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 June 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, 27,690,870 shares outstanding at August 12, 1998
<PAGE>
<TABLE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Storage USA, Inc.
Consolidated Statements of Operations
(unaudited)
(amounts in thousands, except per share data)
<CAPTION>
<S> <C>
Three months Three months Six months Six months
ended ended ended ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
----------------- ----------------- ---------------- -----------------
Property Revenues:
Rental income $52,839 $37,865 $100,109 $71,340
Other income 891 786 1,939 1,072
----------------- ----------------- ---------------- -----------------
Total property revenues 53,730 38,651 102,048 72,412
----------------- ----------------- ---------------- -----------------
Property Expenses:
Cost of property operations & maintenance 13,058 9,424 25,186 17,715
Taxes 4,634 3,191 8,577 6,151
General & administrative 2,721 1,559 4,597 2,823
Depreciation & amortization 7,124 4,505 13,692 8,670
----------------- ----------------- ---------------- -----------------
Total property expenses 27,537 18,679 52,052 35,359
----------------- ----------------- ---------------- -----------------
Income from property operations 26,193 19,972 49,996 37,053
Other income (expense):
Interest expense (10,477) (3,494) (19,742) (6,763)
Interest income 1,840 259 3,080 496
----------------- ----------------- ---------------- -----------------
Income before minority interest
and gain (loss) on exchange 17,556 16,737 33,334 30,786
Gain (loss) on exchange of storage facilities (284) 2,569 (284) 2,569
----------------- ----------------- ---------------- -----------------
Income before minority interest 17,272 19,306 33,050 33,355
Minority interest (1,966) (1,411) (3,306) (2,476)
----------------- ----------------- ---------------- -----------------
Net income $15,306 $17,895 $29,744 $30,879
================= ================= ================ =================
Basic net income per share $0.55 $0.66 $1.07 $1.18
================= ================= ================ =================
Diluted net income per share $0.55 $0.65 $1.07 $1.17
================= ================= ================ =================
Basic weighted average shares outstanding 27,688 27,224 27,688 26,138
================= ================= ================ =================
Diluted weighted average shares outstanding 27,855 27,423 27,872 26,354
================= ================= ================ =================
See Notes to Consolidated Financial Statements
2
<PAGE>
Storage USA, Inc.
Consolidated Balance Sheets
(amounts in thousands, except share data)
<CAPTION>
as of as of
June 30, 1998 December 31, 1997
----------------------- ----------------------
(unaudited)
Assets
Investments in storage facilities, at cost:
Land $378,212 $339,939
Buildings and equipment 1,025,729 902,925
----------------------- ----------------------
1,403,941 1,242,864
Accumulated depreciation (58,123) (44,955)
----------------------- ----------------------
1,345,818 1,197,909
Cash & cash equivalents 1,166 1,172
Mortgages receivable 75,045 24,541
Other assets 47,309 36,178
----------------------- ----------------------
Total assets $1,469,338 $1,259,800
======================= ======================
Liabilities & shareholders' equity
Notes payable $400,000 $400,000
Line of credit borrowings 178,730 31,843
Mortgage notes payable 56,373 42,766
Accounts payable & accrued expenses 12,424 11,137
Dividends payable 17,722 -
Rents received in advance 9,675 7,457
Minority interest 90,061 71,182
----------------------- ----------------------
Total liabilities 764,985 564,385
----------------------- ----------------------
Commitments and contingencies
Shareholders' equity:
Common stock $.01 par value, 150,000,000 shares
authorized, 27,690,272 and 27,634,790
shares issued and outstanding 277 276
Paid-in capital 749,141 738,185
Notes receivable - officers (10,484) (12,771)
Deferred compensation - (1,366)
Accumulated deficit (15,831) (15,831)
Distributions in excess of net income (18,750) (13,078)
----------------------- ----------------------
Total shareholders' equity 704,353 695,415
----------------------- ----------------------
Total liabilities & shareholders' equity $1,469,338 $1,259,800
======================= ======================
See Notes to Consolidated Financial Statements
3
<PAGE>
Storage USA, Inc.
