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


6-Nov-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 JULY 1, 2013 THROUGH SEPTEMBER 30, 2013, COMPARED TO THE PERIOD JULY 1, 2012 THROUGH SEPTEMBER 30, 2012

We recorded rental revenues of $65.8 million for the three months ended September 30, 2013, an increase of $8.2 million or 14.3% when compared to rental revenues of $57.6 million for the same period in 2012. Of the increase in rental revenue, $3.9 million resulted from a 7.0% 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 250 basis point increase in average quarterly occupancy and a 3.6% increase in rental income per square foot. The remaining increase in rental revenue of $4.3 million was a result of the revenues from the acquisition of 34 properties completed since January 1, 2012. Other operating income, which includes merchandise sales, insurance commissions, truck rentals, management fees and acquisition fees, increased by $1.0 million for the three months ended September 30, 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 $1.4 million or 9.8% in the three months ended September 30, 2013 as compared to the same period in 2012. The 362 core properties considered in the same store pool experienced a $0.3 million or 2.3% increase in operating expenses as a result of higher costs for employees, insurance, and credit card fees. The same store pool benefited from reduced yellow page expense. The remaining increase in property operating expenses of $1.1 million resulted from the 34 properties acquired since January 1, 2012. Real estate tax expense increased $1.4 million as a result of a 5.0% 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 $6.4 million or 15.4% as a result of a 9.3% 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 September 30, 2013 and 2012.

                                              Three Months ended September 30,
  (dollars in thousands)                        2013                    2012
  Net operating income
  Same store                               $        42,973         $        39,300
  Other stores and management fee income             5,295                   2,526

  Total net operating income                        48,268                  41,826
  General and administrative                        (8,965 )                (8,172 )
  Acquisition related costs                           (776 )                (1,075 )
  Depreciation and amortization                    (11,381 )               (10,427 )
  Interest expense                                  (7,923 )                (8,350 )
  Interest income                                        1                      -
  Equity in income of joint ventures                   575                     335
  Income from discontinued operations                   -                    4,821

  Net income                               $        19,799         $        18,958

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Our third 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 acquisitions.

Same Store Summary



                                                      Three Months ended
                                                         September 30,              Percentage
(dollars in thousands)                                2013            2012            Change
Same store rental income                           $   59,672       $ 55,778                7.0 %
Same store other operating income                       3,168          2,804               13.0 %

Total same store operating income                      62,840         58,582                7.3 %
Same store property operations and maintenance         14,143         13,828                2.3 %
Same store real estate taxes                            5,724          5,454                5.0 %

Total same store operating expenses                    19,867         19,282                3.0 %

Same store net operating income                    $   42,973       $ 39,300                9.3 %


                                                                                      Change
Quarterly same store move ins                          39,182         41,651             (2,469 )
Quarterly same store move outs                         43,675         43,066                609

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.

General and administrative expenses increased $0.8 million or 9.7% from 2012 to 2013. The key driver of the increase was a $0.8 million increase in salaries and performance incentives.

Acquisition related costs were $0.8 million in the three months ended September 30, 2013 as a result of the acquisition of three stores during that period. Acquisition related costs for the three months ended September 30, 2012 were $1.1 million as a result of the acquisition of 10 stores during that period.

Depreciation and amortization expense increased to $11.4 million in the three months ended September 30, 2013 from $10.4 million in the same period of 2012, primarily as a result of depreciation on the 34 properties acquired in 2012 and 2013.

Interest expense decreased from $8.4 million in the three months ended September 30, 2012 to $7.9 million in the same period in 2013. The decrease was due to reduced interest rates as a result of our refinancing in June 2013.

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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FOR THE PERIOD JANUARY 1, 2013 THROUGH SEPTEMBER 30, 2013, COMPARED TO THE PERIOD JANUARY 1, 2012 THROUGH SEPTEMBER 30, 2012

We recorded rental revenues of $188.4 million for the nine months ended September 30, 2013, an increase of $26.5 million or 16.4% when compared to rental revenues of $161.9 million for the same period in 2012. Of the increase in rental revenue, $12.4 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 380 basis point increase in average quarterly occupancy and a 2.5% increase in rental income per square foot. The remaining increase in rental revenue of $14.1 million was a result of the revenues from the acquisition of 34 properties completed since January 1, 2012. Other operating income, which includes merchandise sales, insurance commissions, truck rentals, management fees and acquisition fees, increased by $2.5 million for the nine months ended September 30, 2013 compared to the same period in 2012 primarily as a result of increased commissions earned on customer insurance.

Property operations and maintenance expenses increased $4.7 million or 11.6% in the nine months ended September 30, 2013 as compared to the same period in 2012. The 362 core properties considered in the same store pool experienced a $1.0 million or 2.4% increase in operating expenses as a result of higher costs for employees, 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 $3.7 million resulted from the 34 properties acquired since January 1, 2012. Real estate tax expense increased $3.2 million as a result of a 4.2% 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 $21.1 million or 18.1% as a result of a 10.7% increase in our same store net operating income and the acquisitions completed since January 1, 2012.

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, 2013 and 2012.

