MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
REVENUE: Partnership performance increased over the past two years as a
result of significant increases in revenue and earnings. Earnings rose 13% from
1994 to 1995 and 22% from 1993 to 1994. Rental revenue also rose $469,000 in
1995 after a $533,000 increase in 1994. Current year revenue increased due to a
slight increase in average occupancies and a 7.5% increase in average rental
rates. Additionally, all the stores within the joint partnership, in which the
Partnership owns 70% interest, had significant revenue gains, with 1995
averaging 13.7% over 1994. Revenue gains from 1993 to 1994 were primarily the
result of stable occupancies and a 9.5% increase in average rental rates.
Average occupancy has increased slightly, averaging 88% at December 31, 1993 and
1994 to 89% at December 31, 1995. With rental rates and average occupancy
increasing during 1995, the Partnership seeks to maximize revenues by adjusting
rents to match demand. Store managers evaluate their store's rental rates,
based on unit demand, unit availability and competitors' rental rates. The
Partnership trains its store managers in revenue optimization and empowers them
to adjust marginal rental rates based on their "on the ground" analysis of
demand and availability at their particular store. In addition, the use of
month-to-month leases, combined with customer turnover, allows rents to be
quickly adjusted to match current demand in a flexible manner.
EXPENSES: Operating expenses increased $110,000 in 1995 and $58,000 in
1994. The majority of the 1995 increase is due to 1) the increased personnel
costs resulting from additional hours worked by managers, 2) an increase in
landscaping expense during the spring and summer months at Canton, Fraser and
Warren storage centers and 3) repairs made to the air conditioning units at the
Margate storage center. In 1994, operating expenses increased due to 1) higher
utility usage from a colder than normal winter in the south, 2) additional phone
lines installed for modem communications, and 3) increased repair and
maintenance at Livonia and Morgan Falls due to snow removal and landscaping.
Interest expense increased $33,000 in 1995 after remaining stable in 1994.
The majority of the change in 1995 reflects the rise in the interest rate from
7.75% at December 1994 to 9.25% at December 1995.
Real estate taxes decreased $25,000 in 1995 after an $11,300 drop in 1994.
The 1995 decrease is due to tax refunds received as a result of successful real
estate tax appeals for the Fraser, Margate and Ontario storage centers. The
1994 decrease was largely due to levy decreases in the Michigan districts. The
Partnership does not expect to be able to continue to decrease real estate taxes
in the future.
Administrative expenses rose $36,000 in 1995 after a slight increase in
1994. The 1995 increase is primarily due to the increase in printing costs for
the Partnership's quarterly and annual reports.
LIQUIDITY AND CAPITAL RESOURCES
CASH FROM OPERATIONS: Cash from operations increased by $338,800 from 1993
to 1994 and $408,500 from 1994 to 1995, reflecting the increase in earnings.
Management believes that cash balances and cash flow from operations will be
adequate to support the future operating needs of the Partnership.
INVESTING ACTIVITIES: Investments in storage centers have been $99,000,
$137,000, and $119,000 during 1995, 1994 and 1993, respectively. The majority
of improvements in 1995 included building improvements at the Ontario and Canton
storage centers as well as pavement upgrades at the Warren and Canton storage
centers. Improvements completed during 1994 were security upgrades at South
Military Highway, Walnut and Ontario centers and pavement work at the Canton and
Warren centers. In 1993, investments were for pavement work at Canton and
Livonia centers and security equipment at the
Midlothian Turnpike center. Planned improvements for 1996 total approximately
$63,300 and are expected to be funded from operations and cash reserves.
FINANCING ACTIVITIES: On December 6, 1995, the Partnership repaid its
seven-year note payable to the bank of $1,418,201 with cash accumulated from
operations. During 1995, 1994 and 1993, the Partnership had made principal
payments on this note of $33,000, $45,000, and $41,000, respectively. The
Partnership now has no outstanding long-term debt.
DISTRIBUTIONS TO PARTNERS: The average annual distribution rates were
7.69%, 6.81%, and 6.06% for 1995, 1994 and 1993, respectively. Distributions
are expected to continue on a quarterly basis and will reflect the Partnership's
future operating results and cash position.
POTENTIAL TRANSACTION: The Partnership is currently conducting discussions
with an affiliated party regarding the possible acquisition of an interest in,
or a merger with, the Partnership. Whether and when the Partnership will reach
agreement regarding this potential acquisition will depend on a number of
factors. There can be no assurance that any agreement will be reached, or if
reached, that the transactions contemplated thereby will be consummated.
