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 June 30, 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 June 30, 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, 23,046,817 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)
June 30, December 31,
1996 1995
Assets: ---------- ----------
Storage centers:
Land $ 110,627 $ 105,224
Buildings and equipment, net 415,090 404,329
Construction in progress 23,941 20,942
--------- ---------
549,658 530,495
Other real estate investments 25,127 21,407
Cash and cash equivalents 3,748 5,683
Restricted cash 6,016 5,551
Other assets, net 47,013 47,258
--------- ---------
Total assets $ 631,562 $ 610,394
========= =========
Liabilities and Shareholders' Equity:
Accounts payable and other liabilities $ 18,991 $ 19,101
Dividends payable 10,669
Lines of credit 38,890 10,905
Notes payable 132,250 131,935
--------- ---------
Total liabilities 190,131 172,610
--------- ---------
Minority interest in other
real estate investments 2,561 3,288
Shareholders' equity:
Class A common stock, $0.001 par value;
120,000,000 authorized; 23,046,817 and
23,039,317 shares issued and outstanding 453,017 452,852
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 (13,061) (17,270)
-------- --------
Total shareholders' equity 438,870 434,496
-------- --------
Total liabilities and
shareholders' equity $ 631,562 $ 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 For the three
months ended months ended
June 30, 1996 June 30, 1995
------------- -------------
Rental revenue $ 24,982 $ 22,771
Revenue from other
real estate investments 461 362
Property management revenue 880 974
--------- ---------
Total revenue 26,323 24,107
--------- ---------
Operating expense 7,266 6,180
Depreciation and amortization 5,314 4,264
Real estate taxes 2,109 1,885
General and administrative 1,162 1,449
--------- ---------
Total expenses 15,851 13,778
--------- ---------
Income from operations 10,472 10,329
Interest and other income 150 161
Interest expense (2,821) (3,852)
-------- ---------
Total other income (expense) (2,671) (3,691)
-------- --------
Net income $ 7,801 $ 6,638
======== ========
Net income per share $ 0.34 $ 0.35
======== ========
<PAGE>
Shurgard Storage Centers, Inc.
Part I, Item 1: Consolidated Statements of Net Income
(unaudited)
(Amounts in thousands except per share data)
For the six For the six
months ended months ended
June 30, 1996 June 30, 1995
------------- -------------
Rental revenue $ 48,513 $ 43,743
Revenue from other
real estate investments 895 701
Property management revenue 1,734 1,031
--------- --------
Total revenue 51,142 45,475
--------- --------
Operating expense 14,192 11,315
Management fees 1,320
Depreciation and amortization 10,399 8,031
Real estate taxes 4,190 3,693
General and administrative 2,244 2,236
-------- --------
Total expenses 31,025 26,595
-------- --------
Income from operations 20,117 18,880
Interest and other income 245 395
Interest expense (5,248) (7,283)
-------- --------
Total other income (expense) (5,003) (6,888)
-------- --------
Net income $ 15,114 $ 11,992
======== ========
Net income per share $ 0.65 $ 0.66
======== ========
<PAGE>
Shurgard Storage Centers, Inc.
Part I, Item 1: Consolidated Statements of Cash Flows
(unaudited)
(Amounts in thousands)
Six months Six months
ended ended
June 30, June 30,
1996 1995
Operating activities: --------- ----------
Net income $15,114 $11,992
Adjustments to reconcile earnings
to net cash provided by operating
activities:
Depreciation and amortization 10,399 8,031
Minority interest in earnings
of joint ventures 39 66
Changes in other accounts:
Restricted cash (465) (193)
Other assets (751) 2,216
Accounts payable and other
liabilities (1,266) (1,510)
Net cash provided by -------- -------
operating activities 23,070 20,602
-------- -------
Investing activities:
Construction, acquisition and
improvement of storage centers (27,106) (18,503)
Purchase of other real estate
investments (4,508) (6,530)
Purchase of non-competition
agreements (304)
Purchase of amortizable assets (200)
Investment in property management
company (428)
Investment in limited partnership (35,308)
Distributions in excess of earnings
from investment in joint partnerships 116 270
Net cash used in investing -------- --------
activities (31,802) (60,699)
-------- --------
Financing activities:
Proceeds from stock offering 96,944
Proceeds from notes payable 315
Net proceeds from (payments on)
line of credit 27,985 (46,337)
Payment of financing costs (1,353)
Principal payments on notes payable (21)
Proceeds from exercise of
stock options 165
Dividends paid (21,574) (15,286)
Distributions to minority partners (94)
Net cash provided by financing-------- -------
activities 6,797 33,947
-------- -------
Decrease in cash and cash equivalents (1,935) (6,150)
Cash and cash equivalents at
beginning of year 5,683 13,162
-------- -------
Cash and cash equivalents at
end of period $ 3,748 $ 7,012
======== ========
Supplemental schedule of cash flow information:
Cash paid during the period
for interest $ 6,523 $ 7,492
========= ========
<PAGE>
Shurgard Storage Centers, Inc.
