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 June 30, 1999
Commission file number: 1-13820
Sovran Self Storage, Inc.
(Exact name of Registrant as specified in its charter)
Maryland 16-1194043
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5166 Main Street
Williamsville, NY 14221
(Address of principal executive offices) (Zip code)
(716) 633-1850
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Title Outstanding
Common Stock, $.01 par value per share. 12,438,665
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
SOVRAN SELF STORAGE, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
(dollars in thousands, except share data) 1999 1998
--------------- -------------
<S> <C> <C>
Assets
Investment in storage facilities:
Land $ 110,693 $ 102,864
Building and equipment 435,378 399,638
-------- --------
546,071 502,502
Less: accumulated depreciation (27,188) (21,339)
-------- --------
Investments in storage facilities, net 518,883 481,163
Cash and cash equivalents 3,075 2,984
Accounts receivable 2,397 1,699
Prepaid expenses and other assets 3,336 4,278
-------- --------
Total Assets $ 527,691 $ 490,124
========= =========
Liabilities
Line of credit $ 144,500 $ 112,000
Term note 75,000 75,000
Accounts payable and accrued liabilities 5,131 3,542
Deferred revenue 3,423 2,943
Accrued dividends 6,966 6,895
Mortgage payable 5,269 3,059
------- -------
Total Liabilities 240,289 203,439
Minority interest 23,622 24,020
Shareholders' Equity
Common stock $.01 par value, 100,000,000
shares authorized, 12,438,665 shares
outstanding (12,312,756 at December 31,1998 125 124
Preferred stock, 10,000,000 shares authorized,
none issued and outstanding,
250,000 shares designated as
Series A Junior Participating
Preferred Stock, $.01 par value - -
Additional paid-in capital 277,572 274,638
Unearned restricted stock (368) (418)
Dividends in excess of net income (11,559) (9,689)
Treasury stock at cost, 75,700 shares (1,990) (1,990)
------- -------
Total Shareholders' Equity 263,780 262,665
------- -------
Total Liabilities and Shareholders' Equity $ 527,691 $ 490,124
========= =========
</TABLE>
See notes to financial statements.
<PAGE>
SOVRAN SELF STORAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
April 1, 1999 April 1, 1998
to to
(dollars in thousands, except share data) June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Revenues:
Rental income .............................. $ 20,331 $ 16,171
Interest and other income .................. 274 271
------------ ------------
Total revenues .......................... 20,605 16,442
Expenses:
Property operations and maintenance ........ 4,035 3,164
Real estate taxes .......................... 1,719 1,311
General and administrative ................. 1,387 1,093
Interest ................................... 3,631 2,153
Depreciation and amortization .............. 3,238 2,450
------------ ------------
Total expenses .......................... 14,010 10,171
------------ ------------
Income before minority interest .............. 6,595 6,271
Minority interest ............................ (422) (219)
------------ ------------
Net Income ................................... $ 6,173 $ 6,052
============ ============
Earnings per share - basic ................... $ 0.50 $ 0.49
============ ============
Earnings per share - diluted ................. $ 0.50 $ 0.49
============ ============
Common shares used in basic
earnings per share calculation ............. 12,420,258 12,330,040
Common shares used in diluted
earnings per share calculation ............. 12,435,123 12,374,021
Dividends declared per share ................. $ 0.56 $ 0.54
============ ============
</TABLE>
See notes to financial statements.
<PAGE>
SOVRAN SELF STORAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
January 1, 1999 January 1, 1998
to to
(dollars in thousands, except share data) June 30, 1999 June 30, 1998
--------------- ---------------
<S> <C> <C>
Revenues:
Rental income .............................. $ 39,573 $ 30,347
Interest and other income .................. 484 470
------------ ------------
Total revenues .......................... 40,057 30,817
Expenses:
Property operations and maintenance ........ 8,076 5,983
Real estate taxes .......................... 3,295 2,498
General and administrative ................. 2,515 1,947
Interest ................................... 6,972 3,368
Depreciation and amortization .............. 6,341 4,547
------------ ------------
Total expenses .......................... 27,199 18,343
------------ ------------
Income before minority
interest and extraordinary item ............. 12,858 12,474
Minority interest ............................ (830) (424)
------------ ------------
Income before extraordinary item ............. 12,028 12,050
Extraordinary loss on extinguishment of debt . - (350)
------------ ------------
Net Income ................................... $ 12,028 $ 11,700
============ ============
Earnings per share before
extraordinary item - basic ............... 0.97 0.98
Extraordinary item ........................... - (0.03)
------------ ------------
Earnings per share - basic ................... $ 0.97 $ 0.95
============ ============
Earnings per share - diluted ................. $ 0.97 $ 0.95
============ ============
Common shares used in basic
earnings per share calculation ........... 12,389,724 12,309,866
Common shares used in diluted
earnings per share calculation ........... 12,404,522 12,363,548
Dividends declared per share ................. $ 1.12 $ 1.08
============ ============
</TABLE>
See notes to financial statements.
