UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q
 

 

(Mark one)

x

 

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

 

 

 

For the quarterly period ended September 30, 2007

 

 

 

or

 

 

 

o

 

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

 

 

 

For the transition period from                      to                      .

 

Commission file number: 001-32324

 


 

U-STORE-IT TRUST

(Exact Name of Registrant as Specified in its Charter)

 

Maryland

 

20-1024732

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

50 Public Square, Suite 2800

 

 

Cleveland, Ohio

 

44113

(Address of Principal Executive Offices)

 

(Zip Code)

 

(216) 274-1340

(Registrant’s Telephone Number, Including Area Code)

 

6745 Engle Road, Suite 300

Cleveland, Ohio  44130

(Former address, if changed since last report)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x Accelerated filer o Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Class

 

Outstanding at November 2, 2007

common stock, $.01 par value

 

57,700,200

 

 



 

U-STORE-IT TRUST

TABLE OF CONTENTS

 

Part I. FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

 

3

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

20

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

33

Item 4.

Controls and Procedures

 

33

Part II. OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

 

35

Item 1A

Risk Factors

 

36

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

36

Item 6.

Exhibits

 

37

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q, together with other statements and information publicly disseminated by U-Store-It Trust (“we,” “us,” “our” or the “Company”), contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such statements are based on assumptions and expectations that may not be realized and are inherently subject to risks, uncertainties and other factors, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Although we believe the expectations reflected in these forward-looking statements are based on reasonable assumptions, future events and actual results, performance, transactions or achievements, financial and otherwise, may differ materially from the results, performance, transactions or achievements expressed or implied by the forward-looking statements. Risks, uncertainties and other factors that might cause such differences, some of which could be material, include, but are not limited to:

 

         national and local economic, business, real estate and other market conditions;

 

         the competitive environment in which we operate;

 

         the execution of our business plan;

 

         financing risks, including the risk of overleverage and the corresponding risk of default on our mortgage loans and other debt;

 

         increases in interest rates and operating costs;

 

         our ability to maintain our status as a real estate investment trust (“REIT”) for federal income tax purposes;

 

         acquisition and development risks;

 

         changes in real estate and zoning laws or regulations;

 

         risks related to natural disasters;

 

         potential environmental and other liabilities;

 

         material weaknesses in our internal control over financial reporting;

 

         other factors affecting the real estate industry generally or the self-storage industry in particular; and

 

         other risks identified in our Annual Report on Form 10-K and, from time to time, in other reports we file with the Securities and Exchange Commission (the “SEC”) or in other documents that we publicly disseminate.

 

We undertake no obligation to publicly update or revise these forward-looking statements, whether as a result of new information, future events or otherwise except as may be required in securities laws.

 

2



 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

U-STORE-IT TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Storage facilities

 

$

1,904,179

 

$

1,771,864

 

Accumulated depreciation

 

(251,752

)

(205,049

)

 

 

1,652,427

 

1,566,815

 

Cash and cash equivalents

 

5,903

 

19,716

 

Restricted cash

 

19,449

 

14,126

 

Loan procurement costs - net of amortization

 

6,390

 

7,575

 

Other assets

 

14,560

 

6,475

 

Due from related parties

 

 

632

 

Total assets

 

$

1,698,729

 

$

1,615,339

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Revolving credit facility

 

$

191,500

 

$

90,500

 

Unsecured term loan

 

200,000

 

200,000

 

Secured term loan

 

47,444

 

 

Mortgage loans and notes payable

 

580,294

 

588,930

 

Accounts payable and accrued expenses

 

27,494

 

22,590

 

Due to related parties

 

110

 

336

 

Distributions payable

 

18,236

 

18,197

 

Deferred revenue

 

10,229

 

9,740

 

Security deposits

 

594

 

655

 

Total liabilities

 

1,075,901

 

930,948

 

 

 

 

 

 

 

Minority interests

 

50,449

 

56,898

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

Common shares $.01 par value, 200,000,000 shares authorized, 57,574,851 and 57,335,490 shares issued and outstanding at September 30, 2007 and December 31, 2006, respectively

 

576

 

573

 

Additional paid in capital

 

797,262

 

794,632

 

Accumulated other comprehensive loss

 

(427

)

 

Accumulated deficit

 

(225,032

)

(167,712

)

Total shareholders’ equity

 

572,379

 

627,493

 

Total liabilities and shareholders’ equity

 

$

1,698,729

 

$

1,615,339

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

3



 

U-STORE-IT TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

(as restated, see note 2)

 

 

 

(as restated, see note 2)

 

REVENUES

 

 

 

 

 

 

 

 

 

Rental income

 

$

53,969

 

$

52,021

 

$

156,481

 

$

145,906

 

Other property related income

 

4,236

 

3,823

 

12,929

 

10,501

 

Other - related party

 

101

 

126

 

340

 

340

 

Total revenues

 

58,306

 

55,970

 

169,750

 

156,747

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

Property operating expenses

 

25,110

 

21,856

 

70,475

 

61,375

 

Property operating expenses - related party

 

8

 

15

 

59

 

47

 

Depreciation

 

17,068

 

16,312

 

50,475

 

46,532

 

Asset write-off

 

 

307

 

 

307

 

Lease abandonment

 

1,316

 

 

1,316

 

 

General and administrative

 

5,173

 

7,289

 

16,736

 

16,810

 

General and administrative - related party

 

118

 

73

 

337

 

523

 

Total operating expenses

 

48,793

 

45,852

 

139,398

 

125,594

 

OPERATING INCOME

 

9,513

 

10,118

 

30,352

 

31,153

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

Interest:

 

 

 

 

 

 

 

 

 

Interest expense on loans

 

(13,666

)

(11,917

)

(39,398

)

(32,714

)

Loan procurement amortization expense

 

(445

)

(527

)

(1,334

)

(1,500

)

Write-off of loan procurement cost due to early extinguishment of debt

 

 

 

 

(1,273

)

Interest income

 

104

 

95

 

308

 

1,138

 

Other

 

 

(14

)

(6

)

(74

)

Total other expense

 

(14,007

)

(12,363

)

(40,430

)

(34,423

)

LOSS BEFORE MINORITY INTERESTS AND DISCONTINUED OPERATIONS

 

(4,494

)

(2,245

)

(10,078

)

(3,270

)

MINORITY INTERESTS

 

364

 

187

 

822

 

271

 

LOSS FROM CONTINUING OPERATIONS

 

(4,130

)

(2,058

)

(9,256

)

(2,999

)

DISCONTINUED OPERATIONS

 

 

 

 

 

 

 

 

 

Income from operations

 

 

105

 

118

 

265

 

Gain on disposition of discontinued operations

 

 

 

2,122

 

 

Minority interest attributable to discontinued operations

 

 

(9

)

(184

)

(20

)

Income from discontinued operations

 

 

96

 

2,056

 

245

 

NET LOSS

 

$

(4,130

)

$

(1,962

)

$

(7,200

)

$

(2,754

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per share from continuing operations

 

$

(0.07

)

$

(0.04

)

$

(0.16

)

$

(0.05

)

Basic and diluted earnings per share from discontinued operations

 

 

0.01

 

0.03

 

 

Basic and diluted loss per share

 

$

(0.07

)

$

(0.03

)

$

(0.13

)

$

(0.05

)

 

 

 

 

 

 

 

 

 

 

Weighted-average basic and diluted shares outstanding

 

57,537

 

57,351

 

57,466

 

57,308

 

 

 

 

 

 

 

 

 

 

 

Distributions declared per common share and unit

 

$

0.29

 

$

0.29

 

$

0.87

 

$

0.87

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

4



 

U-STORE-IT TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSS

(in thousands)

(unaudited)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

(as restated, see
note 2)

 

 

 

(as restated, see
note 2)

 

NET LOSS

 

$

(4,130

)

$

(1,962

)

$

(7,200

)

$

(2,754

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

Unrealized loss on derivative financial instruments

 

(427

)

 

(427

)

 

Total other comprehensive loss

 

(427

)

 

(427

)

 

COMPREHENSIVE LOSS

 

$

(4,557

)

$

(1,962

)

$

(7,627

)

$

(2,754

)

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

5



 

U-STORE-IT TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2007

 

2006

 

 

 

 

 

(as restated, see note 2)

 

Operating Activities

 

 

 

 

 

Net loss

 

$

(7,200

)

$

(2,754

)

Adjustments to reconcile net loss to cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

51,628

 

48,316

 

Asset write-off

 

 

319

 

Lease abandonment charge

 

1,316

 

 

Gain on disposition of discontinued operations

 

(2,122

)

 

Gain on sale of assets

 

 

(4

)

Equity compensation expense

 

1,296

 

987

 

Accretion of fair market value of debt

 

(229

)

(582

)

Early extinguishment of debt

 

 

1,273

 

Minority interests

 

(638

)

(251

)

Changes in other operating accounts:

 

 

 

 

 

Other assets

 

(2,432

)

(1,882

)

Accounts payable and accrued expenses

 

3,498

 

3,199

 

Other liabilities

 

420

 

(359

)

Net cash provided by operating activities

 

$

45,537

 

$

48,262

 

Investing Activities

 

 

 

 

 

Acquisitions, additions and improvements to storage facilities

 

(30,418

)

(305,415

)

Acquisitions, additions and improvements to storage facilities - related party

 

(121,108

)

(37,414

)

Sales of properties, net

 

12,161

 

42

 

Proceeds from sales of marketable securities

 

 

114,170

 

Investment in marketable securities

 

 

(19,000

)

Insurance settlements

 

 

1,712

 

Increase in restricted cash

 

(5,323

)

(234

)

Net cash used in investing activities

 

$

(144,688

)

$

(246,139

)

Financing Activities

 

 

 

 

 

Proceeds from:

 

 

 

 

 

Revolving credit facility

 

129,000

 

170,500

 

Secured term loan

 

47,444

 

 

Short-term financing

 

 

30,000

 

Principal payments on:

 

 

 

 

 

Revolving credit facility

 

(28,000

)

 

Mortgage loans and notes payable

 

(8,407

)

(9,457

)

Short term financing

 

 

(30,000

)

Capital lease obligations

 

 

(31

)

Distributions paid to shareholders

 

(50,053

)

(49,934

)

Distributions paid to minority partners

 

(4,502

)

(4,523

)

Loan procurement costs

 

(144

)

(1,237

)

Proceeds from exercise of stock options

 

 

2,339

 

Net cash provided by financing activities

 

$

85,338

 

$

107,657

 

Decrease in cash and cash equivalents

 

(13,813

)

(90,220

)

Cash and cash equivalents at beginning of period

 

19,716

 

101,679

 

Cash and cash equivalents at end of period

 

$

5,903

 

$

11,459

 

Supplemental Cash Flow Information

 

 

 

 

 

Cash paid for interest, net of interest capitalized

 

$

39,282

 

$

30,706

 

Supplemental disclosure of noncash activities:

 

 

 

 

 

Storage facilities acquired through the assumption of a mortgage loan

 

$

 

$

34,451

 

Other assets and liabilites (net) acquired as part of storage facility acquisitions

 

$

 

$

2,032

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

6



 

U-STORE-IT TRUST AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.  ORGANIZATION AND NATURE OF OPERATIONS

 

U-Store-It Trust, a Maryland real estate investment trust (collectively with its subsidiaries, “we” or the “Company”), is a self-administered and self-managed real estate investment trust, or REIT, active in acquiring, developing and operating self-storage properties for business and personal use under month-to-month leases.  As of September 30, 2007, the Company owned 411 self-storage facilities (collectively, the “Properties”) containing an aggregate of approximately 26.2 million square feet.  The Properties are located in 26 states throughout the United States.

 

The Company owns substantially all of its assets through U-Store-It, L.P., a Delaware limited partnership (the “Operating Partnership”).  The Company is the sole general partner of the Operating Partnership and, as of September 30, 2007, owned a 91.9% interest in the Operating Partnership.  The Company manages its assets through YSI Management LLC (the “Management Company”), a wholly owned subsidiary of the Operating Partnership.  The Company owns 100% of U-Store-It Mini Warehouse Co. (the “TRS”), which it has elected to treat as a taxable REIT subsidiary. In general, a taxable REIT subsidiary may perform non-customary services for tenants, hold assets that the Company cannot hold directly and generally may engage in any real estate or non-real estate related business.

 

2.  RESTATEMENTS OF PREVIOUSLY ISSUED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Subsequent to the issuance of the Company’s 2006 third quarter financial statements, the Audit Committee of the Board of Trustees of the Company, upon recommendation from management, concluded that the previously issued financial statements contained errors related to the Company’s classification of auction rate securities held at December 31, 2005 and the interim periods in 2006 as cash and cash equivalents.  As a result, the Company is restating its previously issued financial statements for the three and nine months ended September 30, 2006.

 

In the quarter ended September 30, 2006, the Company early adopted Staff Accounting Bulletin No. 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”).  As a result of the discovery of the error described above, the Company is restating its previously issued financial statements to reflect, in the appropriate periods, the correction of the errors originally corrected via an adjustment of the Company’s January 1, 2006 accumulated deficit in accordance with SAB 108.

 

The following is a description of the nature of the errors being corrected in the restatement:

 

Cash and Cash Equivalents

 

The Company adjusted its Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2006 to change the classification of outstanding checks from “Accounts payable and accrued expenses” to “Cash and cash equivalents.”  This adjustment had no effect on the Condensed Consolidated Statement of Operations.

 

Auction Rate and Other Marketable Securities

 

The Company adjusted its Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2006 to change the classification of approximately $89.8 million of auction rate and approximately $5.4 million of other variable rate demand note securities from “Cash and cash equivalents” to “Marketable Securities.” Auction rate and variable rate demand note securities are securities that have stated maturities beyond three months, but are priced and traded as short-term investments due to the liquidity provided through an auction mechanism. The definition of a cash equivalent does not include these securities. This adjustment resulted in changes to the opening cash and cash equivalents balance in the Statement of Cash Flows for the nine months ended September 30, 2006, and had no effect on the Condensed Consolidated Statement of Operations.

 

Restricted Cash

 

The Company adjusted its Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2006 to change the classification of certain deposits related to facilities encumbered with mortgage loans from “Cash and cash equivalents” to “Restricted Cash.”  This adjustment resulted in changes to the opening cash and cash equivalents balance in the Statement of Cash Flows for the nine months ended September 30, 2006, and had no effect on the Condensed Consolidated Statement of Operations.

 

7



 

Loan Procurement Costs

 

The Company adjusted its Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2006 to reflect a change in amortization period of certain loan procurement costs, associated with debt instruments with increasing interest rates. The loan procurement costs were being amortized over a period inconsistent with the determination of the debt instruments’ interest cost.

 

Other Assets / Rental Income

 

The Company adjusted its Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2006 for adjustments to certain leasing transactions. The misstatement related to the period in which the revenue associated with certain tenants had been recognized.

 

Accounts Payable and Accrued Expense

 

The Company adjusted its Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2006 to accrue for utility costs at period end and workers compensation expense that had been understated as a result of erroneous information used to previously calculate the expense.

 

Related Party Revenue

 

The Company adjusted its Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2006 to change the classification of management fee revenue earned through the Company’s management of certain facilities owned by related parties from “Rental income” to “Other-related party.”

 

In addition, the Company adjusted its Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2006 to correct the presentation of the change in accounts payable related to real estate investment as an Investing Activity where it had previously been reported as an Operating Activity, and the Company added a disclosure regarding cash paid for interest, net of interest capitalized.

 

The following tables recap the adjustments described above:

 

 

 

 

 

 

 

Discontinued

 

 

 

 

 

Previously 
Reported

 

Restatement 
Adjustments

 

Operations 
(see Note 11)

 

As Restated

 

 

 

(in thousands)

 

For the three months ended September 30, 2006

 

 

 

 

 

 

 

 

 

Statement of Operations

 

 

 

 

 

 

 

 

 

Rental income

 

$

52,562

 

$

(126

)

$

(415

)

$

52,021

 

Other - related party

 

$

 

$

126

 

$

 

$

126

 

Property operating expenses

 

$

21,978

 

$

23

 

$

(145

)

$

21,856

 

Total operating expenses

 

$

46,067

 

$

23

 

$

(238

)

$

45,852

 

Operating income

 

$

10,339

 

$

(23

)

$

(198

)

$

10,118

 

Loss before minority interests and discontinued operations

 

$

(2,117

)

$

(23

)

$

(105

)

$

(2,245

)

Minority interests

 

$

176

 

$

2

 

$

9

 

$

187

 

Net loss

 

$

(1,941

)

$

(21

)

$

 

$

(1,962

)

 

8



 

 

 

 

 

 

 

Discontinued

 

 

 

 

 

Previously 
Reported

 

Restatement 
Adjustments

 

Operations 
(see Note 11)

 

As Restated

 

 

 

(in thousands)

 

For the nine months ended September 30, 2006

 

 

 

 

 

 

 

 

 

Statement of Operations

 

 

 

 

 

 

 

 

 

Rental income

 

$

147,444

 

$

(340

)

$

(1,198

)

$

145,906

 

Other - related party

 

$

 

$

340

 

$

 

$

340

 

Property operating expenses

 

$

61,792

 

$

23

 

$

(440

)

$

61,375

 

Total operating expenses

 

$

126,290

 

$

23

 

$

(719

)

$

125,594

 

Operating income

 

$

31,717

 

$

(23

)

$

(541

)

$

31,153

 

Loss before minority interests

 

$

(2,982

)

$

(23

)

$

(265

)

$

(3,270

)

Minority interests

 

$

249

 

