UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended March 31, 2001
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: 001-12910
STORAGE USA, INC.
(Exact name of registrant as specified in its charter)
Tennessee
(State or other jurisdiction of
incorporation or organization)
62-1251239
(IRS Employer
Identification Number)
175 Toyota Plaza, Suite 700, Memphis, TN
(Address of principal executive offices)
38103
(Zip Codes)
Registrant's telephone number, including area code: (901) 252-2000
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. ( X) Yes ( ) NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $.01 par value, 27,177,279 shares outstanding at May 1, 2001.
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Storage USA, Inc.
Consolidated Statements of Operations
(unaudited)
(amounts in thousands, except per share data)
Three months Three months
ended ended
March 31, 2001 March 31, 2000
------------------ -------------------
Operating Revenues:
Rental and other property income $66,964 $59,548
Service and other income 1,543 1,951
------------------ -------------------
Total operating revenues 68,507 61,499
------------------ -------------------
Operating Expenses:
Cost of property operations & maintenance 17,993 15,713
Taxes 5,252 5,187
Costs of providing services 1,495 1,285
General & administrative 4,281 2,265
Depreciation & amortization 9,974 9,193
------------------ -------------------
Total operating expenses 38,995 33,643
------------------ -------------------
Income from operations 29,512 27,856
Other income (expense):
Interest expense, net (12,332) (10,677)
------------------ -------------------
Income before minority interest 17,180 17,179
and gain on exchange
Gain on exchange of storage facilities -
890
------------------ -------------------
Income before minority interest 17,180 18,069
Minority interest (3,194) (3,391)
------------------ -------------------
Net income $13,986 $14,678
================== ===================
Basic net income per share $ 0.52 $ 0.53
================== ===================
Diluted net income per share $ 0.51 $ 0.53
================== ===================
See Notes to Consolidated Financial Statements
2
Storage USA, Inc.
Consolidated Balance Sheets
(amounts in thousands, except share data)
as of as of
March 31, 2001 December 31, 2000
-------------------- --------------------
(unaudited)
Assets
Investments in storage facilities, at cost $1,737,591 $1,710,725
Accumulated depreciation (142,581) (132,527)
-------------------- --------------------
1,595,010 1,578,198
Cash & cash equivalents 1,605 5,045
Advances and investments in real estate 137,079 136,125
Other assets 35,941 47,402
-------------------- --------------------
Total assets $1,769,635 $1,766,770
=================== ====================
Liabilities & shareholders' equity
Notes payable $ 600,000 $ 600,000
Line of credit borrowings 171,848 168,333
Mortgage notes payable 66,232 66,845
Other borrowings 38,998 38,804
Accounts payable & accrued expenses 29,144 26,498
Dividends payable 19,241 18,643
Rents received in advance 12,916 10,783
Deferred gain from contribution of self-storage facilities 37,175 37,175
-------------------- --------------------
Total liabilities 975,554 967,081
-------------------- --------------------
Minority interests
Preferred units 65,000 65,000
Common units 80,101 82,542
-------------------- --------------------
Total minority interests 145,101 147,542
-------------------- --------------------
Commitments and contingencies
Shareholders' equity:
Common stock $.01 par value, 150,000,000 shares
authorized, 27,099,569 and 27,019,095
shares issued and outstanding 271 270
Paid-in capital 729,070 727,022
Notes receivable - officers (11,301) (11,310)
Deferred compensation
(223) (252)
Accumulated deficit (15,831) (15,831)
Distributions in excess of net income (53,006) (47,752)
-------------------- --------------------
Total shareholders' equity 648,980 652,147
-------------------- --------------------
Total liabilities & shareholders' equity $1,769,635 $1,766,770
==================== ====================
3
See Notes to Consolidated Financial Statements
Storage USA, Inc.
Consolidated Statements of Cash Flows
(unaudited)
(amounts in thousands)
Three months Three months
ended ended
March 31, 2001 March 31, 2000
---------------------------------------
Operating activities: $ 13,986 $ 14,678
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 9,974 9,193
Minority interest 3,194 3,391
Gain on exchange of self-storage facilities - (890)
Changes in assets and liabilities:
Other assets 4,343 (2,206)
Other liabilities 3,002 1,404
---------------------------------------
Net cash provided by operating activities 34,499 25,570
=======================================
Investing activities:
Acquisition and improvements of storage facilities (7,587) (4,263)
Proceeds from sale/exchange of storage facilities - 21,350
Development of storage facilities (7,671) (10,414)
Advances and investments in real estate (6,961) (10,330)
Proceeds from liquidation and distributions from advances
and investments in real estate 8,282 2,013
Issuances of notes receivable (26) (92)
Payments on notes receivable 5,171 2,022
---------------------------------------
Net cash (used in)/provided by investing activities (8,792) 286
=======================================
Financing activities:
Net (repayments)/borrowings under line of credit (6,485) 3,182
Mortgage principal payments (341) (313)
Other borrowings principal payments/payoffs (100) (100)
Cash dividends (18,643) (18,831)
Preferred unit dividends (1,442) (1,442)
Repurchase of common stock - (6,153)
Payments on notes receivable - officers 9 43
Distribution to minority interests (2,304) (2,491)
Other financing transactions - net 159 107
---------------------------------------
Net cash used in financing activities (29,147) (25,998)
=======================================
Net decrease in cash and equivalents (3,440) (142)
Cash and equivalents, beginning of period 5,045 1,699
---------------------------------------
Cash and equivalents, end of period $ 1,605 $ 1,557
=======================================
Supplemental schedule of non-cash activities:
Common Stock issued in exchange for notes receivable $ - $ 57
Equity share of joint venture received for
disposition of assets - 6,526
Note received in consideration for undepreciated land sold - 2,200
Partnership Units exchanged for shares of common stock 2,815 5,604
=======================================
See Notes to Consolidated Financial Statements
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
1. Unaudited Interim Financial Statements
References to the Company include Storage USA, Inc. ("the REIT") and
SUSA Partnership, L.P. (the "Partnership"), its principal operating
subsidiary. Interim consolidated financial statements of the Company
are prepared pursuant to the requirements for reporting on Form 10-Q.
Accordingly, certain disclosures accompanying annual financial
statements prepared in accordance with generally accepted accounting
principles are omitted. In the opinion of management, all adjustments,
consisting solely of normal recurring adjustments, necessary for the
fair presentation of consolidated financial statements for the interim
periods have been included. The current period's results of operations
are not necessarily indicative of results that ultimately may be
achieved for the year. The interim consolidated financial statements
and notes thereto should be read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-K for
the year ended December 31, 2000 as filed with the Securities and
Exchange Commission.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amount reported in the financial
statements and accompanying notes. Actual results could vary from these
estimates.
