<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended June 30, 2000
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
Commission File Number: 001-12403
SUSA PARTNERSHIP L.P.
(Exact name of registrant as specified in its charter)
Tennessee
(State or other jurisdiction of
incorporation or organization)
62-1554135
(IRS Employer
Identification Number)
165 Madison Avenue, Suite 1300, Memphis, TN
(Address of principal executive offices)
38103
(Zip Codes)
Registrant's telephone number, including area code: (901) 252-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. ( X) Yes ( ) NO
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
SUSA Partnership, L.P.
Consolidated Statements of Operations
(unaudited)
(amounts in thousands, except per unit data)
<TABLE>
<CAPTION>
Three months Three months Six months Six months
ended ended ended ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
--------------- ---------------- --------------- ---------------
<S> <C>
Operating Revenues:
Rental and other property income $63,724 $62,407 $123,290 $122,809
Service income 1,267 441 2,873 718
Other income 601 947 1,317 935
--------------- ---------------- --------------- ---------------
Total operating revenues 65,592 63,795 127,480 124,462
--------------- ---------------- --------------- ---------------
Operating Expenses:
Cost of property operations & maintenance 15,498 15,079 31,228 30,112
Taxes 5,450 5,280 10,637 10,277
Costs of providing services 979 385 2,265 710
General & administrative 3,649 4,107 5,914 7,805
Depreciation & amortization 10,097 9,017 19,291 17,373
--------------- ---------------- --------------- ---------------
Total operating expenses 35,673 33,868 69,335 66,277
--------------- ---------------- --------------- ---------------
Income from property operations 29,919 29,927 58,145 58,185
Other income (expense):
Interest expense, net (11,478) (10,416) (22,525) (21,263)
--------------- ---------------- --------------- ---------------
Income before gain(loss) on exchange, minority
interest and distribution to preferred unitholders 18,441 19,511 35,620 36,922
Gain/(Loss) on sale of assets - 441 890 (137)
--------------- ---------------- --------------- ---------------
Income before minority interest and
distribution to preferred unitholders 18,441 19,952 36,510 36,785
Minority interest 5 (68) (38) (92)
--------------- ---------------- --------------- ---------------
Income before distributions to preferred unitholders 18,446 19,884 36,472 36,693
Distributions to preferred unitholders (1,442) (1,293) (2,884) (2,551)
--------------- ---------------- --------------- ---------------
Net Income $17,004 $18,591 $33,588 $34,142
--------------- ---------------- --------------- ---------------
Basic net income per unit $0.55 $0.59 $1.07 $1.09
--------------- ---------------- --------------- ---------------
Diluted net income per unit $0.55 $0.59 $1.07 $1.08
--------------- ---------------- --------------- ---------------
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE>
SUSA Partnership, L.P.
Consolidated Balance Sheets
(amounts in thousands, except unit data)
<TABLE>
<CAPTION>
as of as of
June 30, 2000 December 31, 1999
--------------------- ---------------------
(unaudited)
<S> <C>
Assets
Investments in storage facilities, at cost:
Land 426,651 $441,080
Buildings and equipment 1,246,393 1,229,812
--------------------- ---------------------
1,673,044 1,670,892
Accumulated depreciation (112,993) (94,538)
--------------------- ---------------------
1,560,051 1,576,354
Cash & cash equivalents 2,453 1,699
Advances and investments in real estate 135,978 120,246
Other assets 71,243 56,620
--------------------- ---------------------
Total assets $1,769,725 $1,754,919
--------------------- ---------------------
Liabilities & partners' capital
Notes payable $600,000 $600,000
Line of credit borrowings 154,960 105,500
Mortgage notes payable 68,809 70,163
Other borrowings 43,204 42,453
Accounts payable & accrued expenses 22,111 21,982
Dividends payable 18,816 18,831
Rents received in advance 11,689 10,869
Deferred gain from contribution of self-storage facilities 37,076 37,125
Minority Interest 954 959
--------------------- ---------------------
Total liabilities 957,619 907,882
--------------------- ---------------------
Limited common partnership units
3,426,840 and 3,655,093 outstanding
at redemption value 101,145 110,567
Commitments and contingencies
Partners' capital:
Preferred Partnership units
650,000 outstanding 65,000 65,000
Deferred compensation
(458) (517)
General Common Partnership units
27,269,114 and 27,865,932 outstanding 658,344 683,355
Notes receivable - officers (11,925) (11,368)
--------------------- ---------------------
Total partners' capital 710,961 736,470
--------------------- ---------------------
Total liabilities & partners' capital $1,769,725 $1,754,919
--------------------- ---------------------
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
SUSA Partnership, L.P.
Consolidated Statements of Cash Flows
(unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 2000 June 30, 1999
-------------------- --------------------
<S> <C>
Operating activities:
Net income $33,588 $34,142
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 19,291 17,373
Minority interest 38 92
(Gain)/Loss on exchange of self-storage facilities (890) 137
Changes in assets and liabilities:
Other assets (18,914) (6,619)
Other liabilities 4,317 8,653
-------------------- --------------------
Net cash provided by operating activities 37,430 53,778
-------------------- --------------------
Investing activities:
Acquisition and improvements of storage facilities (12,987) (59,228)
Proceeds from sale/exchange of storage facilities 21,682 137,130
Development of storage facilities (18,729) (29,062)
Net change in funds in escrow account used for asset acquisition - (51,679)
Advances and investments in real estate (9,846) (15,202)
Proceeds from liquidation of advances and investments in real estate 6,344 16,607
-------------------- --------------------
Net cash used in investing activities (13,536) (1,434)
-------------------- --------------------
Financing activities:
Net (repayments)/borrowings under line of credit 49,460 (3,597)
Mortgage principal payments (831) (3,417)
Other borrowings principal payments/payoffs (100) (1,102)
Payment of debt issuance costs (4) (1,084)
Distributions to general partner (38,044) (36,422)
Distribution to limited partners (4,917) (4,831)
Distribution to minority interests (44) (38)
Preferred unit dividends (2,884) (2,452)
Proceeds from issuance of preferred units 148 -
Repurchase of units from general partner (25,967) -
Payments on notes receivable 43 54
Distribution of minority interest capital - (233)
Other financing transactions, net - 1,876
-------------------- --------------------
Net cash used in financing activities (23,140) (51,246)
-------------------- --------------------
Net increase in cash and equivalents 754 1,098
Cash and equivalents, beginning of period 1,699 2,358
-------------------- --------------------
Cash and equivalents, end of period $2,453 $3,456
-------------------- --------------------
Supplemental schedule of non-cash activities:
Equity share of joint venture received in exchange for assets $6,526 $5,900
Note received in consideration for facility/land sold 2,200 875
Common Stock issued in exchange for notes receivable and
contributed to Partnership in exchange for Partnership units 756 -
Partnership units received in payment of notes receivable 156 -
Common stock issued to Directors and contributed to Partnership
in exchange for Partnership units 160 160
Storage facilities acquired in exchange for Partnership Units - 4,238
Restricted stock issued by GP - 246
Exchange of Partnership Units for shares of GP common stock 8,234 5,717
Exchange of storage facilities (net) - 137
-------------------- --------------------
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(amounts in thousands, except unit and per unit data)
1. Unaudited Interim Financial Statements
References to the "Company" and the "Partnership" refer to SUSA
Partnership, L.P. References to the "GP" refer to Storage USA, Inc.,
general partner and holder of approximately 89% of the interest
therein. Interim consolidated financial statements of the Company are
prepared pursuant to the requirements for reporting on Form 10-Q.
Accordingly, certain disclosures accompanying annual financial
statements prepared in accordance with generally accepted accounting
principles are omitted. In the opinion of management, all adjustments,
consisting solely of normal recurring adjustments, necessary for the
fair presentation of consolidated financial statements for the interim
periods have been included. The current period's results of operations
are not necessarily indicative of results that ultimately may be
achieved for the year. The interim consolidated financial statements
and notes thereto should be read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-K for
the year ended December 31, 1999 as filed with the Securities and
Exchange Commission.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could vary from these
estimates.
2. Organization
The Company was formed by the GP in 1985 to acquire, develop,
construct, franchise, own and operate self-storage facilities
throughout the United States. On March 23, 1994, the GP completed an
initial public offering (the "IPO") of 6,325,000 shares of common stock
at $21.75 per share. The GP is structured as an umbrella partnership
real estate investment trust ("UPREIT") in which substantially all of
the GP's business is conducted through the Partnership. Under this
structure, the Company is able to acquire self-storage facilities in
exchange for units of limited partnership interest in the Partnership
("Units"), permitting the sellers to at least partially defer taxation
of capital gains. At June 30, 2000 and December 31, 1999, respectively,
the GP owned approximately 88.8% and 88.4% of the partnership interest
in the Partnership.
