant's Form 8-A/A Registration Statement
relating to the Depositary Shares Each Representing 1/1,000 of a Share
of 8.600% Cumulative Preferred Stock, Series Q and incorporated herein
by reference.
3.32 Amendment to Certificate of Determination for Equity Stock, Series A.
Filed with Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2001 and incorporated herein by reference.
3.33 Certificate of Determination for 8.000% Cumulative Preferred Stock,
Series R. Filed with Registrant's Form 8-A Registration Statement
relating to the Depositary Shares Each Representing 1/1,000 of a Share
of 8.000% Cumulative Preferred Stock, Series R and incorporated herein
by reference.
3.34 Certificate of Determination for 7.875% Cumulative Preferred Stock,
Series S. Filed with Registrant's Form 8-A Registration Statement
relating to the Depositary Shares Each Representing 1/1,000 of a Share
of 7.875% Cumulative Preferred Stock, Series S and incorporated herein
by reference.
3.35 Certificate of Determination for 7.625% Cumulative Preferred Stock,
Series T. Filed with Registrant's Form 8-A Registration Statement
relating to the Depositary Shares Each Representing 1/1,000 of a Share
of 7.625% Cumulative Preferred Stock, Series T and incorporated herein
by reference.
3.36 Certificate of Determination for 7.625% Cumulative Preferred Stock,
Series U. Filed with Registrant's Form 8-A Registration Statement
relating to the Depositary Shares Each Representing 1/1,000 of a Share
of 7.625% Cumulative Preferred Stock, Series U and incorporated herein
by reference.
3.37 Amendment to Certificate of Determination for 7.625% Cumulative
Preferred Stock, Series T. Filed with Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 2002 and
incorporated herein by reference.
3.38 Certificate of Determination for 7.500% Cumulative Preferred Stock,
Series V. Filed with Registrant's Form 8-A Registration Statement
relating to the Depositary Shares Each Representing 1/1,000 of a Share
of 7.500% Cumulative Preferred Stock, Series V and incorporated herein
by reference.
3.39 Certificate of Determination for 6.500% Cumulative Preferred Stock,
Series W. Filed with Registrant's Form 8-A Registration Statement
relating to the Depositary Shares Each Representing 1/1,000 of a Share
of 6.500% Cumulative Preferred Stock, Series W and incorporated herein
by reference.
3.40 Certificate of Determination for 6.450% Cumulative Preferred Stock,
Series X. Filed with Registrant's Form 8-A Registration Statement
relating to the Depositary Shares Each Representing 1/1,000 of a Share
of 6.450% Cumulative Preferred Stock, Series X and incorporated herein
by reference.
3.41 Bylaws, as amended. Filed with Registrant's Registration Statement No.
33-64971 and incorporated herein by reference.
72
3.42 Amendment to Bylaws adopted on May 9, 1996. Filed with Registrant's
Registration Statement No. 333-03749 and incorporated herein by
reference.
3.43 Amendment to Bylaws adopted on June 26, 1997. Filed with Registrant's
Registration Statement No. 333-41123 and incorporated herein by
reference.
3.44 Amendment to Bylaws adopted on January 6, 1998. Filed with Registrant's
Registration Statement No. 333-41123 and incorporated herein by
reference.
3.45 Amendment to Bylaws adopted on February 10, 1998. Filed with
Registrant's Current Report on Form 8-K dated February 10, 1998 and
incorporated herein by reference.
3.46 Amendment to Bylaws adopted on March 4, 1999. Filed with Registrant's
Current Report on Form 8-K dated March 4, 1999 and incorporated herein
by reference.
3.47 Amendment to Bylaws adopted on May 6, 1999. Filed with Registrants'
Form 10-Q for the quarterly period ended June 30, 1999 and incorporated
herein by reference.
3.48 Amendment to Bylaws adopted on November 7, 2002. Filed with
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2002 and incorporated herein by reference.
3.49 Amendment to Bylaws adopted on May 8, 2003. Filed with Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended March 31,
2003 and incorporated herein by reference.
3.50 Amendment to Bylaws adopted on August 5, 2003. Filed with Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2003 and incorporated herein by reference.
10.1 Second Amended and Restated Management Agreement by and among
Registrant and the entities listed therein dated as of November 16,
1995. Filed with PS Partners, Ltd.'s Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by reference.
10.2 Amended Management Agreement between Registrant and Public Storage
Commercial Properties Group, Inc. dated as of February 21, 1995. Filed
with Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference.
10.3 Loan Agreement between Registrant and Aetna Life Insurance Company
dated as of July 11, 1988. Filed with Registrant's Current Report on
Form 8-K dated July 14, 1988 and incorporated herein by reference.
