InStorage Real Estate Investment Trust
TSX : IS.UN

InStorage Real Estate Investment Trust

March 19, 2008 06:50 ET

InStorage REIT Announces Fourth Quarter and Year-End 2007 Results

TORONTO, ONTARIO--(Marketwire - March 19, 2008) - (TSX:IS.UN) InStorage Real Estate Investment Trust ("InStorage" or the "REIT") announced today its results for the three months and year ended December 31, 2007.

Highlights:

Fourth quarter 2007

- Total revenues of $10.9 million in Q4 2007, up from $10.7 million in Q3 2007 and $3.5 million in Q4 2006

- Average rental rate of $17.47 per square foot, up 2.8% in Q4 2007 compared to Q3 2007

- Same property revenues in Q4 2007 up 8% from Q4 2006

- Average occupancies seasonally lower at 79% for Q4 compared to 82% for Q3 2007, in line with management's expectations

- Same property average occupancies higher at 83.1% for Q4 2007 compared to 81.5% for Q4 2006

- Net Operating Income ("NOI")(i) $5.4 million in Q4 2007 up from $2.1 million in Q4 2006

- Funds from Operations ("FFO")(i) of $1.8 million or $0.009 per unit in Q4 2007 up from $0.6 million or $0.005 per unit in Q4 2006

- Adjusted Funds from Operations ("AFFO")(i) of $2.4 million or $0.012 per unit in Q4 2007 up from $0.5 million or $0.005 per unit in Q4 2006

(i) See "Non-GAAP Measures"

Acquisitions and Mezzanine Financing

- Acquired 32 properties in 2007 totalling 2.0 million square feet of gross rentable area for $294.4 million

- Portfolio grows to 52 properties at year-end with a gross rentable area of 3.0 million square feet and gross book value of approximately $454.0 million

- Mezzanine financing - $26.4 million of loans advanced to InScotia Developments as at December 31, 2007 with an estimated development potential of 596,000 square feet of rentable area

Other Events

- Distribution Reinvestment Plan ("DRIP") instituted in January 2008

- Units consolidated (8 to 1) in February 2008

- Migration from the Venture Exchange to the TSX on February 20, 2008

- Unitholders rights plan implemented in February 2008

- Internalization of management completed in September 2007

Operating Highlights

- Successful integration of acquired properties

- Field management infrastructure established

- Completed implementation of new operating systems at properties and accounting systems to leverage revenue management capabilities

- Implementing system wide re-branding of acquired properties for a consistent image of acquired properties under the InStorage banner

InStorage continued to grow its portfolio during 2007 with the acquisition of 32 properties located in Alberta, Saskatchewan, Ontario and Quebec totalling 2.0 million square feet of net rentable area for an aggregate acquisition cost of $294.4 million. With the completion of these transactions, the REIT's portfolio has grown to 52 properties with a gross rentable area of 3.0 million square feet and gross book value of real estate assets of approximately $454.0 million as at December 31, 2007.

"Our growth has transformed InStorage into the largest owner and operator of self-storage facilities in Canada," stated T. James Tadeson, Chief Executive Officer. "While we will continue to prudently consolidate the fragmented self-storage industry and grow our property portfolio, our main focus going forward is to capitalize on the increase in our size and scale to capture cost synergies and economies of scale, while at the same time generating solid organic revenue growth through higher occupancies and increased rents. We have recently implemented national buying programs for everything from insurance to communications, supplies, pest control, security, shipping, advertising, and collateral materials. We are sourcing best pricing across the country and working to drive operating margins higher. At the same time, we have begun to implement regional and national sales and marketing programs targeting business customers and referral networks, and are putting sales and customer service training programs into place. We are excited about the opportunities that we see within our portfolio to add significant value."

Financial Performance

For the year ended December 31, 2007, total revenues were $34.7 million, including rental property income of $31.7 million and interest income on mezzanine loans of $3.0 million. Total revenues for the fourth quarter of 2007 were $10.9 million, up from $10.7 million in the third quarter of the year, and included rental property income of $10.1 million and interest income on mezzanine loans of $0.8 million compared to $10.0 million and $0.7 million respectively in the third quarter of the year. Same property rental property income in the fourth quarter of 2007 increased by 8% over the same period last year. The revenue growth reflects the overall improvement in rental rates and occupancies achieved at these properties compared to last year. Rental property income consists of rental income from the properties, net revenues from the sale of merchandise and contents insurance to tenants.

