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, 2011.

 

or

 

£         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 £

 

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 x No £

 

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 £

 

Accelerated filer x

 

 

 

Non-accelerated filer £

 

Smaller reporting company £

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes £ 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 8, 2011

common shares, $.01 par value

 

99,447,117

 

 

 



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

 

18

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

 

28

Item 4.     Controls and Procedures

 

28

Part II. OTHER INFORMATION

 

 

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds

 

29

Item 6.     Exhibits

 

30

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q, or “this Report”, together with other statements and information publicly disseminated by U-Store-It Trust (“we,” “us,” “our” or the “Company”), contain 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, 2010 and in our other filings with the Securities and Exchange Commission (“SEC”).  These risks include, but are not limited to, the following:

 

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

 

·         the competitive environment in which we operate, including our ability to raise rental rates;

 

·         the execution of our business plan;

 

·         the availability of external sources of capital;

 

·         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;

 

·         increases in taxes, fees, and assessments from state and local jurisdictions;

 

·         changes in real estate and zoning laws or regulations;

 

·         risks related to natural disasters;

 

·         potential environmental and other liabilities;

 

·         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 that we file with 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,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Storage facilities

 

$

1,781,331

 

$

1,743,021

 

Less: Accumulated depreciation

 

(318,770

)

(314,530

)

Storage facilities, net

 

1,462,561

 

1,428,491

 

Cash and cash equivalents

 

1,845

 

5,891

 

Restricted cash

 

9,747

 

10,250

 

Loan procurement costs, net of amortization

 

12,672

 

15,611

 

Other assets, net

 

22,637

 

18,576

 

Total assets

 

$

1,509,462

 

$

1,478,819

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

Revolving credit facility

 

$

9,000

 

$

43,000

 

Unsecured term loans

 

300,000

 

200,000

 

Mortgage loans and notes payable

 

347,645

 

372,457

 

Accounts payable, accrued expenses and other liabilities

 

37,105

 

36,172

 

Distributions payable

 

7,260

 

7,275

 

Deferred revenue

 

9,532

 

8,873

 

Security deposits

 

490

 

489

 

Total liabilities

 

711,032

 

668,266

 

 

 

 

 

 

 

Noncontrolling interests in the Operating Partnership

 

49,789

 

45,145

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Common shares $.01 par value, 200,000,000 shares authorized, 98,854,160 and 98,596,796 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively

 

989

 

986

 

Additional paid in capital

 

1,028,640

 

1,026,952

 

Accumulated other comprehensive loss

 

(113

)

(1,121

)

Accumulated deficit

 

(321,053

)

(302,601

)

Total U-Store-It Trust shareholders’ equity

 

708,463

 

724,216

 

Noncontrolling interest in subsidiaries

 

40,178

 

41,192

 

Total equity

 

748,641

 

765,408

 

Total liabilities and equity

 

$

1,509,462

 

$

1,478,819

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

4



Table of Contents

 

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,

 

 

 

2011

 

2010

 

2011

 

2010

 

REVENUES

 

 

 

 

 

 

 

 

 

Rental income

 

$

52,906

 

$

48,156

 

$

104,777

 

$

95,870

 

Other property related income

 

5,650

 

4,417

 

10,406

 

8,220

 

Property management fee income

 

848

 

590

 

1,757

 

634

 

Total revenues

 

59,404

 

53,163

 

116,940

 

104,724

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

Property operating expenses

 

25,085

 

23,755

 

50,688

 

46,102

 

Depreciation and amortization

 

15,945

 

15,930

 

31,518

 

31,878

 

General and administrative

 

6,841

 

6,844

 

12,874

 

12,711

 

Total operating expenses

 

47,871

 

46,529

 

95,080

 

90,691

 

OPERATING INCOME

 

11,533

 

6,634

 

21,860

 

14,033

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

Interest:

 

 

 

 

 

 

 

 

 

Interest expense on loans

 

(8,020

)

(9,625

)

(16,133

)

(19,676

)

Loan procurement amortization expense

 

(1,396

)

(1,620

)

(3,031

)

(3,159

)

Loan procurement amortization expense - early repayment of debt

 

(2,085

)

 

(2,085

)

 

Interest income

 

5

 

62

 

14

 

597

 

Acquisition related costs

 

(146

)

(300

)

(255

)

(300

)

Other

 

(198

)

(35

)

(201

)

(76

)

Total other expense

 

(11,840

)

(11,518

)

(21,691

)

(22,614

)

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS

 

(307

)

(4,884

)

169

 

(8,581

)

 

 

 

 

 

 

 

 

 

 

INCOME FROM DISCONTINUED OPERATIONS

 

1,895

 

495

 

1,895

 

1,000

 

NET INCOME (LOSS)

 

1,588

 

(4,389

)

2,064

 

(7,581

)

NET LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

 

 

 

 

 

 

 

 

Noncontrolling interests in the Operating Partnership

 

(44

)

233

 

(39

)

411

 

Noncontrolling interest in subsidiaries

 

