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, 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.)
1155 Valley St., SUITE 400, SEATTLE, WASHINGTON 98109
(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 November 3, 1998:
Class A Common Stock, $.001 par value, 28,600,416 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>
September 30, December 31,
1998 1997
------------ -----------
<S> <C> <C>
Assets:
Storage centers:
Land $ 176,815 $ 168,076
Buildings and equipment, net 639,920 636,168
Construction in progress 113,922 49,484
----------- -----------
930,657 853,728
Other real estate investments 37,242 38,522
Cash and cash equivalents 12,398 7,248
Restricted cash 6,788 7,028
Other assets 57,147 48,962
----------- ----------
Total assets $1,044,232 $ 955,488
Liabilities and Shareholders' Equity:
Accounts payable and other liabilities $ 33,115 $ 29,055
Lines of credit 113,806 57,477
Notes payable 274,399 239,494
--------- ---------
Total liabilities 421,320 326,026
--------- ---------
Minority interest in other real estate
investments 19,215 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; 28,600,416 and
28,431,826 issued and outstanding 599,792 595,269
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 (43,065) (31,452)
--------- ---------
Total shareholders' equity 603,697 610,787
Total liabilities and shareholders'
equity $ 1,044,232 $ 955,488
----------- ---------
</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, 1998 Sept. 30, 1997
-------------- --------------
<S> <C> <C>
Rental revenue $ 41,639 $ 36,274
Loss from other
real estate investments (715) (30)
Property management revenue 625 841
--------- ---------
Total revenue 41,549 37,085
--------- ---------
Operating expense 11,850 10,666
Depreciation and amortization 8,496 6,958
Real estate taxes 3,323 2,935
General and administrative 1,130 919
--------- -------
Total expenses 24,799 21,478
--------- -------
Income from operations 16,750 15,607
--------- -------
Interest and other income 352 345
Interest expense (6,007) (4,555)
------- -------
Total other income
(expense) (5,655) (4,210)
------- -------
Minority interest 699 425
Net income $ 11,794 $ 11,882
========= =========
Net income per common share:
Basic $ 0.37 $ 0.38
========= =========
Diluted $ 0.37 $ 0.38
========= =========
Distributions per common share:
Basic $ 0.49 $ 0.48
========= =========
Diluted $ 0.49 $ 0.48
========= =========
</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, 1998 Sept. 30, 1997
-------------- --------------
<S> <C> <C>
Rental revenue $ 116,492 $ 100,540
Revenue (loss) from other
real estate investments (1,244) 114
Property management revenue 1,803 1,864
------- --------
Total revenue 117,051 102,518
Operating expense 33,724 28,797
Depreciation and amortization 24,269 19,991
Real estate taxes 9,508 8,236
General and administrative 2,899 3,005
------- -------
Total expenses 70,400 60,029
------- -------
Income from operations 46,651 42,489
-------
Interest and other income 1,042 1,103
Interest expense (15,441) (12,686)
-------- --------
Total other income
(expense) (14,399) (11,583)
-------- --------
Minority interest 1,250 973
Net income $ 33,502 $ 31,879
========= =========
Net income per common share:
Basic $ 1.05 $ 1.08
========= =========
Diluted $ 1.05 $ 1.08
========= =========
Distributions per common share:
Basic $ 1.46 $ 1.43
========= =========
Diluted $ 1.46 $ 1.43
========= =========
</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,
1998 1997
---------- ----------
<S> <C> <C>
Operating activities:
Net income $33,502 $31,879
Adjustments to reconcile earnings
to net cash provided by operating
activities:
Depreciation and amortization 24,269 19,991
Other (294)
Loss from other real estate
investments 3,091 1,340
Minority interest in earnings
from investments in other
real estate investments (1,250) (1,355)
Changes in other accounts:
Restricted cash 240 131
Other assets (3,895) (998)
Accounts payable and other
liabilities 6,577 3,836
------- ------
Net cash provided by operating
activities 62,240 54,824
------- -------
Investing activities:
Construction, acquisition and
improvement of storage centers (126,721) (116,256)
Payment for purchase of units of
an affiliated partnership (21,181)
Reimbursement related to contribution
of real estate 51,898
Proceeds from sale of real estate 2,000
Purchase of other real estate
investments (7,676) (17,647)
Payments for non-competition
agreements (1,809) (1,464)
(Increase) decrease in loans to
affiliates (5,131) 997
Distributions in excess of earnings
from other real estate investments 1,387 170
------- -------
