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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[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 0-23466
SHURGARD STORAGE CENTERS, INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1603837
(State of organization) (IRS Employer Identification No.)
1201 Third Avenue, Suite 2200, Seattle, Washington 98101
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (206) 624-8100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Class A Common Stock, par value $.001 per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
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 (Section 229.405 of this chapter) 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. [X]
Aggregate market value of voting stock held by nonaffiliates of the registrant
as of February 27, 1998: $768,737,224
Class A Common Stock outstanding as of February 27, 1998: 28,480,118 shares
Class B Common Stock outstanding as of February 27, 1998: 154,604 shares
Documents incorporated by reference: Part III is incorporated by reference from
the Proxy Statement to be filed in connection with our Annual Shareholders
Meeting to be held May 12, 1998.
There are 60 pages.
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PART I
ITEM 1 - BUSINESS
OVERVIEW
Shurgard Storage Centers, Inc. (the Company) is a fully integrated,
self-administered and self-managed real estate investment trust (REIT) that
develops, acquires, owns and manages self storage centers. These self storage
centers offer easily accessible storage space for personal and business uses. We
are one of the four largest operators of self storage centers in the United
States. We own and operate, as of December 31, 1997, directly and through joint
ventures, 281 properties (including 279 self-storage properties), containing
approximately 18.2 million net rentable square feet, which are located in 19
states. Of the 281 properties, nine are located in Europe. We also manage for
third parties, 30 self storage centers and one business park containing
approximately 1.5 million net rentable square feet. For the year ended December
31, 1997, our self storage centers had a weighted average annual net rentable
square foot occupancy rate of 86% and a weighted average rent per net rentable
square foot of $9.37.
The Company was incorporated in Delaware on July 23, 1993 and began
operations through the consolidation on March 1, 1994 of 17 publicly held real
estate limited partnerships (the Consolidation) that were sponsored by Shurgard
Incorporated (the Management Company). On March 24, 1995, the Management Company
merged with and into the Company (the Merger) and we became self-administered
and self managed. On November 14, 1996, we completed the purchase of
IDS/Shurgard Income Growth Partners L.P., IDS/Shurgard Income Growth Partners
L.P. II, and IDS/Shurgard Income Growth Partners L.P. III (the IDS
Partnerships), affiliated partnerships whose properties were previously managed
by the Company. These acquisitions added 37 properties totaling 2.3 million net
rentable square feet to our portfolio.
In May 1997, the Company reincorporated in the state of Washington for
purposes of cost reductions.
BUSINESS STRATEGY
The Company implements its strategy of being a national leader in
storage products and services by (i) emphasizing customer service and
satisfaction, (ii) maintaining a portfolio of convenient and secure stores,
(iii) optimizing revenue through efficient rent pricing and collection policies,
(iv) pursuing on-going market research and Company marketing programs, and (v)
integrating its property management systems and procedures. We believe the key
to the success of our business strategy is the quality of our employees'
interaction with customers. Accordingly, employee training programs that
emphasize a team-oriented approach to customer service are utilized.
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Commitment to Customer Service and Satisfaction
Our goal is to achieve a high level of customer satisfaction, and we
view the quality of customers' interaction with employees as critical to our
long-term success. Through our emphasis on training, personnel development and
decentralized decision-making, we believe we attract well-qualified, highly
motivated employees committed to providing superior levels of customer service.
Convenient and Secure Stores
Our stores are located for easy access, offer a range of storage
products and services for customer convenience, and emphasize security and
product quality. We believe that our strategy of offering high-quality,
convenient stores strengthens the brand image of Shurgard, attracts customers
and enables the Company to maintain premium rents.
o Store Location and Hours. Our stores are generally located in major
metropolitan areas along retail and high-traffic corridors for easy
customer access, and usually have significant road frontage for high
visibility. Although hours vary from store to store, customers can
generally access their individual units between 6 a.m. and 9 p.m.
o One-Stop Convenience. Our stores offer a range of storage products and
ancillary services, generally including sales of supplies such as
packing material, locks and boxes, as well as property insurance
referrals, moving company referrals, and other services such as Ryder
truck rentals (through a third-party rental company), to conveniently
and efficiently address customers' storage needs. In addition, we
generally offer premium features such as computer-controlled access and
electronic security systems. In addition, a number of our stores offer
climate-controlled storage space.
o Property Security. A variety of measures are used at our stores, as
appropriate, to enhance security. Such measures may include, among
others, on site personnel, electronic devices such as intrusion and
fire alarms, access controls, video and intercom surveillance devices,
individual unit alarms, perimeter beams, fencing and lighting.
Customers are assigned a designated personal identification number for
use in connection with a computerized gate access system. Each access
is computer-logged. In addition, we have developed and plan to continue
to improve a proprietary package of security controls, including
software, video and interactive communication.
o Capital Expenditures and Maintenance. We budget for a level of capital
expenditures consistent with our commitment to maintaining attractive,
well-maintained and secure self storage centers. This commitment
contributes to our ability to pursue a premium pricing strategy. In
addition, capital expenditures for consistent signage and color scheme
among our properties strengthens the brand image of Shurgard. (See Item
7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Capital Expenditures)
o Selective Disposition. We regularly review our portfolio compared to
established internal standards and identify those few properties which
can not economically meet these standards. We intend to dispose of
these properties over time.
Marketing and Market Research
We employ various means to increase our share of the self storage
market. We place prominent advertisements in the yellow pages and seek to
promote customer awareness of our stores through highly visible store locations,
site signage and architectural features. We locate our stores along retail and
high-traffic corridors, usually with significant road frontage to increase
visibility.
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We build, on newly developed stores, a distinctive "lighthouse" office to
distinguish ourself from competitors and to increase customer awareness of the
Shurgard brand.
Primary marketing emphasis is placed on providing managers with
telephone sales skills to elicit customer needs and turn prospects into
customers. We also have a national call center to field overflow calls from
individual properties. Employees at the national call center are able to rent a
unit at the store most convenient to the customer.
The Company has sophisticated market research skills, and maintains an
extensive market research database on its primary markets that permits it to
closely track occupancy levels, rental rates and other operational data
regarding self storage properties within these markets. We have also conducted
focus group research and telephone surveys, and utilize customer comment cards
to identify the primary considerations in customers' self storage choices and
satisfaction so that we can better attract and service customers.
We are testing a new strategy that makes storage more visible and more
convenient to potential customers. In 1997, we added kiosks in major malls in
Portland, OR, San Francisco, CA and the Seattle, WA metropolitan area. These
kiosks (a sales counter located in the center of malls) are staffed with trained
sales representatives who are available to answer questions about both self
storage and containerized storage. They have computer links to area storage
centers through which they can give rate and availability information and lease
units or containers to customers on the spot.
Property Management Systems/Management Information Systems
The Company has integrated property management systems and procedures
for marketing, advertising, leasing, operations, maintenance and security of
properties and the management of on site personnel. Our computerized management
information system links our corporate office with each store. During 1997, we
completed the development and installation of proprietary software that
expedites internal auditing, financial statement and budget preparations, allows
the daily exchange of information with our corporate office, and manages
detailed information with respect to the tenant mix, demographics, occupancy
levels, rental rates, revenue optimization, payroll and other information
relating to each store. Additionally, we have purchased a new network-based
accounting package that will aid in the compilation and dissemination of
information from our stores. We believe that this new information system will be
adequate to support the management of our currently owned properties as well as
planned future growth.
We have evaluated our exposure regarding any potential computer system
problems related to the new millennium. Because we have recently replaced most
of our internal systems, we believe our exposure for internal systems is not
material. We will need to replace our network software at an estimated cost of
$6,000 and 23 of our older store gate control systems at an estimated cost of
$80,000. We are currently in the process of evaluating our external interface
systems, which include our electronic fund transfer software and credit card
equipment.
Other Activities
The Company also manages, under the Shurgard name, self storage
properties owned by others that meet our quality standards. Management of such
properties enables us to spread the cost of overhead over a greater number of
properties. Additionally, it enables us to expand our presence in the markets in
which we operate, to offer customers a broader geographic selection of self
storage properties to suit their needs and to establish relationships with
property owners that may lead to future acquisitions. Management fees earned by
the Company are not qualifying income for REIT
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qualification purposes. Accordingly, we closely monitor the level of these
activities to ensure our continued qualification as a REIT.
GROWTH STRATEGIES
Our growth strategies are designed to maximize shareholder value by
increasing funds from operations through (i) increases in revenue and operating
efficiencies at existing stores and (ii) the development of new self storage
properties and the acquisition of additional self storage properties. We have an
integrated real estate and storage operations management team which combines its
experience to implement our growth plan. We believe that the experience of our
management team in operating, developing and acquiring self storage properties
and our access to capital markets strongly contribute to our ability to execute
these strategies.
Internal Growth Strategy
Our internal growth strategy is to increase same store cash flow by
achieving the highest rental rate structure consistent with strong occupancy
rates, containing costs and improving operating leverage, and undertaking
expansion of our existing stores.
o Revenue Optimization. We seek to optimize our revenue by achieving the
highest rental rate structure for our stores, consistent with strong
levels of occupancy, through the use of teams of store employees who are
trained and authorized to set rental rates and make rental rate changes
based on their analysis of demand and availability at a particular
store. We encourage decentralized decisions by store managers to change
marginal rental rates in order to ensure a fast, flexible response to
changing market conditions. Store managers evaluate their property's
rental rates on a periodic basis, based on unit demand and unit
availability, and can quickly change marginal rental rates to ensure
that revenue is optimized.
o Cost Containment and Improved Operating Leverage. We seek to maximize
cash flow by carefully containing operating expenses. For example, we
aggressively appeal our real estate tax assessments. In addition, as the
Company increases the number of properties in its targeted markets, it
achieves larger economies of scale and lessens the impact of corporate
overhead expense. The Company believes that its management and
operational procedures, which can be implemented over a large number of
properties, enable it to add new properties with little additional
overhead expense.
o Strategic Build-Outs. We seek to maximize revenue by building out
additional rentable storage space at suitable stores either through on
site expansion or acquisition of property adjacent to existing stores.
