UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K/A
(Amendment No. 1)
(Mark One)
[ x ] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 31, 1997
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 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 and zip code)
(573) 499-4799
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
Title of Each Class Name of each exchange on which registered
- ------------------- -------------------------------------------
Common Shares of Beneficial New York Stock Exchange
Interest, $.01 par value (the
"Common Shares")
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. _____________
As of March 6, 1998, the aggregate market value of the 15,234,962 Common
Shares held by non-affiliates of the registrant was approximately $380.9
million, based on the closing price ($25.00) on The New York Stock Exchange
composite tape on such date.
As of March 6, 1998, there were 15,447,193 Common Shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1997 annual report to shareholders are
incorporated by reference into Parts I and II. Portions of the proxy
statement for the registrant's annual shareholders meeting held on May 12,
1998 are incorporated by reference into Part III.
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Table of Contents
Item 1A Policies and Objectives With Respect to Certain Activities...........
Item 6. Selected Financial Data..............................................
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................
* Note: The purpose of this Amendment No. 1 is to include and revise the
information required by Items 1A, 6 and 7 of Storage Trust Realty's Form
10-K for the fiscal years ended December 31, 1997.
<PAGE>
PART I
Item 1A. Policies and Objectives with Respect to Certain Matters
The following is a discussion of the policies of Storage Trust
Realty (the "Company") with respect to investments, dispositions,
financings, conflicts of interest and certain other activities. These
policies have been determined by the Board of Trustees of the Company and,
although there is no present intention to do so, these policies may be
amended or revised from time to time at the discretion of the Board of
Trustees without a vote of the Company's shareholders, except that the
Company cannot change its policy of seeking to maintain its qualification
as a real estate investment trust (a "REIT") nor can it enter into
extraordinary transactions (such as a merger or the sale of all or
substantially all of its assets) without the approval of shareholders. No
assurance can be given that the Company's objectives will be obtained or
that the value of the Company will not decrease.
Investment Policies
Investments in Real Estate or Interests in Real Estate. The Company
conducts all of its investment activities through Storage Trust Properties,
L.P. (the "Operating Partnership"). The Company's investment objective is
to provide quarterly cash distributions and achieve long-term appreciation
through increases in cash flows and the value of the facilities. The
Company intends to pursue these objectives by continuing to acquire and
develop self-storage facilities with cash flow growth potential.
Additionally, the Company intends to rehabilitate and upgrade the
facilities and any newly acquired self-storage facilities as needed. The
Company also intends to develop self-storage facilities for long-term
ownership.
The Company intends to pursue its investment objectives through the
direct and indirect ownership of facilities and the ownership of interests
in other entities. The Company intends to focus on facilities in the
Southern, Mid- Atlantic, Midwestern and Western regions of the United
States where the Company currently has operations. However, future
investments, including the activities described below, will not be limited
to any geographic area or to a specified percentage of the Company's
assets. All of the facilities owned by the Company are managed directly by
the Company.
The Company also may participate with other entities in property
ownership though joint ventures or other types of co-ownership. The Company
views joint venture investments as an opportunity to evaluate potential
acquisition targets or to provide entry into attractive new markets.
Storage Realty Management Co. (the "Management Company") may also pursue
management contracts relating to self-storage facilities with unaffiliated
third parties pursuant to a similar philosophy. Equity investments may be
subject to existing mortgage financing and other indebtedness or such
financing or indebtedness may be incurred in connection with acquiring
interests in facilities. Any such financing or indebtedness will have
priority over the Company's equity interest in such facility.
Investments in Real Estate Mortgages. While the Company has
emphasized equity real estate investments, it may, in its discretion,
invest in mortgage and other real estate interests related to self-storage
facilities consistent with its qualification as a REIT. The Company may
make such an investment in connection with the construction or development
of self-storage facilities by third parties. The Company may invest in
equity participating first mortgages or junior mortgages or convertible
mortgages if it concludes that it may benefit from the cash flow or any
appreciation in the value of the subject facility. Such mortgages are
similar to equity participation. The Company may also retain a purchase
money mortgage for a portion of the sale price in connection with the
disposition of facilities from time to time.
