FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
Commission file number: 1-13820
Sovran Self Storage, Inc.
(Exact name of Registrant as specified in its charter)
Maryland 16-1194043
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5166 Main Street
Williamsville, NY 14221
(Address of principal executive offices) (Zip code)
(716) 633-1850
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Title Outstanding
Common Stock, $.01 par value per share. 12,463,632
Part I. Financial Information
Item 1. Financial Statements
SOVRAN SELF STORAGE, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, December 31,
(dollars in thousands, except share data) 1999 1998
------------- -------------
Assets
Investment in storage facilities:
Land ........................................... $ 111,425 $ 102,864
Building and equipment ......................... 440,382 399,638
------------ ------------
551,807 502,502
Less: accumulated depreciation ................. (30,261) (21,339)
------------ ------------
Investment in storage facilities, net ............. 521,546 481,163
Cash and cash equivalents ......................... 1,074 2,984
Accounts receivable ............................... 1,707 1,699
Prepaid expenses and other assets ................. 4,541 4,278
------------ ------------
Total Assets ................................... $ 528,868 $ 490,124
============ ============
Liabilities
Line of credit .................................... $ 114,000 $ 112,000
Term note ......................................... 75,000 75,000
Accounts payable and accrued liabilities .......... 7,037 3,542
Deferred revenue .................................. 3,227 2,943
Accrued dividends ................................. 7,104 6,895
Mortgage payable .................................. 5,262 3,059
------------ ------------
Total Liabilities .............................. 211,630 203,439
Minority interest ................................... 23,659 24,020
Shareholders' Equity
Series A Junior Participating Cumulative
Preferred Stock, $.01 par value, 250,000
shares authorized and no shares issued
and outstanding ................................. - -
9.85% Series B Cumulative Redeemable Preferred
Stock, $.01 par value, 1,700,000 shares
authorized, 1,200,000 shares issued and
outstanding, $30,000 liquidation value .......... 28,753 -
Common stock $.01 par value, 100,000,000
shares authorized, 12,463,632 shares
outstanding (12,312,756 at December 31,
1998)............................................ 126 124
Additional paid-in capital ........................ 280,490 274,638
Unearned restricted stock ......................... (365) (418)
Dividends in excess of net income ................. (11,511) (9,689)
Treasury stock at cost, 158,900 shares ............ (3,914) (1,990)
------------ ------------
Total Shareholders' Equity ..................... 293,579 262,665
------------ ------------
Total Liabilities and Shareholders' Equity ........ $ 528,868 $ 490,124
============ ============
See notes to financial statements.
SOVRAN SELF STORAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
July 1, 1999 July 1, 1998
to to
(dollars in thousands, except share data) Sept. 30, 1999 Sept. 30, 1998
-------------- --------------
Revenues:
Rental income .................................. $ 21,535 $ 18,876
Interest and other income ...................... 1,035 231
------------ ------------
Total revenues .............................. 22,570 19,107
Expenses:
Property operations and maintenance ............ 4,309 3,905
Real estate taxes .............................. 1,901 1,481
General and administrative ..................... 1,318 1,173
Interest ....................................... 3,503 3,080
Depreciation and amortization .................. 3,362 2,830
------------ ------------
Total expenses .............................. 14,393 12,469
------------ ------------
Income before minority interest .................. 8,177 6,638
Minority interest ................................ (523) (438)
------------ ------------
Net Income ....................................... 7,654 6,200
Series B preferred stock dividend ............... (501) -
------------ ------------
Net income available to common shareholders ...... $ 7,153 $ 6,200
============ ============
Per Common Share:
Earnings per share - basic ..................... $ 0.57 $ 0.51
============ ============
Earnings per share - diluted ................... $ 0.57 $ 0.50
============ ============
Common shares used in basic
earnings per share calculation ............. 12,486,771 12,273,535
Common shares used in diluted
earnings per share calculation ............. 12,494,452 12,294,243
Dividends declared per common share .............. $ 0.57 $ 0.56
============ ============
See notes to financial statements.