We receive high incremental returns on such build out investments,
because resulting revenue increases are achieved with little increase in
fixed operating costs.
External Growth Strategy
Our external growth strategy is to develop new, high-quality self
storage properties and to selectively acquire additional self storage properties
that meet or can be upgraded to our standards. In general, we plan to develop or
acquire new properties primarily in our existing markets and in new markets that
create economies of scale with our current network of stores. We seek to own at
least 15 stores in each of our markets in order to realize operating and
marketing efficiencies and increase brand awareness. We believe that the
experience of our management team in developing and acquiring self storage
properties strengthens our ability to pursue our external growth strategy.
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We favor development or acquisition of self storage properties in major
metropolitan markets, located near retail or high-traffic corridors, usually
with significant road frontage to increase visibility. We rely on our market
personnel to target areas in which to develop and acquire new stores. We utilize
our staff of real estate professionals in various markets around the nation to
develop and acquire new stores in the markets presenting the best business
opportunities. We have developed comprehensive market expansion plans for each
of our target markets, and use these plans as the basis for selecting new store
locations and acquisition targets. The market expansion plans utilize a
demographic analysis of an area along with an evaluation of competitors'
locations, rates and product quality to determine the optimum number and
location of new stores. Management believes that, under current market
conditions, development will generally provide superior long-term returns when
compared to acquisitions of similar size, quality and location. Based on this
belief, our current growth plan focuses heavily on property development;
however, management continually analyzes market conditions and acquisition
opportunities.
Development. We believe that several factors favor our development
strategy:
o Development Expertise. We have substantial construction management and
architectural experience that was acquired over the past 25 years. The
Company (or its predecessors) developed more than a third of the
properties we currently own or manage, and, since 1972, we have
maintained an internal development staff, which currently employs 36
people.
o Strategic Site Selection to Maximize Revenue. To obtain the best store
locations, we target sites for development in urban areas and up-scale
retail areas that often require rezoning and other complex development
measures. We believe that the difficulties of developing storage
properties in such in-fill areas may discourage competitors from
locating nearby and, as a result, enable us to operate in areas that are
underserved. This in turn enables us to charge higher rental rates.
o Focus on Quality and Brand Image Development. By developing our own self
storage properties, we gain greater control to ensure excellent
construction and consistent building design that is inviting to
customers. We believe our focus on quality and consistency will enable
us to further strengthen awareness of the Shurgard brand, obtain repeat
business, maintain premium prices and differentiate ourself from our
competitors.
The historical results of recent development partnerships sponsored by
the Management Company demonstrate the superior returns possible through
development. The development properties completed from 1989 to 1994 are
currently returning 16% on original property costs. There can be no assurance,
however, that we will achieve such returns on our development properties. Future
development may differ materially from results of past development properties.
Factors that may lead to different results include, but are not limited to, the
possibility of more competition to our new developments than was experienced in
the periods in which these partnerships were renting up their developments, the
quality and location of the competing projects being built, and the possibility
that the metropolitan markets in which we are developing may have less favorable
supply and demand characteristics.
Acquisitions. We also selectively acquire high-quality properties that
provide a strategic advantage to the Company. Additional acquisitions allow us
to spread overhead and certain management, marketing and advertising costs over
a greater number of revenue-producing assets. As a result, we can achieve
increasing economies of scale with each new property acquired. We complete a
thorough analysis of each property that we intend to acquire, including, but not
limited
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to, a review of capital expenditures that will be required for the property to
meet our standards and, at a minimum, a Phase I environmental assessment report.
Shurgard Storage To Go, Inc. (STG) Our customer service focus means that
we are continually exploring new ways to serve our customers' storage needs. One
of the ways we have broadened our ability to meet customer needs is by bringing
storage directly to the customer through containerized storage. Weatherized
8'x5'x8' storage containers are delivered to customers for packing. The
containers are then picked up and delivered to a warehouse where they are
stored. The customer may access their storage container in a showroom at the
warehouse or have it redelivered to their home. In addition to the monthly
rental charge, service fees may be charged for pickup and delivery. This
business venture is currently operating in the Seattle, Portland, San Francisco,
Atlanta, and Chicago markets.
As of December 31, 1997, we had invested $4.2 million in Shurgard
Storage to Go, Inc. (STG). We have committed to contribute an additional
$300,000 and lend up to $9 million under an unsecured five year note.
Additionally, we have guaranteed $12.9 million in lease obligations. We own only
nonvoting stock in this start-up venture which is not a qualified REIT
Subsidiary and is subject to corporate level tax.
CAPITAL STRATEGY
We expect to fund future developments and acquisitions through the
incurrence of additional indebtedness, future offerings of equity securities,
and retained cash flow. In the long-term, we anticipate reducing our payout
ratio in order to retain cash flow for growth.
To fund development and acquisitions, we have up to $100 million
available pursuant to our revolving domestic credit facility. The actual amount
available under this revolving credit facility varies based on the terms of the
agreement. At December 31, 1997, based on those terms, the Company could borrow
the entire $100 million. The Company's European subsidiary anticipates financing
growth through a combination of equity and debt financing which will be invested
primarily by a joint venture in which we have an 8.5% interest. This joint
venture will in turn be funded through debt financing.
We anticipate that cash flow from operating activities will continue to
provide adequate capital for debt service payments until maturity, as well as
for distribution payments in accordance with REIT requirements. We anticipate
refinancing outstanding debt upon maturity through long-term debt or equity or
some combination thereof.
Under our By-Laws, subject to certain exceptions, we may not incur debt
if, after giving effect to such borrowing, our Indebtedness for borrowed funds
would exceed 50% of our Total Assets or 300% of our Adjusted Net Worth (as such
terms are defined in the By-Laws). As of December 31, 1997, our Indebtedness was
approximately 29% of our Total Assets and approximately 42% of our Adjusted Net
Worth.
During 1997, in order to mitigate our currency exchange and interest
rate risk, the Board of Directors authorized us to contract with financial
institutions for hedging, exchanging, or entering into one or more swap
transactions up to the full amount of capital used outside the United States.
Our policy specifically prohibits us from entering into any such contract solely
to secure profit by speculating on the direction of currency exchange rates if
unrelated to capital borrowed, lent or invested by us.
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THE SELF STORAGE INDUSTRY
The self storage industry serves an important function in the commercial
and residential real estate markets. Self storage properties were first
developed in the early 1960's in the southwestern United States in response to
the growing need for low-cost, accessible storage. A number of factors
accelerated the demand for low-cost storage, including, among others, a more
mobile society, with individuals moving to new homes and new cities needing
short-term storage for their belongings, the increasing cost of housing
(resulting in smaller houses), the increased popularity of apartments and
condominiums, more individuals with growing discretionary income (resulting in
the purchase of items such as boats and recreational vehicles that cannot be
stored at residences), the growing number of small businesses and the escalating
cost of other storage alternatives. As the demand for such storage increased,
and the acceptance of self storage became more widespread, self storage
properties were built throughout the United States. Generally, such properties
were constructed along major thoroughfares that provided ready access and public
visibility or in outlying areas where land was inexpensive. In certain areas of
the country, where new construction was impractical because of construction
costs, lack of suitable sites or other restrictions, older structures have been
converted into self storage properties.
We believe, based on our experience, that the self storage industry is
characterized by fragmented ownership, high gross margins, low levels of price
sensitivity and increasing customer demand. Typical customers of a self storage
property include individuals, ranging from homeowners to college students, and
commercial users, such as sales representatives and distributors, who require
frequent access, and business owners requiring seasonal storage. We believe
business use is a growing segment of demand in the industry. A single customer
rarely occupies more than 1% or 2% of the net rentable area in any particular
store.
Capital expenditures are generally less for self storage properties as
compared to other types of commercial real estate due to the properties'
structural simplicity and durable materials and the lack of tenant improvement
demands. Primary capital expenditures include periodic expenditures for
replacing roofs and pavement, as well as improvements such as expansions and
unit reconfigurations. Expense items include repairing asphalt, doors, fences
and masonry walls, maintaining landscaping, and repairing damage caused by
customer vehicles. Minimal maintenance is required to a storage unit when
vacated to prepare it for the next customer.
COMPETITION
Competition exists in every market in which our stores are located. As a
result, we compete with, among others, national, regional and local self storage
operators and developers. The primary factors on which competition is based are
location, rental rates, security, suitability of the property's design to
prospective tenants' needs and the manner in which the property is operated and
marketed. We believe that the primary competition for potential customers of any
of our self storage centers comes from other self storage properties within a
five-mile radius of that store. We have positioned our stores within their
respective markets as a high-quality operator that emphasizes customer service
and security. We do not seek to be the lowest-price storage provider.
Entry into the self storage business through acquisition of existing
properties is relatively easy for persons or institutions with the required
initial capital. Some of our competitors may have more resources than the
Company. Competition may be accelerated by any increase in availability of funds
for investment in real estate. Decreases in interest rates tend to increase the
availability of funds and therefore can increase the growth of competition. Due
to recent increases in plans for
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development of self storage properties, we anticipate that increased available
storage space will continue to reduce occupancy levels per storage property in
certain markets in 1998 and further intensify competition among storage
providers for available tenants in those markets. The extent to which we are
affected by competition will depend in significant part on local market
conditions.
REGULATION
Environmental Regulations
The Company is subject to federal, state and local environmental
regulations that apply to the ownership, management and development of real
property, including regulations affecting both construction activities and the
operation of self storage properties.
In developing properties and constructing improvements, we utilize
environmental consultants and/or governmental data to determine whether there
are any flood plains, wetlands or environmentally sensitive areas that are part
of the property to be developed. If any such areas are identified, development
and construction are planned in conformance with federal, state, and local
environmental and land-use requirements.
Under various federal, state and local laws, ordinances and regulations,
an owner or operator of real property may become liable for the costs of removal
or remediation of certain hazardous substances released on or in its property.
