<PAGE>
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 quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-13462
STORAGE TRUST REALTY
(Exact name of Registrant as specified in its Charter)
MARYLAND 43-1689825
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
2407 RANGELINE STREET
COLUMBIA, MISSOURI 65202
(Address of principal executive offices) (Zip Code)
(573) 499-4799
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
16,076,291 common shares of Beneficial Interest, $.01 par value as
of October 31, 1998.
<PAGE>
<TABLE>
<CAPTION>
STORAGE TRUST REALTY
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(amounts in thousands, except for share information)
Sept. 30, Dec. 31,
1998 1997
<S> <C> <C>
ASSETS (unaudited)
Investment in self-storage stores, net $ 500,277 $ 386,574
Cash and cash equivalents 3,025 4,909
Notes receivable 5,394 2,376
Accounts receivable, earnest deposits
and other assets 1,764 5,201
Deferred financing costs, net of
amortization of $417 and $1,085 1,437 951
Investments in joint ventures 219 284
Total assets $ 512,116 $ 400,295
LIABILITIES AND EQUITY
Liabilities:
Mortgages and notes payable:
Revolving line of credit $ 83,470 $ -
Senior Notes 100,000 100,000
Accounts payable and accrued expenses 8,410 5,087
Accrued hedging loss 5,464 -
Accrued interest payable 1,843 3,457
Tenant prepayments 4,134 3,242
Dividends and distributions payable 7,936 -
Total liabilities 211,257 111,786
Minority interests 23,426 15,905
Shareholders' equity:
Common shares, $.01 par value,
150,000,000 shares authorized,
16,075,653 and 15,446,125 shares
issued and outstanding, respectively 161 155
Additional paid-in capital 294,740 280,324
Distributions in excess of net income (17,468) (7,875)
Total shareholders' equity 277,433 272,604
Total liabilities and shareholders'
equity $ 512,116 $ 400,295
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
STORAGE TRUST REALTY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(amounts in thousands, except for share information)
(unaudited)
1998 1997
<S> <C> <C>
Revenues:
Rental income $ 20,554 $ 15,477
Product sales and other property income 532 311
Interest income 126 66
Management income 53 80
Equity in earnings of joint ventures 28 30
Total revenues 21,293 15,964
Expenses:
Property operations and product sales 4,580 3,286
Real estate taxes 2,080 1,568
General and administrative 1,166 879
Strategic evaluation costs 212 -
Hedging loss 5,464 -
Interest 3,184 2,196
Depreciation 3,493 2,487
Amortization 87 161
Total expenses 20,266 10,577
Net income before minority interests 1,027 5,387
Minority interests (97) (358)
Net income $ 930 $ 5,029
Net income per share:
Basic $ 0.06 $ 0.39
Diluted $ 0.06 $ 0.39
Weighted-average number of shares
outstanding during the period 16,074,875 12,909,775
Dividends declared per share
during the period $ 0.460 $ 0.435
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
STORAGE TRUST REALTY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(amounts in thousands, except for share information)
(unaudited)
1998 1997
<S> <C> <C>
Revenues:
Rental income $ 56,561 $ 42,623
Product sales and other property income 1,423 766
Interest income 327 161
Management income 159 193
Equity in earnings of joint ventures 65 69
Total revenues 58,535 43,812
Expenses:
Property operations and product sales 12,294 9,025
Real estate taxes 5,757 3,995
General and administrative 3,094 2,302
Strategic evaluation costs 212 -
Hedging loss 5,464 -
Interest 8,530 5,596
Depreciation 9,724 6,812
Amortization 261 467
Total expenses 45,336 28,197
Net income before minority interests 13,199 15,615
Minority interests (893) (1,011)
Net income $ 12,306 $ 14,604
Net income per share:
Basic $ 0.78 $ 1.13
Diluted $ 0.77 $ 1.12
Weighted-average number of shares
outstanding during the period 15,815,810 12,901,434
Dividends declared per share
during the period $ 1.380 $ 1.305
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
STORAGE TRUST REALTY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(amounts in thousands)
(unaudited)
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $ 12,306 $14,604
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 9,985 7,279
Hedging loss 5,464 -
Equity in earnings of joint ventures (65) (69)
Distributions from joint ventures 130 -
Minority interests 893 1,011
Other changes in assets and liabilities 2,784 3,976
Net cash provided by operating activities 31,497 26,801
Cash flows from investing activities:
Acquisition of self-storage stores (65,252) (61,831)
Other additions to self-storage stores (13,062) (2,360)
Earnest money deposits for acquisitions 3,197 -
Funding of notes receivable (4,593) (2,031)
Net cash used in investing activities (79,710) (66,222)
Cash flows from financing activities:
Borrowings on revolving line of credit 107,980 53,570
Payments on revolving line of credit (24,510) (90,423)
Principal payments on other notes payable (35,151) (4,226)
Funding of Senior Notes - 100,000
Financing costs paid (747) (1,026)
Proceeds from sale of Common Shares 15,000 -
Offering costs paid (833) -
Disstributions to minority interests paid (1,014) (1,113)
Dividends paid (14,503 (16,831)
Other issuances of Common Shares 107 143
Net cash provided by financing activities 46,329 40,094
Net change in cash and cash equivalents (1,884) 673
Cash and cash equivalents at beginning
of period 4,909 2,317
Cash and cash equivalents at end of period $ 3,025 $ 2,990
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
STORAGE TRUST REALTY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(amounts in thousands)
(unaudited)
1998 1997
<S> <C> <C>
Other changes in assets and liabilities:
Accounts receivable and other assets $ 184 $ 24
Accounts payable, tenant prepayments and
accrued expenses 2,600 3,952
Total $ 2,784 $ 3,976
Supplemental cash flow information:
Cash paid for interest $10,459 $ 4,146
Schedule of non-cash investing and
financing activities:
Mortgages assumed in connection with the
acquisition of self-storage stores $35,151 $ 1,644
Issuance of Units in connection with the
acquisition of self-storage stores $ 8,387 $ -
Application of note receivable in
connection with the acquisition of
a self-storage store $ 1,575 $ -
Self-storage stores acquired (10 in 1997)
in exchange for self-storage stores
(16 in 1997) $ - $23,683
Issuance of Units in connection with the
earnout provisions of contracts on
previously acquired self-storage stores $ - $ 293
Conversion of Units of the Operating
Partnership held by minority interests
to Common Shares of the Company $ 204 $ 545
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
STORAGE TRUST REALTY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization and Basis of Presentation
Organization
Storage Trust Realty (the "Company") was formed as a Maryland
real estate investment trust ("REIT") on July 12, 1994 to
continue the self-storage business of Burnam Holding
Companies Co. ("BHC") and certain of its affiliates
(collectively, the "Predecessor Company") in owning,
operating and managing self-storage stores. The Company and
its subsidiaries commenced operations effective with the
completion of the Company's initial public offering ("IPO")
of common shares of beneficial interest, par value $.01 per
share ("Common Shares") on November 16, 1994. As of
September 30, 1998, the Company owned 222 self-storage stores
in 16 states, and was a partner in two joint ventures that
owned two operating self-storage stores.
