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 to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|-------|--------------------------------------------------------------------------------------------------------|

** **

**Forthe quarterly period ended March 31, 2010.**

** **

**or**

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

** **

**Forthe transition period from                to               .**

 

**Commission file number:001-32324**

** **

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** **

**U-STORE-ITTRUST**

(Exact Name of Registrant as Specified in itsCharter)

 

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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’sTelephone Number, Including Area Code)

 

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

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T during the preceding 12 months (or for such shorter periodthat the registrant was required to submit and post such files). Yes  o  No  o

 

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

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No  x

 

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

 
| **Class**                      | ** ** | **Outstanding at May 3, 2010** | ** ** |
|--------------------------------|------------|-------------------------------------|------------|
| common shares, $.01 par  value |       | 93,450,438                          |       |

 

 

 

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Table of Contents

 

**U-STORE-ITTRUST**

**TABLE OF CONTENTS**

 
| Part I.  FINANCIAL INFORMATION |                                                                                        |
|-------------------------------------|---------------------------------------------------------------------------------------------|
| Item 1.                             | Financial Statements                                                                        | 4 |
| Item 2.                             | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 15 |
| Item 3.                             | Quantitative  and Qualitative Disclosures About Market Risk                                 | 22 |
| Item 4.                             | Controls and  Procedures                                                                    | 23 |
| Part II. OTHER  INFORMATION    |                                                                                        |
| Item 2.                             | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 24 |
| Item 6.                             | Exhibits                                                                                    | 25 |

 

**Forward-LookingStatements**

 

This Quarterly Report on Form 10-Q,together with other statements and information publicly disseminated byU-Store-It Trust (“we,” “us,” “our” or the “Company”), contains certainforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended, or the Exchange Act. Forward-lookingstatements 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.

 

There are a number ofrisks and uncertainties that could cause our actual results to differmaterially from the forward-looking statements contained in or contemplated bythis Report.  Any forward-lookingstatements should be considered in light of the risks and uncertaintiesreferred to in Item 1A. “Risk Factors” in the U-Store-It Trust Annual Report onForm 10-K for the year ended December 31, 2009 and in our otherfilings 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 tothe use of derivative financial instruments;

 

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

 

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

 

·                  risks of investing through jointventures, 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 orregulations;

 

·                  risks related to natural disasters;

 

·                  potential environmental and otherliabilities; and

 

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

 

Given these uncertainties and the other risksidentified elsewhere in our Annual Report on Form 10-K and in this Report,we caution readers not to place undue reliance on forward-lookingstatements.  We undertake no obligationto publicly update or revise these forward-looking statements, whether as aresult of new information, future events or otherwise except as may be requiredby securities laws.

 

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Table of Contents

 

**PART I. FINANCIAL INFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

 

**U-STORE-ITTRUST AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**(inthousands, except share data)**

**(unaudited)**

 
| ** **                                                                                                                                                                              | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                              | ** ** | **2010**           | ** ** | **2009**              | ** ** |
|                                                                                                                                                                                    |       |               |       |                  |       |
| **ASSETS**                                                                                                                                                                              |       |               |       |                  |       |
| Storage facilities                                                                                                                                                                      |       | $                  | 1,743,312  |                  | $          | 1,774,542 |   |
| Less: Accumulated  depreciation                                                                                                                                                         |       | (326,935           | )          | (344,009              | )          |
| Storage facilities, net                                                                                                                                                                 |       | 1,416,377          |       | 1,430,533             |       |
| Cash and cash  equivalents                                                                                                                                                              |       | 41,524             |       | 102,768               |       |
| Restricted cash                                                                                                                                                                         |       | 13,521             |       | 16,381                |       |
| Loan procurement costs,  net of amortization                                                                                                                                            |       | 18,006             |       | 18,366                |       |
| Notes receivable                                                                                                                                                                        |       | 2,532              |       | 20,112                |       |
| Other assets, net                                                                                                                                                                       |       | 10,016             |       | 10,710                |       |
| Total assets                                                                                                                                                                            |       | $                  | 1,501,976  |                  | $          | 1,598,870 |   |
|                                                                                                                                                                                    |       |               |       |                  |       |
| **LIABILITIES  AND EQUITY**                                                                                                                                                             |       |               |       |                  |       |
|                                                                                                                                                                                    |       |               |       |                  |       |
| Secured term loan                                                                                                                                                                       |       | $                  | 200,000    |                  | $          | 200,000 |   |
| Mortgage loans and  notes payable                                                                                                                                                       |       | 483,324            |       | 569,026               |       |
| Accounts payable,  accrued expenses and other liabilities                                                                                                                               |       | 27,749             |       | 33,767                |       |
| Distributions payable                                                                                                                                                                   |       | 2,456              |       | 2,448                 |       |
| Deferred revenue                                                                                                                                                                        |       | 9,008              |       | 8,449                 |       |
| Security deposits                                                                                                                                                                       |       | 458                |       | 456                   |       |
| Total liabilities                                                                                                                                                                       |       | 722,995            |       | 814,146               |       |
|                                                                                                                                                                                    |       |               |       |                  |       |
| Noncontrolling  interests in the Operating Partnership                                                                                                                                  |       | 45,086             |       | 45,394                |       |
|                                                                                                                                                                                    |       |               |       |                  |       |
| Commitments and  contingencies                                                                                                                                                          |       |               |       |                  |       |
|                                                                                                                                                                                    |       |               |       |                  |       |
| Equity                                                                                                                                                                                  |       |               |       |                  |       |
| Common shares $.01 par  value, 200,000,000 shares authorized, 92,902,133 and 92,654,979 shares issued  and outstanding at March 31, 2010 and December 31, 2009,  respectively |       | 929                |       | 927                   |       |
| Additional paid in  capital                                                                                                                                                             |       | 976,145            |       | 974,926               |       |
| Accumulated other  comprehensive loss                                                                                                                                                   |       | (1,056             | )          | (874                  | )          |
| Accumulated deficit                                                                                                                                                                     |       | (285,487           | )          | (279,670              | )          |
| Total U-Store-It Trust  shareholders’ equity                                                                                                                                       |       | 690,531            |       | 695,309               |       |
| Noncontrolling interest  in subsidiaries                                                                                                                                                |       | 43,364             |       | 44,021                |       |
| Total equity                                                                                                                                                                            |       | 733,895            |       | 739,330               |       |
| Total liabilities and  equity                                                                                                                                                           |       | $                  | 1,501,976  |                  | $          | 1,598,870 |   |

 

See accompanyingnotes to the unaudited consolidated financial statements.