<PAGE>
Sovran Self Storage, Inc.
Statements of Cash Flow
<TABLE>
<CAPTION>
January 1, 1999 January 1, 1998
to to
(dollars in thousands) June 30, 1999 June 30, 1998
---------------- ---------------
<S> <C> <C>
Operating Activities
Net income ................................... $ 12,028 $ 11,700
Adjustments to reconcile net income
to net cash provided by operating activities:
Extraordinary item ......................... - 350
Depreciation and amortization .............. 6,341 4,547
Minority interest .......................... 830 424
Restricted stock earned .................... 50 7
Changes in assets and liabilities:
Accounts receivable ..................... (677) (474)
Prepaid expenses and other assets ....... 525 (462)
Accounts payable and other liabilities .. 1,440 2,767
Deferred revenue ........................ 223 649
------------ ------------
Net cash provided by operating activities .... 20,760 19,508
------------ ------------
Investing Activities
Additions to storage facilities ............ (40,955) (115,337)
Additions to other assets .................. (22) (851)
------------ ------------
Net cash used in investing activities ........ (40,977) (116,188)
------------ ------------
Financing Activities
Net proceeds from issuance of common
stock through Dividend Reinvestment
and Stock Purchase Plan ................... 2,935 -
Proceeds from line of credit draw down ..... 32,500 112,000
Dividends paid ............................. (13,898) (13,258)
Purchase of treasury stock ................. - (954)
Minority interest distributions ............ (966) (480)
Redemption of operating partnership units .. (261) -
Mortgage principal payments ................ (2) (500)
------------ ------------
Net cash provided by financing activities .... 20,308 96,808
------------ ------------
Net increase in cash ......................... 91 128
Cash at beginning of period .................. 2,984 2,567
------------ ------------
Cash at end of period ........................ $ 3,075 $ 2,695
============ ============
Supplemental cash flow information
Cash paid for interest .................. $ 6,669 $ 3,181
</TABLE>
<PAGE>
Sovran Self Storage, Inc.
Statements of Cash Flow
<TABLE>
<CAPTION>
Supplemental cash-flow information for the six months ended June 30, 1999
(dollars in thousands)
- --------------------------------------------------------------------------------
<S> <C>
Fair value of net liabilities assumed on
the acquisition of storage facilities $ 385
Storage facilities acquired through the
assumption of mortgages $ 2,212
- --------------------------------------------------------------------------------
Dividends declared but unpaid were $6,966 at June 30, 1999 and $6,895 at
December 31, 1998.
</TABLE>
See notes to financial statements.
<PAGE>
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
six month periods ended June 30, 1999 and 1998 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1999.
2. Organization
Sovran Self Storage, Inc. (the "Company"), a self-administered and
self-managed real estate investment trust (a REIT), was formed on April 19, 1995
to own and operate self-storage facilities throughout the United States. On June
26, 1995, the Company commenced operations effective with the completion of its
initial public offering of 5,890,000 shares (the Offering). Since its formation
the Company has purchased a total of 146, (fifteen in 1999, fifty in 1998, forty
four in 1997, twenty-nine in 1996 and eight in 1995) self storage properties
from unaffiliated third parties, increasing the total number of self-storage
properties owned at June 30, 1999 to 220 properties, most of which are in the
eastern United States and Texas.