2. Organization
Storage USA, Inc. (the "Company") a Tennessee corporation, was formed
in 1985 to acquire, develop, construct, franchise, own and operate
self-storage facilities throughout the United States. The Company is
structured as an umbrella partnership real estate investment trust
("UPREIT") in which substantially all of the Company's business is
conducted through SUSA Partnership, L.P. (the "Partnership"). Under
this structure, the Company is able to acquire self-storage facilities
in exchange for units of limited partnership interest in the
Partnership ("Units"), permitting the sellers to at least partially
defer taxation of capital gains. At March 31, 2001 and December 31,
2000, respectively, the Company owned approximately 89.0% and 88.8% of
the partnership interest in the Partnership.
In 1996, the Company formed Storage USA Franchise Corp ("Franchise"), a
Tennessee corporation. From the initial inception of Franchise until
December 31, 2000, the Partnership owned 100% of its non-voting common
stock, and accounted for Franchise under the equity method. The
Partnership included its 97.5% share of the profit or loss of Franchise
in Service and Other Income as part of income from equity investments,
and its share of the net assets of Franchise in Other Assets. On
January 2, 2001, the Company acquired all of the outstanding voting
stock of Franchise for total consideration of $203 thousand. The voting
stock was acquired from the Company's Chief Executive Officer and
President in a Board approved transaction. Accordingly, commencing in
2001, the Company consolidates Franchise for accounting purposes. Also
effective as of the beginning of the year was the Company's election of
Franchise as a taxable REIT subsidiary under the REIT provisions of the
Ticket to Work and Work Incentives Improvement Act of 1999.
3. Summary of Significant Accounting Policies
Rental and Other Property Income
Rental and other property income consists of rental income plus other
income from property specific activities (rental of floor and storage
space for locks and packaging material, truck rentals and ground rents
for cellular telephone antenna towers and billboards). Below is a
summary of first quarter rental and other property income:
Three months Three months
ended ended
March 31, 2001 March 31, 2000
---------------------------------------------------------------------------------
(in thousands)
Rental Income: $ 65,904 $ 58,446
Other property specific income: 1,060 1,102
--------------------------------------
Rental and other property income $ 66,964 $ 59,548
======================================
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
March 31, 2001
Service and Other Income
Service and other income consists of revenue derived from providing
services to third parties and related joint ventures and the Company's
proportionate share of the net income of equity investments, including
joint ventures. The services provided by the Company include the
management of self-storage facilities, general contractor, development
and acquisition services provided to the GE Capital Corp Development
and Acquisition Ventures ("GE Capital Ventures"), and services provided
by Franchise Corp. With the January 1, 2001 implementation of the REIT
provisions of the Ticket to Work and Work Incentives Improvement Act of
1999 (the "Act"), taxable REIT subsidiaries gained the ability to
provide "non-customary" services to tenants. Accordingly, one of the
services now being provided by Franchise Corp. is the offering to the
Company's customers direct access to tenant insurance, which insures
their goods against described perils. With the consolidation of
Franchise, first quarter 2001 tenant insurance income plus royalty fees
from franchisees are included in Franchise services income. Below is a
summary of first quarter service and other income:
Three months Three months
ended ended
March 31, 2001 March 31, 2000
---------------------------------------------------------------------------------
(in thousands)
Management fees $ 855 $ 612
Acquisition, Development and
General Contractor fees 165 993
Franchise services income 772 -
Income (loss) from Equity Investments (249) 346
----------------------------------------
Total service and other income: $ 1,543 $ 1,951
========================================
Interest Expense, net
Interest income and expense are netted together and the breakout of
income and expense is as follows:
Three months Three months
ended ended
March 31, 2001 March 31, 2000
---------------------------------------------------------------------------------
(in thousands)
Interest expense $ 15,408 $ 14,016
Interest income (3,076) (3,339)
------------------------------------------
Net interest expense $ 12,332 $ 10,677
==========================================
Reclassifications
Certain previously reported amounts have been reclassified to conform
to the current financial statement presentation with no impact on
previously reported net income or shareholders' equity.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
March 31, 2001
4. Investment in Storage Facilities
Investments in storage facilities consisted of the following at March
31, 2001 and December 31, 2000:
March 31, 2001 December 31, 2000
----------------------------------------------------------------------------------------
(in thousands)
Land $ 419,628 $ 418,507
Buildings and improvements 1,209,123 1,197,701
Tenant improvements 8,886 7,338
Furniture, fixtures and equipment 44,484 42,525
Development in progress, including land 55,470 44,654
-------------------------------------------
Total 1,737,591 1,710,725
Less: accumulated depreciation (142,581) (132,527)
-------------------------------------------
$ 1,595,010 $ 1,578,198
===========================================
The preceding cost balances include facilities acquired through capital
leases of $31.5 million at March 31, 2001 and December 31, 2000. Also
included above are $25.3 million at March 31, 2001 and $22.8 at
December 31, 2000 of corporate office furniture and fixtures.
Accumulated depreciation associated with the facilities acquired
through capital leases was $1.6 million at March 31, 2001 and $1.4
million at December 31, 2000.
The Company acquired one self-storage facility for $4.6 million during
the first quarter. The Company also opened one developed facility in
the first quarter at a total cost of approximately $6.4 million.
5. Advances and Investments in Real Estate
Advances and investments in real estate consisted of the following at
March 31, 2001 and December 31, 2000:
March 31, 2001 December 31, 2000
--------------------------------------------------------------------------------
(in thousands)
Advances to franchisees: $ 110,661 $ 113,272
Fidelity joint venture: (400) (300)
GE joint ventures: 26,027 20,758
Other joint ventures: 791 2,395
----------------------------------------
Total advances & investments $ 137,079 $ 136,125
========================================
Advances
As of March 31, 2001 and December 31, 2000, $110.7 million and $113.3
million respectively of advances had been made by the Company to
franchisees of Franchise to fund the development and construction of
franchised self-storage facilities. The loans are collateralized by the
property.
Joint Ventures
Fidelity Venture
On June 7, 1999, the Company formed a joint venture with Fidelity
Management Trust Company (the "Fidelity Venture"). The Company
contributed 32 self-storage facilities with a fair value of $144.0
million to the Fidelity Venture in return for a 25% interest and cash
proceeds of approximately $131.0 million. The Company accounts for its
investment in the Fidelity Venture under the equity method.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
March 31, 2001
The Company recognized $328 thousand in equity earnings from the
Fidelity Venture and $350 thousand in management fees for operating the
venture's properties in the first quarter of 2001, compared to $272
thousand and $323 thousand, respectively, in the first quarter of 2000.
As of March 31, 2001 and December 31, 2000, the Company had recorded
negative investment balances in the Fidelity Venture of $400 and $300
thousand, respectively. The following table summarizes certain
financial information related to the Fidelity Venture:
Three months Three months
ended ended
March 31, 2001 March 31, 2000
----------------------------------------------------------------------
(in thousands)
Income Statement:
Property revenues $ 5,828 $ 5,349
Property expenses 2,007 1,859
Net Operating Income 3,821 3,490
Net income 1,313 1,087
Balance Sheet:
Total assets $146,456 $149,235
Total debt 91,306 92,655
GE Capital Ventures
On December 1, 1999, the Company formed two joint ventures with GE
Capital providing for a total investment capacity of $400 million for
acquisitions and development of self-storage facilities. The Company
has a 25% interest in the $160 million Development Venture and a 16.7%
interest in the $240 million Acquisition Venture. All of the properties
acquired and developed by the ventures are operated by Storage USA
under a management contract. In addition to the property management,
Storage USA provides certain fee-based services for the ventures,
including identifying suitable development and acquisition
opportunities and general contractor services. The Company accounts for
these joint ventures under the equity method of accounting.
