UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended September 30, 1998
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
Commission File Number: 001-12910
STORAGE USA, INC.
(Exact name of registrant as specified in its charter)
Tennessee
(State or other jurisdiction of
incorporation or organization)
62-1251239
(IRS Employer
Identification Number)
165 Madison Avenue, Suite 1300, Memphis, TN
(Address of principal executive offices)
38103
(Zip Codes)
Registrant's telephone number, including area code: (901) 252-2000
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. ( X) Yes ( ) NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $.01 par value, 27,736,360 shares outstanding at November 13, 1998
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Storage USA, Inc.
Consolidated Statements of Operations
(unaudited)
(amounts in thousands, except per share data)
<CAPTION>
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------------ ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Property Revenues:
Rental income $56,813 $41,913 $156,922 $113,267
Other income 1,792 1,139 3,731 2,213
------------------ ----------------- ---------------- -----------------
Total property revenues 58,605 43,052 160,653 115,480
------------------ ----------------- ---------------- -----------------
Property Expenses:
Cost of property operations & maintenance 15,512 10,651 40,699 28,359
Taxes 4,753 3,248 13,330 9,403
General & administrative 2,916 1,833 7,513 4,656
Depreciation & amortization 7,345 5,332 21,037 14,002
------------------ ----------------- ---------------- -----------------
Total property expenses 30,526 21,064 82,579 56,420
------------------ ----------------- ---------------- -----------------
Income from property operations 28,079 21,988 78,074 59,060
Other income (expense):
Interest expense (12,363) (4,841) (32,105) (11,604)
Interest income 2,555 386 5,635 880
------------------ ----------------- ---------------- -----------------
Income before minority interest 18,271 17,533 51,604 48,336
and gain (loss) on exchange
Gain (loss) on exchange of storage facilities - - (284) 2,569
------------------ ----------------- ---------------- -----------------
Income before minority interest 18,271 17,533 51,320 50,905
Minority interest (2,280) (1,639) (5,586) (4,115)
------------------ ----------------- ---------------- -----------------
Net income $15,991 $15,894 $45,734 $46,790
================== ================= ================ =================
Basic net income per share $0.58 $0.58 $1.65 $1.76
================== ================= ================ =================
Diluted net income per share $0.58 $0.58 $1.64 $1.74
================== ================= ================ =================
Basic weighted average shares outstanding 27,707 27,376 27,695 26,638
================== ================= ================ =================
Diluted weighted average shares outstanding 27,801 27,597 27,820 26,860
================== ================= ================ =================
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE>
<TABLE>
Storage USA, Inc.
Consolidated Balance Sheets
(amounts in thousands, except share data)
<CAPTION>
as of as of
September 30, 1998 December 31, 1997
----------------------- ----------------------
(unaudited)
Assets
<S> <C> <C>
Investments in storage facilities, at cost:
Land $421,197 $339,939
Buildings and equipment 1,147,575 902,925
----------------------- ----------------------
1,568,772 1,242,864
Accumulated depreciation (64,969) (44,955)
----------------------- ----------------------
1,503,803 1,197,909
Cash & cash equivalents 2,869 1,172
Mortgages receivable 97,489 24,541
Other assets 51,279 36,178
----------------------- ----------------------
Total assets $1,655,440 $1,259,800
======================= ======================
Liabilities & shareholders' equity
Notes payable $600,000 $400,000
Line of credit borrowings 87,012 31,843
Mortgage notes payable 67,926 42,766
Other borrowings 47,443 -
Accounts payable & accrued expenses 25,954 11,137
Dividends payable 17,751 -
Rents received in advance 10,274 7,457
Minority interest 94,174 71,182
----------------------- ----------------------
Total liabilities 950,534 564,385
----------------------- ----------------------
Commitments and contingencies
Shareholders' equity:
Common stock $.01 par value, 150,000,000 shares
authorized, 27,735,870 and 27,634,790
shares issued and outstanding 277 276
Paid-in capital 752,675 738,185
Notes receivable - officers (11,706) (12,771)
Deferred compensation - (1,366)
Accumulated deficit (15,831) (15,831)
Distributions in excess of net income (20,509) (13,078)
----------------------- ----------------------
Total shareholders' equity 704,906 695,415
----------------------- ----------------------
Total liabilities & shareholders' equity $1,655,440 $1,259,800
======================= ======================
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
<TABLE>
Storage USA, Inc.
Consolidated Statements of Cash Flows
(unaudited)
(amounts in thousands)
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
---------------------- ----------------------
<S> <C> <C>
Operating activities:
Net income $ 45,734 $ 46,790
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 21,037 14,002
Minority interest 5,586 4,115
Loss (gain) on exchange of self-storage facilities 284 (2,569)
Changes in assets and liabilities:
Other assets (20,510) (15,910)
Other liabilities 19,410 7,768
---------------------- ----------------------
Net cash provided by operating activities 71,541 54,196
====================== ======================
Investing activities:
Acquisition and improvements of storage facilities (181,118) (159,247)
Proceeds from sale/exchange of storage facilities 1,694 10,213
Development of storage facilities (43,926) (22,036)
Loans to Franchisees (69,177) (10,781)
---------------------- ----------------------
Net cash used in investing activities (292,527) (181,851)
====================== ======================
Financing activities:
Net borrowings (repayments) under line of credit 55,169 (17,801)
Mortgage principal payments/payoffs (3,121) (12,566)
Mortgage principal borrowings 145 1,244
Cash dividends (35,437) (32,686)
Proceeds from issuance of notes payable 198,311 98,732
Proceeds from issuance of stock 1,276 94,046
Proceeds from payoff of construction loan 7,747 -
Payments on notes receivable 3,062 1,794
Minority investor cash contribution 39 165
Distribution of minority interest capital (193) -
Distribution to minority interests (4,315) (2,493)
---------------------- ----------------------
Net cash provided by financing activities 222,683 130,435
====================== ======================
Net increase in cash and equivalents 1,697 2,780
Cash and equivalents, beginning of period 1,172 1,323
---------------------- ----------------------
Cash and equivalents, end of period $ 2,869 $ 4,103
====================== ======================
</TABLE>
4
<PAGE>
<TABLE>
Storage USA, Inc.