(642

)

(365

)

(1,240

)

(826

)

NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY

 

$

902

 

$

(4,521

)

$

785

 

$

(7,996

)

 

 

 

 

 

 

 

 

 

 

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

 

$

(0.01

)

$

(0.05

)

$

(0.01

)

$

(0.10

)

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

 

$

0.02

 

$

 

$

0.02

 

$

0.01

 

Basic and diluted earnings (loss) per share attributable to common shareholders

 

$

0.01

 

$

(0.05

)

$

0.01

 

$

(0.09

)

 

 

 

 

 

 

 

 

 

 

Weighted-average basic and diluted shares outstanding

 

98,844

 

92,925

 

98,807

 

92,880

 

 

 

 

 

 

 

 

 

 

 

AMOUNTS ATTRIBUTABLE TO THE COMPANY’S COMMON SHAREHOLDERS:

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(906

)

$

(4,992

)

$

(1,023

)

$

(8,947

)

Total discontinued operations

 

1,808

 

471

 

1,808

 

951

 

Net income (loss)

 

$

902

 

$

(4,521

)

$

785

 

$

(7,996

)

 

See accompanying notes to the unaudited consolidated financial statements.

 

5



Table of Contents

 

U-STORE-IT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

For the Six-Month Periods Ended June 30, 2011 and 2010

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling

 

 

 

 

 

 

 

Additional

 

Accumulated Other

 

 

 

Total 

 

Noncontrolling

 

 

 

Interests in the

 

 

 

Common Shares

 

Paid in

 

Comprehensive

 

Accumulated

 

Shareholders’

 

Interest in

 

Total

 

 Operating

 

 

 

Number

 

Amount

 

Capital

 

(Loss) Income

 

Deficit

 

Equity

 

Subsidiaries

 

Equity

 

Partnership

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2010

 

98,597

 

$

986

 

$

1,026,952

 

$

(1,121

)

$

(302,601

)

$

724,216

 

$

41,192

 

$

765,408

 

$

45,145

 

Contributions from noncontrolling interests in subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

7

 

7

 

 

 

Issuance of restricted shares

 

225

 

2

 

 

 

 

 

 

 

2

 

 

 

2

 

 

 

Exercise of stock options

 

24

 

1

 

121

 

 

 

 

 

122

 

 

 

122

 

 

 

Conversion from units to shares

 

8

 

 

 

85

 

 

 

 

 

85

 

 

 

85

 

(85

)

Amortization of restricted shares

 

 

 

 

 

664

 

 

 

 

 

664

 

 

 

664

 

 

 

Share compensation expense

 

 

 

 

 

818

 

 

 

 

 

818

 

 

 

818

 

 

 

Net income

 

 

 

 

 

 

 

 

 

785

 

785

 

1,240

 

2,025

 

39

 

Adjustment for noncontrolling interest in Operating Partnership

 

 

 

 

 

 

 

 

 

(5,305

)

(5,305

)

 

 

(5,305

)

5,305

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on interest rate swap

 

 

 

 

 

 

 

797

 

 

 

797

 

25

 

822

 

39

 

Unrealized gain on foreign currency translation

 

 

 

 

 

 

 

211

 

 

 

211

 

7

 

218

 

10

 

Distributions

 

 

 

 

 

 

 

 

 

(13,932

)

(13,932

)

(2,293

)

(16,225

)

(664

)

Balance at June 30, 2011

 

98,854

 

$

989

 

$

1,028,640

 

$

(113

)

$

(321,053

)

$

708,463

 

$

40,178

 

$

748,641

 

$

49,789

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling

 

 

 

 

 

 

 

Additional

 

Accumulated Other

 

 

 

Total

 

Noncontrolling

 

 

 

Interests in the 

 

 

 

Common Shares

 

Paid in

 

Comprehensive

 

Accumulated

 

Shareholders’

 

Interest in

 

Total

 

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 loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

6



Table of Contents

 

U-STORE-IT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

Net income (loss)

 

$

2,064

 

$

(7,581

)

Adjustments to reconcile net income (loss) to cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

34,431

 

35,880

 

Equity compensation expense

 

1,482

 

1,734

 

Accretion of fair market value adjustment of debt

 

(57

)

(187

)

Loan procurement amortization expense - early repayment of debt

 

2,085

 

 

Changes in other operating accounts:

 

 

 

 

 

Other assets

 

(3,261

)

(2,681

)

Restricted cash

 

582

 

 

Accounts payable and accrued expenses

 

612

 

(182

)

Other liabilities

 

229

 

455

 

Net cash provided by operating activities

 

$

38,167

 

$

27,438

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Acquisitions, additions and improvements to storage facilities

 

$

(56,379

)

$

(9,944

)

Proceeds from repayment of notes receivable

 

 

19,856

 

(Increase) decrease in restricted cash

 

(79

)

2,420

 

Net cash (used in) provided by investing activities

 

$

(56,458

)

$

12,332

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Proceeds from:

 

 

