Attached is the assignment requirement and 2 previous assignments as example

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3- using graphs as shown in the examples

4- should be done perfectly as required

CFA Institute Research Challenge Hosted by Local Challenge CFA Society of Buffalo and Rochester Canisius College Canisius College - Student Research Financial Sector, Real Estate Industry New York Stock Exchange Sovran Self Storage Date: 1/11/2015 Ticker - NYSE: SSS Current Price: $90.90 (1/06/15) Headquarters: Williamsville, NY SSS per Share This report is published for educational purposes only by students competing in the CFA Institute Research Challenge. Share Price Movement Highlights We initiate coverage on Sovran Self Storage (SSS) with a Hold recommendation based on a one-year target price of $95, offering 4.5% upside from its closing price of $90.90 on January 6, 2015. Our recommendation is primarily driven by: Management Platform - Sovran has been able to adapt to a changing environment in the self-storage industry through leveraging their economies of scale, utilizing an efficient web-based marketing strategy and integrating their revenue management system. Through these business practices, Sovran has maintained stable profitability and growth Growth Drivers - Sovran has been able to grow their revenues by improving occupancy rates, increasing pricing power and maintaining a strong acquisition pipeline. As occupancy rates reach mature levels, growth will primarily be driven through acquisitions, for which the Company is well positioned Valuation - Valuation methods indicate a current intrinsic value of $95 per share. SSS offers slight long-term upside through strategic expansion into the Midwest, as well as continued exposure to current geographic locations. We evaluated Sovran's intrinsic value primarily though a discounted cash flow analysis and a relative multiples valuation Main Risks to Sovran Include - Adverse changes in Macroeconomic conditions that drive the self-storage industry, a reduction in the liquidity of certain undesired assets, a lowering of Sovran's credit rating to junk bond status, and a lack of board independence Note: ^RMZ - MSCI US REIT Index Market Profile Closing Price $90.90 52-Week High / Low $90.90 / $62.66 Average Volume (3M) 195,935 Diluted Shares Out. 33,867,243 Market Cap $3.08B Dividend Yield 3.30% Beta 0.87 EV / Revenue 13.2x EV / EBITDA 23.1x FFO / Share 22.8x Institutional Holdings 94.15% Insider Holdings 2.55% Valuation DCF Multiples Estimated Price $95.02 $94.96 Weights 50.0% 50.0% Target Price $95.00 Target Price is rounded from $94.99 to $95.00 SSS Diluted FFO per Share SSS per Share 3.72 3.98 3.14 2.36 2.45 2.43 2009 2010 2011 2012 2013 2014 TTM *FFO - Funds from Operations Recommendation: HOLD Target Price: $95.00 USD Recent News Sovran Self Storage Raises Quarterly Dividend 10% - 01/05/2015: Sovran has announced an increase in quarterly dividends from $0.68 to $0.75 a share Sovran Self Storage, Inc. Announces Financing of $625 Million in Senior Unsecured Credit Facilities, Expands Credit Line - 12/15/2014: As part of this arrangement, Sovran's revolving credit limit has increased from $175M to $300M, while floating interest rates on this debt have decreased from LIBOR + 1.5% to LIBOR + 1.3% Sovran Self Storage Reports Third Quarter Results, Adjusted FFO per Share Increases 15.8%, Acquires Eight Properties for $87 Million - 10/29/2014: Total revenues increased 21.0% Q3 YoY, while operating costs increased 16.4%, resulting in an NOI increase of 23.1%. Key Financials and Ratios 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E Total Revenue (1) $234,082 $273,507 $309,366 $340,589 $370,238 $401,151 $429,798 $456,687 (1) Net Operating Income 120,202 146,296 164,274 180,853 197,707 214,415 230,372 245,241 Net Profit Margin 23.8% 27.1% 26.2% 26.2% 26.6% 26.6% 27.1% 27.1% Operating Margin 34.0% 37.0% 35.6% 35.6% 35.8% 35.9% 36.2% 36.3% NOI Margin 51.4% 53.5% 53.1% 53.1% 53.4% 53.5% 53.6% 53.7% Interest Coverage 2.40x 3.16x 3.56x 3.56x 3.57x 3.56x 3.56x 3.54x LT Debt to Assets 0.40x 0.40x 0.42x 0.41x 0.40x 0.39x 0.38x 0.38x FFO / Share $3.14 $3.72 $3.94 $4.18 $4.41 $4.61 $4.77 $4.89 Return on Equity 7.5% 8.4% 8.2% 8.1% 8.1% 8.0% 8.1% 8.0% (1) In USD 000s Revenue ($ in 000s) Figure 1:Total Total Revenue ($ in 000s) 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 2010 2011 2012 2013 2014E 2015E Source: Company Data, Team Estimates Figure 2: 2013 Revenue by State Business Description Sovran Self Storage (SSS) was founded in 1982 and is currently headquartered in Williamsville, New York. SSS operated as a private company for 13 years until its IPO on June 21st, 1995. Together with its direct and indirect subsidiaries, SSS is a selfadministered and self-managed real estate investment trust (REIT) that acquires, owns, and manages self-storage properties. As of Q3 2014, SSS holds ownership interest in, leases, and or manages 502 properties throughout 25 states - consisting of approximately 32.4 million net rentable square feet. Of these properties, 77 are managed as Joint Venture and or Third Party Management Operations. The trust is structured as an Umbrella Partnership REIT (UPREIT), under which they own an indirect interest in all properties through an operating partnership (Appendix B). In total, Sovran owns approximately 98.4% interest in the operating partnership while Sovran Holding and an unaffiliated third party own 1% and 0.6%, respectively. One of Sovran's competitive advantages is their expertise in managing self-storage facilities. SSS offers storage space to both residential and commercial users, as well as outside storage for automobiles, recreational vehicles, and boats. SSS targets customers of all social classes and demographics. 92.6% of 2013 Revenue was derived from Rental Income, while 7.4% came from Ancillary Income. As a REIT, over 75% of total revenue must come from real estate operations. Source: Company Data Figure 3: Shareholder Structure 14% 9% 6% 4% 4% 63% Source: Bloomberg Figure 4: 2 Year Revenue CAGRs by State 40.0% 30.0% 20.0% 10.0% 0.0% TX FL NY NJ GA Source: Company Data Properties Sovran Self Storage properties conduct business under the name Uncle Bob's SelfStorage. These properties are strategically located mostly throughout the eastern coast of the United States. Uncle Bob's storage spaces come in a variety of sizes - from small 5x5 ft. storage to vehicle/boat parking sizes. In addition, they lease facilities that offer climate, humidity, solar powered and heating controlled options. Sovran equips each of its facilities with an advanced security system that monitors on site activity 24/7. Alongside this security system, the Company provides its customers with a greater sense of security through keypad controlled access to the entire facility along with providing only the customer with a key to their storage site. This technology allows customers easy access to their belongings 24 hours a day. SSS has diverse geographic locations with each property being strategically positioned to create maximum occupancy rates while not cannibalizing the sales of similar stores around them. As shown in Figure 2, the majority of the Company's properties are located in Texas, Florida, and New York. Demand for self-storage units in these areas is at an apex, which is largely attributed to the fact that many homes in these states are built on concrete slabs (Appendix G). The majority of homes in Texas and Florida are built on slabs due to their low relative cost and the cooler feel it creates for a home. As a result of building on slabs, homeowners in Texas and Florida are left without a basement to provide extra storage. Strategy The company's main strategy is to expand and acquire interest in self-storage facilities. Sovran's operations are designed to generate growth and increase value through: Increasing operating performance and cash flow through aggressive management of acquired/owned