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SSS > SEC Filings for SSS > Form 10-Q on 6-May-2014All Recent SEC Filings

Show all filings for SOVRAN SELF STORAGE INC

Form 10-Q for SOVRAN SELF STORAGE INC


6-May-2014

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, 2014 THROUGH MARCH 31, 2014, COMPARED TO THE PERIOD JANUARY 1, 2013 THROUGH MARCH 31, 2013

We recorded rental revenues of $70.0 million for the three months ended March 31, 2014, an increase of $10.4 million or 17.4% when compared to rental revenues of $59.6 million for the same period in 2013. Of the increase in rental revenue, $4.5 million resulted from a 7.7% increase in rental revenues at the 386 core properties considered in same store sales (those properties included in the consolidated results of operations since January 1, 2013). The increase in same store rental revenues was a result of a 310 basis point increase in average quarterly occupancy and a 3.4% increase in rental income per square foot. The remaining increase in rental revenue of $5.9 million was a result of the revenues from the acquisition of 18 properties and the lease of four properties completed since January 1, 2013. Other operating income, which includes merchandise sales, insurance commissions, truck rentals, management fees and acquisition fees, increased by $1.2 million for the three months ended March 31, 2014 compared to the same period in 2013 primarily as a result of increased commissions earned on customer insurance.

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Property operations and maintenance expenses increased $1.9 million or 12.8% in the three months ended March 31, 2014 as compared to the same period in 2013. The 386 core properties considered in the same store pool experienced a $0.7 million or 4.7% increase in operating expenses as a result of higher costs for utilities, repairs and maintenance, and snow removal. The same store pool benefited from reduced yellow page expense. The remaining increase in property operating expenses of $1.2 million resulted from the acquisition of 18 properties and the lease of four properties completed since January 1, 2013. Real estate tax expense increased $1.6 million as a result of a 10.4% increase in property taxes on the 386 same store pool and the inclusion of taxes on the properties acquired and leased in 2014 and 2013.

Net operating income increased $8.0 million or 18.9% as a result of a 9.3% increase in our same store net operating income and the acquisitions completed since January 1, 2013.

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, 2014 and 2013.

                                                 Three Months ended March 31,
    (dollars in thousands)                        2014                  2013
    Net operating income
    Same store                               $       44,697        $       40,889
    Other stores and management fee income            5,630                 1,446

    Total net operating income                       50,327                42,335
    General and administrative                       (9,956 )              (8,793 )
    Acquisition related costs                        (2,778 )                (486 )
    Operating leases of storage facilities           (1,997 )                  -
    Depreciation and amortization                   (11,942 )             (11,202 )
    Interest expense                                 (7,343 )              (8,457 )
    Interest income                                       6                    -
    Gain on sale of real estate                          -                    421
    Equity in income of joint ventures                  458                   386
    Income from discontinued operations                  -                    168

    Net income                               $       16,775        $       14,372

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Our first quarter 2014 same store results consist of only those properties that were included in our consolidated results since January 1, 2013, and exclude the four properties we sold in 2013. The following table sets forth operating data for our 386 same store properties. These results provide information relating to property operating changes without the effects of acquisitions.

Same Store Summary



                                             Three Months ended
                                                  March 31,             Percentage
     (dollars in thousands)                   2014          2013          Change
     Same store rental income              $   63,938     $ 59,389              7.7 %
     Same store other operating income          3,493        2,867             21.8 %

     Total same store operating income         67,431       62,256              8.3 %
     Payroll and benefits                       6,254        6,187              1.1 %
     Real estate taxes                          7,058        6,394             10.4 %
     Utilities                                  2,861        2,502             14.3 %
     Repairs and maintenance                    2,711        2,445             10.9 %
     Office and other operating expenses        2,420        2,418              0.1 %
     Insurance                                  1,073        1,023              4.9 %
     Advertising and yellow pages                 357          398            -10.3 %

     Total same store operating expenses       22,734       21,367              6.4 %

     Same store net operating income       $   44,697     $ 40,889              9.3 %


                                                                          Change
     Quarterly same store move ins             38,618       38,115              503
     Quarterly same store move outs            35,577       36,707           (1,130 )

We believe the increase in same store move ins was a byproduct of our increased internet advertising spend, our revenue management system, and a general increase in demand for storage. We believe the decrease in move outs is a result of customers staying longer with us.

General and administrative expenses for the three months ended March 31, 2014 increased $1.2 million or 13.2% compared with the three months ended March 31, 2013. The key driver of the increase was a $0.7 million increase in salaries and performance incentives and a $0.4 million increase in internet advertising. The remaining $0.1 million increase is the result of various other administrative costs related to managing the increased number of stores in our portfolio as compared to the 2013 period.

Acquisition related costs were $2.8 million in the three months ended March 31, 2014 as a result of the acquisition of seven stores during that period. Acquisition related costs for the three months ended March 31, 2013 were $0.5 million as a result of the acquisition of three stores during that period.

The operating lease expense for storage facilities in the 2014 period relates to leases which commenced in November 2013 with respect to four self storage facilities in New York (2) and Connecticut (2). Such leases have annual lease payments of $6 million with a provision for 4% annual increases, and an exclusive option to purchase the facilities for $120 million.

Depreciation and amortization expense increased to $11.9 million in the three months ended March 31, 2014 from $11.2 million in the same period of 2013, primarily as a result of depreciation on the 18 properties acquired in 2013 and the first quarter of 2014.

Interest expense decreased from $8.5 million in the three months ended March 31, 2013 to $7.3 million in the same period in 2014. The decrease was due to reduced interest rates as a result of our refinancing in June 2013.

