FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 1, 2000:
Class A Common Stock, $.001 par value, 29,759,439 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>
September 30,
2000 December 31,
(unaudited) 1999
----------- -----------
<S> <C> <C>
Assets
Storage centers:
Land $ 239,449 $ 228,601
Buildings and equipment, net 821,250 761,921
Construction in progress 53,543 49,939
----------- ----------
Total storage centers 1,114,242 1,040,461
Other real estate investments 35,111 35,689
Cash and cash equivalents 12,766 11,645
Restricted cash and investments 8,449 7,166
Other assets 63,223 58,265
----------- ----------
Total assets $1,233,791 $1,153,226
=========== ===========
Liabilities and Shareholders' Equity
Accounts payable and other liabilities $ 41,833 $ 34,312
Lines of credit 164,675 102,002
Notes payable 344,994 332,347
----------- ----------
Total liabilities 551,502 468,661
----------- ----------
Minority interest in other real estate
investments 38,146 40,763
Commitments and contingencies (Notes D 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; 29,604,835 and
29,093,474 issued and outstanding 623,910 611,973
Class B Common Stock, $0.001 par value;
500,000 authorized, 154,604 issued
and outstanding; net of loans to
shareholders of $3,680 (760) (1,086)
Accumulated net income less
distributions (75,178) (63,256)
----------- ---------
Total shareholders' equity 644,143 643,802
----------- ----------
Total liabilities and shareholders'
equity $ 1,233,791 $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
Sept. 30, 2000 Sept. 30, 1999
-------------- --------------
<S> <C> <C>
Revenue
Rental $ 51,949 $ 45,503
Other real estate investments (627) (568)
Property management 397 337
----------- ----------
Total revenue 51,719 45,272
----------- ----------
Expenses
Operating expense 14,362 12,116
Depreciation and amortization 10,324 9,420
Real estate taxes 4,327 3,910
General, administrative
and other 1,242 1,031
----------- ----------
Total expenses 30,255 26,477
----------- ----------
Income from operations 21,464 18,795
----------- ----------
Interest and other income 946 585
Interest expense (8,171) (6,050)
----------- -----------
Other income (expense), net (7,225) (5,465)
----------- -----------
Minority interest 548 688
----------- ----------
Income before cumulative effect
of a change in accounting
principle 14,787 14,018
Cumulative effect of a change in
accounting principle
----------- ----------
Net income $ 14,787 $ 14,018
=========== ==========
Basic net income per common
share:
Income before
change in accounting principle $ 0.42 $ 0.41
Cumulative effect of a change in
accounting principle
----------- ----------
Net income $ 0.42 $ 0.41
=========== ===========
Diluted net income per common
share:
Income before
change in accounting principle $ 0.42 $ 0.41
Cumulative effect of a change in
accounting principle
----------- -----------
Net income $ 0.42 $ 0.41
=========== ===========
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 nine For the nine
months ended months ended
Sept. 30, 2000 Sept. 30, 1999
-------------- --------------
<S> <C> <C>
Revenue
Rental $ 145,774 $129,496
Other real estate investments (2,269) (2,412)
Property management 1,156 1,047
---------- ----------
Total revenue 144,661 128,131
---------- ---------
Expenses
Operating expense 41,475 34,828
Depreciation and amortization 30,019 27,442
Real estate taxes 12,897 11,405
General, administrative
and other 3,730 3,211
---------- ---------
Total expenses 88,121 76,886
---------- ---------
Income from operations 56,540 51,245
---------- ---------
Interest and other income 2,559 1,163
Interest expense (23,038) (16,198)
---------- ----------
Other income (expense), net (20,479) (15,035)
---------- ----------
Minority interest 3,338 1,846
---------- ----------
Income before cumulative effect
of a change in accounting
principle 39,399 38,056
Cumulative effect of a change in
accounting principle (1,098)
---------- ----------
Net income $ 39,399 $ 36,958
========= ==========
Basic net income per common
share:
Income before
change in accounting principle $ 1.11 $ 1.09
Cumulative effect of a change in
accounting principle (.05)
---------- ----------
Net income $ 1.11 $ 1.04
========== ==========
Diluted net income per common
share:
Income before
change in accounting principle $ 1.11 $ 1.09
Cumulative effect of a change in
accounting principle $ (.05)
---------- ----------
Net income $ 1.11 $ 1.04
========== ==========
Distributions per common share: $ 1.52 $ 1.49
========== =========
</TABLE>
<TABLE>
Shurgard Storage Centers, Inc.