Consolidated Statements of Cash Flows, continued
(unaudited)
(amounts in thousands)
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
---------------------- ----------------------
<S> <C> <C>
Supplemental schedule of non-cash activities:
Common Stock issued in exchange for notes receivable $ 1,997 $ 358
Shares issued to Directors $ 132 $ 107
Mortgages assumed on storage facilities acquired $ 28,135 $ 5,458
Storage facilities acquired in exchange for
Partnership Units $ 33,962 $ 30,944
Storage facilities acquired in exchange for unsecured notes $ 12,769 $ -
Storage facilities acquired in exchange for deferred
Partnership Unit agreement $ 10,785 $ -
Storage facilities acquired through capital lease $ 23,889 $ -
Partnership Units exchanged for shares of
common stock $ 211 $ 149
Exchange of storage facilities (net) $ - $ 7,644
Minority interest in acquired facility $ 45 $ -
====================== ======================
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(amounts in thousands, except share and per share data)
1. Unaudited Interim Financial Statements
References to the Company include Storage USA, Inc. ("the REIT") and
SUSA Partnership, L.P. (the "Partnership"), its principal operating
subsidiary. Interim consolidated financial statements of the Company
are prepared pursuant to the requirements for reporting on Form 10-Q.
Accordingly, certain disclosures accompanying annual financial
statements prepared in accordance with generally accepted accounting
principles are omitted. In the opinion of management, all adjustments,
consisting solely of normal recurring adjustments, necessary for the
fair presentation of consolidated financial statements for the interim
periods have been included. The current period's results of operations
are not necessarily indicative of results that ultimately may be
achieved for the year. The interim consolidated financial statements
and notes thereto should be read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-K for
the year ended December 31, 1997 as filed with the Securities and
Exchange Commission.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amount reported in the financial
statements and accompanying notes. Actual results could vary from these
estimates.
2. Organization
Storage USA, Inc. (the "Company") a Tennessee corporation, was formed
in 1985 to acquire, develop, construct, franchise, own and operate
self-storage facilities throughout the United States. On March 23,
1994, the Company completed an initial public offering (the "IPO") of
6,325,000 shares of common stock at $21.75 per share. The Company is
structured as an umbrella partnership real estate investment trust
("UPREIT") in which substantially all of the Company's business is
conducted through the Partnership. Under this structure, the Company is
able to acquire self-storage facilities in exchange for units of
limited partnership interest in the Partnership ("Units"), permitting
the sellers to at least partially defer taxation of capital gains. At
September 30, 1998 and 1997, respectively, the Company had an
approximately 88% and 91% partnership interest in the Partnership.
In 1996, the Company formed Storage USA Franchise Corp ("Franchise"), a
Tennessee corporation. The Partnership owns 100% of the non-voting
common stock of Franchise. The Partnership accounts for Franchise under
the equity method and includes its 97.5% share of the profit or loss of
Franchise in Other Income.
3. Investment in Storage Facilities
The following table summarizes the activity in storage facilities
during the period:
Cost:
Balance on January 1, 1998 $ 1,242,864
Property acquisitions 274,663
Investment in development 43,923
Disposition of property (8,721)
Improvements and other 16,043
-------------------------
Balance on September 30, 1998 $ 1,568,772
-------------------------
Accumulated Depreciation:
Balance on January 1, 1998 $ 44,955
Additions during the period 20,427
Disposition of property (413)
-------------------------
Balance on September 30, 1998 $ 64,969
-------------------------
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
September 30, 1998
(amounts in thousands, except share and per share data)
3. Investment in Storage Facilities, continued
The following pro forma combined results of operations of the Company
for the nine months ended September 30, 1998 has been prepared assuming
that the acquisition of the 56 properties acquired during the same nine
month period had been completed as of January 1, 1998.
Pro forma for the
nine months ended
September 30, 1998
------------------------
Revenues $ 178,722
Net income $ 47,007
Basic net income per share $ 1.70
Diluted net income per share $ 1.69
The unaudited pro forma information is not necessarily indicative of
what actual results of operations of the Company would have been
assuming such transactions had been completed as of January 1, 1998,
nor does it purport to represent the results of operations for future
periods.
4. Notes Payable
On July 13, 1998 the Company issued $100,000 of 6.95% senior unsecured
notes due July 1, 2006 and $100,000 of 7.45% senior unsecured notes due
July 1, 2018 (together, the "98 Notes"). Interest on the 98 Notes is
payable on July 1 and January 1 of each year, commencing January 1,
1999. The 98 Notes are redeemable at any time at the option of the
Partnership in whole or in part, at a redemption price equal to the sum
of: (a) the principal amount of the 98 Notes being redeemed plus
accrued interest or (b) a make-whole amount as more fully defined in
the 98 Notes prospectus. The 98 Notes are not subject to any mandatory
sinking fund and are an unsecured obligation of the Partnership. The 98
Notes contain various covenants restricting the amount of secured and
unsecured indebtedness the Partnership may incur. The proceeds were
used to repay debt incurred under the revolving lines of credit, which
are used to finance the acquisition of self-storage facilities and for
working capital. As of September 30, 1998, the Company had issued $600
million of senior unsecured notes (the "Notes"). The combined Notes
have a weighted average interest rate of 7.37%. The terms of the notes
are staggered between seven and thirty years, maturing between 2003 and
2027.
