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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED].
For the transition period from to
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Commission File Number: 1-8389
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PUBLIC STORAGE, INC.
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(Exact name of registrant as specified in its charter)
California 95-3551121
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
701 Western Avenue, Glendale, California 91201-2397
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 244-8080.
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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10% Cumulative Preferred Stock, Series A, $.01 par value............................ New York Stock Exchange
9.20% Cumulative Preferred Stock, Series B, $.01 par value.......................... New York Stock Exchange
Adjustable Rate Cumulative Preferred Stock, Series C, $.01 par value................ New York Stock Exchange
9.50% Cumulative Preferred Stock, Series D, $.01 par value.......................... New York Stock Exchange
10% Cumulative Preferred Stock, Series E, $.01 par value............................ New York Stock Exchange
9.75% Cumulative Preferred Stock, Series F, $.01 par value.......................... New York Stock Exchange
Depositary Shares Each Representing 1/1,000 of a Share of 8-7/8% Cumulative
Preferred Stock, Series G, $.01 par value......................................... New York Stock Exchange
Depositary Shares Each Representing 1/1,000 of a Share of 8.45% Cumulative
Preferred Stock, Series H, $.01 par value......................................... New York Stock Exchange
Depositary Shares Each Representing 1/1,000 of a Share of 8-5/8% Cumulative
Preferred Stock, Series I, $.01 par value......................................... New York Stock Exchange
8.25% Convertible Preferred Stock, $.01 par value................................... New York Stock Exchange,
Pacific Exchange
Common Stock, $.10 par value........................................................ New York Stock Exchange,
Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of class)
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 if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [ ]
The aggregate market value of the voting stock held by non - affiliates of the
registrant as of March 18, 1997:
Common Stock, $.10 Par Value - $1,525,781,238 (computed on the basis of $28.375
per share which was the reported closing sale price of the Company's Common
Stock on the New York Stock Exchange on March 18, 1997).
The number of shares outstanding of the registrant's classes of common stock as
of March 18, 1997:
Common Stock, $.10 Par Value - 93,038,779 shares
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Class B Common Stock, $.10 Par Value - 7,000,000 shares
- -------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Information required by Part III will be included in an amendment to this Form
10-K under cover of a Form 10-K/A filed within 120 days of the Registrant's 1996
fiscal year, which information is incorporated by reference into Part III.
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PART I
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ITEM 1. BUSINESS
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GENERAL
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Public Storage, Inc. (the "Company") is an equity real estate investment
trust ("REIT") organized as a corporation under the laws of California on July
10, 1980. The Company is a fully integrated, self-administered and self-managed
real estate investment trust ("REIT") that acquires, develops, owns and operates
self-storage facilities. The Company is the largest owner and operator of
self-storage space in the United States with direct and indirect equity
investments in 1,064 self-storage facilities containing approximately 64.0
million square feet of space at December 31, 1996. To a much lesser extent, the
Company has ownership interests in commercial properties containing commercial
and industrial space for rent.
The Company has elected to be taxed as a REIT under the Internal Revenue
Code of 1986, as amended. To the extent that the Company continues to qualify as
a REIT, it will not be subject to tax, with certain limited exceptions, on the
taxable income that is distributed to its shareholders.
Prior to November 16, 1995, the Company's operations were managed, pursuant
to contractual arrangements, by Public Storage Advisers, Inc., the Company's
investment advisor, by Public Storage Management, Inc. ("PMSI"), its
self-storage property operator and by Public Storage Commercial Properties
Group, Inc. ("PSCP"), its commercial property operator. On November 16, 1995,
the Company completed a merger transaction with PSMI whereby the Company became
self-administered and self-managed and acquired substantially all of the United
States real estate operations of PSMI. In addition, the Company's name was
changed from Storage Equities, Inc. to Public Storage, Inc.
MANAGEMENT
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The Company's senior management team is headed by B. Wayne Hughes (63),
Chairman and Chief Executive Officer. Mr. Hughes established the Public Storage
Organization in 1972 and has successfully managed the Company through several
market cycles. The Company's executive management includes: Harvey Lenkin (60),
President; John Reyes (36), Senior Vice President and Chief Financial Officer;
Hugh W. Horne (52), Senior Vice President - Development; and Marvin M. Lotz
(54), Senior Vice President-Operations.
The Company's five senior officers have been responsible for the
acquisition of more than 350 self-storage facilities, the development of more
than 650 self-storage facilities and the management of more than 1,000
self-storage facilities during their average 18 years of experience with the
Public Storage organization. In addition, the Company's senior management has a
significant ownership position in the Company with executive officers, directors
and their families owning approximately 39.3 million shares or 42% of the Common
Stock as of March 18, 1997.
REIT Structure
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The Company has elected to operate as a REIT for income tax purposes. This
structure provides the Company with two principal benefits which it believes
enhance shareholder value:
1) Eliminates effectively a corporate level tax on the earnings from the
Company's business operations. As long as the Company meets certain tests,
its common shareholders are not subject to "double taxation".
2) Facilitates the financial leveraging of the Company's business with
"permanent capital" i.e., perpetual preferred stock, versus debt, with no
adverse tax consequences. Operating as a REIT, the dividends the Company
pays on preferred stock have similar tax attributes as interest payments on
debt. However, unlike debt, perpetual preferred stock carries no
refinancing risks.
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INVESTMENT OBJECTIVE
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The Company's primary objective is to maximize shareholder value through
internal growth (by increasing funds from operations and cash available for
distribution) and acquisitions of additional real estate investments. The
Company believes that its access to capital, geographic diversification and
operating efficiencies resulting from its size will enhance its ability to
achieve this objective.
COMPETITION
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Competition in the market areas in which the Company operates is
significant and affects the occupancy levels, rental rates and operating
expenses of certain of the Company's facilities. The Company believes that its
operating results have benefited from favorable industry trends and conditions.
In seeking investments, the Company competes with a wide variety of
institutions and other investors. An increase in the amount of funds available
for real estate investments may increase competition for ownership of interests
in facilities and may reduce yields. In addition, recent increases in plans for
development of self-storage facilities is expected to further intensify
competition among self-storage operators in certain market areas.
The Company believes that the significant operating and financial
experience of its executive officers and directors, combined with the Company's
capital structure, national investment scope, geographic diversity, economies of
scale and the "Public Storage" name, should enable the Company to continue to
compete effectively with other entities.
In recent years consolidation has occurred in the fragmented self-storage
industry. In addition to the Company, there are four other publicly traded REITs
and numerous private regional and local operators operating in the self-storage
industry. The Company believes that it is well-positioned to capitalize on this
consolidation trend due to its demonstrated access to capital and national
presence.
BUSINESS ATTRIBUTES
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The Company believes it possesses several distinguishing characteristics
which enable it to compete effectively in the self-storage industry. The
Company's facilities are part of a comprehensive distribution system
encompassing standardized procedures, integrated reporting and information
networks and centralized marketing. The Company possesses the most experienced
facility management, acquisition and development staffs in the self-storage
industry.
This distribution system facilitates the cross-marketing, referral and
targeting of properties within each market and is designed to maximize revenue
through pricing and occupancy. In addition, the Company is able to generate
incremental revenue from sales of ancillary products such as truck rental,
locks, boxes and most recently portable self-storage. The distribution system
was significantly enhanced during 1996 with the introduction and implementation
of the national telephone reservation center and new facility management
software. These distinguishing characteristics are as follows:
NATIONAL TELEPHONE RESERVATION SYSTEM: Commencing in early 1996, the
Company began to experiment with a national telephone reservation system
designed to provide added customer service. Customers calling either the
Company's toll-free telephone referral system, (800) 44-STORE, or a self-storage
facility are directed to the national reservation system where a representative
discusses with the customer space requirements, price and location preferences
and also informs the customer of other products and services provided by the
Company. The national telephone reservation system, which is no longer
experimental, was not fully operational for most of the Company's facilities
until the fourth quarter of 1996. As of December 31, 1996, the national
telephone reservation system was supporting rental activity at all of the
Company's properties, with the exception of one major market, which was included
in March 1997.
The Company believes that the national telephone reservation system has
enhanced the Company's ability to effectively market its self-storage facilities
and is primarily responsible for the Company's increasing occupancy levels and
realized rental rates experienced during 1996.
PORTABLE SELF-STORAGE: In 1996, the Company organized Public Storage Pickup
and Delivery, Inc. ("PSPUD") as a separate corporation to operate a portable
self-storage business that rents storage containers to customers for storage in
central warehouses and provides related transportation services. The concept of
PSPUD is to provide an alternative to a self-storage facility where customers
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transport their goods to the facility and rent a space to store their goods.
PSPUD will deliver a storage container(s) to the customer's location where the
customer, at his convenience, packs his goods into the storage container. PSPUD
will subsequently return to the customer's location to retrieve the storage
container(s) for storage in a central warehouse.
The Company believes PSPUD's business complements the Company's existing
self-storage operations and PSPUD is using the national telephone reservation
system and various marketing initiatives, including radio and television, to
promote its rental activity. PSPUD currently operates a total of 12 facilities
in six greater metropolitan areas in California and Texas. PSPUD anticipates
opening four additional facilities in these areas and in three additional areas
by the end of the first quarter of 1997. PSPUD presently anticipates expanding
its operations to a significant number of additional areas during the remainder
of 1997 and 1998, subject to continuing evaluation of the feasibility of this
business and the satisfaction of regulatory requirements. There can be no
assurance on the level of PSPUD's expansion or profitability. Although PSPUD was
not material to the Company's 1996 operating results, the Company expects that
this business will have a material impact on the Company during 1997 and beyond.
PSPUD's operating experience is limited and its operations may be affected
by such factors as the level of competition in the business, the demand for
storage containers, general economic conditions, either nationally or in the
market areas in which PSPUD operates, the rate of facility move-ins and
move-outs, the availability of acceptable locations, the level of PSPUD's
operating expenses and the cost of capital equipment. The Company estimates that
during the first year operations of a newly opened facility it will incur
operating losses due to the "fill-up" process. Until the facilities are
operating profitably, PSPUD's operations are expected to adversely impact the
Company's earnings growth rate. The extent of the impact will depend in
significant part on the number, timing and performance of new facilities.
RETAIL CENTERS: In an effort to attract a wider variety of customers, to
further differentiate the Company from its competition and to generate new
sources of revenue, additional products are being offered to enhance the
Company's self-storage business. These products and services include the sale of
locks, boxes and packing supplies and the rental of trucks and other moving
equipment through the implementation of a retail expansion truck rental program.
The strategic objective of the retail expansion program is to create a
"Retail Store" that will (i) rent spaces for the attached self-storage facility,
(ii) rent spaces for the other Public Storage facilities in adjacent
neighborhoods, (iii) sell locks, boxes and packing materials and (iv) rent
trucks and other moving equipment all in an environment that is retail oriented.
Retail stores will be retro-fitted to some existing self-storage facility rental
offices or "built-in" as part of the development of new self-storage facilities,
both in high traffic, high visibility locations.
ECONOMIES OF SCALE: The Company is by far the largest provider of
self-storage space in the industry. The Company operates approximately one and
one-half times the number of self-storage facilities than the other four
publicly traded self-storage REITs in the self-storage industry combined. As of
December 31, 1996, the Company operated 1,101 self-storage facilities (including
37 managed for third parties) in 38 states and had over 539,000 spaces rented.
The size and scope of the Company's operations have enabled it to consistently
achieve a high level of profit margins and low level of administrative costs
relative to revenues in its industry.
BRAND NAME RECOGNITION: The Company's operations are conducted under the
"Public Storage" brand name, which it believes is the most recognized and
established name in the self-storage industry. The Company's operations are
conducted in 38 states, giving it national recognition and prominence. The
Company focuses its operations within those states in the major metropolitan
markets. This concentration establishes the Company as one of the dominant
providers of storage space in each market that it operates in and enables it to
use a variety of promotional venues, such as television and radio advertising as
well as targeted discounting and referrals, which are generally not economically
viable to its competitors.
GROWTH STRATEGIES
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The Company's growth strategies focus on improving the operating
performance of its existing properties and on increasing its ownership of
self-storage facilities through additional investments. Major elements of these
strategies are as follows:
INCREASE NET CASH FLOW OF EXISTING PROPERTIES. The Company seeks to
increase the net cash flow generated by its existing properties by (i)
increasing average occupancy rates and (ii) achieving higher levels of realized
monthly rents per occupied square foot. The Company believes that its property
management personnel and systems combined with the national telephone
reservation system will enhance the Company's ability to meet these goals.
ACQUIRE PROPERTIES OPERATED AND PARTIALLY OWNED BY THE COMPANY. In addition
to 429 wholly owned self-storage facilities, the Company operates, on behalf of
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approximately 70 ownership entities, 635 self-storage facilities under the
"Public Storage" name in which it has a partial equity interest. From time to
time, some of these self-storage facilities or interests in them are available
for purchase, providing the Company with a source of additional acquisition
opportunities. The Company believes these properties include some of the better
located, better constructed self-storage facilities in the industry. Because
these properties are partially owned by the Company, it is provided with
reliable operating information prior to acquisition and these properties are
easily integrated into the Company's portfolio.
DEVELOP PROPERTIES IN SELECTED MARKETS. During 1995, the Company commenced
construction of self-storage facilities. One facility was completed and opened
in August 1995. During 1996, the Company opened a total of four facilities,
representing 241,000 net rentable square feet. As of December 31, 1996, the
Company had eleven facilities at various stages of development with expected
opening dates ranging from January 1997 through March 1998. In addition, the
Company has identified 17 facilities (1,026,000 square feet) which it expects to
begin constructing during 1997. The Company is evaluating the feasibility of
developing additional self-storage facilities in selected markets in which there
are few, if any, facilities to acquire at attractive prices and where the
scarcity of other undeveloped parcels of land or other impediments to
development make it difficult to construct additional competing facilities.
ACQUIRE PROPERTIES OWNED OR OPERATED BY OTHERS. The Company believes its
presence in and knowledge of substantially all of the major markets in the
United States enhances its ability to identify attractive acquisition
opportunities and capitalize on the overall fragmentation in the self-storage
industry. The Company maintains local market information on rates, occupancy and
competition in each of the markets in which it operates. Of the more than 20,000
self-storage facilities in the United States, the Company believes that the ten
largest operators manage less than 15% of the total space. During 1996, the
Company acquired 58 self-storage facilities from unaffiliated third parties. The
Company, however, does not expect third party acquisitions to be significant
during fiscal 1997, unless attractive investment opportunities are available.
EXPAND THE PORTABLE SELF-STORAGE BUSINESS: PSPUD currently operates a total
of 12 facilities in six greater metropolitan areas in California and Texas.
PSPUD anticipates opening four additional facilities in these areas and in three
additional areas by the end of the first quarter of 1997. PSPUD presently
anticipates expanding its operations to a significant number of additional areas
during the remainder of 1997 and 1998, subject to continuing evaluation of the
feasibility of this business and the satisfaction of regulatory requirements.
Generally, PSPUD expects to expend an amount ranging from $850,000 to
$1,100,000 per facility during the first full year of operations, depending on
location and pricing structure. This estimate includes approximately $550,000 of
capitalized expenditures and assumes (i) a leased facility for 2,000 storage
containers, (ii) a break-even occupancy level of 55% to 65%, (iii) a stabilized
occupancy level of 90% reached in 9 to 12 months and (iv) monthly rental rates
ranging from $35.00 to $45.00 per container. Rental rates will vary based on
location and market conditions. Most of the operating costs of a facility are
expected to be fixed. However, certain fixed costs are expected to be reduced as
the facility reaches a stabilized occupancy level and certain economies of scale
are expected to be achieved as the number of facilities in operation grows.
PSPUD's operating experience is limited and its operations may be affected by
certain factors previously described.
COMMERCIAL PROPERTIES: Effective January 2, 1997, the Company restructured
its commercial property operations by reorganizing PSCP, (now known as American
Office Park Properties, Inc.) its commercial property manager, into a private
REIT that will concentrate its investing efforts in real estate facilities
containing commercial and industrial rental space through an operating
partnership. The Company and Consolidated Partnerships contributed 35 commercial
properties to the operating partnership in exchange for limited partnership
interests in the operating partnership.
The Company believes that the concentration of all the commercial
properties and the property manager into one entity will create a vehicle which
should facilitate future growth in this segment of the real estate industry. The
Company will participate in the entity's growth through the Company's
approximate 85% economic interest. Due to the Company's significant ownership
interest in the newly created REIT and operating partnership, the Company will
continue to consolidate the REIT and operating partnership until such time that
the Company's ownership and control is reduced to a level which is not
significant.
FINANCING OF THE COMPANY'S GROWTH STRATEGIES
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RETAINED OPERATING CASH FLOW: The Company seeks to retain significant funds
(after funding its distributions and capital improvements) for additional
investments and debt reduction. During the year ended December 31, 1996, the
Company distributed 44% of its funds from operations ("FFO") allocable to Common
Stock and retained $70.9 million which was available for principal payments on
debt and reinvestment into real estate assets. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources."
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REVOLVING LINE OF CREDIT: The Company currently has a $150.0 unsecured
million credit facility with a bank group led by Wells Fargo Bank, which the
Company uses as a temporary source of acquisition financing. As of March 18,
1997, there were no borrowings on this credit facility. The Company seeks to
ultimately finance all acquisitions with permanent capital to eliminate
refinancing and interest rate risk.
ACCESS TO ACQUISITION CAPITAL. The Company believes that its strong
financial position enables it to access capital to finance its growth. Since
1993, the Company has issued approximately $703.2 million of preferred and $1.2
billion of common equity to finance its acquisitions. The Company's long-term
debt, as a percentage of shareholders' equity, has decreased from 9.6% at
December 31, 1993 to 4.3% at December 31, 1996, thereby significantly reducing
refinancing risks. The Company has created leverage in its capital structure for
the benefit of its common shareholders through the use of preferred stock. The
Company targets a 40% leverage ratio; debt and preferred stock as a percentage
of total shareholders' equity.
DEVELOPMENT JOINT VENTURE: The Company has reached an agreement in
principle with a joint venture partner to participate in funding the development
of approximately $220 million of self-storage facilities (including the
properties currently under development by the Company). The joint venture
partner would contribute about 70% of the venture's capital with the balance
provided by the Company. After a period of time, the Company would have an
option to acquire the other venturer's interest. There can be no assurance that
a definitive agreement can be reached between the Company and the joint venture
partner. Assuming an agreement is finalized, the joint venture is expected to be
funded in early April 1997.
INVESTMENTS IN REAL ESTATE FACILITIES
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The Company has invested directly and indirectly in self-storage
facilities, and to a much smaller extent in existing commercial properties
containing commercial and industrial rental space, principally through (i) the
acquisition of wholly-owned properties, (ii) the acquisition of limited and
general partnership interests in real estate partnerships owning self-storage
facilities and/or commercial properties and (iii) the acquisition of common
stock of other REITs owning self-storage facilities and/or commercial
properties. The following table outlines the Company's ownership interest in
self-storage facilities and commercial properties:
At December 31, 1996
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Net Rentable Square Feet
Number of Real Estate Facilities (in thousands)
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Self-storage Commercial Self-storage Commercial
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Consolidated facilities:
Wholly-owned 429 21 26,355 1,503
Joint Venture and other 292 14 17,062 1,542
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721 35 43,417 3,045
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Unconsolidated facilities:
Institutional partnerships 131 - 7,787 -
Foreign partnerships 42 - 2,404 -
Other partnerships 51 - 2,730 -
REITs 119 10 7,679 673
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343 10 20,600 673
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Totals 1,064 45 64,017 3,718
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WHOLLY-OWNED FACILITIES: As of December 31, 1996, the Company had a total
of 450 wholly-owned real estate facilities compared to 273 wholly-owned
facilities at December 31, 1995. The increase in the number of wholly-owned
facilities was due to the mergers of eight affiliated REITs (103 facilities),
acquisition of other affiliated properties (12 facilities), acquisition of
facilities from third parties (58 facilities) and the completed construction of
four facilities during 1996.
JOINT VENTURE AND OTHER FACILITIES: From 1983 through 1987, the Company and
a series of eight public limited partnerships (the "PSP Partnerships") jointly
invested in an aggregate of 211 real estate facilities through general
partnerships (the "Joint Ventures"). The Company's joint venture interests range
from 10% to 70%, but are generally 50% or less. In addition, the PSP
Partnerships have a total of 29 real estate facilities which are wholly-owned by
the partnerships. The Company has an indirect interest in these facilities
through its ownership of both limited and general partnership interests in each
of the PSP Partnerships.
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The Company, through its direct ownership interests in the Joint Ventures
combined with its limited and general partnership interests owns a significant
economic interest in each of the PSP Partnerships. In addition, the Company is
able to exercise significant control over the PSP Partnerships through its (i)
position as a co-general partner, (ii) ownership of significant limited
partnership interests and (iii) ability to compel the sale of the properties
held in the joint ventures after seven years after the property was acquired.
Accordingly, the Company consolidates the assets, liabilities, and results of
operations of these eight partnerships in the Company's financial statements.
The Company also has significant ownership interests in and control both as
limited partner and general partner of 13 other limited partnerships which own
in aggregate 66 self-storage facilities. The accounts of these 13 limited
partnerships are also included in the Company's consolidated financial
statements.
UNCONSOLIDATED REAL ESTATE ENTITIES
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The Company currently has ownership interests in 41 limited partnerships
(consisting of 18 institutional Partnerships that own 131 properties, 14
partnerships with foreign investors that own 36 properties, and nine other
partnerships that own 57 properties) and eight REITs that own 129 properties
(collectively the "Unconsolidated Entities"). The Company's ownership interest
in these entities ranges from 15% to 45%, but generally averages approximately
30%. Due to the Company's limited ownership interest and control of these
entities, the Company does not consolidate the accounts of these entities for
financial reporting purposes and accounts for such investments using the equity
method.
INSTITUTIONAL PARTNERSHIPS. Under the partnership agreements for the
institutional partnerships, the general partners are generally entitled to 8% of
"cash flow from operations" (as defined in the partnership agreements) until
distributions to the limited partners from all sources equal 100% of their
investment ("cross-over"); after cross-over, the general partners are entitled
to 25% of cash flow from operations and of sale and financing proceeds. The
partnership agreements define cash flow from operations as cash funds provided
from operations of the partnerships, without deduction for depreciation, but
after deducting cash funds used to pay or establish a reserve for all other
expenses, debt payments, capital improvements and replacements. The general
partners are also entitled to 1% of the limited partnership interest in respect
of their capital investment.
PARTNERSHIPS WITH FOREIGN INVESTORS. Under the partnership agreements for
the partnerships with foreign investors, the general partners are generally
entitled to 8% of "cash flow from operations" until distributions to the limited
partners equal 105% to 115% of their investment ("cross-over"); after
cross-over, the general partners are entitled to 28% of cash flow from
operations (including 3% to a third general partner unaffiliated with the
Company). Limited partners generally receive all of the sale and financing
proceeds until such proceeds from a property equal 105% to 115% of the
investment in the property; the general partners are entitled to receive the
next sale or financing proceeds from that property up to an amount equal to 40%
of the sale or financing proceeds previously distributed to limited partners
from that property; and any additional sale or financing proceeds generated by
the same property are distributed 72% to the limited partners and 28% to the
general partners (including 3% to the third general partner). The general
partners are also entitled to 1% of the limited partnership interest in respect
of their capital investment.
OTHER PARTNERSHIPS. The sharing arrangements between the general and
limited partners in five of the six other partnerships are the same as in the
institutional partnerships. In the sixth partnership (PS Carolinas Balanced
Fund), the general partners are entitled to a partnership management fee of 8%
of cash flow from operations until payments to investors (consisting of both
limited partners and noteholders) equal 100% of their collective investment
("cross-over"); after cross-over, the general partners are entitled to a
partnership management fee of 8% of sale proceeds. After principal and accrued
interest has been paid to the noteholders, the general partners are entitled to
an additional 17% of cash flow from operations and sales proceeds.