Part I, Item 1: Notes to Consolidated Financial Statements
Six Months Ended June 30, 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.
Effective January 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
Adoption of this standard had no impact on the Company's financial
statements.
Weighted average shares outstanding for the three months ended June
30, 1996 and 1995 were 23,201,187 and 19,140,701, respectively.
Weighted average shares outstanding for the six months ended June
30, 1996 and 1995 were 23,199,023 and 18,117,241, respectively.
Note B _ Lines of Credit
During 1996, the Company borrowed an additional $26.2 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 1996, the Company obtained an
additional $10.9 million of available credit under its European
lines and borrowed approximately $1.8 million. Subsequent to the
end of the quarter, the Company received an extension of one of its
lines of credit from August 18, 1996 to September 18, 1996 while
negotiations on a new agreement are underway.
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 and in the Company's Form 10-K. 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 1996, management continued its efforts to maximize 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 owned through-out the period from January 1, 1995 to June 30,
1996:
Dollars in thousands Quarter Ended Six Months Ended
except average rent June 30, June 30,
----------------------- -----------------------
1996 1995 Change 1996 1995 Change
------- ------- ------ ------- ------- ------
Rental revenue $21,814 $20,906 4.3% $42,617 $41,080 3.7%
Property operating
expenses (1) 6,521 6,205 5.1% 13,024 12,551 3.8%
------- ------- ------- -------
Net operating income $15,293 $14,701 4.0% $29,593 $28,529 3.7%
======= ======= ======= =======
Avg. annual rent per $9.07 $8.80 3.1% $8.98 $8.74 2.8%
sq.ft. (2)
Avg. sq.ft. occupancy 91% 89% 90% 89%
Total net rentable 10,000,000 10,000,000 10,000,000 10,000,000
sq.ft.
# of properties (3) 154 154 154 154
_______________
(1)Includes all direct property expenses. Does not include property
management fees previously charged by the Management Company 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 30% 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 90% of the operating results of one property
in which the Company owns a 90% interest (operating results for
this property are consolidated in the Company's financial
statements).
Net operating income (NOI) 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. Second quarter as
well as six month revenue gains from 1995 to 1996 were driven primarily
by rent increases with slight increases in occupancy over the same
periods. The same store growth rate of revenue and NOI has slowed
compared to the last several years as the significant increases in
occupancy levels which helped drive the historical growth rates have
slowed. Management believes that occupancy in the high 80's to low 90's
is "full" for the self storage industry. Because occupancies have
reached these levels, management believes that future growth will
result primarily from rate increases. The Company's ability to
increase rates may be effected by increasing competition in certain
markets.
Revenue increases were partially offset by higher operating
expenses. Real estate taxes rose 5.5% or $96,000 for the quarter and
5.2% or $185,000 for the six months ended June 30, 1996. Both of
these increases were due to assessment and mill rate increases at
various properties throughout the portfolio. The Company regularly
reviews assessed values and appeals them whenever it is believed to be
cost effective. Additionally, repair and maintenance expenses
increased 9% for both periods primarily due to the severe winter in the
East. Remaining increases relate to personnel costs and yellow page
advertising rates.
The following table is a geographical summary of the changes in
average revenues, rates and occupancies from the second quarter of 1995
to the second quarter of 1996 for the storage centers held by the
Company throughout both quarters:
% Change
% Change % Change in # of
in Rents in Rate Sq. Ft.