Net cash used in investing
activities (107,233) (134,200)
--------- ---------
Financing activities:
Proceeds from notes payable 34,905 103,026
Proceeds from (payments on) lines
of credit 56,329 (117,907)
Return of capital invested 9,272
Payment of loan costs (1,341)
Proceeds from exercise of stock
options and dividend reinvestment
plan 4,523 346
Cancellation of Company stock (253)
Distributions paid (45,115) (41,739)
Proceeds from preferred stock
offering, net 48,164
Proceeds from common stock
offering, net 78,135
Contribution by minority partners 7,338
Distributions to minority partners (499) (706)
-------- --------
Net cash provided by
financing activities 50,143 84,335
------- -------
Increase in cash and cash equivalents 5,150 4,959
Cash and cash equivalents at beginning
of year 7,248 3,239
------- -------
Cash and cash equivalents at end
of period $ 12,398 $ 8,198
========= =========
Supplemental schedule of cash flow information:
Cash paid during the period for
interest $ 16,519 $ 11,541
========= =========
Supplemental schedule of noncash investing information:
Storage centers contributed to
joint venture $ 1,738
=========
</TABLE>
<PAGE>
Shurgard Storage Centers, Inc.
Part I, Item 1: Notes to Consolidated Financial Statements
Nine Months Ended September 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 nine months ended
September 30, 1998 and 1997 were 28,660,673 and 27,726,436,
respectively, and for the three months ended September 30, 1998
and 1997 were 28,715,259 and 27,966,307 respectively. Diluted
average shares outstanding for the nine months ended September 30,
1998 and 1997 were 28,674,856 and 27,770,047, respectively,
and for the three months ended September 30, 1998 and 1997 were
28,729,442 and 28,009,919, respectively.
Certain amounts in the 1997 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 $150
million which was scheduled to be reduced to $100 million
effective November 1, 1998. Subsequent to quarter end, the
maximum available under this line was increased to $150 million
through September 1999 with the option to extend until September
2000. The required spread over LIBOR increased from 70 to 95
basis points, and will continue to vary based on the terms of the
agreement. At September 30, 1998, approximately $103 million was
outstanding and the average interest rate was 6.4%.
We have four unsecured European credit lines (denominated in
local currencies) to borrow up to a total of $15.1 million of
which $10.2 million was outstanding at September 30, 1998. Of
this amount, $7.4 million matures June 2001 with the remaining
maturing between December 2002 and December 2005. The weighted
average effective interest rate on these lines at September 30,
1998 was 5.9%.
Note C - Storage Centers
Building and equipment are presented net of accumulated
depreciation of $102 million and $74.6 million as of September
30, 1998 and December 31, 1997, respectively.
On May 29, 1998, we formed a partnership, Shurgard/Fremont
Partners I (SFP1), with Fremont Realty Capital L.L.C. (Fremont).
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.
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). Thirteen
properties were contributed to SFP1 between May and September
1998 for which we were reimbursed $51.9 million. Subsequent to
the end of the quarter, two additional properties were
contributed to SFP1. SFP1 is expected to be capitalized with
approximately $73 million to fund the acquisition of up to 16
properties and SFP1's operations.
Note D - Equity
During the first nine months of 1998, 157,995 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 September 30, 1998 totaled
$20.9 million. We have also guaranteed our pro rata portion of
the debt of certain domestic joint ventures, which at September
30, 1998 totaled $33.5 million. Subsequent to the end of the
quarter, a portion of this debt was refinanced, and the amount we
guaranteed was reduced by $9.1 million.
Additionally, we have guaranteed $13.6 million in lease
obligations for Shurgard 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 - Purchase of Units of an Affiliated Party
During 1998, we purchased eighteen Limited Partner units in
Shurgard Institutional Fund LP, from unaffiliated third parties,
for $22.6 million in cash ($21.2 million, net cash received).
We now own 22 of 25 units and are entitled to 88% of LP distributions.
For earnings allocation purposes, these purchases were effective July 1,
1998. We continue to own a general partnership interest in this
partnership. Due to our majority interest, Shurgard Institutional
Fund LP is now consolidated for financial statement purposes.
