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, 1999
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 August 2, 1999:
Class A Common Stock, $.001 par value, 28,960,094 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>
June 30, December 31,
1999 1998
-------- ----------
<S> <C> <C>
Assets
Storage centers:
Land $ 238,987 $ 212,154
Buildings and equipment, net 784,693 750,700
Construction in progress 71,075 81,043
--------- ---------
Total storage centers 1,094,755 1,043,897
Other real estate investments 34,003 33,057
Cash and cash equivalents 10,317 9,474
Restricted cash and investments 7,016 6,864
Other assets 60,554 60,615
---------- ---------
Total assets $1,206,645 $1,153,907
========== ==========
Liabilities and Shareholders' Equity
Accounts payable and other liabilities $ 33,314 $ 41,201
Lines of credit 120,733 95,028
Notes payable 374,594 331,109
--------- ---------
Total liabilities 528,641 467,338
--------- ---------
Minority interest in other real estate
investments 34,245 34,759
Commitments and contingencies (Notes D and E)
Shareholders' equity:
Series B Cumulative Redeemable Preferred
Stock; $0.001 par value; 2,300,000
authorized; 2,000,000 shares issued
and outstanding; liquidation preference 48,056 48,056
Series C Cumulative Redeemable Preferred
Stock; $0.001 par value: 2,000,000
authorized; 2,000,000 shares issued
and outstanding; liquidation preference 48,115 48,115
Class A Common Stock, $0.001 par value;
120,000,000 authorized; 28,958,095 and
28,677,367 issued and outstanding 608,694 605,484
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 net income less distributions (57,471) (47,312)
Accumulated other comprehensive income (2,549) (1,447)
-------- -------
Total shareholders' equity 643,759 651,810
-------- -------
Total liabilities and shareholders'
equity $ 1,206,645 $ 1,153,907
============ ===========
</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
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Revenue
Rental $ 44,873 $ 38,075
Other real estate investments (364) (341)
Property management 355 653
------- -------
Total revenue 44,864 38,387
------- -------
Expenses
Operating expense 12,927 11,010
Depreciation and amortization 9,795 7,659
Real estate taxes 3,937 3,216
General, administrative and
other 1,593 744
------- -------
Total expenses 28,252 22,629
------- -------
Income from operations 16,612 15,758
------- -------
Interest and other income 288 264
Interest expense (6,602) (4,973)
------- --------
Other income
(expense), net (6,314) (4,709)
------- -------
Minority interest 2,844 290
------- -------
Income before cumulative
effect of a change in
accounting principle 13,142 11,339
Cumulative effect of a change
in accounting principle
------- --------
Net income $ 13,142 $ 11,339
========= =========
Basic net income per common share:
Income before change in
accounting principle $ 0.38 $ 0.36
Cumulative effect of a change
in accounting principle $
--------- ---------
Net income $ 0.38 $ 0.36
========= =========
Diluted net income per common share:
Income before change in
accounting principle $ 0.38 $ 0.36
Cumulative effect of a change
in accounting principle $
--------- ---------
Net income $ 0.38 $ 0.36
========= =========
Distributions per common share:
Basic $ .50 $ 0.49
========= =========
Diluted $ .50 $ 0.49
========= =========
</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 six For the six
months ended months ended
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Revenue
Rental $ 87,369 $ 74,853
Other real estate investments (990) (529)
Property management 710 1,178
------- -------
Total revenue 87,089 75,502
------- -------
Expenses
Operating expense 25,892 21,874
Depreciation and amortization 19,337 15,773
Real estate taxes 7,645 6,185
General, administrative and
other 3,087 1,769
------- -------
Total expenses 55,961 45,601
------- -------
Income from operations 31,128 29,901
------- -------
Interest and other income 578 690
Interest expense (12,473) (9,434)
------- -------
Other income
(expense), net (11,895) (8,744)
------- -------
Minority interest 5,073 551
------- -------
Income before cumulative
effect of a change in
accounting principle 24,306 21,708
Cumulative effect of a change
in accounting principle (1,366)
------- -------
Net income $ 22,940 $ 21,708
========= =========
Basic net income per common share:
Income before change in
accounting principle $ .69 $ 0.68
Cumulative effect of a change
in accounting principle $ (.05)
--------- ---------
Net income $ .64 $ 0.68
========= =========
Diluted net income per common share:
Income before change in
accounting principle $ .69 $ 0.68
Cumulative effect of a change
in accounting principle $ (.05)
--------- ---------
Net income $ .64 $ 0.68
========= =========
Distributions per common share:
Basic $ .99 $ 0.98
========= =========
Diluted $ .99 $ 0.98
========= =========
</TABLE>
<PAGE>
Shurgard Storage Centers, Inc.
Part I, Item 1: Consolidated Statements of Cash Flows
(unaudited)
(Amounts in thousands)
<TABLE>
Six months Six months
ended ended
June 30, June 30,
1999 1998
-------- ---------
<S> <C> <C>
Operating activities:
Net income $22,940 $21,708
Adjustments to reconcile earnings
to net cash provided by operating
activities:
Cumulative change in accounting
principle 1,366
Depreciation and amortization 19,337 15,773
Other (294)
Loss from other real estate
investments 2,108 1,910
Minority interest in earnings from
investments in other real estate
investments (5,073) (551)
Changes in operating accounts:
Restricted cash (153) 126
Other assets (1,218) (1,302)
Accounts payable and other
liabilities 532 (964)
------ ------
Net cash provided by
operating activities 39,839 36,406
====== ======
Investing activities:
Construction, acquisition and
improvements to storage centers (82,381) (86,943)
Proceeds from sale of real estate 2,000
Purchase of other real estate
investments (3,829) (1,267)
Purchase of non-competition agreements
and other amortizable assets (575) (1,353)
Increase in loans to affiliates (358) (3,988)
Purchase of additional interest in
an affiliated partnership (1,191)
Distributions in excess of earnings
from other real estate investments 1,878
------ ------
Net cash used in investing
activities (88,334) (89,673)
------- -------
Financing activities:
Proceeds from notes payable 48,345 46,358
Net proceeds from lines of credit 26,838 24,964
Payment of loan costs (1,983) (133)
Proceeds from exercise of stock options
and dividend reinvestment plan 2,158 2,792
Distributions paid (33,098) (29,956)
Contributions received from
minority partners 7,650 10,490
Distributions to minority partners (478) (385)
------ ------
Net cash provided by financing
activities 49,432 54,130
------ ------
Net effect of translation on cash (95)
------ ------
Increase in cash and cash equivalents 842 863
Cash and cash equivalents at beginning
of period 9,475 7,248
Cash and cash equivalents at end of ------ ------
period $ 10,317 $ 8,111
======== =======
Supplemental schedule of cash flow information:
Cash paid for interest, net of
interest capitalized $ 13,530 $ 11,002
======== ========
</TABLE>
<PAGE>
Shurgard Storage Centers, Inc.
