LIFE STORAGE, INC. - FORM 10-Q

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EX-31.1 - EX-31.1 - LIFE STORAGE, INC.	d701739dex311.htm
EX-32 - EX-32 - LIFE STORAGE, INC.	d701739dex32.htm
EX-31.2 - EX-31.2 - LIFE STORAGE, INC.	d701739dex312.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

Commission file number: 1-13820

SOVRAN SELF STORAGE, INC.

(Exact name of Registrant as specified in its charter)

Maryland

16-1194043

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

6467 Main Street

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 ¨

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 x No ¨

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):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of April 30, 2014, 32,981,746 shares of Common Stock, $.01 par value per share, were outstanding.

Part I. Financial Information

Item 1. Financial Statements

SOVRAN SELF STORAGE, INC.

CONSOLIDATED BALANCE SHEETS


(dollars in thousands, except share data)	March 31, 2014 (unaudited)			December 31, 2013
Assets
Investment in storage facilities:
Land	$	346,052		$	312,053
Building, equipment, and construction in progress		1,617,007			1,552,584

		1,963,059			1,864,637
Less: accumulated depreciation		(377,685	)		(366,472	)

Investment in storage facilities, net		1,585,374			1,498,165
Cash and cash equivalents		6,260			9,524
Accounts receivable		4,774			5,119
Receivable from unconsolidated joint ventures		860			883
Investment in unconsolidated joint ventures		30,199			30,391
Prepaid expenses		7,594			5,978
Fair value of interest rate swap agreements		580			794
Other assets		7,367			11,021

Total Assets	$	1,643,008		$	1,561,875

Liabilities
Line of credit	$	115,000		$	49,000
Term notes		575,000			575,000
Accounts payable and accrued liabilities		27,095			37,741
Deferred revenue		7,589			6,708
Fair value of interest rate swap agreements		9,233			7,523
Mortgages payable		2,223			2,254

Total Liabilities		736,140			678,226
Noncontrolling redeemable Operating Partnership Units at redemption value		14,535			12,940
Shareholders’ Equity
Common stock $.01 par value, 100,000,000 shares authorized, 32,938,654 shares issued and outstanding at March 31, 2014 (32,532,991 at December 31, 2013)		341			337
Additional paid-in capital		1,097,014			1,066,399
Dividends in excess of net income		(169,516	)		(162,450	)
Accumulated other comprehensive loss		(8,331	)		(6,402	)
Treasury stock at cost, 1,171,886 shares		(27,175	)		(27,175	)

Total Shareholders’ Equity		892,333			870,709

Total Liabilities and Shareholders’ Equity	$	1,643,008		$	1,561,875

See notes to consolidated financial statements.

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SOVRAN SELF STORAGE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)


(dollars in thousands, except per share data)	January 1, 2014 to March 31, 2014			January 1, 2013 to March 31, 2013
Revenues
Rental income	$	69,953		$	59,562
Other operating income		5,504			4,317

Total operating revenues		75,457			63,879
Expenses
Property operations and maintenance		17,064			15,125
Real estate taxes		8,066			6,419
General and administrative		9,956			8,793
Acquisition costs		2,778			486
Operating leases of storage facilities		1,997			—
Depreciation and amortization		11,942			11,202

Total operating expenses		51,803			42,025

Income from operations		23,654			21,854
Other income (expenses)

Interest expense		(7,343	)		(8,457	)
Interest income		6			—
Gain on sale of real estate		—			421
Equity in income of joint ventures		458			386

Income from continuing operations		16,775			14,204
Income from discontinued operations		—			168

Net income		16,775			14,372
Net income attributable to noncontrolling interest		(102	)		(92	)

Net income attributable to common shareholders	$	16,673		$	14,280

Earnings per common share attributable to common shareholders – basic
Continuing operations	$	0.51		$	0.46
Discontinued operations		—			0.01

Earnings per share—basic	$	0.51		$	0.47

Earnings per common share attributable to common shareholders – diluted
Continuing operations	$	0.51		$	0.46
Discontinued operations		—			0.01

Earnings per share—diluted	$	0.51		$	0.47

Common shares used in basic earnings per share calculation		32,383,996			30,488,853
Common shares used in diluted earnings per share calculation		32,538,429			30,654,495
Dividends declared per common share	$	0.68		$	0.48

See notes to consolidated financial statements.

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SOVRAN SELF STORAGE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)


	Three months ended March 31,
(dollars in thousands)	2014			2013
Net income	$	16,775		$	14,372
Other comprehensive income:
Change in fair value of derivatives net of reclassification to interest expense		(1,929	)		1,539

Total comprehensive income		14,846			15,911
Comprehensive income attributable to noncontrolling interest		(90	)		(102	)

Comprehensive income attributable to common shareholders	$	14,756		$	15,809

See notes to consolidated financial statements.

- 4 -

SOVRAN SELF STORAGE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


(dollars in thousands)	January 1, 2014 to March 31, 2014			January 1, 2013 to March 31, 2013
Operating Activities
Net income	$	16,775		$	14,372
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		11,937			11,290
Amortization of deferred financing fees		195			209
Gain on sale of real estate		—			(421	)
Equity in income of joint ventures		(458	)		(386	)
Distributions from unconsolidated joint venture		618			555
Non-vested stock earned		1,223			626
Stock option expense		36			57
Changes in assets and liabilities (excluding the effects of acquisitions):
Accounts receivable		356			340
Prepaid expenses		(1,588	)		(2,178	)
Receipts from joint ventures		72			116
Accounts payable and other liabilities		(10,794	)		(14,743	)
Deferred revenue		224			342

Net cash provided by operating activities		18,596			10,179

Investing Activities

Acquisitions of storage facilities		(89,101	)		(22,174	)
Improvements, equipment additions, and construction in progress		(4,631	)		(2,917	)
Net proceeds from the sale of real estate		—			4,367
Investment in unconsolidated joint ventures		—			(198	)
Property deposits		(1,161	)		—

Net cash used in investing activities		(94,893	)		(20,922	)

Financing Activities

Net proceeds from sale of common stock		29,360			54,465
Proceeds from line of credit		92,000			16,000
Repayments of line of credit		(26,000	)		(45,000	)
Financing costs		(50	)		—
Dividends paid-common stock		(22,111	)		(14,614	)
Distributions to noncontrolling interest holders		(135	)		(96	)
Redemption of operating partnership units		—			(306	)
Mortgage principal payments		(31	)		(45	)

Net cash provided by financing activities		73,033			10,404

Net decrease in cash		(3,264	)		(339	)
Cash at beginning of period		9,524			7,255

Cash at end of period	$	6,260		$	6,916

Supplemental cash flow information
Cash paid for interest, net of interest capitalized	$	6,140		$	8,682

See notes to consolidated financial statements.

- 5 -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	BASIS OF PRESENTATION

The accompanying unaudited financial statements of Sovran Self Storage, Inc. 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, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

Reclassification: Certain amounts from the 2013 financial statements have been reclassified as discontinued operations a result of the sale of 4 storage facilities in 2013 (see Note 5).

