Table of Contents

 

 

 

**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

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**(Mark one)**

 

**x****      Quarterly report pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934**

 

**For the quarterly period ended September 30, 2010.**

 

**or**

 

**o****         Transition reportpursuant to Section 13 or 15(d) of the Securities Exchange Act of1934**

 

**For the transition period from                     to                     .**

 

**Commission file number: 001-32324**

 

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**U-STORE-ITTRUST**

(ExactName of Registrant as Specified in its Charter)

 

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| **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 AreaCode)

 

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

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12months (or for such shorter period that the registrant was required to submitand post such files).  Yes £  No £

 

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

 

| Large  accelerated filer £ |   | Accelerated  filer x              |
|---------------------------------|--------|-----------------------------------|
|                            |   |                              |
| Non-accelerated  filer £   |   | Smaller  reporting company £ |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes £ No x

 

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

 

| **Class**                      | ** ** | **Outstanding at November 1, 2010** |
|--------------------------------|------------|---------------------------------------------------------|
| common  shares, $.01 par value |       | 95,885,503                                              |

 

 

 

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Table ofContents

 

**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 | 17     |
| Item 3.   Quantitative  and Qualitative Disclosures About Market Risk                                 | 27     |
| Item 4.   Controls  and Procedures                                                                    | 28     |
| Part II.  OTHER INFORMATION                                                                                |   |
| Item 2.   Unregistered  Sales of Equity Securities and Use of Proceeds                                | 28     |
| Item 6.   Exhibits                                                                                    | 30     |

 

**Forward-Looking Statements**

 

ThisQuarterly Report on Form 10-Q, or “this Report”, together with otherstatements and information publicly disseminated by U-Store-It Trust (“we,” “us,”“our” or the “Company”), contain certain forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof 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, capitalexpenditures, financing needs, plans or intentions relating to acquisitions andother information that is not historical information.  In some cases, forward-looking statements canbe identified by terminology such as “believes,” “expects,” “estimates,” “may,”“will,” “should,” “anticipates,” or “intends” or the negative of such terms orother comparable terminology, or by discussions of strategy.  Such statements are based on assumptions andexpectations that may not be realized and are inherently subject to risks,uncertainties and other factors, many of which cannot be predicted withaccuracy and some of which might not even be anticipated.  Although we believe the expectationsreflected in these forward-looking statements are based on reasonableassumptions, future events and actual results, performance, transactions orachievements, financial and otherwise, may differ materially from the results,performance, transactions or achievements expressed or implied by theforward-looking statements.  As a result,you should not rely on or construe any forward-looking statements in thisReport, or which management may make orally or in writing from time to time, aspredictions of future events or as guarantees of future performance.  We caution you not to place undue reliance onforward-looking statements, which speak only as of the date of this Report oras 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 thisstatement.

 

Thereare a number of risks and uncertainties that could cause our actual results todiffer materially from the forward-looking statements contained in orcontemplated by this Report.  Anyforward-looking statements should be considered in light of the risks anduncertainties referred to in Item 1A. “Risk Factors” in the U-Store-It TrustAnnual Report on Form 10-K for the year ended December 31, 2009 andin 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 andoperating self-storage facilities;

 

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

 

·                  the execution of our business plan;

 

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

 

·                  increases in interest rates and operatingcosts;

 

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

 

·                  our ability to maintain our status as a realestate investment trust (“REIT”) for U.S. federal income tax purposes;

 

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·                  acquisition and development risks, includingunanticipated costs associated with the integration and operation ofacquisitions;

 

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

 

·                  changes in real estate and zoning laws or regulations,including, without limitation, those laws and regulations governing REITS;

 

·                  risks related to natural disasters;

 

·                  potential environmental and otherliabilities; and

 

·                  other risks identified in our Annual Reporton Form 10-K and, from time to time, in other reports that we file withthe SEC or in other documents that we publicly disseminate.

 

Given these uncertaintiesand the other risks identified elsewhere in our Annual Report on Form 10-Kand in this Report, we caution readers not to place undue reliance onforward-looking statements.  We undertakeno obligation to publicly update or revise these forward-looking statements,whether as a result of new information, future events or otherwise except as maybe required by securities laws.

 

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**PART I.FINANCIAL INFORMATION**

**ITEM 1.FINANCIAL STATEMENTS**

 

**U-STORE-IT TRUST AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(in thousands, except share data)**

**(unaudited)**

 
| ** **                                                                                                                                                                                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                  | ** ** | **2010**               | ** ** | **2009**              | ** ** |
|                                                                                                                                                                                        |       |                   |       |                  |       |
| **ASSETS**                                                                                                                                                                                  |       |                   |       |                  |       |
| Storage  facilities                                                                                                                                                                         |       | $                      | 1,745,625  |                  | $          | 1,774,542 |   |
| Less:  Accumulated depreciation                                                                                                                                                             |       | (326,314               | )          | (344,009              | )          |
| Storage  facilities, net                                                                                                                                                                    |       | 1,419,311              |       | 1,430,533             |       |
| Cash  and cash equivalents                                                                                                                                                                  |       | 23,203                 |       | 102,768               |       |
| Restricted  cash                                                                                                                                                                            |       | 15,528                 |       | 16,381                |       |
| Loan  procurement costs, net of amortization                                                                                                                                                |       | 17,351                 |       | 18,366                |       |
| Notes  receivable                                                                                                                                                                           |       | —                 |       | 20,112                |       |
| Assets  held for sale                                                                                                                                                                       |       | 1,867                  |       | —                |       |
| Other  assets, net                                                                                                                                                                          |       | 19,934                 |       | 10,710                |       |
| Total  assets                                                                                                                                                                               |       | $                      | 1,497,194  |                  | $          | 1,598,870 |   |
|                                                                                                                                                                                        |       |                   |       |                  |       |
| **LIABILITIES AND EQUITY**                                                                                                                                                                  |       |                   |       |                  |       |
|                                                                                                                                                                                        |       |                   |       |                  |       |
| Unsecured  term loan                                                                                                                                                                        |       | $                      | 200,000    |                  | $          | — |   |
| Secured  term loan                                                                                                                                                                          |       | —                 |       | 200,000               |       |
| Mortgage  loans and notes payable                                                                                                                                                           |       | 456,174                |       | 569,026               |       |
| Accounts  payable, accrued expenses and other liabilities                                                                                                                                   |       | 40,646                 |       | 33,767                |       |
| Distributions  payable                                                                                                                                                                      |       | 2,515                  |       | 2,448                 |       |
| Deferred  revenue                                                                                                                                                                           |       | 8,893                  |       | 8,449                 |       |
| Security  deposits                                                                                                                                                                          |       | 512                    |       | 456                   |       |
| Other  liabilities held for sale                                                                                                                                                            |       | 22                     |       | —                |       |
| Total  liabilities                                                                                                                                                                          |       | 708,762                |       | 814,146               |       |
|                                                                                                                                                                                        |       |                   |       |                  |       |
| Noncontrolling  interests in the Operating Partnership                                                                                                                                      |       | 43,871                 |       | 45,394                |       |
|                                                                                                                                                                                        |       |                   |       |                  |       |
| Commitments  and contingencies                                                                                                                                                              |       |                   |       |                  |       |
|                                                                                                                                                                                        |       |                   |       |                  |       |
| Equity                                                                                                                                                                                      |       |                   |       |                  |       |
| Common  shares $.01 par value, 200,000,000 shares authorized, 95,435,132 and  92,654,979 shares issued and outstanding at September 30, 2010 and  December 31, 2009, respectively |       | 954                    |       | 927                   |       |
| Additional  paid in capital                                                                                                                                                                 |       | 998,894                |       | 974,926               |       |
| Accumulated  other comprehensive loss                                                                                                                                                       |       | (924                   | )          | (874                  | )          |
| Accumulated  deficit                                                                                                                                                                        |       | (296,225               | )          | (279,670              | )          |
| Total  U-Store-It Trust shareholders’ equity                                                                                                                                           |       | 702,699                |       | 695,309               |       |
| Noncontrolling  interest in subsidiaries                                                                                                                                                    |       | 41,862                 |       | 44,021                |       |
| Total  equity                                                                                                                                                                               |       | 744,561                |       | 739,330               |       |
| Total  liabilities and equity                                                                                                                                                               |       | $                      | 1,497,194  |                  | $          | 1,598,870 |   |

 

See accompanying notes to the unaudited consolidated financialstatements.

 

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**U-STORE-IT TRUST AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(in thousands, except per share data)**

**(unaudited)**

 
| ** **                                                                                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| **REVENUES**                                                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Rental  income                                                                                          |       | $                                                    | 50,809     |                                                | $          | 50,269 |   | $ | 149,080 |   | $ | 151,008 |   |
| Other  property related income                                                                          |       | 5,155                                                |       | 4,347                                               |       | 13,919 |   | 12,510 |   |
| Property  management fee income                                                                         |       | 1,048                                                |       | 12                                                  |       | 1,682 |   | 140 |   |
| Total  revenues                                                                                         |       | 57,012                                               |       | 54,628                                              |       | 164,681 |   | 163,658 |   |
| **OPERATING EXPENSES**                                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Property  operating expenses                                                                            |       | 24,602                                               |       | 23,065                                              |       | 71,921 |   | 71,509 |   |
| Depreciation  and amortization                                                                          |       | 15,557                                               |       | 17,844                                              |       | 48,258 |   | 53,385 |   |
| General  and administrative                                                                             |       | 6,597                                                |       | 5,556                                               |       | 19,308 |   | 16,658 |   |
| Total  operating expenses                                                                               |       | 46,756                                               |       | 46,465                                              |       | 139,487 |   | 141,552 |   |
| **OPERATING INCOME**                                                                                    |       | 10,256                                               |       | 8,163                                               |       | 25,194 |   | 22,106 |   |
| **OTHER INCOME (EXPENSE)**                                                                              |       |                                                 |       |                                                |       |   |   |   |   |
| Interest:                                                                                               |       |                                                 |       |                                                |       |   |   |   |   |
| Interest  expense on loans                                                                              |       | (9,648                                               | )          | (12,008                                             | )          | (29,324 | ) | (34,834 | ) |
| Loan  procurement amortization expense                                                                  |       | (1,559                                               | )          | (489                                                | )          | (4,718 | ) | (1,517 | ) |
| Interest  income                                                                                        |       | 19                                                   |       | 150                                                 |       | 616 |   | 249 |   |
| Acquisition  related costs                                                                              |       | (165                                                 | )          | —                                              |       | (465 | ) | — |   |
| Other                                                                                                   |       | (67                                                  | )          | —                                              |       | (142 | ) | (13 | ) |
| Total  other expense                                                                                    |       | (11,420                                              | )          | (12,347                                             | )          | (34,033 | ) | (36,115 | ) |
|                                                                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| **LOSS FROM CONTINUING OPERATIONS**                                                                     |       | (1,164                                               | )          | (4,184                                              | )          | (8,839 | ) | (14,009 | ) |
|                                                                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| **DISCONTINUED OPERATIONS**                                                                             |       |                                                 |       |                                                |       |   |   |   |   |
| Income  from discontinued operations                                                                    |       | 49                                                   |       | 777                                                 |       | 143 |   | 2,610 |   |
| Net  gain on disposition of discontinued operations                                                     |       | —                                               |       | 10,910                                              |       | — |   | 13,530 |   |
| Total  discontinued operations                                                                          |       | 49                                                   |       | 11,687                                              |       | 143 |   | 16,140 |   |
| **NET (LOSS) INCOME**                                                                                   |       | (1,115                                               | )          | 7,503                                               |       | (8,696 | ) | 2,131 |   |
| **NET LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTERESTS**                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Noncontrolling  interests in the Operating Partnership                                                  |       | 76                                                   |       | (512                                                | )          | 487 |   | (93 | ) |
| Noncontrolling  interest in subsidiaries                                                                |       | (441                                                 | )          | (173                                                | )          | (1,267 | ) | (173 | ) |
| **NET (LOSS) INCOME ATTRIBUTABLE TO THE COMPANY**                                                       |       | $                                                    | (1,480     | )                                                   | $          | 6,818 |   | $ | (9,476 | ) | $ | 1,865 |   |
|                                                                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| Basic  and diluted loss per share from continuing operations attributable to common  shareholders       |       | $                                                    | (0.02      | )                                                   | $          | (0.05 | ) | $ | (0.10 | ) | $ | (0.21 | ) |
| Basic  and diluted earnings per share from discontinued operations attributable to  common shareholders |       | $                                                    | —     |                                                | $          | 0.14 |   | $ | — |   | $ | 0.24 |   |
| Basic  and diluted (loss) earnings per share attributable to common shareholders                        |       | $                                                    | (0.02      | )                                                   | $          | 0.09 |   | $ | (0.10 | ) | $ | 0.03 |   |
|                                                                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted-average  basic and diluted shares outstanding                                                  |       | 93,724                                               |       | 75,248                                              |       | 93,154 |   | 63,764 |   |
| **AMOUNTS ATTRIBUTABLE TO THE COMPANY’S COMMON SHAREHOLDERS:**                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Loss  from continuing operations                                                                        |       | $                                                    | (1,527     | )                                                   | $          | (4,098 | ) | $ | (9,613 | ) | $ | (13,210 | ) |
| Total  discontinued operations                                                                          |       | 47                                                   |       | 10,916                                              |       | 137 |   | 15,075 |   |
| Net  (loss) income                                                                                      |       | $                                                    | (1,480     | )                                                   | $          | 6,818 |   | $ | (9,476 | ) | $ | 1,865 |   |

 

See accompanying notes to the unaudited consolidated financialstatements.