Part I, Item 1: Consolidated Statements of Cash Flows
(unaudited)
(Amounts in thousands)
<CAPTION>
Nine months Nine months
ended ended
Sept. 30, Sept. 30,
2000 1999
---------- ----------
<S> <C> <C>
Operating activities:
Net income $ 39,399 $36,958
Adjustments to reconcile earnings to
net cash provided by operating activities:
Cumulative change in accounting principle 1,098
Depreciation and amortization 30,019 27,442
Gain on sale of assets (163)
Loss from other real estate investments 4,180 4,074
Minority interest in earnings from
other real estate investments (3,338) (1,846)
Changes in operating accounts:
Restricted cash and investments (1,283) (228)
Other assets (2,726) (585)
Accounts payable and other
liabilities 7,566 4,008
--------- -------
Net cash provided by operating
activities 73,817 70,758
---------- -------
Investing activities:
Construction, acquisition and
improvements to storage centers (93,276) (89,204)
Purchase of other real estate investments (3,925) (6,879)
Decrease in cash and cash equivalents as a
Result of deconsolidation (Note A) (1,301)
Purchase of non-competition agreements
and other amortizable assets (504) (580)
Increase in loans to affiliates (1,735) (1,196)
Purchase of additional interest in an
Affiliated partnership (3,807) (1,191)
Distributions in excess of earnings from
other real estate investments 323 1,361
--------- -------
Net cash used in investing activities (102,924) (98,990)
---------- -------
Financing activities:
Net proceeds from notes payable 12,647 5,984
Net proceeds from lines of credit 62,673 67,150
Payment of loan costs (85) (1,997)
Proceeds from payment on loan
to shareholder 330
Proceeds from issuance of common stock 2,730 4,749
Distributions paid (51,321) (49,843)
Contributions received from minority
partners 5,026 7,650
Distributions to minority partners (1,771) (692)
----------- --------
Net cash provided by financing
activities 30,228 33,001
Decrease in cash and cash equivalents 1,121 4,769
Cash and cash equivalents at beginning
of period 11,645 9,474
--------- -------
Cash and cash equivalents at end of period $ 12,766 $14,243
========= =======
Supplemental schedule of cash flow information:
Cash paid for interest $ 26,994 $22,315
========= =======
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
Nine Months Ended September 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 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 nine months ended
September 30, 2000 and 1999 were 29,492,632 and 29,068,053, while
the three months ended September 30, 2000 and 1999 were 29,748,121
and 29,137,330, respectively. Diluted average shares outstanding
for the nine months ended September 30, 2000 and 1999 were
29,544,806 and 29,103,294, while the three months ended September
30, 2000 and 1999 were 29,816,868 and 29,174,533, 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 September 30, 2000, the current available amount is
$200 million of which $164.7 million was outstanding. At
September 30, 2000, the weighted average interest rate was 7.80%.
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) Sept. 30, 2000 Dec. 31, 1999
-------------- ------------
<S> <C> <C>
Note payable to financial $ 122,580 $ 122,580
services company
Senior notes payable 100,000 100,000
Mortgage notes payable 122,414 109,767
--------- ---------
$ 344,994 $ 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 $160.5 million and $133.9 million as of September
30, 2000 and December 31, 1999, respectively. We have entered into
39 construction contracts for developments of new or improvements to
existing storage centers. Outstanding commitments under these
contracts total $54.3 million.
Note E - Shareholders' Equity
During the first nine months of 2000, 94,304 shares of Class A
common stock were issued in connection with our Dividend
Reinvestment Plan. Additionally, 29,124 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 September 30, 2000 totaled
$135.0 million. We have also guaranteed all or portions of the debt
of certain domestic joint ventures and joint venture partners, which
at September 30, 2000 totaled $35.2 million.
Additionally, we have guaranteed $9.2 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 agreements executed in connection with
the formation of Shurgard/Fremont Partners I (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
annualized net operating income of the properties for the three or
four-month period preceding the exercise of the option subject to a
floor. We will exercise our option between January 1 2001 and March
31, 2001.