Securities of or Interest in Persons Primarily Engaged in Real
Estate Activities and Other Issuers. While the Company does not have any
current intention of acquiring any interests other than direct equity
ownership in self-storage facilities and, other than its interest in the
Management Company, subject to the percentage of ownership limitations and
gross income tests necessary for REIT qualification, the Company also may
invest in securities of entities engaged in real estate activities or
securities of other issuers, including for the purpose of exercising
control over such entities.
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The Company intends to make investments in such a way that will not
be treated as an investment company under the Investment Company Act of
1940, as amended.
Disposition and Exchange Policies
Management constantly reviews the facilities comprising the
Company's portfolio and may dispose of any of the facilities in the future.
Any decision to dispose of a particular facility 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, (c) the current market value and (d)
alternate uses of capital. The Company may dispose of facilities for cash or
other consideration or may exchange facilities with other entities, including
other publicly-held self-storage REITs. In addition, the potentially adverse
tax consequences of the disposition of certain facilities may influence the
decision of certain executive officers and Trustees of the Company who hold
ownership interests in the Operating Partnership ("Units"), directly or
indirectly, as to the desirability of a sale.
Any decision to dispose of a facility requires approval by a
majority of the Board of Trustees.
Financing Policies
The Board of Trustees of the Company currently has a policy of
limiting Company Debt to less than 50% of the Company's Total Market
Capitalization. This ratio, which is based in part upon the market value of
the Common Shares, and, accordingly, will fluctuate with changes in the
price of Common Shares (and the issuance of additional shares of beneficial
interest, or other forms of capital, if any), differs from the
debt-to-book- capitalization ratio, which is based upon book values. As the
debt-to-book-capitalization ratio may not reflect the current income
potential of a company's assets and operating business, the Company
believes that this ratio provides a more appropriate indication of leverage
for a company whose assets are primarily operating real estate. The
Company, however, may from time to time re-evaluate and modify its
borrowing policies in light of then current economic conditions, relative
costs of debt and equity capital, market values of facilities, growth and
acquisition opportunities and other factors and may increase or decrease
these ratios accordingly. The Declaration of Trust of the Company does not
impose a limit on the ratio of Company Debt to Total Market Capitalization
and consequently if the Board of Trustees of the Company chose to do so at
a later date, the Company could become more leveraged.
Company Debt may consist of a combination of property level debt and
corporate level debt at the Operating Partnership or Company level and also
consists of obligations relating to joint venture indebtedness (including
guarantees of such indebtedness). Financing may consist of floating and/or
fixed rate debt. Company Debt consists of both fixed and floating rate
debt. To the extent that the Board of Trustees of the Company desires to
obtain additional capital, the Company may raise such capital through
additional public and private equity offerings, debt financing, retention
of cash flow (subject to satisfying the Company's distribution requirements
under the REIT rules) or a combination of these methods.
To the extent that the Board of Trustees determines to obtain
additional debt financing, the Company may do so through mortgages on its
facilities in a manner consistent with its financing policies. These
mortgages may be recourse, non-recourse, or cross-collateralized and may
contain cross-default provisions. The Company has not established any limit
on the number or amount of mortgages that may be placed on any single
property or on its portfolio as a whole.
The Company's revolving line of credit is available to fund
development activities, property acquisitions and for general corporate
purposes. The Company may also determine to issue securities senior to
Common Shares, including preferred shares of beneficial interest and debt
securities (either of which may be convertible into Common Shares or may be
accompanied by warrants to purchase Common Shares). The Company may also
finance acquisitions through the exchange of facilities or through the
issuance of Units, Common Shares or other securities.
The proceeds from any borrowings by the Company may be used to pay
distributions, to provide working capital, to pay existing indebtedness or
to finance acquisitions, expansions or development of new facilities.
2
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Conflict of Interest Policies
The Company has adopted certain policies and has entered into
non-competition agreements with certain Trustees and officers designed to
eliminate or minimize potential conflicts of interest, as described below.