 

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**U-STORE-IT TRUST AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF EQUITY**

**For the Nine-Month Periods Ended September 30, 2010 and2009**

**(in thousands)**

**(unaudited)**

 
| ** **                                                   | ** ** | **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, 2009**                        |       | 92,655                 |       | $                            | 927        |                                      | $          | 974,926         |       | $                             | (874       | )                                    | $          | (279,670         | )          | $                                                         | 695,309    |   | $ | 44,021 |   | $ | 739,330 |   | $ | 45,394 |   |
| Contributions  from noncontrolling interests in subsidiaries |       | —                 |       | —                       |       | —                                    |       | —          |       | —                        |       | —                               |       | 20               |       | 20                                                        |       | — |   |
| Issuance  of restricted shares                               |       | 201                    |       | 2                            |       | —                                    |       | —          |       | —                        |       | 2                                    |       | —           |       | 2                                                         |       | — |   |
| Issuance  of common shares                                   |       | 2,450                  |       | 24                           |       | 20,414                                    |       | —          |       | —                        |       | 20,438                               |       | —           |       | 20,438                                                    |       | — |   |
| Exercise  of stock options                                   |       | 56                     |       | —                       |       | 194                                       |       | —          |       | —                        |       | 194                                  |       | —           |       | 194                                                       |       | — |   |
| Conversion  from units to shares                             |       | 73                     |       | 1                            |       | 674                                       |       | —          |       | —                        |       | 675                                  |       | —           |       | 675                                                       |       | (675 | ) |
| Amortization  of restricted shares                           |       | —                 |       | —                       |       | 1,256                                     |       | —          |       | —                        |       | 1,256                                |       | —           |       | 1,256                                                     |       | — |   |
| Share  compensation expense                                  |       | —                 |       | —                       |       | 1,430                                     |       | —          |       | —                        |       | 1,430                                |       | —           |       | 1,430                                                     |       | — |   |
| Net  (loss) income                                           |       | —                 |       | —                       |       | —                                    |       | —          |       | (9,476                        | )          | (9,476                               | )          | 1,267            |       | (8,209                                                    | )          | (487 | ) |
| Other  comprehensive income:                                 |       |                   |       |                         |       |                                      |       |            |       |                          |       |                                 |       |             |       |                                                      |       |   |   |
| Unrealized  loss on foreign currency translation             |       | —                 |       | —                       |       | —                                    |       | (50             | )          | —                        |       | (50                                  | )          | (1               | )          | (51                                                       | )          | (3 | ) |
| Distributions                                                |       | —                 |       | —                       |       | —                                    |       | —          |       | (7,079                        | )          | (7,079                               | )          | (3,445           | )          | (10,524                                                   | )          | (358 | ) |
| **Balance at September 30, 2010**                       |       | 95,435                 |       | $                            | 954        |                                      | $          | 998,894         |       | $                             | (924       | )                                    | $          | (296,225         | )          | $                                                         | 702,699    |   | $ | 41,862 |   | $ | 744,561 |   | $ | 43,871 |   |

 
| ** **                                                   | ** ** | **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 |   |
| Contributions  from noncontrolling interests in subsidiaries |       | —                 |       | —                       |       | —                                    |       | —          |       | —                        |       | —                               |       | 44,794           |       | 44,794                                                    |       | (114 | ) |
| Issuance  of restricted shares                               |       | 84                     |       | 1                            |       | —                                    |       | —          |       | —                        |       | 1                                    |       | —           |       | 1                                                         |       | — |   |
| Issuance  of common shares                                   |       | 34,676                 |       | 346                          |       | 170,503                                   |       | —          |       | —                        |       | 170,849                              |       | —           |       | 170,849                                                   |       | — |   |
| Amortization  of restricted shares                           |       | —                 |       | —                       |       | 1,256                                     |       | —          |       | —                        |       | 1,256                                |       | —           |       | 1,256                                                     |       | — |   |
| Share  compensation expense                                  |       | —                 |       | —                       |       | 1,323                                     |       | —          |       | —                        |       | 1,323                                |       | —           |       | 1,323                                                     |       | — |   |
| Net  income                                                  |       | —                 |       | —                       |       | —                                    |       | —          |       | 1,865                         |       | 1,865                                |       | 173              |       | 2,038                                                     |       | 93 |   |
| Other  comprehensive income:                                 |       |                   |       |                         |       |                                      |       |            |       |                          |       |                                 |       |             |       |                                                      |       |   |   |
| Unrealized  gain on interest rate swap                       |       | —                 |       | —                       |       | —                                    |       | 4,538           |       | —                        |       | 4,538                                |       | —           |       | 4,538                                                     |       | 377 |   |
| Unrealized  gain on foreign currency translation             |       | —                 |       | —                       |       | —                                    |       | 535             |       | —                        |       | 535                                  |       | —           |       | 535                                                       |       | 37 |   |
| Distributions                                                |       | —                 |       | —                       |       | —                                    |       | —          |       | (5,295                        | )          | (5,295                               | )          | (239             | )          | (5,534                                                    | )          | (362 | ) |
| **Balance at September 30, 2009**                       |       | 92,383                 |       | $                            | 923        |                                      | $          | 974,111         |       | $                             | (2,480     | )                                    | $          | (274,554         | )          | $                                                         | 698,000    |   | $ | 44,728 |   | $ | 742,728 |   | $ | 46,057 |   |

 

See accompanying notes to the unaudited consolidated financialstatements.

 

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**U-STORE-IT TRUST AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

**(unaudited)**

 
| ** **                                                                   | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| ** **                                                                   | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| **Operating Activities**                                                     |       |                                                    |       |   |   |
| Net  (loss) income                                                           |       | $                                                       | (8,696     | ) | $ | 2,131 |   |
| Adjustments  to reconcile net loss to cash provided by operating activities: |       |                                                    |       |   |   |
| Depreciation  and amortization                                               |       | 53,036                                                  |       | 57,689 |   |
| Gain  on disposition of discontinued operations                              |       | —                                                  |       | (13,532 | ) |
| Equity  compensation expense                                                 |       | 2,686                                                   |       | 2,589 |   |
| Accretion  of fair market value adjustment of debt                           |       | (251                                                    | )          | (348 | ) |
| Changes  in other operating accounts:                                        |       |                                                    |       |   |   |
| Other  assets                                                                |       | (1,023                                                  | )          | (2,860 | ) |
| Accounts  payable and accrued expenses                                       |       | 4,898                                                   |       | 1,905 |   |
| Other  liabilities                                                           |       | 297                                                     |       | (592 | ) |
| Net  cash provided by operating activities                                   |       | $                                                       | 50,947     |   | $ | 46,982 |   |
|                                                                         |       |                                                    |       |   |   |
| **Investing Activities**                                                     |       |                                                    |       |   |   |
| Acquisitions,  additions and improvements to storage facilities              |       | $                                                       | (45,037    | ) | $ | (13,142 | ) |
| Proceeds  from sales of properties, net                                      |       | —                                                  |       | 61,227 |   |
| Proceeds  from sales to noncontrolling interests                             |       | —                                                  |       | 48,674 |   |
| Proceeds  from repayment of notes receivable                                 |       | 20,112                                                  |       | — |   |
| Decrease  (increase) in restricted cash                                      |       | 853                                                     |       | (307 | ) |
| Net  cash (used in) provided by investing activities                         |       | $                                                       | (24,072    | ) | $ | 96,452 |   |
|                                                                         |       |                                                    |       |   |   |
| **Financing Activities**                                                     |       |                                                    |       |   |   |
| Proceeds  from:                                                              |       |                                                    |       |   |   |
| Revolving  credit facility                                                   |       | $                                                       | —     |   | $ | 9,500 |   |
| Mortgage  loans and notes payable                                            |       | —                                                  |       | 73,246 |   |
| Principal  payments on:                                                      |       |                                                    |       |   |   |
| Revolving  credit facility                                                   |       | —                                                  |       | (181,500 | ) |
| Secured  term loans                                                          |       | —                                                  |       | (57,419 | ) |
| Mortgage  loans and notes payable                                            |       | (112,576                                                | )          | (92,865 | ) |
| Proceeds  from issuance of common shares, net                                |       | 20,438                                                  |       | 170,851 |   |
| Exercise  of stock options                                                   |       | 194                                                     |       | — |   |
| Contributions  from noncontrolling interests in subsidiaries                 |       | 20                                                      |       | — |   |
| Distributions  paid to shareholders                                          |       | (7,006                                                  | )          | (4,416 | ) |
| Distributions  paid to noncontrolling interests in Operating Partnership     |       | (362                                                    | )          | (381 | ) |
| Distributions  paid to noncontrolling interests in subsidiaries              |       | (3,445                                                  | )          | (239 | ) |
| Loan  procurement costs                                                      |       | (3,703                                                  | )          | (2,988 | ) |
| Net  cash used in financing activities                                       |       | $                                                       | (106,440   | ) | $ | (86,211 | ) |
|                                                                         |       |                                                    |       |   |   |
| Increase  (decrease) in cash and cash equivalents                            |       | (79,565                                                 | )          | 57,223 |   |
|                                                                         |       |                                                    |       |   |   |
| Cash  and cash equivalents at beginning of period                            |       | 102,768                                                 |       | 3,744 |   |
| Cash  and cash equivalents at end of period                                  |       | $                                                       | 23,203     |   | $ | 60,967 |   |
|                                                                         |       |                                                    |       |   |   |
| **Supplemental Cash Flow and Noncash Information**                           |       |                                                    |       |   |   |
| Cash  paid for interest, net of interest capitalized                         |       | $                                                       | 29,609     |   | $ | 34,266 |   |
| Supplemental  disclosure of noncash activities:                              |       |                                                    |       |   |   |
| Acquisition  related contingent consideration                                |       | $                                                       | 1,849      |   | $ | — |   |
| Notes  receivable originated upon disposition of property                    |       | $                                                       | —     |   | $ | 17,600 |   |
| Derivative  valuation adjustment                                             |       | $                                                       | —     |   | $ | 4,915 |   |
| Foreign  currency translation adjustment                                     |       | $                                                       | (54        | ) | $ | 572 |   |
| Gain  deferral on sales to noncontrolling interests                          |       | $                                                       | —     |   | $ | 3,992 |   |

 

Seeaccompanying notes to the unaudited consolidated financial statements.

 

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**U-STORE-IT TRUST AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.  ORGANIZATIONAND NATURE OF OPERATIONS**

 

U-Store-It Trust, a Marylandreal estate investment trust (collectively with its subsidiaries, “we”, “us” orthe “Company”), is a self-administered and self-managed real estate investmenttrust, or REIT, that specializes in acquiring, developing, managing andoperating self-storage properties for business and personal use undermonth-to-month leases.  The Company’sself-storage facilities (collectively, the “Properties”) are located in 26 statesthroughout the United States, and inthe District of Columbia and are managed under one reportable operatingsegment: we own, operate, develop, manage and acquire self-storagefacilities.  The Company ownssubstantially 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 ofthe Operating Partnership and, as of September 30, 2010, owned a 95.3%interest in the Operating Partnership.  The Company manages its ownedassets through YSI Management, LLC (the “Management Company”), a wholly ownedsubsidiary of the Operating Partnership, and manages assets owned by thirdparties through Storage Asset Management, LLC, also a wholly owned subsidiaryof the Operating Partnership.   TheCompany owns four subsidiaries that have elected to be treated as taxable REITsubsidiaries.  In general, a taxable REITsubsidiary, which is treated as a corporation for U.S. federal income taxpurposes, may perform non-customary services for tenants, hold assets that theCompany, as a REIT, cannot hold directly and generally may engage in any realestate or non-real estate related business.

 

**2.  SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS**

 

*Basis ofPresentation*

 

The accompanying unauditedconsolidated financial statements have been prepared by the Company pursuant tothe rules and regulations of the SEC regarding interim financial reportingand, in the opinion of management, include all adjustments (consisting ofnormal recurring adjustments) necessary for a fair presentation of financialposition, results of operations and cash flows for the interim periodspresented in accordance with generally accepted accounting principles in theUnited States (“GAAP”).  Accordingly,readers of this Quarterly Report on Form 10-Q should refer to the Company’saudited financial statements prepared in accordance with GAAP, and the relatednotes thereto, for the year ended December 31, 2009, which are included inthe Company’s Annual Report on Form 10-K for the fiscal year ended December 31,2009 as certain footnote disclosures normally included in financial statementsprepared in accordance with GAAP have been condensed or omitted from thisreport pursuant to the rules of the SEC. The results of operations for each of the three and nine months ended September 30,2010 and 2009 are not necessarily indicative of the results of operations to beexpected for any future period or the full year.

