Attached files
file | filename |
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EX-32 - EX-32 - SOVRAN ACQUISITION LTD PARTNERSHIP | l39544exv32.htm |
EX-31.2 - EX-31.2 - SOVRAN ACQUISITION LTD PARTNERSHIP | l39544exv31w2.htm |
EX-31.1 - EX-31.1 - SOVRAN ACQUISITION LTD PARTNERSHIP | l39544exv31w1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
Commission file number: 0-24071
SOVRAN ACQUISITION LIMITED PARTNERSHIP
(Exact name of Registrant as specified in its charter)
Delaware | 16-1481551 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
6467 Main Street
Williamsville, NY 14221
(Address of principal executive offices) (Zip code)
Williamsville, NY 14221
(Address of principal executive offices) (Zip code)
(716) 633-1850
(Registrants telephone number including area code)
(Registrants 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large Accelerated Filer þ | Accelerated Filer o | Non-accelerated Filer o (Do not check if a smaller reporting company) | Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Part I. Financial Information
Item 1. Financial Statements
SOVRAN ACQUISITION LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
March 31, | ||||||||
2010 | December 31, | |||||||
(dollars in thousands, except unit data) | (unaudited) | 2009 | ||||||
Assets |
||||||||
Investment in storage facilities: |
||||||||
Land |
$ | 237,233 | $ | 237,233 | ||||
Building, equipment, and construction in progress |
1,148,589 | 1,146,169 | ||||||
1,385,822 | 1,383,402 | |||||||
Less: accumulated depreciation |
(252,336 | ) | (244,035 | ) | ||||
Investment in storage facilities, net |
1,133,486 | 1,139,367 | ||||||
Cash and cash equivalents |
7,365 | 10,710 | ||||||
Accounts receivable |
1,846 | 2,401 | ||||||
Receivable from unconsolidated joint venture |
210 | 173 | ||||||
Investment in unconsolidated joint venture |
19,839 | 19,944 | ||||||
Prepaid expenses |
5,869 | 4,220 | ||||||
Other assets |
5,082 | 5,314 | ||||||
Net assets of discontinued operations |
2,438 | 3,047 | ||||||
Total Assets |
$ | 1,176,135 | $ | 1,185,176 | ||||
Liabilities |
||||||||
Line of credit |
$ | | $ | | ||||
Term notes |
400,000 | 400,000 | ||||||
Accounts payable and accrued liabilities |
19,040 | 22,338 | ||||||
Deferred revenue |
5,240 | 5,036 | ||||||
Fair value of interest rate swap agreements |
11,953 | 11,524 | ||||||
Mortgages payable |
80,648 | 81,219 | ||||||
Total Liabilities |
516,881 | 520,117 | ||||||
Limited partners redeemable capital interest (384,952
units in 2010 and 419,952 in 2009) |
13,419 | 15,005 | ||||||
Partners Capital |
||||||||
General partner (219,567 units outstanding in 2010 and 2009) |
3,461 | 3,495 | ||||||
Limited partner (27,347,438 and 27,327,460 units
outstanding in 2010 and
2009, respectively) |
641,166 | 644,742 | ||||||
Accumulated other comprehensive income |
(11,874 | ) | (11,265 | ) | ||||
Total Controlling Partners Capital |
632,753 | 636,972 | ||||||
Noncontrolling interest- consolidated joint venture |
13,082 | 13,082 | ||||||
Total Partners Capital |
645,835 | 650,054 | ||||||
Total Liabilities and Partners Capital |
$ | 1,176,135 | $ | 1,185,176 | ||||
See notes to consolidated financial statements.
- 2 -
SOVRAN ACQUISITION LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
January 1, 2010 | January 1, 2009 | |||||||
to | to | |||||||
(dollars in thousands, except per unit data) | March 31, 2010 | March 31, 2009 | ||||||
Revenues |
||||||||
Rental income |
$ | 46,176 | $ | 46,837 | ||||
Other operating income |
1,970 | 1,867 | ||||||
Total operating revenues |
48,146 | 48,704 | ||||||
Expenses |
||||||||
Property operations and maintenance |
13,194 | 13,134 | ||||||
Real estate taxes |
5,253 | 5,048 | ||||||
General and administrative |
5,139 | 4,387 | ||||||
Depreciation and amortization |
8,332 | 8,369 | ||||||
Total operating expenses |
31,918 | 30,938 | ||||||
Income from operations |
16,228 | 17,766 | ||||||
Other income (expenses) |
||||||||
Interest expense |
(7,878 | ) | (9,979 | ) | ||||
Interest income |
20 | 33 | ||||||
Equity in income of joint ventures |
70 | 30 | ||||||
Income from continuing operations |
8,440 | 7,850 | ||||||
(Loss) income from discontinued operations (including
loss on disposal of $580 in 2010) |
(552 | ) | 270 | |||||
Net income |
7,888 | 8,120 | ||||||
Net income attributable to noncontrolling interest |
(340 | ) | (340 | ) | ||||
Net income attributable to common unitholders |
$ | 7,548 | $ | 7,780 | ||||
Earnings per common unit attributable to common
unitholders basic |
||||||||
Continuing operations |
$ | 0.29 | $ | 0.34 | ||||
Discontinued operations |
(0.02 | ) | 0.01 | |||||
Earnings per unit basic |
$ | 0.27 | $ | 0.35 | ||||
Earnings per common unit attributable to common
unitholders diluted |
||||||||
Continuing operations |
$ | 0.29 | $ | 0.34 | ||||
Discontinued operations |
(0.02 | ) | 0.01 | |||||
Earnings per unit diluted |
$ | 0.27 | $ | 0.35 | ||||
Common units used in basic earnings per unit calculation |
27,860,886 | 22,389,017 | ||||||
Common units used in diluted earnings per unit calculation |
27,894,933 | 22,392,312 | ||||||
Distributions declared per common unit |
$ | 0.45 | $ | 0.64 | ||||
See notes to consolidated financial statements.
- 3 -
SOVRAN ACQUISITION LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
January 1, 2010 | January 1, 2009 | |||||||
to | to | |||||||
(dollars in thousands) | March 31, 2010 | March 31, 2009 | ||||||
Operating Activities |
||||||||
Net income |
$ | 7,888 | $ | 8,120 | ||||
Adjustments to reconcile net income to net cash provided
by operating activities: |
||||||||
Depreciation and amortization |
8,621 | 8,856 | ||||||
Loss on sale of storage facilities |
580 | | ||||||
Equity in (income) losses of joint ventures |
(70 | ) | (30 | ) | ||||
Distributions from unconsolidated joint venture |
150 | 205 | ||||||
Non-vested stock earned |
346 | 365 | ||||||
Stock option expense |
72 | 71 | ||||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
555 | 1,129 | ||||||
Prepaid expenses |
(1,633 | ) | 1,078 | |||||
Accounts payable and other liabilities |
(2,857 | ) | (5,383 | ) | ||||
Deferred revenue |
205 | 88 | ||||||
Net cash provided by operating activities |
13,857 | 14,499 | ||||||
Investing Activities |
||||||||
Acquisitions of storage facilities |
| | ||||||
Improvements, equipment additions, and construction in progress |
(2,450 | ) | (6,810 | ) | ||||
Investment in unconsolidated joint venture |
| (75 | ) | |||||
(Advances) reimbursement of advances to joint ventures |
(37 | ) | 153 | |||||
Property deposits |
(25 | ) | | |||||
Receipts from related parties |
| 14 | ||||||
Net cash used in investing activities |
(2,512 | ) | (6,718 | ) | ||||
Financing Activities |
||||||||
Net proceeds from sale of common stock |
54 | 1,334 | ||||||
Proceeds from borrowings on line of credit |
7,000 | 9,000 | ||||||
Repayments of borrowings on line of credit |
(7,000 | ) | | |||||
Distributions paid |
(12,925 | ) | (14,701 | ) | ||||
Redemption of operating partnership units |
(1,248 | ) | | |||||
Mortgage principal and capital lease payments |
(571 | ) | (484 | ) | ||||
Net cash used in financing activities |
(14,690 | ) | (4,851 | ) | ||||
Net (decrease) increase in cash |
(3,345 | ) | 2,930 | |||||
Cash at beginning of period |
10,710 | 4,486 | ||||||
Cash at end of period |
$ | 7,365 | $ | 7,416 | ||||
Supplemental cash flow information |
||||||||
Cash paid for interest |
$ | 6,613 | $ | 8,786 |
Distributions declared but unpaid were $0 at March 31, 2010 and $14,404 at March 31, 2009.
