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, 2001

 

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
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

6467 Main Street
Buffalo, 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 ____

As of November 14, 2001 there were outstanding 12,296,929 shares of the registrants' Common Stock, $.01 par value.

 

 

 

 

 

 

 PART I.

FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

SOVRAN SELF STORAGE, INC.
CONSOLIDATED BALANCE SHEETS



(dollars in thousands, except share data)

September 30,  
2001     
  (unaudited) 


December 31,
       2000     

 Assets

 

 

 Investment in storage facilities:

 

 

  Land

$ 110,874 

$ 110,874 

  Building and equipment

   464,212 

   451,847 

 

575,086 

562,721 

  Less: accumulated depreciation

   (55,502)

   (45,253)

Investment in storage facilities, net

519,584 

517,468 

Cash and cash equivalents

1,232 

1,421 

Accounts receivable

1,227 

1,141 

Receivable from related parties

2,707 

2,007 

Notes receivable from joint ventures

27,532 

15,772 

Investment in joint ventures

4,659 

4,033 

Prepaid expenses and other assets

      6,066 

       5,297 

  Total Assets

$ 563,007 

$ 547,139 

Liabilities

 

 

Line of credit

$142,000 

$124,000 

Term note

105,000 

105,000 

Accounts payable and accrued liabilities

8,387 

4,888 

Deferred revenue

3,068 

3,221 

Accrued dividends

7,252 

6,977 

Mortgage payable

     2,198 

     2,223 

  Total Liabilities

267,905 

  246,309 

Minority interest

19,689 

23,432 

 

 

 

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 Preferred Stock, $.01
  par value, 1,700,000 shares authorized, 1,200,000 shares issued and outstanding, $30,000 liquidation value



28,585 



28,585 

Common stock $.01 par value, 100,000,000 shares
  authorized, 12,290,929 shares outstanding
  (12,028,687 at December 31, 2000)



131 



128 

Additional paid-in capital

290,051 

283,745 

Unearned restricted stock

(1,553)

(550)

Dividends in excess of net income

(22,835)

(18,282)

Accumulated other comprehensive income

(2,289)

Treasury stock at cost, 792,925 shares (772,700
  shares at December 31, 2000)


   (16,677)


  (16,228)

  Total Shareholders' Equity

   275,413 

  277,398 

 

 

 

  Total Liabilities and Shareholders' Equity

$563,007 

$547,139 

See notes to financial statements.

 

 

 

SOVRAN SELF STORAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)



(dollars in thousands, except share data)

            July 1, 2001
                   to
September 30, 2001

    July 1, 2000
              to
September 30, 2000

Revenues:

 

 

  Rental income

$   22,913  

$   23,097  

  Interest and other income

   622  

   389  

  Equity in income of joint ventures

         80  

       -  

     Total revenues

23,615  

23,486  

 

 

 

Expenses:

 

 

  Property operations and maintenance

5,200  

5,295  

  Real estate taxes

2,079  

2,096  

  General and administrative

1,593  

1,403  

  Interest

3,216  

4,482  

  Depreciation and amortization

       3,789  

       3,578  

     Total expenses

     15,877  

     16,854  

 

 

 

  Income before minority interest

7,738  

6,632  

  Minority interest

        (466) 

       (435) 

 

 

 

  Net Income

7,272  

6,197  

    Series B preferred stock dividend

        (739) 

       (739) 

  Net income available to common shareholders

  $   6,533  

 $   5,458  

 

 

 

Per common share:

 

 

  Earnings per common share - basic

  $   0.53  

  $    0.46  

 

 

 

  Earnings per common share - diluted

  $   0.53  

  $    0.46  

 

 

 

  Common shares used in basic earnings
    per share calculation


12,279,982  


11,994,737  

  Common shares used in diluted earnings
    per share calculation


12,382,764  


11,996,549  

 

 

 

  Dividends declared per common share

$         0.59  

$         0.58  

See notes to financial statements.