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 30 months. 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 1998 and 1997:
<TABLE>
Dollars in thousands Quarter ended September 30,
except average rent ---------------------------
1998 1997 % Change
---- ---- --------
<S> <C> <C> <C>
Rental revenue $37,359 $36,073 3.6%
Property operating 9,923 10,309 (3.7%)
expenses (1) ------- -------
Net operating income $27,436 $25,765 6.5%
======= =======
Avg. annual rent per sq. $10.19 $9.75 4.5%
ft. (2)
Avg. sq. ft. occupancy 89% 89%
Total net rentable sq. 15,100,000 15,100,000
ft.
# of properties 230 230
</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.
Third quarter net operating income (NOI) for these centers has
risen 6.5% over the same quarter last year due primarily to
increases in revenue which is primarily a function of changes in
rental rates. Third quarter revenue gains resulted primarily from
increases in rental rates which were partially offset by a decline
in other income, such as administrative fees, late fees and retail
sales. Third quarter 1998 operating expenses declined 3.7% from 1997
levels due to a decrease in on-site employee bonuses. However, 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 which partially offset the lower on-site bonuses.
<TABLE>
Dollars in thousands Nine months ended September 30,
except average rent -------------------------------
1998 1997 % Change
----- ---- --------
<S> <C> <C> <S>
Rental revenue $108,066 $103,303 4.6%
Property operating 30,389 29,826 1.9%
expenses (1) -------- --------
Net operating income $77,677 $73,478 5.7%
======== ========
Avg. annual rent per sq. $10.02 $9.60 4.3%
ft. (2)
Avg. sq. ft. occupancy 88% 88%
Total net rentable sq. 15,100,000 15,000,000
ft. (3)
# of properties 230 230
</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 September 30, 1997.
Same store net operating income for the first nine months of
1998 has risen 5.7% over the same period last year due primarily to
rental rate increases, 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 has increased as a
result of expansion projects completed during the last year.
Operating expenses for the first nine months increased 1.9% over the
prior-year period primarily due to increases in personnel costs. As
noted above, we have experienced higher than average wage increases
which were partially offset by lower on-site bonuses.
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 Rate in No. of
in per Sq. Sq. Ft.
Rents Ft. Occupied
----- ------- --------
'97 to '98 '97 to '98 '97 to '98
---------- ---------- ----------
<S> <C> <C> <C>
Arizona (0.2)% (2.7)% 2.6%
California 6.2 5.3 0.9
Florida 2.4 3.6 (1.2)
Georgia 1.4 0.3 1.1
Illinois 6.9 6.3 0.6
Michigan 3.9 2.6 1.2
New York 5.3 6.7 (1.3)
Oregon 3.4 2.4 1.0
Texas 5.1 3.2 1.8
Virginia 6.7 2.9 3.8
Washington 5.1 7.9 (2.5)
Other 5.3 4.3 0.9
---- ---- ----
Weighted Average 4.9% 4.3% 0.5%
</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 California contributed to above-average
revenue increases. Although occupancy declined in the Seattle, WA,
New York, and Florida markets, revenue rose substantially due to
rate increases. Arizona, however, has experienced new competition;
as a result, we have reduced rates in order to maintain occupancy.
On April 5, 1998, 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 nine months of 1998, we purchased six storage
centers totaling 306,000 net rentable square feet at a total cost of
$14.5 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 three in Texas. One
of the Texas properties was purchased on September 25, 1998 and
therefore, had no material impact on our operations and has been
excluded from the table below. For a discussion of purchases of
partnership units, see Liquidity and Capital Resources.
<TABLE>
Dollars in thousands Quarter Nine months
except average rent ended ended
September 30, September 30,
------------- -------------
Results for 1998 1998 1998
Acquisitions ---- ----
<S> <C> <C>
Rental revenue $529 $940
Property operating 201 309
expenses (1) ----- -----
Net operating income $328 $631
===== =====
Avg. annual rent per $7.80 $7.96
sq.ft. (2)
Avg. sq.ft. occupancy 91% 92%
Total net rentable 292,000 292,000
sq.ft.