REIT INVESTMENTS: The Company and Hughes own shares of common stock in
eight REITs that own 129 properties, which like the REITs acquired by the
Company in 1994 through 1996 were organized by the Company in 1990 through 1991
to succeed to the business of Public Storage sponsored limited partnerships.
The capital structures of the eight REITs consist of series A, B and C
shares. The series A shares are generally analogous to the limited partnership
interest, and the series B and C shares are analogous to the general partnership
interest, in the predecessor partnerships.
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The series B shares (representing 8% of the original outstanding shares) of
each of these eight REITs do not participate in distributions of sale or
financing proceeds, but participate in distributions of cash flow from
operations on the same basis as the series A shares. The series C shares do not
participate in any distributions. The series B and C shares (representing
together 25% of the original issued shares) of a REIT convert automatically into
series A shares on a share-for-share basis when (A) the sum of (1) all
cumulative distributions from all sources paid with respect to the series A
shares (including liquidating distributions) and (2) the cumulative
distributions from all sources to limited partners of such REIT's predecessor
partnership equals (B) the product of $20 (the pro rata original investment in
the REITs) multiplied by the number of then-outstanding series A shares in such
REIT.
The series A shares of each of the eight REITs are traded on the American
Stock Exchange ("AMEX").
PROHIBITED INVESTMENTS AND ACTIVITIES
- -------------------------------------
The Company's Bylaws prohibit the Company from purchasing properties in
which the Company's officers or directors have an interest, or from selling
properties to such persons, unless the transactions are approved by a majority
of the independent directors and are fair to the Company based on an independent
appraisal. This Bylaw provision may be changed only upon a vote of the holders
of a majority of the shares of (i) Common Stock and Convertible Preferred Stock,
voting together and (ii) each of the series of Senior Preferred Stock. See
"Limitations on Debt" for other restrictions in the Bylaws.
BORROWINGS
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The Company has an unsecured $150.0 million credit facility with a group of
commercial banks which expires on July 31, 2001. The expiration date may be
extended by one year on each anniversary of the credit agreement. Interest on
outstanding borrowings on the credit facility is payable monthly. At the option
of the Company, the rate of interest charged on borrowings is equal to (i) the
prime rate, or (ii) a rate ranging from the London Interbank Offered Rate
("LIBOR") plus .40% to LIBOR plus 1.10% depending on the Company's coverage
ratios, as defined. In addition, the Company is required to pay a quarterly
commitment fee of 0.250% (per annum) of the unused portion of the revolving
credit facility. The credit facility also includes a bid feature, for up to $50
million, which allows the Company, at its option, to request the group of banks
to propose the interest rate they would charge on specific borrowings. However,
in no case may the interest rate bid be greater than the amount provided by the
credit agreement.
Under covenants of the credit facility, the Company is required to (i)
maintain a balance sheet leverage ratio (as defined) of less than 0.40 to 1.00,
(ii) maintain net income of not less than $1.00 for each fiscal quarter, (iii)
maintain certain cash flow and interest coverage ratios (as defined) of not less
than 1.0 to 1.0 and 5.0 to 1.0, respectively and (iv) maintain a minimum total
shareholders' equity (as defined). In addition, the Company is limited in its
ability to incur additional borrowings (the Company is required to maintain
unencumbered assets with an aggregate book value equal to or greater than three
times the Company's unsecured recourse debt) or sell assets. There were no
borrowings outstanding under the credit facility at March 18, 1997.
As of December 31, 1996, the Company had outstanding borrowings of
approximately $108.4 million. See Note 8 to the consolidated financial
statements for a summary of the Company's borrowings at December 31, 1996.
Subject to a limitation on unsecured borrowings in the Company's Bylaws
(described below), the Company has broad powers to borrow in furtherance of the
Company's objectives. The Company has incurred in the past, and may incur in the
future, both short-term and long-term indebtedness to increase its funds
available for investment in real estate, capital expenditures and distributions.
LIMITATIONS ON DEBT
- -------------------
The Bylaws provide that the Board of Directors shall not authorize or
permit the incurrence of any obligation by the Company which would cause the
Company's "Asset Coverage" of its unsecured indebtedness to become less than
300%. Asset Coverage is defined in the Bylaws as the ratio (expressed as a
percentage) by which the value of the total assets (as defined in the Bylaws) of
the Company less the Company's liabilities (except liabilities for unsecured
borrowings) bears to the aggregate amount of all unsecured borrowings of the
Company. This Bylaw provision may be changed only upon a vote of the holders of
a majority of the shares of (i) Common Stock and Convertible Preferred Stock
voting together and (ii) each of the series of Senior Preferred Stock.
The Company's Bylaws prohibit the Company from issuing debt securities in a
public offering unless the Company's "cash flow" (which for this purpose means
net income, exclusive of extraordinary items, plus depreciation) for the most
recent 12 months for which financial statements are available, adjusted to give
effect to the anticipated use of the proceeds from the proposed sale of debt
securities, would be sufficient to pay the interest on such securities. This
Bylaw provision may be changed only upon a vote of the holders of a majority of
the shares of (i) Common Stock and Convertible Preferred Stock voting together
and (ii) each of the series of Senior Preferred Stock.
9
Without the consent of the holders of a majority of each of the series of
Senior Preferred Stock, the Company will not take any action that would result
in a ratio of "Debt" to "Assets" (the "Debt Ratio") in excess of 50%. As of
December 31, 1996, the Debt Ratio was approximately 4.2%. "Debt" means the
liabilities (other than "accrued and other liabilities" and "minority interest")
that should, in accordance with generally accepted accounting principles, be
reflected on the Company's consolidated balance sheet at the time of
determination. "Assets" means the Company's total assets that should, in
accordance with generally accepted accounting principles, be reflected on the
Company's consolidated balance sheet at the time of determination.
The Company's bank and senior unsecured debt agreements contain various
financial covenants, including limitations on the level of indebtedness of 30%
of total capitalization, as defined, and the prohibition of the payment of
dividends upon the occurrence of an event of default, as defined.
OTHER BUSINESS ACTIVITIES
- -------------------------
A corporation owned by Hughes and members of his family (the "Hughes
Family") reinsures policies against losses to goods stored by tenants in the
Company's self-storage facilities. The Company believes that the availability of
insurance reduces the potential liability of the Company to tenants for losses
to their goods from theft or destruction. The corporation receives the premiums
and bears the risks associated with the insurance.
The Company, through a 95% owned subsidiary, sells locks and boxes and
rents trucks to the general public and tenants to be used in securing their
spaces and moving their goods and believes that the availability of locks and
boxes for sale and the rental of trucks promotes the rental of spaces.
In August 1996, a subsidiary of the Company acquired a company engaged in
the portable self-storage business in Southern California. The subsidiary
currently has twelve locations as of March 18, 1997 and anticipates opening an
additional four prior to the end of the first quarter of 1997. The operations of
this subsidiary are not significant to the Company's operations during 1996.
EMPLOYEES
- ----------
There are approximately 3,500 persons who render services on behalf of the
Company, primarily personnel engaged in property operation, substantially all of
whom are employed by a clearing company that provides certain administrative and
cost-sharing services to the Company and other owners of properties operated by
the Company.
FEDERAL INCOME TAX
- ------------------
The Company believes that it has operated, and intends to continue to
operate, in such a manner as to qualify as a REIT under the Internal Revenue
Code of 1986, but no assurance can be given that it will at all times so
qualify. To the extent that the Company continues to qualify as a REIT, it will
not be taxed, with certain limited exceptions, on the taxable income that is
distributed to its shareholders.
INSURANCE
- ----------
The Company believes that its properties are adequately insured. Facilities
operated by the Company have historically carried comprehensive insurance,
including fire, earthquake, liability and extended coverage from nationally
recognized carriers.
PROPOSED MERGERS
- -----------------
In December 1996, Public Storage Properties XIV, Inc. ("Properties 14") and
Public Storage Properties XV, Inc. ("Properties 15") each agreed, subject to
certain conditions, to merge with and into the Company. Properties 14 and
Properties 15 are affiliated publicly traded equity REITs. Each of the mergers
is conditioned on approval by the respective shareholders of Properties 14 and
Properties 15. However, the mergers are not conditioned on each other. The
Company expects that, if approved by the shareholders, the mergers would be
completed in April 1997.
The estimated value of the Properties 14 merger is approximately $63.8
million. Properties 14 has 2,263,218 outstanding shares of common stock series
A, 232,762 outstanding shares of common stock series B, and 659,494 outstanding
shares of common stock series C. The Company owns 208,033 shares of common stock
series A, 218,616 shares of common stock series B, and 623,058 shares of common
stock series C. Upon completion of the merger, each outstanding share of common
stock series A of Properties 14 (other than shares held by the Company) would be
10
converted, at the election of the shareholders of Properties 14, into either
shares of the Company's common stock with a market value of $21.73 or, with
respect to up to 20% of the Properties 14 common stock series A, $21.73 in cash.
In addition, each share of Properties 14 series B and C (other than shares held
by the Company) will be converted into the right to receive $16.07 in the
Company's common stock, plus the estimated required REIT distributions
attributable to Properties 14 common stock series B of $1.18 per share. The
shares of Properties 14 common stock series A, B and C held by the Company will
be canceled in the merger. Properties 14 owns 14 properties (912,000 square
feet).
The estimated value of the Properties 15 merger is approximately $58.5
million. Properties 15 has 2,136,885 outstanding shares of common stock series
A, 232,762 outstanding shares of common stock series B, and 659,494 outstanding
shares of common stock series C. The Company owns 501,225 shares of common stock
series A, 138,655 shares of common stock series B, and 416,079 shares of common
stock series C. Upon completion of the merger, each outstanding share of common
stock series A of Properties 15 (other than shares held by the Company) would be
converted, at the election of the shareholders of Properties 15, into either
shares of the Company's common stock with a market value of $21.99 or, with
respect to up to 20% of the Properties 15 common stock series A, $21.99 in cash.
In addition, each share of Properties 15 series B and C (other than shares held
by the Company) will be converted into the right to receive $12.63 in the
Company's common stock, plus the estimated required REIT distributions
attributable to Properties 15 common stock series B of $1.23 per share. The
shares of Properties 15 common stock series A, B and C held by the Company will
be canceled in the merger. Properties 15 owns 19 properties (1,087,000 square
feet).
ITEM 2. PROPERTIES
----------
At December 31, 1996, the Company had direct ownership interests or
partnership interests in 1,109 properties located in 38 states:
At December 31, 1996
------------------------------------------------------------------------
Net Rentable Square Feet
Number of Facilities (in thousands)
---------------------------------- ---------------------------------
Self-storage Commercial Self-storage Commercial
-------------- -------------- -------------- --------------
California:
Northern 130 5 7,291 444
Southern 148 16 9,587 1,277
Texas 120 8 7,913 824
Florida 96 - 5,540 -
Illinois 62 - 3,898 -
Colorado 37 - 2,330 -
Washington 36 1 2,224 28
Georgia 36 - 1,975 -
Virginia 35 4 2,332 328
New Jersey 34 - 1,955 -
Maryland 32 - 1,851 -
New York 28 - 1,650 -
Ohio 27 - 1,648 -
Oregon 25 2 1,232 40
Nevada 22 - 1,409 -
Pennsylvania 18 - 1,222 -
Missouri 18 - 956 -
Other states (22 states) 160 9 9,004 777
-------------- -------------- -------------- --------------
Totals 1,064 45 64,017 3,718
============== ============== ============== ==============
The Company's facilities are generally operated to maximize cash flow
through the regular review and, when warranted by market conditions, adjustment
of scheduled rents. For the year ended December 31, 1996, the weighted average
occupancy level and the weighted average annual realized rent per rentable
square foot for the Company's self-storage facilities were approximately 90.7%
and $8.76, respectively, and for the commercial properties approximately 95.6%
and $8.76, respectively.
None of the Company's current facilities involves 1% or more of the
Company's total assets, gross revenues or net income.
11
SELF-STORAGE FACILITIES: Self-storage facilities, which comprise the vast
majority of the Company's investments (approximately 92% based on rental
income), are designed to offer accessible storage space for personal and
business use at a relatively low cost. A user rents a fully enclosed space which
is for the user's exclusive use and to which only the user has access on an
unrestricted basis during business hours. On-site operation is the
responsibility of resident managers who are supervised by area managers. Some
self-storage facilities also include rentable uncovered parking areas for
vehicle storage. Leases for self-storage facilities space may be on a long-term
or short-term basis, although typically spaces are rented on a month-to-month
basis. Rental rates vary according to the location of the property and the size
of the storage space. The Company's self-storage facilities are operated under
the "Public Storage" name.
Users of space in self-storage facilities include both individuals and
large and small businesses. Individuals usually employ this space for storage of
furniture, household appliances, personal belongings, motor vehicles, boats,
campers, motorcycles and other household goods. Businesses normally employ this
space for storage of excess inventory, business records, seasonal goods,
equipment and fixtures.
Self-storage facilities in which the Company has invested generally consist
of three to seven buildings containing an aggregate of between 350 to 750
storage spaces, most of which have between 25 and 400 square feet and an
interior height of approximately 8 to 12 feet.
The Company experiences minor seasonal fluctuations in the occupancy levels
of self-storage facilities with occupancies generally higher in the summer
months than in the winter months. The Company believes that these fluctuations
result in part from increased moving activity during the summer.
The Company's self-storage facilities are geographically diversified
located primarily in or near major metropolitan markets in 37 states. Generally
the Company's self-storage facilities are located in heavily populated areas and
close to concentrations of apartment complexes, single family residences and
commercial developments. However, there may be circumstances in which it may be
appropriate to own a property in a less populated area, for example, in an area
that is highly visible from a major thoroughfare and close to, although not in,
a heavily populated area. Moreover, in certain population centers, land costs
and zoning restrictions may create a demand for space in nearby less populated
areas.
Since the Company's investments are primarily self-storage facilities, the
ability of the Company to preserve its investments and achieve its objectives is
dependent in large part upon success in this field. Historically, the Company's
self-storage facility interests have generally shown a high degree of
consistency in generating cash flows, despite changing economic conditions. The
Company believes that its self-storage facilities have attractive
characteristics consisting of high profit margins, high average occupancy
levels, a broad tenant base and low levels of capital expenditures to maintain
their condition and appearance.
COMMERCIAL PROPERTIES: The Company may invest in all types of real estate.
Most of the Company's non-self-storage facilities investments are interests in
business parks and low-rise office buildings. A commercial property may include
both industrial and office space. Industrial space may be used for, among other
things, light manufacturing and assembly, storage and warehousing, distribution
and research and development activities. The Company believes that most of the
office space is occupied by tenants who are also renting industrial space. The
remaining office space is used for general office purposes. A commercial
property may also include facilities for commercial uses such as banks, travel
agencies, restaurants, office supply shops, professionals or other tenants
providing services to the public. The amount of retail space in a commercial
property is not expected to be significant.
ENVIRONMENTAL MATTERS: The Company's current practice is to conduct
environmental investigations in connection with property acquisitions. As a
result of environmental investigations of its properties, which commenced in
1995, the Company recorded an amount which, in management's best estimate, will
be sufficient to satisfy anticipated costs of known investigation and
remediation requirements. At December 31, 1995, the Company accrued $2,741,000
for estimated environmental remediation costs. In addition, during 1995,
entities in which the Company accounts for on the equity method also accrued
amounts for estimated environment remediation costs of which the Company's share
is approximately $510,000. The Company believes that amounts accrued in 1995 are
still sufficient to satisfy anticipated costs and therefore no additional amount
has been accrued in 1996.
ITEM 3. LEGAL PROCEEDINGS
-----------------
There are no material legal proceedings pending against the Company.
12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Company held an annual meeting of shareholders on October 7, 1996.
Proxies for the annual meeting were solicited pursuant to Regulation 14 under
the Securities Exchange Act of 1934. The annual meeting involved the following
matters:
1. ELECTION OF DIRECTORS
Number of Shares of Convertible
Number of Shares of Common Stock Preferred Stock, Series CC
-------------------------------- --------------------------------
Name Voted For Withheld Voted For Withheld
------------------------------- --------- -------- --------- --------
B. Wayne Hughes 62,222,007 321,179 58,955 -
Harvey Lenkin 62,227,394 315,792 58,955 -
Robert J. Abernethy 62,228,191 314,995 58,955 -
Dann V. Angeloff 62,226,802 316,384 58,955 -
William C. Baker 62,224,518 318,668 58,955 -
Uri P. Harkham 62,224,001 319,185 58,955 -
Total Common Stock and Convertible Preferred Stock, Series CC
-------------------------------------------------------------
Name Voted For Withheld
------------------------------- --------- ---------
B. Wayne Hughes 62,280,962 321,179
Harvey Lenkin 62,286,349 315,792
Robert J. Abernethy 62,287,146 314,995
Dann V. Angeloff 62,285,757 316,384
William C. Baker 62,283,473 318,668
Uri P. Harkham 62,282,956 319,185
2. Adoption of amendments to the Company's articles of incorporation in the
form of Exhibit A to the Company's Proxy Statement dated August 30, 1996 to
authorize 200,000,000 shares of Equity Stock - approval of this proposal
required the affirmative vote of the holders of (i) a majority of the
Company's outstanding shares of Common Stock and (ii) a majority of the
Company's outstanding shares of Common Stock and Convertible Preferred
Stock, Series CC, voting together as a single class, and this proposal was
approved by the following vote:
For Against Abstain No Vote
---------- --------- -------- ---------
Common Stock 53,697,808 5,576,843 447,671 2,820,864
Convertible Preferred Stock, Series CC 58,955 - - -
---------- --------- -------- ---------
Total Common Stock and Convertible
Preferred Stock, Series CC 53,756,763 5,576,843 447,671 2,820,864
========== ========= ======== =========
3. Approval of adoption of the Company's 1996 Stock Option and Incentive Plan
in the form of Exhibit B to the Company's Proxy Statement dated August 30,
1996 - approval of this proposal required the affirmative vote of a
majority of the votes cast on the proposal, and this proposal was approved
by the following vote:
For Against Abstain No Vote
---------- --------- -------- ---------
Common Stock 60,876,527 1,166,963 499,694 2
Convertible Preferred Stock, Series CC 58,955 - - -
---------- --------- -------- ---------
Total Common Stock and Convertible
Preferred Stock, Series CC 60,935,482 1,166,963 499,694 2
========== ========= ======== =========
13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
-----------------------------------------------------------------
a. Market Price of the Registrant's Common Equity:
The Common Stock has been listed on the New York Stock Exchange since
October 19, 1984 and on the Pacific Exchange since December 26, 1996.
The following table sets forth the high and low sales prices of the
Common Stock on the New York Stock Exchange composite tapes for the
applicable periods.
Range
---------------------------
Year Quarter High Low
- --------------- --------------- ---------- ----------
1995 1st $ 17-1/8 $ 13-1/2
2nd 17-1/8 15-1/4
3rd 18-3/4 16-3/8
4th 19-3/4 17-3/8
1996 1st 21-7/8 18-7/8
2nd 21-1/2 19-3/8
3rd 22-5/8 19-7/8
4th 31-3/8 22-1/4
As of February 28, 1997, there were approximately 19,676 holders of
record of the Common Stock.
b. Related Common Stockholder Matters:
In connection with the PSMI Merger, the Company (a) increased the
number of shares of Common Stock that the Company is authorized to issue
from 60,000,000 to 200,000,000, a portion of which were issued in the PSMI
Merger, and authorized 7,000,000 shares of Class B Common Stock, all of
which was issued in the PSMI Merger, and (b) established an ownership
limitation for the Company's capital stock to assist in preserving its REIT
status.
c. Class B Common Stock
The Class B Common Stock issued in connection with the PSMI Merger has
the following characteristics:
* The Class B Common Stock will (i) not participate in distributions
until the later to occur of funds from operations ("FFO") per Common
Share as defined below, aggregating $1.80 during any period of four
consecutive calendar quarters, or January 1, 2000, thereafter the
Class B Common Stock will participate in distributions (other than
liquidating distributions), at the rate of 97% of the per share
distributions on the Common Stock, provided that cumulative
distributions of at least $.22 per quarter per share have been paid on
the Common Stock, (ii) not participate in liquidating distributions,
(iii) not be entitled to vote (except as expressly required by
California law) and (iv) automatically convert into Common Stock, on a
share for share basis, upon the later to occur of FFO per Common Share
aggregating $3.00 during any period of four consecutive calendar
quarters or January 1, 2003.
For these purposes:
1) FFO, means net income (loss) (computed in accordance with GAAP) before
(i) gain (loss) on early extinguishment of debt, (ii) minority
interest in income and (iii) gain (loss) on disposition of real
estate, adjusted as follows: (i) plus depreciation and amortization
(including the Company's pro-rata share of depreciation and
amortization of unconsolidated equity interests and amortization of
assets acquired in the PSMI Merger, including property management
agreements and goodwill), and (ii) less FFO attributable to minority
interest. FFO is a supplemental performance measure for equity REITs
as defined by the National Association of Real Estate Investment
Trusts, Inc. ("NAREIT"). The NAREIT definition does not specifically
address the treatment of minority interest in the determination of FFO
14
or the treatment of the amortization of property management agreements
and goodwill. In the case of the Company, FFO represents amounts
attributable to its shareholders after deducting amounts attributable
to the minority interests and before deductions for the amortization
of property management agreements and goodwill. FFO is presented
because many industry analysts consider FFO to be one measure of the
performance of the Company and it is used in establishing the terms of
the Class B Common Stock. FFO does not take into consideration
scheduled principal payments on debt, capital improvements,
distributions and other obligations of the Company. Accordingly, FFO
is not a substitute for the Company's cash flow or net income as a
measure of the Company's liquidity or operating performance or ability
to pay distributions.
2) FFO per Common Share means FFO less preferred stock dividends (other
than dividends on convertible preferred stock) divided by the
outstanding weighted average shares of Common Stock assuming
conversion of all outstanding convertible securities and the Class B
Common Stock.
For these purposes, FFO per share of Common Stock (as defined) was
$1.86 for the year ended December 31, 1996.
The Company has paid quarterly distributions to its shareholders since
1981, its first full year of operations. Distributions paid per share of
Common Stock for 1996 amounted to $0.88.
Holders of Common Stock are entitled to receive distributions when and
if declared by the Company's Board of Directors out of any funds legally
available for that purpose. The Company is required to distribute at least
95% of its net taxable ordinary income prior to the filing of the Company's
tax return and 85%, subject to certain adjustments, during the calendar
year, to maintain its REIT status for federal income tax purposes. It is
management's intention to pay distributions of not less than this required
amount.
For Federal tax purposes, distributions to shareholders are treated as
ordinary income, capital gains, return of capital or a combination thereof.
Distributions to common shareholders were $0.88, $0.88 and $0.85 and for
1996, 1995 and 1994, respectively and in each case represents ordinary
income.
d. Registrant's Preferred Equity:
On October 26, 1992, the Company completed a public offering of
1,825,000 shares ($25 stated value per share) of 10% Cumulative Preferred
Stock, Series A ("Series A Preferred Stock"). The Series A Preferred Stock
has general preference rights over the Common Stock with respect to
distributions and liquidation proceeds. During 1996, the Company paid
dividends totaling $4,563,000 ($2.50 per preferred share).
On March 25, 1993, the Company completed a public offering of
2,300,000 shares ($25 stated value per share) of 9.20% Cumulative Preferred
Stock, Series B ("Series B Preferred Stock"). The Series B Preferred Stock
has general preference rights over the Common Stock with respect to
distributions and liquidation proceeds. During 1996, the Company paid
dividends totaling $5,488,000 ($2.30 per preferred share).
