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SSS > SEC Filings for SSS > Form 10-Q on 6-Nov-2012All Recent SEC Filings

Show all filings for SOVRAN SELF STORAGE INC

Form 10-Q for SOVRAN SELF STORAGE INC


6-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the Company's consolidated financial condition and results of operations should be read in conjunction with the unaudited financial statements and notes thereto included elsewhere in this report.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

When used in this discussion and elsewhere in this document, the words "intends," "believes," "expects," "anticipates," and similar expressions are intended to identify "forward-looking statements" within the meaning of that term in Section 27A of the Securities Act of 1933 and in Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company to be materially different from those expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the effect of competition from new self-storage facilities, which would cause rents and occupancy rates to decline; the Company's ability to evaluate, finance and integrate acquired businesses into the Company's existing business and operations; the Company's ability to effectively compete in the industry in which it does business; the Company's existing indebtedness may mature in an unfavorable credit environment, preventing refinancing or forcing refinancing of the indebtedness on terms that are not as favorable as the existing terms; interest rates may fluctuate, impacting costs associated with the Company's outstanding floating rate debt; the Company's ability to comply with debt covenants; any future ratings on the Company's debt instruments; regional concentration of the Company's business may subject it to economic downturns in the states of Florida and Texas; the Company's reliance on its call center; the Company's cash flow may be insufficient to meet required payments of operating expenses, principal, interest and dividends; and tax law changes that may change the taxability of future income.

RESULTS OF OPERATIONS

FOR THE PERIOD JULY 1, 2012 THROUGH SEPTEMBER 30, 2012, COMPARED TO THE PERIOD JULY 1, 2011 THROUGH SEPTEMBER 30, 2011

We recorded rental revenues of $57.6 million for the three months ended September 30, 2012, an increase of $9.3 million or 19.3% when compared to rental revenues of $48.3 million for the same period in 2011. Of the increase in rental revenue, $3.6 million resulted from a 7.7% increase in rental revenues at the 334 core properties considered in same store sales (those properties included in the consolidated results of operations since July 1, 2011). The increase in same store rental revenues was a result of a 670 basis point increase in average quarterly occupancy which was offset by a 1.4% decrease in rental income per square foot. The remaining increase in rental revenue of $5.7 million resulted from the continued lease-up of our Richmond, Virginia property constructed in 2009 and the revenues from the acquisition of 42 properties completed since July 1, 2011. Other operating income, which includes merchandise sales, insurance commissions, truck rentals, management fees and acquisition fees, increased by $0.4 million for the three months ended September 30, 2012 compared to the same period in 2011 primarily as a result of increased commissions earned on customer insurance.

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Property operations and maintenance expenses increased $1.0 million or 7.9% in the three months ended September 30, 2012 as compared to the same period in 2011. The 334 core properties considered in the same store pool experienced a $0.3 million or 2.0% decrease in operating expenses as a result of lower utilities, yellow page advertising, and credit card fees. The decrease in same store operating expenses was offset by the $1.3 million increase in operating expenses resulting from the 42 properties acquired since July 1, 2011. Real estate tax expense increased $0.1 million as a result of a 1.6% increase in property taxes on the 334 same store pool and the inclusion of taxes on the properties acquired in 2012 and 2011.

Net operating income increased $8.0 million or 23.6% as a result of a 13.1% increase in our same store net operating income and the acquisitions completed since July 1, 2011.

Net operating income or "NOI" is a non-GAAP (generally accepted accounting principles) financial measure that we define as total continuing revenues less continuing property operating expenses. NOI also can be calculated by adding back to net income: interest expense, impairment and casualty losses, depreciation and amortization expense, acquisition related costs, general and administrative expense, and deducting from net income: income from discontinued operations, interest income, gain on sale of real estate, and equity in income of joint ventures. We believe that NOI is a meaningful measure of operating performance because we utilize NOI in making decisions with respect to capital allocations, in determining current property values, and in comparing period-to-period and market-to-market property operating results. NOI should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP, such as total revenues, operating income and net income. There are material limitations to using a measure such as NOI, including the difficulty associated with comparing results among more than one company and the inability to analyze certain significant items, including depreciation and interest expense, that directly affect our net income. We compensate for these limitations by considering the economic effect of the excluded expense items independently as well as in connection with our analysis of net income. The following table reconciles NOI generated by our self-storage facilities to our net income presented in the consolidated financial statements for three months ended September 30, 2012 and 2011.

