FORM 10-Q
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 March 31, 1996
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 March 31, 1996 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 May 1, 1996:
Class A Common Stock, $.001 par value, 23,046,517 shares outstanding
Class B Common Stock, $.001 par value, 154,604 shares outstanding
/page
Shurgard Storage Centers, Inc.
Part I, Item 1: Consolidated Balance Sheets (unaudited)
(Amounts in thousands except share data)
March 31, December 31,
1996 1995
--------- ----------
Assets:
Storage centers:
Land $ 107,060 $ 105,224
Buildings and equipment, net 409,333 404,329
Construction in progress 21,339 20,942
--------- ---------
537,732 530,495
Other real estate investments 22,169 21,407
Cash and cash equivalents 5,960 5,683
Restricted cash 5,915 5,551
Other assets 46,152 47,258
--------- ---------
Total assets $ 617,928 $ 610,394
========= =========
Liabilities and Shareholders' Equity:
Accounts payable and other liabilities $ 16,224 $ 19,101
Dividends payable 10,669
Lines of credit 25,013 10,905
Notes payable 132,247 131,935
--------- ----------
Total liabilities 173,484 172,610
--------- ----------
Minority interest in other
real estate investments 2,617 3,288
Shareholders' equity:
Class A common stock, $0.001 par value;
120,000,000 authorized; 23,046,517 and
23,039,317 shares issued and outstanding 452,870 452,852
Class B common stock, $0.001 par value;
500,000 shares authorized, 154,604 issued
and outstanding; net of loans to shareholders
of $4,002 (1,086) (1,086)
Cumulative dividends in excess
of cumulative earnings (9,957) (17,270)
--------- ---------
Total shareholders' equity 441,827 434,496
--------- ---------
Total liabilities and shareholders' equity $ 617,928 $ 610,394
========= =========
/page
Shurgard Storage Centers, Inc.
Part I, Item 1: Consolidated Statements of Net Income (unaudited)
(Amounts in thousands except per share data)
For the three months
ended March 31,
-----------------------
1996 1995
---------- ----------
Rental revenue $ 23,531 $ 20,972
Revenue from other
real estate investments 434 339
Property management revenue 854 57
--------- ---------
Total revenue 24,819 21,368
--------- ----------
Operating expense 6,926 5,135
Management fees 1,320
Depreciation and amortization 5,085 3,767
Real estate taxes 2,081 1,808
General and administrative 1,082 787
--------- ----------
Total expenses 15,174 12,817
--------- ---------
Income from operations 9,645 8,551
--------- ---------
Interest and other income 95 234
Interest expense (2,427) (3,431)
--------- ----------
Total other income (expense) (2,332) (3,197)
--------- ----------
Net income $ 7,313 $ 5,354
========= =========
Net income per share $ 0.32 $ 0.31
========= =========
/page
Shurgard Storage Centers, Inc.
Part I, Item 1: Consolidated Statements of Cash Flows (unaudited)
(Amounts in thousands)
Three months Three months
ended ended
March 31, March 31,
1996 1995
----------- -----------
Operating activities:
Net income $ 7,313 $ 5,354
Adjustments to reconcile earnings to net cash
provided by operating activities:
Depreciation and amortization 5,085 3,767
Minority interest in earnings of joint ventures 90
Changes in other accounts:
Restricted cash (364) 77
Other assets 310 1,947
Accounts payable and other liabilities (1,452) (1,985)
----------- -----------
Net cash provided by operating activities 10,982 9,160
----------- -----------
Investing activities:
Construction, acquisition and improvement of
storage centers (12,647) (5,820)
Purchase of other real estate investments (1,558) (3,971)
Purchase of non-competition agreements (304) (200)
Investment in property management company (233)
Distributions in excess of earnings from
investment in joint partnerships 82 120
----------- -----------
Net cash used in investing activities (14,427) (10,104)
----------- -----------
Financing activities:
Proceeds from notes payable 313
Proceeds from line of credit 14,108 7,000
Payment of financing costs (427)
Repayment of assumed line of credit (4,337)
Principal payments on notes payable (1) (20)
Proceeds from exercise of stock options 18
Dividends paid (10,669) (7,603)
Distributions to minority partners (47)
----------- -----------
Net cash provided by (used in)
financing activities 3,722 (5,387)
----------- -----------
Increase (decrease) in cash and cash equivalents 277 (6,331)
Cash and cash equivalents at beginning of year 5,683 13,162
----------- -----------
Cash and cash equivalents at end of period $ 5,960 $ 6,831
=========== ===========
Supplemental schedule of cash flow information:
Cash paid during the period for interest $ 3,186 $ 3,418
=========== ===========
/page
Shurgard Storage Centers, Inc.
