SHU Shurgard Storage Ctr

Shurgard Storage Centers, Inc. (NYSE:SHU), a leading self-storage real estate investment trust in the United States and Europe, today announced results for the quarter ended March 31, 2006. Net income to common shareholders for the quarter was $2.0 million ($0.04 per share), compared to $2.2 million ($0.05 per share) in the first quarter of 2005. However, earnings for the first quarter of 2005 were largely driven by a reported gain on property sales of $6.4 million. Funds from operations (FFO) attributable to common shareholders for the first quarter of 2006 were $24.6 million ($0.51 per share), compared to $15.5 million ($0.33 per share) for the first quarter of 2005. The substantial increase in FFO is primarily attributable to strong revenue growth in both the Company's domestic and European portfolios along with reductions achieved in operating and general and administrative costs. Of the 643 properties in Shurgard's global portfolio, the 585 stores classified in the Same Store group generated a combined increase in revenue and net operating income (NOI) after leasehold and indirect expenses (at constant exchange rates) in excess of 10% and 20%, respectively, for the first quarter of 2006, compared to the first quarter of 2005. FFO in the first quarter of 2006 benefited from an $11.9 million, or 22%, improvement ($0.25 per share) in NOI after leasehold and indirect expenses from all stores, compared to the first quarter of 2005. There was also a net positive swing in foreign currency exchange and derivative fluctuations (net of minority interest share) of approximately $3.7 million ($0.08 per share) from the first quarter of 2005 to the first quarter of 2006. Partially offsetting these gains were increases in interest expense of $5.3 million ($0.11 per share) due to higher borrowings and interest rates, and costs incurred in the first quarter of 2006 associated with the Company's proposed merger with Public Storage, Inc. totaling $1.5 million ($0.03 per share). As previously disclosed, on March 6, 2006, Shurgard entered into a merger agreement with Public Storage that contemplates that Shurgard will be merged with and into a subsidiary of Public Storage. A copy of the merger agreement is filed with Shurgard's current report on Form 8-K dated March 7, 2006. Operating Results Compared to the first quarter of 2005 and at constant exchange rates, combined domestic and European Same Store revenue for the first quarter of 2006 increased by $11.4 million (or 10.5%) to $119.7 million from $108.3 million, and NOI after indirect and leasehold expenses increased by $11.3 million (or 20.6%) to $66.1 million from $54.8 million. The 462 stores in the Company's domestic Same Store segment generated a 7.9% increase in revenue and a 10.7% increase in NOI after leasehold and indirect expenses in the first quarter of 2006, compared to the first quarter of 2005, due primarily to a 6.5% increase in rental rates and moderated expense growth. At constant exchange rates, the 123 stores in the European Same Store segment in the first quarter of 2006 generated an 18.4% increase in revenue and a 74% increase in NOI after leasehold and indirect expenses, compared to the same quarter in 2005. Most of the European Same Store revenue growth came from broad gains in occupancy, which averaged 80% in the first quarter of 2006 compared to 68% in the first quarter of 2005. The substantial year-over-year improvement in NOI after leasehold and indirect expenses was additionally due to significant reductions in indirect operating expenses. When the 27 most recent additions to the European Same Store pool are excluded from this analysis, the remaining 96 stores in the pool generated growth in revenue and NOI after leasehold and indirect expenses of approximately 14% and 47%, respectively. Shurgard's Chief Executive Officer, David K. Grant, commented, "We are very pleased with the continued improvement in operating results from both our domestic and European portfolios. The trend in revenue growth experienced during the first quarter has continued through April and industry demand appears to be remaining solid across most markets. At the same time the substantial drop in our operating costs in Europe is evidence that our restructuring plan put in place last summer is bearing fruit. While we are working with our counterparts at Public Storage on the companies' integration plan our people have continued to maintain their focus on our core business." Portfolio As of March 31, 2006, Shurgard operated an international network of 656 operating properties containing approximately 41 million net rentable square feet. The total includes 484 owned, partially-owned or leased storage centers and 13 storage centers managed for third parties in the United States and 159 owned