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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 the 4th quarter of 2013, we sold four non-strategic facilities in Ohio, Florida (2), and Virginia for net proceeds of approximately $11.7 million resulting in a gain of approximately $2.4 million. The 2013 operations of these facilities are reported in income from discontinued operations.

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, 2014         March 31, 2013
Net income attributable to common shareholders         $          16,673       $        14,280
Net income attributable to noncontrolling interest                   102                    92
Depreciation of real estate and amortization of
intangible assets exclusive of deferred financing
fees                                                              11,716                11,001
Depreciation of real estate included in
discontinued operations                                               -                     89
Depreciation and amortization from unconsolidated
joint ventures exclusive of deferred financing
fees                                                                 376                   375
Gain on sale of real estate                                           -                   (421 )
Funds from operations allocable to noncontrolling
redeemable Operating Partnership Units                              (176 )                (162 )

FFO available to common shareholders                   $          28,691       $        25,254

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, 2014, 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, 2014, our leverage ratio as defined in the agreements was approximately 37.3%. 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, 2014, 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 April 2016, at which time $150 million of term notes mature.

Cash flows from operating activities were $18.6 million and $10.2 million for the three months ended March 31, 2014, and 2013, respectively. The increase in operating cash flows in the 2014 period compared to the 2013 period was primarily due to the increase in net income and a smaller decrease in accounts payable in 2014 as compared to the same period in 2013.

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Cash used in investing activities was $94.9 million and $20.9 million for the three months ended March 31, 2014 and 2013, respectively. The increase in cash used in investing activities in the 2014 period compared to the 2013 period was due to the acquisition of seven storage facilities in the three months ended March 31, 2014 for $89.1 million as compared to three storage facilities in the same period of 2013 for $22.2 million. 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.

Cash provided by financing activities was $73.0 million and $10.4 million for the three months ended March 31, 2014 and 2013, respectively. In the 2014 period we made net borrowings of $66.0 million on our line of credit primarily to fund acquisitions. In the 2014 period we also issued shares under our continuous equity offering program to fund acquisitions which, when combined with proceeds from the exercise of stock options and the sale of common stock through our dividend reinvestment plan, resulted in net cash proceeds from the sale of common stock of $29.4 million. We paid dividends of $22.1 million in the 2014 period which increased in comparison to dividends of $14.6 million in the 2013 period primarily because of an increase in our common shares outstanding and an increase in our dividend rate. In the 2013 period we issued more shares under our continuous equity offering program in comparison to the 2014 period for the purpose of funding acquisitions and reducing the balance on our line of credit. Proceeds from the issuance of shares under the equity offering program, stock option exercises and the sale of shares through our dividend reinvestment program resulted in net proceeds of $54.5 million in the 2013 period. We made net repayments on our line of credit of $29.0 million in the 2013 period.

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 March 31, 2014 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 March 31, 2014 the margin is 1.50%), and requires a 0.20% facility fee. The interest rate at March 31, 2014 on the Company's available line of credit was approximately 1.65% (1.67% at December 31, 2013). At March 31, 2014, there was $59.3 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 March 31, 2014 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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The Company also maintains 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.

On April 8, 2014, the Company entered into a $175 million term note maturing April 2024 bearing interest at a fixed rate of 4.533%. The interest rate on the term note increases to 6.283% if the Company is not rated by at least one rating agency or if the Company's credit rating is downgraded. The proceeds from this term note were used to repay the $115 million outstanding on the Company's line of credit at April 8, 2014, with the excess proceeds to be used for future acquisitions.

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 $2.2 million of mortgages payable that are secured by a storage facility.

On February 27, 2013, the Company entered into a continuous equity offering program ("Equity Program") with Wells Fargo Securities, LLC ("Wells Fargo"), Jefferies LLC fka 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, 2014, the Company sold 359,102 shares of common stock under this Equity Program at a weighted average issue price of $74.32 per share, generating net proceeds of $26.4 million after deducting $0.3 million of sales commissions payable to SunTrust. In addition to sales commissions, the Company incurred expenses of $0.1 million in connection with the Equity Program during the 2014 period. The Company used the proceeds from the Equity Program to fund a portion of the acquisition of seven storage facilities. As of March 31, 2014, the Company had $38.8 million available for issuance under the Equity Program.

During the three months ended March 31, 2013, the Company sold 822,000 shares of common stock 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 $0.1 million in connection with the Equity Program during the period ended March 31, 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.

In 2013, the Company implemented a Dividend Reinvestment Plan. The Company sold 47,583 common shares under the new plan during the three months ended March 31, 2014.

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During the three months ended March 31, 2014 and 2013, 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, 2014, 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.

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 April 2016, when certain term notes mature.

ACQUISITION AND DISPOSITION OF PROPERTIES

In the three months ended March 31, 2014, the Company acquired seven self-storage facilities comprising 0.5 million square feet in Florida (2), Illinois (1), Maine (2), and Texas (2) for a total purchase price of $95.4 million. Based on the trailing financial information of the entities from which the properties were acquired, the weighted average capitalization rate was 5.1% on these purchases and ranged from 1.0% on a facility with low occupancy to 7.3% on a mature facility.

In 2013, we acquired 11 self storage facilities comprising 0.6 million square feet in Colorado (1), Connecticut (1), Florida (1), Massachusetts (1), New Jersey (2), New York (3), and Texas (2) for a total purchase price of $94.9 million. In addition to the properties acquired, in November 2013 the Company entered into lease agreements with respect to four self storage facilities in . . .

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