Under the terms of the agreements executed in connection with
the formation of Shurgard/Fremont Partners II, (SFPII), we were
granted an option to acquire all sixteen 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 annualized 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 SFP
II. 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 nine months ended September 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 New
Stores Stores Disposed Total
-------- --------- -------- ---------
Quarter ended
September 30, 2000
<S> <C> <C> <C> <C>
Rental revenue $48,078 $ 7,420 $55,498
Less unconsolidated
joint ventures (2,681) (868) (3,549)
-------- --------- -------- ---------
Consolidated revenue 45,397 6,552 51,949
Direct operating
expenses and real 13,310 2,454 15,764
estate taxes
Less unconsolidated
joint ventures (776) (454) (1,230)
-------- --------- -------- ---------
Consolidated 12,534 2,000 14,534
operating expenses -------- --------- -------- ---------
Consolidated NOI $32,863 $ 4,552 $ $37,415
========= ========= ======== =========
Quarter ended
September 30, 1999
Rental revenue $44,677 $ 3,104 $ 626 $48,407
Less unconsolidated
joint ventures (2,559) (345) (2,904)
---------- --------- -------- ---------
Consolidated revenue 42,118 2,759 626 45,503
Direct operating
expenses and real 12,400 1,255 197 13,852
estate taxes
Less unconsolidated
joint ventures (763) (248) (1,011)
--------- --------- -------- ---------
Consolidated 11,637 1,007 197 12,841
operating expenses --------- --------- -------- ---------
Consolidated NOI $30,481 $ 1,752 $ 429 $32,662
========= ========= ======== =========
</TABLE>
<TABLE>
<CAPTION>
(in thousands)
Same New
Stores Stores Disposed Total
------- ------- -------- ------
Nine months ended
September 30, 2000
<S> <C> <C> <C> <C>
Rental revenue $136,797 $ 18,902 $155,699
Less unconsolidated
joint ventures (7,736) 2,189) (9,925)
-------- --------- -------- ---------
Consolidated revenue 129,061 16,713 145,774
Direct operating
expenses and real estate 39,000 7,310 46,310
taxes
Less unconsolidated
joint ventures (2,281) (1,292) (3,573)
-------- --------- -------- ---------
Consolidated operating 36,719 6,018 42,737
expenses -------- --------- -------- ---------
Consolidated NOI $92,342 $ 10,695 $ $103,037
======== ======== ======== =========
Nine months ended
September 30, 1999
Rental revenue $128,446 $ 7,105 $ 1,850 $137,401
Less unconsolidated
joint ventures (7,227) (678) (7,905)
-------- -------- -------- --------
Consolidated revenue 121,219 6,427 1,850 129,496
Direct operating
expenses and real estate 36,456 3,470 649 40,575
taxes
Less unconsolidated
joint ventures (2,113) (488) (2,601)
-------- --------- -------- ---------
Consolidated operating 34,343 2,982 649 37,974
expenses -------- -------- -------- ---------
Consolidated NOI $86,876 $ 3,445 $ 1,201 $91,522
======= ======= ======== ========
</TABLE>
The following table reconciles the reportable segments' rental
revenue per the table above to consolidated total revenue for the
quarters and nine months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
(in thousands) Three months ended Nine months ended
September 30, September 30,
-------------------- -------------------
2000 1999 2000 1999
--------- --------- -------- -------
<S> <C> <C> <C> <C>
Consolidated rental $51,949 $45,503 $145,774 $129,496
revenue
Other real estate
investments income (loss) (627) (568) (2,269) (2,412)
Property management revenue 397 337 1,156 1,047
-------- ------- -------- --------
Total revenue $51,719 $45,272 $144,661 $128,131
======== ======= ======== ========
</TABLE>
The following table reconciles the reportable segments' NOI per
the table above to consolidated net income for the quarter and nine
months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
(in thousands) Three months ended Nine months ended
September 30, September 30,
-------------------- ------------------
2000 1999 2000 1999
-------- ------ ------ --------
<S> <C> <C> <C> <C>
Consolidated NOI $ 37,415 $32,662 $103,037 $91,522
Other real estate investments
income (loss) (627) (568) (2,269) (2,412)
Property management revenue 397 337 1,156 1,047
Other operating expenses (4,140) (3,185) (11,635) (8,259)
Depreciation and amortization (10,324) (9,420) (30,019) (27,442)
Interest expense (8,171) (6,050) (23,038) (16,198)
General and Administrative (1,242) (1,031) (3,730) (3,211)
Interest & other income 931 585 2,259 1,163
Minority interest 548 688 3,338 1,846
Change in accounting
principle (1,098)
--------- -------- -------- --------
Net income $ 14,787 $14,018 $ 39,399 $36,958
========= ======= ======== =======
</TABLE>
Part I, Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
This discussion and analysis should be read in conjunction with
our financial statements and accompanying notes thereto included in this
report and the audited financial statements and notes thereto included in
our most recent Annual Report on Form 10-K.
