Table of Contents

 

 

 

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 June 30, 2010.

 

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.)

 

 

 

460 East Swedesford Road

 

 

Wayne, Pennsylvania

 

19087

(Address of Principal Executive Offices)

 

(Zip Code)

 

(610) 293-5700

(Registrant’s Telephone Number, Including Area Code)

 


 

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company 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 August 2, 2010

common shares, $.01 par value

 

93,642,380

 

 

 



Table of Contents

 

U-STORE-IT TRUST

TABLE OF CONTENTS

 

Part I. FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

 

4

Item 2.

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

 

15

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

26

Item 4.

Controls and Procedures

 

26

Part II. OTHER INFORMATION

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

27

Item 5.

Other Information

 

27

Item 6.

Exhibits

 

28

 

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, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions and other information that is not historical information.  In some cases, forward-looking statements can be identified by terminology such as “believes,” “expects,” “estimates,” “may,” “will,” “should,” “anticipates,” or “intends” or the negative of such terms or other comparable terminology, or by discussions of strategy.  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.  As a result, you should not rely on or construe any forward-looking statements in this Report, or which management may make orally or in writing from time to time, as predictions of future events or as guarantees of future performance.  We caution you not to place undue reliance on forward-looking statements, which speak only as of the date of this Report or as of the dates otherwise indicated in the statements.  All of our forward-looking statements, including those in this Report, are qualified in their entirety by this statement.

 

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in or contemplated by this Report.  Any forward-looking statements should be considered in light of the risks and uncertainties referred to in Item 1A. “Risk Factors” in the U-Store-It Trust Annual Report on Form 10-K for the year ended December 31, 2009 and in our other filings with the Securities and Exchange Commission (“SEC”).  These risks include, but are not limited to, the following:

 

·                  changes in national and local economic, business, real estate and other market conditions which, among other things, reduce demand for self-storage facilities or increase costs of owning and operating self-storage facilities;

 

·                  competition from other self-storage facilities and storage alternatives, which could result in lower occupancy and decreased rents;

 

·                  the execution of our business plan;

 

·                  financing risks including the risk of over-leverage and the corresponding risk of default on our mortgage and other debt and potential inability to refinance existing indebtedness;

 

·                  increases in interest rates and operating costs;

 

·                  counterparty non-performance related to the use of derivative financial instruments;

 

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

 

2



Table of Contents

 

·                  acquisition and development risks, including unanticipated costs associated with the integration and operation of acquisitions;

 

·                  risks of investing through joint ventures, including risks that our joint venture partners may not fulfill their obligations or may pursue actions that are inconsistent with our objectives;

 

·                  changes in real estate and zoning laws or regulations;

 

·                  risks related to natural disasters;

 

·                  potential environmental and other liabilities; and

 

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

 

Given these uncertainties and the other risks identified elsewhere in our Annual Report on Form 10-K and in this Report, we caution readers not to place undue reliance on forward-looking statements.  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 by securities laws.

 

3



Table of Contents

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

U-STORE-IT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Storage facilities

 

$

1,739,617

 

$

1,774,542

 

Less: Accumulated depreciation

 

(336,392

)

(344,009

)

Storage facilities, net

 

1,403,225

 

1,430,533

 

Cash and cash equivalents

 

31,877

 

102,768

 

Restricted cash

 

13,961

 

16,381

 

Loan procurement costs, net of amortization

 

16,458

 

18,366

 

Notes receivable

 

256

 

20,112

 

Other assets, net

 

19,257

 

10,710

 

Total assets

 

$

1,485,034

 

$

1,598,870

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

Secured term loan

 

$

200,000

 

$

200,000

 

Mortgage loans and notes payable

 

465,854

 

569,026

 

Accounts payable, accrued expenses and other liabilities

 

35,400

 

33,767

 

Distributions payable

 

2,435

 

2,448

 

Deferred revenue

 

8,932

 

8,449

 

Security deposits

 

428

 

456

 

Total liabilities

 

713,049

 

814,146

 

 

 

 

 

 

 

Noncontrolling interests in the Operating Partnership

 

44,731

 

45,394

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Common shares $.01 par value, 200,000,000 shares authorized, 92,958,089 and 92,654,979 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively

 

930

 

927

 

Additional paid in capital

 

977,211

 

974,926

 

Accumulated other comprehensive loss

 

(1,104

)

(874

)

Accumulated deficit

 

(292,350

)

(279,670

)

Total U-Store-It Trust shareholders’ equity

 

684,687

 

695,309

 

Noncontrolling interest in subsidiaries

 

42,567

 

44,021

 

Total equity

 

727,254

 

739,330

 

Total liabilities and equity

 

$

1,485,034

 

$

1,598,870

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

4



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U-STORE-IT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

REVENUES

 

 

 

 

 

 

 

 

 

Rental income

 

$

49,465

 

$

49,807

 

$

98,461

 

$

101,052

 

Other property related income

 

4,702

 

4,480

 

8,780

 

8,170

 

Property management fee income

 

590

 

 

634

 

 

Total revenues

 

54,757

 

54,287

 

107,875

 

109,222

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

Property operating expenses

 

24,421

 

24,920

 

47,390

 

48,568

 

Depreciation and amortization

 

16,363

 

17,756

 

32,741

 

35,583

 

General and administrative

 

6,844

 

5,628

 

12,711

 

11,102

 

Total operating expenses

 

47,628

 

48,304

 

92,842

 

95,253

 

OPERATING INCOME

 

7,129

 

5,983

 

15,033

 