 

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**U-STORE-ITTRUST AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(inthousands, except per share data)**

**(unaudited)**

** **
| ** **                                                                                              | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                              | ** ** | **2010**                              | ** ** | **2009** | ** ** |
|                                                                                                    |       |                                  |       |   |   |
| **REVENUES**                                                                                            |       |                                  |       |   |   |
| Rental income                                                                                           |       | $                                     | 49,042     |   | $ | 51,243 |   |
| Other property related  income                                                                          |       | 4,081                                 |       | 3,690 |   |
| Total revenues                                                                                          |       | 53,123                                |       | 54,933 |   |
| **OPERATING  EXPENSES**                                                                                 |       |                                  |       |   |   |
| Property operating  expenses                                                                            |       | 22,973                                |       | 23,613 |   |
| Depreciation and  amortization                                                                          |       | 16,378                                |       | 17,825 |   |
| General and  administrative                                                                             |       | 5,868                                 |       | 5,476 |   |
| Total operating  expenses                                                                               |       | 45,219                                |       | 46,914 |   |
| **OPERATING  INCOME**                                                                                   |       | 7,904                                 |       | 8,019 |   |
| **OTHER  INCOME (EXPENSE)**                                                                             |       |                                  |       |   |   |
| Interest:                                                                                               |       |                                  |       |   |   |
| Interest expense on  loans                                                                              |       | (10,051                               | )          | (11,353 | ) |
| Loan procurement  amortization expense                                                                  |       | (1,539                                | )          | (483 | ) |
| Interest income                                                                                         |       | 535                                   |       | 43 |   |
| Other                                                                                                   |       | (41                                   | )          | (12 | ) |
| Total other expense                                                                                     |       | (11,096                               | )          | (11,805 | ) |
|                                                                                                    |       |                                  |       |   |   |
| **LOSS  FROM CONTINUING OPERATIONS**                                                                    |       | (3,192                                | )          | (3,786 | ) |
|                                                                                                    |       |                                  |       |   |   |
| **DISCONTINUED  OPERATIONS**                                                                            |       |                                  |       |   |   |
| Income from  discontinued operations                                                                    |       | —                                |       | 1,000 |   |
| Net gain on disposition  of discontinued operations                                                     |       | —                                |       | 500 |   |
| Total discontinued  operations                                                                          |       | —                                |       | 1,500 |   |
| **NET  LOSS**                                                                                           |       | (3,192                                | )          | (2,286 | ) |
| **NET  LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTERESTS**                                         |       |                                  |       |   |   |
| Noncontrolling  interests in the Operating Partnership                                                  |       | 178                                   |       | 177 |   |
| Noncontrolling interest  in subsidiaries                                                                |       | (461                                  | )          | — |   |
| **NET  LOSS ATTRIBUTABLE TO THE COMPANY**                                                               |       | $                                     | (3,475     | ) | $ | (2,109 | ) |
| Basic and diluted loss  per share from continuing operations attributable to common shareholders        |       | $                                     | (0.04      | ) | $ | (0.06 | ) |
| Basic and diluted  earnings per share from discontinued operations attributable to common  shareholders |       | $                                     | —     |   | $ | 0.03 |   |
| Basic and diluted loss  per share attributable to common shareholders                                   |       | $                                     | (0.04      | ) | $ | (0.03 | ) |
|                                                                                                    |       |                                  |       |   |   |
| Weighted-average basic  and diluted shares outstanding                                                  |       | 92,834                                |       | 57,687 |   |
| **AMOUNTS  ATTRIBUTABLE TO THE COMPANY’S COMMON SHAREHOLDERS:**                                    |       |                                  |       |   |   |
| Loss from continuing  operations                                                                        |       | $                                     | (3,475     | ) | $ | (3,488 | ) |
| Total discontinued operations                                                                           |       | —                                |       | 1,379 |   |
| Net loss                                                                                                |       | $                                     | (3,475     | ) | $ | (2,109 | ) |

 

See accompanyingnotes to the unaudited consolidated financial statements.

 

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**U-STORE-ITTRUST AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF EQUITY**