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. We
disclaim any obligation to publicly release the results of any
revisions to these forward-looking statements reflecting new
estimates, events or circumstances after the date 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 third quarter and first nine months of 2000 and 1999:
<TABLE>
Same Store Results
<CAPTION>
(dollars in thousands except Three months ended September
average rent) 30, <F1>
-------------------------------
%
2000 1999 Change
------- ------- -------
<S> <C> <C> <C>
Rental revenue $48,078 $44,677 7.6%
Property operating expenses<F2> 13,310 12,400 7.3%
------- -------
Net operating income $34,768 $32,277 7.7%
======= =======
Avg. annual rent per sq. ft.<F3> $ 11.00 $ 10.46 5.2%
Avg. sq. ft. occupancy 89% 88%
Total net rentable sq. ft.
18,032,000 18,032,000
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>
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 1999 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. The revenue generating initiatives continued to ramp up during
the third quarter. Store occupancy increased in the third quarter,
which we believe is attributable to the marketing and sales
initiatives. We have experienced Same Store revenue growth
increases from 4.2% in the fourth quarter of 1999 to 5.0%, 6.8% and
7.6% in the first, second and third quarters 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 third quarter of 2000 is up 7.6%
over the same quarter in 1999. Revenue gains were a function of a
5.2% increase in rental rates, a 1.4% increase in occupancy, and an
increase in other income contributing 1.0% to the overall revenue
increase 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 7.3% as
compared to the same quarter last year due to increases in marketing
and performance related personnel expenditures. Net operating income
(NOI) increased 7.7% over the prior year quarter. As expected, we
incurred additional costs related to implementation of our new
initiatives, but have seen 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 Nine months ended
average rent) September 30, <F1>
--------------------
2000 1999 % Change
-------- -------- ---------
<S> <C> <C> <C>
Rental revenue $136,797 $128,446 6.5%
Property operating expenses<F2> 39,000 36,456 7.0%
-------- --------
Net operating income $97,797 $91,990 6.3%
========= =========
Avg. annual rent per sq. ft.<F3> $ 10.78 $10.31 4.6%
Avg. sq. ft. occupancy 88% 86%
Total net rentable sq. ft. 18,032,000 18,032,000
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 nine months of 2000 rose 6.5% 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 nine
months of 2000 increased 7.0% due to increases in real estate taxes
due to higher assessments, and increases in marketing and personnel
expenditures.
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 except Three months ended Nine months ended
average rent) September 30, <F1> September 30, <F1>
----------------- -----------------
2000 1999 2000 1999
------- ------- ------ -------
<S> <C> <C> <C> <C>
Rental revenue $7,420 $3,104 $18,902 $7,105
Property operating expenses<F2> 2,454 1,255 7,310 3,470
------- ------- ------- -----
Net operating income $4,966 $1,849 $11,592 $3,635
======= ====== ======= ======
Number of properties 71 37 71 37
Number of property months <F3> 194 107 520 271
<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 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 nine months of 2000, we purchased seven
storage centers totaling 368,000 net rentable square feet at a total
cost of $24.9 million (including the cost associated with the
related non-competition agreements.) These properties are located in
California and Texas. One of these properties was purchased in the
first quarter, one in the second quarter and five properties were
purchased during the third quarter. Together these seven properties
contributed $746,000 to net operating income for the nine months
ended September 30, 2000.