stores - Sovran differentiates themselves from competition and other self-storage facilities through their centralized customer call center that is available 24/7, 360 days a year. In addition, they offer customer care, which allows customers to access their storage lockers at any time. The Uncle Bob's truck move-in program assists customers moving in or out from their facilities. These value-added services aim to increase customer satisfaction and increase occupancy rates. Expanding market share through third party management and joint ventures - Sovran's views these management partnerships as a pipeline for future acquisitions. This strategy allows the company to test potential markets in which Sovran does not currently have exposure, as well as to strengthen their presence in their current markets. In the event that these managed properties become available for sale, Sovran has the right to agree or disagree to the terms. The strategy in acquiring these propertied is driven by Sovran's ability to maximize occupancy rate per facility through leveraging their economies of scale. Cost and Price efficiency - Sovran's web based advertisements and computer applications provide the company consistent real-time flow of information. The application enhances customer account management, which automatically provides move-in and move-out analysis, impositions of late fees, and marketing reports to improve regional marketing efforts. The revenue management system accesses multiple market characteristics to determine optimal pricing (Appendix F). Sovran's information system is linked with each of the primary sales channels, which essentially provides managers with real time access to space and inventory availability, pricing, promotions, and other useful marketing information . Figure 5: Customer Base Management & Governance Sovran's executive management team has been a key driving force behind the Company's overall success. All four co-founders of Sovran: Robert Attea, David Rodgers, Kenneth Myszka and Charles Lannon, maintain active roles with the Company executing the overall strategy and shaping its direction. The entire executive management team (Appendix K) averages more than 25 years of experience with Sovran and in the selfstorage industry. Management has effectively navigated through multiple economic cycles, most notably in 2008 when they reacted appropriately to market conditions by deferring expansion plans, reducing dividends and improving efficiencies and core operations. Source: Company Presentation Figure 6: Job Openings by Region 2000 1750 1500 1250 1000 Oct-14 Jun-14 Oct-13 Feb-14 Jun-13 Feb-13 Oct-12 Jun-12 Oct -11 500 Feb-12 750 In terms of Corporate Governance, Sovran is highly rated (Appendix N). Like most REITs, Sovran is incorporated within the state of Maryland. The state offers specific REIT protection laws in terms of broader liability protection, better protection against hostile takeovers and easier bylaw amendment provisions. The strengths of Sovran's corporate governance can be seen in the following areas: Committees - Established Audit, Compensation, and Governance Committees to oversee and direct company operations (Appendix M). Shareholder Rights - One vote per share voting policy; minority shareholder interests protected through rights to call special meetings, right to dividends and REIT stipulation that five or fewer investors cannot own more than 50% of SSS share. Company Code of Ethics- Created code of ethics for entire company as well as one charter for senior financial officers to follow. Industry Overview and Competitive Positioning Source: U.S. Bureau of Labor Statistics Demand Drivers The demand for Sovran's self-storage facilities comes primarily from four types of customers: Residential, Commercial, Students, and Military. Residential areas account for the largest portion of customers in the Self-Storage Industry. Multiple economic factors were examined in order to understand the impact of Sovran's reliance on residential areas (Figure 5). These factors play a role in both consumption and residential investment: Figure 7: Rental Rates 40% 38% 36% Strong U.S. Economic growth Overall, the U.S. economy has witnessed a relatively strong recovery since the 2008 32% recession. The wealth effect from the QE program has lifted consumer spending and reduced unemployment rates to their current value of 5.6%. U.S. GDP is trending 30% upwards and is forecasted to increase to 3% through the end of 2015 (Appendix H). 2015 2016 2017 2018 2019 2020 Strengths in both the current and projected macroeconomic factors have encouraging implications for the Self-Storage Industry. 34% Source: Team Estimates Figure 8: Aging and Growing U.S. Population 335,000 Population 16.5% 330,000 16.0% 15.5% 325,000 320,000 17.0% 15.0% 2015 2016 2017 2018 2019 2020 Source: U.S Census Bureau 14.5% Job Growth Job openings and labor turnover (JOLTS) indirectly impact the Self-Storage Industry. An increase or decrease in job openings affects moving rates which is a primary driver of sales in the industry. There has been an upward trend in job openings (13% 3-year CAGR) and separations (6% 3-year CAGR) over the past three years in Sovran's three major geographic regions (NE, S, MW) (Figure 6). The increase in job openings implies increased moving rates; this is projected to continue through 2020. The increase in separations, which suggests an increased level of comfort, will lead to greater job turnover. Demographics The density of population in metropolitan areas, the expected population growth, average household size, and the age of the population directly affects the self-storage sector. According to the U.S. Census Bureau, homeownership rates have been decreasing and rental rates have been increasing at a 5-year CAGR of roughly 1.5% in Sovran's three main geographic regions. This upward trend in rental rates is projected to continue through 2020 (Figure 7). The U.S. population is both aging and growing; nearly 17% of the population is projected to be age 65 or above by 2020 according to U.S. Census projections (Figure 8). An increase in the average age, which is propelled by the Baby Boomers, is a positive indicator for Sovran, as an increase in retirement leads to an increase in moving rates, which directly impacts self-storage. Table 1: Self Storage Facility Growth Annual Year Facilities Growth Annual % 2015E 52,754 678 1.30% 2014E 52,076 668 1.30% 2013E 51,408 684 1.35% 2012 50,724 676 1.35% 2011 50,048 692 1.40% 2010 49,356 635 1.30% 2009 48,721 1,207 2.54% 2008 47,514 2,540 5.65% 2007 44,974 2,007 4.67% 2006 42,967 1,845 4.49% 2005 41,122 2,305 5.94% Industry Supply Over the past fifteen years the total supply of self-storage space has more than doubled from 3.31 to 7.30 square feet of space per person. This significant industry growth can be attributed to greater public awareness of the economic and personal advantages of self-storage. Increased awareness and desire for self-storage is demonstrated by the considerable growth in occupancy rates throughout the industry. These rates have been reported as high as 87.4% in Q3 of 2013, outpacing supply growth. The industry supply is projected to grow at 1.30% from 2014 to 2015 (Table 1). Increased demand for selfstorage, coupled with the high costs associated with building new facilities, explains why many areas in the country are currently undersupplied. New York, Sovran's third biggest market, is one of the many states projected to see growth in self-storage saturation levels, measured in terms of square footage per person (Appendix J). While there is demand for self-storage in many areas, whether or not there will be the necessary supply is unclear, as the cost is higher for creating storage facilities than developing acquired storage facilities. Source: Self Storage Association, Team Estimates Self-Storage Industry The Self-Storage Industry has been one of the fastest growing sectors in the U.S. commercial real estate industry over the last 38 years. According to the Self-Storage Association, the U.S. had over 48,500 \"primary\" self-storage facilities last year. Combined, they amounted to 2.3 billion square feet of space for lease and generated $24B in revenue. Figure 9: Industry Revenue Breakdown Sovran, and their main competitors (Public Storage, Extra Storage Space, and CubeSmart), own, operate, and manage approximately 4,332 facilities, about 9% of all self-storage facilities in the United States. This accounts for roughly 10% or $2.4B of the Industry's revenue (Figure 9). 