Substantially all of the Company's assets and interests in
self-storage stores are held by, and all of its operations
are conducted through, Storage Trust Properties, L.P. (the
"Operating Partnership"). The Company is the sole general
partner of, and thereby controls the operations of, the
Operating Partnership, holding a 93.18% ownership interest
therein as of September 30, 1998. The remaining ownership
interests in the Operating Partnership (the "Units") are held
by certain owners of the Predecessor Company, including BHC,
and certain former owners of assets acquired by the Operating
Partnership subsequent to the IPO.
Storage Realty Management Co. (the "Subsidiary Company")
manages self-storage stores owned by unrelated third parties
and conducts other business, such as the sale of locks and
packaging supplies, the processing of customer property
insurance and the rental of trucks, at various self-storage
stores. At September 30, 1998, 13 self-storage stores were
managed by the Subsidiary Company, including one of the
stores owned by a joint venture in which the Company has an
ownership interest. Through its ownership of the preferred
stock of the Subsidiary Company, the Operating Partnership
receives substantially all of the economic benefit of the
businesses carried on by the Subsidiary Company.
<PAGE>
STORAGE TRUST REALTY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization and Basis of Presentation (continued)
Basis of Presentation:
The financial statements included herein have been prepared
without audit pursuant to the rules and regulations of the
Securities and Exchange Commission. These financial
statements reflect all adjustments which, in the opinion of
management, are necessary to fairly present results for the
interim periods and all such adjustments are of a normal
recurring nature.
Certain amounts from 1997 have been reclassified to conform
to the presentation in 1998.
Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations, although
the Company believes that the accompanying disclosures are
adequate to make the information presented not misleading.
The results for the interim periods are not necessarily
indicative of the results for a full fiscal year. These
financial statements should be read in conjunction with the
financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
The accompanying consolidated financial statements include
the accounts of the Company, the Operating Partnership, and
the Subsidiary Company. All significant intercompany
transactions have been eliminated in the consolidated
presentations.
<PAGE>
STORAGE TRUST REALTY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. Summary of Significant Accounting Policies
Investment in Self-Storage Stores
Investment in self-storage stores is recorded at cost.
Depreciation is computed using straight-line and accelerated
methods over estimated useful lives ranging from 5 to 40
years for buildings and improvements, and 3 to 10 years for
furniture, fixtures and equipment. Expenditures for
significant renovations and improvements, which improve
and/or extend the useful lives of fixed assets, are
capitalized. Maintenance and repairs are expensed as
incurred.
The purchase contracts on certain self-storage stores
acquired included "earnout provisions" that call for
additional payments to the sellers (in cash or Units) upon
achievement of specified net operating income amounts. These
amounts are recorded when the terms of the purchase contract
are met.
Accounting for Internal Acquisition Costs
On March 19, 1998, the Emerging Issues Task Force of the
Financial Accounting Standards Board reached a consensus on
Issue Number 97-11, "Accounting for Internal Costs Relating
to Real Estate Property Acquisitions"("EITF 97-11"). EITF 97-
11 states that internal pre-acquisition costs (e.g. costs of
an internal acquisition department) associated with the
acquisition of a fully developed self-storage store should be
expensed as incurred. Internal costs incurred for non-
operating stores being developed or converted can be
capitalized in specified circumstances. Prior to the
issuance of EITF 97-11, the Company capitalized certain
costs, primarily payroll, directly related to the acquisition
of operating self-storage stores. The Company has adopted
the accounting guidance from EITF 97-11.
<PAGE>
STORAGE TRUST REALTY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. Summary of Significant Accounting Policies (continued)
Accounting for Internal Acquisition Costs (continued)
For the three months ended September 30, 1998 and 1997, the
Company had total acquisition costs of $165,000 and $177,000,
respectively, which include capitalized internal acquisition
costs of $0 and $109,000, respectively. For the nine months
ended September 30, 1998 and 1997, the Company had total
acquisition costs of $702,000 and $435,000, respectively,
which include capitalized internal acquisition costs of
$284,000 and $255,000, respectively.
Revenue Recognition
Rental income is recorded when due from tenants under
operating lease agreements.
Federal Income Taxes
No provision has been made for Federal income taxes for the
Company in the accompanying consolidated financial statements
because the Company has operated and expects to continue
operating in a manner to qualify as a REIT. Under the
applicable provisions of the Internal Revenue Code for a
REIT, the Company is allowed to reduce taxable income by all
or a portion of its distributions to shareholders so long as
it distributes at least 95% of its taxable income to its
shareholders and complies with certain other requirements.
Cash and Cash Equivalents
The Company considers all demand and money market accounts
and repurchase agreements with a maturity of three months or
less when purchased to be cash and cash equivalents.
<PAGE>
STORAGE TRUST REALTY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. Summary of Significant Accounting Policies (continued)
Notes Receivable
Interest income is recorded as earned under the terms of the
notes. Based on the substantial equity of the borrowers in
these stores and the Company's option (at a fair market rate)
to purchase these stores, the amounts funded are treated as
notes receivable.
Hedging Transactions
The Company enters into hedging transactions (the sale of
Treasury securities) with the objective of reducing its
exposure to changes in interest rates associated with
anticipated debt offerings. The Company follows Statement of
Financial Standards No. 80, "Accounting for Futures
Contracts", which permits hedge accounting for anticipatory
transactions meeting certain criteria. Gains or losses, if
any, on these transactions are deferred and amortized over
the term of the related debt as an adjustment to interest
expense. Changes in the fair value of the hedging
transaction are not recognized in the financial statements.
In the event that the anticipatory transaction is no longer
likely to occur, the Company would mark the derivative to
market and would recognize any adjustment in the consolidated
statement of operations. The Company does not enter into
transactions for trading or speculative purposes.
Deferred Financing Costs
Fees and related expenses incurred in connection with
financing transactions are capitalized at cost and are
amortized on a straight-line basis over the life of the
related financing, which approximates the interest method.
The unamortized balance is expensed upon termination or
prepayment of the financing.
<PAGE>
STORAGE TRUST REALTY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. Summary of Significant Accounting Policies (continued)
Investments in Joint Ventures
Investments in joint ventures represent investments in self-
storage stores in which the Company does not have a
controlling interest. The Company exercises significant
influence over the operating and financial policies of the
joint ventures.
The equity method of accounting has been applied in the
accompanying consolidated financial statements with respect
to the Company's interests in joint ventures.
Net Income Per Common Share
In February 1997, the Financial Accounting Standards Board
issued Statement No. 128, "Earnings per Share" ("FASB 128"),
which the Company adopted on December 31, 1997. FASB 128
replaced the calculations of primary and fully diluted
earnings per Common Share with basic and diluted earnings per
Common Share. Unlike primary earnings per Common Share,
basic earnings per Common Share excludes any dilutive effects
from options, warrants and convertible securities. Diluted
earnings per Common Share is very similar to the previous
fully diluted earnings per Common Share. The earnings per
Common Share for the three and nine months ended September
30, 1997 have been restated to conform to requirements of
FASB 128.