<TABLE>
<CAPTION>
Dollars in thousands except Quarter Nine months
average rent ended ended
Sept. 30, Sept. 30,
<F1> <F1>
--------- ---------
Results for 2000 Acquisitions 2000 2000
------ -------
<S> <C> <C>
Rental revenue $ 672 $ 1,029
Property operating expenses<F2> 200 283
------- -------
Net operating income $ 472 $ 746
======== =======
Avg. annual rent per sq.ft.<F3> $ 10.01 $ 10.68
Avg. sq.ft. occupancy 83% 81%
Total net rentable sq.ft. 368,000 368,000
Number of properties 7 7
Number of property-months <F4> 14 19
Purchase price $24,870
<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 Nine months
average rent ended ended
September 30,<F1> September 30,<F1>
----------------- ------------------
Results for 1999 Acquisitions 2000 1999 2000 1999
----- ------ ------ -------
<S> <C> <C> <C> <C>
Rental revenue $ 553 $ 254 $ 1,575 $ 356
Property operating expenses<F2> 197 83 544 97
------ ------- -------- -------
Net operating income $ 356 $ 171 $ 1,031 $ 259
====== ====== ======== =======
Avg. annual rent per sq.ft.<F3> $11.61 $ 9.80 $ 11.60 $ 10.00
Avg. sq.ft. occupancy 86% 80% 82% 82%
Total net rentable sq.ft. 209,000 139,000 209,000 139,000
Number of properties 5 3 5 3
Number of property-months (4) 15 9 45 11
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 third quarter and nine
months ended September 30, 2000 reflect the increase in the number
of stores as compared to the prior year periods. Two stores
purchased in the fourth quarter of 1999 contributed to occupancy
increases for these properties in 2000. For the one month ended
September 30, 2000, these acquisitions had net operating income of
$121,000 which represents 83% of projected monthly NOI at maturity.
The yield for these 1999 acquisitions is 10.4% (calculated as actual
net operating income for the first nine 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 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 September 30, 2000, we had
guaranteed $17.9 million in outstanding debt for four properties
related to this joint venture and will guarantee additional amounts
as future properties are developed.
Domestic Development
We opened twelve domestic storage centers in the first nine
months of 2000, and, when all phases are complete, these projects
will total approximately 706,000 net rentable square feet with an
estimated total cost of $49.0 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
$112.6 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 $3,172,000 in net
operating income for the first nine months of 2000. For the month
of September 2000, these developments had NOI of $609,000, which
represents 54% of projected monthly NOI at maturity, and averaged
66% 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 $5,782,000 in net operating income
for the first nine months of 2000. For the month of September 2000,
these developments had NOI of $806,000, which represents 81% of
projected monthly NOI at maturity, and averaged 81% 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 15
storage centers under construction (three of these are being
developed in Florida through joint ventures) as of September 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 18-20 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 September 30, 2000.
<TABLE>
<CAPTION>
Estimated
Completed Total Cost to
Number Cost of Date as of
of Projects Sept. 30,
Projects <F1><F2> 2000<F1>
-------- ----------- ------------
<S> <C> <C> <C>
Consolidated
Developments:
Construction in progress 12 $56.9 million $41.6 million
Land purchased pending
construction 1 $5.4 million $1.2 million
Unconsolidated
Developments:
Construction in progress 3 $13.6 million $8.6 million
Expansion of Existing
Properties:
Construction in progress 1 $1.3 million $0.5 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 $1,454,000 (net operating income of $2,539,000 less
$3,993,000 of interest at 8.5% interest on invested capital) for the
first nine months of 2000 compared to $1,604,000 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 September 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 $325,000 and $173,000 for the quarters ended September 30, 2000
and 1999, and $1,026,000 and $759,000 for the nine months ended
September 30, 2000 and 1999, respectively. In order to take
advantage of the business 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 September 30, 2000, Benelux SCA had 36
storage centers operating in 5 countries. The following tables
include selected financial and operating information that
illustrates the performance and growth of Benelux SCA.
Summary of European Properties:
<TABLE>
<CAPTION>
Number of Total Net Estimated September 30, 2000 Sept. 30,
Open Rentable Total -------------------- 2000
Proper- Sq. Ft. Cost Occ. Rates % Rate
ties<F5> <F1> <F1> <F2> <F2><F3> Inc.<F4>
-------- ------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Country
Belgium 12 736,000 $37.6 million 77.7% $10.84 3.4%
France 7 361,000 $21.6 million 94.6% $20.15 16.1%
Netherlands 3 173,000 $12.7 million
Sweden 9 538,000 $31.3 million 66.3% $14.16 -3.0%
United Kingdom 5 273,000 $36.0 million
-- ------- --------------
36 2,081,000 $139.2 million
<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.
<F5> Two of these stores opened in late September.
</TABLE>
Selected Financial Data of Benelux SCA
<TABLE>
<CAPTION>
Quarter Ended September 30,
---------------------------
2000 1999
------------- --------------
<S> <C> <C>
Total Revenue $4.0 million $2.7 million
Total Assets $201.4 million $140.8 million
Total Bank Debt<F1> $159.7 million $122.9 million
<FN>
<F1>Includes unsecured debt between Benelux SCA and affiliates of
$84.1 and $111.3 million as of September 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 nine months
ended September 30, 2000 and September 30, 1999.