$

2

 

$

20

 

$

271

 

Net loss

 

$

(2,733

)

$

(21

)

$

 

$

(2,754

)

Statement of Cash Flows

 

 

 

 

 

 

 

 

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(2,733

)

$

(21

)

$

 

$

(2,754

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

Minority interests

 

$

(249

)

$

(2

)

$

 

$

(251

)

Changes in other operating accounts

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

3,146

 

$

53

 

$

 

$

3,199

 

Net cash provided by operating activities

 

$

48,232

 

$

30

 

$

 

$

48,262

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

 

Acquisitions, additions and improvements to storage facilities

 

$

(305,385

)

$

(30

)

$

 

$

(305,415

)

Proceeds from sale of marketable securities

 

$

 

$

114,170

 

$

 

$

114,170

 

Investment in marketable securities

 

$

 

$

(19,000

)

$

 

$

(19,000

)

Increase in restricted cash

 

$

(42

)

$

(192

)

$

 

$

(234

)

Net cash used in investing activites

 

$

(341,087

)

$

94,948

 

$

 

$

(246,139

)

Increase (decrease) in cash and cash equivalents

 

$

(185,198

)

$

94,978

 

$

 

$

(90,220

)

Cash and cash equivalents at beginning of period

 

$

201,098

 

$

(99,419

)

$

 

$

101,679

 

Cash and cash equivalents at end of period

 

$

15,900

 

$

(4,441

)

$

 

$

11,459

 

 

3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Readers of this Quarterly Report on Form 10-Q should refer to the Company’s audited financial statements prepared in accordance with GAAP, and the related notes thereto, for the year ended December 31, 2006, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, as certain footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report pursuant to the rules of the SEC. The results of operations for the three and nine months ended September 30, 2007 and 2006 are not necessarily indicative of the results of operations to be expected for any future period or the full year.

 

Recent Accounting Pronouncements

 

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 provides guidance for using fair value to measure assets and liabilities. This statement clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing the asset or liability. SFAS No. 157 establishes a fair value hierarchy, giving the highest priority to quoted prices in active markets and the lowest priority to unobservable data. SFAS No. 157 applies whenever other standards require assets or liabilities to be measured at fair value. This statement is effective in fiscal years beginning after November 15, 2007. The Company believes that the adoption of this standard on January 1, 2008 will not have a material effect on our consolidated financial statements.

 

9



 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value, with unrealized gains and losses related to these financial instruments reported in earnings at each subsequent reporting date.  This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007.  The Company is in the process of evaluating the impact of SFAS No. 159 on its financial statements.

 

4.  STORAGE FACILITIES

 

The Company’s real estate assets are summarized as follows:

 

 

 

September 30,

 

December 31,

 

 

 

2007

 

2006

 

 

 

(in thousands)

 

 

 

 

 

 

 

Land

 

$

394,966

 

$

370,196

 

Buildings and improvements

 

1,328,319

 

1,226,690

 

Equipment

 

178,337

 

173,496

 

Construction in progress

 

2,557

 

1,482

 

Total

 

1,904,179

 

1,771,864

 

Less accumulated depreciation

 

(251,752

)

(205,049

)

Storage facilities — net

 

$

1,652,427

 

$

1,566,815

 

 

The following table summarizes the Company’s acquisition and disposition activity during the period January 1, 2006 to September 30, 2007:

 

Facility/Portfolio

 

Transaction Date

 

Total Number 
of Facilities

 

Purchase / Sale Price (in 
thousands)

 

 

 

 

 

 

 

 

 

2007 Acquisitions

 

 

 

 

 

 

 

Sanford Portfolio

 

January 2007

 

1

 

$

6,300

 

Grand Central Portfolio

 

January 2007

 

2

 

13,200

 

Rising Tide Portfolio

 

September 2007

 

14

 

121,100

 

 

 

 

 

17

 

$

140,600

 

 

 

 

 

 

 

 

 

2007 Dispositions

 

 

 

 

 

 

 

South Carolina Assets

 

May 2007

 

3

 

$

12,750

 

 

 

 

 

3

 

$

12,750

 

 

 

 

 

 

 

 

 

2006 Acquisitions

 

 

 

 

 

 

 

Nashville, TN Portfolio

 

January 2006

 

2

 

$

13,100

 

Dallas, TX Portfolio

 

January 2006

 

2

 

11,500

 

U-Stor Self Storage Portfolio

 

February 2006

 

3

 

10,800

 

Sure Save Portfolio

 

February 2006

 

24

 

164,500

 

Texas Storage Portfolio

 

March 2006

 

4

 

22,500

 

Nickey Portfolio

 

April 2006

 

4

 

13,600

 

SecurCare Portfolio

 

May 2006

 

4

 

35,700

 

Texas Storage Portfolio

 

June 2006

 

1

 

6,500

 

Jernigan Portfolio

 

July 2006

 

9

 

45,300

 

U-Stor Self Storage Portfolio

 

August 2006

 

1

 

3,500

 

Bailes Portfolio

 

August 2006

 

3

 

15,600

 

In & Out Self Storage Portfolio

 

August 2006

 

1

 

7,600

 

Texas Storage Portfolio

 

September 2006

 

2

 

12,200

 

 

 

 

 

60

 

$

362,400

 

 

10



 

The following table summarizes the change in number of self-storage facilities from January 1, 2006 through September 30, 2007:

 

 

 

2007

 

2006

 

Balance - Beginning of year

 

399

 

339

 

Facilities acquired

 

17

 

60

 

Facilities consolidated

 

(2

)

 

Facilities sold

 

(3

)

 

Balance - End of period

 

411

 

399

 

 

5.  REVOLVING CREDIT FACILITY, UNSECURED TERM LOAN AND SECURED TERM LOAN

 

As of September 30, 2007, the Company and its Operating Partnership had in place a three-year $450 million unsecured credit facility, including $200 million in an unsecured term loan and $250 million in unsecured revolving loans.  The outstanding balance on the Company’s credit facility was $391.5 million at September 30, 2007 and was comprised of $200 million of unsecured term loan borrowings and $191.5 million of unsecured revolving loans.  Approximately $58.5 million was available under the Company’s unsecured credit facility at September 30, 2007.  Borrowings under the credit facility bear interest, at our option, at either an alternative base rate or a Eurodollar rate, in each case, plus an applicable margin based on our leverage ratio or our credit rating.  The alternative base interest rate is a fluctuating rate equal to the higher of the prime rate or the sum of the federal funds effective rate plus 50 basis points.  The applicable margin for the alternative base rate will vary from 0.00% to 0.50% depending on our leverage ratio prior to achieving an investment grade rating, and will vary from 0.00% to 0.25% depending on our credit rating after achieving an investment grade rating.  The Eurodollar rate is a rate of interest that is fixed for interest periods of one, two, three or six months based on the LIBOR rate determined two business days prior to the commencement of the applicable interest period.  The applicable margin for the Eurodollar rate will vary from 1.00% to 1.50% depending on our leverage ratio prior to achieving an investment grade rating, and will vary from 0.425% to 1.00% depending on our credit rating after achieving an investment grade rating.  This credit facility is scheduled to terminate on November 20, 2009, with an option for the Company to extend the termination date to November 20, 2010. At September 30, 2007, borrowings under the unsecured credit facility had a weighted average interest rate of 6.35% after giving consideration to the interest rate swaps and caps more fully described in Note 7.  The company was in compliance with all financial covenants at September 30, 2007.

 

On September 14, 2007, the Company and its Operating Partnership entered into a secured term loan agreement that allows for term loans in the aggregate principal amount of up to $50 million. Each term loan matures on November 20, 2009, subject to extension in the sole discretion of the lenders. Each term loan bears interest at either an alternative base rate or a Eurodollar rate, at our option, in each case plus an applicable margin at terms identical to the unsecured revolving credit facility.  As of September 30, 2007, there was one term loan outstanding for $47.4 million.  The outstanding term loan is secured by a pledge by our Operating Partnership of all equity interests in YSI RT LLC, the wholly-owned subsidiary of the Operating Partnership that acquired eight self-storage facilities in September 2007.  At September 30, 2007, the outstanding term loan had an interest rate of 6.95%.

