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 September 30, 1997
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, 1997 Commission file number 0-23466
SHURGARD STORAGE CENTERS, INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 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 28, 1997:
Class A Common Stock, $.001 par value, 28,424,867 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)
<TABLE>
Sept. 30, Dec. 31,
1997 1996
-------- -------
<S> <C> <C>
Assets:
Storage centers:
Land $ 157,498 $ 142,127
Buildings and equipment, net 592,899 538,180
Construction in progress 58,123 32,531
-------- --------
808,520 712,838
Other real estate investments 42,563 27,769
Cash and cash equivalents 8,198 3,239
Restricted cash 6,683 6,814
Other assets 54,455 53,823
------- -------
Total assets $ 920,419 $ 804,483
======== ========
Liabilities and Shareholders' Equity:
Accounts payable and other liabilities $ 31,045 $ 29,964
Lines of credit 23,090 140,997
Notes payable 234,819 131,794
------- -------
Total liabilities 288,954 302,755
------- -------
Minority interest in other real estate
investments 16,422 3,217
Shareholders' equity:
Series B Cumulative Redeemable Preferred
Stock, $0.001 par value; 2,300,000
authorized; 2,000,000 issued and
outstanding 48,164
Class A common stock, $0.001 par value;
120,000,000 authorized; 28,424,068 and
25,509,348 issued and outstanding 595,024 516,796
Class B common stock, $0.001 par value;
500,000 authorized, 154,604 issued
and outstanding; net of loans to
shareholders of $4,002 (1,086) (1,086)
Accumulated distributions in excess
of earnings (27,059) (17,199)
-------- --------
Total shareholders' equity 615,043 498,511
------- -------
Total liabilities and
shareholders' equity $ 920,419 $ 804,483
======== ========
</TABLE>
<PAGE>
Shurgard Storage Centers, Inc.
Part I, Item 1: Consolidated Statements of Net Income
(unaudited)
(Amounts in thousands except per share data)
<TABLE>
For the three For the three
months ended months ended
Sept. 30, 1997 Sept 30, 1996
-------------- -------------
<S> <C> <C>
Rental revenue $ 36,274 $ 26,510
Revenue from other
real estate investments (30) 704
Property management revenue 841 837
------- -------
Total revenue 37,085 28,051
------- -------
Operating expense 10,666 7,695
Depreciation and amortization 6,958 4,979
Real estate taxes 2,935 2,139
General and administrative 919 1,142
------ ------
Total expenses 21,478 15,955
------ ------
Income from operations 15,607 12,096
------ ------
Interest and other income 770 220
Interest expense (4,555) (3,287)
------- -------
Total other income
(expense) (3,785) (3,067)
------- -------
Net income $ 11,822 $ 9,029
======= ======
Net income per share $ 0.38 $ 0.39
======== =======
Distribution per share $ 0.48 $ 0.47
======== =======
</TABLE>
<PAGE>
Shurgard Storage Centers, Inc.
Part I, Item 1: Consolidated Statements of Net Income
(unaudited)
(Amounts in thousands except per share data)
<TABLE>
For the nine For the nine
months ended months ended
Sept. 30, 1997 Sept. 30, 1996
------------- --------------
<S> <C> <C>
Rental revenue $ 100,540 $ 75,023
Revenue from other
real estate investments 114 1,599
Property management revenue 1,864 2,571
------- -------
Total revenue 102,518 79,193
------- -------
Operating expense 28,797 21,887
Depreciation and amortization 19,991 15,378
Real estate taxes 8,236 6,329
General and administrative 3,005 3,386
------ ------
Total expenses 60,029 46,980
------ ------
Income from operations 42,489 32,213
------ ------
Interest and other income 2,076 465
Interest expense (12,686) (8,535)
-------- -------
Total other income
(expense) (10,610) (8,070)
-------- -------
Net income $ 31,879 $ 24,143
======= =======
Net income per share $ 1.08 $ 1.04
======= =======
Distribution per share $ 1.43 $ 1.40
======= ========
</TABLE>
<PAGE>
Shurgard Storage Centers, Inc.
