Sovran Self Storage, Inc. (SSS)
Q2 2008 Earnings Call
August 7, 2008 9:00 am ET
Kenneth F. Myszka - President, Chief Operating Officer
David Rogers - Chief Financial Officer
Christine McElroy - Banc of America Securities
David Coty for Michael Bilerman - Citigroup
Jordan Sadler - Keybanc Capital Markets
Todd Thomas – KeyBanc Capital Markets
Christeen Kim - Deutsche Bank Securities
Paul Adornato - BMO Capital Markets
Michael Salinsky - RBC Capital Markets
Previous Statements by SSS
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Kenneth F. Myszka
As a reminder, the following discussion will include forward-looking statements. Our actual results may differ materially from projected results. Additional information concerning the factors that may cause such differences is included in our company's SEC filings. Copies of these filings may be obtained by contacting the company or the SEC.
We experienced another solid quarter as we again increased revenues and net operating income at our properties. Thanks to our revenues and NOI increased by 1.2% and 1.8% respectively over the second quarter of 2007. There were one or two areas in particular that negatively impacted our results, Florida and the capital district, and without these two areas our same store revenues would rise from 1.2% to 3.9% and our same store in Hawaii would go from 1.8% to 5.9%. You can see, with the exception of these two areas, our portfolio is in good shape and performing well.
The second quarter trending started stronger than it ended with moving activity in June well below that of June of 2007. Rentals did improve somewhat dramatically and date gates were about flat for July, which are encouraging times for us. However, we have had to increase the number of concessions offered to attract new customers, which accounts for most of the reason we have lowered our guidance, as we will discuss further in the call.
But we had a busy quarter. We formed a $350.0 million joint venture with Heitman, LLC, a firm based in Chicago, and this will enable us to use our operating platform to expand in our current market as well as new areas of the country. We completed a $375.0 million unsecured credit facility with favorable terms amid what we would call pretty turbulent financial times. This strengthened our balance sheet and provides us with capacity and flexibility to expand and improve our business.
And just after the close of the quarter we closed, in a JV, a purchase of 21 stores in five states at a cost of $144.0 million. We also completed 12 expansions during the second quarter at a cost of just under $16.0 million, and sold our only store near Detroit, Michigan, for $7.4 million, generating a profit of approximately $700,000. So it was a busy quarter.
Let’s ask Dave Rogers, our Chief Financial Officer, to provide some details on these transactions.
Regarding operations, our total revenues increased $2.3 million, or 4.7%, over 2007 second quarter and property operating expenses increased by $700,000. These increases resulting in an overall increase of 5.1% were primarily due to improvements in the same store results I will get to in a minute and the addition of the 20 stores net that we purchased since the beginning of Q2 last year. Average overall occupancy was 82.3% for the quarter and average rent per square foot was $10.35.
Same store revenues increased by 1.2% over those of the second quarter of 2007. The gain was purely rate driven, as our same store weighted average occupancy declined from that of the second quarter in 2007 by 220 basis points to 82.6%. At the quarter end date same store occupancy was 83.5%. Rental rates were higher, at $10.51 per square foot compared to same store rate last year of $10.24.
Total operating expenses on a same store basis increased by only 10 basis points this period. Our payroll costs were up about 5% and our utilities were up 17% but insurance cost savings made up for that and all other categories grew only nominally. We think that for the most part expenses have been, and should continue to be, well-contained.
Growing the top line by 1.2% with only a negligible increase in operating costs resulted in a same store NOI growth of 1.8%. G&A costs for the period came in at $4.1 million, which is pretty much as expected, and while this is about 10% higher than last year’s second quarter, we’re operating more stores at this point.
With regard to capital matters, we didn’t acquire any stores during the period but we did sell one, as Ken mentioned, near Detroit, for $7.4 million. We realized a gain of about $700,000. There were no encumbrances on the property so all the cash came to us. We do not include such gains on sales in our FFO computation.
We used the proceeds of that sale to fund the last remaining piece of our first joint venture, Locke Sovran I, LLC, which was formed in 2000. We paid $6.1 million now for the right to own 100% of the venture, which operates 11 properties.
Late in the quarter we announced the formation of Sovran HHF Storage Holdings, a joint venture formed with an investor advised by Heitman. The venture expects to acquire about $300.0 million of quality self-storage properties in strategic markets throughout the continental United States. Sovran will contribute 20% of the venture’s equity and Heitman’s investor will contribute 80%, with leverage of around 60% expected to be utilized.