See notes to consolidated financial statements.
- 4 -
SOVRAN ACQUISITION LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
Jan. 1, 2010 | Jan. 1, 2009 | |||||||
to | to | |||||||
(dollars in thousands) | Mar. 31, 2010 | Mar. 31, 2009 | ||||||
Net income |
$ | 7,888 | $ | 8,120 | ||||
Other comprehensive income: |
||||||||
Change in fair value of derivatives |
(609 | ) | 59 | |||||
Total comprehensive income |
$ | 7,279 | $ | 8,179 | ||||
- 5 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of Sovran Acquisition Limited Partnership 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 three-month period ended March 31, 2010 are not necessarily
indicative of the results that may be expected for the year ended December 31, 2010.
Reclassification: Certain amounts from the 2010 financial statements have been reclassified as a
result of the sale of two storage facilities in April 2010 that have been reclassified as
discontinued operations (see Note 5).
2. ORGANIZATION
Sovran Acquisition Limited Partnership (the Operating Partnership) is the entity through which
Sovran Self Storage, Inc. (the Company), a self-administered and self-managed real estate
investment trust (REIT), conducts substantially all of its business and owns substantially all of
its assets. On June 26, 1995, the Company commenced operations, through the Operating Partnership,
effective with the completion of its initial public offering. At March 31, 2010, we had an
ownership interest in and managed 381 self-storage properties in 24 states under the name Uncle
Bobs Self Storage ®. Among our 381 self-storage properties are 27 properties that we manage for a
consolidated joint venture of which we are a majority owner and 25 properties that we manage for an
unconsolidated joint venture of which we are a 20% owner. Approximately 40% of the Operating
Partnerships revenue is derived from stores in the states of Texas and Florida.
As of March 31, 2010, the Company was a 98.6% economic owner of the Operating Partnership and
controls it through Sovran Holdings, Inc. (Holdings), a wholly owned subsidiary of the Company
incorporated in Delaware and the sole general partner of the Operating Partnership (this structure
is commonly referred to as an umbrella partnership REIT or UPREIT). The board of directors of
Holdings, the members of which are also members of the Board of Directors of the Company, manages
the affairs of the Operating Partnership by directing the affairs of Holdings. The Companys
limited partner and indirect general partner interests in the Operating Partnership entitle it to
share in cash distributions from, and in the profits and losses of, the Operating Partnership in
proportion to its ownership interest therein and entitle the Company to vote on all matters
requiring a vote of the limited partners.
We consolidate all wholly owned subsidiaries. Partially owned subsidiaries and joint ventures are
consolidated when we control the entity. Our consolidated financial statements include the
accounts of the Operating Partnership, Locke Sovran I, LLC, and Locke Sovran II, LLC, which is a
majority owned joint venture. All intercompany transactions and balances have been eliminated.
Investments in joint ventures that we do not control but for which we have
significant influence over are reported using the equity method.
- 6 -
In December 2007, the FASB issued additional accounting guidance now codified in ASC Topic 810,
"Consolidation through the issuance of FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements (SFAS No. 160) which was adopted by the Company on January 1,
2009. The additional guidance requires that the portion of equity in a subsidiary attributable to
the owners of the subsidiary other than the parent or the parents affiliates be labeled
noncontrolling interests and presented in the consolidated balance sheet as a component of
equity. The additional guidance does not significantly change the Operating Partnerships past
accounting practices with respect to the attribution of net income between controlling and
noncontrolling interests, however, the provisions of the additional guidance require that earnings
attributable to noncontrolling interests be reported as part of consolidated earnings and not as a
separate component of income or expense. In addition, the additional guidance requires the
disclosure of the attribution of consolidated earnings to the controlling and noncontrolling
interests on the face of the statement of operations.
In accordance with the guidance provided in ASC Topic 810, Consolidation we present
noncontrolling interests in Locke Sovran II, LLC as a separate component of equity, called
Noncontrolling interests consolidated joint venture in the consolidated balance sheets.
Included in the consolidated balance sheets are limited partners redeemable capital interest.
These interests are presented in the mezzanine section of the consolidated balance sheet because
they dont meet the functional definition of a liability or equity under current authorative
accounting literature. These represent the outside ownership interests of the limited partners in
the Operating Partnership. At March 31, 2010 and 2009, there was 384,952 and 419,952 limited
partners redeemable operating partnership Units outstanding, respectively. The Operating
Partnership is obligated to redeem each of these limited partnership Units in the Operating
Partnership at the request of the holder thereof for cash equal to the fair market value of a share
of the Companys common stock, at the time of such redemption, provided that the Company at its
option may elect to acquire any such Unit presented for redemption for one common share or cash.
Effective January 1, 2009, the Operating Partnership accounts for these noncontrolling redeemable
Operating Partnership Units under the provisions of FASB ASC Topic 480-10-S99. The application of
the FASB ASC Topic 480-10-S99 accounting model requires the noncontrolling interest to follow
normal noncontrolling interest accounting and then be marked to redemption value at the end of each
reporting period if higher (but never adjusted below that normal noncontrolling interest accounting
amount). The offset to the adjustment to the carrying amount of the noncontrolling redeemable
Operating Partnership Units is reflected in general and limited partners capital. Accordingly, in
the accompanying consolidated balance sheet, limited partners redeemable capital interests are
reflected at redemption value at March 31, 2010 and March 31, 2009, equal to the number of Units
outstanding multiplied by the fair market value of the Companys common stock at that date.
Redemption value exceeded the value determined under the Operating Partnerships historical basis
of accounting at those dates.