Capitalized Interest
Interest is capitalized on accumulated expenditures relating
to the development or conversion of qualifying self-storage
stores. During the three months and nine months ended
September 30, 1998, the Company capitalized $149,000 and
$315,000, respectively, of interest costs for qualifying
self-storage stores.
<PAGE>
STORAGE TRUST REALTY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. Summary of Significant Accounting Policies (continued)
Minority Interests
The minority interests reflects the ownership interests of
the limited partners of the Operating Partnership and the
other shareholder of the Subsidiary Company. Amounts
allocated to these interests are reflected as an expense in
the statement of operations and increase the Company's
liability. Distributions to these limited partners and the
other shareholder reduce this liability. Minority interest
of Unitholders in the Operating Partnership is calculated on
the weighted-average Common Shares and Units outstanding for
the period.
During the nine months ended September 30, 1998, 318,432
Units (valued at $8,115,000) were issued in connection with
the acquisition of self-storage stores and 11,151 Units
(valued at $272,000) were issued to Burnam Family Co., L.P.
in connection with the acquisition of an industrial property
containing 13,000 net rentable square feet which is adjacent
to the Company's Columbia, MO home office.
The Units in the Operating Partnership held by minority
interests can be exchanged for Common Shares of the Company
on a one-for-one basis or redeemed in cash at the Company's
option. During the nine months ended September 30, 1998 and
1997, limited partners exchanged 10,566 and 27,829 Units,
respectively, in the Operating Partnership for an equal
number of Common Shares in the Company.
At September 30, 1998, minority interest ownership in the
Operating Partnership was 1,176,701 Units or 6.82%.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
<PAGE>
STORAGE TRUST REALTY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Earnings per Share
The following tables set forth the computation of basic and
diluted earnings per share (amounts in thousands, except for
share information):
<TABLE>
Three Months Ended
September 30,
1998 1997
<S> <C> <C>
Numerator:
Net income $ 930 $ 5,029
Effect of dilutive securities:
Options on Common Shares - -
Income allocated to Units of
the Operating Partnership
owned by minority interests 97 351
Numerator for diluted earnings
per Common Share-net income
after assumed conversions $ 1,027 $ 5,380
Denominator:
Denominator for basic earnings
per share - weighted-average
Common Shares outstanding 16,074,875 12,909,775
Effect of dilutive securities:
Options on Common Shares 81,839 143,926
Weighted-average Units
outstanding in the
Operating Partnership
owned by minority interests 1,169,307 862,684
Dilutive potential Common Shares 1,251,146 1,006,610
Denominator for diluted earnings
per Common Shares-adjusted
weighted-average Common Shares
and assumed conversions 17,326,021 13,916,385
Basic earnings per Common Share $0.06 $0.39
Diluted earnings per Common Share $0.06 $0.39
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STORAGE TRUST REALTY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Earnings per Share (continued)
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
Numerator:
Net income $ 12,306 $ 14,604
Effect of dilutive securities:
Options on Common Shares - -
Income allocated to Units of
the Operating Partnership
owned by minority interests 885 998
Numerator for diluted earnings
per Common Share-net income
after assumed conversions $ 13,191 $ 15,602
Denominator:
Denominator for basic earnings
per share - weighted-average
Common Shares outstanding 15,815,810 12,901,434
Effect of dilutive securities:
Options on Common Shares 103,136 134,232
Weighted-average Units
outstanding in the
Operating Partnership
owned by minority interests 1,108,167 861,178
Dilutive potential Common Shares 1,211,303 995,410
Denominator for diluted earnings
per Common Shares-adjusted
weighted-average Common Shares
and assumed conversions 17,027,113 13,896,844
Basic earnings per Common Share $0.78 $1.13
Diluted earnings per Common Share $0.77 $1.12
</TABLE>
<PAGE>
STORAGE TRUST REALTY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. Investment in Self-Storage Stores
The following summarizes investment in self-storage stores
(amounts in thousands):
<TABLE>
<CAPTION>
Sept. 30, December 31,
1998 1997
(unaudited)
<S> <C> <C>
Land $ 98,601 $ 77,620
Buildings 384,421 299,237
Developments and expansions
in progress 10,061 3,107
Furniture, fixtures and equipment 35,310 25,002
Total cost 528,393 404,966
Accumulated depreciation (28,116) (18,392)
Investment in self-storage
stores, net $500,277 $386,574
</TABLE>
5. Mortgages and Notes Payable
Mortgages and notes payable consist of the following
(column amounts in thousands):
<TABLE>
<CAPTION>
Sept. 30, December 31,
1998 1997
(unaudited)
<S> <C> <C>
Revolving line of credit:
Unsecured revolving line of credit with
an aggregate borrowing limit of $150
million, bearing interest at LIBOR plus
1.10% per annum at September 30, 1998
(6.725%) and LIBOR plus 1.20% per
annum at December 31, 1997, interest
only payable monthly and a fee on the
unused portion of .15% per annum.
Expiration on January 25, 2001. $ 83,470 $ -
During the second quarter of 1998, the interest rate on the
revolving line of credit decreased from LIBOR plus 1.20% to
LIBOR plus 1.10% based on the Company receiving ratings from
two major rating agencies.
</TABLE>
<PAGE>
STORAGE TRUST REALTY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5. Mortgages and Notes Payable (continued)
<TABLE>
<CAPTION>
Sept. 30, December 31,
1998 1997
(unaudited)
<S> <C> <C>
Senior Notes:
Series A, bearing interest at a
fixed rate of 7.47% per annum,
interest payable semi-annually on
January 15 and July 15,principal
payments of $14,700,000 due on
January 15, 2002 and 2003, with
the remaining principal
due January 15, 2004. $ 44,000 $ 44,000
Series B, bearing interest at a
fixed rate of 7.66% per annum,
interest payable semi-annually on
January 15 and July 15, principal
payments of $11,200,000 due on
January 15, 2003, 2004, 2005 and
2006, with the remaining
principal due January 15, 2007. 56,000 56,000
Total $100,000 $100,000
</TABLE>
In anticipation of the Senior Notes offering, the Company
entered into a hedging transaction (the sale of Treasury
securities) with the objective of reducing its exposure to
changes in interest rates. The hedge was closed upon
receiving the commitments from the institutional investors in
December 1996. The Company realized net proceeds of $645,000
from this transaction. This hedging gain is being amortized
against interest expense over the weighted-average term of
the Senior Notes. The balance of the hedging gain, which is
included in accrued liabilities, at September 30, 1998 and
December 31, 1997 was $482,000 and $553,000, respectively.
