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, 2000
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 1, 2000:
Class A Common Stock, $.001 par value, 29,743,324 shares
outstanding
Class B Common Stock, $.001 par value, 154,604 shares
outstanding
<TABLE>
Shurgard Storage Centers, Inc.
Part I, Item 1: Consolidated Balance Sheets
(Amounts in thousands except share data)
<CAPTION>
June 30,
2000 December 31,
(unaudited) 1999
----------- -----------
<S> <C> <C>
Assets
Storage centers:
Land $ 229,796 $ 228,601
Buildings and equipment, net 795,057 761,921
Construction in progress 72,012 49,939
----------- ----------
Total storage centers 1,096,865 1,040,461
Other real estate investments 35,685 33,929
Cash and cash equivalents 9,735 11,645
Restricted cash and investments 8,109 7,166
Other assets 59,147 60,025
----------- ----------
Total assets $1,209,541 $1,153,226
=========== ==========
Liabilities and Shareholders' Equity
Accounts payable and other liabilities $ 34,610 $ 34,312
Lines of credit 141,480 102,002
Notes payable 344,996 332,347
----------- ----------
Total liabilities 521,086 468,661
----------- ----------
Minority interest in other real estate
investments 42,355 40,763
Commitments and contingencies (Notes D, E and F)
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 of $50,000 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 of $50,000 48,115 48,115
Class A Common Stock, $0.001 par value;
120,000,000 authorized; 29,183,429 and
29,585,301 issued and outstanding 623,461 611,973
Class B Common Stock, $0.001 par value;
500,000 authorized, 154,604 issued
and outstanding; net of loans to
shareholders of $3,840 (924) (1,086)
Accumulated net income less
distributions (72,608) (63,256)
----------- ----------
Total shareholders' equity 646,100 643,802
----------- ----------
Total liabilities and shareholders'
equity $1,209,541 $1,153,226
=========== ==========
</TABLE>
<TABLE>
Shurgard Storage Centers, Inc.
Part I, Item 1: Consolidated Statements of Net Income
(unaudited)
(Amounts in thousands except per share data)
<CAPTION>
For the three For the three
months ended months ended
June 30, 2000 June 30, 1999
------------- --------------
<S> <C> <C>
Revenue
Rental $ 49,058 $ 43,184
Other real estate
investments (748) (696)
Property management 372 355
------------ -----------
Total revenue 48,682 42,843
------------ -----------
Expenses
Operating expense 14,242 11,341
Depreciation and amortization 9,792 8,974
Real estate taxes 4,302 3,855
General, administrative and other 1,356 1,189
------------ -----------
Total expenses 29,692 25,359
------------ -----------
Income from operations 18,990 17,484
------------ -----------
Interest and other income 841 290
Interest expense (7,900) (5,262)
------------ -----------
Other income (expense), net (7,059) (4,972)
------------ ------------
Minority interest 1,382 630
------------ ------------
Income before cumulative effect of
a change in accounting
principle 13,313 13,142
Cumulative effect of a change in
accounting principle
----------- -----------
Net income $ 13,313 $ 13,142
============ ===========
Basic net income per common share:
Income before
change in accounting principle $ 0.38 $ 0.38
Cumulative effect of a change in
accounting principle
------------ -----------
Net income $ 0.38 $ 0.38
============ ===========
Diluted net income per common share:
Income before
change in accounting principle $ 0.38 $ 0.38
Cumulative effect of a change in
accounting principle
------------ -----------
Net income $ 0.38 $ 0.38
=========== ===========
Distributions per common share: $ 0.51 $ 0.50
============ ===========
</TABLE>
<TABLE>
Shurgard Storage Centers, Inc.
Part I, Item 1: Consolidated Statements of Net Income
(unaudited)
(Amounts in thousands except per share data)
<CAPTION>
For the six For the six
months ended months ended
June 30, 2000 June 30, 1999
-------------- --------------
<S> <C> <C>
Revenue
Rental $ 93,825 $ 83,993
Other real estate
investments (1,643) (1,844)
Property management 759 710
------------- ------------
Total revenue 92,941 82,859
------------- ------------
Expenses
Operating expense 27,113 22,712
Depreciation and amortization 19,695 18,022
Real estate taxes 8,570 7,495
General, administrative
and other 2,488 2,180
------------- ------------
Total expenses 57,866 50,409
------------- ------------
Income from operations 35,075 32,450
------------- ------------
Interest and other income 1,614 579
Interest expense (14,867) (10,149)
------------- ------------
Other income (expense), net (13,253) (9,570)
------------- ------------
Minority interest 2,790 1,158
------------- ------------
Income before cumulative effect of
a change in accounting
principle 24,612 24,038
Cumulative effect of a change in
accounting principle (1,098)
------------- ------------
Net income $ 24,612 $ 22,940
============= ============
Basic net income per common share:
Income before change in accounting
principle $ 0.69 $ .69
Cumulative effect of a change in
accounting principle (.05)
-------------- ------------
Net income $ 0.69 $ .64
============== ===========
Diluted net income per common share:
Income before change in accounting
principle $ 0.69 $ 0.69
Cumulative effect of a change in
accounting principle $ (.05)
-------------- ------------
Net income $ 0.69 $ 0.64
============== ============
Distributions per common share: $ 1.01 $ 0.99
============== ===========
</TABLE>
<TABLE>
Shurgard Storage Centers, Inc.
Part I, Item 1: Consolidated Statements of Cash Flows
(unaudited)
(Amounts in thousands)
<CAPTION>
Six months Six months
ended ended
June 30, June 30,
2000 1999
----------- ----------
<S> <C> <C>
Operating activities:
Net income $ 24,612 $ 22,940
Adjustments to reconcile earnings to net cash
provided by operating activities:
Cumulative change in accounting
principle 1,098
Depreciation and amortization 19,695 18,022
Loss from other real estate
investments 2,845 2,962
Minority interest in earnings from investments
in other real estate investments (2,790) (1,158)
Changes in operating accounts:
Restricted cash (943) (153)
Other assets (2,331) 1,851
Accounts payable and other
liabilities 1,303 (1,280)
----------- ------------
Net cash provided by operating
activities 42,391 44,282
----------- ------------
Investing activities:
Construction, acquisition and improvements to
storage centers (65,605) (60,897)
Purchase of other real estate
investments (3,165) (4,074)
Decrease in cash and cash equivalents as a
Result of deconsolidation (Note A) (1,301)
Purchase of non-competition agreements
and other amortizable assets (92) (575)
Increase in loans to affiliates (711) (358)
Purchase of additional interest in an
affiliated partnership (1,191)
Distributions in excess of earnings from
other real estate investments 323 245
---------- ------------
Net cash used in investing
activities (69,250) (68,151)
----------- ------------
Financing activities:
Net proceeds from notes payable 12,649 21,126
Net proceeds from lines of credit 39,478 27,380
Payment of loan costs (43) (1,983)
Proceeds from payment on loan
to shareholder 165
Proceeds from issuance of common stock 2,282 3,211
Distributions paid (33,963) (33,098)
Contributions received from minority
partners 5,026 7,650
Distributions to minority partners (645) (478)
----------- ------------
Net cash provided by financing
activities 24,949 23,808
Decrease in cash and cash equivalents (1,910) (61)
Cash and cash equivalents at beginning
of period 11,645 9,474
----------- -----------
Cash and cash equivalents at end of period $ 9,735 $ 9,413
=========== ===========
Supplemental schedule of cash flow information:
Cash paid for interest $ 18,628 $ 16,599
========== ===========
Supplemental Schedule of Noncash Investing Information:
Common stock issued as consideration for
partnership interests $ 9,213
==========
</TABLE>
Shurgard Storage Centers, Inc.