 

 

 

Revolving credit facility

 

$

87,200

 

$

 

Unsecured Term Loans

 

200,000

 

 

Mortgage loans and notes payable

 

3,537

 

 

Principal payments on:

 

 

 

 

 

Revolving credit facility

 

(121,200

)

 

Unsecured Term Loans

 

(100,000

)

 

Mortgage loans and notes payable

 

(36,417

)

(102,753

)

Proceeds from issuance of common shares, net

 

 

371

 

Exercise of stock options

 

121

 

181

 

Contributions from noncontrolling interests in subsidiaries

 

7

 

16

 

Distributions paid to shareholders

 

(13,911

)

(4,694

)

Distributions paid to noncontrolling interests in Operating Partnership

 

(697

)

(242

)

Distributions paid to noncontrolling interests in subsidiaries

 

(2,293

)

(2,289

)

Loan procurement costs

 

(2,102

)

(1,251

)

Net cash provided by (used in) financing activities

 

$

14,245

 

$

(110,661

)

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(4,046

)

(70,891

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

5,891

 

102,768

 

Cash and cash equivalents at end of period

 

$

1,845

 

$

31,877

 

 

 

 

 

 

 

Supplemental Cash Flow and Noncash Information

 

 

 

 

 

Cash paid for interest, net of interest capitalized

 

$

16,370

 

$

19,940

 

Supplemental disclosure of noncash activities:

 

 

 

 

 

Acquisition related contingent consideration

 

$

1,791

 

$

1,849

 

Foreign currency translation adjustment

 

$

228

 

$

(249

)

Derivative valuation adjustment

 

$

861

 

$

 

Mortgage loan assumption at fair value

 

$

7,943

 

$

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

7



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, that specializes 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, the District of Columbia and the UK and are managed under one reportable segment: we own, operate, develop, manage and acquire self-storage facilities.  The Company owns substantially all of its assets and conducts its operations 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, 2011, owned a 95.4% interest in the Operating Partnership.  The remaining 4.6% interest consists of units of limited partnership interest issued to third parties in exchange for contributions of property to 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 assets owned by third parties through Storage Asset Management, LLC, also a wholly owned subsidiary of the Operating Partnership.   Four of the Company’s subsidiaries have elected to be treated as taxable REIT subsidiaries.  In general, a taxable REIT subsidiary, which is treated as a corporation for U.S. federal income tax purposes, 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

 

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, 2010, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 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, 2011 and 2010 are not necessarily indicative of the results of operations to be expected for any future period or the full year.

 

3.  STORAGE FACILITIES

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(in thousands)

 

 

 

 

 

 

 

Land and improvements

 

$

382,808

 

$

374,569

 

Buildings and improvements

 

1,318,303

 

1,273,938

 

Equipment

 

76,883

 

93,571

 

Construction in progress

 

3,337

 

943

 

Total

 

1,781,331

 

1,743,021

 

Less accumulated depreciation

 

(318,770

)

(314,530

)

Storage facilities, net

 

$

1,462,561

 

$

1,428,491

 

 

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As assets become fully depreciated, the carrying values are removed from their respective asset category and accumulated depreciation.  During the six months ended June 30, 2011 and 2010, $23.9 million and $40.3 million of assets, respectively, became fully depreciated and were removed from storage facilities and accumulated depreciation.

 

The following table summarizes the Company’s acquisition and disposition activity during the period January 1, 2010 to June 30, 2011:

 

Facility/Portfolio

 

Location

 

Transaction Date

 

Number of Facilities

 

Purchase / Sales
Price (in thousands)

 

 

 

 

 

 

 

 

 

 

 

2011 Acquisitions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Burke Lake Asset

 

Fairfax Station, VA

 

January 2011

 

1

 

$

14,000

 

West Dixie Asset

 

Miami, FL

 

April 2011

 

1

 

13,500

 

White Plains Asset

 

White Plains, NY

 

May 2011

 

1

 

23,000

 

Phoenix Asset

 

Phoenix, AZ

 

May 2011

 

1

 

612

 

Houston Asset

 

Houston, TX

 

June 2011

 

1

 

7,600

 

 

 

 

 

 

 

5

 

$

58,712

 

2010 Acquisitions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Frisco Asset

 

Frisco, TX

 

July 2010

 

1

 

$

5,800

 

New York City Assets

 

New York, NY

 

September 2010

 

2

 

26,700

 

Northeast Assets

 

Multiple locations in NJ, NY and MA

 

November 2010

 

5

 

18,560

 

Manassas Asset

 

Manassas, VA

 

November 2010

 

1

 

6,050

 

Apopka Asset

 

Orlando, FL

 

November 2010

 

1

 

4,235

 

Wyckoff Asset

 

Queens, NY

 

December 2010

 

1

 

13,600

 

McLearen Asset

 

McLearen, VA

 

December 2010

 

1

 

10,200

 

 

 

 

 

 

 

12

 

$

85,145

 

2010 Dispositions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sun City Asset

 

Sun City, CA

 

October 2010

 

1

 

$

3,100

 

Inland Empire/Fayetteville Assets

 

Multiple locations in CA and NC

 

December 2010

 

15

 

35,000

 

 

 

 

 

 

 

16

 

$

38,100

 

 

During the three months ended June 30, 2011, the Company received compensation from the state of California regarding 2009 eminent domain proceedings on our North H Street asset.  Accordingly, the Company recognized $1.9 million of income during the three months ended June 30, 2011.