                                                         Three Months ended September 30,
(dollars in thousands)                                    2012                     2011
Net operating income
Same store                                           $        35,964          $        31,801
Other stores and management fee income                         5,862                    2,045

Total net operating income                                    41,826                   33,846

General and administrative                                    (8,172 )                 (6,637 )
Acquisition related costs                                     (1,075 )                 (2,913 )
Depreciation and amortization                                (10,427 )                 (8,585 )
Interest expense                                              (8,350 )                (13,760 )
Interest income                                                   -                         5
Equity in income (losses) of joint ventures                      335                     (512 )
Income from discontinued operations                            4,821                      922

Net income                                           $        18,958          $         2,366

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Our third quarter 2012 same store results consist of only those properties that were included in our consolidated results since July 1, 2011, excluding the one property we developed in 2009 and the 17 properties we sold in July and August of 2012. The following table sets forth operating data for our 334 same store properties. These results provide information relating to property operating changes without the effects of acquisition.

Same Store Summary



                                                   Three Months ended
                                                      September 30,           Percentage
(dollars in thousands)                              2012          2011          Change
Same store rental income                         $   50,866     $ 47,249              7.7 %
Same store other operating income                     2,632        2,265             16.2 %

Total same store operating income                    53,498       49,514              8.0 %

Same store property operations and maintenance       12,608       12,862             -2.0 %
Same store real estate taxes                          4,926        4,851              1.5 %

Total same store operating expenses                  17,534       17,713             -1.0 %

Same store net operating income                  $   35,964     $ 31,801             13.1 %


                                                                                Change
Quarterly same store move ins                        38,278       37,236            1,042
Quarterly same store move outs                       39,943       37,261            2,682

We believe the increase in same store move ins was a result of more effective online marketing and improved rental rate management.

General and administrative expenses increased $1.5 million or 23.1% from 2011 to 2012. The key drivers of the increase were a $1.0 million increase in salaries and performance incentives, $0.5 million increase in internet advertising, and a $0.2 million increase in income taxes on our taxable REIT subsidiary.

Acquisition related costs were $1.1 million in the three months ended September 30, 2012 as a result of the acquisition of 10 stores during that period. Acquisition related costs for the three months ended September 30, 2011 were $2.9 million as a result of the acquisition of 27 stores during that period.

Depreciation and amortization expense increased to $10.4 million in the three months ended September 30, 2012 from $8.6 million in the same period of 2011, primarily as a result of depreciation on the 42 properties acquired in 2011 and 2012.

Interest expense decreased from $13.8 million in the three months ended September 30, 2011 to $8.4 million in the same period in 2012. The decrease was mainly due to the $5.5 million that was paid to terminate two interest rate swap agreements related to the $150 million term note that was repaid as part of our debt refinancing in August 2011.

In July and August of 2012, the Company sold 17 non-strategic storage facilities in Maryland (1), Michigan (4) and Texas (12) for net proceeds of approximately $47.7 million resulting in a gain of approximately $4.5 million. The 2012 and 2011 operations of these facilities are reported in income from discontinued operations for all periods presented.