Such laws may impose liability without regard to whether the owner or operator
knew of, or was responsible for, the release of such hazardous substances. The
presence of hazardous substances on a property may adversely affect the owner's
ability to sell the property or to borrow using the property as collateral, and
may cause the owner or manager of the property to incur substantial remediation
costs. In addition to claims for cleanup costs, the presence of hazardous
substances on a property could result in the owner or manager incurring
substantial liabilities as a result of a claim by a private party for personal
injury or a claim by an adjacent property owner for property damage.
We have notified the Missouri Department of Natural Resources of
elevated levels of (hydrocarbons) found in groundwater monitoring wells on a
property in St. Louis, Missouri. We have been monitoring in accordance with a
work plan approved by the MDNR. The source of the contamination is unknown at
this time, and further investigation is necessary to determine what steps, if
any, are appropriate to remediate. Except for this property in St. Louis, we
have not been notified by any governmental authority of any current, material
environmental noncompliance, claim or liability in connection with any of the
properties it owns or manages. We have not been notified of a current claim for
personal injury or property damage by a private party in connection with any of
the properties in connection with environmental conditions. We have received a
Phase I environmental assessment report prepared by an independent environmental
consultant for each of the properties we own.
We are not aware of any environmental condition with respect to the
properties we own or manage including the Missouri property discussed above,
that could have a material adverse effect on our financial condition or results
of operations. There can be no assurance, however, that any environmental
assessments undertaken with respect to the properties have revealed all
potential environmental liabilities, that any prior owner or operator of the
properties did not create any material environmental condition not known to us,
or that an environmental condition does not otherwise exist as to any one or
more of the properties that could have a material adverse effect on our
financial condition or results of operation. In addition, there can be no
assurance that (i) future laws, ordinances or regulations will not impose any
material environmental liability, (ii) the current
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environmental condition of our owned or managed properties will not be affected
by the condition of properties in the vicinity of such properties (such as the
presence of leaking underground storage tanks) or by third parties unrelated to
us, or (iii) tenants will not violate their leases by introducing hazardous or
toxic substances into our owned or managed properties that could expose us to
liability under federal or state environmental laws.
Americans With Disabilities Act; Fire and Safety Regulations
Under the ADA, all public accommodations are required to meet certain
federal requirements relating to physical access and use by disabled persons.
Compliance might require, among other things, removal of access barriers. A
determination that we are not in compliance with the ADA could result in the
imposition of fines, injunctive relief, damages or attorneys' fees. If we were
required to make modifications to comply with the ADA, our ability to make
expected distributions to our shareholders could be adversely affected; however,
management believes that such effect would not be material. In addition, we are
required to operate our properties in compliance with fire and safety
regulations, building codes and other land use regulations, as they may be
adopted by governmental agencies and bodies and become applicable to our
properties. Compliance with such requirements may require substantial capital
expenditures, which would reduce money otherwise available for distribution to
shareholders.
INSURANCE
We believe that our self storage properties are covered by adequate
fire, flood, wind, earthquake and property insurance, as well as business
interruption insurance, provided by reputable companies and with commercially
reasonable deductibles and limits. We purchase title insurance on all of our
properties at the time of acquisition. We use our discretion in determining
amounts, coverage limits and deductibility provisions of title, casualty and
other insurance, based on the purchase price paid for such property, in each
case with a view to obtaining appropriate insurance coverage on our properties
at a reasonable cost and on suitable terms.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 870 persons.
None of our employees are covered by a collective bargaining agreement. We
believe that our relations with our employees are good.
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ITEM 2 - PROPERTIES
The Company owns, as of December 31, 1997, directly and through its
subsidiaries and joint ventures, 281 properties (including 279 self storage
properties) located in 19 states and nine located in Europe. Our self storage
properties are designed to offer accessible storage space for personal and
business use. Individuals typically rent individual units in self storage
properties for storage of personal belongings such as furniture, appliances,
boats and other household and recreational goods. Businesses typically rent
space for storage of business property such as equipment, seasonal goods,
records and fixtures. We believe that it is desirable to have commercial
customers because they tend to rent larger units, stay for longer terms, are
more reliable payers and are less sensitive to price increases. Accordingly, we
have marketing programs that target commercial users. We estimate that
commercial users account for approximately 30%-35% of our total occupancy.
Our self storage properties are divided into a number of self-enclosed
rental units that generally range in size from 25 to 360 square feet. Many
properties have uncovered storage outside the buildings for parking motor
vehicles, boats, campers and other similar items suitable for outside storage.
Additionally, a number of our properties include climate-controlled storage
units for which we charge rents at substantial premiums.
Customers of self storage properties are generally responsible for
delivering and retrieving their goods. Many leased spaces can be accessed
directly by automobile or truck, but some properties, in particular the
multistory buildings, have separate loading docks and elevators available for
delivery and retrieval of stored goods. Customers generally have access to their
unit without additional charge during normal business hours and control access
to such space through the use of their personal padlocks. We offer truck rentals
at a majority of our properties for added convenience to our customers and to
differentiate ourself from most of our competitors. In addition to truck
rentals, we sell locks, boxes and packing and storage materials at our stores.
The leasing, maintenance and operation of our stores are the
responsibility of store managers. The property's security is provided through a
variety of systems that may include, among others, on site personnel, electronic
devices such as intrusion and fire alarms, access controls, video and intercom
surveillance devices, property fencing and lighting.
Although our stores range considerably in size, most properties consist
of one or more single-story buildings that are located on a site of 1.5 to 5
acres. The smallest store has approximately 23,000 net rentable square feet,
while the largest store has approximately 300,000 net rentable square feet. The
properties generally are constructed with concrete block or tilt-up concrete
panels, with steel columns or precast concrete columns that rest on concrete
footings and slabs, and have built-up tar roofs or pitched truss roofs with
shingles or standing seam metal roofs. The interior walls are generally
constructed with metal studs and partitions or other construction materials that
are secure but readily movable. The parking areas and driveways are generally
asphalt or cement. All stores have fencing, floodlights, and electronic gates.
In some cases, multistory buildings able to bear substantial weight
loads, such as warehouses and newspaper plants, have been converted into self
storage properties. In addition, similar multistory buildings for self storage
have been constructed in dense urban areas where land costs, zoning and other
development considerations make it impractical or undesirable to construct
