Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
SSS > SEC Filings for SSS > Form 10-Q on 5-Aug-2014All Recent SEC Filings

Show all filings for SOVRAN SELF STORAGE INC

Form 10-Q for SOVRAN SELF STORAGE INC


5-Aug-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 APRIL 1, 2014 THROUGH JUNE 30, 2014, COMPARED TO THE PERIOD APRIL 1, 2013 THROUGH JUNE 30, 2013

We recorded rental revenues of $74.4 million for the three months ended June 30, 2014, an increase of $12.3 million or 19.7% when compared to rental revenues of $62.1 million for the same period in 2013. Of the increase in rental revenue, $5.1 million resulted from an 8.3% 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 270 basis point increase in average quarterly occupancy and a 4.4% increase in rental income per square foot. The remaining increase in rental revenue of $7.2 million was a result of the revenues from the acquisition of 34 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 $1.1 million for the three months ended June 30, 2014 compared to the same period in 2013 primarily as a result of increased commissions earned on customer insurance. Also included in 2014 other income is an acquisition fee of $0.1 million related to three properties acquired for one of our unconsolidated joint ventures. There was no such fee in 2013.

- 23 -


Property operations and maintenance expenses increased $1.9 million or 12.7% in the three months ended June 30, 2014 as compared to the same period in 2013. The 386 core properties considered in the same store pool experienced a $0.4 million or 2.9% increase in operating expenses as a result of higher costs for repairs and maintenance, bank charges and other operating expenses. The same store pool benefited from reduced property insurance and yellow page expenses. The remaining increase in property operating expenses of $1.5 million resulted from the acquisition of 34 properties and the lease of four properties completed since January 1, 2013. Real estate tax expense increased $1.7 million as a result of a 12.1% 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 $9.8 million or 21.2% as a result of a 10.0% 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 the three months ended June 30, 2014 and 2013.

                                                 Three Months ended June 30,
     (dollars in thousands)                       2014                 2013
     Net operating income
     Same store                               $      48,701        $      44,279
     Other stores and management fee income           7,235                1,873

     Total net operating income                      55,936               46,152
     General and administrative                     (10,404 )             (8,988 )
     Acquisition related costs                       (1,938 )                 -
     Operating leases of storage facilities          (1,997 )                 -
     Depreciation and amortization                  (12,481 )            (11,358 )
     Interest expense                                (8,872 )             (8,446 )
     Interest income                                     24                    1
     Equity in income of joint ventures                 433                  455
     Income from discontinued operations                 -                   236

     Net income                               $      20,701        $      18,052

- 24 -


Our 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
                                                  June 30,              Percentage
     (dollars in thousands)                   2014          2013          Change
     Same store rental income              $   66,745     $ 61,641              8.3 %
     Same store other operating income          3,786        3,294             14.9 %

     Total same store operating income         70,531       64,935              8.6 %
     Payroll and benefits                       6,286        6,145              2.3 %
     Real estate taxes                          7,043        6,284             12.1 %
     Utilities                                  2,421        2,359              2.6 %
     Repairs and maintenance                    2,315        2,091             10.7 %
     Office and other operating expenses        2,422        2,281              6.2 %
     Insurance                                    988        1,113            -11.2 %
     Advertising and yellow pages                 355          383             -7.3 %

     Total same store operating expenses       21,830       20,656              5.7 %

     Same store net operating income       $   48,701     $ 44,279             10.0 %


                                                                          Change
     Quarterly same store move ins             45,898       47,791           (1,893 )
     Quarterly same store move outs            39,662       38,800              862

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 for the three months ended June 30, 2014 increased $1.4 million or 15.8% compared with the three months ended June 30, 2013. The key driver of the increase was a $0.8 million increase in salaries and performance incentives and a $0.2 million increase in internet advertising. The remaining $0.4 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 $1.9 million in the three months ended June 30, 2014 as a result of the acquisition of 16 stores during that period. There were no acquisition related costs in the three months ended June 30, 2013 as no acquisitions were completed 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 $12.5 million in the three months ended June 30, 2014 from $11.4 million in the same period of 2013, primarily as a result of depreciation on the 34 properties acquired in 2013 and 2014.

Interest expense increased from $8.5 million in the three months ended June 30, 2013 to $8.9 million in the same period in 2014. The increase was due the higher outstanding balance on our terms notes in 2014 which were used to fund a portion of our acquisitions and to repay our line of credit balance.

- 25 -


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.

FOR THE PERIOD JANUARY 1, 2014 THROUGH JUNE 30, 2014, COMPARED TO THE PERIOD JANUARY 1, 2013 THROUGH JUNE 30, 2013

We recorded rental revenues of $144.3 million for the six months ended June 30, 2014, an increase of $22.7 million or 18.6% when compared to rental revenues of $121.7 million for the same period in 2013. Of the increase in rental revenue, $9.7 million resulted from an 8.0% 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 290 basis point increase in average quarterly occupancy and a 3.9% increase in rental income per square foot. The remaining increase in rental revenue of $13.0 million was a result of the revenues from the acquisition of 34 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 $2.3 million for the six months ended June 30, 2014 compared to the same period in 2013 primarily as a result of increased commissions earned on customer insurance. Also included in 2014 other income is an acquisition fee of $0.1 million related to three properties acquired for one of our unconsolidated joint ventures. There was no such fee in 2013.