<TABLE>
<CAPTION>
(dollars in thousands except Three months ended September 30,
average rent) -----------------------------------
US Local
Dollar currency
2000 1999 % Change % Change
----- ----- -------- --------
<S> <C> <C> <C> <C>
Rental revenue $1,488 $1,472 1% 17%
Property operating expenses<F1> 399 535 -25% -14%
------ -------
Net operating income $1,089 $ 937 16% 34%
====== =======
Avg. annual rent per sq.ft.<F2> $13.10 $13.80 -5% 10%
Avg. sq.ft. occupancy 91% 85% 7% 7%
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 Nine months ended September 30,
average rent --------------------------------
US Local
Dollar Currency
2000 1999 % Change % Change
----- ----- -------- --------
<S> <C> <C> <C> <C>
Rental revenue $4,392 $4,126 6% 21%
Property operating expenses<F1> 1,348 1,508 -11% 2%
------ -------
Net operating income $3,044 $2,618 16% 33%
====== ======
Avg. annual rent per sq.ft.<F2> $13.40 $13.80 -3% 10%
Avg. sq.ft. occupancy 87% 79% 10% 10%
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>
During the third quarter of 2000, revenue from the same stores
in local currency increased 17% over the third quarter of last year.
This resulted from an average rate increase of 10% combined with an
increase of 7% in occupancy. This revenue increase is offset by a
decline in the value of the EUR of 16% over the last year resulting
in a 1% increase in revenue when measured in US dollars.
For the nine months ended September 30, 2000, an increase in
rental revenue of 21% in local currencies resulted from increases in
occupancy and rental rates, and was offset by changes in foreign
currency exchange rates, to 6% when measured in US dollars. In
addition, the decrease in property operating expenses is primarily
attributable to the change in foreign exchange rates.
European Development
The following table summarizes European developments by country
in U.S. dollars:
<TABLE>
<CAPTION>
Total Net
Rentable
Number Sq. Ft.
of Estimated when all
Proper- Total Cost phases are
ties <F1> complete
------- ---------- ----------
<S> <C> <C> <C>
Opened in 2000
France 3 $12.2 million 183,000
United 2 $15.3 million 95,000
Netherlands 2 $8.0 million 113,000
Belgium 1 $3.6 million 67,000
Opened in 1999
Belgium 2 $5.2 million 137,000
France 1 $3.2 million 54,000
Netherlands 1 $4.7 million 61,000
Sweden 5 $16.0 million 282,000
United Kingdom 3 $19.5 million 179,000
Opened in 1998
Belgium 3 $9.2 million 185,000
Sweden 4 $15.2 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 nine months of 2000, Benelux SCA opened eight
storage centers with an estimated total cost of $39.1 million and
net rentable square feet of 458,000 when all phases are complete.
Two of these storage centers opened in late September and did not
contribute to NOI for the quarter. After an average of five months
of operation, these stores have an average occupancy of 35% and
generated $586,000 in net operating losses for the first nine 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 $48.6 million and net rentable square feet of 713,000
when all phases are complete. These storage centers generated
$287,000 of net income for the quarter and $562,000 in net operating
losses for the nine months ended September 30, 2000.
The seven storage centers opened during 1998 had an average
occupancy of 64% after an average of 24 months of operations and
together generated $1,450,000 in net operating income for the first
nine months of 2000. For the month ended September 30, 2000, net
operating income for these developments represented 64% of projected
monthly NOI at stabilization (as measured in the relevant local
currency).