single-story buildings.
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The following table provides information regarding the year developed or
acquired, year built, approximate net rentable square feet and acreage of each
of the self storage properties and business parks owned by us as of December 31,
1997. We own additional properties which are under development, but not
reflected in this table.
PROPERTY APPROXIMATE
STATE/ OWNED YEAR NET RENTABLE
PROPERTY NAME PROPERTY LOCATION COUNTRY SINCE BUILT SQUARE FEET ACREAGE
- ------------- ----------------- ------- ----- ----- ----------- -------
Airpark Scottdale AZ 1997 1997 49,000 1.3
Arrowhead Phoenix AZ 1997 1997 67,000 3.2
Chandler Chandler AZ 1986 1986 71,000 4.0
Dobson Ranch Mesa AZ 1996 1978 58,000 4.2
Gilbert Gilbert AZ 1996 1985 66,000 4.0
Mesa Mesa AZ 1987 1985 99,000 4.8
Phoenix Phoenix AZ 1985 1984 78,000 2.7
Phoenix East Phoenix AZ 1987 1984 66,000 2.0
Scottsdale Scottsdale AZ 1985 1976/85 47,000 3.0
Scottsdale North Scottsdale AZ 1985/87 1985 112,000 4.1
Shea Scottsdale AZ 1997 1996 43,000 1.3
Tempe Tempe AZ 1984 1976 54,000 3.0
Warner (1) Mesa AZ 1995 1985 62,000 3.1
Aliso Viejo Aliso Viejo CA 1996 1996 87,000 3.5
Bloomington Bloomington CA 1997 1983 50,000 2.8
Castro Valley Castro Valley CA 1996 1975 69,000 3.1
Colton Colton CA 1985 1984 73,000 3.8
Culver City Los Angeles CA 1988 1989 77,000 1.4
Daly City Daly City CA 1995 1989 96,000 5.2
El Cajon El Cajon CA 1986 1977 129,000 6.0
El Cerrito Richmond CA 1986 1987 62,000 1.5
Fontana Sierra Fontana CA 1987 1980/85 854,000 3.6
Hayward/Union City(2) Hayward CA 1985 1985 90,000 5.7
Huntington Beach Huntington Beach CA 1988 1986 99,000 3.3
Kearney-Balboa San Diego CA 1986 1984 90,000 2.3
La Habra La Habra CA 1986 1979/91 95,000 7.1
Martinez (3) Martinez CA 1995 1987 56,000 3.0
Mountain View Mountain View CA 1987 1986 28,000 0.7
Newark Newark CA 1996 1991 61,000 3.1
Ontario Ontario CA 1996 1984 57,000 2.1
Orange Orange CA 1996 1985 89,000 2.8
Palo Alto Palo Alto CA 1986 1987 48,000 1.4
Pinole (3) Pinole CA 1995 1988 38,000 2.5
S. San Francisco San Francisco CA 1987 1985 56,000 2.1
Sacramento Sacramento CA 1996 1991 53,000 2.6
San Leandro San Leandro CA 1996 1991 59,000 2.7
San Lorenzo San Lorenzo CA 1996 1990 54,000 1.9
Santa Ana Santa Ana CA 1986 1975/86 168,000 8.1
Solana Beach (4) Solana Beach CA 1987 1984 88,000 4.5
Sunnyvale Sunnyvale CA 1986 1974/75 101,000 6.5
Tracy Tracy CA 1996 1986 70,000 3.0
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PROPERTY APPROXIMATE
STATE/ OWNED YEAR NET RENTABLE
PROPERTY NAME PROPERTY LOCATION COUNTRY SINCE BUILT SQUARE FEET ACREAGE
- ------------- ----------------- ------- ----- ----- ----------- -------
Walnut Walnut CA 1996 1986 97,000 3.6
Westwood Santa Monica CA 1986 1988 65,000 0.3
Lakewood Golden CO 1986 1985 67,000 2.7
Northglenn Northglenn CO 1987 1979 75,000 5.5
Tamarac Denver CO 1984 1977 25,000 1.9
Thornton Denver CO 1984 1984 41,000 2.4
Windermere Littleton CO 1984 1977/79 81,000 5.3
Blue Heron West Palm Beach FL 1987 1975 168,000 11.8
Davie (5) Davie FL 1996 1990 76,000 5.5
Delray Beach Delray Beach FL 1996 1986 77,000 4.5
Lauderhill Lauderhill FL 1997 1986 62,000 4.0
Maitland(10) Orlando FL 1997 1997 54,000 8.7
Margate Margate FL 1996 1984 75,000 4.0
Military Trail West Palm Beach FL 1987 1981 124,000 9.4
Oakland Park Ft. Lauderdale FL 1985 1974/78 290,000 13.4
Oviedo (10) Orlando FL 1997 1997 65,000 9.0
Red Bug (10) Seminole County FL 1997 1997 75,000 4.3
S. Semoran(10) Orlando FL 1997 1997 68,000 5.2
Seminole Seminole FL 1986 1984/85 61,000 2.7
South Orange(10) Orlando FL 1997 1997 71,000 5.0
Ansley Park Atlanta GA 1995 1991 69,000 1.4
Brookhaven Atlanta GA 1995 1992 66,000 2.0
Clairemont Atlanta GA 1996 1990 41,000 1.1
Decatur Atlanta GA 1995 1992 65,000 2.5
Forest Park Forest Park GA 1996 1980 65,000 7.9
Gwinnett Lawrenceville GA 1996 1996 69,000 4.4
Jones Bridge Atlanta GA 1997 1997 75,000 5.3
Lawrenceville Lawrenceville GA 1997 1997 74,000 3.4
Morgan Falls Dunwoody GA 1996 1990 76,000 3.7
Norcross Norcross GA 1996 1984 62,000 9.3
Peachtree Duluth GA 1997 1996 100,000 6.2
Perimeter Atlanta GA 1996 1996 72,000 3.3
Roswell Roswell GA 1986 1986 57,000 3.8
Satellite Blvd. Duluth GA 1997 1994 76,000 5.2
Stone Mountain Stone Mountain GA 1996 1985 61,000 10.1
Tucker Tucker GA 1996 1987 60,000 4.6
Alsip Alsip IL 1982 1980 66,000 4.6
Bolingbrook Bolingbrook IL 1997 1997 68,000 1.5
Bridgeview Bridgeview IL 1985 1983 75,000 4.1
Dolton Calumet City IL 1982 1979 79,000 3.0
Hillside Hillside IL 1988 1988 65,000 5.3
Lisle Lisle IL 1986 1976/86 55,000 3.4
Lombard Lombard IL 1982 1980 52,000 3.1
Oak Forest Orland Park IL 1995 1991 87,000 3.9
Rolling Meadows Rolling Meadows IL 1982 1980 71,000 4.5
Schaumburg Schaumburg IL 1982 1980 71,000 4.3
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PROPERTY APPROXIMATE
STATE/ OWNED YEAR NET RENTABLE
PROPERTY NAME PROPERTY LOCATION COUNTRY SINCE BUILT SQUARE FEET ACREAGE
- ------------- ----------------- ------- ----- ----- ----------- -------
Willowbrook Willowbrook IL 1986 1979/82 44,000 3.3
Allisonville Allisonville IN 1997 1987 93,000 7.4
Carmel Carmel IN 1996 1996 61,000 4.3
College Park Indianapolis IN 1986 1984 68,000 6.0
Georgetown Indianapolis IN 1996 1996 72,000 4.2
Glendale Indianapolis IN 1986 1985 60,000 5.6
Briggs Chaney Silver Spring MD 1994 1987 28,000 2.0
Clinton Clinton MD 1986 1985 31,000 2.0
Crofton Gambrills MD 1988 1985 40,000 2.1
Frederick Frederick MD 1994 1987 32,000 1.7
Gaithersburg Gaithersburg MD 1994 1986 76,000 5.4
Germantown Germantown MD 1994 1988 45,000 1.9
Laurel Laurel MD 1988 1984 30,000 2.0
Oxon Hill Ft. Washington MD 1994 1987 28,000 1.3
Suitland Suitland MD 1987 1985 45,000 2.7
Ann Arbor Ann Arbor MI 1988 1977 62,000 3.9
Canton Canton MI 1988 1986 58,000 3.3
Flint East Flint MI 1997 1977 45,000 2.7
Fraser Fraser MI 1988 1985 74,000 5.2
Grand Rapids Grand Rapids MI 1983 1978 45,000 3.2
Jackson Jackson MI 1997 1978 49,000 3.1
Kalamazoo Kalamazoo MI 1980 1980 42,000 3.0
Lansing Lansing MI 1983 1978/79 40,000 2.5
Livonia Livonia MI 1988 1985 67,000 4.8
Madison Heights Detroit MI 1995 1977 65,000 4.1
Plymouth Canton Township MI 1985 1979 74,000 5.3
Rochester Utica MI 1996 1989 57,000 4.8
Saginaw Saginaw MI 1997 1978 57,000 3.1
Southfield Southfield MI 1983 1976 76,000 4.3
Sterling Heights Sterling Heights MI 1996 1986 105,000 8.9
Taylor Taylor MI 1995 1980 83,000 4.2
Troy East Troy MI 1981 1975/77 82,000 4.8
Troy West Troy MI 1983 1979 88,000 5.2
Walled Lake Walled Lake MI 1985/89 1984 69,000 4.3
Warren Warren MI 1988 1985 68,000 4.6
Bellefontaine St. Louis MO 1985 1979 46,000 4.9
Brentwood Brentwood MO 1988 1977 52,000 3.4
Olive Innerbelt St. Louis MO 1987 1952/86 98,000 2.5
Capital Blvd. Raleigh NC 1994 1984 34,000 2.1
Cary Cary NC 1994 1984 62,000 4.7
Creedmore Raleigh NC 1997 1997 73,000 4.8
Garner Garner NC 1994 1987 28,000 3.1
Glenwood Raleigh NC 1994 1983 31,000 1.9
Morrisville Morrisville NC 1994 1988 40,000 3.3
Old Bridge Matawan NJ 1987 1987 77,000 6.1
Gold Brooklyn NY 1986 1940 102,000 0.4
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PROPERTY APPROXIMATE
STATE/ OWNED YEAR NET RENTABLE
PROPERTY NAME PROPERTY LOCATION COUNTRY SINCE BUILT SQUARE FEET ACREAGE
- ------------- ----------------- ------- ----- ----- ----------- -------
Northern Long Island City NY 1987 1940 76,000 1.9
Utica Brooklyn NY 1986 1964 74,000 1.1
Van Dam Long Island City NY 1986 1925 57,000 0.5
Yonkers Yonkers NY 1986 1928 100,000 1.6
16th & Sandy (3) Portland OR 1995 1973 26,000 0.5
Allen Blvd. Beaverton OR 1996 1973 42,000 2.6
Barbur Boulevard Portland OR 1995 1993 67,000 2.8
Beaverton Beaverton OR 1985 1974 26,000 2.0
Denny Road Beaverton OR 1989 1988 65,000 6.2
Division (5) Portland OR 1996 1992 47,000 2.0
Gresham Portland OR 1996 1996 64,000 4.4
Hillsboro Portland OR 1996 1996 66,000 8.9
King City Tigard OR 1987 1986 83,000 4.9
Liberty Road Salem OR 1995 1993 54,000 4.4
Milwaukie (5) Milwaukie OR 1996 1990 62,000 3.3
Oregon City Portland OR 1995 1992 57,000 3.2
Portland Portland OR 1988 1988 49,000 2.1
Salem Salem OR 1983 1979/81 67,000 3.8
Airport Philadelphia PA 1986 1985 96,000 6.7
Edgemont Philadelphia PA 1995 1992 64,000 5.5
West Chester (4) West Chester PA 1986 1980 85,000 7.0
Franklin (6) Nashville TN 1995 1995 55,000 3.3
Hermitage (7) Nashville TN 1995 1995 65,000 2.8
Hickory Hollow(14) Nashville TN 1997 1997 41,000 2.5
Medical Center (8) Nashville TN 1994 1995 60,000 2.3
Rivergate(15) Nashville TN 1996 1996 46,000 4.7
Wolfchase( 16) Nashville TN 1997 1997 39,000 1.8
Arlington Arlington TX 1986 1984 57,000 2.7
Bandera Road San Antonio TX 1988 1981 75,000 3.6
Bedford Bedford TX 1985 1984 69,000 2.7
Beltline Road Irving TX 1989 1985/86 69,000 6.3
