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SSS > SEC Filings for SSS > Form 10-Q on 8-May-2013All Recent SEC Filings

Show all filings for SOVRAN SELF STORAGE INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for SOVRAN SELF STORAGE INC


8-May-2013

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 JANUARY 1, 2013 THROUGH MARCH 31, 2013, COMPARED TO THE PERIOD JANUARY 1, 2012 THROUGH MARCH 31, 2012

We recorded rental revenues of $60.0 million for the three months ended March 31, 2013, an increase of $8.8 million or 17.1% when compared to rental revenues of $51.2 million for the same period in 2012. Of the increase in rental revenue, $4.0 million resulted from a 7.8% increase in rental revenues at the 362 core properties considered in same store sales (those properties included in the consolidated results of operations since January 1, 2012). The increase in same store rental revenues was a result of a 530 basis point increase in average quarterly occupancy and a 0.4% increase in rental income per square foot. The remaining increase in rental revenue of $4.8 million was a result of the revenues from the acquisition of 31 properties completed since January 1, 2012. Other operating income, which includes merchandise sales, insurance commissions, truck rentals, management fees and acquisition fees, increased by $0.6 million for the three months ended March 31, 2013 compared to the same period in 2012 primarily as a result of increased commissions earned on customer insurance.

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Property operations and maintenance expenses increased $1.8 million or 13.8% in the three months ended March 31, 2013 as compared to the same period in 2012. The 362 core properties considered in the same store pool experienced a $0.4 million or 3.1% increase in operating expenses as a result of higher costs for snow removal, insurance, and credit card fees. The same store pool benefited from reduced yellow page expense. The remaining increase in property operating expenses of $1.4 million resulted from the 31 properties acquired since January 1, 2012. Real estate tax expense increased $1.0 million as a result of a 3.9% increase in property taxes on the 362 same store pool and the inclusion of taxes on the properties acquired in 2013 and 2012.

Net operating income increased $6.5 million or 18.1% as a result of a 10.6% increase in our same store net operating income and the acquisitions completed since January 1, 2012.

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 March 31, 2013 and 2012.

                                                 Three Months ended March 31,
    (dollars in thousands)                        2013                  2012
    Net operating income
    Same store                               $       38,428         $      34,730
    Other stores and management fee income            4,163                 1,324

    Total net operating income                       42,591                36,054
    General and administrative                       (8,793 )              (7,565 )
    Acquisition related costs                          (486 )                  (7 )
    Depreciation and amortization                   (11,290 )              (9,894 )
    Interest expense                                 (8,457 )              (8,253 )
    Interest income                                      -                      3
    Gain on sale of real estate                         421                    -
    Equity in income of joint ventures                  386                    68
    Income from discontinued operations                  -                    863

    Net income                               $       14,372         $      11,269

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Our first quarter 2013 same store results consist of only those properties that were included in our consolidated results since January 1, 2012, and exclude the 17 properties we sold in July and August of 2012. The following table sets forth operating data for our 362 same store properties. These results provide information relating to property operating changes without the effects of acquisition.

Same Store Summary



                                                      Three Months ended
                                                           March 31,                Percentage
(dollars in thousands)                                2013            2012            Change
Same store rental income                           $   55,048       $ 51,071                7.8 %
Same store other operating income                       2,793          2,448               14.1 %

Total same store operating income                      57,841         53,519                8.1 %
Same store property operations and maintenance         13,747         13,337                3.1 %
Same store real estate taxes                            5,666          5,452                3.9 %

Total same store operating expenses                    19,413         18,789                3.3 %

Same store net operating income                    $   38,428       $ 34,730               10.6 %


                                                                                      Change
Quarterly same store move ins                          36,037         37,591             (1,554 )
Quarterly same store move outs                         34,483         33,385              1,098

We believe the decrease in same store move ins was a byproduct of our increased occupancy leaving fewer spaces to rent. We believe the increase in move outs is also a byproduct of having more customers and a result of a return to somewhat normal seasonality.

General and administrative expenses increased $1.2 million or 16.2% from 2012 to 2013. The key drivers of the increase were a $0.8 million increase in salaries and performance incentives, and a $0.2 million increase in internet advertising.

Acquisition related costs were $0.5 million in the three months ended March 31, 2013 as a result of the acquisition of three stores during that period. Acquisition related costs for the three months ended March 31, 2012 were minimal as there were no acquisitions during that period.

Depreciation and amortization expense increased to $11.3 million in the three months ended March 31, 2013 from $9.9 million in the same period of 2012, primarily as a result of depreciation on the 31 properties acquired in 2012 and 2013.