 

11



 

6.  MORTGAGE LOANS AND NOTES PAYABLE

 

The Company’s mortgage loans and notes payable are summarized as follows:

 

 

 

Carrying Value as of:

 

 

 

 

 

 

 

September 30,

 

December 31,

 

Effective Interest

 

Maturity

 

Mortgage Loan

 

2007

 

2006

 

Rate

 

Date

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

YSI XXIII

 

$

 

$

1,322

 

 

 

YSI XVI

 

13,979

 

14,261

 

6.49

%

Nov-07

 

YSI XXII

 

 

993

 

5.00

%

Nov-07

 

YSI XXIX

 

4,269

 

4,374

 

5.00

%

Jan-08

 

YSI XXI

 

1,190

 

1,217

 

5.00

%

Apr-08

 

Acq IV

 

2,376

 

2,425

 

7.71

%

Dec-08

 

Acq VI

 

1,756

 

1,787

 

8.43

%

Aug-09

 

YSI III

 

87,128

 

88,332

 

5.09

%

Nov-09

 

YSI I

 

87,179

 

88,362

 

5.19

%

May-10

 

YSI IV

 

6,246

 

6,299

 

5.25

%

Jul-10

 

YSI XXVI

 

10,013

 

10,175

 

5.00

%

Oct-10

 

YSI XXV

 

8,228

 

8,304

 

5.00

%

Oct-10

 

Promissory Notes

 

110

 

132

 

5.97

%

Nov-10

 

YSI II

 

87,243

 

88,400

 

5.33

%

Jan-11

 

YSI XII

 

1,608

 

1,634

 

5.97

%

Sep-11

 

YSI XIII

 

1,382

 

1,404

 

5.97

%

Sep-11

 

YSI VI

 

79,918

 

80,000

 

5.13

%

Aug-12

 

YASKY

 

80,000

 

80,000

 

4.96

%

Sep-12

 

YSI XIV

 

1,920

 

1,952

 

5.97

%

Jan-13

 

YSI VII

 

3,294

 

3,334

 

6.50

%

Jun-13

 

YSI IX

 

2,070

 

2,096

 

6.50

%

Jun-13

 

YSI VIII

 

1,882

 

1,905

 

6.50

%

Jun-13

 

YSI XVII

 

4,504

 

4,583

 

6.32

%

Jul-13

 

YSI XXX

 

8,078

 

8,233

 

5.59

%

Nov-13

 

YSI XXVII

 

551

 

561

 

5.59

%

Nov-13

 

YSI XI

 

2,619

 

2,660

 

5.87

%

Dec-13

 

YSI V

 

3,459

 

3,513

 

5.25

%

Jan-14

 

YSI XXVIII

 

1,685

 

1,712

 

5.59

%

Feb-14

 

YSI X

 

4,320

 

4,367

 

5.87

%

Jan-15

 

YSI XV

 

2,009

 

2,036

 

6.41

%

Jan-15

 

YSI XX

 

70,022

 

71,050

 

5.97

%

Nov-15

 

Unamortized fair value

 

1,256

 

1,507

 

 

 

 

 

 

 

 

 

 

 

 

 

Total mortgage loans and notes payable

 

$

580,294

 

$

588,930

 

 

 

 

 

 

The following table presents the future principal payment requirements on outstanding mortgage loans and notes payable at September 30, 2007 (in thousands):

 

2007

 

$

16,445

 

2008

 

16,950

 

2009

 

94,360

 

2010

 

112,428

 

2011

 

88,114

 

2012 and thereafter

 

250,741

 

Total mortgage payments

 

579,038

 

Plus: Unamortized debt premiums

 

1,256

 

Total mortgage indebtedness

 

$

580,294

 

 

12



 

7.  DERIVATIVE FINANCIAL INSTRUMENTS

 

The Company’s use of derivative instruments is limited to the utilization of interest rate agreements or other instruments to manage interest rate risk exposures and not for speculative purposes. The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company’s operating and financial structure, as well as to hedge specific transactions. The counterparties to these arrangements are major financial institutions with which the Company and its subsidiaries may also have other financial relationships. The Company is potentially exposed to credit loss in the event of non-performance by these counterparties. However, because of the high credit ratings of the counterparties, the Company does not anticipate that any of the counterparties will fail to meet these obligations as they come due. The Company does not hedge credit or property value market risks.

 

The Company formally assesses, both at inception of the hedge and on an on-going basis, whether each derivative is highly-effective in offsetting changes in cash flows of the hedged item. If management determines that a derivative is highly-effective as a hedge, it accounts for the derivative using hedge accounting, pursuant to which gains or losses inherent in the derivative do not impact the Company’s results of operations.  If management determines that a derivative is not highly-effective as a hedge or if a derivative ceases to be a highly-effective hedge, the Company will discontinue hedge accounting prospectively and will reflect in its statement of operations realized and unrealized gains and losses in respect of the derivative.

 

The Company has entered into interest rate swap agreements that qualify and are designated as cash flow hedges designed to reduce the impact of interest rate changes on its variable rate debt.   Therefore, the interest rate swaps are recorded in the condensed and consolidated balance sheet at fair value and the related gains or losses are deferred in shareholders’ equity as Accumulated Other Comprehensive Loss.  These deferred gains and losses are amortized into interest expense during the period or periods in which the related interest payments affect earnings.  However, to the extent that the interest rate swaps are not perfectly effective in offsetting the change in value of the interest payments being hedged, the ineffective portion of these contracts is recognized in earnings immediately.  Ineffectiveness was immaterial for all periods presented.

 

At September 30, 2007, the Company had interest rate swap agreements for notional principal amounts aggregating $75 million. The swap agreements effectively fix the 30-day LIBOR interest rate on $50 million of credit facility borrowings at 4.7725% per annum and on $25 million of credit facility borrowings at 4.716% per annum, in each case until November 2009.  The interest rate cap agreements effectively limit the interest rate on $20 million of credit facility borrowings at 5.50% and an additional $20 million of credit facility borrowings at 6.00% per annum until December 2007.

 

The following table summarizes the terms and fair values of the Company’s derivative financial instruments at September 30, 2007 (in thousands):

 

 

 

 

 

Notional

 

 

 

 

 

Fair

 

Hedge Product

 

Hedge Type

 

Amount

 

Strike

 

Maturity

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

Cap

 

Cash flow

 

$

20,000

 

5.5000

%

12/21/2007

 

 

 

Cap

 

Cash flow

 

$

20,000

 

6.0000

%

12/21/2007

 

 

 

Swap

 

Cash flow

 

$

50,000

 

4.7725

%

11/20/2009

 

$

(304

)

Swap

 

Cash flow

 

$

25,000

 

4.7160

%

11/20/2009

 

$

(123

)

 

8.  MINORITY INTERESTS

 

Operating Partnership minority interests relate to the interests in the Operating Partnership that are not owned by the Company, which at September 30, 2007 and December 31, 2006 amounted to approximately 8.1% and 8.3%, respectively.  These minority interests were issued in the form of Operating Partnership units and were a component of the consideration the Company paid to acquire certain self-storage facilities. Limited partners who acquired Operating Partnership units have the right to require the Operating Partnership to redeem part or all of their Operating Partnership units for, at the Company’s option, an equivalent number of common shares of the Company or cash based upon the fair market value of an equivalent number of common shares of the Company. The market value of the Company’s common shares for this purpose will be equal to the average of the closing trading price of the Company’s common shares on the New York Stock Exchange for the 10 trading days before the date the Company received the redemption notice.

 

13



 

 

 

Number of limited 
partnership units

 

 

 

 

 

As of December 31, 2006

 

5,198,855

 

Units issued

 

 

Units redeemed, May 2007

 

(15,000

)

Units redeemed, June 2007

 

(60,000

)

Units redeemed, August 2007

 

(43,927

)

As of September 30, 2007

 

5,079,928

 

 

9.  RELATED PARTY TRANSACTIONS

 

Robert J. Amsdell, former Chief Executive Officer and Chairman of the Board of Trustees, retired from the Board effective as of February 13, 2007.  Barry L. Amsdell submitted his letter of resignation from the Board on February 20, 2007.  Effective as of February 19, 2007, Todd C. Amsdell, President of U-Store-It Development LLC, a subsidiary of the Company, resigned.

 

Amsdell Settlement/Rising Tide Acquisition

 

On September 14, 2007, the Company settled all pending state and federal court litigation involving the Company and the interests of Robert J. Amsdell, Barry L. Amsdell, Todd C. Amsdell and Kyle Amsdell, son of Robert and brother of Todd Amsdell (collectively, the “Amsdells”), and Rising Tide Development LLC, a company owned and controlled by Robert J. Amsdell and Barry L. Amsdell (“Rising Tide”).  The Board of Trustees of the Company, along with the Corporate Governance and Nominating Committee, approved the terms of the settlement.

 

In addition, on September 14, 2007, the Operating Partnership purchased 14 self-storage facilities from Rising Tide for an aggregate purchase price of $121 million.  In connection with the settlement agreement and acquisition of the 14 self storage facilities, the Company considered the provisions of EITF 04-01, Accounting for Pre-existing relationships between the Parties to a Business Combination.

 

Pursuant to a Settlement Agreement and Mutual Release, dated August 6, 2007, (the “Settlement Agreement”) which was conditioned upon the acquisition of the 14 self-storage facilities from Rising Tide for $121 million, each of the parties to the agreement executed various agreements.  A summary of the various agreements follows:

 

                  Standstill Agreement.  Robert J. Amsdell, Barry L. Amsdell and Todd C. Amsdell agreed that through June 30, 2008, they would not commence or participate in any proxy solicitation or initiate any shareholder proposal; take any action to convene a meeting of shareholders; or take any actions, including making any public or private proposal or announcement, that could result in an extraordinary corporate transaction relating to the Company.