**For theThree-Month Periods Ended March 31, 2010 and 2009**

**(inthousands)**

**(unaudited)**

 
| ** **                                                   | ** ** | ** **         | ** ** | ** **  | ** ** | ** **      | ** ** | ** **           | ** ** | ** **             | ** ** | ** **       | ** ** | ** **         | ** ** | ** **         | ** ** | **Noncontrolling** | ** ** |
|--------------------------------------------------------------|------------|--------------------|------------|-------------|------------|-----------------|------------|----------------------|------------|------------------------|------------|------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                   | ** ** | ** **         | ** ** | ** **  | ** ** | **Additional**  | ** ** | **Accumulated**      | ** ** | ** **             | ** ** | **Total**        | ** ** | **Noncontrolling** | ** ** | ** **         | ** ** | **Interests  in**  | ** ** |
| ** **                                                   | ** ** | **Common  Shares** | ** ** | **Paid in** | ** ** | **Other  Com-** | ** ** | **Accumulated**      | ** ** | **Shareholders’** | ** ** | **Interest  in** | ** ** | ** **         | ** ** | **the  Operating** | ** ** |
| ** **                                                   | ** ** | **Number**         | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **prehensive  Loss** | ** ** | **Deficit**            | ** ** | **Equity**       | ** ** | **Subsidiaries**   | ** ** | **Total  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 |       | —             |       | —      |       | —          |       | —               |       | —                 |       | —           |       | 19                 |       | 19                 |       | —             |       |
| Issuance of restricted  shares                               |       | 195                |       | 2           |       | —          |       | —               |       | —                 |       | 2                |       | —             |       | 2                  |       | —             |       |
| Exercise of stock  options                                   |       | 52                 |       | —      |       | 180             |       | —               |       | —                 |       | 180              |       | —             |       | 180                |       | —             |       |
| Amortization of  restricted shares                           |       | —             |       | —      |       | 503             |       | —               |       | —                 |       | 503              |       | —             |       | 503                |       | —             |       |
| Share compensation  expense                                  |       | —             |       | —      |       | 536             |       | —               |       | —                 |       | 536              |       | —             |       | 536                |       |               |       |
| Net (loss) income                                            |       | —             |       | —      |       | —          |       | —               |       | (3,475                 | )          | (3,475           | )          | 461                |       | (3,014             | )          | (178               | )          |
| Other comprehensive loss:                                    |       |               |       |        |       |            |       |                 |       |                   |       |             |       |               |       |               |       |               |       |
| Unrealized loss on  foreign currency translation             |       | —             |       | —      |       | —          |       | (182                 | )          | —                 |       | (182             | )          | (5                 | )          | (187               | )          | (10                | )          |
| Distributions                                                |       | —             |       | —      |       | —          |       | —               |       | (2,342                 | )          | (2,342           | )          | (1,132             | )          | (3,474             | )          | (120               | )          |
| **Balance  at March 31, 2010**                          |       | 92,902             |       | $           | 929        |            | $          | 976,145              |       | $                      | (1,056     | )                | $          | (285,487           | )          | $                  | 690,531    |               | $          | 43,364 |   | $ | 733,895 |   | 45,086 |   |

 
| ** **                                       | ** ** | ** **        | ** ** | ** **  | ** ** | **Additional** | ** ** | **Accumulated**     | ** ** | ** **             | ** ** | **Total**       | ** ** | **Noncontrolling** | ** ** | ** **        | ** ** | **Noncontrolling  Interests in** | ** ** |
|--------------------------------------------------|------------|-------------------|------------|-------------|------------|----------------|------------|---------------------|------------|------------------------|------------|-----------------|------------|--------------------|------------|-------------------|------------|----------------------------------|------------|
| ** **                                       | ** ** | **Common Shares** | ** ** | **Paid in** | ** ** | **Other Com-** | ** ** | **Accumulated**     | ** ** | **Shareholders’** | ** ** | **Interest in** | ** ** | ** **         | ** ** | **the Operating** | ** ** |
| ** **                                       | ** ** | **Number**        | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **prehensive Loss** | ** ** | **Deficit**            | ** ** | **Equity**      | ** ** | **Subsidiaries**   | ** ** | **Total Equity**  | ** ** | ** Partnership**            | ** ** |
| **Balance  at December 31, 2008**           |       | 57,623            |       | $           | 576        |           | $          | 801,029             |       | $                      | (7,553     | )               | $          | (271,124           | )          | $                 | 522,928    |                             | $          | — |   | $ | 522,928 |   | 46,026 |   |
| Issuance of restricted  shares                   |       | 64                |       | 1           |       | —         |       | —              |       | —                 |       | 1               |       | —             |       | 1                 |       | —                           |       |
| Amortization of  restricted shares               |       | —            |       | —      |       | 415            |       | —              |       | —                 |       | 415             |       | —             |       | 415               |       | —                           |       |
| Share compensation  expense                      |       | —            |       | —      |       | 443            |       | —              |       | —                 |       | 443             |       | —             |       | 443               |       | —                           |       |
| Net loss                                         |       | —            |       | —      |       | —         |       | —              |       | (2,109                 | )          | (2,109          | )          | —             |       | (2,109            | )          | (177                             | )          |
| Other comprehensive  income:                     |       |              |       |        |       |           |       |                |       |                   |       |            |       |               |       |              |       |                             |       |
| Unrealized gain on  interest rate swap           |       | —            |       | —      |       | —         |       | 1,005               |       | —                 |       | 1,005           |       | —             |       | 1,005             |       | 89                               |       |
| Unrealized gain on  foreign currency translation |       | —            |       | —      |       | —         |       | 246                 |       | —                 |       | 246             |       | —             |       | 246               |       | 22                               |       |
| Distributions                                    |       | —            |       | —      |       | —         |       | —              |       | (1,456                 | )          | (1,456          | )          | —             |       | (1,456            | )          | (127                             | )          |
| **Balance  at March 31, 2009**              |       | 57,687            |       | $           | 577        |           | $          | 801,887             |       | $                      | (6,302     | )               | $          | (274,689           | )          | $                 | 521,473    |                             | $          | — |   | $ | 521,473 |   | 45,833 |   |

 

See accompanyingnotes to the unaudited consolidated financial statements.