On June 30, 1994, the Company completed a public offering of 1,200,000
shares ($25 stated value per share) of Adjustable Rate Cumulative Preferred
Stock, Series C ("Series C Preferred Stock"). The Series C Preferred Stock
has general preference rights over the Common Stock with respect to
distributions and liquidation proceeds. During 1996, the Company paid
dividends totaling $2,212,000 ($1.84 per preferred share)
On September 1, 1994, the Company completed a public offering of
1,200,000 shares ($25 stated value per share) of 9.50% Cumulative Preferred
Stock, Series D ("Series D Preferred Stock"). The Series D Preferred Stock
has general preference rights over the Common Stock with respect to
distributions and liquidation proceeds. During 1996, the Company paid
dividends totaling $2,850,000 ($2.375 per preferred share).
On February 1, 1995, the Company completed a public offering of
2,195,000 shares ($25 stated value per share) of 10% Cumulative Preferred
Stock, Series E ("Series E Preferred Stock"). The Series E Preferred Stock
has general preference rights over the Common Stock with respect to
distributions and liquidation proceeds. During 1996, the Company paid
dividends totaling $5,488,000 ($2.50 per preferred share).
15
On May 3, 1995, the Company completed a public offering of 2,300,000
shares ($25 stated value per share) of 9.75% Cumulative Preferred Stock,
Series F ("Series F Preferred Stock"). The Series F Preferred Stock has
general preference rights over the Common Stock with respect to
distributions and liquidation proceeds. During 1996, the Company paid
dividends totaling $5,606,000 ($2.437 per preferred share).
On December 13, 1995, the Company completed a public offering of
6,900,000 depositary shares each representing 1/1,000 of a share of 8-7/8%
Cumulative Preferred Stock, Series G ("Series G Preferred Stock")($25
stated value per depositary share). The Series G Preferred Stock has
general preference rights over the Common Stock with respect to
distributions and liquidation proceeds. During 1996, the Company paid
dividends totaling $15,479,000 ($2.219 per preferred depositary share).
On January 25, 1996, the Company completed a public offering of
6,750,000 depositary shares each representing 1/1,000 of a share of 8.45%
Cumulative Preferred Stock, Series H ("Series H Preferred Stock")($25
stated value per depositary share). The Series H Preferred Stock has
general preference rights over the Common Stock with respect to
distributions and liquidation proceeds. During 1996, the Company paid
dividends totaling $13,348,000 ($1.978 per preferred share, pro rated from
January 25, 1996 through December 31, 1996, the period during which the
Series H Preferred Stock was outstanding).
On November 1, 1996, the Company completed a public offering of
4,000,000 depositary shares each representing 1/1,000 of a share of 8-5/8%
Cumulative Preferred Stock, Series I ("Series I Preferred Stock")($25
stated value per depositary share). The Series I Preferred Stock has
general preference rights over the Common Stock with respect to
distributions and liquidation proceeds. During 1996, the Company paid
dividends totaling $1,438,000 ($0.359 per preferred share, pro rated from
November 1, 1996 through December 31, 1996, the period during which the
Series I Preferred Stock was outstanding).
The Series A, Series B, Series C, Series D, Series E, Series F, Series
G, Series H and Series I Preferred Stock are collectively referred to as
the "Senior Preferred Stock."
On July 15, 1993, the Company completed a public offering of 2,300,000
shares ($25 stated value per share) of 8.25% Convertible Preferred Stock
("Convertible Preferred Stock"). The Convertible Preferred Stock has
general preference rights over the Common Stock (and ranks junior to the
Senior Preferred Stock) with respect to distributions and liquidation
proceeds. During 1996 the Company paid dividends totaling $4,679,000
($2.063 per preferred share).
Effective July 1, 1995, the Company issued 31,200 shares of its
Mandatory Convertible Participating Preferred Stock to an unaffiliated
investor to acquire the investor's limited partnership interest in an
affiliated real estate partnership. In April 1996, the Mandatory
Convertible Participating Preferred Stock was exchanged into 1,611,265
shares of common stock. Costs incurred with the exchange have been charged
to Paid in Capital.
In April 1996, the Company issued $58,955,000 (58,955 shares) of its
Mandatory Convertible Preferred Stock, Series CC (the "Series CC Preferred
Stock"). The Series CC Preferred Stock ranks junior to the Company's
Cumulative Senior Preferred Stock with respect to general preference rights
and has a liquidation value of $1,000 per share. Other significant terms of
the Series CC Preferred Stock include: (i) quarterly distributions equal to
$32.50 per share, (ii) conversion, at anytime at the option of the holder,
into common stock of the Company at a conversion price of $28.56 or 35.014
shares of common stock for each share of Series CC Preferred Stock and
(iii) automatic conversion into common stock of the Company on March 31,
2000 at the conversion price described above.
16
ITEM 6. SELECTED FINANCIAL DATA
- ---------------------------------
For the year ended December 31,
---------------------------------------------------------------------
1996 (1) 1995 (1) 1994 1993 1992
-------- -------- -------- -------- -------
(In thousands, except per share data)
Revenues:
Rental income $294,005 $202,134 $141,845 $109,203 $95,886
--------- -------- -------- -------- -------
Equity in earnings of real estate entities 22,121 3,763 764 563 -
Facility management fees 14,428 2,144 - - -
Ancillary business income 3,504 112 - - -
Interest and other income 7,064 4,497 4,587 4,914 1,562
--------- -------- -------- -------- -------
341,122 212,650 147,196 114,680 97,448
--------- -------- -------- -------- -------
Expenses:
Cost of operations 93,244 72,247 52,816 42,116 38,348
Cost of facility management 2,575 352 - - -
Cost of operations - ancillary business 3,418 100 - - -
Depreciation and amortization 64,967 40,760 28,274 24,998 22,405
General and administrative 5,524 3,982 2,631 2,541 2,629
Interest expense 8,482 8,508 6,893 6,079 9,834
Environmental cost - 2,741 - - -
Advisory fee - 6,437 4,983 3,619 2,612
--------- -------- -------- -------- -------
178,210 135,127 95,597 79,353 75,828
--------- -------- -------- -------- -------
Income before minority interest and gain on
disposition of real estate 162,912 77,523 51,599 35,327 21,620
Minority interest in income (9,363) (7,137) (9,481) (7,291) (6,895)
--------- -------- -------- -------- -------
Income before gain on disposition of real 153,549 70,386 42,118 28,036 14,725
estate
Gain on disposition of real estate, net - - - - 398
--------- -------- -------- -------- -------
Net income $153,549 $ 70,386 $42,118 $28,036 $15,123
========= ======== ======== ======== ========
Per Common Share:
Income before gain on disposition of real
estate $1.10 $0.95 $1.05 $0.98 $0.88
Gain on disposition of real estate - - - - 0.02
--------- -------- -------- -------- -------
Net income $1.10 $0.95 $ 1.05 $0.98 $ 0.90
========= ======== ======== ======== ========
Distributions per common share $0.88 $0.88 $ 0.85 $0.84 $ 0.84
========= ======== ======== ======== ========
Weighted average common shares 77,358 41,171 24,077 17,558 15,981
========= ======== ======== ======== ========
Total assets $2,572,152 $1,937,461 $820,309 $666,133 $537,724
Total debt $ 108,443 $ 158,052 $ 77,235 $ 84,076 $69,478
Minority interest $ 116,805 $ 112,373 $141,227 $193,712 $202,797
Shareholders' equity $2,305,437 $1,634,503 $587,786 $376,066 $253,669
Other data:
Net cash provided by operating activities $245,237 $123,466 $79,180 $59,477 $44,025
========= ======== ======== ======== ========
Net cash used in investing activities $(479,626) $(248,672) $(169,590) $(137,429) $(21,010)
========= ======== ======== ======== ========
Net cash provided by (used in) financing $180,809 $185,491 $100,029 $80,100 $(21,070)
activities ========= ======== ======== ======== ========
Funds from operations (2) $224,384 $105,086 $56,143 $35,830 $21,133
========= ======== ======== ======== ========
(1) During 1996 and 1995 the Company completed several significant business
combinations and equity transactions. See Notes 3 and 11 to the Company's
consolidated financial statements.
(2) Funds from operations ("FFO"), means net income (loss) (computed in
accordance with GAAP) before (i) gain (loss) on early extinguishment of
debt, (ii) minority interest in income and (iii) gain (loss) on disposition
of real estate, adjusted as follows: (i) plus depreciation and amortization
(including the Company's pro-rata share of depreciation and amortization of
unconsolidated equity interests and amortization of assets acquired in the
PSMI Merger, including property management agreements and excess purchase
cost over net assets acquired), and (ii) less FFO attributable to minority
interest. FFO is a supplemental performance measure for equity REITs as
defined by the National Association of Real Estate Investment Trusts, Inc.
("NAREIT"). The NAREIT definition does not specifically address the
treatment of minority interest in the determination of FFO or the treatment
of the amortization of property management agreements and excess purchase
cost over net assets acquired. In the case of the Company, FFO represents
17
amounts attributable to its shareholders after deducting amounts
attributable to the minority interests and before deductions for the
amortization of property management agreements and excess purchase cost
over net assets acquired. FFO is presented because many analysts consider
FFO to be one measure of the performance of the Company and it is used in
certain aspects of the terms of the Class B Common Stock. FFO does not take
into consideration scheduled principal payments on debt, capital
improvements distributions and other obligations of the Company.
Accordingly, FFO is not a substitute for the Company's cash flow or net
income as a measure of the Company's liquidity or operating performance or
ability to pay distributions.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
----------------------------------------------------------------------
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and notes thereto.
OVERVIEW: Over the past three years, the Company has effected several
business initiatives which have had and should continue to have significant
effects on the Company's results of operations and financial condition. The
Company's asset base has expanded rapidly through the acquisition of additional
real estate investments which have principally been financed through the
issuance of permanent capital in the form of common and preferred stock and the
retention of operating cash flow. Since 1993, the Company's total assets and
shareholders' equity have increased significantly as total assets increased from
$666.1 million at December 31, 1993 to $2.6 billion at December 31, 1996, and
shareholders' equity increased from $376.1 million at December 31, 1993 to $2.3
billion at December 31, 1996. Among the more significant transactions that the
Company completed during 1994, 1995 and 1996 are summarized as follows:
* INCREASED INTERESTS IN REAL ESTATE FACILITIES: Through the acquisition of
wholly-owned facilities and the acquisition of interests in real estate
entities, the Company's ownership interest in real estate facilities has
increased from 331 facilities at the end of 1993 to 1,109 facilities at the
end of 1996.
* MERGERS WITH AFFILIATED REITS: Since 1993, the Company has completed eleven
mergers with affiliated REITs: one in 1994 with an aggregate cost of $55.8
million, two in 1995 with an aggregate cost of $135.4 million, and eight in
1996 with an aggregate cost of $356.8 million.
* BECAME SELF-ADVISED AND SELF-MANAGED: On November 16, 1995, the Company
became self-advised and self-managed in connection with the merger with
Public Storage Management, Inc. ("PSMI") with an aggregate cost of $549.3
million. In the merger with PSMI (the "PSMI Merger"), the Company acquired
all the real estate operations of PSMI, including (i) general and limited
partnership interests in 47 limited partnerships owning an aggregate of 286
self-storage facilities, (ii) shares of common stock in 16 REITs owning an
aggregate of 218 self-storage facilities and 14 commercial properties,
(iii) seven wholly-owned properties, (iv) all-inclusive deeds of trust
secured by ten self-storage facilities, (v) property management contracts,
exclusive of facilities owned by the Company, for 563 self-storage
facilities and through ownership of a 95% economic interest in a
subsidiary, 24 commercial properties and (vi) a 95% economic interest in
another subsidiary that currently sells locks and boxes in self-storage
facilities operated by the Company.
* ISSUANCE OF CAPITAL STOCK: To fund the Company's acquisition activities
over the past three years the Company has issued approximately $592.8
million of preferred stock and $321.3 million of common stock in public
offerings, and approximately $87.4 million of preferred stock and $830.7
million of common stock in connection with mergers and real estate
acquisitions.
* DEVELOPMENT ACTIVITIES: In 1995, the Company commenced development of
self-storage facilities, opening one in 1995 and four in 1996, with eleven
under construction at December 31, 1996.
* PORTABLE SELF-STORAGE BUSINESS: In August 1996, the Company commenced
operations in the portable self-storage business facilitated by the
acquisition of an existing operator. As of December 31, 1996, the Company
opened three new facilities. From December 31, 1996 through March 15, 1997
the Company opened an additional eight facilities.
The significant increases in both the Company's asset and capital base have
translated into significant growth in the Company's overall operating results.
The comparative growth in operating results between 1996 and 1995 is principally
due to the impact of the PSMI Merger combined with mergers with affiliated
REITs. The comparative growth in operating results between 1995 and 1994 is
principally due to mergers with affiliated REITs combined with acquisitions of
additional real estate facilities and investments in real estate entities.
18
- --------------------------------------------------------------------------------
Results of Operations
- --------------------------------------------------------------------------------
NET INCOME AND EARNINGS PER COMMON SHARE: Net income for 1996, 1995 and
1994 was $153,549,000, $70,386,000 and $42,118,000, respectively, representing
increases over the prior year of 118.2% for 1996 and 67.1% for 1995. Net income
allocable to common shareholders (net income less preferred stock dividends) for
1996, 1995 and 1994 was $84,950,000, $39,262,000 and $25,272,000, respectively,
representing increases over the prior year of 116.4% for 1996 and 55.4% for
1995. On a per share basis, net income was $1.10 per share (based on weighted
average shares outstanding of 77,358,000) for 1996, $0.95 per share (based on
weighted average shares outstanding of 41,171,000) for 1995 and $1.05 per share
(based on weighted average shares outstanding of 24,077,000) for 1994. The
increase in net income per share for 1996 compared to 1995 was principally the
result of improved real estate operations. The 1996 per share amount also
reflects earnings dilution caused by (i) development activities ($0.02 per
share), (ii) portable self storage operations ($0.01 per share) and (iii) the
temporary uninvested net offering proceeds ($0.02 per share) from the issuance
of the Series H and Series I preferred stock. The decrease in net income per
share for 1995 compared to 1994 was principally due to increasing depreciation
expense combined with the accrual of estimated environmental remediation costs
at the end of 1995 and a greater number of shares outstanding in 1995.
Net income includes depreciation and amortization expense (including
depreciation included in equity in earnings of real estate entities) of
approximately $70,835,000 ($0.92 per common share) for 1996, $31,449,000 ($0.76
per common share) for 1995, and $14,025,000 ($0.58 per common share) for 1994.
The fiscal 1995 earnings per common share also includes a reduction of
approximately $0.08 per common share relating to the accrual of estimated
environmental remediation costs (discussed below).
The Company's business operations consist of its (i) self-storage
properties, (ii) commercial properties, (iii) property management activities and
(iv) ancillary operations, including the Company' portable self-storage
operations. The Company's real estate operations account for substantially all
of the Company operating activities. During 1996, approximately 94% of the
Company's sources of operating income (income prior to deductions for
depreciation, general and administrative expenses, advisory fees and interest
expense) was generated from property operations.
- --------------------------------------------------------------------------------
Real Estate Operations
- --------------------------------------------------------------------------------
At December 31, 1996, the Company's investment portfolio consisted of (i)
its wholly-owned properties, (ii) properties owned by real estate partnerships
consolidated with the Company (the "Consolidated Partnerships") and (iii)
properties owned by real estate entities (partnerships and REITs) in which the
Company's ownership interest and control are not sufficient to warrant the
consolidation of such entities (the "Unconsolidated Entities"). The following
table summarizes the Company's investment in real estate facilities as of
December 31, 1996:
Number of Facilities in which the Net Rentable Square Footage
Company has an ownership interest in (in thousands)
------------------------------------ -------------------------------------
Self-storage Commercial Self-storage Commercial
facilities properties Total facilities properties Total
------------ ---------- ------- ------------ ---------- -------
Wholly-owned facilities...................... 429 21 450 26,355 1,503 27,858
Facilities owned by Consolidated Partnerships 292 14 306 17,062 1,542 18,604
------------ ---------- ------- ------------ ---------- -------
Total consolidated facilities............ 721 35 756 43,417 3,045 46,462
Facilities owned by Unconsolidated Entities.. 343 10 353 20,600 673 21,273
------------ ---------- ------- ------------ ---------- -------
Total facilities in which the Company has
an ownership interest.................. 1,064 45 1,109 64,017 3,718 67,735
============ ========== ======= ============ ========== =======
The facilities in which the Company has an ownership interest are located
in or near major metropolitan markets in 38 states. The Company believes that
geographic diversity reduces the impact from regional economic downturns and
provides a greater degree of stability to revenues.
19
SELF-STORAGE OPERATIONS: Self-storage rental income and cost of operations
presented on the consolidated statements of income reflect the operations of the
721 self-storage facilities owned by the Company and the Consolidated
Partnerships. The following table summarizes the operating results (before
depreciation) of these facilities for each of the past three years:
SELF-STORAGE OPERATIONS:
- ------------------------
Year Ended December 31, Year Ended December 31,
----------------------- -----------------------
Percentage Percentage
1996 1995 Change 1995 1994 Change
-------- -------- --------- -------- -------- --------
(Dollar mounts in thousands, except rents per square foot)
Rental income:
Consistent group........ $121,481 $116,587 4.2% $116,587 $112,763 3.4%
Post 1993 acquisitions.. 148,948 67,513 120.6% 67,513 14,234 374.3%
-------- -------- --------- -------- -------- --------
270,429 184,100 46.9% 184,100 126,997 45.0%
-------- -------- --------- -------- -------- --------
Cost of operations:
Consistent group........ 37,438 40,319 (7.2)% 40,319 40,246 0.2%
Post 1993 acquisitions.. 45,056 23,077 95.2% 23,077 5,020 359.7%
-------- -------- --------- -------- -------- --------
82,494 63,396 30.1% 63,396 45,266 40.1%
-------- -------- --------- -------- -------- --------
Net operating income:
Consistent group........ 84,043 76,268 10.2% 76,268 72,517 5.2%
Post 1993 acquisitions.. 103,892 44,436 133.8% 44,436 9,214 382.3%
-------- -------- --------- -------- -------- --------
$187,935 $120,704 55.7% $120,704 $81,731 47.7%
======== ======== ========= ======== ======== ========
Consistent group data:
Gross margin............ 69.2% 65.4% 5.8% 65.4% 64.3% 1.7%
Weighted average
occupancy............. 90.7% 89.8% 1.0% 89.8% 90.0% (0.2)%
Average realized annual
rent per square foot $7.68 $7.44 3.2% $7.44 $7.08 5.1%
Average scheduled
annual rent per $7.80 $7.20 8.3% $7.20 $6.84 5.3%
square foot...........
Number of facilities (at
the end of the period):
Consistent group........ 298 298 -% 298 298 -%
Cumulative post 1993
acquisitions.......... 423 222 90.5% 222 67 231.3%
Net rentable square feet (at the end of the period):
Consistent group........ 17,641 17,641 -% 17,641 17,641 -%
Cumulative post 1993
acquisitions.......... 25,776 13,137 96.2% 13,137 4,166 215.3%
The comparative increases in the Company's self-storage operations from
1994 through 1996 are principally due to the acquisition of additional
facilities as indicated in the above table. For the consistent group of
facilities owned throughout each of the three fiscal years, year-over-year
improvements in rental income of 4.2% in 1996 and 3.4% in 1995 are principally
the result of increased realized rent per square foot and, with respect to
fiscal 1996, increased weighted average occupancy levels.
Commencing in early 1996, the Company began to experiment with a national
telephone reservation system designed to provide added customer service.
Customers calling either the Company's toll-free telephone referral system,
(800) 44-STORE, or a local Public Storage facility, are directed to the national
reservation system where a trained representative discusses with the customer
20
space requirements, price and location preferences and also informs the customer
of other products and services provided by the Company. The national telephone
reservation system, which is no longer experimental, was not fully operational
for most of the Company's facilities until the fourth quarter of 1996 and is
currently handling in excess of 100,000 calls per month. As of December 31,
1996, the national telephone reservation system was supporting rental activity
at all of the Company's properties, with the exception of one major market,
which was included in March 1997.
In connection with the national telephone reservation system, the Company
experimented with pricing and promotional discounts designed to increase rental
activity. As a result, promotional discounts increased significantly. Rental
income for the Company's self-storage facilities is net of promotional discounts
totaling $4,031,000 and $303,000 for the years ended December 31, 1996 and 1995,
respectively. The Company believes that the use of the national telephone
reservation system combined with rental discounts has resulted in increased
weighted average occupancies.
In the second half of 1996, the Company began to increase its scheduled
rents charged to new customers (prior to promotional discounts) and to existing
tenants where warranted. As a result, for fiscal 1996, both realized and
scheduled rents per square foot increased compared to 1995. This trend was also
applicable throughout the portfolio of self-storage facilities in which the
Company has an ownership interest and manages (see "Supplemental Property Data"
below).
With the exception of property management fees, most of the self-storage
operating costs (i.e. payroll, property taxes, repairs and maintenance, etc.)
are generally fixed. As a result of becoming self-managed in connection with the
PSMI Merger, the Company no longer incurs property management fees. Cost of
operations for 1996 decreased compared to 1995 principally as a result of the
elimination of property management fees for 1996. Included in cost of operation
for 1995 and 1994 were management fees totaling $9,421,000 and $7,587,000,
respectively ($5,966,000 in 1995 and $6,737,000 in 1994 with respect to the
consistent group of facilities). However, offsetting the decrease in property
management fees in 1996 are expenses with respect to the national telephone
reservation system totaling $1,257,000.
DEVELOPMENT OF SELF-STORAGE FACILITIES: Commencing in 1995, the Company
began to construct self-storage facilities. Through December 31, 1996, the
Company constructed and opened for operation five facilities, one of which began
operations in August 1995 and four in 1996. At December 31, 1996, the Company
had eleven self-storage facilities (approximately 707,000 square feet) under
construction with an aggregate cost incurred to date of approximately $33.5
million and total additional estimated cost to complete of $22.5 million.
Generally the construction period takes 9 to 12 months followed by a 18 to 24
month fill-up process until the newly constructed facility reaches a stabilized
occupancy level of approximately 90%. Due to the timing of the employment of the
capital to construct the facilities and the relatively long "fill-up" period
until the facilities reach a stabilized occupancy level, the Company believes
that its development plans may create earnings dilution in the short-term.
However, the Company has reached an agreement in principle to develop
approximately $220 million of self-storage facilities with a joint venture
partner (see "Liquidity and Capital Resources - Development activities") and
expects that the joint development of self-storage facilities will mitigate this
earnings dilution to the extent of the joint venturer's interest.
