FORM 10-Q A #2
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
For Quarter Ended September 30, 1994 Commission file number 0-23466
SHURGARD STORAGE CENTERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 91-1603837
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1201-3RD AVENUE, SUITE 2200, SEATTLE, WASHINGTON 98101
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) 206-624-8100
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.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Shares outstanding at October 14, 1994:
Class A Common Stock, $.001 par value, 16,829,283 shares
outstanding
Class B Common Stock, $.001 par value, 154,604 shares
outstanding
Part I, Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
On March 1, 1994 (the Acquisition Date), the Company completed the
acquisition of seventeen publicly-held limited partnerships
administered by Shurgard as a means for assembling an initial
portfolio of real estate investments. The Company acquired the
assets, subject to existing liabilities, of each of the Partnerships
for an aggregate cost of $387.4 million. The acquisition was funded
by the issuance of 16,983,728 shares of common stock and $67 million
in proceeds from a note payable to a financial services company. An
additional $37 million was borrowed to repay certain notes payable and
liabilities assumed from the Partnerships, pay loan costs and
establish cash reserves. Real estate assets acquired consist of 134
self-service storage centers and two business parks located in
seventeen states, as well as interests in two joint ventures owning an
additional five storage centers.
On June 9, 1994, the Company refinanced substantially all of its existing
debt (including the $104.6 million incurred in connection with the
acquisition discussed above) with Nomura Asset Capital Corp., a
subsidiary of Nomura Securities International, Inc. through a debt
purchase transaction. The $122.58 million loan provides the Company
with funds for seven years at a fixed rate equal to 8.28% and requires
monthly payments of interest only until maturity. The following table
summarizes the uses of proceeds from this loan:
Repayment of consolidation debt$ 104,600,000
Repayment of other debt 14,156,000
Loan fees and closing costs 2,371,000
Net proceeds 1,453,000
----------
Loan proceeds $ 122,580,000
In connection with this transaction, the Company incurred a $1.2 million
loss on early retirement of debt due to the write off of unamortized
loan fees. Through this refinancing, the Company has stabilized its
debt service costs and provided greater flexibility for the Company's
future growth.
On September 1, 1994, the Company purchased twenty storage centers from an
unaffiliated storage operator based in Raleigh, North Carolina for an
aggregate purchase price of $34 million. These centers were financed
with $30 million from the Company's credit facility, a $1 million note
to the seller and $3 million in cash. The new properties acquired by
the Company were 98% occupied with average rent per square foot of
$7.34 as of June 30 1994. The average age of these properties is 7.6
years. Selected information regarding the newly acquired centers is
as follows:
Metropolitan No. of No. of No. of
Area Stores Units Sq. Ft.
----------------- ------ ----- -------
Washington DC 7 2,399 252,807
Raleigh, NC 5 1.567 195,130
Richmond, VA 3 926 105,225
Virginia Beach, VA 4 1,196 147,550
Charlottesville, VA 1 300 31,600
---- ----- -------
20 6,388 732,312
In connection with this purchase, the Company borrowed $30 million on its
$50 million two-year revolving credit facility. This credit facility
is secured by real estate and interest is payable monthly at 7.33% for
the first six months, and thereafter at either the bank's prime rate
or LIBOR plus 200 basis points (at the Company's option). The
commitment fee for the original two-year revolving period was 75 basis
points of the commitment amount and, upon the expiration of such
period, for an additional fee of 37.5 basis points of the amount
outstanding, the Company may extend any outstanding balance for a one-
year term. The Company's total debt at September 30, 1994 was $155.1
million with an weighted average interest rate of 8.1%.
Additionally, during the quarter, the Company executed a commitment letter
with a financial services company to provide a second $50 million two-
year revolving credit facility. This credit facility will be secured
by real estate, bear interest at LIBOR plus 175 basis points, and
require a draw fee equal to 25 basis points of the amount drawn. The
commitment fee for the original two-year revolving period is 100 basis
points of the commitment amount. The commitment is subject to
customary contingencies and due diligence.