The average rent per square foot realized during the fourth quarter of 2007 was $17.47, up 2.8% from $16.99 in the third quarter of the year. The average rents realized in Western Canada increased by 3.7% and in Ontario by 4.2% during the fourth quarter while the average rents in Quebec declined by 4.3%. The Quebec market shows relatively higher seasonality and the lower rental rates were necessary to maintain occupancy levels and minimize revenue reduction. The weighted average occupancy of the properties for the fourth quarter of 2007 was 79% compared to 82% for the third quarter. The decline was due to seasonal factors in the industry and was in line with management's expectations. Several properties at the end of 2007 were in lease-up with a weighted average occupancy of 63%. Management believes that the occupancies in the lease-up properties will significantly improve through 2008 and will contribute to NOI growth.

Mezzanine loan interest income was $3.0 million in 2007 compared to $0.5 million in 2006. For the three months ended December 31, 2007, mezzanine loan interest income was $0.8 million compared to $0.7 million for the third quarter of 2007. During 2007 the REIT advanced approximately $13.9 million in mezzanine financing. As of December 31, 2007 a total of $26.4 million in mezzanine loans was outstanding, representing ten properties aggregating approximately 596,000 square feet of rentable area under development. Five of these properties are currently in lease-up with rentable area of approximately 387,000 square feet.

For the year ended December 31, 2007, direct property operating expenses were $12.4 million or 39.1% of rental revenue. These expenses consist primarily of realty taxes, wages paid to staff operating the facilities, utilities, advertising, insurance, repairs and maintenance and other administrative and operating costs. Direct property operating expenses for the fourth quarter were $4.6 million, or 46.0% of rental revenue. The increase in operating costs for the fourth quarter of 2007 compared to the previous quarter was primarily due to a number of factors, including the following which had an overall impact of $0.9 million to operating costs:

- Property tax reassessments for 2006 and 2007 and revisions of property tax estimates for certain properties which resulted in an incremental charge of approximately $0.4 million in the fourth quarter, of which $0.1 million relates to prior year reassessments. Rent increases were implemented on February 1, 2008 to compensate for these increased costs;

- Higher snow removal costs and utility expenses of approximately $0.3 million due to the unusually colder weather and increased snowfall in November and December 2007 particularly in Ontario and Quebec; and

- $0.2 million in costs associated with the year-end incentive payments to property staff, support of new operating systems at properties and legal expenses associated with setting up of new policies and systems.

NOI for the year ended December 31, 2007 was $19.3 million or 60.9% of rental property income compared to $2.9 million or 65.7% of rental property income in 2006. NOI(i) for the three months ended December 31, 2007 was $5.4 million or 54% of rental property income, compared to $6.5 million or 65.1% in the third quarter of the year. The decrease in NOI is due primarily to the seasonally lower occupancy combined with higher property operating costs as discussed above.

For the year ended December 31, 2007, FFO was $8.7 million or $0.047 per unit. FFO for the fourth quarter of 2007 was $1.8 million or $0.009 per unit compared to $2.9 million or $0.014 per unit in the third quarter of 2007. FFO for 2007 reflects general and administrative expenses ("G&A") of $2.8 million, re-branding costs of $0.3 million and $0.4 million of unit based compensation expense. Re-branding costs reduced FFO for the quarter by $0.1 million and for the year by $0.3 million. Effective September 1, 2007 the REIT completed the internalization of its asset and property management functions. As a result, effective that day, the REIT's G&A included compensation costs for the senior officers whose services were previously provided by the external manager. AFFO(i) for the three months ended December 31, 2007 was $2.4 million or $0.012 per unit, compared to $3.3 million or $0.016 per unit in the third quarter of 2007.

