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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 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 THIRD 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 August 3, 1998:
Class A Common Stock, $.001 par value, 28,536,229 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,
1998 1997
-------- ----------
Assets:
Storage centers:
Land $ 171,357 $ 168,076
Buildings and equipment, net 630,523 636,168
Construction in progress 83,850 49,484
--------- ---------
885,730 853,728
Other real estate investments 38,351 38,522
Cash and cash equivalents 7,521 7,248
Restricted cash 6,902 7,028
Other assets 52,670 48,962
-------- --------
Total assets $ 991,174 $ 955,488
========= =========
Liabilities and Shareholders' Equity:
Accounts payable and other liabilities $ 24,392 $ 29,055
Lines of credit 82,441 57,477
Notes payable 261,270 239,494
--------- ---------
Total liabilities 368,103 326,026
--------- ---------
Minority interest in other real estate
investments 17,739 18,675
Commitments and contingencies (Note E)
Shareholders' equity:
Series B cumulative redeemable preferred
stock, $0.001 par value; 2,300,000
authorized; 2,000,000 issued and
outstanding 48,056 48,056
Class A common stock, $0.001 par value;
120,000,000 authorized; 28,533,831 and
28,431,826 issued and outstanding 598,061 595,269
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 (39,699) (31,452)
-------- --------
Total shareholders' equity 605,332 610,787
------- --------
Total liabilities and
shareholders' equity $ 991,174 $ 955,488
========== ==========
<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, 1998 June 30, 1997
------------- -------------
Rental revenue $ 38,075 $ 33,234
Loss from other
real estate investments (341) (139)
Property management revenue 653 604
------- ---------
Total revenue 38,387 33,699
------- -------
Operating expense 11,010 9,155
Depreciation and amortization 7,659 6,670
Real estate taxes 3,216 2,524
General and administrative 744 1,023
------- -------
Total expenses 22,629 19,372
------- -------
Income from operations 15,758 14,327
------- ------
Interest and other income 264 545
Interest expense (4,973) (4,237)
------- -------
Total other income
(expense) (4,709) (3,692)
------- -------
Minority interest 290 224
Net income $ 11,339 $ 10,859
======== ========
Net income per common share:
Basic $ 0.36 $ 0.36
======== ========
Diluted $ 0.36 $ 0.36
======== ========
Distributions per common share:
Basic $ 0.49 $ 0.48
======== ========
Diluted $ 0.49 $ 0.48
======== ========
<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, 1998 June 30, 1997
------------- -------------
Rental revenue $ 74,853 $ 64,266
Revenue (loss) from other
real estate investments (529) 144
Property management revenue 1,178 1,023
-------- --------
Total revenue 75,502 65,433
-------- --------
Operating expense 21,874 18,131
Depreciation and amortization 15,773 13,033
Real estate taxes 6,185 5,301
General and administrative 1,769 2,086
-------- -------
Total expenses 45,601 38,551
-------- -------
Income from operations 29,901 26,882
-------- -------
Interest and other income 690 758
Interest expense (9,434) (8,131)
-------- --------
Total other income
(expense) (8,744) (7,373)
--------- --------
Minority interest 551 548
Net income $ 21,708 $ 20,057
========= =========
Net income per common share:
Basic $ 0.68 $ 0.69
========= =========
Diluted $ 0.68 $ 0.69
========= =========
Distributions per common share:
Basic $ 0.98 $ 0.96
========= =========
Diluted $ 0.98 $ 0.96
========= =========
<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,
1998 1997
--------- ---------
Operating activities:
Net income $21,708 $20,057
Adjustments to reconcile earnings
to net cash provided by operating
activities:
Depreciation and amortization 15,773 13,033
Other (294)
Loss from other real estate
investments 1,910 715
Minority interest in earnings
from investments in other real
estate investments (551) (548)
Changes in other accounts:
Restricted cash 126 (2,088)
Other assets (164) 4,759
Accounts payable and other
liabilities (1,308) (2,964)
------ ------
Net cash provided by operating
activities 37,200 32,964
------- ------
Investing activities:
Construction, acquisition and
improvement of storage centers (85,680) (63,815)
Proceeds from the sale of real
estate 35,458
Purchase of other real estate
investments (2,433) (9,091)
Payments for non-competition
agreements (1,353) (1,254)
(Increase) decrease in loans to
affiliates (3,988) 1,413
Distributions in excess of earnings
from other real estate investments 1,878 129
------ ------
Net cash used in investing
activities (56,118) (72,618)
-------- --------
Financing activities:
Proceeds from notes payable 21,776 102,937
Proceeds from (payments on) lines
of credit 24,964 (135,789)
Return of capital invested 9,272
Payment of loan costs (1,341)
Proceeds from exercise of stock
options and dividend reinvestment
plan 2,792 238
Cancellation of Company stock (253)
Distributions paid (29,956) (27,274)
Proceeds from preferred stock
offering, net 48,164
Proceeds from common stock
offering, net 59,200
Contribution by minority partners 7,338
Distributions to minority partners (385) (117)
------ ------
Net cash provided by
financing activities 19,191 62,375
------- ------
Increase in cash and cash equivalents 273 22,721
Cash and cash equivalents at
beginning of year 7,248 3,239
------ ------
Cash and cash equivalents at
end of period $ 7,521 $ 25,960
======== =========
Supplemental schedule of cash flow information:
Cash paid during the period for
interest $ 11,002 $ 8,146
======== =========
Supplemental schedule of noncash investing information:
Storage centers contributed to
joint venture $ 1,184
========
<PAGE>
Shurgard Storage Centers, Inc.