SOVRAN SELF STORAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Jan. 1, 1999 Jan. 1, 1998
to to
(dollars in thousands, except share data) Sept. 30, 1999 Sept. 30, 1998
-------------- --------------
Revenues:
Rental income .................................. $ 61,108 $ 49,223
Interest and other income ...................... 1,519 701
------------ ------------
Total revenues .............................. 62,627 49,924
Expenses:
Property operations and maintenance ............ 12,385 9,888
Real estate taxes .............................. 5,196 3,979
General and administrative ..................... 3,833 3,120
Interest ....................................... 10,476 6,448
Depreciation and amortization .................. 9,703 7,377
------------ ------------
Total expenses .............................. 41,593 30,812
------------ ------------
Income before minority
interest and extraordinary item ................. 21,034 19,112
Minority interest ................................ (1,352) (862)
------------ ------------
Income before extraordinary item ................. 19,682 18,250
Extraordinary loss on extinguishment of debt ..... - (350)
------------ ------------
Net Income ....................................... 19,682 17,900
Series B preferred stock dividend ............... (501) -
------------ ------------
Net income available to common shareholders ...... $ 19,181 $ 17,900
============ ============
Per Common Share:
Earnings per share before
extraordinary item - basic ..................... $ 1.54 $ 1.48
Extraordinary item ............................... - (0.02)
------------ ------------
Earnings per share - basic ....................... $ 1.54 $ 1.46
============ ============
Earnings per share - diluted ..................... $ 1.54 $ 1.45
============ ============
Common shares used in basic
earnings per share calculation ............. 12,422,433 12,297,622
Common shares used in diluted
earnings per share calculation ............. 12,436,230 12,327,986
Dividends declared per common share .............. $ 1.69 $ 1.64
============ ============
See notes to financial statements.
Sovran Self Storage, Inc.
Statements of Cash Flow
(unaudited)
Jan. 1, 1999 Jan. 1, 1998
to to
(dollars in thousands) Sept. 30, 1999 Sept. 30, 1998
-------------- -------------
Operating Activities
Net income ....................................... $ 19,682 $ 17,900
Adjustments to reconcile net income
to net cash provided by operating activities:
Extraordinary item ............................. - 350
Depreciation and amortization .................. 9,703 7,377
Minority interest .............................. 1,352 862
Restricted stock earned ........................ 75 5
Changes in assets and liabilities:
Accounts receivable ......................... 16 (409)
Prepaid expenses and other assets ........... (748) (659)
Accounts payable and other liabilities ...... 3,314 2,695
Deferred revenue ............................ (6) 67
------------ ------------
Net cash provided by operating activities ........ 33,388 28,188
------------ ------------
Investing Activities
Additions to storage facilities ................ (46,770) (140,924)
Additions to other assets ...................... (172) (866)
------------ ------------
Net cash used in investing activities ............ (46,942) (141,790)
------------ ------------
Financing Activities
Net proceeds from issuance of common
stock through Dividend Reinvestment
and Stock Purchase Plan ....................... 5,832 -
Net proceeds from issuance of preferred
stock ......................................... 28,753 -
Proceeds from line of credit draw down ......... 2,000 140,500
Dividends paid - common stock .................. (20,794) (19,899)
Dividends paid - preferred stock ............... (501) -
Purchase of treasury stock ..................... (1,924) (1,990)
Minority interest distributions ................ (1,452) (964)
Redemption of operating partnership units ...... (261) -
Mortgage principal payments .................... (9) (500)
------------ ------------
Net cash provided by financing activities ........ 11,644 117,147
------------ ------------
Net increase (decrease) in cash .................. (1,910) 3,545
Cash at beginning of period ...................... 2,984 2,567
------------ ------------
Cash at end of period ............................ $ 1,074 $ 6,112
============ ============
Supplemental cash flow information
Cash paid for interest ...................... $ 10,591 $ 5,940
See notes to financial statements.
Sovran Self Storage, Inc.
Statements of Cash Flow
(unaudited)
Supplemental cash-flow information for the nine months ended September 30, 1999
(dollars in thousands)
- --------------------------------------------------------------------------------
Storage facilities acquired through the
assumption of mortgages $ 2,212
Fair value of net liabilities assumed on
the acquisition of storage facilities $ 445
- --------------------------------------------------------------------------------
Dividends declared but unpaid were $7,104 at September 30, 1999 and $6,895 at
December 31, 1998
See notes to financial statements.
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements of Sovran Self Storage,
Inc. (the Company) have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
nine month period ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1999.