21
COMMERCIAL PROPERTY OPERATIONS: Commercial property rental income and cost
of operations presented on the consolidated statements of income reflect the
operations of the 35 facilities owned by the Company and the Consolidated
Partnerships. The following table summarizes the operating results (before
depreciation) of these facilities for each of the past three years:
COMMERCIAL PROPERTY OPERATIONS:
- -------------------------------
Year Ended December 31, Year Ended December 31,
----------------------- -----------------------
Percentage Percentage
1996 1995 Change 1995 1994 Change
------- ------- -------- -------- ------- --------
(Dollar amounts in thousands, except rents per square foot)
Rental income:
Consistent group...... $14,685 $14,689 -% $14,689 $14,144 3.9%
Post-1993 Acquisitions 8,891 3,345 165.8% 3,345 704 375.1%
------- ------- -------- -------- ------- --------
23,576 18,034 30.7% 18,034 14,848 21.5%
------- ------- -------- -------- ------- --------
Cost of operations:
Consistent group...... 7,260 7,305 (0.6)% 7,305 7,269 0.5%
Post-1993 Acquisitions 3,490 1,546 125.7% 1,546 281 450.2%
------- ------- -------- -------- ------- --------
10,750 8,851 21.5% 8,851 7,550 17.2%
------- ------- -------- -------- ------- --------
Net operating income:
Consistent group...... 7,425 7,384 0.6% 7,384 6,875 7.4%
Post-1993 Acquisitions 5,401 1,799 200.2% 1,799 423 325.3%
------- ------- -------- -------- ------- --------
$12,826 $9,183 39.7% $9,183 $7,298 25.8%
======= ======= ======== ======== ======= ========
Consistent Group data:
Gross margin.......... 50.6% 50.3% 0.6% 50.3% 48.6% 3.4%
Weighted average
occupancy........... 96.0% 96.3% (0.3)% 96.3% 95.0% 1.3%
Average realized annual
rent per square foot $8.64 $8.64 -% $8.64 $8.28 4.4%
Number of facilities (at
the end of the period):
Consistent group...... 15 15 -% 15 15 -%
Cumulative Post-1993
Acquisitions.......... 19 5 280.0% 5 1 400.0%
Net rentable square feet (at the end of the period):
Consistent group...... 1,696 1,696 -% 1,696 1,696 -%
Cumulative Post-1993
Acquisitions.......... 1,041 308 238.0% 308 195 57.9%
As indicated in the above table, the Company's commercial property
operations have grown principally as a result of the addition of new properties
over the past three years. The operations of the consistent group of properties
over the past three years has been relatively stable, with changes in operations
principally the result of changing occupancy levels and realized rental rates.
Due to the size of the Company's investment in commercial properties relative to
its self-storage facilities, the Company has not emphasized its growth in this
segment of its portfolio.
Effective January 2, 1997, the Company restructured its commercial property
operations to concentrate its investing efforts in real estate facilities
containing commercial and industrial rental space through a separate entity. See
Note 14 to the consolidated financial statements. The Company believes that
restructuring will create a vehicle which should facilitate future growth in
this segment of the real estate industry. The Company will participate in this
growth through its ownership interest in the new entity. The Company currently
owns approximately 85% of the economic interest in the new entity. Accordingly,
due to the Company's significant ownership interest the Company will continue to
consolidate the entity until such time that the Company's ownership and control
is reduced to a level not warranting consolidation.
EQUITY IN EARNINGS OF REAL ESTATE ENTITIES: As of December 31, 1996, the
Company had ownership interests in 41 affiliated limited partnerships and eight
affiliated REITs which comprise the Unconsolidated Entities. The Company's
ownership interest in these entities ranges from 15% to 45%, but generally
averages approximately 30%. Due to the Company's limited ownership interest and
control of these entities, the Company does not consolidate the accounts of
these entities for financial reporting purposes.
22
Equity in earnings of real estate entities represents the Company's pro
rata share of earnings of the Unconsolidated Entities using the equity method.
Similar to the Company, the Unconsolidated Entities generate substantially all
of their income from their ownership of self-storage facilities which are
managed by the Company. In the aggregate, the Unconsolidated Entities own a
total of 353 real estate facilities, 343 of which are self-storage facilities.
The following table summarizes the components of the Company's equity in
earnings of real estate entities:
Year Ended December 31, Year Ended December 31,
----------------------- -----------------------
Dollar Dollar
1996 1995 Change 1995 1994 Change
------- ------- -------- -------- ------- --------
(Amounts in thousands)
Self-storage operations.......... $41,722 $6,573 $35,149 $6,573 $764 $5,809
Commercial property operations... 2,667 269 2,398 269 - 269
Depreciation:
Self-storage facilities........ (15,709) (1,909) (13,800) (1,909) - (1,909)
Commercial properties.......... (1,741) (136) (1,605) (136) - (136)
Other (a)........................ (4,818) (1,034) (3,784) (1,034) - (1,034)
------- ------- -------- -------- ------- --------
Total equity in earnings of
real estate entities $22,121 $3,763 $18,358 $3,763 $764 $2,999
======= ======= ======== ======== ======= =========
a) principally the Company's pro rata share of general and administrative
expense and interest expense
The increase in 1995 earnings compared to 1994 is principally the result of
the acquisition of ownership interests in the Unconsolidated Entities acquired
pursuant to the PSMI Merger. The increase in earnings in 1996 compared to 1995
is due to (i) the 1996 earnings reflects a full year's operations for those
interests acquired in the PSMI Merger as opposed to just one and one-half months
in 1995, (ii) the Company acquired additional interests during 1996 in the
Unconsolidated Entities which resulted in increased earnings from these entities
(See Note 5 to the consolidated financial statements) offset by (iii) certain
business combinations occurring in 1996 whereby the Company's existing ownership
interest in certain entities were converted into wholly-owned real estate
facilities (See Note 3 to the consolidated financial statements).
The following table summarizes the combined operating data for fiscal 1996
with respect to those Unconsolidated Entities in which the Company had an
ownership interest as of December 31, 1996:
Rental income................................................... $180,197,000
Total revenues.................................................. 182,036,000
Cost of operations.............................................. 65,417,000
Depreciation.................................................... 27,332,000
Net income...................................................... 75,937,000
23
- --------------------------------------------------------------------------------
Property Management Operations
- --------------------------------------------------------------------------------
In connection with the PSMI Merger, the Company acquired property
management contracts, exclusive of facilities owned by the Company, for
self-storage facilities and, through ownership of a 95% economic interest in a
subsidiary, the management contracts for commercial properties. These facilities
constitute all of the United States self-storage facilities and commercial
properties doing business under the "Public Storage" name and all those in which
the Company has an interest. At December 31, 1996, the Company managed 1,101
self-storage facilities (1,064 owned by affiliates of the Company and 37 owned
by third parties) and 45 commercial properties, all of which are owned by
affiliates of the Company.
The property management contracts generally provide for compensation equal
to 6%, in the case of the self-storage facilities, and 5%, in the case of the
commercial properties, of gross revenues of the facilities managed. Under the
supervision of the property owners, the Company coordinates rental policies,
rent collections, marketing activities, the purchase of equipment and supplies,
maintenance activity, and the selection and engagement of vendors, suppliers and
independent contractors. In addition, the Company assists and advises the
property owners in establishing policies for the hire, discharge and supervision
of employees for the operation of these facilities, including resident managers,
assistant managers, relief managers and billing and maintenance personnel.
PROPERTY MANAGEMENT OPERATIONS:
- --------------------------------
Year Ended December 31, Year Ended December 31,
----------------------- -----------------------
Dollar Dollar
1996 1995 Change 1995 1994 Change
------- ------- -------- -------- ------- --------
(Amounts in thousands)
Facility management fees:
Self-storage.......... $13,474 $1,976 $11,498 $1,976 $ - $1,976
Commercial properties. 954 168 786 168 - 168
------- ------- -------- -------- ------- --------
14,428 2,144 12,284 2,144 - 2,144
------- ------- -------- -------- ------- --------
Cost of operations:
Self-storage.......... 1,820 264 1,556 264 - 264
Commercial properties. 755 88 667 88 - 88
------- ------- -------- -------- ------- --------
2,575 352 2,223 352 - 352
------- ------- -------- -------- ------- --------
Net operating income:
Self-storage.......... 11,654 1,712 9,942 1,712 - 1,712
Commercial properties. 199 80 119 80 - 80
------- ------- -------- -------- ------- --------
$11,853 $1,792 $10,061 $1,792 $ - $1,792
======= ======= ======== ======== ======= --------
Because the Company has significant ownership interests in all but 37 of
the facilities it manages, the revenues generated from its property management
operations are generally predictable and are dependent upon the future growth of
rental income for those facilities the Company manages. However, because the
Company has in the past, and may continue to seek to acquire in the future, real
estate facilities owned by the Unconsolidated Entities, the Company's facility
management income should decrease in 1997 compared to 1996. The acquisitions of
such facilities will reduce management fee income. However, offsetting the
reduction in management fee income will be a corresponding reduction in the cost
of property operations as the facilities acquired by the Company will no longer
incur property management fees.
24
- --------------------------------------------------------------------------------
Ancillary Businesses
- --------------------------------------------------------------------------------
Although not material to the Company's overall operations, its ancillary
business is expected to play a more important role in the future of the Company.
The following table summarizes the Company's ancillary business operations:
Year Ended December 31, Year Ended December 31,
----------------------- -----------------------
Dollar Dollar
1996 1995 Change 1995 1994 Change
------- ------- -------- -------- ------- --------
(Amounts in thousands)
Ancillary revenues:
Sales of locks, boxes and
packaging material......... $2,540 $101 $2,439 $101 $ - $101
Truck rental income.......... 543 11 532 11 - 11
Portable self-storage rents.. 421 - 421 - - -
------- ------- -------- -------- ------- --------
3,504 112 3,392 112 - 112
------- ------- -------- -------- ------- --------
Cost of operations - ancillary
business
Locks, boxes and package
materials.................. 1,660 84 1,576 84 - 84
Truck rentals................ 511 16 495 16 - 16
Portable self-storage........ 1,247 - 1,247 - - -
------- ------- -------- -------- ------- --------
3,418 100 3,318 100 - 100
------- ------- -------- -------- ------- --------
Net operating income (loss) -
ancillary business
Locks, boxes and package
materials.................. 880 17 863 17 - 17
Truck rentals................ 32 (5) 37 (5) - (5)
Portable self-storage........ (826) - (826) - - -
------- ------- -------- -------- ------- --------
$86 $ 12 $74 $ 12 - $ 12
======= ======= ======== ======== ======= ========
In an effort to attract a wider variety of customers, to further
differentiate the Company from its competition and to generate new sources of
revenues, additional business are being developed to complement the Company's
self-storage business. These products include the sale of locks, boxes and
packing supplies and the rental of trucks and other moving equipment through the
implementation of (i) a retail expansion program, (ii) truck rental program and
more importantly (iii) a portable self-storage business.
The strategic objective of the retail expansion program is to create a
"Retail Store" that will (i) rent spaces for the attached self-storage facility,
(ii) rent spaces for the other Public Storage facilities in adjacent
neighborhoods, (iii) sell locks, boxes and packing materials to the general
public, including tenants and (iv) rent trucks and other moving equipment, all
in an environment that is more retail oriented. Retail stores will be
retro-fitted to existing self-storage facility rental offices or "built-in" as
part of the development of new self-storage facilities, both in high traffic,
high visibility locations.
In 1996, the Company organized Public Storage Pickup and Delivery, Inc.
("PSPUD") as a separate corporation to operate a portable self-storage business
that rents storage containers to customers for storage in central warehouses and
provides related transportation services. The Company believes PSPUD's business
complements the Company's existing operations and PSPUD is using the national
telephone reservation system and various marketing initiatives, including radio
and television, to promote its rental activity. PSPUD currently operates a total
of 12 facilities in six greater metropolitan areas in California and Texas.
PSPUD anticipates opening four additional facilities in these areas and in three
additional areas by the end of the first quarter of 1997. PSPUD presently
anticipates expanding its operations to a significant number of additional areas
during the remainder of 1997 and 1998, subject to continuing evaluation of this
business and the satisfaction of regulatory requirements. There can be no
assurance on the level of PSPUD's expansion or profitability.
25
Generally, PSPUD expects to expend an amount ranging from $850,000 to
$1,100,000 per facility during the first full year of operations, depending on
location and pricing structure. This estimate includes approximately $550,000 of
capitalized expenditures and assumes (i) a leased facility for 2,000 storage
containers, (ii) a break-even occupancy level of 55% to 65%, (iii) a stabilized
occupancy level of 90% reached in 9 to 12 months, and (iv) monthly rental rates
ranging from $35.00 to $45.00 per container. Rental rates will vary based on
location and market conditions. Most of the operating costs of a facility are
expected to be fixed. However, certain fixed costs are expected to be reduced as
the facility reaches a stabilized occupancy level and certain economies of scale
are expected to be achieved as the number of facilities in operation grows.
PSPUD's operating experience is limited and its operations may be affected
by such factors as the level of competition in the business, the demand for
storage containers, general economic conditions, either nationally or in the
market areas in which PSPUD operates, the rate of facility move-ins and
move-outs, the availability of acceptable locations, the level of PSPUD's
operating expenses and the cost of capital equipment. Until the facilities are
operating profitably, PSPUD's operations are expected to adversely impact the
Company's earnings growth rate. The extent of the impact will depend in
significant part on the number, timing and performance of new facilities.
- --------------------------------------------------------------------------------
Other Income and Expense Items
- --------------------------------------------------------------------------------
INTEREST AND OTHER INCOME: Interest and other income was $7,064,000 in
1996, $4,497,000 in 1995, and $4,587,000 in 1994. This income is primarily
attributable to interest income on cash balances (as a result of uninvested net
equity offering proceeds during 1996 and 1995) and interest income from mortgage
notes receivable. The Company canceled approximately $700,000 in 1996,
$16,435,000 in 1995, and $24,441,000 in 1994 of mortgage notes receivable in
connection with the acquisition of real estate facilities securing such notes.
The Company also acquired notes receivable of $6,667,000 in the PSMI Merger in
1995 and an additional $3,709,000 in 1996 from affiliated parties. As a result,
interest income from mortgage notes receivable decreased from $4,333,000 in 1994
to $1,974,000 in 1995, as the average outstanding mortgage notes receivable
balance was significantly lower. Interest income from the mortgage notes
receivable increased from $1,974,000 in 1995 to $2,710,000 in 1996 as a result
of the notes acquired in 1995 and 1996.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense was
$64,967,000 in 1996, $40,760,000 in 1995, and $28,274,000 in 1994. These
increases are principally due to the acquisition of additional real estate
facilities in each period combined with amortization of intangible assets
acquired in connection with the PSMI Merger. Depreciation expense with respect
to the real estate facilities was $55,689,000 in 1996, $39,376,000 in 1995, and
$28,099,000 in 1994; the increases are due to the acquisition of additional real
estate facilities in 1994 through 1996. Amortization expense with respect to
intangible assets acquired in the PSMI Merger totaled $9,309,000 in 1996 and
$1,164,000 in 1995 (the 1995 amount representing a pro rated amount from
November 16, 1995 through the end of the year).
GENERAL AND ADMINISTRATIVE EXPENSE: General and administrative expense was
$5,524,000 in 1996, $3,982,000 in 1995, and $2,631,000 in 1994. The Company has
experienced and expects to continue to experience increased general and
administrative costs due to the following: (i) the growth in the size of the
Company, (ii) the Company's property acquisition activities have continued to
expand, resulting in certain additional costs incurred in connection with the
acquisition of additional real estate facilities, and (iii) pursuant to the PSMI
Merger, the Company became self-advised, resulting in the Company internalizing
management functions which previously were provided by the Company's investment
adviser. However, offsetting the expected increases in general and
administrative expenses has been the elimination of advisory fee expense.
General and administrative costs for each year principally consist of state
income taxes (for states in which the Company is a non-resident), investor
relation expenses, and certain overhead associated with the acquisition and
development of real estate facilities.
INTEREST EXPENSE: Interest expense was $8,482,000 in 1996, $8,508,000 in
1995, and $6,893,000 in 1994. Reflecting the Company's reluctance to finance its
growth with debt, debt and related interest expense remains relatively low
compared to the Company's overall asset base. The decrease in interest expense
in 1996 compared to 1995, principally is due to the early retirement of debt in
1996 of approximately $41 million having a weighted average interest rate of
7.76% partially offset by assumption of a $65.5 million, 7.08% unsecured senior
note in connection with the PSMI Merger on November 16, 1995.
ENVIRONMENTAL COSTS: The Company's policy is to accrue environmental
assessments and/or remediation cost when it is probable that such efforts will
be required and the related costs can reasonably be estimated. The majority of
the Company's real estate facilities were acquired prior to the time when it was
customary to conduct environmental assessments. During 1995, the Company and the
Consolidated Partnerships conducted independent environmental investigations of
26
their real estate facilities. As a result of these investigations, the Company
has recorded an amount which, in management's best estimate, will be sufficient
to satisfy anticipated costs of known remediation requirements. At December 31,
1995, the Company accrued $2,741,000 for estimated environmental remediation
costs. Although there can be no assurance, the Company is not aware of any
environmental contamination of any of its facilities which individually or in
the aggregate would be material to the Company's overall business, financial
condition, or results of operations. The Company believes that amounts accrued
in 1995 are sufficient to satisfy anticipated costs.
ADVISORY FEES: Advisory fees were $4,983,000 in 1994 and $6,437,000 in
1995. The advisory fee, which was based on a contractual computation, increased
as a result of increased adjusted net income (as defined) per common share
combined with the issuance of additional preferred and common stock during each
of the periods. Advisory fees for fiscal 1995 represents such amounts from the
beginning of the year through November 16, 1995, when the Company became
self-advised pursuant to the PSMI Merger. As a result of becoming self-advised,
the Company no longer incurs advisory fees.
MINORITY INTEREST IN INCOME: Minority interest in income represents the
income allocable to equity interests in the Consolidated Partnerships which are
not owned by the Company. Since 1990, the Company has acquired portions of these
equity interests through its acquisition of limited and general partnership
interests in the Consolidated Partnerships. These acquisitions have resulted in
reductions to the "Minority interest in income" from what it would otherwise
have been in the absence of such acquisitions, and accordingly, have increased
the Company's share of the Consolidated Partnerships' income. However,
offsetting the reduction in minority interest in 1996 caused by the acquisition
of additional equity interests are the inclusion of additional partnerships in
the Company's consolidated financial statements. During 1996, the Company
acquired sufficient ownership interest and control in three partnerships and
commenced including the accounts of these partnerships in the Company's
consolidated financial statements which amounted to an increase in minority
interest in income of approximately $2,187,000 in 1996.
In determining income allocable to the minority interest for 1996, 1995 and
1994 consolidated depreciation and amortization expense of approximately
$11,490,000, $11,243,000 and $13,556,000, respectively, was allocated to the
minority interest. The decrease in depreciation allocated to the minority
interest was principally the result of the acquisition of limited partnership
units in the Consolidated Partnerships by the Company throughout fiscal 1994,
1995 and 1996 offset by an increase in 1996 resulting from the above mentioned
consolidation of three partnerships.
27
- --------------------------------------------------------------------------------
Supplemental Property Data and Trends
- --------------------------------------------------------------------------------
There are approximately 81 ownership entities owning in aggregate 1,064
self-storage facilities, including the facilities which the Company owns and/or
operates. At December 31, 1996, 343 of these facilities were owned by
Unconsolidated Entities, entities in which the Company has an ownership interest
and uses the equity method for financial statement presentation. The remaining
721 facilities are owned by the Company and Consolidated Partnerships many of
which were acquired through business combinations with affiliates during 1996,
1995, and 1994.
In order to evaluate how the Company's overall portfolio has performed,
management analyzes the operating performance of a consistent group of
self-storage facilities representing 951 (55.8 million net rentable square feet)
of the 1,064 self-storage facilities (herein referred to as "Same Store"
self-storage facilities) which have been operated under the "Public Storage"
name for at least the past three years. The Same Store group of properties
includes 613 consolidated facilities and 338 facilities owned by Unconsolidated
Entities. The following table summarizes the pre-depreciation historical
operating results of the Same Store self-storage facilities:
SAME STORE SELF-STORAGE FACILITIES:
- -----------------------------------
(historical property operations)
Year Ended December 31, Year Ended December 31,
----------------------- -----------------------
Percentage Percentage
1996 1995 Change 1995 1994 Change
------- ------- -------- -------- ------- --------
(Amounts in thousands)
Rental income.............. $445,586 $422,933 5.4% $422,933 $403,295 4.9%
Cost of operations(1)...... 158,212 149,660 5.7% 149,660 144,752 3.4%
------- ------- -------- -------- ------- --------
Net operating income....... $287,374 $273,273 5.2% $273,273 $258,543 5.7%
======= ======= ======== ======== ======== ========
Gross profit margin(3)..... 64.5% 64.6% (0.2)% 64.6% 64.1% 0.8%
Weighted Ave. Occupancy.... 91.2% 90.1% 1.2% 90.1% 89.2% 1.0%
Weighted Ave. realized
annual rent per sq. ft(2).. $8.76 $8.40 4.3% $8.40 $8.16 2.9%
Weighted Ave. scheduled
annual rent per sq. ft(2).. $9.00 $8.16 10.3% $8.16 $7.80 4.6%
1. Assumes payment of property management fees on all facilities, including
those facilities owned by the Company for which effective November 16, 1995
no fee is paid. Cost of operations consists of the following:
1996 1995 1994
---------- ---------- ----------
Payroll expense $43,490 $ 42,545 $ 41,092
Property taxes 40,799 38,325 36,941
Property management fees 26,139 25,391 24,214
Advertising 3,851 3,502 3,709
Telephone center costs 1,956 - -
Other (4) 41,977 39,897 38,796
---------- ---------- ----------
$158,212 $149,660 $144,752
========== ========== ==========
2. Realized rent per square foot as presented throughout this report
represents the actual revenue earned per occupied square foot. Management
believes this is a more relevant measure then the scheduled rental rates,
since scheduled rates can be discounted through the use of promotions.
3. Gross profit margin is computed by dividing property net operating income
(before depreciation expense) by rental revenues. Cost of operations
include a 6% management fee. The gross profit margin excluding the facility
management fee was 70.5%, 70.6% and 70.1% in 1996, 1995 and 1994,
respectively. On November 16, 1995, the Company acquired its facility
manager and no longer incurs such fees on the properties it owns.
4. Other expenses principally include utilities, repairs and maintenance, and
other items such as office expenses.
As indicated above, in early 1996, the Company implemented a national
telephone reservation system designed to provide added customer service for all
the self-storage facilities under management by the Company. The Company
believes that the improved operating results, as indicated in the above table,
in large part are due to the success of the national telephone reservation
system. However, the national telephone reservation system was not fully
28
operational for most of the self-storage facilities until the later part of the
third quarter fourth quarter of 1996. As of December 31, 1996, the national
telephone reservation system was supporting rental activity at all of the
self-storage properties managed by the Company, with the exception of one major
market, which will be operational by end of March 1997.
Rental income for the Same Store facilities included promotional discounts
totaling $6,000,000 in 1996 ($3,000,000 of which occurred during the fourth
quarter of 1996) compared to $729,000 and $1,466,000 in 1995 and 1994,
respectively. The significant increase in 1996 was principally due to
experimentation with pricing and promotional discounts designed to increase
rental activity.
In addition to evaluating property operating trends in occupancy, realized
rents, expenses and net operating income on a Same Store basis, management
evaluates trends by geographic regions. Operating trends for the Same-Store
facilities for the five largest regions are shown in the table on the following
page.
29
Same-Store Operating Trends by Region
- --------------------------------------------------------------------------------
Northern California. Southern California. Texas Florida
--------------------- ---------------------- ---------------------- ---------------------
% change % change % change % change
from prior from prior from prior from prior
Amount year Amount year Amount year Amount year
------- ---------- ------- ----------- ------- ---------- ------- -----------
Rental Revenues:
- ----------------
1996 $65,222 8.61% $79,524 4.88% $39,704 1.31% $27,908 3.11%
1995 $60,053 5.77% $75,826 3.60% $39,191 2.69% $27,066 3.14%
1994 $56,777 4.40% $73,191 6.73% $38,163 4.32% $26,241 3.45%
Cost of operations
- ------------------
1996 $18,457 3.37% $24,580 5.72% $16,482 5.83% $10,772 3.46%
1995 $17,856 3.39% $23,250 (1.62)% $15,574 1.51% $10,412 1.06%
1994 $17,271 5.68% $23,633 5.52% $15,342 9.35% $10,303 4.03%
Net operating income:
- ---------------------
1996 $46,765 10.83% $54,944 4.50% $23,222 (1.67)% $17,136 2.89%
1995 $42,197 6.81% $52,576 6.09% $23,617 3.49% $16,654 4.49%
1994 $39,506 3.85% $49,558 7.39% $22,821 1.19% $15,938 3.09%
Weighted avg. occupancy
- -----------------------
1996 94.5% 3.73% 87.3% 2.46% 89.6% 1.36% 88.7% 0.23%
1995 91.1% 3.52% 85.2% 2.40% 88.4% - 88.5% (1.34)%
1994 88.0% 0.57% 83.2% 3.35% 88.4% 1.61% 89.7% (1.32)%
Weighted avg. annual realized rents per sq. ft.
