InStorage Real Estate Investment Trust
TSX : IS.UN

InStorage Real Estate Investment Trust

November 12, 2008 17:30 ET

InStorage REIT Announces Third Quarter 2008 Results

TORONTO, ONTARIO--(Marketwire - Nov. 12, 2008) - InStorage Real Estate Investment Trust (TSX:IS.UN) ("InStorage" or the "REIT") announced today results for the three and nine months ended September 30, 2008.

HIGHLIGHTS:

- Third quarter property revenues up 8% over prior year on a 4.9% increase in average rents

- Occupancy was 81% in the third quarter and remained stong through October at almost 80%

- Third quarter revenues, net operating income, NOI margins and adjusted funds from operations rise compared to second quarter

- Closing of InScotia acquisition to enhance long-term performance

- Investment in branding, marketing, training, call centre, sales initiatives driving improved performance

"We are pleased with our results in the third quarter as strong seasonal demand combined with our marketing, customer service and branding programs continue to have a positive impact on our performance," commented T. James Tadeson, Chief Executive Officer. "Our stabilized portfolio is strong, while revenues and profitability in our lease-up portfolio continue to increase, resulting in overall portfolio performance improvements. We are also pleased with our performance to date in the fourth quarter as traditional demand decreases have been largely abated. Our average occupancy levels over the first six weeks of the fourth quarter have held at 79.4%."

Total revenues in the third quarter of 2008 were $11.6 million compared to $10.7 million in the third quarter of 2007. Rental property revenue increases between the second and third quarter of 2008 are due primarily to improved revenue management, balancing higher average rents with lower occupancies. Management continues to implement and refine a more structured revenue maximization approach to pricing and occupancies. These improvements offset lower mezzanine interest income. Same property rental income in the third quarter increased 5.9% over the same period last year.

For the nine months ended September 30, 2008 total revenues were $34.0 million, up from $23.8 million in the first nine months of 2007. The nine month increase is due primarily to acquisitions completed over the prior twelve months and improved revenue management.

The average rental rate per square foot during the third quarter of 2008 was $17.76 compared to $18.16 in the second quarter of 2008, $17.76 in the first quarter of 2008, $17.47 in the fourth quarter of 2007 and $16.99 in the third quarter of 2007. Some discounting activity employed at specific properties in the third quarter of 2008 to enhance occupancies resulted in a lower average rent per square foot in the period compared to the second quarter of the year. Average occupancy for the third quarter of 2008 was 81% compared to 78% in the second quarter of 2008 and 83% in the third quarter of 2007.

"Our programs to increase revenues at properties acquired over the last year are proving effective," Mr. Tadeson added. "Our strategy is to enhance the quality of our tenant base and ensure we are achieving an appropriate level of rents in each of our markets by capitalizing on our new revenue management systems, branding initiatives, marketing programs, and strategic alliances to grow occupancies and rental rates in a balanced and sustainable manner. We saw significant progress in the third quarter and through the first several weeks of the fourth quarter, and expect our programs will result in relatively improved revenues through the seasonally slower fourth and first quarters ahead."

Direct property operating costs for the third quarter of 2008 were $4.4 million or 40.3% of rental revenue, compared to $4.5 million or 42.2% of rental revenue in the second quarter of 2008 and $3.5 million or 34.9% of rental revenue in the third quarter of 2007. Direct property operating costs for the first nine months of 2008 were $13.7 million or 43.5% of rental revenues compared to $7.8 million or 35.9% of revenues for the same period last year. The increases in operating costs in 2008 are due primarily to the acquisition of properties still in the lease-up stage over the last twelve months. Operating margins were lower on a comparative basis as the acquired properties have lower initial occupancies and revenues. As occupancies increase, margins improve substantially due to the largely fixed cost nature of the self storage business.

Net Operating Income(i) ("NOI") for the three months ended September 30, 2008 was $6.5 million or 59.7% of rental property income compared to $6.2 million or 57.8% of property revenue in the second quarter of 2008 and $6.5 million or 65.1% of rental income in the third 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 third quarter of 2007. For the first nine months of 2008, NOI was $17.8 million or 56.5% of rental property income, compared to $13.9 million or 64.1% of rental income for the same nine month period in 2007. As discussed above, the acquired properties had lower initial occupancies and revenues, thus generating lower margins.

General and Administrative ("G&A") expenses were $1.0 million or 8.7% of revenues in the third quarter of 2008 compared to 11.3% of revenues in the second quarter of 2008 and 9.5% of revenues in the third quarter of 2007. Management's stated objective is to maintain G&A expenses at no more than 9% - 10% of total revenues. For the nine months ended September 30, 2008 G&A expenses were $3.6 million or 10.6% of revenues. Certain one-time costs related to the REIT's listing on the TSX in the first quarter of 2008, together with legal fees incurred towards the creation of the REIT's equity-based plans resulted in higher G&A expenses in 2008 relative to 2007. Not including these costs, G&A as a percentage of revenues would have been approximately 9.9% for the first nine months of 2008.

