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As filed with the Securities and Exchange Commission on February 13, 2003
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
PUBLIC STORAGE, INC.
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of incorporation or organization)
| 95-3551121 |
6798 | |
| (I.R.S. Employer Identification No.) |
(Primary Standard Industrial Classification Code Number) |
| HARVEY LENKIN | ||
| 701 Western Avenue |
Public Storage, Inc. | |
| Glendale, California 91201-2397 |
701 Western Avenue | |
| (818) 244-8080 |
Glendale, California 91201-2397 | |
| (Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices) |
(818) 244-8080 | |
| (Name, address, including zip code, and telephone | ||
| Number, including area code, of agent for service) |
Copies to:
DAVID GOLDBERG, ESQ.
Public Storage, Inc.
701 Western Avenue
Glendale, California 91201-2397
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this
Registration Statement.
If the only securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. ¨
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
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CALCULATION OF REGISTRATION FEE
| Title Of Each Class Of Securities To Be Registered |
Amount To Be Registered |
Offering Price Per Share |
Proposed Maximum Aggregate Offering Price |
Proposed Maximum Amount Of Registration Fee | ||||
| Common Stock, $.10 par value per share |
1,500,000 shares(1) |
(1) |
$6,527,627.01(1) |
$601(1)(2) | ||||
| (1) | This Registration Statement relates to the proposed acquisition by the Registrant of all of the 52,851 units of limited partnership interest (“Units”) in PS Partners IV, Ltd., a California Limited Partnership (the “Partnership”) that are not currently owned by the Registrant. The Registrant’s acquisition of the 52,851 Units will be accomplished through a merger of a subsidiary of the Registrant into the Partnership and the conversion of the 52,851 Units into either cash or common stock of the Registrant. The book value of the Units at September 30, 2002 was $123.51 per Unit. The maximum number of shares of Registrant to be issued in the merger is 1,500,000. The exact number of shares of common stock of the Registrant to be issued in the merger cannot be determined at this time. |
| (2) | Calculated in accordance with rule 457(f)(2) under the Securities Act of 1933. All of the registration fee was previously paid in connection with the Partnership’s preliminary information statement. |
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PS PARTNERS IV, LTD.,
A CALIFORNIA LIMITED PARTNERSHIP
701 Western Avenue
Glendale, California 91201-2349
, 2003
Dear Limited Partner:
We enclose an information statement, notice of action without a meeting and prospectus and accompanying cash election form relating to the acquisition by Public Storage of all of the units of limited partnership interest in the Partnership not currently owned by Public Storage. Public Storage, a general partner of the Partnership, indirectly owns 59% of the Partnership units. Public Storage is acquiring the units through a merger in which each of your units will be converted into the right to receive a value of $442 in Public Storage common stock or, at your election, in cash.
Following the merger, the Partnership will remain in existence, and Public Storage and B. Wayne Hughes will continue as general partners of the Partnership.
The Partnership is not asking you to approve the merger or related amendment to the partnership agreement. Public Storage, the holder of a majority of the Partnership units, has executed a written consent approving the merger and the related amendment to the partnership agreement.
We are not asking you for a proxy and you are requested not to send us a proxy. If you want to receive cash in this transaction, you must make a cash election by , 2003, as described in the accompanying cash election form.
If you have any questions, please contact Public Storage’s Investor Services Department at (800) 421-2856 or (818) 244-8080.
| Very truly yours,
PUBLIC STORAGE, INC. General Partner |
| By: Harvey Lenkin |
| President |
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PUBLIC STORAGE, INC.
PS PARTNERS IV, LTD.,
A CALIFORNIA LIMITED PARTNERSHIP
INFORMATION STATEMENT, NOTICE OF ACTION WITHOUT A MEETING AND PROSPECTUS
We are furnishing this information statement, notice of action without a meeting and prospectus to limited partners of PS Partners IV, Ltd., a California Limited Partnership (the “Partnership”) in connection with the acquisition by Public Storage, Inc. of all of the units of limited partnership interest not currently owned by Public Storage. Public Storage, a general partner of the Partnership, indirectly owns 59% of the Partnership units. Public Storage is acquiring the units through a merger in which each unit not currently owned by Public Storage will be converted into the right to receive a value of $442 in Public Storage common stock or, at your election, in cash. Following the merger, the Partnership will remain in existence, and Public Storage and B. Wayne Hughes will continue as general partners of the Partnership.
See “Risk Factors” beginning on page 15 for certain factors that you should consider, including the following:
| • | Public Storage owns sufficient Partnership units to approve the merger without your vote and has done so. |
| • | Public Storage and the Partnership have not (1) negotiated the merger at arm’s length, (2) hired independent persons to negotiate the terms of the merger for you or (3) asked any person to make an offer to buy the Partnership’s assets. |
| • | The merger will be taxable for most of you. This means that original taxable limited partners who receive either cash or stock will recognize a substantial taxable gain. |
| • | After the merger, if you do not elect cash you will own an investment in an ongoing fully-integrated real estate company instead of an interest in a specified portfolio of properties for a fixed period. |
| • | If you receive Public Storage common stock, your level of distributions may be lower after the merger than the amount you received as a limited partner of the Partnership. |
| • | The Partnership’s assets might be worth more later. Public Storage will realize the benefit of any increase in value. |
| • | You will not be entitled to dissenters’ rights of appraisal under California law in the merger. |
| • | Public Storage, which controls the Partnership, has significant conflicts of interest in connection with, and will benefit from, the merger. In the absence of these conflicts, the terms of the merger may have been more favorable to you. |
The Public Storage common stock is traded on the New York Stock Exchange under the symbol “PSA.” On , 2003, the closing price of the Public Storage common stock on the NYSE was $ . There is no active market for the Partnership units.
The Partnership is not asking you to approve the merger or related amendment to the partnership agreement. Public Storage, the holder of a majority of the Partnership units, has executed a written consent
We are not asking you for a proxy and you are requested not to send us a proxy. If you want to receive cash in this transaction, you must make a cash election by ,2003, as described in the accompanying cash election form.
Neither the Securities and Exchange Commission nor any state’s securities regulator has approved the common stock of Public Storage to be issued under this Information Statement, Notice of Action Without a Meeting and Prospectus or determined if this Information Statement, Notice of Action Without a Meeting and Prospectus is accurate or adequate. Any representation to the contrary is a criminal offense.
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approving the merger and the related amendment to the partnership agreement. We are mailing this statement on or about , 2003 to limited partners of record at the close of business on the date of this statement.
We are not asking you for a proxy and you are requested not to send us a proxy. If you want to receive cash in this transaction, you must make a cash election by ,2003, as described in the accompanying cash election form.
Neither the Securities and Exchange Commissin nor any state’s securities regulator has approved the common stock of Public Storage to be issued under this Information Statement, Notice of Action Without a Meeting and Prospectus or determined if this Information Statement, Notice of Action Without a Meeting and Prospectus is accurate or adequate. Any representation to the contrary is a criminal offense.
, 2003
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| Page | ||
| 85 | ||
| 85 | ||
| 86 | ||
| 86 | ||
| 98 | ||
| 100 | ||
| 101 | ||
| Information Reporting and Backup Withholding Tax Applicable to Shareholders |
104 | |
| 105 | ||
| 105 | ||
| 106 | ||
| F-1 |
| Appendix A |
– |
Agreement and Plan of Reorganization among Public Storage, PS Partners IV Merger Co., Inc. and the Partnership dated as of December 18, 2002. | ||
| Appendix B |
– |
Real Estate Appraisal Report by Charles R. Wilson & Associates, Inc. for the Partnership dated September 16, 2002 | ||
| Appendix C |
– |
Opinion of Robert A. Stanger & Co., Inc. dated February 12, 2003 |
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The following summary is qualified by the detailed information appearing elsewhere in this statement, including the appendices.
Public Storage is acquiring the Partnership units Public Storage does not currently own in the merger under the Agreement and Plan of Reorganization attached as Appendix A to this statement as follows:
| • | A wholly owned, second tier subsidiary of Public Storage will be merged into the Partnership. |
| • | Each Partnership unit (other than units already owned directly or indirectly by Public Storage) will be converted into the right to receive a value of $442 in Public Storage common stock or, at your election, in cash. To be effective you must make a cash election by , 2003, as described in the accompanying cash election form. |
| • | The Partnership will make a cash distribution to holders of Partnership units as of April 28, 2003, the Effective Date, to cause the estimated net asset value per unit as of the Effective Date, to be substantially equivalent to $442 as described under “—Determination of Amounts to be Received by Limited Partners in the Merger.” This payment is expected to be made shortly after the Effective Date. |
| • | The market value of the Public Storage common stock issued in the merger will be based on the average of the per share closing prices of the Public Storage common stock on the NYSE during the 20 consecutive trading days ending on the fifth trading day prior to the Effective Date. If, prior to the Effective Date, Public Storage should split or combine the Public Storage common stock, or pay a stock dividend, the Public Storage common stock issued in the merger will be appropriately adjusted to reflect such action. |
| • | Following the merger, Public Storage will own all Partnership units (through wholly owned entities), the Partnership will remain in existence, and Public Storage and Mr. Hughes will continue as general partners of the Partnership. |
See “The Merger—Determination of Amounts to be Received by Limited Partners in the Merger.” For a description of the terms of the merger, see “The Merger—The Merger Agreement.”
The Public Storage common stock is listed on the NYSE. On , 2003, the last full trading day prior to the date of this statement, the reported closing price per share of Public Storage common stock was $ . There is no established trading market for the Partnership units. See “Distributions and Price Range of Public Storage Common Stock” and “Distributions and Market Prices of Partnership Units.”
The merger involves certain risks and detriments that you should consider, including the following:
| • | Vote by Public Storage. Public Storage owns sufficient Partnership units to approve the merger without your vote and approved the merger on December 18, 2002. |
| • | No Arm’s Length Negotiation or Independent Representatives. Public Storage and the Partnership have not (1) negotiated the merger at arm’s length or (2) hired independent persons to negotiate the |
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terms of the merger for you. If independent persons had been hired, the terms of the merger may have been more favorable to you.
| • | changes its portfolio of properties from time to time without approval of shareholders; |
| • | does not plan to sell its assets within a fixed period of time; and |
| • | is engaged in all aspects of the mini-warehouse industry, including property development and management. |
If you receive Public Storage common stock in the merger, you will be able to liquidate your investment only by selling your shares. The market value of your shares may or may not reflect the full fair market value of Public Storage’s assets and will fluctuate.
| • | Potential Loss of Future Appreciation. The Partnership’s assets may be worth more later. Public Storage will realize the benefit of any increase in value. |
| • | No Dissenters’ Rights of Appraisal. You will not be entitled to dissenters’ rights of appraisal under California law in the merger. |
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Public Storage’s charter documents restrict the number of Public Storage shares that may be owned by any other person. These ownership factors should prevent any takeover of Public Storage not approved by Mr. Hughes.
| • | Financing Risks. Public Storage, unlike the Partnership, borrows money ($122 million at September 30, 2002), which increases the risk of loss. |
The merger involves certain benefits to Public Storage, including the following:
| • | Own All Partnership Units. As a result of the merger, Public Storage will own all of the Partnership units without taxable gain to Public Storage. |
| • | Cost Efficiencies. The merger will eliminate almost all Partnership administrative expenses, much of which has been borne by Public Storage as owner of 59% of the Partnership units. |
| • | Issue Capital Stock. The merger will enable Public Storage, which is seeking to expand its capital base, to issue up to 1,500,000 shares of common stock. |
| • | Eliminate Conflicts of Interest. The merger will eliminate the conflicts of interest resulting from the competition of the Partnership’s properties with other mini-warehouses owned by Public Storage. |
Potential Benefits of the Merger
The following are the principal potential benefits of the merger to you:
| (1) | If you elect to receive cash, you will liquidate your investment at an amount higher than the prices in the limited secondary transactions involving Partnership units. Also, you will simplify your tax reporting for years after 2003. |
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| (2) | If you receive Public Storage common stock, the principal potential benefits to you are: |
| • | Ownership Interest in a Diversified Real Estate Company. Because the Partnership is not authorized to issue new securities or to reinvest sale or financing proceeds, the Partnership is less able to take advantage of new real estate investment opportunities. In contrast, Public Storage has a substantially larger, more diversified investment portfolio that reduces the risks associated with any particular assets or group of assets and increases Public Storage’s ability to access capital markets for new capital investments. |
| • | Increased Liquidity. There is no active market for the Partnership units. In comparison, Public Storage has approximately 117.4 million shares of common stock listed on the NYSE with an average daily trading volume during the 12 months ended September 30, 2002 of approximately 219,800 shares. Given Public Storage’s market capitalization and trading volume, you are likely to enjoy a more active trading market and increased liquidity for the Public Storage common stock you receive. |
| • | Simplified Tax Reporting. The merger will simplify your tax reporting for years after 2003. |
The Partnership owns one mini-warehouse directly and interests in 32 mini-warehouses jointly with Public Storage (collectively, the “Properties”). The Partnership also owns a 2% interest in PS Business Parks, L.P. (“PSBP”) jointly with Public Storage. Public Storage has a significant interest in PSBP, which owns and operates commercial properties. See “Description of Partnership’s Properties.”
The general partners of the Partnership are Public Storage and Mr. Hughes. Public Storage manages and operates the Properties under the “Public Storage” name. See “Description of Partnership Properties.” There is no active market for the Partnership units. See “Distributions and Market Prices of Partnership Units.”
Public Storage is a fully integrated, self-administered and self-managed REIT that acquires, develops, owns and operates mini-warehouses. Public Storage is the largest owner and operator of mini-warehouses in the United States. At September 30, 2002, Public Storage had equity interests (through direct ownership, as well as general and limited partnership interests) in 1,407 storage facilities located in 37 states. Public Storage also has an interest in PSBP.
The principal executive offices of the Partnership and Public Storage are located at 701 Western Avenue, Glendale, California 91201-2349. The telephone number is (818) 244-8080.
Background and Reasons for the Merger
Public Storage and the Partnership have not negotiated the merger at arm’s length. Public Storage has structured the merger. Public Storage controls the Partnership and has significant conflicts of interest in connection with, and will benefit from, the merger. Public Storage and Mr. Hughes, the general partners of the Partnership, believe that the merger is fair to you. This is based in significant part on a third party appraisal of the Properties and on the opinion of a financial advisor, in which the general partners concur.
The general partners organized the Partnership in 1985 to acquire properties jointly with Public Storage and alone. The Partnership is well beyond its original anticipated term. The Partnership originally anticipated selling the Properties and liquidating from five to eight years after acquisition, i.e., between 1990 and 1993.
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Public Storage was organized in 1980 and has increased its asset and capital base substantially since that time. Much of Public Storage’s growth has resulted from increasing its interest in affiliated entities, like the Partnership.
After the merger, Public Storage will own all of the Partnership units, and the merger will eliminate almost all Partnership administrative expenses, including the cost of operating as a public entity.
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The consideration you receive in the merger is based on the appraised value of the Properties as determined by a third party appraiser, Charles R. Wilson & Associates, Inc. (“Wilson”), as of June 30, 2002. The general partners believe that the merger is fair to you. This is based in significant part on the Wilson appraisal of the Properties and on the opinion of a financial advisor, Robert A. Stanger & Co., Inc. (“Stanger”), in which the general partners concur.
The general partners considered liquidation and continued ownership by limited and general partners as alternatives to the merger. The general partners believe that the consideration to be received by you in the merger compares favorably with other alternatives. The general partners did not ask any person to buy the Partnership’s assets.
In comparing the merger to other alternatives, the general partners noted the following:
Liquidation. In a liquidation the proceeds available for distribution to limited partners would be reduced by expenses of sale. However, if the Partnership liquidated its assets through asset sales to unaffiliated third parties, you would not need to rely upon a real estate portfolio appraisal to estimate the fair market value of the Properties and you could use the cash received in the liquidation to purchase shares of Public Storage common stock in the public market.
Continued Ownership. The Partnership is operating profitably. Continued ownership by the limited and general partners should provide you with continued distributions of net operating cash flow and participation in any future potential appreciation of the Properties and would avoid many of the risks described under “Risk Factors.” However, continued ownership by the limited and general partners would fail to provide you with liquidity through receipt of Public Storage common stock or, at your election, a cash payment for your Partnership units and would fail to provide Public Storage with the benefits described under “Benefits to Insiders.”
For a summary of certain risks and detriments of the merger, refer to “—Summary Risk Factors” beginning on page 1.
Determination of Amounts to be Received by Limited Partners in the Merger
In connection with the merger, you will receive a value of $442 per Partnership unit in cash or Public Storage common stock. In addition, as noted in note (7) below, you will also receive a final distribution in cash equal to the amount by which the value of a unit on the Effective Date exceeds $442. The general partners have determined the amount to be received by you in the merger based on the estimated net asset value per unit computed as follows:
| Estimated value of Partnership’s interest in the Properties (1) |
$ |
46,210,200 |
| |
| Plus: |
||||
| Market value of Partnership’s interest in PSBP (2) |
|
9,580,900 |
| |
| Partnership’s interest in other tangible net assets and liabilities (3) |
|
1,315,500 |
| |
| Net proceeds available for distribution |
|
57,106,600 |
| |
| Distributions to general partners (4) |
|
(571,100 |
) | |
| Distributions to limited partners |
$ |
56,535,500 |
| |
| Amount per Partnership unit (5)(6)(7)(8) |
$ |
442 |
| |
| (1) | Reflects appraised value of the Properties determined by Wilson as of June 30, 2002. Assumes a sale of the Properties at the appraised value and that the proceeds from the sale of the Properties, together with other tangible net assets and liabilities of the joint ventures as of September 30, 2002, are allocated |
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| between the Partnership and Public Storage based on their joint venture agreement. See “Description of Partnership’s Properties” and “The Merger—Real Estate Portfolio Appraisal by Wilson.” |
| (2) | Reflects closing price of shares of PS Business Parks, Inc. on The American Stock Exchange, Inc. (“AMEX”) as of October 31, 2002 (the PSBP partnership interests are exchangeable for those shares on a one unit for one share basis). Assumes a sale of the units at that price and an allocation of the proceeds between the Partnership and Public Storage based on their joint venture agreement. See note (7) below. |
| (3) | Reflects the Partnership’s interest in cash and other non-real estate assets offset by the Partnership’s interest in prepaid rents, security deposits, accounts payable and accrued expenses as of September 30, 2002. |
| (4) | Represents subordinated incentive distributions payable to the general partners and distributions attributable to the general partners’ 1% capital interest in the Partnership. In accordance with the Partnership Agreement, no subordinated incentive distributions are payable at this time. |
| (5) | Based on 128,000 Partnership units. |
| (6) | Upon completion of the merger, each Partnership unit would be converted into Public Storage common stock with a value of $442 or, at the election of a limited partner, $442 in cash. The number of shares of Public Storage common stock to be issued in the merger will be determined by dividing $442 by the average of the closing prices of Public Storage common stock during the 20 consecutive trading days ending on the fifth trading day prior to the Effective Date. If, prior to the Effective Date, Public Storage should split or combine the Public Storage common stock, or pay a stock dividend, the Public Storage common stock issued in the merger will be appropriately adjusted to reflect such action. The market price of Public Storage common stock may fluctuate after the date that the number of shares to be issued to limited partners in the merger is determined and before those shares actually are issued. |
| (7) | On the Effective Date, the value of the Partnership units will be recomputed. A cash distribution will be made to limited partners as of the Effective Date in an amount by which the recomputed value exceeds $442 to cause the estimated net asset value per Partnership unit as of the Effective Date to be substantially equivalent to $442 per unit. In computing the estimated net asset value per unit as of the Effective Date, the estimated value of the Partnership’s interest in the Properties will be based on the June 30, 2002 property appraisal, the PSBP partnership interests will be valued at the average of the per share closing price on the AMEX of the shares of PS Business Parks, Inc. during the 20 consecutive trading days ending on the fifth trading day prior to the Effective Date and the Partnership’s interest in the tangible net assets and liabilities (including the tangible net assets and liabilities of the joint ventures) will be measured as of the last day of the calendar month preceding the Effective Date. |
| (8) | Original purchase price of a Partnership unit was $500. |
The merger will be a taxable event and result in taxable gain or loss to most of you whether you receive cash or stock. Taxable limited partners will recognize gain or loss in an amount equal to the difference between the value of what they receive in the merger (cash or stock) and their adjusted basis in their Partnership units. It has been estimated that an original limited partner will realize approximately $270 of taxable gain per Partnership unit as a result of the merger (assuming that the merger is effective as of the end of the first quarter of 2003). The merger should not be a taxable event to Public Storage. See “Federal Income Tax Considerations—The Merger.”
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Fairness Analysis; Opinion of Financial Advisor
Public Storage and the Partnership have not negotiated the merger at arm’s length. Public Storage has structured the merger. Public Storage controls the Partnership and has significant conflicts of interest in connection with, and will benefit from, the merger. The general partners believe that the merger is fair to you. This is based in significant part on the Wilson appraisal and the opinion of a financial advisor, in which the general partners concur.
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The general partners base their conclusion on the following factors:
| • | The Wilson appraisal of the Properties. |
| • | Stanger delivered a fairness opinion to the Partnership. |
| • | Although the merger has been structured by Public Storage, the merger provides you with a choice of converting your investment into an investment in Public Storage or receiving cash for your investment. |
| • | Based on certain significant assumptions, qualifications and limitations, the consideration to be received by you compares favorably with other alternatives. |
The general partners believe that the consideration to be received by you in the merger compares favorably with:
| • | the prices of the limited secondary sales of Partnership units; |
| • | a range of estimated going-concern values per unit; |
| • | an estimated liquidation value per unit; and |
| • | the book value per unit. |
The general partners recognize that these comparisons are subject to significant assumptions, qualifications and limitations. See “The Merger—Comparison of Consideration to be Received in the Merger to Other Alternatives.”
The Partnership engaged Stanger to deliver a written summary of its determination as to the fairness of the consideration to be received in the merger, from a financial point of view, to you. The full text of the opinion is set forth in Appendix C to this statement and should be read in its entirety. Subject to the assumptions, qualifications and limitations contained in the fairness opinion, the fairness opinion concludes that, as of the date of the fairness opinion, the consideration to be received in the merger is fair to you, from a financial point of view. In arriving at its opinion, Stanger considered, among other things
| • | the independent appraised value of the Properties; |
| • | the estimated liquidation value of the Partnership prepared by the Partnership, based upon a sale of the Partnership’s assets to a third party for cash; |
| • | financial analyses and projections prepared by the general partners concerning the going-concern value of the Partnership under its current business plan; and |
| • | a comparison of limited secondary sales prices of Partnership units with the consideration being received by you in the merger. |
The Partnership did not ask Stanger to
| • | select the method of determining the consideration being received by you in the merger; |
| • | make any recommendation to you whether to select cash or Public Storage common stock in the merger; |
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| • | express any opinion as to the business decision regarding the merger or its alternatives or tax factors resulting from the merger or relating to Public Storage’s qualification as a REIT; or |
| • | conduct an independent appraisal of the Properties or the value of the Partnership units. |
Stanger’s opinion is based on business, economic, real estate and securities markets and other conditions as of the date of its analysis. See “The Merger—Fairness Opinion from Stanger.”
The general partners believe that hiring Wilson to appraise the Properties and Stanger to deliver a fairness opinion helped the general partners fulfill their duties to you. However, the Partnership is paying Wilson and Stanger for their services and Public Storage is expected to pay them for other assignments. See “The Merger—Real Estate Portfolio Appraisal by Wilson” and “—Fairness Opinion from Stanger.”
Conditions to Completion of the Merger
Completion of the merger is subject to satisfaction of the following conditions:
| • | the Commission has declared effective the Registration Statement; |
| • | Public Storage has received all other authorizations necessary to issue Public Storage common stock in exchange for Partnership units and to complete the merger; |
| • | holders of a majority of the Partnership units have approved the merger (this condition has been satisfied by Public Storage’s vote of its units in favor of the merger); |
| • | the NYSE has approved the shares of Public Storage common stock issued to limited partners; |
| • | Stanger has issued a fairness opinion to the Partnership (this opinion has been received); |
| • | no legal action challenging the merger is pending; |
| • | the average of the per share closing prices on the NYSE of Public Storage common stock during the 20 consecutive trading days ending on the fifth trading day prior to the Effective Date is not less than $29 (Public Storage does not intend to postpone the merger if this condition is not satisfied in this time frame, and if this condition is not satisfied or waived by Public Storage, Public Storage intends to promptly notify the limited partners in writing); |
| • | the Partnership Agreement is amended as described under “Amendment to Partnership Agreement”; and |
| • | Public Storage in its sole discretion, is satisfied as to title to, and the results of an environmental audit of the Properties. |
Amendment or Termination of the Merger Agreement
The merger agreement may be amended by a written agreement authorized by the board of directors of Public Storage and the general partners. The merger may be abandoned at any time before or after shareholder approval by mutual written consent and may be abandoned by either party if, among other things, the closing of the merger has not occurred on or before June 30, 2003.
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Each holder of record of Partnership units may make a cash election to have his or her Partnership units converted into the right to receive cash in the merger. All cash elections are to be made on a cash election form. A cash election form is being sent to all holders of record of Partnership units on the date of this statement. A duplicate cash election form may be obtained by calling the exchange agent, EquiServe Trust Company, N.A., at the telephone number listed below. To be effective, a cash election form must be properly completed and signed in accordance with the instructions which accompany the cash election form and must be received by the exchange agent, no later than 5:00 p.m. New York City time on , 2003 (the “Election Deadline”) at one of the following addresses:
| By Mail |
By Hand |
By Overnight Courier |
For Assistance |
For information | ||||
| EquiServe Trust 02940-3014 |
Securities Transfer & Reporting Services 100 William Street
Galleria |
EquiServe Trust Company, N.A. Corporate Actions 150 Royall Street Mail Stop 45-02-80 Canton, MA 02021 |
EquiServe Trust Company, N.A. Shareholder Services (781) 575-3120 |
Public Storage, Inc. Investor Services Dept. 701 Western Avenue Glendale, CA 91201-2349 (800) 421-2856 |
Holders of record of units who hold units as nominees, trustees or in other representative capacities may submit multiple cash election forms, provided that such representative certifies that each such cash election form covers all the units held by such representative for a particular beneficial owner. An election may be revoked by the person or persons making such election by a written notice signed and dated by such person or persons and received by the exchange agent at one of the addresses listed above prior to the Election Deadline, identifying the name of the registered holder of the units subject to such election and the total number of units owned by the beneficial owner. In addition, all cash election forms will automatically be revoked if the exchange agent is notified in writing that the merger has been abandoned. The exchange agent may determine whether or not elections to receive cash have been properly made or revoked, and any such determination shall be conclusive and binding.
Amendment to Partnership Agreement
While the general partners do not believe that the partnership agreement prohibits the merger, the partnership agreement is being amended to expressly authorize the merger.
Comparison of Partnership Units with Public Storage Common Stock
The information below summarizes certain principal differences between the Partnership units and the Public Storage common stock. The effect of the merger if you receive Public Storage common stock is set forth in italics below each comparison. For an expanded discussion of these and other comparisons and effects, see “The Merger—Comparison of Partnership Units with Public Storage Common Stock.”
| Partnership |
Public Storage | |
| Investment Objectives and Policies
| ||
| To provide (1) quarterly cash distributions from operations and (2) long-term capital gains through appreciation in the value of the Properties. |
To maximize funds from operations, or FFO, allocable to holders of Public Storage common stock and to increase shareholder value through internal growth and acquisitions. FFO is a supplemental performance measure for equity REITs used by industry analysts. FFO does not |
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| take into consideration principal payments on debt, capital improvements, distributions and other obligations of Public Storage. Accordingly, FFO is not a substitute for Public Storage’s net cash provided by operating activities or net income as a measure of Public Storage’s liquidity or operating performance. An increase in Public Storage’s FFO will not necessarily correspond with an increase in distributions to holders of Public Storage common stock. See “—Liquidity, Marketability and Distributions.” |
If you receive Public Storage common stock in the merger, you will change your investment from “finite life” to “infinite life” and realize the value of your investment only by selling your Public Storage common stock. If Public Storage issues additional securities, including securities that would have priority over Public Storage common stock as to cash flow, distributions and liquidation proceeds, it will dilute the interest of Public Storage shareholders. Public Storage intends to issue additional securities under a currently effective registration statement. See “Risk Factors—The number of shares of Public Storage common stock to be issued in the merger has not been determined” and “—Public Storage and its shareholders are subject to financing risks.”