 

*New AccountingPronouncements*

 

TheFinancial Accounting Standards Board (“FASB”) established the *FASB Accounting Standards CodificationTM* (“Codification”)as the source of authoritative GAAP recognized by the FASB to be applied bynongovernmental entities in the preparation of financial statements issued forinterim and annual periods ending after September 15, 2009.  The Codification has changed the manner inwhich GAAP guidance is referenced, but did not have an impact on ourconsolidated financial position, results of operations or cash flows.

 

TheFASB issued authoritative guidance on accountingfor transfers of financial assets**inJune 2009, which we adopted on a prospective basis beginning January 1,2010.  The guidance requires entities toprovide more information regarding sales of securitized financial assets andsimilar transactions, particularly if the entity has continuing exposure to therisks related to transferred financial assets. It also eliminates the concept of a “qualifying special-purpose entity,”changes the requirements for derecognizing financial assets and requiresadditional disclosures.  The applicationdid not have an impact on our consolidated financial position, results ofoperations or cash flows.

 

TheFASB issued authoritative guidance on how a company determines when an entityshould be consolidated in June 2009, which we adopted on a prospectivebasis beginning January 1, 2010. The guidance clarifies that the determination of whether a company isrequired to consolidate an entity is based on, among other things, an entity’spurpose and design and a company’s ability to direct the activities of theentity that most significantly impact the entity’s economic performance.  The guidance requires an ongoing reassessmentof whether a company is the primary beneficiary of a variable interestentity.  It also requires additionaldisclosures 

 

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abouta company’s involvement in variable interest entities and any significantchanges in risk exposure due to that involvement.  The application did not have an impact on ourconsolidated financial position, results of operations or cash flows.

 

**3.  STORAGE FACILITIES**

 

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

 
| ** **                     | ** ** | **September 30,**  | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2010**                | ** ** | **2009**              | ** ** |
| ** **                     | ** ** | **(in thousands)** | ** ** |
|                           |       |                    |       |                  |       |
| Land  and improvements         |       | $                       | 373,576    |                  | $          | 369,842 |   |
| Buildings  and improvements    |       | 1,265,362               |       | 1,243,047             |       |
| Equipment                      |       | 102,478                 |       | 157,452               |       |
| Construction  in progress      |       | 4,209                   |       | 4,201                 |       |
| Total                          |       | 1,745,625               |       | 1,774,542             |       |
| Less  accumulated depreciation |       | (326,314                | )          | (344,009              | )          |
| Storage  facilities, net       |       | $                       | 1,419,311  |                  | $          | 1,430,533 |   |

 

As assets become fullydepreciated, they are removed from their respective asset category.  During the nine months ended September 30,2010 and 2009, $65.2 million and $38.0 million of assets became fullydepreciated and were removed from storage facilities, respectively.

 

**4.  ACQUISITIONS**

 

OnApril 28, 2010, the Company acquired 85 management contracts from UnitedStor-All Management, LLC (“United Stor-All”). The Company accounted for this acquisition as a businesscombination.  The 85 management contractsrelate to facilities located in 16 states and the District of Columbia.  The Company recorded the fair value of theassets acquired which include the intangible value related to the managementcontracts and are included in other assets, net on the Company’s consolidatedbalance sheet.  The Company’s estimate ofthe fair value of the acquired assets and liabilities utilized Level 3 inputsand considered the probability of the expected period the contracts wouldremain in place, including estimated renewal periods, and the amount of thediscounted estimated future contingent payments to be made.  The Company paid $4.1 million in cash for thecontracts and recognized $1.8 million in contingent consideration.  The Company accounts for the contingentconsideration liability by recording the changes in fair value of the liabilityrecorded in earnings.  The Company hasrecognized $0.3 million and $0.5 million of amortization during the threemonths and nine months ended September 30, 2010, respectively.  The Company expensed $0.3 million intransaction related costs during the quarter ended June 30, 2010 that areincluded in acquisition related costs on the Company’s consolidated statementof operations.  The estimated life of theintangible value of the management contracts is 56 months and the remainingamortization expense that will be recognized during 2010 is $0.3 million.

 

Duringthe quarter ended September 30, 2010, the Company acquired oneself-storage facility located in Frisco, TX and two self-storage facilitieslocated in New York, NY.   In connection with these acquisitions, theCompany allocated a portion of the purchase price to the intangible value ofin-place leases which aggregated $2.3 million.  The estimated life ofthese in-place leases is 12 months and the estimated amortization expense thatwill be recognized during 2010 is approximately $0.6 million.

 

The following tablesummarizes the Company’s acquisition activity during the period January 1,2010 to September 30, 2010:

 

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| **Facility/Portfolio** | ** ** | **Location**  | ** ** | **Transaction Date** | ** ** | **Total Number  of Facilities** | ** ** | **Gross Purchase Price (in  thousands)** | ** ** |
|------------------------|------------|---------------|------------|---------------------------|------------|-------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **             | ** ** | ** **    | ** ** | ** **                | ** ** | ** **                                | ** ** | ** **                                              | ** ** |
| *2010 Acquisitions:*   | * *   | * *      |       |                      |       |                                      |       |                                                    |       |
|                   |       |          |       |                      |       |                                      |       |                                                    |       |
| Frisco  Asset          |       | Frisco,  TX   |       | July 2010            |       | 1                                         |       | $                                                       | 5,800      |   |
| New  York City Assets  |       | New  York, NY |       | September 2010       |       | 2                                         |       | 26,700                                                  |       |
|                   |       |          |       |                      |       | 3                                         |       | $                                                       | 32,500     |   |

 

**5.  UNSECUREDCREDIT FACILITY**

 

OnDecember 8, 2009, the Company and its Operating Partnership entered into athree-year, $450 million senior secured credit facility (the “Secured CreditFacility”), consisting of a $200 million secured term loan and a $250 millionsecured revolving credit facility.  TheSecured Credit Facility was collateralized by mortgages on “borrowing baseproperties” (as defined in the Secured Credit Facility agreement).  The Secured Credit Facility replaced theprior, three-year $450 million unsecured credit facility, which was enteredinto in November 2006, and consisted of a $200 million unsecured term loanand $250 million in unsecured revolving loans. All borrowings under the unsecured credit facility were repaid in December 2009.

 

OnSeptember 29, 2010, the Company amended its existing $450 million creditfacility.  The amended credit facilityconsists of a $200 million unsecured term loan and a $250 million unsecuredrevolving credit facility. The amended credit facility has a three year termexpiring on December 7, 2013, is unsecured, and borrowings on the facilityincur interest based on a borrowing spread based on the Company’s leveragelevels plus LIBOR.  The Company incurred$2.5 million in connection with executing this amendment which was capitalizedand is included as a component of loan procurement costs, net of amortizationon the Company’s consolidated balance sheet.

 

AtSeptember 30, 2010, $200 million of unsecured term loan borrowings wereoutstanding under the unsecured credit facility and $250 million was availablefor borrowing under the unsecured revolving credit facility.  As of September 30, 2010, borrowingsunder the unsecured credit facility had a weighted average interest rate of3.8% and the Company was in compliance with all covenants in the amendedagreement.

 

**6.  MORTGAGELOANS AND NOTES PAYABLE**

 

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

 

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| ** **                              | ** ** | **Carrying Value as of:** | ** ** | ** **            | ** ** | ** **             | ** ** |
|-----------------------------------------|------------|------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                              | ** ** | **September 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                                 |       | —                                   |       | 7,975                 |       | 5.00                   | %          | Oct-10 |   |
| USIFB                                   |       | 3,809                                    |       | 3,834                 |       | 4.59                   | %          | Dec-10 |   |
| YSI  2                                  |       | 82,121                                   |       | 83,480                |       | 5.33                   | %          | Jan-11 |   |
| YSI  12                                 |       | 1,488                                    |       | 1,520                 |       | 5.97                   | %          | Sep-11 |   |
| YSI  13                                 |       | 1,279                                    |       | 1,307                 |       | 5.97                   | %          | Sep-11 |   |
| YSI  6                                  |       | 76,453                                   |       | 77,370                |       | 5.13                   | %          | Aug-12 |   |
| YASKY                                   |       | 80,000                                   |       | 80,000                |       | 4.96                   | %          | Sep-12 |   |
| YSI  14                                 |       | 1,773                                    |       | 1,812                 |       | 5.97                   | %          | Jan-13 |   |
| YSI  7                                  |       | 3,116                                    |       | 3,163                 |       | 6.50                   | %          | Jun-13 |   |
| YSI  8                                  |       | 1,781                                    |       | 1,808                 |       | 6.50                   | %          | Jun-13 |   |
| YSI  9                                  |       | 1,959                                    |       | 1,988                 |       | 6.50                   | %          | Jun-13 |   |
| YSI  17                                 |       | 4,153                                    |       | 4,246                 |       | 6.32                   | %          | Jul-13 |   |
| YSI  27                                 |       | 503                                      |       | 516                   |       | 5.59                   | %          | Nov-13 |   |
| YSI  30                                 |       | 7,381                                    |       | 7,567                 |       | 5.59                   | %          | Nov-13 |   |
| YSI  11                                 |       | 2,437                                    |       | 2,486                 |       | 5.87                   | %          | Dec-13 |   |
| YSI  5                                  |       | 3,216                                    |       | 3,281                 |       | 5.25                   | %          | Jan-14 |   |
| YSI  28                                 |       | 1,566                                    |       | 1,598                 |       | 5.59                   | %          | Feb-14 |   |
| YSI  34                                 |       | 14,856                                   |       | 14,955                |       | 8.00                   | %          | Jun-14 |   |
| YSI  37                                 |       | 2,219                                    |       | 2,244                 |       | 7.25                   | %          | Aug-14 |   |
| YSI  40                                 |       | 2,536                                    |       | 2,581                 |       | 7.25                   | %          | Aug-14 |   |
| YSI  44                                 |       | 1,102                                    |       | 1,121                 |       | 7.00                   | %          | Sep-14 |   |
| YSI  41                                 |       | 3,904                                    |       | 3,976                 |       | 6.60                   | %          | Sep-14 |   |
| YSI  38                                 |       | 4,000                                    |       | 4,078                 |       | 6.35                   | %          | Sep-14 |   |
| YSI  45                                 |       | 5,465                                    |       | 5,527                 |       | 6.75                   | %          | Oct-14 |   |
| YSI  46                                 |       | 3,444                                    |       | 3,486                 |       | 6.75                   | %          | Oct-14 |   |
| YSI  43                                 |       | 2,938                                    |       | 2,994                 |       | 6.50                   | %          | Nov-14 |   |
| YSI  48                                 |       | 25,369                                   |       | 25,652                |       | 7.25                   | %          | Nov-14 |   |
| YSI  50                                 |       | 2,337                                    |       | 2,380                 |       | 6.75                   | %          | Dec-14 |   |
| YSI  10                                 |       | 4,110                                    |       | 4,166                 |       | 5.87                   | %          | Jan-15 |   |
| YSI  15                                 |       | 1,888                                    |       | 1,920                 |       | 6.41                   | %          | Jan-15 |   |
| YSI  20                                 |       | 62,919                                   |       | 64,258                |       | 5.97                   | %          | Nov-15 |   |
| YSI  31                                 |       | 13,719                                   |       | 13,891                |       | 6.75                   | %          | Jun-19 | (a) |
| YSI  35                                 |       | 4,499                                    |       | 4,499                 |       | 6.90                   | %          | Jul-19 | (a) |
| YSI  32                                 |       | 6,084                                    |       | 6,160                 |       | 6.75                   | %          | Jul-19 | (a) |
| YSI  33                                 |       | 11,422                                   |       | 11,570                |       | 6.42                   | %          | Jul-19 |   |
| YSI  42                                 |       | 3,204                                    |       | 3,263                 |       | 6.88                   | %          | Aug-19 | (a) |
| YSI  39                                 |       | 3,947                                    |       | 3,991                 |       | 6.50                   | %          | Nov-19 | (a) |
| YSI  47                                 |       | 3,197                                    |       | 3,250                 |       | 6.63                   | %          | Jan-20 | (a) |
| Unamortized  fair value adjustment      |       | (20                                      | )          | 231                   |       |                   |       |   |   |
|                                    |       |                                     |       |                  |       |                   |       |   |   |
| Total  mortgage loans and notes payable |       | $                                        | 456,174    |                  | $          | 569,026                |       |   |   |   |   |

 

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(a)                  Theseborrowings have a fixed interest rate for the first five years of theirrespective term.  At the end of theinitial five year term, the rate resets and remains constant over the remainingfive years of the loan term.