 

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**U-STORE-ITTRUST AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(inthousands)**

**(unaudited)**

 
| ** **                                                                   | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                   | ** ** | **2010**                              | ** ** | **2009** | ** ** |
|                                                                         |       |                                  |       |   |   |
| **Operating  Activities**                                                    |       |                                  |       |   |   |
| Net loss                                                                     |       | $                                     | (3,192     | ) | $ | (2,286 | ) |
| Adjustments to  reconcile net loss to cash provided by operating activities: |       |                                  |       |   |   |
| Depreciation and  amortization                                               |       | 17,917                                |       | 19,219 |   |
| Gain on disposition of  discontinued operations                              |       | —                                |       | (500 | ) |
| Equity compensation  expense                                                 |       | 1,039                                 |       | 858 |   |
| Accretion of fair  market value adjustment of debt                           |       | (113                                  | )          | (116 | ) |
| Changes in other  operating accounts:                                        |       |                                  |       |   |   |
| Other assets                                                                 |       | 668                                   |       | 1,475 |   |
| Accounts payable and  accrued expenses                                       |       | (5,996                                | )          | (7,525 | ) |
| Other liabilities                                                            |       | 561                                   |       | 164 |   |
| Net cash provided by  operating activities                                   |       | $                                     | 10,884     |   | $ | 11,289 |   |
|                                                                         |       |                                  |       |   |   |
| **Investing  Activities**                                                    |       |                                  |       |   |   |
| Acquisitions, additions  and improvements to storage facilities              |       | (2,612                                | )          | (3,201 | ) |
| Proceeds from sales of  properties, net                                      |       | —                                |       | 2,852 |   |
| Proceeds from repayment  of notes receivable                                 |       | 17,580                                |       | — |   |
| Decrease (increase) in  restricted cash                                      |       | 2,860                                 |       | (27 | ) |
| Net cash provided by  (used in) investing activities                         |       | $                                     | 17,828     |   | $ | (376 | ) |
|                                                                         |       |                                  |       |   |   |
| **Financing  Activities**                                                    |       |                                  |       |   |   |
| Proceeds from:                                                               |       |                                  |       |   |   |
| Revolving credit  facility                                                   |       | —                                |       | 6,500 |   |
| Principal payments on:                                                       |       |                                  |       |   |   |
| Revolving credit  facility                                                   |       | —                                |       | (15,500 | ) |
| Mortgage loans and  notes payable                                            |       | (85,390                               | )          | (2,508 | ) |
| Exercise of stock  options                                                   |       | 180                                   |       | — |   |
| Contributions from  noncontrolling interests in subsidiaries                 |       | 19                                    |       | — |   |
| Distributions paid to  shareholders                                          |       | (2,331                                | )          | (1,445 | ) |
| Distributions paid to  noncontrolling interests in Operating Partnership     |       | (122                                  | )          | (127 | ) |
| Distributions paid to  noncontrolling interests in subsidiaries              |       | (1,132                                | )          | — |   |
| Loan procurement costs                                                       |       | (1,180                                | )          | — |   |
| Net cash used in  financing activities                                       |       | $                                     | (89,956    | ) | $ | (13,080 | ) |
|                                                                         |       |                                  |       |   |   |
| Decrease in cash and  cash equivalents                                       |       | (61,244                               | )          | (2,167 | ) |
|                                                                         |       |                                  |       |   |   |
| Cash and cash  equivalents at beginning of period                            |       | 102,768                               |       | 3,744 |   |
| Cash and cash  equivalents at end of period                                  |       | $                                     | 41,524     |   | $ | 1,577 |   |
|                                                                         |       |                                  |       |   |   |
| **Supplemental  Cash Flow and Noncash Information**                          |       |                                  |       |   |   |
| Cash paid for interest,  net of interest capitalized                         |       | $                                     | 10,245     |   | $ | 11,335 |   |
| Supplemental disclosure  of noncash activities:                              |       |                                  |       |   |   |
| Derivative valuation  adjustment                                             |       | $                                     | —     |   | $ | 1,094 |   |
| Foreign currency  translation adjustment                                     |       | $                                     | (197       | ) | $ | 268 |   |

 

See accompanyingnotes to the unaudited consolidated financial statements.

 

7

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**U-STORE-ITTRUST AND SUBSIDIARIES**

**NOTES TOUNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.  ORGANIZATION AND NATUREOF OPERATIONS**

 

U-Store-It Trust, a Maryland real estate investmenttrust (collectively with its subsidiaries, “we”, “us” or the “Company”), is aself-administered and self-managed real estate investment trust, or REIT,active in acquiring, developing and operating self-storage properties forbusiness and personal use under month-to-month leases.  The Company’s self-storage facilities (collectively,the “Properties”) are located in 26 states throughout the United States, and in the District of Columbia andare managed under one reportable operating segment: we own, operate, develop,and acquire self-storage facilities.  TheCompany owns substantially all of its assets through U-Store-It, L.P., aDelaware limited partnership (the “Operating Partnership”).  The Company is the sole general partner ofthe Operating Partnership and, as of March 31, 2010, owned a 95.1%interest in the Operating Partnership.  The Company manages its assetsthrough YSI Management, LLC (the “Management Company”), a wholly ownedsubsidiary of the Operating Partnership. In addition to the Management Company, the Company owns foursubsidiaries that have elected to be treated as taxable REIT subsidiaries.  In general, a taxable REIT subsidiary mayperform non-customary services for tenants, hold assets that the Company, as aREIT, cannot hold directly and generally may engage in any real estate ornon-real estate related business.

 

**2.  SUMMARY OF SIGNIFICANTACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS**

 

*Basis of Presentation*

 

The accompanying unaudited consolidated financialstatements have been prepared by the Company pursuant to the rules andregulations of the SEC regarding interim financial reporting and, in theopinion of management, include all adjustments (consisting of normal recurringadjustments) necessary for a fair presentation of financial position, resultsof operations and cash flows for the interim periods presented in accordancewith generally accepted accounting principles in the United States (“GAAP”).  Accordingly, readers of this Quarterly Reporton Form 10-Q should refer to the Company’s audited financial statementsprepared in accordance with GAAP, and the related notes thereto, for the yearended December 31, 2009, which are included in the Company’s Annual Reporton Form 10-K for the fiscal year ended December 31, 2009 as certainfootnote disclosures normally included in financial statements prepared inaccordance with GAAP have been condensed or omitted from this report pursuantto the rules of the SEC.  Theresults of operations for each of the three months ended March 31, 2010and 2009 are not necessarily indicative of the results of operations to beexpected for any future period or the full year.