During the quarter, the Company entered into a joint venture a partnership
managed by Freeman Management Corporation, a storage operator and
developer, to develop a property in Nashville, Tennessee. Shurgard
owns a 67% interest in this project, which will initially have 59,700
net rentable square feet and is expected to be complete in early 1995.
The Company's investment in this project is $600,000. The Company has
guaranteed repayment of $833,500 of the joint venture's construction
loan. Additionally, the Company is evaluating a second $640,000
development opportunity in Nashville under a similar arrangement with
Freeman Management Corporation.
The Company anticipates that cash flow from operating activities will
continue to provide adequate capital for all principal payments as
well as dividend payments in accordance with REIT requirements. Cash
provided by operating activities for the seven months of operations
was $19 million. Working capital reserves at September 30, 1994 were
$8.5 million. The Company declared a dividend of $0.44 per share on
October 28, 1994.
Results of Operations
Three Months Ended September 30, 1994
The Company operates a professionally-managed real estate portfolio
consisting primarily of self-service storage properties that provide
month-to-month leases for business and personal use. Net income for
the quarter was $6 million, or $0.35 per share, reflecting three
months of consolidated operations for 139 storage centers and two
business parks, as well as one month of operations for the 20 storage
centers purchased on September 1.
Third quarter 1994 rental revenues rose 9% or $1.69 million compared to the
Predecessor's third quarter of 1993. This reflects approximately
$450,000 of revenues related to the 20 storage centers recently
acquired as well as 7% increase in average rental rates for the
original portfolio of assets. Occupancy levels remained stable at 90%
for the quarter ended September 30 of each year.
The Company's debt at September 30, 1994 is $129 million higher than the
Predecessor's debt at December 31, 1993. This additional debt is
reflected in the Company's interest expense and earnings for the three
months ended September 30, 1994. In connection with the
Consolidation, certain of the partners, representing the equivalent of
3.5 million shares of the Company's Class A Common Stock, elected to
take cash and liquidate their investment. The Company borrowed the
$67 million required for these cash payments as well as approximately
$20 million to pay liabilities related to the Consolidation which were
assumed from the Predecessor and approximately $10 million to cover
loan closing costs and establish cash reserves. Interest on the $97
million for the three months ended September 30, 1994 is $2.1 million.
Additionally, as a result of the Consolidation, the majority of the
debt held by the partnerships, including short-term debt at relatively
low interest rates, had to be refinanced at a slightly higher rate
(8.28%). The Company also borrowed $30 million in connection with the
acquisition of the 20 storage centers on September 1, 1994; interest
for one month on this borrowing was $183,000. The aggregate remaining
expenses increased less than 1%.
Predecessor operations for the third quarter of 1993 reflect a gain due to
the settlement of litigation. This settlement represents a
reimbursement for expenses incurred to correct a structural problem
that arose due to the contractor's negligence. These expenses had
been previously expensed due to the uncertainty of the case.
March 1, 1994 (beginning of operations) through September 30, 1994
Income before extraordinary item for the period was $13.8 million, or $0.74
per share, reflecting seven months of consolidated operations for 139
storage centers and two business parks, and one month of operations
for the 20 newly purchased storage properties in the following states:
Percentage of Portfolio Year-to-date 1994
Based on Original Cost Annualized Property
At Sept. 30, 1994 Performance
California 15.2% 11.1%
Florida 5.8% 10.7%
New York 5.4% 12.4%
Texas 14.6% 10.9%
Virginia 9.0% 11.7%
Washington 20.2% 11.6%
Other 29.8% 12.5%
-----
Total 100%
The table above provides measures of geographic diversity and earnings as a
percentage of historical cost. Performance measures are annualized to
allow comparisons between periods and equivalent competitor
information. The annualized property performance percentages are
determined by dividing the annualized property level net operating
income (rental revenue less operating expenses, real estate taxes and
management fees) for the seven months ended September 30, 1994 by the
original acquisition cost. This performance is not necessarily
indicative of what the actual property performance percentages for the
full year will be. Net operating income is not reduced by
depreciation or certain general and administrative expenses and, had
it been, the percentages would be lower. This performance measure
should not be construed as a yield or return of investment.