10% In addition to the public companies in this industry, there are more than 110 privatelyheld firms that own and operate 10 or more self-storage facilities each; about 2,450 firms that own and operate 2-9 self-storage facilities; and approximately 30,800 firms that own and operate just one facility. 90% Source: Self Storage Association Figure 10: Porter's Five Forces Bargaining Power of Customers Recent Trends and The Advancements of Storage facilities Most of the self-storage facilities in operation today would be classified as second generation facilities. They characteristically have rows of storage buildings with a limited amount of multi-story facilities. In recent years large public self-storage operators have been able to differentiate themselves, implementing solutions which allow them to simultaneously improve customer satisfaction and cut costs. This is reflected in their new third generation facilities that effectively create a stable and upscale image that cultures a strong perception of trust among local consumers. This is also done through: location and convenience, web integration, call centers, and on-site automation. The smaller competitors struggle to compete due to their inability to finance the necessary capital expenditures on information systems. With increased familiarity of self-storage and third generation facilities, the industry's demand expanded with the need for extra business space as well as residential space. Competitive Positioning Intensity of The small and fragmented nature of the overall self-storage market presents a number Competitive of opportunities for growing players such as Sovran. However, in a rising real estate cost Rivalry environment - paralleled by increasing demand and limited supply - Sovran is forced to Barriers to Entry pay larger upfront prices for their acquired properties than ever before. Threat of Substitutes Bargaining Power of Suppliers Source: Team Calculations The strengthening trends in internet marketing and local competition are making it difficult to maintain pricing power as knowledgeable customers have begun to exercise their negotiating power (Appendix O: Porter's Five Forces). As companies such as Sovran reach peak occupancy levels, pricing power becomes critical for future revenue growth. It is therefore important to have top-tier internet marketing and data integration architectures in place. Sovran's competitive advantage lies in their impressive call center, revenue management system, and web marketing feedback loops (Appendix F). Their brand awareness, experienced management team, and thirdgeneration storage facilities provide additional depth to their relative competitive position. In addition to their storage practices, Sovran engages in third party management Figure 11: Integration of Management Platform Revenue Management Program Call Center Webbased Marketing Source: Company Website systems and joint ventures as a way to generate additional revenue, exercise their industry expertise, and provide a pipeline for future acquisition targets with tried and tested market data. These practices, namely the third party management systems, are not performed on the same scale as competitors EXR and CUBE, mostly because it is not the strategic direction of the company to enhance said practices. A detailed competitive analysis can also be found in Appendix I. Competiting Positioning Market Capitalization Number of Properties Number of Square Feet Occupancy Rates Number of Acquisitions Third Party Management Parnerships Number of Joint Ventures Revenue As of December 31, 2013 SSS EXR CUBE PSA $3.08B $7.35B $3.86B $34.29B 478 779 366 2,200 32,355,667 73,142,740 24,662,105 141,019,000 88.10% 88.00% 88.30% 91.80% 11 78 20 121 22 250 42 55 273 35 187 $255.3M $532.3M $317.2M $2,039.3M Investment Summary Figure 12: SWOT Analysis (Appendix P) Strengths 40 30 20 10 0 Threats Merits Strong Management Use of Technology Platforms Weaknesses SSS has been able to take advantage of their economies of scale by heavily investing in innovative technology platforms through their partnership with VeriTec Solutions. These platforms allow the company to quickly revamp business functions of newly acquired storage facilities and optimize their revenues more efficiently. The integration of the revenue management system, call center, and web based marketing allows SSS to take advantage of the industry shift to mobile, improve occupancy rates, and continue to drive top line growth into the future. Threats Source: Team Calculations Figure 13: Historical Cap Structure: Book Value 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% 2010 Total Debt 2011 2012 Total Common Equity We issue a Hold Recommendation on Sovran Self Storage (SSS) with a target price of $95 using a Discounted Cash Flow Analysis, a Relative Multiples Valuation, and a Dividend Discount Model. This valuation is supported by numerous merits, as outlined below, as well as concerns taken into consideration: 2013 Q3 2014 Total Minority Interest Source: Team Calculations Figure 14: Annual Dividends $3.29 Improving Financial Position and Increasing Dividend Yield SSS is currently the least leveraged self-storage company among its peers. The DCF model projects that this will remain the case over the next five years as Sovran's debt to assets steadily decrease as a result of their 70% equity and 30% debt financing. Current management has stressed the need to maintain their BBB- investment grade rating in order to keep debt service costs low. This will enable the Company to expand its current 3.3% dividend yield, which they have done each year for the past three years. Sovran Stands to Benefit from U.S. Economic Recovery The self-storage industry will benefit from multiple economic tail winds over the foreseeable future, including: The unemployment rate has declined from 9.9% in December 2009 to 5.6% in December of 2014. This is the lowest the unemployment rate since June of 2008. Over the past 3 years, especially in regions where Sovran is located, there has been an increase in the number of job openings and labor turnover. Americans aged 65 and above, as a percent of the total population, is projected to grow from 14.9% in 2015 to 16.9% in 2020. The homeowner rate has declined from 67.4% in 2009 to 64.6% in 2014 in the United States. We expect that this momentum will be sustainable for the U.S. Economy and accretive to the self-storage industry. Transparent Acquisition Pipeline In a fragmented industry that is facing consolidation, Sovran has proven their continued ability to execute on their acquisition pipeline. Their third party management relationships and joint ventures have and will continue to provide test market scenarios through which Sovran can increase their strategic market presence. The predictability of their acquisition pipeline, through these external operations, breeds confidence in the DCF's assumptions. $2.79 $2.29 $1.79 $1.29 $0.79 Source: Team Calculations Concerns Future Growth Constrained by Maturing Occupancy Rates Over the past two years, revenue growth has been primarily driven by improving occupancy rates. According to our assumption that Sovran's peak occupancy levels of 90.5% are near fruition (2017), Sovran will no longer be able to grow significantly through this medium. Therefore, revenue growth is dependent on Sovran's ability to implement pricing power, which is currently being diluted by a more educated consumer base. TermTerm DebtDebt to Assets FigureLong 15: Long to Assets 0.43x 0.42x Increasing Price of Future Acquisition Targets Sovran's price per acquired store has increased 71% since 2010 and 114% since 2006. If this trend continues, in order to grow at a constant rate, Sovran will be forced to issue larger sums of equity, diluting outstanding equity offerings. In addition, the premium paid for these facilities will drive up acquisition costs, hindering margins and tying up valuable capital which could be used in alternative business operations. 