Sovran Self Storage Reports Second Quarter Results

Sovran Self Storage, Inc. (NYSE:SSS), a self-storage real estate investment trust (REIT), reported operating results for the quarter ended June 30, 2009.

Net income available to common shareholders for the second quarter of 2009 was $6.3 million or $.28 per diluted share. Net income available to common shareholders for the same period in 2008 was $10.5 million or $.48 per diluted share. Funds from operations for the quarter were $.66 per fully diluted common share. One-time costs of almost $1 million associated with a first quarter covenant waiver, higher interest expense associated with the Company’s recent long-term financing, and increased customer move-in incentives were the primary factors leading to lower earnings for 2009’s second quarter.

Occupancy levels at the Company’s 385 storage facilities at June 30 improved to 82.5%, an increase of 360 basis points since March 31. Kenneth Myszka, the Company’s President and Chief Operating Officer stated, "In a very challenging environment, we’re pleased to see our marketing and call center efforts take hold. During the quarter, we had a net gain of 9,400 customers on a same store basis, and while we made heavy use of incentives, this got our summer season off to a solid start.”

In early May, the Company announced it had breached a debt covenant with its lenders. David Rogers, the Company’s Chief Financial Officer commented, "During the quarter, we took the necessary steps to fix this problem and to improve our liquidity position. We became even more prudent regarding acquisitions and expansions, reduced the dividend on our common stock, and raised some equity through our DRIP and Stock Purchase Plans. We’ve gained sufficient room concerning the covenant restriction and, at June 30, we have in excess of $60 million in cash and permissible borrowings remaining on our credit line.”

OPERATIONS:

Total Company net operating income for the second quarter declined 2.3% ($724,000) compared with the same quarter in 2008 to $31.2 million. Overall average occupancy for the quarter was 80.9% and average rent per square foot for the portfolio was $10.16.

Revenues at the 359 stores owned and/or managed for the entire quarter in both years decreased 3.7% over the second quarter of 2008, the result of a 2.8% decrease in effective rental rates and a 130 basis point drop in average occupancy. The Company continues to make extensive use of move-in incentives; during the quarter over $3.4 million in "first month free” incentives were granted, almost 65% more than those of last spring. At the quarter end date, occupancy on a same store basis was 82.6% compared to 83.1% at June 30, 2008.

Same store operating expenses decreased by 3.6% from last year’s second quarter. A 6.5% increase in property taxes, and modest growth in marketing costs and internet advertising were offset by significant declines in virtually all other operating expense categories.

General and administrative expenses grew $243,000 over the same period in 2008, primarily due to increased expenses associated with operating the Joint Venture.

During the quarter, modest revenue growth was shown at the Company’s Maryland, Louisiana, and Texas stores, while stores in Florida, Georgia, and New England continued to show considerable revenue declines.

PROPERTIES:

The Company did not acquire any properties during the quarter for its own portfolio or for that of the Joint Venture.

As previously announced, the Company has curtailed its program of expanding and enhancing its existing stores, awaiting improvements in both the capital markets and the general economy. Four projects that were started in 2008 have been completed thus far this year at a cost of $5.4 million. Most improvements will be postponed indefinitely, except for about $8 million yet to be applied to projects still underway.

CAPITAL TRANSACTIONS:

The Company’s line of credit and term notes require it to meet certain financial covenants, including prescribed leverage, fixed charge coverage, minimum net worth, limitations on additional indebtedness and limitations on dividend payouts. One such covenant limits total consolidated liabilities to 55% of gross asset value; at March 31 this ratio was 55.4%. In May, the Company received a waiver from its lenders at a cost of almost $1 million, and then took measures to prevent a recurrence. These included issuance of equity through its Dividend Reinvestment Program and Direct Stock Purchase Plan, reducing the quarterly dividend, and reducing discretionary capital expenditures.

1.3 million shares were issued during the quarter, generating cash proceeds of $29.4 million. This, combined with the other measures mentioned above, served to reduce the Company’s liabilities by $41 million during the quarter, while providing funding for some $4 million of previously committed expansion projects and adding $4.2 million to cash and current assets.