Consolidated Statements of Cash Flows
(unaudited)
(amounts in thousands)
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
----------------------- ----------------------
Operating activities:
Net income $29,744 $30,879
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 13,692 8,670
Minority interest 3,306 2,476
Loss (gain) on exchange of self-storage facilities 284 (2,569)
Changes in assets and liabilities:
Other assets (11,657) (6,045)
Other liabilities 3,980 3,259
----------------------- ----------------------
Net cash provided by operating activities 39,349 36,670
----------------------- ----------------------
Investing activities:
Acquisition and improvements of storage facilities (92,404) (140,435)
Proceeds from sale/exchange of storage facilities 151 10,213
Development of storage facilities (27,482) (14,702)
Loans to Franchisees (50,504) -
----------------------- ----------------------
Net cash used in investing activities (170,239) (144,924)
----------------------- ----------------------
Financing activities:
Net borrowings (repayments) under line of credit 146,887 (47,615)
Mortgage principal payments/payoffs (620) (12,356)
Mortgage principal borrowings 145 2,243
Cash dividends (17,715) (16,322)
Proceeds from issuance of notes payable - 98,732
Proceeds from issuance of stock 1,255 91,123
Payments on notes receivable 3,065 1,786
Minority investor cash contribution 39 165
Distribution of minority interest capital (193) -
Distribution to minority interests (1,979) (1,170)
----------------------- ----------------------
Net cash provided by financing activities 130,884 116,586
----------------------- ----------------------
Net increase (decrease) in cash and equivalents (6) 8,332
Cash and equivalents, beginning of period 1,172 1,323
----------------------- ----------------------
Cash and equivalents, end of period $1,166 $9,655
======================= ======================
4
<PAGE>
Storage USA, Inc.
Consolidated Statements of Cash Flows, continued
(unaudited)
(amounts in thousands)
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
----------------------- ----------------------
Supplemental schedule of non-cash activities:
Common Stock issued in exchange for notes receivable $778 $358
Shares issued to Directors $132 $107
Mortgages assumed on storage facilities acquired $14,081 $1,835
Storage facilities acquired in exchange for
Partnership Units $27,545 $20,111
Partnership Units exchanged for shares of
common stock $211 $149
Exchange of storage facilities (net) $1,721 $7,644
----------------------- ----------------------
See Notes to Consolidated Financial Statements
</TABLE>
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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.
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
June 30, 1998 and 1997, respectively, the Company had an approximately
89% 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 126,077
Investment in development 27,482
Disposition of property (1,978)
Improvements and other 9,496
-------------------------
Balance on June 30, 1998 $1,403,941
=========================
Accumulated Depreciation:
Balance on January 1, 1998 $44,955
Additions during the period 13,274
Disposition of property (106)
-------------------------
Balance on June 30, 1998 $58,123
=========================
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
June 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 six months ended June 30, 1998 has been prepared assuming that
the acquisition of the 32 properties acquired during the same six month
period had been completed as of January 1, 1998.
Pro forma for the
six months ended
June 30, 1998
------------------------
Revenues $ 105,975
Net income $ 29,594
Basic net income per share $ 1.07
Diluted net income per share $ 1.06
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. Lines of Credit and Mortgages Payable
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. During the quarter ended June 30, 1998, the weighted average
borrowings were $125,480, and the weighted average interest rate was
6.7%. At June 30, 1998, approximately $178,730 was outstanding on the
lines of credit. At June 30, 1998, there were $46,002 of fixed rate
mortgage notes payable and $10,371 of variable rate mortgage notes
payable. As of June 30, 1998, the fixed rate mortgage notes carried
rates of interest ranging from 6.5% to 11.5% with a weighted average
rate of 10.1%. The variable rate mortgage notes carried rates of
interest ranging from 7.9% to 9.0% with a weighted average rate of
8.3%. During the six months ended June 30, 1998, total interest paid
was $20,098 and total interest capitalized for construction costs was
$1,442.