In 1996, the Company formed Storage USA Franchise Corp ("Franchise"), a
Tennessee corporation. The Partnership owns 100% of the non-voting
common stock of Franchise. The Partnership accounts for Franchise under
the equity method and includes its 97.5% share of the profit or loss of
Franchise in Other Income.
3. Summary of Significant Accounting Policies
Rental and Other Property Income
Rental and other property income consists of rental income plus other
income from property specific activities (rental of floor and storage
space for locks and packaging material, truck rentals and ground rents
for cellular telephone antenna towers and billboards). Below is a
summary of rental and other property income for the second quarter and
for the six months ended June 30, 2000:
<TABLE>
<CAPTION>
Three months Three months Six months Six months
ended ended ended ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------------------------------------------------------
<S> <C>
Rental Income $ 62,805 $ 61,441 $ 121,251 $ 120,848
Other Property Specific Income 919 966 2,039 1,961
------------------------------------------------------------
Total Rental and Other Property Income $ 63,724 $ 62,407 $ 123,290 $ 122,809
============================================================
</TABLE>
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
June 30, 2000
(amounts in thousands, except unit and per unit data)
Service Income
Service income consists of revenue derived from providing services to
third parties and related joint ventures. These services include the
management of self-storage facilities, as well as general contractor,
development and acquisition services provided to the GE Capital Corp
Development and Acquisition Ventures ("GE Capital Ventures"). Below is
a summary of service income for the second quarter and for the six
months ended June 30, 2000:
<TABLE>
<CAPTION>
Three months Three months Six months Six months
ended ended ended ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
----------------------------------------------------------------
<S> <C>
Management fees $ 686 $ 441 $ 1,298 $ 718
General Contractor fees 184 - 633
Development fees 120 - 665
Acquisition fees 277 - 277
----------------------------------------------------------------
Total service income $ 1,267 $ 441 $ 2,873 $ 718
================================================================
</TABLE>
Other Income
Other income consists solely of the Company's proportionate share of
the net income of equity investments including joint ventures and
Franchise.
Interest Expense, net
Interest income and expense are netted together and the breakout of
income and expense is as follows:
<TABLE>
<CAPTION>
Three months Three months Six months Six months
ended ended ended ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
---------------------------------------------------------------
<S> <C>
Interest income $ 3,335 $ 3,310 $ 6,674 $ 6,302
Interest expense (14,813) (13,726) (29,199) (27,565)
---------------------------------------------------------------
Interest expense, net $ (11,478) $ (10,416) $ (22,525) $ (21,263)
===============================================================
</TABLE>
Reclassifications
Certain previously reported amounts have been reclassified to conform
to the current financial statement presentation with no impact on
previously reported net income or partners' capital.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
June 30, 2000
(amounts in thousands, except unit and per unit data)
4. Investment in Storage Facilities
The following table summarizes the activity in storage facilities
during the period:
Cost:
Balance on January 1, 2000 $ 1,670,892
Property Acquisitions 3,169
Development Investment 18,729
Disposition of Property (29,533)
Improvements and other 9,787
------------
Balance on June 30, 2000 $ 1,673,044
============
Accumulated Depreciation:
Balance on January 1, 2000 $ 94,538
Additions during the period 18,500
Disposition of Property (45)
------------
Balance on June 30, 2000 $ 112,993
============
The preceding cost balances include facilities acquired through capital
leases of $31,395 at June 30, 2000 and $31,334 at December 31, 1999 and
construction in progress of $43,980 at June 30, 2000 and $89,870 at
December 31, 1999. Also included above is $14,500 at June 30, 2000 and
$11,800 at December 31, 1999 of corporate office furniture and
fixtures. Accumulated depreciation associated with the facilities
acquired through capital leases was $1,102 at June 30, 2000 and $771 at
December 31, 1999.
The Company acquired one self-storage facility for $3,200 during the
second quarter. The Company also placed into service three developed
facilities during the quarter, representing a $15,100 investment.
5. Advances and Investments in Real Estate
Advances
As of June 30, 2000 and December 31, 1999, $121,451 and $117,022
respectively of advances had been made by the Company to franchisees of
Franchise to fund the development and construction of franchised
self-storage facilities. The loans are collateralized by the property.
Joint Ventures
Fidelity Venture
On June 7, 1999, the Company formed a joint venture with Fidelity
Management Trust Company (the "Fidelity Venture"). The Company
contributed 32 self-storage facilities with a fair value of $144,000 to
the Fidelity Venture in return for a 25% interest and cash proceeds of
approximately $131,000. The Company recognized $367 in equity earnings
from the Fidelity Venture and $341 in management fees for operating the
venture's properties in the second quarter. For the six months ended
June 30, 2000, $639 in equity earnings have been recognized, as well as
$664 in management fees. As of June 30, 2000, the Company had a
recorded negative investment balance in the Fidelity Venture of $219.
The following table summarizes certain financial information related to
the Fidelity Venture:
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
June 30, 2000
(amounts in thousands, except unit and per unit data)
Three months Six months
ended ended
June 30, 2000 June 30, 2000
-------------- ---------------
Income Statement:
Property revenues $5,764 $11,113
Property expenses 1,810 3,669
Net Operating Income 3,954 7,444
Net income 1,469 2,556
Balance Sheet:
Total assets $149,246
Total debt 92,327
GE Capital Ventures
On December 1, 1999, the Company formed two joint ventures with GE
Capital Corp ("GE Capital"), the "Acquisition Venture" and "Development
Venture," providing for a total investment capacity of $400,000 for
acquisitions and development of self-storage facilities. The Company
has a 25% interest in the $160,000 Development Venture and a 16.7%
interest in the $240,000 Acquisition Venture. During the first quarter,
the Company transferred nine projects that were in various stages of
development into the GE Capital Development Venture, representing
projected aggregate total costs of $53,000. The projects were
transferred to the Development Venture at the Company's cost of
$26,030. The Company received $19,856 in cash, and recorded an
investment in the venture of $6,526, representing a 25% interest.
On February 14, 2000, the Development Venture closed on a credit
facility with a commercial bank. Under the facility, the Development
Venture can borrow up to 50% of the cost of each project. The
borrowings are supported by mortgages which are non-recourse to the
joint venture partners, except for an environmental indemnification and
construction completion guaranty that SUSA Partnership, L.P. will
provide. The facility bears interest at various spreads over the
Eurodollar Rate. During the second quarter, the Development Venture
invested a total of $4,788 in construction. As of June 30, 2000, the
Development Venture had one property open and operating and eight in
design and construction.
Also during the second quarter, the Acquisition Venture closed on a
debt facility with a group of commercial banks. Under this facility,
the Acquisition venture can borrow up to 50% of the lesser of the cost
or appraised value of the acquired properties. The facility is secured
by those properties, and bears interest at various spreads over LIBOR.
The Acquisition Venture proceeded during the quarter to acquire five
self-storage facilities for a cost of approximately $32,400. Four of
the properties are located in Chicago with the fifth in New York City.
The Company has recognized certain fees related to the GE Capital
Ventures as summarized below:
Three months Six months
ended ended
June 30, 2000 June 30, 2000
--------------- --------------
General contractor fees $ 184 $ 633
Development fees 120 665
Acquisition fees 277 277
Management fees - 23
--------------- --------------
$ 581 $ 1,598
--------------- --------------
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
June 30, 2000
(amounts in thousands, except unit and per unit data)
The Company has recognized $5 in equity earnings from the GE Capital
Ventures for the six months ended June 30, 2000, all relating to the
second quarter. The Company has also recognized $109 in amortization
expense for the second quarter of 2000, and $181 amortization expense
for the six months ended June 30, 2000 for costs relating to the
amortization of the difference between the Company's cost and the
underlying equity in the Ventures' net assets. As of June 30, 2000, the
Company had a combined recorded investment of $14,776 in the GE Capital
Ventures. The following table summarizes certain financial information
related to the Ventures for the quarter and the six months ended June
30, 2000:
3 months ended June 30, 2000 6 months ended June 30, 2000
-----------------------------------------------------------
Development Acquisition Development Acquisition
Venture Venture Venture Venture
---------------------------- ------------------------------
Income Statement:
Property revenues $ 28 $ - $ 32 $ 334
Property expenses 46 - 74 67
Net Operating Income (loss) (18) - (42) 267
Net income (loss) (58) - (83) 146
Balance Sheet:
Total assets $ 32,343 $ 34,768
Total third party debt 9,574 -
Other Ventures
The Company has equity interests in several single facility joint
ventures. As of June 30, 2000, the Company had a combined recorded
negative investment balance in the other joint ventures of $30.