 

*New Accounting Pronouncements*

 

The Financial AccountingStandards Board (“FASB”) established the *FASBAccounting Standards 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 GAAP guidance is referenced, but did not have an impact on ourconsolidated financial position, results of operations or cash flows.

 

The FASB issuedauthoritative 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 about a company’s involvement in variable interest entities and anysignificant changes in risk exposure due to that involvement.  The application did not have an impact on ourconsolidated financial position, results of operations or cash flows.

 

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**3.  STORAGEFACILITIES**

 

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

 
| ** **                     | ** ** | **March 31,**  | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2010**            | ** ** | **2009**              | ** ** |
| ** **                     | ** ** | **(in  thousands)** | ** ** |
| Land and improvements          |       | $                   | 369,663    |                  | $          | 369,842 |   |
| Buildings and  improvements    |       | 1,242,406           |       | 1,243,047             |       |
| Equipment                      |       | 128,238             |       | 157,452               |       |
| Construction in  progress      |       | 3,005               |       | 4,201                 |       |
| Total                          |       | 1,743,312           |       | 1,774,542             |       |
| Less accumulated  depreciation |       | (326,935            | )          | (344,009              | )          |
| Storage facilities, net        |       | $                   | 1,416,377  |                  | $          | 1,430,533 |   |

 

As assets become fully depreciated, they are removedfrom their respective asset category. During the first quarter of 2010 and2009, $33.4 million and $9.2 million of assets became fully depreciated, andwere removed from storage facilities, respectively.

 

**4.  SECURED CREDIT FACILITY**

 

On December 8, 2009,the Company and its Operating Partnership entered into a three-year, $450million senior secured credit facility (the “secured credit facility”),consisting of a $200 million secured term loan and a $250 million securedrevolving credit facility.  The securedcredit facility is collateralized by mortgages on borrowing base properties asdefined in the secured credit facility agreement.  At March 31, 2010, $200 million ofsecured term loan borrowings were outstanding under the secured creditfacility.  At March 31, 2010, $250million was available for borrowing under the secured revolving creditfacility.  Borrowings under the securedcredit facility bear interest at rates ranging from 3.25% to 4.00% over LIBOR,with a LIBOR floor of 1.5%, depending on our leverage ratio.  At March 31, 2010, borrowings under thesecured credit facility had a weighted average interest rate of 5.0% and theCompany was in compliance with all financial covenants of the agreement.

 

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

 

**5.  MORTGAGE LOANS ANDNOTES PAYABLE**

 

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

 