Part I, Item 1: Notes to Consolidated Financial Statements
Three Months Ended March 31, 1996
(unaudited)
Note A _ Basis of Presentation
The consolidated financial statements include the accounts of the
Company and its subsidiaries, including both U.S. and Belgian
subsidiaries. All intercompany balances and transactions have been
eliminated upon consolidation.
The consolidated financial statements included in this report are
unaudited. In the opinion of the Company, all adjustments necessary for
a fair presentation of such financial statements have been included and
such adjustments consisted only of normal recurring items. The interim
financial statements should be read in conjunction with the Company's
1995 Annual Report. Interim results are not necessarily indicative of
results for a full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Weighted average shares outstanding for the three months ended March 31,
1996 and 1995 were 23,196,858 and 17,082,409, respectively.
Note B _ Lines of Credit
During the first quarter of 1996, the Company borrowed an additional $
12.7 million on its domestic lines of credit. Proceeds were used to
fund the construction of storage centers and the purchase of several
parcels of undeveloped land on which the Company intends to build
storage centers. Additionally, during the quarter, the Company obtained
an additional $x million of available credit under its European lines
and borrowed approximately $1.4 million.
Note C _ Accounting for Stock Options
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123, " Accounting for Stock-Based Compensation." This
statement provides that the measure of compensation cost be based on the
value of the award and be recognized over the service period. Companies
may elect to adopt the stock-based compensation accounting recognition
method under the new standard or continue accounting for it under
current guidance, Accounting Principles Board Opinion No. 25 (APB No.
25), "Accounting for Stock Issued to Employees." The Company adopted
the new standard on January 1, 1996 and has elected to continue
accounting for stock-based compensation under APB No. 25.
/page
Part I, Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
When used in this discussion, the words "believes," "anticipates,"
"projects" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from those projected.
Factors which could affect the Company's financial results are described
below. Forward-looking statements are based on estimates as of the date
hereof; estimates are likely to change over time as additional information
becomes known. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements reflecting new
estimates, events or circumstances after the date hereof.
INTERNAL GROWTH
In the first quarter of 1996, management continued its focus on
internal growth, i.e., increasing net operating income from its existing
real estate assets through revenue optimization and cost containment. The
following table summarizes the operating performance of the storage centers
operated for the entire period from January 1, 1995 to March 31, 1996:
<TABLE>
Dollars in thousands except Quarter Ended March 31,
average rent ------------------------------------
1996 1995 % Change
------------ ------------ --------
<S> <C> <C> <C>
Rental revenue $21,181 $20,520 3.2%
Property operating expenses (1) 6,630 6,465 2.6%
------ ------
Net operating income $14,551 $14,055 3.5%
======= =======
Avg. annual rent per sq. ft. (2) $8.87 $8.61 3.0%
Avg. sq. ft. occupancy 87% 87%
Total net rentable sq. ft. 10,200,000 10,200,000
# of properties (3) 157 157
<FN>
(1) Includes all direct property expenses. Does not include property
management fees previously charged by Shurgard Incorporated, the
management company that was acquired in March 1995, nor does it include
any allocation of joint expenses incurred by the Company such as off-
site management personnel.
(2)Average annual rent per square foot is calculated by dividing actual
rent collected by the average number of square feet occupied during the
period.
(3)Includes 100% of the operating results of four properties in which the
Company owns a 30% interest (operating results for these properties are
not consolidated in the Company's financial statement), as well as one
property in which the Company owns a 90% interest (operating results
for this property are consolidated in the Company's financial
statements).
</FN>
</TABLE>
Net operating income for these centers has risen over the same quarter
last year due to increases in revenue, which are a function of changes in
rental rates and occupancy. First quarter revenue gains from 1995 to 1996
were driven entirely by rent increases. Revenue increases were partially
offset by higher operating expenses. Real estate taxes rose 4.7% or
$84,000 due to both assessment and tax rate increases at various properties
throughout the portfolio. The Company regularly reviews assessed values
and appeals them when ever it is believed to be cost effective.