6. Other Assets
As of As of
June 30, December 31,
2000 1999
------------------------------
Deposits $ 4,770 $ 4,147
Deferred costs of issuances of
notes payable 9,029 10,006
Accounts receivable 3,934 4,855
Mortgages receivable 5,912 4,449
Notes receivable 10,989 7,445
Other receivables 6,055 4,988
Advances and investments in Franchise 21,724 13,906
Other 8,830 6,824
------------------------------
Total Other Assets $ 71,243 $ 56,620
==============================
7. Lines of credit, Mortgages payable, and Other borrowings
The Company can borrow under a $200,000 line of credit with a group of
commercial banks and under a $40,000 line of credit with a commercial
bank. The lines bear interest at various spreads above LIBOR. The
following table lists additional information about the lines of credit.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
June 30, 2000
(amounts in thousands, except unit per unit data)
As of
Line of Credit Borrowings June 30, 2000
-----------------------------------------------------------------
Total lines of credit $ 240,000
Borrowings outstanding $ 154,960
Weighted average daily interest
rate year-to-date 7.37%
The Company from time to time assumes mortgages on facilities acquired.
Certain mortgages were assumed at above market interest rates. Premiums
were recorded upon assumption and amortized using the interest method
over the terms of the related debt. The following table provides
information about the mortgages:
Mortgage Notes Payable
as of June 30, 2000 Face Amount Maturity Range
--------------------------------------------------------------------------------
Fixed rate $ 57,541 2000-2021
Variable rate 5,278 2006-2016
-----------------------------------
$ 62,819
Premiums 5,990
-----------------
Mortgage notes payable $ 68,809
The Company has other borrowings used in the financing of property
acquisitions. The following table provides information about the other
borrowings.
Other Borrowings
as of June 30, 2000 Face Amount Carry Value Imputed Rate
------------------------------------------------------------------------------
Non-interest bearing notes $ 9,150 $ 8,667 7.50%
Deferred units 12,000 10,639 7.50%
Capital Leases - 23,898 7.50%
-------------------------------------------------
$ 43,204
==============
During the six months ended June 30, 2000, total interest paid on all
debt was $31,118 and total interest capitalized for construction costs
was $2,583.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
June 30, 2000
(amounts in thousands, except unit and per unit data)
8. Income per Unit
Basic and diluted income per unit is calculated as presented in the
following table:
<TABLE>
<CAPTION>
Three months Three months Six months Six months
ended ended ended ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------------------------------------------------------
<S> <C>
Basic net income per Unit:
Net income attributable to common unitholders $ 17,004 $ 18,591 $ 33,588 $ 34,142
Basic weighted average Units outstanding 30,975 31,558 31,181 31,519
-----------------------------------------------------------------------------------------------------------
Basic net income per Unit $ 0.55 $ 0.59 $ 1.07 $ 1.09
Diluted net income per Unit:
Net income attributable to common unitholders $ 17,004 $ 18,591 $ 33,588 $ 34,142
Basic weighted average Units outstanding 30,975 31,558 31,181 31,519
Dilutive effect of the GP's stock options 47 122 50 81
------------------------------------------------------------
Diluted weighted average Units outstanding 31,022 31,680 31,231 31,600
-----------------------------------------------------------------------------------------------------------
Diluted net income per Unit $ 0.55 $ 0.59 $ 1.07 $ 1.08
</TABLE>
9. Commitments
As of June 30, 2000, the Company is committed to advance an additional
$16,348 to franchisees of Franchise for the construction of
self-storage facilities. These advances are collateralized by the
facility. The Company is a limited guarantor on $7,768 of loan
commitments made by third party lenders to franchisees of Franchise.
This entire amount has been funded as of June 30, 2000.
10. Subsequent Events
From June 30, 2000 to July 14, 2000, the Company completed the
acquisition of one self-storage facility for approximately $3.1 million
and also acquired the remaining franchisee equity interest in two
franchised properties for $1.3 million. These two facilities are
located in New York and Florida. These acquisitions were financed
primarily through operating cash flows and borrowings under available
lines of credit. The Company has entered into no further property
acquisition contracts to date.
The GP also continued with its Board-authorized plan to repurchase
up to 5% of its common shares outstanding through open market and
private purchases. Between July 1 and August 1, 2000, an additional 86
shares were repurchased at an average price of approximately $30 per
share. The total of 1,194 shares as of August 1, 2000 represents
approximately 85% of the announced repurchase.
11. Legal Proceedings
On July 22, 1999, a purported statewide class action was filed against
the REIT and Partnership in the Circuit Court of Montgomery County,
Maryland, under the style Ralph Grunewald v. Storage USA, Inc. and SUSA
Partnership, L.P., case no. 201546V, seeking recovery of certain late
fees paid by tenants and an injunction against further assessment of
similar fees. The Company filed a responsive pleading on September 17,
1999, setting out its answer and affirmative defenses. The Company
believes that it has defenses to the claims in the suit and intends to
vigorously defend it. Plaintiff filed a Motion for Partial Summary
Judgment and a Motion for Class Certification, but before Storage USA
was required to respond to these motions, the case was stayed
indefinitely. The stay was entered in part because of a new statute
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
June 30, 2000
(amounts in thousands, except units and per unit data)
passed by the Maryland legislature relating to late fees. The
constitutionality of that statute has been challenged in an unrelated
litigation not involving the Company.
On November 15, 1999, a purported nationwide class action was filed
against the REIT and Partnership in the Supreme Court of the State of
New York, Ulster County, under the style West 125th Street Associates,
L.L.C. v. Storage USA, Inc. and SUSA Partnership, L.P., case no
99-3278, seeking the recovery of certain late and administrative fees
paid by tenants and an injunction against similar fees. The Company
filed a responsive pleading on January 28, 2000 and the case has been
transferred to New York County, case no. 401589/00. On July 6, 2000 the
Plaintiff filed an Amended Complaint and a Motion for Class
Certification. The Company believes that it has defenses to the suit
and intends to vigorously defend it, including opposing the Motion for
Class Certification.
On March 28, 2000, separate actions (now consolidated) were commenced
in the Supreme Court of the State of New York, New York County styled
SMB Hochman Partners, et al. v. Goldman, et al., Index No. 601346/00
and Kramer, et al. v. Goldman, et al., Index No. 601347/00, by certain
limited partnerships and their limited partners relating to the sale to
the Partnership of two storage facilities located in Westchester
County, New York. The consolidated action alleges fraud and breach of
fiduciary duty by the general partners of the limited partnerships in
connection with their negotiation of the sale of the facilities on
behalf of the limited partnerships. It further alleges that the REIT
and the Partnership aided and abetted the breach of fiduciary duty. The
consolidated action seeks unspecified compensatory damages and $25
million in punitive damages. The Company believes it has defenses to
the suit, which is in the early stages of discovery, and intends to
vigorously defend it.
While the ultimate resolution of these cases will not have a material
adverse effect on the Company's financial position, if during any
period the potential contingency should become probable, the results of
operations in such period could be materially affected.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the consolidated financial condition
and results of operations should be read together with the Consolidated
Financial Statements and Notes thereto. References to "we," "our" or "the
Company" or "the Partnership" refer to SUSA Partnership, L.P. References to "the
GP" refer to Storage USA, Inc., general partner and holder of approximately 88%
of the interest in the Partnership.
The following are definitions of terms used throughout this discussion that will
be helpful in understanding our business.
o Physical Occupancy means the total net rentable square feet rented as of
the date (or period if indicated) divided by the total net rentable square
feet available.
o Scheduled Rent Per Square Foot means the average market rate per square
foot of rentable space.
o Net Rental Income means income from self-storage rentals less discounts.
o Realized Rent Per Square Foot means the annualized result of dividing
rental income, less discounts by total square fee rented.
o Direct Property Operating Cost means the costs incurred in the operation of
a facility, such as utilities, real estate taxes, and on-site personnel.