or partially-owned storage centers in Europe. In the first quarter of 2006, the Company acquired ten storage centers in Europe, all in France. As previously announced, in January the Company acquired a business which operates nine stores, consisting of 343,000 net rentable square feet, for approximately $47.4 million, although one of the acquired stores is being held for resale. Additionally, the Company acquired a storage center in Marseilles, France on March 31, 2006, consisting of 47,000 net rentable square feet, for $3.1 million. These acquisitions brought the Company's New Store portfolio to a total of 57 properties, representing an investment of $327 million, or 10% of the total portfolio. NOI after leasehold and indirect expenses for this group was approximately at breakeven for the first quarter of 2006. As of March 31, 2006, the Company had 21 new storage centers or major redevelopment projects under construction or pending construction (fifteen in the United States and six in Europe) for an estimated total cost at completion of approximately $145 million. Proposed Merger with Public Storage, Inc. On April 20, 2006, Public Storage filed a registration statement on Form S-4 with the SEC related to the common stock to be issued by Public Storage in connection with the merger and containing a joint proxy statement seeking the approvals necessary by our respective common stockholders to consummate the merger. As disclosed by Public Storage on their earnings call on May 5, 2006, the SEC's decision to review the registration statement will likely delay the closing date of the proposed merger into the third quarter. Supplemental Information Copies of this press release and supplemental tables relating to the quarter ended March 31, 2006 will be available on the Company's website at http://www.shurgard.com/ir or by request at 206-624-8100. The Company will host a conference call to discuss first quarter results on Thursday, May 11, 2006, at 10:00 am (Pacific). The public is invited to listen to the call live via the Internet by clicking the appropriate links on the Company's website. The call is also available live on a listen-only basis by dialing 866-250-4375 (US & CN callers) and 303-262-2050 (international callers). A taped replay of the conference call will be available via the Internet address listed above, or via telephone until May 18, 2006, at 800-405-2236 (US & CN callers) and 303-590-3000 (international callers) access code 11060821#. The Company uses FFO in addition to net earnings to report its operating results. The Company uses the definition of FFO adopted by the National Association of Real Estate Investment Trusts as interpreted by the Securities and Exchange Commission. Accordingly, FFO is defined as net earnings (computed in accordance with U.S. GAAP), excluding gains (losses) on dispositions of interests in depreciated operating properties and real estate depreciation and amortization expenses. FFO includes the Company's share of FFO of unconsolidated real estate ventures and discontinued operations and excludes minority interests in FFO. The Company believes FFO is a meaningful disclosure as a supplement to net earnings because net earnings assumes that the values of real estate assets diminish predictably over time as reflected through depreciation and amortization expenses. The Company believes that the values of real estate assets fluctuate due to market conditions. The Company's calculation of FFO may not be comparable to similarly titled measures reported by other companies because not all companies calculate FFO in the same manner. FFO is not a liquidity measure and should not be considered as an alternative to cash flows or indicative of cash available for distribution. It also should not be considered an alternative to net earnings, as determined in accordance with U.S. GAAP, as an indication of the Company's financial performance. A reconciliation of U.S. GAAP net income to FFO is included in the tables attached to this release. Although net operating income (NOI) is a non-U.S. GAAP measure, the Company believes it is a meaningful measure of operating performance as a supplement to net income because the Company relies on NOI for purposes of making decisions with respect to resource allocations, current property values, segment performance, and comparing period-to-period and market-to-market property operating results. NOI is defined as storage center operations revenues less direct operating and real estate tax expense for each of the Company's properties. A reconciliation of Same Store and New Store NOI to income (loss) from continuing operations is provided in the tables attached to this release and in supplemental tables posted to our website at http://www.shurgard.com/ir. This release contains forward-looking statements as that term is defined in Section 27A of the Securities Act of 1933, as amended, and in Section 21F of the Securities Exchange Act of 1934 as amended. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "intend," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative of these terms or other similar terminology. These statements are only predictions and are inherently uncertain. The Company's actual results may differ significantly from its expectations due to uncertainties, including the risk that: -- the Company may encounter difficulties in realizing the proposed merger with Public Storage, Inc. and integrating the two companies; Shurgard or Public Storage may fail to obtain approval of the transaction by their respective shareholders or to satisfy other closing conditions to the transaction; -- changes in economic conditions in the markets in which the Company operates or competition from new self-storage facilities or other storage alternatives may cause a decline in rent or occupancy rates or delays in rent-up of newly developed properties; -- new developments could be delayed or reduced by zoning and permitting requirements outside of the Company's control, increased competition for desirable sites, construction delays due to weather, unforeseen site conditions, labor shortages, personnel turnover or scheduling problems with contractors, subcontractors or suppliers; -- the Company may experience increases in the cost of labor, taxes, marketing and other operating and construction expenses; -- tax law changes may change the taxability of future income; -- increases in interest rates or changes to our credit ratings may increase the cost of refinancing long-term debt; -- alternatives for funding the Company's business plan may be impaired by economic uncertainty due to war or terrorism; -- Shurgard Self Storage SCA, the Company's wholly-owned European subsidiary, may be adversely affected if it is unable to find adequate sites to complete the targeted number of developments in its Second Shurgard joint venture; -- the Company may not maintain compliance with its debt covenants; and -- the Company may be adversely affected by legislation or changes in regulations. For a discussion of additional risks and other factors that could affect these forward-looking statements and Shurgard's financial performance, see Shurgard's report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 20, 2006. Forward-looking statements are based on estimates as of the date of this release. Except as required by law, we disclaim any obligation to publicly update these forward-looking statements reflecting new estimates, events or circumstances after the date of this release. INDEX of TABLES TO FOLLOW: Table 1. Condensed Consolidated Statements of Income for the three months ended March 31, 2006 and 2005. Table 2. Condensed Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005. Table 3. FFO Reconciliation for the three months ended March 31, 2006 and 2005. Table 4. Segment Totals for the three months ended March 31, 2006 and 2005. Table 5. Reconciliation of Segment NOI to income from continuing operations for the three months ended March 31, 2006 and 2005. Table 6. Segment exchange rate differences for the three months ended March 31, 2005. -0- *T Table 1: SHURGARD STORAGE CENTERS, INC. OPERATING RESULTS (unaudited) Condensed Consolidated Statements of Income for the three months ended March 31, 2006 and 2005 (in thousands except per share data) Three months ended March 31, 2006 2005 -------- -------- Revenue Storage center operations $126,768 $112,238 Other 842 1,386 -------- -------- Total revenue 127,610 113,624 -------- -------- Expenses Operating 61,094 59,078 Real estate development 1,670 2,930 Depreciation and amortization 25,923 23,344 Impairment losses and abandoned project expense 545 323 General, administrative and other 7,453 8,029 -------- -------- Total storage center expenses 96,685 93,704 -------- -------- Income from operations 30,925 19,920 -------- -------- Other income (expense) Costs related to proposed merger (1,465) - Interest expense (29,404) (24,125) Gain (loss) on derivatives, net 691 (359) Foreign exchange gain (loss) 125 (3,848) Interest income and other, net 405 960 -------- -------- Other expense, net (29,648) (27,372) -------- -------- Income (loss) before equity in earnings of other real estate investments, net, minority interest and income taxes 1,277 (7,452) Minority interest 3,933 6,110 Equity in earnings of other real estate investments, net - 21 Income tax expense (19) (10) -------- -------- Income (loss) from continuing operations 5,191 (1,331) Discontinued operations Income from discontinued operations 68 164 Gain on sale of discontinued operations - 6,423 -------- -------- Discontinued operations 68 6,587 Cumulative