- -----------------------------------------------
1996 $10.20 4.94% $10.32 2.38% $6.84 - $8.04 3.10%
1995 $9.72 2.53% $10.08 1.20% $6.84 1.79% $7.80 4.84%
1994 $9.48 2.60% $9.96 3.75% $6.72 3.70% $7.44 3.33%
Same-Store Operating Trends by Region
- --------------------------------------------------------------------------------
Illinois Other states Total
--------------------- ---------------------- ---------------------
% change % change % change
from prior from prior from prior
Amount year Amount year Amount year
------ ---------- ------- ----------- ------- ----------
Rental Revenues:
- ----------------
1996 $31,123 9.00% $202,105 5.13% $445,586 5.36%
1995 $28,552 7.67% $192,245 5.39% $422,933 4.87%
1994 $26,518 12.64% $182,405 9.94% $403,295 7.73%
Cost of operations
- ------------------
1996 $14,887 5.47% $73,034 6.69% $158,212 5.71%
1995 $14,115 16.94% $68,453 3.51% $149,660 3.39%
1994 $12,070 0.32% $66,133 4.19% $144,752 4.76%
Net operating income
- --------------------
1996 $16,236 12.46% $129,071 4.26% $287,374 5.16%
1995 $14,437 (0.08)% $123,792 6.47% $273,273 5.70%
1994 $14,448 25.51% $116,272 13.51% $258,543 9.47%
Weighted avg. occupancy
- -----------------------
1996 92.8% - 92.2% 0.55% 91.2% 1.22%
1995 92.8% 1.98% 91.7% 0.33% 90.1% 1.01%
1994 91.0% 7.44% 91.4% 2.81% 89.2% 2.53%
Weighted avg. annual realized rents per sq. ft.
- ----------------------------------------------
1996 $8.88 8.82% $8.40 4.48% $8.76 4.29%
1995 $8.16 4.62% $8.04 4.69% $8.40 2.94%
1994 $7.80 4.84% $7.68 6.67% $8.16 6.25%
- --------
Factors affecting regional trends in revenues and expenses include;
* acts of nature, including the Northridge earthquake (Southern
California, January 1994).
* new competition from property development (Texas)
* property valuations and related reassessments for purposes of property
taxes (Illinois, 1995)
These factors have affected and are expected to continue to affect regional
operating trends. During 1997, management expects additional property tax
assessments due to higher valuations/rates, resulting in increased property
taxes.
30
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
The Company has operated and intends to continue to operate in a
self-sufficient manner without reliance on external sources of financing to fund
its ongoing operating needs. The Company believes that funds internally
generated from ongoing operations will continue to be sufficient to enable it to
meet its operating expenses, capital improvements, debt service requirements and
distributions to shareholders for the foreseeable future.
INTERNALLY GENERATED CASH FLOWS: The Company believes that important
measures of its performance as well as its liquidity are cash provided by
operations, funds from operations ("FFO") and the ability of these measures to
fund the Company's operating requirements (i.e. capital improvements, principal
payments on debt, and distribution requirements).
Net cash provided by operating activities (as determined in accordance with
generally accepted accounting principles) reflects the cash generated from the
Company's business before distributions to various equity holders, including the
preferred shareholders, capital expenditures or mandatory principal payments on
debt. Net cash provided by operations has increased over the past three years
from $79.2 million in 1994 to $245.2 million in 1996.
Operating as a REIT, the Company's ability to retain cash flow for
reinvestment is restricted. In order for the Company to maintain its REIT
status, a substantial portion of its operating cash flow must be used to make
distributions to its shareholders (see "REIT status" below). Remaining cash flow
must then be sufficient to fund necessary capital improvements and scheduled
debt service requirements. The following table summarizes the Company's ability
to pay the minority interests' distributions, its dividends to the preferred
shareholders and capital improvements to maintain the facilities through the use
of cash provided by operating activities. The remaining cash flow is available
to the Company to make both scheduled and optional principal payments on debt,
pay distributions to common shareholders and for reinvestment.
For the Year Ended December 31,
-------------------------------------
1996 1995 1994
-------- ------- -------
(Amounts in thousands)
Net income............................................................. $153,549 $70,386 $42,118
Depreciation and amortization.......................................... 64,967 40,760 28,274
Depreciation from Unconsolidated Entities.............................. 17,450 2,045 -
Minority interest in income............................................ 9,363 7,137 9,481
Environmental accrual.................................................. - 3,251 -
Amortization of discounts on mortgage notes receivable................. (92) (113) (693)
-------- ------- -------
Net cash provided by operating activities.............................. 245,237 123,466 79,180
Distributions from operations to minority interests.................... (20,853) (18,380) (23,037)
-------- ------- -------
Cash from operations/FFO allocable to the Company's shareholders....... 224,384 105,086 56,143
Less: preferred stock dividends........................................ (68,599) (31,124) (16,846)
-------- ------- -------
Cash from operations/FFO available to common shareholders.............. 155,785 73,962 39,297
Capital improvements to maintain facilities:
Self-storage facilities.............................................. (15,957) (8,509) (6,360)
Commercial properties................................................ (4,409) (2,852) (1,952)
Add back: minority interest share of capital improvements to maintain
facilities.......................................................... 3,159 3,219 2,948
-------- ------- -------
Funds available for principal payments on debt, common dividends and
reinvestment........................................................ 138,578 65,820 33,933
Cash distributions to common shareholders.............................. (67,709) (38,586) (21,249)
facilities -------- ------- -------
Funds available for principal payments on debt and reinvestment........ $70,869 $27,234 $ 12,684
facilities ======== ======= ========
See the consolidated statements of cash flows for the each of the three
years in the period ended December 31, 1996 for additional information regarding
the Company's investing and financing activities.
31
Total FFO increased to $224,384,000 for the year ended December 31, 1996
compared to $105,086,000 in 1995 and $56,143,000 in 1994. FFO available to
common shareholders (after deducting preferred stock dividends) increased to
$155,785,000 for the year ended December 31, 1996 compared to $73,962,000 in
1995 and $39,297,000 in 1994. FFO means net income (loss) (computed in
accordance with generally accepted accounting principles) before (i) gain (loss)
on early extinguishment of debt, (ii) minority interest in income and (iii) gain
(loss) on disposition of real estate, adjusted as follows: (i) plus depreciation
and amortization (including the Company's pro-rata share of depreciation and
amortization of unconsolidated equity interests and amortization of assets
acquired in the PSMI Merger, including property management agreements and
goodwill), and (ii) less FFO attributable to minority interest.
FFO is a supplemental performance measure for equity REITs as defined by
the National Association of Real Estate Investment Trusts, Inc. ("NAREIT"). The
NAREIT definition does not specifically address the treatment of minority
interest in the determination of FFO or the treatment of the amortization of
property management agreements and goodwill. In the case of the Company, FFO
represents amounts attributable to its shareholders after deducting amounts
attributable to the minority interests and before deductions for the
amortization of property management agreements and goodwill. FFO is presented
because many industry analysts consider FFO to be one measure of the performance
of the Company and it is used in establishing the terms of the Class B Common
Stock. FFO does not take into consideration capital improvements, scheduled
principal payments on debt, distributions and other obligations of the Company.
Accordingly, FFO is not a substitute for the Company's cash flow or net income
(as discussed above) as a measure of the Company's liquidity or operating
performance.
The Company accounts for the Unconsolidated Entities using the equity
method of accounting, and accordingly, earnings are recognized based upon the
Company's interest in each of the partnerships and REITs. This interest is based
on the Company's share of the increase or decrease in the net assets of the
entities from their operations. Provisions of the partnerships' and REITs'
governing documents provide for the payment of preferred cash distributions to
other investors (until certain specified amounts have been paid) without regard
to the pro rata interest of all investors in current earnings. As a result,
actual cash distributions paid to the Company for a period of time will be less
than the Company's interest in the entities' FFO. During 1996, FFO distributed
to the Company was approximately $16.4 million less than the Company's share of
FFO. Preferred cash distributions paid to other investors during each period
have the effect of increasing the Company's economic interest in each of the
respective entities and reducing the amount of future preference payments which
must be paid to other investors before cash distributions will be shared on a
pro rata basis with respect to each investor's actual interest. The aggregate
future preference payments to other investors is approximately $81.1 million and
is expected to be paid over approximately 12 years, with approximately 50% of
the amount being paid over the next 3.5 years.
DISTRIBUTIONS REQUIREMENTS: Over the past four years, the Company's
conservative distribution policy has been the principal reason for the Company's
ability to retain significant operating cash flows which have been used to make
additional investments and debt reductions. During 1994, 1995 and 1996, the
Company distributed to common shareholders approximately 54%, 52% and 43% of its
FFO available to common shareholders, respectively, allowing it to retain
approximately $110.8 million over this period of time after satisfying its
capital improvements and preferred stock dividend requirements.
During 1996, the Company paid dividends totaling $56,472,000 to the holders
of the Company's Senior Preferred Stock, $12,127,000 to the holders of the
Convertible Preferred Stock, and $67,709,000 to the holders of Common Stock.
Dividends with respect to the Senior Preferred Stock and the Convertible
Preferred Stock include pro-rated amounts for securities issued during 1996. The
Company estimates the distribution requirements for fiscal 1997 with respect to
Senior Preferred Stock and the Convertible Preferred Stock to be approximately
$76.8 million. Distributions with respect to the common stock will be determined
based upon the Company's REIT distribution requirements after taking into
consideration distributions to the Company's preferred shareholders.
CAPITAL IMPROVEMENT REQUIREMENTS: During 1997, the Company has budgeted
approximately $26.6 million for capital improvements ($22.4 million for its
self-storage facilities and $4.2 million for its commercial properties). The
minority interests' share of the budgeted capital improvements is approximately
$3.3 million.
During 1995, the Company commenced a program to enhance its visual icon and
modernize the appearance of its self-storage facilities, including modernization
of signs, paint color schemes, and rental offices. Included in the 1997 capital
improvement budget is approximately $4.8 million with respect to these
expenditures.
The significant increase in capital improvements in 1996 for the
self-storage facilities (as reflected in the table above) is due to the
acquisition of new facilities in 1996 and 1995 and the aforementioned visual
enhancements during 1996.
32
DEBT SERVICE REQUIREMENTS: The Company does not believe it has any
significant refinancing risks with respect to its mortgage debt, all of which is
fixed rate. During 1996, the Company retired early approximately $41 million
of mortgage debt. At December 31, 1996, the Company had total outstanding
borrowings of approximately $108.4 million. See Note 8 to the consolidated
financial statements for approximate principal maturities of such borrowings.
The Company uses its $150.0 million of bank credit facility (all of which
was unused as of March 18, 1997) primarily to fund acquisitions and provide
financial flexibility and liquidity. The credit facility currently bears
interest at LIBOR plus 0.40% based on the Company's current financial ratios.
GROWTH STRATEGIES: During 1997, the Company intends to continue to expand
its asset and capital base principally through the (i) acquisition of real
estate assets and interests in real estate assets from both unaffiliated and
affiliated parties through direct purchases, mergers, tender offers or other
transactions, (ii) development of additional self-storage facilities and (iv)
the expected growth in the operations of PSPUD in the portable self-storage
business. See further discussion below with respect to each of these activities.
The Company expects to fund these transactions with internally generated
retained cash flows and borrowings under its $150.0 million credit facility. The
Company intends to repay amounts borrowed under the credit facility from
undistributed operating cash flow or, as market conditions permit and are
determined to be advantageous, from the public or private placement of equity
securities. With respect to the development of additional self-storage
facilities, the Company expects to enter into a joint venture arrangement, see
"Development Activities" below.
EXTERNAL FINANCING ABILITY: The Company believes that its size and
financial flexibility enables it to access capital for growth when appropriate.
The Company's financial profile is characterized by a low level of debt to total
capitalization, increasing net income, increasing cash flow from operations, and
a conservative dividend payout ratio with respect to the common stock. The
Company's credit ratings on its Senior Preferred Stock by each of the three
major credit agencies are Baa2 by Moody's and BBB+ by Standard and Poors and
Duff & Phelps.
The Company's portfolio of real estate facilities remains substantially
unencumbered. At December 31, 1996, the Company had mortgage debt outstanding of
$48.7 million and had consolidated real estate facilities with a book value of
$1.9 billion. The Company, however, has been reluctant to financing its
acquisitions with debt and generally will only increase its mortgage borrowing
through the assumption of pre-existing debt on acquired real estate facilities.
Over the past three years the Company has funded substantially all of its
acquisitions with permanent capital (both common and preferred stock). Unlike
many other real estate companies, the Company has elected to use preferred stock
despite the fact that the coupon rates of its preferred stock exceeds current
rates on conventional debt. The Company has chosen this method of financing for
the following reasons: (i) the Company's perpetual preferred stock has no
sinking fund requirements, or maturity date and does not require redemption, all
of which eliminate any future refinancing risks, (ii) preferred stock allows the
Company to leverage the common stock without the attendant interest rate or
refinancing risks of debt, and (iii) dividends on the preferred stock can be
applied to the Company's REIT distributions requirements, which have helped the
Company to maintain a low common stock dividend payout ratio and retain cash
flow.
On March 18, 1997, the Company publicly issued 4.6 million shares of common
stock, raising net proceeds of approximately $126.5 million. The Company intends
to use the net proceeds from this offering to make investments in real estate,
primarily self-storage, including mortgage loans and interest in real estate
partnerships, to satisfy cash elections in connection with mergers with
affiliated REITs and to fund expenditures of PSPUD.
PROPOSED MERGERS WITH AFFILIATES: In December 1996, Public Storage
Properties XIV, Inc. ("Properties 14") and Public Storage Properties XV, Inc.
("Properties 15") each agreed, subject to certain conditions, to merge with and
into the Company. Properties 14 and Properties 15 are affiliated publicly traded
equity REITs. Each of the mergers is conditioned on approval by the respective
shareholders of Properties 14 and Properties 15. However, the mergers are not
conditioned on each other. The Company expects that if approved by the
shareholders, the mergers would be completed in April 1997. The estimated value
of the Properties 14 and Properties 15 merger is approximately $63.8 million and
$58.5 million, respectively. Properties 14 and Properties 15 own 14 properties
(912,000 square feet) and 19 properties (1,087,000 square feet), respectively.
The Company currently owns approximately 33% and 35% of the economic interest in
Properties 14 and Properties 15, respectively.
33
DEVELOPMENT ACTIVITIES: At December 31, 1996, the Company had eleven
self-storage facilities (approximately 707,000 square feet) under construction
with an aggregate cost incurred to date of approximately $33.5 million and total
additional estimated cost to complete of $22.5 million. The Company currently
has plans to develop an additional 17 self-storage facilities (approximately
1,026,000 square feet) in various locations at an estimated cost of
approximately $70.2 million. The Company is evaluating the feasibility of
developing additional self-storage facilities in selected markets in which there
are few, if any, facilities to acquire at attractive prices and where the
scarcity of other undeveloped parcels of land or other impediments to
development make it difficult to construct additional competing facilities.
The Company has reached an agreement in principle with a joint venture
partner to participate in funding the development of approximately $220 million
of self-storage facilities (including the facilities currently under development
by the Company). The joint venture partner would contribute about 70% of the
venture's capital with the balance provided by the Company. After a period of
time, the Company would have an option to acquire the other venturer's interest.
There can be no assurance that a definitive agreement can be reached between the
Company and the joint venturer partner. Assuming an agreement is finalized, it
is expected that the joint venture would be funded in early April 1997.
PORTABLE SELF-STORAGE BUSINESS: As indicated above, in 1996 the Company
organized PSPUD as a separate corporation to operate a portable self-storage
business that rents storage containers to customers for storage in central
warehouses and provides related transportation services. PSPUD currently
operates a total of 12 facilities in six greater metropolitan areas in
California and Texas and anticipates opening four additional facilities in these
areas and in three additional areas by the end of the first quarter of 1997.
PSPUD presently anticipates expanding its operations to a significant number of
additional areas during the remainder of 1997 and 1998, subject to continuing
evaluation of this business and the satisfaction of regulatory requirements.
There can be no assurance on the level of PSPUD's expansion or profitability.
Generally, PSPUD expects to expend an amount ranging from $850,000 to
$1,100,000 per facility during the first full year of operations, depending on
location and pricing structure. This estimate includes approximately $550,000 of
capitalized expenditures combined with estimated first year operating losses and
is based on certain assumptions indicated above under "Ancillary Businesses."
REIT STATUS: The Company believes that it has operated, and intends to
continue to operate, in such a manner as to qualify as a REIT under the Internal
Revenue Code of 1986, but no assurance can be given that it will at all times so
qualify. To the extent that the Company continues to qualify as a REIT, it will
not be taxed, with certain limited exceptions, on the taxable income that is
distributed to its shareholders. As a REIT, the Company is not taxed on that
portion of its taxable income which is distributed to its shareholders provided
that at least 95% of its taxable income is so distributed prior to filing of the
Company's tax return. The Company has satisfied the REIT distribution
requirement since 1980.
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The financial statements of the Company at December 31, 1996 and December
31, 1995 and for each of the three years in the period ended December 31, 1996
and the report of Ernst & Young LLP, Independent Auditors, thereon and the
related financial statement schedules, are included elsewhere herein. Reference
is made to the Index to Financial Statements and Schedules in Item 14.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
----------------------------------------------------
Not applicable.
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
Incorporated by reference herein is the information required by this item,
which is to be included in an amendment on Form 10-K/A to the Form 10-K filed
within 120 days of the end of the Company's 1996 fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Incorporated by reference herein is the information required by this item,
which is to be included in an amendment on Form 10-K/A to the Form 10-K filed
within 120 days of the end of the Company's 1996 fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Incorporated by reference herein is the information required by this item,
which is to be included in an amendment on Form 10-K/A to the Form 10-K filed
within 120 days of the end of the Company's 1996 fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Incorporated by reference herein is the information required by this item,
which is to be included in an amendment on Form 10-K/A to the Form 10-K filed
within 120 days of the end of the Company's 1996 fiscal year.
36
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) 1. Financial Statements
The financial statements listed in the accompanying Index to Financial
Statements and Schedules hereof are filed as part of this report.
2. Financial Statement Schedules
The financial statements schedules listed in the accompanying Index to
Financial Statements and Schedules are filed as part of this report.
3. Exhibits
See Index to Exhibits contained herein.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated October 28, 1996,
pursuant to Item 5, which filed certain exhibits relating to the Company's
public offering of Depositary Shares each representing 1/1000 of a share of
8-5/8% Cumulative Preferred Stock, Series I.
(c) Exhibits:
See Index to Exhibits contained herein.
37
PUBLIC STORAGE, INC.
INDEX TO EXHIBITS
(Items 14(a)(3) and 14(c))
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 Registration'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.
3.12 Certificate of Determination for the 8-7/8% Cumulative Preferred
Stock, Series G. Filed with Registration's Form 8-A/A Registration
Statement relating to the Depositary Shares Each Representing
1/1,000th of a Share of 8-7/8% Cumulative Preferred Stock, Series G
and incorporated herein 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 1/1,000th 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.
38
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 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 Bylaws, as amended. Filed with Registrant's Registration Statement No.
33-64971 and incorporated herein by reference.
3.19 Amendment to Bylaws adopted on May 9,1996. Filed with Registrant's
Registration Statement No. 333-03749 and incorporated herein by
reference.
10.1 Amended and Restated Advisory Contract between Registrant and Public
Storage Advisers, Inc. dated as of September 30, 1991. Filed with
Registrant's Current Report on Form 8-K dated October 2, 1991 and
incorporated herein by reference.
10.2 First Amendment to Amended and Restated Advisory Contract between
Registrant and Public Storage Advisers, Inc. dated as of October 1,
1991. Filed with Registrant's Registration Statement No. 33-43750 and
incorporated herein by reference.
10.3 Second Amendment to Amended and Restated Advisory Contract between
Registrant and Public Storage Advisers, Inc. dated as of May 14, 1992.
Filed with Registrant's Current Report on Form 8-K dated May 14, 1992
and incorporated herein by reference.
10.4 Third Amendment to Amended and Restated Advisory Contract between
Registrant and Public Storage Advisers, Inc. dated as of February 25,
1993. Filed with the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1992 and incorporated herein by reference.
10.5 Fourth Amendment to Amended and Restated Advisory Contract between
Registrant and Public Storage Advisers, Inc. dated as of June 7, 1994.
Filed with Registrant's Current Report on Form 8-K dated June 23, 1994
and incorporated herein by reference.
10.6 Fifth Amendment to Amended and Restated Advisory Contract between
Registrant and Public Storage Advisers, Inc. dated as of August 9,
1994. Filed with Registrant's Current Report on Form 8-K dated August
24, 1994 and incorporated herein by reference.
10.7 Sixth Amendment to Amended and Restated Advisory Contract between
Registrant and Public Storage Advisers, Inc. dated as of January 12,
1995. Filed with Registrant's Current Report on Form 8-K dated January
24, 1995 and incorporated herein reference.
10.8 Seventh Amendment to Amended and Restated Advisory Contract between
Registrant and Public Storage Advisers, Inc. dated as of April 13,
1995. Filed with Registrant's Current Report on Form 8-K dated April
25, 1995 and incorporated herein by reference.
10.9 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.
39
10.10 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.
10.11 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.
10.12 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.
10.13 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.
10.14 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.
10.15* 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.
10.16* Registrant's 1994 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..
10.17* Registrant's 1996 Stock Option and Incentive Plan. Filed herewith.
10.18 Agreement and Plan of Reorganization between Registrant and Public
Storage Properties VI, Inc. dated as of September 26, 1994. Filed with
Registrant's Registration Statement No. 33-56925 and incorporated
herein by reference.
10.19 Agreement and Plan of Reorganization between Registrant and Public
Storage Properties VII, Inc. dated as of February 2, 1995. Filed with
Registrant's Registration Statement No. 33-58893 and incorporated
herein by reference.
10.20 Agreement and Plan of Reorganization by and among Public Storage,
Inc., Public Storage Management, Inc. and Registrant dated as of June
30, 1995. Filed as Appendix A to Registrant's Proxy Statement dated
October 11, 1995 (filed October 13, 1995) and incorporated herein by
reference.
10.21 Amendment to Agreement and Plan of Reorganization by and among Public
Storage, Inc., Public Storage Management, Inc. and Registrant dated as
of November 13, 1995. Filed with Registrant's Current Report on Form
8-K dated November 16, 1995 and incorporated herein by reference.
10.22 Agreement and Plan of Reorganization among Registrant, Public Storage
Properties IX, Inc., and PS Business Parks, Inc. dated as of December
13, 1995. Filed with Registrant's Registration Statement No. 333-00591
and incorporated herein by reference.
10.23 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 1/1000th of a Share of 8-7/8
Cumulative Preferred Stock, Series G and incorporated herein by
reference.
40
10.24 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 1/1000th of a Share of 8.45%
Cumulative Preferred Stock, Series H and incorporated herein by
reference.
10.25** 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.
10.26 Agreement and Plan of Reorganization between Registrant and Storage
Properties, Inc. dated as of March 4, 1996. Filed with Registrant's
Registration Statement No. 333-03749 and incorporated herein by
reference.
10.27 Agreement and Plan of Reorganization between Registrant and Public
Storage Properties X, Inc. dated as of June 20, 1996. Filed with
Registrant's Registration Statement No. 333-08671 and incorporated
herein by reference.