Part I, Item 1: Notes to Consolidated Financial Statements
Six Months Ended June 30, 1999
(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
1998 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 December 31, 1998, we adopted Statements of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130) and No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS No. 130
establishes standards for reporting and display of comprehensive
income and its components. SFAS No. 131 establishes standards for
determining an entity's operating segments and the type and level of
financial information to be disclosed in both annual and interim
financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers (see Note G).
On April 3, 1998, the AICPA Accounting Standards Executive
Committee (AcSEC) issued Statement of Position 98-5 (SOP 98-5),
"Reporting on the Costs of Start-Up Activities", which is effective
for fiscal years beginning after December 15, 1998. SOP 98-5
requires start-up activities and organization expenses to be
expensed as incurred. We have implemented SOP 98-5 in the first
quarter of 1999. This initial application for consolidated entities
is reported as a cumulative effect of a change in accounting
principle.
Basic average shares outstanding for the six months ended June 30,
1999 and 1998 were 29,032,756 and 28,633,157, while the three
months ended June 30, 1999 and 1998 were 29,068,594 and 28,658,910,
respectively. Diluted average shares outstanding for the six months
ended June 30, 1999 and 1998 were 29,071,238 and 28,664,244, while
the three months ended June 30, 1999 and 1998 were 29,125,943 and
28,689,998, respectively.
Certain amounts in the 1998 financial statements have been
reclassified to conform to the current presentation.
Accumulated other comprehensive income consists of foreign
currency translation adjustments.
Note B - Lines of Credit
We have an unsecured domestic line of credit to borrow up to
$150 million at a spread over LIBOR, maturing September 30, 1999,
with the option to extend until September 2000. The amount
available and the spread vary based on the terms of the agreement;
as of June 30, 1999, the current available amount is $150 million,
of which approximately $108.8 million was outstanding. At June 30,
1999, the weighted average interest rate was 6.2%.
We have European credit lines (denominated in local currencies)
to borrow up to a total of $13.3 million of which $11.9 million had
been drawn down as of June 30, 1999. Of this amount, $0.3 million
matures in 1999, $9.6 million matures in 2001, and the remaining
matures between 2002 and 2005. The weighted average effective
interest rate on these lines at June 30, 1999 was 5.0%.
Note C - Storage Centers
Building and equipment are presented net of accumulated
depreciation of $122.7 million and $106.5 million as of June 30,
1999 and December 31, 1998, respectively.
On March 17, 1999, we formed a partnership, Shurgard/Fremont
Partners II (SFPII), with Fremont Realty Capital L.L.C. (Fremont).
One of our wholly owned subsidiaries and an affiliate of Fremont are
the general partners of SFPII. We have a 10% equity interest and
the Fremont affiliate has a 90% equity interest in SFPII. Under the
terms of the agreements executed in connection with the formation of
SFPII, we contribute properties to SFPII shortly after construction
is completed. The first six properties were contributed on May 21,
1999. SFPII has granted us an option to acquire all of the
properties owned by the Partnership. The purchase option is
exercisable at certain times between December 15, 2001 and November
30, 2003, depending upon the performance of the properties.
On May 29, 1998, we formed a partnership, Shurgard/Fremont
Partners I (SFP1), with Fremont Realty Capital L.L.C. (Fremont). The
general partners of SFP1 consist of one of our wholly owned
subsidiaries and an affiliate of Fremont. 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.
For a further discussion of this partnership, see NEW DEVELOPMENT
FINANCING ARRANGEMENT in our 1998 Annual Report on Form 10-K.
Note D - Shareholders' Equity
During the first six months of 1999, 115,368 shares of Class A
common stock were issued in connection 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.
Under the Merger Agreement with Shurgard Inc., we are
contingently obligated to issue additional shares as consideration
for certain partnership interests held by Shurgard Inc. which were
not valued at the time of the merger. During the first quarter of
1999, we issued 145,286 shares related to this obligation.
Additional shares may be issued over the next two years as
consideration for similar interests in two other partnerships.
Note E -Contingent Liability and Commitments
As a general partner, we are contingently liable for the debt
of a European joint venture, which at June 30, 1999 totaled $26.8
million. We have also guaranteed all or portions of the debt of
certain domestic joint ventures and joint venture partners, which at
June 30, 1999 totaled $36.4 million.
Additionally, we have guaranteed $11.2 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
On March 31, 1999, we purchased one Limited Partner unit in
Shurgard Institutional Fund LP II, from an unaffiliated third party,
for $1.2 million in cash. We now own 6.5 of the 9.5 limited partner
units and are entitled to 67% of limited partner distributions. We
continue to own a general partnership interest in this partnership
which is consolidated in our financial statements.
Note G - Segment Reporting
SSCI has three reportable segments; Same, New and European
Stores. Our definition of Same Stores includes existing domestic
facilities acquired prior to January 1 of 1998 as well as developed
properties that have been operating a full two years as of April 1,
1999. We project that newly developed properties will reach
stabilization in an average of 21 to 24 months. New Stores include
existing domestic facilities that had not been acquired as of
January 1, 1998 as well as domestic developed properties that had
not been operating a full two years as of April 1, 1999. European
Stores include all of our non-domestic stores. We are currently
located in five European countries: Belgium, France, Sweden, the
Netherlands, and the United Kingdom.