In addition to the above completed developments, Benelux SCA
currently has another 14 European storage centers under
construction. These developments are located as follows: six in
France, three in the Netherlands, two in Sweden, two in Belgium and
one in the UK. Additionally, they have purchased one site in
Belgium in which construction has not yet started. The following
table summarizes European development projects in progress at
September 30, 2000:
<TABLE>
<CAPTION>
Estimated
Number Completed Total Cost to
of Cost of Date as of
Projects Projects (1) Sept. 30, 2000
-------- ----------- --------------
<S> <C> <C> <C>
New Developments
Construction in Progress
France 6 $25.3 million $13.1 million
Sweden 2 $8.6 million $2.3 million
Netherlands 3 $12.1 million $5.5 million
Belgium 2 $7.0 million $3.9 million
UK 1 $7.0 million $2.9 million
Land purchased pending
construction
Belgium 1 $3.9 million $1.7 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, this expansion and
development strategy creates a short-term dilution of earnings
during the rent-up phase of a project. Beginning in 2001, Shurgard
anticipates developing between 30 and 40 stores per year. These
projections are based on estimates and assumptions that we believe
are reasonable, but projections are necessarily speculative,
unanticipated events may occur, actual results are likely to vary
from the projections and, accordingly, you are cautioned not to
place undue reliance on the projections. Actual results may differ
materially as a result of several factors, including those discussed
above. 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 $95 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 are in the process
of finalizing financing arrangements. We expect the closing will
take place before the end of the year and will include 21
properties.
OTHER REAL ESTATE INVESTMENTS
The following table shows income (loss) from unconsolidated
real estate investments for the three and nine months ended
September 30, 2000 and 1999. All income and loss amounts reflect
our pro rata ownership percentage.
<TABLE>
<CAPTION>
(dollars in thousands) Three months ended Nine months ended
Sept. 30, Sept. 30,
------------------- --------------------
2000 1999 2000 1999
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Containerized storage $ (354) $ (533) $(1,353) $(1,945)
Unconsolidated joint (384) (286) (1,140) (665)
ventures
Participating mortgages 436 424 1,250 1,225
European operations (325) (173) (1,026) (1,027)
--------- -------- -------- --------
Total $ (627) $ (568) $(2,269) $(2,412)
========= ======== ========= =========
</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 September 30, 2000, our gross investment in STG
was $5.0 million and we have committed to lend up to $12.95 million
under unsecured five-year notes to fund negative cash flow during
the rent up phase. At September 30, 2000, $12.5 million was
outstanding. Our pro rata portion of STG losses was $355,000 and
$533,000 for the three months ended September 30, 2000 and 1999, and
$1,353,000 and $1,945,000 for the nine months ended September 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 nine 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 $1.8 million, including $700,000 of depreciation.
Our pro rata portion of third quarter NOI was $41,000. 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 1999 Annual Report on Form 10-K. Additionally, we currently
guarantee $9.2 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 may 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 September 30, 2000,
we had invested a total of $25.0 million in these joint ventures.
Our pro rata portion of joint venture losses totaled $1,070,000
($494,000 of income before depreciation and amortization) for the
nine months ended September 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 $408,000 ($819,000 of income before
depreciation and amortization) for the nine months ended September
30, 1999. We have guaranteed our pro-rata portion of certain joint
venture loans totaling $35.2 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 $13.1 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 $2.1 million over the prior year
quarter and $6.8 million over the first nine months of 1999 due to
an increase in the outstanding debt balance from $428.8 million at
September 30, 1999 to $509.7 million at September 30, 2000.
Additionally, we capitalized $6.3 million and $6.4 million in
interest related to the construction of storage centers for the nine
months ended September 30, 2000 and 1999, while $2.2 million and
$2.1 million were capitalized for the three months ended September
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 Nine months ended
Sept. 30, Sept. 30,
--------------- ------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income $14,787 $14,018 $ 39,399 $ 36,958
Non-recurring
revenue/expenses 1,545
Preferred dividend (2,187) (2,187) (6,563) (6,563)
Depreciation/amortization 10,324 9,420 30,019 27,442
Depreciation/
amortization from
unconsolidated joint
ventures and subsidiaries (454) (80) (1,281) 84
Deferred financing costs (256) (289) (769) (859)
-------- -------- -------- --------
FFO as currently defined $22,214 $20,882 $ 60,805 $ 58,607
========= ======== ========= ========
</TABLE>
FFO for the third quarter and first nine months of 2000 rose
6.4% and 3.8% over FFO for the third quarter and first nine months
of 1999, respectively. 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 offset by financing
costs and increased expenses in marketing and real estate taxes.
Additionally, improvements in the operating performance of our
containerized storage business contributed $537,000 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. We expect FFO
for the fourth quarter 2000 to fall within the range of $.69 to $.73
per share. (See Note A to the Financial Statements). These projections
are based on estimates and assumptions that we believe are reasonable,
but projections are necessarily speculative, unanticipated events may
occur, actual results are likely to vary from the projections and,
accordingly, you are cautioned not to place undue reliance on the
projections. Actual results may differ materially as a result of
several factors, including those discussed above.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 2000, we invested $63.7 million
in domestic development and expansion projects, $24.9 million on
acquisitions, and $4.7 million in capital improvements to our
existing portfolio and other capital improvements. The $3.9 million
increase in other real estate investments consists primarily of $3.7
million invested in joint ventures and $0.2 million invested in our
containerized storage operation.