10.28 Agreement and Plan of Reorganization between Registrant and Public
Storage Properties XII, Inc. dated as of June 20, 1996. Filed with
Registrant's Registration Statement No. 333-08791 and incorporated
herein by reference.
10.29 Agreement and Plan of Reorganization among Registrant, Partners
Preferred Yield, Inc., Partners Preferred Yield II, Inc. and Partners
Preferred Yield III, Inc.. dated as of August 15, 1996. Filed with
Registrant's Registration Statement No. 333-14161 and incorporated
herein by reference.
10.30 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 1/1000th of a Share of 8-5/8%
Cumulative Preferred Stock, Series I and incorporated herein by
reference.
10.31 Agreement and Plan of Reorganization among Registrant, Public Storage
Properties XIV, Inc. and, Public Storage Proprieties XV, Inc. dated as
of December 5, 1996. Filed with Registrant's Registration Statement
No. 333-22665 and incorporated herein by reference.
11 Statement Re Computation of Earnings Per Share. Filed herewith.
12 Statement Re Computation of Ratio of Earnings to Fixed Charges. Filed
herewith.
23 Consent of Independent Auditors. Filed herewith.
27 Financial data schedule. Filed herewith.
- --------------------
* Compensatory benefit plan.
** Management contract.
41
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
PUBLIC STORAGE, INC.
Date: March 27, 1997 By: /s/ Harvey Lenkin .
---------------------- -----------------------------
Harvey Lenkin, President
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
- ------------------------------- -------------------------------------------- ----------------
/s/ B. Wayne Hughes Chairman of the Board, Chief March 27, 1997
- ------------------------------- Executive Officer and Director --------------
B. Wayne Hughes (principal executive officer)
/s/ Harvey Lenkin President and Director March 27, 1997
- ------------------ --------------
Harvey Lenkin
/s/ John Reyes Senior Vice President and March 27, 1997
- ------------------------------- Chief Financial Officer --------------
John Reyes (principal financial officer and
principal accounting officer)
/s/ Robert J. Abernethy Director March 27, 1997
- ------------------------------- --------------
Robert J. Abernethy
/s/ Dann V. Angeloff Director March 27, 1997
- ------------------------------- --------------
Dann V. Angeloff
/s/ William C. Baker Director March 27, 1997
- ------------------------------- --------------
William C. Baker
/s/ Uri P. Harkham Director March 27, 1997
- ------------------------------- --------------
Uri P. Harkham
42
PUBLIC STORAGE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULES
(Item 14 (a))
Page
References
Report of Independent Auditors......................................... F-1
Consolidated balance sheets as of December 31, 1996 and 1995........... F-2
For each of the three years in the period ended December 31, 1996:
Consolidated statements of income...................................... F-3
Consolidated statements of shareholders' equity ....................... F-4
Consolidated statements of cash flows.................................. F-5 - F-6
Notes to consolidated financial statements............................. F-7 - F-23
SCHEDULE:
III - Real estate and accumulated depreciation......................... F-24 - F-43
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements or notes thereto.
43
REPORT OF INDEPENDENT AUDITORS
------------------------------
The Board of Directors and Shareholders
Public Storage, Inc.
We have audited the accompanying consolidated balance sheets of Public Storage,
Inc. as of December 31, 1996 and 1995, and the related consolidated statements
of income, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996. Our audits also included the financial
statement schedule listed in the Index at Item 14 (a). These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Public
Storage, Inc. at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
ERNST & YOUNG L L P
Los Angeles, California
February 25, 1997
F-1
PUBLIC STORAGE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
December 31, December 31,
ASSETS 1996 1995
------ ----------- -----------
Cash and cash equivalents.................................................... $ 26,856 $ 80,436
Real estate facilities, at cost:
Land...................................................................... 596,141 382,144
Buildings................................................................. 1,625,172 1,030,990
----------- -----------
2,221,313 1,413,134
Accumulated depreciation.................................................. (297,655) (241,966)
----------- -----------
1,923,658 1,171,168
Investment in real estate entities........................................... 350,190 416,216
Intangible assets, net....................................................... 222,253 231,562
Mortgage notes receivable from affiliates.................................... 25,016 23,699
Other assets................................................................. 24,179 14,380
----------- -----------
Total assets................................................... $ 2,572,152 $ 1,937,461
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable................................................................ $ 108,443 $ 158,052
Accrued and other liabilities................................................ 41,467 32,533
----------- -----------
Total liabilities................................................... 149,910 190,585
Minority interest............................................................ 116,805 112,373
Commitments and contingencies................................................ - -
Shareholders' equity:
Preferred Stock, $0.01 par value, 50,000,000 shares authorized, 13,421,580
shares issued and outstanding (13,444,100 issued and outstanding at
December 31, 1995), at liquidation preference:
Cumulative Preferred Stock, issued in series........................ 718,900 450,150
Convertible Preferred Stock......................................... 114,929 85,970
Common stock, $0.10 par value, 200,000,000 shares authorized, 88,362,026
shares issued and outstanding (71,513,799 at December 31, 1995)......... 8,837 7,152
Class B Common Stock, $0.10 par value, 7,000,000 shares authorized and
issued.................................................................. 700 700
Paid-in capital........................................................... 1,454,387 1,100,088
Cumulative net income..................................................... 396,420 242,871
Cumulative distributions paid............................................. (388,736) (252,428)
----------- -----------
Total shareholders' equity.......................................... 2,305,437 1,634,503
----------- -----------
Total liabilities and shareholders' equity..................... $ 2,572,152 $ 1,937,461
=========== ===========
See accompanying notes.
F-2
PUBLIC STORAGE, INC.
CONSOLIDATED STATEMENTS OF INCOME
For each of the three years in the period ended December 31, 1996
(amounts in thousands, except per share data)
1996 1995 1994
---------- ----------- -----------
REVENUES:
Rental income:
Self-storage facilities................................... $270,429 $184,100 $126,997
Commercial properties..................................... 23,576 18,034 14,848
Equity in earnings of real estate entities................... 22,121 3,763 764
Facility management fee...................................... 14,428 2,144 -
Ancillary business income.................................... 3,504 112 -
Interest and other income.................................... 7,064 4,497 4,587
---------- ----------- -----------
341,122 212,650 147,196
---------- ----------- -----------
EXPENSES:
Cost of operations:
Self-storage facilities................................... 82,494 63,396 45,266
Commercial properties..................................... 10,750 8,851 7,550
Cost of facility management................................... 2,575 352 -
Cost of operations - ancillary business....................... 3,418 100 -
Depreciation and amortization ................................ 64,967 40,760 28,274
General and administrative.................................... 5,524 3,982 2,631
Interest expense.............................................. 8,482 8,508 6,893
Environmental cost............................................ - 2,741 -
Advisory fee ................................................. - 6,437 4,983
---------- ----------- -----------
178,210 135,127 95,597
---------- ----------- -----------
Income before minority interest................................. 162,912 77,523 51,599
Minority interest in income..................................... (9,363) (7,137) (9,481)
---------- ----------- -----------
Net income...................................................... $153,549 $70,386 $42,118
========== =========== ===========
Net income allocation:
Allocable to preferred shareholders.......................... $ 68,599 $31,124 $16,846
Allocable to common shareholders............................. 84,950 39,262 25,272
---------- ----------- -----------
$153,549 $70,386 $42,118
========== =========== ===========
PER COMMON SHARE:
Net income...................................................... $ 1.10 $ 0.95 $ 1.05
========== =========== ===========
Weighted average common shares outstanding...................... 77,358 41,171 24,077
========== =========== ===========
See accompanying notes.
F-3
PUBLIC STORAGE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For each of the three years in the period ended December 31, 1996
(Amounts in thousands, except share and per share amounts)
Class B
Preferred Stock Common Common
Cumulative Convertible Stock Stock
-------- -------- ------ -------
BALANCES AT DECEMBER 31, 1993....................... $103,125 $ 57,500 $1,806 $ -
Issuance of Preferred Stock, net of issuance costs:
Series B, C and D (2,486,000 shares)........... 62,150 - - -
Issuance of Common Stock (10,770,437 shares)..... - - 1,077 -
Net income....................................... - - - -
Cash distributions:
Preferred Stock................................ - - - -
Common Stock, $0.85 per share.................. - - - -
-------- -------- ------ -------
BALANCES AT DECEMBER 31, 1994....................... 165,275 57,500 2,883 -
Issuance of Preferred Stock, net of issuance costs:
Series E, F, G (4,501,900 shares).............. 284,875 - - -
Convertible Participating (31,200 shares)...... 28,470
Issuance of Common Stock (42,687,092 shares)..... - - 4,269 -
Issuance of Class B Common Stock (7,000,000 shares) - - - 700
Net income....................................... - - - -
Cash distributions:
Preferred Stock................................ - - - -
Common Stock, $0.88 per share.................. - - - -
-------- -------- ------ -------
BALANCES AT DECEMBER 31, 1995....................... 450,150 85,970 7,152 700
Issuance of Preferred Stock, net of issuance costs:
Series H and I (10,750 shares)................. 268,750 - - -
Mandatory Convertible, Series CC (58,955 shares) - 58,955 - -
Issuance of Common Stock (15,134,241 shares) - - 1,514 -
Conversion of Mandatory Convertible Participating
Preferred Stock into Common Stock (1,611,265
shares) - (28,470) 161 -
Conversion of 8.25% Convertible Preferred Stock
into Common Stock (102,721 shares) - (1,526) 10 -
Net income....................................... - - - -
Cash distributions:
Preferred Stock................................ - - - -
Common Stock, $0.88 per share.................. - - - -
-------- -------- ------ -------
BALANCES AT DECEMBER 31, 1996....................... $718,900 $114,929 $8,837 $700
======== ======== ====== =======
PUBLIC STORAGE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For each of the three years in the period ended December 31, 1996
(Amounts in thousands, except share and per share amounts)
Total
Paid-in Cumulative Cumulative Shareholders'
Capital Net Income Distributions Equity
---------- -------- --------- ----------
BALANCES AT DECEMBER 31, 1993....................... $ 227,891 $130,367 $(144,623) $ 376,066
Issuance of Preferred Stock, net of issuance costs:
Series B, C and D (2,486,000 shares)........... (2,300) - - 59,850
Issuance of Common Stock (10,770,437 shares)..... 146,770 - - 147,847
Net income....................................... - 42,118 - 42,118
Cash distributions:
Preferred Stock................................ - - (16,846) (16,846)
Common Stock, $0.85 per share.................. - - (21,249) (21,249)
---------- -------- --------- ----------
BALANCES AT DECEMBER 31, 1994....................... 372,361 172,485 (182,718) 587,786
Issuance of Preferred Stock, net of issuance costs:
Series E, F, G (4,501,900 shares).............. (9,718) - - 275,157
Convertible Participating (31,200 shares)...... 28,470
Issuance of Common Stock (42,687,092 shares)..... 664,645 - - 668,914
Issuance of Class B Common Stock (7,000,000 shares) 72,800 - - 73,500
Net income....................................... - 70,386 - 70,386
Cash distributions:
Preferred Stock................................ - - (31,124) (31,124)
Common Stock, $0.88 per share.................. - - (38,586) (38,586)
---------- -------- --------- ----------
BALANCES AT DECEMBER 31, 1995....................... 1,100,088 242,871 (252,428) 1,634,503
Issuance of Preferred Stock, net of issuance costs:
Series H and I (10,750 shares)................. (8,972) - - 259,778
Mandatory Convertible, Series CC (58,955 shares) - - - 58,955
Issuance of Common Stock (15,134,241 shares) 333,956 - - 335,470
Conversion of Mandatory Convertible Participating
Preferred Stock into Common Stock (1,611,265
shares) 27,799 - - (510)
Conversion of 8.25% Convertible Preferred Stock
into Common Stock (102,721 shares) 1,516 - - -
Net income....................................... - 153,549 - 153,549
Cash distributions:
Preferred Stock................................ - - (68,599) (68,599)
Common Stock, $0.88 per share.................. - - (67,709) (67,709)
---------- -------- --------- ----------
BALANCES AT DECEMBER 31, 1996....................... $1,454,387 $396,420 $(388,736) $2,305,437
========== ======== ========= ==========
See accompanying notes.
F-4
PUBLIC STORAGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS)
1996 1995 1994
-------- -------- --------
Cash flows from operating activities:
Net income............................................................... $153,549 $ 70,386 $ 42,118
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization (net of amortization of mortgage notes
receivable discounts)................................................ 64,875 40,647 27,581
Depreciation included in equity in earnings of real estate entities.... 17,450 2,045 -
Environmental accrual (including $510 from equity in earnings of real
estate entities)..................................................... - 3,251 -
Minority interest in income............................................ 9,363 7,137 9,481
-------- -------- --------
Total adjustments.................................................... 91,688 53,080 37,062
-------- -------- --------
Net cash provided by operating activities............................ 245,237 123,466 79,180
-------- -------- --------
Cash flows from investing activities:
Principal payments received on mortgage notes receivable............... 1,784 2,063 6,785
Proceeds from disposition of real estate facilities, net............... - - 1,666
Acquisition of minority interests in consolidated real estate
partnerships..................................................... (15,419) (32,683) (51,711)
Acquisition of mortgage notes receivable............................... (3,709) (12,355) (4,020)
Acquisition of real estate facilities.................................. (198,404) (108,326) (93,026)
Acquisition cost of business combinations.............................. (113,522) (57,374) (20,972)
Acquisition of interests in real estate entities....................... (83,893) (20,657) -
Construction in process................................................ (46,097) (7,979) -
Capital improvements to real estate facilities......................... (20,366) (11,361) (8,312)
-------- -------- --------
Net cash used in investing activities................................ (479,626) (248,672) (169,590)
-------- -------- --------
Cash flows from financing activities:
Net paydowns on revolving line of credit............................... - (37,607) (10,323)
Net proceeds from the issuances of preferred stock..................... 259,778 275,157 57,899
Net proceeds from the issuances of common stock........................ 130,538 80,526 110,280
Principal payments on mortgage notes payable........................... (51,310) (39,212) (8,233)
Distributions paid to shareholders..................................... (136,308) (69,072) (38,095)
Distributions from operations to minority interests in consolidated
real estate partnerships............................................. (20,853) (18,380) (23,037)
Net reinvestment by minority interests in consolidated real estate
partnerships......................................................... 3,976 (1,739) 7,962
Other.................................................................. (5,012) (4,182) 3,576
-------- -------- --------
Net cash provided by financing activities............................ 180,809 185,491 100,029
-------- -------- --------
Net (decrease) increase in cash and cash equivalents........................ (53,580) 60,285 9,619
Cash and cash equivalents at the beginning of the year...................... 80,436 20,151 10,532
-------- -------- --------
Cash and cash equivalents at the end of the year............................ $ 26,856 $ 80,436 $ 20,151
======== ======== ========
See accompanying notes.
F-5
PUBLIC STORAGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS)
(Continued)
1996 1995 1994
-------- -------- --------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
INVESTING ACTIVITIES:
Acquisition of real estate facilities in exchange for common and preferred
stock, the assumption of mortgage notes payable, the cancellation of
mortgage notes receivable and the reduction of
investment in real estate entities..................................... $(4,292) $(87,941) $(42,656)
Business combinations (Note 3):
Real estate facilities............................................... (531,794) (230,519) (57,415)
Investment in real estate entities................................... 124,696 (385,222) -
Mortgage notes receivable............................................ - (6,667) -
Other assets......................................................... (5,849) (8,862) (1,620)
Intangible assets.................................................... - (232,726) -
Accrued and other liabilities........................................ 15,399 17,134 695
Notes Payable........................................................ - 96,728 -
Minority interest.................................................... 20,139 17,034 -
Reduction of investment in real estate entities in exchange for real
estate facilities..................................................... 1,891 - -
Acquisition of partnership interests in real estate entities in exchange
for common stock....................................................... - (4,034) -
Reduction in other assets - deposits on pending real estate acquisitions. - - 4,350
FINANCING ACTIVITIES:
Cancellation of mortgage notes receivable to acquire real estate 700 16,435 24,441
facilities.............................................................
Assumption of mortgage notes payable upon the acquisition of real estate
facilities............................................................. 1,701 60,908 11,715
Accrued and unpaid distributions ........................................ - 638 -
Issuance of Preferred Stock:
Series B Preferred Stock to acquire real estate facilities........... - - 2,150
Mandatory Convertible Preferred Stock, Series CC to acquire interest
in consolidated real estate partnerships........................... 58,955 - -
Mandatory Convertible Participating Preferred Stock to acquire
interest in consolidated real estate partnerships.................. - 28,470 -
Issuance of Common Stock:
In connection with mergers........................................... 204,932 573,756 37,369
Acquire real estate facilities....................................... - 10,598 -
Acquire partnership interests in real estate entities................ - 4,034 -
In connection with conversion of Convertible Preferred Stock......... 29,486 - -
Issuance of Class B Common Stock in connection with mergers............. - 73,500 -
Conversion of 8.25% Convertible Preferred Stock.......................... (1,526) - -
Conversion of Mandatory Convertible Preferred Stock...................... (28,470) - -
See accompanying notes.
F-6
PUBLIC STORAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
1. Description of the business
---------------------------
Public Storage, Inc. (the "Company") is a California corporation which
was organized in 1980. The Company is a fully integrated, self-administered
and self-managed real estate investment trust ("REIT") that acquires,
develops, owns and operates self-storage facilities which offer
self-storage spaces for lease, usually on a month-to-month basis, for
personal and business use. The Company, to a lesser extent, also owns and
operates commercial properties facilities containing commercial and
industrial rental space.
Prior to November 16, 1995, the Company's operations were managed,
pursuant to contractual arrangements, by Public Storage Advisers, Inc. (the
"Adviser"), the Company's investment advisor, by Public Storage Management,
Inc. ("PSMI"), its self-storage facilities property operator and by Public
Storage Commercial Properties Group, Inc. ("PSCP"), its business park
facility operator. On November 16, 1995, in a series of mergers among PSMI
and its affiliates, culminating in the merger of PSMI into the Company (the
"PSMI Merger"), the Company became self-administered and self-managed and
acquired substantially all of the United States real estate operations of
PSMI (Note 3).
The Company invests in real estate facilities primarily through the
acquisition of wholly-owned facilities combined with the acquisition of
equity interests in real estate entities owning real estate facilities. At
December 31, 1996, the Company had direct and indirect equity interests in
1,109 properties located in 38 states, including 1,064 self-storage
facilities and 45 commercial properties. All of these facilities are
operated by the Company under the "Public Storage" name.
2. Summary of significant accounting policies
------------------------------------------
Basis of presentation
---------------------
The consolidated financial statements include the accounts of (i) the
Company, (ii) majority owned subsidiaries involved in the sale of locks and
boxes, rental of trucks and portable self-storage, and (iii) twenty-one
limited partnerships in which the Company has significant economic interest
(generally in excess of 50%) and is able to exercise significant control
(the "Consolidated Partnerships"). Collectively, the Company and the
Consolidated Partnerships own a total of 756 real estate facilities,
consisting of 721 self-storage facilities and 35 commercial properties.
The Company also has equity investments in 41 other affiliated limited
partnerships and eight REITs owning in aggregate 353 real estate facilities
(343 self-storage facilities and 10 commercial properties) which are
managed by the Company. The Company's ownership interest in such real
estate entities is less than 50% of the total equity interest and,
accordingly, the Company's investments in these real estate entities are
accounted for using the equity method.
Use of estimates
----------------
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results
could differ from 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, the Company is not taxed on that portion
of its taxable income which is distributed to its shareholders provided
that the Company meets certain tests. The Company believes it has met these
tests during 1996, 1995 and 1994; accordingly, no provision for income
taxes has been made in the accompanying financial statements.
F-7
Financial instruments
---------------------
For purposes of financial statement presentation, the Company
considers all highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents.
The carrying amount of cash and cash equivalents and mortgage notes
receivable approximates fair value because with respect to cash and cash
equivalents maturities are less than three months and with respect to the
mortgage notes receivable interest rates approximate market rates for the
type of real estate securing such loans. The carrying amount of the
Company's fixed rate long-term debt is estimated using discounted cash flow
analyses based on incremental borrowing rates the Company believes it could
obtain with similar terms and maturities.
Real estate facilities
----------------------
Real estate facilities are recorded at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
buildings and improvements, which are generally between 5 and 25 years.
Allowance for possible losses
-----------------------------
The Company has no allowance for possible losses relating to any of
its real estate investments, long-lived assets and mortgage notes
receivable. The need for such an allowance is evaluated by management by
means of periodic reviews of its investment portfolio.
Intangible assets
-----------------
Intangible assets consist of property management contracts
($165,000,000) and the cost over the fair value of net tangible and
identifiable intangible assets ($67,726,000) acquired in the PSMI Merger.
Intangible assets are amortized straight-line over 25 years. At December
31, 1996 and 1995, intangible assets are net of accumulated amortization of
$10,473,000 and $1,164,000, respectively. Included in depreciation and
amortization expense is $9,309,000 in 1996 and $1,164,000 in 1995 (for the
period from November 16, 1995 through December 31, 1995) related to the
amortization of intangible assets.
Revenue and expense recognition
-------------------------------
Property rents are recognized as earned. Equity in earnings of real
estate entities are recognized based on the Company's ownership interest in
the earnings of each of the unconsolidated real estate entities. Leasing
commissions relating to the business park operations are expensed as
incurred.
Environmental costs
-------------------
The Company's policy is to accrue environmental assessments and/or
remediation cost when it is probable that such efforts will be required and
the related costs can be reasonably estimated. The majority of the
Company's real estate facilities were acquired prior to the time that it
was customary to conduct environmental assessments. During 1995, the
Company and the Consolidated Partnerships conducted independent
environmental investigations of their real estate facilities. As a result
of these investigations, the Company recorded an amount which, in
management's best estimate and based upon independent analysis, was
sufficient to satisfy anticipated costs of known remediation requirements.
At December 31, 1995, the Company accrued $2,741,000 for estimated
environmental remediation costs. Similar to the Company, real estate
entities in which the Company accounts for using the equity method recorded
environmental accruals at the end of 1995. The Company's pro rata share,
based on its ownership interest, totaled $510,000 and is included in
"Equity in earnings of real estate entities" in 1995. Although there can be
no assurance, the Company is not aware of any environmental contamination
of any of its facilities which individually or in the aggregate would be
material to the Company's overall business, financial condition, or results
of operations.
F-8
Net income per common share
---------------------------
Net income per common share is computed using the weighted average
common shares outstanding (adjusted for stock options). The inclusion of
the Class B Common Stock in the determination of earnings per common share
has been determined to be anti-dilutive (after giving effect to the pro
forma additional income required to satisfy certain contingencies (Note 11)
required for the Class B common stock to convert into common stock) and,
accordingly, the conversion of the Class B common stock into common stock
has not been assumed.
The Company's preferred stocks (Note 11) were determined not to be
common stock equivalents. In computing earnings per common share, preferred
stock dividends totaling $68,599,000, $31,124,000 and $16,846,000 for the
years ended December 31, 1996, 1995 and 1994, respectively, reduced income
available to common stockholders.
Fully diluted earnings per common share are not presented, as the
assumed conversion of the Company's convertible preferred stock (Note 11)
would be anti-dilutive.
Stock-based compensation
------------------------
In October 1995, the FASB issued SFAS No. 123 "Accounting for
Stock-Based Compensation" ("Statement 123") which provides companies an
alternative to accounting for stock-based compensation as prescribed under
APB Opinion No. 25 (APB 25). Statement 123 encourages, but does not require
companies to recognize expense for stock-based awards based on their fair
value at date of grant. Statement 123 allows companies to continue to
follow existing accounting rules (intrinsic value method under APB 25)
provided that pro-forma disclosures are made of what net income and
earnings per share would have been had the new fair value method been used.