Costs incurred in the management of all facilities, such as accounting
personnel and management level operations personnel are excluded.
o Net Operating Income ("NOI") means total property revenues less Direct
Property Operating Costs.
o Annual Capitalization Rate ("Cap Rate")/ Yield means NOI of a facility
divided by the total capitalized costs of the facility.
o Funds from Operations ("FFO") means net income, computed in accordance with
generally accepted accounting principles ("GAAP"), excluding gains (losses)
from debt restructuring and sales of property, plus depreciation and
amortization of revenue-producing property, and after adjustments for
unconsolidated partnerships and joint ventures.
o Same-Store Facilities include all facilities that we owned for the entire
period of both comparison periods. Development properties and expansions
are removed from these groups to avoid skewing the results.
Overview
As of June 30, 2000, we owned, managed and franchised 521 facilities containing
35.2 million square feet in 31 states and the District of Columbia.
Internal Growth
The following table compares Same-Store Facilities for the quarter (330
properties owned since April 1, 1999) and for the first six months of 2000 (326
properties owned since January 1, 1999). Newly developed and expanded facilities
are removed from the same-store pool to avoid skewing the results.
13
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
-------------------------------------------------------------------------------------
Same-Store Results June 30, 2000 June 30, 1999 Growth % June 30, 2000 June 30, 1999 Growth %
-----------------------------------------------------------------------------------------------------------------------
<S> <C>
(amounts in thousands except occupancy and per square foot figures)
Revenues excluding late fees $51,769 $49,057 5.5% $99,433 $94,654 5.0%
Expenses
Operating Expenses 9,186 8,778 4.6% 18,454 17,741 4.0%
Property Tax & Other 5,727 5,658 1.2% 11,235 11,325 (0.8%)
-------------------------------------------------------------------------------------
Total Expenses 14,913 14,436 3.3% 29,689 29,066 2.1%
-------------------------------------------------------------------------------------
NOI excluding late fees $36,856 $34,621 6.5% $69,744 $65,588 6.3%
-------------------------------------------------------------------------------------
Late fee Income 1,716 2,960 (42.0%) 3,134 5,933 (47.2%)
NOI including late fees $38,572 $37,581 2.6% $72,878 $71,521 1.9%
=====================================================================================
Physical Occupancy 85.8% 86.4% (0.6%) 84.8% 85.5% (0.7%)
Scheduled Rent per Square Foot $11.82 $11.28 4.8% $11.85 $11.27 5.1%
Realized Rent per Square Foot $10.82 $10.15 6.6% $10.66 $10.05 6.1%
</TABLE>
o Our Same-Store Facilities achieved 6.5% NOI growth excluding late fees in
the second quarter of 2000, and a 2.6% growth including late fees, as
compared to the same quarter in 1999. The 6.5% NOI growth without late fees
resulted from revenue increases of 5.5%, offset by expense growth of 3.3%.
For the six months ended June 30, 2000, same-store NOI excluding late fees
grew 6.3%, due to revenue increases of 5.0% offset by expense growth of
2.1%.
o The revenue increase of 5.5% for the quarter was driven by an increase in
realized rent per square foot of 6.6% partially offset by a 0.6 percentage
point decrease in physical occupancy. For the six months ending June 30,
there was a 5.0% increase in revenues over the same period last year,
caused by a 6.1% increase in realized rent per square foot, partially
offset by a 0.7 percentage point decrease in physical occupancy.
o Our operating expenses grew 4.6% over the second quarter of 1999 and 4.0%
over the first six months of 1999. This growth is primarily attributable to
increases in repairs and maintenance expense, health insurance and
utilities. Meanwhile, property tax and other expenses increased 1.2% over
the second quarter of 1999 and decreased 0.8% over the first six months of
1999. The second quarter increase is mainly due to timing, while the year
to date decrease is attributable to significant reductions in property and
liability insurance costs experienced in the first quarter.
The following table lists changes in the 10 largest same-store markets (on a
percentage of year to date same-store NOI basis, excluding late fees) and the
change in net rental income, realized rent per square foot, and occupied square
feet for the second quarter of 2000 versus the same period in 1999, as well as
for the six months ended June 30. The largest 10 markets in total represent
68.2% of the total same-store NOI.
14
<PAGE>
<TABLE>
<CAPTION>
% of Change in Net Rental % Change in % Change in
# of YTD same- Income (1) Realized RPSF (2) Occupied sq. ft.
Market Facilities store NOI QTD YTD QTD YTD QTD YTD
------------------------------------------------------------------------------------------------------------ -----------------
<S> <C>
Los Angeles-Riverside-Orange County, CA 45 17.8% 9.6% 9.1% 9.1% 9.1% 0.4% 0.1%
New York-N. New Jersey-Long Island, NY 25 14.9% 7.3% 7.0% 6.7% 7.5% 0.5% (0.4%)
Washington-Baltimore, DC-MD-VA-WV 21 9.8% 4.4% 4.3% 7.5% 6.5% (2.8%) (2.0%)
Miami-Fort Lauderdale, FL 15 6.5% 8.5% 6.1% 10.8% 8.0% (2.1%) (1.8%)
Philadelphia-Wilm-Atlantic City, PA-NJ 14 4.0% 4.5% 3.6% 6.8% 5.9% (2.2%) (2.2%)
San Francisco-Oakland-San Jose, CA 8 3.3% 3.0% 2.0% 8.4% 5.5% (5.0%) (3.3%)
Detroit, Ann Arbor-Flint, MI 12 3.1% 9.0% 9.0% 7.3% 8.1% 1.6% 0.8%
Phoenix,-Mesa, AZ 15 3.1% 5.9% 4.7% 6.8% 6.9% (0.0%) (2.0%)
Dallas-Forth Worth, TX 10 3.1% 2.2% 2.4% 2.7% 2.0% (4.0%) 0.3%
San Diego, CA 6 2.6% 7.0% 6.6% 9.0% 8.6% (1.9%) (1.8%)
</TABLE>
(1) The percentage change in Realized Rent per Square Foot plus the percent
change in occupied square feet approximates the percentage change in net
rental income.
(2) Rent Per Square Foot.
External Growth
Acquisitions
There was one new property acquisition in the second quarter of 2000. This new
self-storage facility, in the Denver, Colorado market, increased our total
available square feet by approximately 67 thousand at a cost of $3.1 million. We
expect that the majority of property acquisitions transacted throughout the
remainder of the year will be through the General Electric Capital Corporation
("GE Capital") Acquisition Venture. There were no new property acquisitions
during the first quarter of 2000.
New Development and Expansion
The following newly developed and expanded facilities were opened in the first
and second quarters of 2000:
<TABLE>
<CAPTION>
Developments Expansions
Number of Total Net Rentable Number of Total Net Rentable
Quarter ended Facilities Investment Square Feet Facilities Investment Square Feet
------------------------------------------------------------------------------------------------------------------
(amounts in thousands except number of facilities)
<S> <C>
March 31, 2000 - $ - - 4 $ 4,814 86
June 30, 2000 3 $ 15,059 206 3 $ 3,702 53
------------------------------------------------------------------------------------
Total year-to-date 3 $ 15,059 206 7 $ 9,168 139
====================================================================================
</TABLE>
In connection with our joint ventures with GE Capital discussed in the
Financing section below, we transferred nine projects in various stages of
development into the GE Capital Development Venture during the first quarter of
2000. These projects had a total projected cost of $53.0 million, and were
transferred to the venture at our cost of $26.0 million. We do plan to continue
the development of eight new facilities within the REIT. The following chart
summarizes the details of these eight projects as well as our expansion projects
under construction or in construction planning as of June 30, 2000:
<TABLE>
<CAPTION>
# of Square Expected Investment Remaining
Prop. Feet Investment to Date Investment
---------------------------------------------------------------------------------------------------
(amounts in thousands except for number of facilities)
<S> <C>
Total development in process 8 584 $ 53,640 $ 28,079 $ 25,561
Total expansions in process 19 450 $ 26,096 $ 5,648 $ 20,448
-----------------------------------------------------------------
Total 27 1,034 $ 79,736 $ 33,727 $ 46,009
=================================================================
</TABLE>
15
<PAGE>
The following table presents the anticipated timing of completion and the total
expected dollar amounts invested in opening the facilities in the process of
being newly developed or expanded.