5. Other Income
Other income for the six months ended June 30, 1998 and 1997 consisted
primarily of revenue from truck rentals, ground rents for billboards
and cellular towers and the proportionate share of earnings of
Franchise. Fees earned for the management of facilities owned by third
parties and lock and packaging income are included in the earnings of
Franchise.
7
<PAGE>
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
June 30, 1998
(amounts in thousands, except share and per share data)
6. 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>
<S> <C>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
---------------------------------- ----------------------------------
Basic weighted average
common shares outstanding 27,688 27,224 27,688 26,138
Dilutive effect of stock options 167 199 184 216
---------------------------------- ----------------------------------
Diluted weighted average
common shares outstanding 27,855 27,423 27,872 26,354
</TABLE>
7. Recent Accounting Developments
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 Company
adopted SOP 98-1 on April 1, 1998. The adoption of SOP 98-1 is not
expected to have a material impact on the financial statements of the
Company.
In March 1998, EITF 97-11, "Accounting for Internal Costs Related to
Real Estate Property Acquisitions", was adopted. This standard, adopted
by the Company on April 1, 1998, requires that the Company expense all
costs of its internal acquisitions department. The adoption of EITF
97-11 is not expected to have a material impact on the financial
statements of the Company.
On April 3, 1998, the AICPA Accounting Standards Executive Committee
(AcSEC) issued Statement of Position 98-5 (SOP 98-5), "Accounting for
the Costs of Start-Up Activities", which is effective for fiscal years
beginning after December 31, 1998. SOP 98-5 requires all costs of
start-up activities to be expensed as incurred. The adoption of SOP
98-5 is not expected to have a material impact on the financial
statements of the Company.
On June 16, 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (FAS 133), which is effective for fiscal years beginning
after June 15, 1999. FAS 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
FAS 133 is not expected to have a material impact on the financial
statements of the Company.
8. Subsequent Events
From June 30, 1998 to August 14, 1998, the Company completed the
acquisition of seven self-storage facilities for approximately $19,750.
These acquisitions were 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 $62,450. These acquisitions are subject to
customary conditions to closing, including satisfactory due diligence,
and should close during the third and fourth quarters. Should these
contracts be terminated, the costs incurred by the Company would not be
material.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
June 30, 1998
(amounts in thousands, except share and per share data)
8. Subsequent Events, continued
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. 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.
9. Commitments
The Company is committed to lend approximately $69,313 to franchisees
of Franchise ("Franchisees") for the construction of franchised
self-storage facilities, secured by the facility.
The Company is the guarantor on $14,281 of loans made by third party
lenders to Franchisees and has committed to guarantee another $5,119.
10. Legal Proceedings
The Company is the subject of a purported national class action filed
on September 25, 1997, in the Superior Court of the District of
Columbia, Nelda Perkins v. Storage USA, Inc., Civil Action No.
97-CA97426, seeking recovery of certain late fees paid by Company
tenants since September 1993, treble damages, unspecified punitive
damages and an injunction against further assessment of similar fees.
In April 1998 the plaintiff in this case petitioned for the
certification of a nationwide class action, and the Company has since
filed an opposition to such petition. The Company believes it has
defenses to the claims in this suit and intends to defend the suit
vigorously. While the ultimate resolution of this case cannot be
currently determined, management believes that the aggregate liability
or loss, if any, resulting from this claim will not have a material
adverse effect on its financial position. However, if during any period
the potential contingency should become probable, the results of
operations in that period could be materially affected.
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 described in the Company's 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 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 thereto. 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 June 30, 1997 to June
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 Ended June 30, 1998 Compared to Quarter Ended
June 30, 1997.