 

The following table presentsthe future principal payments on outstanding mortgage loans and notes payableat September 30, 2010 (in thousands):

 
| 2010                         |   | $       | 5,785   |   |
|------------------------------|--------|---------|---------|--------|
| 2011                         |   | 90,544  |    |
| 2012                         |   | 159,984 |    |
| 2013                         |   | 26,240  |    |
| 2014                         |   | 88,260  |    |
| 2015  and thereafter         |   | 85,381  |    |
| Total  mortgage payments     |   | 456,194 |    |
| Plus:  Fair value adjustment |   | (20     | )       |
| Total  mortgage indebtedness |   | $       | 456,174 |   |

 

**7.  FAIRVALUE MEASUREMENTS**

 

InJanuary 2008, the FASB issued a pronouncement regarding the methods tovalue financial assets and liabilities. The Company adopted this pronouncement effective January 1,2009.  As defined in the guidance, fairvalue is based on the price that would be received from the sale of an asset orpaid to transfer a liability in an orderly transaction between marketparticipants at the measurement date.  Inorder to increase consistency and comparability in fair value measurements, theguidance establishes a fair value hierarchy that prioritizes observable andunobservable inputs used to measure fair value into three broad levels, whichare described below:

 

Level1: Quoted prices (unadjusted) in active markets that are accessible at themeasurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

 

Level2: Observable prices that are based on inputs not quoted on active markets, butcorroborated by market data.

 

Level3: Unobservable inputs are used when little or no market data isavailable.  The fair value hierarchygives the lowest priority to Level 3 inputs.

 

Indetermining fair value, the Company utilizes valuation techniques that maximizethe use of observable inputs and minimize the use of unobservable inputs to theextent possible and considers counterparty credit risk in its assessment offair value.

 

InApril 2009, the FASB issued a pronouncement regarding disclosures aboutfair value of financial instruments and a pronouncement which amends GAAP asfollows: a) to require disclosures about fair value of financial instrumentsfor interim reporting periods of publicly traded companies as well as in annualfinancial statements and b) to require disclosures in summarized financialinformation at interim reporting periods. This pronouncement is effective for interim reporting periods endingafter June 15, 2009.  Accordingly,the Company adopted this pronouncement during the quarter ended September 30,2009.  Disclosures about fair value offinancial instruments are based on pertinent information available tomanagement as of the valuation date. Considerable judgment is necessary to interpret market data and developestimated fair values.  Accordingly, theestimates presented are not necessarily indicative of the amounts at whichthese instruments could be purchased, sold or settled.  The use of different market assumptionsand/or estimation methodologies may have a material effect on the estimatedfair value amounts.

 

Thefair value of financial instruments, including cash and cash equivalents,accounts receivable and accounts payable approximates their respective bookvalues at September 30, 2010 and December 31, 2009.  At September 30, 2010 and December 31,2009, the Company had fixed interest rate loans with a carrying value of $456.2million and $569.0 million, respectively. The estimated fair values of these fixed rate loans were $442.0 millionand $530.7 million at September 30, 2010 and December 31, 2009,respectively.  The Company had a variableinterest rate loan with a carrying value of $200.0 million at September 30,2010 and December 31, 2009, the fair value of which approximated itscarrying value at each respective date.  These estimates are based ondiscounted cash flow analyses assuming market interest rates for comparableobligations at September 30, 2010 and December 31, 2009.

 

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**8.  NONCONTROLLINGINTERESTS**

 

**Variable Interests inConsolidated Real Estate Joint Ventures**

 

OnAugust 13, 2009, the Company, through a wholly-owned affiliate, formed ajoint venture (“HART”) with an affiliate of Heitman, LLC (“Heitman”) to own andoperate 22 self-storage facilities, which are located throughout the UnitedStates.  Upon formation, Heitmancontributed approximately $51 million of cash to a newly-formed limitedpartnership and the Company contributed certain unencumbered wholly-ownedproperties with an agreed upon value of approximately $102 million to such limitedpartnership.  In exchange for itscontribution of those properties, the Company received a cash distribution fromHART of approximately $51 million and retained a 50% interest in HART.  The Company is the managing partner of HARTand the manager of the properties owned by HART in exchange for a market ratemanagement fee.

 

TheCompany determined that HART is a variable interest entity under GAAP, and thatthe Company is the primary beneficiary. Accordingly, the Company consolidated the assets, liabilities andresults of operations of HART.  The 50%interest that is owned by Heitman is reflected as noncontrolling interest insubsidiaries within permanent equity, separate from the Company’s equity on theconsolidated balance sheets.  At September 30,2010, HART had total assets of $90.1 million, including $88.5 million ofstorage facilities, net and total liabilities of $2.4 million.

 

USIFB,LLP (“the Venture”) was formed to own, operate, acquire and developself-storage facilities in England.  TheCompany owns a 97% interest in the Venture through a wholly-owned subsidiaryand the Venture commenced operations at two facilities in London, Englandduring 2008.  The Company determined thatthe Venture is a variable interest entity under GAAP, and that the Company isthe primary beneficiary.  Accordingly,the Company consolidated the assets, liabilities and results of operations ofthe Venture.  At September 30, 2010,the Venture had total assets of $8.1 million and total liabilities of $4.1million including a mortgage loan of $3.8 million secured by storage facilitieswith a net book value of $7.6 million. At September 30, 2010, the Venture’s creditors had no recourse tothe general credit of the Company.

 

**Operating Partnership Ownership**

 

The Company has followed theFASB guidance regarding the classification and measurement of redeemablesecurities.  Under this guidance,securities that are redeemable for cash or other assets, at the option of theholder and not solely within the control of the issuer, must be classifiedoutside of permanent equity.  Thisclassification results in certain outside ownership interests being included asredeemable noncontrolling interests outside of permanent equity in theconsolidated balance sheets.  The Companymakes this determination based on terms in applicable agreements, specificallyin relation to redemption provisions. Additionally, with respect to noncontrolling interests for which theCompany has a choice to settle the redemption by delivery of its own shares,the Company considered the guidance regarding accounting for derivativefinancial instruments indexed to, and potentially settled in, a company’s ownshares, to evaluate whether the Company controls the actions or eventsnecessary to presume share settlement.  The guidance also requires that noncontrollinginterests classified outside of permanent equity be adjusted each period to thegreater of the carrying value based on the accumulation of historical cost orthe redemption value.

 

The consolidated results ofthe Company include results attributable to units of the Operating Partnershipthat are not owned by the Company, which amounted to approximately 4.7% of alloutstanding Partnership units as of September 30, 2010 and 4.9 % of alloutstanding Partnership units as of December 31, 2009.  The interests in the Operating Partnershiprepresented by these units were a component of the consideration that theCompany paid to acquire certain self-storage facilities.  The holders of the units are limited partnersin the Operating Partnership and have the right to require the OperatingPartnership 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 thefair value of an equivalent number of common shares of the Company.  However, the partnership agreement containscertain provisions that could result in a settlement outside the control of theCompany.  Accordingly, consistent withthe guidance, the Company will record these noncontrolling interests outside ofpermanent equity in the consolidated balance sheets.  Net income or loss related to thesenoncontrolling interests is excluded from net income or loss attributable tothe Company in the consolidated statements of operations.

 

The per unit cash redemptionamount would equal the average of the closing prices of the Company’s commonshares on the New York Stock Exchange for the 10 trading days ending prior tothe Company’s receipt of the redemption notice for the applicable unit.  At September 30, 2010 and December 31,2009, 4,737,136 and 4,809,636 units were outstanding, respectively, and thecalculated aggregate redemption value of outstanding Operating Partnershipunits based upon the Company’s average closing share prices, as 

 

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referenced above, wasapproximately $40.2 million and $35.4 million, respectively.  Based on the Company’s evaluation of theredemption value of the redeemable noncontrolling interest, the Company hasreflected these interests at their carrying value as of September 30, 2010and December 31, 2009 because the carrying cost exceeded the estimatedredemption value.

 

**9.  RELATEDPARTY TRANSACTIONS**

 

During 2005 and 2006, theOperating Partnership entered into various office lease agreements with Amsdelland Amsdell, an entity owned by Robert Amsdell and Barry Amsdell (each a formerTrustee).  Pursuant to these leaseagreements, the Operating Partnership rented office space in the AirportExecutive 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 entryinto, each of the office lease agreements by the Operating Partnership.  In addition to monthly rent, the office leaseagreements require the Operating Partnership to reimburse Amsdell and Amsdell for certain maintenance andimprovements to the leased office space. The aggregate amount of payments by the Company to Amsdell and Amsdellunder these lease agreements for each of the three months ended September 30,2010 and September 30, 2009 was approximately $0.1 million.  Additionally, the aggregate amount of paymentsfor each of the nine months ended September 30, 2010 andSeptember 30, 2009 was approximately $0.3 million.  The Companyvacated the office space owned by Amsdell and Amsdell in 2007, but remainsobligated under certain of the lease agreements through 2014.  Subsequently, the Company entered into asublease agreement for a portion of the space with a third party for theremainder of the lease term.

 

Total future minimum rentalpayments under the related party lease agreements as of September 30, 2010are as follows: 

 
| ** ** | ** ** | **Due to Related Party** | ** ** | **Due from Subtenant** | ** ** |
|------------|------------|-----------------------------------------|------------|----------------------------------|------------|
| ** ** | ** ** | **Amount**                              | ** ** | **Amount**                       | ** ** |
| ** ** | ** ** | **(in thousands)**                 | ** ** |
|       |       |                                    |       |                             |       |
| 2010       |       | $                                       | 114        |                             | $          | 70 |   |
| 2011       |       | 475                                     |       | 278                              |       |
| 2012       |       | 475                                     |       | 278                              |       |
| 2013       |       | 499                                     |       | 278                              |       |
| 2014       |       | 499                                     |       | 278                              |       |
|       |       | $                                       | 2,062      |                             | $          | 1,182 |   |

 

**10.  DISCONTINUEDOPERATIONS**

 

For the three months ended September 30,2010, income from discontinued operations relates to one property that wasconsidered held-for-sale at September 30, 2010.  For the three months ended September 30,2009, income from discontinued operations relates to 13 properties sold throughSeptember 30, 2009, two properties that were considered held-for-sale atSeptember 30, 2009, the aforementioned property held-for-sale at September 30,2010, and one property removed due to eminent domain proceedings.  For the nine months ended September 30,2010, income from discontinued operations relates to one property that wasconsidered held-for-sale at September 30, 2010.  For the nine months ended September 30,2009, income from discontinued operations relates to 16 properties sold during2009, two properties that were considered held-for-sale at September 30,2009, the aforementioned property held-for-sale at September 30, 2010, andone property removed due to eminent domain proceedings.  Net gain on disposition of discontinued operationsrelates to gains recognized on property sales completed during the three andnine months ended September 30, 2009.

 

The following tablesummarizes the revenue and expense information for the properties classified asdiscontinued operations for the three and nine months ended September 30,2010 and September 30, 2009 (in thousands):

 

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| ** **                                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                          | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                          | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| REVENUES                                            |       |                             |       |                            |       |   |   |   |   |
| Rental  income                                      |       | $                                | 96         |                            | $          | 2,239 |   | $ | 287 |   | $ | 7,716 |   |
| Other  property related income                      |       | 13                               |       | 163                             |       | 31 |   | 564 |   |
| Total  revenues                                     |       | 109                              |       | 2,402                           |       | 318 |   | 8,280 |   |
|                                                |       |                             |       |                            |       |   |   |   |   |
| OPERATING  EXPENSES                                 |       |                             |       |                            |       |   |   |   |   |
| Property  operating expenses                        |       | 40                               |       | 770                             |       | 115 |   | 2,883 |   |
| Depreciation                                        |       | 20                               |       | 855                             |       | 60 |   | 2,787 |   |
| Total  operating expenses                           |       | 60                               |       | 1,625                           |       | 175 |   | 5,670 |   |
|                                                |       |                             |       |                            |       |   |   |   |   |
| INCOME  FROM DISCONTINUED OPERATIONS                |       | 49                               |       | 777                             |       | 143 |   | 2,610 |   |
|                                                |       |                             |       |                            |       |   |   |   |   |
| Net  gain on disposition of discontinued operations |       | —                           |       | 10,910                          |       | — |   | 13,530 |   |
| Income  from discontinued operations                |       | $                                | 49         |                            | $          | 11,687 |   | $ | 143 |   | $ | 16,140 |   |

 

As of September 30,2010, the property held-for-sale includes $1.9 million of storage facilities,net and the approximate gain on disposition of the property is $1.1 million andwill be finalized as the sale is consummated.

 

**11.  PROFORMA FINANCIAL INFORMATION**

 

During 2010, the Companycompleted an acquisition accounted for as a business combination of 85management contracts from United Stor-All. Additionally, during the three months ended September 30, 2010, theCompany acquired three self-storage facilities for an aggregate purchase priceof approximately $32.5 million (see note 4).

 

The consolidated pro formafinancial information set forth below reflects adjustments to the Company’shistorical financial data to give effect to the acquisitions as if they hadoccurred at the beginning of each period presented.  The unaudited pro forma information presentedbelow does not purport to represent what the Company’s actual results ofoperations would have been for the periods indicated, nor does it purport torepresent the Company’s future results of operations.