Part I, Item 1: Notes to Consolidated Financial Statements
Six Months Ended June 30, 1998
(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 1997 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 January 1, 1997, we adopted Statement of Financial
Accounting Standards No. 128 "Earnings per Share." All prior-
period per share data has been restated to conform with the
provisions of this statement.
Effective January 1, 1998, we adopted Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income."
The only component of comprehensive income, other than net
income, is gain or loss on foreign currency exchange translation,
which is immaterial.
Basic average shares outstanding for the six months ended June
30, 1998 and 1997 were 28,633,157 and 27,603,149, while the three
months ended June 30, 1998 and 1997 were 28,658,910 and
27,846,870, respectively. Diluted average shares outstanding for
the six months ended June 30, 1998 and 1997 were 28,664,244 and
27,633,731, while the three months ended were 28,689,998 and
27,877,452, respectively.
Certain amounts in the 1997 financial statements have been
reclassified to conform to the current presentation.
Note B - Lines of Credit
During the second quarter, we amended our domestic line of credit
agreement to increase the maximum amount available to $150
million until October 31, 1998 at which point the maximum returns
to $100 million until maturity in September 1999. This amendment
decreased the required spread over LIBOR to 70 basis points,
which varies based on the terms of the agreement. Pursuant to
this amendment, we have the option to extend this line of credit
until September 2000. At June 30, 1998, approximately $70.9
million was outstanding and the average interest rate was 6.4%.
We have five unsecured European credit lines (denominated in
local currencies) to borrow up to a total of $13.7 million of
which $11.3 million was outstanding at June 30, 1998. Of this
amount, $10.8 million matures June 2001 with the remaining
maturing between December 2002 and December 2005. The weighted
average effective interest rate on these lines at June 30, 1998
was 6.0%.
Note C - Storage Centers
Building and equipment are presented net of accumulated
depreciation of $87.3 million and $74.6 million as of June 30,
1998 and December 31, 1997, respectively.
Note D - Equity
During the first half of 1998, 93,948 shares of Class A common
stock were issued in accordance with our Dividend Reinvestment
Plan (the "Plan"). The Plan offers shareholders an opportunity
to invest cash dividends in additional shares at a 2% discount
from the current market price. All shareholders are eligible to
participate.
Note E - Commitment and Contingent Liability
As a general partner, we are contingently liable for the debt of
a European joint venture, which at June 30, 1998 totaled $20.9
million. We have also guaranteed our pro rata portion of the
debt of certain domestic joint ventures, which at June 30, 1998
totaled $32.1 million.
Additionally, we have guaranteed $13.6 million in lease
obligations for Shurgard's Storage to Go, Inc., a containerized
storage business. We own only nonvoting stock in this start-up
venture which is not a qualified REIT subsidiary and is subject
to corporate level tax.
Note F - Subsequent Event
On July 24, 1998, we purchased from an unaffiliated third party,
for $10.2 million in cash, eight limited partnership units in
Shurgard Institutional Fund LP, an affiliated partnership. We
now own 12 of 25 units and are entitled to 48% of LP
distributions. We continue to own a general partnership interest
in this partnership.