per Sq.Ft. Occupancied
'95 to '96 '95 to '96 '95 to '96
---------- ---------- ----------
Arizona (2.4)% 0.9% (3.3%)
California 6.9 2.7 4.0
Colorado (2.7) 10.3 (11.8)
Florida 4.3 3.1 1.2
Illinois 5.7 4.5 1.1
Michigan 8.9 10.8 (1.7)
New York 1.5 5.0 (3.4)
Oregon 7.3 7.2 0.1
Texas (2.8) (3.0) 0.2
Virginia 7.2 3.4 3.7
Washington 7.7 2.3 5.3
Other 7.2 4.4 2.7
----- ----- -----
Total 4.6% 3.1% 1.5%
===== ===== =====
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 lower revenue. The decline in Arizona is due
primarily to the conversion of units to climate controlled space at one
facility. During the contruction phase of this project it was
necessary to vacate these units, but when complete they are expected to
command higher rent. The San Antonio, TX market has declined as new
competition (ten in the last year) has forced rate decreases; storage
development in this market continues with five new projects under
construction and management expects the market will continue to be
impacted by this development. 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, twelve were purchased in May
1995 and one was purchased in late June 1995. The following table
summarizes the operating performance of these properties during 1996:
Dollars in thousands Quarter Ended Six Months Ended
except average rent June 30, June 30,
------------------------- -----------------------
1996 1995 Change 1996 1995 Change
------ ------ ------ ------ ------- ------
Rental revenue $2,345 $1,240 $1,105 $4,490 $1,240 $3,250
Property operating
expenses (1) 597 296 301 1,206 296 910
------ ----- ----- ------ ------ ------
Net operating income $1,748 $944 $804 $3,284 $944 $2,340
------ ----- ----- ------ ------ ------
Avg. annual rent per $10.53 $10.37 $10.46 $10.37
sq.ft. (2)
Avg. sq.ft. occupancy 91% 85% 89% 85%
Total net rentable 910,000 840,000 910,000 840,000
sq.ft.
# of properties (3) 15 14 15 14
# of property-months (4) 45 24 90 24
(1) Includes all direct property expenses. Does not include property
management fees previously charged by the Management Company 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 rents collected by the average number of square feet
occupied during the period.
(3) Includes 59.5% of the operating results of the three properties
owned by Shurgard Institutional Partners in which the Company owns
a 59.5% interest.
(4) Represents the sum of the number of months each property operated
during the year.
The increases in revenue and operating expenses reflect the additional
property-months of operating activity as well as the increasing rates
and occupancy of several of the properties purchased.
DOMESTIC DEVELOPMENT
In addition to the Washington storage center opened at the end of
March 1996, the Company opened six facilities during the second
quarter. The six projects opened in 1995 are renting up ahead of plan,
as are the seven projects opened during 1996. The following table
summarizes revenues from opening to June 30, 1996 for domestic
development projects compared to the original pro forma made at the
time the projects were approved:
Revenue from
Opening to June 30, 1996
# of ------------------------
Developments completed in: properties Pro Forma Actual
----------- --------- ----------
1995 6 $ 679,000 $1,095,000
1996 7 $ 24,000 $ 82,000
Five of these thirteen projects together provided $92,000 in net
operating income; the remaining eight have not yet reached break-even
for the quarter and thus reduced the Company's net operating income by
$45,000. These projects were funded from stock offering proceeds,
operating cash flow and proceeds from the Company's line of credit and
they impacted the Company's FFO for the quarter ended June 30, 1996 by
approximately $500,000. 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 June
30, 1996:
Estimated
Completed Cost
# of of
Projects Projects
--------- -------------
New developments:
Opened in 1995 6 $17 million
Opened year to date June 30, 1996 7 $24 million
Construction in progress 11 $43 million
Land purchased pending 1 $3 million
construction
Expansion of existing properties:
Opened year to date June 30, 1996 2 $2 million
Construction in progress 2 $2 million
Land purchased pending 1 $3 million
construction
PROPERTY MANAGEMENT OPERATIONS
In connection with the merger of the Company and Shurgard
Incorporated (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.
OTHER OPERATIONS
Income for other real estate investments for the second quarter of
1996 has increased $99,000 over the same quarter in 1995 due primarily
to the Company's investment in partnership units made at the end of
1995 and the beginning of 1996. These investments increased the
Company's interest in two affiliated partnerships for which the Company
manages storage centers. The increase for the six months ended June
30, 1996 is also primarily a result of this investment.
Interest expense decreased $1 million due to a drop in the average
outstanding balance on the lines of credit from the second quarter of
1995 to the second quarter of 1996. Additionally, during the second
quarter of 1996, the Company capitalized $511,000 in interest related
to the construction of storage centers while only $201,000 in interest
was capitalized in the second quarter of 1995. The decline in interest
expense for the six months ended June 30, 1996 reflect the same changes
in debt balances. Interest capitalized for the six months ended June
30, 1996 was $1,270,000 compared to $201,000 for the same period in
1995.