 

4.  ACQUISITIONS

 

On April 28, 2010, the Company acquired 85 management contracts from United Stor-All Management, LLC (“United Stor-All”).  The Company accounted for this acquisition as a business combination.  The 85 management contracts relate to facilities located in 16 states and the District of Columbia.  The Company recorded the fair value of the assets acquired which includes the intangible value related to the management contracts as other assets, net on the Company’s consolidated balance sheet.  The Company’s estimate 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 estimated 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 records changes in the fair value of the contingent consideration liability in earnings.  As of June 30, 2011, no adjustments to the fair value were deemed necessary.  The average estimated life of the intangible value of the management contracts is 56 months from the April 2010 closing and the related amortization expense recognized during the three and six months ended June 30, 2011 was $0.3 million and $0.6 million, respectively.  The Company recognized $0.2 million of amortization during the three and six months ended June 30, 2010.

 

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During 2010, the Company acquired 12 self-storage facilities for an aggregate purchase price of $85.1 million and allocated approximately $3.7 million to the intangible value of the in-place leases.  The amortization expense that was recognized during the three and six months ended June 30, 2011 was approximately $1.0 million and $1.9 million, respectively, with no comparable expense during the 2010 period.

 

During the six months ended June 30, 2011, the Company acquired five self-storage facilities for an aggregate purchase price of $58.7 million and allocated approximately $3.1 million to the intangible value of in-place leases at the time of acquisition.  The Company recognized amortization expense related to these assets of $0.5 million and $0.6 million during the three and six months ended June 30, 2011.  In connection with one of the acquisitions, the Company assumed mortgage debt with an outstanding principal balance of $7.5 million and recorded a premium of $0.5 million to reflect the fair value of the debt at the time of assumption.

 

5.  UNSECURED CREDIT FACILITY AND UNSECURED TERM LOANS

 

On September 29, 2010, the Company amended its three-year, $450 million senior secured credit facility (the “Secured Credit Facility”), which consisted of a $200 million secured term loan and a $250 million secured revolving credit facility.  The Secured Credit Facility was collateralized by mortgages on “borrowing base properties” (as defined in the Secured Credit Facility agreement).   The amended credit facility (the “Credit Facility”) consists of a $200 million unsecured term loan and a $250 million unsecured revolving credit facility. The Credit Facility is unsecured and has a three-year term expiring on December 7, 2013.  Borrowings under the Credit Facility bear interest ranging from 3.25% to 3.75% over LIBOR depending on our leverage ratio.  If the Company receives two investment grade ratings, pricing on the Credit Facility will adjust to range from 1.90% to 3.00% over LIBOR.  The Company incurred $2.5 million in connection with executing this amendment and capitalized such costs as a component of loan procurement costs, net of amortization on the Company’s consolidated balance sheet.

 

On June 20, 2011, the Company entered into an unsecured Term Loan Agreement (the “Term Loan Facility”) which consisted of a $100 million term loan with a five-year maturity and a $100 million term loan with a seven-year maturity.  The Term Loan Facility permits the Company to request additional advances of five-year or seven-year loans in minimum increments of $5,000,000 provided that the aggregate of such additional advances does not exceed $50,000,000.  Pricing on the Term Loan Facility ranges, depending on the Company’s leverage levels, from 1.90% to 2.75% over LIBOR for the five-year loan, and from 2.05% to 2.85% over LIBOR for the seven-year loan, and each loan has no LIBOR floor.  If the Company receives two investment grade ratings, pricing on the Term Loan Facility will adjust to range from 1.45% to 2.10% over LIBOR for the five-year loan, and from 1.60% to 2.25% over LIBOR for the seven-year loan.  The Company incurred $2.1 million in connection with executing the agreement and capitalized such costs as a component of loan procurement costs, net of amortization on the Company’s consolidated balance sheet.

 

On June 30, 2011, $200 million of unsecured term loan borrowings were outstanding under the Term Loan Facility, $100 million of unsecured term loan borrowings and $9 million of unsecured revolving credit facility borrowings were outstanding under the Credit Facility, and $241 million was available for borrowing under the Credit Facility.  The Company had an interest rate cap agreement as of June 30, 2011, that effectively limited the LIBOR component of the interest rate on $100 million of Credit Facility borrowings to 2.00% per annum through January 2012.  In addition, the Company had interest rate swap agreements as of June 30, 2011 that fix LIBOR on both the five and seven-year term loans through their respective maturity dates.  The interest rate swap agreements fix thirty-day LIBOR over the terms of the five and seven-year term loans at 1.80% and 2.47%, respectively.  The Company recognized loan procurement amortization expense - early repayment of debt of $2.1 million related to the write-off of unamortized loan procurement costs associated with $100 million of unsecured term loans that were repaid during the three months ended June 30, 2011.