2.	ORGANIZATION

Sovran Self Storage, Inc. (the “Company,” “We,” “Our,” or “Sovran”), 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. At March 31, 2014, we had an ownership interest in, leased, and/or managed 485 self-storage properties in 25 states under the name Uncle Bob’s Self Storage ^®. Among our 485 self-storage properties are 25 properties that we manage for an unconsolidated joint venture (Sovran HHF Storage Holdings LLC) of which we are a 20% owner, 30 properties that we manage for an unconsolidated joint venture (Sovran HHF Storage Holdings II LLC) of which we are a 15% owner, 22 properties that we manage and have no ownership interest, and four properties we lease. Approximately 40% of the Company’s revenue is derived from stores in the states of Texas and Florida.

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 of the Operating Partnership; the Company is a limited partner of the Operating Partnership, and through its ownership of the Subsidiary and its limited partnership interest controls the operations of the Operating Partnership, holding a 99.4% ownership interest therein as of March 31, 2014. The remaining ownership interests in the Operating Partnership (the “Units”) are held by certain former owners of assets acquired by the Operating Partnership subsequent to its formation.

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 Company, the Operating Partnership, Uncle Bob’s Management, LLC (the Company’s taxable REIT subsidiary), Locke Sovran I, LLC (a wholly-owned subsidiary), and Locke Sovran II, LLC (a wholly-owned subsidiary). 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 accounted for using the equity method.

- 6 -

On June 30, 2011, the Company entered into a newly formed joint venture agreement with an owner of a self-storage facility in New Jersey (West Deptford JV LLC). As part of the agreement the Company contributed $4.2 million to the joint venture for a $2.8 million mortgage note at 8%, a 20% common interest, and a $1.4 million preferred interest with an 8% preferred return. The Company had concluded that this joint venture is a variable interest entity pursuant to the guidance in FASB ASC Topic 810, “Consolidation” on the basis that the total equity investment in the joint venture is not sufficient to permit the joint venture to finance its activities without additional subordinated financial support from its investors. On February 5, 2013 the Company entered into a Membership Interest Purchase Agreement to sell its common and preferred interests in West Deptford JV LLC to the other joint venture partner for approximately $1.4 million, resulting in a gain of $0.4 million. Simultaneous with this transaction the joint venture partner also repaid the $2.8 million mortgage note held by the Company. As a result of these transactions the Company no longer holds any ownership interest in this joint venture.

Included in the consolidated balance sheets are noncontrolling redeemable operating partnership units. These interests are presented in the “mezzanine” section of the consolidated balance sheet because they do not meet the functional definition of a liability or equity under current accounting literature. These represent the outside ownership interests of the limited partners in the Operating Partnership. At March 31, 2014, there were 198,913 noncontrolling redeemable operating partnership Units outstanding (198,913 at December 31, 2013). These unitholders are entitled to receive distributions per unit equivalent to the dividends declared per share on the Company’s common stock. 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 Company’s 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. The Company accounts for these noncontrolling redeemable Operating Partnership Units under the provisions of EITF D-98, “Classification and Measurement of Redeemable Securities” which was codified in 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 dividends in excess of net income. Accordingly, in the accompanying consolidated balance sheet, noncontrolling redeemable Operating Partnership Units are reflected at redemption value at March 31, 2014 and December 31, 2013, equal to the number of Units outstanding multiplied by the fair market value of the Company’s common stock at that date. Redemption value exceeded the value determined under the Company’s historical basis of accounting at those dates.


(dollars in thousands)	Three Months Ended Mar. 31, 2014
Beginning balance noncontrolling redeemable Operating Partnership Units	$	12,940
Net income attributable to noncontrolling interests – consolidated joint venture		102
Distributions		(135	)
Adjustment to redemption value		1,628

Ending balance noncontrolling redeemable Operating Partnership Units	$	14,535

- 7 -

3.	STOCK BASED COMPENSATION

The Company accounts for stock-based compensation under the provisions of ASC Topic 718, “Compensation—Stock Compensation”. The Company recognizes compensation cost in its financial statements for all share based payments granted, modified, or settled during the period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the related vesting period.

For the three months ended March 31, 2014 and 2013, the Company recorded compensation expense (included in general and administrative expense) of $36,000 and $57,000, respectively, related to stock options and $1,193,000 and $596,000, respectively, related to amortization of non-vested stock grants.

During the three months ended March 31, 2014 and 2013, employees exercised 1,500 and 107,645 stock options respectively, and 9,880 and 10,982 shares of non-vested stock, respectively, vested.

4.	INVESTMENT IN STORAGE FACILITIES

The following summarizes our activity in storage facilities during the three months ended March 31, 2014.


(dollars in thousands)
Cost:
Beginning balance	$	1,864,637
Acquisition of storage facilities		93,854
Improvements and equipment additions		2,987
Net increase in construction in progress		1,671
Dispositions and impairments		(90	)

Ending balance	$	1,963,059


Accumulated Depreciation:
Beginning balance	$	366,472
Depreciation expense during the period		11,276
Dispositions		(63	)

Ending balance	$	377,685

The assets and liabilities of the acquired storage facilities, which primarily consist of tangible and intangible assets, are measured at fair value on the date of acquisition in accordance with the principles of FASB ASC Topic 820, “Fair Value Measurements and Disclosures.” During the three months ended March 31, 2014 the Company acquired 7 self-storage facilities, respectively, and the purchase price of the facilities was assigned as follows:

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(dollars in thousands)							Consideration paid						Acquisition Date Fair Value
State	Number of Properties		Date of Acquisition		Purchase Price		Cash Paid		Loan Assumed		Net Other Liabilities (Assets) Assumed		Land		Building, Equipment, and Improvements		In-Place Customers Leases		Closing Costs Expensed
2014
Florida		2		1/9/2014	$	54,000	$	53,599	$	—	$	401	$	23,309	$	29,867	$	824	$	1,691
Texas		1		1/17/2014		9,000		8,962		—		38		3,999		4,856		145		225
Texas		1		2/10/2014		8,900		8,857		—		43		2,235		6,564		101		212
Maine		2		2/11/2014		14,750		14,601		—		149		2,639		11,824		287		426
Illinois		1		3/31/2014		8,700		8,582		—		118		1,837		6,724		139		224

Total 2014		7			$	95,350	$	94,601	$	—	$	749	$	34,019	$	59,835	$	1,496	$	2,778

All of the properties acquired were purchased from unrelated third parties. The operating results of the acquired facilities have been included in the Company’s operations since the respective acquisition dates. Of the $94.6 million paid at closing for the properties acquired during the quarter ended March 31, 2014, $5.5 million represented deposits that were paid when these properties originally went under contract.