The three reportable segments allow us to focus on increasing
net operating income from our existing domestic real estate assets,
renting up our new domestic properties, and becoming a dominant
player in the European market. We evaluate each segment's
performance based on net operating income (NOI) which is defined as
rental revenue less direct operating expenses and real estate taxes.
NOI does not include any allocation of off-site management or
overhead costs.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. There
are no inter-segment sales and transfers.
SSCI does not allocate non-direct operating expenses,
depreciation & amortization, general, administrative and other,
interest expense, interest and other income (net) and minority
interest to the segments.
Using the definition of Same Store and New Store described
above, the portfolio of assets reported in these segments changes
from year to year. Assets transition from New Store to Same Store
over time. The following tables illustrate the results using the
1999 Same Store, New Store and European Store base for reportable
segments as of and for the three months and six months ended
June 30, 1999 and 1998.
(in thousands)
<TABLE>
Same New European
Stores Stores Stores Total
------- ------ -------- ------
<S> <C> <C> <C> <C>
Quarter ended
June 30, 1999
Rental revenue $40,656 $4,916 $1,689 $47,261
Less unconsolidated
joint ventures (1,250) (1,138) (2,388)
------ ------ ------ ------
Consolidated revenue 39,406 3,778 1,689 44,873
Operating expenses 11,518 2,108 1,068 14,694
Less unconsolidated
joint ventures (290) (533) (823)
------ ----- ------ ------
Consolidated
operating expenses 11,228 1,575 1,068 13,871
------- ------ ----- -------
Consolidated NOI $28,178 $2,203 $621 $31,002
======= ====== ===== =======
Quarter ended
June 30, 1998
Rental revenue $39,182 $2,176 $769 $42,127
Less unconsolidated
joint ventures (2,584) (1,468) (4,052)
------ ------ ----- ------
Consolidated revenue 36,598 708 769 38,075
Operating expenses 11,382 916 678 12,976
Less unconsolidated
joint ventures (686) (839) (1,525)
------ ----- ----- ------
Consolidated
operating expenses 10,696 77 678 11,451
------ ----- ----- ------
Consolidated NOI $25,902 $631 $91 $26,624
======= ===== ----- -------
</TABLE>
(in thousands)
<TABLE>
Same New European
Stores Stores Stores Total
------ ------ ------- ------
<S> <C> <C> <C> <C>
Six months ended
June 30, 1999
Rental revenue $79,671 $9,320 $3,376 $92,367
Less unconsolidated
(3,204) (1,794) (4,998)
------- ------ ------ -------
Consolidated revenue 76,467 7,526 3,376 87,369
Operating expenses 22,735 3,960 2,160 28,855
Less unconsolidated
joint ventures (779) (783) (1,562)
------ ----- ------ ------
Consolidated
operating expenses 21,956 3,177 2,160 27,293
------ ------ ------ -------
Consolidated NOI $54,511 $4,349 $1,216 $60,076
======= ====== ====== =======
Six months ended
June 30, 1998
Rental revenue $76,899 $3,467 $1,486 $81,852
Less unconsolidated
joint ventures (5,024) (1,975) (6,999)
------- ------ ------ ------
Consolidated 71,875 1,492 1,486 74,853
revenue
Operating expenses 22,946 1,440 1,019 25,405
Less unconsolidated
joint ventures (1,271) (926) (2,197)
------ ----- ----- ------
Consolidated
operating expenses 21,675 514 1,019 23,208
------ ---- ----- -------
Consolidated NOI $50,200 $978 $467 $51,645
======= ==== ===== =======
</TABLE>
The following table reconciles the reportable segments' rental
revenue per the table above to consolidated total revenue for the
quarters and six months ended June 30, 1999 and 1998.
<TABLE>
(in thousands) Three months ended Six months ended
June 30, June 30,
------------------ ---------------------
1999 1998 1999 1998
------- ------ ------ --------
<S> <C> <C> <C> <C>
Consolidated rental
revenue $44,873 $38,075 $87,369 $74,853
Other real estate
investments income (loss) (364) (341) (990) (529)
Property management revenue 355 653 710 1,178
------- ------- ------- -------
Total revenue $44,864 $38,387 $87,089 $75,502
======= ======= ======= =======
</TABLE>
The following table reconciles the reportable segments' NOI per
the table above to consolidated net income for the quarters and six
months ended June 30, 1999 and 1998.
<TABLE>
(in thousands) Three months ended Six months ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
------ ----- ------ -----
<S> <C> <C> <C> <C>
Consolidated NOI $31,002 $26,624 $60,076 $51,645
Other real estate
investments income (loss) (364) (341) (990) (529)
Property management revenue 355 653 710 1,178
Other operating expenses (14,381) (11,178) (28,668) (22,393)
Interest & other income (6,314) (4,709) (11,895) (8,744)
Minority interest 2,844 290 5,073 551
Change in accounting ------ ------- ------ -----
principle (1,366)
------ ------- ------- -------
Net income $13,142 $11,339 $22,940 $21,708
======= ======= ======= =======
</TABLE>
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)
and Item 7A of our most recent 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
The primary way we analyze our performance is to measure year
over year improvements in Same Store operating results. Our
definition of Same Stores includes existing stores acquired prior to
January 1 of 1998 as well as developed properties that have been
operating for a full two years as of April 1, 1999. We project that
newly developed properties will reach stabilization in an average of
21 to 24 months. Please note that our definition of Same Stores
results in the addition of stores each quarter as new acquisitions
and developments meet the criteria for inclusion, and that we then
include these stores in the previous year's comparable data. Other
storage companies may define Same Stores differently, which will
affect the comparability of the data. The following tables summarize
same store operating performance for the 2nd quarter and first six
months of 1999 and 1998:
Same Store Results
<TABLE>
(dollars in thousands except Three months ended June 30,(3)
average rent) ------------------------------
1999 1998 % Change
------- ------ --------
<S> <C> <C> <C>
Rental revenue $40,656 $39,182 3.8%
Property operating expenses (1) 11,518 11,380 1.2%
------- -------
Net operating income $29,138 $27,802 4.8%
======= =======
Avg. annual rent per sq. ft.(2) $10.28 $9.82 4.7%
Avg. sq. ft. occupancy 87% 87%
Total net rentable sq. ft. 16,900,000 16,900,000
Number of properties 260 260
</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) Table includes the total operating results of each store
regardless of our ownership interest in that store. Note G to the
consolidated financial statements reconciles Same Store results to
our consolidated net income.