 

As of June 30, 2011, borrowings under the Credit Facility and Term Loan Facility had a weighted average interest rate of 3.87%.  As of June 30, 2011, the effective interest rates on the five and seven-year term loans were 3.70% and 4.52%, respectively, after giving consideration to the interest rate swaps described in Note 7.

 

The Company’s ability to borrow under the Credit Facility and Term Loan Facility is subject to the Company’s ongoing compliance with certain financial covenants which include:

 

·         Maximum total indebtedness to total asset value of 60.0% at any time;

 

·         Minimum fixed charge coverage ratio of 1.50:1.00; and

 

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·         Minimum tangible net worth of $821,211,200 plus 75% of net proceeds from equity issuances after June 30, 2010.

 

Further, under the Credit Facility and Term Loan Facility, the Company is restricted from paying distributions on its common shares that would exceed an amount equal to the greater of (i) 95% of the Company’s funds from operations, and (ii) such amount as may be necessary to maintain our REIT status.

 

The Company is currently in compliance with all financial covenants and anticipates being in compliance with all financial covenants through the terms of the Credit Facility and Term Loan Facility.

 

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6.  MORTGAGE LOANS AND NOTES PAYABLE

 

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

 

 

 

Carrying Value as of:

 

 

 

 

 

 

 

June 30,

 

December 31,

 

Effective

 

Maturity

 

Mortgage Loan

 

2011

 

2010

 

Interest Rate

 

Date

 

 

 

(in thousands)

 

 

 

 

 

YSI 12

 

$

 

$

1,477

 

5.97

%

Sep-11

 

YSI 13

 

 

1,270

 

5.97

%

Sep-11

 

YSI 6

 

75,489

 

76,137

 

5.13

%

Aug-12

 

YASKY

 

80,000

 

80,000

 

4.96

%

Sep-12

 

YSI 14

 

1,731

 

1,759

 

5.97

%

Jan-13

 

YSI 7

 

3,066

 

3,100

 

6.50

%

Jun-13

 

YSI 8

 

1,752

 

1,771

 

6.50

%

Jun-13

 

YSI 9

 

1,927

 

1,948

 

6.50

%

Jun-13

 

YSI 17

 

4,054

 

4,121

 

6.32

%

Jul-13

 

YSI 27

 

490

 

499

 

5.59

%

Nov-13

 

YSI 30

 

7,184

 

7,316

 

5.59

%

Nov-13

 

YSI 11

 

2,386

 

2,420

 

5.87

%

Dec-13

 

USIFB

 

7,366

 

3,726

 

5.11

%

Dec-13

 

YSI 5

 

3,147

 

3,193

 

5.25

%

Jan-14

 

YSI 28

 

1,532

 

1,555

 

5.59

%

Feb-14

 

YSI 34

 

 

14,823

 

8.00

%

Jun-14

 

YSI 37

 

2,192

 

2,210

 

7.25

%

Aug-14

 

YSI 40

 

 

2,520

 

7.25

%

Aug-14

 

YSI 44

 

1,084

 

1,095

 

7.00

%

Sep-14

 

YSI 41

 

3,827

 

3,879

 

6.60

%

Sep-14

 

YSI 38

 

 

3,973

 

6.35

%

Oct-14

 

YSI 45

 

5,399

 

5,443

 

6.75

%

Oct-14

 

YSI 46

 

 

3,430

 

6.75

%

Oct-14

 

YSI 43

 

 

2,919

 

6.50

%

Nov-14

 

YSI 48

 

25,059

 

25,270

 

7.25

%

Nov-14

 

YSI 50

 

2,292

 

2,322

 

6.75

%

Dec-14

 

YSI 10

 

4,051

 

4,091

 

5.87

%

Jan-15

 

YSI 15

 

1,855

 

1,877

 

6.41

%

Jan-15

 

YSI 20

 

61,519

 

62,459

 

5.97

%

Nov-15

 

YSI 51

 

7,470

 

 

6.36

%

Oct-16

 

YSI 31

 

13,539

 

13,660

 

6.75

%

Jun-19

(a)

YSI 35

 

4,499

 

4,499

 

6.90

%

Jul-19

(a)

YSI 32

 

6,005

 

6,058

 

6.75

%

Jul-19

(a)

YSI 33

 

11,266

 

11,370

 

6.42

%

Jul-19

 

YSI 42

 

 

3,184

 

6.88

%

Sep-19

(a)

YSI 39

 

3,899

 

3,931

 

6.50

%

Sep-19

(a)

YSI 47

 

3,134

 

3,176

 

6.63

%

Jan-20

(a)

Unamortized fair value adjustment

 

431

 

(24

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total mortgage loans and notes payable

 

$

347,645

 

$

372,457

 

 

 

 

 

 

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(a)                 These borrowings have a fixed interest rate for the first five-years of their term, which then resets and remains constant over the final five-years of the loan term.

