InStorage Real Estate Investment Trust
TSX : IS.UN

InStorage Real Estate Investment Trust

August 14, 2008 07:00 ET

InStorage REIT Announces Improved Second Quarter 2008 Results

TORONTO, ONTARIO--(Marketwire - Aug. 14, 2008) - InStorage Real Estate Investment Trust ("InStorage" or the "REIT") (TSX:IS.UN) announced today its results for the three and six months ended June 30, 2008.

Total revenues in the second quarter of 2008 were $11.6 million, including property revenue of $10.6 million and mezzanine loan interest of $0.9 million, up from $10.8 million, including property revenue of $10.0 million and mezzanine loan interest of $0.8 million in the first quarter of 2008, and up from $8.6 million in the second quarter of 2007, including property revenue of $7.9 million and mezzanine loan interest $0.7 million. For the six months ended June 30, 2008 total revenues were $22.3 million, including property revenue of $20.6 million and mezzanine loan interest of $1.7 million, up from total revenues of $13.1 million in the first half of 2007, including property revenue of $11.7 million and mezzanine loan interest of $1.4 million. The increases are due primarily to acquisitions completed over the prior twelve months and higher average rents. Same property rental revenue in the second quarter and first half of 2008 increased by 6.2% and 5.6% respectively, over the same periods last year due primarily to higher rental rates.

"As expected, the seasonally stronger second quarter resulted in occupancy increases, levering our increased rental rates and improving our operating margins. Our realized same property revenue increases exemplify this effect. We expect to see further improvement through the busy third quarter of the year, particularly as our branding and marketing efforts start to pay off." stated T. James Tadeson, Chief Executive Officer.

The average rent per square foot realized during the second quarter of 2008 was $18.16, up from $17.76 in the first quarter of 2008, $17.47 in the fourth quarter of 2007, $16.99 in the third quarter of 2007 and $16.94 in the second quarter of 2007. The weighted average occupancy for the second quarter of 2008 was 78% compared to 76% in the first quarter of 2008 and 82% in the second quarter of 2007. Certain properties acquired over the last twelve months had lower occupancies and average rents than market, and while management's efforts to enhance the quality of its tenant base have resulted in a solid increase in average rents, occupancies did decline marginally. Management is confident its sales and marketing programs and new branding initiatives will result in enhanced occupancies and further increases in average rents going forward.

Direct property operating expenses for the second quarter of 2008 were $4.5 million, or 42.2% of rental revenue, compared to $4.8 million or 48.2% of rental revenue in the first quarter of 2008 and $2.8 million or 35.3% of rental revenue in the second quarter of 2007. Direct property operating expenses for the first six months of 2008 were $9.3 million or 45.1% of rental revenues, compared to $4.3 million or 36.6% of revenues for the same period last year. The increases in operating costs in 2008 are due primarily to the acquisition of properties over the last twelve months and new management and property infrastructure put in place to facilitate the integration and standardization of operations. Many of these properties are newer or recently expanded and in earlier stages of lease up. During the first six months of 2008, $28.7 million of such properties were transferred from "properties under development" to income producing properties as they had achieved break even NOI.

Net Operating Income(1) ("NOI") for the three months ended June 30, 2008 was $6.2 million or 57.8% of rental property revenue, compared to $5.2 million or 51.8% of property revenue in the first quarter of 2008 and $5.1 million or 64.7% of rental revenue in the second quarter of 2007. The increase in NOI is due primarily to the acquisition of properties over the past twelve months which were not fully reflected in the second quarter of 2007. For the first six months of 2008, NOI was $11.3 million or 54.9% of rental property revenue, compared to $7.4 million or 63.4% of rental revenue for the same six month period in 2007.

General and Administrative (G&A) expenses were $1.3 million or 11.3% of revenues in the second quarter of 2008 compared to 11.9% of revenues in the first quarter of 2008 and 6.9% of revenues in the second quarter of 2007. For the six months ended June 30, 2008 G&A expenses were $2.6 million or 11.6% of revenues. The increase in G&A expenses in 2008 is primarily due to increased management infrastructure put in place to manage the REIT's growth, one-time costs related to the REIT's listing on the TSX in the first quarter of 2008, and the internalization of management effective September 1, 2007 which transferred the salaries and benefits of the three senior officers of the REIT from asset management fees to G&A. Not including the one-time TSX listing costs, G&A as a percentage of revenues would have been approximately 10.5% for the first six months of 2008, generally in-line with management's objective to maintain G&A costs in the range of 9% to 10% of revenues on an annualized basis.

Funds From Operations(1) ("FFO") for the second quarter of 2008 were $2.0 million or $0.08 per unit compared to $1.0 million or $0.04 per unit in the first quarter of 2008, and $2.8 million or $0.11 per unit in the second quarter of 2007. FFO for the first six months of 2008 was $3.0 million or $0.12 per unit compared to $4.0 million or $0.19 per unit in the first half of 2007. Not including the one-time G&A costs and re-branding expenses discussed above, FFO would have been approximately $3.4 million or $0.13 per unit through the first six months of 2008.