5. Lines of Credit, Mortgages Payable and Other Borrowings
The Company can borrow under a $150,000 line of credit with a group of
commercial banks and under a $40,000 line of credit with a commercial
bank. These lines of credit bear interest at various spreads over
LIBOR. At September 30, 1998, $87,012 was outstanding on the lines of
credit at a weighted average rate of 6.61%. At September 30, 1998,
there were $59,854 of fixed rate mortgage notes payable and $8,072 of
variable rate mortgage notes payable. As of September 30, 1998, the
fixed rate mortgage notes carried rates of interest ranging from 6.5%
to 11.5% with a weighted average rate of 10.0%. The variable rate
mortgage notes carried rates of interest ranging from 7.9% to 9.0% with
a weighted average rate of 8.4%. Included in other borrowings at
September 30, 1998 are $12,769 of unsecured non-interest bearing notes,
$10,785 of deferred units and $23,889 of capital lease obligations.
During the nine months ended September 30, 1998, total interest paid on
all debt was $23,361 and total interest capitalized for construction
costs was $2,420.
7
<PAGE>
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
September 30, 1998
(amounts in thousands, except share and per share data)
6. Other Income
Other income for the nine months ended September 30, 1998 and 1997
consisted primarily of revenue from fees earned for the management of
facilities owned by third parties, lock and packaging income, truck
rentals, ground rents for billboards and cellular towers and the
proportionate share of earnings of Franchise.
7. Income per Share
Basic and diluted income per share is calculated by dividing net income
by the appropriate weighted average shares as presented in the
following table:
<CAPTION>
Three Months Ended September 30, Nine months ended September 30,
1998 1997 1998 1997
-------------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
Basic weighted average
common shares outstanding 27,707 27,376 27,695 26,638
Dilutive effect of stock options 94 221 125 222
-------------------------------------- -----------------------------------
Diluted weighted average
common shares outstanding 27,801 27,597 27,820 26,860
</TABLE>
8. Recent Accounting Developments
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131), which is effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 establishes standards
for determining an entity's operating segments and the type and level
of financial information to be disclosed in both annual and interim
financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. The Company expects to report the following segments in its
disclosures for the year ended December 31, 1998: Operating Properties,
Current Year Acquisition Properties and Development Properties. The
adoption of SFAS No. 131 is not expected to have a material impact on
the financial statements of the Company.
On February 27, 1998, the AICPA Accounting Standards Executive
Committee (AcSEC) issued Statement of Position 98-1 (SOP 98-1),
"Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use", which is effective for fiscal years beginning after
December 15, 1998. SOP 98-1 sets forth guidelines for the
capitalization of costs relating to internal-use software. The adoption
of SOP 98-1 is not expected to have a material impact on the financial
statements of the Company.
In accordance with EITF 97-11, "Accounting for Internal Costs Related
to Real Estate Property Acquisitions", the Company began expensing all
costs of its internal acquisitions department in April of 1998. The
adoption of EITF 97-11 did not have a material impact on the financial
statements of the Company.
On June 16, 1998, FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133), which is
effective for fiscal years beginning after June 15, 1999. SFAS 133
establishes accounting and reporting standards for derivative
instruments and hedging activities. Under this statement derivatives
are recognized at fair market value and changes in fair market value
are recognized as gains or losses. The adoption of SAS 133 is not
expected to have a material impact on the financial statements of the
Company.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
September 30, 1998
(amounts in thousands, except share and per share data)
9 Subsequent Events
From September 30, 1998 to November 14, 1998, the Company acquired one
self-storage facility for approximately $3.8 million and acquired the
remaining interest in a joint venture property for $1.9 million,
financed through operating cash flows and borrowings under the
available lines of credit. The Company has also entered into various
property acquisition contracts with an aggregate cost of approximately
$12.5 million. These acquisitions are subject to customary conditions
to closing, including satisfactory due diligence, and should close
during the fourth quarter of 1998 and the first quarter of 1999. Should
these contracts be terminated, the costs incurred by the Company would
not be material.
On November 12, 1998 the Partnership completed a private placement of
$65,000 of 8.875% Series A Cumulative Redeemable Preferred Partnership
Units ("Preferred Units"). The Partnership has the right to redeem the
Preferred Units after November 1, 2003 at the original capital
contribution plus the cumulative priority return to the redemption date
to the extent not previously distributed. The Units are exchangeable
for 8.875% Series A Preferred Stock of The REIT, on or after November
1, 2008 (or earlier upon the occurrence of certain events) at the
option of 51% of the holders of the Preferred Units. The proceeds were
used to repay debt incurred under the revolving lines of credit, which
are used to finance the acquisition of self-storage facilities and for
working capital.
10. Commitments
The Company is committed to lend approximately $66,746 to franchisees
of Franchise ("Franchisees") for the construction of franchised
self-storage facilities, secured by the facility.
The Company is the guarantor on $15,896 of loans made by third party
lenders to Franchisees and has committed to guarantee another $3,504.
