MANAGEMENT'S DISCUSSION & ANALYSIS
RESULTS OF OPERATIONS
REVENUE: The Partnership's rental revenue rose $271,000 and $420,000 in
1995 and 1994, respectively. These increases resulted primarily from the rise
in the average rental rate per square foot from $7.78 in 1993 to $8.08 in 1994
to $8.59 in 1995 as well as storage center expansions. Additionally, earnings
increased $120,000 in 1995 and $246,000 in 1994. The average occupancy for all
of the Partnership's storage centers was 87%, 90%, and 91% at December 31, 1995,
1994 and 1993, respectively. Although the average occupancy for the Partnership
decreased three percentage points during 1995, total revenues increased as a
result of the Partnership seeking to maximize revenue 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 $68,000 in 1995 after an $89,000
increase in 1994. Operating expenses for 1995 rose primarily due to 1)
increased hours worked by store managers, 2) higher postage and supply costs, 3)
increased payout of tenant claims and foreclosure expenses and 4) the increase
in utility expense at the Chesapeake storage center due to the new expansion.
Increases in 1994 were primarily attributable to repair and maintenance costs
for the air conditioning unit at T.C. Jester and higher salary cost throughout
the Partnership's storage centers.
Real estate expense has decreased each year from 1993 to 1995. The slight
decrease in 1995 was due to a tax refund received in 1995 as a result of the
successful real estate tax appeal of the Sterling Heights storage center's 1994
assessed value. The decrease in real estate taxes in 1994 was accredited to
winning an appeal for Kennydale's 1993 and 1994 assessed value. The refund due
for 1993 taxes was offset against the taxes due in 1994. The Partnership does
not expect to be able to continue to decrease real estate taxes in the future.
Additionally, interest expense rose $16,000 and $72,000 in 1995 and 1994,
respectively. The increase in 1995 was due to additional borrowings on the
Partnership's line of credit to fund the Chesapeake expansion as well as the
slight rise in interest rates from 8.125% at December 31, 1994 to 8.5% at
December 31, 1995 on the commercial bank note totaling $1,200,000. The increase
in 1994 was due to the Partnership borrowing on their line of credit to finance
the expansion of Newport News North which was subsequently refinanced.
Administrative expenses rose $29,000 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 $460,800 from 1993
to 1994 and $289,500 from 1994 to 1995, reflecting the increase in earnings.
These fluctuations reflect changes in earnings adjusted by the timing of certain
expense payments and payments due to affiliates. Management believes that cash
balances and cash flow from operations will be adequate to support the future
operating needs of the Partnership.
INVESTING ACTIVITIES: During 1994 and 1995 the Partnership invested
approximately $1,200,000 to expand the Chesapeake storage center. This project
entailed the construction of two, one-story buildings adding approximately
26,000 square feet of storage space, as well as the addition of 2,400 square
feet of RV
parking. The new expansion opened the beginning of April 1995 and is currently
76% occupied. The expenditures during 1994 and 1995 were primarily funded from
operating cash flow and cash reserves; the remaining costs were funded from the
line of credit. The expansion of the Partnership's existing facilities provide
an opportunity to increase revenue without a significant increase in operating
costs. In 1993 the Partnership completed the expansion at Newport News North at
a cost of $763,000. This expansion added 26,000 square feet to the existing
33,000 square feet of storage. The additional space includes both climate
controlled and non-climate controlled units.
Additionally, investments in the remaining storage centers have been
$69,000, $51,000, and $47,000 in 1995, 1994, and 1993, respectively. In 1995,
investments included pavement work at the Sterling Heights and Bellefield
storage centers as well as security upgrades at the Orange storage center. The
majority of improvement in 1994 were security upgrades at the Orange and
Sterling Heights storage centers. During 1993 improvements included new
pavement at the Bellefield and Sterling Heights storage centers as well as new
doors installed at the Orange storage center. Planned improvements for 1996
total approximately $91,000 and are expected to be funded from operations of the
Partnership.
FINANCING ACTIVITIES: On May 1, 1995, the Partnership obtained an $850,000
non-revolving line of credit with interest rate of prime plus one half percent,
maturing May 1, 1997. During 1995, the Partnership drew $470,000 on the line of
credit in order to fund the Chesapeake expansion. The Partnership intends to
pay off or refinance this line of credit from operating cash flow over the next
two years. Additionally, in 1994, the Partnership converted its $1,250,000 line
of credit into a seven year note which will mature in March of 2001.