Part I, Item 1: Notes to Consolidated Financial Statements
Six Months Ended June 30, 2000
(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.
Beginning with the year ended December 31, 1999, European
operations are no longer being consolidated, but are reported under
the equity method. All financial information for 1999 reflects this
change.
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 1999
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.
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, 2000 and 1999 were 29,363,484 and 29,032,756, while the three
months ended June 30, 2000 and 1999 were 29,368,583 and 29,068,594,
respectively. Diluted average shares outstanding for the six months
ended June 30, 2000 and 1999 were 29,435,192 and 29,071,238, while the
three months ended June 30, 2000 and 1999 were 29,440,612 and
29,125,943, respectively.
Certain amounts in the 1999 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 $200
million at a spread over LIBOR, maturing September 30, 2001, with the
option to extend until September 2002. The amount available and the
spread vary based on the terms of the agreement; as of June 30, 2000,
the current available amount is $200 million of which $141.5 million
was outstanding. At June 30, 2000, the weighted average interest rate
was 7.83%. Covenants on this line of credit restrict our dividends to
no more than 95% of funds from operations (as defined by the National
Association of Real Estate Investment Trusts) and require us to
maintain certain financial ratios.
<TABLE>
NOTE C - Notes Payable
<CAPTION>
(in thousands) June 30, Dec. 31,
2000 1999
-------- ---------
<S> <C> <C>
Note payable to financial $122,580 $122,580
services company
Senior notes payable 100,000 100,000
Mortgage notes payable 122,416 109,767
--------- ---------
$344,996 $332,347
========= =========
</TABLE>
The maturities of principal on debt are approximately $175.5
million in 2001; $62.2 million in 2002; $57.3 million in 2004; $50
million in 2007. Each of these notes contains covenants which require
us to submit financial information and maintain certain financial
ratios. For a further discussion see NOTE G-Notes Payable in our 1999
Annual Report on Form 10-K.
Note D - Storage Centers
Building and equipment are presented net of accumulated
depreciation of $151.3 million and $133.9 million as of June 30, 2000
and December 31, 1999, respectively. We have entered into 33
construction contracts for developments of new or improvements to
existing storage centers. Outstanding commitments under these
contracts total $45.7 million.
Note E - Shareholders' Equity
During the first six months of 2000, 84,229 shares of Class A
common stock were issued in connection with our Dividend Reinvestment
Plan (the Plan). Additionally, 19,785 shares were issued in connection
with the exercise of employee stock options and the Employee Stock
Purchase Plan.
Under the March 24, 1995 merger agreement between us and Shurgard
Incorporated, we were contingently obligated to issue additional
shares to former Shurgard Incorporated shareholders as consideration
for certain partnership interests held by Shurgard Incorporated which
were not valued at the time of the merger. During the second quarter
of 2000, we issued 387,933 shares related to this obligation. This is
the final issuance of shares related to this obligation.
On April 27, 2000, the Board approved the extension of maturity
dates of certain promissory notes to Class B common stockholders to
March 1, 2003. The extended notes require quarterly payments of
interest only at 200 basis points above LIBOR beginning September 1,
2000.
Note F -Contingent Liability and Commitments
As a general partner, we are contingently liable for the debt of
a European joint venture, which at June 30, 2000 totaled $130.2
million. We have also guaranteed all or portions of the debt of
certain domestic joint ventures and joint venture partners, which at
June 30, 2000 totaled $31.3 million.
Additionally, we have guaranteed $10.2 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.
Under the terms of the SFPI agreement executed in connection with
the formation of SFPI, we were granted an option to acquire all
fifteen of the properties owned by SFPI. 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 subject to a floor. If the properties meet
certain performance criteria, we are committed to make an option
payment of $7.5 million. If we choose to exercise the option, the
option payment will be applied toward the purchase price of the
properties. We intend to exercise our option in December 2000, with
closing anticipated in early 2001.
Under the terms of the SFPII agreement executed in connection
with the formation of SFPII, we were granted an option to acquire all
fifteen of the properties owned by SFPII. The purchase option is
exercisable at certain times between December 31, 2001 and October 31,
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. If the properties meet certain
performance criteria, we are committed to make an option payment of
15% of the approved aggregate capital budget of the properties
acquired by the Partnership. If we choose to exercise the option, the
option payment will be applied toward the purchase price of the
properties.
Note G - Segment Reporting
We have two reportable segments; Same and New Stores. Our
definition of Same Stores includes existing stores acquired prior to
January 1 of the previous year as well as developed properties that
have been operating for a full two years as of January 1 of the
current year. We project that newly developed properties will reach
stabilization in an average of approximately 24 months. New Stores
include existing domestic facilities that had not been acquired as of
January 1 of the previous year as well as domestic developed
properties that have not been operating a full two years as of January
1 of the current year. In the tables below, Disposed represents
properties sold during 1999.