2. Organization
The Company, a self-administered and self-managed real estate
investment trust (a REIT), was formed on April 19, 1995 to own and operate
self-storage facilities throughout the United States. On June 26, 1995, the
Company commenced operations effective with the completion of its initial public
offering of 5,890,000 shares (the Offering). Since its formation the Company has
purchased a total of 148, (seventeen purchased and one sold in 1999, fifty in
1998, forty four in 1997, twenty-nine in 1996 and eight in 1995) self storage
properties from unaffiliated third parties, increasing the total number of
self-storage properties owned at September 30, 1999 to 221 properties, most of
which are in the eastern United States and Texas.
All of the Company's assets are owned by, and all its operations are
conducted through, Sovran Acquisition Limited Partnership (the Operating
Partnership). Sovran Holdings, Inc., a wholly-owned subsidiary of the Company
(the Subsidiary), is the sole general partner; and the Company is a limited
partner of the Operating Partnership, and thereby controls the operations of the
Operating Partnership holding a 93.59% ownership interest therein as of
September 30, 1999. The remaining ownership interests in the Operating
Partnership are held by certain former owners of assets acquired by the
Operating Partnership subsequent to its formation. The consolidated financial
statements of the Company include the accounts of the Company, the Operating
Partnership, and the Subsidiary. All intercompany transactions and balances have
been eliminated.
3. Investment in Storage Facilities
The following summarizes activity in storage facilities during the period ended
September 30, 1999.
(dollars in thousands)
Cost:
Beginning balance ....................................... $ 502,502
Property acquisitions ................................... 43,705
Improvements and equipment additions .................... 7,335
Dispositions ............................................ (1,735)
----------------
Ending balance ............................................. $ 551,807
================
Accumulated Depreciation:
Beginning balance ....................................... $ 21,339
Additions during the period ............................. 9,044
Dispositions ............................................ (122)
----------------
Ending balance ............................................. $ 30,261
================
4. Unsecured Line of Credit and Term Note
The Company has a $150 million unsecured credit facility that matures
February 2001 and provides for funds at LIBOR plus 1.25%. At September 30, 1999,
the outstanding balance on the credit facility was $114 million. In 1998 the
Company recorded an extraordinary loss on the extinguishment of debt of $350,000
representing the unamortized financing costs of the former $75 million revolving
credit facility.
In December 1998, the Company entered into a $75 million unsecured term
note that matures on December 22, 2000 and bears interest at LIBOR plus 1.50%.
The Company entered into interest rate swap and cap agreements to
manage its exposure to interest rate changes. The swap involves the exchange of
fixed and variable interest rate payments without exchanging the notional
principal amount. At September 30, 1999, the Company had an interest rate swap
with a notional amount of $55 million through December 1999. Under this
agreement, the Company receives a floating interest rate based upon LIBOR and
pays a fixed interest rate of 5.12% on the $55 million amount. The Company also
has a LIBOR-based interest rate cap on $70 million of debt through June 2000 at
6.5%. Payments or receipts on the agreements are recorded monthly as adjustments
to interest expense. The net carrying amount of the Company's debt instruments
approximates fair value.
5. Commitments and Contingencies
The Company's current practice is to conduct environmental
investigations in connection with property acquisitions. At this time, the
Company is not aware of any environmental contamination of any of its facilities
which individually or in the aggregate would be material to the Company's
overall business, financial condition, or results of operations.
As of September 30, 1999, the Company had entered into a contract for
the purchase of one facility with an expected cost of $1.85 million.
6. Pro Forma Financial Information
The following unaudited pro forma Condensed Statement of Operations is
presented as if the 17 storage facilities purchased during the nine months ended
September 30, 1999, had occurred at January 1, 1999. Such unaudited pro forma
information is based upon the historical combined statements of operations of
the Company. It should be read in conjunction with the financial statements of
the Company and notes thereto included elsewhere herein. In management's
opinion, all adjustments necessary to reflect the effects of these transactions
have been made. This unaudited pro forma statement does not purport to represent
what the actual results of operations of the Company would have been assuming
such transactions had been completed as set forth above nor does it purport to
represent the results of operations for future periods.