Borrowing Policies
| No outstanding borrowings. |
Permitted to borrow in furtherance of its investment objectives, subject to certain limitations. |
Public Storage has outstanding debt and reinvests proceeds from borrowings. Incurring debt increases the risk of loss of investment. Public Storage does not plan to finance the Properties.
Transactions with Affiliates
| Limited partner approval required for a variety of business transactions with affiliates, including purchases, sales, leases and loans. See “Amendment to Partnership Agreement.” |
Restricted from acquiring properties from its affiliates or from selling properties to them unless the transaction is approved by a majority of Public Storage’s independent directors and is fair to Public Storage based on an independent appraisal. |
Given Public Storage’s control of all Partnership voting decisions, both Public Storage and the Partnership can enter into transactions with affiliates without the need for approval of either the public shareholders or public limited partners. In the case of Public Storage, however, these transactions require approval of Public Storage’s independent directors.
Properties (As of September 30, 2002)
| Direct and indirect equity interests in 33 mini-warehouses in 15 states. Also owns an interest in PSBP. |
Direct and indirect equity interests in 1,407 storage facilities in 37 states. Also owns a larger interest in PSBP. |
Because Public Storage owns substantially more property interests in more states than the Partnership, the operations of a single property have less effect on Public Storage’s results of operations than in the case of the
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Partnership. Also, it would be more difficult to liquidate Public Storage than the Partnership within a reasonable period of time.
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Liquidity, Marketability and Distributions
| No active trading market for Partnership units. The Partnership may not issue securities having priority over Partnership units. |
Public Storage common stock is traded on the NYSE. During the 12 months ended September 30, 2002, the average daily trading volume of Public Storage common stock was approximately 219,800 shares. Public Storage has issued, and may in the future issue, securities that have priority over Public Storage common stock as to cash flow, distributions and liquidation proceeds. |
The Partnership pays distributions to limited partners from cash available for distribution. Tax laws require Public Storage to distribute at least 90% of its ordinary REIT taxable income in order to maintain its qualification as a REIT. Since Public Storage distributes less than its cash available for distribution (recently distributing amounts approximately equal to its taxable income), it is able to retain funds for additional investment and debt reduction.
If you receive Public Storage common stock in the merger, the market for your investment will be broader and more active than the market for Partnership units. Distributions on Public Storage common stock may be lower than the distributions on the Partnership units. Distributions on Public Storage common stock also are subject to priority of preferred stock.
Additional Issuances of Securities and Anti-Takeover Provisions
| The partnership agreement does not provide for the issuance of additional Partnership units. |
Subject to the rules of the NYSE and applicable provisions of California law, Public Storage can issue authorized capital stock without shareholder approval. |
Both the Partnership and Public Storage can deter attempts to obtain control in transactions not approved by management. In the case of the Partnership, Public Storage owns a majority of the Partnership units. In the case of Public Storage, the Hughes family effectively controls Public Storage and Public Storage has the flexibility to issue capital stock, including senior securities with special voting rights and priority over Public Storage common stock.
The financial data in this section should be read in conjunction with the financial statements included in this statement and in the documents to which limited partners have been referred.
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Public Storage
| Years Ended December 31, |
Nine Months Ended September 30, |
||||||||||||||||||||||||||
| 1997(1) |
1998(1) |
1999(1) |
2000(1) |
2001(1) |
2001 |
2002 |
|||||||||||||||||||||
| ($ In thousands, except per share data) |
(unaudited) |
||||||||||||||||||||||||||
| Operating Data: |
|||||||||||||||||||||||||||
| Total revenues |
$ |
451,473 |
|
$ |
553,753 |
|
$ |
642,786 |
|
$ |
717,684 |
$ |
790,700 |
|
$ |
588,260 |
|
$ |
639,522 |
| |||||||
| Depreciation and amortization |
|
92,746 |
|
|
111,691 |
|
|
137,469 |
|
|
148,662 |
|
167,484 |
|
|
123,187 |
|
|
135,057 |
| |||||||
| Interest expense |
|
6,792 |
|
|
4,507 |
|
|
7,971 |
|
|
3,293 |
|
3,227 |
|
|
3,023 |
|
|
3,284 |
| |||||||
| Equity earnings |
|
17,569 |
|
|
26,602 |
|
|
32,183 |
|
|
36,109 |
|
38,542 |
|
|
28,912 |
|
|
23,739 |
| |||||||
| Minority interest in income |
|
11,684 |
|
|
20,290 |
|
|
16,006 |
|
|
38,356 |
|
46,015 |
|
|
35,370 |
|
|
33,463 |
| |||||||
| Discontinued Operations |
|
(123 |
) |
|
(1,107 |
) |
|
(328 |
) |
|
83 |
|
(494 |
) |
|
(6,951 |
) |
|
(431 |
) | |||||||
| Net income |
$ |
178,649 |
|
$ |
227,019 |
|
$ |
287,885 |
|
$ |
297,088 |
$ |
324,208 |
|
$ |
240,012 |
|
|
251,524 |
| |||||||
| Balance Sheet Data (at end of period): |
|||||||||||||||||||||||||||
| Total cash and cash equivalents |
$ |
41,455 |
|
$ |
51,225 |
|
$ |
55,125 |
|
$ |
89,467 |
$ |
49,347 |
|
|
288,393 |
|
$ |
276,255 |
| |||||||
| Total assets |
|
3,311,645 |
|
|
3,403,904 |
|
|
4,214,385 |
|
|
4,513,941 |
|
4,625,879 |
|
|
4,773,646 |
|
|
5,037,965 |
| |||||||
| Total debt |
|
103,558 |
|
|
81,426 |
|
|
167,338 |
|
|
156,003 |
|
168,552 |
|
|
149,058 |
|
|
121,582 |
| |||||||
| Minority interest |
|
288,479 |
|
|
139,325 |
|
|
186,600 |
|
|
532,918 |
|
454,601 |
|
|
503,102 |
|
|
441,860 |
| |||||||
| Shareholders’ equity |
$ |
2,848,960 |
|
$ |
3,119,340 |
|
$ |
3,689,100 |
|
$ |
3,724,117 |
$ |
3,909,583 |
|
|
4,004,487 |
|
$ |
4,187,977 |
| |||||||
| Per Share of Common Stock: |
|||||||||||||||||||||||||||
| Net income–basic (2) |
$ |
.92 |
|
$ |
1.30 |
|
$ |
1.53 |
|
$ |
1.41 |
$ |
1.53 |
|
$ |
1.14 |
|
$ |
1.01 |
| |||||||
| Net income–diluted (2) |
|
.91 |
|
|
1.30 |
|
|
1.52 |
|
|
1.41 |
|
1.51 |
|
|
1.13 |
|
|
0.99 |
| |||||||
| Distributions (3) |
|
.88 |
|
|
.88 |
|
|
1.52 |
|
|
1.48 |
|
1.69 |
|
|
1.24 |
|
|
1.35 |
| |||||||
| Book value (at end of |
$ |
17.19 |
|
$ |
18.30 |
|
$ |
18.95 |
|
$ |
18.84 |
$ |
18.12 |
|
$ |
18.12 |
|
$ |
17.87 |
| |||||||
| Weighted average—diluted shares of common stock (in thousands) |
|
98,961 |
|
|
114,357 |
|
|
126,669 |
|
|
131,657 |
|
123,577 |
|
|
123,977 |
|
|
124,539 |
| |||||||
| (1) | Public Storage has completed several significant business combinations, property acquisitions and equity transactions and has developed a significant number of real estate facilities in the five years ended December 31, 2001. See Notes 3 and 9 to Public Storage’s financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the three years ended December 31, 2001, included in Public Storage’s December 31, 2001 Form 10-K, as amended, for further discussion. In addition, amounts have been reclassified to conform to current presentation. |
| (2) | Net income per common share is computed in accordance with Statement of Financial Accounting Standard No. 128 (SFAS 128)—“Earnings per Share” and is presented on the diluted basis using the weighted average shares of Public Storage common stock outstanding—diluted. The diluted net income per common share is computed using the weighted average common shares outstanding (adjusted for stock options). Beginning in 2000, 6,790,000 of the 7,000,000 shares of class B common stock are included in the determination of net income per common share. |
| (3) | For federal income tax purposes, distributions for all periods were characterized as ordinary income. All distributions for generally accepted accounting principles (“GAAP”) were from investment income. |
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| (4) | Book value per share computed based on the number of shares of Public Storage common stock and Public Storage class B common stock outstanding. |
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Partnership
| Years Ended December 31, |
Nine Months Ended September 30, | ||||||||||||||||||||
| 1997 |
1998 |
1999 |
2000 |
2001 |
2001 |
2002 | |||||||||||||||
| (In thousands, except per unit data) |
(unaudited) | ||||||||||||||||||||
| Operating Data: |
|||||||||||||||||||||
| Total revenues |
$ |
306 |
$ |
433 |
$ |
410 |
$ |
527 |
$ |
504 |
$ |
362 |
$ |
345 | |||||||
| Equity in earnings of real estate entity |
|
1,950 |
|
2,603 |
|
2,920 |
|
3,262 |
|
3,765 |
|
2,799 |
|
2,927 | |||||||
| Depreciation and amortization |
|
62 |
|
66 |
|
69 |
|
70 |
|
76 |
|
57 |
|
56 | |||||||
| Net income |
|
1,924 |
|
2,696 |
|
2,974 |
|
3,418 |
|
3,902 |
|
2,860 |
|
2,966 | |||||||
| Allocation of net income: |
|||||||||||||||||||||
| Limited partners’ share |
|
1,707 |
|
2,471 |
|
2,434 |
|
3,127 |
|
3,254 |
|
2,312 |
|
2,570 | |||||||
| General partners’ share |
|
217 |
|
225 |
|
540 |
|
291 |
|
648 |
|
548 |
|
396 | |||||||
| Balance Sheet Data (at end of period) |
|||||||||||||||||||||
| Cash and cash equivalents |
$ |
1,293 |
$ |
3,414 |
$ |
2,337 |
$ |
3,727 |
$ |
1,741 |
$ |
1,895 |
$ |
1,493 | |||||||
| Total debt |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— | |||||||
| Total assets |
|
19,853 |
|
20,524 |
|
18,404 |
|
19,181 |
|
16,979 |
|
16,866 |
|
16,263 | |||||||
| Limited Partners’ per Unit Data (5) |
|||||||||||||||||||||
| Net income |
$ |
13.34 |
$ |
19.30 |
$ |
19.02 |
$ |
24.43 |
$ |
25.42 |
$ |
18.06 |
$ |
20.08 | |||||||
| Cash distributions (6) |
|
13.92 |
|
13.92 |
|
35.84 |
|
18.10 |
|
42.80 |
|
36.54 |
|
25.74 | |||||||
| Book value (limited partners’ equity) |
|
151.67 |
|
157.05 |
|
140.23 |
|
146.55 |
|
129.17 |
|
128.08 |
|
123.51 | |||||||
| Public Storage—Pro Forma per Partnership Unit | |||||||||||||||||||||
| Per equivalent Partnership Unit (7); |
|||||||||||||||||||||
| Net income-diluted |
$ |
22.24 |
$ |
14.58 | |||||||||||||||||
| Distributions paid on common stock |
|
24.90 |
|
19.89 | |||||||||||||||||
| Book value (at September 30, 2002) |
$ |
263.28 | |||||||||||||||||||
| (5) | Limited partners’ per unit data is based on the weighted average number of Partnership units (128,000) outstanding during the year. |
| (6) | In 1999, distributions included a portion of the operating reserve estimated at $21.92 per unit. In 2001, including the nine months ended September 30, 2001, distributions included another special distribution of $18.45 per unit. In the nine months ended September 30, 2002, distributions included a special distribution of $6.96 per unit. |
| (7) | Presents pro forma amounts of Public Storage per equivalent Partnership unit. Net income, cash distributions and book value data are calculated by multiplying Public Storage’s historical results (before impact of the merger, which is not expected to have a material impact on Public Storage’s per share amounts) by an assumed exchange ratio of approximately 14.733 (the Partnership’s merger value of $442 divided by an assumed issue price of Public Storage common stock of $30.00). |
Due to the immateriality of the transaction to Public Storage (depending on the level of cash elections, the number of shares of Public Storage common stock being issued in the transaction ranges from 0.0% to 0.7% of Public Storage’s outstanding shares), the pro forma results are the same for both scenarios
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(maximum cash elections and all Public Storage common stock). Accordingly, only one set of pro forma results has been presented.
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The following charts show the relationships among Mr. Hughes, Public Storage and the Partnership both before and after the merger. As reflected in the charts below, Mr. Hughes, Public Storage’s chairman of the board and chief executive officer, effectively controls Public Storage. Public Storage and Mr. Hughes are the general partners of the Partnership. Public Storage and the Partnership jointly own 32 of the 33 Properties, all of which are managed by Public Storage.
Percentage of ownership of the Partnership by Public Storage represents percentage of units of limited partnership interest owned by Public Storage. Both before and after the merger, Public Storage’s general and limited partner interests are owned indirectly through wholly owned entities. Percentage of stock ownership of Public Storage by Mr. Hughes represents percentage of outstanding shares of Public Storage common stock owned by Mr. Hughes and members of his immediate family. Mr. Hughes has no ownership interest in the Partnership (other than through his share ownership in Public Storage) either before or after the merger. As described in “Certain Related Transactions – Joint Venture Interest”, the Partnership manages the joint venture, although Public Storage may compel the sale of the joint venture’s properties and the Partnership and Public Storage have a right of first refusal to acquire the other’s interest in the event of a proposed sale of the joint venture’s properties. The joint venture owns 32 of the Properties. Under the joint venture agreement, the interest of each of the Partnership and Public Storage in each of the joint venture’s properties is approximately 50%. See “Description of Partnership’s Properties.” Public Storage manages the Properties for a fee of 6% of gross revenues. After the merger (assuming no cash elections) the public limited partners of the Partnership would own approximately 0.7% of Public Storage.
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The merger involves certain risks and detriments that you should consider, including the following:
Public Storage has approved the merger without your vote.
Public Storage, as owner of 59% of the Partnership units, owns sufficient units to approve the merger without your vote and voted its units in favor of the merger on December 18, 2002. Accordingly, if the conditions to the merger are satisfied or waived, the merger will be completed even if opposed by all of the public limited partners.
Public Storage and the Partnership have not hired anyone to represent you.
Public Storage and the Partnership have not (1) negotiated the merger at arm’s length or (2) hired independent persons to negotiate the terms of the merger for you. If independent persons had been hired, the terms of the merger may have been more favorable to you.
The merger agreement prohibits the Partnership from soliciting alternative offers.
Public Storage and the Partnership have not asked any person to buy the Partnership’s assets. The merger agreement prohibits the Partnership from soliciting other offers. Other offers might have resulted in higher payments to the limited partners.
The merger will be a taxable event for limited partners who are subject to income taxation, whether they receive cash or stock. The actual tax effects will vary based on each partner’s adjusted tax basis in the units and the partner’s other specific circumstances. Because the consideration to be paid will significantly exceed the tax basis of taxable limited partners who acquired their units when the units were originally issued by the Partnership in 1985, those limited partners can be expected to recognize substantial taxable gain.
The merger will change your investment from finite life to infinite life if you receive stock.
The Partnership is a limited partnership organized to hold interests in properties for a fixed period. In the absence of the merger, the Partnership would terminate when all of its properties were sold, but not later than December 31, 2038. In contrast, Public Storage, which is engaged in all aspects of the mini-warehouse industry, including property development and management, intends to operate for an indefinite period. Therefore, if you receive Public Storage common stock in the merger, you will be able to liquidate your investment only by selling your shares on the NYSE or in private transactions. The market value of Public Storage common stock may or may not reflect the full fair market value of Public Storage’s assets and will fluctuate.
Your level of distributions may be lower after the merger if you receive stock.
If you receive Public Storage common stock in the merger, your level of distributions may be lower after the merger than the amount you received as a limited partner of the Partnership. Based on a closing price of $30.00 for Public Storage common stock and the current regular quarterly distribution rate for Public Storage ($0.45 per share) and the regular and special distributions for the Partnership during the 12 months ended September 30, 2002 ($32.00 per unit), your annual distributions would decrease by approximately 17.1% if you receive Public Storage common stock in the merger.
You will not benefit from any increase in value of the properties.
The Partnership’s properties may increase in value and might be able to be sold for higher prices at a later date. Public Storage will realize the benefit of any increase in value.
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You have no dissenters’ rights of appraisal.
Under California law, you will not be entitled to dissenters’ rights of appraisal in connection with the merger. Accordingly, if the merger is completed, you will not be entitled to ask for an alternative valuation of your Partnership units.
Public Storage has conflicts of interest in the merger.
Relationships among the parties create conflicts of interest. Because of the relationships among Public Storage, the Partnership and Mr. Hughes, there are significant conflicts of interest in connection with the merger. Public Storage and Mr. Hughes are the general partners of the Partnership, and Public Storage owns 59% of the Partnership units. In the absence of these conflicts, the terms of the merger may have been more favorable to you. See “Summary—Relationships.”
Insiders have structured the merger. Public Storage initiated and structured the merger. Public Storage and the Partnership did not negotiate the merger at arm’s length. Public Storage has an interest in acquiring the Partnership units at the lowest possible price, while you have an interest in selling your units at the highest possible price. Public Storage and the Partnership did not hire independent persons to negotiate the terms of the merger for you. If independent persons had been hired, the terms of the merger might have been more favorable to you.
The merger includes benefits to insiders. The merger involves certain benefits to Public Storage, including the following:
| • | Ownership of All Partnership Units. As a result of the merger, Public Storage will own all of the Partnership units without taxable gain to Public Storage. |
| • | Cost Efficiencies. The merger will eliminate almost all Partnership administrative expenses, much of which has been borne by Public Storage as owner of 59% of the Partnership units. |
| • | Elimination of Conflicts of Interest. The merger will eliminate the conflicts of interest resulting from the public limited partners’ ownership of a minority interest in the Partnership. The principal conflicts involve the competition of the Properties with other mini-warehouses owned by Public Storage. |
The Partnership did not engage Stanger or any other third party other than Wilson to perform an independent appraisal of the Partnership’s Properties or Units which appraiser may have concluded a higher valuation.
In rendering the fairness opinion Stanger was not engaged to and did not conduct an independent appraisal of the Partnership’s portfolio of properties or the value of the Partnership units. In conducting the reviews in connection with the fairness opinion, Stanger has relied on the accuracy and completeness of the portfolio appraisal performed by Wilson and the analyses provided by the general partners. By not engaging Stanger or any other third party to perform an independent appraisal of the Partnership’s properties or the value of the Partnership units, limited partners do not have the potential benefit of any independent appraisals in addition to the Wilson appraisal. Had additional appraisals been obtained, such appraisals may have concluded a higher appraisal valuation than Wilson.
The Hughes family could control Public Storage.
The Hughes family owns approximately 34% of the outstanding shares of Public Storage common stock (approximately 37% upon conversion of the Public Storage class B common stock). Consequently, the Hughes
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family could control matters submitted to a vote of Public Storage shareholders, including electing directors, amending Public Storage’s organizational documents, dissolving and approving other extraordinary transactions, such as a takeover attempt.
Provisions in Public Storage’s organizational documents may prevent changes in control.
Restrictions in Public Storage’s organizational documents may further limit changes in control of Public Storage securities. Unless Public Storage’s board of directors waives these limitations, no Public Storage shareholder may own more than (A) 2.0% of the outstanding shares of all common stock of Public Storage or (B) 9.9% of the outstanding shares of each class or series of preferred or equity stock of Public Storage. The Public Storage organizational documents in effect provide, however, that the Hughes family may continue to own the shares of Public Storage common stock held at the time of a 1995 reorganization. These limitations are designed, to the extent possible, to avoid a concentration of ownership that might jeopardize the ability of Public Storage to qualify as a REIT. These limitations, however, also make a change of control significantly more difficult (if not impossible) even if it would be favorable to the interests of the public shareholders of Public Storage. These provisions will prevent future takeover attempts not approved by the Public Storage board of directors even if a majority of the public shareholders of Public Storage deem it to be in their best interests because they would receive a premium for their shares over the shares’ then market value or for other reasons. See “Description of Public Storage Capital Stock—Ownership Limitations.”
The number of shares of Public Storage common stock to be issued in the merger has not been determined.
If you receive Public Storage common stock in the merger, the number of shares will be based on the average market price of Public Storage common stock for the 20 consecutive trading days ending on the fifth trading day prior to the Effective Date. Since the market price of Public Storage common stock fluctuates, the market value of Public Storage common stock that you may receive in the merger may decrease after the date that the number of shares is determined, but before those shares actually are issued. In addition, because of possible increased selling activity following issuance of shares in this merger and other factors, such as changes in interest rates and market conditions, the market value of Public Storage common stock that you may receive in the merger may decrease following the merger.
Public Storage would incur adverse tax consequences if it fails to qualify as a REIT.
If you receive Public Storage common stock in the merger, you will be subject to the risk that Public Storage may not qualify as a REIT. As a REIT, Public Storage must distribute at least 90% of its REIT taxable income to its shareholders (which include not only holders of Public Storage common stock but also holders of preferred and equity stock). Failure to meet the extensive requirements applicable to REITs could jeopardize Public Storage’s qualification as a REIT. See “Federal Income Tax Considerations—Taxation of Public Storage as a REIT.”
For any taxable year that Public Storage fails to qualify as a REIT and the relief provisions do not apply, Public Storage would be taxed at the regular corporate rates on all of its taxable income, whether or not it makes any distributions to its shareholders. Those taxes would reduce the amount of cash available to Public Storage for distribution to its shareholders or for reinvestment. As a result, failure of Public Storage to qualify during any taxable year as a REIT could have a material adverse effect upon Public Storage and its shareholders. Furthermore, unless certain relief provisions apply, Public Storage would not be eligible to elect REIT status again until the fifth taxable year that begins after the first year for which Public Storage fails to qualify.
Public Storage would incur a corporate level tax if it sold certain assets.
Public Storage will generally be subject to a corporate level tax if it sells before November 2005 any of the assets (primarily general partnership interests and management operations relating to mini-warehouses) it acquired
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in a November 1995 reorganization. These assets were valued at approximately $550 million in the reorganization. Public Storage has no present intention to sell any of these assets.
Public Storage and its shareholders are subject to financing risks.
Debt increases risk of loss. In making real estate investments, Public Storage, unlike the Partnership, borrows money, which increases the risk of loss. At September 30, 2002, Public Storage’s debt of $122 million was approximately 2% of its total assets.
Issuing additional shares reduces the interest of existing shareholders. Issuing additional securities can dilute the interest of Public Storage shareholders in Public Storage, including persons who receive shares in the merger.
Public Storage intends to issue additional securities under a currently effective registration statement. Issuing additional stock will dilute the interest of Public Storage shareholders. See “Description of Public Storage Capital Stock” for a discussion of the terms of the preferred stock, common stock and equity stock.
If Public Storage is liquidated, holders of the preferred stock will be entitled to receive, before any distribution of assets to holders of Public Storage common stock, liquidating distributions (an aggregate of approximately $2.0 billion with respect to preferred stock outstanding at September 30, 2002), plus any accrued and unpaid dividends. Holders of preferred stock are entitled to receive, when declared by the Public Storage board of directors, cash dividends (an aggregate of approximately $160 million per year with respect to preferred stock outstanding at September 30, 2002), in preference to holders of Public Storage common stock.
The merger payments are based on an appraisal instead of arm’s length negotiation.
The payment you receive in the merger is based in significant part on a third party appraised value of the Properties. However, appraisals are opinions as of the date specified and are subject to certain assumptions and may not represent the true worth or realizable value of these Properties. There can be no assurance that if these Properties were sold, they would be sold at the appraised values; the sales prices might be higher or lower.
Public Storage is subject to real estate operating risks.
Value of Public Storage’s investment may be reduced by general risks of real estate ownership. Like the Partnership, Public Storage is subject to the risks generally incident to the ownership of real estate-related assets, including
| • | lack of demand for rental spaces or units in a locale; |
| • | changes in general economic or local conditions, changes in supply of or demand for similar or competing facilities in an area; |
| • | potential terrorist attacks; |
| • | the impact of environmental protection laws; |
| • | changes in interest rates and availability of permanent mortgage funds which may render the sale or financing of a property difficult or unattractive; and |
| • | changes in tax, real estate and zoning laws. |
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There is significant competition among mini-warehouses. Like the Partnership, most of Public Storage’s properties are mini-warehouses. Competition in the market areas in which many of their properties are located is significant and has affected the occupancy levels, rental rates and operating expenses of certain of their properties. The weighted average occupancy level for our “same store” pool of mini-warehouses (a consistent group of stabilized properties) for the nine months ended September 30, 2002 was 4.3% less than during the nine months ended September 30, 2001. See “Description of Public Storage’s Properties” Any increase in availability of funds for investment in real estate may accelerate competition. Recent increases in development of mini-warehouses are expected to further intensify competition among mini-warehouse operators in certain market areas in which Public Storage operates.
Public Storage may incur significant environmental costs and liabilities. Under various federal, state and local environmental laws, an owner or operator of real estate interests may have to clean up spills or other releases of hazardous or toxic substances on or from a property. Certain environmental laws impose liability whether or not the owner knew of, or was responsible for, the presence of the hazardous or toxic substances. In some cases, liability may not be limited to the value of the property. The presence of such substances, or the failure to properly remediate any resulting contamination, also may adversely affect the owner’s or operator’s ability to sell, lease or operate its property or to borrow using its property as collateral.
Public Storage has conducted preliminary environmental assessments of most of its properties (and intends to conduct such assessments in connection with property acquisitions) to evaluate the environmental condition of, and potential environmental liabilities associated with, such properties. These assessments generally consist of an investigation of environmental conditions at the subject property (not including soil or groundwater sampling or analysis), as well as a review of available information regarding the site and publicly available data regarding conditions at other sites in the vicinity. In connection with these recent property assessments, Public Storage’s operations and recent property acquisitions, Public Storage has become aware that prior operations or activities at certain facilities or from nearby locations have or may have resulted in contamination to the soil and/or groundwater at such facilities. In this regard, certain such facilities are or may be the subject of federal or state environmental investigations or remedial actions. Public Storage has obtained, with respect to recent acquisitions and intends to obtain with respect to pending or future acquisitions, appropriate purchase price adjustments or indemnifications that it believes are sufficient to cover any related potential liabilities. Although there can be no assurance, based on the recent preliminary environmental assessments, Public Storage believes it has funds available to cover any liability from environmental contamination or potential contamination and Public Storage is not aware of any environmental contamination of its facilities material to its overall business, financial condition or results of operation.
Public Storage has no interest in Canadian mini-warehouses.
The Hughes family has ownership interests in, and operates, approximately 38 mini-warehouses in Canada under the name “Public Storage.” Public Storage personnel are engaged, at the expense of the Canadian owners, in the supervision of the operation of these properties. Public Storage has a right of first refusal to acquire the stock or assets of the corporation engaged in these operations if the Hughes family or the corporation agree to sell them. However, Public Storage has no interest in the operations of this corporation, has no right to acquire this stock or assets unless the Hughes family decides to sell and receives no benefit from the profits and increases in value of the Canadian mini-warehouses. There may be conflicts of interest in allocating the time of Public Storage personnel between Public Storage’s properties and the Canadian properties.
The portable self-storage business has incurred operating losses.
Public Storage organized Public Storage Pickup & Delivery in 1996 to operate a portable self-storage business. Public Storage owns all of Pickup & Delivery. Since Pickup & Delivery will operate profitably only if it can succeed in the relatively new field of portable self-storage, there can be no assurance as to its profitability. Pickup & Delivery incurred operating losses of $7,396,000 in 1999, $5,135,000 in 2000, $2,218,000 in 2001 and
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an operating loss of $4,674,000 for the first nine months of 2002 (compared to an operating loss of $1,110,000 for the first nine months of 2001).
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The merger involves certain benefits to Public Storage, including the following:
| • | Ownership of All Partnership Units. As a result of the merger, Public Storage will own all of the Partnership units without taxable gain to Public Storage. |
| • | Cost Efficiencies. The merger will eliminate almost all Partnership administrative expenses, much of which has been borne by Public Storage as owner of 59% of the Partnership units. |
| • | Elimination of Conflicts of Interest. The merger will eliminate the conflicts of interest resulting from the public limited partners’ ownership of a minority interest in the Partnership. The principal conflicts involve the competition of the Properties with other mini-warehouses owned by Public Storage. |
ABOUT THIS INFORMATION STATEMENT AND PROSPECTUS
This statement is part of a registration statement that Public Storage filed with the Securities and Exchange Commission (the “Commission”) relating to the registration of up to 1,500,000 shares of Public Storage common stock being issued in connection with the merger. This statement provides you with a general description of the securities Public Storage will offer. You should read this statement together with the additional information described under the heading “Where You Can Find More Information.”