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," "expects,"
"projects" and similar expressions are intended to identify forward-
looking statements regarding financial performance. ACTUAL RESULTS
MAY DIFFER MATERIALLY DUE TO UNCERTAINTIES INCLUDING THE RISK THAT
COMPETITION FROM NEW SELF STORAGE FACILITIES OR OTHER STORAGE
ALTERNATIVES MAY CAUSE RENT TO DECLINE, OCCUPANCY RATES TO DROP and
DELAYS IN THE RENT-UP OF NEWLY DEVELOPED PROPERTIES, TAX LAW CHANGES
MAY CHANGE THE TAXABILITY OF FUTURE INCOME, AND LITIGATION MAY
MATERIALLY DECREASE LATE FEE REVENUE. ACTUAL RESULTS MAY DIFFER IF
INCREASES IN LABOR, TAXES, MARKETING, LITIGATION AND OTHER OPERATING
AND CONSTRUCTION EXPENSES OCCUR. 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 of this report. The Company
disclaims any obligation to publicly release the results of any
revisions to these forward-looking statements reflecting new
estimates, events or circumstances after the date of this report.
INTERNAL GROWTH
One of the ways we analyze our performance is to measure year
over year improvements in same store operating results. Our
definition of same stores includes existing facilities acquired as
of January 1 the previous year as well as developed properties that
have been operating a full 24 months. We include these newly
developed storage centers in our same store comparison beginning the
quarter following their second anniversary of opening. We project
that newly developed properties will reach stabilization at
approximately 18 to 24 months. Other storage companies may define
same stores differently, which will affect comparability. The
following tables summarize same store operating performance for the
second quarter and the first six months of 1998 and 1997:
<TABLE>
Dollars in thousands Quarter ended June 30,
except average rent ----------------------
<C> <C>
1998 1997 % Change
---- ----
Rental revenue $35,526 $34,138 4.1%
Property operating 10,010 9,389 6.6%
expenses (1) ------ ------
Net operating income $25,516 $24,749 3.1%
======= =======
Avg. annual rent per sq. $9.99 $9.71 2.9%
ft. (2)
Avg. sq. ft. occupancy 88% 88%
Total net rentable sq. 14,900,000 14,800,000
ft. (3)
# of properties 227 227
</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) The increase in net rentable square feet is the result of
additions to several existing stores since June 30, 1997.
Second quarter net operating income (NOI) for these centers has
risen 3.1% over the same quarter last year due to increases in
revenue which are a function of changes in rental rates and
occupancy. Second quarter revenue gains resulted primarily from
increases in rates but also from an increase in the number of square
feet rented. Although our occupancy percentage has not risen, the
total number of square feet rented and available has increased as a
result of expansion projects completed during the last year. Second
quarter 1997 operating expenses were offset by a $150,000 positive
adjustment received for workers compensation insurance and a $75,000
real estate tax refund. These two 1997 items resulted in a higher
1998 second quarter expense increase (6.6%) when compared to that
experienced in the first quarter of 1998 (2.7%). The remaining
increase in operating expenses for the quarter is primarily due to
increases in personnel costs. We have experienced tightening in the
labor markets in several areas of the US and, as a result, have
experienced higher than average wage increases.
<TABLE>
Dollars in thousands Six months ended June 30,
except average rent -------------------------
<C> <C>
1998 1997 % Change
---- ---- --------
Rental revenue $69,905 $66,571 5.0%
Property operating 20,171 19,277 4.6%
expenses (1) ------ ------
Net operating income $49,734 $47,295 5.2%
======= =======
Avg. annual rent per sq. $9.93 $9.53 4.2%
ft. (2)
Avg. sq. ft. occupancy 87% 87%
Total net rentable sq. 14,900,000 14,800,000
ft. (3)
# of properties 227 227
</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) The increase in net rentable square feet is the result of
additions to several existing stores since June 30, 1997.
Same store net operating income for the first half of 1998 has
risen 5.2% over the same period last year due primarily to rent
increases. Operating expenses for the first six months increased
4.6% over the prior-year period primarily due to increases in
personnel costs. As noted above, we have experienced higher than
average wage increases. Year to date operating expense increases
were also effected by the 1997 items discussed above.