Blanco Road San Antonio TX 1988 1989/91 66,000 3.6
East Lamar Arlington TX 1996 1996 43,000 3.0
Federal Houston TX 1988 1988 55,000 3.4
Fredicksburg San Antonio TX 1987 1978/82 82,000 4.5
Georgetown Austin TX 1997 1996 58,000 4.1
Hill Country Village San Antonio TX 1985 1982 79,000 4.0
Hillcroft (4) Houston TX 1991 1988 59,000 3.4
Hurst Hurst TX 1987 1974 68,000 4.7
Imperial Valley Houston TX 1988 1987 54,000 3.1
Irving/MacArthur Blvd.(2) Irving TX 1985 1975/84 142,000 11.4
Kingwood Kingwood TX 1988 1988 54,000 3.3
Lewisville Dallas TX 1997 1997 49,000 4.0
McArthur Crossing Irving TX 1996 1996 66,000 4.1
Medical Center Houston TX 1989 1989 57,000 2.6
Mission Bend Houston TX 1995 1995 66,000 4.1
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PROPERTY APPROXIMATE
STATE/ OWNED YEAR NET RENTABLE
PROPERTY NAME PROPERTY LOCATION COUNTRY SINCE BUILT SQUARE FEET ACREAGE
- ------------- ----------------- ------- ----- ----- ----------- -------
North Austin Austin TX 1986 1982 67,000 5.9
Park Cities East Dallas TX 1995 1995 68,000 4.3
Parker Road Dallas TX 1995 1995 65,000 3.5
Preston Road Dallas TX 1997 1997 58,000 3.2
River Oaks (5) Houston TX 1996 1989 67,000 2.4
Round Rock Austin TX 1997 1995 55,000 3.6
San Antonio NE San Antonio TX 1985 1982 74,000 3.6
Slaughter Lane Austin TX 1997 1994 76,000 4.6
South Cooper Arlington TX 1996 1996 67,000 3.7
Sugarland Sugarland TX 1988 1987 55,000 3.0
T.C. Jester Houston TX 1996 1990 64,000 2.8
Thousand Oaks San Antonio TX 1986 1987 53,000 2.9
Universal City (1) San Antonio TX 1995 1985 82,000 5.1
Valley Ranch Coppell TX 1997 1995 94,000 5.1
West U Houston TX 1989 1988 60,000 1.8
Westheimer Houston TX 1986 1977 73,000 3.7
Windcrest San Antonio TX 1996 1975 87,000 6.3
Woodforest Houston TX 1996 1996 45,000 6.2
Woodlands Houston TX 1988 1988 64,000 3.8
Bayside Virginia Beach VA 1988 1984 28,000 1.7
Burke Fairfax VA 1996 1984 32,000 1.7
Cedar Road Chesapeake VA 1994 1989 36,000 2.1
Charlottesville Charlottesville VA 1994 1984 32,000 2.1
Chesapeake Chesapeake VA 1996 1986 58,000 5.2
Crater Road Petersburg VA 1994 1987 36,000 3.8
Dale City Dale City VA 1994 1986 32,000 1.6
Fairfax Fairfax VA 1986 1980 62,000 5.6
Falls Church Falls Church VA 1987 1988 93,000 1.5
Gainesville Gainesville VA 1994 1988 31,000 2.0
Herndon Herndon VA 1988 1985 39,000 3.0
Holland Road Virginia Beach VA 1994 1985 34,000 3.9
Jeff Davis Hwy Richmond VA 1994 1990 35,000 5.2
Kempsville Virginia Beach VA 1989 1985 33,000 2.0
Laskin Road Virginia Beach VA 1994 1984 39,000 2.5
Leesburg Leesburg VA 1996 1986 28,000 1.6
Manassas East & West(2) Manassas VA 1988 1984 69,000 3.5
McLean McLean VA 1997 1997 30,000 4.2
Midlothian Turnpike Richmond VA 1996 1984 44,000 2.9
Newport News North Newport News VA 1996 1986 59,000 3.8
Newport News. S Newport News VA 1985/92 1985 59,000 3.9
North Richmond Richmond VA 1988 1984 37,000 2.6
Princess Anne Road Virginia Beach VA 1994 1985 40,000 2.2
S. Military Highway Virginia Beach VA 1996 1984 47,000 2.7
Temple Avenue Petersburg VA 1994 1989 34,000 4.0
Virginia Beach Virginia Beach VA 1989 1985 65,000 2.3
Auburn Auburn WA 1996 1996 62,000 7.3
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PROPERTY APPROXIMATE
STATE/ OWNED YEAR NET RENTABLE
PROPERTY NAME PROPERTY LOCATION COUNTRY SINCE BUILT SQUARE FEET ACREAGE
- ------------- ----------------- ------- ----- ----- ----------- -------
Bellefield Bellevue WA 1996 1978 65,000 2.9
Bellevue East & West (2) Bellevue WA 1984 1975 165,000 10.8
Bellingham Bellingham WA 1981 1981 73,000 5.7
Bremerton Bremerton WA 1997 1976 41,000 2.5
Burien Seattle WA 1985 1974 92,000 5.3
Canyon Park (9) Bothell WA 1996 1990 59,000 4.4
Capitol Hill (10) Seattle WA 1987 1988 71,000 0.7
Downtown Seattle (11) Seattle WA 1986 1912 95,000 0.3
E. Bremerton Bremerton WA 1996 1985 66,000 3.1
East Lynnwood Lynnwood WA 1986 1978 80,000 3.8
Edmonds Edmonds WA 1984 1974/75 120,000 6.5
Everett Everett WA 1981 1978 63,000 4.2
Factoria Bellevue WA 1984 1984 57,000 3.8
Factoria Square Bellevue WA 1996 1989 70,000 1.9
Federal Way Federal Way WA 1984 1975 134,000 5.7
Fife (12) Tacoma WA 1984 1977 43,000 3.9
Hazel Dell (5) Vancouver WA 1996 1989 56,000 3.4
Highland Hill Tacoma WA 1981 1982 60,000 3.9
Interbay Seattle WA 1987 1988 84,000 0.4
Issaquah Issaquah WA 1985 1986 56,000 4.7
Kennydale Renton WA 1996 1991 64,000 2.8
Kent Kent WA 1997 1977 43,000 2.5
Lacey Olympia WA 1997 1977 25,000 1.4
Lake City (1) Seattle WA 1995 1987 52,000 1.1
Lakewood 512 Tacoma WA 87/88/91 1979/81 129,000 12.2
Lynnwood Lynnwood WA 1997 1979 54,000 4.0
North Spokane Spokane WA 1984 1976 79,000 4.1
Parkland Tacoma WA 1997 1980 52,000 4.2
Port. Orchard Port. Orchard WA 1997 1991 46,000 3.0
Puyallup Puyallup WA 1996 1986 28,000 1.7
Renton Renton WA 1984 1979/89 80,000 4.5
Salmon Creek Vancouver WA 1997 1997 68,000 2.6
Sea-Tac Seattle WA 1985 1979 60,000 3.0
Shoreline/Seattle Seattle WA 1986 1978 135,000 6.1
Smokey Point Arlington WA 1987 1984/87 35,000 2.2
South Center Renton WA 1985 1979 68,000 4.1
South Hill Seattle WA 1995 1980 45,000 2.8
South Tacoma Tacoma WA 1987 1975 47,000 3.1
Spokane Spokane WA 1997 1976 49,000 2.6
Sprague (5) Tacoma WA 1996 1950/89 52,000 2.8
Totem Lake Kirkland WA 1984 1978 61,000 2.6
Vancouver Mall Vancouver WA 1980 1982 46,000 3.3
West Olympia Olympia WA 1997 1978 30,000 2.2
West Seattle Seattle WA 1997 1997 66,000 3.4
Whitecenter Seattle WA 1980 1981 47,000 3.4
Woodinville Woodinville WA 1984 1982/84 70,000 3.5
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PROPERTY APPROXIMATE
STATE/ OWNED YEAR NET RENTABLE
PROPERTY NAME PROPERTY LOCATION COUNTRY SINCE BUILT SQUARE FEET ACREAGE
- ------------- ----------------- ------- ----- ----- ----------- -------
Aartselaar (13) Brussels Belgium 1997 1997 76,000 1.7
Forest (13) Greater Brussels Belgium 1995 1995 49,000 0.4
Machalen (13) Brussels Belgium 1997 1997 65,000 1.5
Molenbeek (13) Greater Brussels Belgium 1995 1995 34,000 0.5
Waterloo (13) Greater Brussels Belgium 1995 1995 86,000 3.5
Zaventem (13) Greater Brussels Belgium 1996 1996 75,000 3.0
Montrouge (13) Paris France 1997 1996 59,000 1.4
Nice (13) Nice France 1997 1991 42,000 1.0
Varlin (13) Paris France 1997 1997 23,000 0.5
---------- -----
Total 18,223,000 1,045
========== =====
- -------------
(1) We own a 74.1% interest in this property. (Does not include general
partner interest)
(2) These properties are now operated as one property.
(3) We own a 56.7% interest in this property. (Does not include general
partner interest)
(4) We do not have fee title, but have a long-term lease, with respect to
the land on which property is located.
(5) We own a 15% interest in this property. (Does not include general
partner interest)
(6) We own a 85.5% interest in this property.
(7) We own a 50% interest in this property.
(8) We own a 67% interest in this property.
(9) We own a 12.8% interest in this property. (Does not include general
partner interest)
(10) We own a 90% interest in this property.
(11) Property is a commercial building.
(12) Property is a business park.
(13) We own a 12.5% interest in this property
(14) We own a 84% interest in this property
(15) We own a 85.5% interest in this property.
(16) We own a 86% interest in this property.
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19
The following table sets forth information by state regarding weighted
average occupancy and weighted average rent per square foot for the domestic
self storage properties owned by the Company for the years ended December 31,
1997, 1996 and, 1995.
AVERAGE OCCUPANCY AVERAGE RENT PER SQUARE FOOT
----------------------- ------------------------------
STATE 1997 1996 1995 1997 1996 1995
- --------- ---- ---- ---- ----- ----- -----
Arizona 78% 78% 84% $9.19 $9.21 $9.15
California 89 88 85 10.38 10.32 10.04
Florida 85 85 83 9.00 8.41 8.12
Illinois 90 94 95 9.25 8.60 8.30
Maryland 84 91 91 11.66 11.14 10.54
Michigan 89 91 93 7.88 8.09 7.38
New York 88 89 92 17.25 15.98 15.14
Oregon 81 84 92 8.81 8.34 7.77
Texas 81 79 82 8.27 8.19 8.13
Virginia 87 92 90 9.75 9.35 8.95
Washington 90 90 89 8.87 8.41 8.17
Other 81 85 89 9.43 9.58 8.76
---- ---- ---- ----- ----- -----
Weighted Average 86% 87% 88% $9.37 $9.23 $8.84
The following table sets forth information for all domestic properties
owned by the Company (and its predecessors) regarding weighted average occupancy
and weighted average rent per square foot for the years ended December 31, 1997
through December 31, 1993.
1997 1996 1995 1994 1993(1)
---- ---- ---- ---- -------
Weighted average occupancy 86% 87% 88% 89% 87%
Weighted average rent per square foot $9.37 $9.23 $8.84 $8.25 $7.84
- ---------------
(1) Calculated as the weighted average of the original 137 properties owned
by the Company.