(Dollars in thousands) | 2010 | |||
Beginning balance limited partners redeemable capital interest |
$ | 15,005 | ||
Redemption of Operating Partnership Units |
(772 | ) | ||
Net income attributable to limited partners redeemable capital interests |
121 | |||
Distributions |
(189 | ) | ||
Adjustment to redemption value |
(746 | ) | ||
Ending balance limited partners redeemable capital interest |
$ | 13,419 | ||
- 7 -
Changes in total equity, equity attributable to the parent and equity attributable to
noncontrolling interests consist of the following:
Noncontrolling | ||||||||||||
(dollars in thousands) | Parent | Interests | Total | |||||||||
Balance at December 31, 2009 |
$ | 636,972 | $ | 13,082 | $ | 650,054 | ||||||
Net income attributable to the parent |
7,427 | | 7,427 | |||||||||
Net income attributable to noncontrolling interest holders |
| 340 | 340 | |||||||||
Change in fair value of derivatives |
(609 | ) | | (609 | ) | |||||||
Distributions |
(12,396 | ) | | (12,396 | ) | |||||||
Distributions to noncontrolling interest holders |
| (340 | ) | (340 | ) | |||||||
Adjustment of noncontrolling redeemable Operating
Partnership units to carrying value |
746 | | 746 | |||||||||
Net proceeds from issuance of stock through Dividend
Reinvestment and Stock Purchase Plan |
9 | | 9 | |||||||||
Other |
604 | | 604 | |||||||||
Balance at March 31, 2010 |
$ | 632,753 | $ | 13,082 | $ | 645,835 |
3. STOCK BASED COMPENSATION
The Operating Partnership accounts for stock-based compensation under the provisions of ASC Topic
718, Compensation Stock Compensation (formerly, FASB Statement 123R). The Operating Partnership
recognizes compensation cost in its financial statements for all share based payments granted,
modified, or settled during the period.
The Operating Partnership recorded compensation expense (included in general and administrative
expense) of $72,000 and $71,000 related to stock options and $346,000 and $365,000 related to
amortization of non-vested stock grants for the three months ended March 31, 2010 and 2009,
respectively. The Operating Partnership uses the Black-Scholes Merton option pricing model to
estimate the fair value of stock options granted subsequent to the adoption of ASC Topic 718. The
application of this pricing model involves assumptions that are judgmental and sensitive in the
determination of compensation expense.
During the three months ended March 31, 2010 and 2009, employees exercised no stock options and
22,798 and 25,471 shares of non-vested stock, respectively, vested.
- 8 -
4. INVESTMENT IN STORAGE FACILITIES
The following summarizes our activity in storage facilities during the three months ended March 31,
2010.
(dollars in thousands) | ||||
Cost: |
||||
Beginning balance |
$ | 1,383,402 | ||
Improvements and equipment additions |
4,136 | |||
Net decrease in construction in progress |
(1,678 | ) | ||
Dispositions |
(38 | ) | ||
Ending balance |
$ | 1,385,822 | ||
Accumulated Depreciation: |
||||
Beginning balance |
$ | 244,035 | ||
Depreciation expense during the period |
8,332 | |||
Dispositions |
(31 | ) | ||
Ending balance |
$ | 252,336 | ||
The Operating Partnership allocates purchase price to the tangible and intangible assets and
liabilities acquired based on their estimated fair values. The value of land and buildings are
determined at replacement cost. Intangible assets, which represent the value of existing customer
leases, are recorded at their estimated fair values as of the dates acquired. The Operating
Partnership measures the fair value of in-place customer leases based on the Operating
Partnerships experience with customer turnover. The Operating Partnership amortizes in-place
customer leases on a straight-line basis over 12 months (the estimated future benefit period).
During the three months ended March 31, 2010, the Operating Partnership did not acquire any storage
facilities.
5. DISCONTINUED OPERATIONS
In April 2010, the Operating Partnership sold two non-strategic storage facilities in Michigan for
net proceeds of approximately $2.4 million. A loss of $0.6 million was recorded at March 31, 2010,
since the contingencies relating to the sale had been substantially satisfied as of March 31, 2010
and the storage facilities met the held for sale criteria under ASC 360-45-9 Property, Plant, and
Equipment, at March 31, 2010. During the third and fourth quarters of 2009, the Operating
Partnership sold five non-strategic storage facilities in Massachusetts, North Carolina, and
Pennsylvania for net cash proceeds of $16.3 million. The operations of these facilities are
reported as discontinued operations. The amounts in the 2010 and 2009 financial statements related
to the operations and the net assets of these properties have been reclassified and are presented
as discontinued operations. Cash flows of discontinued operations have not been segregated from
the cash flows of continuing operations on the accompanying consolidated statement of cash flows
for the three months ended March 31, 2010 and 2009. The following is a summary of the amounts
reported as discontinued operations:
- 9 -
Jan. 1, 2010 | Jan. 1, 2009 | |||||||
to | to | |||||||
(dollars in thousands) | Mar. 31, 2010 | Mar. 31, 2009 | ||||||
Total revenue |
$ | 151 | $ | 842 | ||||
Property operations and maintenance expense |
(76 | ) | (303 | ) | ||||
Real estate tax expense |
(16 | ) | (97 | ) | ||||
Depreciation and amortization expense |
(31 | ) | (172 | ) | ||||
Net loss on sale of property |
(580 | ) | | |||||
Total (loss) income from discontinued operations |
$ | (552 | ) | $ | 270 | |||
6. UNSECURED LINE OF CREDIT AND TERM NOTES
On June 25, 2008, the Operating Partnership entered into agreements relating to new unsecured
credit arrangements, and received funds under those arrangements. As part of the agreements, the
Operating Partnership entered into a $250 million unsecured term note maturing in June 2012 bearing
interest at LIBOR plus 1.625% (based on the Operating Partnerships March 31, 2010 credit rating).
In October 2009, the Operating Partnership repaid $100 million of this term note. The agreements
also provide for a $125 million (expandable to $175 million) revolving line of credit maturing June
2011 bearing interest at a variable rate equal to LIBOR plus 1.375% (based on the Operating
Partnerships credit rating at March 31, 2010), and requires a 0.25% facility fee. The interest
rate at March 31, 2010 on the Operating Partnerships available line of credit was approximately
1.62% (1.61% at December 31, 2009). At March 31, 2010, there was $125 million available on the
unsecured line of credit.
The Operating Partnership also maintains an $80 million term note maturing September 2013 bearing
interest at a fixed rate of 6.26%, a $20 million term note maturing September 2013 bearing interest
at a variable rate equal to LIBOR plus 1.50%, and a $150 million unsecured term note maturing in
April 2016 bearing interest at 6.38% (based on the Operating Partnerships credit rating at March
31, 2010).
The line of credit and term notes require the Operating Partnership 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 distribution payouts.
At March 31, 2010, the Operating Partnership was in compliance with its debt covenants.
We believe that if operating results remain consistent with historical levels and levels of other
debt and liabilities remain consistent with amounts outstanding at March 31, 2010 the entire $125
million line of credit could be drawn without violating our debt covenants.
- 10 -
7. MORTGAGES PAYABLE
Mortgages payable at March 31, 2010 and December 31, 2009 consist of the following:
March 31, | December 31, | |||||||
(dollars in thousands) | 2010 | 2009 | ||||||
7.80% mortgage note due December 2011, secured by 11 self-storage facilities (Locke Sovran I) with an aggregate net book value of $42.4 million, principal and interest paid monthly | $ | 28,286 | $ | 28,447 | ||||
7.19% mortgage note due March 2012, secured by 27 self-storage facilities (Locke Sovran II) with an aggregate net book value of $79.8 million, principal and interest paid monthly | 41,170 | 41,475 | ||||||
7.25% mortgage note due December 2011, secured by 1 self-storage facility with an aggregate net book value of $5.6 million, principal and interest paid monthly. Estimated market rate at time of acquisition 5.40% | 3,332 | 3,369 | ||||||
6.76% mortgage note due September 2013, secured by 1 self-storage facility with an aggregate net book value of $1.9 million, principal and interest paid monthly | 971 | 977 | ||||||
6.35% mortgage note due March 2014, secured by 1 self-storage facility with an aggregate net book value of $3.7 million, principal and interest paid monthly | 1,065 | 1,072 | ||||||
7.50% mortgage notes due August 2011, secured by 3 self-storage facilities with an aggregate net book value of $13.9 million, principal and interest paid monthly. Estimated market rate at time of acquisition 6.42% | 5,824 | 5,879 | ||||||
Total mortgages payable | $ | 80,648 | $ | 81,219 | ||||
The Operating Partnership assumed the 7.25%, 6.76%, 6.35%, and 7.50% mortgage notes in connection
with the acquisitions of storage facilities in 2005 and 2006. The 7.25% and 7.50% mortgages were
recorded at their estimated fair value based upon the estimated market rates at the time of the
acquisitions ranging from 5.40% to 6.42%. The carrying value of these two mortgages approximates
the actual principal balance of the mortgages payable. An immaterial premium exists at March 31,
2010, which will be amortized over the remaining term of the mortgages based on the effective
interest method.