 

SOVRAN SELF STORAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)



(dollars in thousands, except share data)

January 1, 2001
          to         
September 30, 2001

January 1, 2000
          to         
September 30, 2000

Revenues:

 

 

  Rental income

$   66,844  

$   66,558  

  Interest and other income

   1,609  

   1,015  

  Equity in income of joint ventures

        226  

           -  

     Total revenues

68,679  

67,573  

 

 

 

Expenses:

 

 

  Property operations and maintenance

15,226  

14,628  

  Real estate taxes

6,284  

6,112  

  General and administrative

4,893  

4,341  

  Interest

10,802  

12,673  

  Depreciation and amortization

     11,160  

     10,559  

     Total expenses

     48,365  

     48,313  

 

 

 

  Income before minority interest

20,314  

19,260  

  Minority interest

          (1,246) 

      (1,265) 

 

 

 

  Net Income

19,068  

17,995  

    Series B preferred stock dividend

       (2,216) 

       (2,216) 

  Net income available to common shareholders

  $  16,852  

 $  15,779  

 

 

 

Per common share:

 

 

  Earnings per common share - basic

  $   1.38  

  $    1.31  

 

 

 

  Earnings per common share - diluted

  $   1.38  

  $    1.31  

 

 

 

  Common shares used in basic earnings
    per share calculation


12,180,717  


12,085,169  

  Common shares used in diluted earnings
    per share calculation


12,252,258  


12,086,392  

 

 

 

  Dividends declared per common share

$         1.75  

$         1.72  

See notes to financial statements.

  

SOVRAN SELF STORAGE, INC.
STATEMENT OF CASH FLOW
(unaudited)



(dollars in thousands)

January 1, 2001
          to          
September 30, 2001

January 1, 2000
         to          
September 30, 2000

Operating Activities

 

 

Net income

$  19,068  

$  17,995  

Adjustments to reconcile net income to net cash
  provided by operating activities:

 

 

    Depreciation and amortization

11,160  

10,559  

    Equity in income of joint ventures

            (226)

-  

    Minority interest

1,246  

1,265  

    Restricted stock earned

297  

92  

    Changes in assets and liabilities:

 

 

      Accounts receivable

(86) 

(606) 

      Prepaid expenses and other assets

(1,631) 

(1,606) 

      Accounts payable and other liabilities

1,209  

615  

      Deferred revenue

         (153) 

     (141) 

Net cash provided by operating activities

     30,884  

  28,173  

 

 

 

Investing Activities

 

 

  Additions to storage facilities

(12,414) 

(17,381) 

  Advances to joint ventures

(12,160) 

-  

  Advances to related parties

      (700) 

   (1,058) 

Net cash used in investing activities

  (25,274) 

 (18,439) 

 

 

 

Financing Activities

 

 

  Net proceeds from issuance of common stock
    through Dividend Reinvestment and Stock
    Purchase Plan



5,009  



1,364  

  Proceeds from line of credit draw down

18,000  

23,500  

  Dividends paid-common stock

(21,129) 

(20,757) 

  Dividends paid-preferred stock

(2,216) 

(2,216) 

  Minority interest distributions

(1,339) 

(1,467) 

  Purchase of treasury stock

(449) 

(7,784) 

  Redemption of Operating Partnership Units

(3,650) 

-  

  Mortgage principal payments

         (25) 

        (39) 

Net cash used in financing activities

    (5,799) 

   (7,399) 

Net (decrease) increase in cash

(189) 

2,335  

Cash at beginning of period

    1,421  

     1,032  

Cash at end of period

$    1,232  

$   3,367  

Supplemental cash flow information
  Cash paid for interest

$  10,744  

$  12,849  

  Fair value of net liabilities assumed on the

     acquisition of storage facilities

-  

84  

 

Dividends declared but unpaid were $7,252 at September 30, 2001 and $6,954 at September 30, 2000.

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, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001.

 

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 of common stock. At September 30, 2001, the Company owned 222 self-storage properties in 21 states. The Company also manages 11 properties under an agreement with a joint venture that is 45% owned by the Company.

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 94.6% ownership interest therein as of September 30, 2001. 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, 2001.

(dollars in thousands)                                                                              

Cost:

 

  Beginning balance

$   562,721 

  Property acquisitions

  Improvements and equipment additions

12,530 

  Dispositions                                                                      

          (165)

Ending balance                                                                    

$   575,086 

Accumulated Depreciation:

 

  Beginning balance

$    45,253 

  Additions during the period

10,298 

  Dispositions                                                                      

           (49)

Ending balance                                                                    

$    55,502 

 

4.