We transferred nine projects in various stages of development into the
GE Capital Development Venture during the first quarter of 2000. These
projects had a total projected cost of $53.0 million, $26.0 million of
which represented the Company's total costs as of March 31, 2000. We
received $19.9 million in cash, and recorded an investment in the
venture of $6.5 million, representing a 25% interest. As of March 31,
2001, six properties were open and operating and three remained in
design and construction within the Development Venture. During the
first quarter of 2001, the Acquisition Venture acquired two properties
and leasehold interests in five others for a cost of approximately
$23.3 million, bringing the total number of operating properties within
the Venture to 13 as of March 31, 2001. Of the properties acquired
during the first quarter of 2001, six are located in the Boston
metropolitan area and one is located in Northern New Jersey.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
March 31, 2001
The Company has recognized certain fees related to the GE Capital
Ventures as summarized below. The 2000 totals reflect fees generated by
the initial transfer of the nine development projects to the
Development Venture.
Three months Three months
ended ended
March 31, 2001 March 31, 2000
----------------------------------------------------------------------------
(in thousands)
Acquisition, Development and
General Contractor fees $ 291 $ 993
Management fees 163 -
-------------------------------------
Total service and other income: $ 454 $ 993
=====================================
The Company has recognized a $140 thousand loss in equity earnings from
the GE Capital Ventures for the first quarter. The Company has also
recognized $89 thousand in amortization expense for the three months
ended March 31, 2001 for costs relating to the amortization of the
difference between the Company's cost and the underlying equity in the
Ventures' net assets. As of March 31, 2001 and December 31, 2000, the
Company had combined recorded investments of $26.0 million and $20.8
million, respectively, in the GE Capital Ventures. The following table
summarizes certain financial information related to the Ventures for
the quarter ended March 31, 2001. There are no comparable amounts
available for the same period in 2000 due to the timing of the
formation of the ventures, as noted above.
Development Acquisition
Venture Venture Total
----------------------------------------------------------------------------------
(in thousands)
Income Statement:
Property revenues $ 361 $ 2,242 $ 2,603
Property expenses 478 1,106 1,584
Net Operating Income (118) 1,136 1,018
Net income (667) 162 (505)
Balance Sheet:
Total assets $ 45,040 $ 74,959 $ 119,999
Total third party debt 21,395 15,143 36,535
Other Ventures
SUSA Partnership has equity interests in several single facility joint
ventures. Franchise has equity interests in a number of franchisee
joint ventures which are now included in advances and investments in
real estate. Prior to the first quarter of 2001, these equity interests
were included in Other Assets as part of the Company's recording of its
share of the overall net assets of Franchise.
The decline in Other Ventures from $2.4 million at December 31, 2000 to
$791 thousand at March 31, 2001 is primarily due to the consolidation
of Franchise and the related inclusion of its equity interest in
franchisee properties as described above.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
March 31, 2001
6. Other Assets
As of As of
March 31, 2001 December 31, 2000
----------------------------------------------------------------------------------------
(in thousands)
Deposits $ 3,490 $ 4,449
Accounts receivable 3,733 4,192
Mortgages receivable 567 4,019
Notes receivable 3,445 6,389
Other receivables 9,906 8,237
Advancements and investments in Franchise - 9,464
Deferred costs of issuances of unsecured notes
(net of amortization) 7,936 8,291
Other 6,864 2,361
--------------------------------------
Total Other Assets $ 35,941 $ 47,402
--------------------------------------
7. Lines of Credit, Mortgages Payable, and Other Borrowings
SUSA Partnership can borrow under a $200 million line of credit with a
group of commercial banks and under a $40 million line of credit with a
commercial bank. Franchise can borrow under a $10 million line of
credit with a commercial bank. The lines bear interest at various
spreads of LIBOR. The following table lists additional information
about the lines of credit.
Line of Credit Borrowings
As of March 31, 2001 SUSA Partnership Franchise
------------------------------------------------------------------
(in thousands)
Total lines of credit $ 240,000 $10,000
Borrowings outstanding $ 168,848 10,000
Weighted average daily interest
rate year-to-date 7.17% 7.14%
The Company from time to time assumes mortgages on facilities acquired.
Certain mortgages were assumed at above market interest rates. Premiums
were recorded upon assumption and amortized using the interest method
over the terms of the related debt. The following table provides
information about the mortgages:
Mortgage Notes Payable
as of March 31, 2001 Face Amount Franchise
-----------------------------------------------------------------
(in thousands)
Fixed rate $ 55,841 2000-2021
Variable rate 5,194 2006-2016
------------------------------------
$ 61,035
Premiums 5,197
---------------
Mortgage notes payable $ 66,232
===============
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
March 31, 2001
The Company has other borrowings used in the financing of property
acquisitions. The following table provides information about the other
borrowings.
Other Borrowings
as of March 31, 2001 Face Amount Carry Value Imputed Rate
---------------------------------------------------------------------------------
(in thousands)
Non-interest bearing notes $ 5,150 $ 4,986 7.50%
Deferred units 11,000 10,180 7.50%
Capital Leases - 23,832 7.50%
----------------------------------------------------
$ 16,150 $ 38,998
=================================
During the three months ended March 31, 2001, total interest paid on
all debt was $12.7 million and total interest capitalized for
construction costs was $1.1 million.
8. Income per Share
Basic and diluted income per share is calculated as presented in the
following table:
Three months Three months
ended ended
March 31, 2001 March 31, 2000
---------------------------------------------------------------------------------------------
(in thousands except per share data)
Basic net income per share:
Net income $ 13,986 $ 14,678
Basic weighted average
common shares outstanding 27,075 27,850
-----------------------------------------
Basic net income per share $ 0.52 $ 0.53
-----------------------------------------
Diluted net income per share:
Net income $ 13,986 $ 14,678
Minority interest relating to limited
partners of the Partnership 1,732 1,905
-----------------------------------------
Net income before minority interest relating
to limited partners of the Partnership $ 15,718 $ 16,583
Basic weighted average
common shares outstanding 27,075 27,850
Weighted average Partnership Units
outstanding 3,367 3,538
Basic weighted average common shares
and partnership units outstanding 30,442 31,388
Dilutive effect of stock options 214 53
-----------------------------------------
Diluted weighted average common shares
and partnership units outstanding 30,656 31,441
-----------------------------------------
Diluted net income per share $ 0.51 $ 0.53
=========================================
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
March 31, 2001
9. Commitments
As of March 31, 2001, the Company is committed to advance an additional
$4.9 million to franchisees of Franchise for the construction of
self-storage facilities. These advances are collateralized by the
facility. The Company is a limited guarantor on $6.0 of loan
commitments made by third party lenders to franchisees of Franchise.