The Company has elected to adopt the disclosure requirements of Statement
123 but will continue to account for stock-based compensation under APB 25.
Statement 123's disclosure requirements are applicable to stock-based
awards granted in fiscal years beginning after December 15, 1994.
Reclassifications
-----------------
Certain reclassification have been made to the consolidated financial
statements for the years ended December 31, 1995 and 1994 in order to
conform with the 1996 presentation.
F-9
3. Business combinations
---------------------
Mergers with affiliated REITs
-----------------------------
During 1996, the Company completed merger transactions with eight
affiliated public REITs whereby the Company acquired all the outstanding
stock of the REITs which it did not previously own in exchange for cash and
common stock of the Company. The aggregate acquisition cost of these
mergers is summarized as follows:
Merger consideration
----------------------------------------------
Common Pre-existing
Entity Date of merger Stock Cash investment Total
- --------------------------------------------------- ------------------ --------- ---------- ---------- ---------
(Amounts in thousands)
Public Storage Properties IX, Inc. ("Properties 9") March 26, 1996 $ 24,719 $ 9,907 $12,937 $ 47,563
PS Business Parks, Inc. ("PSBP") March 26, 1996 5,249 2,719 3,337 11,305
Storage Properties, Inc. ("SPI") June 27, 1996 17,148 4,801 1,799 23,748
Public Storage Properties X, Inc. ("Properties 10") September 16, 1996 26,012 14,178 9,333 49,523
Public Storage Properties XII, Inc. ("Properties 12") September 16, 1996 33,157 7,436 9,472 50,065
Partners Preferred Yield, Inc. ("PPY") December 23, 1996 38,076 13,922 18,179 70,177
Partners Preferred Yield II, Inc. ("PPY-2") December 23, 1996 41,790 13,692 18,077 73,559
Partners Preferred Yield III, Inc. ("PPY-3") December 23, 1996 18,781 5,787 6,327 30,895
-------- ------- ------- --------
$204,932 $72,442 $79,461 $356,835
======== ======= ======= ========
During 1995, the Company completed merger transactions with two affiliated
public REITs whereby the Company acquired all the outstanding stock of the REITs
for an aggregate cost of $135,406,000, consisting of the issuance of 6,664,287
shares of the Company's common stock ($99,972,000) and $35,434,000 in cash. The
fair market values of the assets acquired and liabilities assumed were: (i) real
estate facilities - $140,775,000, (ii) other assets - $1,440,000, and (iii)
accrued and other liabilities - $6,809,000.
Affiliated Partnership acquisitions:
------------------------------------
During 1996, the Company increased its ownership interest in three
affiliated limited partnerships. Prior to the acquisitions, the Company
accounted for its investment in each of the three partnerships using the equity
method. As a result of increasing its ownership interest and control of the
partnerships, the Company began to consolidate the accounts of the partnerships
in the Company's consolidated financial statements. These transactions are
summarized as follows:
Consideration paid
to acquire Limited
Partnership Units The
Percentage of ------------------- Company's
Limited Partner Date Preferred Pre-existing
Entity Units Purchased Purchased Stock Cash investment Total
- --------------------------------------------- --------------- --------- --------- -------- ------------- --------
(Amounts in thousands)
PS Institutional Fund ("PSIF") 64% March 1996 $ - $41,080 $27,863 $ 68,943
Diversified Storage Fund ("Diversified") 100% April 1996 39,410 - 11,565 50,975
Diversified Storage Fund II ("Diversified II") 100% April 1996 19,545 - 5,807 25,352
--------- -------- ------------- --------
$58,955 $41,080 $45,235 $145,270
========= ======== ============= ========
During 1995, the Company increased its ownership interest and control of
twelve limited partnerships. As a result, commencing in 1995, the Company began
to consolidate the accounts of these partnerships for financial statement
purposes. The aggregate amount of the interests acquired totaled $48,410,000
consisting of the issuance of $28,470,000 of Mandatory Convertible Participating
Preferred Stock and cash of $19,940,000.
F-10
PSMI merger
-----------
On November 16, 1995, in a series of mergers among PSMI and its affiliates,
culminating in the merger of PSMI into the Company (the "PSMI Merger"), the
Company became self-administered and self-managed and acquired substantially all
of the United States real estate operations of PSMI. As a result of the PSMI
Merger, the Company's name was changed from Storage Equities, Inc. to Public
Storage, Inc.
The aggregate consideration paid by the Company for the net assets acquired
in the PSMI Merger (including expenses of $2.0 million) was $549,284,000,
consisting of 29,449,513 shares of common stock ($473,784,000), 7,000,000 shares
of Class B common stock ($73,500,000) (Note 11). The real estate operations
acquired in the PSMI Merger included (1) the "Public Storage" name, (2) general
and limited partnership interests in 47 limited partnerships owning an aggregate
of 286 self-storage facilities, (3) shares of common stock in 16 REITs owning an
aggregate of 218 self-storage facilities and 14 business park properties, (4)
seven wholly-owned properties, (5) all-inclusive deeds of trust secured by ten
self-storage facilities, (6) property management contracts, exclusive of
facilities owned by the Company, for 563 self-storage facilities and, through
ownership of a 95% economic interest in a subsidiary, 24 business park
properties and (7) a 95% economic interest in another subsidiary that currently
sells locks and boxes in self-storage facilities operated by the Company.
Each of the above mergers with affiliated REIT's, acquisitions of
partnership interests, and merger with PSMI discussed above has been accounted
for as a purchase; accordingly, allocations of the total acquisition cost to the
net assets acquired were made based on the fair value of such assets and
liabilities as of the dates of each respective transaction. The fair market
values of the assets acquired and liabilities assumed with respect to the
transactions occurring in 1996 and 1995 are summarized as follows:
REIT Partnership
mergers Acquisitions PSMI Merger Total
---------- ------------ ------------ ----------
1996 business combinations:
Real estate facilities............... $364,984 $166,810 $ - $531,794
Other assets......................... 5,032 817 - 5,849
Accrued and other liabilities........ (13,181) (2,218) - (15,399)
Minority interest.................... - (20,139) - (20,139)
---------- ------------ ------------ ----------
$356,835 $145,270 $ - $502,105
========== ============ ============ ==========
1995 business combinations:
Real estate facilities............... $140,775 $69,801 $19,943 $230,519
Investments in real estate facilities - (4,464) 389,686 385,222
Mortgage notes receivable............ - - 6,667 6,667
Other assets......................... 1,440 2,851 4,571 8,862
Intangible assets.................... - - 232,726 232,726
Accrued and other liabilities........ (6,809) (701) (9,624) (17,134)
Notes payable........................ - (3,387) (93,341) (96,728)
Minority interest.................... - (15,690) (1,344) (17,034)
---------- ------------ ------------ ----------
$135,406 $48,410 $549,284 $733,100
========== ============ ============ ==========
The historical operating results of the above business combinations prior
to each respective acquisition date have not been included in the Company's
historical operating results. Pro forma data (unaudited) for the years ended
December 31, 1996, 1995 and 1994 as though (i) business combinations and (ii)
the public issuances of common and preferred stock (with the exception of the
Series G, Series H, and Series I preferred stock and for 1996 Public Issuance of
Common Stock) during 1996, 1995 and 1994 and the use of the proceeds therefrom
had been effective at the beginning of each period follows:
F-11
For the Year
Ended December 31,
--------------------------------------------
1996 1995 1994
----------- ---------- ---------
(in thousands except per share data)
Revenues.................................................. $378,718 $343,135 $325,572
Net income................................................ $163,731 $129,829 $121,693
Net income per common share............................... $1.11 $1.10 $1.03
The pro forma data does not purport to be indicative either of results of
operations that would have occurred had the transactions occurred at the
beginning of each period or future results of operations of the Company. Certain
pro forma adjustments were made to the combined historical amounts to reflect
(i) expected reductions in general and administrative expenses, (ii) estimated
increased interest expense from bank borrowings to finance the cash portion of
the acquisition cost, (iii) estimated increase in depreciation and amortization
expense, and (iv) elimination of advisory fee expense.
4. Real estate facilities
----------------------
Activity in real estate facilities during 1996, 1995 and 1994 is as
follows:
1996 1995 1994
------------ ----------- -----------
(Amounts in thousands)
Operating Facilities
Beginning balance.......................... $1,405,155 $967,718 $764,126
Property acquisitions
Business combinations (Note 3) .......... 531,794 230,519 57,415
Other acquisitions...................... 202,696 191,002 135,682
Developed facilities........................ 18,261 5,265 -
Acquisition of minority interest (Note 9).. 7,226 (223) 4,820
Capital improvements........................ 20,366 11,361 8,312
Property dispositions....................... - (487) (2,637)
------------ ----------- -----------
Ending balance............................. 2,185,498 1,405,155 967,718
------------ ----------- -----------
Construction in progress:
Beginning balance........................... 7,979 - -
Current development cost.................... 46,097 13,244 -
Newly opened development facilities......... (18,261) (5,265) -
------------ ----------- -----------
Ending balance............................. 35,815 7,979 -
------------ ----------- -----------
Accumulated depreciation:
Beginning balance........................... (241,966) (202,745) (175,621)
Additions during the year................... (55,689) (39,376) (28,099)
Property dispositions ...................... - 155 975
------------ ----------- -----------
Ending balance............................. (297,655) (241,966) (202,745)
------------ ----------- -----------
Total real estate facilities.................. $1,923,658 $1,171,168 $764,973
============ =========== ===========
F-12
During 1996, the Company acquired a total of 154 real estate facilities for
an aggregate cost of $531,794,000, in connection with certain business
combinations (Note 3). The Company also acquired an additional 58 real estate
facilities from third parties with an aggregate acquisition cost of $202,696,000
consisting of the cancellation of mortgage notes receivable ($700,000),
cancellation of pre-existing investments ($1,891,000), assumption of mortgage
notes payable ($1,701,000), and cash ($198,404,000).
Commencing in 1995, the Company began to construct self-storage facilities.
Through December 31, 1996, the Company constructed and opened for operation five
facilities, one of which began operations in August 1995 and four in 1996.
Included in real estate facilities at December 31, 1996 is approximately
$35,815,000 of costs related to the remaining eleven facilities under
construction and the 17 additional facilities that the Company has plans to
develop.
During 1995, the Company acquired a total of 95 real estate facilities for
an aggregate cost of $230,519,000 in connection with certain business
combinations. During 1995, the Company also acquired an additional 58 real
estate facilities for an aggregate cost of $184,861,000 (including the facility
developed in 1995), consisting of the cancellation of mortgage notes receivable
($16,435,000), the assumption of mortgage notes payable ($60,908,000) and cash
($107,518,000).
A substantial number of the real estate facilities acquired during 1996,
1995 and 1994 were acquired from affiliates with an aggregate acquisition cost
of approximately $531,794,000, $300,193,000 and $119,211,000 respectively.
At December 31, 1996, the adjusted basis of real estate facilities for
Federal income tax purposes was approximately $1.4 billion net of
accumulated depreciation of $598.3 million.
5. Investments in real estate entities
-----------------------------------
During 1996, the Company's equity in real estate entities decreased
principally as a result of business combinations whereby the Company eliminated
approximately $124.7 million of pre-existing equity in real estate entity
investments. Offsetting this decrease were additional investments in numerous
other unconsolidated affiliates for $83.9 in cash.
During 1995, the Company (i) acquired limited and general partnership
interest in 47 partnerships and common stock in 16 REITs in connection with the
PSMI Merger at an aggregate cost of $389,686,000, (ii) acquired additional
interests in some of the same partnerships and REITs for an aggregate cost of
$23,953,000, consisting of Common Stock ($4,034,000) and cash ($19,919,000), and
(iii) reclassified investments in partnerships which commencing in 1995 are
consolidated with the Company ($4,464,000). Prior to 1995, the Company's
investment in real estate entities generally consisted of limited and general
partnership interests in real estate limited partnerships which were accounted
for using the cost method.
At December 31, 1996, the Company's investments in these real estate
entities consist generally of ownership interests in 41 affiliated partnerships
and common stock in 8 affiliated REITs. Such interests consists of ownership
interests ranging from 15% to 45% and are accounted for using the equity method
of accounting. Accordingly, earnings are recognized by the Company based upon
the Company's ownership interest in each of the partnerships and REITs.
Provisions of the governing documents of the partnerships and REITs provide for
the payment of preferred cash distributions to other investors (until certain
specified amounts have been paid) without regard to the pro rata interest of
investors in current earnings.
Equity in earnings of real estate entities for 1996 and 1995 principally
consists of the Company's pro rata share of earnings for those interests
acquired in the PSMI Merger. During 1996 and 1995, the Company recognized
F-13
earnings from its investments of $22,121,000 and $3,763,000, respectively, and
received cash distributions totaling $27,326,000 and $5,580,000, respectively.
Included in equity in earnings of real estate entities for 1996 and 1995 is the
Company's share of depreciation expense ($9,556,000 and $926,000, respectively)
and environmental costs ($510,000 in 1995, none in 1996) of the real estate
entities. In addition, equity in earnings of real estate entities includes
amortization totaling $7,894,000 in 1996 and $1,119,000 in 1995 (from date of
the PSMI Merger through the end of the year) representing the amortization of
the Company's cost basis over the underlying book value of the Company's equity
interest in each of the entities. At December 31, 1996, the unamortized excess
of the Company's investment over its equity in the underlying net assets of
these real estate entities at the date of acquisition was approximately $154.5
million.
Summarized combined financial data (based on historical cost) with respect
to those real estate entities in which the Company had an ownership interest in
at December 31, 1996 are as follows:
Year ended
December 31,
--------------------------
1996 1995
---------- ----------
(in thousands)
Rental income..................................... $ 180,197 $ 172,675
Total revenues.................................... 182,036 175,150
Cost of operations................................ 65,417 62,542
Depreciation...................................... 27,332 27,368
Net income........................................ 75,937 69,467
Total assets, net of accumulated depreciation..... 834,695 839,775
Total debt........................................ 89,349 95,305
Total equity...................................... 710,118 708,768
6. Mortgage notes receivable from affiliates
-----------------------------------------
At December 31, 1996, mortgage notes receivable of $25,016,000 bear
interest at stated rates ranging from 7.4% to 14.0% and are secured by 13
self-storage facilities owned by affiliates of the Company.
During 1996, the Company acquired a $1,970,000 mortgage note receivable
from a third party (secured by a self-storage facility) and provided loans
totaling $1,739,000 to affiliated limited partnerships. During 1995, in
connection with the PSMI Merger, the Company acquired mortgage notes receivable
totaling $6,667,000 which are secured by self-storage facilities owned by
affiliated entities.
The Company canceled mortgage notes with a net carrying value of $700,000
and $16,435,000 during 1996 and 1995, respectively, as part of the acquisition
cost of the underlying real estate facilities securing the mortgage notes (Note
4).
7. Revolving line of credit
------------------------
As of December 31, 1996, the Company had no borrowings on its unsecured
credit agreement with a group of commercial banks. On February 25, 1997, the
credit agreement was amended (the "Credit Facility") to increase the available
borrowings to $150.0 million and extend the expiration date to July 31, 2001.
The expiration date may be extended by one year on each anniversary of the
credit agreement. Interest on outstanding borrowings is payable monthly. At the
option of the Company, the rate of interest charged is equal to (i) the prime
rate or (ii) a rate ranging from the London Interbank Offered Rate ("LIBOR")
plus 0.40% to LIBOR plus 1.10% depending on the Company's credit ratings and
coverage ratios, as defined. In addition, the Company is required to pay a
quarterly commitment fee of 0.250% (per annum) of the unused portion of the
F-14
Credit Facility. The Credit Facility allows the Company, at its option, to
request the group of banks to propose the interest rate they would charge on
specific borrowings not to exceed $50 million. However, in no case may the
interest rate proposal be greater than the amount provided by the Credit
Facility.
Under covenants of the Credit Facility, the Company is required to (i)
maintain a balance sheet leverage ratio of less than 0.40 to 1.00, (ii) maintain
net income of not less than $1.00 for each fiscal quarter, (iii) maintain
certain cash flow and interest coverage ratios (as defined) of not less than 1.0
to 1.0 and 5.0 to 1.0, respectively and (iv) maintain a minimum total
shareholders' equity (as defined). In addition, the Company is limited in its
ability to incur additional borrowings (the Company is required to maintain
unencumbered assets with an aggregate book value equal to or greater than three
times the Company's unsecured recourse debt) or sell assets. The Company was in
compliance with the covenants of the Credit Facility at December 31, 1996.
8. Notes payable
-------------
Notes payable at December 31, 1996 and 1995 consist of the following:
1996 1995
------------------------ --------------------------
Carrying Carrying
amount Fair value amount Fair value
--------- ----------- ---------- -------------
(Amounts in thousands)
7.08% unsecured senior notes, due November 2003.......... $59,750 $59,750 $65,500 $65,500
Mortgage notes payable:
10.55% mortgage notes secured by real estate
facilities, principal and interest payable
monthly, due August 2004......................... 32,115 34,964 33,699 36,959
7.07% to 11.10% mortgage notes secured by real estate
facilities, principal and interest payable monthly,
due at varying dates between
December 1997 and September 2028................. 16,578 16,578 22,875 22,875
Variable rate mortgage notes secured by real
estate facilities................................ - - 35,978 35,978
--------- ----------- ---------- -------------
$108,443 $111,292 $158,052 $161,312
========= =========== ========== =============
During 1995, in connection with the PSMI Merger, the Company assumed the
7.08% unsecured senior notes payable. The senior notes require interest and
principal payments to be paid semi-annually and have various restrictive
covenants, all of which have been met at December 31, 1996.
The 10.55% mortgage notes consist of five notes which are
cross-collateralized by 19 properties and are due to a life insurance company.
Although there is a negative spread between the carrying value and the estimated
fair value of the notes, the notes provide for the prepayment of principal
subject to the payment of penalties which exceed this negative spread.
Accordingly, prepayment of the notes at this time would not be economically
practicable.
Mortgage notes payable are secured by 30 of the Company's real estate
facilities having an aggregate net book value of $68.1 million at December 31,
1996.
At December 31, 1996, approximate principal maturities of notes payable are
as follows:
F-15
Fixed Rate
Mortgage debt
--------------------
7.08% Unsecured (weighted average
Senior Notes rate of 10.28%) Total
--------------- --------------------- -----------
(in thousands)
1997............... $ 6,500 $ 4,744 $11,244
1998............... 7,250 7,908 15,158
1999 .............. 8,000 6,484 14,484
2000............... 8,750 2,721 11,471
2001............... 9,500 2,238 11,738
Thereafter......... 19,750 24,598 44,348
--------- ---------- ----------
$59,750 $48,693 $108,443
========= ========== ==========
Interest paid (including interest related to the borrowings on the Credit
Facility) during 1996, 1995 and 1994 was $10,312,000, $8,595,000 and $5,940,000,
respectively. In addition, in 1996 and 1995, the Company capitalized interest
totaling $1,861,000 and $307,000, respectively, related to construction of real
estate facilities.
9. Minority interest
------------------
In consolidation, the Company classifies ownership interests other than its
own in the net assets of each of the Consolidated Partnerships as minority
interest on the consolidated financial statements. Minority interest in income
consists of the minority interests' share of the operating results of the
Company relating to the consolidated operations of the Consolidated
Partnerships.
During 1996, the Company acquired limited partnership interests in the
Consolidated Partnerships in several transactions for an aggregate cost of
$15,419,000. These transactions had the effect of reducing minority interest by
approximately $8,193,000 (the historical book value of such interests in the
underlying net assets of the partnerships). The excess of the underlying book
value over cost ($7,226,000) has been allocated to real estate facilities in
consolidation. In 1995 and 1994, the Company acquired interests in the
Consolidated Partnerships at an aggregate cost of $32,683,000 and $51,711,000,
respectively, reducing minority interest by approximately $32,906,000 and
$46,891,000, respectively. The excess of cost over underlying book values was
allocated to real estate facilities in consolidation.
During 1996 and 1995, in connection with certain business combinations
(Note 3) minority interest was increased by $20,139,000 and $17,034,000,
respectively, representing the remaining partners' equity interests in the
aggregate net assets of the consolidated partnerships.
10. Property management and advisory contracts
------------------------------------------
Pursuant to the PSMI Merger, the Company became self-advised and
self-managed, accordingly, effective November 16, 1995, the Company no longer
incurs either advisory fees or property management fees.
Prior to the PSMI Merger, PSMI provided property operation services for a
fee to the Company under a management agreement and an affiliate of PSMI
administered the day-to-day investment operations for a fee pursuant to an
advisory contract. Pursuant to the management agreement, PSMI or an affiliate of
PSMI operated all of the properties in which the Company invested in for a fee
which is equal to 6% of the gross revenues of the self-storage facilities spaces
managed and 5% of the gross revenues of the commercial properties operated.
Management fees relating to the Company's real estate facilities, which are
included in cost of operations, amounted to $10,232,000 and $8,355,000 in 1995
and 1994, respectively. During 1994 and 1995 (from January 1, 1995 through
November 16, 1995), the Company paid advisory fees equal to $4,983,000 and
$6,437,000 pursuant to the advisory contract.
F-16
In connection with the PSMI Merger, the Company acquired property
management contracts for (i) self-storage facilities owned by affiliated
entities and, to a lesser extent, third parties and (ii) through ownership of a
95% economic interest in a subsidiary, commercial properties. These facilities
constitute all of the United States self-storage facilities and commercial
properties doing business under the "Public Storage" name and, with the
exception of third party properties, all those in which the Company had an
interest. At December 31, 1996, the Company managed 1,101 self-storage
facilities (721 owned by consolidated facilities, 343 owned by unconsolidated
affiliates and 37 owned by third parties) and 45 commercial properties (35 owned
by consolidated facilities and 10 owned by unconsolidated affiliates).
The property management contracts generally provide for compensation equal
to 6%, in the case of the self-storage facilities, and 5%, in the case of the
commercial properties of gross revenues of the facilities managed. Under the
supervision of the property owners, the Company coordinates rental policies,
rent collections, marketing activities, the purchase of equipment and supplies,
maintenance activity, and the selection and engagement of vendors, suppliers and
independent contractors. In addition, the Company assists and advises the
property owners in establishing policies for the hire, discharge and supervision
of employees for the operation of these facilities, including resident managers,
assistant managers, relief managers and billing and maintenance personnel.
11. Shareholders' equity
--------------------
Preferred Stock
---------------
At December 31, 1996 and 1995, the Company had the following series of
Preferred Stock outstanding:
At December 31, 1996 At December 31, 1995
------------------------------- ----------------------------
Dividend Shares Carrying Shares Carrying
Series Rate Outstanding Amount Outstanding Amount
- -------------------------------------- ----------- --------------- -------------- ------------ -------------
Series A 10.000% 1,825,000 $ 45,625,000 1,825,000 $ 45,625,000
Series B 9.200% 2,386,000 59,650,000 2,386,000 59,650,000
Series C Adjustable 1,200,000 30,000,000 1,200,000 30,000,000
Series D 9.500% 1,200,000 30,000,000 1,200,000 30,000,000
Series E 10.000% 2,195,000 54,875,000 2,195,000 54,875,000
Series F 9.750% 2,300,000 57,500,000 2,300,000 57,500,000
Series G 8.875% 6,900 172,500,000 6,900 172,500,000
Series H 8.45% 6,750 168,750,000 - -
Series I 8.625% 4,000 100,000,000 - -
--------------- -------------- ------------ -------------
Total Senior Preferred Stock 11,123,650 718,900,000 11,112,900 450,150,000
--------------- -------------- ------------ -------------
Convertible 8.25% 2,238,975 55,974,000 2,300,000 57,500,000
Mandatory Convertible - Series CC 13.00% 58,955 58,955,000 - -
Mandatory Convertible Participating Variable - - 31,200 28,470,000
--------------- -------------- ------------ -------------
Total Convertible Preferred Stock 2,297,930 114,929,000 2,331,200 85,970,000
--------------- -------------- ------------ -------------
13,421,580 $833,829,000 13,444,100 $536,120,000
=============== ============== ============ =============
During 1996, the Company issued 6,750,000 depositary shares (depositary
shares, each representing 1/1,000 of a share) of its 8.45% Series H Preferred
Stock (January 25, 1996) raising net proceeds of approximately $163.1 million
and 4,000,000 depositary shares (depositary shares, each representing 1/1,000 of
a share) of its 8-5/8% Series I Preferred Stock (November 1, 1996) raising net
proceeds of approximately $96.7 million.