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| ** **                              | ** ** | **Carrying Value as of:** | ** ** | ** **            | ** ** | ** **        | ** ** |
|-----------------------------------------|------------|------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                              | ** ** | **March 31,**                       | ** ** | **December 31,** | ** ** | **Effective**     | ** ** | **Maturity** | ** ** |
| **Mortgage Loan**                  | ** ** | **2010**                                 | ** ** | **2009**              | ** ** | **Interest Rate** | ** ** | **Date** | ** ** |
| ** **                              | ** ** | **(in thousands)**                       | ** ** | ** **            | ** ** | ** **        | ** ** |
| YSI  1                                  |       | —                                   |       | 83,342                |       | 5.19              | %          | May-10 |   |
| YSI  4                                  |       | 6,041                                    |       | 6,065                 |       | 5.25              | %          | Jul-10 |   |
| YSI  26                                 |       | 9,410                                    |       | 9,475                 |       | 5.00              | %          | Aug-10 |   |
| YSI  25                                 |       | 7,943                                    |       | 7,975                 |       | 5.00              | %          | Oct-10 |   |
| YSI  2                                  |       | 83,017                                   |       | 83,480                |       | 5.33              | %          | Jan-11 |   |
| YSI  12                                 |       | 1,509                                    |       | 1,520                 |       | 5.97              | %          | Sep-11 |   |
| YSI  13                                 |       | 1,297                                    |       | 1,307                 |       | 5.97              | %          | Sep-11 |   |
| YSI  6                                  |       | 77,054                                   |       | 77,370                |       | 5.13              | %          | Aug-12 |   |
| YASKY                                   |       | 80,000                                   |       | 80,000                |       | 4.96              | %          | Sep-12 |   |
| USIFB                                   |       | 3,636                                    |       | 3,834                 |       | 4.59              | %          | Oct-12 |   |
| YSI  14                                 |       | 1,799                                    |       | 1,812                 |       | 5.97              | %          | Jan-13 |   |
| YSI  7                                  |       | 3,147                                    |       | 3,163                 |       | 6.50              | %          | Jun-13 |   |
| YSI  8                                  |       | 1,798                                    |       | 1,808                 |       | 6.50              | %          | Jun-13 |   |
| YSI  9                                  |       | 1,978                                    |       | 1,988                 |       | 6.50              | %          | Jun-13 |   |
| YSI  17                                 |       | 4,215                                    |       | 4,246                 |       | 6.32              | %          | Jul-13 |   |
| YSI  27                                 |       | 512                                      |       | 516                   |       | 5.59              | %          | Nov-13 |   |
| YSI  30                                 |       | 7,504                                    |       | 7,567                 |       | 5.59              | %          | Nov-13 |   |
| YSI  11                                 |       | 2,469                                    |       | 2,486                 |       | 5.87              | %          | Dec-13 |   |
| YSI  5                                  |       | 3,259                                    |       | 3,281                 |       | 5.25              | %          | Jan-14 |   |
| YSI  28                                 |       | 1,587                                    |       | 1,598                 |       | 5.59              | %          | Feb-14 |   |
| YSI  34                                 |       | 14,916                                   |       | 14,955                |       | 8.00              | %          | Jun-14 |   |
| YSI  37                                 |       | 2,235                                    |       | 2,244                 |       | 7.25              | %          | Aug-14 |   |
| YSI  40                                 |       | 2,565                                    |       | 2,581                 |       | 7.25              | %          | Aug-14 |   |
| YSI  44                                 |       | 1,115                                    |       | 1,121                 |       | 7.00              | %          | Sep-14 |   |
| YSI  41                                 |       | 3,952                                    |       | 3,976                 |       | 6.60              | %          | Sep-14 |   |
| YSI  38                                 |       | 4,052                                    |       | 4,078                 |       | 6.35              | %          | Sep-14 |   |
| YSI  45                                 |       | 5,505                                    |       | 5,527                 |       | 6.75              | %          | Oct-14 |   |
| YSI  46                                 |       | 3,471                                    |       | 3,486                 |       | 6.75              | %          | Oct-14 |   |
| YSI  43                                 |       | 2,981                                    |       | 2,994                 |       | 6.50              | %          | Nov-14 |   |
| YSI  48                                 |       | 25,554                                   |       | 25,652                |       | 7.25              | %          | Nov-14 |   |
| YSI  50                                 |       | 2,365                                    |       | 2,380                 |       | 6.75              | %          | Dec-14 |   |
| YSI  10                                 |       | 4,147                                    |       | 4,166                 |       | 5.87              | %          | Jan-15 |   |
| YSI  15                                 |       | 1,909                                    |       | 1,920                 |       | 6.41              | %          | Jan-15 |   |
| YSI  20                                 |       | 63,818                                   |       | 64,258                |       | 5.97              | %          | Nov-15 |   |
| YSI  31                                 |       | 13,835                                   |       | 13,891                |       | 6.75              | %          | Jun-19 | (a) |
| YSI  35                                 |       | 4,499                                    |       | 4,499                 |       | 6.90              | %          | Jul-19 | (a) |
| YSI  32                                 |       | 6,135                                    |       | 6,160                 |       | 6.75              | %          | Jul-19 | (a) |
| YSI  33                                 |       | 11,522                                   |       | 11,570                |       | 6.42              | %          | Jul-19 |   |
| YSI  42                                 |       | 3,243                                    |       | 3,263                 |       | 6.88              | %          | Aug-19 | (a) |
| YSI  39                                 |       | 3,976                                    |       | 3,991                 |       | 6.50              | %          | Nov-19 | (a) |
| YSI  47                                 |       | 3,236                                    |       | 3,250                 |       | 6.63              | %          | Jan-20 | (a) |
| Unamortized  fair value adjustment      |       | 118                                      |       | 231                   |       |              |       |   |   |
|                                    |       |                                     |       |                  |       |              |       |   |   |
| Total  mortgage loans and notes payable |       | $                                        | 483,324    |                  | $          | 569,026           |       |   |   |   |   |
|                                         |            |                                          |            |                       |            |                   |            |  |  |  |  |

 

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

 

The following table presents the future principalpayments on outstanding mortgage loans and notes payable at March 31, 2010(in thousands):

 
| 2010                         |   | $       | 29,145  |   |
|------------------------------|--------|---------|---------|--------|
| 2011                         |   | 90,544  |    |
| 2012                         |   | 163,620 |    |
| 2013                         |   | 26,240  |    |
| 2014                         |   | 88,262  |    |
| 2015 and thereafter          |   | 85,395  |    |
| Total mortgage payments      |   | 483,206 |    |
| Plus: Fair value  adjustment |   | 118     |    |
| Total mortgage  indebtedness |   | $       | 483,324 |   |

 

The Company currentlyintends to fund the remainder of its 2010 principal payment requirements withavailable cash and from cash provided by operating activities.  At March 31, 2010, the Company was incompliance with all financial covenants of the respective borrowings.

 

**6.  DERIVATIVE FINANCIALINSTRUMENTS**

 

TheCompany’s use of derivative instruments has been limited to interest rateagreements or other instruments to manage interest rate risk exposures and notfor speculative purposes.  The principalobjective of such arrangements is to minimize the risks and/or costs associatedwith the Company’s operating and financial structure, as well as to hedgespecific transactions.  Thecounterparties to these arrangements are major financial institutions withwhich the Company and its subsidiaries may also have other financialrelationships.  The Company did not hedgecredit or property value market risks.

 

TheCompany has entered into interest rate swap agreements that qualified and weredesignated as cash flow hedges designed to reduce the impact of interest ratechanges on its variable rate debt. Therefore, the interest rate swaps were recorded in the consolidatedbalance sheets at fair value and the related gains or losses were deferred inshareholders’ equity as Accumulated Other Comprehensive Loss.  These deferred gains and losses wereamortized into interest expense during the period or periods in which therelated interest payments affect earnings. However, to the extent that the interest rate swaps are not perfectly effectivein offsetting the change in value of the interest payments being hedged, theineffective portions of these contracts were recognized in earningsimmediately.  Ineffectiveness wasimmaterial for all periods presented.

 

TheCompany formally assesses, both at inception of a hedge and on an on-goingbasis, whether each derivative is highly-effective in offsetting changes incash flows of the hedged item.  Ifmanagement determines that a derivative is highly-effective as a hedge, theCompany accounts for the derivative using hedge accounting, pursuant to whichgains or losses inherent in the derivative do not impact the Company’s resultsof operations.  If management determinesthat a derivative is not highly-effective as a hedge or if a derivative ceasesto be a highly-effective hedge, the Company discontinues hedge accountingprospectively and reflects in its statement of operations realized andunrealized gains and losses in respect of the derivative.