WHERE YOU CAN FIND MORE INFORMATION
Public Storage and the Partnership are subject to the reporting requirements of the Securities Exchange Act of 1934 (the “Exchange Act”), and each files reports, proxy statements and other information with the Commission. You may read and copy any materials Public Storage and the Partnership files with the Commission at the Commission’s Public Reference Room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission also maintains a computer site on the World Wide Web (http://www.sec.gov) that contains reports, proxies, information statements, and other information regarding issuers that file electronically. Public Storage’s outstanding common stock is listed on the New York Stock Exchange (“NYSE”) and the Pacific Exchange (“PCX”) under the symbol PSA, and all reports, proxy statements and other information filed by Public Storage with the NYSE may be inspected at the NYSE’s offices at 20 Broad Street, New York, New York 10005 and all those reports and other information filed by Public Storage with the PCX may be inspected at the PCX’s offices at 301 Pine Street, San Francisco, California 94104.
Public Storage has filed with the Commission a registration statement on Form S-4 (together with all amendments and exhibits, the “Registration Statement”) under the Securities Act, with respect to the shares of Public Storage common stock being offered in the merger. This statement, which constitutes part of the Registration Statement, does not contain all of the information set forth in the Registration Statement. Certain parts of the Registration Statement are omitted from this statement in accordance with the rules and regulations of the Commission. For further information, please refer to the Registration Statement. Statements made in this statement concerning the contents of any documents referred to in this document are not necessarily complete, and in each case are qualified in all respects by reference to the copy of such document filed with the Commission.
The Commission allows Public Storage and the Partnership to “incorporate by reference” the information Public Storage and the Partnership file with the Commission, which means that Public Storage and the Partnership can disclose important information to you by referring you to those documents. The information incorporated by reference is an important part of this statement, and information that Public Storage files later with the Commission will automatically update and supersede this information.
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Public Storage incorporates by reference the documents listed below:
| • | Public Storage’s Annual Report on Form 10-K for the year ended December 31, 2001, as amended by Form 10-K/A filed July 12, 2002; |
| • | Public Storage’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2002, June 30, 2002 and September 30, 2002; |
| • | Public Storage’s Current Reports on Form 8-K dated January 15, 2002, February 13, 2002; and September 4, 2002 and; |
| • | The description of Public Storage’s common stock contained in Public Storage’s Registration Statement on Form 8-A, effective June 30, 1981, as supplemented by the description of Public Storage’s common stock contained in this statement. |
The Commission has assigned file number 1-8389 to the reports and other information that Public Storage files with the Commission.
The Partnership incorporates by reference the documents listed below:
| • | The Partnership’s Annual Report on Form 10-K for the year ended December 31, 2001, as amended by Form 10-K/A dated February 12, 2003; |
| • | The Partnership’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2002, June 30, 2002 and September 30, 2002; and |
| • | The Partnership’s Current Report on Form 8-K dated December 18, 2002. |
The Commission has assigned file number 0-14475 to the reports and other information that the Partnership files with the Commission.
This statement also incorporates by reference any future filings made by Public Storage with the Commission under Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act prior to the date the merger is completed. You should be aware that any statement contained in this statement or in a document incorporated by reference may be modified or superseded by a document filed with the Commission at a later date. Any statement which has been modified or superseded shall not be considered to constitute a part of this statement.
You may request a copy of each of the filings of Public Storage or the Partnership, at no cost, by writing or telephoning Public Storage at the following address, telephone or facsimile number:
Investor Services Department
Public Storage, Inc.
701 Western Avenue
Glendale, California 91201-2349
Telephone: (800) 421-2856
(818) 244-8080
Facsimile: (818) 241-0627
In order to ensure timely delivery of any documents, you must request the information by , 2003.
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You may also find more information concerning Public Storage at the following Internet address: http://www.publicstorage.com.
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You should rely only on the information included in this statement or incorporated in this statement. Public Storage has not authorized anyone else to provide you with different information. Public Storage is not making an offer of its shares of common stock in any state where the offer is not permitted. You should not assume that the information in this statement is accurate as of any date other than the date on the front of those documents.
Statements contained in this statement that are not based on historical fact are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “continue” or similar terms, variations of those terms or the negative of those terms. Cautionary statements set forth in “Risk Factors” and elsewhere in this statement identify important factors that could cause actual results to differ materially from those in the forward-looking statements.
The acquisition of the Partnership units not currently owned by Public Storage will be accomplished in the merger as follows:
| • | A wholly-owned, second tier subsidiary of Public Storage will be merged into the Partnership. |
| • | Each Partnership unit (other than units owned by Public Storage) will be converted into the right to receive a value of $442 in Public Storage common stock or, at the election of a limited partner, in cash. To be effective a cash election must be made by , 2003, in accordance with the accompanying cash election form. For information on obtaining a cash election form and contact information see “—Cash Election Procedure.” |
| • | Distributions will be made to holders of Partnership units to cause the estimated net asset value per Partnership unit as of the Effective Date to be substantially equivalent to $442. In computing the estimated net asset value per unit as of the Effective Date, the PSBP partnership interests will be valued at the average of the per share closing price on the AMEX of the shares of PS Business Parks, Inc. during the 20 consecutive trading days ending on the fifth trading day prior to the Effective Date. |
| • | For purposes of the merger, the market value of the Public Storage common stock will be the average of the per share closing prices on the NYSE of the Public Storage common stock during the 20 consecutive trading days ending on the fifth trading day prior to the Effective Date. If, prior to the Effective Date, Public Storage should split or combine the Public Storage common stock, or pay a stock dividend, the Public Storage common stock issued in the merger will be appropriately adjusted to reflect such action. |
| • | Following the merger, Public Storage (through a wholly owned entity) will own all Partnership units, the Partnership will remain in existence, and Public Storage and Mr. Hughes will continue as general partners of the Partnership. |
It is estimated that the aggregate consideration (cash or Public Storage common stock or a combination of the two) to be paid by Public Storage to acquire in the merger the Partnership units owned by the public limited partners (including costs) will be approximately $23.5 million. See “—Determination of Amounts to be Received by Limited Partners in the Merger” and “—Costs of the Merger.”
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Background and Reasons for the Merger
The merger has not been negotiated at arm’s length. The merger has been structured by Public Storage, which controls the Partnership and has significant conflicts of interest in connection with, and will benefit from, the merger. Based in significant part on a third party appraisal of the Properties and on the opinion of a financial advisor, in which they concur, Public Storage and Hughes, the general partners of the Partnership, believe that the merger is fair to the public limited partners.
The Partnership was organized in 1985 and raised $64 million in gross proceeds in a public offering. All of the proceeds from the offering have been invested to acquire properties, all but one of which were acquired jointly with Public Storage. A predecessor of Public Storage sponsored the Partnership. In the absence of the merger, the Partnership would terminate when all of its properties were sold, but not later than December 31, 2038.
As indicated in the original prospectus, the Partnership originally anticipated selling the Properties and liquidating from five to eight years after acquisition, i.e., between 1990 and 1993. By 1990, significant changes had taken place in the financial and real estate markets affecting the timing of any proposed sale of the Properties, including (1) the increased construction of mini-warehouses from 1984 to 1988, which had increased competition, (2) the general deterioration of the real estate market (resulting from a variety of factors, including the 1986 changes in tax laws), which had significantly affected property values and decreased real estate sales activities, (3) the reduced sources of real estate financing (resulting from a variety of factors, including adverse developments in the savings and loan industry) and (4) the glut in the real estate market caused by overbuilding and sales of properties acquired by financial institutions. Accordingly, the Properties were not marketed during the originally anticipated liquidation period.
In view of the events affecting the timing of the sale of the Properties, Public Storage concluded that the limited partners of the Partnership, as well as the limited partners of other partnerships sponsored by Public Storage, should be provided with a more efficient method of realizing the value of their investment than the secondary market for limited partnership interests. Accordingly, Public Storage purchased Partnership units from those limited partners who desired to sell, including through tender offers in April 1994, October 1995 and January 1997. As a result of these purchases, public limited partners now own only 41% of the units with the balance owned indirectly by Public Storage. Since the Partnership is beyond its original anticipated term and the public limited partners own only a minority of the units, the general partners have decided to eliminate through the merger the ongoing costs of a public structure and the conflicts of interest resulting from the public limited partners’ ownership of a minority interest in the Partnership. The principal conflicts involve the competition of the Properties with other mini-warehouses owned by Public Storage.
Public Storage, which was organized in 1980, has from time to time taken actions to increase its asset and capital base and increase diversification, such as by increasing its interest in affiliated entities, like the Partnership. Public Storage’s interests in the Partnership include (1) Public Storage and the Partnership jointly own 32 of the 33 Properties and the interest in PSBP, (2) Public Storage (through a wholly-owned entity) and Hughes are general partners of the Partnership, (3) Public Storage (through a wholly owned entity) owns 59% of the Partnership units and (4) the Properties are managed by Public Storage. As a result of the merger, Public Storage will own all of the Partnership units and almost all Partnership administrative expenses will be eliminated.
The Partnership’s reasons for the merger are that the Partnership is well beyond the anticipated holding period of the Properties and the merger provides limited partners with the opportunity to elect either (1) to convert their relatively illiquid investment in the Partnership into a liquid investment in Public Storage, which like the Partnership primarily owns mini-warehouses, or (2) to receive a cash payment based on the appraised value of the Properties. There has been no consideration of the Partnership’s reasons for the merger by any independent persons.
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The merger has not been negotiated at arm’s length. The merger has been structured by Public Storage, which controls the Partnership and has significant conflicts of interest in connection with, and will benefit from, the merger. However, based in significant part on a third party appraisal of the Properties and on the opinion of Stanger, in which they concur, the general partners believe that the merger is fair to public limited partners.
The general partners based their conclusions on the following factors: (1) the consideration to be received by the limited partners in the merger is based on the appraised value of the Properties as determined by an independent appraisal firm; (2) the Partnership has received a fairness opinion from Stanger relating to the consideration to be received by public limited partners; (3) although the merger has been structured by Public Storage, the merger provides public limited partners with a choice of converting their investment into an investment in Public Storage or receiving cash for their investment; and (4) based on certain significant assumptions, qualifications and limitations, the consideration to be received by public limited partners compares favorably with other alternatives.
The general partners believe that the engagement of Wilson and Stanger to provide the portfolio appraisal and the fairness opinion, respectively, assisted the general partners in the fulfillment of their duties to public limited partners, notwithstanding that these parties received fees in connection with their engagements by the Partnership and in connection with other engagements and may receive fees in the future. See “—Real Estate Portfolio Appraisal by Wilson” and “—Fairness Opinion from Stanger.”
The general partners considered liquidation and continued ownership by the limited and general partners as alternatives to the merger. In order to determine whether the merger or one of its alternatives would be more advantageous to public limited partners, the general partners compared the potential benefits and detriments of the merger with the potential benefits and detriments of the alternatives.
Benefits of Liquidation. An alternative to the merger would be to liquidate the Partnership’s assets, distribute the net liquidation proceeds to the partners and thereafter dissolve the Partnership. Through such liquidation, the Partnership would provide for a final disposition of its partners’ interests in the Partnership. Limited partners would receive cash liquidation proceeds (as they will if they make cash elections) and could use the proceeds to purchase shares of Public Storage common stock in the public market. If the Partnership liquidated its assets through asset sales to unaffiliated third parties, limited partners would not need to rely upon a real estate portfolio appraisal of the fair market value of the Properties. The Partnership would be valued through arm’s length negotiations between the Partnership and prospective purchasers.
Limited partners should recognize that appraisals are opinions as of the date specified and are subject to certain assumptions and may not represent the true worth or realizable value of the Properties. There can be no assurance that if the Properties were sold, they would be sold at the appraised value; the sales price might be higher or lower than the appraised value.
Disadvantages of Liquidation. In contrast to the merger, the Partnership would incur certain costs in a liquidation, including transfer taxes, real estate commissions and other closing costs estimated at $4.0 million. If the merger is completed, all costs incurred in connection with the merger will be paid by Public Storage.
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Continued Ownership of the Partnership
Benefits of Continued Ownership. Another alternative to the merger would be to continue the Partnership, with the Partnership continuing to be owned by the limited and general partners. The Partnership is operating profitably.
A number of advantages could be expected to arise from the continued ownership of the Partnership by the limited and general partners. Limited partners would continue to receive regular quarterly distributions of net cash flow arising from operations and the sale or refinancing of the Partnership’s assets. Continued ownership of the Partnership by the general and limited partners affords limited partners with the opportunity to participate in any future appreciation in the Partnership’s assets. In addition, this decision, if elected, would mean that there would be no change in the nature of the investment of limited partners. This option avoids whatever disadvantages might be deemed inherent in the merger. See “Risk Factors” for discussion of various risks associated with the merger.
Disadvantages of Continued Ownership. The Partnership is well beyond the anticipated holding period of the Properties. Continued ownership of the Partnership by the limited and general partners would fail to provide the partners with liquidity either through the receipt of Public Storage common stock or, at a limited partner’s election, a cash payment for the Partnership units and would fail to provide the benefits to the general partners that are highlighted under “Benefits to Insiders.” The merger affords limited partners increased liquidity. In addition, because the Partnership is not authorized to issue new securities or to reinvest sale or financing proceeds, the Partnership is less able to take advantage of new real estate investment opportunities. In contrast, Public Storage has a substantially larger, more diversified, investment portfolio that reduces the risks associated with any particular assets or group of assets and increases Public Storage’s ability to access capital markets for new capital investments.
Determination of Amounts to be Received by Limited Partners in the Merger
In connection with the merger, limited partners will receive a value of $442 per Partnership unit in cash or Public Storage common stock. In addition, as noted in note (7) below, limited partners will also receive a final distribution in cash equal to the amount by which the net asset value of Partnership units on the Effective Date exceeds $442. The general partners have determined this amount based on the estimated net asset value per unit computed as follows:
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| Estimated value of Partnership’s interest in the Properties (1) |
$ |
46,210,200 |
| |
| Plus: |
||||
| Market value of Partnership’s interest in PSBP (2) |
|
9,580,900 |
| |
| Partnership’s interest in other tangible net assets and liabilities (3) |
|
1,315,500 |
| |
| Net proceeds available for distribution |
|
57,106,600 |
| |
| Distributions to general partners (4) |
|
(571,100 |
) | |
| Distributions to limited partners |
$ |
56,535,500 |
| |
| Amount per Partnership unit (5)(6)(7)(8) |
$ |
442 |
| |
| (1) | Reflects appraised value of the Properties determined by Wilson as of June 30, 2002. Assumes proceeds from a deemed sale of the Properties at the appraised value and that the proceeds from the sale of the Properties, together with other tangible net assets and liabilities of the joint ventures as of September 30, 2002, are allocated between the Partnership and Public Storage based on their joint venture agreement. See “Description of Partnership’s Properties” and “The Merger—Real Estate Portfolio Appraisal by Wilson.” |
| (2) | Reflects closing price of shares of PS Business Parks, Inc. on the AMEX as of October 31, 2002 (the PSBP partnership interests are exchangeable for those shares on a one unit for one share basis). Assumes proceeds from a deemed sale of the units at that price are allocated between the Partnership and Public Storage based on the joint venture agreement. See note (7) below. |
| (3) | Includes the Partnership’s interest in cash and other non-real estate assets offset by the Partnership’s interest in prepaid rents, security deposits, accounts payable and accrued expenses as of September 30, 2002. |
| (4) | Represents distributions attributable to general partners’ 1% capital interest in the Partnership. In accordance with the Partnership Agreement, no subordinated incentive distributions are payable at this time. |
| (5) | Based on 128,000 Partnership units. |
| (6) | Upon completion of the merger, each Partnership unit would be converted into Public Storage common stock with a value of $442 or, at the election of a limited partner, $442 in cash. The number of shares of Public Storage common stock to be issued in the merger will be determined by dividing $442 by the average of the closing prices of Public Storage common stock during the 20 consecutive trading days ending on the fifth trading day prior to the Effective Date. If, prior to the Effective Date, Public Storage should split or combine the Public Storage common stock, or pay a stock dividend, the Public Storage common stock issued in the merger will be appropriately adjusted to reflect such action. The market price of Public Storage common stock may fluctuate after the date that the number of shares to be issued to limited partners in the merger is determined and before those shares actually are issued. |
| (7) | On the Effective Date, the value of the Partnership units will be recomputed. A cash distribution will be made to limited partners, as of the Effective Date, in an amount by which the recomputed value exceeds $442 to cause the estimated net asset value per Partnership unit as of the Effective Date to be substantially equivalent to $442 per unit. In computing the estimated net asset value per unit as of the Effective Date, the estimated value of the Partnership’s interest in the Properties will be based on the June 30, 2002 property appraisal, the PSBP partnership interests will be valued at the average of the per share closing price on the AMEX of the shares of PS Business Parks, Inc. during the 20 consecutive trading days ending on the fifth trading day |
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| prior to the Effective Date and the Partnership’s interest in the tangible net assets and liabilities (including the tangible net assets and liabilities of the joint ventures) will be measured as of the last day of the calendar month preceding the Effective Date. |
| (8) | Original purchase price of a Partnership unit was $500. |
Potential Benefits of the Merger
The general partners believe that the following are the principal potential benefits to limited partners:
(1) Limited partners who elect to receive cash will have fully liquidated their investment at an amount higher than the prices in the limited secondary transactions. Also, they will have simplified their tax reporting for years after 2002.
(2) For limited partners who receive Public Storage common stock, the principal potential benefits are:
| • | Ownership Interest in a Diversified Real Estate Company. Because the Partnership is not authorized to issue new securities or to reinvest sale or financing proceeds, the Partnership is less able to take advantage of new real estate investment opportunities. In contrast, Public Storage has a substantially larger, more diversified, investment portfolio that reduces the risks associated with any particular assets or group of assets and increases Public Storage’s ability to access capital markets for new capital investments. |
| • | Increased Liquidity. There is no active market for the Partnership units. In comparison, Public Storage has approximately 117.5 million shares of Public Storage common stock listed on the NYSE with an average daily trading volume during the 12 months ended September 30, 2002 of approximately 219,800 shares. Given Public Storage’s market capitalization and trading volume, limited partners who receive Public Storage common stock are likely to enjoy a more active trading market and increased liquidity for the Public Storage securities they receive. |
| • | Simplified Tax Reporting. The merger also will simplify tax reporting for years after 2002 for limited partners who receive Public Storage common stock. Public Storage shareholders will receive Form 1099-DIV to report their dividends from Public Storage. Form 1099-DIV is substantially easier to understand than the Schedule K-1 prepared for the reporting of the financial results of the Partnership. |
For a discussion of certain risks and detriments of the merger, see “Risk Factors” beginning on page 20.
Conclusions. Based upon an analysis of the merger, the general partners have concluded that (1) the terms of the merger are fair to public limited partners and (2) after comparing the potential benefits and detriments of the merger with alternatives, the merger is more advantageous to public limited partners than such alternatives.
Although the general partners reasonably believe the terms of the merger are fair to public limited partners, the general partners have significant conflicts of interest with respect to the merger. The merger has been initiated and structured by Public Storage, one of the general partners. See “Summary—Relationships” and “Risk Factors—Public Storage has conflicts of interest in the merger.”
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Material Factors Underlying Conclusions of General Partners. The following is a discussion of the material factors underlying the conclusions of the general partners. The general partners have not quantified the relative importance of these factors.
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1. Consideration Offered. The general partners believe that (A) basing the consideration to be paid to public limited partners in the merger on the value of the Partnership’s assets is reasonable and consistent with the partnership agreement, (B) the Partnership’s net asset value represents a fair estimate of the value of its assets, net of liabilities, and constitutes a reasonable basis for determining the consideration to be received by public limited partners, (C) the allocation of the appraised value of the Properties between the Partnership and Public Storage is fair because it reflects the amount each would receive upon the Partnership’s liquidation under the joint venture agreement and (D) the allocation of the Partnership’s net asset value between the limited and general partners is fair because it reflects the amount they would receive upon the Partnership’s liquidation under the partnership agreement. There was no negotiation regarding the basis for determining the consideration to be paid to public limited partners in the merger. See “—Background and Reasons for the Merger.”
2. Choice as to Form of Consideration. The merger provides public limited partners with the choice of either (A) converting their investment into an investment in Public Storage, which generally owns the same type of properties as the Partnership and which has acquired, and is expected to continue to acquire, additional properties or (B) receiving in cash the amounts they would receive if the Properties were sold at their appraised values and the Partnership’s interest in PSBP were sold at its market value and the Partnership were liquidated (without any reduction for commissions and other sales expenses).
3. Independent Portfolio Appraisal and Fairness Opinion. The conclusions of the general partners are based in significant part upon the portfolio appraisal prepared by Wilson and Stanger’s fairness opinion. The general partners attributed significant weight to these items, which they believe support their position, and do not know of any factors that are reasonably likely to detract from the conclusions in Wilson’s portfolio appraisal and Stanger’s fairness opinion. The general partners believe that the engagement of Wilson and Stanger to provide the portfolio appraisal and the fairness opinion, respectively, assisted the general partners in the fulfillment of their duties to public limited partners, notwithstanding that these parties received fees in connection with their engagements by the Partnership and in connection with other engagements by Public Storage and its affiliates and may receive fees in the future. See “—Real Estate Portfolio Appraisal by Wilson” and “—Fairness Opinion from Stanger.”
4. Comparison of Payments to be
Received in the Merger to Other Alternatives. The payments to be received in the merger of $442 per Partnership unit generally compares favorably with (A) the prices at which limited secondary sales of units have been effectuated
during 2000, 2001 and 2002 (through September 30) ($200–$440), (B) a range of estimated going-concern value per unit ($413 to $429), (C) an estimated liquidation value per unit ($425) and (D) the book value per unit as of September 30, 2002
($124). The general partners recognize that this comparison is subject to significant assumptions, qualifications and limitations. See
“—Comparison of Consideration to be Received in the Merger to Other Alternatives.”
5. Possible Lower Level of Distributions to Limited Partners After the Merger. The level of distributions to limited partners who receive Public Storage common stock in the merger may be lower after the merger than before.
6. Conflicts of Interest. The merger has been initiated and structured by Public Storage, one of the general partners. Independent representatives were not engaged to negotiate these arrangements on behalf of public limited partners, and the terms of the merger are not the result of arm’s length negotiations.
The general partners do not believe that the absence of independent representatives to negotiate the merger undermines the fairness of the merger. Based upon the use of an independent appraisal firm and the Stanger fairness opinion, the general partners considered that the engagement of such independent representatives was not necessary or cost effective.
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Comparison of Consideration to be Received in the Merger to Other Alternatives
General. The general partners compared the consideration to be received in the merger, i.e., a value of $442 per Partnership unit to: (1) the prices at which limited secondary sales have been effectuated; (2) estimates of the value of the Partnership on a liquidation basis assuming that its assets were sold at their appraised fair market value and the net proceeds distributed between the joint venture partners in accordance with the joint venture agreement and between the limited and general partners in accordance with the partnership agreement; and (3) estimates of the value of the Partnership on a going-concern basis assuming that it were to continue as a stand-alone entity and its assets sold at the end of a five-year holding period. Due to the uncertainty in establishing these values, the Partnership established a range of estimated values for certain of the alternatives, representing a high and low estimated value for the potential consideration. Since the value of the consideration for alternatives to the merger is dependent upon varying market conditions, no assurance can be given that the range of estimated values indicated establishes the highest or lowest possible values. However, the general partners believe that analyzing the alternatives in terms of ranges of estimated value, based on currently available market data and, where appropriate, reasonable assumptions made in good faith, establishes a reasonable framework for comparing alternatives.
The results of these comparative analyses are summarized in the following tables. Limited partners should bear in mind that the estimated values assigned to the alternate forms of consideration are based on a variety of assumptions that have been made by the Partnership. These assumptions relate, among other things, to: projections as to the future income, expenses, cash flow and other significant financial matters of the Partnership; the capitalization rates that will be used by prospective buyers when the Partnership’s assets are liquidated; and, appropriate discount rates to apply to expected cash flows in computing the present value of the cash flows that may be received with respect to Partnership units. In addition, these estimates are based upon certain information available to the Partnership at the time the estimates were computed, and no assurance can be given that the same conditions analyzed by them in arriving at the estimates of value would exist at the time of the merger. The assumptions used have been determined by the Partnership in good faith, and, where appropriate, are based upon current and historical information regarding the Partnership and current real estate markets, and have been highlighted below to the extent critical to the conclusions of the general partners.
No assurance can be given that such consideration would be realized through any of the designated alternatives, and limited partners should carefully consider the following discussions to understand the assumptions, qualifications and limitations inherent in the presented valuations. The estimated values presented in the following table are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These estimated values are based upon certain assumptions that relate, among other things, to (1) the price of Public Storage common stock and common stock of PS Business Parks, Inc. as of the date of the merger being the same as during the 20 trading days ending on the fifth trading day prior to the Effective Date, (2) projections as to the future revenues, expenses, cash flow and other significant financial matters of the Partnership, (3) the capitalization rates that will be used by prospective buyers when the Partnership’s assets are liquidated, (4) selling costs, (5) appropriate discount rates to apply to expected cash flows in computing the present value of the cash flows and (6) the manner of sale of the Properties. The specific assumptions used are outlined below in the detailed description of each assumption. Actual results may vary from those set forth below based on numerous factors, including interest rate fluctuations, tax law changes, supply and demand for mini-warehouses, the manner in which the properties are sold and changes in availability of capital to finance acquisitions of mini-warehouses.
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Partnership Comparison of Alternatives
| Payments in Merger per Partnership unit(1) |
Limited Secondary Market Prices of Partnership Units(2) |
Estimated Going-Concern Value per Partnership Unit(3) |
Estimated Liquidation Value per Partnership Unit at Appraised Value (4) | |||||||
| $442 |
$200 |
$440 |
$413 |
$429 |
$425 | |||||
| (1) | Based on the Partnership’s net asset value consisting of the independently appraised market value of the Properties as of June 30, 2002, the closing price of PS Business Parks, Inc. on the AMEX on October 31, 2002 and the estimated book value of its other net assets as of September 30, 2002. The market price of Public Storage common stock may fluctuate following establishment of the number of shares to be issued to limited partners in the merger and prior to issuance and could decrease as a result of increased selling activity following issuance of the shares in the merger and other factors. See “—Determination of Amounts to be Received by Limited Partners in the Merger.” |
| (2) | There is no active market for the Partnership units. Based on the information available to the Partnership, the prices at which limited secondary sales have been effectuated from January 1, 2000 through September 30, 2002. Included in this price range are sales to Public Storage which occurred at prices ranging from $300 to $335 per unit. See “Distributions and Market Prices of Partnership Units.” |
| (3) | Reflects a range of values based upon a number of assumptions regarding the future net operating income and distributions of the Partnership and the date of its liquidation. See “—Going-Concern Value.” |
| (4) | Based upon Wilson’s real estate appraisal for the Properties, less estimated expenses of liquidation. See “—Liquidation Values.” |
Limited Secondary Market Prices of Units. There is no active market for the Partnership units. Based on the information available to the Partnership, the prices at which limited secondary sales have been effectuated ranged from $200 to $440 per unit from January 1, 2000 through September 30, 2002. Although sales of units on the secondary market do not necessarily reflect the full value of the Partnership’s net assets, the general partners believe that these sales are relevant because the merger consideration would not likely be fair if consistently less than the secondary sales prices. Included in this price range are sales to Public Storage which occurred at prices ranging from $300 to $335 per unit. See “Distributions and Market Prices of Partnership Units.”
Going-Concern Value. The Partnership has estimated the going-concern value of the Partnership by analyzing projected cash flows and distributions assuming that the Partnership was operated as an independent stand-alone entity and its assets sold in a liquidation of the Partnership after a five-year holding period. The Partnership assumed sale of the Properties at a terminal value computed by capitalizing the projected net operating income in year six at a capitalization rate equal to the midpoint of the effective capitalization rate in the appraisal based on the appraiser’s projected first year net operating income and before deductions for items of deferred maintenance and the capitalization rate used by the appraiser in the residual value component of the discounted cash flow analysis (an average capitalization rate of approximately 9.34% for the Properties) resulting in the Partnership’s assumed interest in the Properties being approximately $51.8 million after reduction for cost of sale. The Partnership assumed that the Partnership’s interest in PSBP was sold at an FFO multiple of 9.13 less $0.06 per PSBP unit in brokerage commissions. Real estate selling costs were assumed to be incurred at the same percentage of sale proceeds (4.4%) as incurred in the liquidation alternative. Distribution and sale proceeds per Partnership unit were discounted in the projections at rates ranging from 12% to 13%.