In April 1996, in connection with the acquisition of limited partnership
interests (Note 3), the Company issued $58,955,000 (58,955 shares) of its
F-17
Mandatory Convertible Preferred Stock, Series CC (the "Series CC Preferred
Stock"). The Series CC Preferred Stock ranks junior to the Company's Cumulative
Senior Preferred Stock with respect to general preference rights and has a
liquidation value of $1,000 per share. Other significant terms of the Series CC
Preferred Stock include: (i) quarterly distributions equal to $32.50 per share,
(ii) conversion, at anytime at the option of the holder, into common stock of
the Company at a conversion price of $28.56 or 35.014 shares of common stock for
each share of Series CC Preferred Stock, and (iii) automatic conversion into
common stock of the Company on March 31, 2000 at the conversion price described
above.
During the second quarter of 1996, the Mandatory Convertible Participating
Preferred Stock was exchanged into 1,611,265 shares of common stock. Costs
incurred in connection with the exchange have been charged to Paid in Capital.
The Series A through Series I (collectively the "Cumulative Senior
Preferred Stock") have general preference rights with respect to liquidation and
quarterly distributions. With respect to the payment of dividends and amounts
upon liquidation, all of the Company's Convertible Preferred Stock ranks junior
to the Cumulative Senior Preferred Stock and any other shares of preferred stock
of the Company ranking on a parity with or senior to the Cumulative Senior
Preferred Stock. The Convertible Preferred Stock ranks senior to the common
stock, any additional class of common stock and any series of preferred stock
expressly made junior to the Convertible Preferred Stock.
Holders of the Company's preferred stock, except under certain conditions
and as noted above, will not be entitled to vote on most matters. In the event
of a cumulative arrearage equal to six quarterly dividends or failure to
maintain a Debt Ratio (as defined) of 50% or less, holders of all outstanding
series of preferred stock (voting as a single class without regard to series)
will have the right to elect two additional members to serve on the Company's
Board of Directors until events of default have been cured. At December 31,
1996, there were no dividends in arrears and the Debt Ratio was 4.2%.
Except under certain conditions relating to the Company's qualification as
a REIT, the Senior Preferred Stock are not redeemable prior to the following
dates: Series A - September 30, 2002, Series B - March 31, 2003, Series C - June
30, 1999, Series D - September 30, 2004, Series E - January 31, 2005, Series F -
April 30, 2005, Series G - December 31, 2000, Series H - January 31, 2001,
Series I - October 31, 2001. On or after the respective dates, each of the
series of Senior Preferred Stock will be redeemable at the option of the
Company, in whole or in part, at $25 per share (or depositary share in the case
of the Series H and Series I), plus accrued and unpaid dividends.
The Convertible Preferred Stock is convertible at any time at the option of
the holders of such stock into shares of the Company's common stock at a
conversion rate of 1.6835 shares of common stock for each share of Convertible
Preferred Stock, subject to adjustment in certain circumstances. On or after
July 1, 1998, the Convertible Stock will be redeemable for shares of the
Company's common stock at the option of the Company, in whole or in part, at a
redemption price of 1.6835 shares of common stock for each share of Convertible
Stock (subject to adjustment in certain circumstances), if for 20 trading days
within any period of 30 consecutive trading days (including the last trading day
of such period), the closing price of the common stock on its principal trading
market exceeds $14.85 per share (subject to adjustment in certain
circumstances). The Convertible Preferred Stock is not redeemable for cash.
Common stock
------------
During 1996, 1995 and 1994, the Company issued shares of its common stock
as follows:
F-18
1996 1995 1994
------------------------ ------------------------ ------------------------
Shares Amount Shares Amount Shares Amount
---------- -------- ---------- -------- ---------- --------
(Dollar amounts in thousands)
Public offerings............. 6,151,200 $ 128,501 5,482,200 $82,068 7,984,000 $108,083
In connection with mergers
(Note 3)................... 8,839,181 204,932 36,113,800 573,756 2,593,914 38,498
Issuance costs of mergers.... - - - (2,527) - (1,124)
Exercise of stock options.... 100,663 1,037 46,670 403 82,666 689
Issuance to affiliates....... 43,197 1,000 40,000 582 109,857 1,701
Conversion of Mandatory
Convertible Preferred
Stock...................... 1,611,265 27,960 - - - -
Acquisition of interests in
real estate entities....... - - 257,067 4,034 - -
Acquisition of real estate
facilities (Note 4)........ - - 747,355 10,598 - -
Conversion of 8.25%
Convertible Preferred Stock. 102,721 1,526 - - - -
---------- -------- ---------- -------- ---------- --------
16,848,227 $364,956 42,687,092 $668,914 10,770,437 $147,847
========== ======== ========== ======== ========== ========
Shares of common stock issued to affiliates in 1996, 1995 and 1994, were
issued for cash. All the shares of common stock, with the exception of the
shares issued in connection with the exercise of stock options, were issued at
the prevailing market price at the time of issuance.
At December 31, 1996, the Company had 5,250,004 shares of common stock
reserved in connection with the Company's stock option plans (Note 12) and
12,834,000 shares of common stock reserved for the conversion of the Convertible
Preferred Stock, Class B Common Stock and Series CC convertible preferred stock.
On March 18, 1997, the Company publicly issued 4,600,000 shares of common
stock, raising net proceeds of approximately $126.5 million. The Company intends
to use the net proceeds from this offering to make investments in real estate
and fund the activities of its portable self-storage operations.
Class B Common Stock
--------------------
The Class B Common Stock was issued in connection with the PSMI Merger.
Under the terms of the merger agreement, the issuance of the Class B Common
Stock was subject to certain conditions which were satisfied in December 1995
and the Class B Common Stock was issued on January 2, 1996. The Company has
reflected the Class B Common Stock as outstanding as of December 31, 1995.
The Class B Common Stock will (i) not participate in distributions until
the later to occur of funds from operations ("FFO") per Common Share as defined
below, aggregating $1.80 during any period of four consecutive calendar
quarters, or January 1, 2000; thereafter, the Class B Common Stock will
participate in distributions (other than liquidating distributions), at the rate
of 97% of the per share distributions on the Common Stock, provided that
cumulative distributions of at least $0.22 per quarter per share have been paid
on the Common Stock, (ii) not participate in liquidating distributions, (iii)
not be entitled to vote (except as expressly required by California law) and
(iv) automatically convert into Common Stock, on a share for share basis, upon
the later to occur of FFO per Common Share aggregating $3.00 during any period
of four consecutive calendar quarters or January 1, 2003.
For these purposes FFO, means net income (loss) (computed in accordance
with generally accepted accounting principles) before (i) gain (loss) on early
extinguishment of debt, (ii) minority interest in income and (iii) gain (loss)
on disposition of real estate, adjusted as follows: (i) plus depreciation and
F-19
amortization (including the Company's pro-rata share of depreciation and
amortization of unconsolidated equity interests and amortization of assets
acquired in the Merger, including property management agreements and goodwill),
and (ii) less FFO attributable to minority interest. For these purposes, FFO per
Common Share means FFO less preferred stock dividends (other than dividends on
convertible preferred stock) divided by the outstanding weighted average shares
of Common Stock assuming conversion of all outstanding convertible securities
and the Class B Common Stock.
For these purposes, FFO per share of Common Stock (as defined) was $1.86
for the year ended December 31, 1996.
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. At
December 31, 1996, the Company had no outstanding shares of Equity Stock.
Dividends
---------
The characterization of dividends for Federal income tax purposes is made
based upon earnings and profits of the Company, as defined by the Internal
Revenue Code. Distributions declared by the Board of Directors (including
distributions to the holders of preferred stock) in 1996, 1995 and 1994 were
characterized as ordinary income.
The following summarizes dividends paid during 1996, 1995 and 1994 (with
the exception of the Series G Preferred Stock distributions which were accrued
and unpaid at December 31, 1995):
1996 1995 1994
---------------------- ---------------------- -----------------------
Per share Total Per share Total Per share Total
--------- --------- --------- --------- --------- ---------
(in thousands, except per share data)
Series A $ 2.500 $ 4,563 $ 2.500 $ 4,563 $ 2.500 $ 4,563
Series B $ 2.300 5,488 $ 2.300 5,488 $ 2.300 5,340
Series C $ 1.840 2,212 $ 1.970 2,364 $ 1.042 1,250
Series D $ 2.375 2,850 $ 2.375 2,850 $ 0.792 950
Series E $ 2.500 5,488 $ 2.292 5,030 - -
Series F $ 2.437 5,606 $ 1.618 3,721 - -
Series G $ 2.219 15,479 $ 0.092 638 - -
Series H $ 1.978 13,348 - - - -
Series I $ 0.359 1,438 - - - -
Convertible $ 2.063 4,679 $ 2.063 4,744 $ 2.063 4,743
Series CC $97.500 5,748 - - - -
Mandatory Convertible
Participating $54.487 1,700 $55.322 1,726 - -
---------- --------- ---------
68,599 31,124 16,846
Common $0.880 67,709 $ 0.880 38,586 $ 0.850 21,249
---------- --------- ---------
$136,308 $69,710 $38,095
========== ========= =========
The dividend rate on the Series C Preferred Stock is adjusted quarterly and
is equal to the highest of one of three U.S. Treasury indices (Treasury Bill
Rate, Ten Year Constant Maturity Rate, and Thirty Year Constant Maturity Rate)
multiplied by 110%. However, the dividend rate for any dividend period will not
be less than 6.75% per annum nor greater than 10.75% per annum. The dividend
rate with respect to the first quarter of 1997 will be equal to 7.26% per annum.
The Mandatory Convertible Participating Preferred Stock was issued in
connection with the acquisition of all of the limited partnership interests in a
F-20
real estate limited partnership in 1995. Dividends with respect to the Mandatory
Convertible Participating Preferred Stock varied depending on operating results
of the underlying real estate facilities of the partnership. During June 1996,
the Mandatory Convertible Participating Preferred Stock was exchanged for common
stock of the Company.
12. Stock options
-------------
The Company has a 1990 Stock Option Plan (which was adopted by the Board of
Directors in 1990 and approved by the shareholders in 1991) (the "1990 Plan")
which provides for the grant of non-qualified stock options. The Company has a
1994 Stock Option Plan (which was adopted by the Board of Directors and approved
by the shareholders in 1994) (the "1994 Plan") and a 1996 Stock Option and
Incentive Plan (which was adopted by the Board of Directors and approved by the
shareholders in 1996 (the "1996 Plan"), each of which provides for the grant of
non-qualified options and incentive stock options. (The 1990 Plan, the 1994 Plan
and the 1996 Plan are collectively referred to as the "Plans"). Under the Plans,
the Company has granted non-qualified options to certain directors, officers and
key employees and service providers 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 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 and 1996 Plan, ten years after the date of grant. The 1996 Plan also
provides for the grant of restricted stock to officers, key employees and
service providers on terms determined by the Audit Committee of the Board of
Directors; no shares of restricted stock have been granted.
Information with respect to the Plans during 1996 and 1995 is as follows:
1996 1995
------------------------- ----------------------
Weighted Weighted
Number Average Number Average
of Price per of Price per
Options Share Options Share
----------- --------- --------- ---------
Options outstanding January 1 693,667 $13.61 512,834 $11.88
Granted 1,183,000 21.39 227,500 16.48
Exercised (100,663) 10.29 (46,667) 8.63
Canceled (23,835) 16.02 - -
----------- --------- --------- ---------
Options outstanding December 31 1,752,169 $19.02 693,667 $13.61
========= =========
$8.125 $8.125
Option price range at December 31 to 25.875 to $18.00
Options exercisable at December 31 367,947 $13.05 302,485 $10.89
=========== ========= ========= =========
Options available for grant at December 31 3,497,835 807,000
=========== =========
In 1996, the Company adopted the disclosure requirement provision of SFAS
123 in accounting for stock-based compensation issued to employees. As of
December 31, 1996 and 1995, there were 1,391,500 and 208,500 options
outstanding, respectively, that were subject to SFAS 123 disclosure
requirements. The fair value of these options was estimated utilizing prescribed
valuation models and assumptions as of each respective grant date. Based on the
results of such estimates, management determined that there was no material
effect on net income or earnings per share for the years ended December 31, 1996
and 1995. The remaining contractual lives were 8.6 and 7.2 years, respectively,
at December 31, 1996 and 1995.
13. Proposed mergers
----------------
In December 1996, Public Storage Properties XIV, Inc. ("Properties 14") and
Public Storage Properties XV, Inc. ("Properties 15") each agreed, subject to
certain conditions, to merge with and into the Company. Properties 14 and
Properties 15 are affiliated publicly traded equity REITs. Each of the mergers
F-21
is conditioned on approval by the respective shareholders of Properties 14 and
Properties 15. However, the mergers are not conditioned on approval of each
other. The Company expects that if approved by the shareholders, the mergers
would be completed in April 1997.
The estimated value of the Properties 14 and Properties 15 merger is
approximately $63.8 million and $58.5 million, respectively. Properties 14 and
Properties 15 own 14 properties (912,000 square feet) and 19 properties
(1,087,000 square feet), respectively. The Company currently owns approximately
33% and 35% of the economic interest in Properties 14 and Properties 15,
respectively.
14. Restructuring of commercial properties operations
-------------------------------------------------
Effective January 2, 1997, the Company restructured its commercial property
operations by forming a new private REIT that will concentrate its investing
efforts in real estate facilities containing commercial and industrial rental
space. The Company's majority owned subsidiary, Public Storage Commercial
Properties Group, Inc. (which subsequently changed its name to American Office
Park Properties, Inc.), its commercial property manager, contributed all its
property management contracts to a newly created operating partnership in
exchange for the general partnership interest. The Company and the Consolidated
Partnerships contributed substantially all of their commercial properties to the
operating partnership in exchange for limited partnership interests. The limited
partnership interests, pursuant to the terms and conditions of the governing
documents, are convertible into shares of common stock of American Office Park
Properties, Inc. American Office Park Properties, Inc. intends to elect to
operate as a REIT as defined in Section 856 of the Internal Revenue Code
effective January 1, 1997. The restructuring will not immediately impact total
assets, shareholders' equity, or the operations of the company.
The Company believes that the concentration of all the business park
facilities and the property manager into one entity will create a vehicle which
should facilitate future growth in this segment of the real estate industry. The
Company and the affiliates exchanging real estate assets to the new REIT will
participate in the growth through its ownership interest in the new REIT.
F-22
15. Supplementary quarterly financial data (unaudited)
Three months ended
-------------------------------------------------------------
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
-------- --------- ------------- ------------
(in thousands, except per share data)
Revenues $74,967 $83,133 $88,103 $94,919
======= ======= ======= =======
Net income 32,341 37,739 40,366 43,103
====== ====== ====== ======
Per Common Share (Note 2):
Net income $ .24 $ .27 $ .30 $ .29
======= ======= ======= =======
Three months ended
-------------------------------------------------------------
March 31, June 30, September 30, December 31,
1995 1995 1995 1995
-------- --------- ------------- ---------
(in thousands, except per share data)
Revenues $43,198 $47,912 $56,938 $64,602
======= ======= ======= =======
Net income $13,200 $16,551 $19,470 $21,165
======= ======= ======= =======
Per Common Share (Note 2):
Net income $ 0.24 $ 0.26 $ 0.26 $ 0.20
======== ======== ======== ========
Revenues for each of the three month periods in 1996 and 1995 reflect
reclassification to conform with the fiscal 1996 presentation. The three months
ended December 31, 1995 reflects the effect of the PSMI merger.
F-23
Public Storage, Inc.
Exhibit 11 - Statement Re: Computation of Earnings Per Share
For the Year Ended December 31,
----------------------------------------------------------
1996 1995 1994
------------- ------------- -------------
(amounts in thousands, except per share data)
PRIMARY EARNINGS PER SHARE:
- ---------------------------
Net income $153,549 $70,386 $42,118
Less: Preferred Stock Dividends:
10% Cumulative Preferred Stock, Series A (4,563) (4,563) (4,563)
9.20% Cumulative Preferred Stock, Series B (5,488) (5,488) (5,339)
Adjustable Rate Preferred Stock, Series C (2,212) (2,364) (1,250)
9.50% Cumulative Preferred Stock, Series D (2,850) (2,850) (950)
10.00% Cumulative Preferred Stock, Series E (5,488) (5,030) -
9.50% Cumulative Preferred Stock, Series F (5,606) (3,721) -
8-7/8% Cumulative Preferred Stock, Series G (15,479) (638) -
8.45% Cumulative Preferred Stock, Series H (13,348) - -
8-5/8% Cumulative Preferred Stock, Series I (1,438) - -
8.25% Convertible Preferred Stock (4,679) (4,744) (4,744)
Mandatory Convertible Participating Preferred Stock (1,700) (1,726) -
Mandatory Convertible Preferred Stock, Series CC (5,748) - -
---------- ------------- ------------
Net income allocable to common shareholders $84,950 $39,262 $25,272
======= ======= =======
Weighted Average common and common equivalent shares outstanding:
Weighted average common shares outstanding 77,117 41,039 23,978
Net effect of dilutive stock options - based on treasury
stock method using average market price 241 132 98
--------- -------- --------
Total 77,358 41,171 24,077
====== ====== ======
Primary earnings per common and common equivalent share $ 1.10 $ 0.95 $ 1.05
======= ======= =======
Exhibit-11
For the Year Ended December 31,
----------------------------------------------
1996 1995 1994
----------- ----------- ------------
(amounts in thousands, except per share data)
FULLY-DILUTED EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
- -------------------------------------------------------------
Net income allocable to common shareholders per Primary calculation above $84,950 $39,262 $25,272
Add: Dividends to 8.25% Convertible Preferred Stock 4,679 4,744 4,744
Add: Dividends to Mandatory Convertible Participating Preferred Stock 1,700 1,726 -
Add: Dividends to Mandatory Convertible Preferred Stock, Series CC 5,748 - -
-------- ------------ ------------
Net income allocable to common shareholders for purposes of determining
Fully-diluted Earnings per Common and Common Equivalent Share $97,077 $45,732 $30,016
======= ======= =======
Weighed average common and common equivalent shares outstanding 77,358 41,171 24,077
Pro forma weighted average common shares assuming conversion of 8.25%
Convertible Preferred Stock at date of issuance (July 15, 1994) 3,823 3,872 3,872
Pro forma weighted average common shares assuming conversion of the
Mandatory Convertible Participating Preferred Stock at date of
issuance (July 1, 1995) 715 785 -
Pro forma weighted average common shares assuming conversion of the
Mandatory Convertible Preferred Stock, Series CC at date of issuance
(April 1, 1996) 1,548 - -
======== ============ ===========
Weighed average common and common equivalent shares for purposes of computation
of Fully-diluted Earnings per Common and Common Equivalent
Share 83,444 45,828 27,949
====== ====== ======
Fully-diluted Earnings per Common and Common
Share (1) $ 1.16 $ 1.00 $ 1.07
======== ======== =======
(1) Such amounts are anti-dilutive and are not presented in the Company's
consolidated financial statements. The 8.25% Convertible Preferred Stock,
the Mandatory Convertible Participating Preferred Stock and the Mandatory
Convertible Preferred Stock, Series CC are individual anti-dilutive with an
incremental earnings per common share of $1.22, $2.38 and $3.71,
respectively, for 1996.
In addition, the Company has 7,000,000 shares of Class B Common Stock which
are convertible into shares of the Company's Common Stock subject to the
attainment of certain earnings milestone by the Company. The assumption of
such earnings and the pro forma conversion of the Class B Common Stock into
Common Stock in the above computations would have resulted in an increase
in the fully-diluted earnings per common share, and accordingly, is
anti-dilutive.
Exhibit-11
PUBLIC STORAGE, INC.
EXHIBIT 12 - STATEMENT RE: COMPUTATION OF RATIO OF
EARNINGS TO FIXED CHARGES
For the Year Ended December 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------- -------
(Amounts in thousands, except ratios)
Net income $153,549 $70,386 $42,118 $28,036 $15,123
Add: Minority interest in income 9,363 7,137 9,481 7,291 6,895
Less: Gain on disposition of real estate - - - - (398)
Less: Minority interests in income
which do not have fixed charges (8,273) (4,700) (5,906) (737) (694)
-------- ------- ------- ------- -------
Income from continuing operations 154,639 72,823 45,693 34,590 20,926
Interest expense 8,482 8,508 6,893 6,079 9,834
-------- ------- ------- ------- -------
Total Earnings Available to Cover
Fixed Charges $163,121 $81,331 $52,586 $40,669 $30,760
======== ======= ======= ======= =======
Total Fixed Charges - Interest expense $10,343 $8,815 $6,893 $6,079 $9,834
======== ======= ======= ======= =======
Total Preferred Stock dividends $68,599 $31,124 $16,846 $10,889 $812
======== ======= ======= ======= =======
Total Combined Fixed Charges and
Preferred Stock dividends $78,942 $39,939 $23,739 $16,968 $10,646
======== ======= ======= ======= =======
Ratio of Earnings to Fixed Charges 15.77 9.23 7.63 6.69 3.13
======== ======= ======= ======= =======
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock dividends 2.07 2.04 2.22 2.40 2.89
======== ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF RATIO OF FUNDS
- ---------------------------------------------
FROM OPERATIONS ("FFO") TO FIXED
-----------------------------------
CHARGES:
--------
FFO $224,384 $105,086 $56,143 $35,830 $21,133
Interest expense 8,482 8,508 6,893 6,079 9,834
-------- ------- ------- ------- -------
Adjusted FFO available to cover fixed charges $232,866 $113,594 $63,036 $41,909 $30,967
======== ======= ======= ======= =======
Total Fixed Charges - Interest expense $10,343 $8,815 $6,893 $6,079 $9,834
======== ======= ======= ======= =======
Total Preferred Stock dividends $68,599 $31,124 $16,846 $10,889 $812
======== ======= ======= ======= =======
Total Combined Fixed Charges and
Preferred Stock dividends $78,942 $39,939 $23,739 $16,968 $10,646
======== ======= ======= ======= =======
Ratio of FFO to Fixed Charges 22.51 12.88 9.15 6.89 3.15
======== ======= ======= ======= =======
Ratio of FFO to Combined Fixed
Charges and Preferred Stock dividends 2.95 2.84 2.66 2.47 2.91
======== ======= ======= ======= =======
Exhibit-12
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
on Form S-8 (No. 33-36004) of Public Storage, Inc., formerly Storage Equities,
Inc., pertaining to the 1990 Stock Option Plan, the Registration Statement on
Form S-8 (No. 33-55541) pertaining to the 1994 Stock Option Plan, the
Registration Statement on Form S-8 (no. 333-13463) pertaining to the 1996 Stock
Option and Incentive Plan, the Registration Statements on Form S-3 (Nos.
333-00965 and 333-18395) and in the related prospectus and Registration
Statement on Form S-4 (No. 33-64971) and in the related prospectus of our report
dated February 25, 1997 with respect to the consolidated financial statements
and schedules of Public Storage, Inc. for the years ended December 31, 1996,
1995 and 1994 included in the Annual Report (Form 10-K) for 1996 filed with the
Securities and Exchange Commission.
ERNST & YOUNG L L P
March 27, 1997
Los Angeles, California
Exhibit-23