Part I, Item 1: Consolidated Statements of Cash Flows
(unaudited)
(Amounts in thousands)
<TABLE>
Nine months Nine months
ended ended
Sept. 30, Sept. 30,
1997 1996
---------- ----------
<S> <C> <C>
Operating activities:
Net income $31,879 $24,143
Adjustments to reconcile earnings
to net cash provided by operating
activities:
Depreciation and amortization 19,991 15,378
Minority interest in earnings
of joint ventures (1,355) (65)
Changes in other accounts:
Restricted cash 131 (585)
Other assets (1) (3,134)
Accounts payable and other
liabilities 3,836 1,104
------ -------
Net cash provided by operating
activities 54,481 36,841
------ -------
Investing activities:
Construction, acquisition and
improvement of storage centers (116,256) (49,280)
Purchase of other real estate
investments (17,647) (49,453)
Purchase of non-competition
agreements (1,464) (929)
Distributions in excess of earnings
from investment in joint
partnerships 1,510 45
------- --------
Net cash used in investing
activities (133,857) (99,617)
--------- --------
Financing activities:
Proceeds from notes payable 103,026 315
Principal payments on notes payable (499)
Proceeds (payments) on lines
of credit (117,907) 93,852
Return of capital invested 9,272
Payment of loan costs (1,341)
Proceeds from exercise of stock
options and dividend reinvestment
plan 346 166
Cancellation of Company stock (253)
Distributions paid (41,739) (32,478)
Proceeds from preferred stock
offering, net 48,164
Proceeds from common stock
offerings, net 78,135
Contribution by minority interest 7,338 542
Distributions to minority partners (706) (109)
------- -------
Net cash provided by
financing activities 84,335 61,789
------ ------
Increase (decrease) in cash and cash
equivalents 4,959 (987)
Cash and cash equivalents at
beginning of year 3,239 5,683
------ ------
Cash and cash equivalents at
end of period $ 8,198 $ 4,696
======= =======
Supplemental schedule of cash flow information:
Cash paid during the period for
interest $ 11,541 $ 10,119
======= =======
</TABLE>
<PAGE>
Shurgard Storage Centers, Inc.
Part I, Item 1: Notes to Consolidated Financial Statements
Nine Months Ended September 30, 1997
(unaudited)
Note A _ Basis of Presentation
The consolidated financial statements include the accounts of
Shurgard Storage Centers, Inc. and its subsidiaries, including
U.S. and foreign subsidiaries. All intercompany balances and
transactions have been eliminated upon consolidation.
The consolidated financial statements included in this report are
unaudited. In our opinion, 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
our 1996 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 us 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 February 1, 1997, we adopted Statement of Financial
Accounting Standards No. 128 "Earnings per Share." We do not
believe adoption of this standard will have a material impact on
our financial statements.
Weighted average shares outstanding for the three months ended
September 30, 1997 and 1996 were 28,009,919 and 23,201,451,
respectively, and for the nine months ended September 30, 1997
and 1996 were 27,770,047 and 23,199,838, respectively.
Certain amounts in the 1996 financial statements have been
reclassified to conform to the current presentation.
Note B _ Lines of Credit
We have an unsecured domestic line of credit to borrow up to a
maximum of $100 million at a spread over LIBOR, maturing
September 1999. The amount available and the spread vary based
on the terms of the agreement; as of September 30, 1997, the
available amount was $100 million, of which $13.0 million was
outstanding, and the spread was 100 basis points over LIBOR. In
September 1997, we repaid $17.6 million on this line with a
portion of the proceeds from the issuance of Class A common
stock.
Note C _ European Operations
In March 1997, we entered into a joint venture agreement with two
unaffiliated entities. We have a minority interest in this joint
venture, which borrowed $19 million to purchase a majority
limited partner interest in SSC Benelux & Co., SCS (Benelux SCS),
thus reducing our equity position in Benelux SCS from 85.6% to
12.5%. This transaction resulted in the return of $9.3 million
for loans we had made to Benelux SCS. We, together with one of
our partners, have the right to increase our participation in the
joint venture through an equity contribution.
Note D _ Storage Centers
Building and equipment are presented net of accumulated
depreciation of $65.4 million and $45.9 million as of September
30, 1997 and December 31, 1996, respectively.
Note E _ Equity
In January and February 1997, we raised $59.3 million through the
sale of 2.2 million shares of Class A Common Stock. On April 16,
1997, we raised $50 million ($48.2 million in net proceeds)
through the sale of 2 million shares of Series B Cumulative
Redeemable Preferred Stock at $25 per share. These preferred
shares require quarterly distribution payments totaling 8.8% per
year and are callable at our option after five years. On
September 16, 1997, we raised $18.9 million through the sale of
727,080 shares of Class A Common Stock at $27.50 per share less a
5% discount.