DISTRIBUTIONS TO PARTNERS: Annualized distribution rates were 6.5%, 6.31%
and 6.25% 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 Year Ended December 31,
1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Rental Revenue $ 4,308,603 $ 4,037,720 $ 3,617,849 $ 3,239,555 $ 2,277,377
- ------------------------------------------------------------------------------------------------------
Interest Income $11,044 $19,765 $3,549 $7,191 $ 104,082
- ------------------------------------------------------------------------------------------------------
Earnings $ 1,460,799 $ 1,340,145 $ 1,094,475 $ 967,598 $ 1,133,764
- ------------------------------------------------------------------------------------------------------
Earnings per Unit of
Limited
- ------------------------------------------------------------------------------------------------------
Partnership Interest $ 12.06 $ 11.06 $ 9.03 $ 7.99 $ 9.36
- ------------------------------------------------------------------------------------------------------
Distributions to
- ------------------------------------------------------------------------------------------------------
Limited Partners $ 1,870,536 $ 1,816,578 $ 1,798,591 $ 1,798,591 $ 1,798,591
- ------------------------------------------------------------------------------------------------------
Distributions per Unit of
- ------------------------------------------------------------------------------------------------------
Limited Partnership
- ------------------------------------------------------------------------------------------------------
Interest $16.25 $15.78 $15.62 $15.62 $15.62
- ------------------------------------------------------------------------------------------------------
Total Assets $25,685,359 $25,866,021 $26,321,921 $26,123,867 $26,371,546
- ------------------------------------------------------------------------------------------------------
Total Debt $ 3,337,661 $ 2,938,331 $ 3,005,313 $ 1,793,868 $ 1,240,000
- ------------------------------------------------------------------------------------------------------
Partners' Equity $21,958,768 $22,466,953 $23,038,996 $23,837,776 $24,763,433
- ------------------------------------------------------------------------------------------------------
BALANCE SHEETS
December 31,
1995 1994
- -------------------------------------------------------------------------------
Assets:
- -------------------------------------------------------------------------------
Cash and cash equivalents $ 455,167 $ 384,867
- -------------------------------------------------------------------------------
Storage centers, net 24,965,503 25,126,512
- -------------------------------------------------------------------------------
Other assets 155,712 174,768
- -------------------------------------------------------------------------------
Amortizable assets, less accumulated
- -------------------------------------------------------------------------------
amortization of $350,718 and $279,821 108,977 179,874
- -------------------------------------------------------------------------------
Total Assets $25,685,359 $25,866,021
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Liabilities and partners' equity (deficit):
- -------------------------------------------------------------------------------
Liabilities:
- -------------------------------------------------------------------------------
Accounts payable and other accrued expenses $ 256,049 $ 169,033
- -------------------------------------------------------------------------------
Construction payable 173,572
- -------------------------------------------------------------------------------
Unearned rent and tenant deposits 132,881 118,132
- -------------------------------------------------------------------------------
Line of credit 470,000
- -------------------------------------------------------------------------------
Notes payable 2,867,661 2,938,331
- -------------------------------------------------------------------------------
Total Liabilities 3,726,591 3,399,068
- -------------------------------------------------------------------------------
Partners' equity (deficit):
- -------------------------------------------------------------------------------
Limited partners 22,140,440 22,623,217
- -------------------------------------------------------------------------------
General partner (181,672) (156,264)
- -------------------------------------------------------------------------------
Total Partners' Equity 21,958,768 22,466,953
- -------------------------------------------------------------------------------
Total Liabilities and Partners'
Equity $25,685,359 $25,866,021
- -------------------------------------------------------------------------------
See notes to financial statements.
STATEMENTS OF EARNINGS
Year Ended December 31,
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
REVENUE:
- ---------------------------------------------------------------------------------------------------------------
Rental $4,308,603 $4,037,720 $3,617,849
- ---------------------------------------------------------------------------------------------------------------
Interest income 11,044 19,765 3,549
- ---------------------------------------------------------------------------------------------------------------
Total Revenue 4,319,647 4,057,485 3,621,398
- ---------------------------------------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------------------------------------------------
Operating 943,532 875,926 786,459
- ---------------------------------------------------------------------------------------------------------------
Property management fees 258,253 242,259 217,121
- ---------------------------------------------------------------------------------------------------------------
Depreciation 848,364 832,554 814,883
- ---------------------------------------------------------------------------------------------------------------
Real estate taxes 324,450 327,337 337,741
- ---------------------------------------------------------------------------------------------------------------
Interest 254,026 237,962 166,036
- ---------------------------------------------------------------------------------------------------------------
Amortization 70,897 70,835 78,580
- ---------------------------------------------------------------------------------------------------------------
Administrative 159,326 130,467 126,103
- ---------------------------------------------------------------------------------------------------------------
Total Expenses 2,858,848 2,717,340 2,526,923
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
EARNINGS $1,460,799 $1,340,145 $1,094,475
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
EARNINGS PER UNIT OF LIMITED PARTNERSHIP INTEREST $ 12.06 $ 11.06 $ 9.03
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS PER UNIT OF LIMITED PARTNERSHIP INTEREST $ 16.25 $ 15.78 $ 15.62
- ---------------------------------------------------------------------------------------------------------------
See notes to financial statements.
STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
Limited Partners General Partner Total
- ---------------------------------------------------------------------------------------------------------------
Balance, January 1, 1993 $23,925,497 $ (87,721) $23,837,776
- ---------------------------------------------------------------------------------------------------------------
Distributions (1,798,591) (94,664) (1,893,255)
- ---------------------------------------------------------------------------------------------------------------
Earnings 1,039,751 54,724 1,094,475
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 23,166,657 (127,661) 23,038,996
- ---------------------------------------------------------------------------------------------------------------
Distributions (1,816,578) (95,610) (1,912,188)
- ---------------------------------------------------------------------------------------------------------------
Earnings 1,273,138 67,007 1,340,145
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 22,623,217 (156,264) 22,466,953
- ---------------------------------------------------------------------------------------------------------------
Distributions (1,870,536) (98,448) (1,968,984)
- ---------------------------------------------------------------------------------------------------------------
Earnings 1,387,759 73,040 1,460,799
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $22,140,440 $(181,672) $21,958,768
- ---------------------------------------------------------------------------------------------------------------
See notes to financial statements.
STATEMENTS OF CASH FLOWS
Year Ended December 31,
1995 1994 1993
OPERATING ACTIVITIES:
- ---------------------------------------------------------------------------------------------------------------------
Earnings $ 1,460,799 $ 1,340,145 $ 1,094,475
- ---------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile earnings
- ---------------------------------------------------------------------------------------------------------------------
to net cash provided by operating activities:
- ---------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 919,261 903,389 893,463
- ---------------------------------------------------------------------------------------------------------------------
Changes in operating accounts:
- ---------------------------------------------------------------------------------------------------------------------
Other assets 19,056 (41,692) (22,696)
- ---------------------------------------------------------------------------------------------------------------------
Accounts payable and other accrued expenses 87,016 (1,861) (212,815)
- ---------------------------------------------------------------------------------------------------------------------
Unearned rent and tenant deposits 14,749 11,414 (1,796)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,500,881 2,211,395 1,750,631
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
- ---------------------------------------------------------------------------------------------------------------------
Construction of and improvements to storage centers (860,927) (430,410) (809,619)
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
- ---------------------------------------------------------------------------------------------------------------------
Proceeds from (payments on) line of credit 470,000 (1,250,000) 1,250,000
- ---------------------------------------------------------------------------------------------------------------------
Payment of loan costs (38,021) (2,671)
- ---------------------------------------------------------------------------------------------------------------------
Payments on notes payable (70,670) (66,982) (38,555)
- ---------------------------------------------------------------------------------------------------------------------
Proceeds from notes payable 1,250,000
- ---------------------------------------------------------------------------------------------------------------------
Distributions to partners (1,968,984) (1,912,188) (1,893,255)
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,569,654) (2,017,191) (684,481)
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and
- ---------------------------------------------------------------------------------------------------------------------
cash equivalents 70,300 (236,206) 256,531
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents
- ---------------------------------------------------------------------------------------------------------------------
at beginning of year 384,867 621,073 364,542
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 455,167 $ 384,867 $ 621,073
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- ---------------------------------------------------------------------------------------------------------------------
Cash paid during year for interest $ 254,026 $ 237,962 $ 166,036
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
- ---------------------------------------------------------------------------------------------------------------------
Liabilities incurred in connection with
- ---------------------------------------------------------------------------------------------------------------------
the improvement and construction
- ---------------------------------------------------------------------------------------------------------------------
of storage centers $ -- $ 173,572 $ --
- ---------------------------------------------------------------------------------------------------------------------
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL: IDS/Shurgard Income Growth Partners L.P. II (the Partnership) was
organized under the laws of the State of Washington on November 15, 1988, 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. II, a Washington limited
partnership.
As of December 31, 1995, there were approximately 4,200 limited partners in
the Partnership. There were 115,100 units of limited partnership interest
outstanding at a contribution of $250 per unit.
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, consisting of loan costs and non-
compete covenants, are amortized over their expected useful lives of three to
eight years.
RENTAL REVENUE: Rental revenue is recognized as earned under accrual
accounting principles.