11. Legal Proceedings
On September 25, 1997, a purported national class action was filed
against the Company in the Superior Court of the District of Columbia,
Nelda Perkins v. Storage USA, Inc., Civil Action No. CA 97-7426,
seeking recovery of certain late fees paid by Company tenants since
September 1994, treble damages, unspecified punitive damages and an
injunction against further assessment of similar fees. In April 1998
the plaintiff petitioned for certification of a nationwide class, which
certification the Company opposed. On August 14, 1998, the Superior
Court declined to certify any class, either nationwide or for the
District of Columbia. Following the court ruling, the Company reached
an agreement in principle with the plaintiff to settle and dismiss the
plaintiff's individual claim. The terms of the settlement will not have
material adverse effect on the Company's financial position or results
of operations.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-Q may include forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements are identified by phrases such as the
Company "expects" or "anticipates" and words of similar effect. Actual results
may differ materially from those projected. Among the factors that could cause
such a difference are: changes in the economic conditions in the markets in
which the Company operates; certain of the Company's competitors with
substantially greater financial resources than the Company reducing the number
of suitable acquisition opportunities offered to the Company and increasing the
price necessary to consummate the acquisition of particular facilities;
increased development of new facilities and competition in the Company's markets
resulting in oversupply thereby lowering rental and occupancy rates; the
availability of sufficient capital to finance the Company's business plan on
terms satisfactory to the Company; increased costs related to compliance with
laws, including environmental laws; general business and economic conditions;
and other risk factors. Further discussion of these risks are described in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 and
other reports filed from time to time with the Securities and Exchange
Commission. The Company cautions readers not to place undue reliance on any such
forward-looking statements, which statements are made pursuant to the Private
Securities Litigation Reform Act of 1995 and, as such, speak only as of the date
made.
The following discussion and analysis of the consolidated financial condition
and results of operations of the Company should be read in conjunction with the
Consolidated Financial Statements and Notes included elsewhere in this Report
and in the Company's Annual Report on Form 10-K for the year ended December 31,
1997. References to the Company include Storage USA, Inc. (the "REIT") and SUSA
Partnership L.P., the principal operating subsidiary of the REIT (the
"Partnership").
Due to the substantial number of facilities acquired from September 30, 1997 to
September 30, 1998, management believes that it is meaningful and relevant in
understanding the present and ongoing operations of the Company to compare
certain information using occupancy and per square foot information.
The following are definitions of terms used throughout this discussion in
analyzing the Company's business. Physical Occupancy is defined as the total net
rentable square feet rented as of the date computed divided by the total net
rentable square feet available. Gross Potential Income is defined as the sum of
all units available to rent at a facility multiplied by the market rental rate
applicable to those units as of the date computed. Expected Income is defined as
the sum of the monthly rent being charged for the rented units at a facility as
of the date computed. Economic Occupancy is defined as the Expected Income
divided by the Gross Potential Income. Rent Per Square Foot is defined as the
annualized result of dividing Gross Potential Income on the date computed by
total net rentable square feet available. Direct Property Operating Costs is
defined as the costs incurred in the operation of a facility, such as utilities,
real estate taxes, and on-site personnel. Indirect Property Operating Costs is
defined as costs incurred in the management of all facilities, such as
accounting personnel and management level operations personnel. Net Operating
Income ("NOI") is defined as total property revenues less Direct Property
Operating Costs.
10
<PAGE>
<TABLE>
Results of Operations- Quarter and Nine Months Ended September 30, 1998 Compared
to Quarter and Nine Months Ended September 30, 1997.
The following table reflects the profit and loss statement for the quarters
ended September 30, 1998 and September 30, 1997 based on a percentage of total
revenues and is used in the discussion that follows:
<CAPTION>
Three Months Ended Nine months ended
1998 1997 1998 1997
----------------------------- -----------------------------
REVENUES
<S> <C> <C> <C> <C>
Rental income 92.9% 96.5% 94.4% 97.3%
Other income 2.9% 2.6% 2.2% 1.9%
Interest income 4.2% 0.9% 3.4% 0.8%
Total income 100.0% 100.0% 100.0% 100.0%
EXPENSES
Property operations 25.3% 24.5% 24.5% 24.4%
Taxes 7.8% 7.5% 8.0% 8.1%
General and administrative 4.8% 4.2% 4.5% 4.0%
Earnings before depreciation and interest (EBITDA) 62.1% 63.8% 63.0% 63.5%
</TABLE>
Rental income increased $14.9 million, or 35.5% in the quarter ended September
30, 1998 and $43.7 million, or 38.5% for the nine months ended September 30,
1998 compared to the same periods in 1997. These increases are primarily a
result of the Company's acquisitions. Since September 30, 1997, the Company has
acquired 110 facilities. These acquired facilities added 6.5 million square
feet, an increase of 31.7%, bringing the total square feet of the 418 facilities
owned by the Company at September 30, 1998 to 27.5 million. The 1998
acquisitions added $6.1 million in rental income for the quarter and $10.8
million year-to-date. The remainder of the increase in rental income is
primarily a result of recognizing a full year of rental income on the 1997
acquisitions and the Company's internal growth. For the third quarter of 1998,
the 259 same-store facilities owned during the entire third quarter of 1997
provided 68.7% of the Company's rental income. These same-store facilities'
rental income grew 6.5% over third quarter 1997 results. The majority of this
growth was provided by an approximate 6.2% average rate increase from $9.72 per
square foot to $10.32, which was partially offset by discounts and the timing of
rate increases. The remaining growth was a result of increases in average
occupancy from 88% for the quarter ended September 30, 1997 to 89% for the same
quarter in 1998. For the nine months ended September 30, 1998, the 209
same-store facilities owned during the entire 1997 fiscal year, rental income
grew 6.0% over the first nine months of 1997. An approximate 6.7% average rate
increase from $9.91 per square foot to $10.57 and an average occupancy increase
from 87.2% to 87.5% provided the majority of this growth. Discounts and the
timing of rate increases offset these increases. The Company's portfolio of
facilities as a whole had an average physical occupancy at September 30, 1998 of
86% with an average rent per square foot of $10.70.
Other income increased $653 thousand in the third quarter of 1998 and $1.5
million in the first nine months of 1998 over the same periods in 1997. The
increase for both periods is primarily due to income earned on cellular tower
and billboard leases, truck rentals, income from lock and packaging materials
and other less significant accounts.