13,969

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

Interest:

 

 

 

 

 

 

 

 

 

Interest expense on loans

 

(9,625

)

(11,473

)

(19,676

)

(22,826

)

Loan procurement amortization expense

 

(1,620

)

(545

)

(3,159

)

(1,028

)

Interest income

 

62

 

55

 

597

 

100

 

Acquisition related costs

 

(300

)

 

(300

)

 

Other

 

(35

)

(1

)

(76

)

(13

)

Total other expense

 

(11,518

)

(11,964

)

(22,614

)

(23,767

)

 

 

 

 

 

 

 

 

 

 

LOSS FROM CONTINUING OPERATIONS

 

(4,389

)

(5,981

)

(7,581

)

(9,798

)

 

 

 

 

 

 

 

 

 

 

DISCONTINUED OPERATIONS

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

 

775

 

 

1,804

 

Net gain on disposition of discontinued operations

 

 

2,120

 

 

2,622

 

Total discontinued operations

 

 

2,895

 

 

4,426

 

NET LOSS

 

(4,389

)

(3,086

)

(7,581

)

(5,372

)

NET LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

 

 

 

 

 

 

 

 

Noncontrolling interests in the Operating Partnership

 

233

 

242

 

411

 

419

 

Noncontrolling interest in subsidiaries

 

(365

)

 

(826

)

 

NET LOSS ATTRIBUTABLE TO THE COMPANY

 

$

(4,521

)

$

(2,844

)

$

(7,996

)

$

(4,953

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per share from continuing operations attributable to common shareholders

 

$

(0.05

)

$

(0.09

)

$

(0.09

)

$

(0.16

)

Basic and diluted earnings per share from discontinued operations attributable to common shareholders

 

$

 

$

0.04

 

$

 

$

0.07

 

Basic and diluted loss per share attributable to common shareholders

 

$

(0.05

)

$

(0.05

)

$

(0.09

)

$

(0.09

)

 

 

 

 

 

 

 

 

 

 

Weighted-average basic and diluted shares outstanding

 

92,925

 

58,165

 

92,880

 

57,928

 

 

 

 

 

 

 

 

 

 

 

AMOUNTS ATTRIBUTABLE TO THE COMPANY’S COMMON SHAREHOLDERS:

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(4,521

)

$

(5,507

)

$

(7,996

)

$

(9,020

)

Total discontinued operations

 

 

2,663

 

 

4,067

 

Net loss

 

$

(4,521

)

$

(2,844

)

$

(7,996

)

$

(4,953

)

 

See accompanying notes to the unaudited consolidated financial statements.

 

5



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U-STORE-IT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

For the Six-Month Periods Ended June 30, 2010 and 2009

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling

 

 

 

Common Shares

 

Additional
Paid in

 

Accumulated Other
Comprehensive

 

Accumulated

 

Total
Shareholders’

 

Noncontrolling
Interest in

 

Total

 

Interests in the
Operating

 

 

 

Number

 

Amount

 

Capital

 

Loss

 

Deficit

 

Equity

 

Subsidiaries

 

Equity

 

Partnership

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2009

 

92,655

 

$

927

 

$

974,926

 

$

(874

)

$

(279,670

)

$

695,309

 

$

44,021

 

$

739,330

 

$

45,394

 

Contributions from noncontrolling interests in subsidiaries

 

 

 

 

 

 

 

16

 

16

 

 

Issuance of restricted shares

 

201

 

2

 

 

 

 

2

 

 

2

 

 

Issuance of common shares

 

46

 

 

371

 

 

 

371

 

 

371

 

 

Exercise of stock options

 

52

 

1

 

180

 

 

 

181

 

 

181

 

 

Conversion from units to shares

 

4

 

 

 

 

 

 

 

 

 

Amortization of restricted shares

 

 

 

753

 

 

 

753

 

 

753

 

 

Share compensation expense

 

 

 

981

 

 

 

981

 

 

981

 

 

Net (loss) income

 

 

 

 

 

(7,996

)

(7,996

)

826

 

(7,170

)

(411

)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on foreign currency translation

 

 

 

 

(230

)

 

(230

)

(7

)

(237

)

(12

)

Distributions

 

 

 

 

 

(4,684

)

(4,684

)

(2,289

)

(6,973

)

(240

)

Balance at June 30, 2010

 

92,958

 

$

930

 

$

977,211

 

$

(1,104

)

$

(292,350

)

$

684,687

 

$

42,567

 

$

727,254

 

$

44,731

 

 

 

 

Common Shares

 

Additional
Paid in

 

Accumulated Other
Comprehensive

 

Accumulated

 

Total Shareholders’

 

Noncontrolling
Interest in

 

Total

 

Noncontrolling
Interests in the
Operating

 

 

 

Number

 

Amount

 

Capital

 

Loss

 

Deficit

 

Equity

 

Subsidiaries

 

Equity

 

Partnership

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2008

 

57,623

 

$

576

 

$

801,029

 

$

(7,553

)

$

(271,124

)

$

522,928

 

$

 

$

522,928

 

$

46,026

 

Issuance of restricted shares

 

84

 

1

 

 

 

 

1

 

 

1

 

 

Issuance of common shares

 

2,431

 

24

 

9,503

 

 

 

9,527

 

 

9,527

 

 

Amortization of restricted shares

 

 

 

825

 

 

 

825

 

 

825

 

 

Share compensation expense

 

 

 

890

 

 

 

890

 

 

890

 

 

Net loss

 

 

 

 

 

(4,953

)

(4,953

)

 

(4,953

)