The Company measures the fair value of in-place customer lease intangible assets based on the Company’s experience with customer turnover. The Company amortizes in-place customer leases on a straight-line basis over 12 months (the estimated future benefit period). In-place customer leases are included in other assets on the Company’s balance sheet as follows:


(Dollars in thousands)	Mar. 31, 2014			Dec. 31, 2013
In-place customer leases	$	16,139		$	14,643
Accumulated amortization		(14,217	)		(13,551	)

Net carrying value at the end of period	$	1,922		$	1,092

Amortization expense related to in-place customer leases was $0.7 million and $0.9 million for the three months ended March 31, 2014 and 2013, respectively. The Company expects to record $2.5 million of amortization expense for the year ended December 31, 2014.

5.	DISCONTINUED OPERATIONS

In the 4^th quarter of 2013, the Company sold four non-strategic storage facilities in Florida (2), Ohio (1), and Virginia (1) for net proceeds of approximately $11.7 million resulting in a gain of approximately $2.4 million. The operations of these facilities are reported 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, 2013. The following is a summary of the amounts reported as discontinued operations:


(dollars in thousands)	Jan. 1, 2014 to Mar. 31, 2014		Jan. 1, 2013 to Mar. 31, 2013
Total revenue	$	—	$	456
Property operations and maintenance expense		—		(158	)
Real estate tax expense		—		(41	)
Depreciation and amortization expense		—		(89	)
Net realized gain on sale of property		—		—

Total income from discontinued operations	$	—	$	168

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Income from continuing operations attributable to common shareholders was $16.7 million and $14.1 million for the three months ended March 31, 2014, and 2013, respectively. Income from discontinued operations attributable to common shareholders was $0 and $0.2 million for the three months ended March 31, 2014, and 2013, respectively.

6.	UNSECURED LINE OF CREDIT AND TERM NOTES

Borrowings outstanding on our unsecured line of credit and term notes are as follows:


(Dollars in thousands)	Mar. 31, 2014		Dec. 31, 2013
Revolving line of credit borrowings	$	115,000	$	49,000

Term note due April 13, 2016		150,000		150,000
Term note due June 4, 2020		225,000		225,000
Term note due June 4, 2020		100,000		100,000
Term note due August 5, 2021		100,000		100,000

Total term notes payable	$	575,000	$	575,000

On June 4, 2013, the Company entered into an amendment to its unsecured credit arrangements. As part of the amended agreement, the Company entered into a $225 million unsecured term note maturing June 4, 2020 bearing interest at LIBOR plus a margin based on the Company’s credit rating (at March 31, 2014 the margin is 1.65%). The agreement also provides for a $175 million (expandable to $250 million) revolving line of credit bearing interest at a variable rate equal to LIBOR plus a margin based on the Company’s credit rating (at March 31, 2014 the margin is 1.50%), and requires a 0.20% facility fee. The interest rate at March 31, 2014 on the Company’s available line of credit was approximately 1.65% (1.67% at December 31, 2013). At March 31, 2014, there was $59.3 million available on the unsecured line of credit net of outstanding letters of credit of $0.7 million and without considering the additional availability under the expansion feature. The revolving line of credit has a maturity date of June 4, 2018, but can be extended for two one-year periods at the Company’s option with the payment of an extension fee equal to 0.125% of the total line of credit commitment.

In addition, on June 4, 2013, as part of the amendment to its unsecured credit arrangement, the Company secured an additional $100 million term note with a delayed draw feature that was used to fund the Company’s term notes that matured in September 2013. The delayed draw term note matures June 4, 2020 and bears interest at LIBOR plus a margin based on the Company’s credit rating (at March 31, 2014 the margin is 1.65%).

In 2011, the Company entered into a $100 million term note maturing August 5, 2021 bearing interest at a fixed rate of 5.54%. The interest rate on the term note increases to 7.29% if the notes are not rated by at least one rating agency, the credit rating on the notes is downgraded or if the Company’s credit rating is downgraded. The proceeds from this term note were used to fund acquisitions and investments in unconsolidated joint ventures.

The Company also maintains a $150 million unsecured term note maturing April 13, 2016 bearing interest at 6.38%. The interest rate on the $150 million unsecured term note increases to 8.13% if the notes are not rated by at least one rating agency, the credit rating on the notes is downgraded or the Company’s credit rating is downgraded.

- 10 -

The line of credit and term notes require the Company 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 dividend payouts. At March 31, 2014, the Company 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, 2014 the entire availability on the line of credit could be drawn without violating our debt covenants.

The Company’s fixed rate term notes contain a provision that allows for the noteholders to call the debt upon a change of control of the Company at an amount that includes a make whole premium based on rates in effect on the date of the change of control.

On April 8, 2014, the Company entered into a $175 million term note maturing April 8, 2024 bearing interest at a fixed rate of 4.533%. See Note 16 for additional detail.

7.	MORTGAGES PAYABLE AND DEBT MATURITIES

Mortgages payable at March 31, 2014 and December 31, 2013 consist of the following:


(dollars in thousands)	March 31, 2014		December 31, 2013
5.99% mortgage notes due May 1, 2026, secured by one self-storage facility with an aggregate net book value of $4.4 million, principal and interest paid monthly (effective interest rate 6.21%)		2,223		2,254

Total mortgages payable	$	2,223	$	2,254

The table below summarizes the Company’s debt obligations and interest rate derivatives at March 31, 2014. 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 notes and mortgage notes were estimated by discounting the future 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. These assumptions are considered Level 2 inputs within the fair value hierarchy as described in Note 9. The carrying values of our variable rate debt instruments approximate their fair values as these debt instruments bear interest at current market rates that approximate market participant rates. This is considered a Level 2 input within the fair value hierarchy. 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 Company would realize in a current market exchange.

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	Expected Maturity Date Including Discount
(dollars in thousands)	2014		2015		2016		2017		2018		Thereafter		Total		Fair Value
Line of credit - variable rate LIBOR + 1.50% (1.65% at March 31, 2014)		—		—		—		—	$	115,000		—	$	115,000	$	115,000
Notes Payable:
Term note - fixed rate 6.38%		—		—	$	150,000		—		—		—	$	150,000	$	168,131
Term note - variable rate LIBOR+1.65% (1.80% at March 31, 2014)		—		—		—		—		—	$	225,000	$	225,000	$	225,000
Term note - variable rate LIBOR+1.65% (1.81% at March 31, 2014)		—		—		—		—		—	$	100,000	$	100,000	$	100,000
Term note - fixed rate 5.54%		—		—		—		—		—	$	100,000	$	100,000	$	110,576
Mortgage notes - fixed rate 5.99%	$	95	$	134	$	142	$	151	$	160	$	1,541	$	2,223	$	2,316
Interest rate derivatives – asset		—		—		—		—		—		—		—	$	(580	)
Interest rate derivatives – liability		—		—		—		—		—		—		—	$	9,233

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 Company 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 Company 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 Loss (“AOCL”). These deferred gains and losses are recognized in 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 deminimus for the three months ended March 31, 2014, and 2013.