Property operations and maintenance expenses increased $3.8 million or 12.8% in the six months ended June 30, 2014 as compared to the same period in 2013. The 386 core properties considered in the same store pool experienced a $1.1 million or 3.8% 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 insurance and yellow page expenses. The remaining increase in property operating expenses of $2.7 million resulted from the acquisition of 34 properties and the lease of four properties completed since January 1, 2013. Real estate tax expense increased $3.3 million as a result of an 11.2% 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 $17.8 million or 20.1% as a result of a 9.7% 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

- 26 -


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 the six months ended June 30, 2014 and 2013.

                                                  Six Months ended June 30,
       (dollars in thousands)                       2014               2013
       Net operating income
       Same store                               $      93,398        $  85,169
       Other stores and management fee income          12,865            3,317

       Total net operating income                     106,263           88,486
       General and administrative                     (20,360 )        (17,781 )
       Acquisition related costs                       (4,716 )           (486 )
       Operating leases of storage facilities          (3,994 )             -
       Depreciation and amortization                  (24,423 )        (22,559 )
       Interest expense                               (16,216 )        (16,904 )
       Interest income                                     31                1
       Gain on sale of real estate                         -               421
       Equity in income of joint ventures                 892              842
       Income from discontinued operations                 -               404

       Net income                               $      37,477        $  32,424

Our 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



                                              Six Months ended
                                                  June 30,              Percentage
     (dollars in thousands)                  2014          2013           Change
     Same store rental income              $ 130,684     $ 121,029              8.0 %
     Same store other operating income         7,278         6,162             18.1 %

     Total same store operating income       137,962       127,191              8.5 %
     Payroll and benefits                     12,540        12,331              1.7 %
     Real estate taxes                        14,100        12,679             11.2 %
     Utilities                                 5,283         4,861              8.7 %
     Repairs and maintenance                   5,026         4,535             10.8 %
     Office and other operating expenses       4,842         4,699              3.0 %
     Insurance                                 2,061         2,136             -3.5 %
     Advertising and yellow pages                712           781             -8.8 %

     Total same store operating expenses      44,564        42,022              6.0 %

     Same store net operating income       $  93,398     $  85,169              9.7 %


                                                                          Change
     Year-to-date same store move ins         84,516        85,906           (1,390 )
     Year-to-date same store move outs        75,239        75,507             (268 )

- 27 -


We believe the decrease in same store move ins was a byproduct of our increased occupancy, leaving fewer spaces to rent. We believe the decrease in year-to-date move outs is a result of customers staying longer with us.

General and administrative expenses for the six months ended June 30, 2014 increased $2.6 million or 14.5% compared with the six months ended June 30, 2013. The key driver of the increase was a $1.5 million increase in salaries and performance incentives and a $0.5 million increase in internet advertising. The remaining $0.6 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 $4.7 million in the six months ended June 30, 2014 as a result of the acquisition of 23 stores during that period. Acquisition related costs for the six months ended June 30, 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 $24.4 million in the six months ended June 30, 2014 from $22.6 million in the same period of 2013, primarily as a result of depreciation on the 34 properties acquired in 2013 and 2014.

Interest expense decreased from $16.9 million in the six months ended June 30, 2013 to $16.2 million in the same period in 2014. The decrease was due to reduced interest rates as a result of our refinancing in June 2013, partially offset by increased borrowings to fund acquisitions.

During the six months ended June 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.

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.

- 28 -


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.

Reconciliation of Net Income to Funds From Operations (unaudited)



                                      Three Months          Three Months           Six Months            Six Months
                                          Ended                 Ended                 Ended                 Ended
(in thousands)                        Jun. 30, 2014         Jun. 30, 2013         Jun. 30, 2014         Jun. 30, 2013
Net income attributable to common
shareholders                         $        20,576       $        17,937       $        37,249       $        32,217
Net income attributable to
noncontrolling interest                          125                   115                   228                   207
Depreciation of real estate and
amortization of intangible assets
exclusive of deferred financing
fees                                          12,255                11,138                23,970                22,141
Depreciation of real estate
included in discontinued
operations                                        -                     89                    -                    177
Depreciation and amortization
from unconsolidated joint
ventures exclusive of deferred
financing fees                                   360                   372                   736                   746
Gain on sale of real estate                       -                     -                     -                   (421 )
Funds from operations allocable
to noncontrolling redeemable
Operating Partnership Units                     (202 )                (189 )                (378 )                (351 )

FFO available to common
shareholders                         $        33,114       $        29,462       $        61,805       $        54,716

- 29 -


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 June 30, 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 June 30, 2014, our leverage ratio as defined in the agreements was approximately 38.3%. 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 June 30, 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 . . .

  Add SSS to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for SSS - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.