<PAGE>
STORAGE TRUST REALTY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5. Mortgages and Notes Payable (continued)
Proposed Securities Offering:
The Company and the Operating Partnership have filed a shelf
registration statement on Form S-3 for the issuance of $150
million in equity securities (either Common Shares or
preferred shares) by the Company and/or debt securities by
the Operating Partnership. The shelf registration statement
was not made effective in consideration of the strategic
alternative evaluations.
In anticipation of a potential debt offering, the Company entered
into from March 13, 1998 through July 1, 1998 several hedging
transactions (the sale of Treasury securities) with the objective
of reducing its exposure to changes in interest rates. Due to the
exploration of strategic alternatives and the uncertainty created
by overall market conditions, management determined that a debt
offering in the near term was not probable and the Company
discontinued accounting for these transactions as a hedge.
Accordingly, a loss of $5,464,000 was recorded in the third
quarter of 1998. The hedging transactions were closed out on
October 2, 1998.
<PAGE>
STORAGE TRUST REALTY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5. Mortgages and Notes Payable (continued)
Scheduled Maturities:
The scheduled maturities of mortgages and notes payable
subsequent to September 30, 1998 are as follows (amounts in
thousands):
<TABLE>
<CAPTION>
Revolving
Year Ending Line of Senior
December 31, Credit Notes Total
<C> <S> <C> <C>
1998 $ - $ - $ -
1999 - - -
2000 - - -
2001 83,470 - 83,470
2002 - 14,700 14,700
2003 - 25,900 25,900
2004 - 25,800 25,800
2005 - 11,200 11,200
2006 - 11,200 11,200
2007 - 11,200 11,200
Totals $ 83,470 $100,000 $183,470
</TABLE>
<PAGE>
STORAGE TRUST REALTY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. Sale of Common Shares
On April 24, 1998, the Company sold 613,811 Common Shares to
an underwriter as part of the formation of an Unit Investment
Trust. The net proceeds of $14.2 million were used to repay
indebtedness under the Company's revolving line of credit.
Notes Receivable
Included in Notes Receivable on July 24, 1998, the Company entered
into an agreement to lend funds for the conversion of a warehouse into
a self-storage store in Dallas, TX. The total commitment under the
note receivable is $5,575,000 and amounts outstanding will
bear interest at 9% per annum. The balance outstanding at
September 30, 1998 was $3,243,000. The note matures on
January 24, 2002. The Company has an option to purchase the
store starting one month after the store receives its
certificate of occupancy, with the purchase price based on
the net operating income of the store and a capitalization
rate of 10%. The note is collateralized by a first mortgage
on the store.
8. Subsequent Events
On November 12, 1998, the Company declared a $.46 dividend
on each Common Share for the fourth quarter of 1998. The
dividend is payable on January 15, 1999 to shareholders of
record on December 15, 1998.
On November 12, 1998, the Company and Public Storage, Inc.
entered into an Agreement and Plan of Merger (the "Merger
Agreement"). Pursuant to the Merger Agreement, a subsidiary
of Public Storage will be merged into the Company, and each
common share of the Company will be converted into .86 shares
of common stock of Public Storage. The consummation of the
transactions contemplated by the Merger Agreement is subject
to certain conditions, including approval by the shareholders
of the Company.
<PAGE>
STORAGE TRUST REALTY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
9. Acquisitions and Pro Forma Information
During the first nine months of 1998, the Company has
acquired 34 stores containing 1,820,000 net rentable square
feet for consideration, with an aggregate value of
$106,100,000.
The following presents the consolidated results of operations
of the Company for the nine months ended September 30, 1998
on a pro forma basis as if (a) these acquisitions during the
first nine months of 1998 had been completed on January 1,
1998 and (b) the sale of Common Shares in April 1998 occurred
on January 1, 1998 (amounts in thousands, except for share
information).
<TABLE>
<CAPTION>
<S> <C>
Revenues:
Rental income $ 59,169
Product sales and other property income 1,494
Interest income 268
Management income 151
Equity in earnings of joint ventures 65
Total revenues 61,147
Expenses:
Property operations and product sales 12,939
Real estate taxes 5,976
General and administrative 3,094
Strategic evaluation costs 212
Hedging loss 5,464
Interest 9,481
Depreciation 10,238
Amortization 261
Total expenses 47,665
Net income before minority interests 13,482
Minority interests (865)
Net income $ 12,617
Net income per share-basic $ 0.79
Net income per share-diluted $ 0.78
Weighted-average number
of shares outstanding 16,069,878
</TABLE>
<PAGE>
STORAGE TRUST REALTY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Acquisitions and Pro Forma Information (continued)
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.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussions should be read in conjunction with the
financial statements and notes thereto appearing elsewhere herein
and in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
Storage Trust Realty (the "Company") was formed as a Maryland real
estate investment trust ("REIT") on July 12, 1994 to continue the
self-storage business of Burnam Holding Companies Co. ("BHC") and
certain of its affiliates (collectively, the "Predecessor Company")
in owning, operating and managing self-storage stores. The
Company and its subsidiaries commenced operations effective with
the completion of the Company's initial public offering (the "IPO")
of common shares of beneficial interest, par value $.01 per share
("Common Shares") on November 16, 1994. As of September 30, 1998,
the Company owned 222 self-storage stores in 16 states and owned
an interest in two joint ventures that owned two self-storage
stores.
Substantially all of the Company's assets and interests in self-
storage stores are held by, and all of its operations are
conducted through, Storage Trust Properties, L.P. (the "Operating
Partnership"). The Company is the sole general partner of, and
thereby controls the operations of, the Operating Partnership,
holding a 93.18% ownership interest therein as of September 30,
1998. The remaining ownership interest in the Operating
Partnership (the "Units") are held by certain owners of the
Predecessor Company, including BHC, and certain former owners of
assets acquired by the Operating Partnership subsequent to the
IPO.
Storage Realty Management Co. (the"Subsidiary Company") manages
self-storage stores owned by unrelated third parties and conducts
other business, such as the sale of locks, the processing of
customer property insurance and the rental of trucks, at various
facilities. At September 30, 1998, 13 self-storage stores were
managed by the Subsidiary Company, including one of the stores
owned by a joint venture in which the Company has an ownership
interest. Through its ownership of the preferred stock of the
Subsidiary Company, the Operating Partnership receives
substantially all of the economic benefits of the business carried
on by the Subsidiary Company.
<PAGE>
The Company derives its revenue principally from the Operating
Partnership, which is generated primarily by (i) the Operating
Partnership's rental of self-storage units at the Company's
stores, (ii) revenues (for financial reporting purposes) of the
Subsidiary Company, and (iii) earnings from joint ventures.
The following discussion is based on the consolidated financial
statements that include the accounts of the Company, the Operating
Partnership and the Subsidiary Company. Unless the context
indicates otherwise, references to the Company are to Storage
Trust Realty, Storage Trust Properties, L.P. and Storage Realty
Management Co. on a consolidated basis.
The statements contained in this discussion that are not
historical facts are 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 forward-looking
statements are based on current expectations, estimates and
projections about the industry and markets in which the Company
operates, management?s beliefs, and assumptions by management.