Leasing of Properties. Rental units are usually rented on a
month-to-month basis. The average rental period for a tenant is approximately
1.5 years. This average is comprised of the rental periods of business tenants,
who tend to lease space for longer periods (approximately 2-3 years), and those
of residential customers, who tend to lease space for shorter periods
(approximately six months to a year). Rental income from leased space
constitutes the primary revenue from such properties, but additional revenue are
received from incidental services rendered at the properties, such as lock and
box sales and truck rentals. Rental rates vary substantially depending on the
size of the storage space, the property location, the quality of the property
and the location of competition within five miles.
Other Properties. The Company owns two business parks, both of which are
located near Tacoma, Washington. The business parks were built in 1977 and 1979
and contain an aggregate of approximately 191,000 net rentable square feet. We
also manage one additional business park for an unaffiliated owner. In addition,
we own a property in downtown Seattle, Washington that was, in 1997, leased to a
records storage company affiliated with our management, on terms approved by our
disinterested directors. In 1998, the building is expected to revert to
self-storage.
ITEM 3 - LEGAL PROCEEDINGS
None.
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ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth
quarter of 1997.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common stock is traded on the NYSE under the symbol "SHU."
As of February 27, 1998, there were 25,187 holders of record of our Common Stock
and the reported NYSE closing price per share of Common Stock was $27.88.
The table below sets forth for the fiscal periods indicated the high and
low closing prices per share of Common Stock as reported in published financial
sources, and distributions declared.
PRICE PER SHARE OF
COMMON STOCK
-------------------- DISTRIBUTIONS
HIGH LOW DECLARED(1)
------- ------- --------------
1996
First Quarter................................. $27.50 $25.88 $.47
Second Quarter................................ 26.13 24.13 .47
Third Quarter................................. 26.00 23.63 .47
Fourth Quarter................................ 29.63 25.13 .47
1997
First Quarter................................. 29.50 27.63 .48
Second Quarter................................ 28.88 26.00 .48
Third Quarter................................. 29.25 27.25 .48
Fourth Quarter................................ 29.94 26.81 .48
- --------------
(1) Distributions declared by the Board of Directors based on financial
results for the quarter specified.
Holders of shares of Company Common Stock are entitled to receive
distributions when, as and if declared by our Board of Directors out of any
assets legally available for payment. We are required to distribute annually to
our shareholders at least 95% of our "REIT taxable income," which, as defined by
the relevant tax statutes and regulations, is generally equivalent to net
taxable ordinary income.
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ITEM 6 - SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the other financial information
included elsewhere in this Form 10-K.
(in thousands, except per share data)
COMPANY PREDECESSOR (1)
---------------------------------------------------- -----------------------
AT OR FOR YEAR JAN 1 TO AT OR FOR
ENDED DEC. 31, MAR 1, YEAR
---------------------------------------------------- ----------- ENDED DEC.
31,
1997 1996 1995 1994(2) 1994 1993
--------- --------- -------- ------- -------- ---------
OPERATING DATA:
Total revenue $ 140,434 $ 110,399 $ 96,771 $ 66,921 $ 12,368 $ 72,346
Net income 42,311 32,785 29,572 17,821 34,286 18,284
Net income per common
share:(3)
Basic 1.40 1.39 1.43 1.05 63.97 34.11
Diluted 1.40 1.39 1.43 1.05 63.97 34.11
Distributions declared
per common share:(3)
Basic 1.91 1.41(6) 2.38(5) 1.02(4) 732.05 59.57
Diluted 1.91 1.41(6) 2.38(5) 1.02(4) 732.05 59.57
BALANCE SHEET DATA:
Total assets 955,488 804,483 610,394 494,590 391,685 393,982
Total borrowings 296,971 272,791 142,840 167,137 -- 26,016
- --------
(1) The Predecessor information reflects the combination of the 17
partnerships operated prior to the March 1, 1994 consolidation.
(2) Operating data for the year ended December 31, 1993 are not included as
they are de minimis.
(3) Predecessor "per share" information is net income and distributions per
limited partner unit. Distributions for the period from January 1, 1994
to March 1, 1994 include the liquidating distribution made in connection
with the consolidation.
(4) Does not include the distribution of $.44 per share declared in January
1995 based on financial results for the quarter ended December 31, 1994.
(5) Includes distribution of $.44 per share declared in January 1995 based
on financial results for the quarter ended December 31, 1994 as well as
the special distribution of $.10 declared in November 1995.
(6) Does not include the distribution of $.47 per share declared in January
1997 based on financial results for the quarter ended December 31, 1996.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Shurgard Storage Centers, Inc. (SSCI) is a fully integrated,
self-administered, self-managed REIT headquartered in Seattle, Washington,
specializing in all aspects of the self storage industry. As of December 31,
1997,we operated a network of more than 310 storage centers located throughout
the United States and in Europe. Of these properties, we own, directly and
through our subsidiaries and joint ventures, 281 operating properties (including
279 self storage properties), containing approximately 18.2 million net rentable
square feet. Of these properties, 272 are located in 19 states and nine are
located in Europe. Self storage properties offer low-cost, easily accessible
storage space for personal and business uses. Our investment objective is to
maximize shareholder value by increasing funds from operations through internal
growth and through the acquisition and development of additional self storage
properties. We believe that our access to both the debt and equity markets, the
experience of our management team in acquiring, developing, and operating self
storage properties, our geographic diversification and our emphasis on quality
will enhance our ability to achieve this objective.
Our mission is to be the global leader in storage products and services.
We believe we can obtain this goal by focusing on providing exceptional customer
service and the highest quality products to our customers.
We believe that in order to supply the best customer service in the
industry, we must have employees who are responsive to customer needs.
Accordingly, we promote employee
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empowerment and training programs, as well as personnel policies that attract
quality people. We also promote entrepreneurship among our employees by
encouraging the exchange of ideas on providing new ways to meet customers'
ever-changing needs. One product that is currently being offered as a result of
this company culture involves bringing storage to the customer through a
containerized storage business. Another strategy is to make the process of
renting storage more convenient by placing kiosks in local malls at which a
customer may rent either a storage unit or a container.
As part of our focus on obtaining the highest quality products for our
customers, we look for those storage centers that are located in well populated
retail areas. When entering a market, we seek dominant locations within specific
three to five mile trade areas. "Dominant locations" refers to highly visible
and accessible locations in retail corridors. This kind of visibility creates
customer awareness. Through multiple locations of this kind within a
metropolitan area, we establish brand recognition as well as economies of scale
in operations of our stores. We seek to own at least 15 stores in each of our
markets in order to realize these efficiencies. To further enhance brand
recognition, we strive to achieve a uniform look to our properties. This is
accomplished through the use of signage, color schemes, quality of the building
and our trademark "lighthouse" office design in new developments.
Throughout the past three years, we have expanded our portfolio of real
estate properties and real estate based investments through the use of equity
and debt capital. During 1997, we acquired 23 and developed 17 domestic new
centers directly or through joint ventures. Additionally, we acquired three
storage centers in France, and opened two additional developments in Belgium.
The following discussion of operations provides additional comparative financial
information and discussion of each of the areas of growth, including internal or
same store growth, direct acquisitions, domestic development, European
operations, property management operations and other forms of real estate
investments. A discussion of capital expenditures, financing transactions and
liquidity is also included.
********************************************************************************
When used in this discussion and elsewhere in this Annual Report on Form
10-K, the words "believes," "anticipates," "projects" and similar expressions
are intended to identify forward-looking statements regarding financial
performance. ACTUAL RESULTS MAY DIFFER MATERIALLY DUE TO UNCERTAINTIES INCLUDING
THE RISK THAT COMPETITION FROM NEW SELF STORAGE FACILITIES OR OTHER STORAGE
ALTERNATIVES MAY CAUSE RENT TO DECLINE AND MAY CAUSE OCCUPANCY RATES TO DROP,
TAX LAW CHANGES MAY CHANGE THE TAXABILITY OF FUTURE INCOME, AND LITIGATION MAY
MATERIALLY DECREASE LATE FEE REVENUE. ACTUAL RESULTS MAY DIFFER IF INCREASES IN
LABOR, TAXES, MARKETING AND OTHER OPERATING AND CONSTRUCTION EXPENSES OCCUR.
Other factors which could affect our financial results are described below and
in Item 1 (Business) of this Annual Report on Form 10-K. Forward-looking
statements are based on estimates as of the date of this report. The Company
disclaims any obligation to publicly release the results of any revisions to
these forward-looking statements reflecting new estimates, events or
circumstances after the date of this report.
********************************************************************************
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INTERNAL GROWTH
In 1997, we continued our focus on increasing net operating income from
our existing real estate assets. One of the ways we analyze our performance is
to measure year over year improvements in same store operating results. We
define "same stores" each quarter as those stabilized storage centers which were
owned for the entire quarter of both comparison years. Thus, storage centers
acquired in May of 1995 are included only in the third and fourth quarter same
store comparison of 1995 versus 1996 and centers acquired in the third quarter
of 1996 are only included in the fourth quarter same store comparison of 1996
versus 1997. Annual same store data is the combination of same store data for
each quarter. Other storage companies may define same stores differently, which
will affect the comparability of the data. The following table summarizes same
store operating performance from 1997 to 1995.
SAME STORE RESULTS
(dollars in thousands except average rent)
YEAR ENDED DECEMBER 31, (1) YEAR ENDED DECEMBER 31, (2)
------------------------------- -------------------------------
% %
1997 1996 CHANGE 1996 1995 CHANGE
--------- --------- ------ --------- --------- ------
Rental revenue $ 105,551 $ 100,407 5.1% $ 92,334 $ 88,434 4.4%
Property operating expenses (3) 30,936 30,388 1.8% 28,031 26,545 5.6%
--------- --------- --------- ---------
Net operating income $ 74,615 $ 70,019 6.6% $ 64,303 $ 61,889 3.9%
========= ========= ========= =========
Avg. annual rent per sq.ft. (4) $9.68 $9.24 4.8% $9.22 $8.89 3.7%
Avg. sq.ft. occupancy 88% 88% 89% 88%
Total net rentable sq.ft.
