Public Storage 1997 Annual Report Download - page 45

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Public Storage, Inc. 1997 Annual Report
Financing the Company’s growth strategies: The Company expects to fund its growth strategies with cash on hand at December 31, 1997,
internally generated retained cash flows and borrowings under its $150 million credit facility. The Company intends to repay amounts
borrowed under the credit facility from undistributed operating cash flow or, as market conditions permit and are determined to be advan-
tageous, from the public or private placement of equity securities.
The Company believes that its size and financial flexibility enables it to access capital for growth when appropriate. The Company’s
financial profile is characterized by a low level of debt to total capitalization, increasing net income, increasing cash flow from operations,
and a conservative dividend payout ratio with respect to the common stock. The Company’s credit ratings on its Senior Preferred Stock
by each of the three major credit agencies are Baa2 by Moody’s and BBB+ by Standard and Poor’s and Duff & Phelps.
The Company’s portfolio of real estate facilities remains substantially unencumbered. At December 31, 1997, the Company had mortgage
debt outstanding of $43.3 million and had consolidated real estate facilities with a book value of $2.7 billion. The Company has been
reluctant to finance its acquisitions with debt and generally will only increase its mortgage borrowing through the assumption of pre-existing
debt on acquired real estate facilities.
Over the past three years the Company has funded substantially all of its acquisitions with permanent capital (both common and
preferred stock). The Company has elected to use preferred stock despite the fact that the dividend rates of its preferred stock exceeds
current interest rates on conventional debt. The Company has chosen this method of financing for the following reasons: (i) the Company’s
perpetual preferred stock has no sinking fund requirement, or maturity date and does not require redemption, all of which eliminate any
future refinancing risks, (ii) preferred stock allows the Company to leverage the common stock without the attendant interest rate or
refinancing risks of debt, and (iii) like interest payments, dividends on the preferred stock can be applied to the Company’s REIT distributions
requirements, which have helped the Company to maintain a low common stock dividend payout ratio and retain cash flow.
Since January 1, 1998, the Company has issued an aggregate of approximately 6.4 million shares of common stock, raising net proceeds of
approximately $189 million. The Company intends to use the net proceeds from these offerings to make investments in real estate, primarily
self-storage, including mortgage loans and interest in real estate partnerships, to satisfy cash elections in connection with mergers with
affiliated REITs and to fund investments in PSPUD.
REIT status: The Company believes that it has operated, and intends to continue to operate, in such a manner as to qualify as a REIT under
the Internal Revenue Code of 1986, but no assurance can be given that it will at all times so qualify. To the extent that the Company continues to
qualify as a REIT, it will not be taxed, with certain limited exceptions, on the taxable income that is distributed to its shareholders, provided
that at least 95% of its taxable income is so distributed prior to filing of the Company’s tax return. The Company has satisfied the REIT distrib-
ution requirement since 1980.
Funds from operations: Total funds from operations or “FFO” increased to $272,234,000 for the year ended December 31, 1997 compared
to $224,476,000 in 1996 and $105,199,000 in 1995. FFO available to common shareholders (after deducting preferred stock dividends)
increased to $197,253,000 for the year ended December 31, 1997 compared to $155,877,000 in 1996 and $74,075,000 in 1995. FFO means
net income (loss) (computed in accordance with generally accepted accounting principles) before (i) gain (loss) on early extinguishment of
debt, (ii) minority interest in income and (iii) gain (loss) on disposition of real estate, adjusted as follows: (i) plus depreciation and amortization
(including the Company’s pro-rata share of depreciation and amortization of unconsolidated equity interests and amortization of assets acquired
in the PSMI Merger, including property management agreements and goodwill), and (ii) less FFO attributable to minority interest.
FFO is a supplemental performance measure for equity REITs as defined by the National Association of Real Estate Investment Trusts, Inc.
(“NAREIT”). The NAREIT definition does not specifically address the treatment of minority interest in the determination of FFO or the
treatment of the amortization of property management agreements and goodwill. In the case of the Company, FFO represents amounts
attributable to its shareholders after deducting amounts attributable to the minority interests and before deductions for the amortization of
property management agreements and goodwill. FFO is presented because many industry analysts consider FFO to be one measure of the
performance of the Company and it is used in establishing the terms of the Class B Common Stock. FFO does not take into consideration
capital improvements, scheduled principal payments on debt, distributions and other obligations of the Company. Accordingly, FFO is not a
substitute for the Company’s cash flow or net income (as discussed above) as a measure of the Company’s liquidity or operating performance.