This entire amount has been funded as of March 31, 2001.
10. Subsequent Events
On April 26, 2001, the Company opened a newly developed facility in
Santa Rosa, California at an approximate cost of $5.9 million. The
Company has entered into no further property acquisition contracts to
date.
11. Legal Proceedings
On July 22, 1999, a purported statewide class action was filed against
the REIT and Partnership in the Circuit Court of Montgomery County,
Maryland, under the style Ralph Grunewald v. Storage USA, Inc. and SUSA
Partnership, L.P., case no. 201546V, seeking recovery of certain late
fees paid by tenants and an injunction against further assessment of
similar fees. The Company filed a responsive pleading on September 17,
1999, setting out its answer and affirmative defenses. The Company
believes that it has defenses to the claims in the suit and intends to
vigorously defend it. The Plaintiff filed a Motion for Partial Summary
Judgment and a Motion for Class Certification, but before Storage USA
was required to respond to these motions, the case was stayed until
June 2001. The stay was entered in part because of a new statute passed
by the Maryland legislature relating to late fees. The
constitutionality of that statute has been challenged in an unrelated
litigation not involving the Company.
On November 15, 1999, a purported nationwide class action was filed
against the REIT and Partnership in the Supreme Court of the State of
New York, Ulster County, under the style West 125th Street Associates,
L.L.C. v. Storage USA, Inc. and SUSA Partnership, L.P., case no
99-3278, seeking the recovery of certain late and administrative fees
paid by tenants and an injunction against similar fees. The Company
filed a responsive pleading on January 28, 2000 and the case was
transferred to New York County, case no. 401589/00. On July 6, 2000 the
Plaintiff filed an Amended Complaint and a Motion for Class
Certification. On February 6, 2001, the New York Supreme Court, in an
oral ruling by Justice Gammerman, declined to certify either a New York
or nationwide class. The ruling may be appealed by the plaintiffs.
While the ultimate resolution of the cases discussed above will not
have a material adverse effect on the Company's financial position, if
during any period the potential contingency should become probable and
quantifiable, the results of operations in such period could be
materially affected.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the consolidated financial
condition and results of operations should be read together with the
Consolidated Financial Statements and Notes thereto. References to "we," "our"
or "the Company" include Storage USA, Inc. (the "REIT") and SUSA Partnership,
L.P., the principal operating subsidiary of the REIT (the "Partnership").
The following are definitions of terms used throughout this discussion that
will be helpful in understanding our business.
o Physical Occupancy means the total net rentable square feet rented as of the
date (or period if indicated) divided by the total net rentable square feet
available.
o Scheduled Rent Per Square Foot means the average market rate per square foot
of rentable space.
o Net Rental Income means income from self-storage rentals less discounts.
o Realized Rent Per Square Foot means the annualized result of dividing rental
income, less discounts by total square feet rented.
o Direct Property Operating Cost means the costs incurred in the operation of
a facility, such as utilities, real estate taxes, and on-site personnel.
Costs incurred in the management of all facilities, such as accounting
personnel and management level operations personnel are excluded.
o Net Operating Income ("NOI") means total property revenues less Direct
Property Operating Costs.
o Annual Capitalization Rate ("Cap Rate")/ Yield means NOI of a facility divided
by the total capitalized costs of the
facility.
o Funds from Operations ("FFO") means net income, computed in accordance with
generally accepted accounting principles ("GAAP"), excluding gains (losses)
from debt restructuring and sales of property, plus depreciation and
amortization of revenue-producing property, and after adjustments for
unconsolidated partnerships and joint ventures.
o Same-Store Facilities include all facilities that we owned for the entire
period of both comparison periods. Development properties and expansions
are removed from these groups to avoid skewing the results.
Overview
As of March 31, 2001, we owned, managed and franchised 543 facilities containing
36.5 million square feet in 32 states and the District of Columbia.
Internal Growth
The following table compares Same-Store Facilities (362 properties owned since
January 1, 2000) for the first quarter of 2001 and 2000. Newly developed and
expanded facilities are removed from the same-store pool to avoid skewing the
results.
Quarter Ended Quarter Ended
Same-Store Results March 31, 2001 March 31, 2000 Growth %
- ----------------------------------------------------------------------------------------------
(amounts in thousands except occupancy and per square foot figures)
Revenues $ 60,009 $ 55,237 8.6%
Expenses
Operating Expenses 11,510 10,575 8.8%
Property Tax & Other 6,393 6,166 3.7%
------------------------------------------------------
Total Expenses 17,903 16,741 6.9%
------------------------------------------------------
Net Operating Income $ 42,106 $ 38,496 9.4%
======================================================
Physical Occupancy 84% 83%
Scheduled Rent per Square Foot $ 12.46 $ 11.92 4.5%
Realized Rent per Square Foot $ 11.30 $ 10.51 7.5%
13
o Our Same-Store Facilities achieved 9.4% NOI growth in the first quarter of
2001 as compared to the first quarter of 2000. The growth resulted from
revenue increases of 8.6%, offset by expense growth of 6.9%. We do not
believe that our first quarter Same-Store NOI growth is sustainable and are
estimating that it will moderate during the remaining quarters of 2001 to a
rate of 5.5% to 6.5%.
o Three factors contributed to the revenue increase of 8.6% for the first
quarter of 2001 as compared to the first quarter of 2000: a physical
occupancy increase from 83% to 84%; an increase in scheduled rent per
square foot of 4.5%; and a significant decrease in discounts granted to
tenants. Discounts were $1.3 million less in the first quarter of 2001 for
Same-Store facilities, and were largely responsible for the additional
increase in realized rent per square foot, 7.5%, versus scheduled rent per
square feet, 4.5%.
o Our operating expenses grew 8.8% as compared to the first quarter of 2000
due to increases in utilities, health insurance and snow removal costs.
Meanwhile, property tax and other expenses grew 3.7% as compared to the
first quarter of 2000 due primarily to increased property and liability
insurance premiums.
The following table lists changes in the 10 largest same-store markets on a rent
per square foot basis and occupied square foot basis and the resulting change in
net rental income for the first quarter 2001 over the first quarter 2000. The
largest 10 markets in total represent 68.5% of the same-store NOI.
---------------------------------------
Quarter Ended March 31, 2001 vs.
Quarter Ended March 31, 2000
---------------------------------------
% % % %
Number of Total Change in Change in Change in
of Same-Store Net Rental Realized Occupied
Market Facilities NOI Income(1) RPSF(2) Sq. Ft.