All of the Company's assets are owned by, and all its operations are
conducted through, Sovran Acquisition Limited Partnership (the Operating
Partnership). Sovran Holdings, Inc., a wholly-owned subsidiary of the Company
(the Subsidiary), is the sole general partner; and the Company is a limited
partner of the Operating Partnership, and thereby controls the operations of the
Operating Partnership holding a 93.58% ownership interest therein as of June 30,
1999. The remaining ownership interests in the Operating Partnership are held by
certain former owners of assets acquired by the Operating Partnership subsequent
to its formation. The consolidated financial statements of the Company include
the accounts of the Company, the Partnership, and the wholly-owned Subsidiary.
All intercompany transactions and balances have been eliminated.
<PAGE>
3. Investment in Storage Facilities
The following summarizes activity in storage facilities during the period ended
June 30, 1999.
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
Cost:
Beginning balance ............................. $ 502,502
Property acquisitions ......................... 38,675
Improvements and equipment additions .......... 5,002
Dispositions .................................. (108)
---------
Ending balance ................................... $ 546,071
=========
Accumulated Depreciation:
Beginning balance ............................. $ 21,339
Additions during the period ................... 5,903
Dispositions .................................. (54)
---------
Ending balance ................................... $ 27,188
=========
</TABLE>
4. Unsecured Line of Credit and Term Note
The Company has a $150 million unsecured credit facility that matures
February 2001 and provides for funds at LIBOR plus 1.25%. At June 30, 1999, the
outstanding balance on the credit facility was $144.5 million. In 1998 the
Company recorded an extraordinary loss on the extinguishment of debt of $350,000
representing the unamortized financing costs of the former $75 million revolving
credit facility.
In December 1998, the Company entered into a $75 million unsecured term
note that matures on December 22, 2000 and bears interest at LIBOR plus 1.50%.
The Company entered into interest rate swap and cap agreements to
manage its exposure to interest rate changes. The swap involves the exchange of
fixed and variable interest rate payments without exchanging the notional
principal amount. At June 30, 1999, the Company had an interest rate swap with a
notional amount of $55 million through December 1999. Under this agreement, the
Company receives a floating interest rate based upon LIBOR and pays a fixed
interest rate of 5.12% on the $55 million amount. The Company also has a
LIBOR-based interest rate cap on $70 million of debt through June 2000 at 6.5%.
Payments or receipts on the agreements are recorded monthly as adjustments to
interest expense. The net carrying amount of the Company's debt instruments
approximates fair value.
5. Commitments and Contingencies
The Company's current practice is to conduct environmental
investigations in connection with property acquisitions. At this time, the
Company is not aware of any environmental contamination of any of its facilities
which individually or in the aggregate would be material to the Company's
overall business, financial condition, or results of operations.
As of June 30, 1999, the Company had entered into contracts for the
purchase of two facilities with expected costs of $5 million. One of the
facilities was purchased on August 2, 1999 for $2 million.
<PAGE>
6. Pro Forma Financial Information
The following unaudited pro forma Condensed Statement of Operations is
presented as if the 15 storage facilities purchased during the six months ended
June 30, 1999, had occurred at January 1, 1999. Such unaudited pro forma
information is based upon the historical combined statements of operations of
the Company. It should be read in conjunction with the financial statements of
the Company and notes thereto included elsewhere herein. In management's
opinion, all adjustments necessary to reflect the effects of these transactions
have been made. This unaudited pro forma statement does not purport to represent
what the actual results of operations of the Company would have been assuming
such transactions had been completed as set forth above nor does it purport to
represent the results of operations for future periods.
<TABLE>
<CAPTION>
(in thousands, except share data)
Six Months Ended
June 30,
1999
----------------
<S> <C>
Revenues:
Rental income $ 41,000
Other income 501
----------------
Total revenues 41,501
Expenses:
Property operations & maintenance 8,287
Real estate taxes 3,495
General and administrative 2,538
Interest 7,661
Depreciation and amortization 6,606
----------------
Total expenses 28,587
----------------
Income before minority interest 12,914
Minority interest (839)
----------------
Net income $ 12,075
================
Earnings per share - basic $ .97
================
Earnings per share - diluted $ .97
================
Common shares used in basic earnings
per share calculation 12,438,665
</TABLE>
<PAGE>
7. Legal Proceedings
A former business associate (Plaintiff) of certain officers and
directors of the Company, including Robert J. Attea, Kenneth F. Myszka, David L.