The following table is a geographical summary of the changes in
weighted average rents, rates and occupancies for the first six
months of the applicable year for the same store storage centers as
defined in the previous table:
<TABLE>
% Change
% % Change in No. of
Change in Rate Sq. Ft.
in Rents per Sq. Ft. Occupied
-------- ---------- --------
'97 to '98 '97 to '98 '97 to '98
---------- ---------- ----------
<C> <C> <C>
Arizona 0.5% (2.6)% 3.2%
California 5.1 4.8 0.3
Florida 4.7 3.4 1.3
Georgia (2.1) (2.2) 0.1
Illinois 7.3 6.8 0.5
Michigan 5.2 2.7 2.4
New York 4.2 7.2 (2.8)
Oregon 3.2 1.6 1.5
Texas 5.4 2.6 2.8
Virginia 6.7 1.3 5.4
Washington 6.0 8.6 (2.4)
Other 5.9 6.5 (0.5)
---- ---- -----
Weighted Average 5.0% 4.2% 0.8%
</TABLE>
We believe our diversified portfolio minimizes the impact of
individual market fluctuations that result from economic or
competitive changes within those markets. Market conditions in
Illinois, Virginia, and Washington state contributed to above-
average revenue increases. Although occupancy declined in the
Seattle, WA and New York markets, revenues rose substantially due to
rate increases. Arizona, however, has experienced new competition
at two stores; as a result, we have reduced rates in order to
maintain occupancy. Georgia experienced a drop in rates due to some
price sensitivity and increased competition in the market.
During the second quarter, a lawsuit was filed in the state of
California against Shurgard Storage Centers Inc., alleging that our
late fees and lien fees constitute an unfair business practice. It
is too early to predict the impact, if any, this suit will have on
our operating results. See Part II, Item 1: Legal Proceedings.
DOMESTIC ACQUISITIONS
During the first half of 1998, we purchased five storage
centers totaling 251,000 net rentable square feet at a total cost of
$12.4 million (including the cost associated with the related non-
competition agreements). We also acquired a leasehold in an existing
self storage center containing 41,000 net rentable square feet for
$1.2 million. These acquisitions were located as follows: one in
Arizona, one in Indiana, two in Tennessee, and two in Texas. The
Indiana property was purchased on June 30, 1998 and therefore had no
impact on our operations and has been excluded from the table below.
<TABLE>
Dollars in thousands Quarter Six months
except average rent ended ended
June 30, June 30,
-------- ---------
Results for 1998 1998 1998
Acquisitions -------- --------
<S> <C> <C>
Rental revenue $290 $346
Property operating 84 87
expenses (1) ----- -----
Net operating income $206 $259
===== =====
Avg. annual rent per $9.39 $9.72
sq.ft. (2)
Avg. sq.ft. occupancy 92% 92%
Total net rentable 243,000 243,000
sq.ft.
# of property-months (3) 12 14
Purchase price $11,008
</TABLE>
(1) Includes all direct property operating expenses, but does not
include land lease expense. 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 rents collected by the average number of square feet
occupied during the period.
(3) Represents the sum of the number of months we operated each
property during the applicable period.
During the first half of 1997, we purchased nine storage
centers totaling 615,000 net rentable square feet at a total cost of
$29 million (including the cost associated with the related non-
competition agreements), one in California, one in Florida, two in
Georgia, four in Texas, and one in Washington state. Several of
these properties were still renting up when they were acquired and
thus their average occupancy and yield are lower than most
acquisitions. This decreases the average occupancy in the tables
below. The current average yield for the 1997 acquisitions is 9.5%
(calculated as actual net operating income divided by purchase
price). The following tables summarize the operating performance of
these properties during the second quarter and first half of 1998:
<TABLE>
Dollars in thousands Quarter Quarter
except average rent ended ended
June 30, June 30,
-------- ---------
Results for 1997 1998 1997
Acquisitions ---- ----
<S> <C> <C>
Rental revenue $1,023 $482
Property operating 340 221
expenses (1) ----- -----
Net operating income $683 $261
===== =====
Avg. annual rent per $7.47 $6.52
sq.ft. (2)
Avg. sq.ft. occupancy 82% 75%
Total net rentable 615,000 615,000
sq.ft.
# of property-months (3) 27 20
Purchase price $29,124
</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 rents collected by the average number of square feet
occupied during the period.
(3) Represents the sum of the number of months we operated each
property during the applicable period.
<TABLE>
Dollars in thousands Six months Six months
except average rent ended ended
June 30, June 30,
--------- ----------
Results for 1997 1998 1997
Acquisitions ----- ----
<S> <C> <C>
Rental revenue $1,989 $563
Property operating 601 268
expenses (1) ------ -----
Net operating income $1,388 $295
====== =====
Avg. annual rent per $7.35 $6.21
sq.ft. (2)
Avg. sq.ft. occupancy 80% 78%
Total net rentable 615,000 615,000
sq.ft.
# of property-months (3) 54 24
Purchase price $29,124
</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 rents collected by the average number of square feet
occupied during the period.