Note F _ Long-Term Debt
On April 25, 1997, we issued $100 million in senior unsecured
notes, $50 million of which are seven year notes due April 2004
bearing interest at 7.5% and $50 million of which are ten year
notes due April 2007 bearing interest at 7.625%. The notes
require semi-annual interest due April 25th and October 25th.
Net proceeds totaled $98.7 million.
Note G _ Contingent Liability
As one of three general partners in a joint venture, we are
contingently liable for $24.5 million in debt at September 30,
1997 (See Note C).
Part I, Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
When used in this discussion and elsewhere in this Quarterly
Report on Form 10-Q, the words "believes," "anticipates," "projects"
and similar expressions are intended to identify forward-looking
statements regarding our business and financial performance. Such
statements are subject to risks that could cause actual results to
differ materially including the risk that competition from new self
storage facilities or other storage alternatives may cause rents to
decline and may cause occupancy rates to drop. We are also at risk
for increases in labor, taxes, marketing, and other operating and
construction expenses. Other factors which could affect our
financial results are described below and in Item 1 (Business) of
our Annual Report on Form 10-K. Forward-looking statements are
based on estimates as of the date hereof. We disclaim any
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
During the third quarter of 1997, we continued our focus on
increasing net operating income from our existing real estate
assets. One of the ways we analyze our performance is to measure
year over year improvements in same store operating results. We
define "same stores" each quarter as those stabilized storage
centers which were owned for the entire quarter of both comparison
years. Other storage companies may define same stores differently,
which will affect comparability. The following tables summarize
same store operating performance for the third quarter and the first
nine months of 1997 and 1996:
<TABLE>
Dollars in thousands Quarter Ended Sept. 30
except average rent ------------------------
<S> <C> <C> <C>
1997 1996 % Change
----- ---- --------
Rental revenue $27,447 $25,972 5.7%
Property operating 7,623 7,320 4.1%
expenses (1) ------ ------
Net operating income $19,824 $18,652 6.3%
====== ======
Avg. annual rent per sq. $9.82 $9.24 6.3%
ft. (2)
Avg. sq. ft. occupancy 90% 91%
Total net rentable sq. 11,400,000 11,400,000
ft.
# of properties (3) 169 169
</TABLE>
_______________
(1)Includes all direct property expenses. Does not 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 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).
<TABLE>
Dollars in thousands Nine Months Ended Sept. 30,
except average rent ---------------------------
1997 1996 % Change
------ ------ --------
<S> <C> <C> <C>
Rental revenue $78,646 $74,788 5.2%
Property operating 22,405 22,269 0.6%
expenses (1) ------ ------
Net operating income $56,241 $52,519 7.1%
====== ======
Avg. annual rent per sq. $9.61 $9.20 4.5%
ft. (2)
Avg. sq. ft. occupancy 88% 88%
Total net rentable sq. 11,400,000 11,300,000
ft.
# of properties (3) 169 169
</TABLE>
_______________
(1)Includes all direct property expenses. Does not 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 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 for these centers has risen for both the
quarter and the first nine months over the same period last year due
primarily to increases in revenue, which are a function of changes
in rental rates and occupancy. Revenue gains from 1996 to 1997 were
driven primarily by rent increases due to the revenue optimization
program discussed in our annual report. Operating expenses for the
first six months declined below 1996 levels, but as expected showed
a modest increase over 1996 in the third quarter. We have
experienced tightening in the labor markets in several areas of the
US and, as a result, have experienced wage increases during the
quarter. Additionally, store employee performance bonuses were
higher in 1997 than in 1996 reflecting operating results that were
above expectation. Real estate taxes rose only 3.0% or $167,000 as
assessment and tax rate increases at various properties throughout
the portfolio were partially offset by refunds received for several
California properties during the second quarter. Although we expect
real estate taxes to continue to increase, we regularly review
assessed values and appeal them when we believe it is cost
effective.