10.4 Amendment to Loan Agreement between Registrant and Aetna Life Insurance
Company dated as of September 1, 1993. Filed with Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993 and
incorporated herein by reference.
10.5 Second Amended and Restated Credit Agreement by and among Registrant,
Wells Fargo Bank, National Association, as agent, and the financial
institutions party thereto dated as of February 25, 1997. Filed with
Registrant's Registration Statement No. 333-22665 and incorporated
herein by reference.
10.6 Note Assumption and Exchange Agreement by and among Public Storage
Management, Inc., Public Storage, Inc., Registrant and the holders of
the notes dated as of November 13, 1995. Filed with Registrant's
Registration Statement No. 33-64971 and incorporated herein by
reference.
10.7 Registrant's 1990 Stock Option Plan. Filed with Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference.
73
10.8* Registrant's 1994 Stock Option Plan. Filed with Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference.
10.9* Registrant's 1996 Stock Option and Incentive Plan. Filed with
Registrant's Annual Report on Form 10-K for the year ended December 31,
2000 and incorporated herein by reference.
10.10 Deposit Agreement dated as of December 13, 1995, among Registrant, The
First National Bank of Boston, and the holders of the depositary
receipts evidencing the Depositary Shares Each Representing 1/1,000 of
a Share of 8-7/8% Cumulative Preferred Stock, Series G. Filed with
Registrant's Form 8-A/A Registration Statement relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 8-7/8%
Cumulative Preferred Stock, Series G and incorporated herein by
reference.
10.11 Deposit Agreement dated as of January 25, 1996, among Registrant, The
First national Bank of Boston, and the holders of the depositary
receipts evidencing the Depositary Shares Each Representing 1/1,000 of
a Share of 8.45% Cumulative Preferred Stock, Series H. Filed with
Registrant's Form 8-A/A Registration Statement relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 8.45%
Cumulative Preferred Stock, Series H and incorporated herein by
reference.
10.12** Employment Agreement between Registrant and B. Wayne Hughes dated as of
November 16, 1995. Filed with Registrant's Annual Report on Form 10-K
for the year ended December 31,1995 and incorporated herein by
reference.
10.13 Deposit Agreement dated as of November 1, 1996, among Registrant, The
First National Bank of Boston, and the holders of the depositary
receipts evidencing the Depositary Shares Each Representing 1/1,000 of
a Share of 8-5/8% Cumulative Preferred Stock, Series I. Filed with
Registrant's Form 8-A/A Registration Statement relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 8-5/8%
Cumulative Preferred Stock, Series I and incorporated herein by
reference.
10.14 Limited Partnership Agreement of PSAF Development Partners, L.P.
between PSAF Development, Inc. and the Limited Partner dated as of
April 10, 1997. Filed with Registrant's Form 10-Q for the quarterly
period ended June 30, 1997 and incorporated herein by reference.
10.15 Deposit Agreement dated as of August 28, 1997 among Registrant, The
First National Bank of Boston, and the holders of the depositary
receipts evidencing the Depositary Shares Each Representing 1/1,000 of
a Share of 8% Cumulative Preferred Stock, Series J. Filed with
Registrant's Form 8-A/A Registration Statement relating to the
Depositary Shares Each Representing 1/1,000 of a Share of 8% Cumulative
Preferred Stock, Series J and incorporated herein by reference.
10.16 Agreement of Limited Partnership of PS Business Parks, L.P. dated as of
March 17, 1998. Filed with PS Business Parks, Inc.'s Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1998 and
incorporated herein by reference.
10.17 Deposit Agreement dated as of January 19, 1999 among Registrant,
BankBoston, N.A. and the holders of the depositary receipts evidencing
the Depositary Shares Each Representing 1/1,000 of a Share of 8-1/4%
Cumulative Preferred Stock, Series K. Filed with Registrant's Form
8-A/A Registration Statement relating to the Depositary Shares Each
Representing 1/1,000 of a Share of 8-1/4% Cumulative Preferred Stock,
Series K and incorporated herein by reference.
10.18 Agreement and Plan of Merger among Storage Trust Realty, Registrant and
Newco Merger Subsidiary, Inc. dated as of November 12, 1998. Filed with
Registrant's Registration Statement No. 333-68543 and incorporated
herein by reference.
74
10.19 Amendment No. 1 to Agreement and Plan of Merger among Storage Trust
Realty, Registrant, Newco Merger Subsidiary, Inc. and STR Merger
Subsidiary, Inc. dated as of January 19, 1999. Filed with registrant's
Registration Statement No. 333-68543 and incorporated herein by
reference.