 

                  First Amendment to Lease.  The Operating Partnership and Amsdell and Amsdell, an entity owned by Robert and Barry Amsdell, entered into a First Amendment to Lease which modified certain terms of all of the lease agreements the Operating Partnership has with Amsdell and Amsdell for office space in Cleveland, Ohio.  The First Amendment provided the Operating Partnership the ability to assign or sublease the office space previously used for its corporate office and certain operations.  Separately, Amsdell and Amsdell consented to the Operating Partnership’s proposed sublease to an unrelated party of approximately 22,000 square feet of office space covered by the aforementioned leases.

 

                  Termination of Option Agreement.  The Operating Partnership and Rising Tide entered into an Option Termination Agreement that terminated an Option Agreement dated October 27, 2004, by and between the Operating Partnership and Rising Tide.  The Option Agreement provided the Operating Partnership with an option to acquire Rising Tide’s right, title and interest to 18 properties, including:  the 14 Rising Tide Properties discussed above; three properties that the Operating Partnership acquired in 2005 pursuant to exercise of its option; and one undeveloped property that Rising Tide has the option to acquire and that was not acquired as a part of the purchase and sale agreement.

 

                  Termination of Property Management Agreement, and Marketing and Ancillary Services Agreement.  Certain of the Company’s subsidiaries and Rising Tide entered into a Property Management Termination Agreement and a Marketing and

 

14



 

Ancillary Services Termination Agreement. Under the Property Management Agreement, the Company provided property management services for the Rising Tide Properties for a fee equal to the greater of 5.35% of the gross revenues of each property or $1,500 per property per month.  Under the Marketing and Ancillary Services Agreement, the Company provided limited marketing and other miscellaneous services for the Rising Tide Properties.  In connection with the termination of the Property Management Agreement, expenses relating to property management will be prorated.

 

                  Amendment of Employment and Non-Compete Agreements.  As part of the Settlement Agreement, the Company entered into a Modification of Noncompetition Agreement and Termination of Employment Agreement (each a “Modification of Noncompetition Agreement and Termination of Employment Agreement”) with each of Robert J. Amsdell and Todd C. Amsdell, and a Modification of Noncompetition Agreement (“Modification of Noncompetition Agreement”) with Barry L. Amsdell, which terminates and modifies specific provisions of the noncompetition agreement the Company has with each of them, dated October 27, 2004 (the “Original Noncompetition Agreements”).  The Original Noncompetition Agreements restrict the ability of Robert J., Barry L. and Todd C. Amsdell to compete with the Company for one year and their ability to solicit employees of the Company for two years from the date of their termination employment or resignation from service as a Trustee.  Pursuant to these modification agreements, Todd C. Amsdell will be able to compete with the Company, and Robert J. and Barry L. Amsdell will be able to (a) develop the one Rising Tide property that the Company did not acquire under the Purchase Agreement and (b) compete with respect to any property identified as part of a Section 1031 “like-kind exchange” referenced in the purchase agreement.  Further, each Original Noncompetition Agreement is modified to allow each of them to hire, for any purpose, any employee or independent contractor who was terminated, has resigned or otherwise left the employment or other service of the Company or any of its affiliates on or prior to June 1, 2007.

 

The modification and Noncompetition Agreement and Termination of Employment Agreement with each of Robert J. Amsdell and Todd C. Amsdell also terminates the employment agreements the Company had with each of them, effective as of February 13, 2007 with respect to Robert J. Amsdell and February 19, 2007 with respect to Todd C. Amsdell.

 

Construction Services

 

Historically, the Company engaged Amsdell Construction, a company owned by Robert J. Amsdell and Barry L. Amsdell, to maintain and improve its self-storage facilities. The total payments incurred by the Company to Amsdell Construction during 2006 was approximately $11,000 and $42,000 for the three and nine months ended September 30, 2006, respectively.  The Company did not engage Amsdell Construction during 2007.

 

Office Leases

 

During 2005 and 2006, the Operating Partnership entered into various office lease agreements with Amsdell and Amsdell.  Pursuant to these lease agreements, during 2006 we rented office space from Amsdell and Amsdell at The Parkview Building, a multi-tenant office building of approximately 40,000 square feet located at 6745 Engle Road, an office building of approximately 18,000 square feet located at 6751 Engle Road, and an office building of approximately 28,000 square feet located at 6779 Engle Road.  Each of these properties is part of Airport Executive Park, a 50-acre office and flex development located in Cleveland, Ohio, which is owned by Amsdell and Amsdell. Our independent Trustees approved the terms of, and entry into, each of the office lease agreements by the Operating Partnership.  The table below shows the office space subject to these lease agreements and certain key provisions, including the term of each lease agreement, the period for which the Operating Partnership may extend the term of each lease agreement, and the minimum and maximum rents payable per month during the term.

 

Office Space

 

Approximate 
Square Footage

 

Term

 

Period of 
Extension Option (1)

 

Fixed Minimum
Rent Per Month

 

Fixed 
Maximum Rent
Per Month

 

The Parkview Building
— 6745 Engle Road; and
6751 Engle Road

 

21,900

 

12/31/2014

 

Five-year

 

$

25,673

 

$

31,205

 

6745 Engle Road —
Suite 100

 

2,212

 

12/31/2014

 

Five-year

 

$

3,051

 

$

3,709

 

6745 Engle Road —
Suite 110

 

1,731

 

12/31/2014

 

Five-year

 

$

2,387

 

$

2,901

 

6751 Engle Road —
Suites C and D

 

3,000

 

12/31/2014

 

Five-year

 

$

3,137

 

$

3,771

 

6779 Engle Road —
Suites G and H

 

3,500

 

12/31/2008

 

Five-year

 

$

3,079

 

$

3,347

 

6745 Engle Road —
Suite 120

 

1,600

 

4/30/2007

 

Three-year

 

$

1,800

 

$

1,900

 

6779 Engle Road —
Suites I and J

 

3,500

 

 

(2)

N/A

 

$

3,700

 

N/A

 

 

15



 


(1)          The Operating Partnership may extend the lease agreement beyond the termination date by the period set forth in this column at prevailing market rates upon the same terms and conditions contained in each of the lease agreements.

 

(2)          In June 2006, the Operating Partnership terminated this lease agreement which had a month-to-month term.

 

In addition to monthly rent, the office lease agreements provide that the Operating Partnership reimburse Amsdell and Amsdell for certain maintenance and improvements to the leased office space.  The aggregate amount of payments by us to Amsdell and Amsdell under these lease agreements for the three and nine months ended September 30, 2006 was approximately $0.2 and $0.4 and the aggregate amount of payments by us to Asdell and Amsdell under these lease agreements for the three and nine months ended September 30, 2007 was approximately $0.1 and $0.3 million, respectively.

 

Total future minimum rental payments under the related party lease agreements entered into as of September 30, 2007 are as follows:

 

 

 

Related Party

 

 

 

Amount

 

 

 

(in thousands)

 

 

 

 

 

2007

 

$

119

 

2008

 

468

 

2009

 

453

 

2010

 

453

 

2011

 

475

 

2012 and thereafter

 

1,473

 

 

 

$

3,441

 

 

Aircraft Lease

 

The Company chartered an aircraft from Aqua Sun Investments, L.L.C. (“Aqua Sun”), a company owned by Robert J. Amsdell and Barry L. Amsdell. The Company was under contract pursuant to a timesharing agreement to reimburse Aqua Sun at the rate of $1,250 for each hour of use of the aircraft and the payment of certain expenses associated with the use of the aircraft. As described in the paragraph below, effective June 30, 2005 the timesharing agreement was terminated by mutual agreement of the parties thereto and was replaced on July 1, 2005 with a non-exclusive aircraft lease agreement with Aqua Sun (the “Aircraft Lease”). The Company’s independent Trustees approved the terms of, and the entry into, the Aircraft Lease by the Operating Partnership.

 

The Operating Partnership was able to lease for corporate use from time to time an airplane owned by Aqua Sun at an hourly rate of $1,450 per flight hour. Aqua Sun was responsible for various costs associated with operation of the airplane, including insurance, storage and maintenance and repair, but the Operating Partnership was responsible for fuel costs and the costs of pilots and other cabin personnel required for its use of the airplane. The Aircraft Lease, which was effective as of July 1, 2005, had a one-year term and was terminated on June 30, 2006. The total amounts incurred for such aircraft charters described above by the Company for the nine months ended September 30, 2006 was approximately $0.1 million. No amounts were incurred after June 30, 2006 when the lease was terminated.