The following table is a geographical summary of the changes in
weighted average rents, rates and occupancies for the first nine
months of the applicable year for the same store storage centers as
defined in the previous table:
<TABLE>
% % Change
% Change Change in No. of
in Rents in Rate Sq. Ft.
per Sq. Ft. Occupied
-------- ----------- ----------
'96 to '97 '96 to '97 '96 to '97
<S> <C> <C> <C>
Arizona 2.6% 1.1% 1.5%
California 7.6 5.6 1.9
Florida 7.9 2.8 4.9
Illinois 6.9 7.5 (0.6)
Maryland 2.3 5.0 (2.6)
Michigan 2.3 4.7 (2.3)
New York 7.4 8.7 (1.2)
Oregon 0.7 6.3 (5.3)
Texas 1.8 0.7 1.1
Virginia 0.7 6.8 (5.7)
Washington 9.7 4.7 4.8
Other 2.5 4.0 (1.7)
---- ---- -----
Aggregate 5.0% 4.5% 0.4%
</TABLE>
We believe our diversified portfolio minimizes the impact of
individual market fluctuations that result from economic or
competitive changes within those markets. In general, rental rate
increases have driven the increase in revenues. Market conditions
in San Francisco, CA, Ft. Lauderdale, FL and Seattle, WA contributed
to above average revenue increases. The completion of significant
building improvements at our New York stores have improved our
product quality and allowed our managers to increase rates. New
York and Chicago, in particular, demonstrate our use of revenue
optimization; although occupancy declined in both markets, revenues
rose well above average due to rate increases. Portland has
experienced a drop in occupancy due to increased competition in our
local market areas as well as some price sensitivity in the market.
Oregon City center revenue has declined 8% due partially to a fire
during the third quarter and partially due to new competition. The
decline in the Dallas, TX market was offset by gains in the Houston,
TX market. Many of our older storage centers in the Dallas, TX.
market are being impacted by new competitors entering their
immediate trade area. We expect to see some continued softening of
rates and occupancy declines until this new supply is absorbed. Our
results in Houston, TX show the recovery from a fire in 1995 which
impacted 1996 revenues. The Washington DC market made significant
increases in rates which were offset by a decline in occupancy.
DOMESTIC ACQUISITIONS
During the first nine months of 1997, we purchased 21 storage
centers totaling 1.2 million net rentable square feet for a total
cost of $58 million (including related non-competition agreements).
These acquisitions were located as follows: two in Arizona, one in
California, one in Florida, two in Georgia, three in Michigan, four
in Texas, and eight in Washington. During 1996, we purchased 40
storage centers (four in which we already owned a 30% interest) at a
total cost of $128.2 million. All of these properties were
purchased late in the third and fourth quarters and therefore had
minimal effect on our operations in 1996. The following tables
summarize the operating performance of these properties during the
third quarter and first nine months of 1997:
<TABLE>
<CAPTION>
Dollars in thousands Stores Acquired in 1997
except average rent -----------------------
Quarter Nine months
ended ended
Sept. 30, Sept.30,
1997 1997
-------- --------
<S> <C> <C>
Rental revenue $1,379 $1,971
Property operating 585 851
expenses (2) ----- -----
Net operating income $794 $1,120
===== =====
Avg. annual rent per $7.93 $7.47
sq.ft. (3)
Avg. sq.ft. occupancy 80% 79%
Total net rentable 1,155,000 1,155,000
sq.ft.
Number of properties 21 21
# of property-months (4) 37 61
</TABLE>
<TABLE>
Dollars in thousands Stores Acquired in 1996 (1)
except average rent ---------------------------
Quarter Nine months
ended ended
Sept. 30, Sept. 30,
1997 1997
-------- ----------
<S> <C> <C>
Rental revenue $5,178 $15,070
Property operating 1,506 4,281
expenses (2) ----- -----
Net operating income $3,672 $10,789
===== ======
Avg. annual rent per $8.86 $8.94
sq.ft. (3)
Avg. sq.ft. occupancy 89% 88%
Total net rentable 2,400,000 2,400,000
sq.ft.
Number of properties 40 40
# of property-months (4) 120 360
</TABLE>
(1) Includes 70% of the operating results of the four properties
previously owned by Shurgard Joint Partners II through which
the Company owned a 30% 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.
(4) Represents the sum of the number of months we operated each
property during the applicable period.
DOMESTIC DEVELOPMENT
We opened 11 domestic storage centers in the first nine months
of 1997 (including five through joint ventures in Florida), 13
during 1996 (including one through a joint venture) and six during
1995 (including three through joint ventures). The 11 projects
opened in 1997 will total approximately 704,000 net rentable square
feet when all phases are complete, with an estimated total cost of
$42.3 million. In total, the 11 stores opened in 1997 are currently
showing both revenue and net operating income above projected
levels. However, these stores have not been open long enough to
have adequate operational data for projecting future performance.
