Sovran Self Storage: 4Q 2008 Financial Results, Expectations for 2009

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On Tuesday, Sovran Self Storage Inc., a self-storage real estate investment trust (REIT), reported operating results for the quarter ended Dec. 31, 2008.
 
Net income available to common shareholders for the fourth quarter of 2008 was $8.4 million vs. $10.7 million for the same period in 2007. Funds from operations (FFO) for the quarter were $.78 per fully diluted common share. Management expects FFO for the first quarter of 2009 to be approximately $.72 to $.74 per share, and between $3.00 and $3.08 for the year 2009.
 
Costs associated with acquisitions the company no longer intends to pursue were written off during the quarter, and reserves were established against potential losses relating to customer accounts receivable and for settlement of a long-standing legal dispute. These write-downs and reserves had a negative impact of $.02 per share on the FFO for the quarter. Higher interest expense associated with the company’s recent long-term financing and increased customer move-in incentives were the other significant factors resulting in lower earnings for the quarter.
 
Net operating income for the fourth quarter declined 0.5% ($150,000) compared with the same quarter in 2007 to $32.3 million. Overall average occupancy for the quarter was 81.6 percent, and average rent per square foot for the portfolio was $10.54. Revenue at the 353 stores owned or managed increased 50 basis points over the fourth quarter of 2007, the result of a slight increase in effective rental rates.
 
Although average occupancy was only 50 basis points lower than the same quarter in 2007, it was expensive to maintain that level, as the company continues to make extensive use of move-in incentives. During the quarter, almost $2 million in “first month free” incentives were granted, more than double that of last fall. Further pressuring the top line was a charge of $170,000 against accounts receivable, which was taken as a result of longer than usual delinquencies at a number of our stores that have a significant military customer base.
 
Compared to last year’s fourth quarter, same-store operating expenses increased 4.7 percent; property taxes increased by 21.2 percent; and all other costs grew by 0.2 percent. During the quarter, strong revenue growth was shown at the company’s Louisiana, Missouri, New York, South Carolina and Texas stores. Stores in Florida, Georgia and Washington, D.C., markets experienced slower than expected growth.
 
Sovran is anticipating reduced consumer demand in many of its markets and for conditions to become increasingly more competitive. It expects to use leasing incentives as well as increased advertising and aggressive marketing to improve occupancy and, accordingly, estimates a decline in same store revenue of 1 percent to 2 percent.
 
The company has curtailed its expansion and enhancement program and, until market conditions significantly improve, will defer its planned 2009 expenditures of $50 million. It has an estimated total of $9.5 million of commitments outstanding on construction projects expected to be completed in 2009.
 
“Although adding significantly to our interest costs, the steps we took earlier this year to refinance our short-term debt have put us on sound financial footing,” said David Rogers, chief financial officer. “We’ve maintained a conservatively leveraged balance sheet, have no significant debt maturities until 2012, are obligated on less than $15 million of forward capital commitments, and have sufficient liquidity to enable us to navigate these difficult capital market and operating environments. We will continue to focus on improving operating results at our 385 stores and protecting shareholder value.”
 
Sovran, based in Williamsville, N.Y., is a self-administered and self-managed equity REIT that is in the business of acquiring and managing self-storage facilities. The company operates 385 facilities in 24 states under the name “Uncle Bob’s Self Storage.” For more information, visit www.unclebobs.com.

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