effect of change in accounting principle (200) - -------- -------- Net income 5,059 5,256 Net income allocation Preferred stock dividends and other (3,037) (3,042) -------- -------- Net income available to common shareholders $ 2,022 $ 2,214 ======== ======== Basic per share amounts: Income (loss) from continuing operations available to common shareholders $ 0.04 $ (0.09) Total discontinued operations - 0.14 Cumulative effect of change in accounting principle - - -------- -------- Net income available to common shareholders per share $ 0.04 $ 0.05 ======== ======== Diluted per share amounts: Income (loss) from continuing operations available to common shareholders $ 0.04 $ (0.09) Discontinued operations - 0.14 Cumulative effect of change in accounting principle - - -------- -------- Net income available to common shareholders per share $ 0.04 $ 0.05 ======== ======== Distributions per common share $ 0.56 $ 0.55 ======== ======== Table 2: SHURGARD STORAGE CENTERS, INC. BALANCE SHEET Condensed Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005 (in thousands except share and per share data) March 31, Dec. 31, 2006 2005 ---------- ---------- ASSETS: (unaudited) Storage centers: Operating storage centers $3,316,120 $3,244,258 Less accumulated depreciation (576,875) (552,171) ---------- ---------- Operating storage centers, net 2,739,245 2,692,087 Construction in progress 88,349 67,073 Properties held for sale 3,783 6,774 ---------- ---------- Total storage centers 2,831,377 2,765,934 ---------- ---------- Cash and cash equivalents 36,616 39,778 Restricted cash 2,876 4,972 Goodwill 27,440 27,440 Other assets 125,071 119,248 ---------- ---------- Total assets $3,023,380 $2,957,372 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Accounts payable and other liabilities $ 143,136 $ 181,435 Lines of credit 620,700 583,500 Notes payable 1,322,780 1,275,720 ---------- ---------- Total liabilities 2,086,616 2,040,655 ---------- ---------- Minority interest 138,983 116,365 Commitments and contingencies Shareholders' equity: Series C Cumulative Redeemable Preferred Stock; $0.001 par value; 2,000,000 shares authorized; 2,000,000 shares issued and outstanding; liquidation preference of $50,000 48,115 48,115 Series D Cumulative Redeemable Preferred Stock; $0.001 par value; 3,450,000 shares authorized; 3,450,000 shares issued and outstanding; liquidation preference of $86,250 83,068 83,068 Class A Common Stock, $0.001 par value; 120,000,000 authorized; 47,251,336 and 47,041,680 shares issued and outstanding, respectively 47 47 Additional paid-in capital 1,150,041 1,142,288 Accumulated deficit (483,856) (459,586) Accumulated other comprehensive (loss) income 366 (13,580) ---------- ---------- Total shareholders' equity 797,781 800,352 ---------- ---------- Total liabilities and shareholders' equity $3,023,380 $2,957,372 ========== ========== Table 3: SHURGARD STORAGE CENTERS, INC. FUNDS FROM OPERATIONS (unaudited) FFO Reconciliation for the three months ended March 31, 2006 and 2005 (in thousands except per share data) Three months ended March 31, 2006 2005 ------- ------- Net income (1) $ 5,059 $ 5,256 Depreciation and amortization (2) 22,271 19,723 Loss (gain) on sale of operating properties 82 (6,423) Cumulative effect of change in accounting principle 200 - ------- ------- FFO 27,612 18,556 Preferred dividends and other (3,037) (3,042) ------- ------- FFO attributable to common shareholders - Diluted $24,575 $15,514 ======= ======= Weighted-average number of basic shares 46,955 46,514 Effect of dilutive stock based awards 1,228 673 ------- ------- Weighted-average number of diluted shares 48,183 47,187 ======= ======= FFO per share - Diluted $ 0.51 $ 0.33 ======= ======= Distributions per common share $ 0.56 $ 0.55 ======= ======= (1) Net income includes the following: Q1 2006 Q1 2005 -------- ------- Foreign exchange gain (loss) 125 (3,848) -------- ------- Costs related to proposed merger (1,465) - -------- ------- (2) Excludes depreciation related to non-real estate assets and minority interests in depreciation and amortization and includes depreciation and amortization of discontinued operations. Table 4: SHURGARD STORAGE CENTERS, INC. SEGMENT TOTALS (unaudited) Segment Totals for the three months ended March 31, 2006 and 2005 (in thousands) Three months ended Domestic Domestic Europe Europe March 31, 2006 Same Store New Store Same Store New Store --------- -------- --------- -------- Storage center operations revenue $ 87,583 $ 3,548 $ 32,123 $ 3,514 Direct operating expense 30,601 1,580 13,923 4,003 --------- -------- --------- -------- Net operating income 56,982 1,968 18,200 (489) --------- -------- --------- -------- Indirect expense 4,755 227 2,637 857 Leasehold expense 1,002 163 654 317 --------- -------- --------- -------- Indirect and leasehold