These reportable segments allow us to focus on increasing net
operating income from our existing domestic real estate assets and
renting up our new domestic facilities. 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. We do not allocate non-direct
operating expenses, depreciation and 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 2000 Same Store
and New Store base for reportable segments as of and for the three
months and six months ended June 30, 2000 and 1999. Same Stores
includes all stores acquired prior to January 1, 1999, and domestic
developments opened prior to January 1, 1998. New Stores represents
all stores acquired after January 1, 1999, and domestic developments
opened after January 1, 1998:
<TABLE>
<CAPTION>
(in thousands)
Same Stores New Stores Disposed Total
----------- ---------- -------- ------
Quarter ended
June 30, 2000
<S> <C> <C> <C> <C>
Rental revenue $ 45,697 $ 6,715 $52,412
Less unconsolidated
joint ventures (2,621) (733) (3,354)
------- --------- -------- --------
Consolidated revenue 43,076 5,982 49,058
Operating expenses 12,905 2,690 15,595
Less unconsolidated
joint ventures (780) (421) (1,201)
-------- --------- -------- --------
Consolidated
operating 12,125 2,269 14,394
expenses ------- --------- -------- --------
Consolidated NOI $ 30,951 $ 3,713 $ $34,664
======== ========= ======== =========
Quarter ended
June 30, 1999
Rental revenue $ 42,802 $ 2,384 $ 618 $45,804
Less unconsolidated
joint ventures (2,413) (207) (2,620)
-------- --------- -------- --------
Consolidated revenue 40,389 2,177 618 43,184
Operating expenses 12,215 1,203 258 13,676
Less unconsolidated
joint ventures (730) (142) (872)
---------- --------- -------- ---------
Consolidated 11,485 1,061 258 12,804
operating -------- --------- -------- ---------
expenses
Consolidated NOI $ 28,904 $ 1,116 $ 360 $30,380
========= ========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
(in thousands)
Same Stores New Stores Disposed Total
----------- ---------- -------- -------
Six months ended
June 30, 2000
<S> <C> <C> <C> <C>
Rental revenue $ 88,722 $ 11,482 $100,204
Less unconsolidated
joint ventures (5,050) (1,329) (6,379)
--------- --------- -------- ---------
Consolidated revenue 83,672 10,153 93,825
Operating expenses 25,689 4,846 30,535
Less unconsolidated
joint ventures (1,527) (805) (2,332)
-------- --------- -------- ---------
Consolidated
operating 24,162 4,041 28,203
expenses -------- --------- -------- ---------
Consolidated NOI $ 59,510 $ 6,112 $ $ 65,622
========= ======== ======== =========
Six months ended
June 30, 1999
Rental revenue $ 83,768 $ 4,000 1,225 $ 88,993
Less unconsolidated
joint ventures (4,667) (333) (5,000)
-------- ---------- -------- ---------
Consolidated revenue 79,101 3,667 1,225 83,993
Operating expenses 24,056 2,215 452 26,723
Less unconsolidated
joint ventures (1,350) (240) (1,590)
-------- --------- -------- ----------
Consolidated 22,706 1,975 452 25,133
operating -------- --------- -------- ----------
expenses
Consolidated NOI $ 56,395 $ 1,692 $ 773 $ 58,860
========= ======== ====== =========
</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, 2000 and 1999.
<TABLE>
<CAPTION>
(in thousands) Three months ended Six months ended
June 30, June 30,
-------------------- -----------------
2000 1999 2000 1999
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Consolidated rental revenue $49,058 $43,184 $93,825 $83,993
Other real estate
investments (748) (696) (1,643) (1,844)
income (loss)
Property management revenue 372 355 759 710
-------- ------- ------- -------
Total revenue $48,682 $42,843 $92,941 $82,859
======= ======= ======= =======
</TABLE>
The following table reconciles the reportable segments' NOI per
the table above to consolidated net income for the quarter and six
months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
(in thousands) Three months ended Six months ended
June 30, June 30,
--------------------- -----------------
2000 1999 2000 1999
--------- ------- ------- -------
<S> <C> <C> <C> <C>
Consolidated NOI $ 34,664 $30,380 $65,622 $58,860
Other real estate
investments income (loss) (748) (696) (1,643) (1,844)
Property management revenue 372 355 759 710
Other operating expenses (4,150) (2,392) (7,480) (5,073)
Depreciation and
amortization (9,792) (8,974) (19,695) (18,022)
Interest expense (7,900) (5,262) (14,867) (10,149)
General and Administrative (1,356) (1,189) (2,488) (2,180)
Interest & other income 841 290 1,614 578
Minority interest 1,382 630 2,790 1,158
Change in accounting
principle (1,098)
---------- ------- ------- --------
Net income $ 13,313 $13,142 $ 24,612 $22,940
========= ======== ========= ========
</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," "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 AND MAY CAUSE OCCUPANCY RATES TO DROP, TAX LAW
CHANGES MAY CHANGE THE TAXABILITY OF FUTURE INCOME, INCREASES IN
INTEREST RATES MAY INCREASE THE COST OF REFINANCING LONG TERM DEBT,
AND WE MAY BE AFFECTED BY LITIGATION OR LEGISLATION RELATING TO LATE
FEES. ACTUAL RESULTS MAY DIFFER IF INCREASES IN LABOR, TAXES,
MARKETING 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. Shurgard Storage Centers, Inc. (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
the previous year as well as developed properties that have been
operating for a full two years as of January 1 of the current year. We
project that newly developed properties will reach stabilization in an
average of approximately 24 months. Please note that our definition
of Same Stores results in the addition of stores each year 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 second quarter and
first six months of 2000 and 1999:
<TABLE>
Same Store Results
<CAPTION>
(dollars in thousands Three months ended June 30, <F1>
except average rent) --------------------------------
2000 1999 % Change
-------- -------- ---------
<S> <C> <C> <C>
Rental revenue $ 45,697 $ 42,802 6.8%
Property operating 12,905 12,215 5.6%
expenses <F2> --------- ----------
Net operating income $ 32,792 $ 30,587 7.2%
========= =========
Avg. annual rent per sq. $ 10.78 $ 10.29 4.8%
ft. <F3>
Avg. sq. ft. occupancy 88% 86%
Total net rentable sq. 18,015,000 18,015,000
ft.
Number of properties 277 277
<FN>
<F1> 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.
<F2> Includes all direct property expenses. Does not include any
allocation of joint expenses incurred by the Company such as off-site
management personnel.
<F3> 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>
In order to accelerate revenue growth, we undertook a number of
sales and marketing initiatives during the first quarter of 2000. As
indicated in our Annual Report on Form 10-K, the kick off of these
initiatives was expected to result immediately in higher expenses with
revenue gains growing over the first three quarters of 2000. Total
initiative related expenses for the second quarter are on target, and
we are beginning to see the acceleration of revenue growth. We have
experienced Same Store revenue growth increases from 4.2% in the
fourth quarter of 1999 to 5.0% and 6.8% in the first and second
quarter of 2000, respectively. We believe the full impact of these
initiatives could, if successful, result in year over year Same Store
revenue gains in the range of 8% to 9%.
Same Store revenue for the second quarter of 2000 is up 6.8% over
the same quarter in 1999. Revenue gains were primarily a function of a
4.8% increase in rental rates, and a 2.0% increase in occupancy over
the prior year quarter. Increases in rental revenues were partially
offset by a decline in Ryder truck rentals and late fee revenue.