 

The following tablesummarizes, on a pro forma basis, the Company’s consolidated results ofoperations for the nine months ended September 30, 2010 and 2009 based onthe assumptions described above:

 
| ** **                                     | ** ** | **Nine Months Ended September 30,**            | ** ** |
|------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **2010**                                                           | ** ** | **2009** | ** ** |
| ** **                                     | ** ** | **(in thousands, except per share data)** | ** ** |
| ** **                                     | ** ** | **(unaudited)**                                                    | ** ** |
|                                           |       |                                                               |       |   |   |
| Pro  forma revenue                             |       | $                                                                  | 168,049    |   | $ | 169,066 |   |
| Pro  forma net loss from continuing operations |       | $                                                                  | (9,588     | ) | $ | (15,795 | ) |
| Net  loss per common share                     |       |                                                               |       |   |   |
| Basic  and diluted - as reported               |       | $                                                                  | (0.10      | ) | $ | (0.21 | ) |
| Basic  and diluted - as pro forma              |       | $                                                                  | (0.11      | ) | $ | (0.23 | ) |

 

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**12.  COMPREHENSIVEINCOME (LOSS)**

 
| ** **                                              | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                              | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                              | ** ** | **(in thousands)**                                  | ** ** |
|                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| NET  INCOME (LOSS)                                      |       | $                                                        | (1,115     | )                                                       | $          | 7,503 |   | $ | (8,696 | ) | $ | 2,131 |   |
| Other  comprehensive income (loss):                     |       |                                                     |       |                                                    |       |   |   |   |   |
| Unrealized  gain on derivative financial instruments    |       | —                                                   |       | 2,000                                                   |       | — |   | 4,915 |   |
| Unrealized  gain (loss) on foreign currency translation |       | 195                                                      |       | (197                                                    | )          | (54 | ) | 572 |   |
| COMPREHENSIVE  INCOME (LOSS)                            |       | $                                                        | (920       | )                                                       | $          | 9,306 |   | $ | (8,750 | ) | $ | 7,618 |   |

 

**13.  SUBSEQUENTEVENTS**

 

On October 12, 2010,the Company repaid the YSI 2 mortgage loan of approximately $82.1 million thathad a scheduled maturity date of January 11, 2011 with available cash andborrowings from the credit facility. There were no prepayment costs associated with the early repayment ofthe loan.

 

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

 

*Thefollowing discussion should be read in conjunction with the financialstatements**and notesthereto appearing elsewhere in this report. The Company makes certain**statementsin 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-LookingStatements.”  Certain risk**factors may cause actual results, performance orachievements to differ materially**fromthose 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 subsequentquarterly reports.*

 

**Overview**

 

The Company is an integratedself-storage real estate company, has and as such we have in-house capabilitiesin the operation, design, development, leasing, management and acquisition ofself-storage facilities.  The Company haselected to be taxed as a REIT for U.S. federal income tax purposes.  As of September 30, 2010 andDecember 31, 2009, the Company owned 370 and 367 self-storage facilities,respectively, totaling approximately 23.9 million rentable square feet and 23.7million rentable square feet, respectively. In addition, as of September 30, 2010, the Company managed 122properties for third parties bringing the total number of properties which itowned and/or managed to 492.

 

We derive revenuesprincipally from rents received from its customers who rent units at its self-storagefacilities under month-to-month leases, and, to a lesser extent, from themanagement of properties owned by third parties.  Therefore, our operating results dependmaterially on our ability to retain our existing customers and lease ouravailable self-storage units to new customers while maintaining and, wherepossible, increasing our pricing levels. In addition, our operating results depend on the ability of ourcustomers to make required rental payments to us.  We believe that our decentralized approach tothe management and operation of our facilities, which places an emphasis onlocal, market level oversight and control, allows us to respond quickly andeffectively to changes in local market conditions, increasing rents whereappropriate, while maintaining occupancy levels, or increasing occupancy levelswhile maintaining pricing levels.

 

We typically experienceseasonal fluctuations in the occupancy levels of our facilities, which aregenerally slightly higher during the summer months due to increased movingactivity.

 

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

 

In the future, we intend tofocus on internal growth opportunities and selectively pursuing targetedacquisitions and developments of self-storage facilities.  We would expect to fund any such futureacquisitions or developments with additional borrowings.

 

We have one reportableoperating segment: we own, operate, develop, manage, and acquire self-storagefacilities.

 

Our self-storage facilitiesare located in major metropolitan and rural areas and have numerous tenants perfacility.  No single tenant represents asignificant concentration of our revenues. The facilities in Florida, California, Texas and Illinois providedapproximately 17%, 15%, 10% and 7%, respectively, of total revenues for thethree months ended September 30, 2010. The facilities in Florida, California, Texas and Illinois providedapproximately 18%, 15%, 10% and 7%, respectively, of total revenues for thenine months ended September 30, 2010.

 

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**Summary ofCritical Accounting Policies and Estimates**

 

Set forth below is a summaryof the accounting policies and estimates that management believes are criticalto an understanding of the unaudited consolidated financial statements includedin this report.  These policies requirethe application of judgment and assumptions by management and, as a result, aresubject to a degree of uncertainty.  Dueto this uncertainty, actual results could differ from estimates calculated andutilized by management.

 

***Self-Storage Facilities***

 

We record self-storagefacilities at cost less accumulated depreciation.  Depreciation on the buildings and equipmentis recorded on a straight-line basis over their estimated useful lives, whichrange from five to 40 years. Expenditures for significant renovations or improvements that extend theuseful lives of assets are capitalized. Repairs and maintenance costs areexpensed as incurred.

 

When facilities areacquired, the purchase price is allocated to the tangible and intangible assetsacquired 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 valuewhich may include an income approach or a cash flow analysis using appropriaterisk adjusted capitalization rates, which take into account the relative size,age and location of the individual facility along with current and projectedoccupancy and rental rate levels or appraised values, if available.  Allocations to the individual assets andliabilities are based upon comparable market sales information for land,buildings and improvements and estimates of depreciated replacement cost ofequipment.

 

In allocating the purchaseprice, we determine whether the acquisition includes intangible assets orliabilities, which may include the value of in-place leases, above or belowmarket lease intangibles, and tenant relationships.  Substantially all of the leases in place atacquired facilities are at market rates, as the majority of the leases aremonth-to-month contracts.  Accordingly,to date no portion of the purchase price has been allocated to above- orbelow-market lease intangibles.  To date,no intangible asset has been recorded for the value of tenant relationships,because the we do not have any concentrations of significant tenants and theaverage tenant turnover is fairly frequent.

 

Long-lived assets classifiedas “held for use” are reviewed for impairment when events and circumstancesindicate that there may be impairment. The carrying values of these long-lived assets are compared to theundiscounted future net operating cash flows attributable to the assets.  An impairment loss is recorded if the netcarrying value of the asset exceeds the undiscounted future net operating cashflows attributable to the asset.  Theimpairment loss recognized equals the excess of net carrying value over therelated fair value of the asset.  Futureevents, or facts and circumstances that currently exist, that we have not yetidentified, could cause us to conclude in the future that our long-lived assetsare impaired.  Any resulting impairmentloss could have a material adverse impact on our financial condition andresults of operations.  No impairment wasrecorded for the periods ended September 30, 2010 and 2009.

 

We consider long-lived assetsto be “held for sale” upon satisfaction of the following criteria:(a) management commits to a plan to sell a facility (or group offacilities), (b) the facility is available for immediate sale in itspresent condition subject only to terms that are usual and customary for salesof such facilities, (c) an active program to locate a buyer and otheractions 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 isexpected to be completed within one year, (e) the facility is beingactively marketed for sale at a price that is reasonable in relation to itscurrent fair value, and (f) actions required to complete the plan indicatethat it is unlikely that significant changes to the plan will be made or thatthe plan will be withdrawn.

 

Typically these criteria areall met when the relevant assets are under contract, significant non-refundabledeposits have been made by the potential buyer, the assets are immediatelyavailable for transfer and there are no contingencies related to the sale thatmay prevent the transaction from closing. In most transactions, these contingencies are not satisfied until theactual closing of the transaction; and, accordingly, the facility is generallynot identified as held for sale until the closing occurs.  However, each potential transaction isevaluated based on its separate facts and circumstances.  Properties classified as held for sale arereported at the lesser of carrying value or fair value less estimated costs tosell.

 

***Revenue Recognition***

 

Management has determinedthat all of our leases with tenants are operating leases.  Rental income is recognized in accordancewith the terms of the lease agreements or contracts, which generally are month-to-month.

 

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Management fee revenues arerecognized monthly as services are performed and in accordance with the termsof the related management agreements.

 

We recognize gains ondisposition of properties only upon closing in accordance with the guidance onsales of real estate.  Payments receivedfrom purchasers prior to closing are recorded as deposits.  Profit on real estate sold is recognizedusing the full accrual method upon closing when the collectability of the salesprice is reasonably assured and we are not obligated to perform significantactivities after the sale.  Profit may bedeferred in whole or part until the sale meets the requirements of profitrecognition on sales under this guidance.

 

***Share-Based Payments***

 

We apply the fair valuemethod of accounting for contingently issued shares and share options issuedunder our equity incentive plans.  Accordingly,share compensation expense is recorded ratably over the vesting period relatingto such contingently issued shares and options.   The Company has elected to recognizecompensation expense on a straight-line method over the requisite serviceperiod.

 

***Noncontrolling Interests***

 

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

 

**Recent Accounting Pronouncements**

 

TheFASB established the *FASB AccountingStandards CodificationTM* (“Codification”) as the source ofauthoritative GAAP recognized by the FASB to be applied by nongovernmentalentities in the preparation of financial statements issued for interim andannual periods ending after September 15, 2009.  The Codification has changed the manner inwhich U.S. GAAP guidance is referenced, but did not have an impact on ourconsolidated financial position, results of operations or cash flows.

 

TheFASB issued authoritative guidance on accountingfor transfers of financial assets**inJune 2009, which was adopted on a prospective basis beginning January 1,2010.  The guidance requires entities toprovide more information regarding sales of securitized financial assets and similartransactions, particularly if the entity has continuing exposure to the risksrelated to transferred financial assets. It also eliminates the concept of a “qualifying special-purpose entity,”changes the requirements for derecognizing financial assets and requiresadditional disclosures.  The applicationdid not have an impact on our consolidated financial position, results ofoperations or cash flows.

 

TheFASB issued authoritative guidance on how a company determines when an entityshould be consolidated in June 2009, which was adopted on a prospectivebasis beginning January 1, 2010. The guidance clarifies that the determination of whether a company isrequired to consolidate an entity is based on, among other things, an entity’spurpose and design and a company’s ability to direct the activities of theentity that most significantly impact the entity’s economic performance.  The guidance requires an ongoing reassessmentof whether a company is the primary beneficiary of a variable interest entity.  It also requires additional disclosures abouta company’s involvement in variable interest entities and any significantchanges in risk exposure due to that involvement.  The application did not have an impact on ourconsolidated financial position, results of operations or cash flows.

 

**Results ofOperations**

 

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

 

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***Acquisitionand Development Activities***

 

The comparability of theCompany’s results of operations is affected by the timing of acquisition anddisposition activities during the periods reported.  At September 30, 2010 and 2009, theCompany owned 370 and 368 self-storage facilities and related assets,respectively.  The following tablesummarizes the change in number of owned self-storage facilities from January 1,2009 through September 30, 2010:

 
| ** **                   | ** ** | **2010**   | ** ** | **2009**   | ** ** |
|------------------------------|------------|------------|------------|------------|------------|
| ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance  - January 1    |       | 367        |       | 387        |       |
| Facilities  acquired         |       | —     |       | —     |       |
| Facilities  sold             |       | —     |       | (1         | )          |
| Balance  - March 31     |       | 367        |       | 386        |       |
| Facilities  acquired         |       | —     |       | —     |       |
| Facilities  sold             |       | —     |       | (2         | )          |
| Balance  - June 30      |       | 367        |       | 384        |       |
| Facilities  acquired         |       | 3          |       | —     |       |
| Facilities  sold             |       | —     |       | (16        | )          |
| Balance  - September 30 |       | 370        |       | 368        |       |
| Facilities  acquired         |       |       |       | —     |       |
| Facilities  sold             |       |       |       | (1         | )          |
| Balance  - December 31  |       |       |       | 367        |       |

 

***Comparison of the three months ended September 30, 2010 to thethree months ended September 30, 2009***

 

The following table andsubsequent discussion provides information pertaining to our portfolio for thethree months ended September 30, 2010 and 2009.  We consider our same-store portfolio toconsist of only those facilities owned, and operated on a stabilized basis, atthe beginning and at the end of the applicable periods presented.  Same-store results are considered to beuseful to investors in evaluating our performance as they provide informationrelating to changes in facility-level operating performance without taking intoaccount the effects of acquisitions, developments or dispositions.