SELECTED FINANCIAL INFORMATION
AT OR FOR THE YEAR ENDED DECEMBER 31,
1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
Rental Revenue $ 6,465,170 $ 5,995,824 $ 5,462,738 $ 4,853,259 $ 4,153,611
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Interest Income $ 107,234 $ 60,204 $ 28,570 $ 23,577 $ 19,938
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Earnings $ 2,502,504 $ 2,223,709 $ 1,820,725 $ 1,488,299 $ 866,967
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings per Unit of Limited
- ----------------------------------------------------------------------------------------------------------------------------------
Partnership Interest $ 16.04 $ 14.25 $ 11.67 $ 9.54 $ 5.56
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions to
- ----------------------------------------------------------------------------------------------------------------------------------
Limited Partners $ 2,848,260 $ 2,524,069 $ 2,246,190 $ 2,223,033 $ 2,223,033
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions per Unit of
- ----------------------------------------------------------------------------------------------------------------------------------
Limited Partnership Interest $ 19.22 $ 17.03 $ 15.16 $ 15.00 $ 15.00
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Total Assets $ 29,738,680 $ 31,947,580 $ 32,278,171 $ 32,942,812 $ 32,419,372
- ----------------------------------------------------------------------------------------------------------------------------------
Note Payable $ -- $ 1,451,399 $ 1,495,986 $ 1,537,082 $ --
- ----------------------------------------------------------------------------------------------------------------------------------
Partners' Equity $ 26,892,179 $ 27,387,844 $ 27,821,050 $ 28,364,734 $ 29,216,470
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CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
1995 1994
- ------------------------------------------------------------------------------------------------------
ASSETS:
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 668,672 $ 1,877,311
- ------------------------------------------------------------------------------------------------------
Storage centers, net 28,760,097 29,770,641
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Other assets 294,954 280,497
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Amortizable assets, less accumulated amortization
- ------------------------------------------------------------------------------------------------------
of $1,154,322 and $1,150,148 14,957 19,131
- ------------------------------------------------------------------------------------------------------
Total Assets $ 29,738,680 $ 31,947,580
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- ------------------------------------------------------------------------------------------------------
LIABILITIES AND PARTNERS' EQUITY (DEFICIT):
- ------------------------------------------------------------------------------------------------------
Liabilities:
- ------------------------------------------------------------------------------------------------------
Accounts payable $ 105,669 $ 59,496
- ------------------------------------------------------------------------------------------------------
Other accrued expenses 44,953 40,790
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Due to affiliates 39,082 40,208
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Unearned rent and tenant deposits 174,935 172,231
- ------------------------------------------------------------------------------------------------------
Note payable 1,451,399
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Total Liabilities 364,639 1,764,124
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- ------------------------------------------------------------------------------------------------------
Minority interest in joint partnership 2,481,862 2,795,612
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Partners' equity (deficit):
- ------------------------------------------------------------------------------------------------------
Limited partners 27,186,240 27,657,121
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General partner (294,061) (269,277)
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Total Partners' Equity 26,892,179 27,387,844
- ------------------------------------------------------------------------------------------------------
Total Liabilities and Partners' Equity $ 29,738,680 $ 31,947,580
- ------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31,
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
REVENUE:
- ------------------------------------------------------------------------------------------------------------------------
Rental $ 6,465,170 $ 5,995,824 $ 5,462,738
- ------------------------------------------------------------------------------------------------------------------------
Interest income 107,234 60,204 28,570
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Total Revenue 6,572,404 6,056,028 5,491,308
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- ------------------------------------------------------------------------------------------------------------------------
EXPENSES:
- ------------------------------------------------------------------------------------------------------------------------
Operating 1,493,285 1,383,594 1,325,571
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Property management fees 387,904 359,655 327,766
- ------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 1,113,748 1,260,049 1,119,109
- ------------------------------------------------------------------------------------------------------------------------
Real estate taxes 465,662 490,913 502,219
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Interest 130,022 96,731 94,915
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Administrative 215,529 179,596 172,236
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Total Expenses 3,806,150 3,636,538 3,541,816
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Minority interest in joint partnership earnings (263,750) (195,781) (128,767)
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Earnings $ 2,502,504 $ 2,223,709 $ 1,820,725
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Earnings per unit of limited partnership interest $ 16.04 $ 14.25 $ 11.67
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Distributions per unit of limited partnership interest $ 19.22 $ 17.03 $ 15.16
- ------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
Limited Partners General Partner Total
- ------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1993 $ 28,585,167 $ (220,433) $ 28,364,734