The table below summarizes the Operating Partnerships debt obligations and interest rate
derivatives at March 31, 2010. The estimated fair value of financial instruments is subjective in
nature and is dependent on a number of important assumptions, including discount rates and relevant
comparable market information associated with each financial instrument. The fair value of the
fixed rate term note and mortgage note were estimated by discounting the future
- 11 -
cash flows using the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities. The use of different market assumptions and
estimation methodologies may have a material effect on the reported estimated fair value amounts.
Accordingly, the estimates presented below are not necessarily indicative of the amounts the
Operating Partnership would realize in a current market exchange.
Expected Maturity Date Including Discount | ||||||||||||||||||||||||||||||||
Fair | ||||||||||||||||||||||||||||||||
(dollars in thousands) | 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | Value | ||||||||||||||||||||||||
Line of credit variable rate LIBOR + 1.375
(1.62% at March 31, 2010) |
| | | | | | | | ||||||||||||||||||||||||
Notes Payable: |
||||||||||||||||||||||||||||||||
Term note variable rate LIBOR+1.625%
(1.87% at March 31, 2010) |
| | $ | 150,000 | | | | $ | 150,000 | $ | 150,000 | |||||||||||||||||||||
Term note variable rate LIBOR+1.50%
(1.88% at March 31, 2010) |
| | | $ | 20,000 | | | $ | 20,000 | $ | 20,000 | |||||||||||||||||||||
Term note fixed rate 6.26% |
| | | $ | 80,000 | | | $ | 80,000 | $ | 77,292 | |||||||||||||||||||||
Term note fixed rate 6.38% |
| | | | | $ | 150,000 | $ | 150,000 | $ | 136,630 | |||||||||||||||||||||
Mortgage note fixed rate 7.80% |
$ | 469 | $ | 27,817 | | | | | $ | 28,286 | $ | 29,230 | ||||||||||||||||||||
Mortgage note fixed rate 7.19% |
$ | 906 | $ | 1,301 | $ | 38,963 | | | | $ | 41,170 | $ | 42,744 | |||||||||||||||||||
Mortgage note fixed rate 7.25% |
$ | 112 | $ | 3,220 | | | | | $ | 3,332 | $ | 3,352 | ||||||||||||||||||||
Mortgage note fixed rate 6.76% |
$ | 19 | $ | 27 | $ | 29 | $ | 896 | | | $ | 971 | $ | 1,005 | ||||||||||||||||||
Mortgage note fixed rate 6.35% |
$ | 21 | $ | 30 | $ | 31 | $ | 34 | $ | 949 | | $ | 1,065 | $ | 1,057 | |||||||||||||||||
Mortgage notes fixed rate 7.50% |
$ | 167 | $ | 5,657 | | | | | $ | 5,824 | $ | 5,992 | ||||||||||||||||||||
Interest rate derivatives liability |
| | | | | | | $ | 11,953 |
8. DERIVATIVE FINANCIAL INSTRUMENTS
Interest rate swaps are used to adjust the proportion of total debt that is subject to variable
interest rates. The interest rate swaps require the Operating Partnership to pay an amount equal
to a specific fixed rate of interest times a notional principal amount and to receive in return an
amount equal to a variable rate of interest times the same notional amount. The notional amounts
are not exchanged. No other cash payments are made unless the contract is terminated prior to its
maturity, in which case the contract would likely be settled for an amount equal to its fair value.
The Operating Partnership enters interest rate swaps with a number of major financial institutions
to minimize counterparty credit risk.
The interest rate swaps qualify and are designated as hedges of the amount of future cash flows
related to interest payments on variable rate debt. Therefore, the interest rate swaps are
recorded in the consolidated balance sheet at fair value and the related gains or losses are
deferred in shareholders equity as Accumulated Other Comprehensive Income (AOCI). These
deferred gains and losses are amortized into interest expense during the period or periods in which
the related interest payments affect earnings. However, to the extent that the interest rate swaps
are not perfectly effective in offsetting the change in value of the interest payments being
hedged, the ineffective portion of these contracts is recognized in earnings immediately.
Ineffectiveness was immaterial in 2010, and 2009.
The Operating Partnership has three interest rate swap agreements in effect at March 31, 2010 as
detailed below to effectively convert a total of $170 million of variable-rate debt to fixed-rate
debt.
- 12 -
Fixed | Floating Rate | |||||||||||||||
Notional Amount | Effective Date | Expiration Date | Rate Paid | Received | ||||||||||||
$20 Million |
9/4/05 | 9/4/13 | 4.4350 | % | 6 month LIBOR | |||||||||||
$50 Million |
7/1/08 | 6/25/12 | 4.2825 | % | 1 month LIBOR | |||||||||||
$100 Million |
7/1/08 | 6/22/12 | 4.2965 | % | 1 month LIBOR |
The interest rate swap agreements are the only derivative instruments, as defined by FASB ASC Topic
815 Derivatives and Hedging, held by the Operating Partnership. During the three months ended
2010 and 2009, the net reclassification from AOCI to interest expense was $1.9 million and $2.5
million, respectively, based on payments made under the swap agreements. Based on current interest
rates, the Operating Partnership estimates that payments under the interest rate swaps will be
approximately $7.5 million for the twelve months ended March 31, 2011. Payments made under the
interest rate swap agreements will be reclassified to interest expense as settlements occur. The
fair value of the swap agreements, including accrued interest, was a liability of $12.0 million and
$25.5 million at March 31, 2010 and 2009 respectively.
Jan. 1, 2010 | Jan. 1, 2009 | |||||||
to | to | |||||||
(dollars in thousands) | Mar. 31, 2010 | Mar. 31, 2009 | ||||||
Adjustments to interest expense: |
||||||||
Realized loss reclassified from accumulated other comprehensive
loss to interest expense |
$ | (1,896 | ) | $ | (2,454 | ) | ||
Adjustments to other comprehensive income (loss): |
||||||||
Realized loss reclassified to interest expense for 2010 and 2009,
respectively |
1,896 | 2,454 | ||||||
Unrealized loss from changes in the fair value of the effective
portion of the interest rate swaps for 2010 and 2009, respectively |
(2,505 | ) | (2,395 | ) | ||||
(Loss) gain included in other comprehensive income (loss) |
$ | (609 | ) | $ | 59 | |||
9. FAIR VALUE MEASUREMENTS
The Operating Partnership applies the provisions of ASC Topic 820 Fair Value Measurements and
Disclosures in determining the fair value of its financial and nonfinancial assets and
liabilities. ASC Topic 820 establishes a valuation hierarchy for disclosure of the inputs to
valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad
levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical
assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in
active markets or inputs that are observable for the asset or liability, either directly or
indirectly through market corroboration, for substantially the full term of the financial
instrument. Level 3 inputs are unobservable inputs based on our own assumptions used to measure
assets and liabilities at fair value. A financial asset or liabilitys classification within the
hierarchy is determined based on the lowest level input that is significant to the fair value
measurement.