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Both scenarios of the going-concern analysis assume that all of the Properties are sold concurrently at the expiration of the holding period. Should the assets be liquidated over time, even at prices equal to those projected, distributions to limited partners out of the Partnership’s cash flow from operations might be reduced because relatively fixed costs, such as general and administrative expenses, are not proportionately reduced with the liquidation of assets. However, for simplification purposes, the sales are assumed to occur concurrently.
The estimated value of the Partnership on a going-concern basis is not intended to reflect the distributions payable to limited partners if its assets were to be sold at their current fair market value.
Liquidation Values. Since one of the alternatives available to the general partners is to proceed with a liquidation of the Partnership, and the corresponding distribution of the net liquidation proceeds between the joint venture partners and, within the Partnership, to the limited partners and the general partners, the Partnership has estimated the liquidation value of the Partnership assuming that the Properties are sold at their appraised value based upon the Wilson real estate portfolio appraisal. This alternative assumes that the Partnership’s interest in PSBP is sold at the October 31, 2002 trading price (less a commission of $.06 per share), the Partnership incurs real estate selling costs at the time of liquidation (state and local transfer taxes, real estate commissions of 3% of sales proceeds and legal and other closing costs) of approximately $4.0 million, and the remaining net liquidation proceeds, including the Partnership’s interest in other tangible net assets and liabilities as of September 30, 2002, are distributed between the joint venture partners in accordance with the joint venture agreement and between the limited and general partners in accordance with the partnership agreement.
The liquidation analysis assumes that all of the Properties are sold concurrently at their appraised value. Should the assets be liquidated over time, even at prices equal to those projected, distributions to limited partners from cash flow from operations might be reduced because the Partnership’s relatively fixed costs, such as general and administrative expenses, are not proportionately reduced with the liquidation of assets. However, for simplification purposes, the sales of the Properties are assumed to occur concurrently.
Applying these procedures, the Partnership arrived at the liquidation value set forth in the table. The real estate portfolio appraisal sets forth, subject to the specified assumptions, limitations and qualifications, Wilson’s professional opinion as to the market value of the Properties as of June 30, 2002. While the portfolio appraisal is not necessarily indicative of the price at which the assets would sell, market value generally seeks to estimate the price at which the Properties would sell if disposed of in an arm’s length transaction between a willing buyer and a willing seller, each having access to relevant information regarding the historical revenues and expenses. The real estate portfolio appraisal assumes that these Properties are disposed of in an orderly manner and are not sold in forced or distressed sales where sellers might be expected to dispose of their interests at substantial discounts to their actual fair market value. See “- Real Estate Portfolio Appraisal by Wilson.”
Distribution Comparison. The general partners have considered the potential impact of the merger upon distributions that would be made to limited partners who exchange their Partnership units for Public Storage common stock. Based on a market price of Public Storage common stock of $30.00, the current regular quarterly distribution rate for Public Storage ($.45 per share) and the regular and special distributions for the Partnership during the 12 months ended September 30, 2002 ($32.00 per unit), limited partners would receive approximately $5.48 (17.1%) less in annual distributions per Partnership unit after the merger from Public Storage than before the merger from the Partnership and approximately $0.86 less per unit in annual distributions for each $1.00 (3.3%) increase in the market price of Public Storage common stock above $30.00.
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In evaluating this estimate, limited partners should bear in mind that this comparison does not reflect the tax that a limited partner will have to pay in connection with the merger. The merger will be a taxable event for the public limited partners resulting in the recognition of gain to most taxable public limited partners who receive either cash or Public Storage common stock. In evaluating this estimate, limited partners should also bear in mind that a number of factors affect the level of distributions. These factors include the distributable income generated by operations, the principal and interest payments on debt, if any, capital expenditure levels (in excess of normal expenditures for ongoing maintenance and repairs) and the corporate policy with respect to cash distributions. A comparison of the current distribution levels of Public Storage with those of the Partnership does not show how the merger might affect a limited partner’s distribution level over a number of years.
Real Estate Portfolio Appraisal by Wilson
Wilson was engaged by the Partnership to appraise the Properties and has delivered a written report of its analysis, based upon the review, analysis, scope and limitations described therein, as to the market value of the Properties as of June 30, 2002. The appraisal was limited in that Wilson did not inspect all of the Properties and its conclusion is primarily based on the Income Capitalization Approach. The Partnership selected Wilson to provide the appraisal because of its experience and reputation in appraising mini-warehouses, including its appraisal of other properties managed by Public Storage. The consideration to be paid by Public Storage to the limited partners in the merger is based on the appraisal. The appraisal, which contains a description of the assumptions and qualifications made, matters considered and limitations on the review and analysis, is set forth as Appendix B and should be read in its entirety. Certain of the material assumptions, qualifications and limitations to the appraisal are described below.
Experience of Wilson. Wilson, formed by Charles R. Wilson in 1976, has specialized in the appraisal of self-storage and commercial facilities since 1972. Wilson has conducted real estate appraisals on a variety of property types and uses throughout the United States for owners, banks and thrift organizations, insurance companies and other financial institutions. Wilson also owns Self-Storage Data Services, Inc., a company which maintains a database containing operating income and expense data for several hundred self-storage facilities nationwide.
Summary of Methodology. At the request of the Partnership, Wilson evaluated the Properties. In valuing the Properties, Wilson considered the applicability of all three commonly recognized approaches to value: the cost approach, the income capitalization approach and the sales comparison approach. The type and age of a property, market conditions and the quantity and quality of data affect the applicability of each approach in a specific appraisal situation. Wilson did not consider the cost approach to be applicable to the Properties.
The income capitalization approach estimates a property’s capacity to produce income through an analysis of the rental market, operating expenses and net operating income. Net operating income may then be processed into a value estimate through either (or a combination) of two methods: direct capitalization or yield capitalization, i.e., a discounted cash flow analysis.
The sales comparison approach is based upon the principle of substitution, i.e., that an informed purchaser would pay no more for a property than the cost of acquiring an existing property with the same utility. The sales comparison approach establishes what typical investors in the marketplace are willing to pay for the subject properties based on amounts paid for similar type properties.
The cost approach is based on the estimated market value of the site as if vacant plus the depreciated replacement cost of the existing improvements. The cost approach was not considered appropriate in the case of the Properties since (a) today’s investors generally do not rely upon the cost approach in making investment decisions for older properties and (b) the necessity of estimating total accrued depreciation in buildings of the type and age of the Properties diminishes the validity of this approach.
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While the appraisal was prepared for all of the Properties as a whole, Wilson analyzed the individual Properties by (a) reviewing each Property’s previous three years’ operating statements, (b) reviewing information submitted to Wilson by on-site managers which included competitive rental surveys, subject facility descriptions, area trends and other factors and (c) developing information from a variety of sources about market conditions for each individual property that included population, employment and housing trends within the market. Wilson verified the competitive property rental rates and occupancies, where available via telephone. Wilson also verified the market conditions and Properties’ physical condition (including necessary reserves for deferred maintenance) by visiting and inspecting a representative sample of the Properties and discussing maintenance requirements with property management.
Wilson also reviewed evaluations for each property and interviewed management personnel responsible for the Properties to ascertain competitive conditions, area economic trends affecting the properties, historical operating revenues and expenses and items of deferred maintenance.
Wilson then estimated the value of each of the Properties relying heavily upon the income approach. To define the occupancy and rental rates and expense escalators to be used in developing cash flow projections, Wilson in part reviewed the acquisition criteria and projection parameters in use in the marketplace by major mini-warehouse investors, owners and operators, appraisers and financing sources. In addition, Wilson reviewed other published information concerning acquisition criteria in use by property investors. Further, Wilson gathered and reviewed sales of mini-warehouses located nationwide within the past 24 months in order to derive certain valuation indicators. Sources for data concerning such transactions included local appraisers, property owners, real estate brokers and others. Wilson also reviewed information compiled by management identifying sales and acquisitions of mini-warehouses.
In applying a discounted cash flow analysis, projections of cash flow from each property (assuming no indebtedness) were developed for a 10-year period ending in the year 2012 with a residual value computed at the end of year 10. The first year’s scheduled gross income was estimated taking into consideration each property’s current rent structure and the rental rates of competitive facilities. Also included in the income estimate were trends in ancillary income from late fees and rental concessions. Wilson then made an analysis of each subject’s occupancy history and took into account local market conditions to estimate a stabilized occupancy level for each of the Properties.
Estimated expenses were based primarily upon each of the Properties’ actual operating history. Expenses were also tested for reasonableness (and adjusted where deemed necessary) based upon a comparison of the expense levels to market norms. Expenses were deducted from effective gross income to derive a net operating income for each property. Consideration was given, and adjustments made, to reflect replacement reserves and scheduled capital repairs. Income and expense growth rates were based on projection parameters currently being used by property investors as well as upon local, regional and historical trends.
Wilson used annual revenue growth rates from 0.9% to 6.6% over the twelve months ending June 30, 2002 for the initial year of its cash flow projection and annual growth rates of 3% thereafter. Expense growth rates for the Properties ranged between 0.7% and 18.9% over the twelve months ending June 30, 2002 for the first year of Wilson’s cash flow projection and 3% per annum thereafter except for real estate taxes in California that increased 2.0% per annum. Wilson then used a terminal capitalization rate of 9.75% to capitalize each of the Properties’ 11th year net income into a residual value at the end of a 10-year holding period, and assumed a normal cost of disposing of the Properties. The 10 yearly cash flows were then discounted to present worth using discount rates ranging from 11.50% to 12.00%. In addition, Wilson valued each of the Properties using the direct capitalization method by applying capitalization rates ranging from 9.00% to 9.50% to projected net operating income for the next 12 months.
The indicated value for the Properties based upon the discounted cash flow analysis is approximately $90,677,000 and based upon the direct capitalization method is approximately $92,087,000. Wilson then deducted from the value of each property the present value of the costs associated with items of deferred maintenance.
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The indicated value for the Properties after the above adjustment based upon the discounted cash flow analysis is $88,860,000 and based upon the direct capitalization technique is $90,270,000.
In applying the sales comparison approach to the Properties, Wilson analyzed approximately 142 mini-warehouse properties that were sold during 1999 through 2002. Using a regression analysis, a strong correlation was derived between the comparable property’s net income and its sales price per square foot.
In addition, Wilson reviewed capitalization rates and purchase prices paid in recent transactions of properties similar to the Properties involving Public Storage and others and has concluded that the Properties are reasonably and appropriately valued relative to these other transactions.
Conclusions as to Value. Wilson gave primary emphasis to the income capitalization approach, an emphasis deemed appropriate based on acquisition criteria currently employed in the mini-warehouse market. Wilson validated the value from the income capitalization approach with the direct comparison approach.
Based on the valuation methodology described above, Wilson assigned a market value to the Properties as of June 30, 2002 of $89,500,000. The resulting effective implied capitalization rate for the Properties based on reported property operations (before non-recurring items and after certain property tax adjustments) during the 12 months ended June 30, 2002 averaged approximately 9.0 %.
Wilson’s conclusion as to value relates to 100% of the Properties, which includes the joint venture interests of both the Partnership and Public Storage. Wilson did not separately value the interest of the Partnership in the Properties.
Assumptions, Limitations and Qualifications of the Appraisal. The appraisal reflects Wilson’s valuation of the Properties as of June 30 2002 in the context of the information available on such date. Events occurring after June 30 2002 and before the closing of the merger could affect the properties or assumptions used in preparing the appraisal. Wilson has no obligation to update the appraisal on the basis of subsequent events; however, Wilson has informed the Partnership that, as of the date of this statement, Wilson is not aware of any event or change in conditions since June 30 2002 that may have caused a material change in the value of the Properties since that date.
The appraisal is subject to certain general and specific assumptions and limiting conditions and is in conformity with the Departure Provision of Uniform Standards of Professional Appraisal Practice. Among other limitations, the appraisal (1) did not consider the effect of easements, restrictions, structural repairs and other similar items on the value of the Properties, (2) assumed that the properties comply with local building codes and zoning ordinances, (3) assumed that there are no new or planned facilities except as noted in the appraisal and (4) did not involve the physical inspections of all of the subject or competing properties. See Appendix B for a discussion of the specific assumptions, limitations and qualifications of the appraisal.
Compensation and Material Relationships. Wilson is being paid an aggregate fee of $52,000 for preparation of the appraisal, which fee includes reimbursement for all of Wilson’s related out-of-pocket expenses. Wilson is also entitled to indemnification against certain liabilities. The fee was negotiated with Wilson and payment is not dependent upon completion of the merger. As a leading appraiser of mini-warehouses, Wilson (and its predecessor) have prepared appraisals for Public Storage and its affiliates, including appraisals of the properties of prior partnerships and REITs in connection with their mergers with Public Storage, and Wilson is expected to continue to prepare appraisals for Public Storage. From January 1, 1999 to the present, Wilson have received compensation aggregating approximately $239,600 for these services (exclusive of amounts received in connection with the merger).
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Stanger was engaged by the Partnership to deliver a written opinion of its determination as to the fairness of the consideration to be received in the merger, from a financial point of view, to the public limited partners. The full text of the opinion, which contains a description of the assumptions and qualifications made, matters considered and limitations on the review and opinion, is set forth in Appendix C to this statement and should be read in its entirety. The material assumptions, qualifications and limitations to the fairness opinion are set forth below. The summary set forth below does not purport to be a complete description of the analyses used by Stanger in rendering the fairness opinion. Arriving at a fairness opinion is a complex analytical process not necessarily susceptible to partial analysis or amenable to summary description.
In rendering the fairness opinion, Stanger did not conduct an independent appraisal of the Partnership’s portfolio of properties or the value of the Partnership units. In conducting the reviews in connection with the fairness opinion, Stanger has relied on the accuracy and completeness of the portfolio appraisal performed by Wilson and the analyses provided by the general partners.
Except for the assumptions, described more fully below, which the Partnership advised Stanger that it would be reasonable to make, the Partnership imposed no conditions or limitations on the scope of Stanger’s investigation or with respect to the methods and procedures to be followed in rendering the fairness opinion. The Partnership has agreed to indemnify Stanger against certain liabilities arising out of its engagement to prepare and deliver the fairness opinion.
Experience of Stanger. Stanger, founded in 1978, has provided information, research, investment banking and consulting services to clients throughout the United States, including major NYSE firms and insurance companies and over 70 companies engaged in the management and operation of partnerships and REITs. The investment banking activities of Stanger include financial advisory services, asset and securities valuations, equity and debt placements, industry and company research and analysis, litigation support and expert witness services, and due diligence investigations in connection with both publicly registered and privately placed securities transactions.
Stanger, as part of its investment banking business, is regularly engaged in the valuation of businesses and their securities in connection with mergers, acquisitions, reorganizations and for estate, tax, corporate and other purposes. In particular, Stanger’s valuation practice principally involves partnerships, partnership securities and the assets typically owned through partnerships including, but not limited to, oil and gas reserves, real estate, cable television systems and equipment leasing assets.
Summary of Materials Considered. In the course of Stanger’s analysis to render its opinion regarding the merger, Stanger: (1) reviewed a draft of this statement in substantially the form intended to be filed with the Securities and Exchange Commission (the “SEC”) and provided to limited partners; (2) reviewed the financial statements contained in Form 10-K filed with the SEC for Public Storage and the Partnership for the three fiscal years ending December 31, 1999, 2000 and 2001 and the financial statements contained in Form 10-Q filed with the SEC for Public Storage and the Partnership for the nine months ended September 30, 2002; (3) reviewed the MAI certified appraised value of the portfolio prepared by Wilson; (4) reviewed information regarding purchases and sales of self-storage properties by Public Storage or any affiliated entities over the past three years, and other information available relating to acquisition criteria for self-storage properties; (5) reviewed estimates prepared by the Partnership, and based in part on the appraisal, of the current net liquidation value per Partnership unit of the Partnership’s assets and projections of cash flow from operations, cash distributions and going-concern values per Partnership unit for the Partnership, and the calculation of the allocation of such values between the joint venture partners and between the limited and general partners; (6) discussed with certain members of management of Public Storage and the Partnership conditions in self-storage property markets, conditions in the market for sales/acquisitions of properties similar to those owned by the Partnership, current and expected operations and performance, and the financial condition and future prospects of Public Storage and the Partnership; (7) reviewed
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historical market prices, trading volume and dividends for Public Storage common stock and historical secondary market transactions for Partnership units; and (8) conducted other studies, analyses, inquiries and investigations as Stanger deemed appropriate.
Summary of Analysis. The following is a summary of certain financial and comparative analyses reviewed by Stanger in connection with and in support of its fairness opinion. The summary of the opinion and analysis of Stanger set forth in this statement is qualified in its entirety by reference to the full text of such opinion.
Review of Appraised Value. In preparing its opinion, Stanger relied upon the appraisal of the Properties which was prepared as of June 30, 2002 by Wilson, an independent appraiser. Stanger reviewed the appraisal, the methodology employed by Wilson and the appraised value rendered by Wilson and discussed with Wilson its experience and qualifications and the appraisal conclusions.
Stanger observed that the appraisal was certified by a Member of the Appraisal Institute and was conducted on a limited scope basis utilizing primarily the income approach to valuation, applying the direct capitalization and discounted cash flow methods to establish a value for each individual property, and the sales comparison approach.
Stanger observed that the effective capitalization rate utilized in the appraisal based upon the Properties’ net operating income generated for the 12 months ended August 31, 2002 and before the reduction in value for deferred maintenance items was approximately 9.1% and approximately 9.0% after certain property tax adjustments to such net operating income. Lower capitalization rates generally reflect higher sales prices for income-producing properties.
Stanger concluded that the valuation approaches and methods used by the appraiser are consistent with standard real estate appraisal practices for limited scope appraisals and therefore support Wilson’s conclusion of value and, since the merger consideration is based primarily upon the Wilson appraisal, the fairness of the consideration to be paid in the merger.
Review of Liquidation Analysis. Stanger reviewed an analysis prepared by the Partnership of the estimated value of the Partnership based upon liquidation of its portfolio utilizing the same assumptions and estimates prepared by the Partnership as described under “– Comparison of Consideration to be Received in the Merger to Other Alternatives – Liquidation Values” and information provided by Wilson.
The liquidation analysis assumes that all of the properties are sold concurrently at the appraised value as reported in the appraisal to an independent third-party buyer or buyers. Costs of such property sales by the Partnership to independent third parties were estimated by the Partnership to total approximately $4.0 million and were comprised of estimates of $391,000 in state and local transfer taxes, $2,685,000 in commissions and $931,000 in legal and other closing costs. Such amounts were based on prevailing transfer tax rates in the locale of each property and on estimates of the Partnership based on its knowledge of real estate transactions. Stanger observed that the estimated net proceeds from such liquidation, the sale of the Partnership’s interest in PSBP (less $0.06 per PSBP unit in brokerage commissions) and the associated dissolution of the Partnership and distribution of all remaining assets was $425 per Partnership unit, versus the consideration offered in the merger of $442 cash per unit, or the equivalent of $442 of Public Storage common stock per unit, based on the average closing price of Public Storage common stock on the NYSE during the 20 consecutive trading days ending on the fifth trading day prior to the Effective Date.
Stanger concluded that the liquidation analysis indicates that the consideration to be received by the limited partners in the merger exceeds the expected proceeds that could be received by the limited partners from liquidation of the Partnership’s assets and dissolution of the Partnership. Stanger concluded that this analysis supports the fairness of the consideration to be paid in the merger.
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Stanger also reviewed information on multi-property purchases and sales of self-storage properties transacted by Public Storage, Public Storage Management or affiliates. Stanger observed that Public Storage, Public Storage Management or affiliated entities have acquired two third-party bulk portfolios since 1996. Stanger observed that the stabilized capitalization rate for the first portfolio, which was purchased in the fourth quarter of 2000, averaged approximately 10.3%. However, Stanger deemed that portfolio not comparable to the Partnership’s portfolio in that it was comprised of four recently developed and unstabilized properties (with a weighted average occupancy of approximately 27% at the time of purchase). The second portfolio was purchased in the third quarter of 2002 and was comprised of three properties. Stanger observed that this transaction had a capitalization rate of approximately 8.3% based on 2001 actual income, pro forma Public Storage’s expense structure, and its expense structure and a capitalization rate of approximately 9.4% pro forma Public Storage’s management of the portfolio. During 1996, Public Storage, Public Storage Management and affiliated entities completed 11 bulk purchases of property portfolios, excluding the properties associated with the mergers of REITs and partnerships affiliated with Public Storage. These transactions involved affiliated and unaffiliated entities with an interest in 73 properties with an aggregate acquisition cost of approximately $209 million. Capitalization rates ranged from approximately 9.0% to 11.6% and averaged 9.6%.
Stanger also reviewed information regarding the merger between Public Storage and Storage Trust Realty (“Storage Trust”) which was closed in March 1999. Stanger noted that in the merger Public Storage acquired a portfolio of 215 self-storage properties and certain other assets for aggregate consideration of approximately $600 million, based on the price of Public Storage common stock as of November 6, 1998. Stanger also noted that in the context of rendering a fairness opinion, the financial advisor to Storage Trust performed a net asset valuation of Storage Trust based on a real estate valuation utilizing property specific financial projections for 1999 and a direct capitalization method. The capitalization rates utilized in this analysis ranged from 9.5% to 10.5%.
Based on the total transaction value of the Storage Trust merger and other information cited in the proxy statement relating to the merger, the implied trailing and forward capitalization rates of the Storage Trust portfolio in the merger were estimated by Stanger to be approximately 8.7% and 9.3%, respectively. This capitalization rate does not reflect certain options and benefits to be received by Public Storage as a result of the merger, including a reduction in consolidated general and administrative expenses from the elimination of certain duplicative administrative costs following the merger, estimated at over $2 million on a pro forma basis for the nine months ending September 30, 1998.
Review of Going-Concern Analysis. Stanger reviewed financial analyses and projections prepared by the Partnership concerning estimated cash flows and distributions from the Partnership’s continued operation as an independent stand-alone entity and estimated sales proceeds from the liquidation of the Properties. The analyses incorporated the same assumptions and estimates of revenues and operating expenses for the Properties, capital expenditures (including deferred maintenance items), entity-level general and administrative costs and interest income, and cash flow distributions and proceeds from sale of the Properties during a projection period of five years as described under “– Comparison of Consideration to be Received in the Merger to Other Alternatives – Going-Concern Value.” The analyses and projections assumed, among other things, that (1) net operating cash flow for the Partnership including projected distributions with respect to the Partnership’s holdings in PS Business Parks, Inc. would grow at a compound annual rate of approximately 4.0% over the five-year projection period; and (2) the sale of the Properties would occur at the terminal value projected by capitalizing the estimated net operating income in year six at a capitalization rate equal to the midpoint of the effective capitalization rate in the appraisal based on the appraiser’s initial year cash flow projection and the capitalization rate used by the appraiser in the residual value component of the discounted cash flow analysis (an average capitalization rate of approximately 9.34%). Real estate selling costs were assumed to be incurred at the same percentage of sale proceeds (4.4%) as incurred in the liquidation alternative.
The projections evaluated the Partnership’s going-concern value by analyzing projected cash flow and distributions assuming that the Partnership was operated as an independent stand-alone entity and its assets sold in a liquidation of the Partnership after a five-year holding period. The projections also assume that the Partnership’s interest in PSBP is sold at an FFO multiple of 9.13 (reduced by a commission of $.06 per share). Distributions and sale proceeds per Partnership unit were discounted in the projections at rates ranging from 12% to 13%.
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Stanger observed that the estimated values per Partnership unit on a going-concern basis resulting from the above analysis were $413 and $429, compared with the consideration in the merger of $442 per Partnership unit.
Stanger concluded that the range of going-concern values per Partnership unit indicates that the consideration to be received by the limited partners in the merger exceeds the expected present value of the returns that could be received by the limited partners from the alternative of continuing the Partnership in existence. Stanger concluded that the going-concern analysis supports the fairness of the consideration paid in the merger.
The estimated values assigned to the alternative forms of consideration are based on a variety of assumptions that have been made by the Partnership. While the Partnership has advised Stanger that it believes that it has a reasonable basis for these assumptions, these assumptions may not reflect the Partnership’s actual experience and such differences could be material. See “– Comparison of Consideration to be Received in the Merger to Other Alternatives.”
Review of Tender Offer and Secondary Market Prices. Stanger observed that Partnership units have been purchased in recent months on the informal secondary market for partnership securities and through a tender offer by Public Storage in 1996.
Stanger observed that, based on prices reported to Stanger by various firms active in the informal secondary market for partnership interests, the highest selling price reported for Partnership units in the informal secondary market between January 1, 2000 and September 30, 2002 was $440 per unit compared with the consideration in the merger of $442 per unit.
Stanger also observed that the Partnership units had been the subject of informal secondary market purchases by Public Storage in 2000, 2001 and 2002 at prices ranging from $300 to $335 per unit and that Public Storage conducted a tender offer for up to 25,000 Partnership units in December 1996 at an offering price of $300 per unit in cash.
Stanger believes sales of partnership units on the informal secondary market do not necessarily reflect the full value of a partnership’s net assets. Therefore, Stanger would expect secondary market sales prices generally to be below the estimated fair market value of a partnership’s net assets. Although Stanger believes reviewing secondary market prices is advisable for the purpose of investigating whether or not the estimated fair market value of a partnership’s net assets has been understated, Stanger did not place primary reliance on such secondary market prices as indicators of the fairness of the merger.
Distribution/FFO Analysis. Stanger reviewed distributions per Partnership unit and FFO per Partnership unit on an equivalent per unit basis. Stanger noted that based on a closing price of $30.00 for Public Storage common stock and the resulting exchange ratio of Partnership units for Public Storage common stock, the current regular quarter distribution rate for Public Storage ($0.45 per share) and the regular and special distributions (which are not necessarily recurring and which does not reflect potential future expenditures for deferred maintenance) for the Partnership during the 12 months ended September 30, 2002 ($32.00 per unit), annual distributions per share would decrease by approximately $5.48 (17.1%) for limited partners receiving Public Storage common stock.
Stanger observed that, at a closing price of $30.00 for Public Storage common stock and based on operating results for the Partnership and Public Storage during the 12 months ending December 31, 2001, and nine months ended September 30, 2002, FFO per Partnership unit on a fully diluted basis on the equivalent per share basis earned by limited partners would increase by approximately 9% and 7%, respectively.
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Stanger concluded that the limited partners choosing to receive Public Storage common shares in the merger would have, on an historical pro forma basis, lower dividends, but higher FFO attributable to their Partnership units after the merger. Stanger observed that Public Storage’s FFO and level of distributions reflects in part development and reinvestment activities intended to enhance shareholder value, whereas the Partnership, a finite life entity, does not pursue development or reinvestment opportunities. Stanger concluded that the reduction of distributions attributable to limited partners on an historical pro forma basis after the merger does not adversely impact its determination as to the fairness of the consideration to be paid in the merger since the merger consideration is based on the net asset value attributable to the units and the limited partners have the option of receiving cash instead of shares of Public Storage common stock.
Conclusions. Based on the foregoing, Stanger concluded that, based upon its analysis and assumptions, and the qualifications and limitations cited in its opinion, as of the date of the fairness opinion, the consideration to be received in the merger is fair to the public limited partners, from a financial point of view.
Assumptions. In evaluating the merger, Stanger relied upon and assumed, without independent verification, the accuracy and completeness of all financial and other information contained in this statement or that was furnished or otherwise communicated to Stanger. Stanger did not perform an independent appraisal of the assets and liabilities of Public Storage, the Partnership or any joint ventures and relied upon and assumed the accuracy of the restricted appraisal and adjustments included therein, including but not limited to the amount and timing of deferred maintenance items. Stanger also relied on the assurances of Public Storage and the Partnership that any projections, budgets, estimates of deferred maintenance or value estimates contained in this statement or otherwise provided to Stanger, were reasonably prepared on bases consistent with actual historical experience and reflect the best currently available estimates and good faith judgments; that the property values and the Partnership’s net asset value have been allocated between the joint venture partners and between the limited and general partners in accordance with the provisions of the joint venture and Partnership agreements in the same manner they would be allocated upon the joint ventures’ and Partnership’s liquidation; that no material changes have occurred in the appraised value of the Properties or the information reviewed between the date of the appraisal or the date of the other information provided and the date of the opinion; and that Public Storage and the Partnership are not aware of any information or facts that would cause the information supplied to Stanger to be incomplete or misleading in any material respect.