(in thousands, except share data)
Nine Months Ended
September 30, 1999
------------------
Revenues:
Rental income ............................................ $ 63,081
Other income ............................................. 1,539
----------------
Total revenues ........................................ 64,620
Expenses:
Property operations and maintenance ...................... 12,709
Real estate taxes ........................................ 5,431
General and administrative ............................... 3,877
Interest ................................................. 10,077
Depreciation and amortization ............................ 10,042
----------------
Total expenses ........................................ 42,136
Income before minority interest ............................ 22,484
Minority interest ........................................ (1,440)
----------------
Net income ................................................. 21,044
Series B preferred stock dividend ........................ (2,216)
----------------
Net income available to common shareholders ................ $ 18,828
================
Earnings per common share - basic .......................... $ 1.51
================
Earnings per common share - diluted ........................ $ 1.51
================
Common shares used in basic earnings
per share calculation ..................................... 12,463,632
7. Legal Proceedings
A former business associate (Plaintiff) of certain officers and
directors of the Company, including Robert J. Attea, Kenneth F. Myszka, David L.
Rogers and Charles E. Lannon, filed a lawsuit against the Company on June 13,
1995 in the United States District Court for the Northern District of Ohio. The
Plaintiff has since amended the complaint in the lawsuit alleging breach of
fiduciary duty, breach of contract, breach of general partnership/joint venture
arrangement, breach of duty of good faith, fraud and deceit, and other causes of
action including declaratory judgement as to the Plaintiff's continuing interest
in the Company. The Plaintiff is seeking money damages in excess of $15 million,
as well as punitive damages and declaratory and injunctive relief (including the
imposition of a constructive trust on assets of the Company in which the
Plaintiff claims to have a continuing interest) and an accounting. The amended
complaint also added Messrs. Attea, Myszka, Rogers and Lannon as additional
defendants. The parties are currently involved in discovery. The Company intends
to vigorously defend the lawsuit. Messrs. Attea, Myszka, Rogers and Lannon have
agreed to indemnify the Company for costs and any loss arising from the lawsuit.
The Company believes that the actual amount of the Plaintiff's recovery in this
matter, if any, would be within the ability of these individuals to provide
indemnification. The Company does not believe that the lawsuit will have a
material adverse effect upon the Company.
8. Earnings Per Share
The Company reports earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." The following
table sets forth the computation of basic and diluted earnings per common share:
Nine Months Nine Months
Ended Ended
Sept. 30, Sept. 30,
(in thousands, except per share data) 1999 1998
----------- -----------
Numerator:
Net income available to common shareholders .......... $ 19,181 $ 17,900
Denominator:
Denominator for basic earnings
per common share - weighted average shares .......... 12,422 12,298
Effect of Dilutive Securities:
Stock options ........................................ 14 30
Denominator for diluted earnings
per common share - adjusted weighted average
shares and assumed conversion ....................... 12,436 12,328
Basic earnings per common share ....................... $ 1.54 $ 1.46
Diluted earnings per common share ..................... $ 1.54 $ 1.45
9. Preferred Stock
On July 30, 1999, the Company issued 1,200,000 shares of 9.85% Series B
Cumulative Redeemable Preferred Stock. The offering price was $25 per share
resulting in net proceeds of $28.8 million after expenses. The Series B
Preferred Stock is not redeemable prior to July 30, 2004, after which the
Company may redeem the shares at a redemption price of $25 per share, plus any
accrued and unpaid dividends. Cash dividends at a rate of 9.85% per annum of the
$25 per share liquidation preference (equivalent to $2.4625 per annum per share)
are payable quarterly in arrears on the last day of each March, June, September
and December. The Company paid a dividend of $0.417 per Series B preferred share
for the period July 31, 1999 through September 30, 1999.
10. Recent Accounting Pronouncements
In April 1998, the AICPA issued Statement of Position 98-5 (SOP 98-5),
"Reporting on the Costs of Start-Up Activities", that is effective for fiscal
years beginning after December 15, 1998. SOP 98-5 requires start-up activities
and organizational costs to be expensed as incurred. The pronouncement had no
effect on the Company.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). In June 1999, the FASB issued SFAS 137, which defers the
effective date of SFAS 133 to fiscal years beginning after June 15, 2000. SFAS
133 establishes accounting and reporting standards for derivative instruments
and hedging activities. Under the statement certain derivatives are recognized
at fair market value and changes in fair market value are recognized as gains
and losses. The adoption of SFAS 133 is not expected to have a material impact
on the financial position or results of operations of the Company.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation
The following discussion and analysis of the consolidated financial
condition and results of operations should be read in conjunction with the
financial statements and notes thereto included elsewhere in this report.