(419

)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on interest rate swap

 

 

 

 

2,680

 

 

2,680

 

 

2,680

 

235

 

Unrealized gain on foreign currency translation

 

 

 

 

708

 

 

708

 

 

708

 

61

 

Distributions

 

 

 

 

 

(2,970

)

(2,970

)

 

(2,970

)

(254

)

Balance at June 30, 2009

 

60,138

 

$

601

 

$

812,247

 

$

(4,165

)

$

(279,047

)

$

529,636

 

$

 

$

529,636

 

$

45,649

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

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U-STORE-IT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

Net loss

 

$

(7,581

)

$

(5,372

)

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

 

 

 

 

 

Depreciation and amortization

 

35,880

 

38,503

 

Gain on disposition of discontinued operations

 

 

(2,622

)

Equity compensation expense

 

1,734

 

1,714

 

Accretion of fair market value adjustment of debt

 

(187

)

(233

)

Changes in other operating accounts:

 

 

 

 

 

Other assets

 

(2,681

)

(1,257

)

Accounts payable and accrued expenses

 

(182

)

(3,374

)

Other liabilities

 

455

 

(197

)

Net cash provided by operating activities

 

$

27,438

 

$

27,162

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Acquisitions, additions and improvements to storage facilities

 

$

(9,944

)

$

(8,339

)

Proceeds from sales of properties, net

 

 

11,180

 

Proceeds from repayment of notes receivable

 

19,856

 

 

Decrease (increase) in restricted cash

 

2,420

 

(2,581

)

Net cash provided by investing activities

 

$

12,332

 

$

260

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Proceeds from:

 

 

 

 

 

Revolving credit facility

 

$

 

$

9,500

 

Mortgage loans and notes payable

 

 

51,900

 

Principal payments on:

 

 

 

 

 

Revolving credit facility

 

 

(77,500

)

Secured term loans

 

 

(10,972

)

Mortgage loans and notes payable

 

(102,753

)

(6,570

)

Proceeds from issuance of common shares, net

 

371

 

9,530

 

Exercise of stock options

 

181

 

 

Contributions from noncontrolling interests in subsidiaries

 

16

 

 

Distributions paid to shareholders

 

(4,694

)

(2,900

)

Distributions paid to noncontrolling interests in Operating Partnership

 

(242

)

(254

)

Distributions paid to noncontrolling interests in subsidiaries

 

(2,289

)

 

Loan procurement costs

 

(1,251

)

(2,243

)

Net cash used in financing activities

 

$

(110,661

)

$

(29,509

)

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(70,891

)

(2,087

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

102,768

 

3,744

 

Cash and cash equivalents at end of period

 

$

31,877

 

$

1,657

 

 

 

 

 

 

 

Supplemental Cash Flow and Noncash Information

 

 

 

 

 

Cash paid for interest, net of interest capitalized

 

$

19,940

 

$

22,700

 

Supplemental disclosure of noncash activities:

 

 

 

 

 

Acquisition related contingent consideration

 

$

1,849

 

$

 

Derivative valuation adjustment

 

$

 

$

2,915

 

Foreign currency translation adjustment

 

$

(249

)

$

769

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

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Table of Contents

 

U-STORE-IT TRUST AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1.  ORGANIZATION AND NATURE OF OPERATIONS

 

U-Store-It Trust, a Maryland real estate investment trust (collectively with its subsidiaries, “we”, “us” or the “Company”), is a self-administered and self-managed real estate investment trust, or REIT, active in acquiring, developing, managing and operating self-storage properties for business and personal use under month-to-month leases.  The Company’s self-storage facilities (collectively, the “Properties”) are located in 26 states throughout the United States, and in the District of Columbia and are managed under one reportable operating segment: we own, operate, develop, manage and acquire self-storage facilities.  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 June 30, 2010, owned a 95.1% interest in the Operating Partnership.  The Company manages its owned assets through YSI Management, LLC (the “Management Company”), a wholly owned subsidiary of the Operating Partnership, and manages its managed assets through Storage Asset Management, LLC.  The Company owns four subsidiaries that have elected to be treated as taxable REIT subsidiaries.  In general, a taxable REIT subsidiary may perform non-customary services for tenants, hold assets that the Company, as a REIT, cannot hold directly and generally may engage in any real estate or non-real estate related business.

 

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of 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 generally accepted accounting principles in the United States (“GAAP”).  Accordingly, 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, 2009, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 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 each of the three and six months ended June 30, 2010 and 2009 are not necessarily indicative of the results of operations to be expected for any future period or the full year.

 

New Accounting Pronouncements

 

The Financial Accounting Standards Board (“FASB”) established the FASB Accounting Standards Codification™ (“Codification”) as the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements issued for interim and annual periods ending after September 15, 2009.  The Codification has changed the manner in which GAAP guidance is referenced, but did not have an impact on our consolidated financial position, results of operations or cash flows.

 

The FASB issued authoritative guidance on accounting for transfers of financial assets in June 2009, which we adopted on a prospective basis beginning January 1, 2010.  The guidance requires entities to provide more information regarding sales of securitized financial assets and similar transactions, particularly if the entity has continuing exposure to the risks related to transferred financial assets.  It also eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets and requires additional disclosures.  The application did not have an impact on our consolidated financial position, results of operations or cash flows.

 

The FASB issued authoritative guidance on how a company determines when an entity should be consolidated in June 2009, which we adopted on a prospective basis beginning January 1, 2010.  The guidance clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance.  The guidance requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity.  It also requires additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement.  The application did not have an impact on our consolidated financial position, results of operations or cash flows.