Adjusted Funds From Operations(1) ("AFFO") for the three months ended June 30, 2008 were $2.3 million or $0.09 per unit compared to $1.5 million or $0.06 per unit in the first quarter of 2008, and $3.2 million or $0.13 per unit in the second quarter of 2007. AFFO for the first six months of 2008 was $3.7 million or $0.15 per unit compared to $4.5 million or $0.22 per unit in the first half of 2007. Not including the one-time G&A costs discussed above, AFFO would have been approximately $4.0 million or $0.16 per unit through the first six months of 2008.

The REIT declared monthly distributions of $3.0 million and $6.3 million, net of distributions declared under the REIT's Distribution Reinvestment Plan, for the three and six months ended June 30, 2008 respectively.

Financial Position

The ratio of total debt to total assets as at June 30, 2008 was 55.0% compared to 51.0% as at June 30, 2007 and 53% as at December 31, 2007. The mortgage portfolio at June 30, 2008 incurred a weighted average interest rate of 5.58% with a weighted average term to maturity of 7.8 years. The REIT held $3.3 million in cash and cash equivalents at June 30, 2008. Approximately 70% of the REIT's total debt is in the form of fixed rate mortgages.

As at June 30, 2008 the REIT had advanced approximately $26.4 million in mezzanine financing to InScotia Developments LP, its third-party property development partner. InScotia is in the process of developing ten self-storage properties representing approximately 596,000 square feet of gross rentable area in key markets across Canada. The REIT has a first right to acquire these properties at a discount to appraised value once they have been fully stabilized for a period of one year.

Outlook

InStorage's existing portfolio offers significant organic growth opportunities. InStorage is fully focused on realizing organic growth through higher occupancies 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 further increase rents where possible during the year.

"The fundamentals of our business are strong, and we are gratified to see our occupancy levels rising while we have aggressively increased rents in most markets across Canada. We have achieved increases in realized rent per square foot for four consecutive quarters, and are capitalizing on the seasonally strong summer months to drive occupancies. We have implemented a number of programs, including intensive sales training, sales incentives, stronger web presence, community sales programs, special events, and increased advertising.

We have been consciously working to build our commercial customer base, and have successfully increased our commercial customers to approximately 30%. Commercial customers traditionally stay longer and are less seasonally sensitive than residential customers.

We are working on further initiatives that we believe will leverage our branding program and continue to drive occupancies. These include internalizing our call centre to provide better service, substantially upgrading our web site, initiating new strategic partnerships, and further refining our revenue management systems.

Our revenue management system has allowed us to dynamically balance occupancy and rental rates at each location, ensuring we are maximizing revenues. Our internal call centre will go on line in Ontario this month, and additional provinces will follow through the balance of the year. In addition, the implementation of our strategic alliance with Discount Car and Truck Rentals this quarter will contribute to our growth going forward. Most importantly, the new branding we are rolling out across the portfolio is proving very effective, and we are reiterating our expectation of having all of our properties completed, on budget, by year-end.

Over the past quarter we have re-organized our company to provide better accountability and focus on key functional areas including Sales & Marketing, Operations, CAPEX, and Investments. All of the major functional group heads now report directly to the CEO, and the organization is flatter and more coordinated.

While we focus on our income statement we are also managing our balance sheet, and fully understand the current realities of the debt and equity capital markets in Canada. Our near term goal is to maximize the potential of our existing portfolio and position ourselves for future growth when the opportunity arises. " Mr. Tadeson concluded.



Financial Highlights

(dollars in Three months Three months Six months Six months
thousands, except ended ended ended ended
per unit amounts) June 30, June 30, June 30, June 30,
2008 2007 2008 2007
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Rental property
income $ 10,649 $ 7,894 $ 20,604 $ 11,681
Property operating
expenses (4,497) (2,788) (9,296) (4,278)
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Net Operating
Income ("NOI")(1) $ 6,152 $ 5,106 $ 11,308 $ 7,403
NOI margin 57.8% 64.7% 54.9% 63.4%
Interest income on
mezzanine loans 913 694 1,737 1,401
Interest expense, net (3,607) (2,055) (7,198) (2,978)
General and
administrative
expenses (1,308) (629) (2,593) (1,110)
Re-branding expense (109) -- (178) --
Asset management fees -- (226) -- (343)
Unit-based compensation (22) (63) (71) (379)

Amortization of
income-producing
properties (4,232) (4,596) (9,657) (6,640)
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Net loss $ (2,213) $ (1,769) $ (6,652) $ (2,646)
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Basic and diluted
net loss per unit $ (0.09) $ (0.07) $ (0.26) $ (0.12)
Funds From Operations
("FFO")(1) $ 2,019 $ 2,827 $ 3,005 $ 3,994
FFO per weighted
average unit,
basic and diluted $ 0.08 $ 0.11 $ 0.12 $ 0.19
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Adjusted Funds from
Operations ("AFFO")(1) $ 2,271 $ 3,194 $ 4,510 $ 4,528
AFFO per weighted
average unit,
basic and diluted $ 0.09 $ 0.13 $ 0.18 $ 0.22
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Weighted average
number of units
diluted (thousands) 25,439 25,082 25,383 20,676
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(1) 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 and six months ended June 30, 2008 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 owned self-storage properties located in Alberta, Saskatchewan, Ontario and Quebec.

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 therof 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 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 included in the REIT's 2007 Annual Report and other regulatory filings available on the REIT's web site and at www.sedar.com.

Contact Information

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