UNSECURED LINE OF CREDIT AND TERM NOTE

At September 30, 2001, the Company had a $150 million revolving line of credit of which $142 million was drawn. The facility bears interest at LIBOR plus 1.375% and matures November 2003.

The Company also has a $75 million unsecured term note due November 2003 (extendable at the Company's option to November 2005), bearing interest at LIBOR plus 1.75%, and a $30 million term note through November 2002 at LIBOR plus 1.375%.

The net carrying amount of the Company's debt instruments approximates fair value.

 

5.

DERIVATIVE FINANCIAL INSTRUMENTS

On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended, which requires companies to carry all derivatives on the balance sheet at fair value. The Company determines the fair value of derivatives by reference to quoted market prices. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, the reason for holding it. The Company's use of derivative instruments is limited to cash flow hedges, as defined in SFAS No. 133, of certain interest rate risks.

In order to provide interest rate risk protection the Company has entered into three interest rate swap agreements, one in March 2001 for $50 million and two in September for $50 million and $30 million, to effectively convert a total of $130 million of variable-rate debt to fixed-rate debt. One of the $50 million interest rate swap agreement matures in November 2005, the other matures in October 2006, and the $30 million matures in September 2008. The cash flow hedge is considered effective and the gain or loss on the change in fair value is reported in other comprehensive income.

The 2001 interest rate swap agreements are the only derivative instruments, as defined by SFAS No. 133, held by the Company; as such there was no impact upon adoption of SFAS No. 133 at January 1, 2001. The net impact of the derivative instruments was a decrease to other comprehensive income of $2,579,000 for the three-month period ended September 30, 2001. The fair value of the derivative at September 30, 2001 was a $2,289,000 liability.

 

6.

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.

 

7.

LEGAL PROCEEDINGS

A former business associate (the "Plaintiff") of certain officers and directors of the Company, including Robert J. Attea, Kenneth F. Myszka, David L. Rogers and Charles E. Lannon (the "Founding Shareholders"), commenced a lawsuit against the Company on June 13, 1995 in the United States District Court for the Northern District of Ohio. The Plaintiff subsequently 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 judgment as to the Plaintiff's continuing interest in the Company. The Plaintiff sought 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 claimed to have a continuing interest) and an accounting. The amended complaint also added the Founding Shareholders as additional defendants. In April 2000, following trial, the jury rendered a verdict adverse to the Company with respect to the Plaintiff's claims for breach of contract and breach of general partnership/joint venture arrangement and found total compensatory damages in the amount of $6,462,068. The Company filed a post-trial motion for judgment as a matter of law and a motion for a new trial. Although the motion for judgment as a matter of law was denied, the motion for a new trial was granted and a new trial was scheduled. Prior to the commencement of the new trial, the parties agreed to settle the lawsuit and the Company has paid $2,359,174 to the Plaintiff in settlement of all claims. The Founding Shareholders have agreed to indemnify the Company for certain costs and losses arising from the lawsuit. Pursuant to that agreement, in April 2001 the Founding Shareholders made payment to the Company of $1,785,000 in connection with expenses arising from the lawsuit that had previously been advanced by the Company. Also, in November 2001, the Founding Shareholders redeemed 46,528 shares of the Company's common stock owned by them having a market value of approximately $1,360,000 to repay certain of the costs incurred by the Company. When all additional costs incurred by the Company in connection with the lawsuit are determined, an allocation of those costs may be made among the Company and the Founding Shareholders.

 

8.

INVESTMENT IN JOINT VENTURES

Investment in joint ventures includes an ownership interest in Locke Sovran I, LLC, which operates 11 self-storage facilities throughout the United States, and an ownership interest in Iskalo Office Holdings, LLC, which owns the building that houses the Company's headquarters and other tenants.

In December 2000, the Company contributed seven self-storage properties to Locke Sovran I, LLC with a fair market value of $19.8 million, in exchange for a $15 million 1 year note receivable bearing interest at LIBOR plus 1.75%, and a 45% interest in Locke Sovran I, LLC. During the nine months ended September 30, 2001, the Company advanced additional funds to Locke Sovran I, LLC that were used to purchase three storage facilities. At September 30, 2001, the 1 year note receivable from Locke Sovran I, LLC was $27.5 million.

 

9.