A majority of the independent Trustees must approve the terms of any
transactions between the Company and any member of the Burnam family. In
addition, the Trustees and officers of the Company are subject to certain
provisions of Maryland law designed to minimize the effects of potential
conflicts of interest. However, there can be no assurance that these
policies always will be successful in eliminating the influences of such
conflicts, and if they are not successful, decisions could be made that
might fail to reflect the interests of all shareholders.
Officers and Trustees of the Company. Messrs. Michael and Crismon
Burnam and Stephen Dulle have each entered into a non-competition agreement
with the Company which requires each of them to devote their full business
time to the Company. The non-competition agreements entered into by Messrs.
Michael and Crismon Burnam and Stephen Dulle (i) prohibit each of them from,
directly or indirectly, owning, acquiring, operating or developing any
self-storage facilities other than on behalf of the Company during the period
each of them is an officer or Trustee of the Company and for a period of two
years thereafter, unless their termination is not voluntary, and (ii)
prohibit each of them from actively engaging in property management,
development or leasing of other real estate facilities, during the period of
one year after his termination as an officer or Trustee of the Company,
unless such termination is voluntary. Mr. Gordon Burnam has also entered into
a non-competition agreement with the Company which requires him to devote at
least one-half of his business time to the Company and prohibits him from,
directly or indirectly, owning, acquiring, operating or developing any
self-storage facilities other than on behalf of the Company during the period
he is an officer or Trustee of the Company and for a period of two years
thereafter, unless his termination is not voluntary.
Restrictions on Transactions with Interested Parties. Maryland law
may subject each Trustee and each officer to restrictions on
misappropriation of Company opportunities. However, under the Declaration
of Trust a transaction effected by the Company or any entity controlled by
the Company in which a Trustee or an officer or certain related persons and
entities of the Trustees has an interest or a material financial interest
is not void and may not be enjoined or set aside solely because of such
interest if (i) the transaction is approved or ratified, after disclosure
to or knowledge of the Trustees or shareholders, as applicable, regarding
the interest, by the affirmative vote of a majority of the Trustees who do
not have an interest in the transaction or by the affirmative vote of a
majority of the votes cast by disinterested shareholders, or (ii) the
transaction is fair and reasonable to the Company; provided, however, that
the Trust shall not enter into a transaction with any member of the Burnam
family or their affiliates without the approval of a majority of the
independent Trustees. Additionally, the Declaration of Trust provides that
the independent Trustees may pursue business opportunities which the
Company may have an interest in pursuing and need not present such
opportunities to the Company.
Majority of Independent Trustees. The Declaration of Trust of the
Company requires that a majority of the Board of Trustees of the Company be
comprised of individuals not affiliated with any member of the Burnam
family or any officers or employees of the Company. Decisions regarding the
enforcement of certain of the agreements relating to the formation
transactions of the Company are reserved for the independent Trustees.
Policies with Respect to Other Activities
The Company may (subject to the limitations described herein), but
does not presently intend to, make investments other than as previously
described. All investments will be primarily related to self-storage
facilities and the ownership, management, leasing and development thereof.
The Company has the authority to offer its shares of beneficial interest or
other securities and to repurchase or otherwise reacquire its shares or any
other securities and may engage in such activities in the future. The
Company may issue Common Shares to holders of Units upon exercise of their
exchange rights. The Company may in the future make loans or capital
contributions to joint ventures in which it participates in order to meet
working capital needs. In addition, the Company does not have any present
intention of making loans to any of its officers or Trustees. The Company
has not engaged in trading, underwriting or agency distribution or sale of
securities of other issuers and does not intend to do so.
3
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The Company intends to make investments in such a manner as to be
consistent with the requirements of the Internal Revenue Code of 1986, as
amended (the "Code") for the Company to qualify as a REIT unless, because
of changing circumstances or changes in the Code (or in Treasury
Regulations), the Board of Trustees of the Company, with the consent of a
majority of the shareholders approving the Board's determination,
determines that it is no longer in the best interests of the Company to
qualify as a REIT.