- ------------------------------------------------------------------------------------------------------------------------
Distributions (2,246,190) (118,219) (2,364,409)
- ------------------------------------------------------------------------------------------------------------------------
Earnings 1,729,689 91,036 1,820,725
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 28,068,666 (247,616) 27,821,050
- ------------------------------------------------------------------------------------------------------------------------
Distributions (2,524,069) (132,846) (2,656,915)
- ------------------------------------------------------------------------------------------------------------------------
Earnings 2,112,524 111,185 2,223,709
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 27,657,121 (269,277) 27,387,844
- ------------------------------------------------------------------------------------------------------------------------
Distributions (2,848,260) (149,909) (2,998,169)
- ------------------------------------------------------------------------------------------------------------------------
Earnings 2,377,379 125,125 2,502,504
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 $ 27,186,240 $ (294,061) $ 26,892,179
- ------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
- ------------------------------------------------------------------------------------------------------------------------
Earnings $ 2,502,504 $ 2,223,709 $ 1,820,725
- ------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile earnings
- ------------------------------------------------------------------------------------------------------------------------
to net cash provided by operating activities:
- ------------------------------------------------------------------------------------------------------------------------
Minority interest in joint partnership earnings 263,750 195,781 128,767
- ------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 1,113,748 1,126,049 1,119,109
- ------------------------------------------------------------------------------------------------------------------------
Changes in operating accounts:
- ------------------------------------------------------------------------------------------------------------------------
Other assets (14,457) (62,984) 85,209
- ------------------------------------------------------------------------------------------------------------------------
Accounts payable 46,173 14,142 (3,626)
- ------------------------------------------------------------------------------------------------------------------------
Other accrued expenses 4,163 (5,805) 10,837
- ------------------------------------------------------------------------------------------------------------------------
Due to affiliates (1,126) 12,689 (4,786)
- ------------------------------------------------------------------------------------------------------------------------
Unearned rent and tenant deposits 2,704 5,395 13,947
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,917,459 3,508,976 3,170,182
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
- ------------------------------------------------------------------------------------------------------------------------
Proceeds from grant of easements 7,599
- ------------------------------------------------------------------------------------------------------------------------
Improvements to storage centers (99,030) (136,846) (118,994)
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (99,030) (136,846) (111,395)
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
- ------------------------------------------------------------------------------------------------------------------------
Payments on note payable (1,451,399) (44,587) (41,096)
- ------------------------------------------------------------------------------------------------------------------------
Distributions to partners (2,998,169) (2,656,915) (2,364,409)
- ------------------------------------------------------------------------------------------------------------------------
Distributions to minority partners in joint partnership (577,500) (75,000) (225,000)
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (5,027,068) (2,776,502) (2,630,505)
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (1,208,639) 595,628 428,282
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 1,877,311 1,281,683 853,401
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 668,672 $ 1,877,311 $ 1,281,683
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
- ------------------------------------------------------------------------------------------------------------------------
Cash paid during period for interest $ 130,022 $ 96,731 $ 94,915
- ------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL: IDS/Shurgard Income Growth Partners L.P. (the Partnership) was
organized under the laws of the State of Washington on September 29, 1987, to
serve as a vehicle for investments in and ownership of, a professionally
managed, real estate portfolio consisting of self storage properties which
provide month-to-month leases for business and personal use. The Partnership
will terminate December 31, 2030, unless terminated at an earlier date. The
general partner is Shurgard Associates L.P., a Washington limited partnership.
As of December 31, 1995, there were approximately 5,750 limited partners in
the Partnership. There were 148,202 units of limited partnership interest
outstanding at a contribution of $250 per unit.
CONSOLIDATED FINANCIAL STATEMENTS: In 1988 the Partnership and Shurgard
Income Properties -- Fund 18 ("Shurgard 18"), an affiliated partnership, formed
a joint venture, Shurgard Joint Partners II ("SJP II"), which purchased four
self storage facilities located in Detroit, Michigan. The Partnership
contributed 70% of the funds needed for the organization of SJP II with Shurgard
18 contributing the remaining 30%.
On March 1, 1994, Shurgard 18 was merged into Shurgard Storage Centers,
Inc. ("SSCI") as part of the consolidation of 17 Shurgard-sponsored limited
partnerships. As a result of the merger, SSCI succeeded to all of Shurgard 18's
interest in SJP II, and assumed its obligations as a partner. The Partnership
consented to SSCI's admission as a successor partner in SJP II. SSCI granted to
the Partnership the right to sell its interest in SJP II at any time in the
future to either SSCI or, at SSCI's request, to any wholly owned subsidiary
thereof, at a price mutually agreeable to the parties or, if no mutual agreement
could be reached, at a price determined through an appraisal process.