-------------------------------------------------------
3rd Qtr 00 4th Qtr 00 2001-2002 Total
-------------------------------------------------------
(amounts in thousands)
Development $ 4,077 $ 16,372 $ 33,191 $ 53,640
Expansions 1,434 2,939 21,723 26,096
-------------------------------------------------------
Total $ 5,511 $ 19,311 $ 54,914 $ 79,736
=======================================================
Financing
During the fourth quarter of 1999, we formed two joint ventures with GE Capital,
providing a total investment capacity of $400 million for acquisitions and
development of self-storage properties. We plan to fund substantially all of our
new acquisition and development through 2001 through the GE Ventures. As stated
above, in the "External Growth" section, we transferred nine projects in various
stages of development into the GE Capital Development Venture during the first
quarter of 2000. These projects had a total projected cost of $53.0 million,
$26.0 million of which represented the Company's total costs as of March 31,
2000. We received $19.9 million in cash, and recorded an investment in the
venture of $6.5 million, representing a 25% interest. As of June 30, 2000, the
GE Development Venture had invested $32.3 million, of which $5.4 was funded
through advances and investments by the Company. The GE Acquisition Venture had
invested $34.8 million as of June 30, 2000, of which $9.4 was funded through
advances and investments by the Company.
In December of 1999, the GP announced a Board authorized plan to repurchase up
to 5% of its common shares outstanding through open market and private
purchases. The timing of the purchases, the length of time that the program will
continue and the exact number of shares to be purchased is dependent upon
prevailing market conditions. As of June 30, 2000, the GP had repurchased 1.108
million shares at an average price of $29.97. Subsequent to the end of the
second quarter of 2000, the GP purchased an additional 86 thousand shares at an
average price of $30.08. The total of 1.194 million shares repurchased as of
August 1, 2000 represents approximately 85% of the announced repurchase.
Other Initiatives
On May 8, 2000, we announced the formation of a strategic alliance with Access
Storage, S.A. and Millers Storage, S.A., the leading self-storage operators in
Europe and Australia, respectively, to provide management advisory services. As
part of the agreement, we received an option to purchase convertible debt and
also to acquire up to a 20% interest in these companies, which are indirect
affiliates of Security Capital Group Incorporated. We do not expect to exercise
such option in 2000.
Commencing on May 1, 2000, we began offering our customers direct access to
tenant insurance, which insures their goods against described perils, in all
Storage USA facilities except those located in the states of Florida and North
Carolina. The net profits from the premiums written during 2000 will ultimately
accrue to the benefit of a charitable trust established by the Company. We are
anticipating that profits from premiums written subsequent to 2000 will
ultimately accrue to the benefit of a taxable REIT subsidiary that will be
formed and wholly owned by the Partnership pursuant to the Ticket to Work and
Work Incentives Improvement Act of 1999.
Results of Operations
The following table reflects the profit and loss statement for the quarter ended
June 30, 2000 and June 30, 1999, and for the six months ended June 30, 2000 and
June 30, 1999, based on a percentage of total revenues and is used in the
discussion that follows:
16
<PAGE>
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
2000 1999 2000 1999
---------------------------------------------------------------------------------------------
<S> <C>
Revenue
Rental and other property income 97.2% 97.8% 96.7% 98.7%
Service income 1.9% 0.7% 2.3% 0.6%
Other income 0.9% 1.5% 1.0% 0.8%
---------------------------------------------------------------------------------------------
Total Income 100.0% 100.0% 100.0% 100.0%
Expenses
Property operations 23.6% 23.6% 24.5% 24.2%
Taxes 8.3% 8.3% 8.3% 8.3%
Cost of Providing Services 1.5% 0.6% 1.8% 0.6%
General and administrative 5.6% 6.4% 4.6% 6.3%
</TABLE>
Rental and other property income consists of rental income plus other income
from property specific activities (rental of floor and storage space for locks
and packaging material, truck rentals and ground rents for cellular telephone
antenna towers and billboards). Following is a summary of rental and other
property income for the second quarter and for the six months ended June 30,
2000.
<TABLE>
<CAPTION>
Three months Three months Six months Six months
ended ended ended ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------------------------------------------------------
<S> <C>
Rental Income $ 62,805 $ 61,441 $ 121,251 $ 120,848
Other Property Specific Income 919 966 2,039 1,961
------------------------------------------------------------
Total Rental and Other Property Income $ 63,724 $ 62,407 $ 123,290 $ 122,809
============================================================
</TABLE>
Rental and other property income increased $1.3 million, or 2.1%, in the quarter
ended June 30, 2000 compared to the same period in 1999, and increased $481
thousand, or 0.4%, in the six months ended June 30, 2000 compared to the same
six months in 1999. The primary contributors to the increase in rental and other
property income are summarized in the following table.
Rental and Other Property Income Growth in 2000 over 1999
for comparable periods ended June 30 (in thousands)
<TABLE>
<CAPTION>
3 months ended June 30, 2000 6 months ended June 30, 2000
----------------------------------------------------------------------------
Before Before
Late fees Late fees Total Late fees Late fees Total
----------------------------------------------------------------------------
<S> <C>
1999 acquisitions $ 2,662 $ 51 $ 2,713 $ 5,421 $ 99 $ 5,520
1999 developments 728 13 741 1,306 24 1,330
1999 dispositions (4,359) (297) (4,656) (9,901) (641) (10,542)
Same-store facilities 2,712 (1,244) 1,468 4,779 (2,799) 1,980
Other lease-up, expansion and development
Facilities 1,142 (91) 1,051 2,388 (195) 2,193
----------------------------------------------------------------------------
$ 2,885 $ (1,568) $ 1,317 $ 3,993 $(3,512) $ 481
----------------------------------------------------------------------------
</TABLE>
The one-time impact of our change in late fee policy, as described in our Form
10-K for the year ended 1999, produced an unfavorable $1.6 million variance in
late fee revenue in the second quarter, or approximately 43.8%, and an
unfavorable $3.5 million in late fee revenue for the six months ended June 30,
2000 compared to the same period in 1999, or 48.7%. Rental and other property
income was also limited due to 1999 property dispositions, most notably the 32
properties contributed to the joint venture with Fidelity Management Trust
Company in the second quarter of 1999.
17
<PAGE>
The impact of the dispositions was an unfavorable $4.4 million for the quarter
and an unfavorable $9.9 million for the six months ended June 30. These
reductions in rental and other property income were partially offset by
increased revenues from 1999 acquisitions, $2.7 million for the quarter and $5.4
million for the six months ended June 30, and from 1999 developments, $728
thousand for the quarter and $1.3 million for the six months ended June 30.
These two groups of properties were held for the full quarter and six months in
2000, versus partial periods in 1999. Growth in rental and other property income
also occurred due to occupancy increases at our facilities currently in lease-up
(including expansions and pre-1999 developments): $1.1 million for the quarter
and $2.4 million for the six months ending June 30. The remaining $2.7 million
growth for the quarter and $4.8 million for the six months ended June 30
occurred in Same-Store Facilities. For the quarter, this was caused by an
approximate 6.6% increase in realized rent per square foot, from $10.15 in 1999
to $10.82 in 2000, partially offset by a slight decrease in physical occupancy,
from 86.4% in 1999 to 85.8% in 2000. For the six months ended June 30, this
Same-Store growth was caused by an approximate 6.1% increase in realized rent
per square foot, from $10.05 in 1999 to $10.66 in 2000, partially offset by a
slight decrease in physical occupancy, from 85.5% in 1999 to 84.8% in 2000.
As stated above, we reevaluated the amounts that we charge our customers for
late fees and implemented reduced late fees in the first quarter of 2000. The
impact of the change in late fee policy on our total revenues was and remains
difficult to determine due to a number of factors: differences in late fee
charges across the country; variances in late fee calculation in acquired
facilities; and the discretion of facility managers to waive late fees. As set
forth in our form 10-K for the year ended 1999, we established an estimate of as
much as $5.0 million in reduced revenue in the year 2000 due to the policy
change. After a review of our operations for the quarter of 2000, we increased
our estimate for late fee revenue reduction to approximately $6.8 million. We
believe that this estimate is still valid, although there can be no assurance
that the reduction will be limited to this amount due to the factors set out
above. You should refer to the discussions under "Legal Proceedings" and
"Forward-Looking Statements and Risk Factors" for additional information
relevant to our late fee policy.
Service income increased by $826 thousand from the second quarter of 1999 to the
same period in 2000, and by $2.2 million from the first six months of 1999 to
the same period in 2000. Service income also grew as a percentage of total
revenue: from 0.7% in 1999 to 1.9% in 2000 in the second quarter; and from 0.6%
in 1999 to 2.3% in 2000 for the six months ended June 30. The bulk of the
increases, $581 thousand for the quarter and $1.6 million for the six months
ended June 30, is due to the service fees received from the GE Capital Ventures.