# of property-months (3) 18 32
Purchase price $13,558
</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 nine months of 1997, we purchased 21 storage
centers totaling 1.2 million net rentable square feet at a total
cost of $58 million (including the cost associated with the related
non-competition agreements). These acquisitions were located as
follows: two in Arizona, one in California, one in Florida, two in
Georgia, four in Texas, and eight 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 10.5%
and 9.7% for the three and nine months ended September 30, 1998.
The average yield is calculated as actual annualized net operating
income for the period divided by the purchase price. The following
tables summarize the operating performance of these properties
during the third quarter and first nine months of 1998:
<TABLE>
Dollars in thousands Quarter Quarter
except average rent ended ended
September 30, September 30,
------------- -------------
Results for 1997 1998 1997
Acquisitions ---- ----
<S> <C> <C>
Rental revenue $2,224 $1,379
Property operating 711 585
expenses (1) ------ ------
Net operating income $1,513 $794
====== =====
Avg. annual rent per $7.96 $7.93
sq.ft. (2)
Avg. sq.ft. occupancy 88% 80%
Total net rentable 1,155,000 1,155,000
sq.ft.
# of property-months 63 37
(3)
Purchase price $57,870
</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 Nine Nine
except average rent months months
ended ended
September 30, September 30,
------------- -------------
Results for 1997 1998 1997
Acquisitions ---- ----
<S> <C> <C>
Rental revenue $6,306 $1,971
Property operating 2,114 851
expenses (1) ------ ------
Net operating income $4,192 $1,120
====== ======
Avg. annual rent per $7.85 $7.47
sq.ft. (2)
Avg. sq.ft. occupancy 85% 79%
Total net rentable 1,155,000 1,155,000
sq.ft.
# of property-months(3) 189 61
Purchase price $57,870
</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 16 domestic storage centers in the first nine months
of 1998, and, when all phases are complete, these 16 projects will
total approximately 756,000 net rentable square feet with an
estimated total cost of $49.8 million. Of the 16 stores opened, six
were developed through our Tennessee and Florida joint ventures,
while another eight were contributed to Shurgard/Fremont Partners I
(SFP1) in which we own a 10% interest (see "NEW DEVELOPMENT
FINANCING ARRANGEMENT"). Subsequent to the end of the quarter, two
additional properties were contributed to SFP1. We intend to
finance the majority of our on-going development through similar
relationships.
The 17 storage centers opened in 1997 (six of which were
contributed to SFP1 and seven which were developed through our
Tennessee and Florida joint ventures), representing 1,181,000 net
rentable square feet, averaged 68% occupancy for the month of
September and together generated $3,508,000 in net operating income
for the first nine months of 1998. For the one month ended
September 30, 1998 these developments had net operating income of
$485,000 which represents 76% of projected monthly NOI at
stabilization. The 13 storage centers opened in 1996 (one of which
is owned through a joint venture), represent 828,000 net rentable
square feet and averaged 79% occupancy for the month of September.
These 1996 developments together generated net operating income of
$2,885,000 for the first nine months of 1998. For the one month
ended September 30, 1998 these developments had net operating income
of $368,000 which represents 83% of projected monthly NOI at
stabilization. We estimate these 30 developments opened in 1996 and
1997 will reach projected stabilized monthly NOI in an average of 18
to 30 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.
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 22
domestic storage centers currently under construction (five 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 September 30, 1998:
<TABLE>
Number Estimated
of Completed Cost
Projects of Projects
-------- ------------
<S> <C> <C>
New Domestic Developments:
Construction in progress 22 $121.4 million
Land purchased pending 5 $21.5 million
construction
Expansion of Existing
Properties:
Construction in progress 5 $7.2 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 $923,000 (net operating income of $3,918,000 less
$4,841,000 of interest at 8.5% on invested capital ) for the first
nine months of 1998 compared to $1,697,000 for the same period 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). 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). Thirteen
properties were contributed to SFP1 between May and September 1998.
We were reimbursed $51.9 million related to the contribution of
these properties. Subsequent to the end of the quarter, two
additional properties were contributed. SFP1 is expected to be
capitalized with approximately $73 million to fund the acquisition
of up to 16 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.
Subsequent to the end of the quarter, we reached an agreement
in principle with an institutional investor to form a joint venture
partnership for the purpose of acquiring up to $105 million of new
self-storage properties developed by Shurgard. The agreement is
anticipated to be finalized in the first quarter of 1999.