(3) Represents the sum of the number of months we operated each
property during the applicable period.
As of March 19, 1998, based on the Emerging Issues Task Force
Issue 97-11, we are no longer capitalizing internal costs related to
the acquisition of operating real estate property. We expect costs
related to acquisition activity, which previously would have been
capitalized, will total approximately $250,000 to $300,000 for 1998.
Current period costs are reflected in our operating expenses.
DOMESTIC DEVELOPMENT
We opened 11 domestic storage centers in the first half of
1998, including two through a joint venture. When all phases are
complete, these 11 projects will total approximately 692,000 net
rentable square feet with an estimated total cost of $43.5 million.
During the second quarter, four of the storage centers opened in
1998 and five of the storage centers opened in 1997 were purchased by
Shurgard/Fremont Partners I (SFP1) in which we own a 10% interest
(see "NEW DEVELOPMENT FINANCING ARRANGEMENT'). An additional seven
centers (three of which are already open) are targeted for
acquisition by SFP1. We intend to finance the majority of our on-
going development through similar relationships.
The 13 storage centers opened in 1996 (one of which is owned
through a joint venture), represent 885,000 net rentable square feet
and averaged 73% occupancy for the month of June. These 1996
developments together generated net operating income of $1,804,000
for the first half of 1998. For the one month ended June 30, 1998
these developments had net operating income of $358,000 which
represents 81% of projected monthly NOI at stabilization. The 17
storage centers opened in 1997 (12 of which are owned through joint
ventures), representing 1,181,000 net rentable square feet, averaged
61% occupancy for the month of June and together generated
$1,618,000 in net operating income for the first half of 1998. For
the one month ended June 30, 1998 these developments had net
operating income of $355,000 which represents 80% of projected
monthly NOI at stabilization. We estimate these 30 developments
will reach projected stabilized NOI (which assumes 85% occupancy) in
an average of 18 to 24 months. The proforma average annual yield on
the estimated total cost of these projects is 11.5 to 12.5% assuming
the projects reach 85% occupancy at proforma rates. Based on the
higher average rate we are receiving at our internally developed
storage centers compared to our same store portfolio, we believe
that customers have shown a willingness to pay more for newer
storage facilities than older facilities. Future net operating
income growth of older storage centers could be impacted by this
trend.
There can be no assurance that these projections regarding 1997
and 1996 development projects will occur. Assumed occupancy levels
and rates could be adversely affected if we experience competition
from other self storage properties and other storage alternatives in
close proximity to our developments. Actual yields may also be
lower if major expenses such as property taxes, labor, and
marketing, among others, increase more than projected.
In addition to the above completed developments, we have 19
domestic storage centers currently under construction (four of these
are being developed in California 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 June 30, 1998:
<TABLE>
Number Estimated
of Completed Cost
Projects of Projects
-------- -------------
<S> <C> <C>
New Domestic Developments:
Construction in progress 19 $101.6 million
Land purchased pending 2 $9.7 million
construction
Expansion of Existing
Properties:
Opened during 1998 2 $0.3 million
Construction in progress 2 $4.3 million
</TABLE>
We believe that a 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. Although certain costs, including
real estate taxes and interest, are capitalized during the
construction period, net operating income does not generally exceed
interest expense on development projects for at least the first year
of operations. This rent-up deficit for our pro rata interest in
developments was $577,000 (net operating income of $3,273,000 less
8.5% interest on invested capital of $3,850,000) for the first half
of 1998 compared to $1,176,000 in 1997. The rent-up deficit for a
typical $3.8 million project, assuming it takes 18 months to rent-up
and is financed with debt at 8.5%, is estimated to be approximately
$300,000 in the first year of operations. The amount of rent-up
deficit and the timing of positive cash flow cannot be predicted
with certainty as it is based on a number of factors including
length of rent-up, ability to collect stated rental rates on leased
units, actual operating expenses incurred, and the time of year a
property opens. For further discussion of the effect of this
dilution, see our Annual Report on Form 10-K.
NEW DEVELOPMENT FINANCING ARRANGEMENT
In order to minimize the effect of the rent-up deficit on funds
from operations (FFO), we have been pursuing alternative financing
options. On May 29, 1998, we formed a partnership, Shurgard/Fremont
Partners I (SFP1), with Fremont Realty Capital L.L.C. (Fremont).