As a percentage of revenues, cost of property operations and maintenance
increased from 24.5% to 25.3% in the third quarter of 1998, and 24.4% to 24.5%
in the nine months ended September 30, 1998. The increase as a percentage of
revenues is primarily a result of a change in the reporting for lock and
packaging income.
Tax expense increased from $3.2 million for the quarter ended September 30, 1997
to $4.8 million for the same period in 1998. As a percentage of revenues, tax
expense remained fairly consistent, increasing from 7.5% for the quarter ended
11
<PAGE>
September 30, 1997, to 7.8% for same the period in 1998. The increase was
primarily due to the acquisition of properties and the reassessment of owned
properties. Tax expense as a percentage of revenues decreased from 8.1% for the
nine months ended September 30, 1997, to 8.0% for the same period in 1998.
General and administrative expense ("G&A") increased from $1.8 million or 4.2%
of revenues for the quarter ended September 30, 1997, to $2.9 million or 4.8% of
revenue for the quarter ended September 30, 1998. For the nine months ended
September 30th, G&A increased from $4.7 million or 4.0% of revenues to $7.5
million or 4.5% of revenues. The growth in G&A reflects the Company's expansion
of its administration, development and acquisition, management information
systems and human resource departments in connection with its ongoing growth
strategy and increases in legal fees primarily relating to the recently settled
litigation described in Note 11 to the Consolidated Financial Statements.
The increase in depreciation and amortization expense of $2.0 million for the
quarter ended September 30, 1998 and $7.0 million for the nine months ended the
same date primarily reflects the Company's acquisition or development of
approximately $377.9 million in depreciable assets since September 30, 1997.
Interest expense for the quarter ended September 30, 1998, was $12.4 million as
compared to $4.8 million for the comparable period in 1997 and $32.1 million for
the nine months ended September 30, 1998 as compared to $11.6 million for the
comparable period in 1997. The increase is primarily due to the following
issuances of senior unsecured notes:
Amount Stated Rate Date Issued
--------------------------------------------------
$100 million 8.2% June, 1997
$100 million 7.0% December, 1997
$100 million 7.5% December, 1997
$100 million 6.95% July, 1998
$100 million 7.45% July, 1998
The remaining interest expense for the quarter represents weighted average
borrowings of $48.2 million under the Company's lines of credit at a weighted
average interest rate of 6.85% and $54.9 million in weighted average mortgages
payable at a weighted average interest rate of 9.75% and $9.6 million in
weighted average other borrowings at a weighted average rate of 7.5%. The
remaining interest expense for the nine month period represents weighted average
borrowings of $78.3 million under the Company's lines of credit at a weighted
average interest rate of 6.81%, $50.1 million in weighted average mortgages
payable at a weighted average interest rate of 9.72% and $3.2 million in
weighted average other borrowings at a weighted average rate of 7.5%.
In the third quarter of 1997, the Company's outstanding indebtedness consisted
of $200 million of notes bearing a weighted average interest rate of 7.6%,
weighted average borrowings under the Company's lines of credit of $27.1 million
at a weighted average interest rate of 7.1%, and weighted average mortgage notes
of $39.9 million at a weighted average interest rate of 9.9%. For the nine month
period ended September 30, 1997, the Company's outstanding indebtedness
consisted of $200 million of notes bearing a weighted average interest rate of
7.6%, weighted average borrowings under the Company's lines of credit of $37.1
million at a weighted average interest rate of 7.1%, and weighted average
mortgage notes of $39.9 million at a weighted average interest rate of 9.9%.
Interest income increased $2.2 million to $2.6 million for the quarter ended
September 30, 1998 and $4.8 million to $5.6 million for the nine months ended
the same date. Interest income represents loans to franchisees of Storage USA
Franchise, Corp. ("Frachisees"), earnings on overnight deposits and amounts
outstanding under the 1995 Employee Stock Purchase and Loan Plan. The increase
in interest income was primarily attributable to interest earned on $97.8
million of loans made to Franchisees from September 1, 1997 to September 30,
1998. The Company has committed to lend an additional $66.7 million to
Franchisees.
During the nine months ended September 30, 1998, the Company incurred a loss on
the exchange of a self-storage facility of $284 thousand. During the nine months
ended 1997, the Company recognized a $2.6 million gain in connection with an
exchange of several self-storage facilities. These exchanges were accounted for
tax purposes under IRC Section 1031, and as such the gain/loss is not recognized
for income tax purposes.
12
<PAGE>
Minority interest expense increased $641 thousand to $2.3 million for the
quarter ended September 30, 1998 and increased $1.5 million to $5.6 million for
the nine months ended the same date as the Company issued approximately 1.2
million units of limited partnership interest in the Partnership ("Units") in
connection with the acquisition of certain facilities from September 30, 1997 to
September 30, 1998.
Liquidity and Capital Resources
Cash provided from operating activities grew to $71.5 million for the nine
months ended September 30, 1998 from the $54.2 million that was provided for the
nine months ended September 30, 1997. This increase was primarily a result of
the expansion of the Company's portfolio. In the twelve months since September
30, 1997 the Company has acquired 110 facilities and placed in service eight
development facilities.
Cash used in investing activities of $292.5 million in the first nine months of
1998 and $181.9 million in the first nine months of 1997 was primarily invested
in the acquisition of self-storage facilities. 56 and 65 facilities containing
3.6 million and 4.3 million square feet, respectively were acquired in the first
nine months of 1998 and 1997, respectively. In addition to acquisitions, $43.9
million and $22.0 million was invested in the first nine months of 1998 and
1997, respectively, for development properties. There were 22 development
properties and 24 expansions in process with $51.6 million invested at September
30, 1998. The total development budget on these properties is $132.1 million.