 

The following table represents the future principal payment requirements on the outstanding mortgage loans and notes payable at June 30, 2011 (in thousands):

 

2011

 

$

2,879

 

2012

 

159,504

 

2013

 

33,084

 

2014

 

62,069

 

2015

 

60,215

 

2016 and thereafter

 

29,463

 

Total mortgage payments

 

347,214

 

Plus: Unamortized fair value adjustment

 

431

 

Total mortgage indebtedness

 

$

347,645

 

 

The Company currently intends to fund its remaining 2011 principal payment requirements from cash provided by operating activities.

 

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 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 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.

 

The Company formally assesses, both at inception of a 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, then the Company 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 following table summarizes the terms and fair values of the Company’s derivative financial instruments at June 30, 2011 (dollars in thousands):

 

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Fair Value

 

Hedge

 

 

 

Notional

 

 

 

 

 

 

 

June 30,

 

Product

 

Hedge Type

 

Amount

 

Strike

 

Effective Date

 

Maturity

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cap

 

Cash flow

 

$

100,000

 

2.0000

%

2/1/2011

 

1/31/2012

 

$

 

Swap

 

Cash flow

 

$

40,000

 

1.8025

%

6/20/2011

 

6/20/2016

 

163

 

Swap

 

Cash flow

 

$

40,000

 

1.8025

%

6/20/2011

 

6/20/2016

 

114

 

Swap

 

Cash flow

 

$

20,000

 

1.8025

%

6/20/2011

 

6/20/2016

 

110

 

Swap

 

Cash flow

 

$

40,000

 

2.4590

%

6/20/2011

 

6/20/2018

 

237

 

Swap

 

Cash flow

 

$

40,000

 

2.4725

%

6/20/2011

 

6/20/2018

 

131

 

Swap

 

Cash flow

 

$

20,000

 

2.4750

%

6/20/2011

 

6/20/2018

 

106

 

 

 

 

 

 

 

 

 

 

 

 

 

$

861

 

 

8.  FAIR VALUE MEASUREMENTS

 

In 2008, the Company adopted the methods of fair value as described in authoritative guidance, to value its financial assets and liabilities. 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.

 

Financial assets and liabilities carried at fair value as of June 30, 2011 are classified in the table below in one of the three categories described above (dollars in thousands):

 

 

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

Interest Rate Swap Derivative Assets

 

$

 

$

861

 

$

 

 

 

 

 

 

 

 

 

Total assets at fair value

 

$

 

$

861

 

$

 

 

Financial assets and liabilities carried at fair value were classified as Level 2 inputs.  For financial liabilities that utilize Level 2 inputs, the Company utilizes both direct and indirect observable price quotes, including LIBOR yield curves, bank price quotes for forward starting swaps, NYMEX futures pricing and common stock price quotes. Below is a summary of valuation techniques for Level 2 financial liabilities:

 

·                  Interest rate swap derivative assets and liabilities — valued using LIBOR yield curves at the reporting date. Counterparties to these contracts are most often highly rated financial institutions none of which experienced any significant downgrades in 2011 that would reduce the amount owed by the Company.  Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by us and the counterparties. However, as of June 30, 2011 we have assessed the significance of the effect of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

 

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The fair values of financial instruments, including cash and cash equivalents, accounts receivable and accounts payable approximates their respective book values at June 30, 2011 and December 31, 2010.  The Company had fixed interest rate loans with a carrying value of $347.6 million and $372.5 million at June 30, 2011 and December 31, 2010, respectively.  The estimated fair values of these fixed rate loans were $336.9 million and $351.8 million at June 30, 2011 and December 31, 2010, respectively.  The Company had variable interest rate loans with a carrying value of $309.0 million and $243.0 million at June 30, 2011 and December 31, 2010, respectively.  The estimated fair values of the variable interest rate loans approximate their carrying values due to their floating rate nature and market spreads.  These estimates are based on discounted cash flow analyses assuming market interest rates for comparable obligations at June 30, 2011 and December 31, 2010.

 

9.  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 in exchange for a market rate management fee.

 

The Company determined that HART is a variable interest entity, and that the Company is the primary beneficiary.  Accordingly, the Company consolidates the assets, liabilities and results of operations of HART.  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 sheets.  At June 30, 2011, HART had total assets of $88.1 million, including $85.8 million of storage facilities, net and total liabilities of $2.2 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 two facilities in London, England during 2008.  The Company determined that the Venture is a variable interest entity, and that the Company is the primary beneficiary.  Accordingly, the Company consolidates the assets, liabilities and results of operations of the Venture.  At June 30, 2011, the Venture had total assets of $11.8 million and total liabilities of $7.8 million, including two mortgage loans totaling $7.4 million secured by storage facilities with a net book value of $11.5 million.  At June 30, 2011, the Venture’s creditors had no recourse to the general credit of the Company.