Rogers and Charles E. Lannon, filed a lawsuit against the Company on June 13,
1995 in the United States District Court for the Northern District of Ohio. The
Plaintiff has since amended the complaint in the lawsuit alleging breach of
fiduciary duty, breach of contract, breach of general partnership/joint venture
arrangement, breach of duty of good faith, fraud and deceit, and other causes of
action including declaratory judgement as to the Plaintiff's continuing interest
in the Company. The Plaintiff is seeking money damages in excess of $15 million,
as well as punitive damages and declaratory and injunctive relief (including the
imposition of a constructive trust on assets of the Company in which the
Plaintiff claims to have a continuing interest) and an accounting. The amended
complaint also added Messrs. Attea, Myszka, Rogers and Lannon as additional
defendants. The parties are currently involved in discovery. The Company intends
to vigorously defend the lawsuit. Messrs. Attea, Myszka, Rogers and Lannon have
agreed to indemnify the Company for costs and any loss arising from the lawsuit.
The Company believes that the actual amount of the Plaintiff's recovery in this
matter, if any, would be within the ability of these individuals to provide
indemnification. The Company does not believe that the lawsuit will have a
material adverse effect upon the Company.
8. Earnings Per Share
The Company reports earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." The following
table sets forth the computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
(in thousands, except per share data) 1999 1998
------------ -----------
<S> <C> <C>
Numerator:
Net Income ............................ $12,028 $11,700
Denominator:
Denominator for basic earnings
per share - weighted average shares . 12,390 12,310
Effect of Dilutive Securities:
Stock options ......................... 15 54
Denominator for diluted earnings
per share - adjusted weighted average
shares and assumed conversion ....... 12,405 12,364
Basic earnings per share ................ $ .97 $ .95
Diluted earnings per share .............. $ .97 $ .95
</TABLE>
<PAGE>
9. Recent Accounting Pronouncements
In April 1998, the AICPA issued Statement of Position 98-5 (SOP 98-5),
"Reporting on the Costs of Start-Up Activities", that is effective for fiscal
years beginning after December 15, 1998. SOP 98-5 requires start-up activities
and organizational costs to be expensed as incurred. The pronouncement had no
effect on the Company.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). In June 1999, the FASB issued SFAS 137, which defers the
effective date of SFAS 133 to fiscal years beginning after June 15, 2000. SFAS
133 establishes accounting and reporting standards for derivative instruments
and hedging activities. Under the statement certain derivatives are recognized
at fair market value and changes in fair market value are recognized as gains
and losses. The adoption of SFAS 133 is not expected to have a material impact
on the financial position or results of operations of the Company.
10. Subsequent Event
On July 23, 1999, the Company completed the offering of 1.2 million
shares of 9.85% Series B Cumulative Redeemable Preferred Stock. The offering
price was $25 per share resulting in gross proceeds of $30 million. Net proceeds
were approximately $28.9 million which will be used to reduce outstanding
indebtedness on the Company's credit facility.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation
The following discussion and analysis of the consolidated financial
condition and results of operations should be read in conjunction with the
financial statements and notes thereto included elsewhere in this report.
The Company operates as a Real Estate Investment Trust ("REIT") and
owns and operates a portfolio of 220 self-storage facilities, providing storage
space for business and personal use to customers in 20 states. The Company's
investment objective is to increase cash flow and enhance shareholder value by
aggressively managing its portfolio, to expand and enhance the facilities in
that portfolio and to selectively acquire new properties in geographic areas
that will either complement or efficiently grow the portfolio.
When used in this discussion and elsewhere in this document, the words
"intends," "believes," "anticipates," and similar expressions are intended to
identify "forward-looking statements" within the meaning of that term in Section
27A of the Securities Act of 1933, and in Section 21E of Securities Exchange Act
of 1934. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors, which may cause the actual results, performance
or achievements of the Company to be materially different from those expressed
or implied by such forward-looking statements. Such factors include, but are not
limited to, the effect of competition from new self-storage facilities, which
would cause rents and occupancy rates to decline; the Company's ability to
evaluate, finance and integrate acquired businesses into the Company's existing
business and operations; the Company's ability to effectively compete in the
industries in which it does business; the Company's cash flow may be
insufficient to meet required payments of principal and interest; and tax law
changes which may change the taxability of future income.