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FOR THE PERIOD JANUARY 1, 2012 THROUGH SEPTEMBER 30, 2012, COMPARED TO THE PERIOD JANUARY 1, 2011 THROUGH SEPTEMBER 30, 2011

We recorded rental revenues of $161.9 million for the nine months ended September 30, 2012, an increase of $22.5 million or 16.1% when compared to rental revenues of $139.4 million for the same period in 2011. Of the increase in rental revenue, $7.0 million resulted from a 5.1% increase in rental revenues at the 333 core properties considered in same store sales (those properties included in the consolidated results of operations since January 1, 2011). The increase in same store rental revenues was a result of a 510 basis point increase in average quarterly occupancy which was offset by a 1.9% decrease in rental income per square foot. The remaining increase in rental revenue of $15.5 million resulted from the continued lease-up of our Richmond, Virginia property constructed in 2009 and the revenues from the acquisition of 43 properties completed since January 1, 2011. Other operating income, which includes merchandise sales, insurance commissions, truck rentals, management fees and acquisition fees, increased by $3.3 million for the nine months ended September 30, 2012 compared to the same period in 2011 primarily as a result of increased commissions earned on customer insurance and from fees for managing the properties in the new joint venture (Sovran HHF Storage Holdings II LLC) which began operations in July 2011.

Property operations and maintenance expenses increased $2.6 million or 6.7% in the nine months ended September 30, 2012 as compared to the same period in 2011. The 333 core properties considered in the same store pool experienced a $1.2 million or 3.2% decrease in operating expenses as a result of lower utilities and snow plowing costs from the mild winter. The same store pool also benefited from reduced yellow page advertising expense and reduced credit card fees. The decrease in same store operating expenses was offset by the $3.8 million increase in operating expenses resulting from the 43 properties acquired since January 1, 2011. Real estate tax expense increased $2.1 million as a result of a 2.4% increase in property taxes on the 333 same store pool and the inclusion of taxes on the properties acquired in 2012 and 2011.

Net operating income increased $21.0 million or 22.1% as a result of a 10.0% increase in our same store net operating income and the acquisitions completed since January 1, 2011.

The following table reconciles NOI generated by our self-storage facilities to our net income presented in the consolidated financial statements for nine months ended September 30, 2012 and 2011.

                                               Nine Months ended September 30,
  (dollars in thousands)                        2012                    2011
  Net operating income
  Same store                               $       101,306         $        92,122
  Other stores and management fee income            14,941                   3,102

  Total net operating income                       116,247                  95,224

  General and administrative                       (23,707 )               (18,344 )
  Acquisition related costs                         (2,382 )                (3,048 )
  Depreciation and amortization                    (30,461 )               (25,164 )
  Interest expense                                 (24,914 )               (29,739 )
  Interest income                                        3                      31
  Equity in income of joint ventures                   608                    (408 )
  Income from discontinued operations                6,693                   2,595

  Net income                               $        42,087         $        21,147

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Our 2012 same store results consist of only those properties that were included in our consolidated results since January 1, 2011, excluding the one property we developed in 2009 and the 17 properties we sold in July and August of 2012. The following table sets forth operating data for our 333 same store properties. These results provide information relating to property operating changes without the effects of acquisition.

Same Store Summary



                                                Nine Months ended September 30,             Percentage
(dollars in thousands)                            2012                    2011                Change
Same store rental income                    $        145,064        $        138,047                5.1 %
Same store other operating income                      7,516                   6,235               20.5 %

Total same store operating income                    152,580                 144,282                5.8 %

Same store property operations and
maintenance                                           36,593                  37,818               -3.2 %
Same store real estate taxes                          14,681                  14,342                2.4 %

Total same store operating expenses                   51,274                  52,160               -1.7 %

Same store net operating income             $        101,306        $         92,122               10.0 %


                                                                                              Change
Year-to-date same store move ins                     115,587                 104,408             11,179
Year-to-date same store move outs                    103,098                 100,798              2,300

We believe the increase in same store move ins was a result of more effective online marketing and improved rental rate management.

General and administrative expenses increased $5.4 million or 29.2% from 2011 to 2012. The key drivers of the increase were a $2.8 million increase in salaries and performance incentives, $1.4 million increase in internet advertising, and a $0.3 million increase in income taxes on our taxable REIT subsidiary. The remaining $0.9 million increase is the result of increases in various other administrative costs as a result of managing the increased number of stores in our portfolio as compared to the 2011 period.