The following table reflects the profit and loss statement for the quarters
ended June 30, 1998 and June 30, 1997 based on a percentage of total revenues
and is used in the discussion that follows:
<CAPTION>
<S> <C>
Three Months Ended Six Months Ended
1998 1997 1998 1997
----------------------------- -----------------------------
REVENUES
Rental income 95.1% 97.3% 95.3% 97.8%
Other income 1.6% 2.0% 1.8% 1.5%
Interest income 3.3% 0.7% 2.9% 0.7%
Total income 100.0% 100.0% 100.0% 100.0%
EXPENSES
Property operations 23.5% 24.2% 24.0% 24.3%
Taxes 8.3% 8.2% 8.2% 8.4%
General and administrative 4.9% 4.0% 4.4% 3.9%
Earnings before depreciation and interest (EBITDA) 63.3% 63.6% 63.4% 63.4%
</TABLE>
In the second quarter of 1998, the Company reported growth in property revenue,
NOI and net income excluding gains/losses, respectively, of $15.1 million, $10.0
million and $264 thousand over the same quarter of 1997. Since June 30, 1997,
the Company has acquired 86 facilities. These acquired facilities added 10.0
million square feet, an increase of 50.5%, bringing the total square feet of the
394 facilities owned by the Company at June 30, 1998 to 25.6 million. For the
second quarter of 1998, the 223 same store facilities owned during the entire
second quarter of 1997 provided 63% of the Company's rental income. These same
store facilities' rental income grew 6.6% over second quarter 1997 results. The
majority of this growth was provided by an approximate 6.2% rate increase, which
was offset by discounts and the timing of rate increases. The remaining growth
was a result of increases in occupancy. At June 30, 1998, the physical occupancy
and rent per square foot of the 223 same-store facilities was 88.9% and $10.53,
respectively, while the figures as of June 30, 1997, were 88.4% and $9.92,
respectively. The Company's portfolio of facilities as a whole had an average
physical occupancy at June 30, 1998 of 86.9% with an average rent per square
foot of $9.33.
Other income increased $105 thousand in the second quarter of 1998 over the same
period in 1997. The increase is primarily due to earnings in the equity
investment in Storage USA Franchise Corp. ("Franchise"), of which the Company
owns a 97.5% economic interest. Included in the earnings of Franchise, pre-tax
earnings from franchising activities increased $209 thousand over the second
quarter of 1997 and pre-tax earnings from management fees and the sales of lock
and packaging products increased $163 thousand over the second quarter of 1997.
These increases were partially offset by income taxes. At June 30, 1998 there
were 26 franchisees open and operating, 35 in design and construction and 18
projects approved, subject to final documentation. Other income also increased
due to income earned on cellular tower and billboard leases and truck rentals.
Cost of property operations and maintenance was $13.1 million for the quarter
ended June 30, 1998, representing a $3.6 million increase over the second
quarter of 1997. As a percentage of revenues, cost of property operations and
maintenance decreased from 24.2% for the quarter ended June 30, 1997 to 23.5%
for the quarter ended June 30, 1998. The decline as a percentage of revenues is
a result of revenue growth outpacing expense growth and is also attributable to
additional revenue sources including interest earned on loans to Franchisees and
earnings from Franchise. Same-store revenues increased 6.5% while same store
expenses only increased 2.5%.
Tax expense increased from $3.2 million or 8.2% of revenues for the quarter
ended June 30, 1997, to $4.6 million or 8.3% of revenue for the quarter ended
June 30, 1998. The increase was primarily due to the acquisition of properties.
11
<PAGE>
General and administrative expense ("G&A") increased from $1.6 million or 4.0%
of revenues for the quarter ended June 30, 1997, to $2.7 million or 4.9% of
revenue for the quarter ended June 30, 1998. 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.
Depreciation expense increased to $7.1 million for the quarter ended June 30,
1998 from $4.5 million for the comparable period in 1997, reflecting the
increase in the number of facilities owned. The Company has acquired or placed
in service approximately $286 million in depreciable assets since July 1, 1997.