The Company has interest rate swap agreements in effect at March 31, 2014 as detailed below to effectively convert a total of $325 million of variable-rate debt to fixed-rate debt.

Notional Amount

Effective
Date

Expiration
Date

Fixed Rate
Paid

Floating
Rate Received

$125 Million

9/1/2011

8/1/18

2.3700

1 month LIBOR

$100 Million

12/30/11

12/29/17

1.6125

1 month LIBOR

$100 Million

9/4/13

9/4/18

1.3710

1 month LIBOR

$100 Million

12/29/17

11/29/19

3.9680

1 month LIBOR

$125 Million

8/1/18

6/1/20

4.1930

1 month LIBOR

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The interest rate swap agreements are the only derivative instruments, as defined by FASB ASC Topic 815 “Derivatives and Hedging”, held by the Company. During the three months ended March 31, 2014 and 2013, the net reclassification from AOCL to interest expense was $1.4 million and $1.4 million, respectively, based on payments made under the swap agreements. Based on current interest rates, the Company estimates that payments under the interest rate swaps will be approximately $5.5 million for the 12 months ended March 31, 2015. 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 an asset of $0.6 million and a liability of $9.2 million at March 31, 2014, and an asset of $0.8 million and a liability of $7.5 million at December 31, 2013.

The Company’s agreements with its interest rate swap counterparties contain provisions pursuant to which the Company could be declared in default of its derivative obligations if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender. The interest rate swap agreements also incorporate other loan covenants of the Company. Failure to comply with the loan covenant provisions would result in the Company being in default on the interest rate swap agreements. As of March 31, 2014, the Company had not posted any collateral related to the interest rate swap agreements. If the Company had breached any of these provisions as of March 31, 2014, it could have been required to settle its obligations under the agreements at their net termination value of $8.7 million.

The changes in AOCL for the three months ended March 31, 2014 and March 31, 2013 are summarized as follows:


(dollars in thousands)	Jan. 1, 2014 to Mar. 31, 2014			Jan. 1, 2013 to Mar. 31, 2013
Accumulated other comprehensive loss beginning of period	$	(6,402	)	$	(15,242	)
Realized loss reclassified from accumulated other comprehensive loss to interest expense		1,360			1,375
Unrealized (loss) gain from changes in the fair value of the effective portion of the interest rate swaps		(3,289	)		164

(Loss) gain included in other comprehensive loss		(1,929	)		1,539

Accumulated other comprehensive loss end of period	$	(8,331	)	$	(13,703	)

9.	FAIR VALUE MEASUREMENTS

The Company 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. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

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Refer to Note 7 for presentation of the fair values of debt obligations which are disclosed at fair value on a recurring basis.

The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of March 31, 2014 and December 31, 2013 (in thousands):


	Asset (Liability)			Level 1		Level 2			Level 3
March 31, 2014
Interest rate swaps		580			—		580			—
Interest rate swaps		(9,233	)		—		(9,233	)		—

December 31, 2013
Interest rate swaps		794			—		794			—
Interest rate swaps		(7,523	)		—		(7,523	)		—

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.

During the three-months ended March 31, 2014, assets and liabilities measured at fair value on a non-recurring basis included the assets acquired and liabilities assumed in connection with the acquisition of seven storage facilities (see note 4). To determine the fair value of land, the Company used prices per acre derived from observed transactions involving comparable land in similar locations, which is considered a Level 2 input. To determine the fair value of buildings, equipment and improvements, the Company used current replacement cost based on information derived from construction industry data by geographic region which is considered a Level 2 input. This replacement cost is then adjusted for the age, condition, and economic obsolescence associated with these assets, which are considered Level 3 inputs. The fair value of in-place customer leases is based on the rent lost due to the amount of time required to replace existing customers which is based on the Company’s historical experience with turnover in its facilities, which is a Level 3 input. Other assets acquired and liabilities assumed in the acquisitions consist primarily of prepaid or accrued real estate taxes and deferred revenues from advance monthly rentals paid by customers. The fair values of these assets and liabilities are based on their carrying values as they typically turn over within one year from the acquisition date and these are Level 3 inputs.

10.

INVESTMENT IN JOINT VENTURES

The Company 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 are managed by the Company. The carrying value of the Company’s investment at March 31, 2014 and December 31, 2013 was $17.3 million and $17.4 million, respectively. Twenty-five properties were acquired by Sovran HHF in 2008 for approximately $171.5 million and no additional properties have been acquired by Sovran HHF since then. In 2008, the Company contributed $18.6 million in cash to the joint venture as its share of capital required to fund the acquisitions. In 2012 the Company contributed an additional $1.2 million in cash to the joint venture. In 2013 the Company received a return of capital distribution

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of $3.4 million as part of the refinancing of Sovran HHF. As of March 31, 2014, the carrying value of the Company’s 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 in 2008. This difference is included in the carrying value of the investment, which is assessed for other-than-temporary impairment on a periodic basis. No other-than-temporary impairments have been recorded on this investment.

The Company has a 15% ownership interest in Sovran HHF Storage Holdings II LLC (“Sovran HHF II”), a joint venture that was formed in 2011 to acquire self-storage properties that are managed by the Company. The carrying value of the Company’s investment at March 31, 2014 and December 31, 2013 was $12.9 million and $12.8 million, respectively. Twenty properties were acquired by Sovran HHF II during 2011 for approximately $166.1 million. During 2011, the Company contributed $12.8 million to the joint venture as its share of capital required to fund the acquisitions. Ten additional properties were acquired by Sovran HHF II during 2012 for approximately $29 million. During 2012, the Company contributed $2.4 million to the joint venture as its share of capital required to fund the acquisitions. The carrying value of this investment is assessed for other-than-temporary impairment on a periodic basis and no such impairments have been recorded on this investment.

As manager of Sovran HHF and Sovran HHF II, the Company earns a management and call center fee of 7% of gross revenues which totaled $0.9 million and $0.8 million for the three months ended March 31, 2014 and 2013, respectively. The Company’s share of Sovran HHF and Sovran HHF II’s income for the three months ended March 31, 2014 and 2013 was $0.4 million and $0.4 million, respectively.

The Company also has a 49% ownership interest in Iskalo Office Holdings, LLC, which owns the building that houses the Company’s headquarters and other tenants. The carrying value of the Company’s investment is a liability of $0.5 million at March 31, 2014 and December 31, 2013, and is included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets. The Company’s share of Iskalo Office Holdings, LLC’s income for the three months ended March 31, 2014 and 2013 was $32,000 and $21,000, respectively. The Company paid rent to Iskalo Office Holdings, LLC of $0.3 million and $0.2 million during the three months ended March 31, 2014 and 2013, respectively.