- -------------------------------------------------------------------------------------------------------------------
Los Angeles-Riverside-Orange County, CA 47 17.7% 10.0% 9.9% 0.0%
New York-Northern New Jersey-Long Island 31 16.7% 8.4% 9.0% (0.6%)
Washington-Baltimore, DC-MD-VA-WV 22 9.7% 10.0% 7.8% 2.0%
Miami-Fort Lauderdale, FL 15 6.1% 8.1% 2.7% 5.3%
Philadelphia-Wilmington-Atlantic City, PA-NJ 14 3.4% 3.9% 5.8% (1.9%)
Dallas-Fort Worth, TX 12 3.3% 9.6% 10.1% (0.5%)
San Francisco-Oakland-San Jose, CA 9 3.2% 9.2% 8.1% 1.1%
Memphis, TN 21 2.9% 3.9% 5.6% (1.6%)
Phoenix-Mesa, AZ 15 2.9% 1.5% 2.4% (0.9%)
Detroit, Ann Arbor-Flint, MI 11 2.6% 7.3% 8.5% (1.1%)
(1) The percentage change in Realized Rent per Square Foot plus the percent
change in occupied square feet approximates the percentage change in net
rental income.
(2) Rent Per Square Foot.
External Growth
Our external growth strategy continues to focus on a combination of on-balance
sheet and joint venture activity to facilitate the acquisition of existing
facilities and the development of new properties.
On-Balance Sheet
Within Storage USA, we acquired one self-storage facility during the first
quarter of 2001. The facility is located in the St. Louis, Missouri market,
contains 61 thousand square feet, and required a total investment of
approximately $4.6 million. We anticipate limited acquisition activity within
the REIT for the remainder of 2001.
From a development and expansion perspective, we opened one newly developed
facility within the REIT during the first quarter, producing a total of 79
thousand rentable square feet at a total cost of approximately $6.4 million. We
also completed the expansion of one facility at a cost of approximately $987
thousand, adding an additional 18 thousand square feet. We plan to continue the
development of five new facilities within the REIT. The following chart
summarizes the details of these five projects as well as our expansion projects
under construction or in construction planning as of March 31, 2001:
14
# of Square Expected Investment Remaining
Properties Feet Investment to Date Investment
- ------------------------------------------------------------------------------------------------------------
(amounts in thousands except for number of facilities)
Total development in process 5 479 $ 42,690 $ 33,313 $ 9,377
Total expansions in process 19 435 33,752 10,837 22,915
----------------------------------------------------------------------
Total 24 914 $ 76,442 $ 44,150 $ 32,292
======================================================================
The following table presents the anticipated timing of completion and the total
expected dollar amounts invested in opening the facilities in the process of
being newly developed or expanded.
----------------------------------------------------------------------------------
2nd Qtr 01 3rd Qtr 01 4th Qtr 01 1st Qtr 02 Thereafter Total
----------------------------------------------------------------------------------
(amounts in thousands)
Development $ 22,652 $ - $ 5,438 $ 14,600 $ - $ 42,690
Expansions 2,393 8,841 10,471 5,052 6,995 33,752
----------------------------------------------------------------------------------
Total $ 25,045 $ 8,841 $ 15,909 $ 19,652 $ 6,995 $ 76,442
==================================================================================
Off-Balance Sheet Ventures
As of March 31, 2001, the GE Capital Development Venture discussed in previous
filings had invested $45.0 million, $8.5 million of which represents our
advances and investments. Six properties are open and operating and three
properties remain in design and construction.
During the first quarter of 2001, the GE Capital Acquisition Venture acquired
two properties and leasehold interests in five others for a cost of
approximately $23.3 million. Six of the properties are located in the Boston
metropolitan area and one is located in Northern New Jersey. The GE Acquisition
Venture had invested a total of $75.0 million as of March 31, 2001, $17.5
million of which was funded through our advances and investments.
Other Initiatives
Commencing May 1, 2000, we began offering our customers direct access to tenant
insurance, allowing them the ability to insure their stored goods against
described perils. The net profits from the premiums written during 2000 accrued
to the benefit of a charitable trust we established. With the January 1, 2001
implementation of the REIT provisions of the Ticket to Work and Work Incentives
Improvement Act of 1999 (the "Act"), taxable REIT subsidiaries gained the
ability to provide certain "non-customary" services to tenants. Accordingly,
tenant insurance is now being provided as a service to Storage USA tenants
through Franchise Corp., which is in turn recording the revenues and associated
expenses.
15
Results of Operations
The following table reflects the profit and loss statement for the three months
ended March 31, 2001 and March 31, 2000 based on a percentage of total revenues
and is used in the discussion that follows:
Three months ended
March 31,
2001 2000
- ------------------------------------------------------------
Revenue
Rental and other property income 97.7% 96.8%
Service and other income 2.3% 3.2%
-----------------------
Total Income 100.0% 100.0%
-----------------------
Expenses
Property operations 26.3% 25.6%
Taxes 7.7% 8.4%
Cost of Providing Services 2.2% 2.1%
General and administrative 6.2% 3.7%
Rental and other property income increased $7.4 million, or 12.5% in the quarter
ended March 31, 2001 compared to the same period in 2000. The primary
contributors to the rise in rental and other property income are summarized in
the table below.
Rental Income Growth in 2001 over 2000 for comparable periods
ended March 31
(in thousands)
Prior year acquisitions $ 425
Prior year developments 415
Same-store facilities 4,772
Current year acquisitions 37
Current year developments -
Dispositions (45)
Other 1,812
--------------
$ 7,416
--------------
The largest contributor to the first quarter 2001 increase in rental and other
property income was the Same-Store group of properties. This was due to an
increase in realized rent per square foot of 7.5%, from $10.51 to $11.30,
between March 31, 2000 and 2001, coupled with a physical occupancy increase from
83% to 84%. Rental and other property income from our single first quarter
acquisition yielded another $37 thousand in revenue growth. Timing of 2000
acquisitions and the opening of 2000 developments produced corresponding rental
and other property income growth of $425 thousand and $415 thousand; timing of
2000 dispositions produced a reduction of $45 thousand. Growth in rental and
other property income also occurred due to occupancy increases at our facilities
currently in lease-up (including expansions and pre-2000 developments), a total
of $1.8 million.
Service and other income decreased by $408 thousand from the first quarter of
2000 to the same period in 2001. It also decreased as a percentage of revenue:
from 3.2% in first quarter 2000 to 2.3% in the same period in 2001. The main
contributor to the decrease, $827 thousand, was a reduction in total fees
received from the GE Capital Ventures. This was due to timing. Acquisition fees
rose between the periods as there was no acquisition activity in the first
quarter of 2000. General contractor and development fees decreased as 2000's
fees reflected those accrued on the nine projects transferred to the GE Capital
Development Venture. Income from equity investments also decreased $595 thousand
due to the timing of the GE Capital Ventures, with equity losses recorded from
the Development Venture during the first quarter of 2001 without corresponding
activity during the first quarter of 2000, combined with increases in losses
recognized on equity participations in franchised facilities. The preceding
decreases were partially offset by growth in management fees and Franchise
service income. Management fees increased $243 thousand due to an increased
number of managed and franchised facilities paying fees to us. There were 108
such properties as of March 31, 2000, versus 132 as of March 31, 2001. Franchise
services income, which includes both tenant insurance income
16
and franchise royalty revenue, increased $772 thousand due to no comparable
activity in 2000, as the recognition of tenant insurance income and the
consolidation of Franchise activity did not commence until January 1, 2001.