 

Operating Partnership Ownership

 

The Company follows 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 classified outside of permanent equity 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 4.6% of all outstanding Operating Partnership units as of June 30, 2011 and December 31, 2010.  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

 

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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 provisions that could result in a settlement outside the control of the Company, as the Company does not have the ability to settle in unregistered shares.  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 Company’s common shares on the New York Stock Exchange for the 10 trading days ending prior to the Company’s receipt of the redemption notice for the applicable unit.  At June 30, 2011 and December 31, 2010, 4,729,136 and 4,737,136 units were outstanding, respectively, and the calculated aggregate redemption value of outstanding Operating Partnership units was based upon the Company’s average closing share prices.  Based on the Company’s evaluation of the redemption value of the redeemable noncontrolling interest, the Company has reflected these interests at their redemption value, as the estimated redemption value exceeded their carrying value at June 30, 2011 and December 31, 2010.  The Company recorded increases to noncontrolling interests and corresponding decreases to shareholders’ equity of $5.3 million and $1.5 million at June 30, 2011 and December 31, 2010, respectively.

 

10.  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 of the Company).  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 require the Operating Partnership  to 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, 2011 and June 30, 2010 was approximately $0.1 million.  Additionally, the aggregate amount of payments for each of the six months ended June 30, 2011 and June 30, 2010 was approximately $0.2 million.  The Company vacated the office space owned by Amsdell and Amsdell in 2007, but remains obligated under certain terms 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, 2011 are as follows:

 

 

 

Due to Related Party

 

Due from Subtenant

 

 

 

Amount

 

Amount

 

 

 

(in thousands)

 

 

 

 

 

 

 

2011

 

$

237

 

$

139

 

2012

 

475

 

278

 

2013

 

499

 

278

 

2014

 

499

 

278

 

 

 

$

1,710

 

$

973

 

 

11.  PRO FORMA FINANCIAL INFORMATION

 

During the six months ended June 30, 2011, the Company acquired five self-storage facilities for an aggregate purchase price of approximately $58.7 million (see note 4).

 

The 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 (including the issuance of common shares) that occurred during 2011 as if each had occurred as of January 1, 2010.  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.

 

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The following table summarizes, on a pro forma basis, the Company’s consolidated results of operations for the six months ended June 30, 2011 and 2010 based on the assumptions described above:

 

 

 

Six Months Ended June 30,

 

 

 

2011

 

2010

 

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

Pro forma revenue

 

$

118,099

 

$

107,012

 

Pro forma net income (loss) from continuing operations

 

$

226

 

$

(9,835

)

Net income (loss) per common share

 

 

 

 

 

Basic and diluted - as reported

 

$

0.01

 

$

(0.09

)

Basic and diluted - as pro forma

 

$

 

$

(0.10

)

 

12.  COMPREHENSIVE INCOME (LOSS)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(in thousands)

 

NET INCOME (LOSS)

 

$

1,588

 

$

(4,389

)

$

2,064

 

$

(7,581

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Unrealized gain on interest rate swap

 

861

 

 

861

 

 

Unrealized gain (loss) on foreign currency translation

 

(24

)

(52

)

228

 

(249

)

COMPREHENSIVE INCOME (LOSS)

 

$

2,425

 

$

(4,441

)

$

3,153

 

$

(7,830

)

 

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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 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, 2010.

 

Overview

 

The Company is an integrated self-storage real estate company, and as such we have 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 U.S. federal income tax purposes.  As of June 30, 2011 and December 31, 2010, the Company owned 367 and 363 self-storage facilities, respectively, totaling approximately 24.0 million rentable square feet and 23.6 million rentable square feet, respectively.  In addition, as of June 30, 2011, the Company managed 85 properties for third parties bringing the total number of properties which it owned and/or managed to 452.

 

The Company derives revenues principally from rents received from its customers who rent units at its 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 have a decentralized approach to the management and operation of our facilities, which places an emphasis on local, market level oversight and control.  We believe this approach allows us to respond quickly and effectively to changes in local market conditions, and to maximize revenues by managing rental rates and occupancy 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 recently experienced an economic downturn that resulted in higher unemployment, stagnant employment growth, 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 maximizing 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 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 17%, 12%, 10% and 7%, respectively, of total revenues for the three and six month periods ended June 30, 2011.

 

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.

 

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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 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 for an acquisition, 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.

 

During 2010, the Company acquired 85 management contracts from United Stor-All Management, LLC (“United Stor-All”).  The Company accounted for this acquisition as a business combination.  The Company recorded the fair value of the assets acquired which includes the intangible value related to the management contracts as other assets, net on the Company’s consolidated balance sheet.  The average estimated life of the intangible value of the management contracts is 56 months, and the related amortization expense recognized during the three and six months ended June 30, 2011 was $0.3 million and $0.6 million.  The Company recognized $0.2 million of amortization during the three and six months ended June 30, 2010.  Additionally, during 2010, the Company acquired 12 self-storage facilities and allocated approximately $3.7 million to the intangible value of the in-place leases.  The amortization expense that was recognized during the three and six months ended June 30, 2011 was $1.0 million and $1.9 million, respectively, with no comparable expense during the 2010 period.