Direct property operating expenses rose 5.6% as compared to the same
period last year due to increases in marketing and personnel
expenditures. Net operating income (NOI) increased 7.2% over the prior
year quarter. As expected, we incurred additional costs related to
implementation of our new initiatives, but have started to see
positive results as reflected in our revenue growth.
Statements regarding the expected impact of our new sales
initiatives on revenues and expenses are based on several assumptions
and actual results could differ materially from those indicated. The
risks and uncertainties that may cause these statements to be
incorrect include the risks that the revenue initiatives will not be
successful, that revenue gains will not be as great as anticipated or
realized in the time frame expected, and that our expenses or revenues
will be affected by other factors not specifically related to the new
initiatives.
<TABLE>
<CAPTION>
(dollars in thousands except Six months ended June 30,<F1>
average rent) ---------------------------------------
2000 1999 % Change
--------- -------- --------
<S> <C> <C> <C>
Rental revenue $ 88,722 $ 83,768 5.9%
Property operating expenses 25,689 24,056 6.8%
<F2> --------- ---------
Net operating income $ 63,033 $ 59,712 5.6%
========= =========
Avg. annual rent per sq. ft. $ 10.67 $10.23 4.3%
<F3>
Avg. sq. ft. occupancy 87% 85%
Total net rentable sq. ft. 18,015,000 18,015,000
Number of properties 277 277
<FN>
<F1> 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.
<F2> Includes all direct property expenses. Does not include any
allocation of joint expenses incurred by the Company such as off-site
management personnel.
<F3> 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>
Same store NOI for the first six months of 2000 rose 5.6% over
the same period last year primarily due to rent increases. Revenue
gains were partially offset by declines in Ryder truck rentals and
late fee revenue. Direct operating expenses for the first six months
of 2000 increased 6.8% due to increases in real estate taxes due to
higher assessments, and increased marketing expenditures related to
our new initiatives.
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 of the previous year as well as domestic developed
properties that have not been operating a full two years as of January
1 of the current year.
<TABLE>
<CAPTION>
(dollars in thousands Three months ended Six months ended
except average rent) June 30, <F1> June 30, <F1>
------------------ ------------------
2000 1999 2000 1999
------ ------ ------- ------
<S> <C> <C> <C> <C>
Rental revenue $6,715 $2,384 $11,482 $4,000
Property operating 2,690 1,203 4,846 2,215
expenses<F2) ------- ------ ------- -------
Net operating income $4,025 $1,181 $6,636 $1,785
======= ====== ======= =======
Number of properties 62 31 62 31
Number of property months 171 88 325 164
<F3>
<FN>
<F1> 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.
<F2> Includes all direct property expenses. Does not include any
allocation of joint expenses incurred by the Company such as off-site
management personnel.
<F3> Represents the sum of the number of months we operated each
property during the year.
</TABLE>
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 six months of 2000, we purchased two storage
centers totaling 175,000 net rentable square feet at a total cost of
$14.3 million (including the cost associated with the related non-
competition agreements.) These properties are located in California
and Texas. Operating data on these acquisitions is the same for the
quarter and six months ended June 30, 2000 as one of the properties
was purchased on March 28, 2000 and the second property was purchased
during the second quarter ended June 2000.
<TABLE>
<CAPTION>
Dollars in thousands except Quarter
average rent Ended June 30,
Results of 2000 Acquisitions <F1> 2000
--------------
<S> <C>
Rental revenue $ 357
Property operating expenses <F2> 83
---------
Net operating income $ 274
=========
Avg. annual rent per sq.ft. <F3> $ 12.24
Avg. sq.ft. occupancy 78%
Total net rentable sq.ft. 175,000
Number of properties 2
Number of property-months <F4) 5
Purchase price $ 14,319
<FN>
<F1> Table includes the total operating results of each store
regardless of our ownership interest in that store.
<F2> Includes all direct property expenses. Does not include any
allocation of joint expenses incurred by the Company such as off-site
management personnel.
<F3> Average annual rent per square foot is calculated by dividing
actual rents collected by the average number of square feet occupied
during the period.
<F4> Represents the sum of the number of months we operated each
property during the applicable period.
</TABLE>
During 1999, we purchased five storage centers totaling 209,000
net rentable square feet for a total cost of $13.3 million (including
the cost associated with the related non-competition agreements).
These properties are located in Arizona, California, Florida, Texas
and Washington.
<TABLE>
<CAPTION>
Dollars in thousands except Three months ended Six months ended
rent June 30, <F1> June 30, <F1>
--------------------- --------------------
Results for 1999 Acquisitions 2000 1999 2000 1999
------ ------ ------- ------
<S> <C> <C> <C> <C>
Rental revenue $ 530 $ 102 $ 1,023 $ 102
Property operating
expenses <F2> 175 14 347 14
------ ----- ------ ------
Net operating income 355 88 676 88
====== ===== ===== ======
Avg. annual rent per sq.ft<F3> $11.75 $10.56 $11.59 $10.56
Avg. sq. ft. occupancy 81% 88% 80% 88%
Total net rentable sq.ft. 209,000 92,000 209,000 92,000
Number of properties 5 2 5 2
Number of property-months <F4> 15 3 30 3
Purchase price $13,251
<FN>
<F1> Table includes the total operating results of each store
regardless of our ownership interest in that store.
<F2> Includes all direct property expenses. Does not include any
allocation of joint expenses incurred by the Company such as off-site
management personnel.
<F3> Average annual rent per square foot is calculated by dividing
actual rents collected by the average number of square feet occupied
during the period.
<F4> Represents the sum of the number of months we operated each
property during the applicable period.
</TABLE>
Increases in revenue and NOI for the second quarter and six
months ended June 30, 2000 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, 2000, these
acquisitions had net operating income of $130,000 which represents 89%
of projected monthly NOI at maturity. The yield for these 1999
acquisitions is 10.2% (calculated as actual net operating income for
the first six months of 2000, annualized, divided by the purchase
price).
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.
Upon completion of the rent-up period, the storage centers are
purchased by a joint venture (in which we hold a majority interest).
During 1999, the joint venture (JV) purchased one of the completed
storage centers for $3.1 million, and another was purchased during the
second quarter of 2000 for $11.0 million. The operating data of these
storage centers is included in the results above. For a further
discussion of this agreement see Domestic Acquisitions in our 1999
Annual Report on Form 10-K. At June 30, 2000, we had guaranteed $23.8
million in outstanding debt for three properties related to this JV
and will guarantee additional amounts as future properties are
developed.