Interest expense for the quarter ended June 30, 1998, was $10.5 million as
compared to $3.5 million for the comparable period in 1997. The increase is due
to the issuance of $100 million in notes payable at 8.2% in June 1997, $100
million in notes payable at 7.0% in December 1997 and $100 million in notes
payable at 7.5% in December 1997. The remaining interest expense represents
weighted average borrowings of $125.5 million under the Company's lines of
credit at a weighted average interest rate of 6.7% and $53.0 million in weighted
average mortgages payable at a weighted average interest rate of 9.5%. In the
second quarter of 1997, the Company's outstanding indebtedness consisted of $200
million of notes bearing a weighted average interest rate of 7.66%, weighted
average borrowings under the Company's lines of credit of $27.2 million at a
weighted average interest rate of 7.05%, and weighted average mortgage notes of
$38.9 million at a weighted average interest rate of 10.0%.
Interest income was $1.8 million for the quarter ended June 30, 1998 as compared
to $259 thousand for the quarter ended June 30, 1997. Interest income represents
loans to franchisees, 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 $75.0 million of loans
made to Franchisees from September 1, 1997 to June 30, 1998. The Company has
committed to lend an additional $72.3 million to Franchisees.
During the second quarter of 1998, the Company incurred a loss on the exchange
of a self-storage facility of $284 thousand. During the second quarter of 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.
Minority interest grew from $1.4 million for the quarter ended June 30, 1997 to
$2.0 million for the quarter ended June 30, 1998 as the Company issued
approximately 1.1 million units of limited partnership interest in the
Partnership ("Units") in connection with the acquisition of certain facilities
from July 1, 1997 to June 30, 1998.
Results of Operations- Six months Ended June 30, 1998 Compared to Six months
Ended June 30, 1997.
In the first six months of 1998, the Company reported growth in property
revenue, NOI and net income excluding gains/losses, respectively, of $29.6
million, $19.7 million and $1.7 million over the same period of 1997. These
increases are primarily the result of the acquisition of 86 facilities,
containing 10.0 million square feet since July 1, 1997, and same-store revenue
and NOI growth of 5.7% and 6.6%, respectively over the first six months of 1997.
Other income increased $867 thousand in the first six months of 1998 over the
same period in 1997. The increase is primarily due to earnings in the equity
investment in Storage USA Franchise Corp. ("Franchise"), of which the Company
owns a 97.5% economic interest. Included in the earnings of Franchise, pre-tax
earnings from franchising activities increased $565 thousand over the first six
months of 1997 and pre-tax earnings from management fees and the sales of lock
and packaging products increased $214 thousand over the first six months of
1997. These increases were partially offset by income taxes. Other income also
increased due to fees earned on loans made to franchisees of Franchise
("Franchisees") by third parties that are guaranteed by the Company and rental
income on cellular tower and billboard leases.
Cost of property operations and maintenance was $25.2 million for the six months
ended June 30, 1998, representing a $7.5 million increase over the same six
month period in 1997. As a percentage of revenues, cost of property operations
and maintenance decreased from 24.3% for the six months ended June 30, 1997 to
24.0% for the six months ended June 30, 1998. The decline as a percentage of
revenues is a result of revenue growth outpacing expense growth and is also
attributable to additional revenue sources, including interest earned on loans
to Franchisees and earnings from Franchise. Same-store revenues increased 5.7%
while same store expenses only increased 3.6%.
12
<PAGE>
Tax expense increased from $6.2 million or 8.4% of revenues for the six months
ended June 30, 1997, to $8.6 million or 8.2% of revenue for the six months ended
June 30, 1998. The increase was primarily due to the acquisition of properties.
General and administrative expense ("G&A") increased from $2.8 million or 3.9%
of revenues for the six months ended June 30, 1997, to $4.6 million or 4.4% of
revenue for the six months ended June 30, 1998. 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.
Depreciation expense increased to $13.7 million for the six months ended June
30, 1998 from $8.7 million for the comparable period in 1997, reflecting the
increase in the number of facilities owned. The Company has acquired or placed
in service approximately $286 million in depreciable assets since July 1, 1997.