The Company also made loans to Franchisees during the first nine months of 1998
in the amount of $69.2 million. The Company has committed to lend an additional
$66.7 million to Franchisees. The Company is the guarantor on loans totaling
$15.9 million that were lent to Franchisees by third party lenders, and has
committed to guarantee additional loans totaling $3.5 million. During the first
nine months of 1997, the Company received $10.2 million in cash as part of an
exchange of self-storage facilities with another self-storage company.
The Company initially funds its capital requirements primarily through its lines
of credit and refinances these with long-term capital in the form of equity and
debt securities. The lines bear interest at various spreads over LIBOR. The
total credit available under the lines of credit is $190 million. Amounts
outstanding under the lines of credit bore interest at a weighted average rate
of 6.81% during the first nine months of 1998. The Company had net borrowings of
$55.2 million in the first nine months of 1998 and net repayments of $17.8
million in the first nine months of 1997.
On July 13, 1998 the Company issued $100 million of 6.95% senior unsecured notes
due July 1, 2006 and $100 million of 7.45% senior unsecured notes due July 1,
2018. The proceeds were used to repay debt incurred under the revolving lines of
credit, which are used to finance the acquisition of self-storage facilities and
for working capital. As of September 30, 1998, the Company had issued $600
million of senior unsecured notes (the "Notes"). The combined Notes have a
weighted average interest rate of 7.37%. The terms of the notes are staggered
between seven and thirty years, maturing between 2003 and 2027.
The Company assumed $28.1 million of mortgages on facilities acquired during the
first nine months of 1998 and $5.5 million in the first nine months of 1997.
During the first nine months of 1998, $3.1 million of mortgage notes were paid
off in the form of periodic loan payments and lump sum payoffs, and $12.6
million of mortgage notes were paid off during the first nine months of 1997. At
September 30, 1998, the Company had $59.8 million of fixed rate mortgage notes
with a weighted average interest rate of 10.0% and $8.1 million of variable rate
mortgage notes with a weighted average interest rate of 8.4%. These mortgage
notes mature at various dates through 2021.
The Company funded a portion of its acquisitions during the third quarter of
1998 through other borrowings including $12.8 million of unsecured non-interest
bearing notes, $10.8 million of deferred units and $23.9 million of capital
lease obligations.
At September 30, 1998, the Company had approximately 27.7 million shares of
Common Stock outstanding. During the first nine months of 1998 and 1997, the
Company declared three quarterly dividends of $0.64 and $0.60 each quarter,
respectively. Total distributions paid to common stockholders and limited
partners in the Partnership equaled approximately $39.8 million in the first
nine months of 1998 and $35.2 million in the first nine months of 1997.
13
<PAGE>
During the first nine months of 1998 and 1997, the Company issued 898 thousand
Units and 827 thousand Units, respectively, valued at $34.0 million and $30.9
million, respectively. These Units were issued in exchange for self-storage
facilities or entities owning self-storage facilities. At September 30, 1998,
the Company had 3.7 million Units outstanding, 82 thousand of which are
redeemable for an amount equal to their fair market value ($2.8 million, based
upon a price per Unit of $34.00 at September 30, 1998) payable by the Company
either in cash or (at the Company's option, based upon a determination by the
Company's Board of Directors that the Company's anticipated cash requirements
and anticipated cash flow make a lump sum payment imprudent) by a promissory
note payable in quarterly installments over two years accruing interest at the
prime rate. At September 30, 1998, 2.6 million Units held by other Limited
Partners were redeemable, at the option of such Limited Partners, having passed
the first anniversary of their issuance, for amounts equal to the then fair
market value of their Units ($88.9 million, based upon a price per Unit of
$34.00 at September 30, 1998) payable by the Company in cash or, at the option
of the Company, in shares of the Company's Common Stock at the initial exchange
ratio of one share for each Unit. It is anticipated that a source of funds for
any such cash redemption will be retained cash flow or proceeds from the future
sale of securities of the Company or other Company indebtedness. The Company has
agreed to register under the Securities Act of 1933 any shares of the Company's
Common Stock issued upon redemption of Units.
On November 12, 1998 the Partnership completed a private placement of $65
million of 8.875% Series A Cumulative Redeemable Preferred Partnership Units
("Preferred Units"). The Partnership has the right to redeem the Preferred Units
after November 1, 2003 at the original capital contribution plus the cumulative
priority return to the redemption date to the extent not previously distributed.
The Units are exchangeable for 8.875% Series A Preferred Stock of The REIT, on
or after November 1, 2008 (or earlier upon the occurrence of certain events) at
the option of 51% of the holders of the Preferred Units. The proceeds were used
to repay debt incurred under the revolving lines of credit, which are used to
finance the acquisition of self-storage facilities and for working capital.
On September 18, 1998, the Company received $7.7 million in proceeds from the
payoff of a construction loan to a joint venture. The loan was refinanced with a
third party lender.
As a general matter, the Company anticipates utilizing its lines of credit as an
interim source of funds to acquire and develop self-storage facilities and
repaying the credit lines with longer-term debt or equity when management
determines that market conditions are favorable. Under joint shelf registration
statements filed with the Securities and Exchange Commission, the REIT and the
Partnership could issue up to $900 million of securities at September 30, 1998,
including up to $650 million of common stock, preferred stock, depositary shares
and warrants of the REIT and up to $250 million of unsecured, non-convertible
senior debt securities of the Partnership. The decline in the real estate debt
and equity markets in 1998 may impair the ability of the Company to access these
markets on favorable terms, which could adversely impact the Company's ability
to maintain its historical external growth activity. The Company is pursuing the
use of operational and development joint ventures and other related strategies
to generate additional cash funding. The Company believes that the combination
of cash flow from operating activities, borrowings under its credit facilities,
issuances of Units and issuances of Preferred Units, as described above, will
provide the Company with the necessary liquidity and capital resources to meet
all existing cash requirements and commitments of the Company through fiscal
year 1999. See "Forward Looking Statements and Risk Factors" in the Company's
annual report on Form 10-K for further description of the risks relating to,
among other things, acquisitions and development activity and fluctuations in
the capital markets and their effect on the Company's proposed operating
strategy.