Words such as "expects", "anticipates", "intends", "plans",
"believes", "seeks", "estimates"; variations of such words and
similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and
assumptions ("Future Factors") which are difficult to predict.
Therefore, actual outcomes may differ materially for what is
expressed or forecasted in such forward-looking statements.
Future Factors include: (a) changes in general economic conditions
in its target markets that could adversely affect demand for the
Company's facilities, (b) changes in financial markets and
interest rates that could adversely affect the Company's cost of
capital and its ability to meet its financial needs and
obligations, and those other factors discussed herein. These
are representations of Future Factors that could affect the
outcome of the forward-looking statements.
<PAGE>
Proposed Merger Agreement
On November 12, 1998, the Company and Public Storage, Inc. entered
into an Agreement and Plan of Merger (the "Merger Agreement").
Pursuant to the Merger Agreement, a subsidiary of Public Storage
will be merged into the Company, and each common share of the
Company will be converted into .86 shares of common stock of
Public Storage. The consummation of the transactions contemplated
by the Merger Agreement is subject to certain conditions,
including approval by the shareholders of the Company.
Results of Operations: Three months ended September 30, 1998
compared to three months ended September 30, 1997
Rental income increased $5,077,000 (32.8%) in the third quarter of
1998 compared to the third quarter of 1997 as a result of the net
addition of four stores during the period from July 1, 1997 to
December 31, 1997 and 34 stores during the nine months ended
September 30, 1998 ($4,480,000) and increases in the average rent
per square foot associated with those stores owned for all of the
three months ended September 30, 1997 and 1998. Average annualized
revenue per square foot for the portfolio increased 5.8% to $8.18
in 1998 from $7.73 in 1997, while occupancy for the whole
portfolio increased from 84.4% at September 30, 1997 to 86.9% at
September 30, 1998.
Product sales and other property income increased $221,000 (71.1%)
primarily from increased sales of locks and packaging supplies and
increased commissions from truck rentals, which are at many of the
Company's stores.
Total revenues on a same store basis (175 stores) increased
$598,000 or 3.9%. Revenues on a same store basis include rental
income, administrative fees, late fees, product sales (locks and
packaging supplies), commissions from truck rentals and other
income. On a same store basis, average annualized revenue per
square foot increased 1.7% to $7.86 in 1998 from $7.73 in 1997,
while occupancy increased from 84.4% at September 30, 1997 to
87.0% at September 30, 1998.
<PAGE>
Results of Operations: Three months ended September 30, 1998
compared to three months ended September 30, 1997 (continued)
Property operating expenses and the cost of product sales
increased $1,294,000 (39.4%) as a result of (a) acquisitions in
1997 and 1998 ($915,000), (b) increases at those stores owned for
all of the three months ended September 30, 1997 and 1998, ?
additional costs due to more regional managers ($138,000) and (d)
the expenses of the recently implemented telephone call center
($122,000). Direct property operating expenses increased on a
same store basis by $119,000 or 4.0%, reflecting (a) additional
payroll costs at the stores, due to higher base pay and incentive
compensation and (b) higher costs due to increased product sales
and commissions on truck rentals. These increases were partially
offset by (a) lower insurance costs, (b) reduced advertising
expenses and lower maintenance costs.
Real estate taxes increased $494,000 (31.1%) as a result of
acquisitions in 1997 and 1998 ($360,000) and increases at those
stores owned for all of the three months ended September 30, 1997
and 1998. Real estate taxes on a same store basis increased by
$134,000 or 8.9%, reflecting higher tax assessments and higher tax
rates on those stores, primarily on stores acquired during the
fourth quarter of 1996 and the first quarter of 1997.
General and administrative expenses increased $287,000 (32.7%).
Accounting for internal acquisition costs in accordance with the
consensus reached by the Emerging Issues Task Force of the
Financial Accounting Standards Board on Issue Number 97-11,
"Accounting for Internal Costs Relating to Real Estate Property
Acquisitions"("EITF 97-11"), the addition of personnel at the
Company's headquarters in 1997, the costs of district managers,
increased travel and higher professional fees accounted for the
majority of this increase. For the three months ended September
30, 1998 and 1997, the Company recognized expenses related to its
internal acquisitions department of $165,000 and $68,000,
respectively, and capitalized internal acquisition costs of $0 and
$109,000, respectively.
The Company has incurred $212,000 of expenses in its evaluation of
strategic alternatives. See Note 8 to Consolidated Financial
Statements for additional information.
<PAGE>
Results of Operations: Three months ended September 30, 1998
compared to three months ended September 30, 1997 (continued)
In anticipation of a potential debt offering, the Company entered
into from March 13, 1998 through July 1, 1998 several hedging
transactions (the sale of Treasury securities) with the objective
of reducing its exposure to changes in interest rates. Due to the
exploration of strategic alternatives and the uncertainty created
by overall market conditions, management determined that a debt
offering in the near term was not probable and the Company
discontinued accounting for these transactions as a hedge.
Accordingly, a loss of $5,464,000 was recorded in the third
quarter of 1998. The hedging transactions were closed out on
October 2, 1998.
Interest expense increased $988,000 (45.0%) due to (a) the
increase in borrowings under the Company's revolving line of
credit and (b) the effect of the issuance of the Senior Notes in
1997. These increases were offset by decrease in the average
interest rate on the revolving line of credit.
Depreciation increased $1,006,000 (40.4%) due to the increased
investment in storage stores.
Amortization decreased $74,000 (46.0%) due to lower costs of the
new revolving line credit entered into during January 1998.
Net income decreased $4,099,000 (81.5%) as a result of the factors
noted above. Basic net income per share and diluted net income
per share decreased $.33 (84.6%) due to the lower net income and
the effect of the offerings of Common Shares in October 1997 and
April 1998.
<PAGE>
Results of Operations: Nine months ended September 30, 1998
compared to nine months ended September 30, 1997
Rental income increased $13,938,000 (32.7%) in the first nine
months of 1998 compared to the first nine months of 1997 as a
result of the net addition of 22 stores during the year ended
December 31, 1997 and 34 stores during the nine months ended
September 30, 1998 ($12,939,000) and increases in the average rent
per square foot associated with those stores owned for all of the
nine months ended September 30, 1997 and 1998. Average annualized
revenue per square foot for the portfolio increased 10.2% to $7.81
in 1998 from $7.09 in 1997.
Product sales and other property income increased $657,000 (85.8%)
primarily from increased sales of locks and packaging supplies and
increased commissions from truck rentals, which are at many of the
Company's stores.
Total revenues on a same store basis (149 stores) increased
$1,320,000 or 3.6%. Revenues on a same store basis include rental
income, administrative fees, late fees, product sales (locks and
packaging supplies), commissions from truck rentals and other
income. On a same store basis, average annualized revenue per
square foot increased 3.1% to $7.40 in 1998 from $7.18 in 1997,
while occupancy increased from 84.3% at September 30, 1997 to
86.5% at September 30, 1998.