Second quarter net operating income (NOI) for these centers has
risen 4.8% over the same quarter last year due to increases in
revenue. Revenue gains were primarily a function of changes in
rental rates and were partially offset by declines in late fees and
retail sales. Second quarter 1999 operating expenses increased 1.2%
from 1998 levels primarily due to increases in utilities and
increases in real estate tax assessments for a couple of markets.
<TABLE>
(dollars in thousands except Six months ended June 30, (3)
average rent) ------------------------------
1999 1998 % Change
------- ------- -------
<S> <C> <C> <C>
Rental revenue $79,671 $76,899 3.6%
Property operating expenses (1) 22,735 22,946 (0.9%)
------- ------
Net operating income $56,936 $53,953 5.5%
======= =======
Avg. annual rent per sq. ft.(2) $10.22 $9.77 4.6%
Avg. sq. ft. occupancy 86% 86%
Total net rentable sq. ft. 16,900,000 16,900,000
Number of properties 260 260
</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) Table includes the total operating results of each store
regardless of our ownership interest in that store. Note G to
the consolidated financial statements reconciles Same Store
results to our consolidated net income. Our pro rata portion of
NOI for these stores is $55,037,000 for the six months ended
June 30, 1999.
Same store NOI for the first half of 1999 rose 5.5% over the
same period last year primarily due to rent increases. Revenue
gains were partially offset by declines in late fees and retail
sales as mentioned above. Operating expenses for the first six
months of 1999 decreased 0.9%. Increases in utilities and repairs
and maintenance expenditures were more than offset by declines in
personnel costs, which include decreased health insurance costs and
lower on-site employee bonuses. We do not expect this decrease to
continue through annual operating results.
New Store Results
Our definition of New Stores, as shown in the table below,
includes existing domestic facilities that had not been acquired as
of January 1, 1998 as well as domestic developed properties that
have not been operating a full eight quarters as of April 1, 1999.
<TABLE>
(dollars in thousands Three months ended Six months ended
except average rent) June 30, (3) June 30, (3)
------------------ -----------------
1999 1998 1999 1998
------ ----- ----- -----
<S> <C> <C> <C> <C>
Rental revenue $ 4,916 $ 2,176 $ 9,320 $ 3,467
Property operating
expenses (1) 2,108 916 3,960 1,440
------ ------ ------ ------
Net operating income $ 2,808 $ 1,260 $ 5,360 $ 2,027
Number of properties 53 28 53 28
Number of property
months (2) 169 71 295 120
Total invested cost
as of June 30, 1999 $211.1 million
</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) Represents the sum of the number of months we operated each
property during the year.
(3) Table includes the total operating results of each store
regardless of our ownership interest in that store. Note G to the
consolidated financial statements reconciles New Store results to
our consolidated net income. For the six months ended June 30,
1999, our pro rata portion of NOI for New stores is $3,429,000 which
represents 47% of projected six month NOI at maturity. Our pro rata
portion of invested cost is $125,354,000 as of June 30, 1999.
Increases from year to year in net operating income (NOI) for the
new store portfolio reflect the greater number of property months
included for the periods presented. Although this increase gives
some indication of how much of our overall NOI growth results from
this segment, it is not a good method of evaluating the performance
of assets within this segment. Acquisitions and development properties
are evaluated based on comparisons of actual results to pro forma NOI
for the appropriate period from opening or at maturity. The performance
of our acquisitions and developments are discussed in the sections that
follow.
Domestic Acquisitions
During the first half of 1999, we purchased two storage centers
totaling 92,000 net rentable square feet at a total cost of $5.0
million (including the cost associated with the related non-
competition agreements). One of these properties is located in
Texas and the other is located in Washington. Both of these
properties were purchased in the second quarter of 1999 and together
contributed $88,000 to net operating income.
During 1998, we purchased seven storage centers totaling
450,000 net rentable square feet for a total cost of $23.8 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. Six of these acquisitions were purchased during the first
half of 1998 of which one was purchased on June 30, 1998, while the
remaining two were purchased in the last half of 1998 and therefore
had no operating results to report for the quarter or six months.
These acquisitions were located as follows: one in Arizona, one in
California, one in Indiana, two in Tennessee, and three in Texas.
The table below summarizes the operating performance of these
properties during the second quarter and first half of 1999. For a
discussion of purchases of partnership units, see Liquidity and
Capital Resources.
<TABLE>
Dollars in thousands Three months ended Six months ended
except average rent June 30, (1) June 30, (1)
------------------ -----------------
Results for 1998 1999 1998 1999 1998
Acquisitions ----- ----- ----- -----
<S> <C> <C> <C> <C>
Rental revenue $893 $354 $1,746 $411
Property operating
expenses (2) 294 104 586 108
----- ----- ------ ----
Net operating income $599 $250 $1,160 $303
Avg. annual rent per
sq.ft. (3) $9.33 $9.39 $9.03 $9.72
Avg. sq.ft. occupancy 83% 92% 85% 92%
Total net rentable
sq. ft. 450,000 243,000 450,000 243,000
Number of properties 8 5 8 5
Number of property
months (4) 24 12 48 14
Purchase price $24,908
</TABLE>
(1) Table includes the total operating results of each store
regardless of our ownership interest in that store.
(2) Includes all direct property expenses. Does not include any
allocation of joint expenses incurred by the Company such as off-
site management personnel.
(3) Average annual rent per square foot is calculated by dividing
actual rents collected by the average number of square feet occupied
during the period.
(4) Represents the sum of the number of months we operated each
property during the applicable period.