- 13 -
The following table provides the assets and liabilities carried at fair value measured on a
recurring basis as of March 31, 2010 (in thousands):
Asset | ||||||||||||||||
(Liability) | Level 1 | Level 2 | Level 3 | |||||||||||||
Interest rate swaps |
(11,953 | ) | | (11,953 | ) | | ||||||||||
Storage facilities held for sale |
2,438 | | | 2,438 |
Interest rate swaps are over the counter securities with no quoted readily available Level 1
inputs, and therefore are measured at fair value using inputs that are directly observable in
active markets and are classified within Level 2 of the valuation hierarchy, using the income
approach.
Assets measured at fair value on a non-recurring basis at March 31, 2010 included two storage
facilities held for sale (see Note 5). Fair value of these assets was determined by reference to
the sales price of the assets pursuant to the terms of a contract with the buyer. This was
classified within Level 3 of the valuation hierarchy because it employs the Operating Partnerships
own assumptions of fair value.
10. INVESTMENT IN JOINT VENTURES
The Operating Partnership has a 20% ownership interest in Sovran HHF Storage Holdings LLC (Sovran
HHF), a joint venture that was formed in May 2008 to acquire self-storage properties that will be
managed by the Operating Partnership. The carrying value of the Operating Partnerships investment
at March 31, 2010 was $19.8 million. Twenty five properties were acquired by Sovran HHF through
March 31, 2010 for approximately $171.5 million. The Operating Partnership contributed $18.6
million to the joint venture as its share of capital required to fund the acquisitions. As of
March 31, 2010, the carrying value of the Operating Partnerships investment in Sovran HHF exceeds
its share of the underlying equity in net assets of Sovran HHF by approximately $1.7 million as a
result of the capitalization of certain acquisition related costs. This difference is not
amortized; it is included in the carrying value of the investment, which is assessed for impairment
on a periodic basis.
As manager of Sovran HHF, the Operating Partnership earns a management and call center fee of 7% of
gross revenues which totaled $0.3 million for the three months ended March 31, 2010. The Operating
Partnerships share of Sovran HHFs income for the three months ended March 31, 2010 was $44,000.
The Operating Partnership also has a 49% ownership interest in Iskalo Office Holdings, LLC, which
owns the building that houses the Operating Partnerships headquarters and other tenants. The
Operating Partnerships investment includes a capital contribution of $49. The carrying value of
the Operating Partnerships investment is a liability of $0.5 million at March 31, 2010 and
December 31, 2009, and is included in accounts payable and accrued liabilities in the accompanying
consolidated balance sheets.
- 14 -
A summary of the unconsolidated joint ventures financial statements as of and for the three months
ended March 31, 2010 is as follows:
Sovran HHF | ||||||||
Storage | Iskalo Office | |||||||
(dollars in thousands) | Holdings LLC | Holdings, LLC | ||||||
Balance Sheet Data: |
||||||||
Investment in storage facilities, net |
$ | 167,441 | $ | | ||||
Investment in office building |
| 5,274 | ||||||
Other assets |
3,859 | 746 | ||||||
Total Assets |
$ | 171,300 | $ | 6,020 | ||||
Due to the Operating Partnership |
$ | 210 | $ | | ||||
Mortgages payable |
78,124 | 7,004 | ||||||
Other liabilities |
2,453 | 238 | ||||||
Total Liabilities |
80,787 | 7,242 | ||||||
Unaffiliated partners equity (deficiency) |
72,410 | (700 | ) | |||||
Operating Partnership equity (deficiency) |
18,103 | (522 | ) | |||||
Total Liabilities and Partners Equity (deficiency) |
$ | 171,300 | $ | 6,020 | ||||
Income Statement Data: |
||||||||
Total revenues |
$ | 4,436 | $ | 302 | ||||
Total expenses |
4,214 | 271 | ||||||
Net income |
$ | 222 | $ | 31 | ||||
The Operating Partnership does not guarantee the debt of Sovran HHF or Iskalo Office Holdings,
LLC.
11. INCOME TAXES
The Company qualifies as a REIT under the Internal Revenue Code of 1986, as amended, and will
generally not be subject to corporate income taxes to the extent it distributes at least 90% of its
taxable income to its shareholders and complies with certain other requirements. Accordingly, no
provision has been made for federal income taxes in the accompanying financial statements.
The Operating Partnerships continuing practice is to recognize interest and/or penalties related
to state income tax matters in income tax expense which is included in general and administrative
expenses. No interest and penalties have been recognized for the three months ended March 31, 2010
and 2009. As of March 31, 2010 and December 31, 2009, the Operating Partnership had no amounts
accrued related to uncertain tax positions. The tax years 2006-2009 remain open to examination by
the major taxing jurisdictions to which the Operating Partnership is subject.
- 15 -
12. EARNINGS PER UNIT
The Operating Partnership reports earnings per unit data in accordance ASC Topic 260, Earnings Per
Share. Effective January 1, 2009, FASB ASC Topic 260 was updated for the issuance of FASB Staff
Position (FSP) EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities, or FSP EITF 03-6-1, with transition guidance included
in FASB ASC Topic 260-10-65-2. Under FSP EITF 03-6-1, unvested share-based payment awards that
contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are
participating securities and shall be included in the computation of earnings-per-unit pursuant to
the two-class method. The Operating Partnership has calculated its basic and diluted earnings per
unit using the two-class method.
The following table sets forth the computation of basic and diluted earnings per common unit
utilizing the two-class method.
Three Months | Three Months | |||||||
Ended | Ended | |||||||
(in thousands except per unit data) | Mar. 31, 2010 | Mar. 31, 2009 | ||||||
Numerator: |
||||||||
Net income from continuing operations attributable to
common unitholders |
$ | 7,548 | $ | 7,780 | ||||
Denominator: |
||||||||
Denominator for basic earnings per unit weighted average units |
27,861 | 22,389 | ||||||
Effect of Dilutive Securities: |
||||||||
Stock options, warrants and non-vested stock |
34 | 3 | ||||||
Denominator for diluted earnings per unit adjusted weighted
average
units and assumed conversion |
27,895 | 22,392 | ||||||
Basic earnings per common unit from continuing operations
attributable to common unitholders |
$ | 0.29 | $ | 0.34 | ||||
Basic earnings per common unit attributable to common unitholders |
$ | 0.27 | $ | 0.35 | ||||
Diluted earnings per common unit from continuing operations
attributable to common unitholders |
$ | 0.29 | $ | 0.34 | ||||
Diluted earnings per common unit attributable to common unitholders |
$ | 0.27 | $ | 0.35 |
Not included in the effect of dilutive securities above are 326,468 stock options and 141,156
unvested restricted shares for the three months ended March 31, 2010, and 330,213 stock options and
119,818 unvested restricted shares for the three months ended March 31, 2009, because their effect
would be antidilutive.