Acquisition related costs were $2.4 million in the nine months ended September 30, 2012 as a result of the acquisition of 14 stores during that period. Acquisition related costs for the nine months ended September 30, 2011 were $3.0 million as a result of the acquisition of 28 stores during that period.

Depreciation and amortization expense increased to $30.5 million in the nine months ended September 30, 2012 from $25.2 million in the same period of 2011, primarily as a result of depreciation on the 43 properties acquired in 2011 and 2012.

Interest expense decreased from $29.7 million in the nine months ended September 30, 2011 to $24.9 million in the same period in 2012. The decrease was mainly due to the $5.5 million that was paid to terminate two interest rate swap agreements related to the $150 million term note that was repaid as part of our debt refinancing in August 2011.

In July and August of 2012, the Company sold 17 non-strategic storage facilities in Maryland (1), Michigan (4) and Texas (12) for net proceeds of approximately $47.7 million resulting in a gain of approximately $4.5 million. The 2012 and 2011 operations of these facilities are reported in income from discontinued operations for all periods presented.

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Net income attributable to noncontrolling interest decreased from $0.8 million in the nine months ended September 30, 2011 to $0.4 million in the same period in 2012 as a result of our May 2011 additional investment in Locke Sovran II LLC in which we purchased the remaining noncontrolling interest in that entity.

FUNDS FROM OPERATIONS

We believe that Funds from Operations ("FFO") provides relevant and meaningful information about our operating performance that is necessary, along with net earnings and cash flows, for an understanding of our operating results. FFO adds back historical cost depreciation, which assumes the value of real estate assets diminishes predictably in the future. In fact, real estate asset values increase or decrease with market conditions. Consequently, we believe FFO is a useful supplemental measure in evaluating our operating performance by disregarding (or adding back) historical cost depreciation.

FFO is defined by the National Association of Real Estate Investment Trusts, Inc. ("NAREIT") as net income available to common shareholders computed in accordance with generally accepted accounting principles ("GAAP"), excluding gains or losses on sales of properties, plus impairment of real estate assets, plus depreciation and amortization and after adjustments to record unconsolidated partnerships and joint ventures on the same basis. We believe that to further understand our performance FFO should be compared with our reported net income and cash flows in accordance with GAAP, as presented in our consolidated financial statements.

In October and November of 2011, NAREIT issued guidance for reporting FFO that reaffirmed NAREIT's view that impairment write-downs of depreciable real estate should be excluded from the computation of FFO. This view is based on the fact that impairment write-downs are akin to and effectively reflect the early recognition of losses on prospective sales of depreciable property or represent adjustments of previously charged depreciation. Since depreciation of real estate and gains/losses from sales are excluded from FFO, it is NAREIT's view that it is consistent and appropriate for write-downs of depreciable real estate to also be excluded. Our calculation of FFO excludes impairment write-downs of investments in storage facilities.

Our computation of FFO may not be comparable to FFO reported by other REITs or real estate companies that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently. FFO does not represent cash generated from operating activities determined in accordance with GAAP, and should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of our performance, as an alternative to net cash flows from operating activities (determined in accordance with GAAP) as a measure of our liquidity, or as an indicator of our ability to make cash distributions.

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Reconciliation of Net Income to Funds From Operations (unaudited)



                                                                Nine months ended
(in thousands)                                  September 30, 2012              September 30, 2011
Net income attributable to common
shareholders                                  $               41,666           $             20,336
Net income attributable to
noncontrolling interest                                          421                            811
Depreciation of real estate and
amortization of intangible assets
exclusive of deferred financing fees                          30,178                         25,164
Depreciation of real estate included
in discontinued operations                                       787                          1,058
Depreciation and amortization from
unconsolidated joint ventures
exclusive of deferred financing fees                           1,205                            636
Gain on sale of real estate                                   (4,498 )                           -
Funds from operations allocable to
noncontrolling redeemable Operating
Partnership Units                                               (721 )                         (560 )
Funds from operations allocable to
noncontrolling interest in
consolidated joint venture                                        -                            (567 )