4
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<TABLE>
<CAPTION>
PART II
Item 6. Selected Financial Data
(amounts in thousands, except for share and property information 1/
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating Data:
Total Revenues $ 59,706 $ 43,442 $ 23,839 $ 8,033 $ 5,443
Total Expenses $ 38,036 $ 26,555 $ 13,811 $ 5,769 $ 4,721
Net Income before minority $ 21,670 $ 16,887 $ 10,028 $ 2,264 $ 722
interest
Minority Interest $ (1,293) $ (1,091) $ (471) $ (1,234) $ --
Net Income $ 20,377 $ 15,796 $ 9,557 $ 1,030 $ 722
Per share data:
Net income-basic 2/ $ 1.52 $ 1.46 $ 1.30 $ 0.18 3/ $ --
Net income-diluted 2/ $ 1.51 $ 1.46 $ 1.30 $ 0.18 3/ $ --
Dividends declared $ 1.7650 $ 1.6650 $ 1.5725 $ 1.3830 3/ $ --
Other Data:
EBITDA 4/ $ 39,318 $ 27,642 $ 15,468 $ 1,383 3/ $ --
FFO 5/ $ 30,973 $ 22,937 $ 13,204 $ 1,348 3/ $ --
Balance Sheet Data:
Investment in storage facilities, $404,966 $314,319 $194,216 $101,077 $ 26,763
before depreciation
Total assets $400,295 $308,725 $194,655 $104,965 $ 22,511
Mortgages and notes payable $100,000 $ 63,225 $ 39,285 $ 8,766 $ 24,532
Total liabilities $111,786 $ 76,559 $ 47,779 $ 13,229 $ 24,899
Minority interest $ 15,905 $ 16,470 $ 7,837 $ 4,313 $ --
Shareholders' equity (deficit) $272,604 $215,696 $139,039 $ 87,423 $ (2,388)
Property Information:
Wholly-owned facilities 187 165 121 74 21
Net rentable square feet 9,894,000 8,491,000 5,709,000 3,182,000 1,010,000
Average rent per square foot $ 7.54 $ 6.99 $ 6.61 $ 6.20 $ 5.51
</TABLE>
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1/ This table sets forth selected financial data on a historic basis
for the consolidated financial statements of Storage Trust Realty
and its subsidiaries and the combined financial statements of Burnam
Holding Companies Co. and certain of its affiliates (the
"Predecessor Company"). Prior to November 16, 1994, this data is
taken from the combined financial statements of the Predecessor
Company. Thereafter, the data is taken from the consolidated
financial statements of the Company.
5
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2/ The per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("FASB 128"). For further discussion of
earnings per share and the impact of FASB 128, see the notes to the
consolidated financial statements.
3/ Per share amounts, EDITDA (defined in footnote 4) and FFO (defined
in footnote 5) for 1994 are for the period from November 16, 1994
(closing of the initial public offering of the Company (the "IPO"))
to December 31, 1994.
4/ EBITDA means operating income before minority interest, mortgage and
other interest expense, income taxes, depreciation and amortization.
The Company has included EDITDA herein because, along with cash flows
from operating activities, financing activities and investing
activities, it provides operating information relevant to the
Company's ability to incur and service debt and to make capital
expenditures. EBITDA does not represent cash generated from operating
activities in accordance with generally accepted accounting principles
("GAAP"), 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. EBITDA is not comparable to similarly entitled items reported
by other REITs that to do not define it exactly as the Company does.
5/ Funds from Operations ("FFO") is defined by the National Association of
Real Estate Investment Trusts ("NAREIT") as net income (loss) before
minority interest (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). Effective in 1996, the
definition of FFO was modified by NAREIT to exclude the add-back of
the amortization of deferred financing fees and depreciation of non
real estate assets. The Company has adopted this new definition.
Amounts for prior years have been revised to conform to the new
definition. The Company believes that FFO is helpful to investors as a
measure of the operations of an equity REIT because, along with cash
flows from operating activities, investing activities and financing
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 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. FFO is not comparable to similarly entitled items
reported by other REITs that do not define it exactly as the Company
defines it.