Funds From Operations(i) ("FFO") for the third quarter of 2008 were $2.4 million or $0.09 per unit compared to $2.0 million or $0.08 per unit in the second quarter of 2008, and $2.9 million or $0.11 per unit in the third quarter of 2007. FFO for the first nine months of 2008 were $5.4 million or $0.21 per unit compared to $6.9 million or $0.31 per unit in the first nine months of 2007. Not including the one-time G&A costs and re-branding expenses, FFO would have been approximately $6.0 million or $0.24 per unit through the first nine months of 2008.

Adjusted Funds From Operations(i) ("AFFO") for the three months ended September 30, 2008 were $2.8 million or $0.11 per unit compared to $2.3 million or $0.09 per unit in the second quarter of 2008, and $3.3 million or $0.13 per unit in the third quarter of 2007. AFFO for the first nine months of 2008 was $6.6 million or $0.26 per unit compared to $7.8 million or $0.35 per unit in the first nine months of 2007. Not including the one-time G&A costs discussed above, AFFO would have been approximately $7.2 million or $0.28 per unit through the first nine months of 2008.

The REIT declared monthly distributions of $3.2 million and $9.5 million, net of distributions declared under the REIT's Distribution Reinvestment Plan, for the three and nine months ended September 30, 2008 respectively. Effective with the October 2008 distribution, monthly cash distributions were reduced to $0.021 per unit or $0.252 on an annualized basis.

Financial Position

The ratio of total debt to total assets as at September 30, 2008 was 55% compared to 52% as at September 30, 2007 and 53% as at December 31, 2007. The mortgage portfolio at September 30, 2008 incurred a weighted average interest rate of 5.58% with a weighted average term to maturity of 7.8 years. Approximately 73% of the REIT's total debt is in the form of fixed rate mortgages.

Subsequent to September 30, 2008, the REIT refinanced variable rate loans of $29.2 million due for repayment in the fourth quarter of 2008. The new financing consists of a $25 million interest only bridge loan that bears interest at 9.65% with a term of three years, but which can be repaid after 18 months. The loan is secured by four properties, two of which are still in the lease-up stage with an average occupancy rate of about 62%. The remaining balance of $4.2 million will be repaid using cash on hand and drawings on existing credit facilities. The REIT also has a commitment to refinance a $7.3 million variable rate loan maturing on January 1, 2009. The commitment consists of a 3 year, 8.5% interest only bridge loan, which may be wholly or partially repaid after 18 months.

Effective November 21, 2008, the REIT's $2.0 million demand facility with TD Bank will be eliminated. Bank indebtedness at September 30, 2008 includes drawings of $0.7 million and letters of credit totalling $0.2 million issued and outstanding against this credit facility. The REIT intends to use cash on hand to fund amounts owing.

It is extremely difficult to increase available liquidity at present due to the unsolicited takeover attempt (see below). This unsolicited offer effectively bars the REIT from raising funds in the public markets (e.g. equity, convertible debentures) and other potential lenders are very cautious about extending further liquidity until the REIT's ownership is clarified. We believe that cash on hand and existing credit facilities will be sufficient to support normal operating activities of the REIT until the unsolicited bid is resolved, at which point more normal liquidity sources should once again become available.

InScotia Acquisition

The previously-announced acquisition of InScotia Developments LP is scheduled to be completed this week. The REIT added eight self-storage properties to its portfolio that are either stabilized or currently in lease-up, together with a 50% interest in a land parcel with zoning in place to construct a 93,300 square foot facility in central Toronto. An additional land parcel acquired is slated to be sold. The REIT's share of NOI from the properties, once they reach a stabilized occupancy is estimated in the range of $5.5 million on an annualized basis. Given the current challenging credit markets and borrowing environment, and the fact that four of the eight InScotia properties were slated to be acquired over the next fifteen months, the REIT believed it was a prudent time to internalize its development capabilities and fully capture the significant upside potential arising from the leasing of the InScotia properties. The three year term and zero percent interest rate on the $15.5 million in convertible debentures issued in partial satisfaction of the purchase price ensures InStorage receives the full benefit of all cash flows from the new properties during their lease-up phase.

"The acquisition of InScotia brings a number of benefits to our unitholders," Mr. Tadeson commented. "We have added eight new, InStorage branded, high quality properties to our portfolio, and fully aligned all aspects of our business with the REIT's unitholders. The development risk from this portfolio is largely gone, the portfolio is performing well, we achieved significant transaction and land transfer tax savings by acquiring the full portfolio rather than in single property acquisitions, potential counter-party risk was eliminated, and InScotia had served its purpose. In this credit environment, InScotia had no further ability to finance and develop properties for the REIT. With the acquisition we were able to eliminate any future capital market uncertainty with respect to InStorage's ability to acquire these first-class properties by negotiating very favourable vendor financing at zero percent interest. With this transaction we ensure that InStorage achieves substantial income growth based on the anticipated lease-up of the properties and a streamlined operating structure for the future, without the need to make material capital and credit market assumptions or taking on risks related to future new developments."