In connection with preparing the fairness opinion, Stanger was not engaged to, and consequently did not, prepare any written report or compendium of its analysis for internal or external use beyond the analysis set forth in Appendix C. Stanger does not intend to deliver any additional written summary of the analysis.
Limitations and Qualifications. Stanger was not requested to, and therefore did not: (1) select the method of determining the consideration being paid in the merger; (2) make any recommendation to the public limited partners with respect to whether to approve or reject the merger or whether to select the cash or Public Storage common stock option in the merger; or (3) express any opinion as to the business decision to effect the merger, alternatives to the merger or tax factors resulting from the merger, or relating to Public Storage’s continued qualification as a REIT. Stanger’s opinion is based on business, economic, real estate and securities markets, and other conditions as of the date of its analysis. Events occurring after that date may materially affect the assumptions used in preparing the opinion.
Among the factors considered in the selection of Stanger were Stanger’s experience in connection with the mergers of 18 affiliated REITs with Public Storage and in connection with the merger of seven similar Partnerships with Public Storage, its expertise in real estate transactions and the fee quoted by Stanger. No party other than Stanger was contacted to render an opinion as to the fairness of the merger to public limited partners, and the Partnership has neither requested nor received any views, preliminary or otherwise, from any party other than Stanger regarding the fairness of the merger to the public limited partners.
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Compensation and Material Relationships. For preparing the fairness opinion and related services in connection with the merger, Stanger is being paid a fee of $67,500. In addition, Stanger will be reimbursed for certain out-of-pocket expenses, including legal fees, up to a maximum of $9,000 and will be indemnified against all liabilities arising under any applicable federal or state law or otherwise related to or arising out of Stanger’s engagement or performance of its services to the Partnership other than liabilities resulting from Stanger’s gross negligence or willful misconduct. The fee was negotiated with Stanger. Payment of the fee to Stanger is not dependent upon completion of the merger. Stanger has rendered consulting and related services and provided products to Public Storage and its affiliates, including fairness opinions to the public shareholders of 18 REITs and seven public limited partnerships in connection with their mergers with Public Storage, and may be engaged in the future. From January 1, 1999 to the present, Stanger has received compensation aggregating approximately $400,000 for these services and products (exclusive of amounts received in connection with the merger).
If the conditions to the merger are satisfied or waived, the merger will be consummated pursuant to the merger agreement which is set forth in Appendix A to, and is incorporated by reference into, this statement. As a result of the merger, all of the Partnership units will be held by a subsidiary of Public Storage. The merger agreement contains representations and warranties of Public Storage and the Partnership and certain other provisions relating to the merger. The representations and warranties are extinguished by, and do not survive, the merger.
Representations and Warranties of Public Storage. Public Storage is representing and warranting to the Partnership that (1) the merger agreement has been duly authorized, (2) Public Storage has been duly organized, (3) Public Storage’s outstanding shares and the shares to be issued in the merger have or will be validly issued, (4) the merger agreement does not conflict with Public Storage’s organizational documents or material agreements (5) there is no material litigation pending against Public Storage, (6) since January 1, 1999, Public Storage has filed all required reports with the Commission, (7) Public Storage’s financial statements present fairly Public Storage’s financial position, (8) since January 1, 2002, there has not been any material adverse change in Public Storage’s business, (9) the information statement does not include any misleading statement of material fact, (10) all of Public Storage’s material insurance is in effect and (11) Public Storage’s representations and warranties in the merger agreement do not include any misleading statement of material fact.
Representations and Warranties of the Partnership. The Partnership is representing and warranting to Public Storage that (1) the merger agreement has been duly authorized, (2) the Partnership has been duly organized, (3) the Partnership’s outstanding units have been validly issued, (4) the merger agreement does not conflict with the Partnership’s organizational documents or material agreements, (5) there is no material litigation pending against the Partnership, (6) since January 1, 1999, the Partnership has filed all required reports with the Commission, (7) the Partnership’s financial statements present fairly the Partnership’s financial position, (8) since January 1, 2002, there has not been any material adverse change in the Partnership’s business, (9) the information statement does not include any misleading statement of material fact, (10) all of the Partnership’s material insurance is in effect and (11) the Partnership’s representations and warranties in the merger agreement do not include any misleading statement of material fact.
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Conditions to Consummation of the Merger. Consummation of the merger is contingent upon standard conditions, including the following: (1) the Registration Statement shall have been declared effective by the Commission and Public Storage shall have received all other authorizations necessary to issue Public Storage common stock in exchange for Partnership units and to consummate the merger; (2) the merger agreement and the merger shall have been approved and adopted by the requisite vote of the limited partners (which condition has been satisfied by Public Storage’s vote of its Partnership units in favor of the merger); (3) the shares of Public Storage common stock issued to limited partners shall be listed on the NYSE; (4) the Partnership shall have received a fairness opinion from Stanger (which opinion will be delivered on or about the date of this statement); (5) no legal action challenging the merger shall be pending; and (6) in the case of Public Storage, the average of the per share closing prices on the NYSE of Public Storage common stock during the 20 consecutive trading days ending on the fifth trading day prior to the Effective Date is not less than $29. Public Storage does not intend to postpone the merger if condition (6) is not satisfied in this time frame. If condition (6) is not satisfied or waived, Public Storage intends to promptly notify the limited partner in writing. The obligation of Public Storage to effect the merger is also subject to Public Storage, in its sole discretion, being satisfied as to title to, and the results of an environmental audit of, the Properties. The merger is also conditioned on the amendment of the Partnership agreement.
Amendment or Termination. The merger agreement provides for amendment or modification thereof with respect to the merger by written agreement authorized by the board of directors of Public Storage and the general partners. The merger may be abandoned at any time before or after shareholder approval by mutual written consent and may be abandoned by either party if, among other things, the closing of the merger has not occurred on or before June 30, 2003.
Consummation. It is contemplated that the merger will be consummated by filing a certificate of merger with the California Secretary of State.
Certificates for Public Storage Common Stock. After the merger, holders of Partnership units that were converted into shares of Public Storage common stock, without any further action, will be entitled to receive certificates representing the number of whole shares of Public Storage common stock into which Partnership units will have been converted and cash payment in lieu of fractional share interests, if applicable. As soon as practicable after the merger, the exchange agent, EquiServe Trust Company, N.A., will send the certificates for the Public Storage common stock to each holder of Partnership units whose Partnership units have been converted into shares of Public Storage common stock. HOLDERS OF PARTNERSHIP UNITS WHO INTEND TO RECEIVE PUBLIC STORAGE COMMON STOCK IN THE MERGER DO NOT NEED TO TAKE ANY ACTION TO RECEIVE THEIR RESPECTIVE CERTIFICATES REPRESENTING THE PUBLIC STORAGE COMMON STOCK. IT IS IMPORTANT THAT YOU MAKE SURE YOU RECEIVE YOUR CERTIFICATE FOR THE PUBLIC STORAGE COMMON STOCK MAILED TO YOU BY EQUISERVE TRUST COMPANY, N.A. IF YOU DO NOT RECEIVE YOUR PUBLIC STORAGE COMMON STOCK CERTIFICATE BY , 2003, CALL EQUISERVE TRUST COMPANY, N.A. AT (781) 575-3120 SO THAT AN AFFIDAVIT OF NON-RECEIPT CAN BE SENT TO YOU AND A CERTIFICATE REISSUED AT NO COST TO YOU. ANY SHAREHOLDER WHO CONTACTS EQUISERVE TRUST COMPANY, N.A. AFTER , 2003 REQUESTING THAT A CERTIFICATE BE REISSUED MAY NEED TO EXECUTE AN AFFIDAVIT OF LOSS AND PAY THE COST OF A BOND OF INDEMNITY BEFORE A CERTIFICATE CAN BE REPLACED.
After the merger, there will be no further registration of transfers of Partnership units on the Partnership’s records.
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Fractional Shares. No fractional shares of Public Storage common stock will be issued in the merger. In lieu of any fractional share interests, each holder of Partnership units who would otherwise be entitled to a fractional share of Public Storage common stock will, upon surrender of the certificate representing Public Storage common stock, receive a whole share of Public Storage common stock if such fractional share to which such holder would otherwise have been entitled is .5 of a share or more, and such fractional share shall be disregarded if it represents less than .5 of a share; provided that such fractional share shall not be disregarded if it represents .5 of 1% or more of the total number of shares of Public Storage common stock such holder is entitled to receive in the merger. In such event, the holder will be paid an amount in cash (without interest), rounded to the nearest $.01, determined by multiplying (1) the per share closing price on the NYSE of the Public Storage common stock at the time of effectiveness of the merger by (2) the fractional interest.
Restrictions on Other Acquisitions. The Partnership has agreed not to initiate, solicit or encourage, directly or indirectly, any inquiries or the making of any proposal with respect to a merger, consolidation, securities exchange or similar transaction involving it, or any purchase of all or any significant portion of its assets, or any equity interest in it, other than the transactions contemplated by the merger agreement, or engage in any negotiations concerning, or provide any confidential information or data to, or have discussions with, any person relating to such a proposal, provided that the general partners may furnish or cause to be furnished information and may participate in such discussions and negotiations through its representatives with persons who have sought the same if the failure to provide such information or participation in the negotiations and discussions might cause the Partnership to breach its fiduciary duty to limited partners under applicable law as advised by counsel. The Partnership has agreed to notify Public Storage immediately if inquiries or proposals are received by, any such information is requested from, or negotiations or discussions are sought to be initiated or continued with it, and to keep Public Storage informed of the status and terms of any such proposals and any such negotiations or discussions.
Distributions. Pending the merger, the Partnership is precluded from declaring or paying any distributions to the limited partners other than (1) regular distributions at a quarterly rate not in excess of $6.26 per Partnership unit and (2) distributions to the limited partners immediately prior to the effectiveness of the merger equal to the amount by which the Partnership’s estimated net asset value allocable to limited partners as of the date of the merger exceeds $442 per Partnership unit. See “– Determination of Amounts to be Received by Limited Partners in the Merger.”
Each holder of record of Partnership units may make a cash election to have his or her Partnership units converted into the right to receive cash in the merger. All cash elections are to be made on a cash election form. A cash election form is being sent to all holders of record of Partnership units on the date of this statement. A duplicate cash election form may be obtained by calling the exchange agent, EquiServe Trust Company, N.A., at the telephone number listed below. To be effective, a cash election form must be properly completed and signed in accordance with the instructions which accompany the cash election form and must be received by the exchange agent, no later than 5:00 p.m. New York City time on , 2003 (the “Election Deadline”) at one of the following addresses:
| By Mail |
By Hand |
By Overnight Courier |
For Assistance |
For information | ||||
| EquiServe Trust Company, N.A. P.O. Box 43014 Providence, RI 02940-3014 |
Securities Transfer & Reporting Services 100 William Street Galleria New York, NY 10038 |
EquiServe Trust Company, N.A. Corporate Actions 150 Royall Street Mail Stop 45-02-80 Canton, MA 02021 |
EquiServe Trust Company, N.A. Shareholder Services (781) 575-3120 |
Public Storage, Inc. Investor Services Dept. 701 Western Avenue Glendale, CA 91201-2349 (800) 421-2856 (818) 244-8080 |
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Holders of record of units who hold units as nominees, trustees or in other representative capacities may submit multiple cash election forms, provided that such representative certifies that each such cash election form covers all the units held by such representative for a particular beneficial owner. An election may be revoked by the person or persons making such election by a written notice signed and dated by such person or persons and received by the exchange agent at one of the addresses listed above prior to the Election Deadline, identifying the name of the registered holder of the units subject to such election and the total number of units owned by the beneficial owner. In addition, all cash election forms will automatically be revoked if the exchange agent is notified in writing that the merger has been abandoned. The exchange agent may determine whether or not elections to receive cash have been properly made or revoked, and any such determination shall be conclusive and binding.
A holder of Partnership units may not make a cash election as to less than all of the units owned by such holder. Any holder of units who does not submit a properly completed and signed cash election form which is received by the exchange agent prior to 5:00 p.m., New York City time, on , 2003 will receive Public Storage common stock in the merger. If Public Storage or the exchange agent determines that any purported cash election was not properly made, such purported cash election will be deemed to be of no force and effect and the holder of units making such purported cash election will, for purposes hereof, receive Public Storage common stock in the merger. None of Public Storage, the Partnership or the exchange agent will be under any obligation to notify any person of any defect in a cash election form.
The tax consequences of receiving cash or Public Storage common stock are described under “Federal Income Tax Considerations – The Merger.”
Consequences to the Partnership if the Merger is Not Completed
If the merger is not completed, the Partnership will remain as a separate legal entity and will continue to operate its properties.
It is estimated that the total consideration (cash and Public Storage common stock) to be paid by Public Storage to acquire all of Partnership units owned by the public limited partners in the merger and to pay related costs and expenses would be approximately $23.5 million. These amounts will be paid from Public Storage’s working capital or with funds borrowed under credit facilities with a group of banks for which Wells Fargo Bank, National Association acts as agent. These credit facilities aggregate $200,000,000 and bear interest at LIBOR plus .45% to 1.50%. Public Storage intends to repay amounts borrowed under these facilities from the public or private placement of securities or from Public Storage’s undistributed cash flow. There are no current borrowings under Public Storage’s credit facilities and Public Storage expects that the units will be acquired with funds from its working capital.
If the merger is completed, all costs incurred by Public Storage and the Partnership in connection with the merger will be paid by Public Storage. If the merger is not completed, all costs incurred in connection with the merger will be paid by the party incurring such costs, except that Public Storage will pay one-half of the cost of any expenses incurred in connection with the printing of this statement and related registration statement, the appraisal, environmental and structural audits and filing fees and the Partnership will pay the other one-half of such costs. The Partnership’s share of such costs would be paid from its working capital.
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The following is a statement of certain fees and expenses estimated to be incurred in connection with the merger (exclusive of amounts paid as a result of cash elections).
| Printing and mailing |
$ |
15,000 | |
| Legal |
|
15,000 | |
| Real estate appraisal and fairness opinion |
|
125,000 | |
| Registration, listing and filing fees |
|
10,000 | |
| Accounting |
|
10,000 | |
| Other |
|
10,000 | |
| TOTAL |
$ |
185,000 | |
For accounting purposes, the merger will be treated as a purchase. Accordingly, the cost of the assets and liabilities of the Partnership will be allocated based on fair value.
The merger is subject to compliance with federal and state securities law requirements.
Comparison of Partnership Units with Public Storage Common Stock
The information below compares certain attributes of Public Storage Common Stock with the Partnership units. The effect of the merger on limited partners who receive Public Storage common stock in the merger is set forth in italics below each caption.
| Partnership |
Public Storage | |
| Investment Objectives and Policies
| ||
| The principal investment objectives are to provide (1) quarterly cash distributions from its operations and (2) long-term capital gains through appreciation in the value of properties.
Under its organizational documents, the Partnership is not permitted to raise new capital or to reinvest operating cash flow or sale or financing proceeds. The Partnership will terminate on December 31, 2038, unless earlier dissolved. The Partnership anticipated selling or financing its properties within five to eight years from acquisition (i.e., between approximately 1990 and 1995). |
The investment objectives of Public Storage are to maximize FFO allocable to holders of Public Storage common stock and to increase shareholder value through internal growth and acquisitions. FFO is a supplemental performance measure for equity REITs used by industry analysts. FFO does not take into consideration principal payments on debt, capital improvements, distributions and other obligations of Public Storage. Accordingly, FFO is not a substitute for Public Storage’s net cash provided by operating activities or net income as a measure of Public Storage’s liquidity or operating performance. An increase in Public Storage’s FFO will not necessarily correspond with an increase in distributions to holders of Public Storage common stock. See “ Liquidity, Marketability and Distributions.”
Public Storage intends to continue its operations for an indefinite period
of time and is not precluded from raising new capital, including senior securities that would have priority over |
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| Public Storage common stock (including Public Storage common stock issued in the merger) as to cash flow, distributions and liquidation proceeds, or from reinvesting cash flow or sale or financing proceeds in new properties, except to the extent such reinvestment precludes Public Storage from satisfying the REIT distribution requirements. Therefore, Public Storage shareholders should expect to be able to liquidate their investment only by selling their shares in the market, and the market value of the Public Storage common stock may not necessarily equal or exceed the market value of Public Storage’s assets or the net proceeds which might be available for distribution upon liquidation if Public Storage were to liquidate. Public Storage has grown, and intends to continue to grow, as new investments are made. |
Limited partners who receive Public Storage common stock in the merger will be changing their investment from “finite life” to “infinite life”; they will be able to realize the value of their investment only by selling the Public Storage common stock. The interest of Public Storage shareholders can be diluted through the issuance of additional securities, including securities that would have priority over Public Storage common stock as to cash flow, distributions and liquidation proceeds. Public Storage has an effective registration statement for preferred stock, common stock, equity stock and warrants and intends to issue additional securities under this registration statement. There is no assurance that any such securities will be issued. See “Risk Factors – The number of shares of Public Storage common stock to be issued in the merger has not been determined” and “– Public Storage and its shareholders are subject to financing risks.”
Public Storage has no plans with respect to a sale or financing of any of the Properties.
Borrowing Policies
| The Partnership has no outstanding borrowings. It is fully invested and would distribute the proceeds from a financing of properties. |
Subject to certain limitations in Public Storage’s bylaws, Public Storage has broad powers to borrow in furtherance of its investment objectives. While Public Storage presently intends to finance its growth with preferred, equity and common stock, Public Storage has incurred in the past, and may incur in the future, both short-term and long-term debt to increase its funds available for investment in real estate, capital expenditures and distributions. As of September 30, 2002, Public Storage’s ratio of “Debt” (liabilities other than “accrued and other liabilities” and “minority interest” that should, in accordance with GAAP, be reflected on Public Storage’s balance sheet) to “Assets” (Public Storage’s total assets that should, in accordance with GAAP, be reflected on Public Storage’s balance sheet) was approximately 2%. |
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Public Storage has outstanding debt and reinvests proceeds from borrowings. The incurrence of debt increases the risk of loss of investment.
Transactions with Affiliates
| The partnership agreement generally prohibits the Partnership from (1) purchasing properties from or selling properties to the general partners, (2) leasing properties from or to the general partners and (3) loaning funds to the general partners. The partnership agreement may be amended by a majority vote of limited partners. See “Amendment to Partnership Agreement.” |
Public Storage’s bylaws restrict Public Storage from acquiring properties from its affiliates or from selling properties to them unless the transaction (1) is approved by a majority of Public Storage’s independent directors and (2) is fair to Public Storage based on an independent appraisal. |
Given Public Storage’s control of all voting decisions with respect to the Partnership, both Public Storage and the Partnership can enter into transactions with affiliates without the need for approval of the public shareholders and public limited partners, respectively. In the case of Public Storage, however, these transactions require approval of Public Storage’s independent directors.
Properties (As of September 30, 2002)
| The Partnership owns direct and indirect equity interests in 33 mini-warehouses in 15 states. Also owns an interest in PSBP. For the 9 months ended September 30, 2002, the weighted average occupancy level and realized annual rent per square foot of the Properties were 84% and $8.86, respectively. See “Description of Partnership’s Properties.” |
Public Storage owns equity interests (directly, as well as through general and limited partnership interests) in 1,407 storage facilities in 37 states, including 1,371 wholly owned properties. Also owns an interest in PSBP. See “Description of Public Storage’s Properties.” |
Because Public Storage owns substantially more property interests in more states than the Partnership, Public Storage’s results of operations are less affected by the profitability or lack of profitability of a single property than are those of the Partnership and it would be more difficult to liquidate Public Storage than the Partnership within a reasonable period of time.
Liquidity, Marketability and Distributions
| There is no active trading market for Partnership units. The Partnership has not issued any securities that have priority over its Partnership units. |
Public Storage common stock is traded on the NYSE. During the 12 months ended September 30, 2002, the average daily trading volume of Public Storage common stock was approximately 219,800 shares. Public Storage has issued, and may in the future issue, securities that have priority over Public Storage common stock as to cash flow, distributions and liquidation proceeds. |
Distributions are paid to limited partners from cash available for distribution. Public Storage is required to distribute at least 90% of its ordinary REIT taxable income in order to maintain its qualification as a REIT. Public Storage distributes less than its cash available for distribution (recently distributing amounts approximately equal to its taxable income), permitting it to retain funds for additional investment and debt reduction.
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A limited partner who receives Public Storage common stock in the merger will have an investment for which the market is broader and more active than the market for Partnership units. Distributions on Public Storage common stock are lower than the distributions on the Partnership units. Distributions on Public Storage common stock also are subject to priority of preferred stock. See “Distributions and Price Range of Public Storage Common Stock” and “Distributions and Market Prices of Partnership Units” for information on market prices of Partnership units and Public Storage Common Stock.
Taxation
| Income or loss earned by the Partnership is not taxed at the partnership level. Limited partners are required to report their allocable share of Partnership income and loss on their respective tax returns. Income and loss from the Partnership generally constitute “passive” income and loss, which can generally offset “passive” income and loss from other investments. Due to depreciation and other noncash items, cash distributions are not generally equivalent to the income and loss allocated to limited partners. During operations, cash distributions have been partially sheltered. After the end of each fiscal year, limited partners receive annual schedule K-1 forms showing their allocable share of Partnership income and loss for inclusion on their federal income tax returns. Limited partners are also required to file state income tax returns and/or pay state income taxes in California and in certain other states in which the Properties are located. |
Public Storage was organized to qualify for taxation as a REIT and intends to continue to so qualify. REITs generally are permitted to deduct distributions to their shareholders, which, to the extent of such deductions, effectively eliminates the “double taxation” (at the corporate and shareholder levels) that typically results when a corporation earns income and distributes that income to shareholders in the form of dividends. Distributions received by Public Storage shareholders generally constitute portfolio income, which cannot be offset by “passive” losses from other investments. Losses and credits generated within Public Storage do not pass through to shareholders. After the end of Public Storage’s calendar year, shareholders receive the less complicated Form 1099-DIV used by corporations to report their dividend income. See “Federal Income Tax Considerations.” |
The Partnership is a pass-through entity, whose income and loss is not taxed at the entity level but instead allocated directly to the limited and general partners. Limited partners are taxed on income or loss allocated to them, whether or not cash distributions are made to them. In contrast, Public Storage qualifies as a REIT, allowing it to deduct dividends paid to its shareholders. To the extent Public Storage has net income (after taking into account the dividends paid deduction), such income will be taxed at the corporate level at the standard corporate tax rates. Dividends paid to Public Storage shareholders will constitute portfolio income and not passive income.
Voting Rights
| Limited partners by a majority vote may, without the concurrence of the general partners, amend the partnership agreement, dissolve the partnership, remove and/or elect a general partner, and approve or disapprove the sale of all or substantially all of the Partnership’s assets. As owner of more than 50% of the Partnership units, Public Storage controls all voting decisions with respect to the Partnership. |
Public Storage holds annual meetings, with each such meeting on a date within 15 months of the prior annual meeting, at which the shareholders elect the directors, with each shareholder entitled to cast as many votes as there are directors to be elected, multiplied by the number of shares registered in his or her name. Under California law, a majority vote of shareholders is required for (1) the removal of directors, (2) the dissolution of the company, (3) the amendment of certain provisions of the organizational documents and (4) the sale of all or substantially |
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| all of the company’s assets. The public shareholders of Public Storage are substantially limited in their ability to control Public Storage in view of the significant ownership of Public Storage Common Stock by the Hughes family. |
Shareholders have different voting rights, including the right to elect directors annually, than the voting rights afforded to limited partners.
Management and Duties
| As a matter of state law, the general partners have liability for the payment of Partnership obligations and debts, unless limitations upon such liability are expressly stated in the obligation. The partnership agreement provides that the general partners are not liable to the Partnership or the limited partners for any act or omission performed in good faith pursuant to authority granted by the partnership agreement, and in a manner reasonably believed to be within the scope of authority granted and in the best interests of the Partnership, provided that such act or omission did not constitute fraud, misconduct, bad faith or negligence. In addition, the partnership agreement indemnifies the general partners for liability, loss, damage, costs and expenses, including attorneys’ fees, incurred by them in conducting the Partnership’s business, except in the case of fraud, misconduct, bad faith or negligence. |
Public Storage is managed by its board of directors and executive officers. A majority of the directors of Public Storage are independent directors. Under California law, directors are accountable to a corporation and its shareholders as fiduciaries and are required to perform their duties in good faith, in a manner believed to be in the best interests of a corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. The liability of the directors of Public Storage and the Partnership is limited under the provisions of California law and their organizational documents, which limit a director’s liability for monetary damages to the respective corporation or its shareholders for breach of the director’s duty of care, where a director fails to exercise sufficient care in carrying out the responsibilities of office. Those provisions would not protect a director who knowingly did something wrong, or otherwise acted in bad faith, nor would they foreclose any other remedy which might be available to the respective corporation or its shareholders, such as the availability of non-monetary relief. In addition, Public Storage’s organizational documents provide Public Storage with the authority to indemnify its “agents” under certain circumstances for expenses or liability incurred as a result of litigation. Under California law, “agents” are defined to include directors, officers and certain other individuals acting on a corporation’s behalf. Public Storage has taken advantage of those provisions and has entered into agreements with the respective corporation’s directors and executive officers, indemnifying them to the fullest extent permitted by California law. To the extent that the foregoing provisions concerning indemnification apply to actions arising under the Securities Act, Public Storage has been advised that, in the opinion of the |
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| Commission, such provisions are contrary to public policy and therefore are not enforceable. |
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The general partners have, under most circumstances, no liability to the Partnership for acts or omissions it undertakes when performed in good faith, in a manner reasonably believed to be within the scope of their authority and in the best interests of the Partnership. The general partners also have, under specified circumstances, a right to be reimbursed by the Partnership for liability, loss, damage, costs and expenses they incur by virtue of serving as general partners. Although the standards are expressed somewhat differently, there are similar protections from liability available to directors and officers of Public Storage when acting on behalf of Public Storage and rights of directors and officers to seek indemnification from Public Storage. Public Storage believes that the scope of the liability and indemnification provisions in Public Storage’s governing documents provides protection against claims for personal liability against Public Storage’s directors and officers which is comparable to, though not identical with, the protections afforded to the general partners under the partnership agreement.
Additional Issuances of Securities and Anti-Takeover Provisions
| The Partnership Agreement does not provide for the issuance of additional Partnership units. |
Subject to the rules of the NYSE and applicable provisions of California law, Public Storage has issued and intends to continue to issue authorized capital stock without shareholder approval. |
Given the ownership level of Public Storage common stock by the Hughes family and Public Storage’s flexibility to issue capital stock, including senior securities with special voting rights and priority over Public Storage common stock, and control of all Partnership voting decisions by Public Storage, both Public Storage and the Partnership are in a position to deter attempts to obtain control in transactions not approved by management.
Limited Liability of Investors
| Under the partnership agreement and California law, the liability of limited partners for the Partnership debts and obligations is limited to the amount of their investments in the Partnership, together with an interest in undistributed income, if any. The Partnership units are fully paid and nonassessable. |
Under California law, shareholders are not generally liable for corporate debts or obligations. The Public Storage common stock is nonassessable. |
The limitation on personal liability of Public Storage shareholders is substantially the same as that of the limited partners.
Review of Investor Lists
| A limited partner is entitled to request copies of investor lists showing the names and addresses of all limited partners. The right to receive such investor lists is conditioned upon payment of the cost of duplication and mailing. |
Under applicable law, a Public Storage shareholder is entitled, upon written demand, to inspect and copy the record of shareholders, at any time during usual business hours, for a purpose reasonably related to his or her interest as a shareholder. |
Limited Partners and shareholders are entitled to access to investor lists and to share records, respectively, subject to certain requirements.
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Table of Contents
AMENDMENT TO PARTNERSHIP AGREEMENT
The partnership agreement is being amended to expressly authorize the merger by adding a new section 13.5 to the partnership agreement that would read in its entirety as follows:
| 13.5 | Merger. Notwithstanding anything in the Agreement to the contrary, the Partnership may merge with PSI or a subsidiary, provided that such merger is approved by a Majority Vote. |
“Majority Vote” means the vote of limited partners owning more than 50% of the Partnership units.