Interest expense increased from $8.3 million in the three months ended March 31, 2012 to $8.5 million in the same period in 2013. The increase was due to increased borrowings on our line of credit.

During the three months ended March 31, 2013, we sold our equity interest and mortgage note in a formerly consolidated joint venture for $4.4 million resulting in a gain on the sale of $0.4 million.

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, which was recorded in the quarter ended September 30, 2012. The 2012 operations of these facilities are reported in income from discontinued operations for all periods presented.

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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)



                                                                Three months ended
(in thousands)                                       March 31, 2013            March 31, 2012
Net income attributable to common
shareholders                                        $          14,280          $        11,138
Net income attributable to noncontrolling
interest                                                           92                      131
Depreciation of real estate and amortization
of intangible assets exclusive of deferred
financing fees                                                 11,090                    9,801
Depreciation of real estate included in
discontinued operations                                            -                       352
Depreciation and amortization from
unconsolidated joint ventures exclusive of
deferred financing fees                                           375                      390
Gain on sale of real estate                                      (421 )                     -
Funds from operations allocable to
noncontrolling redeemable Operating
Partnership Units                                                (162 )                   (254 )

FFO available to common shareholders                $          25,254          $        21,558

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 March 31, 2013, 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 March 31, 2013, our leverage ratio as defined in the agreements was approximately 41.2%. 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 March 31, 2013, 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. Our options to address the term notes due in September 2013 include, draws on our line of credit, a new term note with a syndicate of banks or private noteholders, or an issuance of common stock through our continuous equity offering program.

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Cash flows from operating activities were $10.1 million and $8.5 million for the three months ended March 31, 2013, and 2012, respectively. The increase in operating cash flows from 2012 to 2013 was primarily due to the increase in net income.

Cash used in investing activities was $20.8 million and $6.9 million for the three months ended March 31, 2013 and 2012, respectively. The increase in cash used from 2012 to 2013 was due to the acquisition of three storage facilities in the first quarter of 2013 as compared to none in same period in 2012. We also sold our equity interest and a mortgage note in a consolidated joint venture in 2013 resulting in net proceeds of $4.4 million. No stores were sold during the three months ended March 31, 2012. In 2012 we made an additional investment in an 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 $10.4 million and $4.6 million for the three months ended March 31, 2013 and 2012, respectively. In 2013, we issued shares under our continuous equity offering program and used funds from operations to fund (i) the acquisition of three storage facilities, and
(ii) capital improvements. Since there were no acquisitions in the first quarter of 2012, we used operating cash flows and draws on our line of credit to fund capital improvements and to make an additional investment in an unconsolidated joint venture.

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 March 31, 2013 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 March 31, 2013 the margin is 2.0%), and requires a 0.20% facility fee. The interest rate at March 31, 2013 on the Company's available line of credit was approximately 2.20% (2.21% at December 31, 2012). At March 31, 2013, there was $99 million available on the unsecured line of credit without considering the additional availability under the expansion feature. The revolving line of credit has a maturity date of August 2016, but can be extended for two one-year periods at the Company's option with the payment of an extension fee equal to 0.125% of the total line of credit commitment.

In addition, on August 5, 2011, the Company secured an additional $100 million term note with a delayed draw feature that was used to fund the Company's mortgage maturities in December 2011. The delayed draw term note matures August 2018 and bears interest at LIBOR plus a margin based on the Company's credit rating (at March 31, 2013 the margin is 2.0%).

On August 5, 2011, the Company also entered into a $100 million term note maturing August 2021 bearing interest at a fixed rate of 5.54%. The interest rate on the term note increases to 7.29% if the notes are not rated by at least one rating agency, the credit rating on the notes is downgraded or if the Company's credit rating is downgraded. The proceeds from this term note were used to fund acquisitions and investments in unconsolidated joint ventures.

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The Company also maintains an $80 million term note maturing September 2013 bearing interest at a fixed rate of 6.26%, a $20 million term note maturing September 2013 bearing interest at a variable rate equal to LIBOR plus 1.50%, and a $150 million unsecured term note maturing in April 2016 bearing interest at 6.38%. The interest rate on the $150 million unsecured term note increases to 8.13% if the notes are not rated by at least one rating agency, the credit rating on the notes is downgraded or the Company's credit rating is downgraded.

Our line of credit facility and term notes have an investment grade rating from Standard and Poor's and Fitch Ratings (BBB-).

In addition to the unsecured financing mentioned above, our consolidated financial statements also include $4.2 million of mortgages payable that are secured by three storage facilities.