Liquidity and Capital Resources
Revolving Credit Facility
The Company has a $150 million unsecured credit facility that matures
February 2001 and provides for funds at LIBOR plus 1.25%. The Company intends to
use funds available from this credit facility to finance future acquisition and
development plans described below. At June 30, 1999, the outstanding balance of
the unsecured credit facility was $144.5 million.
<PAGE>
Umbrella Partnership REIT
The Company was formed as an Umbrella Partnership Real Estate Trust
("UPREIT") and, as such, has the ability to issue operating partnership ("OP")
units in exchange for properties sold by independent owners. By utilizing such
OP units as currency in facility acquisitions, the Company may partially defer
the seller's income-tax liability and obtain more favorable pricing or terms.
As of June 30, 1999,
853,037 units have been issued in exchange for property at the request of the
sellers.
Acquisition of Properties
The Company's external growth strategy is to increase the number of
facilities it owns by acquiring suitable facilities in markets in which it
already has an operating presence or to expand into new markets by acquiring
several facilities at once in those new markets. In the three months ended June
30, 1999, the Company entered a new market by acquiring nine properties in
Arizona. The nine acquisitions added 501,000 square feet of space and 5,160
rental units to the Company's portfolio.
Future Acquisition and Development Plans
The Company has contracts on two properties for an aggregate purchase
price of $5 million. One of the facilities was purchased in August 1999. The
closing of the second facility is subject to several customary conditions
including, among other things, satisfactory completion of due diligence. The
Company also intends to improve certain of its existing facilities by building
additional storage buildings on presently vacant land and by installing climate
control and enhanced security systems at selected sites.
Liquidity
As most of the Company's operating cash flow is expected to be used to
pay dividends, (see REIT Qualification and Distribution Requirements), the funds
required to acquire additional properties may be provided by borrowings pursuant
to the unsecured credit facility, a moderate layer of secured debt, and/or a
joint venture acquisition partnership.
On July 23, 1999, the Company completed the offering of 1.2 million
shares of 9.85% Series B Cumulative Redeemable Preferred Stock. The offering
price was $25 per share resulting in gross proceeds of $30 million. Net proceeds
were approximately $28.9 million which will be used to reduce outstanding
indebtedness on the Company's credit facility.
At June 30, 1999, the Company had $5.5 million available under the
unsecured credit facility.
REIT Qualification and Distribution Requirements
As a REIT, the Company is not required to pay federal income tax on
income that it distributes to its shareholders, provided that the amount
distributed is equal to at least 95% of taxable income. These distributions must
be made in the year to which they relate or in the following year if declared
before the Company files its federal income-tax return and if it is paid before
the first regular dividend of the following year.
As a REIT, the Company must derive at least 95% of its total gross
income from income related to real property, interest and dividends. In the six
months ended June 30, 1999, the Company's percentage of revenue from such
sources exceeded 98%, thereby passing the 95% test, and no special measures are
expected to be required to enable the Company to maintain its REIT designation.
Results of Operations
The following discussion is based on the financial statements of the
Company as of June 30, 1999 and June 30, 1998.
For the period January 1, 1999 through June 30, 1999 (dollars in thousands)
The Company reported revenues of $40,057 during the period and incurred
$11,371 in operating expenses, resulting in net operating income of $28,686, or
71.6%. General and administrative expenses of $2,515, interest expense of $6,972
and depreciation and amortization expenses of $6,341 resulted in income of
$12,858 before minority interest. Net income amounted to $12,028.
<PAGE>
Three months ended June 30, 1999, compared to Three months ended June 30, 1998
(dollars in thousands)
The following discussion compares the activities of the Company for the
three months ended June 30, 1999 with the activities of the Company for the
three months ended June 30, 1998.
Total revenues increased from $16,442 for the three months ended June
30, 1998 to $20,605 for the three months ended June 30, 1999, an increase of
$4,163 or 25%. Of this, $3,544 resulted from the acquisition of 46 properties
during the period April 1, 1998 through June 30, 1999 and $619 was realized as a
result of increased rental rates at the 174 properties owned by the Company at
April 1, 1998. Overall, same-store revenues grew 4.0% for the three-month period
ended June 30, 1999 as compared to the same period in 1998.