 

Other

 

During the fourth quarter of 2006, the Company engaged a consultant to assist in establishing certain development protocols and processes. In connection with that assignment, the outside consultant utilized the services of the son-in-law of Dean Jernigan, President and Chief Executive Officer of the Company. Our payments for Jernigan’s son-in-law’s services totaled $110 thousand through September 30, 2007.

 

16



 

The Company, in accordance with a contract signed on April 3, 2006, acquired nine self-storage facilities from Jernigan Property Group on July 27, 2006 for consideration of approximately $45.3 million. Our President and Chief Executive Officer, Dean Jernigan, serves as President of Jernigan Property Group and has a 20% beneficial interest in one self-storage facility partially owned by Jernigan Property Group and related companies and partnerships. Mr. Jernigan has agreed that he will not expand his interest, ownership or activity in the self-storage business. Given Mr. Jernigan’s appointment as a Trustee and the President and Chief Executive Officer of the Company on April 24, 2006, this transaction was subject to review and final approval by a majority of the independent members of the Company’s Board of Trustees. Mr. Jernigan has discontinued all involvement in the day-to-day management or operation of the Jernigan Property Group.

 

The Company engaged Dunlevy Building Systems Inc., a company owned by John Dunlevy, a brother-in-law of Robert J. Amsdell and Barry L. Amsdell, for construction, zoning consultant and general contractor services at certain of its self-storage facilities. The total payments incurred by the Company to Dunlevy Building Systems Inc. for the nine months ended September 30, 2006 were approximately $19,000.  No amounts were incurred subsequent to June 30, 2006.

 

Registration Rights

 

Robert J. Amsdell, Barry L. Amsdell, Todd C. Amsdell and the “Amsdell Entities” that acquired common shares or Operating Partnership units in the formation transactions which took place at the time of the IPO received certain registration rights. An aggregate of approximately 9.7 million common shares acquired in the formation transactions were subject to a registration rights agreement (including approximately 1.1 million shares issuable upon redemption of approximately 1.1 million Operating Partnership units issued in the formation transactions).

 

In addition, Rising Tide Development received registration rights with respect to the Operating Partnership units it received in connection with the Company’s acquisition of three option facilities. An aggregate of approximately 0.4 million common shares (which shares are issuable upon redemption of approximately 0.4 million Operating Partnership units issued in connection with the Company’s option exercises) were subject to a registration rights agreement.

 

In March 2007, the Company filed a Registration Statement on Form S-3 to satisfy all of the abovementioned registration rights.

 

10.  PRO FORMA FINANCIAL INFORMATION

 

During 2006, the Company acquired 60 self-storage facilities for an aggregate purchase price of approximately $362.4 million. During 2007, the Company acquired 17 self-storage facilities for an aggregate purchase price of approximately $140.5 million and sold three self-storage facilities for an aggregate purchase price of approximately $12.8 million.

 

The unaudited condensed consolidated pro forma financial information set forth below reflects adjustments to the Company’s historical financial data to give effect to each of the acquisitions and related financing activity that occurred subsequent to January 1, 2006 as if each had occurred on January 1, 2006.  The unaudited pro forma information presented below does not purport to represent what the Company’s actual results of operations would have been for the periods indicated, nor does it purport to represent the Company’s future results of operations.

 

The following table summarizes, on a pro forma basis, our consolidated results of operations for the nine months ended September 30, 2007 and 2006 based on the assumptions described above:

 

 

 

Nine Months Ended September 30,

 

 

 

2007

 

2006

 

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

Pro forma revenue

 

$

176,224

 

$

172,810

 

Pro forma loss from continuing operations

 

$

(16,093

)

$

(14,540

)

Loss per common share from continuing operations

 

 

 

 

 

Basic and diluted - as reported

 

$

(0.16

)

$

(0.05

)

Basic and diluted - as pro forma

 

$

(0.28

)

$

(0.25

)

 

17



 

11.  DISCONTINUED OPERATIONS

 

For the three and nine month periods ended September 30, 2007 and September 30, 2006, income from discontinued operations relates to three properties that the Company sold in 2007.  The following table summarizes the revenue and expense information for the properties classified as discontinued operations for the three and nine month periods ended September 30, 2007 and September 30, 2006 (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

REVENUES

 

 

 

 

 

 

 

 

 

Rental income

 

$

 

$

415

 

$

587

 

$

1,198

 

Other property related income

 

 

21

 

41

 

62

 

Total revenues

 

 

436

 

628

 

1,260

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

145

 

267

 

440

 

Depreciation

 

 

93

 

157

 

279

 

Total operating expenses

 

 

238

 

424

 

719

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

 

198

 

204

 

541

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

Interest:

 

 

 

 

 

 

 

 

 

Interest expense on loans

 

 

(92

)

(86

)

(272

)

Loan procurement amortization expense

 

 

(1

)

(1

)

(5

)

Interest income

 

 

 

1

 

1

 

Total other expense

 

 

(93

)

(86

)

(276

)

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

 

105

 

118

 

265

 

Gain on disposition of discontinued operations

 

 

 

2,122

 

 

Minority interest attributable to discontinued operations

 

 

(9

)

(184

)

(20

)

Income from discontinued operations

 

$

 

$

96

 

$

2,056

 

$

245

 

 

Interest expense and related amortization of loan procurement costs have been attributed to the properties disposed of as applicable and included in the results of discontinued operations.

 

12.  LEASE ABANDONMENT CHARGE

 

In August 2007, the Company abandoned certain office space in Cleveland, OH that was previously used for its corporate offices.  The related leases have expiration dates ranging from December 31, 2008 through December 31, 2014. Upon vacating the space, the Company entered into a sub-lease agreement with a sub-tenant to lease the majority of the space for the duration of the term.

 

As a result of this exit activity, the Company recognized a “Lease abandonment charge” of $1.3 million during the three months ended September 30, 2007.  The charge is comprised of approximately $0.8 million of costs that represent the present value of the net cash flows associated with leases and the sub-lease agreement (“Contract Termination Costs”) and approximately $0.5 million of costs associated with the write-off of certain assets related to the abandoned space (“Other Associated Costs”).  The Contract Termination Costs of $0.8 million are presented as “Accounts payable and accrued rent” and the Other Associated Costs of $0.5 million were accounted for as a reduction of “Storage facilities.”  The Company will amortize the Contract Termination Costs against rental expense over the remaining life of the respective leases.

 

18



 

13.  INTANGIBLE ASSETS

 

During the three months ended September 30, 2007 (see Note 9), the Company acquired finite-lived intangible assets valued at approximately $5.3 million as part of its acquisition of 14 self-storage facilities.  The Company recognized $0.2 million of amortization during the three-month period ended September 30, 2007.  The estimated life of these assets is 12 months and the estimated remaining amortization expense that will be recognized during 2007 and 2008 is $1.3 million and $3.8 million, respectively.

 

19



 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following Management’s Discussion and Analysis gives effect to the restatements discussed in Note 2 to the unaudited condensed consolidated financial statements.

 

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. The Company makes certain statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this report entitled “Forward-Looking Statements.” Certain risk factors may cause actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see the section in this report entitled “Risk Factors.”

 

Overview

 

On October 27, 2004, the Company completed its initial public offering, or IPO, pursuant to which it sold an aggregate of 28,750,000 common shares (including 3,750,000 shares pursuant to the exercise of the underwriters’ over-allotment option) at an offering price of $16.00 per share. The IPO resulted in gross proceeds to the Company of $460.0 million. On October 7, 2005, the Company completed a follow-on public offering, pursuant to which it sold an aggregate of 19,665,000 common shares (including 2,565,000 shares pursuant to the exercise of the underwriters’ over-allotment option) at an offering price of $20.35 per share, for gross proceeds of approximately $400.2 million.

 

The Company is an integrated self-storage real estate company, which means that it has in-house capabilities in the operation, design, development, leasing, and acquisition of self-storage facilities. The Company has elected to be taxed as a REIT for federal tax purposes. At September 30, 2007 and December 31, 2006, the Company owned 411 and 399 self-storage facilities, respectively, totaling approximately 26.2 million and 25.4 million square feet, respectively.

 

The Company derives revenues principally from rents received from our customers who rent units at our self-storage facilities under month-to-month leases. Therefore, our operating results depend materially on our ability to retain our existing customers and lease our available self-storage units to new customers while maintaining and, where possible, increasing our pricing levels. In addition, our operating results depend on the ability of our customers to make required rental payments to us.  We believe that our decentralized approach to the management and operation of our facilities allows us to respond quickly and effectively to changes in local market conditions.  Emphasis on local, market level oversight and control enhances our ability to optimize occupancy and pricing levels.

 

The Company experiences minor seasonal fluctuations in the occupancy levels of our facilities, which are generally slightly higher during the summer months due to increased moving activity.

 

In the future, the Company intends to focus on maximizing our internal growth and selectively pursuing targeted acquisitions and developments of self-storage facilities. In addition, we intend to selectively dispose of self-storage facilities that no longer meet our operating criteria or that we deem to be in areas that are no longer strategically important to us.  We intend to incur additional debt in connection with any such future acquisitions or developments.