Interest expense for the six months ended June 30, 1998, was $19.7 million as
compared to $6.8 million for the comparable period in 1997. The increase is due
to the issuance of $100 million in notes payable at 8.2% in June 1997, $100
million in notes payable at 7.0% in December 1997, $100 million in notes payable
at 7.5% in December 1997. The remaining interest expense represents weighted
average borrowings of $93.6 million under the Company's lines of credit at a
weighted average interest rate of 6.7% and $47.7 million in weighted average
mortgages payable at a weighted average interest rate of 9.7%. During the first
six months of 1997 the Company's outstanding indebtedness consisted of $100
million of notes issued in November 1996 and $100 million of notes issued in
June 1997, bearing a weighted average interest rate of 7.66%, weighted average
borrowings under the Company's lines of credit of $42.0 million at a weighted
average interest rate of 7.0%, and weighted average mortgage notes of $37.4
million at a weighted average interest rate of 10.0%.
Interest income was $3.1 million for the six months ended June 30, 1998 as
compared to $496 thousand for the six months ended June 30, 1997. Interest
income represents loans to franchisees, 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
$75.0 million of loans made to Franchisees from September 1, 1997 to June 30,
1998.
During the first six months of 1998, the Company incurred a loss on the exchange
of a self-storage facility of $284 thousand. During the first six months of
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.
Minority interest grew from $2.5 million for the six months ended June 30, 1997
to $3.3 million for the six months ended June 30, 1998 as the Company issued
approximately 1.1 million units of limited partnership interest in the
Partnership ("Units") in connection with the acquisition of certain facilities
from July 1, 1997 to June 30, 1998.
Liquidity and Capital Resources
Cash provided from operating activities grew to $39.3 million for the six months
ended June 30, 1998 from the $36.7 million that was provided for the six months
ended June 30, 1997. This increase was primarily a result of the expansion of
the Company's portfolio. In the twelve months since July 1, 1997 the Company has
acquired 86 facilities and placed in service seven development facilities.
Cash used in investing activities of $170.2 million in the first six months of
1998 and $144.9 million in the first six months of 1997 was primarily invested
in the acquisition of self-storage facilities. 32 and 54 facilities containing
1.9 million and 3.6 million square feet, respectively were acquired in the first
13
<PAGE>
six months of 1998 and 1997, respectively. In addition to acquisitions, $27.7
million and $14.7 million was invested in the first six months of 1998 and 1997,
respectively, for development properties. There were 28 development properties
and 26 expansions in process with $50.0 million invested at June 30, 1998. The
total development budget on these properties is $141.9 million. The Company also
made loans to Franchisees during the first six months of 1998 in the amount of
$50.5 million. The Company has committed to lend an additional $69.3 million to
Franchisees. The Company is the guarantor on loans totaling $14.3 million that
were lent to Franchisees by third party lenders, and has committed to guarantee
additional loans totaling $5.1 million. During the first six 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 6.7% during the first six months of 1998. The Company had net borrowings of
$146.9 million in the first six months of 1998 and net repayments of $47.6
million in the first six months of 1997.
As of June 30, 1998, the Company had issued $400 million of senior unsecured
notes (the "Notes"). The combined Notes have a weighted average interest rate of
7.46% and were issued at a price to yield a weighted average of 7.70%. The terms
of the notes are staggered between seven and thirty years, maturing between 2003
and 2027. 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. 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.
The Company assumed $14.1 million of mortgages on facilities acquired during the
first six months of 1998 and $1.8 million in the first six months of 1997.
During the first six months of 1998, $200 thousand of mortgage notes were paid
off, and $12.1 million of mortgage notes were paid off during the first six
months of 1997. At June 30, 1998, the Company had $46.0 million of fixed rate
mortgage notes with a weighted average interest rate of 10.1% and $10.4 million
of variable rate mortgage notes with a weighted average interest rate of 8.3%.
These mortgage notes mature at various dates through 2021.