A summary of the unconsolidated joint ventures’ financial statements as of and for the three months ended March 31, 2014 is as follows:


(dollars in thousands)	Sovran HHF Storage Holdings LLC		Sovran HHF Storage Holdings II LLC		Iskalo Office Holdings, LLC
Balance Sheet Data:
Investment in storage facilities, net	$	157,109	$	186,985	$	—
Investment in office building		—		—		4,899
Other assets		5,580		4,803		669

Total Assets	$	162,689	$	191,788	$	5,568

Due to the Company	$	504	$	362	$	—
Mortgages payable		81,680		103,424		6,391
Other liabilities		2,515		2,200		609

Total Liabilities		84,699		105,986		7,000
Unaffiliated partners’ equity (deficiency)		62,392		72,937		(954	)
Company equity (deficiency)		15,598		12,865		(478	)

Total Partners’ Equity (Deficiency)		77,990		85,802		(1,432	)

Total Liabilities and Partners’ Equity (Deficiency)	$	162,689	$	191,788	$	5,568

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Income Statement Data:
Total revenues	$	5,452		$	6,887		$	364
Property operating expenses		(1,793	)		(2,596	)		(141	)
Administrative, management and call center fees		(415	)		(512	)		—
Depreciation and amortization of customer list		(962	)		(1,036	)		(57	)
Amortization of financing fees		(46	)		(51	)		(3	)
Income tax expense		(22	)		(100	)		—
Interest expense		(1,073	)		(1,272	)		(97	)

Net income	$	1,141		$	1,320		$	66

The Company does not guarantee the debt of Sovran HHF, Sovran HHF II, or Iskalo Office Holdings, LLC.

We do not expect to have material future cash outlays relating to these joint ventures outside our share of capital for future acquisitions of properties.

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 its taxable income to its shareholders and complies with certain other requirements.

The Company has elected to treat one of its subsidiaries as a taxable REIT subsidiary. In general, the Company’s taxable REIT subsidiary may perform additional services for tenants and generally may engage in certain real estate or non-real estate related business. A taxable REIT subsidiary is subject to corporate federal and state income taxes. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities.

For the three months ended March 31, 2014 and 2013, the Company recorded federal and state income tax expense of $0.3 million and $0.3 million, respectively. At March 31, 2014 and 2013, there were no material unrecognized tax benefits. Interest and penalties relating to uncertain tax positions will be recognized in income tax expense when incurred. As of March 31, 2014 and 2013, the Company had no interest or penalties related to uncertain tax positions. Net income taxes payable and the deferred tax liability of our taxable REIT subsidiary are classified within accounts payable and accrued liabilities in the consolidated balance sheet. As of March 31, 2014, the Company’s taxable REIT subsidiary has current prepaid taxes of $0.1 million and a deferred tax liability of $0.9 million. The tax years 2010-2013 remain open to examination by the major taxing jurisdictions to which the Company is subject.

12.

EARNINGS PER SHARE

The Company reports earnings per share 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-share pursuant to the two-class method. The Company has calculated its basic and diluted earnings per share using the two-class method. The following table sets forth the computation of basic and diluted earnings per common share utilizing the two-class method.

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(in thousands except per share data)	Three Months Ended Mar. 31, 2014		Three Months Ended Mar. 31, 2013
Numerator:
Net income from continuing operations attributable to common shareholders	$	16,673	$	14,113
Denominator:
Denominator for basic earnings per share – weighted average shares		32,384		30,489
Effect of Dilutive Securities:
Stock options and non-vested stock		154		165

Denominator for diluted earnings per share – adjusted weighted average shares and assumed conversion		32,538		30,654
Basic earnings per common share from continuing operations attributable to common shareholders	$	0.51	$	0.46
Basic earnings per common share attributable to common shareholders	$	0.51	$	0.47
Diluted earnings per common share from continuing operations attributable to common shareholders	$	0.51	$	0.46
Diluted earnings per common share attributable to common shareholders	$	0.51	$	0.47

Not included in the effect of dilutive securities above are 168,878 unvested restricted shares for the three months ended March 31, 2014, and 77,340 unvested restricted shares for the three months ended March 31, 2013, because their effect would be antidilutive.

13.

SHAREHOLDERS’ EQUITY

The following is a reconciliation of the changes in total shareholders’ equity for the period:


(dollars in thousands)	Three Months Ended March 31, 2014
Beginning balance of total shareholders’ equity	$	870,709
Net proceeds from the issuance of common stock		29,321
Exercise of stock options		39
Earned portion of non-vested stock		1,193
Stock option expense		36
Deferred compensation outside directors		30
Adjustment to redemption value on noncontrolling redeemable Operating Partnership units		(1,628	)
Net income attributable to common shareholders		16,673
Change in fair value of derivatives		(1,929	)
Dividends		(22,111	)

Ending balance of total shareholders’ equity	$	892,333

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On February 27, 2013, the Company entered into a continuous equity offering program (“Equity Program”) with Wells Fargo Securities, LLC (“Wells Fargo”), Jefferies LLC fka Jefferies & Company, Inc. (“Jefferies”) and SunTrust Robinson Humphrey, Inc. (“SunTrust”) pursuant to which the Company may sell from time to time up to $175 million in aggregate offering price of shares of the Company’s common stock. Actual sales under the Equity Program will depend on a variety of factors and conditions, including, but not limited to, market conditions, the trading price of the Company’s common stock, and determinations of the appropriate sources of funding for the Company. The Company expects to continue to offer, sell, and issue shares of common stock under the Equity Program from time to time based on various factors and conditions, although the Company is under no obligation to sell any shares under the Equity Program.

During the three months ended March 31, 2014, the Company issued 359,102 shares of common stock under this Equity Program at a weighted average issue price of $74.32 per share, generating net proceeds of $26.4 million after deducting $0.3 million of sales commissions payable to SunTrust. In addition to sales commissions, the Company incurred expenses of $0.1 million in connection with the Equity Program during 2014. The Company used the proceeds from the Equity Program to fund a portion of the acquisition of seven storage facilities. As of March 31, 2014, the Company had $38.8 million available for issuance under the Equity Program.

In 2013, the Company implemented a new Dividend Reinvestment Plan in which replaced the Company’s previous plan which was suspended in November 2009. The Company issued 47,583 shares under the new plan in 2014.

14.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2013, the FASB issued ASU 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” This ASU provides explicit guidance regarding the presentation in the statement of financial position of an unrecognized tax benefit when net operating losses or tax credit carryforwards exist. It is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, with early adoption permitted, and is applicable to the Company’s fiscal year beginning January 1, 2014. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and disclosures of Components of an Entity”. Under this ASU, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. The ASU also requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. It is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014, with early adoption permitted, and is applicable to the Company’s fiscal year beginning January 1, 2015. The adoption of this guidance is expected to significantly reduce the classification of property sales by the Company as discontinued operations.

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15.