 

During the six months ended June 30, 2011, the Company acquired five self-storage facilities for an aggregate purchase price of $58.7 million and allocated approximately $3.1 million to the intangible value of in-place leases.  These assets represent the value of in-place leases at the time of acquisition.  The Company recognized amortization expense related to these assets of $0.5 million and $0.6 million during the three and six months ended June 30, 2011.  In connection with one of the acquisitions, the Company assumed mortgage debt with an outstanding principal balance of $7.5 million and recorded a premium of $0.5 million to reflect the fair value of the debt at the time of assumption.

 

Long-lived assets classified as “held for use” are reviewed for impairment when events and circumstances such as declines in occupancy and operating results indicate that there may be impairment.  The carrying value of these long-lived assets is compared to the undiscounted future net operating cash flows, plus a terminal value, attributable to the assets to determine if the property’s basis is recoverable.  If a property’s basis is not considered recoverable, an impairment loss is recorded to the extent the net carrying value of the asset exceeds the fair value.  The impairment loss recognized equals the excess of net carrying value over the related fair value of the asset.  There were no impairment losses recognized in accordance with these procedures for the periods ended June 30, 2011 and 2010.

 

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.

 

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Typically these criteria are all met when the relevant asset is 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; 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.  Properties classified as held for sale are reported at 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.

 

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.  In accordance with authoritative guidance issued on noncontrolling interests in consolidated financial statements, such noncontrolling interests are reported on the consolidated balance sheets within equity, separately from the Company’s equity.  The guidance also requires that noncontrolling interests are adjusted each period so that the carrying value equals the greater of its carrying value based on the accumulation of historical cost or its redemption fair value.  On the consolidated statements of operations, revenues, expenses and net income or loss from less-than-wholly-owned subsidiaries are reported at the consolidated amounts, including both the amounts attributable to the Company and noncontrolling interests.  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.  Disclosure of such redemption value provisions is provided in Note 9 to the unaudited condensed consolidated financial statements.

 

Results of Operations

 

The following discussion of our results of operations should be read in conjunction with the 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.  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 years presented. Same-store results are 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.

 

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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, 2011 and 2010, the Company owned 367 self-storage facilities and related assets, respectively.  The following table summarizes the change in number of owned self-storage facilities from January 1, 2010 through June 30, 2011:

 

 

 

2011

 

2010

 

Balance - January 1

 

363

 

367

 

Facilities acquired

 

1

 

 

Facilities sold

 

 

 

Balance - March 31

 

364

 

367

 

Facilities acquired

 

4

 

 

Facilities consolidated

 

(1

)

 

Facilities sold

 

 

 

Balance - June 30

 

367

 

367

 

Facilities acquired

 

 

 

3

 

Facilities sold

 

 

 

 

Balance - September 30

 

 

 

370

 

Facilities acquired

 

 

 

9

 

Facilities sold

 

 

 

(16

)

Balance - December 31

 

 

 

363

 

 

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Comparison of the three months ended June 30, 2011 to the three months ended June 30, 2010

 

 

 

Same-Store Property Portfolio

 

Non Same-Store Properties

 

Other/
Eliminations

 

Total Portfolio

 

 

 

 

 

 

 

Increase/

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase/

 

 

 

 

 

2011

 

2010

 

(Decrease)

 

Change

 

2011

 

2010

 

2011

 

2010

 

2011

 

2010

 

(Decrease)

 

Change

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

49,279

 

$

48,137

 

$

1,142

 

2

%

$

3,627

 

$

19

 

$

 

$

 

$

52,906

 

$

48,156

 

$

4,750

 

10

%

Other property related income

 

4,876

 

4,201

 

675

 

16

%

410

 

216

 

364

 

 

5,650

 

4,417

 

1,233

 

28

%

Property management fee income

 

 

 

 

 

 

 

848

 

590

 

848

 

590

 

258

 

44

%

Total revenues

 

54,155

 

52,338

 

1,817

 

3

%

4,037

 

235

 

1,212

 

590

 

59,404

 

53,163

 

6,241

 

12

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

20,770

 

21,266

 

(496

)

-2

%

1,508

 

269

 

2,807

 

2,220

 

25,085

 

23,755

 

1,330

 

6

%

NET OPERATING INCOME:

 

33,385

 

31,072

 

2,313

 

7

%

2,529

 

(34

)

(1,595

)

(1,630

)

34,319

 

29,408

 

4,911

 

17

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,945

 

15,930

 

15

 

0

%

General and administrative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,841

 

6,844

 

(3

)

0

%

Subtotal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22,786

 

22,774

 

12

 

0

%

Operating income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,533

 

6,634

 

4,899

 

74

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense on loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,020

)

(9,625

)

(1,605

)

-17

%

Loan procurement amortization expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,396

)

(1,620