- 16 -
13. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2009, the FASB issued revised accounting guidance under ASC Topic 810, Consolidation by
issuing SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS 167). The revised
guidance amends previous guidance (as previously required under FASB Interpretation No. 46(R),
Variable Interest Entities) for determining whether an entity is a variable interest entity
(VIE) and requires an enterprise to perform an analysis to determine whether the enterprises
variable interest or interests give it a controlling financial interest in a VIE. Under the
revised guidance, an enterprise has a controlling financial interest when it has a) the power to
direct the activities of a VIE that most significantly impact the entitys economic performance and
b) the obligation to absorb losses of the entity or the right to receive benefits from the entity
that could potentially be significant to the VIE. The revised guidance also requires an enterprise
to assess whether it has an implicit financial responsibility to ensure that a VIE operates as
designed when determining whether it has power to direct the activities of the VIE that most
significantly impact the entitys economic performance. The revised guidance also requires ongoing
assessments of whether an enterprise is the primary beneficiary of a VIE, requires enhanced
disclosures and eliminates the scope exclusion for qualifying special-purpose entities. The
revised guidance is effective for the first annual reporting period that begins after November 15,
2009, with early adoption prohibited. The adoption of this revised guidance did not have a
material effect on the Operating Partnerships consolidated financial statements
In January 2010, the Financial Accounting Standards Board (FASB) issued ASU No. 2010-06 to amend
the disclosure requirements related to recurring and nonrecurring fair value measurements. This
update requires new disclosures on significant transfers of assets and liabilities between Level 1
and Level 2 of the fair value hierarchy (including the reasons for these transfers) and the reasons
for any transfers in or out of Level 3. This update also requires a reconciliation of recurring
Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. In
addition to these new disclosure requirements, this update clarifies certain existing disclosure
requirements. For example, this update clarifies that reporting entities are required to provide
fair value measurement disclosures for each class of assets and liabilities rather than each major
category of assets and liabilities. This update also clarifies the requirement for entities to
disclose information about both the valuation techniques and inputs used in estimating Level 2 and
Level 3 fair value measurements. This update became effective for the Operating Partnership January
1, 2010, except for the requirement to provide the Level 3 activity of purchases, sales, issuances,
and settlements on a gross basis, which will become effective for the Operating Partnership with
the interim and annual reporting period beginning January 1, 2011. The Operating Partnership will
not be required to provide the amended disclosures for any previous periods presented for
comparative purposes. Other than requiring additional disclosures in Note 9, the adoption of this
update did not have a material effect on the Operating Partnerships consolidated financial
statements.
14. COMMITMENT AND CONTINGENCIES
The Operating Partnerships current practice is to conduct environmental investigations in
connection with property acquisitions. At this time, the Operating Partnership is not aware of any
environmental contamination of any of its facilities that individually or in the aggregate would be
material to the Operating Partnerships overall business, financial condition, or results of
operations.
- 17 -
At March 31, 2010, the Operating Partnership has a contract in place with a potential buyer for the
possible sale of eight properties for approximately $21.4 million. The sale of the eight
properties is subject to significant contingencies as of March 31, 2010, including the potential
buyers satisfactory completion of an inspection of the properties and the buyer securing funds
from its lender to finance the transaction. While there can be no assurances that we will
successfully complete the sale of these properties, based upon the status of our dealings with the
potential buyer, the sale of these properties is expected to close in the second quarter of 2010.
Should all of these sales occur, the Operating Partnership would recognize a gain of approximately
$7.6 million on the disposal of these properties in the second quarter of 2010.
15. SUBSEQUENT EVENTS
On April 1, 2010, the Operating Partnership declared a quarterly distribution of $0.45 per common
unit. The distribution was paid on April 26, 2010 to unitholders of record on April 12, 2010. The
total distribution paid amounted to $12.4 million.
- 18 -
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis of the Operating Partnerships 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 our actual results, performance
or achievements 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 Operating
Partnerships ability to evaluate, finance and integrate acquired businesses into the Operating
Partnerships existing business and operations; the Operating Partnerships ability to effectively
compete in the industry in which it does business; the Operating Partnerships 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 Operating Partnerships outstanding
floating rate debt; the Operating Partnerships ability to comply with debt covenants; any future
ratings on the Operating Partnerships debt instruments; the regional concentration of the
Operating Partnerships business may subject it to economic downturns in the states of Florida and
Texas; the Operating Partnerships reliance on its call center; the Operating Partnerships cash
flow may be insufficient to meet required payments of principal, interest and distributions; and
tax law changes that may change the taxability of future income.
RESULTS OF OPERATIONS
FOR THE PERIOD JANUARY 1, 2010 THROUGH MARCH 31, 2010, COMPARED TO THE PERIOD JANUARY 1, 2009
THROUGH MARCH 31, 2009
We recorded rental revenues of $46.2 million for the three months ended March 31, 2010, a decrease
of $0.7 million or 1.4% when compared to rental revenues for the three months ended March 31, 2009
of $46.8 million. The decrease in rental revenue resulted from a 1.5% decrease in rental revenues
at the 353 core properties considered in same store sales (those properties included in the
consolidated results of operations since January 1, 2009). The decrease in same store rental
revenues was a result of a 1.0% decrease in average rental income per square foot as a result of
increased move-in incentives used to attract customers. We also experienced a decrease in square
foot occupancy of 50 basis points, which we believe resulted from general economic conditions, in
particular the housing sector. Other income, which includes merchandise sales, insurance
commissions, truck rentals, management fees and acquisition fees, increased $0.1 million for the
three months ended March 31, 2010 as compared to the same period in 2009 primarily as a result of
an increase in commissions earned from our customer insurance program.
- 19 -
Property operating and real estate tax expense increased $0.3 million, or 1.5%, in the three months
ended March 31, 2010 compared to the three months ended March 31, 2009. Almost all of the increase
was due to an expected increase in property tax expense for 2010. We expect same-store operating
costs to increase only moderately in 2010 with increases primarily attributable to utilities and
property taxes.
General and administrative expenses increased $0.8 million or 17.1% from the three months ended
March 31, 2009 to the three months ended March 31, 2010. The increase primarily resulted from an
increase in internet advertising, income tax expense for our taxable REIT subsidiary, and increased
employee incentives.
Depreciation and amortization expense remained relatively consistent with the prior year as we did
not acquire any properties in either year.
Interest expense decreased from $10.0 million for the three months ended March 31, 2009 to $7.9
million for the same period in 2010 as a result of the paydown of $100 million of term notes and
the termination of the related interest rate swap agreements with the proceeds from our common
stock offering in October 2009.
As described in Note 5 to the financial statements, during April 2010 we sold two non-strategic
storage facilities for net proceeds of $2.4 million, resulting in a loss recorded in the first
quarter of $0.6 million. During the third and fourth quarters of 2009 the Operating Partnership
sold five non-strategic storage facilities for net cash proceeds of $16.3 million. The first
quarter operations of these facilities are reported in income from discontinued operations for 2010
and 2009.
FUNDS FROM OPERATIONS
We believe that Funds from Operations (FFO) provides relevant and meaningful information about
our operating performance that is necessary, along with net earnings and cash flows, for an
understanding of our operating results. FFO adds back historical cost depreciation, which assumes
the value of real estate assets diminishes predictably in the future. In fact, real estate asset
values increase or decrease with market conditions. Consequently, we believe FFO is a useful
supplemental measure in evaluating our operating performance by disregarding (or adding back)
historical cost depreciation.
FFO is defined by the National Association of Real Estate Investment Trusts, Inc. (NAREIT) as net
income computed in accordance with generally accepted accounting principles (GAAP), excluding
gains or losses on sales of properties, 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.