Property operating and real estate tax expense increased $1,279 or 29%
during the period. $1,072 was a result of absorbing additional expenses from
operating the newly acquired properties, and $207 related to the operations of
its sites operated more than one year.
General and administrative increased $294 principally as a result of
the need for additional personnel and increased administrative costs associated
with managing the additional properties.
Interest expense increased $1,478 due to the $72 million drawn on the
Company's line of credit and term note during the last twelve months.
Income before minority interest increased from $6,271 to $6,595,
an increase of $324 or 5%.
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:
<TABLE>
<CAPTION>
Six months Six months
ended June 30, ended June 30,
1999 1998
(in thousands) -------------- ----------------
<S> <C> <C>
Net income $ 12,028 $ 11,700
Minority interest in income 830 424
Depreciation of real estate and amortization
of intangible assets exclusive of deferred
financing fees 5,982 4,435
Extraordinary loss - 350
Funds from operations allocable to minority interest (1,216) (590)
---------- --------
FFO available to common shareholders $ 17,624 $ 16,319
========== ==========
</TABLE>
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.
<PAGE>
Seasonality
The Company's revenues typically have been higher in the third and
fourth quarters, primarily because the Company increases its rental rates on
most of its storage units at the beginning of May and, to a lesser extent,
because self-storage facilities tend to experience greater occupancy during the
late spring, summer and early fall months due to the greater incidence of
residential moves during these periods. However, the Company believes that its
tenant mix, diverse geographical locations, rental structure and expense
structure provide adequate protection against undue fluctuations in cash flows
and net revenues during off-peak seasons. Thus, the Company does not expect
seasonality to affect materially distributions to shareholders.
Impact of the Year 2000
The Company employs several different computer systems for financial
reporting, property management, asset control and payroll. These systems are
purchased by the Company from third parties and therefore there is no internally
generated programming code. The Company has been assessing and testing its
systems to determine if its hardware and software will function properly with
respect to dates in the Year 2000 and thereafter, and no significant problems
were noted. The Company's critical applications relating to financial reporting,
property management and asset control have been updated to Year 2000 compliant
versions within the last year as part of the normal maintenance agreements.
The Company communicates electronically with certain outside vendors in
the banking and payroll processing areas. The Company has been advised by these
vendors that their systems are or will be Year 2000 compliant. The Company has
identified and evaluated certain other systems that may be impacted by the Year
2000, such as gates, security systems and elevators. The Company expects the
implementation of any required solutions to be completed by December 31, 1999,
and the cost to be less than $50,000. The Company is not aware of any other
vendors or suppliers for whom the Year 2000 would materially impact the
Company's business and there are no means of ensuring that outside companies
will be compliant.
The Company will continue to address the Year 2000 throughout 1999 and
has developed a contingency plan if the implementations are not completed
timely. Under a worst case scenario, the Company will have the ability to revert
to a manual system to operate its self-storage stores if any issues with the
Year 2000 are encountered. Despite the approach being taken to prevent a Year
2000 problem, the Company cannot be completely sure that issues will not arise,
or events will not occur that could have material adverse affects on the
Company's results of operations or financial condition.
Year 2000 costs and the date on which the Company believes that it will
be Year 2000 compliant are based upon management's best estimates that were
derived utilizing numerous assumptions of future events. There can be no
assurance that these estimates are achievable and actual results could differ
materially from estimates.
Quantitative and Qualitative Disclosure About Market Risk
The Company manages its exposure to interest rate changes by entering
into interest rate swap agreements. There have been no material changes to the
Company's exposure to interest rate risk since December 31, 1998.
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
A former business associate (Plaintiff) of certain officers and
directors of the Company, including Robert J. Attea, Kenneth F. Myszka,
David L. Rogers and Charles E. Lannon, filed a lawsuit against the Company on
June 13, 1995 in the United States District Court for the Northern District of
Ohio. The Plaintiff has since amended the complaint in the lawsuit alleging
breach of fiduciary duty, breach of contract, breach of general
partnership/joint venture arrangement, breach of duty of good faith, fraud and
deceit, and other causes of action including declaratory judgement as to the
Plaintiff's continuing interest in the Company. The Plaintiff is seeking money
damages in excess of $15 million, as well as punitive damages and declaratory
and injunctive relief (including the imposition of a constructive trust on
assets of the Company in which the Plaintiff claims to have a continuing
interest) and an accounting. The amended complaint also added Messrs. Attea,
Myszka, Rogers and Lannon as additional defendants. The parties are currently
involved in discovery. The Company intends to vigorously defend the lawsuit.