Net income per share decreased for the three and six months ended
June 30, 1996 compared to the same periods in 1995 due to the
development projects opened during the last year and the issuance of
4.9 million shares in late June and early July 1995. Proceeds from
this stock issuance were used to repay short term loans and although
interest expense declined, outstanding shares increased. The issuance
of additional shares will no longer have an impact on third quarter
comparisons as outstanding shares will be approximately equal. However,
the Company's planned development will continue to impact net income
and net income per share.
FUNDS FROM OPERATIONS
Management believes that funds from operations (FFO) is a relevant
measure of performance used in evaluating REIT's and assists industry
analysts in comparing the performance between REIT's. 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 defines FFO,
consistent with the NAREIT recommendations, 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 net income before
extraordinary items to the Company's definition (in thousands):
Quarter ended Six months ended
June 30, June 30,
----------------- ----------------
1996 1995 1996 1995
------ ------- ------- ------
Net income before
extraordinary item $ 7,801 $ 6,638 $15,114 $11,992
Depreciation/amortization 5,361 4,348 10,524 8,142
(including JV)
Less deferred financing costs (280) (280) (560) (560)
------- -------- ------- -------
FFO as currently defined $ 12,882 $ 10,706 $25,078 $19,574
======= ======== ======= =======
FFO for the second quarter of 1996 rose approximately $2.2 million
over the same quarter of 1995. FFO for the six months ended June 30,
1996 rose $5.5 million over the same period in 1995. 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 first six months of 1996, the Company invested $27.1 million
in storage centers, including approximately $25.9 million in
development projects and $1.2 million in capital improvements to its
existing portfolio. The $4.5 million increase in other real estate
investments consists primarily of $2.2 million invested in affiliated
partnerships, and $2.3 million invested in joint ventures.
The Company has borrowed $28 million during 1996 under its lines of
credit to finance development activity described above as well as
general operating needs. At June 30, 1996, the Company's debt to total
assets was 27% and its debt to total market capitalization was 23%.
The Company anticipates that cash flow from operating activities,
available lines of credit, expected new lines of credit and the
proceeds from future debt or equity offerings, if any, will continue to
provide adequate capital for planned portfolio growth, principal
payments and dividend payments in accordance with REIT requirements.
Cash provided by operating activities for the six months of operations
ended June 30, 1996 was $23 million. Capital available from lines of
credit at June 30, 1996 was $75 million (including $9 million on the
Belgian lines). One of the Company's $50 million lines of credit
expires on September 18, 1996 and management is currently negotiating
terms of a new agreement. On July 29, 1996, the Company declared a
dividend of $0.47 per share to be paid on August 21, 1996. This
dividend is approximately 84% of second quarter FFO.
PART II, Item 1: Legal Proceedings
On July 16, 1996, Irving and Roberta B Schuman (the Plaintiffs),
unitholders of IDS/Shurgard Income Growth Partners L.P. II (IDS 2) ,
filed a purported class and derivative action complaint (the Complaint)
on behalf of themselves and all other unitholders of IDS /Shurgard
Income Growth Partners, L.P., IDS2 and IDS/Shurgard Income Growth
Partners L.P. III (together, the Partnerships) and derivatively on
behalf of the Partnerships in the Superior Court of the State of
Washington in and for the County of King naming the Company, Charles K.
Barbo, Arthur W. Buerk, Donald B. Daniels, Kristin H. Stred, Harrell L.
Beck, Michael Rowe, Mark Hall, Shurgard Associates L.P., Shurgard
Associates L.P. II, Shurgard Associates L.P. III and Shurgard General
Partner, Inc. as Defendants and the Partnerships as Nominal Defendants.
In the Complaint, the Plaintiffs asserted claims for breach of
fiduciary duty, aiding and abetting a breach of fiduciary duty, breach
of contract and fraud against each of the Defendants. The Plaintiffs
seek monetary damages and equitable relief, including an order
enjoining the consummation of the Company's tender offers for units of
limited partnership interest in the Partnership (the Offers), or
alternatively, an order requiring the Defendants to issue disclosures
to correct allegedly false and misleading statements and omissions of
material facts in all documents prepared, filed with the SEC, issued or
disseminated to the unitholders of the Partnerships by Defendants in
connection with the Offers.
The Defendants intend to vigorously defend the lawsuit.
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: August 13, 1996 By: /s/ Harrell Beck
-----------------
Harrell Beck
Chief Financial Officer and Authorized Signatory
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<PERIOD-END> JUN-30-1996
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