Property operating expenses and the cost of product sales
increased $3,269,000 (36.2%) as a result of (a) acquisitions in
1997 and 1998 ($2,725,000), (b) increases at those stores owned
for all of the nine months ended September 30, 1997 and 1998, ?
additional costs due to more regional managers ($408,000) and (d)
the expenses of the recently implemented telephone call center
($219,000). Direct property operating expenses decreased on a
same store basis by $83,000 or 1.2%, reflecting (a) lower
insurance costs, (b) reduced advertising expenses and lower
maintenance costs. These decreases were partially offset by (a)
additional payroll costs at the stores, due to higher base pay and
incentive compensation and (b) higher costs due to increased
product sales and commissions on truck rentals.
<PAGE>
Results of Operations: Nine months ended September 30, 1998
compared to nine months ended September 30, 1997 (continued)
Real estate taxes increased $1,762,000 (44.1%) as a result of
acquisitions in 1997 and 1998 ($1,507,000) and increases at those
stores owned for all of the nine months ended September 30, 1997
and 1998. Real estate taxes on a same store basis increased by
$255,000 or 8.1%, reflecting higher tax assessments and higher tax
rates on those stores, primarily on stores acquired during the
fourth quarter of 1996 and the first quarter of 1997.
General and administrative expenses increased $792,000 (34.4%).
Accounting for internal acquisition costs in accordance with EITF
97-11, the addition of personnel at the Company's headquarters in
1997, the costs of district managers, increased travel and higher
professional fees accounted for the majority of this increase.
For the nine months ended September 30, 1998 and 1997, the Company
recognized expenses related to its internal acquisitions
department of $418,000 and $180,000, respectively, and capitalized
internal acquisition costs of $284,000 and $255,000, respectively.
The Company has incurred $212,000 of expenses in its evaluation of
strategic alternatives. See Note 8 to Consolidated Financial
Statements for additional information.
In anticipation of a potential debt offering, the Company entered
into from March 13, 1998 through July 1, 1998 several hedging
transactions (the sale of Treasury securities) with the objective
of reducing its exposure to changes in interest rates. Due to the
exploration of strategic alternatives and the uncertainty created
by overall market conditions, management determined that a debt
offering in the near term was not probable and the Company
discontinued accounting for these transactions as a hedge.
Accordingly, a loss of $5,464,000 was recorded in the third
quarter of 1998. The hedging transactions were closed out on
October 2, 1998.
Interest expense increased $2,934,000 (52.4%) due to (a) the
increase in borrowings under the Company's revolving line of
credit and (b) the effect of the issuance of the Senior Notes in
1997.
<PAGE>
Results of Operations: Nine months ended September 30, 1998
compared to nine months ended September 30, 1997 (continued)
Depreciation increased $2,912,000 (42.7%) due to the increased
investment in storage stores.
Amortization decreased $206,000 (44.1%) due to lower costs of the
new revolving line credit entered into during January 1998.
Net income decreased $2,298,000 (15.7%) as a result of the factors
noted above. Basic net income per share decreased $.35 (31.0%)
and diluted net income per share decreased $.35 (31.3%) due to the
lower net income and the effect of the offerings of Common Shares
in October 1997 and April 1998.
<PAGE>
Funds from Operations
The Company believes that Funds from Operations ("FFO") is helpful
to investors as a measure of the performance of an equity REIT
because, along with cash flows from operating activities,
financing activities and investing activities, it provides
investors with an understanding of the ability of the Company to
incur and service debt and to make capital expenditures. FFO is
defined by NAREIT as income (loss) before minority interest of the
holders of Units (computed in accordance with GAAP), excluding
gains or losses from debt restructuring and sales of property,
provision for losses, and real estate related depreciation and
amortization (excluding amortization of financing costs). FFO is
not to be considered as an alternative to net income or any other
GAAP measurement as a measure of operating performance and is not
necessarily indicative of cash available to fund all cash needs.
Funds from Operations is determined as follows (amounts in
thousands, except for share and unit amounts):
<TABLE>
1998 1997
<S> <C> <C>
Three Months Ended September 30,:
Net income before minority interest $ 1,027 $ 5,387
Depreciation of revenue-producing
assets 3,468 2,462
Strategic evaluation costs 212 -
Hedging loss 5,464 -
Company?s share of joint ventures?
depreciation 4 4
Funds from Operations $10,175 $ 7,853
Weighted-average number of Common
Shares and Units:
Basic 17,244,182 13,772,459
Diluted 17,326,021 13,916,385
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Funds from Operations (continued)
1998 1997
<S> <C> <C>
Nine Months Ended September 30,:
Net income before minority interest $13,198 $15,615
Depreciation of revenue-producing
assets 9,649 6,747
Strategic evaluation costs 212 -
Hedging loss 5,464 -
Company?s share of joint ventures?
depreciation 12 12
Funds from Operations $28,535 $22,374
Weighted-average number of Common
Shares and Units:
Basic 16,923,977 13,762,612
Diluted 17,027,113 13,896,844
</TABLE>
The Company includes Units in these amounts as Units can be
exchanged for Common Shares of the Company on a one-for-one basis
or redeemed in cash at the Company's option.
FFO increased $2,322,000 (29.6%) for the three months ended
September 30, 1998 over the three months ended September 30, 1997
due (a) to the acquisition of stores in 1998 and 1997 and the
effect of the issuance of 4,140,000 Common Shares in October and
November 1997 and (b) the increased results from those stores
owned for all of the three months ended September 30, 1998 and
1997. Net operating income, defined as revenues less direct
property operating expenses and real estate taxes, increased on a
same store basis by $345,000 or 3.2%. These increases were
partially offset by increases in general and administrative
expenses and interest expense, as previously discussed.
FFO increased $6,161,000 (27.5%) for the nine months ended
September 30, 1998 over the nine months ended September 30, 1997
due (a) to the acquisition of stores in 1998 and 1997 and the
effect of the issuance of 4,140,000 Common Shares in October and
November 1997 and (b) the increased results from those stores
owned for all of the nine months ended September 30, 1998 and
1997. Net operating income, defined as revenues less direct
property operating expenses and real estate taxes, increased on a
same store basis by $848,000 or 3.3%. These increases were
partially offset by increases in general and administrative
expenses and interest expense, as previously discussed.
Dispositions and Exchanges
Management constantly reviews the stores comprising the Company's
portfolio and may dispose of any of the stores in the future. Any
decision to dispose of a particular store would be based on a
number of factors, including, but not limited to, (a) the
strategic fit with the rest of the Company's portfolio, (b) the
potential to continue to increase cash flow and value in the
particular market, at the current market value and (d) alternate
uses of capital.
The Company has entered into a contract for the disposition of a
store in Atlanta, GA. Management expects to complete the
disposition during the first quarter of 1999. The disposition
will be closed through an intermediary to allow the Company to
complete a three-party like-kind exchange.