At June 30, 2009, the Company has $500 million of unsecured term note debt and $108 million of mortgage debt outstanding. $26 million of the mortgage debt matures at the end of 2009; the next significant maturities are in 2012.

During the quarter, one of the two Credit Rating Agencies covering the Company reduced its rating on the Company’s senior debt from BBB- to BB+. The other Agency reaffirmed its BBB- rating, although it did place the Company on Rating Watch "Negative”. One of the effects of the rating drop was to cause an increase in the interest rate applied to two of the Company’s unsecured notes. As a result, the Company’s aggregate interest rate on its unsecured debt increased from 6.14% to 6.93%. There would be no additional impact on the cost of this debt should the Company suffer any further rating downgrades.

A summary of certain debt ratios at June 30, 2009 is as follows:

YEAR 2009 EARNINGS GUIDANCE:

The Company is anticipating soft consumer demand in many of its markets and for conditions to remain competitive. It expects to continue the use of leasing incentives as well as increased advertising and aggressive marketing to improve occupancy and, accordingly, estimates a decline in same store revenue of 2 to 4% from that of 2008. Property operating costs are projected to decrease by 1 to 2%. Management reiterates its previous forecast of an expected decline in same store NOI of 2 to 4%.

The Company has curtailed its expansion and enhancement program and, until market conditions significantly improve, will defer most of its planned 2009 expenditures of $50 million. It has an estimated total of $8 million of commitments outstanding on construction projects remaining to be completed in 2009.

At present, the Company does not expect to actively pursue the purchase of additional facilities while the capital and real estate markets remain unstable. It is negotiating the sale of several of its non-core stores, and may sell several of these facilities in the third and fourth quarters of 2009, although the impact of these sales is not included in guidance.

General and administrative expenses are expected to increase by 5 to 7% in 2009.

At June 30, 2009, all of the Company’s debt is either fixed rate or covered by rate swap contracts that essentially fix the rate. Subsequent borrowings that may occur will be pursuant to the Company’s Line of Credit agreement at a floating rate of LIBOR plus 1.75%.

At June 30, 2009 the Company had 23,391,184 shares of common stock outstanding, and 419,952 Operating Partnership Units outstanding.

As a result of the above assumptions, management expects funds from operations for the third quarter of 2009 to be approximately $.65 to $.67 per share, and between $2.70 and $2.74 for the full year 2009.

FORWARD LOOKING STATEMENTS:

When used within this news release, 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 the actual results, performance or achievements of the Company to be materially different from those expressed or implied by such forward looking statements. Such factors include, but are not limited to, the effect of competition from new self storage facilities, which could cause rents and occupancy rates to decline; the Company’s ability to evaluate, finance and integrate acquired businesses into the Company’s existing business and operations; the Company’s ability to form joint ventures and sell existing properties to those joint ventures; the Company’s existing indebtedness may mature in an unfavorable credit environment, preventing refinancing or forcing refinancing of the indebtedness on terms that are not as favorable as the existing terms; interest rates may fluctuate, impacting costs associated with the Company’s outstanding floating rate debt; the Company’s ability to comply with debt covenants; the regional concentration of the Company’s business may subject it to economic downturns in the states of Florida and Texas; the Company’s ability to effectively compete in the industries in which it does business; the Company’s reliance on its call center; the Company’s cash flow may be insufficient to meet required payments of principal, interest and dividends; and tax law changes which may change the taxability of future income.

CONFERENCE CALL:

Sovran Self Storage will hold its Second Quarter Earnings Release Conference Call at 9:00 a.m. Eastern Time on Thursday, August 6, 2009. Anyone wishing to listen to the call may access the webcast via the event page at www.unclebobs.com/company/investment. The call will be archived for a period of 90 days after initial airing.

Sovran Self Storage, Inc. is a self-administered and self-managed equity REIT that is in the business of acquiring and managing self-storage facilities. The Company operates 385 self-storage facilities in 24 states under the name "Uncle Bob’s Self Storage”^®. For more information, please contact David Rogers, CFO or Diane Piegza, VP Corporate Communications at (716) 633-1850 or visit the Company’s Web site at www.unclebobs.com.