 

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3.  STORAGE FACILITIES

 

The book value of the Company’s real estate assets is summarized as follows:

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

 

 

(in thousands)

 

 

 

 

 

 

 

Land and improvements

 

$

369,656

 

$

369,842

 

Buildings and improvements

 

1,244,579

 

1,243,047

 

Equipment

 

122,745

 

157,452

 

Construction in progress

 

2,637

 

4,201

 

Total

 

1,739,617

 

1,774,542

 

Less accumulated depreciation

 

(336,392

)

(344,009

)

Storage facilities, net

 

$

1,403,225

 

$

1,430,533

 

 

As assets become fully depreciated, they are removed from their respective asset category.  During the six months ended June 30, 2010 and 2009, $40.3 million and $27.7 million of assets became fully depreciated, and were removed from storage facilities, respectively.

 

4.  ACQUISITIONS

 

The Company entered into an acquisition accounted for as a business combination of 85 management contracts from United Stor-All Management, LLC (“United Stor-All”) on April 28, 2010.  The 85 contracts relate to facilities located in 16 states and the District of Columbia.  The Company recorded the fair value of the assets acquired which include the intangible value related to the management contracts and are included in other assets, net on the Company’s consolidated balance sheet.  The Company’s estimation of the fair value of the acquired assets and liabilities utilized Level 3 inputs and considered the probability of the expected period the contracts would remain in place, including estimated renewal periods, and the amount of the discounted future contingent payments to be made.  The Company paid $4.1 million in cash for the contracts and recognized $1.8 million in contingent consideration.  The Company will account for the contingent consideration liability by recording the changes in fair value of the liability recorded in earnings.  The Company has recognized $0.2 million of amortization during the three months ended June 30, 2010.  The Company expensed $0.3 million in transition related costs that are included in acquisition related costs on the Company’s consolidated statement of operations.  The estimated life of the intangible value of the management contracts is 56 months and the estimated remaining amortization expense that will be recognized during 2010 is $0.6 million.

 

5.  SECURED CREDIT FACILITY

 

On December 8, 2009, the Company and its Operating Partnership entered into a three-year, $450 million senior secured credit facility (the “secured credit facility”), consisting of a $200 million secured term loan and a $250 million secured revolving credit facility.  The secured credit facility is collateralized by mortgages on borrowing base properties as defined in the secured credit facility agreement.  At June 30, 2010, $200 million of secured term loan borrowings were outstanding under the secured credit facility.  At June 30, 2010, $250 million was available for borrowing under the secured revolving credit facility.  Borrowings under the secured credit facility bear interest at rates ranging from 3.25% to 4.00% over LIBOR, with a LIBOR floor of 1.5%, depending on the Company’s leverage ratio.  At June 30, 2010, borrowings under the secured credit facility had a weighted average interest rate of 5.0% and the Company was in compliance with all covenants of the agreement.

 

The secured credit facility replaced the prior, three-year $450 million unsecured credit facility, which was entered into in November 2006, and consisted of a $200 million unsecured term loan and $250 million in unsecured revolving loans.  All borrowings under the unsecured credit facility were repaid in December 2009.

 

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6.  MORTGAGE LOANS AND NOTES PAYABLE

 

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

 

 

 

Carrying Value as of:

 

 

 

 

 

 

 

June 30,

 

December 31,

 

Effective

 

Maturity

 

Mortgage Loan

 

2010

 

2009

 

Interest Rate

 

Date

 

 

 

(in thousands)

 

 

 

 

 

YSI 1

 

$

 

$

83,342

 

5.19

%

May-10

 

YSI 4

 

 

6,065

 

5.25

%

Jul-10

 

YSI 26

 

 

9,475

 

5.00

%

Aug-10

 

YSI 25

 

7,912

 

7,975

 

5.00

%

Oct-10

 

USIFB

 

3,603

 

3,834

 

4.59

%

Dec-10

 

YSI 2

 

82,572

 

83,480

 

5.33

%

Jan-11

 

YSI 12

 

1,499

 

1,520

 

5.97

%

Sep-11

 

YSI 13

 

1,288

 

1,307

 

5.97

%

Sep-11

 

YSI 6

 

76,755

 

77,370

 

5.13

%

Aug-12

 

YASKY

 

80,000

 

80,000

 

4.96

%

Sep-12

 

YSI 14

 

1,786

 

1,812

 

5.97

%

Jan-13

 

YSI 7

 

3,132

 

3,163

 

6.50

%

Jun-13

 

YSI 8

 

1,790

 

1,808

 

6.50

%

Jun-13

 

YSI 9

 

1,968

 

1,988

 

6.50

%

Jun-13

 

YSI 17

 

4,184

 

4,246

 

6.32

%

Jul-13

 

YSI 27

 

507

 

516

 

5.59

%

Nov-13

 

YSI 30

 

7,443

 

7,567

 

5.59

%

Nov-13

 

YSI 11

 

2,453

 

2,486

 

5.87

%

Dec-13

 

YSI 5

 

3,238

 

3,281

 

5.25

%

Jan-14

 

YSI 28

 

1,576

 

1,598

 

5.59

%

Feb-14

 

YSI 34

 

14,889

 

14,955

 

8.00

%

Jun-14

 

YSI 37

 

2,227

 

2,244

 

7.25

%

Aug-14

 

YSI 40

 

2,551

 

2,581

 

7.25

%

Aug-14

 

YSI 44

 

1,108

 

1,121

 