At June 30, 1998, the Company had approximately 27.7 million shares of Common
Stock outstanding. During the first six months of 1998, the Company has declared
two quarterly dividends of $0.64 each. Total distributions to common
stockholders and limited partners in the Partnership equaled approximately $19.5
million in the first six months of 1998 and $20.0 million was paid on July 13,
1998.
During the first six months of 1998 and 1997, the Company issued 718 thousand
Units and 545 thousand Units, respectively, valued at $27.5 million and $20.0
million, respectively. These Units were issued in exchange for self-storage
facilities or entities owning self-storage facilities. At June 30, 1998, the
Company had 3.5 million Units outstanding, 82 thousand of which are redeemable
for an amount equal to their fair market value ($2.9 million, based upon a price
per Unit of $35.00 at June 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
June 30, 1998, 2.4 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
($82.7 million, based upon a price per Unit of $35.00 at June 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.
Under joint shelf registration statements filed with the Securities and Exchange
Commission, the REIT and the Partnership could issue up to $1.1 billion if
securities at June 30, 1008, including up to $650 million of common stock,
preferred stock, depositary shares and warrants of the REIT and up to $450
million of unsecured, non-convertible senior debt securities of the Partnership.
On July 13, 1998 the Partnership issued $200 million of senior unsecured notes,
reducing the amount of unsecured debt securities available under the shelf
registration statements to $250 million.
14
<PAGE>
Subject to prevailing market conditions, for the remainder of 1998 the Company
anticipates funding its long-term capital needs by issuing some combination of
debt or equity securities. The proceeds from any debt or equity offering would
be used to repay borrowings under the Company's lines of credit and for general
purposes. 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. Subject to
prevailing market conditions, the Company believes that the combination of cash
flow from operating activities, debt or equity issuances pursuant to the shelf
registration statements, in addition to borrowings under its credit facilities
and issuances of Units, as described above, will provide the Company with
necessary liquidity and capital resources to meet the requirements of its
operating strategies over the next twelve months. See "Forward Looking
Statements and Risk Factors" in the Company's annual report on Form 10-K for a
description of the risk relating to fluctuations in the capital markets and its
effect on the Company's proposed operating strategy.
From June 30, 1998 to August 14, 1998, the Company completed the acquisition of
seven self-storage facilities for approximately $19,750. These acquisitions were
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 $62,450. These acquisitions
are subject to customary conditions to closing, including satisfactory due
diligence, and should close during the third and fourth quarters. Should these
contracts be terminated, the costs incurred by the Company would not be
material.
The Company has capitalized approximately $1.5 million for regularly scheduled
maintenance and repairs during the six months ended June 30, 1998 and $2.9
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 during
1996, 1995 and 1994 to Company standards.
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 GAAP,
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.
15
<PAGE>
<TABLE>
The following table illustrates the components of the Company's FFO for the
three months and six months ended June 30, 1998 and June 30, 1997.
<CAPTION>
<S> <C>
Three Months Ended Six Months Ended
in thousands June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
- -------------------------------------------------------------------------------------------------------------------------
Net income $15,306 $17,895 $29,744 $30,879
Loss (gain) on sale of assets 284 (2,569) 284 (2,569)
Depreciation of revenue producing assets 6,668 4,276 12,908 8,233
- -------------------------------------------------------------------------------------------------------------------------
Consolidated FFO $22,258 $19,602 $42,936 $36,543
MI share of gain (loss) on exchange of asset (32) 184 (32) 184
MI share of depreciation & amortization (755) (306) (1,331) (580)
- -------------------------------------------------------------------------------------------------------------------------
FFO available to shareholders $21,471 $19,480 $41,573 $36,147
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The REIT, 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 may 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.
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
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 compliance with the Y2K. The Company has substantially completed
this phase and estimates finishing by October 1998. The third phase involves
implementing the necessary changes, if any, by December 1998. The Company has
grouped all of its systems into three categories based on the critical nature
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 already 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 gate and security systems on some
properties have not been documented as being Y2K compliant, however, the Company
is planning on using only three 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 systems that are not one of the
three vendors. This consolidation of gate systems was planned for reasons other
than the Y2K issue. The current phone system at our Columbia office is not Y2K
compliant but can be upgraded for $4,000. The Company intends to solicit its key
vendors, including financial institutions, to determine their state of readiness
with respect to Y2K issues and expects to complete that process by October 1998.