EARNINGS PER SHARE

The Company reports earnings per share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share." In computing earnings per share, the Company excludes preferred stock dividends from net income to arrive at net income available to common shareholders. The following table sets forth the computation of basic and diluted earnings per common share:


(in thousands except per share data)

Nine Months Ended
September 30, 2001

Nine Months Ended
September 30, 2000

Numerator:

 

 

  Net income available to common shareholders

$  16,852  

$  15,779 

 

 

 

Denominator:

 

 

  Denominator for basic earnings per share -
    weighted average shares


12,181  


12,085  

 

 

 

Effect of Dilutive Securities:

 

 

  Stock options

71  

1  

  Denominator for diluted earnings per share -
    adjusted weighted average shares and
    assumed exercise



12,252  



12,086  

 

 

 

Basic earnings per common share

$      1.38  

$      1.31  

Diluted earnings per common share

$      1.38  

$      1.31  

 

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 REIT and owns or manages a portfolio of 233 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 21F 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 could 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 form joint ventures and sell existing properties to those joint ventures; 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; 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

The Company's unsecured credit facility provides availability up to $150 million, of which $142 million was drawn on September 30, 2001. The facility matures in November 2003 and bears interest at LIBOR plus 1.375%.

In addition to the credit facility, the Company has two unsecured term notes; one in the amount of $30 million due November 2002 bearing interest at LIBOR plus 1.375% and the other in the amount of $75 million due November 2003 bearing interest at LIBOR plus 1.75%. The $75 million note can be extended through November 2005 at the Company's option.

The credit facility and term notes currently have investment grade ratings from Standard and Poor's (BBB-), Moody's (Baa3), and Fitch (BBB-).

The Company also has 1,200,000 shares of 9.85% Series B Cumulative Redeemable Preferred Stock outstanding. The Series B Preferred Stock is currently rated by Standard and Poor's (BB+), Moody's (Ba2) and Fitch (BB+).

The Company believes that its internally generated cash flows and borrowing capacity under the credit facility will be sufficient to fund ongoing operations, capital improvements, dividends, and share repurchases for the year 2001. The Company expects to fund its maturing obligations and its future growth through issuance of secured or unsecured term notes, issuance of preferred stock, sale of properties, private placement solicitation of joint venture equity and other sources of capital.

 

COMMON STOCK REPURCHASE PROGRAM

          

In 2001, the Company acquired 20,225 shares of its common stock via the Share Repurchase Program authorized by the Board of Directors in 1998. Through September 30, 2001 the Company has reacquired 792,925 shares pursuant to this program. From time to time, subject to market price and certain loan covenants, the Company expects to continue reacquiring shares.

 

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 units ("Units") in exchange for properties sold by independent owners. By utilizing such 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, 2001, 705,973 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 at once in those new markets. There were no acquisitions during the nine months ended September 30, 2001.

 

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 90% 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, 2001, 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, 2001 and September 30, 2000.

FOR THE PERIOD JANUARY 1, 2001 THROUGH SEPTEMBER 30, 2001, COMPARED TO THE PERIOD JANUARY 1, 2000 TO SEPTEMBER 30, 2000 (DOLLARS IN THOUSANDS)

Total revenues increased from $67,573 for the nine months ended September 30, 2000 to $68,679 for the nine months ended September 30, 2001. The increase was due to improved performance at the Company's core properties and revenue from its joint venture. These increases were offset by the loss of revenue from the sale of seven facilities to a joint venture in December 2000.

Property operating and real estate tax expenses increased $770 mainly due to increased utility, employee benefits and snow plowing costs in the first quarter of 2001, offset by the operating expenses of the seven facilities sold to a joint venture in December 2000.

General and administrative expenses increased $552 as a result of costs associated with managing additional properties and the costs related to the Company's customer care center.

Interest expense decreased $1,871 due to a reduction of interest rates mainly in the second and third quarters of 2001 as compared to the second and third quarters of 2000.

THREE MONTHS ENDED SEPTEMBER 30, 2001, COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2000 (DOLLARS IN THOUSANDS)

The following discussion compares the activities of the Company for the three months ended September 30, 2001 with the activities of the Company for the three months ended September 30, 2000.

Total revenues increased from $23,486 for the three months ended September 30, 2000 to $23,615 for the three months ended September 30, 2001, an increase of $129. This increase consisted of a 4.0% increase in revenues at the 220 same store facilities as a result of increased rental rates. These increases were offset by the sale of seven facilities to a joint venture that resulted in a decrease in revenues.