 

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| ** **                                                  | ** ** | ** **                                       | ** ** | ** **     | ** ** | ** **       | ** ** | ** **               | ** ** | **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                                               |       | $                                                | 50,312     |           | $          | 49,885           |       | $                        | 427        |                    | 1          | %          | $          | 497        |       | $          | 384        |       | $          | —     |       | $ | — |   | $ | 50,809 |   | $ | 50,269 |   | $ | 540 |   | 1 | % |
| Other property related  income                              |       | 4,577                                            |       | 4,224          |       | 353              |       | 8                        | %          | 233                     |       | 123        |       | 345        |       | —     |       | 5,155      |       | 4,347      |       | 808 |   | 19 | % |
| Property management fee  income                             |       | —                                           |       | —         |       | —           |       | 0                        | %          | —                  |       | —     |       | 1,048      |       | 12         |       | 1,048      |       | 12         |       | 1,036 |   | 8633 | % |
| Total revenues                                              |       | 54,889                                           |       | 54,109         |       | 780              |       | 1                        | %          | 730                     |       | 507        |       | 1,393      |       | 12         |       | 57,012     |       | 54,628     |       | 2,384 |   | 4 | % |
|                                                        |       |                                             |       |           |       |             |       |                     |       |                    |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |
| OPERATING EXPENSES:                                         |       |                                             |       |           |       |             |       |                     |       |                    |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |
| Property operating  expenses                                |       | 21,610                                           |       | 21,011         |       | 599              |       | 3                        | %          | 590                     |       | 316        |       | 2,402      |       | 1,738      |       | 24,602     |       | 23,065     |       | 1,537 |   | 7 | % |
| NET OPERATING INCOME:                                       |       | 33,279                                           |       | 33,098         |       | 181              |       | 1                        | %          | 140                     |       | 191        |       | (1,009     | )          | (1,726     | )          | 32,410     |       | 31,563     |       | 847 |   | 3 | % |
|                                                        |       |                                             |       |           |       |             |       |                     |       |                    |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |
| Depreciation and  amortization                              |       |                                             |       |           |       |             |       |                     |       |                    |       |       |       |       |       |       |       | 15,557     |       | 17,844     |       | (2,287 | ) | -13 | % |
| General and  administrative                                 |       |                                             |       |           |       |             |       |                     |       |                    |       |       |       |       |       |       |       | 6,597      |       | 5,556      |       | 1,041 |   | 19 | % |
| Subtotal                                                    |       |                                             |       |           |       |             |       |                     |       |                    |       |       |       |       |       |       |       | 22,154     |       | 23,400     |       | (1,246 | ) | -5 | % |
| Operating income                                            |       |                                             |       |           |       |             |       |                     |       |                    |       |       |       |       |       |       |       | 10,256     |       | 8,163      |       | 2,093 |   | 26 | % |
|                                                        |       |                                             |       |           |       |             |       |                     |       |                    |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |
| Other Income (Expense):                                     |       |                                             |       |           |       |             |       |                     |       |                    |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |
| Interest:                                                   |       |                                             |       |           |       |             |       |                     |       |                    |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |
| Interest expense on  loans                                  |       |                                             |       |           |       |             |       |                     |       |                    |       |       |       |       |       |       |       | (9,648     | )          | (12,008    | )          | 2,360 |   | -20 | % |
| Loan procurement  amortization expense                      |       |                                             |       |           |       |             |       |                     |       |                    |       |       |       |       |       |       |       | (1,559     | )          | (489       | )          | (1,070 | ) | 219 | % |
| Interest income                                             |       |                                             |       |           |       |             |       |                     |       |                    |       |       |       |       |       |       |       | 19         |       | 150        |       | (131 | ) | -87 | % |
| Acquisition related  costs                                  |       |                                             |       |           |       |             |       |                     |       |                    |       |       |       |       |       |       |       | (165       | )          | —     |       | (165 | ) | -100 | % |
| Other                                                       |       |                                             |       |           |       |             |       |                     |       |                    |       |       |       |       |       |       |       | (67        | )          | —     |       | (67 | ) | -100 | % |
| Total other expense                                         |       |                                             |       |           |       |             |       |                     |       |                    |       |       |       |       |       |       |       | (11,420    | )          | (12,347    | )          | 927 |   | -8 | % |
|                                                        |       |                                             |       |           |       |             |       |                     |       |                    |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |
| LOSS FROM CONTINUING  OPERATIONS                            |       |                                             |       |           |       |             |       |                     |       |                    |       |       |       |       |       |       |       | (1,164     | )          | (4,184     | )          | 3,020 |   | -72 | % |
|                                                        |       |                                             |       |           |       |             |       |                     |       |                    |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |
| DISCONTINUED OPERATIONS                                     |       |                                             |       |           |       |             |       |                     |       |                    |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |
| Income from discontinued  operations                        |       |                                             |       |           |       |             |       |                     |       |                    |       |       |       |       |       |       |       | 49         |       | 777        |       | (728 | ) | -94 | % |
| Net gain on disposition  of discontinued operations         |       |                                             |       |           |       |             |       |                     |       |                    |       |       |       |       |       |       |       | —     |       | 10,910     |       | (10,910 | ) | -100 | % |
| Total discontinued  operations                              |       |                                             |       |           |       |             |       |                     |       |                    |       |       |       |       |       |       |       | 49         |       | 11,687     |       | (11,638 | ) | -100 | % |
| NET (LOSS) INCOME                                           |       |                                             |       |           |       |             |       |                     |       |                    |       |       |       |       |       |       |       | $          | (1,115     | )          | $          | 7,503 |   | $ | (8,618 | ) | -115 | % |
| NET LOSS (INCOME)  ATTRIBUTABLE TO NONCONTROLLING INTERESTS |       |                                             |       |           |       |             |       |                     |       |                    |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |
| Noncontrolling interests  in the Operating                  |       |                                             |       |           |       |             |       |                     |       |                    |       |       |       |       |       |       |       | 76         |       | (512       | )          | 588 |   | -115 | % |
| Partnership                                                 |       |                                             |       |           |       |             |       |                     |       |                    |       |       |       |       |       |       |       | (441       | )          | (173       | )          | (268 | ) | 155 | % |
| Noncontrolling interests  in subsidiaries                   |       |                                             |       |           |       |             |       |                     |       |                    |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |
| NET (LOSS) INCOME  ATTRIBUTABLE TO THE COMPANY              |       |                                             |       |           |       |             |       |                     |       |                    |       |       |       |       |       |       |       | $          | (1,480     | )          | $          | 6,818 |   | $ | (8,298 | ) | -122 | % |
|                                                             |            |                                                  |            |                |            |                  |            |                          |            |                         |            |            |            |            |            |            |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**TotalPortfolio**

 

*Revenues*

 

Rental income increased from$50.3 million for the three months ended September 30, 2009 to $50.8million for the three months ended September 30, 2010, an increase of $0.5million.  This increase is primarilyattributable to increases in average occupancy and scheduled annual rent persquare foot on the same-store portfolio in the 2010 period as compared to the2009 period.

 

Other property related incomeincreased from $4.3 million for the three months ended September 30, 2009to $5.2 million for the three months ended September 30, 2010, an increaseof $0.9 million, or 19%.  This increaseis primarily attributable to an increase of $0.7 million in tenant insurancecommissions and fee income during the third quarter 2010 as compared to thethird quarter 2009.

 

Propertymanagement fee income increased to $1.0 million for the three months endedSeptember 30, 2010 from $12,000 for the three months ended September 30,2009, an increase of $1.0 million. This increase is attributable to an increase in management fees relatedto the third party management business, which included 122 facilities as of September 30,2010 and 6 facilities as of September 30, 2009.

 

*OperatingExpenses*

 

Property operating expensesincreased from $23.1 million for the three months ended September 30, 2009to $24.6 million for the three months ended September 30, 2010, anincrease of $1.5 million, or 7%. This increase is primarily attributable to a $1.0 million

 

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increase in marketingexpenses during the 2010 period as compared to the 2009 period relating to thetiming of our marketing spend in 2010 compared to 2009 as well as $0.3 millionof increased expenses associated with lease-up activities at non same-storeproperties.

 

Depreciation andamortization decreased from $17.8 million for the three months ended September 30,2009 to $15.6 million for the three months ended September 30, 2010,a decrease of $2.2 million or 13%. This decrease is primarily attributable to depreciation expenserecognized in the 2009 period related to assets that became fully depreciatedduring 2009, with no similar activity on these fully depreciated assets in the2010 period.

 

General and administrativeexpenses increased from $5.6 million for the three months ended September 30,2009 to $6.6 million for the three months ended September 30, 2010, anincrease of $1.0 million, or 19%. This increase is primarily attributable to additional personnel costsrelated to the addition of team members during the 2010 period to supportoperational functions of the Company.

 

*OtherExpenses*

 

Interestexpense decreased from $12.0 million for the three months ended September 30,2009 to $9.6 million for the three months ended September 30, 2010, adecrease of $2.4 million, or 20%. The decrease is attributable to a decrease in total outstanding debtfrom $728.1 million as of September 30, 2009 to $656.2 million as of September 30,2010.  More specifically, we paid off ofthe $83.3 million YSI 1 loan during the first quarter of 2010, the $9.4 millionYSI 26 loan and the $6.0 million YSI 4 loan during the second quarter of 2010,and the $7.9 million YSI 25 loan during the third quarter of 2010.

 

*DiscontinuedOperations*

 

Incomefrom discontinued operations decreased from $0.8 million for the three monthsended September 30, 2009 to $0.1 million for the three months ended September 30,2010.  The income from discontinuedoperations in 2009 represents the income during the three months ended September 30,2009 from the properties sold throughout 2009 as well as one property held forsale at September 30, 2010, while the income from discontinued operationsin 2010 represents income related to one property held for sale as ofSeptember, 30, 2010.  Net gains ondisposition of discontinued operations decreased from $10.9 million for thethree months ended September 30, 2009 to no such gains for the threemonths ended September 30, 2010 as a result of the sale of 14 assetsduring the three months ended September 30, 2009 compared to no such assetsales during the 2010 period.

 

**Same-StoreProperty Portfolio**

 

Same-store revenuesincreased from $54.1 million for the three months ended September 30,2009 to $54.9 million for the three months ended September 30, 2010,an increase of $0.8 million or 1%. This increase is primarily attributable to increases in averageoccupancy and scheduled annual rent per square foot on the same-store portfolioin the 2010 period as compared to the 2009 period.  Same-store property operating expensesincreased from $21.0 million for the three months ended September 30,2009 to $21.6 million for the three months ended September 30, 2010,an increase of $0.6 million or 3%.  Thisincrease is primarily attributable to a $0.8 million increase in marketingexpense offset by a $0.1 million decrease in real estate tax expense during the2010 period as compared to the 2009 period.

 

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***Comparison of Operating Results for theNine Months Ended September 30, 2010 and September 30, 2009***