The ventures had no activity until March 2000, so there are no comparable
general contractor, development or acquisition fees for 1999. The remaining
increases are due to management fees, $245 thousand for the quarter and $580
thousand for the six months ended June 30, as a result of an increased number of
managed and franchised facilities paying fees to the Company. There were 96 such
properties as of June 30, 1999, compared to 116 as of June 30, 2000. One third
of the 96 facilities at June 30, 1999 did not join our franchised group of
properties until June, hence contributing only one month's fees to the 1999
totals. Below is a summary of service income for the second quarter and for the
six months ended June 30, 1999 and 2000.
<TABLE>
<CAPTION>
Three months Three months Six months Six months
ended ended ended ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
---------------------------------------------------------------
<S> <C>
Management fees $ 686 $ 441 $ 1,298 $ 718
General Contractor fees 184 - 633
Development fees 120 - 665
Acquisition fees 277 - 277
---------------------------------------------------------------
Total service income $ 1,267 $ 441 $ 2,873 $ 718
===============================================================
</TABLE>
Other income consists solely of the Company's proportionate share of the net
income of equity investments including joint ventures and Franchise. Other
income decreased by $346 thousand from the second quarter of 1999 to the same
period in 2000, and increased by $382 thousand from the first six months of 1999
to the same period in 2000. The quarterly change is primarily due to Franchise
Corp.'s equity participation in the sale of some jointly held franchisee
properties in the second quarter of 1999. The year to date increase of $382
thousand is due to the Company's income from its investment in the Fidelity
joint venture. As the joint venture was formed in June 1999, only one month's
income was recorded as of June 1999, compared to a full quarter and a full six
months in 2000.
As a percentage of revenues, cost of property operations and maintenance
remained constant between the second quarter of 1999 and the same period in
2000, at 23.6%. Actual expenses rose $419 thousand, from $15.1 million in 1999
18
<PAGE>
to $15.5 million in 2000. For the six months ended June 30, cost of property
operations and maintenance as a percentage of revenues increased slightly, from
24.2% in 1999 to 24.5% in 2000, reflecting a $1.1 million expense increase, from
$30.1 million in 1999 to $31.2 million in 2000. The trend for the cost of
property operations as a percentage of revenues is to decrease over time due to
Same-Store Facility revenue growth outpacing expense growth. This was generally
the case here, except for a few notable exceptions. Salary expense increased
between the two periods, primarily due to two strategic initiatives commencing
in 1999: the national reservation center and the internal information technology
help desk. As stated, these departments started operations in 1999, and had
gradually increasing expenses as staffing progressed. Comparatively, year 2000
contains expenses for two mature departments for a full quarter and for a full
six months. Health insurance expense also showed a significant increase,
following what we believe is a national trend. Finally, 2000 utility expenses
exceeded those of 1999 due to the unusually mild winter in 1999. Looking
forward, we will also experience similar exceptions in property and liability
insurance over the next twelve months. Effective July 1, 2000, higher premiums
went into effect relating to our renewal of this coverage for the policy period
July 1, 2000 through June 30, 2001. Premiums over the twelve month period will
be approximately $500 thousand higher that those that were in place under the
previous policy.
Tax expense as a percentage of revenues remained 8.3% for the second quarter of
1999 and 2000, and for the six months ended June 30, 1999 and 2000. Tax expense
as a percentage of revenues tends to trend down as a result of Same-Store
Facility revenue growth outpacing tax expense growth. This trend has been
negated throughout the first six months of 2000 by the impact of property tax
reassessments on a number of our larger facilities.
During the second quarter of 2000, the State of Tennessee passed legislation
that granted REITS relief from a 1999 enacted law that subjects limited
partnerships and limited liability corporations to the states excise and
franchise tax (the "Tennessee Tax"). The legislation is retroactive to the
beginning of the year and will eliminate the applicability of the Tennessee Tax
to the Company. During 1999, we incurred approximately $600 of expense
associated with such tax.
Costs of providing services increased from $385 thousand in the second quarter
of 1999 to $979 thousand in the same period in 2000, and increased as a
percentage of revenues from 0.6% to 1.5%. For the six months ended June 30,
costs of providing services increased from $710 thousand in 1999 to $2.3 million
in 2000, and increased as a percentage of revenues from 0.6% to 1.8%. This was
due primarily to the new services provided in 2000, general contracting,
development and acquisition services, and their corresponding costs. The costs
of providing management services also increased as more managed properties were
added to the Storage USA system between June 30 of 1999 and 2000.
General and administrative expenses ("G&A") as a percentage of revenues
decreased from 6.4% in the second quarter of 1999 to 5.6% for the same period of
2000, indicative of a G&A expense decrease from $4.1 to $3.6 million between the
two periods. G&A expenses as a percentage of revenues also decreased from 6.3%
for the first six months of 1999 to 4.6% for the comparable period in 2000,
indicative of an expense decrease from $7.8 to $5.9 million between the two
periods. Contributing substantially to these decreases in expense was the
classification in 2000 of development, construction and acquisition department
overhead as part of the cost of providing services, continued benefits in 2000
from various cost containment programs and lower management bonus accruals in
2000 compared to 1999.
Depreciation and amortization expense increased from $9.0 million in the second
quarter of 1999 to $10.1 million for the same period in 2000. For the six months
ended June 30, depreciation and amortization expense increased from $17.4 in
1999 to $19.3 million in 2000. This was due to a $78.6 million increase in
depreciable assets since June 30, 1999.
Interest income and expense are netted together for presentation. The breakout
of income and expense follows:
<TABLE>
<CAPTION>
Three months Three months Six months Six months
ended ended ended ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
---------------------------------------------------------------
<S> <C>
Interest income $ 3,335 $ 3,310 $ 6,674 $ 6,302
Interest expense (14,813) (13,726) (29,199) (27,565)
---------------------------------------------------------------
Interest expense, net $ (11,478) $ (10,416) $(22,525) $(21,263)
---------------------------------------------------------------
Capitalized interest $ 1,165 $ 1,029 $ 2,583 $ 2,161
</TABLE>
Interest expense grew $1.1 million from the second quarter of 1999, $13.7
million, to the same period in 2000, $14.8 million. For the six months ended
June 30, interest expense increased $1.6 million, from $27.6 in 1999 to $29.2
million in 2000. The interest expense increase was primarily from the sources
listed in the table below and was offset by capitalized interest of $1.0 million
in the second quarter of 1999 and $2.2 million for the six months ended June 30,
1999, and $1.2 million and $2.6 million for the comparable periods in 2000.
19
<PAGE>
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------------------------------------------------------------------
2000 1999 2000 1999
--------------------------------------------------------------------------------------
Wtd Avg Wtd Avg Wtd Avg Wtd Avg
Wtd Avg Interest Wtd Avg Interest Wtd Avg Interest Wtd Avg Interest
Debt Borrowing Rate Borrowing Rate Borrowing Rate Borrowing Rate
---------------------------------------------------------------------------------------------------------------
<S> <C>
Notes payable 600,000 7.37% 600,000 7.37% 600,000 7.37% 600,000 7.37%
Lines of credit 137,988 7.57% 101,385 6.03% 133,199 7.41% 96,752 6.12%
Mortgages payable 69,133 7.50% 66,593 7.50% 69,509 7.50% 67,052 7.50%
Leases & other 42,991 7.50% 47,439 7.50% 42,806 7.50% 47,578 7.50%
borrowings
</TABLE>
Interest income improved $25 thousand from the second quarter of 1999 to the
same period in 2000. For the six months ended June 30, interest income increased
approximately $400 thousand, from $6.3 million in 1999 to $6.7 million in 2000.
This increase was due to additional advances from us to Franchisees since June
30, 1999, and the resulting interest growth. The remainder of the increase is
from interest earned on amounts outstanding under the 1995 Employee Stock
Purchase and Loan Plan and earnings on overnight deposits.
We recorded an $890 thousand gain on the sale of storage facilities in the first
quarter of 2000. $414 thousand of that gain relates to the sale of two Columbus,
Indiana storage facilities; $295 thousand to the sale of a non-operating
development project in White Marsh, Maryland to a franchisee; and the remaining
$180 to adjustments from prior period dispositions. There were no second quarter
dispositions.
Liquidity and Capital Resources
Cash provided by operating activities was $37.4 million during the six months
ended June 30, 2000 as compared to $53.8 million during thesame period in 1999.
The items affecting the operating cash flows are discussed more fully in the
"Results of Operations" section.