The following table summarizes operating performance for those
projects opened in 1996 and 1995.
<TABLE>
Number of Estimated Total Net Total 9/30/97 Average Projected
Properties Total Rentable Cost per Average Rental Rate Annual
Cost Sq. Ft. Sq. Ft. Occupancy per Sq.Ft. Yield(1)
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Opened 13 $44.8 million 822,000 $55 69% $10.59 13%
in 1996
Opened 6 $18.2 million 379,00 $48 83% $10.03 13%
in 1995
</TABLE>
(1) The projected average annual yield on estimated total cost of
these projects assumes the projects are at 85% occupancy at current
rates.
In total, the 13 storage centers opened in 1996 are renting up
ahead of plan; the average occupancy of these stores as of September
30, 1997 was 69%. The average rental rate of these stores for
September 30, 1997 was $10.59 per square foot. Together, these
stores provided $1,723,000 in net operating income for the first
nine months of 1997 compared to $113,000 for the first nine months
of 1996. For these 13 projects, total development costs, including
land, averaged $55 per net rentable square foot, which is 105% of
our original budgeted cost. The 1996 developments cost more per
square foot than the 1995 developments primarily because of
differences in land costs. We currently expect these stores to take
an average of 18 months to reach maturity (defined as 85% occupancy)
compared to our original projections of 21 months. The projected
average annual yield on estimated total cost of these nine projects
is 13%, assuming the projects are at 85% occupancy at current rates.
In total, the six storage centers opened in 1995 are also
renting up ahead of plan; the average occupancy of these stores as
of September 30, 1997 was 83%. The average rental rate of these
stores for September 30, 1997 was $10.03 per square foot. These
projects together provided first nine months net operating income of
$982,000 for 1997 compared to $451,000 for 1996. For these six
stores, total development costs, including land, averaged $48 per
net rentable square foot, which is 102% of the original budgeted
cost. The projected average annual yield on the estimated total cost
of these six projects is 13%, assuming the projects reach 85%
occupancy at current rates.
There is of course no assurance that these projections
regarding 1995 and 1996 development projects will come to fruition
as numerous factors affect the actual yields and rent up periods.
These factors include the possible inability to reach and maintain
assumed occupancy levels and rates due to increased competition from
newly developed self storage properties, existing self storage
properties and other storage alternatives, and possible increases in
expenses such as property taxes, labor, and marketing, among others.
In addition to the above completed developments, we have 19
storage centers currently under construction (five of these are
being developed in California, Tennessee and Florida through joint
ventures). As a general rule, to limit the risks of development, we
do not purchase land until the permitting process is complete.
Construction usually begins shortly after we obtain title to the
land. The following table summarizes domestic development projects
in progress at September 30, 1997:
<TABLE>
Number of Estimated
Projects Completed Cost
of Projects
-------- -------------
<S> <C> <C>
New Domestic Developments:
Construction in progress 19 $80.0 million
Land purchased pending 3 $10.2 million
construction
Expansion of Existing
Properties:
Opened during 1997 2 $0.7 million
Construction in progress 1 $0.9 million
</TABLE>
In the current real estate environment, we believe that a long-
term strategy of growth through development will result in superior
returns over the long-term. A development strategy, however,
creates a short-term dilution of earnings during the rent-up phase
of a project. For further discussion of the effect of this
dilution, see our Annual Report.
EUROPEAN OPERATIONS
During the first nine months of 1997, two new stores were
opened in Belgium. When all phases are complete they will contain
approximately 141,000 net rentable square feet. In September 1997,
we purchased three operating storage centers in France. The two
facilities in Paris were purchased through a 100% owned Belgian
subsidiary for $1.9 million. These recently constructed centers
contain approximately 79,000 net rentable square feet and are built
on leased land. The storage center in Nice was purchased for $3.9
million through Benelux SCS, in which we have a 12.5% interest.
This storage center is 81% occupied and contains approximately
43,000 net rentable square feet. We are evaluating additional sites
in Belgium, as well as opportunities in Sweden, France, and England.
In March 1997, we entered into a joint venture agreement with
two unaffiliated entities. We have a minority interest in this
joint venture, which borrowed $19.3 million to purchase a majority
limited partner interest in Benelux SCS, thus reducing our equity
position in Benelux SCS from 85.6% to 12.5%. This transaction
resulted in the return of $9.3 million for loans we had made to
Benelux SCS. We, together with one of our partners, have the right
to increase our participation in the joint venture through an equity
contribution.