 
| ** **                                                  | ** ** | ** **                                       | ** ** | **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                                               |       | $                                                | 148,107    |                    | $          | 150,163          |       | $                        | (2,056     | )          | -1         | %          | $          | 973        |       | $ | 845 |   | $ | — |   | $ | — |   | $ | 149,080 |   | $ | 151,008 |   | $ | (1,928 | ) | -1 | % |
| Other property related  income                              |       | 12,968                                           |       | 12,225                  |       | 743              |       | 6                        | %          | 606        |       | 285        |       | 345        |       | — |   | 13,919 |   | 12,510 |   | 1,409 |   | 11 | % |
| Property management fee  income                             |       | —                                           |       | —                  |       | —           |       | 0                        | %          | —     |       | —     |       | 1,682      |       | 140 |   | 1,682 |   | 140 |   | 1,542 |   | 1101 | % |
| Total revenues                                              |       | 161,075                                          |       | 162,388                 |       | (1,313           | )          | -1                       | %          | 1,579      |       | 1,130      |       | 2,027      |       | 140 |   | 164,681 |   | 163,658 |   | 1,023 |   | 1 | % |
|                                                        |       |                                             |       |                    |       |             |       |                     |       |       |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| OPERATING EXPENSES:                                         |       |                                             |       |                    |       |             |       |                     |       |       |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Property operating  expenses                                |       | 64,349                                           |       | 65,312                  |       | (963             | )          | -1                       | %          | 1,337      |       | 703        |       | 6,235      |       | 5,494 |   | 71,921 |   | 71,509 |   | 412 |   | 1 | % |
| NET OPERATING INCOME:                                       |       | 96,726                                           |       | 97,076                  |       | (350             | )          | 0                        | %          | 242        |       | 427        |       | (4,208     | )          | (5,354 | ) | 92,760 |   | 92,149 |   | 611 |   | 1 | % |
|                                                        |       |                                             |       |                    |       |             |       |                     |       |       |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation and  amortization                              |       |                                             |       |                    |       |             |       |                     |       |       |       |       |       |       |       |   |   | 48,258 |   | 53,385 |   | (5,127 | ) | -10 | % |
| General and  administrative                                 |       |                                             |       |                    |       |             |       |                     |       |       |       |       |       |       |       |   |   | 19,308 |   | 16,658 |   | 2,650 |   | 16 | % |
| Subtotal                                                    |       |                                             |       |                    |       |             |       |                     |       |       |       |       |       |       |       |   |   | 67,566 |   | 70,043 |   | (2,477 | ) | -4 | % |
| Operating income                                            |       |                                             |       |                    |       |             |       |                     |       |       |       |       |       |       |       |   |   | 25,194 |   | 22,106 |   | 3,088 |   | 14 | % |
|                                                        |       |                                             |       |                    |       |             |       |                     |       |       |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Other Income (Expense):                                     |       |                                             |       |                    |       |             |       |                     |       |       |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Interest:                                                   |       |                                             |       |                    |       |             |       |                     |       |       |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Interest expense on  loans                                  |       |                                             |       |                    |       |             |       |                     |       |       |       |       |       |       |       |   |   | (29,324 | ) | (34,834 | ) | 5,510 |   | -16 | % |
| Loan procurement  amortization expense                      |       |                                             |       |                    |       |             |       |                     |       |       |       |       |       |       |       |   |   | (4,718 | ) | (1,517 | ) | (3,201 | ) | 211 | % |
| Interest income                                             |       |                                             |       |                    |       |             |       |                     |       |       |       |       |       |       |       |   |   | 616 |   | 249 |   | 367 |   | 147 | % |
| Acquisition related  costs                                  |       |                                             |       |                    |       |             |       |                     |       |       |       |       |       |       |       |   |   | (465 | ) | — |   | (465 | ) | -100 | % |
| Other                                                       |       |                                             |       |                    |       |             |       |                     |       |       |       |       |       |       |       |   |   | (142 | ) | (13 | ) | (129 | ) | 992 | % |
| Total other expense                                         |       |                                             |       |                    |       |             |       |                     |       |       |       |       |       |       |       |   |   | (34,033 | ) | (36,115 | ) | 2,082 |   | -6 | % |
|                                                        |       |                                             |       |                    |       |             |       |                     |       |       |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| LOSS FROM CONTINUING  OPERATIONS                            |       |                                             |       |                    |       |             |       |                     |       |       |       |       |       |       |       |   |   | (8,839 | ) | (14,009 | ) | 5,170 |   | -37 | % |
|                                                        |       |                                             |       |                    |       |             |       |                     |       |       |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| DISCONTINUED OPERATIONS                                     |       |                                             |       |                    |       |             |       |                     |       |       |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Income from discontinued  operations                        |       |                                             |       |                    |       |             |       |                     |       |       |       |       |       |       |       |   |   | 143 |   | 2,610 |   | (2,467 | ) | -95 | % |
| Net gain on disposition  of discontinued operations         |       |                                             |       |                    |       |             |       |                     |       |       |       |       |       |       |       |   |   | — |   | 13,530 |   | (13,530 | ) | -100 | % |
| Total discontinued  operations                              |       |                                             |       |                    |       |             |       |                     |       |       |       |       |       |       |       |   |   | 143 |   | 16,140 |   | (15,997 | ) | -99 | % |
| NET (LOSS) INCOME                                           |       |                                             |       |                    |       |             |       |                     |       |       |       |       |       |       |       |   |   | $ | (8,696 | ) | $ | 2,131 |   | $ | (10,827 | ) | -508 | % |
| NET LOSS (INCOME)  ATTRIBUTABLE TO NONCONTROLLING INTERESTS |       |                                             |       |                    |       |             |       |                     |       |       |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Noncontrolling interests  in the Operating Partnership      |       |                                             |       |                    |       |             |       |                     |       |       |       |       |       |       |       |   |   | 487 |   | (93 | ) | 580 |   | -624 | % |
| Noncontrolling interests  in subsidiaries                   |       |                                             |       |                    |       |             |       |                     |       |       |       |       |       |       |       |   |   | (1,267 | ) | (173 | ) | (1,094 | ) | 632 | % |
| NET (LOSS) INCOME  ATTRIBUTABLE TO THE COMPANY              |       |                                             |       |                    |       |             |       |                     |       |       |       |       |       |       |       |   |   | $ | (9,476 | ) | $ | 1,865 |   | $ | (11,341 | ) | -608 | % |
|                                                             |            |                                                  |            |                         |            |                  |            |                          |            |            |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Revenues*

 

Rentalincome decreased from $151.0 million for the nine months endedSeptember 30, 2009 to $149.1 million for the nine months endedSeptember 30, 2010, a decrease of $1.9 million, or 1%.  This decrease is primarily attributable to anincrease in average occupancy offset by a decrease in realized annual rent persquare foot from the same-store properties during the nine months endedSeptember 30, 2010 as compared to the nine months ended September 30,2009.

 

Otherproperty related income increased from $12.5 million for the nine monthsended September 30, 2009 to $13.9 million for the nine months endedSeptember 30, 2010, an increase of $1.4 million, or 11%. Thisincrease is primarily attributable to an increase of $1.0 million in tenantinsurance commissions and fee income during the nine months endedSeptember 30, 2010 as compared to the nine months ended September 30,2009.

 

Propertymanagement fee income increased to $1.7 million for the nine months endedSeptember 30, 2010 from $0.1 million for the nine months endedSeptember 30, 2009, an increase of $1.6 million.  This increase is attributable to an increasein management fees related to the third party management business, whichincluded 122 facilities as of September 30, 2010 and 6 facilities as of September 30,2009.

 

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*Operating Expenses*

 

Propertyoperating expenses increased from $71.5 million for the nine months endedSeptember 30, 2009 to $71.9 million for the nine months endedSeptember 30, 2010, an increase of $0.4 million, or 1%.  Thisincrease is primarily attributable to a decrease in expenses pertaining to oursame-store portfolio, which are primarily attributable to a reduction in realestate tax expenses during the 2010 period as compared to the 2009 period,offset by an increase in non same-store and other property expenses primarilyattributable to the lease up of non same-store properties and the addition ofthird party management facilities during the 2010 period.

 

Depreciation andamortization decreased from $53.4 million for the nine months endedSeptember 30, 2009 to $48.3 million for the nine months endedSeptember 30, 2010, a decrease of $5.1 million, or 10%. This decreaseis primarily attributable to depreciation expense recognized in the 2009 periodrelated to assets that became fully depreciated during 2009, with no similaractivity on these fully depreciated assets in the 2010 period.

 

General and administrativeexpenses increased from $16.7 million for the nine months ended September 30,2009 to $19.3 million for the nine months ended September 30, 2010, anincrease of $2.6 million, or 16%. This increase is primarily attributable to additional personnel costsrelated to the addition of team members during the 2010 period to supportoperational functions of the Company as well as non recurring contract relatedcosts incurred in conjunction with employment agreement modifications.

 

*Other Expenses*

 

Interestexpense decreased from $34.8 million for the nine months endedSeptember 30, 2009 to $29.3 million for the nine months endedSeptember 30, 2010, a decrease of $5.5 million, or 16%. The decreaseis attributable to a decrease in total outstanding debt from $977.5 million asof January 1, 2009 to $656.2 million as of September 30, 2010.  The decrease is attributable to the payoff ofmultiple mortgages as well as $172.0 million of credit facility borrowings,which resulted in decreased interest expense.

 

*Discontinued Operations*

 

Incomefrom discontinued operations decreased from $2.6 million for the nine monthsended September 30, 2009 to $0.1 million for the nine months endedSeptember 30, 2010.  The income from discontinued operations in 2009represents the income during the nine months ended September 30, 2009 fromproperties sold throughout 2009 and one property held-for-sale as of September 30,2010, while the income from discontinued operations in 2010 represents incomerelated to one property held-for-sale as of September 30, 2010.  Net gains on disposition of discontinuedoperations decreased from $13.5 million for the nine months endedSeptember 30, 2009 to no such gains for the nine months endedSeptember 30, 2010 as a result of the sale of 17 assets during the ninemonths ended September 30, 2009 compared to no asset sales during the 2010period.

 

**Same-StoreProperty Portfolio**

 

Same-store revenuesdecreased from $162.4 million for the nine months ended September 30,2009 to $161.1 million for the nine months ended September 30, 2010,a decrease of $1.3 million, or 1%. This decrease is primarily attributable to an increase in averageoccupancy offset by a decrease in realized annual rent per occupied square footon the same-store portfolio in the 2010 period as compared to the 2009period.  Same-store property operatingexpenses decreased from $65.3 million for the nine months ended September 30,2009 to $64.3 million for the nine months ended September 30, 2010, adecrease of $1.0 million or 1%.  Thisdecrease is primarily attributable to a $0.9 million decrease in real estatetax expense and a $0.3 million decrease in utility expenses during the 2010period as compared to the 2009 period.

 

**Non-GAAP FinancialMeasures**

 

***NOI***

 

Wedefine net operating income, which we refer to as “NOI,” as total continuingrevenues less continuing property operating expenses.  NOI also can be calculated by adding back tonet income (loss): interest expense on loans, loan procurement amortizationexpense, acquisition related costs, amounts attributable to noncontrolling interests,other expense, depreciation and amortization expense, general andadministrative expense, and deducting from net income: income from discontinuedoperations, gains on disposition of discontinued operations, other income, andinterest income.  NOI is not a measure ofperformance calculated in accordance with GAAP.

 

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Weuse NOI as a measure of operating performance at each of our facilities, andfor all of our facilities in the aggregate. NOI should not be considered as a substitute for operating income, netincome, cash flows provided by operating, investing and financing activities,or other income statement or cash flow statement data prepared in accordancewith GAAP.

 

We believe NOI is useful toinvestors in evaluating our operating performance because:

 

·         It is one of the primarymeasures used by our management and our facility managers to evaluate theeconomic productivity of our facilities, including our ability to lease ourfacilities, increase pricing and occupancy, and control our property operating expenses;

 

·         It is widely used in thereal estate industry and the self-storage industry to measure the performanceand value of real estate assets without regard to various items included in netincome that do not relate to or are not indicative of operating performance,such as depreciation and amortization expense, which can vary depending uponaccounting methods and the book value of assets; and

 

·         It helps our investors tomeaningfully compare the results of our operating performance from period toperiod by removing the impact of our capital structure (primarily interestexpense on our outstanding indebtedness) and depreciation of our basis in ourassets from our operating results.

 

Thereare material limitations to using a measure such as NOI, including thedifficulty associated with comparing results among more than one company andthe inability to analyze certain significant items, including depreciation andinterest expense, that directly affect our net income.  We compensate for these limitations byconsidering the economic effect of the excluded expense items independently aswell as in connection with our analysis of net income.  NOI should be considered in addition to, butnot as a substitute for, other measures of financial performance reported inaccordance with GAAP, such as total revenues, operating income and net income.

 

**Cash Flows**

 

***Comparison of the nine months ended September 30, 2010 to the ninemonths ended September 30, 2009***

 

A comparison of cash flowfrom operating, investing and financing activities for the nine months ended September 30,2010 and 2009 is as follows (in thousands):

 
| ** **                            | ** ** | **Nine Months Ended September 30,** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|
| ** **                            | ** ** | **2010**                                                | ** ** | **2009**   | ** ** | **Change** | ** ** |
|                                  |       |                                                    |       |       |       |   |   |
| Net  cash flow provided by (used in): |       |                                                    |       |       |       |   |   |
| Operating  activities                 |       | $                                                       | 50,947     |       | $          | 46,982 |   | $ | 3,965 |   |
| Investing  activities                 |       | $                                                       | (24,072    | )          | $          | 96,452 |   | $ | (120,524 | ) |
| Financing  activities                 |       | $                                                       | (106,440   | )          | $          | (86,211 | ) | $ | (20,229 | ) |

 

Cashflows provided by operating activities for the nine months ended September 30,2010 and 2009 were $50.9 million and $47.0 million, respectively, an increaseof $3.9 million.  The increase primarilyrelates to a $3.0 million increase in accounts payable activity as a result ofthe timing of certain payments during the 2010 period as compared to the 2009period and increased NOI levels of $0.6 million during the 2010 period ascompared to the 2009 period.

 

Cashprovided by (used in) investing activities decreased from $96.5 million in2009 to ($24.1) million in 2010, a decrease of $120.6 million.  Thedecrease primarily relates to property dispositions resulting in $61.2 millionof proceeds in the 2009 period, net proceeds received from the closing of theHART in August 2009 of approximately $48.7 million, with no similartransactions during the 2010 period, as well as higher acquisition activity inthe 2010 period (three facilities for an aggregate purchase price of $32.5million) relative to no acquisitions during the 2009 period.  The decrease was offset by repayment of notesreceivable of $20.1 million during the nine months ended September 30,2010.

 

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Cash used in financingactivities increased from $86.2 million to $106.4 million during the ninemonths ended September 30, 2009 and 2010, respectively.  The increaseprimarily relates to higher common share issuance activity in the 2009 periodcompared to the 2010 period (proceeds of $170.9 million and $20.4 million,respectively), and increased distributions paid to shareholders andnon-controlling interests of $5.8 million during 2010 as compared to 2009due to additional outstanding shares during the 2010 period, offset bydecreased net debt payoffs of $136.5 million in the 2010 period as compared tothe 2009 period.