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussions of the Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Company
should be read in conjunction with the Company's financial statements and
notes appearing or incorporated by reference elsewhere herein.
The Company was formed as a Maryland REIT on July 12, 1994 to
continue the self-storage business of the Predecessor Company in owning,
operating and managing self-storage facilities. The Company and its
subsidiaries commenced operations effective with the completion of the IPO
on November 16, 1994. As of December 31, 1997, the Company owned 187
self-storage facilities in 16 states and owns an interest in two joint
ventures that owned two self-storage facilities.
Substantially all of the Company's assets and interests in
self-storage facilities are held by, and all of its operations are
conducted through the Operating Partnership. The Company is the sole
general partner of, and thereby controls the operations of, the Operating
Partnership, holding a 94.74% ownership interest therein as of December 31,
1997. The remaining 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.
The Management Company manages self-storage facilities 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 December 31, 1997, fourteen self-storage
facilities were managed by the Management Company, including one of the
facilities owned by a joint venture in which the Company has an ownership
interest. Through its ownership of the preferred stock of the Management
Company, the Operating Partnership receives substantially all of the
economic benefits of the business carried on by the Management Company.
The Company derives its revenues principally from the Operating
Partnership, which is generated primarily by (i) the Operating
Partnership's rental of self-storage units at its facilities, (ii) revenues
(for financial reporting purposes) of the Management Company, which is
non-qualifying income for purposes of the Code, and (iii) earnings from
joint ventures.
The following discussion is based on the consolidated financial
statements that include, from the IPO on November 16, 1994 to December 31,
1997, the accounts of the Company, the Operating Partnership and the
Management 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 made in this discussion that are not historical facts
are forward-looking statements within the meaning of Sections 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 that Storage Trust
operates, management's beliefs, and assumptions made 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 and results may differ materially from 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
obligations, and (c) those other factors discussed herein. These are
representative of the Future Factors that could affect the outcome of the
forward-looking statements.
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RESULTS OF OPERATIONS
1997 Compared to 1996
Rental income increases $15,360,000 (36.1%) in 1997 compared to 1996
as a result of the net addition of 22 facilities during 1997 and 44
facilities during 1996 ($14,662,000) and increases in the average revenue per
square foot associated with those facilities owned for all of 1997 and 1996
($698,000). The average revenue per occupied square foot for the portfolio
increased 7.9% to $7.54 in 1997 from $6.99 in 1996. Occupancy for the
portfolio decreased from 86% at December 31, 1996 to 83% at December 31,
1997.
Other income increased $843,000 (124.9%) primarily from increased
product sales (locks and packaging supplies) and increased commissions from
rental trucks, which are rented to customers by the Management Company at
many of the Company's facilities.
Total revenues on a same store basis (106 facilities) increased
$963,000 or 3.1%. For purposes of this discussion, same store basis means the
stores that were open for the entirety of the fiscal periods presented.
Revenues on a same store basis include rental income, administrative fees,
late fees, product sales (locks and packaging supplies), commissions from
rental trucks and other income. On a same store basis, average revenue per
occupied square foot increased 2.8% to $7.35 in 1997 from $7.15 in 1996,
while occupancy decreased from 85% at December 31, 1996 to 83% at December 31,
1997.
Property operating expenses increased $2,391,000 (25.1%) as a result
of the acquisitions in 1996 and 1997 ($2,560,000), net of decreases at
those facilities owned for all of 1996 and 1997. Property operating
expenses decreased on a same store basis by $169,000 or 2.5%, reflecting
lower property insurance costs, reduced advertising expenses and lower
telephone and data transfer costs. These decreases were partially offset by
(a) additional payroll costs at the facilities, due to higher base pay,
incentive compensation and amounts earned from product sales and truck
rental activity, and (b) higher repairs and maintenance.
Real estate taxes increases $1,594,000 (43.0%) as a result of
acquisitions in 1996 and 1997 ($1,493,000) and increases at those
facilities owned for all of 1996 and 1997. Real estate taxes on a same
store basis increased by $101,000 or 4.0%, reflecting higher tax
assessments and higher tax rates on those facilities.