0.41x 0.40x 0.39x 0.38x 0.37x 0.36x 0.35x Potential for Increase in Supply Growth The likelihood that banks loosen their credit policies, as discussed in the Investment Risk section, will further decrease the barriers to entry in the self-storage industry. In addition this will further fragment the self-storage market, reducing Sovran's market share, pricing power, and potential revenue growth Source: Company Data, Team Calculations Highly Competitive Market As Sovran continues to compete for market share against large self-storage companies - both public and private - they face the risk of limited pricing power and acquisition bidding wars. Increased web search optimization efforts among competitors will not only drive up SG&A Expenses, it will also drive down rental prices. As both of these factors limit profitability and growth, Sovran will no longer see margin expansion at the same rate they have seen in the past. Historical Occupancy Rates Figure 16: Occupancy Rates 93.00% 91.00% 89.00% 87.00% Financial Analysis 85.00% 83.00% 81.00% 79.00% Source: Company Data, Team Estimates Figure 17:Historical Historical Acquisitions Acquisitions $10,000,000 $9,000,000 $8,000,000 $7,000,000 $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $0 45 40 35 30 25 20 15 10 5 0 Purchase Price/Store Sovran Acquisition Source: Company Data Financial Condition Profitability NOI / EBITDA Margin Operating Profit Margin Net Profit Margin Return on Assets Return on Equity Liquidity Current Ratio Cash Ratio Activity Accounts Receivable Turnover Total Asset Turnover Fixed Asset Turnover Financial Leverage Long-term Debt to Assets Long-term Debt to Equity Debt to Equity Financial Leverage Interest Coverage Debt Service Coverage Shareholder Ratios FFO per Share Dividend Payout Ratio (2) 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 51.4% 34.0% 23.8% 3.7% 7.5% 53.5% 37.0% 27.1% 4.7% 8.4% 53.1% 35.6% 26.2% 4.5% 8.2% 53.1% 35.6% 26.2% 4.5% 8.1% 53.4% 35.8% 26.6% 4.6% 8.1% 53.5% 35.9% 26.6% 4.6% 8.0% 53.6% 36.2% 27.1% 4.7% 8.1% 53.7% 36.3% 27.1% 4.7% 8.0% 0.08x 0.05x 0.36x 0.22x 0.25x 0.14x 0.17x 0.11x 0.13x 0.08x 0.10x 0.06x 0.09x 0.06x 0.08x 0.05x 68.11 0.16x 0.17x 53.43 0.18x 0.18x 54.63 0.17x 0.18x 50.00 0.17x 0.18x 49.81 0.17x 0.18x 49.58 0.17x 0.18x 49.20 0.17x 0.18x 48.76 0.17x 0.18x 0.40x 0.81x 0.94x 2.00x 2.40x 3.62x 0.40x 0.71x 0.72x 1.77x 3.16x 4.57x 0.42x 0.77x 0.78x 1.83x 3.56x 5.31x 0.41x 0.73x 0.79x 1.80x 3.56x 5.31x 0.40x 0.70x 0.79x 1.77x 3.57x 5.32x 0.39x 0.68x 0.80x 1.75x 3.56x 5.30x 0.38x 0.66x 0.80x 1.73x 3.56x 5.27x 0.38x 0.64x 0.81x 1.71x 3.54x 5.24x $3.14 55.4% $3.72 52.3% $3.94 67.4% $4.18 67.4% $4.41 67.0% $4.61 67.0% $4.77 66.9% $4.89 66.9% (1) Days Inventory Outstanding as Sovran has no Inventory (2) Payout Ratio against Funds From Operations Figure 18: States with Greatest Increases in Population (7/13-7/14) Overview The financial condition chart above reveals Sovran's prospects moving forward, highlighting our assumptions (See Appendix D for full financial projections). Based on our vertical analysis of historical financials, 2013 is not an ideal starting point for projections given the abnormal number of acquisitions (See Figure 17). Source: U.S. Census Bureau Favorable Demographic Trends Strengthen Growth Prospects Texas and Florida, both retirement friendly states, account for 40% of Sovran's 2013 Revenue. The increasing population density over the age of 65 in the United States, alongside numeric growth in state specific populations (Figure 18), presents an attractive opportunity for Sovran. We forecast that these trends will continue into the near future and that Sovran will look to expand in these states through acquisitions. These macroeconomic movements give Sovran the ability to improve occupancy rates (Figure 16) and raise asking rate per square foot, ultimately driving top line growth. Transition in Business Strategy Constrains Margins Average price per property acquired by Sovran has grown at a 4-year CAGR of 11.3%. Figure 19: YoY Revenue Growth 17.5% 15.0% 12.5% Due to these rising real estate costs, forward looking acquisition rates for Sovran are projected to lead to margin constraints. Higher acquisitions costs lead to an increase in property expenses as a percentage of total revenue which directly affects the bottom line. Flexibility in Financing Future Ventures Management has stated that future acquisitions and projects will be funded through a 70% Equity and 30% Debt structure. Sovran has the ability to benefit from future Equity issuance as a result of recent share price appreciation. The combination of Sovran's target capital structure and their appreciated share price will allow them to acquire a more diversified portfolio of facilities. The revenue generated from these increased acquisitions will lead to FFO growth. 10.0% 7.5% 5.0% 2.5% 0.0% -2.5% -5.0% Source: Company Data, Team Estimates Figure 20: FFO / Share $5.00 ROE Decomposition Sovran boasts a 2013 ROE of ~8.4%, which we have projected to decline in 2014 to ~8.21% and then further to 7.97% in 2019. The main drivers of this decline include the stagnant, if not declining, profit margins in our build, as well as the decreased financial leverage over time. ROE is negatively skewed because of the issuance of Equity for acquisition targets. See Appendix T. ROE Decomposition Net Profit Margin Asset Turnover Financial Leverage ROE $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 Source: Company Data, Team Estimates 2013 27.1% 17.5% 1.768 8.39% 2014E 26.2% 17.1% 1.833 8.21% 2015E 26.2% 17.2% 1.800 8.10% 2016E 26.6% 17.2% 1.772 8.11% 2017E 26.6% 17.2% 1.746 7.98% 2018E 27.1% 17.3% 1.728 8.07% 2019E 27.1% 17.2% 1.711 7.97% Optimistic Outlook for Self-Storage Business The attractive economic outlook, combined with a strong consolidation strategy and economies of scale, leads to a projected 5-year revenue CAGR of 8.1%. NOI is forecasted at a 5 year CAGR of 8.3%, which alludes to Sovran's strength in operating leverage despite increasing property expenses. Strong managerial strategy in profitable geographic regions affords Sovran the opportunity to return value to shareholders (Appendix V) through increase funds from operations. FFO per share is forecasted to grow at a 5 year CAGR of 3.9% (Figure 20). Valuation Valuation Price Target: $95 Recommendation: Hold A number of valuation methodologies were utilized in deriving a target price for SSS. Including a 5 and 10 year DCF, a Relative Multiples Valuation, a Dividend Discount Model, and a Net Asset Value Comparison. DCF Model A discounted cash flow analysis was used to estimate the intrinsic value of SSS's share price due to the predictability of cash flows in relation to growth and profitability. The primary model is forecasted five years, mainly because of Sovran's acquisition program, which is heavily dependent on real estate price changes. This model is driven by Net Operating Income (NOI) as a proxy for free cash flow (Appendix Y). NOI represents Rental Income less Op. Ex. and SG&A and is the equivalent to EBITDA for a REIT. The DCF was expanded into a 10-year time frame to understand potential limitations within our model; the finding was consistent in supporting our 5-year DCF model which Table 2: WACC Analysis WACC Analysis Years 1 -2 Years 3-5 Risk Free Rate 2.75% 3.50% S&P 500 Adjusted Beta 0.913 0.913 Market Risk Premium 7.25% 