 

**Issuance ofCommon Shares**

 

In April 2009, the Company commenced the saleof up to 10 million common shares pursuant to a continuous offeringprogram.  Pursuant to the program, we maysell shares in amounts and at times to be determined by us.  Actual sales will be determined by a varietyof factors to be determined by us, including market conditions, the tradingprice of our common shares and determinations by us of the appropriate sourcesof funding.  In connection with theoffering program, we engaged a sales agent who receives compensation equal toup to three percent of the gross sales price per common share for any sharessold pursuant to the program.  During thenine months ended September 30, 2010 we sold 2.5 million shares under theprogram at an average sales price of $8.51 per share resulting in net proceedsof $20.4 million ($30.5 million of net proceeds and 5.0 million shares soldwith an average sales price of $6.25 since program inception).  We used the net proceeds to fund theacquisition of storage facilities and for general corporate purposes.

 

**Liquidityand Capital Resources**

 

***Liquidity Overview***

 

Our cash flow fromoperations has historically been one of our primary sources of liquidity tofund debt service, distributions and capital expenditures.  We derive substantially all of our revenuefrom customers who lease space from us at our facilities.  Therefore, our ability to generate cash fromoperations is dependent on the rents that we are able to charge and collectfrom our customers.  We believe that thefacilities in which we invest — self-storagefacilities — are less sensitive than other real estate product typesto current near-term economic downturns. However, prolonged economic downturns will adversely affect our cashflows from operations.

 

In order to qualify as aREIT for federal income tax purposes, we are required to distribute at least90% of our REIT taxable income, excluding capital gains, to our shareholders onan annual basis or pay federal income tax. The nature of our business, coupled with the requirement that wedistribute a substantial portion of our income on an annual basis, will causeus to have substantial liquidity needs over both the short term and the longterm.

 

Our short term liquidityneeds consist primarily of funds necessary to pay operating expenses associatedwith our facilities, refinancing of certain mortgage indebtedness, interestexpense and scheduled principal payments on debt, expected distributions tolimited partners and shareholders and recurring capital expenditures.  These liquidity needs will vary from year toyear, in some cases significantly.  Weexpect recurring capital expenditures remaining in fiscal year 2010 to beapproximately $2 million to $4 million. In addition, as of September 30, 2010, our scheduled principalpayments on debt, including borrowings outstanding on our unsecured revolvingcredit facility and unsecured term loans, are approximately $5.8 million duringthe remainder of 2010 and $90.5 million in 2011.  Subsequent to September 30, 2010, werepaid the YSI 2 mortgage loan of approximately $82.1 million that had ascheduled maturity date of January 11, 2011 with available cash andborrowings from the credit facility. There were no prepayment costs associated with the early repayment ofthe loan.

 

Our most restrictive debtcovenants limit the amount of additional leverage that we can incur; however,we believe the sources of capital described above will allow us to execute ourcurrent business plan and remain in compliance with our debt covenants.

 

Our liquidity needs beyond2010 consist primarily of contractual obligations which include repayments ofindebtedness at maturity, as well as potential discretionary expenditures suchas (i) non-recurring capital expenditures; (ii) redevelopment ofoperating facilities; (iii) acquisitions of additional facilities; and (iv) developmentof new facilities.  We will have tosatisfy our needs through either additional borrowings, including borrowingsunder a new or revised revolving credit facility, sales of common or preferredshares and/or cash generated through facility dispositions and joint venturetransactions.

 

Notwithstanding thediscussion above, we believe that, as a publicly traded REIT, we will haveaccess to multiple sources of capital to fund long term liquidity requirements,including the incurrence of additional debt and the issuance of additionalequity.  However, we cannot provide anyassurance that this will be the case. Our ability to incur additional debt is dependent on a number offactors,

 

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including our degree of leverage, the valueof our assets and borrowing restrictions that may be imposed by lenders.  In addition, dislocations in the United Statesdebt markets may significantly reduce the availability and increase the cost oflong term debt capital, including conventional mortgage financing andcommercial mortgage-backed securities financing.  There can be no assurance that such capitalwill be readily available in the future. Our ability to access the equity capital markets is also dependent on anumber of factors, including general market conditions for REITs and marketperceptions about us.

 

***Current and Expected Sources of Cash Excluding Credit Facility***

 

Asof September 30, 2010, we had approximately $23.2 million in availablecash and cash equivalents.  In addition,we had approximately $250.0 million of availability for borrowings under ourunsecured revolving credit facility.

 

***Bank Credit Facilities***

 

OnDecember 8, 2009, we entered into a three-year, $450 million seniorsecured credit facility (the “Secured Credit Facility”), consisting of a $200million secured term loan and a $250 million secured revolving creditfacility.  The Secured Credit Facilitywas collateralized by mortgages on “borrowing base properties” (as defined inthe Secured Credit Facility agreement). The Secured Credit Facility replaced the prior, three-year $450 millionunsecured credit facility, which was entered into in November 2006, andconsisted of a $200 million unsecured term loan and $250 million in unsecuredrevolving loans.  All borrowings underthe unsecured credit facility were repaid in December 2009.

 

OnSeptember 29, 2010, we amended its existing $450 million creditfacility.  The amended credit facilityconsists of a $200 million unsecured term loan and a $250 million unsecuredrevolving credit facility. The amended credit facility has a three year termexpiring on December 7, 2013, is unsecured, and borrowings on the facilityincur interest based on a borrowing spread based on the our leverage levelsplus LIBOR.  We incurred $2.5 million inconnection with executing this amendment which was capitalized and is included asa component of loan procurement costs, net of amortization on the ourconsolidated balance sheet.

 

At September 30, 2010,$200 million of unsecured term loan borrowings were outstanding under theunsecured credit facility and $250 million was available for borrowing underthe unsecured revolving credit facility. As of September 30, 2010, borrowings under the unsecured creditfacility had a weighted average interest rate of 3.8%.

 

Our ability to borrow underthe amended credit facility is subject to our ongoing compliance with thefollowing financial covenants, including among others:

 

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

 

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

 

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

 

Further, under our amendedcredit facility, we are restricted from paying distributions on our commonshares that would exceed an amount equal to the greater of (i) 95% of ourfunds from operations, and (ii) such amount as may be necessary tomaintain our REIT status.

 

We are currently incompliance with all of our covenants and anticipate being in compliance withall of our covenants through the term of the amended credit facility andunsecured term loan.

 

**Off-BalanceSheet Arrangements**

 

We do not currently have anyoff-balance sheet arrangements**.**

 

**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

The Company’s future income,cash flows and fair values relevant to financial instruments depend uponprevailing interest rates.

 

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**Market Risk**

 

Our investmentpolicy relating to cash and cash equivalents is to preserve principal andliquidity while maximizing the return through investment of availablefunds.  The carrying value of theseinvestments approximates fair value on the reporting dates.

 

**Effect ofChanges in Interest Rates on our Outstanding Debt**

 

The analysis below presentsthe sensitivity of the fair value of our financial instruments to selectedchanges in market rates.  The range ofchanges chosen reflects our view of changes which are reasonably possible overa one-year period.  Fair values are thepresent value of projected future cash flows based on the market rates chosen.

 

Our financial instrumentsconsist of both fixed and variable rate debt. As of September 30, 2010, our consolidated debt consisted of $456.2million in fixed rate loans payable and $200.0 million in a variable rateunsecured term loan.  All financialinstruments were entered into for other than trading purposes and the fairvalue of these financial instruments is referred to as the financialposition.  Changes in interest rates havedifferent impacts on the fixed and variable rate portions of our debtportfolio.  A change in interest rates onthe fixed portion of the debt portfolio impacts the financial instrumentposition, but has no impact on interest incurred or cash flows.  A change in interest rates on the variableportion of the debt portfolio impacts the interest incurred and cash flows, butdoes not impact the financial instrument position.

 

If market rates of intereston our variable rate debt increase by 1%, the increase in annual interestexpense on our variable rate debt would decrease future earnings and cash flowsby approximately $2.0 million a year.  If market rates of interest on ourvariable rate debt decrease by 1%, the decrease in interest expense on ourvariable rate debt would increase future earnings and cash flows byapproximately $2.0 million a year.

 

If market rates of interestincrease by 1%, the fair value of our outstanding fixed-rate mortgage debtwould decrease by approximately $10.5 million. If market rates of interest decrease by 1%, the fair value of ouroutstanding fixed-rate mortgage debt would increase by approximately $11.0million.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls and Procedures**

 

Asof the end of the period covered by this report, we carried out an evaluation,under the supervision and with the participation of our management, includingthe Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rules 13a-15(e) under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”)).  Based on that evaluation, the CEO and the CFOhave concluded that our disclosure controls and procedures were effective as ofthe end of the period covered by this report.

 

**Changes inInternal Controls Over Financial Reporting**

 

There has been no change inour internal control over financial reporting (as defined inRule 13a-15(f) under the Exchange Act) during our most recent fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART II.OTHER INFORMATION**

 

**ITEM2.  UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

The following table provides information aboutrepurchases of the Company’s common shares during the three month period ended September 30,2010:

 

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| ** **                          | ** ** | **Total  Number of  Shares  Purchased  (1)** | ** ** | **Average  Price Paid  Per Share** | ** ** | **Total Number of  Shares  Purchased as  Part of Publicly  Announced  Plans or  Programs** | ** ** | **Maximum Number of  Shares that May Yet  Be Purchased Under  the Plans or Programs  (2)** | ** ** |
|-------------------------------------|------------|---------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                |       |                                              |       |                                         |       |                                                                                                                     |       |                                                                                                                                         |       |
| July 1- July 31           |       | —                                            |       | —                                       |       | N/A                                                                                                                      |       | 3,000,000                                                                                                                                    |       |
| August 1- August 31       |       | —                                            |       | —                                       |       | N/A                                                                                                                      |       | 3,000,000                                                                                                                                    |       |
| September 1- September 30 |       | 144                                               |       | $                                            | 8.78       |                                                                                                                     | N/A        |                                                                                                                                         | 3,000,000  |   |
|                                |       |                                              |       |                                         |       |                                                                                                                     |       |                                                                                                                                         |       |
| Total                               |       | 144                                               |       |                                         |       | N/A                                                                                                                      |       | 3,000,000                                                                                                                                    |       |
|                                     |            |                                                   |            |                                              |            |                                                                                                                          |            |                                                                                                                                              |            |  |

 

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(1) Represents common shareswithheld by the Company upon the vesting of restricted shares to cover employeetax obligations.

 

(2)  On September 27, 2007, the Companyannounced that the Board of Trustees approved a share repurchase program for upto 3.0 million of the Company’s outstanding common shares.  Unless terminated earlier by resolution ofthe Board of Trustees, the program will expire when the number of authorizedshares has been repurchased.  The Companyhas made no repurchases under this program.

 

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**ITEM 6. EXHIBITS**

 
| **Exhibit No.** | ** ** | ** **                                                                                                                                                                                                                                                                                                                           |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                 |
| 10.1*                |       | Employment  letter Agreement, dated July 13, 2010, by and between U-Store-It Trust  and Robert G. Blatz, incorporated by reference to the Company’s Current  Report on Form 8-K, filed with the SEC on July 29, 2010                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                 |
| 10.2*                |       | Second  Amended and Restated Credit Agreement, dated as of September 29, 2010,  by and among U-Store-It, L.P., U-Store-It Trust, Wells Fargo Securities, LLC  and Banc of America Securities LLC, incorporated by reference to the  Company’s Current Report on Form 8-K, filed with the SEC on  October 4, 2010 |
|                 |       |                                                                                                                                                                                                                                                                                                                                 |
| 12.1                 |       | Statement  regarding Computation of Ratios of U-Store-It Trust. (filed here with)                                                                                                                                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                 |
| 31.1                 |       | Certification  of Chief Executive Officer required by  Rule 13a-14(a)/15d-14(a) under the Exchange Act, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (filed here  with)                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                 |
| 31.2                 |       | Certification  of Chief Financial Officer required by  Rule 13a-14(a)/15d-14(a) under the Exchange Act, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (filed here  with)                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                 |
| 32.1                 |       | Certification  of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 (furnished here with)                                                                                                                     |

 

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* Denotes a contract or compensatory plan, contractor arrangement

 

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SIGNATURES OF REGISTRANT

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                         | U-STORE-IT TRUST                            |
|------------------------------|---------------------------------------------|
|                         | (Registrant)                                |
|                         |                                        |
|                         |                                        |
| Date:  November 5, 2010 | By:                                         | /s/  Dean Jernigan |
|                         | Dean  Jernigan, Chief Executive Officer     |
|                         | (Principal  Executive Officer)              |
|                         |                                        |
|                         |                                        |
| Date:  November 5, 2010 | By:                                         | /s/  Timothy M. Martin |
|                         | Timothy  M. Martin, Chief Financial Officer |
|                         | (Principal  Financial Officer)              |

 

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