expense 5,757 390 3,291 1,174 --------- -------- --------- -------- Net operating income (loss) after indirect and leasehold expense $ 51,225 $ 1,578 $ 14,909 $ (1,663) ========= ======== ========= ======== Three months ended Other Discontinued March 31, 2006 Stores Stores Total -------- ----------- --------- Storage center operations revenue $ 98 $ (98) $ 126,768 Direct operating expense 30 (30) 50,107 -------- ----------- --------- Net operating income 68 (68) 76,661 -------- ----------- --------- Indirect expense - - 8,476 Leasehold expense - - 2,136 -------- ----------- --------- Indirect and leasehold expense - - 10,612 -------- ----------- --------- Net operating income (loss) after indirect and leasehold expense $ 68 $ (68) $ 66,049 ======== =========== ========= Three months ended Domestic Domestic Europe Europe March 31, 2005 Same Store New Store Same Store New Store --------- -------- --------- -------- Storage center operations revenue $ 81,141 $ 651 $ 29,717 $ 721 Direct operating expense 29,351 539 15,209 1,653 --------- -------- --------- -------- Net operating income 51,790 112 14,508 (932) --------- -------- --------- -------- Indirect expense 4,399 92 4,507 576 Leasehold expense 1,129 35 602 - --------- -------- --------- -------- Indirect and leasehold expense 5,528 127 5,109 576 --------- -------- --------- -------- Net operating income (loss) after indirect and leasehold expense $ 46,262 $ (15) $ 9,399 $ (1,508) ========= ======== ========= ======== Three months ended Other Discontinued March 31, 2005 Stores Stores Total -------- ----------- --------- Storage center operations revenue $ 428 $ (420) $ 112,238 Direct operating expense 187 (169) 46,770 -------- ----------- --------- Net operating income 241 (251) 65,468 -------- ----------- --------- Indirect expense 36 (35) 9,575 Leasehold expense - - 1,766 -------- ----------- --------- Indirect and leasehold expense 36 (35) 11,341 -------- ----------- --------- Net operating income (loss) after indirect and leasehold expense $ 205 $ (216) $ 54,127 ======== =========== ========= Table 5: SHURGARD STORAGE CENTERS, INC. RECONCILIATION OF SEGMENT NOI TO INCOME FROM CONTINUING OPERATIONS (unaudited) Reconciliation of Segment NOI to income from continuing operations for the three months ended March 31, 2006 and 2005 (in thousands) Three months ended March 31, ------------------ 2006 2005 -------- -------- NOI after indirect and leasehold expense $ 66,049 $ 54,127 Other revenue 842 1,386 Other operating expense, net (375) (967) Real estate development expense (1,670) (2,930) Depreciation and amortization (25,923) (23,344) Impairment and abandoned project expense (545) (323) General, administrative and other (7,453) (8,029) Costs related to proposed merger (1,465) - Interest expense (29,404) (24,125) Gain (loss) on derivatives, net 691 (359) Foreign exchange gain (loss) 125 (3,848) Interest income and other, net 405 960 Minority interest 3,933 6,110 Equity in earnings of other real estate investments, net - 21 Income tax expense (19) (10) -------- -------- Income (loss) from continuing operations $ 5,191 $ (1,331) ======== ======== Table 6: SHURGARD STORAGE CENTERS, INC. SEGMENT EXCHANGE RATE DIFFERENCES (unaudited) Segment exchange rate differences for the three months ended March 31, 2005 (in thousands) Europe Three months ended New Exchange March 31, 2005 Store (1) Difference Total (2) --------- --------- ------- Segment revenue $ 661 $ 60 $ 721 Direct operating and real estate tax expense 1,517 136 1,653 --------- --------- ------- NOI (856) (76) (932) Leasehold expense - - - --------- --------- ------- NOI after leasehold expense (856) (76) (932) Indirect operating expense 528 48 576 --------- --------- ------- NOI after indirect and leasehold expense $ (1,384) $ (124) $(1,508) ========= ========= ======= Europe Three months ended Same Exchange March 31, 2005 Store (1) Difference Total (2) --------- --------- ------- Segment revenue $ 27,134 $ 2,583 $29,717 Direct operating and real estate tax expense 13,889 1,320 15,209 --------- --------- ------- NOI 13,245 1,263 14,508 Leasehold expense 548 54 602 --------- --------- ------- NOI after leasehold expense 12,697 1,209 13,906 Indirect operating expense 4,131 376 4,507 --------- --------- ------- NOI after indirect and leasehold expense $ 8,566 $ 833 $ 9,399 ========= ========= ======= (1) Amounts are translated from local currencies to U.S. dollars using the average exchange rate for the first quarter of 2006 for the purpose of comparison with 2005 results. See exchange rates on Table 16. (2) Amounts are translated from local currencies to U.S. dollars using the average exchange rate for the first quarter of 2005 for the purpose of reconciliation with the 2005 Condensed Consolidated Financial Statements. See exchange rates on Table 16. *T