From September 30, 1998 to November 14, 1998, the Company acquired one
self-storage facility for approximately $3.8 million and acquired the remaining
interest in a joint venture property for $1.9 million, financed through
operating cash flows and borrowings under the available lines of credit. The
Company has also entered into various property acquisition contracts with an
aggregate cost of approximately $12.5 million. These acquisitions are subject to
customary conditions to closing, including satisfactory due diligence, and
should close during the fourth quarter of 1998 and the first quarter of 1999.
Should these contracts be terminated, the costs incurred by the Company would
not be material.
The Company has capitalized approximately $2.2 million for regularly scheduled
improvements during the nine months ended September 30, 1998 and $4.3 million to
conform facilities acquired to Company standards. For the year, the Company
expects to incur approximately $3.4 million for scheduled maintenance and
repairs and approximately $5.7 million to conform facilities acquired since 1994
to Company standards.
Several covenants under the $150 million line of credit with The First National
Bank of Chicago and various other commercial banks have been modified for the
third and fourth quarters of 1998. The limit for the ratio of "consolidated
total indebtedness to total tangible assets" has been increased from no greater
14
<PAGE>
<TABLE>
than 45% to no greater than 50% and the limit for the ratio of "unencumbered
assets to consolidated senior unsecured indebtedness has been lowered from no
less than 2.25x to no less than 2.00x. The Company expects to renegotiate the
line of credit with the bank group prior to the expiration of these
modifications
The Company's Board of Directors has modified the Company's internal debt
policy, limiting total indebtedness to the lesser of 50% of total assets or that
amount that will sustain a minimum level of debt service coverage. The debt
service coverage ratio has been reduced to a ratio of 2.5:1 from 3.0:1. The
modified policy becomes effective during the fourth quarter of 1998.
Funds From Operations ("FFO")
The Company believes that FFO should be considered in conjunction with its net
income and cash flows to facilitate a clear understanding of its results of
operations. FFO is defined as net income, computed in accordance with generally
accepted accounting principles, excluding gains (losses) from debt restructuring
and sales of property, plus depreciation and amortization, and after adjustments
for unconsolidated partnerships and joint ventures. FFO should not be considered
an alternative to net income as a measure of the Company's performance or to
cash flows as a measure of liquidity.
The following table illustrates the components of the Company's FFO for the
three months and nine months ended September 30, 1998 and September 30, 1997.
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
in thousands 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 15,991 $ 15,894 $ 45,734 $ 46,790
Gain (loss) on sale of assets - - 284 (2,569)
Depreciation of revenue producing assets 6,943 5,095 19,852 13,328
- -----------------------------------------------------------------------------------------------------------------------
Consolidated FFO $ 22,934 $ 20,989 $ 65,870 $ 57,549
MI share of gain (loss) on exchange of asset* - - (32) 198
MI share of depreciation & amortization (806) (448) (2,137) (1,028)
- -----------------------------------------------------------------------------------------------------------------------
FFO available to shareholders $ 22,128 $ 20,541 $ 63,701 $ 56,719
- -----------------------------------------------------------------------------------------------------------------------
*Minority interest is abbreviated as MI
</TABLE>
The Company, in order to qualify as a REIT, is required to distribute a
substantial portion of its net income as dividends to its shareholders. While
the Company's goal is to generate and retain sufficient cash flow to meet its
operating, capital, and debt service needs, the REIT's dividend requirements
generally require the Company to utilize its bank lines of credit to finance
property acquisitions and development and major capital improvements. For the
year ended December 31, 1997, distributions were approximately 83.0% of the
REIT's FFO.
Inflation
The Company does not believe that inflation had or will have a direct effect on
its operations. Substantially all of the leases at the facilities allow for
monthly rental increases that provide the Company with the opportunity to
achieve increases in rental income as each lease matures.
15
<PAGE>
Seasonality
The Company's revenues typically have been higher in the third and fourth
quarters primarily because the Company increases its rental rates on most of its
storage units at the beginning of May, and to a lesser extent because
self-storage facilities tend to experience greater occupancy during the late
spring and early fall months due to the greater incidence of residential moves
during those periods. The Company believes that its tenant mix, rental
structure, and expense structure provide adequate protection against undue
fluctuations in cash flows and net revenues during off-peak seasons. Thus, the
Company does not expect seasonality to materially affect distributions to
shareholders.
Year 2000 Compliance
Many computer programs process transactions using two digits for the year of the
transaction rather than four digits (i.e. "98" for the year 1998). Systems that
process Year 2000 transactions with the year "00" may encounter significant
processing inaccuracies or inoperability. The Company's failure to address these
systems could result in material adverse effect on the operations of the
Company.
The Company is carrying out its plan to ensure that all of its computer systems
are Year 2000 ("Y2K") compliant. The Company has three phases to its Y2K plan.
Phase one included determining the scope of the issue, assigning responsible
parties and proposing solutions to the issue. This phase was completed in July
1998. Phase two includes researching and testing all of the systems and
documenting their Y2K compliance. The Company has substantially completed this
phase and estimates finishing by the end of the first quarter of 1999. The third
phase involves implementing the necessary changes, if any, by the end of the
second quarter of 1999.