Increases in revenue and NOI for the second quarter and six
months ended June 30, 1999 reflect the increase in the number of
stores as compared to the prior year periods. Decreases in occupancy
over the prior periods reflect the acquisition of stores that were
in rent up at acquisition. For the one month ended June 30, 1999
these acquisitions had net operating income of $201,000 which
represents 85% of projected monthly NOI at maturity. The current
average yield for these 1998 acquisitions is 9.3% (calculated as
actual net operating income less lease payments for the first six
months of 1999, annualized, then divided by purchase price).
Domestic Development
We opened six domestic storage centers in the first half of
1999, and, when all phases are complete, these six projects will
total approximately 411,000 net rentable square feet with an
estimated total cost of $27.6 million. Two of these storage centers
were developed through our Florida joint ventures.
We opened 24 storage centers in 1998, representing
approximately 1,600,000 net rentable square feet. Of the 24 stores
opened, one was developed through our California joint venture,
three were developed through our Tennessee and Florida joint
ventures, while another ten were contributed to Shurgard/Fremont
Partners I (SFPI) in which we own a 10% interest (see NEW
DEVELOPMENT FINANCING ARRANGEMENT in our 1998 Annual Report on Form
10-K). During the second quarter of 1999, six of these 1998
developments were contributed to Shurgard/Fremont Partners II
(SFPII) in which we own a 10% interest (see NEW DEVELOPMENT
FINANCING ARRANGEMENT in the following section). These 1998
developments together generated $1,241,000 in net operating income
for the first six months of 1999. For the one month ended June 30,
1999, these developments had NOI of $365,000 which represents 34% of
projected monthly NOI at maturity. Additionally, these developments
averaged 50% occupancy for the month of June 1999. The operating
results of these 1998 developments are included in the New Store
Results in the previous section. The storage center developed
through our California joint venture is not included in the
operating results above as it is currently a managed property. For a
further discussion see OTHER REAL ESTATE INVESTMENTS in our 1998
Annual Report on Form 10-K.
The 17 storage centers opened in 1997 (five of which were
contributed to SFP1 and seven of which were developed through our
Tennessee and Florida joint ventures), representing 1,150,000 net
rentable square feet, averaged 78% occupancy for the month of June
1999. These 1997 developments together generated $3,150,000 in net
operating income for the first six months of 1999. For the one
month ended June 30, 1999 these developments had net operating
income of $581,000 which represents 91% of projected monthly NOI at
maturity. The operating results of each of these 1997 developments
are included in either the Same Store Results or the New Store
Results in the previous section depending on whether they have met
the criteria for inclusion in Same Stores. Total cost to develop
these properties was $67.7 million.
In addition to the above completed developments, we had 20
storage centers under construction (four of these are being
developed in Florida through joint ventures) as of June 30, 1999.
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, 1999.
<TABLE>
Number Estimated Total Cost to
of Completed Cost Date as of
Projects of Projects (1) June 30, 1999
------- --------------- -------------
<S> <C> <C> <C>
New Developments:
Construction in progress 16 $82.8 million $ 53.4 million
Land purchased pending
construction 4 $18.2 million $2.9 million
Joint Venture Developments
Construction in progress 4 $18.0 million $10.7 million
Expansion of Existing
Properties:
Construction in progress 2 $2.6 million $0.1 million
</TABLE>
(1) Table includes costs of projects at 100% ownership
We believe that a long-term strategy of growth through
development will result in superior returns over the long-term. A
development strategy, however, creates a short-term dilution of
earnings during the rent-up phase of a project. 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 $1,172,000 (net operating
income of $168,000 less $1,340,000 of interest at 8.5% interest on
invested capital) for the first six months of 1999 compared to
$577,000 for the same period in 1998. For further discussion of the
effect of this dilution, see our 1998 Annual Report on Form 10-K.
DEVELOPMENT FINANCING ARRANGEMENT
In order to expand our development capacity, broaden our access
to capital and minimize the effect of the rent-up deficit on funds
from operations (FFO), we have been pursuing alternative financing
options. On March 17, 1999, we formed a partnership,
Shurgard/Fremont Partners II (SFPII), with Fremont Realty Capital
L.L.C. (Fremont). One of our wholly owned subsidiaries and an
affiliate of Fremont are the general partners of SFPII. We have a
10% equity interest and the Fremont affiliate has a 90% equity
interest in SFPII. All major decisions by SFPII require approval of
both partners. SFPII will acquire up to 16 newly developed storage
centers of which the first six properties were contributed on May
21, 1999. The remaining properties are expected to be contributed by
the end of the year. The Partnership has obtained a nonrecourse
credit facility from a commercial bank of up to $64.7 million,
secured by the properties owned by the Partnership.
Under the terms of the agreements executed in connection with
the formation of the Partnership, properties are contributed by
Shurgard Development II to the Partnership shortly after completion
of development of the properties by Shurgard. Shurgard is reimbursed
at cost for all expenses it incurred in developing the properties
contributed to the Partnership (including a reimbursement of $2.80
per net rentable square foot for internal costs). The Partnership
will be capitalized with approximately $92.4 million, including the
$64.7 million credit facility, to fund the acquisition of the
properties and Partnership operations.
The Partnership has granted Shurgard an option to acquire all
of the properties owned by the Partnership. The purchase option is
exercisable at certain times between December 15, 2001 and November 30,
2003, 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, subject to a collar.
Under a Management Services Agreement between Shurgard and the
Partnership, Shurgard will act as property manager for the
properties owned by the Partnership, and Shurgard will receive a
monthly management fee equal to the greater of $2,000 per property
or 5% of gross revenues, as well as certain other fees relating to
accounting and administrative services that Shurgard will perform on
behalf of the Partnership.
EUROPEAN OPERATIONS
As of June 30, 1999, SSC Benelux & Co., SCS (Benelux SCS), in
which we have a 13% equity position, was operating in Belgium,
Sweden, France , the Netherlands, and the United Kingdom. For a
detailed discussion of this investment see EUROPEAN OPERATIONS in
our 1998 Annual Report on Form 10-K.