Domestic Development
We opened eight domestic storage centers in the first six months
of 2000, and, when all phases are complete, these projects will total
approximately 487,000 net rentable square feet with an estimated total
cost of $31.7 million. One of these storage centers was developed
with our Tennessee joint venture partner.
We opened 21 domestic storage centers in 1999, and, when all
phases are complete, these 21 projects will total approximately
1,454,000 net rentable square feet with an estimated total cost of
$113.4 million. Six of these storage centers were developed through
our Florida joint ventures and nine were contributed to
Shurgard/Fremont Partners II in which we own a 10% interest (see
DEVELOPMENT FINANCING ARRANGEMENTS in our 1999 Annual Report on Form
10-K). These 1999 developments together generated $1,442,000 in net
operating income for the first six months of 2000. For the month of
June 2000, these developments had NOI of $435,000, which represents
29% of projected monthly NOI at maturity, and averaged 56% occupancy.
The operating results of these 1999 developments are included in the
New Store Results in the previous section.
We opened 23 storage centers in 1998, representing approximately
1,600,000 net rentable square feet. Of the 23 stores opened, three
were developed through our Tennessee and Florida joint ventures, and
16 were contributed to either Shurgard/Fremont Partners I (SFPI) or
Shurgard/Fremont Partners II (SFPII), joint ventures in which we own a
10% interest (see DEVELOPMENT FINANCING ARRANGEMENTS in our 1999
Annual Report on Form 10-K). These 1998 developments together
generated $3,460,000 in net operating income for the first six months
of 2000. For the month of June 2000, these developments had NOI of
$731,000, which represents 55% of projected monthly NOI at maturity,
and averaged 77% occupancy. The operating results of these 1998
developments are included in the New Store Results in the previous
section.
In addition to the above completed developments, we had 16
storage centers under construction (two of these are being developed
in Florida through joint ventures) as of June 30, 2000. 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. We currently anticipate
opening 20-30 developments by the end of 2000. The actual number of
projects could be reduced by various conditions both within and beyond
our control. For a further discussion of these risks, see our 1999
Annual Report on Form 10-K. The following table summarizes domestic
development projects in progress at June 30, 2000.
<TABLE>
<CAPTION>
Estimated
Number Completed Cost Total Cost to Date
of of Projects as of June 30,
Projects <F1><F2> 2000 <F1>
-------- --------------- ------------------
<S> <C> <C> <C>
Consolidated
Developments:
Construction in progress 14 $65.6 million $38.5 million
Land purchased pending
construction 3 $12.9 million $3.9 million
Unconsolidated
Developments:
Construction in progress 2 $8.5 million $4.9 million
Expansion of Existing
Properties:
Construction in progress 1 $1.3 million $0.3 million
<FN>
<F1> Table includes 100% of the costs of projects regardless of our
ownership percentage
<F2> The actual completed cost of projects could vary due to delays
during construction caused by weather, unforeseen site conditions and
problems with subcontractors or contractors. For a further discussion
of events that could impact this estimate, see our 1999 Annual Report
on Form 10-K.
</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 $1,241,000 (net operating income of $1,304,000 less
$2,545,000 of interest at 8.5% interest on invested capital) for the
first six months of 2000 compared to $1,172,000 for the same period in
1999. For further discussion of the effect of this dilution, see our
1999 Annual Report on Form 10-K.
EUROPEAN OPERATIONS
As of June 30, 2000, SSC Benelux & Co., SCA (Benelux SCA), in
which we have a 7.57% equity investment, was operating in Belgium,
Sweden, France, the Netherlands, and the United Kingdom. For a
detailed discussion of this investment see EUROPEAN OPERATIONS in our
1999 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
$345,000 and $332,000 for the quarters ended June 30, 2000, and June
30, 1999,and $702,000 and $586,000 for the six months ended June 30,
2000 and 1999, respectively. In order to take advantage of the
investment opportunity Benelux SCA is accelerating its expansion rate
in Europe. Although the operations of existing stores are improving,
this expansion will produce losses for the next three to four years 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 the European
operations are not consolidated in our financial statements, but
rather our interest is accounted for under the equity method of
accounting. The data included in the following discussion and tables
reflect total European operations, not our pro rata percentage.
European Business Summary
Since 1995, Benelux SCA has tested the self storage product on
local consumers and has tailored its product to meet the needs of
European consumers. As of June 30, 2000, Benelux SCA had 32 storage
centers operating in 5 countries. The following tables include
selective financial and operating information that illustrates the
performance and growth of Benelux SCA.
<TABLE>
Summary of European Properties:
<CAPTION>
Number
of Total Net June 30, 2000 June 30, 2000
Open Rentable Estimated -------------- %Rate
Proper- Sq. Ft. Total Occ. Rates Increases
ties <F1> Cost <F1> <F2> <F2><F3> <F4>
-------- ------- ---------- ----- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Country
Belgium 11 669,000 $36.3 million 75% $11.16 3.9%
France 5 246,000 $14.9 million 95% $21.22 15.1%
2 112,000 $9.5 million
Netherlands
Sweden 9 538,000 $38.3 million 67% $16.25 8.2%
United 5 273,000 $36.0 million
Kingdom -- -------- --------------
32 1,838,000 $135.0million
== ========= ==============
<FN>
<F1> Total net rentable square feet and estimated total cost when all
phases are complete.
<F2> Includes stores that have been operating more than 12 months.
<F3> Average annual rent per square foot is calculated by dividing
actual rent collected by the average number of square feet occupied
during the period.
<F4> In the respective local currencies.
</TABLE>
Selected Financial Data of Benelux SCA
<TABLE>
<CAPTION>
Quarter Ended June 30,
----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Total Revenue $3.2 million $1.7 million
Total Assets $193.2 million $104.8 million
Total Bank Debt<F1> $156.3 million $91.1 million
<FN>
<F1>Includes unsecured debt between Benelux SCA and affiliates of
$90.3 and $79.2 million as of June 30, 2000 and 1999,
respectively.
</TABLE>
The self-storage industry is not well established in much of
Europe and we believe this presents Benelux SCA with the opportunity
to become a dominant player throughout Western Europe. Although we
are seeing other industry players entering the European markets, we
believe the supply being added to the market still leaves significant
opportunity when compared to the overall size of the market. Benelux
SCA and its subsidiaries have established expansion plans that focus
in four markets: the Benelux region (which includes Belgium,
Luxembourg and the Netherlands), France, Scandinavia and the UK. The
following sections discuss in detail the performance of existing
stores as well as our progress in carrying out these expansion plans.
European Same Store Operations
Our definition for European Same Stores includes existing stores
acquired prior to January 1 of the previous year as well as developed
properties that have been operating for a full two years as of January
1 of the current year. The following table summarizes Same Store
operating performance for the quarter and six months ended June 30,
2000 and June 30, 1999.