COMMITMENT AND CONTINGENCIES

At March 31, 2014, the Company was under contract to acquire 18 self-storage facilities for cash consideration of approximately $128.4 million. The Company may assign the purchase of four of the facilities, with a combined purchase price of $47.1 million, to Sovran HHF in which it has a 20% ownership interest. If the Company does assign the four facilities to Sovran HHF, the Company’s cash contribution to Sovran HHF for the purchase of those four facilities would be approximately $9.4 million. The purchase of these facilities by the Company or Sovran HHF is subject to customary conditions to closing, and there is no assurance that these facilities will be acquired.

16.

SUBSEQUENT EVENTS

On April 8, 2014, the Company entered into a $175 million term note maturing April 2024 bearing interest at a fixed rate of 4.533%. The interest rate on the term note increases to 6.283% if the Company is not rated by at least one rating agency or if the Company’s credit rating is downgraded. The proceeds from this term note were used to repay the $115 million outstanding on the Company’s line of credit at April 8, 2014, with the excess proceeds to be used for future acquisitions.

On April 7, 2014, the Company declared a quarterly dividend of $0.68 per common share. The dividend was paid on April 28, 2014 to shareholders of record on April 17, 2014. The total dividend paid amounted to $22.3 million.

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the Company’s 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 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 industry in which it does business; 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; any future ratings on the Company’s debt instruments; regional concentration of the Company’s business may subject it to economic downturns in the states of Florida and Texas; the Company’s reliance on its call center; the Company’s cash flow may be insufficient to meet required payments of operating expenses, principal, interest and dividends; and tax law changes that may change the taxability of future income.

RESULTS OF OPERATIONS

FOR THE PERIOD JANUARY 1, 2014 THROUGH MARCH 31, 2014, COMPARED TO THE PERIOD JANUARY 1, 2013 THROUGH MARCH 31, 2013

We recorded rental revenues of $70.0 million for the three months ended March 31, 2014, an increase of $10.4 million or 17.4% when compared to rental revenues of $59.6 million for the same period in 2013. Of the increase in rental revenue, $4.5 million resulted from a 7.7% increase in rental revenues at the 386 core properties considered in same store sales (those properties included in the consolidated results of operations since January 1, 2013). The increase in same store rental revenues was a result of a 310 basis point increase in average quarterly occupancy and a 3.4% increase in rental income per square foot. The remaining increase in rental revenue of $5.9 million was a result of the revenues from the acquisition of 18 properties and the lease of four properties completed since January 1, 2013. Other operating income, which includes merchandise sales, insurance commissions, truck rentals, management fees and acquisition fees, increased by $1.2 million for the three months ended March 31, 2014 compared to the same period in 2013 primarily as a result of increased commissions earned on customer insurance.

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Property operations and maintenance expenses increased $1.9 million or 12.8% in the three months ended March 31, 2014 as compared to the same period in 2013. The 386 core properties considered in the same store pool experienced a $0.7 million or 4.7% increase in operating expenses as a result of higher costs for utilities, repairs and maintenance, and snow removal. The same store pool benefited from reduced yellow page expense. The remaining increase in property operating expenses of $1.2 million resulted from the acquisition of 18 properties and the lease of four properties completed since January 1, 2013. Real estate tax expense increased $1.6 million as a result of a 10.4% increase in property taxes on the 386 same store pool and the inclusion of taxes on the properties acquired and leased in 2014 and 2013.

Net operating income increased $8.0 million or 18.9% as a result of a 9.3% increase in our same store net operating income and the acquisitions completed since January 1, 2013.

Net operating income or “NOI” is a non-GAAP (generally accepted accounting principles) financial measure that we define as total continuing revenues less continuing property operating expenses. NOI also can be calculated by adding back to net income: interest expense, impairment and casualty losses, depreciation and amortization expense, acquisition related costs, general and administrative expense, and deducting from net income: income from discontinued operations, interest income, gain on sale of real estate, and equity in income of joint ventures. We believe that NOI is a meaningful measure of operating performance because we utilize NOI in making decisions with respect to capital allocations, in determining current property values, and in comparing period-to-period and market-to-market property operating results. NOI should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP, such as total revenues, operating income and net income. There are material limitations to using a measure such as NOI, including the difficulty associated with comparing results among more than one company and the inability to analyze certain significant items, including depreciation and interest expense, that directly affect our net income. We compensate for these limitations by considering the economic effect of the excluded expense items independently as well as in connection with our analysis of net income. The following table reconciles NOI generated by our self-storage facilities to our net income presented in the consolidated financial statements for three months ended March 31, 2014 and 2013.


	Three Months ended March 31,
(dollars in thousands)	2014			2013
Net operating income
Same store	$	44,697		$	40,889
Other stores and management fee income		5,630			1,446

Total net operating income		50,327			42,335
General and administrative		(9,956	)		(8,793	)
Acquisition related costs		(2,778	)		(486	)
Operating leases of storage facilities		(1,997	)		—
Depreciation and amortization		(11,942	)		(11,202	)
Interest expense		(7,343	)		(8,457	)
Interest income		6			—
Gain on sale of real estate		—			421
Equity in income of joint ventures		458			386
Income from discontinued operations		—			168

Net income	$	16,775		$	14,372

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Our first quarter 2014 same store results consist of only those properties that were included in our consolidated results since January 1, 2013, and exclude the four properties we sold in 2013. The following table sets forth operating data for our 386 same store properties. These results provide information relating to property operating changes without the effects of acquisitions.

Same Store Summary


	Three Months ended March 31,				Percentage
(dollars in thousands)	2014		2013		Change
Same store rental income	$	63,938	$	59,389		7.7	%
Same store other operating income		3,493		2,867		21.8	%

Total same store operating income		67,431		62,256		8.3	%
Payroll and benefits		6,254		6,187		1.1	%
Real estate taxes		7,058		6,394		10.4	%
Utilities		2,861		2,502		14.3	%
Repairs and maintenance		2,711		2,445		10.9	%
Office and other operating expenses		2,420		2,418		0.1	%
Insurance		1,073		1,023		4.9	%
Advertising and yellow pages		357		398		-10.3	%

Total same store operating expenses		22,734		21,367		6.4	%

Same store net operating income	$	44,697	$	40,889		9.3	%


					Change
Quarterly same store move ins		38,618		38,115		503
Quarterly same store move outs		35,577		36,707		(1,130	)

We believe the increase in same store move ins was a byproduct of our increased internet advertising spend, our revenue management system, and a general increase in demand for storage. We believe the decrease in move outs is a result of customers staying longer with us.

General and administrative expenses for the three months ended March 31, 2014 increased $1.2 million or 13.2% compared with the three months ended March 31, 2013. The key driver of the increase was a $0.7 million increase in salaries and performance incentives and a $0.4 million increase in internet advertising. The remaining $0.1 million increase is the result of various other administrative costs related to managing the increased number of stores in our portfolio as compared to the 2013 period.

Acquisition related costs were $2.8 million in the three months ended March 31, 2014 as a result of the acquisition of seven stores during that period. Acquisition related costs for the three months ended March 31, 2013 were $0.5 million as a result of the acquisition of three stores during that period.