6.50% Cost of Equity Risk Free Yield BBB- I Spread Cost of Debt Market Value of SE Interest Bearing Debt WACC 6.86% 2.75% 3.17% 5.92% 80.09% 19.91% 6.67% 6.24% 3.50% 3.17% 6.67% 70.00% 30.00% 6.37% Source: Team Calculations Table 3: Beta Calculations Beta Analysis 5Y Monthly Beta S&P R-Squared Standard Error 5Y Monthly Beta RMZ R-Squared Standard Error 3Y Weekly Beta S&P R-Squared Standard Error 3Y Weekly Beta RMZ R-Squared Standard Error Average of S&P 500 5Y & 3Y Betas Average of RMZ 5Y & 3Y Betas SSS CUBE 0.84 1.07 0.24 0.31 0.194 0.211 0.98 1.19 0.57 0.64 0.113 0.117 0.90 0.87 0.25 0.25 0.125 0.124 1.00 0.89 0.53 0.43 0.076 0.082 EXR 0.95 0.32 0.182 1.03 0.63 0.104 0.88 0.27 0.117 1.00 0.59 0.067 PSA 0.77 0.32 0.148 0.92 0.77 0.067 0.75 0.27 0.099 0.89 0.65 0.053 0.87 0.97 0.92 0.76 0.99 1.04 1.01 0.91 Source: Team Calculations Figure 21: Historical EV / EBITDA generated a price target of $95.02. The base case for this model was formulated using guidance from historical performance, industry outlook, an assessment of SSS's competitive positioning, and company guidance on acquisitions, revenue, and earnings growth. The DCF is most sensitive to the following factors, the derivations of which are explained below: Weighted Average Cost of Capital (WACC) To better estimate an appropriate discount rate, the WACC was split into two tiers. The first tier spans 2015-2016 and is structured to more accurately reflect the projection of the 10 year treasury rates following the expected rate hike in 2015. The second tier is adjusted for the normalization of interest rates from 2017-2019. To calculate Beta, linear regressions of SSS's stock price were run against the S&P 500 for two time periods (5-year monthly and 3-year Weekly) and then averaged and adjusted (Appendix S and Table 3). CAPM was used to estimate Cost of Equity, while a risk free rate plus a BBB- bond spread (I-Spread) was used to calculate Cost of Debt. Because Sovran does not pay income tax, there is no after tax figure in this calculation. The target capital structure of 70% equity and 30% debt is utilized from 2017-2019 (Table 2). Capitalization Rate (Cap Rate) Cap rates are an efficient way to analyze the expected rate of return on a particular property based on the amount of income said property is expected to generate. Utilizing a company-wide cap rate (which is determined in part by industry outlook and in part by company specific properties and operations) and then applying it across all of Sovran's properties, permits the estimation of the market value of Sovran's portfolio. The cap rate was also used to derive a terminal value for the DCF, making the model very sensitive to changes in the rate. Revenue Growth Revenue growth for Sovran is based primarily on improving occupancy rates, successful implementation of more expensive asking prices per square foot, and a positive net acquisition growth rate. SSS has shown significant growth in occupancy rates over the past several years (Figure 16). However, moving forward Sovran will encroach upon their peak occupancy level of 90.5%, limiting future growth in this manner. Future revenue growth will be driven by pricing power and a 5-year acquisition CAGR of 5.25% from 2015-2019. Favorable future industry supply and demand characteristics, along with strong competitive positioning in numerous undersupplied areas throughout the eastern coast, leads to a 5-year average asking rate per square foot CAGR of 2.25%, according to the model. The combination of changes in occupancy rates, pricing power, and acquisitions resulted in a 5-year revenue CAGR of 8.1%. Terminal Growth As industry characteristics continue to improve and real estate prices become inflated, SSS's acquisition growth rate will slow. This rate will reach a terminal growth rate equal to expected inflation of 2.5%, which was accounted for in the 10 year DCF model. Source: Team Calculations Table 4: EV / EBITDA Source: Team Calculations DDM Model SSS has a strong history of returning cash to shareholders through dividends. As a REIT, they are required to pay out 90% of taxable income as dividends, and Sovran has been able increase dividend payments since 2010 at a 3-year CAGR of 7.2%. In addition, on 01/05/2015 Sovran raised quarterly dividends from $0.68 to $0.75, resulting in a dividend yield of 3.30% - the most impressive amongst Sovran's peers. The forecasted 5-year dividend CAGR of 3.1% is driven by a historically derived payout ratio. The DDM calculates an intrinsic value of ~$96, which reaffirms our Hold recommendation (Appendix AA and Table 4). Relative Valuation Relative valuation was primarily focused on an EV/EBITDA multiple. This is due to: 1) The compact spread from the 1st to the 3rd quartile of the peer group EBITDA 2) The similar trends in historical multiple movements (Figure 21). 3) The importance of EBITDA as a comparable pre-interest, pre-depreciation and amortization cash flow figure. This analysis leads to an intrinsic value of $94.96 for SSS, a ~4.5% premium to the current trading price. Due to the small premium we remain confident that this valuation reaffirms our Hold recommendation and validates our target price $95 (See Appendix Q for complete valuation). Net Asset Value (NAV) The market value of a property is calculated by dividing a property's expected generated income by its assumed cap rate. By taking SSS's NOI, dividing it by our assumed cap rate, Table 5: NAV Calculation NAV Build NOI (1) Cap Rate Market Value of Current Portfolio Assets Cash Other Current Assets Total Assets Gross Net Asset Value SSS 2015E $179,588,710 5.25% 3,420,737,329 11,920,000 68,907,245 80,827,245 3,501,564,574 Total Liabilities Preffered Stock Net Asset Value Fully Diluted Shares Outstanding NAV per Share 881,870,000 0 2,619,694,574 33,867,243 $77.35 Current Share Price (01/06/2015) Premium (Discount) to NAV $90.90 17.51% (1) Average of 10,000 Simulations for SSS and then adjusting for certain assets and liabilities, a NAV was calculated. Comparing the premium or discount at which SSS trades, shows how the market has priced these selfstorage stocks in relation to one another (See Appendix R and Table 5). What this analysis reveals is that Sovran trades at ~17.7% premium to NAV, in comparison to ~15.6% for PSA, ~14.8% for CUBE, and ~2.2% for EXR. This suggests that SSS is being valued at a slight premium to its peers; however, the premium is not significant enough to justify a Buy or Sell. Monte Carlo Simulation A Monte Carlo Simulation was utilized in analyzing the potential outcomes of Sovran's growth prospects. This methodology simulates a range of possible outcomes for the multiple variables determining the intrinsic value of SSS's stock price. Key factors for this model include SSS's asking rate per square foot, average occupancy rates, net acquisition rates, the 10 year treasury yield, and the assumed cap rate. These inputs are vital to the DCF given its sensitivity to each input, primarily the cap rate. 10,000 simulations were run which accounted for each possibility of a feasible change in important company specific, industry macroeconomic factors. These inputs (Appendix Z) lead to a Price Target of $94.96, and a 79% confidence level in our Hold recommendation. Monte Carlo - 5-year Base Case Source: Team Calculations Table 6: 5-year Base Case Statistics Simulation Statistics 5Yr Mean 94.8 SD 11.3 25th Percentile 86.9 Median 94.2 75th Percentile 102.0 Source: Team Calculations Figure 22: Monte Carlo - Buy Scenario .4% 44.5% % 55.1% Price Target and Range The $95 Target Price is derived primarily using the 5-year DCF with a Monte Carlo simulation. This target price was supported by the 10-year DCF, DDM and relative valuation model. All of these models were designed to account for market conditions, historical financial information, industry trends, and other macroeconomic factors. The $95 Target Price results in a Hold recommendation. Appreciation towards this price target combined with