SFP1 will acquire up to 16 properties during 1998. One of our
wholly owned subsidiaries and an affiliate of Fremont are the
general partners of SFP1. We have a 10% equity interest and the
Fremont affiliate has a 90% equity interest in SFP1. All major
decisions by SFP1 require approval of both partners. SFP1 has
obtained a nonrecourse credit facility from a commercial bank of up
to $51.1 million, secured by the properties owned by SFP1.
Under the terms of the agreements executed in connection with
the formation of SFP1, we contribute properties to SFP1 shortly
after construction is completed. We are reimbursed at cost for all
expenses incurred in developing the properties contributed to
SFP1 (including a 5% reimbursement for internal costs). Six
properties were contributed to SFP1 on May 29, 1998 and three more
were contributed on June 30, 1998. We were reimbursed $33.5 million
related to the contribution of these properties. A majority of the
remaining properties are expected to be contributed by October 1998.
SFP1 will be capitalized with approximately $73 million to fund
the acquisition of the properties and SFP1's operations.
SFP1 has granted us an option to acquire all of the properties
owned by SFP1. The purchase option is exercisable at certain times
between December 15, 2000 and December 31, 2002, depending upon the
performance of the properties. The purchase price for the
properties upon exercise of the option is based on a
9 1/4 capitalization rate applied to the net operating income of the
properties for the three- or four-month period preceding the
exercise of the option. Initially, we are entitled to 10% of SFP1's
cash flow, the terms in the Partnership Agreement increase our
equity return to 20% after the partners receive a specified priority
return.
Under a Management Services Agreement, we will act as property
manager for the properties owned by SFP1 and receive a monthly
management fee equal to the greater of $2,000 per property or 5% of
gross revenues. Additionally, we will receive other fees relating
to accounting and administrative services that we will perform on
behalf of SFP1.
Assuming that we enter into arrangements similar to those
described above for other properties it develops in 1998 and 1999,
we expect that our FFO will grow 11% to 13% in 1999 over 1998 if
there were no material change in outstanding shares. This
expectation regarding FFO growth constitutes a forward-looking
statement within the meaning of the Private Securities Litigation
Reform Act and is based on several assumptions. If any of these
assumptions are not satisfied or prove to be incorrect, actual
results could differ materially from those indicated in the forward-
looking statements. The risks and uncertainties that may cause this
forward-looking statement to prove to be incorrect include the risks
that competition from new self storage facilities or other storage
alternatives may cause rent to decline and may cause occupancy rates
to drop or may cause delays in rent up of newly developed
properties, Shurgard may experience increases in labor, taxes,
marketing and other operating and construction expenses, and
litigation may materially decrease late fee revenue. For a
discussion of additional risks and other factors that could affect
this forward-looking statement and our financial performance, see
our Annual Report on Form 10-K for the year ended December 31, 1997,
as filed with the Securities and Exchange Commission.
EUROPEAN OPERATIONS
We are currently operating in Belgium, Sweden, and France. The
three stores opened in Belgium in 1995 had an average occupancy of
80% at June 30, 1998 and revenue for these same stores rose 6% from
the first quarter of 1998 to the second quarter of 1998. The
development that opened in Belgium in 1996 had an average occupancy
of 61% at June 30, 1998, and its revenue rose 5% from first to
second quarter 1998. During 1997, two additional developments opened
in Belgium that were 46% occupied at the end of the second quarter.
Revenue for these two stores rose 46% from first quarter to second
quarter 1998. We purchased three stores in France during 1997. The
storage center we acquired in Nice, France is 90% occupied, while
the two stores in Paris, France are still in the rent-up phase with
an average occupancy of 51% at June 30, 1998. Revenue related to
the stores in France rose 22% from first quarter to second quarter
1998. During the second quarter of 1998, we opened two developments
in Sweden and at June 30, 1998 these centers had an average
occupancy of 19%. At June 30, 1998, one additional development is
under construction in Sweden and two are currently under
construction in Belgium.
OTHER OPERATIONS
Loss from other real estate investments for the first half of
1998 represents a decrease of $673,000 from income reported for the
same period in 1997. As discussed in our Annual Report, we invested
in Shurgard Storage To Go, Inc., a start-up containerized storage
business that opened its first warehouses during 1997. Our pro rata
share of losses rose $1,040,000, from $521,000 for the first six
months of 1997 to $1,561,000 for the first six months of 1998. This
additional loss was partially offset by the increase in earnings
from joint venture projects still in the rent-up phase as well as an
increase in income on our participating mortgages.
Property management revenue for the first half of 1998
increased $155,000 over the same period last year. A one time
partnership income increase and development fees related to the new
development financing arrangement were partially offset by a decline
in management fees for stores we acquired during late 1997 and the
elimination of management fees related to partnerships we now
consolidate for financial reporting purposes.