 

TheCompany had no interest rate swaps outstanding at March 31, 2010.  All of the Company’s previously outstandingderivative financial instruments expired by November 20, 2009.

 

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**7.  FAIR VALUE MEASUREMENTS**

 

In January 2008,the FASB issued a pronouncement regarding the methods to value financial assetsand liabilities.  The Company adoptedthis pronouncement effective January 1, 2009.  As defined in the guidance, fair value isbased on the price that would be received from the sale of an asset or paid totransfer a liability in an orderly transaction between market participants atthe measurement date.  In order toincrease consistency and comparability in fair value measurements, the guidanceestablishes a fair value hierarchy that prioritizes observable and unobservableinputs used to measure fair value into three broad levels, which are describedbelow:

 

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

 

Level 2: Observable prices that are based on inputsnot quoted on active markets, but corroborated by market data.

 

Level 3: Unobservable inputs are used when little orno market data is available.  The fairvalue hierarchy gives 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 as well as considering counterparty credit risk in itsassessment of fair value.

 

In April 2009,the FASB issued a pronouncement regarding disclosures about fair value offinancial instruments and a pronouncement which amends GAAP as follows: a) torequire disclosures about fair value of financial instruments for interimreporting periods of publicly traded companies as well as in annual financialstatements and b) to require disclosures in summarized financial information atinterim reporting periods.  Thispronouncement is effective for interim reporting periods ending after June 15,2009.  Accordingly, the Company adoptedthis pronouncement during the quarter ended September 30, 2009.  Disclosures about fair value of financialinstruments are based on pertinent information available to management as ofthe valuation date.  Considerablejudgment is necessary to interpret market data and develop estimated fairvalues.  Accordingly, the estimatespresented are not necessarily indicative of the amounts at which theseinstruments 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 March 31, 2010 and December 31, 2009.  The Company has fixed interest rate loanswith a carrying value of $483.3 million and $569.0 million at March 31,2010 and December 31, 2009, respectively. The estimated fair values of these fixed rate loans were $450.5 millionand $530.7 million at March 31, 2010 and December 31, 2009,respectively.  The Company has a variableinterest rate loan with a carrying value of $200.0 million at March 31,2010 and December 31, 2009.  The estimated fair value of the variableinterest rate loan was $200.0 million at March 31, 2010 and December 31,2009.  These estimates are based on discounted cash flow analyses assumingmarket interest rates for comparable obligations at March 31, 2010 and December 31,2009.

 

**8.  NONCONTROLLINGINTERESTS**

 

**Variable Interests in Consolidated Real EstateJoint Ventures**

 

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

 

TheCompany determined that HART is a variable interest entity as defined by GAAP,and that it is the primary beneficiary. The 50% interest that is owned by Heitman is reflected as noncontrollinginterest in subsidiaries within permanent equity, separate from the Company’sequity on the consolidated balance sheet. Accordingly, the assets, liabilities and results of operations of HARTare consolidated.  At March 31,2010, HART had total assets of $92.1 million, including $90.4 million ofstorage facilities, net and total liabilities of $2.2 million.

 

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USIFB,LLP (“the Venture”) was formed to own, operate, acquire and developself-storage facilities in England.  TheCompany has a 97% interest in the Venture, and through a wholly-ownedsubsidiary and together with its joint venture partner, operations began at onefacility in London, England during 2008. The Company has determined that the Venture is a variable interestentity as defined by GAAP, and that it is the primary beneficiary.  Accordingly, the assets, liabilities andresults of operations of the Venture are consolidated.  At March 31, 2010, the Venture had totalassets of $7.8 million and total liabilities of $3.9 million including amortgage loan of $3.6 million secured by storage facilities, net with a bookvalue of $7.3 million.  At March 31,2010, the Venture’s creditors had no recourse to the general credit of theCompany.

 

**Operating Partnership Ownership**

 

The Company has followed the FASB guidance regardingthe classification and measurement of redeemable securities.  Under this guidance, securities that areredeemable for cash or other assets, at the option of the holder and not solelywithin the control of the issuer, must be classified outside of permanentequity.  This classification results incertain outside ownership interests being included as redeemable noncontrollinginterests outside of permanent equity in the consolidated balance sheets.  The Company makes this determination based onterms in applicable agreements, specifically in relation to redemptionprovisions.  Additionally, with respectto noncontrolling interests for which the Company has a choice to settle theredemption by delivery of its own shares, the Company considered the guidanceregarding accounting for derivative financial instruments indexed to, andpotentially settled in, a company’s own shares, to evaluate whether the Companycontrols the actions or events necessary to presume share settlement.  The guidance also requires thatnoncontrolling interests be adjusted each period to the greater of the carryingvalue based on the accumulation of historical cost or the redemption value.

 

The consolidated results of the Company includeresults attributable to units of the Operating Partnership that are not ownedby the Company, which amounted to approximately 4.9% of all outstandingPartnership units as of March 31, 2010 and 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 market value of an equivalent number of common shares of the Company.  However, the partnership agreement containscertain circumstances that could result in a settlement outside the control ofthe Company.  Accordingly, consistentwith the guidance, the Company will record these noncontrolling interestsoutside of permanent equity in the consolidated balance sheets.  Net income or loss related to thesenoncontrolling interests is excluded from net income or loss in the consolidatedstatements of operations.