The balance on the domestic line of credit increased $62.7
million from December 31, 1999 to September 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 September 30, 2000,
the current available amount is $200 million, of which approximately
$164.7 million was outstanding. At September 30, 2000, the weighted
average interest rate was 7.80%. At September 30, 2000, the ratio
of the Company's debt to total assets before depreciation was 37%
and its debt to total market capitalization was 40%.
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 the portion of our long term debt which matures in
2001. Cash provided by operating activities for the nine months
ended September 30, 2000 was $73.8 million compared to $70.8 million
for the same period of 1999. On October 26, 2000, we declared a
dividend of $0.51 per share to be paid on November 22, 2000. This
dividend is approximately 68% of third 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 alleged that the
directors breached their fiduciary duty in connection with their
response to an alleged "takeover offer" from Public Storage. This
complaint has been dismissed.
Part II, Item 5: Other Information
<TABLE>
Pro Rata Statement of Assets and Liabilities at Historical Cost
Supplemental Financial Data
September 30,2000
(Unaudited)
<CAPTION>
(in thousands) Consoli- Unconsoli-
dated dated Total European
Domestic Domestic Domestic Self
Operations Operations Operations Storage Total
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Operating
storage centers $1,049,151 $ 70,198 $1,119,349 $ 10,976 $1,130,325
Construction in
progress 55,761 8,185 63,946 2,417 66,363
Containerized
storage assets 4,038 4,038 4,038
Corporate office 14,238 1,790 16,028 16,028
Accumulated
depreciation (148,553) (7,139) (155,692) (602) (156,294)
---------- -------- --------- --------- ---------
Storage assets,
net 970,597 77,072 1,047,669 12,791 1,060,460
Participating
mortgages 13,116 13,116 13,116
Cash and other
assets 60,075 2,577 62,652 2,010 64,662
Amortizable
assets 28,261 1,536 29,797 444 30,241
---------- -------- --------- ------- ----------
Total assets $1,072,049 $ 81,185 $1,153,234 $ 15,245 $1,168,479
========== ========= ========== ======== ==========
Accounts payable
and other $ 37,687 $ 2,558 $ 40,245 $ 1,340 $ 41,585
Lines of credit 164,675 39,943 204,618 5,723 210,341
Notes payable 242,617 23,424 266,041 6,369 272,410
---------- -------- ---------- -------- --------
Total
liabilities $ 444,979 $ 65,925 $ 510,904 $ 13,432 $ 524,336
========== ======== ========== ======== ==========
</TABLE>
(1) The information is presented on a combined basis and represents both
consolidated and unconsolidated entities at pro rata ownership
percentages
<TABLE>
Other Selected Pro Rata Self Storage Operating Data
For the nine months ended September 30, 2000
<CAPTION>
Historical
NOI Cost
--------- -----------
<S> <C> <C>
Domestic:
Same Store $ 92,342 $ 932,263
New Store 10,695 187,086
---------- ----------
$ 103,037 $1,119,349
========== ==========
European:
Same Store $ 230 $ 1,939
New Store (53) 9,037
----------- -----------
$ 177 $ 10,976
=========== ===========
</TABLE>
(1) This information is presented on a combined basis and represents
both consolidated and unconsolidated entities at pro rata ownership
percentages.
<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 271 17,601,000 271 17,601,000
Partially owned,
Consolidated 48 3,121,000 48 3,121,000
Partially owned,
Unconsolidated 24 1,441,000 36 2,081,000 60 3,522,000
Fee managed 32 1,881,000 32 1,881,000
--- ---------- -- ---------- --- -----------
375 24,044,000 36 2,081,000 411 26,125,000
=== ========== == ========= === ==========
</TABLE>
Effective July 1, 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 - Form of Business Combination Agreement dated
July 27, 2000, together with schedule of actual agreements
Exhibit 27 - Financial Data Schedule
Reports on Form 8-K:
During the quarter ended September 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: November 9, 2000 By: /s/ Harrell Beck
Harrell Beck
Chief Financial Officer, Chief Accounting
Officer and Authorized Signatory