We invested $13.0 million during the first six months of 2000 for the
acquisition and improvement of self-storage facilities compared to $59.2 million
during the same period in 1999. $3.1 million of the $13.0 for 2000 reflects our
single acquisition in the Denver, Colorado market, with the remaining $9.9
million representing improvements. The 1999 acquisition activity reflects the
reinvestment of proceeds from the Fidelity transaction discussed below. We also
received $21.7 million in proceeds from the sale/exchange of storage facilities
in the first six months of 2000 consisting of: $1.0 million from the sale of two
self-storage facilities in Indiana; $19.9 from the transfer of nine development
projects to the GE Capital Development Venture; $463 thousand from the sale of
another non-operating development project to a franchisee; and $332 thousand
from the sale of vacant land adjacent to one of our operating facilities. As
part of the GE Capital transaction, we also received a 25% equity interest in
the venture valued at $6.5 million. In the transaction involving the single
development project, we accepted a $2.2 million note and received the balance of
the sales price in cash. In the first six months of 1999, we received $137.1 in
proceeds from the sale/exchange of storage facilities, mostly from the Fidelity
transaction.
In addition to improvements, we invested $18.7 million for the development and
construction of self-storage facilities in the six months ended June 30, 2000,
compared to $29.1 million for the same time period in 1999. There were 8 newly
developed facilities and 19 expansions of existing facilities in process with
$33.7 million cumulative invested at June 30, 2000. The total budget for these
facilities is $79.7 million, of which $46.0 million remains to be invested. We
invested $9.8 million in real estate during the first six months of 2000,
compared to $15.2 million one year ago. In 2000, we have invested $6.5 million
in cash in the GE Capital Ventures, and provided $3.3 million in financing to
franchisees of Franchise. Proceeds were also received from certain franchisees,
as four repaid their loans during the six months ended June 30, 2000, generating
$6.3 million in cash. We have $16.3 million of loan commitments to franchisees
to fund as of June 30, 2000. Additionally, we expect to invest approximately
$9.3 million as part of our required equity contributions in the GE Capital
joint ventures during the remainder of 2000.
Sometimes we acquire facilities in exchange for Units. The Units are redeemable
after one year for cash or, at our option, shares of the GP's common stock.
Sellers taking Units instead of cash are able to defer recognizing a taxable
gain on the sale of their facilities until they sell or redeem their Units. At
June 30, 2000 we had 3.4 million Units outstanding, of which the following Units
were redeemable:
20
<PAGE>
o 82 thousand Units for an amount equal to the fair market value ($2.4
million, based upon a price per Unit of $29.52 at June 30, 2000) payable in
cash or, at our option, by a promissory note payable in quarterly
installments over two years with interest at the prime rate.
o 3.3 million Units for amounts equal to the fair market value ($98.7 million,
based upon a price per Unit of $29.52 at June 30, 2000) payable by us in
cash or, at our option, in shares of the GP's common stock at the initial
exchange ratio of one share for each Unit.
We anticipate that the source of funds for any cash redemption of Units will be
retained cash flow or proceeds from the future sale of our securities or other
indebtedness. We have agreed to register any shares of the GP's common stock
issued upon redemption of Units under the Securities Act of 1933.
Between November 1996 and July 1998, the Partnership issued $600 million of
notes payable. The notes are unsecured obligations of the Partnership, and may
be redeemed at any time at the option of the Partnership, subject to a premium
payment and other terms and conditions. The combined notes carry a weighted
average interest rate of 7.37% and were issued at a price to yield a weighted
average of 7.42%. The terms of the notes are staggered between seven and thirty
years, maturing between 2003 and 2027.
During the first six months of 2000, the GP repurchased, under its stock
buy-back plan, 858 thousand shares of its common stock at a total cost of $26.0
million. Subject to prevailing market conditions and price levels, the GP
expects to commit an additional estimated $8.9 million during the remainder of
2000 to this plan to purchase up to a total of 5% of its outstanding shares,
inclusive of shares repurchased in 1999.
We initially fund our capital requirements primarily through the available lines
of credit with the intention of refinancing these with long-term capital in the
form of equity and debt securities when we determine that market conditions are
favorable. At June 30, 2000, the GP can issue under currently effective shelf
registration statements up to $650 million of common stock, preferred stock,
depository shares and warrants and can also issue $250 million of unsecured,
non-convertible senior debt securities of the Partnership. Our lines of credit
bear interest at various spreads over LIBOR. We had net borrowings in the six
months ended June 30, 2000 of $49.5 million. For the same period in 1999, net
repayments totaled $3.6 million. We currently have a $200 million unsecured
revolving credit line with a group of commercial banks, bearing interest at a
spread of 120 basis points over LIBOR, based on our current debt rating and
maturing on March 31, 2002. We also have a $40 million line of credit with a
commercial bank. The line bears interest at spread over LIBOR, matures on July
1, 2001, and is renewable at that time.
We paid approximately $43.0 million in distributions during the first six months
of 2000, $38 million to the general partner, $4.9 million to limited partners
and $44 thousand to minority interests. This compares to a total $41.3 million
in distributions for the same period in 1999, $36 million to the general
partner, $4.8 million to limited partners and $38 thousand to minority
interests. The GP increased its dividend to common shareholders 3% between the
two periods, from $.67 to $.69 per share. Distributions to common unitholders
are made at the same rate used by the GP for common stock dividends. Preferred
unit dividends also increased from 1999 to 2000, from $2.5 million to $2.9
million for the six months ended June 30.
We expect to incur approximately $4.5 million for scheduled maintenance and
repairs during 2000 and approximately $5.8 million to conform facilities
acquired from 1994 to 1999 to our standards of which $1.5 million for scheduled
maintenance and $848 thousand for conforming acquired facilities has been
incurred to date. In the second quarter of 2000, we committed to several new
leases relating to corporate office space in Memphis. The leases have a term of
fifteen years with estimated annual payments of $2.7 million. We have rented a
portion of this space to others under several subleases at the same rent and
substantially similar terms to our primary leases and expect to receive
approximately $0.8 million annually from such subleases.
We believe that borrowings under our current credit facilities combined with
cash from operations will provide us with necessary liquidity and capital
resources to meet the funding requirements of our remaining development and
expansion pipeline, commitments to provide financing to franchisees, equity
commitments of the GE Capital joint ventures, dividend and distribution
requirements and expected investments under the GP's stock buy-back plan.
Additionally, no significant maturities are scheduled under any of our
borrowings until 2003.
21
<PAGE>
Qualitative and Quantitative Disclosure About Market Risk
We are exposed to certain financial market risks, the most predominant being
fluctuations in interest rates on existing variable rate debt and the repricing
of fixed rate debt upon maturity. We monitor interest rate fluctuations as an
integral part of our overall risk management program, which recognizes the
unpredictability of financial markets and seeks to reduce the potentially
adverse effect on our results. The effect of interest rate fluctuations
historically has been small relative to other factors affecting operating
results, such as rental rates and occupancy.
Our operating results are affected by changes in interest rates primarily as a
result of borrowing under our lines of credit. If interest rates increased by 25
basis points, our interest expense for the six months ended June 30, 2000 would
have increased by approximately $140 thousand, based on average outstanding
balances during that period.
Funds from Operations ("FFO")
We believe FFO should be considered in conjunction with net income and cash
flows to facilitate a clear understanding of our operating results. FFO should
not be considered as an alternative to net income, as a measure of our financial
performance or as an alternative to cash flows from operating activities as a
measure of liquidity. FFO does not represent cash generated from operating
activities in accordance with GAAP and is not necessarily indicative of cash
available to fund cash needs. We follow the current National Association of Real
Estate Investment Trust's (NAREIT) definition of FFO which effective January 1,
2000, now includes non-recurring results of operations, except those defined as
"extraordinary items" under GAAP. Since we have historically not added back
non-recurring items to our calculation, we were not required to restate prior
period FFO amounts. Our FFO may not be comparable to similarly titled measures
of other REITs that calculate FFO differently. In calculating FFO, we add back
only depreciation and amortization of revenue-producing property. As such, Our
FFO and FFO per share may not be comparable to other REITs that may add back
total depreciation and amortization.
The following table illustrates the components of our FFO for the three months
and six months ended June 30, 2000 and June 30, 1999.
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Funds from Operations Attributable Ended Ended Ended Ended
to Unit holders: June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
---------------- --------------- --------------- ---------------
(in thousands)
<S> <C>
Net Income Attributable to Common Unitholders $ 17,004 $ 18,591 $ 33,588 $ 34,142
Loss/(Gain) on Sale of Assets* (441) (595) 137
-
Total Depreciation and Amortization 10,097 9,017 19,291 17,373
Depreciation from Unconsolidated Entities 183 49 335 49
Less Depreciation of Non-Revenue Producing
Property (998) (592) (1,912) (1,164)
---------------- --------------- --------------- ---------------
FFO attributable to common unitholders $ 26,286 $ 26,624 $ 50,707 $ 50,537
</TABLE>
*Excludes $295 gain on sale of undepreciated land in the first quarter of 2000.