Interest expense for the first half of 1998 increased $1.3
million over the first half of 1997 due to an increase in the
outstanding debt balance (both in lines of credit and notes payable)
from $240 million at June 30, 1997 to $344 million at June 30, 1998.
Additionally, during 1998, we capitalized $3,177,000 in interest
related to the construction of storage centers, while $1,525,000 in
interest was capitalized in the first half of 1997.
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 Six months ended
June 30, June 30,
------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 11,339 $ 10,859 $ 21,708 $ 20,057
Gain on sale of real estate (200) (416)
Preferred dividend (1,100) (860) (2,200) (860)
Depreciation/amortization 7,659 6,670 15,773 13,033
Adjustment for depreciation/
amortization from joint
ventures and subsidiaries 283 25 246 (59)
Deferred financing costs (280) (265) (560) (545)
-------- -------- -------- -------
FFO as currently defined $ 17,701 $ 16,429 $ 34,551 $ 31,626
======== ======== ======== ========
</TABLE>
FFO for the first half of 1998 rose $2.9 million over FFO for
the first half of 1997. As previously discussed, this growth
reflects the improved performance of the original portfolio of
properties as well as the addition of properties acquired over the
past two years. Assuming we finance 1998 and 1999 development
through off-balance sheet agreements and the containerized storage
business reaches break even in 1999 as projected, we expect FFO to
increase significantly in 1999. For a discussion of the factors
that might cause these assumptions not to occur, see DOMESTIC
DEVELOPMENT and NEW DEVELOPMENT FINANCING ARRANGEMENT in this Form
10-Q, and NEW PRODUCTS AND SERVICES in our Annual Report on Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
During the first half of 1998, we invested $85.7 million in
storage centers including approximately $70.3 million in development
projects, $13.6 million in acquisitions and $1.8 million in capital
improvements to our existing portfolio. The purchase of non-compete
agreements relates to acquisitions made during the period. Proceeds
from the sale of real estate includes $33.5 million related to the
contribution of newly developed storage centers into SFP1 as
discussed in "NEW DEVELOPMENT FINANCING ARRANGEMENT." Additionally,
we were required to sell a property to a city to accommodate a road
improvement project which provided $2 million in net proceeds.
The $2.4 million investment in other real estate investments
consists primarily of $2.2 million invested in joint ventures and
$0.2 million invested in our containerized storage operation. In
addition, we contributed $1.2 million in newly developed properties
to SFP1. During the first six months of 1998, loans to joint
ventures increased $1.1 million and we made a $3.4 million loan to
our containerized storage operation.
The balance on the domestic line of credit increased $26
million from December 31, 1997 to June 30, 1998 to finance
development activity and for general corporate purposes. Notes
payable increased $21.8 million as a result of draws on loans from
an affiliated joint venture to fund development activity in Europe.
At June 30, 1998, the ratio of the Company's debt to total assets
was 35% and its debt to total market capitalization was 29%.
During the second quarter, we amended our domestic line of
credit agreement to increase the maximum amount available to $150
million until October 31, 1998 at which point the maximum returns to
$100 million until maturity in September 1999. This amendment also
decreases the required spread over LIBOR to 70 basis points, which
still varies based on the terms of the agreement. We now have the
option to extend this line of credit until September 2000.
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 six months of operations ended June 30, 1998 was
$37.2 million compared to $33 million for the same period of 1997.
Capital available from our domestic line of credit at June 30, 1998
was approximately $79 million. On June 30, 1998, we declared a
dividend of $0.49 per share to be paid on August 21, 1998. This
dividend is approximately 79% of second quarter FFO.
On July 24, 1998, we purchased from an unaffiliated third
party, for $10.2 million in cash, eight limited partnership units in
Shurgard Institutional Fund LP, an affiliated partnership. We now
own 12 units and are entitled to 48% of LP distributions. We
continue to own a general partnership interest in this partnership.
This purchase was funded through a draw on our line of credit.
Part I, Item 3: Quantitative and Qualitative Disclosures about
Market Risk
Not required.
Part II, Item 1: Legal Proceedings
On April 6,1998, a lawsuit was filed against Shurgard Storage
Centers, Inc., in the Superior Court of California for Alameda
County. The plaintiff is a California unincorporated association,
the Consumer Justice Foundation, claiming to bring the action on
behalf of the general public. The Complaint alleges that the late
fees and lien fees collected by Shurgard are not liquidated damages
but constitute an unenforceable penalty in violation of the
California Business and Professions Code and the California Civil
Code. The plaintiff further alleges that imposing late fees and
lien fees constitutes an unfair business practice under the
California Business and Professions Code. The plaintiff seeks
restitution in an undisclosed amount, injunctive relief, as well as
costs and attorneys' fees.