The Company has grouped all of its systems into three categories based on the
critical nature of those systems; critical, moderate and minimal. All critical,
moderate and minimal systems have been documented as Y2K compliant with the
following exceptions. The job costing system used by the Company in 1997 is not
Y2K compliant but is being phased out for other reasons. New construction
projects are being accounted for on a product that is Y2K compliant and jobs
that were started under the old software will continue to be accounted for on
the old system until completion of those projects, which is estimated to be
between late 1998 and early 1999. The phone system in the Company's Columbia, MD
regional office is not Y2K compliant but will be replaced with a system that is
Y2K complaint in late November primarily for reasons unrelated to the Y2K issue.
The gate and security systems on some of the Company's self-storage properties
have not been documented as being Y2K compliant, however, the Company is
planning on using only three gate and security vendors going forward and all
three of those vendors have represented that they are Y2K compliant. Once these
vendors are tested, the Company is planning on replacing all non-compliant gate
and security systems. This consolidation of gate systems was planned for reasons
other than the Y2K issue. The Company has solicited its key vendors, including
financial institutions, to determine their state of readiness with respect to
Y2K issues and is currently following up with vendors who did not reply. Those
vendors who are not prepared for the Y2K issues will be replaced.
Under the worst case scenario, the Company will have the ability to operate its
self-storage facilities manually for a limited period of time.
Because the Company has invested in new technology over the past few years, most
systems were Y2K compliant at the onset of this plan. The Company's management
has spent time investigating the Y2K matter and other than the cost of this time
has only incurred minor expenses for off-the-shelf software to aid in the
testing. The systems the Company has found not to be compliant are in the
process of being replaced for operational reasons not related to the Y2K issue.
At this phase of the investigation, the Company does not anticipate incurring
any costs outside of personnel time directly related to the Y2K issue but will
not know for certain until all systems are documented. As such, with the
information currently available, the Company anticipates that conforming its
systems to be Y2K compliant will not have a material impact on its financial
results.
Y2K costs and the date on which the Y2K modifications are expected to be
completed are based on management's best estimates, which were derived utilizing
numerous assumptions of future events including the availability of certain
resources, third party modifications and other factors. However, there can be no
assurances that these estimates will be achieved and actual results could differ
materially from those expected.
16
<PAGE>
Recent Accounting Developments
See Note 8 "Recent Accounting Developments" in the Notes to the Consolidated
Financial Statements.
Legal Proceedings
On September 25, 1997, a purported national class action was filed against the
Company in the Superior Court of the District of Columbia, Nelda Perkins v.
Storage USA, Inc., Civil Action No. CA 97-7426, seeking recovery of certain late
fees paid by Company tenants since September 1994, treble damages, unspecified
punitive damages and an injunction against further assessment of similar fees.
In April 1998 the plaintiff petitioned for certification of a nationwide class,
which certification the Company opposed. On August 14, 1998, the Superior Court
declined to certify any class, either nationwide or for the District of
Columbia. Following the court ruling, the Company reached an agreement in
principle with the plaintiff to settle and dismiss the plaintiff's individual
claim. The terms of the settlement will not have material adverse effect on the
Company's financial position or results of operations.
17
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
18
<PAGE>
Part II- OTHER INFORMATION
Item 1. Legal Proceedings
Information regarding legal proceedings is incorporated herein by
reference to Part 1, Item 2, Management's Discussion and Analysis of Financial
Condition and Results of Operations-Legal Proceedings.
Item 2. Changes in Securities and Use of Proceeds
During the nine months ended September 30, 1998, the Company has issued
units of limited partnership interest in SUSA Partnership, L.P. ("Units") in
exchange for interest in self-storage facilities. The date, amount and value of
the issuances are summarized in the following table:
Date of Units Approximate
Issuance Issued Value
- --------------------------------------------------------------
March 11, 1998 36,013 $ 1,408,000
March 31, 1998 669,693 $ 25,658,000
May 15, 1998 12,413 $ 479,000
July 31, 1998 125,689 $ 4,692,000
September 1, 1998 39,544 $ 1,280,000
September 25, 1998 14,622 $ 445,000
-----------------------------------
Total 897,974 $ 33,962,000
The Units were issued in private placements exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933 to various owners of self-storage
facilities. Beginning one year after their issuance, each Unit is redeemable for
cash equal to the market value of one share of Common Stock at the time of
redemption or, at the Company's option, one share of Common Stock.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K
None
19
<PAGE>
SIGNATURES
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.
Dated: November 16, 1998
Storage USA, Inc.
By: /s/ Christopher P. Marr
-------------------------------
Christopher P. Marr
Chief Financial Officer
(Principal Financial and Accounting
Officer)
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
registrant's unaudited consolidated financial statements as of September 30,
1998, and the nine months then ended, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,869
<SECURITIES> 0
<RECEIVABLES> 148,768
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 151,637
<PP&E> 1,568,772
<DEPRECIATION> 64,969
<TOTAL-ASSETS> 1,655,440
<CURRENT-LIABILITIES> 148,153
<BONDS> 802,381
0
0
<COMMON> 277
<OTHER-SE> 704,629
<TOTAL-LIABILITY-AND-EQUITY> 1,655,440
<SALES> 156,922
<TOTAL-REVENUES> 160,653
<CGS> 0
<TOTAL-COSTS> 82,579
<OTHER-EXPENSES> 235 <F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,105
<INCOME-PRETAX> 45,734
<INCOME-TAX> 0
<INCOME-CONTINUING> 45,734
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,734
<EPS-PRIMARY> 1.65
<EPS-DILUTED> 1.64
<FN>
Included in other expenses are minority interest expense and interest income
</FN>
</TABLE>