Below is a summary of first quarter service income:
Three months Three months
ended ended
March 31, 2001 March 31, 2000
- ------------------------------------------------------------------------------
(in thousands)
Management fees $ 855 $ 612
Acquisition, Development and
General Contractor fees 165 993
Franchise services income 772 -
(Loss)/Income from Equity Investments (249) 346
---------------------------------------
Total service and other income: $ 1,543 $ 1,951
=======================================
As a percentage of revenues, cost of property operations and maintenance
increased from the first quarter of 2000 to 2001, 25.6% to 26.3%. The trend for
the cost of property operations as a percentage of revenues is to decrease over
time due to Same-Store Facility revenue growth outpacing expense growth. This
was generally the case here, except for a few notable exceptions. Severe weather
conditions in a number of markets plus escalating energy costs produced a large
increase in utilities expense from 2000 to 2001. The initial harsh winter months
also produced a significant increase in snow removal expense. Health insurance
expense also experienced growth, due to increased claims and number of
participating employees. We believe the growing costs are a national trend,
which we expect will continue. We estimate a 15% to 20% increase in total health
insurance costs for 2001. First quarter 2001 property and liability insurance
costs were also significantly higher than in 2000. Effective July 1, 2000,
higher premiums went into effect relating to our renewal of this coverage for
the policy period July 1, 2000 through June 30, 2001. We expect these premiums
to increase again from 20% to 30% upon our 2001 renewal.
Tax expense as a percentage of revenues was 7.7% for the first quarter of 2001
compared to 8.4% for the same period 2000. Tax expense as a percentage of
revenues tends to trend down as a result of Same-Store Facility revenue growth
outpacing tax expense growth.
Costs of providing services increased from $1.3 million in the first quarter of
2000 to $1.5 million in the same period in 2001, and increased as a percentage
of revenues from 2.1% to 2.2%. This was due primarily to timing related to the
GE Capital Acquisition Venture. No acquisitions were completed by the venture in
the first quarter of 2000, compared to six in the same period in 2001.
Associated acquisition costs mirrored this activity. The costs of providing
management services also increased from 2000 to 2001, as 24 additional managed
properties were added to the Storage USA system between March 31 of 2000 and
2001. Additionally, we recorded costs associated with the tenant insurance
initiative in the first quarter of 2001 compared to no corresponding expenses in
the prior year.
General and administrative expenses ("G&A") as a percentage of revenues
increased from 3.7% in the first quarter of 2000 to 6.2% for the same period of
2001. This was indicative of a G&A expense increase from $2.3 to $4.3 million
between the two periods. Contributing substantially to this G&A growth was the
rent expense increase we experienced in relocating the Memphis, TN corporate
offices in October of 2000. Legal fees increased significantly due to efforts
associated with the cases discussed in the "Legal Proceedings" section and in
previous filings. Higher management bonus accruals during the first quarter of
2001 also impacted G&A growth between the two periods. Total G&A expenses also
grew approximately $400 thousand due to the inclusion of Franchise costs, as
the accounting treatment for Franchise changed from the equity method to
consolidation in January 2001.
Depreciation and amortization expense increased from $9.2 million in the first
quarter of 2000 to $10.0 million for the same period in 2001. This was due to a
$83.2 million increase in depreciable assets since March 31, 2000, $7.7 million
of which was attributable to the consolidation of Franchise.
17
Interest income and expense are netted together and the breakout of income and
expense is as follows:
Three months Three months
ended ended
March 31, 2001 March 31, 2000
- ------------------------------------------------------------------------
(in thousands)
Interest expense $ 15,408 $ 14,016
Interest income (3,076) (3,339)
----------------------------------------
Net interest expense $ 12,332 $ 10,677
========================================
Interest expense grew from $14.0 million in the first quarter of 2000 to $15.4
million during the same period in 2001. The interest expense increase was
primarily from the sources listed in the table below and was offset by
capitalized interest of $1.1 million in the first quarter of 2001 and $1.4
million in the first quarter of 2000.
Three months ended March 31,
-------------------------------------------------------------
2001 2000
-------------------------------------------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Debt Borrowing Interest Rate Borrowing Interest Rate
- --------------------------------------------------------------------------------------------
Notes payable $600,000 7.37% $600,000 7.37%
Lines of credit 177,546 7.17% 128,410 7.23%
Mortgages payable 66,539 7.50% 69,877 7.50%
Leases & other borrowings 38,901 7.50% 42,621 7.50%
Interest income decreased $263 thousand, from $3.3 million in the first quarter
of 2000 to $3.1 million in the same period in 2001. The overall decreases in
advances to franchisees and the decline of interest rates on those loans,
reflecting the change in the prime rate during the first quarter of 2001, were
the primary causes of the reduction in interest income. On March 31, 2000,
advances to franchisees totaled $121.6 million, compared to $110.7 million on
March 31, 2001.
We recorded an $890 thousand gain on the sale of storage facilities in the first
quarter of 2000, due to the sale of two Columbus, Indiana storage facilities and
a non-operating development project in White Marsh, Maryland. No dispositions
occurred in the first quarter of 2001.
Minority interest expense represents the portion of income allocable to holders
of limited partnership interest in the Partnership ("Units") and distributions
payable to holders of preferred units. Minority interest expense decreased to
$3.2 million in the first quarter of 2001, a reduction of $197 thousand, or 5.8%
from the same period in 2000. This was due to the decrease in net income between
the two periods, as well as a decrease in weighted average Partnership Units
outstanding, from 3.5 million at March 31, 2000 to 3.4 million at March 31,
2001.
Liquidity and Capital Resources
Cash provided by operating activities was $34.5 million during the three months
ended March 31, 2001 as compared to $25.6 million during the same period in
2000. Significant items affecting the operating cash flows are discussed more
fully in the "Results of Operations" section.
We invested $7.6 million in the first quarter ending March 31, 2001 in the
acquisition and improvement of self-storage facilities compared to $4.3 million
during the same period in 2000. $4.6 million of the $7.6 million for 2001
reflects our single first quarter acquisition in the St. Louis, Missouri market,
with the remaining $3.0 million representing improvements. For 2000, the
entirety of the $4.3 million investment represents improvements, as no
self-storage facilities were acquired. In the first quarter of 2001, there were
no sales or exchanges of storage facilities. This contrasts sharply with the
$21.4 million in proceeds received from dispositions in the first quarter of
2000. In 2000, we received $1.0 million in cash proceeds from the sale of two
self-storage facilities in Indiana, $19.9 from the transfer of nine development
projects to the GE Capital Development Venture, and $463 thousand from the sale
of another non-operating development project to a franchisee. For the GE Capital
transaction, we also received a $6.5 million
18
interest in the venture, representing 25%. In the transaction involving the
single development project, we accepted a $2.2 million note and received the
balance of the sales price in cash.