Property operating and real estate tax expense decreased $112 due to the seven facilities sold to a joint venture in December 2000 offset by increases in utility and employee benefits expenses.

General and administrative expenses increased $190 principally as a result of increased administrative costs associated with managing the additional properties and the costs related to the Company's customer care center.

Interest expense decreased $1,266 due to a reduction of interest rates.

 

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:



(in thousands)

Nine months ended
   September 30,
         2001         

Nine months ended
September 30,
         2000        

Net income

$   19,068 

$  17,995  

Minority interest in income

1,246 

1,265  

Depreciation of real estate and amortization
  of intangible assets exclusive of deferred
  financing fees



10,470  



10,094  

Depreciation and amortization from
  unconsolidated joint ventures


      232  


     -  

Preferred dividends

     (2,216) 

        (2,216) 

Funds from operations allocable to
  minority interest


      (1,766) 


      (1,927) 

FFO available to common shareholders

$  27,034  

$  25,211  

 

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.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

On January 1, 2001 the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended, which requires companies to carry all derivatives on the balance sheet at fair value. The Company's use of derivative instruments is limited to cash flow hedges, as defined in SFAS No. 133, of certain interest rate risks. In order to provide interest rate risk protection the Company entered into an interest rate swap agreement in March 2001, to effectively convert $50 million of variable-rate debt to fixed-rate debt. The Company receives a floating interest rate based upon LIBOR and pays a fixed rate of 5.36% on $50 million notional amount through November 2005. In September 2001, the Company entered into 2 additional interest rate swap agreements. The Company receives a floating interest rate based upon LIBOR and pays a fixed rate of 4.485% on $50 million notional amount through October 2006. Also, the Company receives a floating interest rate based upon LIBOR and pays a fixed rate of 4.805% on $30 million notional amount through September 2008. There have been no other material changes to the Company's exposure to interest rate risk since December 31, 2000.

Because all but $130 million of the Company's outstanding debt of $249 million is on a floating rate basis, changes in short term interest rates will have a significant impact on the Company's earnings and funds from operations. Should the Company enter into further rate swap agreements, earnings could be negatively affected, as short-term rates are presently significantly below the five and seven year cost of funds.

 PART II.

OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

A former business associate (the "Plaintiff") of certain officers and directors of the Company, including Robert J. Attea, Kenneth F. Myszka, David L. Rogers and Charles E. Lannon (the "Founding Shareholders"), commenced a lawsuit against the Company on June 13, 1995 in the United States District Court for the Northern District of Ohio. The Plaintiff subsequently 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 judgment as to the Plaintiff's continuing interest in the Company. The Plaintiff sought 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 claimed to have a continuing interest) and an accounting. The amended complaint also added the Founding Shareholders as additional defendants. In April 2000, following trial, the jury rendered a verdict adverse to the Company with respect to the Plaintiff's claims for breach of contract and breach of general partnership/joint venture arrangement and found total compensatory damages in the amount of $6,462,068. The Company filed a post-trial motion for judgment as a matter of law and a motion for a new trial. Although the motion for judgment as a matter of law was denied, the motion for a new trial was granted and a new trial was scheduled. Prior to the commencement of the new trial, the parties agreed to settle the lawsuit and the Company has paid $2,359,174 to the Plaintiff in settlement of all claims. The Founding Shareholders have agreed to indemnify the Company for certain costs and losses arising from the lawsuit. Pursuant to that agreement, in April 2001 the Founding Shareholders made payment to the Company of $1,785,000 in connection with expenses arising from the lawsuit that had previously been advanced by the Company. Also, in November 2001, the Founding Shareholders redeemed 46,528 shares of the Company's common stock owned by them having a market value of approximately $1,360,000 to repay certain of the costs incurred by the Company. When all additional costs incurred by the Company in connection with the lawsuit are determined, an allocation of those costs may be made among the Company and the Founding Shareholders.

 

ITEM 2.

CHANGES IN SECURITIES AND USE OF PROCEEDS

No disclosure required.

 

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

None

 

  

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 14, 2001      


By:     / S / David L. Rogers                       
          David L. Rogers
           Secretary, Chief Financial Officer

Date