<TABLE>
<CAPTION>
(dollars in thousands except Three months ended June 30,
average rent) -----------------------------
2000 1999 % Change
---- ---- ---------
<S> <C> <C> <C>
Rental revenue $1,443 $1,324 9%
Property operating
expenses <F1> 568 605 (6)%
------ -------
Net operating income $ 875 $ 719 22%
======= =======
Avg. annual rent per
sq.ft. <F2> $13.10 $13.30 (2)%
Avg. sq.ft. occupancy 89% 81%
Total net rentable sq.ft. 491,000 491,000
# of properties 9 9
<FN>
<F1> Includes all direct property expenses. Does not include any
allocation of joint expenses incurred, such as off-site management
personnel.
<F2> 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>
<TABLE>
<CAPTION>
(dollars in thousands except Six months ended June 30,
average rent) ----------------------------------
2000 1999 % Change
------- ------- ---------
<S> <C> <C> <C>
Rental revenue $ 2,897 $ 2,646 9%
Property operating
expenses <F1> 1,085 1,192 (9)%
-------- --------
Net operating income $ 1,812 $ 1,454 25%
======== ========
Avg. annual rent per
sq.ft. <F2> $ 13.50 $ 13.80 (2)%
Avg. sq.ft. occupancy 86% 78%
Total net rentable sq.ft. 491,000 491,000
# of properties 9 9
<FN>
<F1>Includes all direct property expenses. Does not include any
allocation of joint expenses incurred, such as off-site management
personnel
<F2> 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>
In the second quarter of 2000, revenue increases resulted
primarily from an increase in occupancy. Revenue growth in US dollars
was reduced due to a change in currency exchange rates from the second
quarter of 1999 to the same period in 2000. Same Store rental rates
decreased an average of 2% when measured in U.S. dollars and increased
16% when measured in local currency. For the six months ended June 30,
2000, an increase in rental revenue of 24% in local currency resulting
from increases in occupancy and rental rates was offset by changes in
foreign currency exchange rates to 9% when measured in US dollars.
Same Store rental rates increased 11% in local currency and operating
expenses were held to a 3% increase when measured in local currency.
European Development
The following table summarizes European developments by country
in U.S. dollars:
<TABLE>
<CAPTION>
Total Net
Rentable
Sq. Ft.
when all
Number of Estimated phases
Properties Total Cost <F1> are complete
----------- -------------- ---------------
<S> <C> <C> <C>
Opened in 2000
France 1 $5.1 million 68,000
United 2 $15.8 million 95,000
Kingdom
Netherlands 1 $4.2 million 52,000
Opened in 1999
Belgium 2 $5.6 million 137,000
France 1 $3.3 million 54,000
Netherlands 1 $5.3 million 61,000
Sweden 5 $21.8 million 287,000
United 3 $20.2 million 179,000
Kingdom
Opened in 1998
Belgium 3 $9.6 million 185,000
Sweden 4 $16.5 million 260,000
<FN>
<F1> The actual completed cost of this project could vary due to
delays during construction caused by weather, unforeseen site
conditions and problems with subcontractors or contractors. For
a further discussion of events that could impact this estimate,
see our 1999 Annual Report on Form 10-K.
</TABLE>
During the first six months of 2000, Benelux SCA opened four
storage centers with an estimated total cost of $25.1 million and net
rentable square feet of 215,000 when all phases are complete. After an
average of three months of operation, these stores have an average
occupancy of 22% and generated $409,000 in net operating losses for
the first six months of 2000.
Of the 12 storage centers opened in 1999, 11 opened in the last
two months of the year. These 12 storage centers have an estimated
total cost of $564.2 million and net rentable square feet of 718,000
when all phases are complete. These storage centers generated $70,000
and $849,000 in net operating losses for the quarter and six months
ended June 30, 2000. This performance improvement over the first
quarter is primarily attributed to $230,000 in marketing costs
incurred in the first quarter, as well as increased real estate taxes
and other operating expenses, and second quarter revenue increases of
$320,000. The seven storage centers opened during 1998 had an average
occupancy of 60% after an average of 20 months of operations and
together generated $867,000 in net operating income for the first six
months of 2000. For the month ended June 30, 2000, net operating
income for these developments represented 52% of projected monthly NOI
at stabilization (as measured in the relevant local currency).
In addition to the above completed developments, Benelux SCA has
11 European storage centers currently under construction and has
purchased land for two centers. These developments are located as
follows: seven in France, two in the Netherlands, and two in Belgium.
Additionally, they have purchased two sites in Belgium in which
construction has not yet started. The following table summarizes
European development projects in progress at June 30, 2000:
<TABLE>
<CAPTION>
Estimated
Completed Total Cost to
Number of Cost of Date as of
Projects Projects <F1> June. 30, 2000
-------- -------------- ---------------
<S> <C> <C> <C>
New Developments
Construction in
Progress
Belgium 2 $6.6 million $3.1 million
France 7 $33 million $14 million
Netherlands 2 $8.3 million $4.7 million
Land purchased pending
construction
Belgium 2 $8.9 million $4.9 million
<FN>
<F1> The actual completed cost of projects could vary due to delays
during construction caused by weather, unforeseen site conditions and
problems with subcontractors or contractors. For a further discussion
of events that could impact this estimate, see our 1999 Annual Report
on Form 10-K.
</TABLE>
In the current state of the European self storage market, we
believe that a strategy of growth through development will result in
higher returns over the long term. However, as discussed earlier,
this expansion and 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 1999 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. In connection with this initiative, on May 15, 2000, we
formed a new joint venture with Chase Capital Partners (CCP) to
acquire and operate newly developed self storage properties developed
by us. The venture, when fully funded, will be capitalized with
approximately $160 million. The joint venture will be funded with
third-party debt financing equal to approximately 60% of total
capitalization. The venture's equity contributions will be funded 80%
by CCP and 20% by us. We will also develop and manage the properties
for the joint venture under various agreements entitling us to
industry standard development and property management fees.
Additionally, we have the right to certain equity incentive amounts
based on the performance of the properties. We expect the initial
closing will take place before the end of the year and will include
the contribution of approximately 12 properties with substantially all
remaining properties contributed to the venture by the end of the
first half of 2001.
OTHER REAL ESTATE INVESTMENTS
The following table shows income (loss) from unconsolidated real
estate investments for the three and six months ended June 30, 2000
and 1999. All income and loss amounts reflect our pro rata ownership
percentage.