Additionally, repair and maintenance expenses increased 9% primarily due to
snow removal costs incurred during the severe winter in the East.
The following table is a geographical summary of the changes in average
revenues, rates and occupancies from the first quarter of 1995 to the first
quarter of 1996 for the storage centers held by the Company throughout both
quarters:
<TABLE>
% Change in % Change in
% Change in Rate per Sq. Sq. Ft.
Revenues Ft. Occupancy
'95 to `96 '95 to `96 '95 to `96
--------------- -------------- -------------
<S> <C> <C> <C>
Arizona 0.8% 4.7% (5.8%)
California 3.2 3.9 (0.8)
Colorado 0.1 7.8 (7.0)
Florida 4.1 2.8 0.6
Illinois 4.0 5.3 (0.5)
Michigan 8.5 8.7 0.8
New York 0.9 0.9 (1.3)
Oregon 2.3 3.7 (0.2)
Texas (5.3) 1.9 (3.1)
Virginia 7.8 3.0 5.3
Washington 6.2 (0.3) 4.8
Other 5.7 3.5 1.5
------ ------ ------
Total 3.2% 3.0% 0.4%
</TABLE>
The Company maintains a diversified portfolio that it believes offers
protection against the individual market fluctuations that result in
geographical performance differences. In general, rental rate increases
have driven the increase in revenues. In some markets, especially Arizona
and Colorado, occupancy declines offset rate increases resulting in only
slight revenue gains. The San Antonio, TX market has declined as new
competition has affected occupancy levels. The Houston, TX market has
declined due to a fire in 1995; revenue replacement insurance coverage has
expired and new market competition has slowed the rent up of the
reconstructed space.
ACQUISITIONS
During 1995, the Company purchased 15 storage centers. Two centers
were purchased in late March 1995, the rest of these centers were purchased
after the end of the first quarter. The following table summarizes the
operating performance of these properties during the first quarter of 1996:
<TABLE>
Dollars in thousands except
average rent Quarter Ended
March 31, 1996 (1)
-----------------
<S> <C>
Rental revenue $2,296
Property operating expenses (2) 668
------
Net operating income $1,628
======
Avg. annual rent per sq. ft. (3) $10.54
Avg. sq. ft. occupancy 86%
Total net rentable sq. ft. 960,000
# of properties 15
<FN>
(1) Includes the operating results of the three properties owned by
Shurgard Institutional Partners in which the Company owns a 59.5%
interest.
(2) Includes all direct property expenses. Does not include any
allocation of joint expenses incurred by the Company such as off-site
management personnel.
(3) Average annual rent per square foot is calculated by dividing actual
rents collected by the average number of square feet occupied during
the period.
</FN>
</TABLE>
DOMESTIC DEVELOPMENT
At the end of March 1996, the Company opened one new storage center
and the Company anticipates opening five to seven more during the second
quarter of the year. Although not all construction is completed, current
projected cost on this newly opened facility is within 5% of its original
projected cost. Six new storage centers that the Company opened in 1995
are renting up ahead of plan. Four of these projects have not yet reached
break-even for the quarter and thus reduced the Company's net operating
income by $67,000. Although these projects were funded primarily from
stock offering proceeds and thus had no impact on interest expense, they
did impact the Company's FFO per share due to the dilutive effect of the
additional shares issued. For further discussion regarding the potential
impact of development, refer to the Company's annual report on Form 10-K
filed with the Securities and Exchange Commission. The following table
summarizes domestic development and expansion activity as of March 31,
1996:
<TABLE>
Estimated
Completed Cost
# of Projects of Projects
------------- -----------------
<S> <C> <C>
Opened in 1995 6 $17 million
Opened quarter ended March 31, 1996 1 $4 million
Construction in progress 9 $35 million
Land purchased pending construction 3 $10 million
Expansion of existing properties 4 $3 million
</TABLE>
Subsequent to the end of the quarter, the Company closed on two
additional parcels of land on which it intends to develop storage centers.