Rental revenues for the nine months ended September 30, 1994 (including two
months of Predecessor operations from January 1, 1994 to the
Acquisition Date) rose 7.5% or $4.08 million compared to the same
period in 1993 for the Predecessor. This reflects approximately
$450,000 of revenues related to the 20 storage centers recently
acquired as well as rising rental rates and occupancies for the
original portfolio of assets.
The Predecessor financial statements for the period from January 1, 1994 to
the Acquisition Date include various nonrecurring items related to the
consolidation and liquidation of the seventeen partnerships which
comprise the Predecessor, including the gain and related incentive
management fees, litigation, hostile takeover defense and transaction
costs. As discussed above, expenses for the nine month period rose
compared to the Predecessor's 1993 expenses due to the change in
capitalization and the adjustment of assets to market value at the
Acquisition Date. Additionally, general and administrative expenses
from January 1, 1994 to the Acquisition Date for the Predecessor
included certain expenses related to the liquidation of the
Partnerships including audit, tax and legal fees. State taxes for the
Predecessor were also high for the two months of 1994 due to the tax
gains resulting from the sale of assets. Operating expense,
management fees and real estate taxes are comparable for each nine
month period ended September 30, 1993 and 1994.
Pro Forma Results of Operations
As the Company did not begin operating the properties until March 1, 1994,
management believes that the pro forma information included below is
necessary to provide more meaningful comparative information for the
three and nine months ended September 30, 1994.
Pro forma information for 1993 and 1994, as if the Company had owned its
original portfolio of real estate and its current debt was outstanding
for the entire period (note that 1994 information includes one month
of operating activity for the 20 storage centers acquired on September
1, 1994), is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------
1994 1993 1994 1993
--------- -------- -------- -------
Pro forma rental revenues $ 20,515 $18,800 $58,169 $54,037
Pro forma net operating income $ 12,650 $11,310 $35,909 $32,927
Pro forma net income 1 $ 6,004 $ 5,376 $16,713 $14,699
Pro forma net income per share 2 $ 0.35 $ 0.32 $ 0.98 $ 0.87
Funds from operations (FFO)1,3 $ 9,335 $ 8,390 $26,518 $23,661
1 Assumes the Company's fixed rate seven-year debt (8.28%) was outstanding
during the entire period..
2 Assumes 16,983,887 shares of the Company's common stock were outstanding
during the entire period.
3 Funds from Operations ("FFO") are calculated as earnings plus
depreciation and amortization minus certain non-recurring revenue plus
non-recurring expenses.
Total funds from operations for the third quarter of 1994, which include
the acquisition of 20 properties on September 1, 1994, increased 11.3%
to $9.34 million. Funds from operations for the third quarter of 1994
on a same store basis increased by 9.6% to $9.20 million, from pro
forma funds from operations of $8.4 million, for the same period in
1993.
Total 1994 third quarter revenues increased 9% to $20.52 million. Revenues
for the third quarter on a same store basis increased by 7% to $20.07
million, compared with pro forma revenues of $18.8 million in 1993.
Rental rates for this original portfolio increased by 7.5% to $8.51
per square foot for the third quarter of 1994 compared to $7.91 per
square foot for the same quarter of 1993. Occupancy rates were
unchanged at 90% for the third quarter of 1994, and the same for the
third quarter of 1993.
For the nine-month period ended September 30, 1994, funds from operations,
on a pro forma basis were $26.52 million, an increase of 12% over pro
forma funds from operations of $23.66 million for the same period a
year ago. Earnings for the period, on a pro forma basis, increased by
9% to $16.7 million from pro forma earnings of $14.7 million for the
same period in 1993. Pro forma revenues for the nine-months increased
by 8% to $58.17 million, compared with pro forma revenues of $54.04
million in 1993.
SIGNATURE
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.
SHURGARD STORAGE CENTERS, INC.
Date: February 8, 1995 By: /s/ Harrell Beck
Harrell Beck
President, Chief Financial Officer and
Authorized Signatory