The Company may dispose of stores for cash or other consideration
or may exchange them with other self-storage operators, including
other publicly-held self-storage REITs.
<PAGE>
Liquidity and Capital Resources
Mortgages and Notes Payable
The Company's formal policy on the incurrence of debt is to limit
Company debt (including the indebtedness of joint ventures) to 50%
of total market capitalization, which is defined as the market
value of the issued and outstanding Common Shares (including Units
exchangeable for Common Shares) plus Company debt. At September
30, 1998 and December 31, 1997, the Company's debt-to-total market
capitalization was 32.0% and 19.8%, respectively. The Company
does not believe that this limit will restrict its operations or
have a material adverse effect on its financial condition or
results of operations, although there can be no assurance that it
will not do so in the future. The Board of Trustees can change
the policy at any time in light of then current economic
conditions and other relevant factors.
The Company had outstanding borrowings of $183,470,000 at
September 30, 1998. This indebtedness consists of (a)
$100,000,000 of Senior Notes and (b) $83,470,000 on the Company?s
revolving line of credit. The revolving line of credit may be
used to fund the acquisition, development or conversion of
additional stores. The revolving line of credit expires in January
2001 and bears interest at a floating rate of LIBOR plus 1.10%
(6.725% at September 30, 1998). During the second quarter of 1998,
the interest rate on the revolving line of credit decreased from
LIBOR plus 1.20% to LIBOR plus 1.10% based on the Company
receiving ratings from two major rating agencies.
At September 30, 1998, the Company has joint and several liability
but does not guarantee the $5,141,000 indebtedness of a joint
venture in New Orleans, LA in which it has a 15% interest. On
June 15, 1998, the joint venture obtained a new mortgage loan of
$5,150,000 to replace the former mortgage loan, which had a
balance of $3,879,000. The additional proceeds from the new
mortgage loan are to be used to complete improvements at the
store.
In 1996, the Company acquired a 25% interest in a joint venture
that is operating a self-storage store in Kansas City, MO that was
constructed in 1997. The Company has guaranteed 25% of the joint
venture's construction loan, which is for a total of $2,046,000.
The balance outstanding under this construction loan as of
September 30, 1998 was $1,954,000.
<PAGE>
Liquidity and Capital Resources (continued)
Proposed Securities Offering
The Company and the Operating Partnership have filed a shelf
registration statement on Form S-3 for the issuance of $150
million in equity securities (either Common Shares or preferred
shares) by the Company and/or debt securities by the Operating
Partnership. The shelf registration statement was not made
effective in consideration of the strategic alternative
evaluation.
In anticipation of a potential debt offering, the Operating
Partnership sought a rating from Standard & Poor's ("S&P") and
Moody's Investors Service ("Moody's"). During the second quarter of
1998, the Operating Partnership received a rating of "BBB-" from
S&P and a rating of "Baa3" from Moody's.
In anticipation of a potential debt offering, the Company has
entered into several hedging transactions (the sale of Treasury
securities) with the objective of reducing its exposure to changes
in interest rates. Due to the exploration of strategic
alternatives and the uncertainty created by overall market
conditions, management determined that a debt offering in the near
term was not probable and the Company discontinued accounting for
these transactions as a hedge. Accordingly, a loss of $5,464,000
was recorded in the third quarter of 1998. The hedging
transactions were closed out on October 2, 1998.
Liquidity
The expansion of existing stores, the acquisition, conversion and
development of additional self-storage stores and the repayment of
indebtedness, including the Senior Notes and any amounts
outstanding on the revolving line of credit, represent the
Company's principal liquidity requirements.
The Company expects to meet its short-term liquidity requirements
by (a) net cash provided by operating activities, (b) any portion
of net cash flow not distributed currently and at borrowings under
the revolving line of credit.
The Company believes that its future net cash flow will be
adequate to meet operating requirements and provide for payment of
distributions by the Company in accordance with tax requirements
relating to a REIT in the short-term and in the long-term.
<PAGE>
Liquidity (continued)
In order to maintain its status as a REIT, the Company will be
required to make distributions to its shareholders of at least 95%
of its taxable income, which is expected to consist primarily of
its share of the income of the Operating Partnership. Differences
in timing between the recognition of taxable income and receipt of
cash which would be available for distribution could require the
Company to borrow to meet the 95% distribution requirement,
although the Company does not currently anticipate the need to
borrow as a result of any such differences in timing.
Capital Expenditures
During the three months ended September 30, 1998, the Company
spent: (a) $1,321,000 on new facilities under development or
conversion, (b) $719,000 for expansions of existing stores and
climate-controlled conversions, at $99,000 for equipment used by
home office and regional management and (d) $1,342,000 on other
capital expenditures. During the nine months ended September 30,
1998, the Company spent: (a) $5,917,000 on new facilities under
development or conversion, (b) $2,568,000 for expansions of
existing stores and climate-controlled conversions, at $357,000 for
equipment used by home office and regional management and (d)
$4,212,000 on other capital expenditures.
For the remaining three months of 1998, the Company expects to
spend (a) $1,725,000 on new facilities currently under development
or conversion, (b) $2,128,000 for expansions and climate-
controlled conversions and at $984,000 on other capital
expenditures. The Company believes that it can fund any necessary
capital expenditures through its operations or from the revolving
line of credit.
Inflation
Substantially all of the leases at the stores have one-month
terms, which thereby provide the Company with the opportunity to
achieve increases in rental income as each lease matures. Such
types of leases generally minimize the risk of inflation to the
Company.
<PAGE>
Seasonality
The Company's revenues are expected to be higher during the latter
part of the year because its stores experience greater occupancy
from May through September (due to higher levels of residential
moves during that period) and increases in rental rates, which
occur throughout the year. The Company does not expect
seasonality to materially affect distributions to shareholders.
The Company believes that its geographic diversity, tenant mix,
and rental and expense structures provide adequate protection
against significant fluctuations in cash flow and net income due
to seasonality.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued
Statement No. 130, "Reporting Comprehensive Income" ("FASB 130"),
which is effective for financial statements for periods beginning
after December 15, 1997. At that time, the Company will be
required to report comprehensive income and its components in its
financial statements. The Company will implement FASB 130 during
the year ended December 31, 1998. The impact of FASB 130 on the
Company's financial statements is not expected to be material.
In June 1997, the Financial Accounting Standards Board issued
Statement No. 131, "Disclosures about Segments of an Enterprise
and Related Information" ("FASB 131"), which is effective for
financial statements for periods beginning after December 15,
1997. At the time of implementation, the Company will be required
to report additional information (both financial and descriptive)
about operating segments in annual and interim reports. As FASB
131 is not required to be applied to interim financial statements
in the initial year of adoption, the Company is not required to
disclose segment information in accordance with FASB 131 until the
1998 Annual Report, at which time it will restate prior years'
segment disclosures to conform to the FASB 131 segment
presentations. In the Company's first quarter 1999 report and in
subsequent quarters, the Company will present the interim
disclosures required by FASB 131 for both 1999 and 1998.