The Company operates as a Real Estate Investment Trust ("REIT") and
owns and operates a portfolio of 221 self-storage facilities, providing storage
space for business and personal use to customers in 21 states. The Company's
investment objective is to increase cash flow and enhance shareholder value by
aggressively managing its portfolio, to expand and enhance the facilities in
that portfolio and to selectively acquire new properties in geographic areas
that will either complement or efficiently grow the portfolio.
When used in this discussion and elsewhere in this document, the words
"intends," "believes," "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 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
industries in which it does business; the Company's ability to successfully
implement its Uncle Bob's Flex-a-Space strategy; the Company's cash flow may be
insufficient to meet required payments of principal and interest; and tax law
changes which may change the taxability of future income.
Liquidity and Capital Resources
Revolving Credit Facility
The Company has a $150 million unsecured credit facility that matures
February 2001 and provides for funds at LIBOR plus 1.25%. The Company intends to
use funds available from this credit facility to finance future acquisition and
development plans described below. At September 30, 1999, the outstanding
balance of the unsecured credit facility was $114 million.
Umbrella Partnership REIT
The Company was formed as an Umbrella Partnership Real Estate Trust
("UPREIT") and, as such, has the ability to issue operating partnership ("OP")
units in exchange for properties sold by independent owners. By utilizing such
OP units as currency in facility acquisitions, the Company may partially defer
the seller's income-tax liability and obtain more favorable pricing or terms.
As of September 30, 1999,
853,037 units have been issued in exchange for property at the request of the
sellers.
Acquisition of Properties
The Company's external growth strategy is to increase the number of
facilities it owns by acquiring suitable facilities in markets in which it
already has an operating presence or to expand into new markets by acquiring
several facilities in those new markets. In the three months ended September 30,
1999, the Company increased its presence in Florida by purchasing a property in
Cocoa, Florida and acquired one property in Maine. The two acquisitions added
109,562 square feet of space and 1,122 rental units to the Company's portfolio.
Future Acquisition and Development Plans
The Company has entered into a contract for one property with a
purchase price of $1.85 million, with an expected closing in November 1999. The
closing is subject to several customary conditions including, among other
things, satisfactory completion of due diligence.
The Company also intends to improve certain of its existing facilities
by building additional storage buildings on presently vacant land and by
installing climate control and enhanced security systems at selected sites.
Common Stock Repurchase Program
For the three-month period ended September 30, 1999, the Company
repurchased 83,200 common shares under a program authorized by the Board of
Directors in 1998. Since the inception of the program, 158,900 common shares
have been repurchased by the Company.
Liquidity
As most of the Company's operating cash flow is expected to be used to
pay dividends, (see REIT Qualification and Distribution Requirements), the funds
required to acquire additional properties may be provided by borrowings pursuant
to the unsecured credit facility, a moderate layer of secured debt, and/or a
joint venture acquisition partnership.
On July 30, 1999, the Company completed the offering of 1.2 million
shares of 9.85% Series B Cumulative Redeemable Preferred Stock. The offering
price was $25 per share resulting in gross proceeds of $30 million. The net
proceeds of $28.8 million were used to reduce outstanding indebtedness on the
Company's credit facility.
At September 30, 1999, the Company had $36 million available under the
unsecured credit facility.
REIT Qualification and Distribution Requirements
As a REIT, the Company is not required to pay federal income tax on
income that it distributes to its shareholders, provided that the amount
distributed is equal to at least 95% of taxable income. These distributions must
be made in the year to which they relate or in the following year if declared
before the Company files its federal income tax return and if it is paid before
the first regular dividend of the following year.
As a REIT, the Company must derive at least 95% of its total gross
income from income related to real property, interest and dividends. In the nine
months ended September 30, 1999, the Company's percentage of revenue from such
sources exceeded 98%, thereby passing the 95% test, and no special measures are
expected to be required to enable the Company to maintain its REIT designation.
Results of Operations
The following discussion is based on the financial statements of the
Company as of September 30, 1999 and September 30, 1998.
For the period January 1, 1999 through September 30, 1999 (dollars in thousands)
The Company reported revenues of $62,627 during the period. Included in
the total revenues is a gain of $686 resulting from the sale of a facility in
Tennessee for $2,500. The Company incurred $17,581 in operating expenses,
resulting in net operating income of $44,360, or 71.6%. General and
administrative expenses of $3,833, interest expense of $10,476 and depreciation
and amortization expenses of $9,703 resulted in income of $21,034 before
minority interest. Net income amounted to $19,682. The Company paid a Series B
preferred stock dividend of $501 during the period resulting in net income
available to common shareholders of $19,181.