10.20 Amended and Restated Agreement of Limited Partnership of Storage Trust
Properties, L.P., dated as of March 12, 1999. Filed with Registrant's
Form 10-Q for the quarterly period ended June 30, 1999 and incorporated
herein by reference.
10.21* Storage Trust Realty 1994 Share Incentive Plan. Filed with Storage
Trust Realty's Annual Report on Form 10-K for the year ended December
31, 1997 and incorporated herein by reference.
10.22 Amended and Restated Storage Trust Realty Retention Bonus Plan
effective as of November 12, 1998. Filed with Registrant's Registration
Statement No. 333-68543 and incorporated herein by reference.
10.23 Deposit Agreement dated as of March 10, 1999 among Registrant,
BankBoston, N.A. and the holders of the depositary receipts evidencing
the Depositary Shares Each Representing 1/1,000 of a Share of 8-1/4%
Cumulative Preferred Stock, Series L. Filed with Registrant's Form
8-A/A Registration Statement relating to the Depositary Shares Each
Representing 1/1,000 of a Share of 8-1/4% Cumulative Preferred Stock,
Series L and incorporated herein by reference.
10.24 Note Purchase Agreement and Guaranty Agreement with respect to
$100,000,000 of Senior Notes of Storage Trust Properties, L.P. Filed
with Storage Trust Realty's Annual Report on Form 10-K for the year
ended December 31, 1996 and incorporated herein by reference.
10.25 Deposit Agreement dated as of August 17, 1999 among Registrant,
BankBoston, N.A. and the holders of the depositary receipts evidencing
the Depositary Shares Each Representing 1/1,000 of a Share of 8.75%
Cumulative Preferred Stock, Series M. Filed with Registrant's Form
8-A/A Registration Statement relating to the Depositary Shares Each
Representing 1/1,000 of a Share of 8.75% Cumulative Preferred Stock,
Series M and incorporated herein by reference.
10.26 Limited Partnership Agreement of PSAC Development Partners, L.P. among
PS Texas Holdings, Ltd., PS Pennsylvania Trust and PSAC Storage
Investors, L.L.C. dated as November 15, 1999. Filed with Registrant's
Current Report on Form 8-K dated November 15, 1999 and incorporated
herein by reference.
10.27 Agreement of Limited Liability Company of PSAC Storage Investors,
L.L.C. dated as of November 15, 1999. Filed with Registrant's Current
Report on Form 8-K dated November 15, 1999 and incorporated herein by
reference.
10.28 Deposit Agreement dated as of January 14, 2000 among Registrant,
BankBoston, N.A. and the holders of the depositary receipts evidencing
the Depositary Shares Each Representing 1/1,000 of a Share of Equity
Stock, Series A. Filed with Registrant's Form 8-A/A Registration
Statement relating to the Depositary Shares Each Representing 1/1,000
of a Share of Equity Stock, Series A and incorporated herein by
reference.
10.29 Amended and Restated Agreement of Limited Partnership of PSA
Institutional Partners, L.P. among PS Texas Holdings, Ltd. and the
Limited Partners dated as of March 29, 2000. Filed with Registrant's
Annual Report on Form 10-K for the year ended December 31, 1999 and
incorporated herein by reference.
10.30 Amended and Restated Agreement of Limited Partnership of PSA
Institutional Partners, L.P. among PS Texas Holdings, Ltd. and the
Limited Partners dated as of August 11, 2000. Filed with Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2000 and incorporated herein by reference.
75
10.31* Registrant's 2000 Non-Executive/Non-Director Stock Option and Incentive
Plan. Filed with Registrant's Registration Statement No, 333-52400 and
incorporated herein by reference.
10.32 Deposit Agreement dated as of January 19, 2001 among Registrant, Fleet
National Bank and the holders of the depositary receipts evidencing the
Depositary Shares Each Representing 1/1,000 of a Share of 8.600%
Cumulative Preferred Stock, Series Q. Filed with Registrant's Form
8-A/A Registration Statement relating to the Depositary Shares Each
Representing 1/1,000 of a Share of 8.600% Cumulative Preferred Stock,
Series Q and incorporated herein by reference.
10.33* Registrant's 2001 Non-Executive/Non-Director Stock Option and Incentive
Plan. Filed with Registrant's Registration Statement No. 333-59218 and
incorporated herein by reference.
10.34* Registrant's 2001 Stock Option and Incentive Plan. Filed with
Registrant's Registration Statement No. 333-59218 and incorporated
herein by reference.