New Accounting Pronouncements (continued)
In February 1998, the American Institute of Certified Public
Accountants' Accounting Standards Executive Committee issued
Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use"("SOP 98-1"), which
is effective for financial statements for periods beginning after
December 15, 1998. SOP 98-1 sets guidelines for the
capitalization of costs related to internal-use software. The
Company has adopted SOP 98-1 during the year ending December 31,
1998. The adoption of SOP 98-1 is not expected to have a material
impact on the financial statements of the Company.
On March 19, 1998, the Emerging Issues Task Force of the Financial
Accounting Standards Board reached a consensus on Issue Number 97-
11, "Accounting for Internal Costs Relating to Real Estate
Property Acquisitions" ("EITF 97-11"). Internal pre-acquisition
costs (e.g. costs of an internal acquisitions departments)
associated with the acquisition of a fully developed self-storage
store should be expensed as incurred. Internal costs incurred for
non-operating stores being developed or converted can be
capitalized in specified circumstances. The Company has adopted
the accounting guidance for acquisitions of operating self-storage
stores. For the three months ended September 30, 1998 and 1997,
the Company recognized expenses from its internal acquisition
department of $165,000 and $68,000, respectively, and capitalized
internal acquisition costs of $0 and $109,000, respectively. For
the nine months ended September 30, 1998 and 1997, the Company
recognized expenses from its internal acquisition department of
$418,000 and $180,000, respectively, and capitalized internal
acquisition costs of $284,000 and $255,000, respectively.
<PAGE>
New Accounting Pronouncements (continued)
In April 1998, the American Institute of Certified Public
Accountants' Accounting Standards Executive Committee issued
Statement of Position 98-5, "Accounting for the Costs of Start-Up
Activities"("SOP 98-5"), which is effective for financial
statements for periods beginning after December 15, 1998. SOP 98-
5 requires that all costs of start-up activities be expensed as
incurred. The Company will adopt SOP 98-5 during the year ending
December 31, 1999. The adoption of SOP 98-5 is not expected to
have a material impact on the financial statements of the Company.
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("FASB 133"), which is effective for fiscal
years beginning after June 15, 1999. FASB 133 establishes
accounting and financial reporting standards for derivative
instruments, including certain derivative instruments embedded in
other contracts (collectively, referred to as "derivatives"), and
for hedging activities. FASB 133 requires that the Company
recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. The
accounting for changes in fair value of the derivative depends on
the intended use of the derivative and the resulting designation.
The Company will adopt FASB 133 during the year ending December
31, 1999. The adoption of FASB 133 is not expected to have a
material impact on the financial statements of the Company.
<PAGE>
Information Systems and Year 2000 Compliance
Overview:
The Company uses individual computers at each store for the
management of the facilities and a network of computers at the
home office for centralized management and accounting functions.
The company's management information systems ("MIS") department is
responsible for the maintenance of the Company's computer hardware
and software.
Phase I-Assessing the Company's Readiness and Phase II-Determining
Cost of Achieving Readiness:
The Company's accounting system is not fully Year 2000 compliant.
The Company has received a software update from the third-party
vendor (at no cost to the Company) and will install the updated
software during November 1998.
The Company's property management software is not fully Year 2000
compliant. The Company is experiencing problems related to the
non-compliance, but they are minor and are overcome by the use of
a 4-digit date (which is accepted by the software) instead of
using a 2-digit date. The Company expects to receive a software
update from the third-party vendor (at no cost to the Company) in
December 1999 and will install the updated software at each store
during the first quarter of 1999.
The software that controls the operation of the gates at the
Company's stores is Year 2000 compliant.
The inventory of hardware is currently in progress and is expected
to be completed during the fourth quarter of 1998.
The Company has plans for the replacement of non-compliant
hardware in place.
The Company uses a local bank for its normal banking services.
Based on discussions with local bank, they are working on making
the necessary modifications to their systems to be Year 2000
compliant by the end of 1998.
The Company uses a national truck rental company for the
scheduling of equipment to be rented at the Company's stores and
for the purchasing of boxes and packaging supplies. Based on
discussion with the national truck rental company, their systems
are represented to be Year 2000 compliant.
The Company uses a local company for the processing of payroll and
other company benefits. Based on discussion with the local
company, they are working on making the necessary modifications to
their systems to be Year 2000 compliant by the end of 1998.
<PAGE>
Phase III-Assessing Risks to the Company of Non-Compliance:
Based on these factors, management believes that the Company will
not incur significant costs in order that all computer systems to
be Year 2000 compliant and that the impact of any systems that are
not Year 2000 compliant will not have a material adverse effect on
the Company's financial condition and results of operations. Such
beliefs are based on our analysis of the risks to the Company
related to the items discussed above and discussions with our
third-party vendors. However, there are no guarantees that the
work to be performed by third-party vendors or the local bank will
be completed on a timely basis and would not have an adverse
effect on the Company's systems.
The failure of the property management software at an individual
store will have a minimal effect on the Company's financial
condition. While certain of the reports in the property
management software are not Year 2000 compliant, it can be
remediated by the action of the MIS department at the home office.
The property management software will operate when 4-digit dates
are entered. The individual stores can be operated without the
computers and the property management software for a short period
of time.
The failure of the Company's accounting system software is not
expected as the Company has received the software update.
The loss of utilities (primarily electricity) to the Company's
stores could lead to the loss of revenues for those customers who
rent climate-controlled space.
Phase IV - Contingency Plans
The Company has "workaround" plans for the property management
system with respect to the reports that are not Year 2000
compliant through use of 4-digit dates.
The contingency plan if the software that controls the gate at the
Company's stores fails, is to reset the time in the software as
though it was the year 1972.
<PAGE>
Part II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
27 Financial Data Schedules for the three months and
nine months ended September 30, 1998.
(b.) Reports on Form 8-K
A report on Form 8-K dated June 15, 1998, as amended by
a report on Form 8-K/A, dated August 14, 1998, was filed
to report that Storage Trust Properties, L.P. completed
the acquisition of 16 self-storage stores during the
period from March 30, 1998 to June 30, 1998. Historical
Summaries of Combined Gross Revenue and Direct Operating
Expenses for the year ended December 31, 1997 were filed
with the Form 8-K/A for 15 of the 16 stores acquired.
In addition, an unaudited Pro Forma Combined Statement
of Operations for the year ended December 31, 1997 and
an unaudited Pro Forma Combined Statement of Operations
for the six months ended June 30, 1998 were presented.
A report on Form 8-K dated November 12, 1998 was filed
to report that the Company and Public Storage, Inc.
entered into an Agreement and Plan of Merger. See Note
8 to the Consolidated Financial Statements for
additional information.
<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.
STORAGE TRUST REALTY
November 13, 1998 /s/ Michael G. Burnam
(Date) Michael G. Burnam
Chief Executive Officer
November 13, 1998 /s/ Stephen M. Dulle
(Date) Stephen M. Dulle
Chief Financial Officer
<PAGE>
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