Three months ended September 30, 1999, compared to three months ended
September 30, 1998 (dollars in thousands)
The following discussion compares the activities of the Company
for the three months ended September 30, 1999 with the activities of the
Company for the three months ended September 30, 1998.
Total revenues increased from $19,107 for the three months ended
September 30, 1998 to $22,570 for the three months ended September 30, 1999, an
increase of $3,463 or 18.1%. Of this, $686 resulted from the gain on the sale of
a facility in Tennessee, $2,015 resulted from the acquisition of 30 properties
during the period July 1, 1998 through September 30, 1999 and $762 was realized
as a result of increased rental rates at the 191 properties owned by the Company
at July 1, 1998. Overall, same-store revenues grew 4.2% for the three-month
period ended September 30, 1999 as compared to the same period in 1998.
Property operating and real estate tax expense increased $824 or 15%
during the period. $658 was a result of absorbing additional expenses from
operating the newly acquired properties, and $166 related to the operations of
its sites operated for more than one year.
General and administrative expenses increased $145 principally as a
result of the need for additional personnel and increased administrative costs
associated with managing the additional properties.
Interest expense increased $423 due to the $12,500 drawn on the
Company's line of credit and term note during the last twelve months.
Income before minority interest increased from $6,638 to $8,177, an
increase of $1,539 or 23%.
During the quarter the Company introduced a new concept, Uncle Bob's
Flex-a-Space. While the effect of the concept on near term earnings will be
dilutive, the Company expects Uncle Bob's Flex-a-Space to contribute to
profitability by the third quarter of 2000.
Funds from Operations
The Company believes that Funds From Operations ("FFO") is helpful to
investors as a measure of the performance of an equity REIT because, when
considered in conjunction with cash flows from operating activities, financing
activities, and investing activities, it provides investors with an
understanding of the ability of the Company to incur and service debt and to
make capital expenditures. FFO is defined as income before minority interest and
extraordinary item, computed in accordance with GAAP, plus depreciation of real
estate assets and amortization of intangible assets exclusive of deferred
financing fees, and excluding gains (losses) from debt restructuring and sales
of property. FFO should not be considered a substitute for net income or cash
flows, nor should it be considered an alternative to operating performance or
liquidity. The following table sets forth the calculation of FFO:
Nine months Nine months
ended ended
Sept. 30, Sept. 30,
1999 1998
(in thousands) ----------- -----------
Net income ......................................... $ 19,682 $ 17,900
Minority interest in income ........................ 1,352 862
Depreciation of real estate and amortization
of intangible assets exclusive of deferred
financing fees and gain on sale ................. 8,433 7,223
Extraordinary loss ................................. - 350
Funds from operations allocable to minority interest (1,895) (1,212)
Preferred dividends ................................ (501) -
-------- --------
FFO available to common shareholders ............... $ 27,071 $ 25,123
======== ========
Inflation
The Company does not believe that inflation has had or will have a
direct adverse effect on its operations. Substantially all of the leases at the
facilities allow for monthly rent increases, which provide the Company with the
opportunity to achieve increases in rental income as each lease matures.
Seasonality
The Company's revenues typically have been higher in the third and
fourth quarters, primarily because the Company increases its rental rates on
most of its storage units at the beginning of May and, to a lesser extent,
because self-storage facilities tend to experience greater occupancy during the
late spring, summer and early fall months due to the greater incidence of
residential moves during these periods. However, the Company believes that its
tenant mix, diverse geographical locations, rental structure and expense
structure provide adequate protection against undue fluctuations in cash flows
and net revenues during off-peak seasons. Thus, the Company does not expect
seasonality to affect materially distributions to shareholders.
Impact of the Year 2000
The Company employs several different computer systems for financial
reporting, property management, asset control and payroll. These systems are
purchased by the Company from third parties and therefore there is no internally
generated programming code. The Company has been assessing and testing its
systems to determine if its hardware and software will function properly with
respect to dates in the Year 2000 and thereafter, and no significant problems
were noted. The Company's critical applications relating to financial reporting,
property management and asset control have been updated to Year 2000 compliant
versions within the last year as part of the normal maintenance agreements.