PROPERTY MANAGEMENT OPERATIONS
In connection with the merger of the Company and Shurgard
Incorportated (the Management Company) in March 1995, the Company
internalized the management of its own properties as well as acquired
certain management contracts and relationships under which it provides
property management services to outside parties. Prior to the merger, the
Company paid a property management fee equal to 6% of revenues to the
Management Company. The Company now incurs the actual costs of property
management and receives property management fees from affiliated
partnerships and outside parties. The first quarter 1995 included property
management fees of $1.26 million and one week of property management
operations providing $57,000 of revenues. The first quarter of 1996
reflects the actual property management costs incurred, $1.35 million in
operating expenses and $400,000 in administrative expenses, as well as
$854,000 in revenues from the management of properties owned by third
parties.
Other Operations
Income from other real estate investments for the first quarter of
1996 has increased $95,000 over the same quarter in 1995. Earnings related
to the Company's investment in partnership units made at the end of 1995
and the beginning of 1996 totaled $71,000. These investments increased the
Company's interest in two affiliated partnerships for which the Company
manages storage centers.
Interest expense decreased $1 million due to a drop in the outstanding
balance on the lines of credit from $49 million at March 31, 1995 to $25
million at March 31, 1996. Additionally, during the quarter, the Company
capitalized $759 in interest related to the construction of storage centers
while no interest was capitalized in the first quarter of 1995.
FUNDS FROM OPERATIONS
Funds from operations (FFO) is used by many financial analysts in
evaluating REIT's financial performance. However, FFO should not be
considered as an alternative to net income (determined in accordance with
generally accepted accounting principles, GAAP) as an indication of the
Company's financial performance or cash from operating activities
(determined in accordance with GAAP) or as a measure of liquidity, nor is
it necessarily indicative of sufficient cash flow to fund all of the
Company's needs. The Company had historically defined FFO as net income
before extraordinary items, plus depreciation and amortization, plus or
minus certain non-recurring revenue and expenses. The Company has modified
its definition of FFO in accordance with the recommendations of NAREIT (the
REIT industry association) to exclude amortization of financing costs.
Accordingly, management now calculates FFO as net income before
extraordinary items, plus depreciation and amortization relating to real
estate activities, plus or minus certain non-recurring revenue and
expenses. The following table reconciles its previous definition to the
new NAREIT definition (in thousands):
<TABLE>
Quarter ended March 31,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Net income before extraordinary $ 7,313 $ 5,354
item
Depreciation/amortization 5,163 3,794
(including JV) ------------ -------------
FFO as previously defined 12,476 9,148
Less deferred financing costs 280 280
------------ -------------
FFO as currently defined $ 12,196 $ 8,868
============ ===========
</TABLE>
Using the NAREIT definition, FFO for 1996 rose $3.3 million over the
1995 FFO. As previously discussed, this growth rate reflects the improved
performance of the original portfolio of properties as well as the addition
of properties acquired and constructed during the year.
Liquidity and Capital Resources
During the quarter, the Company invested $11.2 million in storage centers
and paid an additional $1.4 million on construction retainage balances.
The investments of $11.2 million included approximately $10.8 million in
development projects and $400,000 in capital improvements to its existing
portfolio. The $1.6 million increase in other real estate investments
consists primarily of $1.2 million invested in Shurgard Institutional Fund
LP, an affiliated partnership, and $300,000 invested in joint ventures.
The Company borrowed $14.4 million during the quarter under its lines of
credit to finance development activity described above as well as general
operating needs. At March 31, 1996, the Company's debt to total assets was
26% and its debt to total market capitalization was 21%.
The Company anticipates that cash flow from operating activities, available
lines of credit and the proceeds from its equity offering will continue to
provide adequate capital for planned expansion, principal payments and
dividend payments in accordance with REIT requirements. Cash provided by
operating activities for the three months of operations ended March 31,
1996 was $11 million. Capital available from lines of credit at March 31,
1996 was $79 million. On May 1, 1996, the Company declared a dividend of
$0.47 per share to be paid on May 24, 1996. This dividend is approximately
89% of first quarter FFO.
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: May 1, 1996 By: /s/ Harrell Beck
Harrell Beck
Chief Financial
Officer and Authorized Signatory
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000906933
<NAME> SHURGARD STORAGE CENTERS, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 5,960
<SECURITIES> 0
<RECEIVABLES> 0
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<TOTAL-ASSETS> 617,928
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<BONDS> 132,247
<COMMON> 451,784
0
0
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<SALES> 0
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</TABLE>