(4th qtr) 11,500,000 11,500,000 11,200,000 11,200,000
No. of properties (4th qtr) 172 172 169 169
---------------
(1) Includes 74% of the operating results of three properties in which we
own a 74% interest and 90% of the operating results of one property in
which we own a 90% interest (operating results for those properties are
consolidated in our financial statements). Includes only operating
results for the three months ended December 31, 1996 and 1997 for the
three properties purchased in the third quarter of 1996.
(2) Includes 30% of the operating results of four properties in which we own
a 30% interest (operating results for these properties are not
consolidated in our financial statements), as well as 74% of the
operating results of three properties in which we own a 74% interest and
90% of the operating results of one property in which we own a 90%
interest (operating results for those properties are consolidated in our
financial statements). Includes only operating results for the six
months ended December 31, 1995 and 1996 for the 15 properties purchased
in the first half of 1995.
(3) Includes all direct property expenses. Does not include property
management fees previously charged by the Management Company nor does it
include any allocation of joint expenses incurred such as off-site
management personnel.
(4) Average annual rent per square foot is calculated by dividing actual
rent collected by the average number of square feet occupied during the
period.
As demonstrated by the operating information above, our same store net
operating income is primarily driven by our ability to increase revenue while
limiting expense increases. Various programs are utilized to obtain and keep
storage customers in order to maximize property revenue. Providing the best
customer service requires exceptional employees and on-going quality training.
Personnel are trained in all aspects of storage operations from operating the
computer system and renting a unit to analyzing demand and pricing strategies.
They are also trained and authorized to make substantially all pricing and
customer service decisions on-site, with reference to our values
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and mission statement. These training and personnel programs are continually
evaluated and improved upon. Another revenue enhancing program currently
utilized is the national call center which fields overflow calls from all the
individual properties, providing personal service when on-site employees are not
available. Employees at the national call center are able to rent a unit at the
store most convenient to the customer.
In 1996, we implemented a new pricing strategy called "revenue
optimization." Historically, we have maintained a general policy on annual rent
increases implemented toward the beginning of the year. The revenue optimization
program focuses on establishing product pricing in relationship to demand and
closing ratios (the percentage of prospects who subsequently rent a unit) in
order to maximize revenue. The implementation of this new program took longer
than expected and there were some additional training costs associated with
implementing it. As such, we did not fully realize the impact of this strategy
until the fourth quarter of 1996. However, 1997 results reflect the benefits of
this program.
Net operating income has risen over the last three years due to
increases in revenue, which are a function of changes in rental rates and
occupancy. While storage has a seasonal trend, spring and summer being peak
occupancy periods, the cycle is annual and the revenue trend from 1995 to 1997
reflects general market changes. Revenue gains from 1996 to 1997 resulted
entirely from rental rate increases, while gains from 1995 to 1996 resulted
primarily from rate increases with slight occupancy improvements.
Direct operating expenses were higher in 1996 than in 1995 due to a
number of factors. We experienced unusually high real estate assessment
increases in 1996, particularly in the Denver market. Additionally, we expanded
our yellow page advertising coverage in markets where we were developing, but,
until the new developments opened in those areas, costs were allocated to the
existing stores in that market. Training of field personnel for the revenue
optimization program discussed above also impacted 1996 expenses. Despite these
increases, direct operating expenses as a percentage of revenue remained
constant. Direct operating expenses rose only 2% from 1996 to 1997 due to an
extensive expense control focus by field personnel as well as decreases in
yellow pages advertising. Increases were experienced primarily in personnel
costs and real estate taxes. We expect expense increases to be closer to 4% in
1998 due to the tightening of certain labor markets and the effect of inflation
on other general expenses.
We are aware of a purported class action lawsuit against a self
storage operator alleging that late fees are unconscionably high which received
national press attention. While a lawsuit of this nature was filed against us
in California on December 17, 1997, it was voluntarily dismissed on February
20, 1998. The plaintiff has the right to refile the lawsuit at anytime, and has
indicated he intends to ask us to change our business practices regarding late
fees in California. Our late fee revenue in California and other states could
be negatively impacted if we were to change our practices.
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The following table is a geographical summary of the changes in weighted
average rents, rates and occupancies for the same store storage centers as
defined in the footnotes to the previous table:
% CHANGE IN RATE % CHANGE IN NO. OF
% CHANGE IN RENTS PER SQ. FT. SQ. FT. OCCUPIED
---------------------- ----------------------- ------------------------
'96 TO '97 '95 TO '96 '96 TO '97 '95 TO '96 '96 TO '97 '95 TO '96
---------- ---------- ---------- ---------- ---------- ----------
Arizona (1.8)% (4.3)% (1.1)% 1.0% (0.7)% (5.2)%
California 7.5 7.0 5.9 3.5 1.4 3.4
Florida 8.1 4.7 3.0 2.8 5.0 1.9
Illinois 6.8 6.2 7.8 4.3 (0.9) 1.8
Maryland 2.6 7.0 4.6 5.6 (1.9) 1.4
Michigan 2.5 7.6 3.6 9.5 (1.1) (1.8)
New York 6.5 2.2 8.1 5.7 (1.5) (3.3)
Oregon 1.4 8.3 6.2 8.9 (4.5) (0.6)
Texas 2.5 (3.9) 1.2 (3.0) 1.2 (0.9)
Virginia 0.3 6.9 5.2 4.2 (4.6) 2.6
Washington 9.8 7.8 6.7 4.8 2.9 2.9
Other 2.4 2.0 4.4 2.8 (2.0) (0.8)
---- ---- ---- --- ---- ----
Weighted Average 4.8% 4.4% 4.8% 3.7% 0.1% 0.7%
We believe our diversified portfolio minimizes the impact of individual
market fluctuations that result from economic or competitive changes within
these markets. In general, rental rate increases have driven the increase in
revenue. Over the last three years, market conditions in San Francisco, CA,
Chicago, IL and Seattle, WA contributed to above average revenue increases. The
completion of significant building improvements at our New York stores during
1996 and 1997 have improved our product quality and allowed our managers to
increase rates beyond increases experienced in the prior year. Chicago and New
York, in particular, demonstrate our use of revenue optimization; although
occupancy declined in both markets, revenue rose well above average due to rate
increases.
In 1996, Arizona experienced new competition in certain trade areas and
a leveling off of demand which has affected rents in both 1996 and 1997.
Additionally, during 1996, we vacated units at one store in order to convert the
units to climate controlled space in anticipation of premium rents. The
conversion of these units was expected to be completed in late spring but due to
unexpected delays was not finished until late August further decreasing
occupancy in 1996.
During 1997, Oregon experienced a drop in occupancy due to increased
competition within three miles of certain stores, as well as some price
sensitivity in the market. Revenue at one store declined 7%, as a result of a
fire during the third quarter and new competition.
A 1997 decline in the Dallas, TX market was more than offset by gains in
the Houston, TX and San Antonio, TX markets. Many of our older storage centers
in the Dallas, TX market are being impacted by new competitors entering their
immediate trade area. We expect to see some continued softening of rates and
occupancy declines until this new supply is absorbed. The San Antonio, TX market
declined in 1996 as new competition has forced rate decreases. The stores in
this market have stabilized and 1997 revenue has risen over the prior year. Our
1996 results in Houston, TX were impacted by a fire in 1995; revenue replacement
insurance coverage expired and new market competition slowed the rent up of the
reconstructed space. Our 1997 results show the recovery from this 1996 impact.
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DOMESTIC ACQUISITIONS
Although availability of capital and competition has in many cases
driven acquisition prices up, we have continued to selectively seek acquisition
opportunities for high quality storage centers that meet our investment
standards. We have limited our efforts to pursue only those centers that enhance
our existing network of stores (i.e. establish greater market presence or expand
an established market to create greater economies of scale) and thus can be
efficiently managed and operated. In many cases, this has resulted in the
purchase of properties we had previously managed for affiliated owners. The
acquisition of previously managed properties means the properties are in
existing Shurgard markets and we are familiar with the operating issues of those
particular stores. Additionally, they usually have been maintained to our
standards and as such do not have significant deferred maintenance costs. The
operating results of our acquisitions are presented in the tables below in order
to show the impact of our operating strategies since the acquisition date. Based
on the definition of same stores, the results of these properties for certain
periods have been included in the same store results previously discussed. (See
notes (1) and (2) to the Same Store Results table.)
RESULTS OF 1997 ACQUISITIONS
(dollars in thousands except average rent)
YEAR ENDED
DEC. 31, 1997
-------------
Rental revenue $ 4,142
Property operating expenses(1) 1,600
----------
Net operating income $ 2,542
==========
Avg. annual rent per sq.ft.(2) $ 7.83
Avg. sq.ft. occupancy 81%
Total net rentable sq.ft 1,314,000
Number of properties 23
Number of property-months(3) 128
Purchase price $ 65,600
- ---------------
(1) Includes all direct property expenses. Does not include any allocation
of joint expenses incurred such as off-site management personnel.
(2) Average annual rent per square foot is calculated by dividing actual
rents collected by the average number of square feet occupied during the
period.
(3) Represents the sum of the number of months we operated each property
during the year.
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During 1997, we purchased 23 storage centers totaling 1.3 million net
rentable square feet for a total cost of $65.6 million (including related
non-competition agreements). These acquisitions were located as follows: two in
Arizona, one in California, one in Florida, two in Georgia, one in Indiana, one
in Illinois, three in Michigan, four in Texas, and eight in Washington. The 1998
projected yield on these properties is (9.5%-10%) (calculated as projected 1998
net operating income divided by purchase price). These projections are based on
numerous assumptions and actual results may vary due to the factors discussed in
the OVERVIEW.