The REIT declared distributions of $13.4 million for the year ended December 31, 2007, or $0.0725 per unit. All cash distributions paid by the REIT in 2007 were returns of capital and would not be included in the income of a unitholder for tax purposes.

Financial Position

The ratio of total debt to gross book value of assets as at December 31, 2007 was 53% compared to 52% at September 30, 2007 and 38% as at December 31, 2006. The mortgage portfolio at December 31, 2007 incurred a weighted average interest rate of 5.58% with a weighted average term to maturity of 7.7 years. The REIT held $3.1 million in cash and cash equivalents at December 31, 2007. On August 7, 2007 the REIT announced that it had arranged a $25.0 million revolving credit facility. The facility is to be used to fund the REIT's growth through acquisitions and its mezzanine financing program as well as for general corporate purposes. As of December 31, 2007, $6.0 million had been drawn against this facility. Approximately 77% of the REIT's total debt is in the form of fixed rate mortgages.

Outlook

InStorage's existing portfolio offers significant organic growth opportunities. InStorage is fully focused on realizing organic growth through higher occupancies of lease-up properties and rental rate increases, and is implementing several programs and initiatives in order to achieve these objectives. The REIT has increased rents at all properties in the first quarter of 2008 and expects to put through further increases during the year. The REIT expects to incur higher than normal costs for utilities and snow removal in the first quarter of 2008 due to below average temperatures and record snowfall. The REIT also expects to incur and has budgeted for higher property taxes of approximately $0.6 million annually as municipalities take a more aggressive approach towards increasing their tax revenues. InStorage expects to pass on these property tax increases to its customers through rent increases.

Management believes that the general and administrative expenses have stabilized and will remain stable at approximately 9% to 10% of total revenues in 2008

"Although our operating expenses were negatively affected primarily by the unseasonable weather during the fourth quarter and by property tax reassessments, we are confident that we will be able to improve our operating margins as we realize on further portfolio efficiencies in 2008 and beyond. Our sales and marketing programs are being implemented to drive incremental revenue, which will make a substantial impact on our overall NOI going forward," said T. James Tadeson, Chief Executive Officer. "We are pleased with our revenue results for Q4, and while Q1 is traditionally a seasonally slow quarter we are optimistic that we will be able to generate similarly positive revenue results in Q1 2008. We are also pleased to be able to state that we have now stabilized our G&A expenses as indicated. This is an important factor towards our ability to improve overall profitability for our unit holders. With a strong balance sheet and a management team focused on organic growth, we look forward to continuing to execute on our business plan towards enhancing unitholder value in 2008."

Subsequent Events

On January 14, 2008, the REIT announced its new Distribution Reinvestment Plan ("DRIP"). Under the terms of the DRIP unitholders now have the option to elect to receive all or a portion of the regular monthly distribution in additional REIT units. As an additional benefit, participants receive additional units equal to 4% of their monthly cash distributions reinvested in the DRIP. As at March 15, 2008 participation in the DRIP stood at approximately 18%.

On February 20, 2008, the units of the REIT commenced trading on the Toronto Stock Exchange ("TSX"). Immediately prior to the listing on the TSX the units of the REIT were consolidated on an eight-to-one (8:1) basis as approved the Unitholders of the REIT at the June 7, 2007 annual and special meeting of the Unitholders. The limited partnership units of InStorage Limited Partnership were consolidated on the same basis as and concurrently with the units of the REIT.

On March 1, 2008, the REIT commenced the management of two new self-storage facilities, located in Calgary, Alberta and Windsor, Ontario. The property in Calgary is owned by InScotia Developments and the REIT has a forward-purchase agreement for the property in Windsor. In total, the two facilities will add approximately 128,000 square feet of gross leasable area (GLA) to the REIT's portfolio once they are acquired.