- 20 -
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 ended | ||||||||
(in thousands) | March 31, 2010 | March 31, 2009 | ||||||
Net income attributable to common unitholders |
$ | 7,548 | $ | 7,780 | ||||
Net income attributable to noncontrolling interest |
340 | 340 | ||||||
Depreciation of real estate and amortization
of intangible assets exclusive of deferred
financing fees |
8,332 | 8,369 | ||||||
Depreciation of real estate included in discontinued
operations |
31 | 172 | ||||||
Depreciation and amortization from
unconsolidated joint ventures |
194 | 208 | ||||||
Loss on sale of real estate |
580 | | ||||||
Funds from operations allocable to
noncontrolling interest in consolidated joint venture |
(340 | ) | (340 | ) | ||||
FFO available to common unitholders |
$ | 16,685 | $ | 16,529 | ||||
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 distribution payouts. At March 31, 2010,
the Operating Partnership was in compliance with all debt covenants. The most sensitive covenant
is the leverage ratio covenant contained in our line of credit and term note agreements. This
covenant limits our total consolidated liabilities to 55% of our gross asset value. At March 31,
2010, our leverage ratio as defined in the agreements was approximately 44.3%. The agreements
define total consolidated liabilities to include the liabilities of the Operating Partnership 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 (EBITDA) as
defined in the agreements. At March 31, 2009, the Operating Partnership had violated the leverage
ratio covenant contained in the line of credit and term note agreements. In May 2009, the
Operating Partnership obtained a waiver of the violation as of March 31, 2009. The fees paid to
obtain the waiver were approximately $0.9 million and were included in interest expense in the
second quarter of 2009. In the event that the Operating Partnership violates debt covenants in the
future, the amounts due under the agreements could be callable by the lenders.
- 21 -
On May 6, 2009, we announced a reduction in our quarterly distribution from $0.64 per unit to $0.45
per unit. In addition to the reduction in the distribution, in the second quarter of 2009 we
changed our policy of declaring the distribution from the last week in the quarter to the first
week following the quarter end. A distribution of $0.45 per common unit was declared on January 4,
2010 and paid on January 26, 2010. The distribution paid amounted to $12.4 million. In 2010, we
expect to declare and pay four distributions in the calendar year.
On October 5, 2009, the Company completed the public offering of 4,025,000 shares of its common
stock at $29.75 per share. Net proceeds to the Operating Partnership after deducting underwriting
discounts and commissions and estimated offering expenses were approximately $114.0 million. The
Operating Partnership used the net proceeds from the offering to repay $100 million of the
Operating Partnerships unsecured term note due June 2012 and to terminate two interest rate swaps
relating to the debt repaid at a cost of $8.4 million. The Operating Partnership used the
remaining proceeds along with operating cash flows to payoff a maturing mortgage in December 2009
of $26.1 million.
We believe that the steps the Operating Partnership has taken, including but not limited to the
equity raised from our common stock offering of approximately $114.0 million, the pay down of $100
million of our term notes, and the reduction in the quarterly distribution, will be adequate to
avoid future covenant violations under the current terms of our line of credit and term note
agreements.
Our ability to retain cash flow is limited because we operate as a REIT. In order to maintain our
REIT status, a substantial portion of our operating cash flow must be used to pay distributions to
our shareholders. We believe that our internally generated net cash provided by operating
activities and our availability on our line of credit will be sufficient to fund ongoing
operations, capital improvements, distributions and debt service requirements through June 2011, at
which time our revolving line of credit matures. Future draws on our line of credit may be limited
due to covenant restrictions.
Cash flows from operating activities were $13.9 million and $14.5 million for the three months
ended March 31, 2010 and 2009, respectively. The decrease in operating cash flows from 2009 to
2010 was primarily due to an increase in prepaid expenses relating to our property insurance which
was partially offset by a smaller decrease in accounts payable.
Cash used in investing activities was $2.5 million and $6.7 million for the three months ended
March 31, 2010 and 2009 respectively. The decrease in cash used from 2009 to 2010 period was due
to reduced capital improvement activity in the first quarter of 2010 as compared to the same period
in 2009.
Cash used in financing activities was $14.7 million and $4.9 for the three months ended March 31,
2010 and 2009 respectively. In 2009, we used our borrowings under our line of credit to fund the
capital improvement activity. In 2010, operating cash flows were used to fund capital
improvements.
- 22 -
On June 25, 2008, we entered into agreements relating to new unsecured credit arrangements, and
received funds under those arrangements. As part of the agreements, the Operating Partnership
entered into a $250 million unsecured term note maturing in June 2012 bearing interest at LIBOR
plus 1.625% (based on the Operating Partnerships March 31, 2010 credit rating). The proceeds from
this term note were used to repay the Operating Partnerships previous line of credit that was to
mature in September 2008, the Operating Partnerships term note that was to mature in September
2009, the term note maturing in July 2008, and to provide for working capital. We repaid $100
million of this term note with the proceeds of our common stock offering. The agreements also
provide for a $125 million (expandable to $175 million) revolving line of credit maturing June 2011
bearing interest at a variable rate equal to LIBOR plus 1.375% (based on the Operating
Partnerships credit rating at March 31, 2010), and requires a 0.25% facility fee. The interest
rate at March 31, 2010 on the Operating Partnerships available line of credit was approximately
1.62% (1.61% at December 31, 2009). At March 31, 2010, there was $125 million available on the
unsecured line of credit. We believe that if operating results remain consistent with historical
levels and levels of other debt and liabilities remain consistent with amounts outstanding at March
31, 2010, the entire $125 million line of credit could be drawn without violating our debt
covenants.
We also maintain a $80 million term note maturing September 2013 bearing interest at a fixed rate
of 6.26%, a $20 million term note maturing September 2013 bearing interest at a variable rate equal
to LIBOR plus 1.50%, and a $150 million unsecured term note maturing in April 2016 bearing interest
at 6.38% (based on our March 31, 2010 credit ratings).
Prior to our October 2009 common stock offering, the line of credit facility and term notes had an
investment grade rating from Standard and Poors (BBB-). Due to our debt covenant violation and
operating trends, Fitch Ratings downgraded the Operating Partnerships rating on its revolving
credit facility and term notes to non-investment grade (BB+) in May 2009. As a result of our
common stock offering in October 2009 and the use of proceeds to repay $100 million of term notes,
Fitch Ratings upgraded our rating on our line of credit and term notes again to investment grade
(BBB-).
In addition to the unsecured financing mentioned above, our consolidated financial statements also
include $80.6 million of mortgages payable as detailed below:
* | 7.80% mortgage note due December 2011, secured by 11 self-storage facilities (Locke Sovran I) with an aggregate net book value of $42.4 million, principal and interest paid monthly. The outstanding balance at March 31, 2010 on this mortgage was $28.3 million. | |
* | 7.19% mortgage note due March 2012, secured by 27 self-storage facilities (Locke Sovran II) with an aggregate net book value of $79.8 million, principal and interest paid monthly. The outstanding balance at March 31, 2010 on this mortgage was $41.2 million. | |
* | 7.25% mortgage note due December 2011, secured by 1 self-storage facility with an aggregate net book value of $5.6 million, principal and interest paid monthly. Estimated market rate at time of acquisition 5.40%. The outstanding balance at March 31, 2010 on this mortgage was $3.3 million. | |
* | 6.76% mortgage note due September 2013, secured by 1 self-storage facility with an aggregate net book value of $1.9 million, principal and interest paid monthly. The outstanding balance at March 31, 2010 on this mortgage was $1.0 million. |
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* | 6.35% mortgage note due March 2014, secured by 1 self-storage facility with an aggregate net book value of $3.7 million, principal and interest paid monthly. The outstanding balance at March 31, 2010 on this mortgage was $1.1 million. | |
* | 7.50% mortgage notes due August 2011, secured by 3 self-storage facilities with an aggregate net book value of $13.9 million, principal and interest paid monthly. Estimated market rate at time of acquisition 6.42%. The outstanding balance at March 31, 2010 on this mortgage was $5.8 million. |
The 7.80% and 7.19% mortgages were incurred in 2001 and 2002 respectively as part of the financing
of the consolidated joint ventures. The Operating Partnership assumed the 7.25%, 6.76%, 6.35%, and
7.50% mortgage notes in connection with the acquisitions of storage facilities in 2005 and 2006.