OTHER OPERATIONS
Income from other real estate investments for the first nine
months of 1997 was $114,000, a decrease of $1,485,000 from the same
period in 1996. As discussed in our Annual Report, we invested in
Shurgard Storage To Go, Inc., a start-up containerized storage
business that opened its first four warehouses during the first
nine months of 1997. Our pro rata share of losses for the first
nine months of 1997 was approximately $1,121,000. In November 1996,
we acquired the remaining interest (70%) in Shurgard Joint Partners
II (SJPII) and the earnings from the properties previously owned by
SJPII are now consolidated. Our pro rata share of SJPII earnings in
the first nine months of 1996 (30%) was $239,000. Additionally, Tennessee
and Florida development joint ventures opened four new stores in
1997 which are creating negative cash flow during this initial rent-
up phase.
Property management revenues decreased $707,000 primarily due
to the purchase of the three partnerships in November 1996 (the IDS
partnerships), which owned 40 properties. We previously received
fees for managing the properties owned by these partnerships.
Interest expense increased $4.2 million due to an increase in
the outstanding debt balance (both lines of credit and notes
payable) from $237 million at September 30, 1996 to $258 million at
September 30, 1997. Additionally, during 1997, we capitalized
$2,239,000 in interest related to the construction of storage
centers while $1,584,000 in interest was capitalized in the first
nine months of 1996.
FUNDS FROM OPERATIONS
Funds from operations (FFO), pursuant to the National
Association of Real Estate Investment Trusts' (NAREIT) March 1995,
White Paper on Funds from Operations, is defined as net income
(calculated in accordance with GAAP) excluding gains or losses from
debt restructuring and sales of real estate, plus depreciation of
real estate and amortization of intangible assets exclusive of
deferred financing costs less dividends paid to preferred
stockholders. Contributions to FFO from unconsolidated entities in
which the reporting entity holds an active interest are to be
reflected in FFO on the same basis. We believe FFO is a meaningful
disclosure as a supplement to net income because net income
implicitly assumes that the value of assets diminish predictably
over time while we believe that real estate values have historically
risen or fallen with market conditions. FFO is not a substitute for
net cash provided by operating activities or net income computed in
accordance with GAAP, nor should it be considered an alternative
indication of our operating performance or liquidity. In addition,
FFO is not comparable to "funds from operations" reported by other
REITs that do not define funds from operations in accordance with
the NAREIT definition. The following table sets forth the
calculation of FFO in accordance with the NAREIT definition (in
thousands):
<TABLE>
Quarter ended Nine months ended
September 30, September 30,
-------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $11,822 $9,029 $31,879 $24,143
Preferred dividend (1,100) (1,960)
Depreciation/amortization 6,958 4,979 19,991 15,378
Adjustment for depreciation/ (168) 129 (227) 254
amortization from
unconsolidated joint
ventures and subsidiaries
Deferred financing costs (280) (280) (825) (840)
------ ------ ------ ------
FFO as currently defined $17,232 $13,857 $48,858 $38,935
======= ======= ======= =======
</TABLE>
FFO for the nine months of 1997 rose $9.9 million over the
first nine months of 1996 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 during the
past year. We believe future growth rates will slow until
development levels off, as the rent-up period on development
projects partially offsets operating results from current properties
and acquisitions. Assuming 100% debt funding at an 8% interest
rate, the negative effect on FFO from development and containerized
storage totaled $3,017,000 for the first nine months of 1997
compared to $1,252,000 for the first nine months of 1996.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1997, we invested $116.3
million in storage centers including approximately $55.7 million in
development projects, $58 million in acquisitions and $2.6 million
in capital improvements to our existing portfolio. The $17.6
million investment in other real estate investments consists
primarily of $9.2 million invested in real estate limited
partnership units, $2.8 million invested in our containerized
storage operation and $5.6 million invested in joint ventures.
Additionally, we received a return of $9.3 million for loans we had
made to Benelux SCS.
In January and February 1997, we raised $59.3 million through
the sale of 2.2 million shares of Class A Common Stock. On April
16, 1997, we raised $50 million ($48.2 million in net proceeds)
through the sale of 2 million shares of Series B Cumulative
Redeemable Preferred Stock at $25 per share. These preferred shares
require quarterly distribution payments totaling 8.8% per year and
are callable at our option after five years.