During the second quarter of 2000, the GP declared a dividend per share of
$0.69, which is an increase of 3.0% over the second quarter 1999 dividend of
$0.67. To date, $1.38 per share in dividends have been declared, compared to
$1.34 in 1999, again a 3.0% increase. As a qualified REIT, the GP is required to
distribute a substantial portion of its net taxable income as dividends to its
shareholders. While our goal is to generate and retain sufficient cash flow to
meet our operating, capital and debt service needs, the GP's dividend
requirements may require us to utilize our bank lines of credit and other
sources of liquidity to finance property acquisitions and development, and major
capital improvements. See "Liquidity and Capital Resources" section.
22
<PAGE>
Legal Proceedings
On July 22, 1999, a purported statewide class action was filed against the REIT
and Partnership in the Circuit Court of Montgomery County, Maryland, under the
style Ralph Grunewald v. Storage USA, Inc. and SUSA Partnership, L.P., case no.
201546V, seeking recovery of certain late fees paid by tenants and an injunction
against further assessment of similar fees. The Company filed a responsive
pleading on September 17, 1999, setting out its answer and affirmative defenses.
The Company believes that it has defenses to the claims in the suit and intends
to vigorously defend it. Plaintiff filed a Motion for Partial Summary Judgment
and a Motion for Class Certification, but before Storage USA was required to
respond to these motions, the case was stayed indefinitely. The stay was entered
in part because of a new statute passed by the Maryland legislature relating to
late fees. The constitutionality of that statute has been challenged in an
unrelated litigation not involving the Company.
On November 15, 1999, a purported nationwide class action was filed against the
REIT and Partnership in the Supreme Court of the State of New York, Ulster
County, under the style West 125th Street Associates, L.L.C. v. Storage USA,
Inc. and SUSA Partnership, L.P., case no 99-3278, seeking the recovery of
certain late and administrative fees paid by tenants and an injunction against
similar fees. The Company filed a responsive pleading on January 28, 2000 and
the case has been transferred to New York County, case no. 401589/00. On July 6,
2000 the Plaintiff filed an Amended Complaint and a Motion for Class
Certification. The Company believes that it has defenses to the suit and intends
to vigorously defend it, including opposing the Motion for Class Certification.
On March 28, 2000, separate actions (now consolidated) were commenced in the
Supreme Court of the State of New York, New York County styled SMB Hochman
Partners, et al. v. Goldman, et al., Index No. 601346/00 and Kramer, et al. v.
Goldman, et al., Index No. 601347/00, by certain limited partnerships and their
limited partners relating to the sale to the Partnership of two storage
facilities located in Westchester County, New York. The consolidated action
alleges fraud and breach of fiduciary duty by the general partners of the
limited partnerships in connection with their negotiation of the sale of the
facilities on behalf of the limited partnerships. It further alleges that the
REIT and the Partnership aided and abetted the breach of fiduciary duty. The
consolidated action seeks unspecified compensatory damages and $25 million in
punitive damages. The Company believes it has defenses to the suit, which is in
the early stages of discovery, and intends to vigorously defend it.
While the ultimate resolution of these cases will not have a material adverse
effect on the Company's financial position, if during any period the potential
contingency should become probable, the results of operations in such period
could be materially affected.
Forward Looking Statements and Risk Factors
Certain information included in this Form 10-Q that is not historical fact is
based on our current expectations. This includes statements regarding: (a)
anticipated future development, acquisition and expansion activity, (b) the
impact of anticipated rental rate increases and our newly revised late fee
policy on our revenue growth, (c) our 2000 anticipated revenues, expenses and
returns, (d) future capital requirements, (e) sources of capital, and (f)
sources of funds for payment of our indebtedness. Words such as "believes",
"expects", "anticipate", "intends", "plans" and "estimates" and variations of
such words and similar words also identify forward looking statements. Such
statements are forward looking in nature and involve a number of risks and
uncertainties. Actual results may differ materially. The following factors,
among others, could cause actual results to differ materially from the
forward-looking statements:
o Changes in the economic conditions in the markets in which we operate could
negatively impact the financial resources of our customers, impairing our
ability to raise rents.
o Certain of our competitors with substantially greater financial resources
than us could reduce the number of suitable acquisition opportunities
offered to us and increase the price necessary to consummate the acquisition
of particular facilities.
o Competition for development sites could drive up costs, making it unfeasible
for us to develop properties in certain markets.
o Increased development of new facilities in our markets could result in over
-supply and lower rental rates.
o Amounts that we charge for late fees are under review, have been and are
the subject of litigation against us and are, in some states, the subject of
governmental regulation. Consequently, such amounts could change, materially
affecting the results of operations.
o The conditions affecting the bank, debt and equity markets could change.
o The availability of sufficient capital to finance our business plan on
satisfactory terms could decrease.
o Competition could increase, adversely effecting occupancy and rental rates,
thereby reducing our revenue.
o Costs related to compliance with laws, including environmental laws could
increase.
o General business and economic conditions could change, adversely effecting
occupancy and rental rates, thereby reducing our revenue.
23
<PAGE>
o Other risk factors exist as described in our Annual Report on Form 10-K for
the year ended December 31, 1999 and other reports filed from time to time
with the Securities and Exchange Commission.
We caution you not to place undue reliance on any such forward-looking
statements. We assume no obligation to update any forward-looking statements as
a result of new information, subsequent events or any other circumstances. Such
statements speak only as of the date that they are made.
24
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
See disclosure in the section entitled "Qualitative and Quantitative Disclosure
About Market Risk" in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
25
<PAGE>
Part II- OTHER INFORMATION
Item 1. Legal Proceedings
See disclosure in the section entitled "Legal Proceedings" in Management's
Discussion and Analysis of Financial Condition and Results of Operations on page
22.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders.
On May 3, 2000, the GP held its Annual Meeting of Shareholders. Three matters
were submitted to the shareholders for consideration:
1. election of nine Directors (being all of its Directors);
2. ratification of the selection of PricewaterhouseCoopers LLP as its
independent public accountants for the fiscal year ending December 31,
2000; and
3. a proposal to approve an amendment to its 1995 Employee Stock Purchase and
Loan Plan, increasing the shares available under the plan from 750,000 to
1,250,000.
1. Election of Nine Directors:
Director: For Withheld
--------- --- --------
C. Ronald Blankenship 25,847,263 68,794
Howard P. Colhoun 25,851,692 64,365
Alan B. Graf, Jr. 25,851,723 64,334
Dean Jernigan 25,851,823 64,234
Mark Jorgensen 25,851,823 64,234
Caroline S. McBride 25,851,409 64,648
John P. McCann 25,850,823 65,234
William D. Sanders 25,847,823 68,234
Harry J. Thie 25,851,717 64,340
2. Ratification of the selection of PricewaterhouseCoopers LLP as the GP's
independent public accountants for the fiscal year ending December 31, 2000.
For 25,873,965
Against 21,230
Abstain 20,772
3. Proposal to approve an amendment to the GP's 1995 Employee Stock Purchase
and Loan Plan, increasing the shares available under the plan from 750,000
to 1,250,000.
For 24,987,559
Against 862,160
Abstain 66,338
26
<PAGE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibit 10.1 Amendment No. 4 to the GP's 1995 Employee Stock Purchase
and Loan Plan dated as of May 3, 2000.
Exhibit 10.2 Employment Agreement between the GP and Bruce F. Taub,
Senior Vice President, Acquisitions, dated as of February 3, 2000.
Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K
On May 2, 2000, we filed our current report on Form 8-K. The filing
included information relating to our April 26, 2000 press release
announcing our financial results for the first quarter of 2000.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 14, 2000
SUSA Partnership, L.P.
By Storage USA, Inc.,
General Partner
By: /s/ Christopher P. Marr
-----------------------
Christopher P. Marr
Chief Financial Officer
(Principal Financial and Accounting Officer)
28
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
10.1 Amendment No. 4 to the GP's 1995 Employee Stock Purchase
and Loan Plan dated as of May 3, 2000.
10.2 Employment Agreement between the GP and Bruce F. Taub,
Senior Vice President, Acquisitions, dated as of February 3, 2000.
27 Financial Data Schedule
29