Our Dividend Reinvestment and Stock Purchase Plan was suspended in November 2009. We plan to
reinstate our Dividend Reinvestment and Stock Purchase Plan in 2010 and expect to issue shares when
our share price and capital needs warrant such issuance.
During 2010 and 2009, we did not acquire any shares of our common stock via the Share Repurchase
Program authorized by the Board of Directors. From the inception of the Share Repurchase Program
through March 31, 2010, we have reacquired a total of 1,171,886 shares pursuant to this program.
From time to time, subject to market price and certain loan covenants, we may reacquire additional
shares.
Future acquisitions, our expansion and enhancement program, and share repurchases are expected to
be funded with draws on our line of credit, sale of properties and private placement solicitation
of joint venture equity. Current capital market conditions may prevent us from accessing other
traditional sources of capital including the issuance of common and preferred stock and the
issuance of unsecured term notes. Should these capital market conditions persist, we may have to
curtail acquisitions, our expansion and enhancement program, and share repurchases as we approach
June 2011, when our line of credit matures.
ACQUISITION AND DISPOSITION OF PROPERTIES
We acquired no properties in 2010 or 2009.
In April 2010 we sold two non-strategic storage facilities in Michigan for net proceeds of $2.4
million, resulting in a loss recorded in the first quarter of $0.6 million. During the third and
fourth quarters of 2009, we sold five non-strategic storage facilities in Massachusetts, North
Carolina, and Pennsylvania for net cash proceeds of $16.3 million.
At March 31, 2010, the Operating Partnership has one contract in place with a potential buyer for
the possible sale of eight properties for approximately $21.4 million. The sale of the eight
properties is subject to significant contingencies as of March 31, 2010, including the potential
buyers satisfactory completion of an inspection of the properties and the buyer securing funds
from its lender to finance the transaction. While there can be no assurances that we will
successfully complete the sale of these properties, based upon the status of our dealings with the
potential buyer, the sale of these properties is expected to close in the second quarter of 2010.
We may seek to sell additional properties to third parties or joint venture programs in 2010.
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FUTURE ACQUISITION AND DEVELOPMENT PLANS
Our external growth strategy is to increase the number of facilities we own by acquiring suitable
facilities in markets in which we already have operations, or to expand in new markets by acquiring
several facilities at once in those new markets. No properties were acquired in 2009 or the first
quarter of 2010, and acquisitions for the remainder of 2010 may be limited due to the fact that, at
present, sellers asking prices remain considerably higher than the Operating Partnership believes
market conditions warrant.
In 2009 we scaled back a planned $50 million program to expand and enhance our existing properties.
Instead we spent approximately $18 million to add 175,000 square feet to existing properties, and
to convert 64,000 square feet to premium storage. We also completed construction of a new 78,000
square foot facility in Richmond, Virginia. Although we do not expect to construct any new
facilities in 2010, we do plan to expend up to $20 million to expand and enhance existing
facilities.
We also expect to continue making capital expenditures on our properties. This includes
repainting, paving, and remodeling of the office buildings. For the first three months of 2010 we
spent approximately $1.8 million on such improvements and we expect to spend approximately $10
million for the remainder of 2010.
DISTRIBUTION REQUIREMENTS OF THE COMPANY AND IMPACT ON THE OPERATING PARTNERSHIP
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 its 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. The Companys source of funds for such
distributions is solely and directly from the Operating Partnership.
Although we currently intend to operate in a manner designed to qualify as a REIT, it is possible
that future economic, market, legal, tax or other considerations may cause our Board of Directors
to revoke our REIT election.
INTEREST RATE RISK
We have entered into interest rate swap agreements in order to mitigate the effects of fluctuations
in interest rates on our floating rate debt. At March 31, 2010, we have three outstanding interest
rate swap agreements as summarized below:
Fixed | Floating Rate | |||||||||||||||
Notional Amount | Effective Date | Expiration Date | Rate Paid | Received | ||||||||||||
$20 Million |
9/4/05 | 9/4/13 | 4.4350 | % | 6 month LIBOR | |||||||||||
$50 Million |
7/1/08 | 6/25/12 | 4.2825 | % | 1 month LIBOR | |||||||||||
$100 Million |
7/1/08 | 6/22/12 | 4.2965 | % | 1 month LIBOR |
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Upon renewal or replacement of the credit facility, our total interest may change dependent on the
terms we negotiate with the lenders; however, the LIBOR base rates have been contractually fixed on
$170 million of our debt through the interest rate swap termination dates.
Through June 2012, all of our $400 million of unsecured debt is on a fixed rate basis after taking
into account the interest rate swaps noted above. Based on our outstanding unsecured debt of $400
million at March 31, 2010, a 100 basis point increase in interest rates would have no effect on our
interest expense.
INFLATION
We do not believe that inflation has had or will have a direct effect on our operations.
Substantially all of the leases at the facilities are on a month-to-month basis which provides us
with the opportunity to increase rental rates as each lease matures.
SEASONALITY
Our revenues typically have been higher in the third and fourth quarters, primarily because we
increase rental rates on most of our storage units at the beginning of May and 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, we believe
that our customer mix, diverse geographic locations, rental structure and expense structure provide
adequate protection against undue fluctuations in cash flows and net revenues during off-peak
seasons. Thus, we do not expect seasonality to materially affect distributions to unitholders.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 13 to the financial statements.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
The information required is incorporated by reference to the information appearing under the
caption Interest Rate Risk in Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations above.
Item 4. | Controls and Procedures |
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of our disclosure controls and
procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange
Act of 1934, has been conducted under the supervision of and with the participation of our
management, including the Chief Executive Officer and Chief Financial Officer. Based on that
evaluation, our management, including the Chief Executive Officer and Chief Financial Officer,
concluded that our disclosure controls and procedures were effective at March 31, 2010. There have
not been changes in the Operating Partnerships internal controls or in other factors that could
significantly affect these controls during the quarter ended March 31, 2010.
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Changes in Internal Control over Financial Reporting
There have not been any changes in the Operating Partnerships internal control over financial
reporting (as defined in 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of
1934) that occurred during the Operating Partnerships most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the Operating Partnerships
internal control over financial reporting.
PART II. Other Information
Item 1. Legal Proceedings
None
Item 1A. | Risk Factors |
In addition to the other information set forth in this report, you should carefully consider the
factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year
ended December 31, 2009, which could materially affect our business, financial condition or future
results. The risks described in our Annual Report on Form 10-K are not the only risks facing our
Operating Partnership. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our business, financial
condition and operating results.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None
Item 3. | Defaults Upon Senior Securities |
None
Item 5. | Other Information |
None
Item 6. | Exhibits |
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. | |
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. | |
32 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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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 Acquisition Limited Partnership |
||||
By: | /S/ David L. Rogers | |||
David L. Rogers | ||||
Chief Financial Officer (Principal Accounting Officer) |
||||
May 7, 2010 | ||||
Date | ||||
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