SSS's current dividend yield would result in a yield of ~7.8%. Impact and Application The Hold recommendation is based on our analysis that the market has adequately priced Sovran's current and future growth expectations. The potential for margin contraction as a result of rising acquisition costs has not been fully realized by the market. The limitations affect bottom-line growth, preventing us from forecasting double digit NOI growth. This recommendation would only shift to a Buy in the event that Sovran were able to grow at a 5-year CAGR of 11% (See Table 7 for Price Target). Source: Team Calculations Table 7: Buy Scenario Statistics Simulation Statistics Mean 104.7 SD 12.4 25th Percentile 96.1 Median 104.0 75th Percentile 112.8 Source: Team Calculations To grow at this rate. Sovran must be able to successfully penetrate the Chicago market. This would establish another footprint in a large metropolitan area, giving Sovran management the confidence to considerably expand into the Midwest. These growth expectations also take into consideration very limited industry supply growth, as well as the preservation of margin levels similar to those enjoyed in 2013. However, these assumptions are unlikely due to the probability of banks easing loan requirements, bidding wars from increased competition, and the expected increase in real estate prices. The \"buy\" scenario is discussed in further detail in Appendix AB. Based on expectations built into the base DCF model, Sovran would need to trade at an EV/EBITDA multiple of 19x and a premium to their NAV of ~11%. Put another way, Sovran's would be a Buy if the current trading price dropped below $81. This shift would mean an entry point that provided a 15% upside, which includes Sovran's 3.3% dividend yield, based on Price Target of $95.00. Investment Risks Regulatory Risk: REIT Classification Restrictions (RR1) In order for Sovran to maintain their classification as a REIT, 75% of the revenue must come from rental operations and they must distribute 90% of their taxable income to shareholders. In the future, this may restrain the growth in their ancillary business segment, which has been growing at a 3-year CAGR of 17%. MR1 MEDIUM Probability HIGH Figure 23: Risk Matrix OR3 ER1 ER2 MR2 OR1 OR4 LOW RR1 OR2 LOW MEDIUM Impact HIGH Source: Team Calculations Table 8: REIT Performance REIT Performance in a Rising Rate Environment Period Performance 10 Year Tresuries 1979-81 133.8% 9.1% to 15.3% 1987 -6.6% 7.1% to 9.0% 1994 1996 1999 2003-07 2.7% 37.1% -2.6% 131.4% 5.7% to 7.8% 5.6% to 6.3% 4.7% to 6.7% 3.3% to 5.0% Source: Barclays Table 9: Risk Mitigation Risk Rise in Interest Rates Illiquid Real Estate Market Mitigating Factors Usage of interest rate swaps Managements ability to swiftly respond to economic conditions Easing of Loan Requirements Slowdown of US Job Market Acquisition Increasing market share in-line with supply growth Economies of scale relative to competitors Test drives markets through joint ventures Maintaining capital structure target Manageable debt structure and equity offering program Compliance with SEC requirements Decreased Credit Rating Liquidity Risk Lack of Board Independence Source: Team Analysis Table 10: Board Independence Board Member Independent Tenure (Yrs) Robert J. Atta No 20 Kenneth F Myszka No 20 Anthony P. Gammie (1) Yes 20 (1) Charles E. Lannon Stephen R. Rusmisel Yes Yes (1) Limited Independence Source: Team Research 20 3 Market Risks: Sudden Rise in Interest Rates (MR 1) The Company's revolving line of credit is floating rate (1-Month LIBOR + 1.3%); a steady or dramatic rise in interest rates could affect Sovran's ability to pay the outstanding balance on their revolving line of credit. This would negatively impact their acquisition strategy if access to capital is being constrained. This does not suggest that high interest rate environments are detrimental to REIT performance (Table 8), however, sudden spikes in interest rates are, as investors are quick to search for yield elsewhere. Illiquid Real Estate Market (MR 2) Illiquidity of Sovran's real estate investments may limit its value. Due to the large size and cost of many of the storage facilities, SSS may be unable to dispose of a property that is ineffective or not part of the company's business strategy - forcing SSS to possibly sell a facility at a discount. Mitigation of this risk is dependent on the management's ability to swiftly respond to changes in economic conditions. Economics Risks: Banks ease internal loan requirements; Hoard less cash (ER 1) Storage facility supply has been growing at a slow rate of 1.74% per annum since the financial crisis of 2008. The tightened restrictions outlined in the newly implemented Basel III requirements have made it more difficult for small business to receive funding from banks. In the likely event that these requirements loosen and or banks begin releasing more cash (Appendix C), the self-storage industry supply growth will likely trend upwards. The formation of a significant amount of new supply would weaken SSS's pricing power and likely drive down occupancy rates. Slowdown of US Job Market (ER 2) Job turnover and wage growth are major macroeconomic factors affecting the demand for storage facilities. In this stage of the economic recovery wage growth, job openings and job separations are slowly increasing. A decline in the rate of either of these factors would constrain the demand for SSS's storage facilities. Operational Risks: Acquisition Risk (OR 1) Sovran faces a significant amount of acquisition risk due to their aggressive growth strategy. There is a probability that investments will fail to perform in accordance with managerial expectations. The potential performance of acquisitions is subject to judgments by management with respect to the prices they pay to acquire facilities and the costs of any improvements required to bring an acquired property up to SSS's standard. Loss of BBB- Credit Rating (OR 2) A lowering of Sovran's credit rating would push SSS into junk bond status, forcing them to pay penalties in the form of higher interest rates on their privately placed debt (Appendix X). Liquidity Risk (OR 3) Sovran's liquidity has been historically low in recent years, and will likely continue to be so as the Company is unable to keep large amounts of cash on hand. Sovran consistently distributes large amounts of cash to shareholders because of their requirements as a REIT. This lack of cash on hand can hinder Sovran's debt and equity structure, as well as daily operations. Despite access to a large line of credit, Sovran's acquisitive strategy is the major use of these funds. Other Risks: Lack of Independence among Board of Directors (OR 4) Sovran meets the SEC's requirement and definition of independent board directors. However, the long term tenures of two independent directors, Anthony Gammie and Charles Lannon, present potential conflicts of interest between management and shareholder alignment (Appendix L and Table 10). Disclosures: Ownership and material conflicts of interest: The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject company's securities. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Society of Buffalo and Rochester, CFA Institute or the CFA Institute Research Challenge with regard to this company's stock. Appendix A: REIT Structure and Glossary of Terms Shareholder Structure In order to operate as a REIT, Sovran must have at least 100 different shareholders. Also, five or fewer shareholders cannot hold more than 50% of the Company's stock. As of Jan. 7, 2015, 344 individuals or institutions owned shares of SSS stock and the top five shareholders made up 37.05% of the shares outstanding. (Figure x) Adjusted Funds From Operations (AFFO) Also referred to as cash available for distribution (CAD),or funds available for distribution (FAD), AFFO is calculated by adjusting FFO for the straight lining of rents, and after establishing a reserve for costs that, though necessary and routine, aren't recoverable from tenants. These include certain maintenance costs and leasing costs. Adjusted Funds From Operations (AFFO) Multiple A company's AFFO yield and its AFFO multiple are reciprocals of each other. For a variety of reasonsincluding that P/AFFO multiples are roughly equivalent to P/E ratiosAFFO multiples are more often cited as a valuation measure than AFFO yields. Adjusted Funds From Operations (AFFO) Payout Ratio This is the single best measure of a company's dividend paying ability. It is calculated by dividing a company's per-share annual dividend by the current year's per share AFFO estimate. Adjusted Funds From Operations (AFFO) Yield In addition to being one measure of valuation, AFFO yield is often used as a proxy for a company's nominal cost of capital. It is calculated by dividing a company's per share AFFO estimate by its stock price. Capitalization Rate A \"cap rate\" is determined by dividing the property's net operating income (NOI) by its purchase price (assuming an all cash purchase). Cost of Capital Variously defined as the weighted average of the cost of equity and debt capital employed by a REIT. A company's \"true\" cost of equity capital is the investor's expected rate of return on his/her investment. DOWNREIT A side benefit of the UPREIT structure is that operating partnership units can be used as currency to acquire properties from owners who would like to defer taxes that would come due if the property(ies) were sold or swapped for stock. In response to this advantage of the UPREIT structure, a number of non- UPREITs have created so-called DOWNREITs. This makes it possible for them to buy properties using DOWNREIT partnership units. The effect is the same; however, the DOWNREIT is subordinate to the REIT itself, hence the name. Fixed Charge Coverage Ratio This ratio is calculated by adding funds from operations, interest expense, and preferred dividends, and subtracting from that total net income. The result is then divided by the company's interest expense plus preferred dividends. A company's fixed charge coverage ratio is generally regarded as the best easily available means of assessing a company's financial leverage. Funds From Operations (FFO) Equal to a REIT's net income after the add back of real estate depreciation. This is the measure of REIT operating performance most commonly accepted and reported by REITs, conceptually analogous to net income of non-real estate companies. Implied Cap Rate Net operating income (NOI) divided by a REIT's total market capitalization (the sum of its equity market capitalization and its total outstanding debt). Multiple-to-Growth Ratio This measure is calculated by dividing a company's price-to-FFO multiple by its FFO growth rate. Investors use this measure to determine how much the market is willing to pay per unit of growth. Companies with P/FFO multiples less than their growth rates are often considered to be undervalued. This measure is frequently associated with the investment strategy referred to as GARP (growth at a reasonable price). Net Asset Value (NAV)Equals the estimated market value of an investment company's total assets minus the value of all assets. REIT analysts often use net asset value per share as a guideline for determining the appropriate share price. Source: REIT.com The term UPREIT is known as an Umbrella Partnership Real Estate Investment Trust. In the UPREIT structure, all properties are acquired and owned by its umbrella partnership. This structure allows property owners to convert their ownership of their real estate in exchange for ownership units in an operating partnership (OP Units). These partnership interests are generally convertible into shares of the REIT, offering voting rights and dividend payments matching those of the REIT shares. The UPREIT transactions provide lucrative benefits for both parties: Provides a viable tax deferral/avoidance exit strategy to property owners facing significant Capital gain tax liabilities on the sale of appreciated property with a low tax basis Diversification of real estate holdings (i.e., OP Unit Holders have an interest in a portfolio of properties instead of just one) Potential to convert liquid long-term assets (i.e. real estate) into more saleable securities (i.e., OP Units REIT Share Cash) No property management responsibilities or concerns Quarterly income distributions Potential to recognize unrealized gains as earnings Professional management and expertise in capital markets Avoids risk of negative cash flow Estate simplification Allows the owner to dispose of its property in a way that maximizes its value Improved cash position through potential leveraging of OP Units Source: Broadstone.com Appendix B: SSS Organizational Chart Appendix C: Bank Lending Policy Banks have tightened their lending requirements to small business owners, specifically self-storage business owners, preventing them from receiving loans and expanding their number of locations. However, because of the economic recovery, the Federal Housing Finance Agency, Fannie Mae and Freddie Mac are planning to guarantee home loans with down payments as low as 3% (down from 5%). These agencies already back 60% of all mortgages originated in the private market and guarantee 90% of all new mortgages. In addition, the federal agencies approved a loosened set of mortgage-lending rules, which will remove the current requirement of a 20% down payment for higher-quality loans, known as \"qualified residential mortgages.\" As banks continue to ease lending requirements, the industry supply growth may trend towards the long run historical average of 5.05%. Appendix D: Base Case, Pre-Simulation Historical and Projected Financial Statements ($ in Millions) As of December 31, ASSETS Gross Property, Plant & Equipment Accumulated Depreciation Total Real Estate Assets % Growth Cash And Equivalents Accounts Receivable Other Receivables Other Intangibles Loans Receivable Current Other Current Assets Trading Asset Securities Deferred Charges, LT Other Long-Term Assets Investments in Joint Ventures Total Assets % Growth LIABILITIES Curr. Port. of LT Debt Long-Term Debt Accounts Payable Curr. Income Taxes Payable Def. Tax Liability, Curr. Other Current Liabilities Unearned Revenue, Non-Current Other Non-Current Liabilities Total Liabilities % Growth Common Stock Additional Paid In Capital Retained Earnings Distributions In Excess Of Earnings Treasury Stock Comprehensive Inc. and Other Total Common Equity % Growth Minority Interest Total Equity % Growth Total Liabilities And Equity % Growth 2009 Historical Balance Sheet 2010 2011 2012 2013 2014E Projected Balance Sheet 2016E 2017E 2015E 2018E 2019E $1,364.45 (239.00) 1,125.48 $1,419.96 (271.80) 1,148.16 2.0% $1,538.60 (292.70) 1,245.87 8.5% $1,742.35 (325.00) 1,417.39 13.8% $1,864.64 (366.50) 1,498.17 5.7% $2,147.76 $2,359.68 $2,567.35 $2,796.84 $2,990.04 $3,198.70 (406.17) (454.91) (502.68) (555.46) (599.90) (647.89) 1,741.59 1,904.76 2,064.68 2,241.38 2,390.14 2,550.81 16.2% 9.4% 8.4% 8.6% 6.6% 6.7% 10.71 2.35 0.17 21.13 2.50 22.76 1,185.10 5.77 2.38 0.25 0.55 2.80 4.41 1.50 19.73 1,185.54 0.0% 7.32 2.94 0.59 2.52 47.64 4.40 32.39 1,343.67 13.3% 7.26 3.44 0.86 2.89 14.44 3.60 34.44 1,484.31 10.5% 9.52 5.12 0.88 1.09 5.98 0.79 4.30 36.02 1,561.88 5.2% 7.48 5.66 7.30 9.10 38.91 1,810.04 15.9% 11.92 6.81 7.83 9.82 42.57 1,983.72 9.6% 13.01 7.43 8.55 11.15 46.46 2,151.28 8.4% 14.16 8.09 9.30 11.94 50.57 2,335.44 8.6% 15.29 8.74 10.05 12.60 54.59 2,491.41 6.7% 16.39 9.37 10.77 13.35 58.53 2,659.22 6.7% 492.74 21.82 0.50 4.98 520.04 36.69 462.79 23.39 0.60 4.93 528.40 1.6% 636.17 30.61 0.20 0.10 0.50 6.08 673.67 27.5% 100.00 599.96 35.06 1.00 0.50 6.39 742.91 10.3% 5.59 628.18 36.34 0.90 0.50 6.71 678.23 -8.7% 8.63 758.63 43.81 7.27 12.62 822.32 21.2% 57.58 807.58 50.24 10.56 13.40 881.87 7.2% 105.55 855.55 54.82 11.52 15.49 937.48 6.3% 158.57 908.57 59.67 12.54 17.09 997.95 6.5% 