While the partnership agreement does not prohibit mergers with the general partners, it does prohibit the Partnership from selling properties to the general partners. To ensure that the merger is legally authorized under the partnership agreement, the new section is being added to expressly authorize the merger. In the absence of this amendment the merger might be challenged as a violation of the partnership agreement.
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Table of Contents
APPROVAL OF THE MERGER AND PARTNERSHIP AGREEMENT AMENDMENT
This statement is first being mailed on or about , 2003 to limited partners in connection with the merger and the amendment to the partnership agreement. The general partners are not soliciting proxies in connection with these matters.
Holders of record at the close of business on the date of this statement will be entitled to receive notice of the merger and the amendment to the partnership agreement. On such date, there were outstanding 128,000 Partnership units. As of the record date, Public Storage beneficially owned 75,149 units (approximately 59% of the units).
The affirmative vote of a majority of the Partnership units is required to approve the merger and the amendment. As indicated above, the general partners are not soliciting proxies from the limited partners in connection with these matters. Public Storage owns sufficient units to approve the merger and the amendment without the vote of any other limited partner and has approved these matters by written consent in accordance with California law and the partnership agreement. The merger and the amendment will become effective upon the signing of the amendment and the filing of a certificate of merger with the California Secretary of State, which pursuant to Rule 14c-2 under the Exchange Act will not take place until at least 20 business days following the date on which this statement is mailed to limited partners.
Security Ownership of Certain Beneficial Owners and Management
Partnership. The Partnership is not aware of any beneficial owner of more than 5% of the Partnership units other than Public Storage which indirectly owns 75,149 units (59% of the units).
Public Storage. The following table sets forth information as of the dates indicated with respect to persons known to the Company to be the beneficial owners of more than 5% of the outstanding shares of Public Storage common stock or (“Common Shares”) or the Depositary Shares representing interests in equity stock of Public Storage (“Depositary Shares”):
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Table of Contents
| Shares of Common Stock Beneficially Owned |
Depositary Shares Each Representing 1/1,000 of a Share of Equity Stock, Series A Beneficially Owned | |||||||
| Name and Address |
Number of Shares |
Percent of Class |
Number of Shares |
Percent of Class | ||||
| B. Wayne Hughes (1) |
20,646,824 |
17.7% |
54,313 |
.6% | ||||
| B. Wayne Hughes, Jr. (1) |
1,177,907 |
1.0% |
34,808 |
.4% | ||||
| Tamara Hughes Gustavson (1) |
17,434,260 |
15.0% |
1,192,923 |
13.6% | ||||
| B. Wayne Hughes, Jr. and Tamara Hughes Gustavson (1) |
11,348 |
— |
43 |
— | ||||
| Total |
39,270,339 |
33.7% |
1,282,097 |
14.6% | ||||
| 701 Western Avenue Glendale, California 91201 |
||||||||
| Cohen Steers Capital Management, Inc. |
(3) |
(3) |
877,300 |
10.0% | ||||
| (1) | This information is as of May 31, 2002. B. Wayne Hughes, B. Wayne Hughes, Jr. and Tamara Hughes Gustavson have filed joint Schedule 13Ds reporting their collective ownership of Common Shares and Depositary Shares and may constitute a “group” within the meaning of section 13(d) (3) of the Securities Exchange Act of 1934, although each of these persons disclaims beneficial ownership of the shares owned by the others. 11,348 Common Shares and 43 Depositary Shares are held jointly by Mr. Hughes, Jr. and Ms. Hughes Gustavson. |
The above table does not include 7,000,000 shares of the Company’s Class B Common Stock which are owned by B. Wayne Hughes, Jr. and Tamara Hughes Gustavson. The Class B Common Stock is convertible into Common Stock on a share-for-share basis upon satisfaction of certain conditions, but in no event earlier than January 1, 2003.
| (2) | This information is as of December 31, 2001 (except that the percent shown is based on the Depositary Shares outstanding at May 31, 2002) and is based on a Schedule 13G filed by Cohen & Steers Capital Management, Inc. (“CSCM”), an investment adviser registered under the Investment Advisers Act of 1940. CSCM has sole voting power of 850,500 Depositary Shares and sole dispositive power of 877,300 Depositary Shares. |
| (3) | Less than 5%. |
The following table sets forth information as of May 31, 2002 concerning the beneficial ownership of the Common Shares and the Depositary Shares of each director of Public Storage, the chief executive officer of Public Storage, the four most highly compensated persons who were executive officers of Public Storage on December 31, 2001 and all directors and executive officers as a group:
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Table of Contents
| Shares of Common Stock: Beneficially Owned(1) Shares Subject to Options(2) |
Depositary Shares Each Representing 1/1,000 of a Share of Equity Stock, Series A Beneficially Owned |
|||||||||||
| Name |
Number of Shares |
Percent |
Number of Shares |
Percent |
||||||||
| B. Wayne Hughes |
20,646,824 |
|
17.7 |
% |
54,313 |
|
.6 |
% | ||||
| Harvey Lenkin |
97,437 |
(3) |
* |
|
3,303 |
(3) |
* |
| ||||
| 215,332 |
(2) |
.2 |
% |
|||||||||
| 312,769 |
|
.3 |
% |
|||||||||
| Marvin M. Lotz |
77,258 |
|
* |
|
5,336 |
|
* |
| ||||
| 170,332 |
(2) |
.1 |
% |
|||||||||
| 247,590 |
|
.2 |
% |
|||||||||
| B. Wayne Hughes, Jr. |
1,189,255 |
(4) |
1.0 |
% |
34,861 |
(4) |
.4 |
% | ||||
| Robert J. Abernethy |
66,568 |
|
* |
|
2,108 |
|
* |
| ||||
| 14,999 |
(2) |
* |
|
|||||||||
| 81,567 |
|
* |
|
|||||||||
| Dann V. Angeloff |
78,500 |
(5) |
* |
|
— |
|
— |
| ||||
| 9,999 |
(2) |
* |
|
|||||||||
| 88,499 |
|
* |
|
|||||||||
| William C. Baker |
20,000 |
|
* |
|
455 |
|
* |
| ||||
| 14,999 |
(2) |
* |
|
|||||||||
| 34,999 |
|
* |
|
|||||||||
| Thomas J. Barrack, Jr. |
— |
|
— |
|
— |
|
— |
| ||||
| 17,500 |
(2) |
* |
|
|||||||||
| 17,500 |
|
* |
|
|||||||||
| Uri P. Harkham |
54,774 |
(6) |
* |
|
555 |
(6) |
* |
| ||||
| 7,499 |
(2) |
* |
|
|||||||||
| 62,273 |
|
* |
|
|||||||||
| Daniel C. Staton |
1,458 |
|
* |
|
47 |
|
* |
| ||||
| 25,239 |
(2) |
* |
|
|||||||||
| 26,697 |
|
* |
|
|||||||||
| John Reyes |
21,378 |
|
* |
|
1,542 |
|
* |
| ||||
| 209,999 |
(2) |
.2 |
% |
|||||||||
| 231,377 |
|
.2 |
% |
|||||||||
| W. David Ristig |
— |
|
* |
|
* |
| ||||||
| 83,332 |
(2) |
.1 |
% |
|||||||||
| 83,332 |
|
.1 |
% |
|||||||||
| All Directors and Executive Officers as a Group |
22,293,682
|
(1)(3)(4) (5)(6)(7) |
19.1 |
% |
104,611
|
(1)(3)(4) (6)(7) |
1.2 |
% | ||||
| (17 persons) |
1,322,725 |
(2) |
1.1 |
% |
||||||||
| 23,616,407 |
|
20.3 |
% |
|||||||||
| * | Less than 0.1% |
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Table of Contents
| (1) | Common Shares or Depositary Shares, as applicable, beneficially owned as of May 31, 2002. Except as otherwise indicated and subject to applicable community property and similar statutes, the persons listed as beneficial owners of the shares have sole voting and investment power with respect to such shares. Includes shares credited to the accounts of the executive officers of the Company that are held in the 401(k) Plan. |
| (2) | Represents vested portion as of May 31, 2002, and portion of which will be vested within 60 days of May 31, 2002, of Common Shares subject to options granted to the named individuals or the group under the Company’s stock option and incentive plans. |
| (3) | Includes 3,126 Common Shares held of record or beneficially by Mrs. Lenkin or a son as to which each has investment power. |
Includes 360 Depositary Shares held of record or beneficially by Mrs. Lenkin or a son as to which each has investment power.
| (4) | Includes 44,159 Common Shares, held of record or beneficially by Mrs. Hughes, Jr. or her children as to which Mrs. Hughes, Jr. has investment power and 11,348 Common Shares held by Mr. Hughes, Jr. and Tamara Hughes Gustavson – Separate Property. |
Includes 1,371 Depositary Shares held of record or beneficially by Mrs. Hughes, Jr. or her children as to which Mrs. Hughes has investment power and 43 Depositary Shares held by Mr. Hughes, Jr. and Tamara Hughes Gustavson – Separate Property.
| (5) | Includes 2,000 Common Shares held by Mrs. Angeloff as to which she has investment power. |
| (6) | Includes 4,966 Common Shares owned beneficially by one of Mr. Harkham’s children as to which he has investment power. |
Includes 153 Depositary Shares owned beneficially by one of Mr. Harkham’s children as to which he has investment power.
| (7) | Includes shares held of record or beneficially by members of the immediate family of executive officers of the Company and shares credited to the accounts of the executive officers of Public Storage that are held in the 401(k) Plan. |
As of May 31, 2002, B. Wayne Hughes, Jr. owned 3,204,758 shares of Public Storage’s Class B Common Stock, representing 45.8% of the outstanding shares of Class B Common Stock. For information on the Class B Common Stock, see note (1) to the table in “Security Ownership of Certain Beneficial Owners and Management — Public Storage.”
Public Storage has outstanding a class of preferred stock, consisting of various series of non-voting senior preferred stock. As of May 31, 2002, B. Wayne Hughes, Jr. owned 400 shares of preferred stock, as to which he shared investment power, Robert J. Abernethy owned 225 shares of preferred stock and the directors and executive officers of Public Storage as a group owned a total of 625 shares of preferred stock, representing less than 0.1% of the outstanding shares.
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Table of Contents
Since January 1, 1999, there have been no, and there are no proposed, material contracts, arrangements, understandings, relationships, negotiations or transactions between the Partnership and Public Storage or its affiliates other than the merger or as follows:
Joint Venture Interest. The Partnership and Public Storage are partners in a joint venture (a general partnership that consolidated 23 prior joint ventures) that owns 32 of the Properties. Under the joint venture agreement, the interest of each of the Partnership and Public Storage in each of the joint venture’s properties is approximately 50%. For information on the Partnership’s interest in each of the joint venture’s properties, refer to “Description of Partnership’s Properties.” Under the joint venture agreement, the Partnership manages the joint venture, although Public Storage may compel the sale of the joint venture’s properties and the Partnership and Public Storage have a right of first refusal to acquire the other’s interest in the event of a proposed sale of the joint venture’s properties. Also, all depreciation and amortization with respect to each property is allocated solely to the Partnership until the Partnership receives allocations equal to its initial capital contribution with respect to that property.
General Partners’ Interest. Public Storage and Mr. Hughes are general partners of the Partnership. Public Storage receives incentive distributions equal to 10% of the Partnership’s cash flow and has a subordinated interest in proceeds from sales or financings of the Properties (15% of such proceeds so long as limited partners have received sale or financing distributions equal to their capital contributions plus any deficiency in a simple 8% annual return). In 1999, 2000, 2001 and nine months ended September 30, 2002 Public Storage received from the Partnership $515,000, $260,000, $615,000, and $370,000, respectively, in respect of its incentive distributions. Public Storage also has a 1% interest in the Partnership in respect of its capital contribution and participates in Partnership distributions in proportion to its interest in the Partnership. Mr. Hughes, has no ownership interest in the Partnership and is not entitled to any compensation, distribution or other consideration from the Partnership, although as a general partner he shares with Public Storage the overall management, conduct and operation of the Partnership and he may be personally liable for Partnership obligations. Mr. Hughes has no other interest in the Partnership.
Property Management. The Properties are managed by Public Storage under a management agreement under which Public Storage receives 6% of gross revenues from operations of the Properties. In 1999, 2000, 2001 and nine months ended September 30, 2002, Public Storage received $789,000, $793,000, $838,000, and $610,000, respectively, for managing the Properties.
Limited Partner Interests. Of the 128,000 outstanding Partnership units, 75,149 units (approximately 59%) are beneficially owned by Public Storage. Public Storage participates in Partnership distributions on the same terms as other holders of units in respect of units owned by Public Storage.
PSBP. The Partnership owns a 2% interest in PSBP jointly with Public Storage. Public Storage has a significant ownership interest in PSBP.
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Table of Contents
DESCRIPTION OF PARTNERSHIP’S PROPERTIES
The Partnership and Public Storage jointly own 32 of the 33 Properties and the remaining one is owned by the Partnership alone. All of the Properties are self-storage facilities, which 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 include rentable uncovered parking areas for vehicle storage. Leases 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 which ranges generally from 25 to 400 square feet.
Users of space in self-storage facilities both individuals and large and small businesses. Individuals usually employ this space for storage of, among other things, 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.
The following table sets forth information as of September 30, 2002 about the Properties.
| Location |
Net Rentable Square Feet |
Number of Spaces |
Date of Acquisition |
Ownership Percentage |
|||||
| Arizona |
|||||||||
| Scottsdale |
44,300 |
555 |
07/12/85 |
50.9 |
% | ||||
| 70th St. |
|||||||||
| California |
|||||||||
| Milpitas |
54,900 |
655 |
12/24/85 |
50.0 |
| ||||
| Pecten Ct. |
|||||||||
| N. Hollywood |
28,900 |
469 |
06/07/85 |
50.0 |
| ||||
| Raymer St. |
|||||||||
| N. Hollywood |
50,000 |
816 |
10/04/85 |
50.0 |
| ||||
| Whitsett Ave. |
|||||||||
| Pleasanton |
71,700 |
577 |
12/17/85 |
50.0 |
| ||||
| Santa Rita Rd. |
|||||||||
| San Diego |
50,900 |
644 |
07/11/85 |
50.0 |
| ||||
| Kearny Mesa Rd. |
|||||||||
| Connecticut |
|||||||||
| Hartford |
47,000 |
430 |
10/17/85 |
50.0 |
| ||||
| Roberts St. |
|||||||||
| Indiana |
|||||||||
| Ft. Wayne |
58,800 |
430 |
07/06/88 |
100.0 |
| ||||
| Illinois Rd. |
|||||||||
| Indianapolis |
59,200 |
492 |
10/31/85 |
50.0 |
| ||||
| Elmwood |
|||||||||
| Indianapolis |
59,100 |
525 |
10/31/85 |
50.0 |
| ||||
| Pike Plaza Rd. |
|||||||||
| Kansas |
|||||||||
| Wichita |
44,200 |
340 |
10/09/85 |
49.9 |
| ||||
| Carey Lane |
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Table of Contents
| Location |
Net Rentable Square Feet |
Number of Spaces |
Date of Acquisition |
Ownership Percentage |
|||||
| Wichita |
64,400 |
452 |
10/09/85 |
49.9 |
% | ||||
| E. Harry |
|||||||||
| Wichita |
41,400 |
294 |
10/09/85 |
49.9 |
| ||||
| E. Kellogg |
|||||||||
| Wichita |
46,800 |
383 |
10/09/85 |
49.9 |
| ||||
| E. MacArthur |
|||||||||
| Wichita |
107,500 |
799 |
10/09/85 |
49.9 |
| ||||
| S. Rock Road |
|||||||||
| Wichita |
63,600 |
537 |
10/09/85 |
49.9 |
| ||||
| S. Tyler Rd. |
|||||||||
| Wichita |
56,000 |
404 |
10/09/85 |
49.9 |
| ||||
| S. Woodlawn |
|||||||||
| Wichita |
50,500 |
425 |
10/09/85 |
49.9 |
| ||||
| W. Maple |
|||||||||
| Kentucky |
|||||||||
| Florence |
53,500 |
439 |
04/30/85 |
50.0 |
| ||||
| Tanner Lane |
|||||||||
| Missouri |
|||||||||
| Joplin |
56,500 |
437 |
10/09/85 |
49.9 |
| ||||
| S. Range Line |
|||||||||
| New Hampshire |
|||||||||
| Manchester |
61,600 |
534 |
05/20/85 |
50.0 |
| ||||
| S. Willow II |
|||||||||
| North Carolina |
|||||||||
| Concord |
41,000 |
444 |
07/26/85 |
50.0 |
| ||||
| Highway 29 |
|||||||||
| Ohio |
|||||||||
| Cincinnati |
52,800 |
482 |
04/30/85 |
50.0 |
| ||||
| Colerain Ave. |
|||||||||
| Cincinnati |
50,500 |
456 |
04/30/85 |
50.0 |
| ||||
| E. Kemper |
|||||||||
| Columbus |
63,000 |
457 |
10/04/85 |
50.0 |
| ||||
| Ambleside Dr. |
|||||||||
| Columbus |
56,900 |
393 |
09/25/85 |
50.0 |
| ||||
| Sinclair Rd. |
|||||||||
| Perrysburg |
62,900 |
488 |
10/29/85 |
50.0 |
| ||||
| Helen Drive |
|||||||||
| Oregon |
|||||||||
| Milwaukie |
50,600 |
478 |
05/17/85 |
49.8 |
| ||||
| McLoughlin II |
|||||||||
| Portland |
35,100 |
440 |
10/02/85 |
50.0 |
| ||||
| SE 82nd St. |
66
Table of Contents
| Location |
Net Rentable Square Feet |
Number of Spaces |
Date of Acquisition |
Ownership Percentage |
|||||
| Pennsylvania |
|||||||||
| Philadelphia |
50,100 |
427 |
09/12/85 |
50.0 |
% | ||||
| Tacony St. |
|||||||||
| Texas |
|||||||||
| Austin |
66,700 |
847 |
04/18/85 |
50.0 |
| ||||
| S. First St. |
|||||||||
| Washington |
|||||||||
| Tacoma |
47,400 |
521 |
05/23/85 |
50.0 |
| ||||
| Phillips Rd. S.W. |
|||||||||
| Wisconsin |
|||||||||
| Madison |
71,500 |
395 |
09/18/85 |
50.0 |
| ||||
| Copps Avenue |
The Partnership has no Property interest that involves 10% or more of the Partnership’s total assets or gross revenues.
The weighted average occupancy level for the Properties was 86% for the 12 months ended December 31, 2001 compared to 88% in the same period in 2000. The annual average realized rent per square foot for the Properties was $8.88 in the 12 months ended December 31, 2001, compared to $8.27 in the same period in 2000.
The weighted average occupancy level for the Properties was 84% for the nine months ended September 30, 2002 compared to 86% for the same period in 2001. The annual average realized rent per square foot for the Properties was $8.86 for the nine months ended September 30, 2002 compared to $8.82 for the same period in 2001. Higher realized rent per occupied square foot was achieved through more aggressive pricing that was implemented during 2001.
As of the date of this statement, each of the Properties is generating sufficient revenues to cover its operating expenses. None of the Properties is subject to any material mortgage, lien, or any encumbrance other than liens for taxes and assessments not yet due or payable, utility easements or other immaterial liens or encumbrances. Each of the Properties will continue to be used for its current purpose. At present, the Partnership has no plans for any material renovation or improvement of its properties. However, the Partnership budgets for regular maintenance, repair and upgrade to the Properties. The Partnership believes each of the Properties is adequately covered by insurance.
Competition exists in all of the market areas in which the Properties are located, and the barriers to entry are relatively low for competitors with the necessary capital. However, the Partnership believes that the current overall demand for space in self-storage facilities is strong, and as reflected in the table below the overall performance of the Properties has generally improved. The Properties are, and will continue after the merger to be, operated as part of the “Public Storage” system by Public Storage, the largest operator of self-storage facilities in the United States.
Set forth below is a schedule showing the overall occupancy rate and realized rent for the Properties for the periods indicated:
67
Table of Contents
| Years ended |
Nine Months ended September 30, |
|||||||||||||||||||
| 1999 |
2000 |
2001 |
2001 |
2002 |
||||||||||||||||
| Weighted average occupancy level |
|
90 |
% |
|
88 |
% |
|
86 |
% |
|
86 |
% |
|
84 |
% | |||||
| Annual realized rent per occupied square foot (1) |
$ |
8.02 |
|
$ |
8.27 |
|
$ |
8.88 |
|
$ |
8.82 |
|
$ |
8.86 |
| |||||
| (1) | Realized rent per occupied square foot represents the actual revenue earned per occupied square foot. Management believes this is a more relevant measure than the posted rental rates, since posted rates can be discounted through the use of promotions. Includes administrative and late fees. |
The Partnership also owns a 2% interest in PSBP jointly with Public Storage.
DESCRIPTION OF PUBLIC STORAGE’S PROPERTIES
At September 30, 2002, Public Storage had equity interests (through direct ownership, as well as general and limited partnership interests in 1,407 storage facilities (1,371 of which were wholly-owned) located in 37 states. Public Storage also has an interest in PS Business Parks, Inc., a REIT that owns and operates commercial properties. None of Public Storage’s properties involves 10% or more of Public Storage’s total assets or gross revenues.
For a general description of self-storage facilities, see “Description of Partnership’s Properties.”
The following table reflects the geographic diversification of Public Storage’s self-storage facilities:
| At September 30, 2002 | ||||
| Number of Facilities (1) |
Net Rentable Square Feet (in thousands) | |||
| California: |
||||
| Northern |
141 |
7,933 | ||
| Southern |
164 |
10,740 | ||
| Texas |
165 |
11,190 | ||
| Florida |
140 |
8,379 | ||
| Illinois |
95 |
5,879 | ||
| Georgia |
62 |
3,626 | ||
| Colorado |
51 |
3,199 | ||
| New Jersey |
41 |
2,437 | ||
| Washington |
43 |
2,834 | ||
| Maryland |
41 |
2,378 | ||
| Missouri |
38 |
2,172 | ||
| Virginia |
38 |
2,294 | ||
| New York |
37 |
2,250 | ||
| Ohio |
31 |
1,925 | ||
| Oregon |
25 |
1,171 | ||
| Tennessee |
27 |
1,566 | ||
| North Carolina |
24 |
1,266 | ||
| South Carolina |
24 |
1,082 | ||
| Kansas |
22 |
1,316 | ||
| Nevada |
22 |
1,409 | ||
| Alabama |
22 |
895 | ||
| Other states (17 states) |
154 |
9,451 | ||
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Table of Contents
| Totals |
1,407 |
85,392 | ||
| (1) | Includes 1,371 facilities owned by Public Storage and entities controlled by Public Storage. The remaining 36 facilities are owned by entities in which Public Storage has a non-controlling interest. |
As of the date of this statement, each of Public Storage’s properties is generating sufficient revenues to cover its operating expenses other than properties in the initial lease-up stage. As of September 30, 2002, only 24 of Public Storage’s properties were subject to any material mortgage, lien, or any encumbrance other than liens for taxes and assessments not yet due or payable, utility easements or other immaterial liens or encumbrances. These 24 properties were encumbered by mortgages in the aggregate amount of $21,407,000 bearing interest at rates ranging from 7.134% to 10.55% per year and maturing between May 2004 and September 2028. Each of Public Storage’s properties will continue to be used for its current purpose. At present, Public Storage has no plans for any material renovation or improvement of its properties. However, Public Storage budgets for regular maintenance, repair and upgrade to its properties. Public Storage believes each of its properties is adequately covered by insurance.
Competition exists in substantially all of the market areas in which Public Storage’s storage facilities and commercial properties are located, and the barriers to entry are relatively low for competitors with the necessary capital. More than 10% of Public Storage’s net rentable square feet of space are located in each of the Southern California and Texas market areas. Public Storage’s self-storage facilities are operated as part of the “Public Storage” system. Public Storage is the largest operator of self-storage facilities in the United States.
Set forth below is a schedule showing the overall occupancy rate and realized rent for 1154 of the 1407 self-storage facilities in which Public Storage had an interest at September 30, 2002. These 1154 facilities reflect a consistent pool of stabilized properties that have been operated under the Public Storage name for each of the periods listed below.
| Years ended December 31, |
Nine Months ended September 30, |
|||||||||||||||||||
| 1999 |
2000 |
2001 |
2001 |
2002 |
||||||||||||||||
| Weighted average occupancy level |
|
91 |
% |
|
91 |
% |
|
89 |
% |
|
90 |
% |
|
85 |
% | |||||
| Annual realized rent per occupied square foot (1) |
$ |
9.99 |
|
$ |
10.44 |
|
$ |
11.47 |
|
$ |
11.08 |
|
$ |
11.38 |
| |||||
| (1) | Realized annual rent per square foot is computed by annualizing rental income including late charges and administrative fees divided by weighted average occupied square footage for the period. |
DISTRIBUTIONS AND PRICE RANGE OF PUBLIC STORAGE COMMON STOCK
The Public Storage common stock has been listed on the NYSE since October 19, 1984. The following table sets forth the distributions paid per share on the Public Storage common stock in the periods indicated below and the reported high and low sales prices on the NYSE composite tape for the applicable periods.
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| Calendar Periods |
High |
Low |
Distributions Paid(1) |
|||||||
| 2000: |
||||||||||
| First quarter |
$ |
24.81 |
$ |
20.88 |
$ |
0.22 |
| |||
| Second quarter |
|
24.88 |
|
21.25 |
|
0.22 |
| |||
| Third quarter |
|
26.94 |
|
23.19 |
|
0.82 |
(2) | |||
| Fourth quarter |
|
24.88 |
|
21.13 |
|
0.22 |
| |||
| 2001: |
||||||||||
| First quarter |
|
26.75 |
|
24.13 |
|
0.22 |
| |||
| Second quarter |
|
30.20 |
|
26.06 |
|
0.22 |
| |||
| Third quarter |
|
34.85 |
|
29.15 |
|
0.80 |
(3) | |||
| Fourth quarter |
|
35.15 |
|
32.48 |
|
0.45 |
| |||
| 2002: |
||||||||||
| First quarter |
|
38.40 |
|
33.19 |
|
0.45 |
| |||
| Second quarter |
|
39.29 |
|
34.95 |
|
0.45 |
| |||
| Third quarter |
|
37.90 |
|
31.12 |
|
0.45 |
| |||
| Fourth quarter |
|
32.53 |
|
27.99 |
|
0.45 |
| |||
| 2003 |
||||||||||
| First quarter (through _______, 2003) |
||||||||||
| (1) | For GAAP purposes, all distributions were from investment income. |
| (2) | Include a special distribution of $0.60 per share. |
| (3) | Include a special distribution of $0.35 per share. |
As of September 30, 2002, there were approximately 22,096 record holders of Public Storage common stock. On , 2003, the last full trading day prior to the date of this statement, the closing price of the Public Storage common stock was $ .
Holders of Public Storage common stock are entitled to receive distributions when, as and if declared by the board of directors out of any funds legally available for that purpose. Public Storage, as a REIT, is required to distribute annually at least 90% of its “REIT taxable income,” which, as defined by the relevant tax statutes and regulations, is generally equivalent to net taxable ordinary income. Under certain circumstances, Public Storage can rectify a failure to meet this distribution requirement by paying dividends after the close of a particular taxable year. See “Federal Income Tax Considerations — Taxation of Public Storage as a REIT.”
Public Storage’s revolving credit facility with a commercial bank restricts Public Storage’s ability to pay distributions in excess of “Funds from Operations” for the prior four fiscal quarters less scheduled principal payments and less capital expenditures. Funds from Operations is defined in the loan agreement generally as net income before gain on sale of real estate, extraordinary loss on early retirement of debt and deductions for depreciation, amortization and non-cash charges. Also, unless full dividends on Public Storage’s preferred stock have been paid for all past dividend periods, no dividends may be paid on Public Storage common stock, except in certain instances.