Our pro rata portion of operating losses before the cumulative
effect of a change in accounting principle for European operations
was $332,000 and $56,000, for the quarters ended June 30, 1999, and
1998, and $586,000 and $111,000 for the six months ended June 30,
1999 and 1998 respectively. Although the operations of existing
stores are improving, we believe Benelux SCS will produce losses
through 2001 as financing costs, start up losses from the additional
stores and overhead costs necessary to carry out current expansion
plans will continue to exceed operating income. The results of our
European operations are consolidated in our financial statements and
data included in the following discussion and tables reflect total
European operations not our pro rata percentage.
European Development
The following table summarizes completed European developments
by country in U.S. dollars:
<TABLE>
Total Net
Number of Estimated Rentable Sq. Ft.
Properties Total Cost When Complete
---------- ---------- ---------------
<S> <C> <C> <C>
Opened in 1999
Sweden 1 $4.2 million 63,000
Opened in 1998
Belgium 3 $10.9 million 185,000
Sweden 4 $16.8 million 260,000
Opened in 1997
Belgium 2 $7.8 million 135,000
</TABLE>
During 1999, we opened one storage center in Sweden with an
estimated total cost of $4.2 million and net rentable square feet of
63,000 when all phases are complete. The seven storage centers
opened during 1998 have been operating an average of seven months,
had an average occupancy of 27% for the last month of the second
quarter of 1999 and together generated $44,000 in net operating
losses for the second quarter of 1999. For the first six months of
1999, these stores generated $9,000 in net operating income. The
losses incurred during the second quarter are caused by increased
marketing efforts during the spring of 1999. Although it is too
early to project actual rent-up periods for these projects, they are
renting up according to plan.
The two storage centers opened in Brussels in 1997 together
generated $140,000 in net operating income during the second quarter
and $264,000 in NOI for the first six months of 1999. For the last
month of this quarter, these developments averaged 68% occupancy and
had net operating income of $49,000 which represents 63% of
projected monthly NOI at maturity (as measured in the relevant local
currency).
Because of the newness of storage to the European market, the
rent-up period for storage centers developed prior to 1998 has been
longer than that of domestic development projects. During the rent
up and initial product introduction period, rental rates are below
those we anticipate at stabilization. As each center reaches
stabilized occupancy, management's focus will change from increasing
occupancy to increasing rates.
In addition to the above completed developments, we have
purchased four sites on which we intend to build storage centers,
three in the U.K. and one in Belgium. Subsequent to the end of the
quarter, we obtained the permits on two of the U.K. properties and
began construction. In order to compete for sites in the United
Kingdom, we have departed from our general policy of purchasing land
only after the permitting process is complete. As a result, we have
undertaken the additional risk that we may be unable to complete the
permitting process and cannot sell the property at a profit. The
following table summarizes European development projects in progress
at June 30, 1999:
<TABLE>
Number Estimated Total Cost to
of Completed Cost Date as of
Projects of Projects June 30, 1999
-------- -------------- -------------
<S> <C> <C> <C>
New Developments:
Construction in progress 7 $37.5 million $14.8 million
Land purchased pending
construction 4 $26.0 million $13.2 million
</TABLE>
Although we have available resources to fund the current
development activity in the table above, we will need to obtain additional
financing in order to continue to expand. In the current state of the
European self storage market, we believe that a strategy of growth through
development will result in superior returns over the long-term. However,
as discussed earlier, this development strategy creates a short-term dilution
of earnings during the rent-up phase of a project. For further
discussion, see DOMESTIC DEVELOPMENT in our 1998 Annual Report on
Form 10-K.
European Acquisitions
During 1997, we purchased three storage centers in France
totaling 116,000 net rentable square feet at a total cost of $7.1
million. One of these storage centers was located in Nice while the
other two were located in Paris. The properties in Paris were
recently developed and were still in the rent-up phase at the time
of acquisition. The Nice acquisition met the criteria for Same
Stores in the previous quarter and is included in the Same Store
results in the following section.
<TABLE>
(dollars in thousands
except average rent)
Three months ended Six months ended June
June 30, 30,
Results for 1997 1999 1998 1999 1998
Acquisitions ------------------ --------------------
<S> <C> <C> <C>
Rental revenue $ 296 $ 222 $ 583 $ 393
Property operating
expenses (1) 124 103 289 216
----- ----- ----- -----
Net operating income $ 172 $ 119 $ 294 $ 177
===== ===== ===== =====
Avg. annual rent per
sq.ft. (2) $ 22.00 $ 21.30 $ 22.60 $ 21.42
Avg. sq.ft. occupancy 67% 47% 64% 42%
Total net rentable
sq. ft 83,000 83,000 83,000 83,000
Number of properties 2 2 2 2
Number of property
months (3) 6 6 12 12
Purchase price $3.6 million
</TABLE>
_______________
(1) Includes all direct property expenses. Does not include any
allocation of joint expenses incurred, 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
We believe these French stores are on track to reach a yield
(calculated as actual net operating income less lease payments,
annualized, then divided by purchase price), in excess of 13%
(assuming the stores reach between 85% and 90% occupancy at current
rates). These projections are based on numerous assumptions and
actual results may vary due to uncertainties including the risk that
competition from new self storage facilities or other storage
alternatives may cause rents to decline and may cause occupancy
rates to drop. Actual results may differ if increases in labor,
taxes, and other operating and construction expenses occur.
Additionally, there is foreign currency exchange risk.
European Same Store Operations
Our definition for European same stores includes existing
facilities acquired prior to January 1 of 1998 as well as
developed properties that have been operating a full two years as
of April 1, 1999. The following tables summarize same store
operating performance for the quarter and six months ended June 30,
1999 and 1998.
<TABLE>
(dollars in thousands
except average rent) Quarter ended June 30,
----------------------
1999 1998 % Change
------- ------- --------
<S> <C> <C> <C>
Rental revenue $ 775 $ 631 23%
Property operating
expenses (1) 264 274 (4)%
----- -----
Net operating income $ 511 $ 357 43%
====== =====
Avg. annual rent per
sq. ft. (2) $ 13.10 $ 11.50 14%
Avg. sq.ft. occupancy 86% 80% 8%
Total net rentable sq. ft. 275,000 275,000
Number of properties 5 5
Total invested cost as
of June 30, 1999 $19.5 million
</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.