Assuming that we enter into arrangements similar to those
described above for other properties we develop in 1999, we expect
that our FFO would 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 statement. The risks and
uncertainties that may cause these assumptions and 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 rents to decline, occupancy rates to drop, or
delays in rent up of newly developed properties. We may experience
increases in labor, taxes, marketing and other operating and
construction expenses, and litigation may materially decrease our
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 a total of 12 storage centers in
Belgium, Sweden, and France. The three stores opened in Belgium in
1995 had an average occupancy of 85% at September 30, 1998. The
development that opened in Belgium in 1996 had an average occupancy
of 80% at September 30, 1998. During 1997, two additional
developments opened in Belgium that were 57% occupied at the end of
the third quarter. We purchased three stores in France during 1997.
The storage center we acquired in Nice, France is 95% occupied,
while the two stores in Paris, France are still in the rent-up phase
with an average occupancy of 60% at September 30, 1998. During the
second quarter of 1998, we opened two developments in Sweden and at
September 30, 1998 these centers had an average occupancy of 33%.
During the third quarter of 1998, we opened one additional store in
Sweden. As of September 30, 1998, there were two developments under
construction in Sweden and three under construction in Belgium.
Additionally, rental rates increased 5% and 1% from the third
quarter of 1998 over the second quarter of 1998 for the Belgium and
French storage centers, respectively. The storage centers in Sweden
have achieved rates in excess of the proforma rates in the rent-up
period.
OTHER OPERATIONS
Loss from other real estate investments for the first nine
months of 1998 represents a decrease of $1,358,000 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 $1,287,000, from
$1,121,000 for the first nine months of 1997 to $2,408,000 for the
first nine months of 1998.
Property management revenue for the first nine months of 1998
decreased $61,000 over the same period last year. The decline in
management fees is due to the acquisition of stores that we had been
previously managing during late 1997 and in the current quarter, and
the elimination of management fees related to partnerships we now
consolidate for financial reporting purposes. This decrease in
management fees is partially offset by development fees related to
the new development financing arrangement (SFP1) and a one time
increase in partnership income.
Interest expense for the first nine months of 1998 increased
$2.8 million over the first nine months of 1997 due to an increase
in the outstanding debt balance (both in lines of credit and notes
payable) from $258 million at September 30, 1997 to $388 million at
September 30, 1998. Additionally, during 1998, we capitalized
$4,634,000 in interest related to the construction of storage
centers, while $2,239,000 in interest was capitalized in the first
nine months 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 Nine months ended
September 30, September 30,
-------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $11,793 $11,822 $33,502 $31,879
Gain on sale of real
estate (416)
Preferred dividend (1,100) (1,100) (3,300) (1,960)
Depreciation/amortization 8,496 6,958 24,269 19,991
Adjustment for
depreciation/amortization
from joint ventures and
subsidiaries 25 (168) 270 (227)
Deferred financing
costs (280) (280) (840) (825)
------- ------ ------ ------
FFO as currently
defined $ 18,934 $ 17,232 $ 53,485 $ 48,858
======== ======== ======== ========
FFO for the first nine months of 1998 rose $4.6 million over
FFO for the first nine months 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 nine months of 1998, we invested $126.7
million in storage centers including approximately $107.6 million in
development projects, $15.7 million in acquisitions and $3.4 million
in capital improvements to our existing portfolio. The purchase of
non-compete agreements relates to acquisitions made during the
period. Reimbursement related to the contribution of real estate of
$51.9 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 $7.6 million investment in other real estate investments
consists primarily of $5.7 million invested in joint ventures and
$0.2 million invested in our containerized storage operation. In
addition, we contributed $1.7 million in newly developed properties
to SFP1. During the first nine months of 1998, loans to joint
ventures increased primarily due to a $5 million loan we made to our
containerized storage operation.
During 1998, we purchased eighteen Limited Partner units in
Shurgard Institutional Fund LP, from unaffiliated third parties, for
$22.6 million in cash ($21.2 million, net of cash received).
We now own 22 of 25 units and are entitled to 88% of LP distributions.
We continue to own a general partnership interest in this partnership.