The operating lease expense for storage facilities in the 2014 period relates to leases which commenced in November 2013 with respect to four self storage facilities in New York (2) and Connecticut (2). Such leases have annual lease payments of $6 million with a provision for 4% annual increases, and an exclusive option to purchase the facilities for $120 million.

Depreciation and amortization expense increased to $11.9 million in the three months ended March 31, 2014 from $11.2 million in the same period of 2013, primarily as a result of depreciation on the 18 properties acquired in 2013 and the first quarter of 2014.

Interest expense decreased from $8.5 million in the three months ended March 31, 2013 to $7.3 million in the same period in 2014. The decrease was due to reduced interest rates as a result of our refinancing in June 2013.

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During the three months ended March 31, 2013, we sold our equity interest and mortgage note in a formerly consolidated joint venture for $4.4 million resulting in a gain on the sale of $0.4 million.

In the 4^th quarter of 2013, we sold four non-strategic facilities in Ohio, Florida (2), and Virginia for net proceeds of approximately $11.7 million resulting in a gain of approximately $2.4 million. The 2013 operations of these facilities are reported in income from discontinued operations.

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 available to common shareholders computed in accordance with generally accepted accounting principles (“GAAP”), excluding gains or losses on sales of properties, plus impairment of real estate assets, 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.

In October and November of 2011, NAREIT issued guidance for reporting FFO that reaffirmed NAREIT’s view that impairment write-downs of depreciable real estate should be excluded from the computation of FFO. This view is based on the fact that impairment write-downs are akin to and effectively reflect the early recognition of losses on prospective sales of depreciable property or represent adjustments of previously charged depreciation. Since depreciation of real estate and gains/losses from sales are excluded from FFO, it is NAREIT’s view that it is consistent and appropriate for write-downs of depreciable real estate to also be excluded. Our calculation of FFO excludes impairment write-downs of investments in storage facilities.

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.

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Reconciliation of Net Income to Funds From Operations (unaudited)


	Three months ended
(in thousands)	March 31, 2014			March 31, 2013
Net income attributable to common shareholders	$	16,673		$	14,280
Net income attributable to noncontrolling interest		102			92
Depreciation of real estate and amortization of intangible assets exclusive of deferred financing fees		11,716			11,001
Depreciation of real estate included in discontinued operations		—			89
Depreciation and amortization from unconsolidated joint ventures exclusive of deferred financing fees		376			375
Gain on sale of real estate		—			(421	)
Funds from operations allocable to noncontrolling redeemable Operating Partnership Units		(176	)		(162	)

FFO available to common shareholders	$	28,691		$	25,254

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 dividend payouts. At March 31, 2014, the Company was in compliance with all debt covenants. The most sensitive covenant is the leverage ratio covenant contained in certain of our term note agreements. This covenant limits our total consolidated liabilities to 55% of our gross asset value. At March 31, 2014, our leverage ratio as defined in the agreements was approximately 37.3%. The agreements define total consolidated liabilities to include the liabilities of the Company 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 and other items (“Adjusted EBITDA”) as defined in the agreements. In the event that the Company violates debt covenants in the future, the amounts due under the agreements could be callable by the lenders and could adversely affect our credit rating requiring us to pay higher interest and other debt-related costs. 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, 2014, the entire availability under our line of credit could be drawn without violating our debt covenants.

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 dividends to our shareholders. We believe that our internally generated net cash provided by operating activities and the availability on our line of credit will be sufficient to fund ongoing operations, capital improvements, dividends and debt service requirements through April 2016, at which time $150 million of term notes mature.

Cash flows from operating activities were $18.6 million and $10.2 million for the three months ended March 31, 2014, and 2013, respectively. The increase in operating cash flows in the 2014 period compared to the 2013 period was primarily due to the increase in net income and a smaller decrease in accounts payable in 2014 as compared to the same period in 2013.

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Cash used in investing activities was $94.9 million and $20.9 million for the three months ended March 31, 2014 and 2013, respectively. The increase in cash used in investing activities in the 2014 period compared to the 2013 period was due to the acquisition of seven storage facilities in the three months ended March 31, 2014 for $89.1 million as compared to three storage facilities in the same period of 2013 for $22.2 million. In 2013 we also sold our equity interest and a mortgage note in a consolidated joint venture resulting in net proceeds of $4.4 million.

Cash provided by financing activities was $73.0 million and $10.4 million for the three months ended March 31, 2014 and 2013, respectively. In the 2014 period we made net borrowings of $66.0 million on our line of credit primarily to fund acquisitions. In the 2014 period we also issued shares under our continuous equity offering program to fund acquisitions which, when combined with proceeds from the exercise of stock options and the sale of common stock through our dividend reinvestment plan, resulted in net cash proceeds from the sale of common stock of $29.4 million. We paid dividends of $22.1 million in the 2014 period which increased in comparison to dividends of $14.6 million in the 2013 period primarily because of an increase in our common shares outstanding and an increase in our dividend rate. In the 2013 period we issued more shares under our continuous equity offering program in comparison to the 2014 period for the purpose of funding acquisitions and reducing the balance on our line of credit. Proceeds from the issuance of shares under the equity offering program, stock option exercises and the sale of shares through our dividend reinvestment program resulted in net proceeds of $54.5 million in the 2013 period. We made net repayments on our line of credit of $29.0 million in the 2013 period.

On June 4, 2013, the Company entered into an amendment to its unsecured credit arrangement. As part of the amended agreement, the Company entered into a $225 million unsecured term note maturing June 4, 2020 bearing interest at LIBOR plus a margin based on the Company’s credit rating (at March 31, 2014 the margin is 1.65%). The agreement also provides for a $175 million (expandable to $250 million) revolving line of credit bearing interest at a variable rate equal to LIBOR plus a margin based on the Company’s credit rating (at March 31, 2014 the margin is 1.50%), and requires a 0.20% facility fee. The interest rate at March 31, 2014 on the Company’s available line of credit was approximately 1.65% (1.67% at December 31, 2013). At March 31, 2014, there was $59.3 million available on the unsecured line of credit without considering the additional availability under the expansion feature. The revolving line of credit has a maturity date of June 4, 2018, but can be extended for two one-year periods at the Company’s option with the payment of an extension fee equal to 0.125% of the total line of credit commitment.

On August 5, 2011, the Company entered into a $100 million term note maturing August 2021 bearing interest at a fixed rate of 5.54%. The interest rate on the term note increases to 7.29% if the notes are not rated by at least one rating agency, the credit rating on the notes is downgraded or if the Company’s credit rating is downgraded. The proceeds from this term note were used to fund acquisitions and investments in unconsolidated joint ventures.

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The Company also maintains a $150 million unsecured term note maturing in April 2016 bearing interest at 6.38%. The interest rate on the $150 million unsecured term note increases to 8.13% if the notes are not rated by at least one rating agency, the credit rating on the notes is downgraded or the Company’s credit rating is downgraded.

Our line of credit facility and term notes have an investment grade rating from Standard and Poor’s and Fitch Ratings (BBB-).