Financial Highlights

Three months
ended Year ended
December 31, December 31,
(dollars in thousands, except per unit amounts) 2007 2007
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Rental property income $ 10,052 $ 31,722

Property operating expenses 4,624 12,393
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Net Operating Income ("NOI")(i) $ 5,428 $ 19,329
NOI margin 54.0% 60.9%
Interest income on mezzanine loans 872 2,986
Interest expense, net (3,421) (9,532)
General and administrative expenses (923) (2,802)
Re-branding expense (90) (277)
Asset management fees - (559)
Unit-based compensation (47) (446)
Amortization of income-producing properties (5,605) (17,921)
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Net loss ($ 3,786) ($ 9,222)
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Basic and diluted net loss per unit ($ 0.02) ($ 0.05)

Funds From Operations ("FFO")(i) $ 1,819 $ 8,699

FFO per weighted average unit, basic and diluted $ 0.009 $ 0.047

Basic and diluted FFO per unit adjusted for
unit consolidation $ 0.072 $ 0.377

Adjusted Funds from Operations ("AFFO")(i) $ 2,356 $ 10,162
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AFFO per weighted average unit, basic and diluted $ 0.012 $ 0.055
Basic and diluted AFFO per unit adjusted for
unit consolidation $ 0.093 $ 0.441
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Weighted average number of units diluted
(thousands) 202,606 184,434
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(i)Non-GAAP Measures

NOI, FFO and AFFO are widely used as supplemental measures of a Canadian real estate investment trust's performance and are not defined under Canadian generally accepted accounting principles ("GAAP"). InStorage uses these measures to assess the operating performance of its income-producing properties. NOI, FFO and AFFO should not be considered alternatives to net income or other measures that have been calculated in accordance with GAAP and may not be comparable to similar measures presented by other issuers. Readers are directed to the REIT's Management's Discussion and Analysis for the three months and year ended December 31, 2007 for a description of these Non-GAAP measures and a reconciliation of FFO and AFFO to net loss.

InStorage Real Estate Investment Trust

The REIT is an unincorporated open-ended real estate investment trust that invests primarily in self-storage properties throughout Canada. The REIT is the largest owner operator of self-storage facilities in Canada and is the country's leading self-storage industry consolidator, with a current portfolio of 52 self-storage properties located in Alberta, Saskatchewan, Ontario and Quebec. The REIT's units (symbol: IS.UN) are traded on the Toronto Stock Exchange.

Additional information concerning the REIT may be obtained on the REIT's website, www.instoragereit.ca, and on the SEDAR website at www.sedar.com, under the REIT's profile.

Forward-Looking Information

This press release contains forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the REIT to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Examples of such statements include: the intention to continue to build the REIT's presence as the leading consolidator in the Canadian self-storage business; the intention to roll out the InStorage brand across the REIT's properties during the year; anticipated demand for the REIT's services; expectations regarding average rental and occupancy rates; and the REIT's intention to focus on integrating recent acquisitions. Actual results and developments are likely to differ, and may differ materially, from those expressed or implied by the forward-looking statements contained in this press release. Such forward-looking statements are based on a number of assumptions which may prove to be incorrect, including, but not limited to: the availability of acquisition opportunities; interest rate levels and the impact thereof on the REIT's debt servicing obligations; the ability of the REIT to successfully integrate newly acquired properties or portfolios into its operations and realise the anticipated benefits of same; the ability of the REIT to increase rental rates and occupancies; the level of activity in the underlying self-storage business of InStorage, the self-storage industry and in the economy generally; consumer interest in the services and products of InStorage's subsidiaries; competition; and anticipated and unanticipated costs. While the REIT anticipates that subsequent events and developments may cause its views to change, it specifically disclaims any obligation to update these forward-looking statements. These forward-looking statements should not be relied upon as representing the REIT's views as of any date subsequent to the date of this press release. Although the REIT has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements.

The factors identified above are not intended to represent a complete list of the factors that could affect the REIT. Additional factors are noted under "Risk and Uncertainties" in the REIT's Management's Discussion and Analysis for the three months and year ended December 31, 2007, a copy of which may be obtained on the SEDAR website at www.sedar.com.

Contact Information

  • InStorage Real Estate Investment Trust
    T. James Tadeson
    Chief Executive Officer
    (416) 867-9705
    or
    InStorage Real Estate Investment Trust
    Alay Shah
    Chief Financial Officer
    (416) 867-9740
    Website: www.instoragereit.ca