 

The Company has one reportable operating segment: we own, operate, develop, and acquire self-storage facilities.

 

The Company’s self-storage facilities are located in major metropolitan areas and have numerous tenants per facility. All our operations are within the United States and no single tenant represents 1% or more of our revenues. The facilities in Florida, California, Texas and Illinois provided approximately 18%, 15%, 8% and 7%, respectively, of total revenues for the nine months ended September 30, 2007.

 

Summary of Critical Accounting Policies and Estimates

 

Set forth below is a summary of the accounting policies that management believes are critical to the preparation of the unaudited condensed consolidated  financial statements included in this report. Certain of the accounting policies used in the preparation of these consolidated financial statements are particularly important for an understanding of the financial position and results of operations presented in the historical condensed consolidated financial statements included in this report. These policies require the application of

 

20



 

judgment and assumptions by management and, as a result, are subject to a degree of uncertainty. Due to this uncertainty, actual results could differ from estimates calculated and utilized by management.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements include all of the accounts of the Company, the Operating Partnership and the wholly-owned subsidiaries of the Operating Partnership.

 

Self-Storage Facilities

 

The Company records self-storage facilities at cost less accumulated depreciation. Depreciation on the buildings and equipment is recorded on a straight-line basis over their estimated useful lives, which range from five to 39 years. Expenditures for significant renovations or improvements that extend the useful life of assets are capitalized. Repairs and maintenance costs are expensed as incurred.

 

When facilities are acquired, the purchase price is allocated to the tangible and intangible assets acquired and liabilities assumed based on estimated fair values. When a portfolio of facilities is acquired, the purchase price is allocated to the individual facilities based upon an income approach or a cash flow analysis using appropriate risk adjusted capitalization rates, which take into account the relative size, age and location of the individual facility along with current and projected occupancy and rental rate levels or appraised values, if available. Allocations to the individual assets and liabilities are based upon comparable market sales information for land, buildings and improvements and estimates of depreciated replacement cost of equipment.

 

In allocating the purchase price, the Company determines whether the acquisition includes intangible assets or liabilities. Substantially all of the leases in place at acquired facilities are at market rates, as the majority of the leases are month-to-month contracts. Accordingly, to date no portion of the purchase price has been allocated to above- or below-market lease intangibles.  To date, no intangible asset has been recorded for the value of tenant relationships, because the Company does not have any concentrations of significant tenants and the average tenant turnover is fairly frequent. While intangible assets for in-place leases have not historically been recorded, the Company recorded a $5.3 million intangible asset to recognize the value of in-place leases related to its acquisition of 14 self-storage facilities during the third quarter of 2007.

 

Long-lived assets classified as “held for use” are reviewed for impairment when events and circumstances indicate that there may be an impairment. The carrying values of these long-lived assets are compared to the undiscounted future net operating cash flows attributable to the assets. An impairment loss is recorded if the net carrying value of the asset exceeds the fair value based on its undiscounted future net operating cash flows attributable to the asset and circumstances indicate that the carrying value of the real estate asset may not be recoverable. The impairment loss recognized equals the excess of net carrying value over the related fair value of the asset.

 

The Company considers long-lived assets to be “held for sale” upon satisfaction of the following criteria: (a) management commits to a plan to sell a facility (or group of facilities), (b) the facility is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such facilities, (c) an active program to locate a buyer and other actions required to complete the plan to sell the facility have been initiated, (d) the sale of the facility is probable and transfer of the asset is expected to be completed within one year, (e) the facility is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and (f) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

 

Typically these criteria are all met when the relevant assets are under contract, significant non-refundable deposits have been made by the potential buyer, the assets are immediately available for transfer and there are no contingencies related to the sale that may prevent the transaction from closing. In most transactions, these contingencies are not satisfied until the actual closing of the transaction; and, accordingly, the facility is not identified as held for sale until the closing actually occurs. However, each potential transaction is evaluated based on its separate facts and circumstances.

 

21



 

Revenue Recognition

 

Management has determined that all of our leases with tenants are operating leases. Rental income is recognized in accordance with the terms of the lease agreements or contracts, which generally are month-to-month. Revenues from long-term operating leases are recognized on a straight-line basis over the term of the lease. The excess of rents recognized over amounts contractually due pursuant to the underlying leases is included in deferred revenue, and contractually due but unpaid rents are included in other assets.

 

Share-Based Payments

 

We apply the fair value method of accounting for contingently issued shares and share options issued under our incentive award plans. Accordingly, share compensation expense was recorded ratably over the vesting period relating to such contingently issued shares and options. The Company has elected to recognize compensation expense on a straight-line method over the requisite service period. Compensation expense recorded for the three months ended September 30, 2007 and 2006 was approximately $0.5 million and $0.6 million, respectively, and $1.3 million and $1.0 million for the nine months ended September 30, 2007 and 2006, respectively.

 

Minority Interests

 

Minority Interests include income allocated to holders of the Operating Partnership units. Income is allocated to the minority interests based on their ownership percentage of the Operating Partnership. This ownership percentage, as well as the total net assets of the Operating Partnership, changes when additional shares of our common stock or Operating Partnership units are issued. Such changes result in an allocation between shareholders’ equity and Minority Interests in the Consolidated Balance Sheets. Due to the number of such capital transactions that occur each period, we present the single net effect of all such allocations for the period as “Adjustment for Minority Interest in Operating Partnership” in our Consolidated Statements of Shareholders’ Equity (rather than separately allocating the minority interests for each individual capital transaction).

 

Recent Accounting Pronouncements

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value, with unrealized gains and losses related to these financial instruments reported in earnings at each subsequent reporting date. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is in the process of evaluating the impact of SFAS No. 159 on its financial statements.

 

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 provides guidance for using fair value to measure assets and liabilities. This statement clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing the asset or liability. SFAS No. 157 establishes a fair value hierarchy, giving the highest priority to quoted prices in active markets and the lowest priority to unobservable data. SFAS No. 157 applies whenever other standards require assets or liabilities to be measured at fair value. This statement is effective in fiscal years beginning after November 15, 2007. The Company believes that the adoption of this standard on January 1, 2008 will not have a material effect on our consolidated financial statements.

 

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on description, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 became effective for the Company on January 1, 2007. The adoption of this standard had no impact on the consolidated financial statements.

 

Results of Operations

 

The following discussion of our results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the accompanying notes thereto. Historical results set forth in the condensed consolidated statements of operations reflect only the existing facilities and should not be taken as indicative of future operations.

 

22



 

Acquisition and Development Activities

 

The comparability of the Company’s results of operations is affected by acquisition and disposition activities in 2007 and 2006. At September 30, 2007 and 2006, the Company owned 411 and 399 self-storage facilities and related assets, respectively.

 

The following table summarizes the acquisition activity that the Company completed during the nine months ended September 30, 2007:

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

Total Rentable

 

Number of

 

 

 

Facility/Portfolio

 

Acquisition Date

 

Square Feet

 

Facilities

 

Purchase Price

 

 

 

 

 

 

 

 

 

 

 

 

Sanford Portfolio

 

January 2007

 

72,550

 

1

 

$

6,300

 

Grand Central Portfolio

 

January 2007

 

166,090

 

2

 

13,200

 

Rising Tide Portfolio

 

September 2007

 

1,100,050

 

14

 

121,100

 

 

 

2007 Total

 

1,338,690

 

17

 

$

140,600

 

 

The acquisitions listed are included in the Company’s results of operations from and after the acquisition date.

 

Comparison of Operating Results for the Three Months Ended September 30, 2007 and September 30, 2006

 

A comparison of net loss for the three months ended September 30, 2007 and September 30, 2006 is as follows (in thousands):

 

23



 

 

 

Three Months Ended September 30,

 

 

 

2007

 

2006

 

REVENUES

 

 

 

 

 

Rental income

 

$

53,969

 

$

52,021

 

Other property related income

 

4,236

 

3,823

 

Other - related party

 

101

 

126

 

Total revenues

 

58,306

 

55,970

 

OPERATING EXPENSES

 

 

 

 

 

Property operating expenses

 

25,110

 

21,856

 

Property operating expenses - related party

 

8

 

15

 

Depreciation

 

17,068

 

16,312

 

Asset write-off

 

 

307

 

Lease abandonment

 

1,316

 

 

General and administrative

 

5,173

 

7,289

 

General and administrative - related party

 

118

 

73

 

Total operating expenses

 

48,793

 

45,852

 

OPERATING INCOME

 

9,513

 

10,118

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

Interest:

 

 

 

 

 

Interest expense on loans

 

(13,666

)

(11,917

)

Loan procurement amortization expense

 

(445

)

(527

)

Interest income

 

104

 

95

 

Other

 

 

(14

)

Total other expense

 

(14,007

)

(12,363

)

LOSS BEFORE MINORITY INTERESTS AND DISCONTINUED OPERATIONS

 

(4,494

)

(2,245

)

MINORITY INTERESTS

 

364

 

187

 

LOSS FROM CONTINUING OPERATIONS

 

(4,130

)

(2,058

)

DISCONTINUED OPERATIONS

 

 

 

 

 

Income from operations

 

 

105

 

Minority interest attributable to discontinued operations

 

 

(9

)

Income from discontinued operations

 

 

96

 

NET LOSS

 

$

(4,130

)

$

(1,962

)

 

Total Revenues

 

Rental income increased from $52.0 million for the three months ended September 30, 2006 to $53.9 million for the three months ended September 30, 2007, an increase of $1.9 million, or 4%. This increase is primarily attributable to additional rental income from the 2006 and 2007 acquisitions as well as $0.9 million from our same-store facilities.