<TABLE>
(dollars in thousands
except average rent) Six months ended June 30,
-----------------------------
1999 1998 % Change
-------- ------- --------
<S> <C> <C> <C>
Rental revenue $ 1,580 $ 1,260 25%
Property operating
expenses (1) 592 596 (.7)%
------ -------
Net operating income $ 988 $ 664 49%
====== =======
Avg. annual rent per
sq. ft. (2) $ 13.30 $ 11.60 15%
Avg. sq.ft. occupancy 87% 79% 10%
Total net rentable
sq. ft. 275,000 275,000
Number of properties 5 5
Total invested cost as
of June 30, 1999 $19.5 million
</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.
In the second quarter of 1999, we increased rental rates of
Same Stores an average of 14% when measured in U.S. dollars and 15%
in local currency as compared to the same quarter in the prior year.
For the six months ended June 30, 1999, Same Store rental rates
increased an average of 15% in both U.S. dollars & local currency as
compared to the prior year period. These current rates continue to
reflect the rental rates we anticipated upon investing in the
storage centers. We attribute this success to increased product
awareness which was obtained through extensive marketing efforts.
OTHER REAL ESTATE INVESTMENTS
The following table shows income (loss) from other real estate
investments for the three and six months ended June 30, 1999 and
1998. All income and loss amounts reflect our pro rata ownership
percentage.
<TABLE>
(dollars in Three months ended Six months ended
thousands) June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
------- ------ ------- --------
<S> <C> <C> <C> <C>
Containerized storage $ (641) $ (939) $ (1,412) $ (1,561)
Joint ventures (92) 117 (279) 42
Participating mortgages 404 441 801 853
Other partnership
investments (35) 40 (100) 137
------ ----- ------- -------
Total $ (364) $ (341) $ (990) $ (529)
======= ====== ======== =======
</TABLE>
Containerized Storage
As discussed in our Annual Report, we have invested in Shurgard
Storage To Go, Inc., (STG) 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. As
of June 30, 1999, we had invested $4.7 million in STG. We have
committed to lend up to $11 million under an unsecured five-year
note of which $9.0 million was outstanding at June 30, 1999. Our
pro rata portion of STG losses was $1,412,000 for the six months
ended June 30, 1999, which includes a $92,000 extraordinary expense
reflecting the write-off of start-up costs in accordance with SOP 98-
5 and $1,561,000 for the six months ended June 30, 1998, which is
net of a one time $224,000 positive adjustment. Additionally, we
currently guarantee $11.2 million in lease obligations for STG.
Joint Ventures
Pursuant to our affiliation agreements with two storage
operators, we have entered into 19 joint ventures in which our
economic interests ranges from 50% to 90%. Losses for these joint
ventures totaled $279,000 for the six months ended June 30, 1999 as
losses from new properties added during the previous and current
year offset earnings from stabilized properties. Performance related
to stores developed through these joint ventures is included in the
discussion in DOMESTIC DEVELOPMENT. The table below summarizes
certain financial information related to the joint ventures
described above.
<TABLE>
(dollars in thousands) As of June 30, (1)
------------------
Joint Ventures 1999 1998
-------- --------
<S> <C> <C>
Operating properties:
Total assets $ 46,929 $ 41,399
Total debt $ 34,054 $ 21,986
Number of properties in
Same Store Results 5 5
Number of properties in
New Store Results 13 10
Under construction properties:
Total assets $ 9,564 $ 3,158
Total debt $ 3,362 $ 1,372
Number of properties under
construction 4 2
</TABLE>
(1) Dollar amounts represent our pro rata portion of assets and
debt based on our ownership percentage.
Additionally, we have entered into an agreement with a
California developer under which it will purchase sites in southern
California and construct storage centers on them according to our
specifications. At June 30, 1999, there were two properties under
construction. For further detail on this agreement see our Annual
Report on Form 10-K for the year ended December 31, 1998. At
June 30, 1999, we had guaranteed $18.6 million in outstanding debt for
four properties related to this agreement and will guarantee
additional amounts as future properties are approved and developed.
Participating Mortgages and other Partnership Investments
We have $13.3 million invested in three participating mortgage
loans. All three mortgages are non-recourse to the borrower and are
secured by real estate, including four storage centers and
office/warehouse space. The first two mortgages total $11.9
million, bear interest at 8%, and mature in December 2004. The
third loan is for $1.4 million, bears interest at 10%, and matures
in October 1999. Additionally, we receive contingent interest
payments from all the mortgaged properties equal to 50% of both
operating cash flow and distributions from the gain on sale of real
property, as defined. We have options to purchase the properties at
established prices, generally exercisable in 1999 and extending
until maturity of the loans.
OTHER OPERATIONS
Property management revenue for the first half of 1999
decreased $468,000 over the same period last year. This decline is
due to the elimination of management fees related to partnerships we
now consolidate for financial reporting purposes as well as a one
time partnership income increase that was included in the first half
of 1998.
Interest expense for the first six months of 1999 increased
$3.0 million over the first six months of 1998 due to an increase in
the outstanding debt balance (both in lines of credit and notes
payable) from $343 million at June 30, 1998 to $496 million at June
30, 1999. Additionally, during the first half of 1999, we
capitalized $4,937,000 in interest related to the construction of
storage centers, while $3,177,000 in interest was capitalized in the
first half of 1998.