FFO available to common shareholders          $               69,038           $             46,878

LIQUIDITY AND CAPITAL RESOURCES

Our line of credit and term notes require us to meet certain financial covenants measured on a quarterly basis, including prescribed leverage, fixed charge coverage, minimum net worth, limitations on additional indebtedness, and limitations on dividend payouts. At September 30, 2012, the Company was in compliance with all debt covenants. The most sensitive covenant is the leverage ratio covenant contained in certain of our term note agreements. This covenant limits our total consolidated liabilities to 55% of our gross asset value. At September 30, 2012, our leverage ratio as defined in the agreements was approximately 40.6%. The agreements define total consolidated liabilities to include the liabilities of the Company plus our share of liabilities of unconsolidated joint ventures. The agreements also define a prescribed formula for determining gross asset value which incorporates the use of a 9.25% capitalization rate applied to annualized earnings before interest, taxes, depreciation and amortization and other items ("Adjusted EBITDA") as defined in the agreements. In the event that the Company violates debt covenants in the future, the amounts due under the agreements could be callable by the lenders and could adversely affect our credit rating requiring us to pay higher interest and other debt-related costs. We believe that if operating results remain consistent with historical levels and levels of other debt and liabilities remain consistent with amounts outstanding at September 30, 2012, the entire availability under our line of credit could be drawn without violating our debt covenants.

Our ability to retain cash flow is limited because we operate as a REIT. In order to maintain our REIT status, a substantial portion of our operating cash flow must be used to pay dividends to our shareholders. We believe that our internally generated net cash provided by operating activities and the availability on our line of credit will be sufficient to fund ongoing operations, capital improvements, dividends and debt service requirements through September 2013, at which time $100 million of term notes mature.

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Cash flows from operating activities were $68.5 million and $55.9 million for the nine months ended September 30, 2012, and 2011, respectively. The increase in operating cash flows from 2011 to 2012 was primarily due to the increase in net income.

Cash used in investing activities was $81.4 million and $175.9 million for the nine months ended September 30, 2012 and 2011, respectively. The decrease in cash used from 2011 to 2012 was due to the acquisition of 14 storage facilities in 2012 as compared to 28 in 2011. We also sold 17 stores in 2012 for net proceeds of $47.7 million. No stores were sold during the nine months ended September 30, 2011. In 2011 we also made an additional investment in Sovran HHF II, an unconsolidated joint venture, to fund the Company's 15% share of the purchase price of 19 self-storage facilities acquired by such joint venture. In 2012 we made an additional investment in the same unconsolidated joint venture to fund the Company's 15% share of the purchase price of 10 self-storage facilities acquired by the joint venture.

Cash provided by financing activities was $11.0 million and $120.7 million for the nine months ended September 30, 2012 and 2011, respectively. In 2012, we issued shares under our continuous equity offering program and used funds from operations to fund (i) acquisition of 14 storage facilities, (ii) capital improvements, (iii) our additional investment in Sovran HHF II, and (iv) other operating activities. In 2011, we used operating cash flows and draws on our line of credit to fund 28 acquisitions, and to make an additional investment in Locke Sovran II LLC.

On August 5, 2011, the Company entered into agreements relating to new unsecured credit arrangements, and received funds under those arrangements. As part of the agreements, the Company entered into a $125 million unsecured term note maturing in August 2018 bearing interest at LIBOR plus a margin based on the Company's credit rating (at September 30, 2012 the margin is 2.0%). The agreements also provide for a $175 million (expandable to $250 million) revolving line of credit bearing interest at a variable rate equal to LIBOR plus a margin based on the Company's credit rating (at September 30, 2012 the margin is 2.0%), and requires a 0.20% facility fee. The interest rate at September 30, 2012 on the Company's available line of credit was approximately 2.22% (2.28% at December 31, 2011). At September 30, 2012, there was $149 million available on the unsecured line of credit without considering the additional availability under the expansion . . .

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