Part II, Item 4: Submission of Matters to a Voter of Security
Holders
Our Annual Meeting of Shareholders was held on May 12, 1998.
There were outstanding and entitled to vote at the meeting
28,635,285 shares of common stock, and the holders of at least
24,377,591 shares of common stock were present in person or by Proxy
(representing 81.8% of the Company shares entitled to vote at the
Meeting). The following are the results of the vote:
Proposal 1 - Election of Directors
Election of the following two nominees to serve as directors for
three-year terms or until their respective successors are elected
and qualified:
<TABLE>
FOR AGAINST OR AUTHORITY
WITHHELD
---------------------------- ------------------------
In By Total In By Total
Person Proxy Person Proxy
------- ----- --------- ------ ------ -------
<C> <C> <C> <C> <C> <C>
Charles K. Barbo 27,213 22,715,005 22,742,218 0 549,209 549,209
George Hutchinson 27,213 22,733,340 22,730,553 0 545,622 545,622
ABSTAIN
-------------------------
In By Total
Person Proxy
------ ------- -------
<C> <C> <C>
Charles K. Barbo 0 131,644 131,644
George Hutchinson 0 116,475 116,475
</TABLE>
Election of the following nominee to serve as director for a one-
year term or until his successor is elected and qualified:
<TABLE>
FOR AGAINST OR AUTHORITY
WITHHELD
----------------------------- ------------------------
In By Total In By Total
Person Proxy Person Proxy
------ ---------- ---------- ------ ------ ------
<C> <C> <C> <C> <C> <C>
Raymond Johnson 27,213 22,713,361 22,740,574 0 553,385 553,385
ABSTAIN
-----------------------
In By Total
Person Proxy
------ ----- -------
<C> <C> <C>
Raymond Johnson 0 128,782 128,782
</TABLE>
In addition, the following directors' terms of office continued
after the meeting:
Director Term Ends
- -------- ---------
Howard Johnson 1999
Harrell Beck 2000
Wendell Smith 2000
Proposal 2 - Amendments to the Amended and Restated Stock Incentive
Plan for non-employee directors
Proposal for approval to amend the amended and restated stock
incentive plan for non-employee directors.
<TABLE>
FOR AGAINST ABSTAIN
------------------- ---------------- ---------------
In By In By In By
Person Proxy Person Proxy Person Proxy
------ ---------- ------ --------- ------ -------
<C> <C> <C> <C> <C> <C>
27,213 20,623,216 0 1,438,719 0 577,978
</TABLE>
Part II, Item 5: Other Information
In accordance with our bylaws, a shareholder proposing to transact
business at our annual meeting must provide written notice of such
proposal, in the manner provided by our bylaws, no later than 60
days prior to the date of such annual meeting (or, if the annual
meeting is not held on the second Tuesday of May and we provide less
than 60 days' notice of such meeting, no later than 10 days after
the date of our notice). In addition, if we receive notice of a
shareholder proposal after February 14, 1999, the persons named as
proxies in such proxy statement and proxy will have discretionary
authority to vote on such shareholder proposal.
Part II, Item 6: Exhibits and Reports on Form 8-K
Exhibits:
Exhibit 27 - Financial Data Schedule
Reports on Form 8-K:
On June 1, 1998, we filed a Form 8-K dated May 29, 1998, which
disclosed, under Item 5, the formation of Shurgard/Fremont Partners I.
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 11, 1998 By: /s/ Harrell Beck
-----------------
Harrell Beck
Chief Financial Officer, Chief Accounting
Officer and Authorized Signatory
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 7,521
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 973,040
<DEPRECIATION> 87,310
<TOTAL-ASSETS> 991,174
<CURRENT-LIABILITIES> 0
<BONDS> 261,270
0
48,056
<COMMON> 596,975
<OTHER-SE> (39,699)
<TOTAL-LIABILITY-AND-EQUITY> 991,174
<SALES> 0
<TOTAL-REVENUES> 75,502
<CGS> 0
<TOTAL-COSTS> 43,832
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,434
<INCOME-PRETAX> 21,708
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,708
<EPS-PRIMARY> .68
<EPS-DILUTED> .68
</TABLE>