10.35 Deposit Agreement dated as of September 28, 2001 among Registrant,
Fleet National Bank and the holders of the depositary receipts
evidencing the Depositary Shares Each Representing 1/1,000 of a Share
of 8.000% Cumulative Preferred Stock, Series R. Filed with Registrant's
Form 8-A Registration Statement relating to the Depositary Shares Each
Representing 1/1,000 of a Share of 8.000% Cumulative Preferred Stock,
Series R and incorporated herein by reference.
10.36 Deposit Agreement dated as of October 31, 2001 among Registrant, Fleet
National Bank and the holder of the depositary receipts evidencing the
Depositary Shares Each Representing 1/1,000 of a Share of 7.875%
Cumulative Preferred Stock, Series S. Filed with Registrant's Form 8-A
Registration Statement relating to the Depositary Shares Each
Representing 1/1,000 of a Share of 7.875% Cumulative Preferred Stock,
Series S and incorporated herein by reference.
10.37 Credit Agreement by and among Registrant, Wells Fargo Bank, National
Association, as agent, and the financial institutions party thereto
dated as of November 1, 2001. Filed with Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended September 30, 2001 and
incorporated herein by reference.
10.38 Deposit Agreement dated as of January 18, 2002 among Registrant, Fleet
National Bank and the holders of the depositary receipts evidencing the
Depositary Shares Each Representing 1/1,000 of a Share of 7.625%
Cumulative Preferred Stock, Series T. Filed with Registrant's Form 8-A
Registration Statement relating to the Depositary Shares Each
Representing 1/1,000 of a Share of 7.625% Cumulative Preferred Stock,
Series T and incorporated herein by reference.
10.39 Deposit Agreement dated as of February 19, 2002 among Registrant, Fleet
National Bank and the holders of the depositary receipts evidencing the
Depositary Shares Each Representing 1/1,000 of a Share of 7.625%
Cumulative Preferred Stock, Series U. Filed with Registrant's Form 8-A
Registration Statement relating to the Depositary Shares Each
Representing 1/1,000 of a Share of 7.625% Cumulative Preferred Stock,
Series U and incorporated herein by reference.
10.40 Deposit Agreement dated as of September 30, 2002 among Registrant,
Fleet National Bank and the holders of the depositary receipts
evidencing the Depositary Shares Each Representing 1/1,000 of a Share
of 7.500% Cumulative Preferred Stock, Series V. Filed with Registrant's
Form 8-A Registration Statement relating to the Depositary Shares Each
Representing 1/1,000 of a Share of 7.500% Cumulative Preferred Stock,
Series V and incorporated herein by reference.
10.41** Employment agreement between Registrant and Harvey Lenkin dated as of
August 5, 2003. Filed with Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2003 and incorporated herein by
reference.
76
10.42 Deposit Agreement dated as of October 6, 2003 among Registrant, Fleet
National Bank and the holders of the depositary receipts evidencing the
Depositary Shares Each Representing 1/1,000 of a Share of 6.500%
Cumulative Preferred Stock, Series W. Filed with Registrant's Form 8-A
Registration Statement relating to the Depositary Shares Each
Representing 1/1,000 of a Share of 6.500% Cumulative Preferred Stock,
Series W and incorporated herein by reference.
10.43 Deposit Agreement dated as of November 13, 2003 among Registrant, Fleet
National Bank and the holders of the depositary receipts evidencing the
Depositary Shares Each Representing 1/1,000 of a Share of 6.450%
Cumulative Preferred Stock, Series X. Filed with Registrant's Form 8-A
Registration Statement relating to the Depositary Shares Each
Representing 1/1,000 of a Share of 6.450% Cumulative Preferred Stock,
Series X and incorporated herein by reference
11 Statement Re: Computation of Ratio of Earnings Per Share. Filed
herewith.
12 Statement Re: Computation of Ratio of Earnings to Fixed Charges. Filed
herewith.
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. Filed herewith.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. Filed herewith.
31.3 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. Filed herewith.
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. Filed herewith.
* Compensatory benefit plan.
** Management contract.
(b) Reports on Form 8-K
The Company furnished a Current Report on from 8-K dated and filed
November 6, 2003, pursuant to Item 7 with its press release announcing
its results for the quarter ended September 30, 2003.
The Company filed a Current Report on Form 8-K, dated September 25,
2003 (filed September 26, 2003), pursuant to Item 5, in connection with
the Company's public offering in October 2003 of depositary shares,
each representing 1/1,000 of a share of the Company's 6.500% Cumulative
Preferred Stock, Series W.
77
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: November 13, 2003
PUBLIC STORAGE, INC.
By: /s/ John Reyes
--------------
John Reyes
Senior Vice President and Chief Financial
Officer (Principal financial officer and duly
authorized officer)
78