General and administrative expenses increased $603,000 (23.7%) due
to the expansion of the operations of the Company. The addition of
personnel at the Company's headquarters and the addition of district
managers in October 1997 to handle this growth, increased travel costs and
higher professional fees accounted for the majority of this increase.
Interest expense increased $3,456,000 (82.5%) due to the increase in
borrowings primarily to fund the acquisition of self-storage facilities.
The Company funded $100,000,000 of Senior Notes in January and April 1997
and raised $59,680,000 from the private sale of 2,530,000 Common Shares in
October and November 1997 to reduce amounts outstanding on the Company's
revolving line of credit.
Depreciation increased $3,275,000 (53.7%) due to the increased
investment in self-storage facilities.
Amortization of deferred financing costs increased $162,000 (35.0%)
in 1997 due to the amortization of the costs of the Senior Notes.
Net income increased $4,495,000 (28.5%) and net income per share
increased $.06 (4.1%) as a result of the factors noted above.
1996 Compared to 1995
Rental income increased $19,583,000 (82.2%) in 1996 compared to 1995
as a results of the net addition of 47 facilities during 1995 and 44
facilities during 1996 ($18,009,000) and increases in the average revenue per
8
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occupied square foot and occupancy levels associated with those facilities
owned for all of 1996 and 1995. Average annualized revenue per occupied
square foot for the portfolio increased 5.7% to $6.99 in 1996 from $6.61 in
1995, while occupancy increased to 86% as of December 31, 1996 compared to
81% as of December 31, 1995.
Revenues on a same store basis (72 facilities) increased $1,574,000
or 9.0%. Revenues on a same store basis include rental income,
administrative fees, late fees and other income. On a same store basis,
average revenue per occupied square foot increased 6.2% to $7.06 in 1996
from $6.65 in 1995, while occupancy increased from 81% at December 31, 1995
to 84% at December 31, 1996.
Management income and equity in earnings in joint ventures decreased
a combined $189,000 (41.4%) in 1996 due to the Company's acquisition of its
partners' interests in five facilities previously held in joint ventures
with such partners, which resulted in the Company owning 100% of these
facilities. Prior to the acquisition, the Operating Partnership managed
these five facilities for the respective joint ventures.
Property operating expenses increased $4,621,000 (93.9%) as a result
of acquisitions in 1996 and 1995 ($4,026,000) and increases at those
facilities owned for all of 1996 and 1995. Property operating expenses on a
same store basis increased $595,000 or 16.5% in 1996, reflecting (a)
additional payroll costs at the facilities, due to higher base pay and
incentive compensation, (b) additional costs for regional managers, due to
more regions, (c) higher training costs, and (d) increased advertising and
marketing efforts.
Real estate taxes increased $1,832,000 (97.6%) as a result of
acquisitions in 1996 and 1995 ($1,766,000) and increases at those
facilities owned for all of 1996 and 1995. Real estate taxes on a same
store basis increased $66,000 or 4.8% in 1996, reflecting higher tax
assessments and increased tax rates.
General and administrative expenses increased $976,000 (62.0%) due
to the rapid expansion of the Company. The addition of personnel at the
Company's headquarters to handle this growth, as well as additional state
and local taxes and professional fees accounted for the majority of this
increase.
Interest expense increased $2,856,000 (214.1%) due to the increase
in borrowings under the Company's line of credit primarily to fund the
acquisition of self-storage facilities.
Depreciation increased $2,934,000 (92.6%) due to the increased
investment in self-storage facilities.
Amortization of deferred financing costs decreased $475,000
(50.6%) in 1996. In 1995, the Company wrote-off $518,000 of deferred
financing costs due to the replacement of the Company's line of credit.
Net income increased $6,239,000 (65.3%) and net income per share
increased $.16 (12.3%) as a result of the factors noted above.
LIQUIDITY AND CAPITAL RESOURCES
Funds from Operations
The Company believes that 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 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.