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DISTRIBUTIONS AND MARKET PRICES OF PARTNERSHIP UNITS
Partnership Distributions. The following table sets forth the distributions paid per Partnership unit (original purchase price $500) in the periods indicated below:
| Distribution |
||||
| 2000: |
||||
| First Quarter |
$ |
3.48 |
| |
| Second Quarter |
|
3.48 |
| |
| Third Quarter |
|
5.57 |
| |
| Fourth Quarter |
|
5.57 |
| |
| 2001: |
||||
| First Quarter |
|
5.57 |
| |
| Second Quarter |
|
24.71 |
(1) | |
| Third Quarter |
|
6.26 |
| |
| Fourth Quarter |
|
6.26 |
| |
| 2002: |
||||
| First Quarter |
|
6.26 |
| |
| Second Quarter |
|
6.26 |
| |
| Third Quarter |
|
13.22 |
(2) | |
| (1) | Includes a special distribution of $18.45 per unit. See note (5) under “Summary—Summary Financial Information.” |
| (2) | Includes a special distribution of $6.96 per unit. See note (5) under “Summary—Summary Financial Information.” |
Holders of Partnership Units. As of September 30, 2002, there were approximately 2,363 record holders of Partnership units.
Sales of Partnership Units. The Partnership units are not listed on any national securities exchange or quoted in the over the counter market, and there is no established public trading market for the units. Secondary sales activity for the units has been limited and sporadic. The general partners monitor transfers of the units (1) because the admission of the transferee as a substitute limited partner requires the consent of the general partners under the partnership agreement, (2) in order to track compliance with safe harbor provisions to avoid treatment as a “publicly traded partnership” for tax purposes and (3) because Public Storage has purchased units. However, the general partners do not have information regarding the prices at which all secondary sales transactions in the units have been effectuated. Various organizations offer to purchase and sell limited partnership interests (such as the units) in secondary sales transactions. Various publications summarize and report information (on a monthly, bimonthly or less frequent basis) regarding secondary sales transactions in limited partnership interests (including the units), including the prices at which such secondary sales transactions are effectuated.
The general partners estimate, based solely on the transfer records of the Partnership and the Partnership’s transfer agent, that the number of Partnership units transferred in sales transactions (i.e., excluding transactions believed to be between related parties, family members or the same beneficial owner) was as follows:
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| Year |
Number of Total Units Transferred(1) |
Percentage of Units Outstanding |
Number of Transactions(1) | |||
| 1999 |
1,933(2) |
1.51% |
69(2) | |||
| 2000 |
1,817(3) |
1.42% |
45(3) | |||
| 2001 |
1,635(4) |
1.28% |
80(4) | |||
| 2002 (through July 1) |
2,198(5) |
1.72% |
116(5) |
| (1) | Transfers are recorded quarterly on the Partnership’s records, as of the first day following each calendar quarter. |
| (2) | In 1999, Public Storage purchased a total of 636 units in 23 transactions: at $300 per unit. |
| (3) | In 2000, Public Storage purchased a total of 1,375 units in 31 transactions: 389 units at $300 per unit and 986 units at $335 per unit. |
| (4) | In 2001, Public Storage purchased a total of 1,341 units in 55 transactions at $335 per unit. |
| (5) | In 2002, Public Storage purchased 130 units in 9 transactions at $335 per unit. |
All of the purchases of Partnership units described in notes (2), (3), (4) and (5) above were acquired directly from limited partners or through secondary firms of the type described below under “Information Regarding Sales Transactions.”
Information Regarding Sales Transactions. The information set forth below is extracted from sections of the March 31, 2000, June 30, 2000, September 30, 2000, December 31, 2000, March 31, 2001, June 30, 2001, Third Quarter 2001, Fourth Quarter 2001, First Quarter 2002 and Second Quarter 2002 issues of a subscription publication available to the public which includes data concerning limited partnership sales transactions captioned “Limited Partnership Secondary-Market Prices,” summarizing secondary market prices for public limited partnerships based on actual transactions during the reporting periods listed on the tables below. Approximately 11 secondary-market firms provided high and low price data for some or all of the reporting periods.
The information regarding sale transactions in Partnership units is as follows:
| Per Unit Transaction Price(1) |
||||||||
| Reporting period |
High |
Low |
No. of Units(2) | |||||
| 2000: |
||||||||
| January 1 – March 31 |
$ |
347.00 |
$ |
265.00 |
216 | |||
| April 1 – June 30 |
|
335.00 |
|
331.11 |
30 | |||
| July 1 – September 30 |
|
331.50 |
|
331.50 |
16 | |||
| October 1 – December 31 |
|
— |
|
— |
— | |||
| 2001: |
||||||||
| January 1 – March 31 |
|
342.00 |
|
323.73 |
124 | |||
| April 1 – June 30 |
|
340.00 |
|
250.00 |
25 | |||
| July 1 – September 30 |
|
— |
|
— |
— | |||
| October 1 – December 31 |
|
340.00 |
|
200.00 |
135 | |||
| 2002: |
||||||||
| January 1 – March 31 |
|
200.00 |
|
200.00 |
305 | |||
| April 1 – June 30 |
|
375.00 |
|
310.00 |
360 | |||
| July 1 – September 30 |
|
440.00 |
|
375.00 |
205 | |||
| (1) | The original purchase price was $500 per unit. Public Storage does not know whether the transaction prices shown are before or after commissions. |
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| (2) | Public Storage does not know the number of transactions. |
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The information above is provided without verification by Public Storage and is subject to the following qualifications in the publication: “Limited partnerships are designed as illiquid, long-term investments. Secondary-market prices generally do not reflect the current value of partnership assets, nor are they indicative of total return since prior cash distributions and tax benefits received by the original investor are not reflected in the price. Transaction prices are not verified by the publication.”
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DESCRIPTION OF PUBLIC STORAGE CAPITAL STOCK
Public Storage is authorized to issue 200,000,000 shares of Public Storage common stock, par value $.10 per share, 7,000,000 shares of Public Storage class B common stock, par value $.10 per share, 50,000,000 shares of preferred stock, par value $.01 per share and 200,000,000 shares of equity stock, par value $.01 per share. At September 30, 2002, Public Storage had outstanding 117,464,122 shares of Public Storage common stock (excluding shares issuable upon conversion of convertible securities and shares subject to options), 7,000,000 shares of Class B Common Stock, 9,264,486 shares of preferred stock (of which 69,486 shares were represented by 69,486,000 depositary shares) and 4,523,320.338 shares of equity stock (of which 8,776.102 shares were represented by 8,776,102 depository shares).
The following description of Public Storage common stock sets forth certain general terms and provisions of Public Storage common stock. The statements below describing Public Storage common stock are in all respects subject to and qualified in their entirety by reference to the applicable provisions of the Public Storage’s articles of incorporation and bylaws.
Public Storage shareholders will be entitled to receive dividends when, as and if declared by Public Storage’s Board of Directors, out of funds legally available therefor. Payment and declaration of dividends on Public Storage common stock and purchases of shares thereof by Public Storage will be subject to certain restrictions if Public Storage fails to pay dividends on outstanding preferred stock. See “—Preferred Stock.” Upon any liquidation, dissolution or winding up of Public Storage, holders of Public Storage common stock will be entitled to share equally and ratably in any assets available for distribution to them, after payment or provision for payment of the debts and other liabilities of Public Storage and the preferential amounts owing with respect to any outstanding preferred stock. Holders of Public Storage common stock have no preemptive rights, which means they have no right to acquire any additional shares of Public Storage common stock that may be issued by Public Storage at a subsequent date.
Each outstanding share of Public Storage common stock entitles the holder to one vote on all matters presented to Public Storage shareholders for a vote, with the exception that Public Storage shareholders have cumulative voting rights with respect to the election of the Board of Directors, in accordance with California law. Cumulative voting entitles each Public Storage shareholder to cast as many votes as there are directors to be elected multiplied by the number of shares registered in his or her name. A Public Storage shareholder may cumulate the votes for directors by casting all of the votes for one candidate or by distributing the votes among as many candidates as the Public Storage shareholder chooses. Public Storage shareholders have no preemptive or other rights to subscribe for or purchase additional shares of Public Storage common stock. All outstanding shares of Public Storage common stock are fully paid and nonassessable.
In a series of transactions among Public Storage Management, Inc. and its affiliates (collectively, “PSMI”), culminating in the November 16, 1995 merger of PSMI into Storage Equities, Inc., Storage Equities became self-administered and self-managed, acquired substantially all of PSMI’s United States real estate interests and was renamed “Public Storage, Inc.”
For Public Storage to qualify as a REIT under the Code, no more than 50% in value of its outstanding shares of capital stock may be owned, directly or constructively under the applicable attribution rules of the Code, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of a taxable year. In order to maintain its qualification as a REIT, Public Storage’s articles of incorporation and bylaws provide certain restrictions on the shares of capital stock that any Public Storage shareholder may own.
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Public Storage’s articles of incorporation and bylaws provide that, subject to certain exceptions, no holder may own, or be deemed to own by virtue of the attribution provisions of the Code, more than (A) 2.0% of the outstanding shares of all common stock of Public Storage, or (B) 9.9% of the outstanding shares of each class or series of shares of preferred stock or equity stock of Public Storage. The articles of incorporation and bylaws provide, however, that no person shall be deemed to exceed the ownership limit solely by reason of the beneficial ownership of shares of any class of stock to the extent that such shares of stock were beneficially owned by such person (including the Hughes family) at the time of the PSMI Merger. This ownership limitation was established in order to assist in preserving Public Storage’s REIT status in view of the Hughes family’s substantial ownership interest in Public Storage. See “Federal Income Tax Considerations – Taxation of Public Storage as a REIT.”
Public Storage’s Board of Directors, in its sole and absolute discretion, may grant an exception to the ownership limits to any person so requesting, so long as (A) the Board of Directors has determined that, after giving effect to (x) an acquisition by such person of beneficial ownership (within the meaning of the Code) of the maximum amount of capital stock of Public Storage permitted as a result of the exception to be granted and (y) assuming that the four other persons who would be treated as “individuals” for the purposes of Section 542(a)(2) of the Code and who would beneficially own the largest amounts of stock of Public Storage (determined by value) beneficially own the maximum amount of capital stock of Public Storage permitted under the ownership limits (or any waivers of the ownership limits granted with respect to such persons), Public Storage would not be “closely held” within the meaning of Section 856(h) of the Code and would not otherwise fail to qualify as a REIT, and (B) such person provides to Public Storage’s Board of Directors such representations and undertakings as the Board of Directors may require. Notwithstanding any of the foregoing ownership limits, no holder may own or acquire, either directly, indirectly or constructively under the applicable attribution rules of the Code, any shares of any class of Public Storage’s capital stock if such ownership or acquisition (i) would cause more than 50% in value of Public Storage’s outstanding capital stock to be owned, either directly or constructively, under the applicable attribution rules of the Code, by five or fewer individuals (as defined in the Code to include certain tax-exempt entities, other than, in general, qualified domestic pension funds), (ii) would result in Public Storage’s stock being beneficially owned by less than 100 persons (determined without reference to any rules of attribution), or (iii) would otherwise result in Public Storage’s failing to qualify as a REIT.
Public Storage’s articles of incorporation and bylaws provide that, if any holder of Public Storage’s capital stock purports to transfer shares to a person or there is a change in the capital structure of Public Storage and either the transfer or the change in capital structure would result in Public Storage failing to qualify as a REIT, or such transfer or the change in capital structure would cause the transferee to hold shares in excess of the applicable ownership limit, then the stock being transferred (or in the case of an event other than a transfer, the stock beneficially owned) which would cause one or more of the restrictions on ownership or transfer to be violated shall be automatically transferred to a trust for the benefit of a designated charitable beneficiary. The purported transferee of such shares shall have no right to receive dividends or other distributions with respect to such shares and shall have no right to vote such shares. Any dividends or other distributions paid to such purported transferee prior to the discovery by Public Storage that the shares have been transferred to a trust shall be paid to the trustee of the trust for the benefit of the charitable beneficiary upon demand. The trustee of the trust will have all rights to dividends with respect to shares of stock held in trust, which rights will be exercised for the exclusive benefit of the charitable beneficiary. Any dividends or distributions paid over to the trustee will be held in trust for the charitable beneficiary. The trustee shall designate a transferee of such stock so long as such shares of stock would not violate the restrictions on ownership or transfer in the Public Storage articles of incorporation or bylaws in the hands of such designated transferee. Upon the sale of such shares, the purported transferee shall receive the lesser of (A)(i) the price per share such purported transferee paid for the stock in the purported transfer that resulted in the transfer of the shares to the trust, or (ii) if the transfer or other event that resulted in the transfer of the shares of the trust was not a transaction in which the purported transferee gave full value for such shares, a price per share equal to the market price on the date of the purported transfer or other event that resulted in the transfer of the shares to the trust and (B) the price per share received by the trustee from the sale or other disposition of the shares held in the trust.
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The Public Storage class B common stock:
(1) Participates in distributions (other than liquidating distributions) at the rate of 97% of the per share distributions on the Public Storage common stock, provided that cumulative distributions of at least $.22 per quarter (beginning with the fourth quarter of 1995) per share have been paid on the Public Storage common stock;
(2) Does not participate in liquidating distributions;
(3) Is not entitled to vote (except as expressly required by California law); and
(4) Will automatically convert into Public Storage common stock, on a share for share basis, upon the later to occur of funds from operations per common share aggregating $3.00 during any period of four consecutive calendar quarters or January 1, 2003.
For these purposes:
(1) Funds from operations 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 Public Storage’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 funds from operations attributable to minority interest. Funds from operations is a supplemental performance measure for equity REITs as defined by the National Association of Real Estate Investment Trusts, Inc. This definition does not specifically address the treatment of minority interest in the determination of funds from operations or the treatment of the amortization of property management agreements and goodwill. In the case of Public Storage, funds from operations 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. Funds from operations does not take into consideration scheduled principal payments on debt, capital improvements, distributions and other obligations of Public Storage. Accordingly, funds from operations is not a substitute for Public Storage’s cash flow or net income as a measure of its liquidity or operating performance or ability to pay distributions.
(2) Funds from operations per Common Share means funds from operations less preferred stock dividends (less dividends on the preferred stock and the equity stock) divided by the outstanding weighted average shares of Public Storage common stock assuming conversion of all outstanding convertible securities and the Public Storage class B common stock.
Public Storage is authorized to issue 50,000,000 shares of preferred stock, $.01 par value per share. Public Storage’s articles of incorporation provide that the preferred stock may be issued from time to time in one or more series and give the Board of Directors broad authority to fix the dividend and distribution rights, conversion and voting rights, if any, redemption provisions and liquidation preferences of each series of preferred stock.
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At September 30, 2002, Public Storage had 15 series of senior preferred stock outstanding and had reserved for issuance, upon conversion of preferred units in an operating partnership, an additional two series. In all respects, each of the series of senior preferred stock ranks on a parity with each other. Each of the series of senior preferred stock: (1) has a stated value of $25 per share, (2) in preference to the holders of shares of the common stock and any other capital stock ranking junior to the senior preferred stock as to payment of dividends, provides for cumulative quarterly dividends calculated as a percentage of the stated value (ranging from 7.500% to 10% per year in the case of the 14 series of fixed rate senior preferred stock and a rate adjustable quarterly ranging from 6.75% to 10.75% per year in the case of a series of adjustable rate senior preferred stock) and (3) is subject to redemption, in whole or in part, at the option of Public Storage at a cash redemption price of $25 per share, plus accrued and unpaid dividends (on and after June 30, 1999 in the case of the adjustable rate senior preferred stock and on or after various dates between March 31, 2003 and September 30, 2007 in the case of the series of fixed rate senior preferred stock).
In the event of any voluntary or involuntary liquidation, dissolution or winding up of Public Storage, the holders of each of the series of senior preferred stock will be entitled to receive out of Public Storage’s assets available for distribution to stockholders, before any distribution of assets is made to holders of Public Storage common stock or any other shares of capital stock ranking as to such distributions junior to the senior preferred stock, liquidating distributions in the amount or equivalent amount of $25 per share, plus all accrued and unpaid dividends.
Except as expressly required by law and in certain other limited circumstances, the holders of the senior preferred stock are not entitled to vote. The consent of holders of at least 66 2/3% of the outstanding shares of the senior preferred stock (and any other series of preferred stock ranking on a parity therewith), voting as a single class, is required to authorize another class of shares senior to such preferred stock.
Public Storage is authorized to issue 200,000,000 shares of equity stock, $.01 par value per share. At September 30, 2002, Public Storage had 4,523,320.338 outstanding shares of equity stock (of which 8,776.102 shares were represented by 8,776,102 depositary shares). Public Storage’s articles of incorporation provide that the equity stock may be issued from time to time in one or more series and give 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. Holders of equity stock have no preemptive rights. The shares of equity stock will be, when issued, fully paid and nonassessable.
At September 30, 2002, Public Storage had three series of equity stock outstanding.
The equity stock, series A is represented by depositary shares (each depositary share representing 1/1,000 of a shares of equity stock, series A). The equity stock, series A (1) provides for cash distributions at the rate of five times the distributions on the common stock per depositary share, but not more than $2.45 per depositary share per year, (2) may be redeemed on or after March 31, 2010 at $24.50 per depositary share, (3) on liquidation each depositary share receives the same amount allocated in respect of a share of common stock, but not to exceed $24.50 per depositary share, (4) is convertible into common stock at the rate of one depositary share into .956 shares of common stock if Public Storage fails to preserve its status as a REIT and (5) votes as a single class with the common stock at the rate of one-tenth of a vote per depositary share. At September 30, 2002, there were 8,776.102 outstanding shares of equity stock, series A (represented by 8,766,102 depositary shares).
The equity stock, series AA (1) provides for cash distributions at the rate of ten times the distributions on the common stock per share, but not more the $8.80 per share per year, (2) on liquidation receives ten times the amount allocated in respect of a share of common stock, but not to exceed $100 per share and (3) is non-voting, except as required by California law. At September 30, 2002, there were 225,000 outstanding shares of equity stock, series AA.
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The equity stock, series AAA (1) provides for cash distributions at the rate of five times the distributions on the common stock per share, but not more than $2.15640625 per depositary share per year, (2) on liquidation receives 120% of the amount allocated in respect of a share of common stock, per share, (3) is convertible into common stock at the rate of 1.2 shares of common stock for each share in November 2014 and (4) is non-voting, except as required by California law. At September 30, 2002, there were 4,289,544.236 outstanding shares of equity stock, series AAA.
Effects of Issuance of Capital Stock
The issuance of Public Storage common stock and the issuance of preferred stock or equity stock with special voting rights could be used to deter attempts by a single shareholder or group of shareholders to obtain control of Public Storage in transactions not approved by Public Storage’s Board of Directors. Public Storage has no intention to issue Public Storage common stock or the preferred stock or equity stock for such purposes.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE PARTNERSHIP
Forward Looking Statements
When used within this document, the words “expects,” “believes,” “anticipates,” “should,” “estimates,” and similar expressions are intended to identify “forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors, which may cause the actual results and performance of the Partnership to be materially different from those expressed or implied in the forward looking statements. Such factors include the impact of competition from new and existing real estate facilities which could impact rents and occupancy levels at the real estate facilities that the Partnership has an interest in; the Partnership’s ability to effectively compete in the markets that it does business in; the impact of the regulatory environment as well as national, state, and local laws and regulations including, without limitation, those governing Partnerships; and the impact of general economic conditions upon rental rates and occupancy levels at the real estate facilities that the Partnership has an interest in.
Critical Accounting Policies
Impairment of Long Lived Assets
Substantially all of the Partnership’s assets consist of long-lived assets, primarily real estate. We evaluate our long-lived assets on a quarterly basis for indicators of impairment. When indicators of impairment are detected, we evaluate the recoverability of such long-lived assets. To the extent that the estimated future undiscounted cash flows are less than the respective book value, an impairment charge is recorded. The Partnership has determined at September 30, 2002 that no such impairments existed and, accordingly, no impairment charges have been recorded.
Future events could cause us to conclude that our long-lived assets are impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.
Estimated Useful Lives of Long-Lived Assets
Substantially all of the Partnership’s assets consist of depreciable, long-lived assets. We record depreciation expense with respect to these assets based upon their estimated useful lives. Any change in the estimated useful lives of those assets, caused by functional or economic obsolescence or other factors, could have a material adverse impact on our financial condition or results of operations.
Accruals for Contingencies
The Partnership is exposed to business and legal liability risks with respect to events that have occurred, but in accordance with generally accepted accounting principles has not accrued for such potential liabilities because the loss is either not probable or not estimable or because the Partnership is not aware of the event. Future events and the result of pending litigation could result in such potential losses becoming probable and estimable, which could have a material adverse impact on our financial condition or results of operations. Some of these potential losses, which the Partnership is aware of, are described in Note 6 to the Partnership’s financial statements.
Results of Operations
Three months ended September 30, 2002 compared to three months ended September 30, 2001:
Our net income for the three months ended September 30, 2002 was $983,000 compared to $942,000 for the three months ended September 30, 2001, representing an increase of $41,000, or 4.4%. The increase is
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primarily due to our share ($26,000) of a gain on sale of real estate recorded by PS Business Parks, Inc. and a decrease in depreciation expense allocated to the Partnership with respect to the Joint Venture.
Property Operations
Rental income for our wholly-owned mini-warehouse property was $81,000 compared to $87,000 for the three months ended September 30, 2002 and 2001, respectively, representing a decrease of $6,000 or 6.9%. Cost of operations (including management fees) decreased by $1,000 or 2.6%, to $37,000 from $38,000 for the three months ended September 30, 2002 and 2001, respectively. Accordingly, for our wholly-owned mini-warehouse property, property net operating income decreased by $5,000 or 10.2%, from $49,000 to $44,000 for the three months ended September 30, 2001 and 2002, respectively.
Equity in Earnings of Real Estate Entities
Equity in earnings of real estate entities was $954,000 in the three months ended September 30, 2002 as compared to $931,000 during the three months ended September 30, 2001, representing an increase of $23,000 or 2.5%. The increase is primarily due to our share ($26,000) of a gain on sale of real estate recorded by PS Business Parks, Inc. and a decrease in depreciation expense allocated to the Partnership with respect to the Joint Venture, partially offset by our share of lower property operations at the real estate facilities that we have an interest in.
Interest Income
Interest income increased by $27,000, from $15,000 for the three months ended September 30, 2001 to $42,000 for the three months ended September 30, 2002, due to higher invested cash balances.
Depreciation and Amortization
Depreciation and amortization remained stable at $19,000 for the three months ended September 30, 2001 and 2002.
Administrative
Administrative expense increased by $4,000 or 11.8%, to $38,000 for the three months ended September 30, 2002 as compared to $34,000 for the same period in 2001.
Nine months ended September 30, 2002 compared to nine months ended September 30, 2001:
Our net income for the nine months ended September 30, 2002 was $2,966,000 compared to $2,860,000 for the nine months ended September 30, 2001, representing an increase of $106,000 or 3.7%. The increase is primarily due to our share ($100,000) of a gain on sale of real estate recorded by PS Business Parks and a decrease in depreciation expense allocated to the Partnership with respect to the Joint Venture, partially offset by our share of lower property operations at the Mini-Warehouse Properties.
Property Operations
Rental income for our wholly-owned mini-warehouse property was $237,000 compared to $246,000 for the nine months ended September 30, 2002 and 2001, respectively, representing a decrease of $9,000 or 3.7%. Cost of operations (including management fees) increased by $4,000 or 3.8%, to $109,000 from $105,000 for the nine months ended September 30, 2002 and 2001, respectively. Accordingly, for our wholly-owned mini-warehouse property, property net operating income decreased by $13,000 or 9.2%, from $141,000 to $128,000 for the nine months ended September 30, 2001 and 2002, respectively.
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Equity in Earnings of Real Estate Entities
Equity in earnings of real estate entities was $2,927,000 in the nine months ended September 30, 2002 as compared to $2,799,000 during the nine months ended September 30, 2001, representing an increase of $128,000 or 4.6%. The increase is primarily due to our share ($100,000) of a gain on sale of real estate recorded by PS Business Parks and a decrease in depreciation expense allocated to the Partnership with respect to the Joint Venture, partially offset by our share of lower property operations at the real estate facilities that we have an interest in.
Interest Income
Interest income decreased by $8,000 or 6.9%, from $116,000 for the nine months ended September 30, 2001 to $108,000 for the nine months ended September 30, 2002, due to lower invested cash balances over the nine month period.
Depreciation and Amortization
Depreciation and amortization decreased by $1,000 or 1.8%, from $57,000 to $56,000 for the nine months ended September 30, 2001 and 2002, respectively.
Administrative
Administrative expense increased by $2,000 or 1.4% to $141,000 for the nine months ended September 30, 2002 as compared to $139,000 for the same period in 2001.
Year ended December 31, 2001 compared to year ended December 31, 2000:
The Partnership’s net income was $3,902,000 in 2001 compared to $3,418,000 in 2000, representing an increase of $484,000, or 14.2%. The increase is due primarily to the Partnership’s share of an improvement in operations of the mini-warehouses in which the Partnership has an interest (the “Mini-Warehouse Properties”) and a decrease in depreciation allocated to the Partnership with respect to the joint venture.
Property Operations
Rental income for the Partnership’s wholly-owned mini-warehouse property was $327,000 in 2001 compared to $319,000 in 2000, representing an increase of $8,000, or 2.5%. Cost of operations (including management fees) remained stable at $137,000 for 2001 and 2000. Accordingly, for the Partnership’s wholly-owned mini-warehouse property, property net operating income increased by $8,000, or 4.4%, from $182,000 in 2000 to $190,000 in 2001.
Equity in earnings of real estate entities
Equity in earnings of real estate entities was $3,765,000 in 2001 as compared to $3,262,000 during 2000, representing an increase of $503,000, or 15.4%. The increase is due primarily to the Partnership’s share of an improvement in operations of the Mini-Warehouse Properties and a decrease in depreciation allocated to the Partnership with respect to the joint venture.
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Depreciation and amortization
Depreciation and amortization increased $6,000, or 8.6%, from $70,000 in 2000 to $76,000 during 2001.
Supplemental Property Data
Most of our net income is from the our share of the operating results of the Mini-Warehouse Properties. Therefore, in order to evaluate our operating results, the General Partners analyze the operating performance of the Mini-Warehouse Properties.
Three months ended September 30, 2002 compared to three months ended September 30, 2001:
Rental income for the Mini-Warehouse Properties was $3,412,000 compared to $3,556,000 for the three months ended September 30, 2002 and 2001, respectively, representing a decrease of $144,000 or 4.0%. The decrease in rental income is primarily attributable to a decrease in average occupancy rates and a reduction in the annual average realized rent per square foot at the Mini-Warehouse Properties. The annual average realized rent per square foot for the Mini-Warehouse Properties was $8.90 compared to $8.87 for the three months ended September 30, 2002 and 2001, respectively. The weighted average occupancy levels at the Mini-Warehouse Properties decreased from 88% to 84% for the three months ended September 30, 2001 and 2002, respectively. Cost of operations (including management fees) decreased $34,000 or 2.3%, to $1,414,000 from $1,448,000 for the three months ended September 30, 2002 and 2001, respectively. This decrease is primarily attributable to higher advertising and promotion, and repairs and maintenance expense. Accordingly, for the Mini-Warehouse Properties, property net operating income decreased by $110,000 or 5.2%, from $2,108,000 to $1,998,000 for the three months ended September 30, 2001 and 2002, respectively.
Nine months ended September 30, 2002 compared to nine months ended September 30, 2001:
Rental income for the Mini-Warehouse Properties was $10,155,000 compared to $10,395,000 for the nine months ended September 30, 2002 and 2001, respectively, representing a decrease of $240,000 or 2.3%. The decrease in rental income is primarily attributable to decreased average occupancy rates at the Mini-Warehouse Properties. The annual average realized rent per square foot for the Mini-Warehouse Properties was $8.86 compared to $8.82 for the nine months ended September 30, 2002 and 2001, respectively. The weighted average occupancy levels at the Mini-Warehouse Properties decreased from 86% to 84% for the nine months ended September 30, 2001 and 2002, respectively. Cost of operations (including management fees) decreased by $10,000 or 0.2%, to $4,003,000 from $4,013,000 for the nine months ended September 30, 2002 and 2001, respectively. Accordingly, for the Mini-Warehouse Properties, property net operating income decreased by $230,000 or 3.6%, from $6,382,000 to $6,152,000 for the nine months ended September 30, 2001 and 2002, respectively.
Year ended December 31, 2001 compared to the year ended December 31, 2000
Rental income for the Mini-Warehouse Properties was $13,921,000 in 2001 compared to $13,183,000 during 2000, representing an increase of $738,000, or 5.6%. The increase in rental income was primarily attributable to increased rental rates. The annual average realized rent per square foot was $8.88 in 2001 compared to $8.27 in 2000. The weighted average occupancy level was 88% in 2000 and 86% in 2001. Cost of operations (including management fees) increased $124,000, or 2.3%, to $5,440,000 during 2001 from $5,316,000 in 2000. This increase was primarily attributable to increases in advertising and property tax expense. Accordingly, for the Mini-Warehouse Properties, property net operating income increased by $614,000, or 7.8%, from $7,867,000 in 2000 to $8,481,000 during 2001.