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,
--------------- -------------------
1999 1998 1999 1998
------- ------ ------- --------
<S> <C> <C> <C> <C>
Net income $ 13,142 $ 11,339 $ 22,940 $ 21,708
Non-recurring revenue/expenses (200) 1,645 (416)
Preferred dividend (2,188) (1,100) (4,375) (2,200)
Depreciation/amortization 9,795 7,659 19,337 15,773
Depreciation/ amortization
from unconsolidated joint
ventures and subsidiaries (773) 283 (1,152) 246
Deferred financing costs (290) (280) (570) (560)
-------- -------- -------- --------
FFO as currently defined $ 19,686 $ 17,701 $ 37,825 $ 34,551
======== ======== ======== ========
</TABLE>
FFO for the first six months of 1999 rose $3.3 million over FFO
for the first six months of 1998. As previously discussed, this
growth reflects the improved performance of the original portfolio
of properties as well as the addition of properties over the past
three years through acquisitions and developments. Non-recurring
revenue and expenses in the table above includes the effect of the
cumulative change in accounting principle relating to SOP 98-5 for
both consolidated entities and our pro-rata portion of
unconsolidated joint ventures. (See Note A)
LIQUIDITY AND CAPITAL RESOURCES
During the first half of 1999, we invested $58.1 million in
domestic development and expansion projects, $21.5 million in
European development projects, and $2.8 million in capital
improvements to our existing portfolio. The $3.8 million increase
in other real estate investments consists primarily of $3.6 million
invested in joint ventures and $0.2 million invested in our
containerized storage operation.
The balance on the domestic line of credit increased $27.4
million from December 31, 1998 to June 30, 1999. Draws on the line
of credit were used to fund the purchase of a partnership unit,
development activity, and general corporate purposes. Notes payable
increased $43.5 million due to draws on loans from an affiliated
joint venture to fund development activity in Europe, as well as the
addition of SFPII as previously discussed in "NEW DEVELOPMENT
FINANCING ARRANGEMENT". At June 30, 1999, the ratio of the
Company's debt to total assets before depreciation was 37% and its
debt to total market capitalization was 36%.
We have an unsecured domestic line of credit to borrow up to
$150 million at a spread over LIBOR, maturing September 30, 1999,
with the option to extend until September 2000. The amount
available and the spread vary based on the terms of the agreement;
as of June 30, 1999, the current available amount is $150 million,
of which approximately $108.8 million was outstanding. At June 30,
1999, the weighted average interest rate was 6.2%.
We have European credit lines (denominated in local currencies)
to borrow up to a total of $13.3 million of which $11.9 million had
been drawn down as of June 30, 1999. Of this amount, $0.3 million
matures in 1999, $9.6 million matures in 2001, and the remaining
matures between 2002 and 2005. The weighted average effective
interest rate on these lines at June 30, 1999 was 5.0%.
On March 31, 1999, we purchased one Limited Partner unit in
Shurgard Institutional Fund LP II, from an unaffiliated third party,
for $1.2 million in cash. We now own 6.5 of the 9.5 limited partner
units and are entitled to 67% of limited partner distributions. We
continue to own a general partnership interest in this partnership
which is consolidated in our financial statements.
We anticipate funding 1999 growth and our on-going development
program primarily through a combination of our lines of credit, long
term debt, preferred equity, and alternative capital sources. We
intend to pursue joint ventures with private institutions and public
pension funds to provide these alternative sources of capital. We
believe that our cash flow in 1999 will be sufficient to make
required principal payments and distribution payments in accordance
with REIT requirements. Cash provided by operating activities for
the six months ended June 30, 1999 was $39.8 million compared to
$37.2 million for the same period of 1998. On July 28, 1999, we
declared a dividend of $0.50 per share to be paid on August 23,
1999. This dividend is approximately 74% of 2nd quarter FFO.
YEAR 2000 COMPLIANCE
We are continuing the process of identifying our potential
risks relating to the Year 2000 issue in both our information
technology and non-information technology systems, and are
implementing solutions to mitigate those risks as they are
identified. We expect to complete our evaluation by September 15,
1999 and 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 due to this, 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 approximately $300,000 to $400,000.
Through June 30, 1999, we have spent approximately $173,000 to
replace our network software and 48 out of 51 of our older, non-
compliant gate control systems at certain of our stores. We
estimate that the remaining gates will be replaced by September
1999. Systems to be replaced include certain computer hardware and
our payroll system. We expect this to be completed by August 31,
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 many 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 necessary changes by September 15, 1999. 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.
We believe the most reasonably likely worst-case scenarios that
we might confront with respect to the Year 2000 issues have to do
with the possible failure of third party systems over which we have
no control, such as, but not limited to, power and telephone
services. We are currently developing a specific Year 2000
contingency plan to mitigate exposure to third party system
failures. We expect the plan to be complete by November 15, 1999.
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 issues and whether third-party providers adequately address
their Year 2000 issues in a timely fashion.
Part II, Item 4: Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Shareholders was held on May 11, 1999.
There were outstanding and entitled to vote at the meeting
29,030,082 shares of common stock, and the holders of at least
24,727,861 shares of common stock were present in person or by Proxy
(representing 85.2% 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:
FOR AGAINST OR AUTHORITY
WITHHELD
--------------------------- -----------------------
<TABLE>
In By In By
Person Proxy Total Person Proxy Total
------ -------- -------- ----- ------- -------
<C> <C> <C> <C> <C> <C>
W. Thomas Porter 0 24,549,688 24,549,688 0 178,173 178,173
Raymond J. Johnson 0 24,551,045 24,551,045 0 176,816 176,816
</TABLE>
In addition, the following directors' terms of office continued
after the meeting:
Director Term Ends
- ------------ ---------
Harrell Beck 2000
Wendell Smith 2000
Charles Barbo 2001
George Hutchinson 2001
Part II, Item 6: Exhibits and Reports on Form 8-K
Exhibits:
Exhibit 27 - Financial Data Schedule
Reports on Form 8-K:
On May 26, 1999, we filed Form 8-K dated May 21, 1999, which
disclosed the initial contribution of the first six properties to a
partnership formed on March 17, 1999, with Fremont Realty Capital
L.L.C. ("Fremont").
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 10, 1999 By: /s/ Harrell Beck
--------------------------
Harrell Beck
Chief Financial Officer, Chief Accounting
Officer and Authorized Signatory
<TABLE> <S> <C>
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<PERIOD-END> JUN-30-1999
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0
96,171
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