In addition to improvements, we invested $7.7 million in the first three months
of 2001 and $10.4 million in the first three months of 2000 for development and
construction of self-storage facilities. There were 5 newly developed facilities
and 19 expansions of existing facilities in process with $44.2 million
cumulative invested at March 31, 2001. The total budget for these facilities is
$76.4 million, of which $32.2 million remains to be invested. We also invested
$7.0 million in advances and investments in real estate during the first three
months of 2001, compared to $10.3 million one year ago. In 2001, we have
invested $4.7 million in cash in the GE Capital Ventures, and provided $2.3
million in financing to franchisees of Franchise. Proceeds were also received
from certain franchisees, as two repaid their loans during the period,
generating $6.9 million in cash. We also received $1.4 million in distributions
from joint ventures. We have $4.9 million of loan commitments to franchisees to
fund as of March 31, 2001. Additionally, we expect to invest approximately $7.6
million as part of our required equity contributions in the GE Capital joint
ventures during the remainder of 2001.
Sometimes we acquire facilities in exchange for Units. The Units are redeemable
after one year for cash or, at our option, shares of our common stock. Sellers
taking Units instead of cash are able to defer recognizing a taxable gain on the
sale of their facilities until they sell or redeem their Units. At March 31,
2001 we had 3.3 million Units outstanding, of which the following Units were
redeemable:
o 82 thousand Units for an amount equal to the fair market value ($2.7
million, based upon a price per Unit of $32.58 at March 31, 2001) payable in
cash or, at our option, by a promissory note payable in quarterly
installments over two years with interest at the prime rate.
o 3.3 million Units for amounts equal to the fair market value ($106.3
million, based upon a price per Unit of $32.58 at March 31, 2001) payable by
us in cash or, at our option, in shares of our common stock at the initial
exchange ratio of one share for each Unit.
We anticipate that the source of funds for any cash redemption of Units will be
retained cash flow or proceeds from the future sale of our securities or other
indebtedness. We have agreed to register any shares of our common stock issued
upon redemption of Units under the Securities Act of 1933.
Between November 1996 and July 1998, the Partnership issued $600 million of
notes payable. The notes are unsecured obligations of the Partnership, and may
be redeemed at any time at the option of the Partnership, subject to a premium
payment and other terms and conditions. The combined notes carry a weighted
average interest rate of 7.37% and were issued at a price to yield a weighted
average of 7.42%. The terms of the notes are staggered between seven and thirty
years, maturing between 2003 and 2027.
We initially fund our capital requirements primarily through the available lines
of credit with the intention of refinancing these with long-term capital in the
form of equity and debt securities when we determine that market conditions are
favorable. At March 31, 2001, we can issue under currently effective shelf
registration statements up to $650 million of common stock, preferred stock,
depository shares and warrants and can also issue $250 million of unsecured,
non-convertible senior debt securities of the Partnership. Our lines of credit
bear interest at various spreads over LIBOR. We had net repayments in the three
months ended March 31, 2001 of $6.5 million. For the same period in 2000, net
borrowings totaled $3.2 million. We currently have a $200 million unsecured
revolving credit line with a group of commercial banks, bearing interest at a
spread of 120 basis points over LIBOR, based on our current debt rating, which
matures in May of 2002. We also have a $40 million line of credit with a
commercial bank. The line bears interest at spread over LIBOR, matures on July
1, 2001, and is renewable at that time. Additionally, in December of 2000,
Franchise closed on a $10 million unsecured line of credit with a commercial
bank, which bears interest at a spread over LIBOR, matures on December 29, 2001
and is renewable at that time. Franchise is fully drawn on the line as of March
31, 2001.
We paid approximately $18.6 million in dividends during the first three months
of 2001, compared to $18.8 million for the same period in 2000. The decrease
between the two periods was primarily due a reduction in the number of shares
outstanding, reflecting our 1999-2000 stock repurchase initiative. There were
27.0 million shares outstanding as of Janaury 1, 2001 compared to 27.9 million
shares at January 1, 2000. This more than offset the increase of 3% in the
dividend rate between the two periods. Preferred unit dividends remained
constant at $1.4 million for the quarters ended March 31, 2001 and 2000, as the
number of units and rate remained unchanged. Distributions to minority interests
decreased from $2.5 million in the first quarter of 2000 to $2.3 million in
2001, mainly due to a reduction in total Partnership units outstanding. There
were 3.7 million Partnership units outstanding at the beginning of 2000,
compared to 3.4 million at the beginning of 2001. Again, there was a 3% rate
increase, corresponding to dividends, but this was more than offset by the
decrease in Partnership units outstanding.
19
As noted previously, in December of 1999, we authorized a plan to repurchase up
to 5% of our common shares outstanding and in the third quarter of 2000, we
completed that repurchase program. During the first quarter of 2000, we
repurchased 204 thousand shares at a cost of $6.2 million.
We expect to incur approximately $5.1 million for scheduled maintenance and
repairs during 2001 and approximately $6.2 million to conform facilities
acquired from 1994 to 2000 to our standards, of which a combined $786 thousand
has been incurred to date.
We believe that borrowings under our current credit facilities combined with
cash from operations will provide us with necessary liquidity and capital
resources to meet the funding requirements of our remaining development and
expansion pipeline, commitments to provide financing to franchisees, equity
commitments of the GE Capital Joint Ventures, dividend and distribution
requirements, and scheduled property related capital expenditures. Additionally,
no significant maturities are scheduled under any of our borrowings until 2003.
Qualitative and Quantitative Disclosure About Market Risk
We are exposed to certain financial market risks, the most predominant being
fluctuations in interest rates on existing variable rate debt and the repricing
of fixed rate debt upon maturity. We monitor interest rate fluctuations as an
integral part of our overall risk management program, which recognizes the
unpredictability of financial markets and seeks to reduce the potentially
adverse effect on our results. The effect of interest rate fluctuations
historically has been small relative to other factors affecting operating
results, such as rental rates and occupancy.
Our operating results are affected by changes in interest rates primarily as a
result of borrowing under our lines of credit. If interest rates increased by 25
basis points, our interest expense for the three months ended March 31,2001
would have increased by approximately $99 thousand, based on average outstanding
balances during that period.
Funds from Operations ("FFO")
We believe FFO should be considered in conjunction with net income and cash
flows to facilitate a clear understanding of our operating results. FFO should
not be considered as an alternative to net income, as a measure of our financial
performance or as an alternative to cash flows from operating activities as a
measure of liquidity. FFO does not represent cash generated from operating
activities in accordance with GAAP and is not necessarily indicative of cash
available to fund cash needs. We follow the current National Association of Real
Estate Investment Trust's (NAREIT) definition of FFO which effective January 1,
2000, now includes non-recurring results of operations, except those defined as
"extraordinary items" under GAAP. Since we have historically not added back
non-recurring items to our calculation, we were not required to restate prior
period FFO amounts. Our FFO may not be comparable to similarly titled measures
of other REITs that calculate FFO differently. In calculating FFO, we add back
only depreciation and amortization of revenue-producing property. As such, Our
FFO and FFO per share may not be comparable to other REITs that may add back
total depreciation and amortization.