The Partnership and SSCI receive cash distributions from SJP II ($1,347,500
to the Partnership in 1995) and are allocated all income, gain, loss and credit
in proportion to their respective capital contributions to SJP II.
The consolidated financial statements include the accounts of the
Partnership and SJP II. All material, interpartnership transactions and
balances have been eliminated. The minority partner's interests in the joint
partnership are shown separately on the accompanying financial statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenue and expenses during the
reporting period. Actual results can differ from those estimates.
CASH EQUIVALENTS: Cash equivalents consist of money market instruments
with original maturities of 90 days or less.
STORAGE CENTERS: Storage centers, including land, buildings and equipment,
are recorded at cost. Depreciation on buildings and equipment is recorded on a
straight-line basis over their estimated useful lives which range from three to
thirty years.
AMORTIZABLE ASSETS: Amortizable assets, which consist primarily of non-
compete covenants and loan costs, are amortized over their expected useful lives
of two to five years.
RENTAL REVENUE: Rental revenue is recognized as earned under accrual
accounting principles.
TAXES ON INCOME: The consolidated financial statements do not reflect a
provision for Federal income taxes because such taxes, including a proportionate
interest in any SJP II taxes, are the responsibility of the individual partners.
LITIGATION: The Partnership has a policy of accruing for probable losses,
which if any, could be material to the future financial position or results of
operations at December 31, 1995. There are currently no known probable
losses, therefore, no such accruals have been made.
EARNINGS PER UNIT OF LIMITED PARTNERSHIP INTEREST: Earnings per unit of
limited partnership interest is based on earnings allocated to the limited
partners divided by the number of limited partnership units outstanding during
the year (148,202 units for each of the three years ended December 31, 1995).
DISTRIBUTIONS PER UNIT OF LIMITED PARTNERSHIP INTEREST: Distributions per
unit of limited partnership interest is based on the total amount distributed to
limited partners divided by the number of limited partnership units outstanding
during the year (148,202 units for each of the three years ended December 31,
1995).
VALUATION OF LONG LIVED ASSETS: The Partnership, using its best
estimates based on reasonable and supportable assumptions and projections,
reviews storage centers and other assets for impairment whenever events or
changes in circumstances have indicated that the carrying amounts of its
assets might not be recoverable. Impaired assets are reported at the lower
of cost or fair value. At December 31, 1995, no assets had been written down.
RECLASSIFICATION: Certain items in the 1993 and 1994 financial statements
have been reclassified to conform with the current year presentation.
NOTE B -- STORAGE CENTERS
Storage centers consist of the following --
DECEMBER 31,
1995 1994
-----------------------------------------------------------------
Land $ 6,429,852 $ 6,429,852
-----------------------------------------------------------------
Buildings 28,463,189 28,390,139
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Equipment 1,200,005 1,174,025
-----------------------------------------------------------------
36,093,046 35,994,016
-----------------------------------------------------------------
-----------------------------------------------------------------
Less accumulated depreciation (7,332,949) (6,223,375)
-----------------------------------------------------------------
$ 28,760,097 $ 29,770,641
NOTE C -- NOTE PAYABLE
At December 31, 1994, the Partnership held a seven year note payable to a
commercial bank bearing interest at 7.75%. On December 6, 1995, the Partnership
repaid the balance of this note.
NOTE D -- TRANSACTIONS WITH AFFILIATES
In connection with the management of both the storage centers and the
Partnership, the Partnership has paid or accrued a monthly management fee
equal to 6% of the properties gross revenue to Shurgard Storage Centers,
Inc., an affiliate of the general partner. On March 24, 1995 the Management
Company of Shurgard Incorporated merged with Shurgard Storage Centers Inc.
Prior to the merger date such fees were paid to the Management Company of
Shurgard Incorporated.
INDEPENDENT AUDITORS' REPORT
General Partners and Limited Partners
IDS/Shurgard Income Growth Partners L.P.
Seattle, Washington
We have audited the accompanying consolidated balance sheets of
IDS/Shurgard Income Growth Partners L.P. and subsidiary as of December 31, 1995
and 1994, and the related consolidated statements of earnings, partners' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of IDS/Shurgard Income Growth
Partners L.P. and subsidiary as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Seattle, Washington
March 1, 1996