On April 25, 1997, we issued $100 million in senior unsecured
notes, $50 million of which are seven year notes due April 2004
bearing interest at 7.5% and $50 million of which are ten year notes
due April 2007 bearing interest at 7.625%. The notes require semi-
annual interest due April 25th and October 25th. Net proceeds
totaled $98.7 million.
On September 16, 1997, we raised an additional $18.9 million
through the sale of 727,080 shares of Class A Common Stock at $27.50
per share less a 5% discount.
A portion of the proceeds from these offerings was used to pay
down the balance on our line of credit. The balance on the domestic
line of credit declined $120.4 million from December 31, 1996 to
September 30, 1997. At September 30, 1997, the ratio of the
Company's debt to total assets was 28% and its debt to total market
capitalization was 22%.
We anticipate that cash flow from operating activities and
available lines of credit 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 nine months of operations ended September 30,
1997 was $545 million compared to $36.8 million for the same period
of 1996. Capital available from our domestic line of credit at
September 30, 1997 was approximately $87 million. On October 28,
1997, we declared a dividend of $0.48 per share to be paid on
November 19, 1997. This dividend is approximately 77% of third
quarter FFO.
Part II, Item 6: Exhibits and Reports on Form 8-K
Exhibits:
Exhibit 11 - Calculation of Net Income per Share
Exhibit 27 - Financial Data Schedule
Reports on Form 8-K:
A report on Form 8-K dated September 11, 1997 was filed on
September 12, 1997 containing exhibits related to the issuance of
shares of Class A Common Stock.
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: November 12, 1997 By: /s/ Harrell Beck
Harrell Beck
Chief Financial Officer, Chief Accounting
Officer and Authorized Signatory
Shurgard Storage Centers, Inc.
Exhibit (11.1) - Statement Re: Computation of Earnings per Share
Primary Net Income Per Quarter Ended Nine Months Ended
Common and Common Equivalent September 30, September 30,
Share -------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
Net income $11,822,000 $9,029,000 $31,879,000 $24,143,000
Preferred dividend (1,100,000) - (1,960,000) -
---------- --------- ---------- -----------
$10,722,000 $9,029,000 $29,919,000 $24,143,000
========== ========= ========== ==========
Weighted average common
and common equivalent shares
outstanding:
Weighted average common
shares outstanding 27,966,307 23,201,451 27,726,435 23,199,838
Net effect of dilutive
stock options based on
treasury stock method
using average market
price (1) 43,612 - 43,612 -
---------- ---------- ---------- ---------
Total 28,009,919 23,201,451 27,770,047 23,199,838
========== ========== ========== ==========
Primary earnings per
common and common
equivalent share $ .38 $ .39 $ 1.08 $ 1.04
========== ========== ========== ==========
Fully-diluted Net Income Per Quarter Ended Nine Months Ended
Common and Common Equivalent September 30, September 30,
Share ------------- -----------------
1997 1996 1997 1996
---- ---- ---- -----
Net income $11,822,000 $9,029,000 $31,879,000 $24,143,000
Preferred dividend (1,100,000) - (1,960,000) -
---------- --------- ---------- ----------
$10,722,000 $9,029,000 $29,919,000 $24,143,000
========== ========= ========== ==========
Weighted average common
and common equivalent
shares outstanding:
Weighted average common
shares outstanding 27,966,307 23,201,451 27,726,435 23,199,838
Net effect of dilutive
stock options
based on treasury stock
method using average market
price (1) 57,576 - 57,576 -
---------- ---------- ---------- ----------
Total 28,023,883 23,201,451 27,784,011 23,199,838
========== ========== ========== ==========
Fully-diluted earnings
per common and
common equivalent share $ .38 $ .39 $ 1.08 $ 1.04
========== ========== ========== ==========
(1) No adjustment has been made in 1996 as the dilutive effect was immaterial.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 8,198
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 873,885
<DEPRECIATION> (65,365)
<TOTAL-ASSETS> 920,419
<CURRENT-LIABILITIES> 0
<BONDS> 234,819
0
48,164
<COMMON> 593,938
<OTHER-SE> (27,059)
<TOTAL-LIABILITY-AND-EQUITY> 920,419
<SALES> 0
<TOTAL-REVENUES> 102,518
<CGS> 0
<TOTAL-COSTS> 57,024
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,686
<INCOME-PRETAX> 31,879
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,879
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.08
</TABLE>