7.00

%

Sep-14

 

YSI 41

 

3,928

 

3,976

 

6.60

%

Sep-14

 

YSI 38

 

4,026

 

4,078

 

6.35

%

Sep-14

 

YSI 45

 

5,485

 

5,527

 

6.75

%

Oct-14

 

YSI 46

 

3,458

 

3,486

 

6.75

%

Oct-14

 

YSI 43

 

2,957

 

2,994

 

6.50

%

Nov-14

 

YSI 48

 

25,465

 

25,652

 

7.25

%

Nov-14

 

YSI 50

 

2,351

 

2,380

 

6.75

%

Dec-14

 

YSI 10

 

4,128

 

4,166

 

5.87

%

Jan-15

 

YSI 15

 

1,899

 

1,920

 

6.41

%

Jan-15

 

YSI 20

 

63,372

 

64,258

 

5.97

%

Nov-15

 

YSI 31

 

13,777

 

13,891

 

6.75

%

Jun-19

(a)

YSI 35

 

4,499

 

4,499

 

6.90

%

Jul-19

(a)

YSI 32

 

6,110

 

6,160

 

6.75

%

Jul-19

(a)

YSI 33

 

11,472

 

11,570

 

6.42

%

Jul-19

 

YSI 42

 

3,224

 

3,263

 

6.88

%

Aug-19

(a)

YSI 39

 

3,961

 

3,991

 

6.50

%

Nov-19

(a)

YSI 47

 

3,217

 

3,250

 

6.63

%

Jan-20

(a)

Unamortized fair value adjustment

 

44

 

231

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total mortgage loans and notes payable

 

$

465,854

 

$

569,026

 

 

 

 

 

 

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(a)                  These borrowings have a fixed interest rate for the first five years of their respective term.  At the end of the initial five years, the rate resets and remains constant over the remaining five years of the loan term.

 

The following table presents the future principal payments on outstanding mortgage loans and notes payable at June 30, 2010 (in thousands):

 

2010

 

$

15,393

 

2011

 

90,544

 

2012

 

159,984

 

2013

 

26,240

 

2014

 

88,261

 

2015 and thereafter

 

85,388

 

Total mortgage payments

 

465,810

 

Plus: Fair value adjustment

 

44

 

Total mortgage indebtedness

 

$

465,854

 

 

The Company currently intends to fund the remainder of its 2010 principal payment requirements with available cash and from cash provided by operating activities.

 

7.  FAIR VALUE MEASUREMENTS

 

In January 2008, the FASB issued a pronouncement regarding the methods to value financial assets and liabilities.  The Company adopted this pronouncement effective January 1, 2009.  As defined in the guidance, fair value is based on the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  In order to increase consistency and comparability in fair value measurements, the guidance establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

 

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.  The fair value hierarchy gives the highest priority to Level 1 inputs.

 

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

 

Level 3: Unobservable inputs are used when little or no market data is available.  The fair value hierarchy gives the lowest priority to Level 3 inputs.

 

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considering counterparty credit risk in its assessment of fair value.

 

In April 2009, the FASB issued a pronouncement regarding disclosures about fair value of financial instruments and a pronouncement which amends GAAP as follows: a) to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements and b) to require disclosures in summarized financial information at interim reporting periods.  This pronouncement is effective for interim reporting periods ending after June 15, 2009.  Accordingly, the Company adopted this pronouncement during the quarter ended September 30, 2009.  Disclosures about fair value of financial instruments are based on pertinent information available to management as of the valuation date.  Considerable judgment is necessary to interpret market data and develop estimated fair values.  Accordingly, the estimates presented are not necessarily indicative of the amounts at which these instruments could be purchased, sold or settled.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

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The fair value of financial instruments, including cash and cash equivalents, accounts receivable and accounts payable approximates their respective book values at June 30, 2010 and December 31, 2009.  At June 30, 2010 and December 31, 2009, the Company had fixed interest rate loans with a carrying value of $465.9 million and $569.0 million, respectively.  The estimated fair values of these fixed rate loans were $445.7 million and $530.7 million at June 30, 2010 and December 31, 2009, respectively.  The Company has a variable interest rate loan with a carrying value of $200.0 million at June 30, 2010 and December 31, 2009, the fair value of which estimates its carrying value.  These estimates are based on discounted cash flow analyses assuming market interest rates for comparable obligations at June 30, 2010 and December 31, 2009.

 

8.  NONCONTROLLING INTERESTS

 

Variable Interests in Consolidated Real Estate Joint Ventures

 

On August 13, 2009, the Company, through a wholly-owned affiliate, formed a joint venture (“HART”) with an affiliate of Heitman, LLC (“Heitman”) to own and operate 22 self-storage facilities, which are located throughout the United States.  Upon formation, Heitman contributed approximately $51 million of cash to a newly-formed limited partnership and the Company contributed certain unencumbered wholly-owned properties with an agreed upon value of approximately $102 million to such limited partnership.  In exchange for its contribution of those properties, the Company received a cash distribution from HART of approximately $51 million and retained a 50% interest in HART.  The Company is the managing partner of HART and the manager of the properties owned by HART, and receives a market rate management fee for its management services.

 

The Company determined that HART is a variable interest entity under GAAP, and that it is the primary beneficiary.  Accordingly, the assets, liabilities, and results of operations of HART are consolidated.  The 50% interest that is owned by Heitman is reflected as noncontrolling interest in subsidiaries within permanent equity, separate from the Company’s equity on the consolidated balance sheet.  At June 30, 2010, HART had total assets of $91.5 million, including $89.5 million of storage facilities, net and total liabilities of $2.3 million.