On February 27, 2013, the Company entered into a continuous equity offering program ("Equity Program") with Wells Fargo Securities, LLC ("Wells Fargo"), Jefferies & Company, Inc. ("Jefferies") and SunTrust Robinson Humphrey, Inc. ("SunTrust") pursuant to which the Company may sell from time to time up to $175 million in aggregate offering price of shares of the Company's common stock. Actual sales under the Equity Program will depend on a variety of factors and conditions, including, but not limited to, market conditions, the trading price of the Company's common stock, and determinations of the appropriate sources of funding for the Company. The Company expects to continue to offer, sell, and issue shares of common stock under the Equity Program from time to time based on various factors and conditions, although the Company is under no obligation to sell any shares under the Equity Program.

During the three months ended March 31, 2013, the Company issued 822,000 shares under this Equity Program at a weighted average issue price of $62.04 per share, generating net proceeds of $50.3 million after deducting $0.5 million of sales commissions payable to SunTrust and $0.2 million to Wells Fargo. In addition to sales commissions, the Company incurred expenses of $87,000 in connection with the Equity Program during 2013. The Company used the proceeds from the Equity Program to reduce the outstanding balance under the Company's revolving line of credit and to fund the acquisition of three storage facilities. As of March 31, 2013, the Company had $124.0 million available for issuance under the Equity Program.

During 2012, the Company issued 1,391,425 shares under its previously available equity offering program with Wells Fargo at a weighted average issue price of $55.20 per share, generating net proceeds of $75.3 million after deducting $1.5 million of sales commissions payable to Wells Fargo. In addition to sales commissions paid to Wells Fargo, the Company incurred expenses of $58,000 in connection with this equity offering program during 2012. The Company used the proceeds from this offering to reduce the outstanding balance under the Company's revolving line of credit.

We implemented a new Dividend Reinvestment Plan in March 2013 which replaced our previous plan which was suspended in November 2009. We did not issue any shares under the new plan in the three months ended March 31, 2013.

During the three months ended March 31, 2013 and 2012, we did not acquire any shares of our common stock via the Share Repurchase Program authorized by the Board of Directors. From the inception of the Share Repurchase Program through March 31, 2013, we have reacquired a total of 1,171,886 shares pursuant to this program. From time to time, subject to market price and certain loan covenants, we may reacquire additional shares.

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Future acquisitions, our expansion and enhancement program, and share repurchases are expected to be funded with draws on our line of credit, issuance of common and preferred stock, the issuance of unsecured term notes, sale of properties, and private placement solicitation of joint venture equity. Should the capital markets deteriorate, we may have to curtail acquisitions, our expansion and enhancement program, and share repurchases as we approach September 2013, when certain term notes mature.

ACQUISITION AND DISPOSITION OF PROPERTIES

In the three months ended March 31, 2013, the Company acquired three self-storage facilities comprising 0.1 million square feet in Massachusetts, New York, and Texas for a total purchase price of $22.3 million. Based on the trailing financials of the entities from which the properties were acquired, the weighted average capitalization rate was 4.5% on these purchases and ranged from 3.3% to 6.5%.

In 2012, we acquired 28 self storage facilities comprising 2.2 million square feet in Arizona (1), Florida (8), Georgia (5), Illinois (9), North Carolina (1), Texas (3), and Virginia (1) for a total purchase price of $189.1 million. Based on the trailing financials of the entities from which the properties were acquired, the weighted average capitalization rate was 5.2% on these purchases and ranged from 1.0% to 8.2%.

In February 2013, we sold our equity interest and a mortgage note in one storage facility in New Jersey for $4.4 million resulting in a gain of $0.4 million.

In July and August of 2012, we sold 17 non-strategic storage facilities located in Michigan, Maryland and Texas for net cash proceeds of $47.7 million resulting in a gain of approximately $4.5 million.

We may seek to sell additional properties to third parties or joint venture programs in 2013.

FUTURE ACQUISITION AND DEVELOPMENT PLANS

Our external growth strategy is to increase the number of facilities we own by acquiring suitable facilities in markets in which we already have operations, or to expand into new markets by acquiring several facilities at once in those new markets. We are actively pursuing acquisitions in 2013, although as of March 31, 2013 we did not have any properties under contract.

In the three months ended March 31, 2013, we added 60,000 square feet to existing properties for a total cost of approximately $3.7 million. In 2012, we added 372,000 square feet to existing properties, and converted 35,000 square feet to premium storage for a total cost of approximately $22.5 million. Although we do not expect to construct any new facilities in 2013, we do plan to expend an additional $16.0 million to expand and enhance existing facilities.

We also expect to continue making capital expenditures on our properties. This includes roofing, paving, and remodeling of the office buildings. For the first three months of 2013 we spent approximately $1.6 million on such improvements and we expect to spend approximately $13.3 million for the remainder of 2013.

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