                                               Nine Months ended September 30,
  (dollars in thousands)                        2013                    2012
  Net operating income
  Same store                               $       122,751         $       110,878
  Other stores and management fee income            14,585                   5,369

  Total net operating income                       137,336                 116,247
  General and administrative                       (26,745 )               (23,707 )
  Acquisition related costs                         (1,263 )                (2,382 )
  Depreciation and amortization                    (34,118 )               (30,461 )
  Interest expense                                 (24,827 )               (24,914 )
  Interest income                                        2                       3
  Gain on sale of real estate                          421                      -
  Equity in income of joint ventures                 1,417                     608
  Income from discontinued operations                   -                    6,693

  Net income                               $        52,223         $        42,087

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Our 2013 year to date 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 acquisitions.

Same Store Summary



                                                       Nine Months ended
                                                         September 30,              Percentage
(dollars in thousands)                               2013            2012             Change
Same store rental income                           $ 171,868       $ 159,441                7.8 %
Same store other operating income                      9,096           8,006               13.6 %

Total same store operating income                    180,964         167,447                8.1 %
Same store property operations and maintenance        41,167          40,211                2.4 %
Same store real estate taxes                          17,046          16,358                4.2 %

Total same store operating expenses                   58,213          56,569                2.9 %

Same store net operating income                    $ 122,751       $ 110,878               10.7 %


                                                                                      Change
Quarterly same store move ins                        118,992         125,305             (6,313 )
Quarterly same store move outs                       114,580         111,184              3,396

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 $3.0 million or 12.8% from 2012 to 2013. The key drivers of the increase were a $2.5 million increase in salaries and performance incentives, and a $0.7 million increase in internet advertising.

Acquisition related costs were $1.3 million in the nine months ended September 30, 2013 as a result of the acquisition of six stores during that period. Acquisition related costs for the nine months ended September 30, 2012 were $2.4 million as a result of the acquisition of 14 stores during that period.

Depreciation and amortization expense increased to $34.1 million in the nine months ended September 30, 2013 from $30.5 million in the same period of 2012, primarily as a result of depreciation on the 34 properties acquired in 2012 and 2013.

Interest expense decreased from $24.9 million in the nine months ended September 30, 2012 to $24.8 million in the same period in 2013. The decrease was due to reduced interest rates on our line of credit and term notes as a result of our refinancing in June 2013.

During the nine months ended September 30, 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.

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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.

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, 2013           September 30, 2012
Net income attributable to common
shareholders                                     $               51,892        $             41,666
Net income attributable to noncontrolling
interest                                                            331                         421
Depreciation of real estate and
amortization of intangible assets exclusive
of deferred financing fees                                       33,477                      30,178
Depreciation of real estate included in
discontinued operations                                              -                          787
Depreciation and amortization from
unconsolidated joint ventures exclusive of
deferred financing fees                                           1,119                       1,205
Gain on sale of real estate                                        (421 )                    (4,498 )
Funds from operations allocable to
noncontrolling redeemable Operating
Partnership Units                                                  (547 )                      (721 )

FFO available to common shareholders             $               85,851        $             69,038

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, 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 September 30, 2013, our leverage ratio as defined in the agreements was approximately 35.2%. 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 September 30, 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 and delayed draw term note will be sufficient to fund ongoing operations, capital improvements, dividends and debt service requirements through April 2016, at which time $150 million of term notes mature.

Cash flows from operating activities were $85.6 million and $68.4 million for the nine months ended September 30, 2013, and 2012, respectively. The increase in operating cash flows from 2012 to 2013 was primarily due to the increase in net income.

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Cash used in investing activities was $68.8 million and $81.4 million for the nine months ended September 30, 2013 and 2012, respectively. The decrease in cash used from 2012 to 2013 was due to the acquisition of 14 storage facilities in the nine months ended September 30, 2012 as compared to the six storage facilities in the same period of 2013. In 2013 we also sold our equity interest and a mortgage note in a consolidated joint venture resulting in net proceeds of $4.4 million. During the nine months ended September 30, 2012 we sold 17 stores resulting in net proceeds of $47.7 million.

Cash (used in) provided by financing activities was ($14.4) million and $11.0 million for the nine months ended September 30, 2013 and 2012, respectively. In 2013 we issued shares under our continuous equity offering program to fund acquisitions and to pay down a net of $56 million on our line of credit. In 2012 we issued shares under our continuous equity offering program to fund acquisitions and to pay down a net of $20 million on our line of credit. The issuance of additional shares of common stock resulted in an increase in our dividend payments from $39.3 million in the nine months ended September 2012 as compared to $46.3 million for the same period of 2013.

On June 4, 2013, the Company entered into an amendment to its unsecured credit arrangement. As part of the amended agreement, the Company entered into a $225 million unsecured term note maturing June 4, 2020 bearing interest at LIBOR plus a margin based on the Company's credit rating (at September 30, 2013 the margin is 1.65%). The agreement also provides 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, 2013 the margin is 1.50%), and requires a 0.20% facility fee. The interest rate at September 30, 2013 on the Company's available line of credit was approximately 1.68% (2.21% at December 31, 2012). At September 30, 2013, there was $126 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 June 4, 2018, 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 June 4, 2013, as part of the amendment to its unsecured credit arrangement, the Company secured an additional $100 million term note with a delayed draw feature that was used to fund the Company's term notes that matured in September 2013. The delayed draw term note matures June 4, 2020 and bears interest at LIBOR plus a margin based on the Company's credit rating (at September 30, 2013 the margin is 1.65%).

On August 5, 2011, the Company 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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