 

USIFB, LLP (“the Venture”) was formed to own, operate, acquire and develop self-storage facilities in England.  The Company owns a 97% interest in the Venture through a wholly-owned subsidiary and the Venture commenced operations at one facility in London, England during 2008.  The Company determined that the Venture is a variable interest entity under GAAP, and that it is the primary beneficiary.  Accordingly, the assets, liabilities and results of operations of the Venture are consolidated.  At June 30, 2010, the Venture had total assets of $7.5 million and total liabilities of $3.8 million including a mortgage loan of $3.6 million secured by storage facilities, net with a book value of $7.2 million.  At June 30, 2010, the Venture’s creditors had no recourse to the general credit of the Company.

 

Operating Partnership Ownership

 

The Company has followed the FASB guidance regarding the classification and measurement of redeemable securities.  Under this guidance, securities that are redeemable for cash or other assets, at the option of the holder and not solely within the control of the issuer, must be classified outside of permanent equity.  This classification results in certain outside ownership interests being included as redeemable noncontrolling interests outside of permanent equity in the consolidated balance sheets.  The Company makes this determination based on terms in applicable agreements, specifically in relation to redemption provisions.  Additionally, with respect to noncontrolling interests for which the Company has a choice to settle the redemption by delivery of its own shares, the Company considered the guidance regarding accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own shares, to evaluate whether the Company controls the actions or events necessary to presume share settlement.  The guidance also requires that noncontrolling interests be adjusted each period to the greater of the carrying value based on the accumulation of historical cost or the redemption value.

 

The consolidated results of the Company include results attributable to units of the Operating Partnership that are not owned by the Company, which amounted to approximately 4.9% of all outstanding Partnership units as of June 30, 2010 and December 31, 2009.  The interests in the Operating Partnership represented by these units were a component of the consideration that the Company paid to acquire certain self-storage facilities.  The holders of the units are limited partners in the Operating Partnership and have the right to require the Operating Partnership to redeem part or all of their units for, at the Company’s option, an equivalent number of common shares of the Company or cash based upon the fair value of an equivalent number of common shares of the Company.  However, the partnership agreement contains certain circumstances that could result in a settlement outside the control of the Company. 

 

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Accordingly, consistent with the guidance, the Company will record these noncontrolling interests outside of permanent equity in the consolidated balance sheets.  Net income or loss related to these noncontrolling interests is excluded from net income or loss attributable to the Company in the consolidated statements of operations.

 

The per unit cash redemption amount would equal the average of the closing prices of the common shares of the New York Stock Exchange for the 10 trading days ending prior to the Company’s receipt of the redemption notice.  At June 30, 2010 and December 31, 2009, 4,806,136 and 4,809,636 units were outstanding, respectively, and the calculated aggregate redemption value of outstanding Operating Partnership units based upon the Company’s share price was approximately $37.8 million and $35.4 million, respectively.  Based on the Company’s evaluation of the redemption value of the redeemable noncontrolling interest, the Company has reflected these interests at their carrying value as of June 30, 2010 and December 31, 2009 because the carrying cost exceeded the estimated redemption value.

 

9.  RELATED PARTY TRANSACTIONS

 

During 2005 and 2006, the Operating Partnership entered into various office lease agreements with Amsdell and Amsdell, an entity owned by Robert Amsdell and Barry Amsdell (each a former Trustee).  Pursuant to these lease agreements, the Operating Partnership rented office space in the Airport Executive Park, an office and flex development located in Cleveland, Ohio, which is owned by Amsdell and Amsdell.  The Company’s independent Trustees approved the terms of, and entry into, each of the office lease agreements by the Operating Partnership.  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 the Company to Amsdell and Amsdell under these lease agreements for each of the three months ended June 30, 2010 and June 30, 2009 was approximately $0.1 million.  Additionally, the aggregate amount of payments for each of the six months ended June 30, 2010 and June 30, 2009 was approximately $0.2 million.  We vacated the office space owned by Amsdell and Amsdell in 2007, but remain obligated under certain of the lease agreements through 2014.  Subsequently, the Company entered into a sublease agreement for a portion of the space with a third party for the remainder of the lease term.

 

Total future minimum rental payments under the related party lease agreements as of June 30, 2010 are as follows:

 

 

 

Due to Related Party

 

Due from Subtenant

 

 

 

Amount

 

Amount

 

 

 

(in thousands)

 

 

 

 

 

 

 

2010

 

$

227

 

$

139

 

2011

 

475

 

278

 

2012

 

475

 

278

 

2013

 

499

 

278

 

2014

 

499

 

278

 

 

 

$

2,175

 

$

1,251

 

 

10.  DISCONTINUED OPERATIONS

 

There were no property sales during the six months ended June 30, 2010.  For the three months ended June 30, 2009, income from discontinued operations relates to 19 properties that the Company sold during 2009.  For the six months ended June 30, 2009, income from discontinued operations relates to 20 properties that the Company sold during 2009.  Net gain on disposition of discontinued operations relates to gains recognized on property sales completed during the three and six months ended June 30, 2009.

