Sovran Self-Storage is hunkering down to weather the recession.
The Williamsville-based self-storage facility operator reported an 11 percent drop in its fourth-quarter earnings, a surprisingly steep decline that was bigger than analysts were expecting.
While Sovran's occupancy levels declined only slightly, the company had to scramble to keep its self-storage units filled as more customers moved out, forcing the firm to offer sweetened incentives to attract new customers in their place.
"People are shopping," said David Rogers, Sovran's chief financial officer, during a conference call Wednesday.
Sovran said it offered customers nearly $2 million more in free rent during the quarter than it did a year ago as part of its incentive that offers consumers their first month's rent at no cost, which the company expanded last fall as the company weakened. In all, the company expects to spend $4 million to $5 million more on its free-rent incentive program this year than it did in 2008, Rogers said.
"The leasing environment is as tough as we've seen," Rogers said. "We are, in effect, buying occupancy."
Sovran executives said turnover has increased as consumers look to cut costs and ease the strain on their family budgets in an uncertain economy.
"It's a question between a mortgage and a car payment and utilities and a self-storage unit," said Kenneth Myszka, the company's president. "That's what we're up against."
As a result, Sovran's funds from operations fell to $17 million, or 78 cents per share, from $19 million, or 88 cents per share, a year ago.
The company said it expects to earn 72 cents to 74 cents per share during the current quarter, down from 81 cents per share a year earlier and less than the 78 cents per share that analysts were expecting. Earnings for the full year are forecast to range between $3 and $3.08 per share, less than the $3.19 consensus estimate among Wall Street analysts.
Sovran said it expects consumers to continue to cut back, prompting executives to predict a 1 percent to 2 percent drop in same-store revenues this year.
Sovran said it has put off $50 million in spending that it had planned to make this year on the company's ongoing facility expansion and upgrade program, leaving $9.5 million in work in progress to be completed this year. Other improvement and expansion projects that had been planned for this year will be postponed indefinitely, the company said.
The company also has curtailed its acquisition activity while the capital markets remain unstable, spending $4.4 million to buy a self storage facility in Cincinnati in its only purchase during the quarter for its own portfolio.
While Sovran executives said they continue to look for purchases, especially under the joint venture it formed last year with Chicago real estate investment firm Heitman LLC, asking prices have not come down significantly.
"Liquidity is pretty dear," Rogers said. "It's been a pretty sobering three or four months."