FFO is defined by NAREIT as income (loss) before the minority
interest of holders of Units in the Operating Partnership and the common
stock of the Management Company (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
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(excluding amortization of financing costs). Effective in 1996, the
definition of FFO was modified by NAREIT to exclude the add-back of
amortization of deferred financing fees and depreciation of non real estate
assets. The Company has adopted this new definition. Prior year's amounts
have been revised to conform to the new definition.
Funds from Operations is determined as follows (amounts in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income before minority interest $21,670 $16,887 $10,028
Depreciation of revenue-producing assets 9,287 6,028 3,135
Company's share of joint ventures' depreciation 16 22 41
------- ------- -------
Funds from Operations $30,973 $22,937 $13,204
====== ====== ======
</TABLE>
The weighted average number of Common Shares and Units for the
years ended December 31, 1997, 1996 and 1995 were 14,238,157, 11,488,213
and 7,674,092, respectively.
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 $8,036,000 (35.0%) in 1997 over 1996 due to the
acquisition of facilities in 1997 and 1996 and the increased results from
those facilities owned for all of 1996 and 1997. Net operating income,
defined as revenues less property operating expenses and real estate taxes,
increased on a same store basis by $1,031,000 or 4.8%. These increases were
partially offset by increases in general and administrative expenses and
interest expense, as previously discussed.
FFO increased $9,733,000 (73.7%) in 1996 over 1995 due to the
acquisition of facilities in 1996 and 1995 and the increased results from
those facilities owned for all of 1996 and 1995. Net operating income,
defined as revenues less property operating expenses and real estate taxes,
increased on a same store basis by $913,000 or 7.3%. These increases were
offset by increases in general and administrative expenses and interest
expense, as previously discussed.
FFO increased $3,480,000 (11.2%) for the pro forma year 1997 as
compared to the actual results for this time period due primarily to the
effect of the offering of 2,530,000 Common Shares assumed to have occurred
on January 1, 1997. This increase was offset by the operations of seven
facilities acquired in 1997 were in their initial lease-up period.
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 December 31, 1997 and 1996, the Company's
debt-to-total market capitalization was 19.8% and 15.4%, 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.
At December 31, 1997, the Company had outstanding borrowings of
$100,000,000 from the Senior Notes (see description below). There were no
outstanding borrowings 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 facilities. The previous revolving line of
credit, with a total commitment of $100 million, expired on January 25,
1998 and bore interest at a floating rate of LIBOR plus 1.375%. The Company
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has entered into a new revolving line of credit that commenced on January 25,
1998 and will expire on January 25, 2001. The total commitment on the new
revolving line of credit is $150 million and will bear interest at a floating
rate of LIBOR plus 1.20%
In December 1996, the Company received commitments from various
institutional investors for the private placement of $100 million of
unsecured Senior Notes. The Company funded $75 million of the Senior Notes
on January 22, 1997 and the remaining $25 million was funded on April 15,
1997. The fixed rate debt has two separate series - Series A Senior Notes
totaling $44 million with a final maturity of seven years, an average
maturity of six years and a fixed interest rate of 7.47% (125 basis points
over comparable Treasuries at the date of pricing) and Series B Senior
Notes totaling $56 million with a final maturity of ten years, an average
maturity of eight years and a fixed interest rate of 7.66% (135 basis
points over corresponding Treasuries at the time of pricing). The proceeds
of the financing were utilized to repay indebtedness under the Company's
revolving line of credit and to finance the acquisition of facilities.
At December 31, 1997, the Company has joint and several liability,
but does not guarantee, the $3,908,000 indebtedness of the joint venture in
New Orleans, LA in which the Company has a 15% ownership interest. In 1996,
the Company acquired a 25% ownership interest in a joint venture that is
operating a self-storage facility 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 $2,054,000. The balance outstanding under
this construction loan as of December 31, 1997 was $1,900,000.
Issuance of Common Shares and Units
During October and November 1997, the Company completed an
offering of 2,530,000 Common Shares at $24-11/16 per Common Share. Net of
transaction discounts and offering costs, the Company received $59,680,000
from this offering. The net proceeds were used to repay indebtedness under
the revolving line of credit and finance the acquisition of facilities.