The Company communicates electronically with certain outside vendors in
the banking and payroll processing areas. The Company has been advised by these
vendors that their systems are or will be Year 2000 compliant. The Company has
identified and evaluated certain other systems that may be impacted by the Year
2000, such as gates, security systems and elevators. The Company expects the
implementation of any required solutions to be completed by December 31, 1999,
and the cost to be less than $50,000. The Company is not aware of any other
vendors or suppliers for whom the Year 2000 would materially impact the
Company's business and there are no means of ensuring that outside companies
will be compliant.
The Company will continue to address the Year 2000 throughout 1999 and
has developed a contingency plan if the implementations are not completed
timely. Under a worst case scenario, the Company will have the ability to revert
to a manual system to operate its self-storage stores if any issues with the
Year 2000 are encountered. Despite the approach being taken to prevent a Year
2000 problem, the Company cannot be completely sure that issues will not arise,
or events will not occur that could have material adverse affects on the
Company's results of operations or financial condition.
Year 2000 costs and the date on which the Company believes that it will
be Year 2000 compliant are based upon management's best estimates that were
derived utilizing numerous assumptions of future events. There can be no
assurance that these estimates are achievable and actual results could differ
materially from estimates.
Quantitative and Qualitative Disclosure About Market Risk
The Company manages its exposure to interest rate changes by entering
into interest rate swap agreements. There have been no material changes to the
Company's exposure to interest rate risk since December 31, 1998.
Part II. Other Information
Item 1. Legal Proceedings
A former business associate (Plaintiff) of certain officers and
directors of the Company, including Robert J. Attea, Kenneth F. Myszka, David L.
Rogers and Charles E. Lannon, filed a lawsuit against the Company on June 13,
1995 in the United States District Court for the Northern District of Ohio. The
Plaintiff has since amended the complaint in the lawsuit alleging breach of
fiduciary duty, breach of contract, breach of general partnership/joint venture
arrangement, breach of duty of good faith, fraud and deceit, and other causes of
action including declaratory judgement as to the Plaintiff's continuing interest
in the Company. The Plaintiff is seeking money damages in excess of $15 million,
as well as punitive damages and declaratory and injunctive relief (including the
imposition of a constructive trust on assets of the Company in which the
Plaintiff claims to have a continuing interest) and an accounting. The amended
complaint also added Messrs. Attea, Myszka, Rogers and Lannon as additional
defendants. The parties are currently involved in discovery. The Company intends
to vigorously defend the lawsuit. Messrs. Attea, Myszka, Rogers and Lannon have
agreed to indemnify the Company for costs and any loss arising from the lawsuit.
The Company believes that the actual amount of the Plaintiff's recovery in this
matter, if any, would be within the ability of these individuals to provide
indemnification. The Company does not believe that the lawsuit will have a
material adverse effect upon the Company.
Item 2. Changes in Securities
On July 30, 1999, the Company issued 1,200,000 shares of 9.85% Series B
Cumulative Redeemable Preferred Stock with a liquidation preference of $25 per
share ("Series B Preferred Stock"). The offering price was $25 per share
resulting in net proceeds of $28.8 million. The proceeds were used to reduce
outstanding amounts on the Company's bank credit facility. The Series B
Preferred Stock is not redeemable prior to July 30, 2004, after which the
Company may redeem the shares at a redemption price of $25 per share, plus any
accrued and unpaid dividends. Cash dividends of $2.4625 per annum per share are
payable quarterly in arrears on the last day of each March, June, September and
December.
Item 3. Defaults Upon Senior Securities
No disclosure required.
Item 4. Submission of Matters to a Vote of Security Holders
No disclosure required.
Item 5. Other Information
No disclosure required.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3. Articles Supplementary to the Amended and Restated
Articles of Incorporation of the Company classifying
and designating the 9.85% Series B Cumulative
Redeemable Preferred Stock (incorporated by reference
to Exhibit 1.6 filed with the Company's Registration
Statement on Form 8-A dated July 29, 1999).
27. Financial Data Schedule
(b) Reports on Form 8-K
On July 30, 1999 the Company filed a Current Report on Form 8-K in
connection with the public offering of 1,200,000 shares of its 9.85% Series B
Cumulative Redeemable Preferred Stock.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Sovran Self Storage, Inc.
November 12, 1999 By: /S/ David L. Rogers
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Date David L. Rogers, Secretary, Chief Financial Officer