<TABLE>
<CAPTION>
(dollars in Three months ended Six months ended
thousands) June 30, June 30,
------------------- --------------------
2000 1999 2000 1999
-------- ------- ------- --------
<S> <C> <C> <C> <C>
Containerized storage $ (496) $ (641) $ (999) $ (1,412)
Unconsolidated joint (365) (92) (756) (279)
ventures
Participating 427 404 814 801
mortgages
European operations (314) (367) (702) (954)
-------- -------- -------- ---------
Total $ (748) $ (696) $(1,643) $(1,844)
======== ======== ======== =========
</TABLE>
Containerized Storage
As discussed in our 1999 Annual Report on Form 10-K, we have
invested in Shurgard Storage To Go, Inc., (STG) a containerized
storage business. We own 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, 2000, our gross investment in STG was $5.0
million and we have committed to lend up to $12.2 million under three
unsecured five-year notes to fund negative cash flow during the rent
up phase. At June 30, 2000, $11.4 million was outstanding. Our pro
rata portion of STG losses was $496,000 and $641,000 for the three
months ended June 30, 2000 and 1999, and $999,000 and $1,412,000 for
the six months ended June 30, 2000 and 1999, respectively. 1999
includes the write-off of start-up costs in accordance with SOP 98-5
totaling $92,000. Although containerized storage revenues are up 23%
over the first six months of 1999, we expect expenses will continue to
exceed revenues in 2000. We currently estimate that our pro rata
portion of 2000 losses will total $1.9 million, including $700,000 of
depreciation. However, we expect earnings before interest, taxes and
depreciation to turn positive some time during the last half of the
year. There is, of course, no assurance that this expectation will be
met as numerous factors affect profitability. For a detailed
discussion of those factors, see our Annual Report on Form 10-K.
Additionally, we currently guarantee $10.2 million in lease
obligations for STG. In order to allocate resources to those markets
we believe have the greatest potential, we are currently evaluating
exit strategies for the Chicago and Portland markets. Under the new
REIT tax laws, it will be necessary to change the ownership structure
of STG before January 2001. Management is evaluating possible
alternatives.
Unconsolidated Joint Ventures
Pursuant to our affiliation agreements with two storage
operators, we have entered into 24 joint ventures in which our
economic interests ranges from 50% to 90%. As of June 30, 2000, we had
invested a total of $25.2 million in these joint ventures. Our pro
rata portion of joint venture losses totaled $756,000 ($271,000 of
income before depreciation and amortization) for the six months ended
June 30, 2000 as losses from new properties added during the previous
and current year offset earnings from stabilized properties. Our pro
rata portion of losses for these joint ventures totaled $279,000
($512,000 of income before depreciation and amortization) for the six
months ended June 30, 1999. We have guaranteed our pro-rata portion
of certain joint venture loans totaling $31.3 million. Performance
related to stores developed through these joint ventures is included
in the appropriate tables and section discussions elsewhere in this
Quarterly Report on Form 10-Q (Same Stores, Domestic Acquisitions or
Domestic Development) under INTERNAL GROWTH.
Participating Mortgages
We have $13.2 million invested in three participating mortgage
loans. All three mortgages are non-recourse to the borrower, bear
interest at 8% per annum and mature in January 2005. These loans are
secured by real estate, including four storage centers and
office/warehouse space. We receive contingent interest payments from
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, that
are exercisable from January 2000 until January 2005.
OTHER OPERATIONS
Interest expense increased $2.6 million over the prior year
quarter and $4.7 million over the first six months of 1999 due to an
increase in the outstanding debt balance from $404.2 million at June
30, 1999 to $486.5 million at June 30, 2000. Additionally, we
capitalized $4.1 million and $4.3 million in interest related to the
construction of storage centers for the six months ended June 30, 2000
and 1999 while $2.1 million and $2.2 million were capitalized for the
three months ended June 30, 2000 and 1999, respectively.
FUNDS FROM OPERATIONS
Funds from operations (FFO), pursuant to the National Association
of Real Estate Investment Trusts' (NAREIT) October, 1999, White Paper
on Funds from Operations, is defined as net income (calculated in
accordance with GAAP) including non-recurring events, except for those
defined as "extraordinary items" under GAAP and gains and losses from
sales of depreciable operating property, plus depreciation of real
estate assets 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. Our 1999 financial information has been restated to
reflect the new definition. The following table sets forth the
calculation of FFO in accordance with the NAREIT definition (in
thousands):
<TABLE>
<CAPTION>
Quarter ended Six months ended
June 30, June 30,
------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 13,313 $ 13,142 $ 24,612 $ 22,940
Non-recurring
revenue/expenses 1,545
Preferred dividend (2,188) (2,188) (4,375) (4,375)
Depreciation/amortization 9,792 8,974 19,695 18,022
Depreciation/ amortization
from unconsolidated joint
ventures and subsidiaries (481) 48 (827) 163
Deferred financing costs (256) (290) (513) (570)
-------- -------- ---------- ---------
FFO as currently defined $20,180 $ 19,686 $ 38,592 $ 37,725
======== ======== ======== ========
</TABLE>
FFO for the first six months of 2000 rose $0.9 million over FFO
for the first six months of 1999. 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 off set by financing costs
and increased expenses in marketing and real estate taxes.
Additionally, improvements in the operating performance of our
containerized storage business contributed $433,000 to this increase.
Non-recurring revenue and expenses for 1999 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 six months of 2000, we invested $48.3 million in
domestic development and expansion projects, $14.3 million on
acquisitions, and $3.0 million in capital improvements to our existing
portfolio and other capital improvements. The $3.2 million increase
in other real estate investments consists primarily of $3.0 million
invested in joint ventures and $0.2 million invested in our
containerized storage operation.
The balance on the domestic line of credit increased $39.5
million from December 31, 1999 to June 30, 2000. Draws on the line of
credit were used to fund development and acquisition activity, as well
as general corporate purposes. We have an unsecured domestic line of
credit to borrow up to $200 million at a spread over LIBOR, maturing
September 30, 2001, with the option to extend until September 2002.
The amount available and the spread vary based on the terms of the
agreement; as of June 30, 2000, the current available amount is $200
million, of which approximately $141.5 million was outstanding. At
June 30, 2000, the weighted average interest rate was 7.83%. At June
30, 2000, the ratio of the Company's debt to total assets before
depreciation was 36% and its debt to total market capitalization was
39%.
We anticipate funding 2000 growth and our ongoing 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 2000 will be sufficient to make required
principal payments and distribution payments in accordance with REIT
requirements. We are currently evaluating alternatives for
refinancing our long term debt which matures in 2001. Cash provided by
operating activities for the six months ended June 30, 2000 was $42.3
million compared to $44.3 million for the same period of 1999. On
July 27, 2000, we declared a dividend of $0.51 per share to be paid on
August 25, 2000. This dividend is approximately 74% of second quarter
FFO.