 

The following table summarizes the revenue and expense information for the properties classified as discontinued operations for the three and six months ended June 30, 2009 (in thousands):

 

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Table of Contents

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 2009

 

June 30, 2009

 

 

 

 

 

 

 

REVENUES

 

 

 

 

 

Rental income

 

$

2,584

 

$

5,292

 

Other property related income

 

211

 

391

 

Total revenues

 

2,795

 

5,683

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

Property operating expenses

 

1,088

 

1,987

 

Depreciation

 

932

 

1,892

 

Total operating expenses

 

2,020

 

3,879

 

 

 

 

 

 

 

INCOME FROM DISCONTINUED OPERATIONS

 

775

 

1,804

 

 

 

 

 

 

 

Net gain on disposition of discontinued operations

 

2,120

 

2,622

 

Income from discontinued operations

 

$

2,895

 

$

4,426

 

 

11.  PRO FORMA FINANCIAL INFORMATION

 

During 2010, the Company entered into an acquisition accounted for as a business combination of 85 management contracts from United Stor-All (see note 4).

 

The consolidated pro forma financial information set forth below reflects adjustments to the Company’s historical financial data to give effect to the acquisition as if it had occurred at the beginning of each period presented.  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 six months ended June 30, 2010 and 2009 based on the assumptions described above:

 

 

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

Pro forma revenue

 

$

109,046

 

$

110,979

 

Pro forma net loss

 

$

(8,158

)

$

(4,981

)

Net loss per common share

 

 

 

 

 

Basic and diluted - as reported

 

$

(0.09

)

$

(0.16

)

Basic and diluted - as pro forma

 

$

(0.09

)

$

(0.16

)

 

12.  COMPREHENSIVE INCOME (LOSS)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(in thousands)

 

(in thousands)

 

NET LOSS

 

$

(4,389

)

$

(3,086

)

$

(7,581

)

$

(5,372

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Unrealized gain on derivative financial instruments

 

 

1,821

 

 

2,915

 

Unrealized gain (loss) on foreign currency translation

 

(52

)

501

 

(249

)

769

 

COMPREHENSIVE LOSS

 

$

(4,441

)

$

(764

)

$

(7,830

)

$

(1,688

)

 

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Table of Contents

 

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

 

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 entitled “Risk Factors” in the Company’s Annual Report on the Form 10-K for the year ended December 31, 2009 and in Part II, Item 1A — Risk Factors, in our subsequent quarterly reports.

 

Overview

 

The Company is an integrated self-storage real estate company, which means that it has in-house capabilities in the operation, design, development, leasing, management and acquisition of self-storage facilities.  The Company has elected to be taxed as a REIT for federal tax purposes.  As of June 30, 2010 and December 31, 2009, the Company owned 367 self-storage facilities that contain approximately 23.7 million rentable square feet.  In addition, as of June 30, 2010, the Company managed 114 properties for third parties bringing the total number of properties which it owned and/or managed to 481.

 

The Company derives revenues principally from rents received from its customers who rent units at its self-storage facilities under month-to-month leases, and, to a lesser extent, from the management of properties owned by third parties.  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, which places an emphasis on local, market level oversight and control, allows us to respond quickly and effectively to changes in local market conditions, increasing rents where appropriate, while maintaining occupancy levels, or increasing occupancy levels while maintaining pricing levels.

 

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

 

The United States has recently experienced an economic downturn that has resulted in higher unemployment, shrinking demand for products, large-scale business failures and tight credit markets.  Our results of operations may be sensitive to changes in overall economic conditions that impact consumer spending, including discretionary spending, as well as to increased bad debts due to recessionary pressures.  A continuation of ongoing adverse economic conditions affecting disposable consumer income, such as employment levels, business conditions, interest rates, tax rates, fuel and energy costs, and other matters could reduce consumer spending or cause consumers to shift their spending to other products and services.  A general reduction in the level of discretionary spending or shifts in consumer discretionary spending could adversely affect our growth and profitability.

 

In the future, the Company intends to focus on internal growth opportunities and selectively pursuing targeted acquisitions and developments of self-storage facilities.  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, manage, and acquire self-storage facilities.

 

The Company’s self-storage facilities are located in major metropolitan and rural areas and have numerous tenants per facility.  No single tenant represents a significant concentration of our revenues.  The facilities in Florida, California, Texas and Illinois provided approximately 18%, 15%, 10% and 7%, respectively, of total revenues for the three and six month periods ended June 30, 2010.

 

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Table of Contents

 

Summary of Critical Accounting Policies and Estimates

 

Set forth below is a summary of the accounting policies and estimates that management believes are critical to an understanding of the unaudited consolidated financial statements included in this report.  These policies require the application of 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.

 

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 40 years.  Expenditures for significant renovations or improvements that extend the useful lives 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 at fair value which may include 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, which may include the value of in-place leases, above or below market lease intangibles, and tenant relationships.  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.

 

Long-lived assets classified as “held for use” are reviewed for impairment when events and circumstances indicate that there may be 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 undiscounted future net operating cash flows attributable to the asset.  The impairment loss recognized equals the excess of net carrying value over the related fair value of the asset.  Future events, or facts and circumstances that currently exist, that we have not yet identified, could cause us to conclude in the future that our long-lived assets are impaired.  Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.  No impairment was recorded for the periods ended June 30, 2010 and 2009.

 

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 generally not identified as held for sale until the closing actually occurs.  However, each potential transaction is evaluated based on its separate facts and circumstances.  Properties classified as held for sale are reported as the lesser of carrying value or fair value less estimated costs to sell.

 

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.

 

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Management fee revenues are recognized monthly as services are performed and in accordance with the terms of the related management agreements.

 

The Company recognizes gains on disposition of properties only upon closing in accordance with the guidance on sales of real estate.  Payments received from purchasers prior to closing are recorded as deposits.  Profit on real estate sold is recognized using the full accrual method upon closing when the collectability of the sales price is reasonably assured and the Company is not obligated to perform significant activities after the sale.  Profit may be deferred in whole or part until the sale meets the requirements of profit recognition on sales under this guidance.