Messrs. Attea, Myszka, Rogers and Lannon have agreed to indemnify the Company
for costs and any loss arising from the lawsuit. The Company believes that the
actual amount of the Plaintiff's recovery in this matter, if any, would be
within the ability of these individuals to provide indemnification. The Company
does not believe that the lawsuit will have a material adverse effect upon the
Company.
Item 2. Changes in Securities
No disclosure required.
Item 3. Defaults Upon Senior Securities
No disclosure required.
Item 4. Submission of Matters to a Vote of Security Holders
a.) The Annual Meeting of Shareholders was held on Tuesday, May 25, 1999.
<TABLE>
<CAPTION>
b.) Directors Votes For Votes Withheld
<S> <C> <C>
Robert J. Attea 10,700,647 107,348
Kenneth F. Myszka 10,700,647 107,348
Charles E. Lannon 10,700,147 107,848
John E. Burns 10,700,402 107,593
Michael A. Elia 10,700,647 107,348
Anthony P. Gammie 10,700,647 107,348
</TABLE>
<TABLE>
<CAPTION>
c.) An amendment to the Sovran Self Storage, Inc. 1995 Award and Option
Plan to increase the number of shares of Common Stock available for
grant thereunder.
<S> <C>
Votes For 10,053,544
Votes Against 616,086
Abstentions 138,360
Broker Nonvotes 5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
d.) An amendment to the Sovran Self Storage, Inc. 1995 Outside Director's
Stock Option Plan to increase the number of shares of Common Stock
available for grant and to increase the amount of initial and annual
grants thereunder.
<S> <C>
Votes For 10,050,074
Votes Against 610,397
Abstentions 147,519
Broker Nonvotes 5
</TABLE>
<TABLE>
<CAPTION>
e.) The Deferred Compensation Plan for Directors of Sovran Self
Storage, Inc.
<S> <C>
Votes For 10,172,321
Votes Against 493,028
Abstentions 142,643
Broker Nonvotes 3
</TABLE>
<TABLE>
<CAPTION>
f.) The ratification of the appointment by the Board of Directors of Ernst
& Young LLP, as independent accountants to audit the accounts of the
Company for the fiscal year ending December 31, 1999.
<S> <C>
Votes For 10,716,918
Votes Against 44,029
Abstentions 47,047
Broker Nonvotes 1
</TABLE>
Item 5. Other Information
No disclosure required.
Item 6. Exhibits and Reports on Form 8-K
1. (a.) Exhibit - Financial data schedule.
2. (b.) Reports on Form 8-K.
On April 19, 1999, the Company filed a Current Report on Form 8-K/A
reporting the financial statements and exhibits for the acquisition of eleven
self-storage facilities previously reported on the Form 8-K filed March 3, 1999.
<PAGE>
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.
August 12, 1999 By:/S/ David L. Rogers
- --------------- -------------------
Date David L. Rogers, Secretary, Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000944314
<NAME> Sovran Self Storage, Inc.
<MULTIPLIER> 1,000
<CURRENCY> US Dollar
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 3,075
<SECURITIES> 0
<RECEIVABLES> 2,397
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,808
<PP&E> 546,071
<DEPRECIATION> 27,188
<TOTAL-ASSETS> 527,691
<CURRENT-LIABILITIES> 240,289
<BONDS> 0
0
0
<COMMON> 125
<OTHER-SE> 263,655
<TOTAL-LIABILITY-AND-EQUITY> 527,691
<SALES> 0
<TOTAL-REVENUES> 40,057
<CGS> 0
<TOTAL-COSTS> 11,371
<OTHER-EXPENSES> 9,686
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,972
<INCOME-PRETAX> 12,028
<INCOME-TAX> 0
<INCOME-CONTINUING> 12,028
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,028
<EPS-BASIC> .97
<EPS-DILUTED> .97
</TABLE>