20
The following table illustrates the components of our FFO for the three months
ended March 31, 2001 and March 31, 2000:
Three Months Three Months
Funds from Operations Attributable Ended Ended
to Company Shareholders: March 31, 2001 March 31, 2000
- --------------------------------------------------------------------------------------------------
(in thousands)
Net Income $ 13,986 $ 14,678
Loss/(Gain) on Sale of Assets* - (595)
Depreciation & Amortization 9,974 9,193
Depreciation from Unconsolidated Entities 448 153
Less Depreciation of Non-Revenue Producing Property (1,111) (914)
------------------ -----------------
$ 23,297 $ 22,515
Minority Interest Share of Loss/(Gain) on Sale - 67
Minority Interest Share of Depreciation &
Amortization from Unconsolidated Entities (49) (17)
Minority Interest Share of Depreciation &
Amortization (984) (933)
------------------ -----------------
FFO Available to Company Shareholders $ 22,264 $ 21,632
================== =================
*Excludes $295 gain on sale of undepreciated land in the first quarter of 2000.
During the first quarter of 2001, we declared a dividend per share of $0.71,
which is an increase of 2.9% over the first quarter 2000 dividend of $0.69. As a
qualified REIT, we are required to distribute a substantial portion of our net
taxable income as dividends to our shareholders. While our goal is to generate
and retain sufficient cash flow to meet our operating, capital and debt service
needs, our dividend requirements may require us to utilize our bank lines of
credit and other sources of liquidity to finance property acquisitions and
development, and major capital improvements. See "Liquidity and Capital
Resources" section.
Legal Proceedings
On July 22, 1999, a purported statewide class action was filed against the REIT
and Partnership in the Circuit Court of Montgomery County, Maryland, under the
style Ralph Grunewald v. Storage USA, Inc. and SUSA Partnership, L.P., case no.
201546V, seeking recovery of certain late fees paid by tenants and an injunction
against further assessment of similar fees. The Company filed a responsive
pleading on September 17, 1999, setting out its answer and affirmative defenses.
The Company believes that it has defenses to the claims in the suit and intends
to vigorously defend it. The Plaintiff filed a Motion for Partial Summary
Judgment and a Motion for Class Certification, but before Storage USA was
required to respond to these motions, the case was stayed until June 2001. The
stay was entered in part because of a new statute passed by the Maryland
legislature relating to late fees. The constitutionality of that statute has
been challenged in an unrelated litigation not involving the Company.
On November 15, 1999, a purported nationwide class action was filed against the
REIT and Partnership in the Supreme Court of the State of New York, Ulster
County, under the style West 125th Street Associates, L.L.C. v. Storage USA,
Inc. and SUSA Partnership, L.P., case no 99-3278, seeking the recovery of
certain late and administrative fees paid by tenants and an injunction against
similar fees. The Company filed a responsive pleading on January 28, 2000 and
the case was transferred to New York County, case no. 401589/00. On July 6, 2000
the Plaintiff filed an Amended Complaint and a Motion for Class Certification.
On February 6, 2001, the New York Supreme Court, in an oral ruling by Justice
Gammerman, declined to certify either a New York or nationwide class. The ruling
may be appealed by the plaintiffs.
21
While the ultimate resolution of the cases discussed above will not have a
material adverse effect on the Company's financial position, if during any
period the potential contingency should become probable, the results of
operations in such period could be materially affected.
Forward Looking Statements and Risk Factors
Certain information included in this Form 10-Q that is not historical fact is
based on our current expectations. This includes statements regarding
anticipated future development and acquisition activity, the impact of
anticipated rental rate increases on our revenue growth, our 2001 anticipated
revenues, expenses and returns, and future capital requirements, among others.
Words such as "believes", "expects", "anticipate", "intends", "plans" and
"estimates" and variations of such words and similar words also identify forward
looking statements. Such statements are forward looking in nature and involve a
number of risks and uncertainties and, accordingly, actual results may differ
materially. The following factors, among others, may affect the Company's future
financial performance and could cause actual results to differ materially from
the forward-looking statements:
o Changes in the economic conditions in the markets in which we operate, such
as unexpected increases in supply and competition, unexpected changes in
financial resources of our customers, or unexpected increases in prevailing
wage levels or in insurance, taxes or utilities, could negatively impact
our ability to raise our rents or control our expenses, thus reducing our
net income.
o Competition for development or acquisition sites could drive up costs,
making it unfeasible for us to develop or acquire properties in certain
markets.
o New development opportunities could be limited due to an inability to obtain
zoning and other local approvals.
o Amounts that we charge for late fees have been and are the subject of
litigation against us and are, in some states, the subject of governmental
regulation. Consequently, such amounts could decrease, materially
affecting the results of operations.
o The conditions affecting the bank, debt and equity markets could change,
increasing our cost of capital or reducing its availability on terms
satisfactory to us either of which could reduce our returns or restrict our
growth.
o Costs related to compliance with laws, including environmental laws could
increase, reducing our net income.
o General business and economic conditions could change, adversely affecting
occupancy and rental rates, thereby reducing our revenue.
o Unfavorable outcome(s) in the pending litigation described in Item 2 of
this Form 10-Q could ultimately reduce our net income.
o Changes in tax laws or market conditions could make real estate investment
less attractive relative to other investment opportunities. Such changes
would reduce the number of buyers for real estate and adversely affect real
estate asset values.
o Construction costs and the timing of a development project may exceed our
original estimates, resulting in reduced returns on investment and delayed
realization of returns.
o The level of on-balance sheet development could exceed current expectations
resulting in higher than anticipated dilution to our earnings.
We caution you not to place undue reliance on any such forward-looking
statements. We assume no obligation to update any forward-looking statements as
a result of new information, subsequent events or any other circumstances. Such
statements speak only as of the date that they are made.
22
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
See disclosure in the section entitled "Qualitative and Quantitative Disclosure
About Market Risk" in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
23
Part II- OTHER INFORMATION
Item 1. Legal Proceedings
See disclosure in the section entitled "Legal Proceedings" in Management's
Discussion and Analysis of Financial Condition and Results of Operations on page
21.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibit 10.1 Form of Employment Agreement between the Company and
Richard B. Stern, effective April 1, 2001.
Exhibit 10.2 Unsecured Revolving Credit Agreement dated as of
December 29, 2000. Among Storage USA Franchise Corp.,
SUSA Partnership L.P., Storage USA, Inc., Storage USA
Trust and First Union National Bank, and First Union
National Bank, as Administrative Agent.
b. Reports on Form 8-K
On February 7, 2001, we filed a current report on Form 8-K. The
filing included information regarding the lawsuit styled: West 125th
St. Associates, L.L.C. vs. Storage USA, Inc. and SUSA Partnership, L.P.
discussed in Part II, Item 1, Legal Proceedings.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 15, 2001
Storage USA, Inc.
By: /s/ Christopher P. Marr
-----------------------
Christopher P. Marr
Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
Exhibit No. Description
10.1 Form of Employment Agreement between the Company and
Richard B. Stern, effective April 1, 2001.
10.2 Unsecured Revolving Credit Agreement Dated as of December
29, 2000. Among Storage USA Franchise Corp., SUSA
Partnership L.P., Storage USA, Inc., Storage USA Trust, and
First Union National Bank, and First Union National Bank,
as Administrative Agent.
26