TAXES ON INCOME: The financial statements do not reflect a provision for
Federal income taxes because such 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. As of 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 (115,110 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 (115,110 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.
NOTE B - STORAGE CENTERS
Storage centers consist of the following :
December 31,
1995 1994
----------------------------------------------------------------
Land $ 6,014,514 $ 5,848,181
----------------------------------------------------------------
Buildings 22,762,245 22,381,990
----------------------------------------------------------------
Equipment 872,980 732,213
----------------------------------------------------------------
29,649,739 28,962,384
----------------------------------------------------------------
Less accumulated depreciation (4,684,236) (3,835,872)
----------------------------------------------------------------
$24,965,503 $25,126,512
----------------------------------------------------------------
Construction in progress was $625,437 in 1994 and is included in
Buildings.
NOTE C - TRANSACTIONS WITH AFFILIATES
In connection with the management of both the storage centers and the
Partnership, the Partnership has paid or accrued management expenses,
reimbursements, and a monthly property 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.
Year Ended December 31,
1995 1994 1993
----------------------------------------------------------------
Partnership management expenses
----------------------------------------------------------------
and reimbursement at cost $ 54,700 $ 64,800 $ 83,700
----------------------------------------------------------------
Property management fees 258,253 242,259 217,121
----------------------------------------------------------------
NOTE D - NOTE PAYABLE
December 31,
1995 1994
----------------------------------------------------------------
Note payable to a commercial
----------------------------------------------------------------
bank. Secured by real estate
----------------------------------------------------------------
and payable in monthly
----------------------------------------------------------------
installments of $15,056,
----------------------------------------------------------------
including principal and
----------------------------------------------------------------
interest at 8%, due October
----------------------------------------------------------------
1999. The note reprices in
----------------------------------------------------------------
September 1997 and can be
----------------------------------------------------------------
fixed for various periods at
----------------------------------------------------------------
the Partnership's option. $1,668,337 $1,713,603
----------------------------------------------------------------
Note payable to a commercial
----------------------------------------------------------------
bank. Secured by real estate
----------------------------------------------------------------
and payable in monthly
----------------------------------------------------------------
installments of $10,837,
----------------------------------------------------------------
including principal and interest
----------------------------------------------------------------
at 8.25%, due March 2001. The
----------------------------------------------------------------
note reprices in September 1996
----------------------------------------------------------------
and can be fixed for various
----------------------------------------------------------------
periods at the Partnership's
----------------------------------------------------------------
option. 1,199,324 1,224,728
----------------------------------------------------------------
$2,867,661 $2,938,331
----------------------------------------------------------------
Based on the borrowing rates currently available to the Partnership
for bank loans with similar terms and average maturities, the fair value of the
fixed rate long-term debt which matures October, 1999 is estimated to be
$1,765,000. The note maturing March 2001 reprices to market every six months,
accordingly, the recorded value approximates fair value.
The approximate maturities of principal on these notes payable over the
next five years are as follows:
----------------------------------------------------------------
1996 $ 78,207
----------------------------------------------------------------
1997 84,856
----------------------------------------------------------------
1998 92,071
----------------------------------------------------------------
1999 99,899
----------------------------------------------------------------
2000 108,395
----------------------------------------------------------------
thereafter 2,404,233
----------------------------------------------------------------
$2,867,661
----------------------------------------------------------------
On May 1, 1995 the Partnership obtained an $850,000 non-revolving line of
credit with interest rate of prime plus one half percent (9% at December 31,
1995), maturing May 1, 1997. During the year, the Partnership drew $470,000 on
the line of credit in order to fund the Chesapeake expansion.
NOTE E - LEASE
The Partnership leases retail space at the Kennydale storage center to a
single tenant under a noncancellable operating lease which expires October 31,
2003. The lease is renewable at current market rates at that time. Future
minimum lease receipts are as follows:
----------------------------------------------------------------
1996 $ 131,818
----------------------------------------------------------------
1997 136,948
----------------------------------------------------------------
1998 137,938
----------------------------------------------------------------
1999 126,084
----------------------------------------------------------------
2000 126,084
----------------------------------------------------------------
2001 to 2003 378,252
----------------------------------------------------------------
$1,037,124
----------------------------------------------------------------
Independent Auditors' Report
General Partners and Limited Partners
IDS/Shurgard Income Growth Partners L.P. II
Seattle, Washington
We have audited the accompanying balance sheets of IDS/Shurgard Income
Growth Partners L.P. II as of December 31, 1995 and 1994, and the related
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 financial statements present fairly, in all
material respects, the financial position of the Partnership as of December 31,
1995 and 1994, and the results of its operations and its 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