Due to our majority interest, Shurgard Institutional Fund LP is now
consolidated for financial statement purposes.
The balance on the domestic line of credit increased $56
million from December 31, 1997 to September 30, 1998. Draws on the
line of credit were used to fund acquisitions, purchases of
partnership units, development activity, and general corporate
purposes. Notes payable increased $34.9 million as a result of
draws on loans from an affiliated joint venture to fund development
activity in Europe. At September 30, 1998, the ratio of the
Company's debt to total assets was 37% and its debt to total market
capitalization was 33%.
We have an unsecured domestic line of credit to borrow up to
$150 million which was scheduled to be reduced to $100 million
effective November 1, 1998. Subsequent to quarter end, the maximum
available under this line was increased to $150 through September
1999 with the option to extend until September 2000. The required
spread over LIBOR increased from 70 to 95 basis points, and will
continue to vary based on the terms of the agreement.
We anticipate that cash flow from operating activities and
available lines of credit will continue to provide adequate capital
for principal payments and dividend payments in accordance with REIT
requirements. We are currently evaluating several alternatives to
finance our planned expansion, including a possible line of credit
with increased capacity, debt or equity opportunities in the capital
markets, as well as, the development financing joint venture
discussed under "New Development Financing Arrangement." Cash
provided by operating activities for the nine months of operations
ended September 30, 1998 was $62.2 million compared to $54.8 million
for the same period of 1997. Capital available from our domestic
line of credit at September 30, 1998 was approximately $36 million.
On October 28, 1998, we declared a dividend of $0.49 per share to be
paid on November 19, 1998. This dividend is approximately 74% of
third quarter FFO.
YEAR 2000 COMPLIANCE
We have completed the process of identifying our potential
risks relating to the Year 2000 problem in both our information
technology and non-information technology systems, and are
implementing solutions to mitigate those risks. We believe that we
will be successful in implementing the identified solutions in a
timely manner.
Our risks relating to the Year 2000 are in the areas of
internal systems, external interface systems and third-party service
providers. We recently replaced most of our internal systems for
reasons other than Year 2000 issues, and as a result very few
systems needed to be replaced as a result of our Year 2000
compliance program. We estimate that our total cost to replace
noncompliant systems will be $86,000. Through September 30, 1998,
we have spent $43,000 to replace our network software and 11 out of
23 of our older, non-compliant store gate control systems. We
estimate that the remaining gates will be replaced by September
1999.
We have been contacting third parties with whom we have
material relationships to attempt to determine their preparedness
with respect to Year 2000 issues and to analyze the risks to us if
they experience significant business interruptions as a result of
Year 2000 noncompliance. Through this process, we have confirmed
that several of our external interface systems and third party
service providers, including our primary bank systems, our transfer
agent, and our employee benefits administrator, are now Year 2000
compliant or have a plan to achieve compliance within a reasonable
time frame. We are continuing to evaluate the remaining external
systems and expect to complete this evaluation by December 31, 1998.
Should these external parties not perform the adjustments they have
indicated are necessary, we could experience inefficiencies in
operations or additional costs associated with fixing the problem or
changing vendors.
Because we do not believe we have any material exposure to Year
2000 issues, and because we believe we will timely implement the
actions we have identified as necessary to address our Year 2000
issues, we do not have a contingency plan and do not intend to
develop one.
The statements above regarding our expectations and estimates
relating to the Year 2000 issue constitute forward-looking
statements. These forward-looking statements are based on several
assumptions. If any of these assumptions are not satisfied or prove
to be incorrect, our actual experience could differ materially from
that indicated in the forward-looking statements. The risks and
uncertainties that may cause these assumptions to not be correct
include, among others, whether we have correctly identified our Year
2000 problems and whether third-party providers adequately address
their Year 2000 issues in a timely fashion.
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 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. Our annual meeting
for 1999 is expected to be held on May 11, 1999.
Part II, Item 6: Exhibits and Reports on Form 8-K
Exhibits:
Exhibit 27 - Financial Data Schedule
Reports on Form 8-K:
During the quarter ended September 30, 1998, no reports were
filed on Form 8-K.
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 10, 1998 By: /s/ Harrell Beck
-----------------
Harrell Beck
Chief Financial Officer, Chief Accounting
Officer and Authorized Signatory
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