Unsolicited Takeover Bid

On October 16, 2008 an unsolicited offer was made by Canadian Storage Partners, ULC to acquire all of the outstanding trust units of InStorage at a price of $3.75 per unit. The REIT's Board of Trustees has unanimously recommended AGAINST accepting the hostile offer and recommends unitholders NOT tender their units to the offer. A Trustees circular was mailed to all unitholders on October 31, 2008 outlining in detail the factors considered by the Trustees, including the following:

- The hostile offer is inadequate and fails to compensate unitholders for the intrinsic value of InStorage's assets, business, scalable platform, brand recognition and strategic position as Canada's largest self storage provider. The offer attributes no value to the anticipated returns from InStorage's important revenue growth initiatives and its increasing stability of cash flows.

- Superior proposals delivering greater value for unitholders are expected to emerge, and a number of third parties have expressed an interest in considering alternative transactions that offer greater value for unitholders.

- Brookfield Financial has provided its opinion that the hostile offer price of $3.75 per unit is inadequate, from a financial point of view, to InStorage's unitholders.

- The offer is considerably less than the average price of at least $5.50 per unit that Partners ULC has paid to purchase InStorage units in the recent past.

"Our results in the third quarter demonstrate clearly that we are making significant progress toward achieving our goals and building value for unitholders," commented Lou Maroun, Chairman of the Board of Trustees. "This opportunistic and hostile offer is too low and we urge unitholders not to tender their units."

Outlook

InStorage's existing portfolio offers significant organic growth opportunities. InStorage is focused on realizing revenue and NOI growth through higher occupancies and rental rate increases, and is implementing several programs and initiatives in order to achieve these objectives.

"The positive momentum we have achieved with our investments in branding, marketing, our call centre, sales training and revenue management are proving highly effective and will ensure we maintain our strong performance going into the challenging winter months. Already through October and into early November we are demonstrating solid results with stable occupancies and average rents. We are cautiously optimistic that despite the challenging economic conditions currently being experienced, InStorage will continue to perform well. Looking ahead, we are confident that with our well-located property portfolio, effective sales and marketing programs, and the significant experience and expertise of our management team, we will generate further improvement in our operating and financial performance going forward," Mr. Tadeson concluded.



Financial Highlights

Three Three Nine Nine
months months months months
ended ended ended ended
(dollars in thousands, Sept. 30, Sept. 30, Sept. 30, Sept. 30,
except per unit amounts) 2008 2007 2008 2007
----------------------------------------------------------------------------

Rental property income $ 10,814 $ 9,989 $ 31,418 $ 21,670
Property operating costs (4,360) (3,491) (13,656) (7,769)
----------------------------------------------------------------------------
Net Operating Income
("NOI")(i) $ 6,454 $ 6,498 $ 17,762 $ 13,901
NOI margin 59.7% 65.1% 56.5% 64.1%
Interest income on
mezzanine loans 804 713 2,541 2,114
Interest expense, net (3,634) (3,133) (10,832) (6,111)
General and
administrative expenses (1,016) (806) (3,609) (1,879)
Re-branding expense (168) (150) (346) (187)
Asset management fees - (216) - (559)
Unit-based compensation (33) (20) (104) (399)
Amortization of
income-producing
properties (3,765) (5,676) (13,422) (12,316)
----------------------------------------------------------------------------

Net loss $ (1,358) $(2,790) $ (8,010) $ (5,436)
----------------------------------------------------------------------------
Basic and diluted net
loss per unit $ (0.05) $ (0.11) $ (0.31) $ (0.24)
Funds From Operations
("FFO")(i) $ 2,407 $ 2,886 $ 5,412 $ 6,880
FFO per weighted average
unit, basic and diluted $ 0.09 $ 0.11 $ 0.21 $ 0.31
----------------------------------------------------------------------------
Adjusted Funds from
Operations ("AFFO")(i) $ 2,820 $ 3,278 $ 6,600 $ 7,806
AFFO per weighted average
unit, basic and diluted $ 0.11 $ 0.13 $ 0.26 $ 0.35
----------------------------------------------------------------------------
Weighted average number
of units diluted
(thousands) 25,574 25,343 25,466 22,298
----------------------------------------------------------------------------


(i)Non-GAAP Measures

NOI, NOI margin, 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 nine months ended September 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
    or
    InStorage Real Estate Investment Trust
    David Dinniwell
    Chief Financial Officer
    (416) 867-9740
    Website: www.instoragereit.ca