In addition to the unsecured financing mentioned above, our consolidated financial statements also include $2.2 million of mortgages payable that are secured by a storage facility.

During the three months ended March 31, 2014, the Company sold 359,102 shares of common stock under this Equity Program at a weighted average issue price of $74.32 per share, generating net proceeds of $26.4 million after deducting $0.3 million of sales commissions payable to SunTrust. In addition to sales commissions, the Company incurred expenses of $0.1 million in connection with the Equity Program during the 2014 period. The Company used the proceeds from the Equity Program to fund a portion of the acquisition of seven storage facilities. As of March 31, 2014, the Company had $38.8 million available for issuance under the Equity Program.

During the three months ended March 31, 2013, the Company sold 822,000 shares of common stock under this Equity Program at a weighted average issue price of $62.04 per share, generating net proceeds of $50.3 million after deducting $0.5 million of sales commissions payable to SunTrust and $0.2 million to Wells Fargo. In addition to sales commissions, the Company incurred expenses of $0.1 million in connection with the Equity Program during the period ended March 31, 2013. The Company used the proceeds from the Equity Program to reduce the outstanding balance under the Company’s revolving line of credit and to fund the acquisition of three storage facilities.

In 2013, the Company implemented a Dividend Reinvestment Plan. The Company sold 47,583 common shares under the new plan during the three months ended March 31, 2014.

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During the three months ended March 31, 2014 and 2013, 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, 2014, 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, issuance of common and preferred stock, the issuance of unsecured term notes, sale of properties, and private placement solicitation of joint venture equity. Should the capital markets deteriorate, we may have to curtail acquisitions, our expansion and enhancement program, and share repurchases as we approach April 2016, when certain term notes mature.

ACQUISITION AND DISPOSITION OF PROPERTIES

In the three months ended March 31, 2014, the Company acquired seven self-storage facilities comprising 0.5 million square feet in Florida (2), Illinois (1), Maine (2), and Texas (2) for a total purchase price of $95.4 million. Based on the trailing financial information of the entities from which the properties were acquired, the weighted average capitalization rate was 5.1% on these purchases and ranged from 1.0% on a facility with low occupancy to 7.3% on a mature facility.

In 2013, we acquired 11 self storage facilities comprising 0.6 million square feet in Colorado (1), Connecticut (1), Florida (1), Massachusetts (1), New Jersey (2), New York (3), and Texas (2) for a total purchase price of $94.9 million. In addition to the properties acquired, in November 2013 the Company entered into lease agreements with respect to four self storage facilities in New York (2) and Connecticut (2). Such leases have annual lease payments of $6 million with a provision for 4% annual increases, and an exclusive option to purchase the facilities for $120 million.

In February 2013, we sold our equity interest and a mortgage note in one storage facility in New Jersey for $4.4 million resulting in a gain of $0.4 million.

During 2013, we sold four non-strategic storage facilities in Florida, Ohio, and Virginia for net proceeds of approximately $11.7 million resulting in a gain of approximately $2.4 million. We may seek to sell additional Properties to third parties or joint venture partners in 2014.

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 into new markets by acquiring several facilities at once in those new markets. We are actively pursuing acquisitions in 2014, and at March 31, 2014 we had 18 properties under contract to be purchased for approximately $128.4 million. The Company may assign the purchase of four of the facilities, with a combined purchase price of $47.1 million, to Sovran HHF in which it has a 20% ownership interest. If the Company does assign the four facilities to Sovran HHF, the Company’s cash contribution to Sovran HHF for the purchase of those four facilities would be approximately $9.4 million.

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In the three months ended March 31, 2014, we added 29,700 square feet to existing properties for a total cost of approximately $1.0 million. During 2013, we added 295,000 square feet to existing Properties and converted 9,000 square feet to premium storage for a total cost of approximately $17.9 million. Although we do not expect to construct any new facilities in 2014, we do plan to complete an additional $29.1 million of expansions and enhancements to our existing facilities.

We also expect to continue making capital expenditures on our properties. This includes roofing, paving, and remodeling of store offices. For the first three months of 2014 we spent approximately $1.9 million on such improvements and we expect to spend approximately $14.0 million for the remainder of 2014.

REIT QUALIFICATION AND DISTRIBUTION REQUIREMENTS

As a REIT, we are not required to pay federal income tax on income that we distribute to our shareholders, provided that we satisfy certain requirements, including distributing at least 90% of our REIT taxable income for a taxable year. These distributions must be made in the year to which they relate, or in the following year if declared before we file our federal income tax return, and if they are paid not later than the date of the first regular dividend of the following year. As a REIT, we must derive at least 95% of our total gross income from income related to real property, interest and dividends.

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.

UMBRELLA PARTNERSHIP REIT

We are formed as an Umbrella Partnership Real Estate Investment Trust (“UPREIT”) and, as such, have the ability to issue Operating Partnership Units in exchange for properties sold by independent owners. By utilizing such Units as currency in facility acquisitions, we may obtain more favorable pricing or terms due to the seller’s ability to partially defer their income tax liability. As of March 31, 2014, 198,913 Units are outstanding. These Units had been issued in prior years in exchange for self-storage properties at the request of the sellers.

INTEREST RATE RISK

The primary market risk to which we believe we are exposed is interest rate risk, which may result from many factors, including government monetary and tax policies, domestic and international economic and political considerations, and other factors that are beyond our control.

We have entered into interest rate swap agreements in order to mitigate the effects of fluctuations in interest rates on our variable rate debt. The LIBOR base rates have been contractually fixed on $325 million of our debt through the interest rate swap termination dates. See Note 8 to our consolidated financial statements appearing elsewhere in this quarterly report on Form 10-Q.

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Based on our outstanding unsecured floating rate debt of $440 million at March 31, 2014, and taking into account our interest rate swap agreements, a 100 basis point increase in interest rates would have a $1.2 million effect on our annual interest expense. These amounts were determined by considering the impact of the hypothetical interest rates on our borrowing cost and our interest rate swap agreements in effect on March 31, 2014. These analyses do not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, we would consider taking actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in our capital structure.

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 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 and college student activity 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 affect materially distributions to shareholders.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 14 to the financial statements.

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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. Management’s 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, 2014. There have not been changes in the Company’s internal controls or in other factors that could significantly affect these controls during the quarter ended March 31, 2014.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s 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 Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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, 2013, 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 Company. 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 4.

Mine Safety Disclosures

Not Applicable

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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101		The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, formatted in XBRL, as follows:

		(i) Consolidated Balance Sheets at March 31, 2014 and December 31, 2013;

		(ii) Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013;

		(iii) Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013;

		(iv) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2014 and 2013; and

		(v) Notes to Consolidated Financial Statements.

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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 Self Storage, Inc.

	By:	/S/ Andrew J. Gregoire
		Andrew J. Gregoire
		Chief Financial Officer (Principal Accounting Officer)

May 6, 2014
Date

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