203.20 953.20 64.42 13.54 18.54 1,049.76 5.2% 251.40 1,001.40 69.07 14.52 20.06 1,105.11 5.3% 0.29 814.99 (139.90) (27.20) (11.30) 636.97 0.29 816.99 (148.30) (27.20) (10.30) 631.58 -0.8% 0.30 862.47 (169.80) (27.20) (10.30) 655.54 3.8% 0.32 943.60 (172.80) (27.20) (15.20) 728.73 11.2% 0.34 1,066.40 (162.50) (27.20) (6.40) 870.71 19.5% - - - - - - 28.09 25.56 14.47 12.67 12.94 - - - - - - 665.06 657.14 -1.2% 670.01 2.0% 741.40 10.7% 883.65 19.2% 987.72 11.8% 1,101.95 11.6% 1,213.88 10.2% 1,337.58 10.2% 1,441.71 7.8% 1,554.18 7.8% 1,185.10 1,185.54 0.0% 1,343.67 13.3% 1,484.31 10.5% 1,561.88 5.2% 1,810.04 15.9% 1,983.82 9.6% 2,151.36 8.4% 2,335.53 8.6% 2,491.48 6.7% 2,659.29 6.7% ($ in Millions) As of December 31, ASSETS Gross Property, Plant & Equipment Accumulated Depreciation Total Real Estate Assets Historical Balance Sheet Common Size Analysis 2009 2010 2011 2012 2013 115.1% -20.2% 95.0% 119.8% -22.9% 96.8% 114.5% -21.8% 92.7% 117.4% -21.9% 95.5% 119.4% -23.5% 95.9% 118.7% -22.4% 96.2% 119.0% -22.9% 96.0% 119.3% -23.4% 96.0% 119.8% -23.8% 96.0% 120.0% -24.1% 95.9% 120.3% -24.4% 95.9% Cash And Equivalents Accounts Receivable Other Receivables Other Intangibles Loans Receivable Current Other Current Assets Trading Asset Securities Deferred Charges, LT Other Long-Term Assets Investments in Joint Ventures Total Assets 0.9% 0.2% 0.0% 1.8% 0.2% 1.9% 100.0% 0.5% 0.2% 0.0% 0.0% 0.2% 0.4% 0.1% 1.7% 100.0% 0.5% 0.2% 0.0% 0.2% 3.5% 0.3% 2.4% 100.0% 0.5% 0.2% 0.1% 0.2% 1.0% 0.2% 2.3% 100.0% 0.6% 0.3% 0.1% 0.1% 0.4% 0.1% 0.3% 2.3% 100.0% 0.4% 0.3% 0.4% 0.5% 2.1% 100.0% 0.6% 0.3% 0.4% 0.5% 2.1% 100.0% 0.6% 0.3% 0.4% 0.5% 2.2% 100.0% 0.6% 0.3% 0.4% 0.5% 2.2% 100.0% 0.6% 0.4% 0.4% 0.5% 2.2% 100.0% 0.6% 0.4% 0.4% 0.5% 2.2% 100.0% LIABILITIES Curr. Port. of LT Debt Long-Term Debt Accounts Payable Curr. Income Taxes Payable Def. Tax Liability, Curr. Other Current Liabilities Unearned Revenue, Non-Current Other Non-Current Liabilities Total Liabilities 41.6% 1.8% 0.0% 0.4% 43.9% 3.1% 39.0% 2.0% 0.1% 0.4% 44.6% 47.3% 2.3% 0.0% 0.0% 0.0% 0.5% 50.1% 6.7% 40.4% 2.4% 0.1% 0.0% 0.4% 50.1% 0.4% 40.2% 2.3% 0.1% 0.0% 0.4% 43.4% 0.5% 41.4% 2.4% 0.4% 0.7% 45.4% 2.9% 37.8% 2.5% 0.5% 0.7% 44.5% 4.9% 34.9% 2.5% 0.5% 0.7% 43.6% 6.8% 32.1% 2.6% 0.5% 0.7% 42.7% 8.2% 30.1% 2.6% 0.5% 0.7% 42.1% 9.5% 28.2% 2.6% 0.5% 0.8% 41.6% Common Stock Additional Paid In Capital Retained Earnings Distributions In Excess Of Earnings Treasury Stock Comprehensive Inc. and Other Total Common Equity 0.0% 68.8% -11.8% -2.3% -1.0% 53.7% 0.0% 68.9% -12.5% -2.3% -0.9% 53.3% 0.0% 64.2% -12.6% -2.0% -0.8% 48.8% 0.0% 63.6% -11.6% -1.8% -1.0% 49.1% 0.0% 68.3% -10.4% -1.7% -0.4% 55.7% - - - - - - 2.4% 2.2% 1.1% 0.9% 0.8% - - - - - - 56.1% 55.4% 49.9% 49.9% 56.6% 54.6% 55.5% 56.4% 57.3% 57.9% 58.4% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Minority Interest Total Equity Total Liabilities And Equity Projected Balance Sheet Common Size Analysis 2015E 2016E 2017E 2018E 2014E 2019E Historical Income Statement 2009 2010 2011 ($ in Thousands) Revenue Rental Income Ancilliary Income Total Revenue % Growth 2012 2013 Projected Income Statement 2015E 2016E 2017E 2018E 2014E 2019E $183,074 7,966 191,040 $182,865 9,207 192,072 0.5% $188,371 12,489 200,860 4.6% $217,906 16,176 234,082 16.5% $253,384 20,123 273,507 16.8% 70,081 18,649 32,736 121,466 70,910 21,857 32,939 125,706 3.5% 75,303 25,986 34,836 136,125 8.3% 81,567 32,313 40,542 154,422 13.4% 92,272 34,939 45,233 172,444 11.7% 105,185 39,908 54,139 199,232 15.5% 115,800 43,936 59,603 219,339 10.1% 124,955 47,576 65,045 237,576 8.3% 135,188 51,548 70,393 257,129 8.2% 144,412 55,014 74,785 274,211 6.6% 152,990 58,456 79,463 290,909 6.1% 69,574 66,366 -4.6% 64,735 -2.5% 79,660 23.1% 101,063 26.9% 110,135 9.0% 121,250 10.1% 132,662 9.4% 144,023 8.6% 155,587 8.0% 165,777 6.5% (49,965) 235 (31,627) 235 (38,549) (340) (33,166) 936 (32,000) 1,948 (30,937) 1,856 (34,059) 2,044 (37,169) 2,974 (40,456) 3,236 (43,676) 4,368 (46,827) 4,917 Income from Continuing Ops Income from Disc Ops 19,844 1,073 34,974 7,562 25,846 5,716 47,430 8,207 71,011 3,123 - - - - - - NI % Growth 20,917 42,536 103.4% 31,562 -25.8% 55,637 76.3% 74,134 33.2% 81,054 9.3% 89,234 10.1% 98,467 10.3% 106,803 8.5% 116,279 8.9% 123,867 6.5% Noncontrolling Interest NI to common shareholders % Growth (1,738) 19,179 (1,899) 40,637 111.9% (937) 30,625 -24.6% (513) 55,124 80.0% (469) 73,665 33.6% (469) 80,585 9.4% (469) 81,613 1.3% (469) 89,331 9.5% (469) 95,849 7.3% (469) 105,924 10.5% (469) 113,351 7.0% 102,310 99,305 -2.9% 99,571 0.3% 120,202 20.7% 146,296 21.7% 164,274 12.3% 180,853 10.1% 197,707 9.3% 214,415 8.5% 230,372 7.4% 245,241 6.5% 54,458 67,296 67,407 92,460 117,179 133,337 146,794 160,539 173,960 186,696 198,413 Expenses Property Expenses SGA Depr & Amort Operating Expenses % Growth Operating Income % Growth Interest Income (Expense) Income from JV NOI % Growth FFO ($ in Millions) Revenue Rental Income Ancilliary Income Total Revenue Historical Income Statement 2009 2010 2011 2012 2013 $285,219 $311,612 $336,915 $362,829 $386,685 $408,185 $24,148 $28,977 $33,324 $38,322 $43,113 $48,502 309,366 340,589 370,238 401,151 429,798 456,687 13.1% 10.1% 8.7% 8.3% 7.1% 6.3% Forecasted Income Statement Common Size Analysis 2014E 2015E 2016E 2017E 2018E Revenue 95.8% 95.2% 93.8% 93.1% 92.6% Rental Income 4.2% 4.8% 6.2% 6.9% 7.4% Ancilliary Income 100.0% 100.0% 100.0% 100.0% 100.0% Total Revenue 2019E 92.2% 91.5% 91.0% 90.4% 90.0% 89.4% 7.8% 8.5% 9.0% 9.6% 10.0% 10.6% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Expenses Property Expenses SGA Depr & Amort Operating Expenses 36.7% 9.8% 17.1% 63.6% 36.9% 11.4% 17.1% 65.4% 37.5% 12.9% 17.3% 67.8% 34.8% 13.8% 17.3% 66.0% Expenses 33.7% Property Expenses 12.8% SGA 16.5% Depr & Amort 63.0% Operating Expenses 34.0% 12.9% 17.5% 64.4% 34.0% 12.9% 17.5% 64.4% 33.8% 12.9% 17.6% 64.2% 33.7% 12.9% 17.5% 64.1% 33.6% 12.8% 17.4% 63.8% 33.4% 12.8% 17.4% 63.6% Operating Income 36.4% 34.6% 32.2% 34.0% 37.0% Operating Income 35.6% 35.6% 35.8% 36.0% 36.2% 36.4% Interest Income (Expense) Income from JV -26.2% -16.5% -19.2% -14.2% -11.7% Interest Income (Expense) 0.1% 0.1% -0.2% 0.4% 0.7% Income from JV Income from Continuing Ops Income from Disc Ops 10.4% 0.6% 18.2% 3.9% 12.9% 2.8% 20.3% 3.5% NI 10.9% 22.1% 15.7% 23.8% Noncontrolling Interest NI to common shareholders -0.9% 10.0% -1.0% 21.2% -0.5% 15.2% -0.2% 23.5% NOI 53.6% 51.7% 49.6% FFO 27.4% 35.2% 30.4% -10.0% -10.0% -10.0% -10.0% -10.2% -10.3% 0.6% 0.6% 0.8% 0.8% 1.0% 1.1% 26.0% NI 1.1% Noncontrolling Interest 27.1% NI to common shareholders 25.7% 25.7% 26.1% 26.2% 26.6% 26.6% -0.9% 10.0% -1.0% 21.2% -0.5% 15.2% -0.2% 23.5% -0.2% 26.9% -0.2% 26.9% 52.6% 52.6% 52.9% 53.0% 53.1% 53.2% 42.6% 42.6% 42.9% 43.0% 42.9% 42.9% 51.4% -0.2% NOI 26.9% FFO 53.5% 37.2% 41.8% Appendix E: Insider Holdings Name Robert J. Attea Kenneth F. Myszka David L. Rogers Charles E. Lannon Andrew J. Gregoire Paul T. Powell Edward F. Killeen Anthony P. Gammie Stephen R. Rusmisel Total Position 231,029 223,476 156,996 114,739 42,501 40,984 34,632 18,953 2,027 865,337 Market Value (01/06/15) $ 21,000,536 $ 20,313,968 $ 14,270,936 $ 10,429,775 $ 3,863,341 $ 3,725,446 $ 3,148,049 $ 1,722,828 $ 184,254 $ 78,659,133 % of Shares 0.68% 0.66% 0.46% 0.34% 0.12% 0.12% 0.10% 0.06% 0.01% 2.55% Appendix F: Location, Web Marketing, Call Center Operations, and Revenue Management Systems Location & Convenience: Sovran's storage facilities offer climate, humidity, and heating controlled options. In addition, Sovran equips each of its facilities with an advanced security system that monitors on site activity 24/7. Alongside this security system, the Company provides its customers with a greater sense of security through keypad controlled access to the entire facility, along with only providing customers with a key to their storage site. SSS has diverse geographic locations with each property being strategically positioned to create maximum occupancy rates while not cannibaliz