RESULTS OF 1996 ACQUISITIONS
(dollars in thousands except average rent)
YEAR ENDED DEC. 31, (1)
-------------------------
1997 1996
---------- ----------
Rental revenue $ 20,158 $ 2,787
Property operating expenses(2) 5,839 851
---------- ----------
Net operating income $ 14,319 $ 1,936
========== ==========
Avg. annual rent per sq.ft.(3) $ 8.92 $ 8.74
Avg. sq.ft. occupancy 88% 88%
Total net rentable sq.ft 2,400,000 2,400,000
Number of properties 40 40
Number of property-months(4) 480 69
Purchase price $ 131,600
- --------------
(1) Includes 70% of the operating results of the four storage centers
purchased in November 1996 as a 30% interest was previously owned.
(2) Includes all direct property expenses. Does not include property
management fees previously charged by the Management Company nor does it
include any allocation of joint expenses incurred such as off-site
management personnel.
(3) Average annual rent per square foot is calculated by dividing actual
rents collected by the average number of square feet occupied during the
period.
(4) Represents the sum of the number of months we operated each property
during the year.
In 1996 we purchased 40 storage centers, four in which we previously
owned a 30% interest. Thirty-seven of these properties, totaling 2.3 million net
rentable square feet, were purchased on November 14, 1996, through the
acquisition of three affiliated partnerships (the IDS Partnerships). We paid
approximately $122 million for the 33 storage centers and the remaining 70%
interest in the four centers mentioned above. The purchase, which included $1.6
million in net liabilities and approximately $3 million in transaction costs,
was funded through cash ($59 million) and the issuance of stock ($64 million).
The 1997 yield on these properties was 11% (calculated as actual 1997 net
operating income divided by purchase price). Additional acquisitions included
two properties located in the greater Seattle, WA metropolitan area, and one
located in Atlanta, GA. These three properties cost $6.4 million and added
approximately 135,000 net rentable square feet to our portfolio.
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RESULTS OF 1995 ACQUISITIONS
(dollars in thousands except average rent)
YEAR ENDED DEC. 31, (1) YEAR ENDED DEC. 31,
--------------------------------- ---------------------
1997 1996 % CHANGE 1996 1995
-------- --------- -------- -------- --------
Rental revenue $ 9,916 $ 9,229 7.4% $ 9,229 $ 5,492
Property operating expenses(2) 2,646 2,455 7.8% 2,455 1,592
-------- --------- -------- --------
Net operating income $ 7,270 $ 6,774 7.3% $ 6,774 $ 3,900
======== ======== ======== ========
Avg. annual rent per sq.ft.(3) $ 10.97 $ 10.59 3.6% $ 10.59 $ 10.25
Avg. sq.ft. occupancy 88% 89% 89% 86%
Total net rentable sq.ft 970,000 970,000 970,000 970,000
No. of properties 15 15 15 15
No. of property-months(4) 180 180 180 115
Purchase price $ 52,500
- --------------
(1) Includes the operating results of the three properties owned by Shurgard
Institutional Partners in which we own a 59.5% interest.
(2) Includes all direct property expenses. Does not include property
management fees previously charged by the Management Company nor does it
include any allocation of joint expenses incurred such as off-site
management personnel.
(3) Average annual rent per square foot is calculated by dividing actual
rents collected by the average number of square feet occupied during the
period.
(4) Represents the sum of the number of months we operated each property
during the year.
In May 1995, we purchased the limited partner interest in Shurgard
Evergreen Limited Partnership (the Evergreen Partnership), an entity formed in
May 1990 to develop and own self storage centers, of which we are the general
partner. The limited partner interest was owned by a whollyowned subsidiary of
the State Investment Board of the State of Washington. The Evergreen Partnership
developed and owns seven self storage centers directly and, through a joint
venture, owns an interest in an additional three centers. The ten centers have
an aggregate of 630,000 net rentable square feet. The purchase price for the
limited partner interest in the Evergreen Partnership was $35.5 million which
was financed through our line of credit. For 1997, the return on this investment
in limited partnership interest, defined as net operating income divided by the
original purchase price, was 13%.
In addition to these major acquisitions, in 1995 we also acquired four
self storage properties through individual purchases and one storage property
through the Merger with the Management Company. These five storage centers,
having a total of approximately 340,000 net rentable square feet of storage
space, are located and were acquired as follows: Daly City, CA (March 1995),
Taylor, MI (March 1995), Orland Park, IL (May 1995), Puyallup, WA (May 1995) and
Madison Heights, MI (June 1995). 1996 operating results for these acquisitions
reflect the additional months of operations. We previously managed all but two
of these properties.
DOMESTIC DEVELOPMENT
Our long-term growth plan includes significant development of new
storage centers in markets in which we currently operate. This is due to the
increased competition for acquisitions in the storage market and our focus on
maintaining high quality standards and consistent building design to develop
brand awareness. Implementation of this development strategy is expected to
continue through 1998. Each development project progresses through a series of
review processes from initial review, through due diligence, final review and
finally to the land purchase and
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construction. We believe the success of this strategy has been greatly enhanced
as a result of the substantial experience we gained through the development of
over one third of our properties.
We opened 17 domestic storage centers in 1997 (including seven through
joint ventures) and 13 in 1996 (including one through a joint venture). Seven of
the projects opened in 1997 opened at the end of the fourth quarter and, as a
result, did not have significant operations during the year. Accordingly, these
seven properties have been excluded from the following table:
Estimated Total Net Total 12/31/97 Average Annual Estimated
Number of Total Rentable Cost per Average Rental Rate Annual
Properties Cost Sq. Ft. Sq. Ft. Occupancy per Sq. Ft. Yield (1)
---------------------------------------------------------------------------------------
Opened through
September 1997 10 $37.9 million 681,000 $56 48% $10.87 13%
Opened in 1996 13 $46.4 million 855,000 $54 67% $10.58 13%
(1) The projected average annual yield on estimated total cost of these
projects assumes the projects are 85% occupied at current rates.
The ten storage centers opened in the first three quarters of 1997,
together, provided $842,000 in net operating income for 1997. The 13 storage
centers opened in 1996 together provided net operating income of $2,529,000 for
1997. We estimate stabilization will be reached in an average of 18 months for
these developments. The average annual yield on the estimated total cost of
these projects is projected at 13%, assuming the projects are at 85% occupancy
at current rates. Based on the higher average rate we are receiving at our
internally developed storage centers compared to our same store portfolio, we
believe that customers have shown a willingness to pay more for newer storage
facilities than older facilities. Future NOI growth of older storage centers
could be impacted by this trend.
There is of course no assurance that these projections regarding 1996
and 1997 development projects will occur. Assumed occupancy levels and rates
could be impacted if we experience competition from other self storage
properties and other storage alternatives in close proximity to our
developments. Actual yields may also be lower if major expenses such as property
taxes, labor, and marketing, among others, increase more than projected.
In addition to the above completed developments, we have 17 storage
centers currently under construction (five of these are being developed in
California, Tennessee, Florida and Mississippi through joint ventures). As a
general rule, to limit the risks of development, we do not purchase land until
the permitting process is complete. Construction usually begins shortly after we
obtain title to the land. The following table summarizes domestic development
projects in progress at December 31, 1997.
Number of Estimated Completed
Projects Cost of Projects
-------- ----------------
New Domestic Developments:
Construction in progress 17 $67.9 million
Land purchased pending construction 5 $25.4 million
Expansion of Existing Properties:
Opened during 1997 4 $5.1 million
Construction in progress 3 $2.8 million
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In the current real estate environment, we believe that a long-term
strategy of growth through development will result in superior returns over the
long-term. A development strategy, however, creates a short-term dilution of
earnings during the rent-up phase of a project. Although certain costs,
including real estate taxes and interest, are capitalized during the
construction period, net operating income does not generally exceed interest
expense on development projects for at least the first year of operations. This
rent-up deficit for developments was $2,507,000 (net operating income of
$3,375,000 less 8.5% interest on invested capital of $5,883,000) in 1997
compared to only $1,931,000 in 1996. The rent-up deficit for a typical $3.8
million project, assuming it takes 18 months to rent-up and is financed with
debt at 8.5%, is estimated to be approximately $300,000 in the first year of
operations. The amount of rent-up deficit and the timing of positive cash flow
cannot be predicted with certainty as it is based on a number of factors
including length of rent-up, ability to collect stated rental rates on leased
units, actual operating expenses incurred, and the time of year a property
opens. Another result of this rent-up period is a decrease in our operating
margins as new property expenses are added but the related revenue stream does
not hit stabilized levels until occupancy reaches 85%.
We currently anticipate opening 30 to 35 domestic developments in 1998
including the 22 listed in the table above. The actual number of projects could
be reduced by zoning and permitting delays outside of our control, increased
competition for sites, delays during construction caused by, among other things,
weather, unforeseen site conditions, labor shortages, personnel turnover,
scheduling problems with contractors, subcontractors or suppliers, or resource
constraints. We are currently in negotiations with an institutional investor to
finance the first half of our 1998 development through an off balance sheet
financing arrangement. If such financing is completed, substantially all of the
rent-up deficit for the projects included in the financing will not adversely
affect our net operating income. We intend to pursue similar arrangements to
finance some or all of the remaining 1998 and 1999 developments. There is no
assurance that this strategy will come to fruition as many factors will affect
our ability to arrange off balance sheet financing. These factors include our
ability to find investors interested in financing the development under mutually
agreeable financial and operating terms.
In addition to utilizing the experience of our in-house real estate
development personnel, in the past few years we have begun establishing
relationships with quality storage operators outside our current markets. We
believe that the most efficient way to operate storage centers is to saturate a
market thereby creating brand awareness and allowing certain economies of scale
in operation processes and advertisement. These relationships create instant
presence in a new market as affiliate owned centers begin using the "Shurgard"
name. In exchange for the use of our name, computer systems and general
operations support services, the affiliate pays us an affiliation fee of 2% of
revenue. Additionally, these affiliation agreements provide the framework for
the joint development of additional storage centers, allowing us to take
advantage of the local operator's market knowledge. We have signed three such
affiliation agreements, which include (1) a Tennessee developer that opened
three jointly developed centers in 1995, one in 1996, two in