Those vendors who are not prepared for the Y2K issues will be replaced.
16
<PAGE>
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 only 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 and the upgrade to the phone system, 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.
Recent Accounting Developments
See Note 7 "Recent Accounting Developments" in the Notes to the Consolidated
Financial Statements.
Legal Proceedings
The Company is the subject of a purported national class action filed on
September 25, 1997, in the Superior Court of the District of Columbia, Nelda
Perkins v. Storage USA, Inc., Civil Action No. 97-CA97426, seeking recovery of
certain late fees paid by Company tenants since September 1993, treble damages,
unspecified punitive damages and an injunction against further assessment of
similar fees. In April 1998 the plaintiff in this case petitioned for the
certification of a nationwide class action, and the Company has since filed an
opposition to such petition. The Company believes it has defenses to the claims
in this suit and intends to defend the suit vigorously. While the ultimate
resolution of this case cannot be currently determined, management believes that
the aggregate liability or loss, if any, resulting from this claim will not have
a material adverse effect on its financial position. However, if during any
period the potential contingency should become probable, the results of
operations in that period could be materially affected.
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 six months ended June 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
- --------------------------------------------------------
Total 718,119 $ 27,545,000
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.
On May 6, 1998 the Company held its Annual Meeting of
Shareholders. Five matters were submitted to the shareholders for
consideration:
1. election of nine Directors;
2. proposal to approve an amendment to the Company's 1993
Omnibus Stock Plan;
3. ratification of the selection of Coopers and Lybrand
L.L.P. as auditors for the fiscal year ending December
31, 1998.
1. Election of Nine Directors:
Director: For Withheld
- -------- --- --------
C. Ronald Blankenship 24,831,853 49,663
Howard P. Calhoun 24,832,866 48,750
Alan B. Graf, Jr. 24,832,476 49,140
Dean Jernigan 24,833,314 48,302
Mark Jorgensen 24,833,323 48,293
Caroline McBride 24,832,196 49,420
John P. McCann 24,833,066 48,550
William D. Sanders 24,832,896 48,720
Harry J. Thie 24,834,057 47,559
19
<PAGE>
3. Proposal to approve an amendment to the Company's 1993 Omnibus Stock Plan:
For Against Abstained Broker Non-Vote
--- ------- --------- ---------------
18,797,500 3,357,529 75,701 2,650,886
4. Ratification of the selection of Coopers and Lybrand L.L.P. as auditors for
the fiscal year ending December 31, 1998:
For Against Abstained
--- ------- ---------
24,860,670 4,111 16,835
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
20
<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: August 14, 1998
Storage USA, Inc.
By: /s/ Christopher P. Marr
-----------------------
Christopher P. Marr
Chief Financial Officer
(Principal Financial and Accounting Officer)
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
registrant's unaudited consolidated financial statements as of June 30, 1998,
and the six months then ended, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,166
<SECURITIES> 0
<RECEIVABLES> 122,354
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 123,520
<PP&E> 1,403,941
<DEPRECIATION> 58,123
<TOTAL-ASSETS> 1,469,338
<CURRENT-LIABILITIES> 129,882
<BONDS> 635,103
0
0
<COMMON> 277
<OTHER-SE> 704,076
<TOTAL-LIABILITY-AND-EQUITY> 1,469,338
<SALES> 100,109
<TOTAL-REVENUES> 102,048
<CGS> 0
<TOTAL-COSTS> 52,052
<OTHER-EXPENSES> 510 <F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,742
<INCOME-PRETAX> 29,744
<INCOME-TAX> 0
<INCOME-CONTINUING> 29,744
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,744
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.07
<FN>
Included in other expenses are minority interest expense and interest income
</FN>
</TABLE>