 

Share-Based Payments

 

We apply the fair value method of accounting for contingently issued shares and share options issued under our equity incentive plans.  Accordingly, share compensation expense is 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.

 

Noncontrolling Interests

 

Noncontrolling interests are the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent.  The ownership interests in the subsidiary that are held by owners other than the parent are noncontrolling interests.  Noncontrolling interests are reported on the consolidated balance sheets within equity, separately from the Company’s equity.  On the consolidated statements of operations, revenues, expenses and net income or loss related to these noncontrolling interests is excluded from net income or loss attributable to the Company.  Presentation of consolidated equity activity is included for both quarterly and annual financial statements, including beginning balances, activity for the period and ending balances for shareholders’ equity, noncontrolling interests and total equity.  The Company has adjusted the carrying value of its noncontrolling interests subject to redemption value to the extent applicable.

 

Recent Accounting Pronouncements

 

The FASB established the FASB Accounting Standards Codification™ (“Codification”) as the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements issued for interim and annual periods ending after September 15, 2009.  The Codification has changed the manner in which U.S. GAAP guidance is referenced, but did not have an impact on our consolidated financial position, results of operations or cash flows.

 

The FASB issued authoritative guidance on accounting for transfers of financial assets in June 2009, which was adopted on a prospective basis beginning January 1, 2010.  The guidance requires entities to provide more information regarding sales of securitized financial assets and similar transactions, particularly if the entity has continuing exposure to the risks related to transferred financial assets.  It also eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets and requires additional disclosures.  The application did not have an impact on our consolidated financial position, results of operations or cash flows.

 

The FASB issued authoritative guidance on how a company determines when an entity should be consolidated in June 2009, which was adopted on a prospective basis beginning January 1, 2010.  The guidance clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance.  The guidance requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity.  It also requires additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement.  The application did not have an impact on our consolidated financial position, results of operations or cash flows.

 

Results of Operations

 

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

 

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Table of Contents

 

Acquisition and Development Activities

 

The comparability of the Company’s results of operations is affected by the timing of acquisition and disposition activities during the periods reported.  At June 30, 2010 and 2009, the Company owned 367 and 384 self-storage facilities and related assets, respectively.  The following table summarizes the change in number of owned self-storage facilities from January 1, 2009 through June 30, 2010:

 

 

 

Self-Storage
Facilities

 

 

 

 

 

Balance - January 1, 2009

 

387

 

Facilities acquired

 

 

Facilities sold

 

(20

)

Balance - December 31, 2009

 

367

 

Facilities acquired

 

 

Facilities sold

 

 

Balance - June 30, 2010

 

367

 

 

Comparison of the three months ended June 30, 2010 to the three months ended June 30, 2009

 

The following table and subsequent discussion provides information pertaining to our portfolio for the three months ended June 30, 2010 and 2009.  The Company considers its same-store portfolio to consist of only those facilities owned, and operated on a stabilized basis, at the beginning and at the end of the applicable periods presented.  Same-store results are considered to be useful to investors in evaluating our performance as they provide information relating to changes in facility-level operating performance without taking into account the effects of acquisitions, developments or dispositions.

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

Non Same-Store

 

Other/

 

 

 

 

 

 

 

 

 

 

 

Same Store Property Portfolio

 

Properties

 

Eliminations

 

Total Portfolio

 

 

 

(dolloars in thousands)

 

 

 

 

 

 

 

Increase/

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase/

 

 

 

 

 

2010

 

2009

 

(Decrease)

 

Change

 

2010

 

2009

 

2010

 

2009

 

2010

 

2009

 

(Decrease)

 

Change

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

49,269

 

$

49,672

 

$

(403

)

-1

%

$

296

 

$

135

 

$

(100

)

$

 

$

49,465

 

$

49,807

 

$

(342

)

-1

%

Other property related income

 

4,467

 

4,393

 

74

 

2

%

235

 

87

 

 

 

4,702

 

4,480

 

222

 

5

%

Property management fee income

 

 

 

 

0

%

 

 

590

 

 

590

 

 

590

 

100

%

Total revenues

 

53,736

 

54,065

 

(329

)

-1

%

531

 

222

 

490

 

 

54,757

 

54,287

 

470

 

1

%

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

21,838

 

22,834

 

(996

)

-4

%

463

 

101

 

2,120

 

1,985

 

24,421

 

24,920

 

(499

)

-2

%

NET OPERATING INCOME:

 

31,898

 

31,231

 

667

 

2

%

68

 

121

 

(1,630

)

(1,985

)

30,336

 

29,367

 

969

 

3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,363

 

17,756

 

(1,393

)

-8

%

General and administrative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,844

 

5,628

 

1,216

 

22

%

Subtotal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23,207

 

23,384

 

(177

)

-1

%

Operating income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,129

 

5,983

 

1,146

 

19

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense on loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,625

)

(11,473

)

1,848

 

-16

%

Loan procurement amortization expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,620

)

(545

)

(1,075

)

197

%

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

62

 

55

 

7

 

13

%

Acquisition related costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(300

)

 

(300

)

-100

%

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(35

)

(1

)

(34

)

3400

%

Total other expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,518

)

(11,964

)

446

 

-4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LOSS FROM CONTINUING OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,389

)

(5,981

)

1,592

 

-27

%

DISCONTINUED OPERATIONS