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Liquidity and Capital Resources
We have adequate sources of cash to finance our operations, both on a short-term and long-term basis, primarily from internally generated cash from property operations and cash reserves. Cash generated from operations and distributions from real estate entities ($3,466,000 for the nine months ended September 30, 2002) has been sufficient to meet all of our current obligations.
During 2002, we do not anticipate incurring significant costs for capital improvements for the Partnership’s wholly-owned property. Total capital improvements for the nine months ended September 30, 2002 with respect to this property was $15,000.
We paid distributions to the limited and general partners totaling $3,295,000 ($25.74 per unit) and $404,000, respectively, during the first nine months of 2002. Included in these distributions is $890,000 ($6.96 per unit) and $10,000 paid to the limited and general partners, respectively, in special distributions. Future distribution rates may be adjusted to levels which are supported by operating cash flow after capital improvements and any other necessary obligations.
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FEDERAL INCOME TAX CONSIDERATIONS
The following discussion describes the material federal income tax consequences relating to the public limited partners as a result of the merger and as a result of the subsequent ownership and disposition of shares of Public Storage common stock for limited partners that do not make a cash election. Because this summary only addresses the federal income tax consequences that generally apply to all limited partners, it may not contain all the information that may be important in your specific circumstances. As you review this discussion, you should keep in mind that:
| (1) | The tax consequences to you may vary depending on your particular tax situation; |
| (2) | Special rules that are not discussed below may apply to you if, for example, you are a tax-exempt organization, a broker-dealer, a non-U.S. person, a trust, an estate, a regulated investment company, a financial institution, an insurance company, or otherwise subject to special tax treatment under the Internal Revenue Code; |
| (3) | This summary does not address state, local or foreign tax considerations; |
| (4) | This summary concerning Public Storage common shareholders deals only with those shareholders that hold common shares as “capital assets,” within the meaning of Section 1221 of the Internal Revenue Code; and |
| (5) | This discussion is not intended to be, and should not be construed as, tax advice. |
You are urged both to review the following discussion and to consult with your own tax advisor to determine the effect of the merger and acquiring, owning and disposing of Public Storage common shares in your individual tax situation, including any state, local or foreign tax consequences.
The information in this section is based on the current Internal Revenue Code, current, temporary and proposed treasury regulations, the legislative history of the Internal Revenue Code, current administrative interpretations and practices of the Internal Revenue Service, including its practices and policies as reflected in private letter rulings, which are not binding on the Internal Revenue Service, and existing court decisions. Future legislation, regulations, administrative interpretations and court decisions could change current law or adversely affect existing interpretations of current law. Any change could apply retroactively. Except as described under “—Taxation of Public Storage as a REIT—Income Tests Applicable to REITs,” Public Storage has not obtained any rulings from the Internal Revenue Service concerning the tax treatment of the matters discussed below. Thus, it is possible that the Internal Revenue Service could challenge the statements in this discussion, which do not bind the Internal Revenue Service or the courts, and that a court could agree with the Internal Revenue Service.
A. Timothy Scott, tax counsel and senior vice president of Public Storage, has reviewed the discussion under the heading “Federal Income Tax Considerations” and is of the opinion that: (i) the discussion describes the material federal income tax considerations to the public limited partners as a result of the merger and as a result of the subsequent ownership of Public Storage common stock for limited partners that do not make a cash election, and (ii) Public Storage has been organized and operated so as to meet the requirements for qualification as a REIT for each of its three most recently completed fiscal years (2000, 2001 and 2002) and that its organization and proposed method of operation should enable it to continue to meet those requirements. As is noted below, Public Storage’s qualification and taxation as a REIT depends upon both Public Storage’s satisfaction in the past, and Public Storage’s ability to meet on a continuing basis in the future, through actual annual operating and other results, the various requirements under the Code relating to, among other things, the sources of its gross income, the lack of “C” corporation earnings and profits, the composition of its assets, the levels of distributions to
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shareholders, and the diversity of its stock ownership. Tax counsel has relied upon representations of management with respect to these matters and has not reviewed or audited, and will not review or audit, compliance with these requirements and does not express an opinion about those representations. Accordingly, no assurance can be given that Public Storage has satisfied or will satisfy the requirements under the Code for qualification and taxation as a REIT for any given taxable year. The opinion is not binding upon the IRS or the courts, and there can be no assurance that the IRS would not seek to assert a contrary position. Also, there cannot be any assurance that future legislative, judicial or administrative changes (which could be retroactive in effect) will not adversely affect the conclusions reached in the opinion or the discussion set forth below. Finally, the opinion is expressly limited to the specific conclusions described in the first sentence of this section and does not purport to address any other federal, state, local or foreign tax consequences that may result from the merger or any other transaction.
The merger will be treated for federal income tax purposes as a taxable sale of the Partnership Units held by public limited partners, both for limited partners electing to receive cash and for those electing to receive Public Storage common stock. Taxable public limited partners will be taxed on the difference between the adjusted basis of their units and the amount of cash received or the fair market value of the Public Storage common stock received. Public Storage estimates that taxable public limited partners who acquired their units in the original offering will recognize a capital gain of approximately $270 per unit as a result of the merger (assuming that the merger is effective as of the end of the first quarter of 2003), a portion of which may be subject to tax as unrecaptured Section 1250 gain. The particular tax consequences of the merger for a public limited partner will depend upon a number of factors related to his or her tax situation, including the tax basis of the limited partner’s units, and the tax impact could be quite different for public limited partners who acquired their units after the original offering.
To the extent that a taxable public limited partner recognizes a capital loss as a result of the merger, the loss generally can be applied to offset capital gain from other sources. Individuals may use capital losses in excess of capital gains to offset up to $3,000 of ordinary income in any single year ($1,500 for a married individual filing a separate return). Any capital losses that are not used currently can be carried forward for use in subsequent years. A corporation’s capital losses in excess of current capital gains generally may be carried back three years, with any remaining unused portion available to be carried forward for five years.
The merger is not expected to be a taxable event for Public Storage, which will retain its existing interests in the Partnership and will be treated as having purchased the interests of the public limited partners.
Taxation of Public Storage as a REIT
General. Public Storage elected to be taxed as a REIT under the Internal Revenue Code beginning with its taxable year ended December 31, 1981. A REIT generally is not subject to federal income tax on the income that it distributes to shareholders if it meets the applicable distribution requirements and other requirements for REIT qualification.
Public Storage believes that it has been organized and operated, and it intends to continue to operate, in a manner to qualify as a REIT, but there can be no assurance that Public Storage has qualified or will qualify or remain qualified as a REIT. Qualification and taxation as a REIT depend upon Public Storage’s ability to meet, through actual annual (or in some cases quarterly) operating results, requirements relating to income, asset ownership, distribution levels and diversity of share ownership, and the various other REIT qualification requirements imposed under the Internal Revenue Code. Given the complex nature of the REIT qualification requirements, the ongoing importance of factual determinations and the possibility of future changes in Public Storage’s circumstances, Public Storage cannot provide any assurance that its actual operating results will satisfy the requirements for taxation as a REIT under the Internal Revenue Code for any particular taxable year.
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So long as Public Storage qualifies for taxation as a REIT, Public Storage generally will not be subject to federal corporate income tax on its net income that is distributed currently to its shareholders. This treatment substantially eliminates the “double taxation” (that is, taxation at both the corporate and shareholder levels) that generally results from an investment in a regular corporation. However, Public Storage will be subject to federal income tax as follows:
| (1) | Public Storage will be taxed at regular corporate rates on any undistributed “REIT taxable income.” REIT taxable income is the taxable income of the REIT subject to specified adjustments, including a deduction for dividends paid. |
| (2) | Under some circumstances, Public Storage may be subject to the “alternative minimum tax” on its items of tax preference. |
| (3) | If Public Storage has net income from the sale or other disposition of “foreclosure property” (generally property acquired through foreclosure after a default on a loan secured by the property or a lease of the property) that is held primarily for sale to customers in the ordinary course of business, or other nonqualifying income from foreclosure property, this income will be subject to tax at the highest corporate rate. |
| (4) | Public Storage’s net income from “prohibited transactions” will be subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property (other than foreclosure property) held primarily for sale to customers in the ordinary course of business. |
| (5) | If Public Storage fails to satisfy either the 75% gross income test or the 95% gross income test discussed below, but still maintains its qualification as a REIT because other requirements are met, Public Storage will be subject to a tax equal to the gross income attributable to the greater of either (1) the amount by which 75% of its gross income exceeds the amount of its income qualifying under the 75% test for the taxable year or (2) the amount by which 90% of its gross income exceeds the amount of its income qualifying for the 95% income test for the taxable year, multiplied by a fraction intended to reflect Public Storage’s profitability. |
| (6) | Public Storage will be subject to a 4% excise tax if Public Storage fails to distribute during each calendar year at least the sum of: |
| (a) | 85% of its REIT ordinary income for the year; |
| (b) | 95% of its REIT capital gain net income for the year; and |
| (c) | any undistributed taxable income from prior taxable years. |
The tax applies to the excess of the required distribution over the sum of amounts actually distributed and amounts retained for which federal income tax was paid.
| (7) | Public Storage will be subject to a 100% penalty tax on some payments it receives (or on certain expenses deducted by a taxable REIT subsidiary) if arrangements among Public Storage, its tenants, and its taxable REIT subsidiaries are not comparable to similar arrangements among unrelated parties. |
In addition, Public Storage could be liable for specified tax liabilities inherited from a taxable “C” corporation, if Public Storage acquired or acquires assets from such a corporation in a carryover basis transaction (such as in the case of its 1995 merger with Public Storage Management). Public Storage also has acquired assets in carryover basis merger transactions with a number of REITs (including its 1999 merger with Storage Trust
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Realty). If any such acquired REIT failed to qualify as a REIT at the time of its merger into Public Storage, it would have been a “C” corporation and Public Storage also would be liable for tax liabilities inherited from it.
When assets are acquired from a “C” corporation in a carryover basis transaction, the “C” corporation is generally required to recognize gain with respect to the assets’ “built-in gain.” Built-in gain is the amount by which an asset’s fair market value exceeds its adjusted basis. As the successor to these acquired entities, Public Storage would be liable for any tax owed by them as a result of the recognition of built-in gain. Applicable treasury regulations, however, allow an acquiring REIT, such as Public Storage, to avoid the recognition of gain and the imposition of corporate level tax on a built-in gain asset acquired in a carryover basis transaction from a “C” corporation on or after January 1, 2002 unless and until the acquiring REIT disposes of that built-in gain asset in a taxable transaction during the 10-year period following the asset’s acquisition, at which time the acquiring REIT would recognize, and would be subject to the highest regular corporate rate of tax on, the built-in gain. Under former treasury regulations, an acquiring REIT, such as Public Storage, was required to make an affirmative election in order to be subject to these 10-year built-in gain rules. For example, in connection with Public Storage’s 1995 merger with Public Storage Management and other carryover basis transactions, Public Storage had to elect affirmatively to be subject to these 10-year built-in gain rules. However, under the current temporary regulations, the 10-year built-in gain treatment is the default rule for any carryover basis transaction on or after January 2, 2002. Similar rules would apply if in the future Public Storage acquires assets from a “C” corporation in a carryover basis transaction.
Requirements for Qualification as a REIT. The Internal Revenue Code defines a REIT as a corporation, trust or association:
| (1) | that is managed by one or more trustees or directors; |
| (2) | the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest; |
| (3) | that would be taxable as a domestic corporation, but for Sections 856 through 859 of the Internal Revenue Code; |
| (4) | that is neither a financial institution nor an insurance company subject to applicable provisions of the Internal Revenue Code; |
| (5) | the beneficial ownership of which is held by 100 or more persons; |
| (6) | during the last half of each taxable year not more than 50% in value of the outstanding shares of which is owned directly or indirectly by five or fewer individuals, as defined in the Internal Revenue Code to include specified entities; |
| (7) | that makes an election to be taxable as a REIT, or has made this election for a previous taxable year which has not been revoked or terminated, and satisfies all relevant filing and other administrative requirements established by the Internal Revenue Service that must be met to elect and maintain REIT status; |
| (8) | that uses a calendar year for federal income tax purposes and complies with the recordkeeping requirements of the Internal Revenue Code and regulations; and |
| (9) | that meets other applicable tests, described below, regarding the nature of its income and assets and the amount of its distributions. |
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Conditions (1), (2), (3) and (4) above must be met during the entire taxable year and condition (5) above must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. For purposes of determining stock ownership under condition (6) above, a supplemental unemployment compensation benefits plan, a private foundation or a portion of a trust permanently set aside or used exclusively for charitable purposes generally is considered an individual. However, a trust that is a qualified trust under Internal Revenue Code Section 401(a) generally is not considered an individual, and beneficiaries of a qualified trust are treated as holding shares of a REIT in proportion to their actuarial interests in the trust for purposes of condition (6) above.
Public Storage believes that it has issued sufficient shares with sufficient diversity of ownership to allow it to satisfy conditions (5) and (6) above. In addition, Public Storage’s organizational documents contain restrictions regarding the transfer of its capital stock that are intended to assist it in continuing to satisfy the share ownership requirements described in conditions (5) and (6) above. The ownership restrictions in Public Storage’s articles of incorporation and bylaws generally prohibit the actual or constructive ownership of more than 2% of the outstanding shares of common stock (excluding the interest held by the Hughes family) or more than 9.9% of the outstanding shares of each class or series of shares of preferred stock or equity stock, unless an exception is established by the board of directors. The restrictions provide that if, at any time, for any reason, those ownership limitations are violated or more than 50% in value of Public Storage’s outstanding stock otherwise would be considered owned by five or fewer individuals, then a number of shares of stock necessary to cure the violation will automatically and irrevocably be transferred from the person causing the violation to a designated charitable beneficiary. See “Description of Public Storage Capital Stock—Ownership Limitations.” At the time of the merger with Public Storage Management, to further assist Public Storage in meeting the ownership restrictions, the Hughes family entered into an agreement with Public Storage for the benefit of Public Storage and certain designated charitable beneficiaries providing that if, at any time, for any reason, more than 50% in value of Public Storage’s outstanding stock otherwise would be considered owned by five or fewer individuals, then a number of shares of Public Storage’s common stock owned by Wayne Hughes necessary to cure such violation would automatically and irrevocably be transferred to a designated charitable beneficiary.
The REIT protective provisions of Public Storage’s organizational documents and the agreement with the Hughes family were modeled after certain arrangements that the Internal Revenue Service ruled in private letter rulings would preclude a REIT from being considered to violate the ownership restrictions so long as the arrangements are enforceable as a matter of state law and the REIT seeks to enforce them as and when necessary. There can be no assurance, however, that the Internal Revenue Service might not seek to take a different position concerning Public Storage (a private letter ruling is legally binding only as to the taxpayer to whom it was issued and Public Storage will not seek a private ruling on this or any other issue) or contend that Public Storage failed to enforce these various arrangements. Accordingly, there can be no assurance that these arrangements necessarily will preserve Public Storage’s REIT status.
To monitor compliance with condition (6) above, a REIT is required to send annual letters to its shareholders requesting information regarding the actual ownership of its shares. For taxable years commencing on or after January 1, 1998, if Public Storage complies with the annual letters requirement and does not know, or exercising reasonable diligence, would not have known, of a failure to meet condition (6) above, then Public Storage will be treated as having met condition (6) above.
To qualify as a REIT, Public Storage cannot have at the end of any taxable year any undistributed earnings and profits that are attributable to a non-REIT taxable year. As a result of various transactions, including the 1995 merger with Public Storage Management, the 1999 merger with Storage Trust Realty and mergers with other affiliated REITs, Public Storage has succeeded to various tax attributes of certain entities and their predecessors, including any undistributed earnings and profits. Public Storage does not believe that it has acquired any undistributed earnings and profits and Public Storage believes that the REITs with which it has merged qualified as REITs at the time of acquisition. However, neither these entities nor Public Storage has sought an opinion of counsel or outside accountants to the effect that Public Storage did not acquire any undistributed non-
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REIT earnings and profits. There can be no assurance that the Internal Revenue Service would not contend otherwise on a subsequent audit.
If the Internal Revenue Service determined that Public Storage inherited undistributed non-REIT earnings and profits and that Public Storage did not distribute the non-REIT earnings and profits by the end of that taxable year, it appears that Public Storage could avoid disqualification as a REIT by using “deficiency dividend” procedures to distribute the non-REIT earnings and profits. The deficiency dividend procedures would require Public Storage to make a distribution to shareholders, in addition to the regularly required REIT distributions, within 90 days of the Internal Revenue Service determination. In addition, Public Storage would have to pay to the Internal Revenue Service interest on 50% of the non-REIT earnings and profits that were not distributed prior to the end of the taxable year in which Public Storage inherited the undistributed non-REIT earnings and profits. If, however, Public Storage were considered to be a “successor” under the applicable treasury regulations to a corporation that had failed to qualify as a REIT at the time of its merger with Public Storage, Public Storage could fail to qualify as a REIT and could be prevented from reelecting REIT status for up to four years after such failure to qualify.
Qualified REIT Subsidiaries. If a REIT owns a corporate subsidiary that is a “qualified REIT subsidiary,” the separate existence of that subsidiary will be disregarded for federal income tax purposes. Generally, a qualified REIT subsidiary is a corporation, other than a “taxable REIT subsidiary” (discussed below), all of the capital stock of which is owned by the REIT. All assets, liabilities and items of income, deduction and credit of the qualified REIT subsidiary will be treated as assets, liabilities and items of income, deduction and credit of the REIT itself. A qualified REIT subsidiary of Public Storage will not be subject to federal corporate income taxation, although it may be subject to state and local taxation in some states.
Taxable REIT Subsidiaries. A “taxable REIT subsidiary” of Public Storage is a corporation in which Public Storage directly or indirectly owns stock and that elects, together with Public Storage, to be treated as a taxable REIT subsidiary under Section 856(l) of the Internal Revenue Code. In addition, if a taxable REIT subsidiary of Public Storage owns, directly or indirectly, securities representing 35% or more of the vote or value of a subsidiary corporation, that subsidiary will also be treated as a taxable REIT subsidiary of Public Storage. A taxable REIT subsidiary is a corporation subject to federal income tax, and state and local income tax where applicable, as a regular “C” corporation.
Generally, a taxable REIT subsidiary can perform some impermissible tenant services (as described under “— Income Tests Applicable to REITs”) without causing Public Storage to receive impermissible tenant services income under the REIT income tests. However, several provisions regarding the arrangements between a REIT and its taxable REIT subsidiaries are intended to ensure that a taxable REIT subsidiary will be subject to an appropriate level of federal income taxation. For example, a taxable REIT subsidiary is limited in its ability to deduct interest payments made to Public Storage. In addition, a REIT will be obligated to pay a 100% penalty tax on some payments that it receives or on certain expenses deducted by the taxable REIT subsidiary if the economic arrangements between the REIT, the REIT’s tenants and the taxable REIT subsidiary are not comparable to similar arrangements among unrelated parties.
Public Storage and PS Orangeco Holdings, Inc. (and its direct and indirect subsidiaries, including PS Orangeco, Inc., PS Pickup & Delivery, Inc. and PS Insurance Co., Ltd), PSCC, Inc. and certain other corporations have made elections for those corporations to be treated as taxable REIT subsidiaries of Public Storage. These entities engage in businesses such as selling locks, boxes and packing materials, renting trucks, the portable self-storage business, providing moving services, reinsuring policies of insurance obtained by tenants covering losses to their goods while in storage, among other activities.
Ownership of Partnership Interests by a REIT. A REIT that is a partner in a partnership will be deemed to own its proportionate share of the assets of the partnership and will be deemed to earn its proportionate share of the partnership’s income. The assets and gross income of the partnership retain the same character in the
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hands of the REIT for purposes of the gross income and asset tests applicable to REITs as described below. In the mergers with Public Storage Management and Storage Trust Realty, the formation of PS Business Parks, L.P., and in other transactions, Public Storage has acquired interests in various partnerships that own and operate properties. Thus, Public Storage’s proportionate share of the assets and items of income of Storage Trust Properties, L.P., PS Business Parks, L.P. or other partnerships, including any such partnerships’ shares of assets and items of income of any subsidiaries that are partnerships or limited liability companies, are treated as assets and items of income of Public Storage for purposes of applying the REIT asset and income tests. For these purposes, under current treasury regulations, Public Storage’s interest in each of the partnerships must be determined in accordance with its “capital interest” in the partnership.
Public Storage believes that Storage Trust Properties, L.P., PS Business Parks, L.P. and each of the partnerships and limited liability companies in which Public Storage owns an interest, directly or through another partnership or limited liability company, will be treated as partnerships or disregarded for federal income tax purposes and will not be taxable as corporations. If any of these entities were treated as a corporation, it would be subject to an entity level tax on its income and Public Storage could fail to meet the REIT income and asset tests. See “—Taxation of Public Storage as a REIT—Income Tests Applicable to REITs” and “—Taxation of Public Storage as a REIT—Asset Tests Applicable to REITs” below.
Income Tests Applicable to REITs. To qualify as a REIT, Public Storage must satisfy two gross income tests. First, at least 75% of its gross income for each taxable year, excluding gross income from prohibited transactions, must be derived directly or indirectly from investments relating to real property or mortgages on real property, including “rents from real property,” gains on the disposition of real estate, dividends paid by another REIT and interest on obligations secured by mortgages on real property or on interests in real property, or from some types of temporary investments. Second, at least 95% of its gross income for each taxable year, excluding gross income from prohibited transactions, must be derived from any combination of income qualifying under the 75% test and dividends, interest, some payments under hedging instruments and gain from the sale or disposition of stock or securities and some hedging instruments.
Rents that Public Storage receives will qualify as rents from real property in satisfying the gross income tests for a REIT described above only if several conditions are met. First, the amount of rent must not be based in whole or in part on the income or profits of any person. However, an amount received or accrued generally will not be excluded from the term rents from real property solely by reason of being based on a fixed percentage or percentages of receipts or sales. Second, rents received from a “related party tenant” will not qualify as rents from real property in satisfying the gross income tests unless the tenant is a taxable REIT subsidiary and at least 90% of the property is leased to unrelated tenants and the rent paid by the taxable REIT subsidiary is substantially comparable to the rent paid by the unrelated tenants for comparable space. A tenant is a related party tenant if the REIT, or an actual or constructive owner of 10% or more of the REIT, actually or constructively owns 10% or more of the tenant. Third, if rent attributable to personal property that is leased in connection with a lease of real property is greater than 15% of the total rent received under the lease, then the portion of rent attributable to the personal property will not qualify as rents from real property.
Generally, for rents to qualify as rents from real property for the purpose of satisfying the gross income tests, Public Storage is only allowed directly to provide services that are “usually or customarily rendered” in connection with the rental of real property and not otherwise considered “rendered to the occupant.” Accordingly, Public Storage may not provide “impermissible services” to tenants (except through a taxable REIT subsidiary, or through an independent contractor that bears the expenses of providing the services and from whom Public Storage derives no revenue) without giving rise to “impermissible tenant service income,” which is nonqualifying income for purposes of the income tests. For this purpose, the amount that Public Storage would be deemed to have received for performing any “impermissible services” will be the greater of the actual amount so received or 150% of the direct cost to Public Storage of providing those services. If impermissible tenant service income exceeds 1% of total income from a property, all of the income from that property will fail to qualify as rents from real property. If the total amount of impermissible tenant service income from a property does not exceed 1% of total income
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from the property, the services will not “taint” the other income from the property (that is, they will not cause the rent paid by tenants of that property to fail to qualify itself as rents from real property), but the impermissible tenant service income will not qualify as rents from real property.
In light of these requirements, Public Storage does not intend to take any of the actions listed below, unless Public Storage determines that the resulting nonqualifying income, taken together with all other nonqualifying income that Public Storage earns in the taxable year, will not jeopardize its status as a REIT:
| (1) | charge rent for any property that is based in whole or in part on the income or profits of any person (unless based on a fixed percentage or percentages of receipts or sales, as permitted and described above); |
| (2) | rent any property to a related party tenant, including a taxable REIT subsidiary; |
| (3) | derive rental income attributable to personal property (other than personal property leased in connection with the lease of real property, the amount of which is less than 15% of the total rent received under the lease); or |
| (4) | directly perform services considered to be noncustomary or rendered to the occupant of the property. |
In connection with Public Storage’s merger with Public Storage Management, Public Storage and the various other owners of self-storage facilities and business parks for which Public Storage performed management activities entered into an agreement with PSCC, Inc. under which PSCC provides the owners and Public Storage certain administrative and cost-sharing services in connection with the operation of the properties and the performance of certain administrative functions. The services include the provision of corporate office space and certain equipment, personnel required for the operation and maintenance of the properties, and corporate or partnership administration. Each of the owners and Public Storage pay PSCC directly for services rendered by PSCC in connection with the administrative and cost sharing agreement. That payment is separate from and in addition to the compensation paid to Public Storage under the management agreements for the management of the properties owned by the owners. At the time of the merger with Public Storage Management, Public Storage received a private letter ruling from the Internal Revenue Service to the effect that the reimbursements and other payments made to PSCC by the owners would not be treated as Public Storage’s revenues for purposes of the 95% gross income test, and to the effect that Public Storage’s income from self-storage facility rentals generally would qualify as rent from real property for purposes of the REIT gross income tests. Public Storage subsequently received a private letter ruling indicating that the truck rental activities of an affiliated corporation (PS Orangeco, Inc., now a taxable REIT subsidiary of Public Storage) would not adversely affect the treatment of Public Storage’s income from self-storage facility rentals as rent from real property for purposes of the REIT gross income tests.
Public Storage owns, directly and indirectly, all of the economic interest in Pickup & Delivery (the portable self-storage business). The income from that business would be nonqualifying income to Public Storage and the business is conducted by a limited partnership between Public Storage and a subsidiary of PS Orangeco, Inc. The share of gross income of that business attributable to Public Storage’s direct partnership interest, when combined with its other nonqualifying income, must be less than 5% of its total gross income. While Public Storage has earned and will continue to earn some nonqualifying income from this and other sources, Public Storage anticipates that it will be able to continue to satisfy both the 95% and 75% gross income tests.
The ownership of certain partnership interests creates several issues regarding Public Storage’s satisfaction of the 95% gross income test. First, Public Storage earns property management fees from these partnerships. Existing treasury regulations do not address the treatment of management fees derived by a REIT from a partnership in which the REIT holds a partnership interest, but the Internal Revenue Service has issued a number of private letter rulings holding that the portion of the management fee that corresponds to the REIT’s interest in the partnership in effect is disregarded in applying the 95% gross income test when the REIT holds a
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“substantial” interest in the partnership. Public Storage disregards the portion of management fees derived from partnerships in which Public Storage is a partner that corresponds to its interest in these partnerships in determining the amount of its nonqualifying income. There can be no assurance, however, that the Internal Revenue Service would not take a contrary position with respect to Public Storage, either rejecting the approach set forth in the private letter rulings mentioned above or contending that Public Storage’s situation is distinguishable from those addressed in the private letter rulings (for example, arguing that Public Storage does not have a “substantial” interest in the partnerships).
In addition, Public Storage acquired interests in certain partnerships that entitle Public Storage to a percentage of profits (either from operations, or upon a sale, or both) in excess of the percentage of total capital originally contributed to the partnership with respect to such interest. Existing treasury regulations do not specifically address how Public Storage’s “capital interest” in partnerships of this type should be determined. This determination is relevant because it affects both the percentage of the gross rental income of the partnership that is considered gross rental income (or qualifying income) to Public Storage and the percentage of the management fees paid to Public Storage that is disregarded in determining its nonqualifying income. For example, if Public Storage takes the position that it has a 25% “capital interest” in a partnership (because Public Storage would receive 25% of the partnership’s assets upon a sale and liquidation) but the Internal Revenue Service determines Public Storage only has a 1% “capital interest” (because the original holder of that interest only contributed 1% of the total capital contributed to the partnership), Public Storage’s share of the qualifying income from the partnership would be reduced and the portion of the management fee from the partnership that would be treated as nonqualifying income would be increased, both of which might adversely affect its ability to satisfy the 95% gross income test. In determining Public Storage’s “capital interest” in the various partnerships, Public Storage estimates the percentage of the partnership’s assets that would be distributed to Public Storage if those assets were sold and distributed among the partners in accordance with t