In November 1996, the Company filed a shelf registration statement
covering $150,000,000 of equity securities. This registration statement has
been declared effective and should permit the Company to access the equity
market efficiently when it deems appropriate. The balance remaining on this
shelf registration statement as of December 31, 1997 was approximately
$87,541,000. However, no assurance can be given that market conditions will
be favorable for such an offering.
During 1997, the Company issued 11,372 Units valued at $294,000
due to the terms of an "earn-out agreement" on a facility acquired in 1996.
The Units in the Operating Partnership not held by the Company 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 1997, 32,829 Units were
converted to Common Shares.
The Company amended its Stock Option plan in 1997 to allow for the
payment of the regular quarterly fees to its Trustees in Common Shares.
During the last two quarters of 1997, the Company issued 924 Common Shares
valued at $24,000 to its Trustees.
Liquidity
The Company's principal liquidity requirements are (a) the
expansion of existing facilities, (b) the acquisition, conversion and
development of additional self-storage facilities and (c) the repayment of
indebtedness, including any amounts outstanding on the revolving line of
credit.
The Company expects to meet its short-term liquidity requirements
by using (a) net cash provided by operating activities and (b) borrowings
under the revolving line of credit. The Company intends to meet its
long-term liquidity requirements primarily through (a) borrowings under the
revolving line of credit, (b) the issuance of new debt and (c) the sale of
Common Shares.
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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 income tax requirements
relating to a REIT in the short-term and in the long-term. 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 income of the
Operating Partnership. Differences in timing between the recognition of
taxable income and receipt of cash which would be available for
distributions 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 difference in timing.
Capital Expenditures
In 1997, the Company spent (a) $3,107,000 on new facilities under
development, (b) $1,659,000 for expansions of existing facilities and
climate-controlled conversions, (c) $515,000 for equipment used by home
office and regional management, and (d) $2,293,000 on other capital
expenditures for the facilities.
In 1998, the Company expects to spend on the current portfolio
$4,100,000 for expansions and climate-controlled conversions and $3.400,000
on other capital expenditures for the facilities. The Company believes that
it can fund any necessary capital expenditures through its operations or
from the revolving line of credit.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
FASB 128, which the Company was required to adopt on December 31, 1997.
FASB 128 replaced the calculation of primary and fully diluted earning per
Common Share with basic and diluted earnings per Common Share. Unlike
primary earnings per Common Share, basis earnings per Common Share exclude
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. All earnings per Common Share amounts
for all periods have been presented, and where appropriate, restated to
conform to FASB 128 requirements.
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 that time, the Company will
be required to report additional information (both financial and
descriptive) about operating segments in annual and interim reports. The
Company will implement FASB 131 during the year ended December 31, 1998,
including the presentation of comparable amounts for prior periods.
Management has not completed its review of FASB 131, but does not
anticipate that the adoption of FASB 131 will have a significant effect on
the Company's segment reporting.
INFORMATION SYSTEMS AND YEAR 2000 COMPLIANCE
The Company uses individual computers at each facility for the
management of the facilities and a network of computers at the home office
for centralized management and accounting functions. The Company uses
software for these computers that was developed by third-party vendors and,
based on the Company's knowledge of the software and discussions with the
third-party vendors, only the software for the operations of the facilities
is currently Year 2000 compliant. For the software that is not currently
Year 2000 compliant, the vendors have stated that they will be making
modifications (at no cost to the Company) during 1998 in order that their
software will be Year 2000 compliant.
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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.
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. 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.
INFLATION
Substantially all of the leases at the Company's facilities have
month-to-month terms, providing 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.
SEASONALITY
The Company's revenues are expected to be higher during the latter
part of the year because its facilities experience greater occupancy from
May through September (due to the 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 flows and net income
due to seasonality.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
amendment to the report to be signed on its behalf by the undersigned,
thereunto duly authorized.
STORAGE TRUST REALTY
By: /s/ Michael G. Burnam
---------------------------
Michael G. Burnam
Chief Executive Officer
and Trustee
Date: December 21, 1998
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