 

Other property related income, including Other - related party, increased from $3.9 million for the three months ended September 30, 2006 to $4.3 million for the three months ended September 30, 2007, an increase of $0.4 million, or 10%. This increase is attributable to other property income from the 2006 and 2007 acquisitions as well as an increase of $0.1 million from our same-store facilities.

 

Total Operating Expenses

 

Property operating expenses, including Property operating expenses – related party, increased from $21.9 million for the three months ended September 30, 2006 to $25.1 million for the three months ended September 30, 2007, an increase of $3.2 million, or 15%. This increase is primarily attributable to additional operating expenses from the 2006 and 2007 acquisitions as well as $1.4

 

24



 

million from our same-store facilities. Increases in operating expenses from the same-store facilities were primarily: (i) $0.7 million of additional property level personnel expenses primarily as a result of facilities being open on Sundays during 2007, and (ii) $0.4 million of increased repair and maintenance costs.

 

General and administrative expenses, including General and administrative – related party, decreased from $7.4 million for the three months ended September 30, 2006 to $5.3 million for the three months ended September 30, 2007, a decrease of $2.1 million, or 29%. The decrease is primarily attributable to severance costs of approximately $2.1 million in the 2006 period, related to a Company restructuring of certain management positions. Depreciation increased from $16.3 million for the three months ended September 30, 2006 to $17.1 million for the three months ended September 30, 2007, an increase of $0.8 million, or 5%. The increase is primarily attributable to additional depreciation expense related to the 2006 and 2007 acquisitions.

 

In August 2007, the Company abandoned certain office space in Cleveland, OH that was previously used for its corporate offices. The related leases have expiration dates ranging from December 31, 2008 through December 31, 2014. Upon vacating the space, the Company entered into a sub-lease agreement with a sub-tenant to lease the majority of the space for the duration of the term. As a result of this exit activity, the Company recognized a “Lease abandonment charge” of $1.3 million during the three months ended September 30, 2007.

 

Total Other Expenses

 

Interest expense increased from $11.9 million for the three months ended September 30, 2006 to $13.7 million for the three months ended September 30, 2007, an increase of $1.8 million, or 15%. The increase is attributable to a higher amount of outstanding debt during the three months ended September 30, 2007, primarily resulting from the financing of certain of the 2006 and 2007 acquisitions with additional borrowings.

 

25



 

Comparison of Operating Results for the Nine Months Ended September 30, 2007 and September 30, 2006

 

A comparison of net loss for the nine months ended September 30, 2007 and September 30, 2006 is as follows (in thousands):

 

 

 

Nine Months Ended September 30,

 

 

 

2007

 

2006

 

REVENUES

 

 

 

 

 

Rental income

 

$

156,481

 

$

145,906

 

Other property related income

 

12,929

 

10,501

 

Other - related party

 

340

 

340

 

Total revenues

 

169,750

 

156,747

 

OPERATING EXPENSES

 

 

 

 

 

Property operating expenses

 

70,475

 

61,375

 

Property operating expenses - related party

 

59

 

47

 

Depreciation

 

50,475

 

46,532

 

Asset write-off

 

 

307

 

Lease abandonment

 

1,316

 

 

General and administrative

 

16,736

 

16,810

 

General and administrative - related party

 

337

 

523

 

Total operating expenses

 

139,398

 

125,594

 

OPERATING INCOME

 

30,352

 

31,153

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

Interest:

 

 

 

 

 

Interest expense on loans

 

(39,398

)

(32,714

)

Loan procurement amortization expense

 

(1,334

)

(1,500

)

Write-off of loan procurement cost due to early extinguishment of debt

 

 

(1,273

)

Interest income

 

308

 

1,138

 

Other

 

(6

)

(74

)

Total other expense

 

(40,430

)

(34,423

)

LOSS BEFORE MINORITY INTERESTS AND DISCONTINUED OPERATIONS

 

(10,078

)

(3,270

)

MINORITY INTERESTS

 

822

 

271

 

LOSS FROM CONTINUING OPERATIONS

 

(9,256

)

(2,999

)

DISCONTINUED OPERATIONS

 

 

 

 

 

Income from operations

 

118

 

265

 

Gain on disposition of discontinued operations

 

2,122

 

 

Minority interest attributable to discontinued operations

 

(184

)

(20

)

Income from discontinued operations

 

2,056

 

245

 

NET LOSS

 

$

(7,200

)

$

(2,754

)

 

Total Revenues

 

Rental income increased from $145.9 million for the nine months ended September 30, 2006 to $156.5 million for the nine months ended September 30, 2007, an increase of $10.6 million, or 7%. This increase is primarily attributable to additional rental income from the 2006 and 2007 Acquisitions.

 

Other property related income, including Other - related party, increased from $10.8 million for the nine months ended September 30, 2006 to $13.3 million for the nine months ended September 30, 2007, an increase of $2.4 million, or 22%. This increase is primarily attributable to the other property income from the 2006 and 2007 Acquisitions.

 

26



 

Total Operating Expenses

 

Property operating expenses, including Property operating expenses – related party, increased from $61.4 million for the nine months ended September 30, 2006 to $70.5 million for the nine months ended September 30, 2007, an increase of $9.1 million, or 15%. This increase is primarily attributable to additional operating expenses from the 2006 and 2007 acquisitions.

 

General and administrative expenses, including General and administrative – related party, decreased from $17.3 million for the nine months ended September 30, 2006 to $17.1 million for the nine months ended September 30, 2007, a decrease of $0.2 million, or 1%. The 2006 period includes approximately $2.1 million of severance costs related to a Company restructuring of certain management positions; the 2007 period includes approximately $1.2 million of non-recurring legal and other costs associated with the litigation and related settlement with the Amsdells, as well as the previously disclosed restatements and inquiry. Depreciation increased from $46.5 million for the nine months ended September 30, 2006 to $50.5 million for the nine months ended September 30, 2007, an increase of $4.0 million, or 9%. The increase is primarily attributable to additional depreciation expense related to the 2006 and 2007 acquisitions.

 

In August 2007, the Company abandoned certain office space in Cleveland, OH that was previously used for its corporate offices. The related leases have expiration dates ranging from December 31, 2008 through December 31, 2014. Upon vacating the space, the Company entered into a sub-lease agreement with a sub-tenant to lease the majority of the space for the duration of the term. As a result of this exit activity, the Company recognized a “Lease abandonment charge” of $1.3 million during the nine months ended September 30, 2007.

 

Total Other Expenses

 

Interest expense increased from $32.7 million for the nine months ended September 30, 2006 to $39.4 million for the nine months ended September 30, 2007, an increase of $6.7 million, or 20%. The increase is attributable to a higher amount of outstanding debt during the nine months ended September 30, 2007, primarily resulting from the financing of certain of the 2006 and 2007 Acquisitions with additional borrowings.

 

In conjunction with replacing the credit facility in February 2006, the Company incurred charges of $1.3 million relating to the write-off of unamortized loan procurement costs.

 

Interest income decreased to $0.3 million for the nine months ended September 30, 2007 from $1.1 million for the nine months ended September 30, 2006. This decrease is primarily attributable to the Company’s investment of excess proceeds from the 2005 follow-on public offering in interest bearing accounts and in short-term marketable securities until the excess proceeds were used to fund acquisitions or pay down existing debt during the 2006 period.

 

Same-Store Facility Results

 

The Company considers its same-store portfolio to consist of only those facilities owned at the beginning and at the end of the applicable periods presented. The following same-store presentation is considered to be useful to investors in evaluating our performance because it provides information relating to changes in facility-level operating performance without taking into account the effects of acquisitions, developments or dispositions. The following table sets forth operating data for our same-store portfolio for the periods presented.

 

27



 

Comparison of the Three Months Ended September 30, 2007 to the Three Months Ended September 30, 2006

 

The following table provides information pertaining to our same-store portfolio for the three months ended September 30, 2007 and 2006 (dollars in thousands):

 

 

 

Same-Store Property Portfolio

 

Properties