Part II, Item 1: Legal Proceedings
Michael Walker vs. Smith, Beck, Barbo, Hutchinson, Porter,
Johnson and Shurgard. On May 9, 2000 a purported class action
complaint to enjoin alleged breaches of fiduciary duty was filed in
King County Superior Court of Washington by Michael Walker, an alleged
shareholder of the Company. The Complaint alleges that the directors
breached their fiduciary duty in connection with their response to an
alleged "takeover offer" from Public Storage. The Company and the
directors filed a notice of appearance on June 7, 2000. Plaintiff has
agreed to extend indefinitely the time to answer or move with respect
to the Complaint and respond to discovery requests.
Part II, Item 4: Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Shareholders was held on May 9, 2000.
There were outstanding and entitled to vote at the meeting 29,327,454
shares of common stock, and the holders of at least 24,902,558 shares
of common stock were present in person or by Proxy (representing
84.91% of the Company shares entitled to vote at the Meeting). The
following are the results of the vote:
Proposal 1 - Election of Directors
Election of the following two nominees to serve as directors for three-
year terms or until their respective successors are elected and
qualified:
<TABLE>
<CAPTION>
AGAINST OR AUTHORITY
FOR WITHHELD
----------------------------- --------------------------
In In
Person By Proxy Total Person By Proxy Total
------ ----------- ---------- ------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Harrell 0 23,220,390 23,220,390 0 1,682,167 1,682,167
Beck
Wendell J.
Smith 0 24,179,348 24,179,348 0 723,209 723,209
</TABLE>
In addition, the following directors' terms of office continued after
the meeting:
<TABLE>
<CAPTION>
Director Term Ends
---------------- ---------
<S> <C>
Charles Barbo 2001
George Hutchinson 2001
W. Thomas Porter 2002
Raymond A. Johnson 2002
</TABLE>
Proposal 2 - Approve the Company's 2000 Long Term Incentive plan
<TABLE>
<CAPTION>
AGAINST OR AUTHORITY
FOR WITHHELD
----------------------------- --------------------------
In In
Person By Proxy Total Person By Proxy Total
------ ---------- ---------- ------ --------- ---------
<C> <C> <C> <C> <C> <C>
0 22,007,288 22,007,288 0 2,362,348 2,362,348
</TABLE>
<TABLE>
<CAPTION>
ABSTAIN
---------------------------
In
Person By Proxy Total
------ --------- -------
<S> <C> <C>
0 532,922 532,922
</TABLE>
Part II, Item 5: Other Information
<TABLE>
Pro Rata Statement of Assets and Liabilities at Historical Cost
Supplemental Financial Data
June 30, 2000
(Unaudited)
<CAPTION>
Consoli- Unconsolid
(in thousands) dated ated Total European
Domestic Domestic Domestic Self
Operations Operations Operations Storage Total
---------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Operating $ 979,214 $ 70,029 $1,049,243 $10,503 $1,059,746
storage centers
Construction in 74,461 6,399 80,860 2,326 83,186
progress
Containerized
storage assets 4,038 4,038 4,038
Corporate office 14,238 1,803 16,041 16,041
Accumulated
depreciation (138,275) (6,479) (144,754) (572) (145,326)
--------- --------- ---------- ------- ---------
Storage assets,
net 929,638 75,790 1,005,428 12,257 1,017 685
Participating 2,712 2,712 2,712
mortgages
Cash and other
assets 81,998 2,831 84,829 1,861 86,690
Amortizable 28,613 1,573 30,186 508 30,694
assets -------- --------- --------- -------- ----------
Total assets $1,042,961 $ 80,194 $1,123,155 $ 14,626 $1,137,781
========== ======== ========== ======== ==========
Accounts payable $ 30,009 $ 3,404 $ 33,413 $ 1,092 $ 34,505
and other
Lines of credit 136,483 42,253 178,736 4,997 183,733
Notes payable 235,788 30,822 266,610 6,833 273,443
-------- --------- --------- -------- ----------
Total $ 402,280 $ 76,479 $ 478,759 $ 12,922 $ 491,681
liabilities ======== ========= ========== ========= ==========
<FN>
<F1> The information is presented on a combined basis and represents both
consolidated and unconsolidated entities at pro rata ownership percentages
</TABLE>
<TABLE>
Other Selected Pro Rata Self Storage Operating Data
For the six months ended June 30, 2000
<CAPTION>
Historical
NOI Cost
--------- ----------
<S> <C> <C>
Domestic:
Same Store $ 59,510 $ 891,378
New Store 6,113 157,865
--------- ----------
$ 65,623 $1,049,243
========= ==========
European:
Same Store $ 137 $ 2,079
New Store (72) 8,424
---------- ----------
$ 65 $ 10,503
========= ==========
<FN>
<F1> This information is presented on a combined basis and represents
both consolidated and unconsolidated entities at pro rata ownership
percentages.
</TABLE>
<TABLE>
Summary of Operating Self Storage Properties
<CAPTION>
Domestic European Total
---------------- ---------------- -----------------
Number Net Number Net Number Net
of Rentable of Rentable of Rentable
Proper- Square Proper- Square Proper- Square
ties Feet ties Feet ties Feet
------ -------- ------ ------- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
100% owned 262 17,281,000 262 17,281,000
Partially
owned, 48 3,121,000 48 3,121,000
Consoli-
dated
Partially
owned, 24 1,441,000 32 1,839,000 56 3,280,000
Unconsoli-
dated
Fee 31 1,805,000 31 1,805,000
managed -- ---------- -- ---------- -- -----------
365 23,648,000 32 1,839,000 397 25,487,000
=== ========== == ========== === ===========
</TABLE>
Effective as of the start of the third quarter 2000, Shurgard's
shareholder accounts are serviced by a new transfer agent, American
Stock Transfer & Trust Company.
Part II, Item 6: Exhibits and Reports on Form 8-K
Exhibits:
Exhibit 10.1 - Service Agreement between Shurgard Storage
Centers, Inc., David K. Grant, and SSC Benelux & Co., SCA dated
June 7, 2000. -
Exhibit 10.2 - Partnership Agreement, dated May 12, 2000, between
Shurgard Development IV, Inc. and Chase Capital Partners Real
Estate Storage, L.L.C. forming CCP/Shurgard Venture, LLC, as
amended.
Exhibit 27 - Financial Data Schedule
Reports on Form 8-K:
During the quarter ended June 30, 2000, 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: August 9, 2000 By: /s/ Harrell Beck
Harrell Beck
Chief Financial Officer, Chief
Accounting Officer and Authorized Signatory