 

The amount of the Company’s common shares whencalculated for the purposes of unit redemption will be equal to the average ofthe closing price of the Company’s common shares on the New York Stock Exchangefor the 10 trading days before the date the Company receives the redemptionnotice.  At March 31, 2010 and December 31,2009, 4,809,636 units were outstanding, and as of March 31, 2010 and December 31,2009, the calculated aggregate redemption value of outstanding OperatingPartnership units based upon the Company’s share price was approximately $35.7million and $35.4 million, respectively. Based on the Company’s evaluation of the redemption value of theredeemable noncontrolling interest, the Company has reflected these interestsat their carrying value as of March 31, 2010 and December 31, 2009because the carrying cost exceeded the estimated redemption value.

 

**9.  RELATED PARTYTRANSACTIONS**

 

During 2005 and 2006, the Operating Partnershipentered into various office lease agreements with Amsdell and Amsdell, anentity owned by Robert Amsdell and Barry Amsdell (each a former Trustee).  Pursuant to these lease agreements, we rentedoffice space in the Airport Executive Park, an office and flex developmentlocated in Cleveland, Ohio, which is owned by Amsdell and Amsdell.  The Company’s independent Trustees approvedthe terms of, and entry into, each of the office lease agreements by theOperating Partnership.  In addition tomonthly rent, the office lease agreements provide that the Operating Partnershipreimburse Amsdell and Amsdell for certain maintenance and improvements to theleased office space.  The aggregateamount of payments by us to Amsdell and Amsdell under these lease agreementsfor each of the three months ended March 31, 2010 and March 31, 2009was approximately $0.1 million.  Wevacated the office space owned by Amsdell and Amsdell in 2007, but remainobligated under certain of the lease agreements through 2014.  Subsequently, we entered into a subleaseagreement for the space with a third party for the remainder of the lease term.

 

Total future minimum rental payments under the relatedparty lease agreements as of March 31, 2010 are as follows:

 

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| ** ** | ** ** | **Due to  Related Party** | ** ** | **Due  from Subtenant** | ** ** |
|------------|------------|---------------------------|------------|-------------------------|------------|
| ** ** | ** ** | **Amount**                | ** ** | **Amount**              | ** ** |
| ** ** | ** ** | **(in thousands)**        | ** ** |
|       |       |                      |       |                    |       |
| 2010       |       | $                         | 356        |                    | $          | 236 |   |
| 2011       |       | 475                       |       | 314                     |       |
| 2012       |       | 475                       |       | 314                     |       |
| 2013       |       | 499                       |       | 314                     |       |
| 2014       |       | 499                       |       | 315                     |       |
|       |       | $                         | 2,304      |                    | $          | 1,493 |   |

 

**10.  DISCONTINUEDOPERATIONS**

 

There were no property sales during the three monthsended March 31, 2010.  For the threemonths ended March 31, 2009, income from discontinued operations relatesto 20 properties that the Company sold during 2009.  Net gain on disposition of discontinuedoperations relates to gains recognized on property sales completed during thethree months ended March 31, 2009.

 

The following table summarizes the revenue and expenseinformation for the properties classified as discontinued operations for thethree months ended March 31, 2009 (in thousands):

 
| ** **                                          | ** ** | **Three Months Ended**  | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|
| ** **                                          | ** ** | **March 31, 2009** | ** ** |
| REVENUES                                            |       |                    |       |
| Rental income                                       |       | $                       | 2,708      |   |
| Other property related  income                      |       | 178                     |       |
| Total revenues                                      |       | 2,886                   |       |
|                                                |       |                    |       |
| OPERATING EXPENSES                                  |       |                    |       |
| Property operating  expenses                        |       | 926                     |       |
| Depreciation                                        |       | 960                     |       |
| Total operating  expenses                           |       | 1,886                   |       |
|                                                |       |                    |       |
| INCOME FROM  DISCONTINUED OPERATIONS                |       | 1,000                   |       |
|                                                |       |                    |       |
| Net gain on disposition  of discontinued operations |       | 500                     |       |
| Income from  discontinued operations                |       | $                       | 1,500      |   |

 

**11.  COMPREHENSIVE INCOME(LOSS)**

** **
| ** **                                              | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                              | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| ** **                                              | ** ** | **(in thousands)**                    | ** ** |
|                                                    |       |                                  |       |   |   |
| NET LOSS                                                |       | $                                     | (3,192     | ) | $ | (2,286 | ) |
| Other comprehensive  income (loss):                     |       |                                  |       |   |   |
| Unrealized gain on  derivative financial instruments    |       | —                                |       | 1,094 |   |
| Unrealized gain (loss)  on foreign currency translation |       | (197                                  | )          | 268 |   |
| COMPREHENSIVE LOSS                                      |       | $                                     | (3,389     | ) | $ | (924 | ) |

 

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

 

*The following discussion should beread in conjunction with the financial statements**andnotes thereto appearing elsewhere in this report.  The Company makes certain**statements in this section that are forward-lookingstatements within the meaning of**thefederal securities laws.  For a completediscussion of forward-looking statements,**see the section in this report entitled “Forward-Looking Statements.”  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 subsequent quarterlyreports.*

 

**Overview**

 

The Company is an integrated self-storage real estatecompany, which means that it has in-house capabilities in the operation,design, development, leasing, and acquisition of self-storage facilities.  The Company has elected to be taxed as a REITfor federal tax purposes.  As of March 31,2010 and December 31, 2009, the Company owned 367 self-storage facilities,totaling approximately 23.7 million rentable square feet.

 

The Company derives revenues principally from rentsreceived from its customers who rent units at its self-storage facilities undermonth-to-month leases.  Therefore, ouroperating results depend materially on our ability to retain our existingcustomers and lease our available self-storage units to new customers whilemaintaining and, where possible, increasing our pricing levels.  In addition, our operating results depend onthe ability of our customers 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.

 

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

 

The United States has recently experienced an economicdownturn that has resulted in higher unemployment, shrinking demand forproducts, large-scale business failures and tight credit markets.  Our results of operations may be sensitive tochanges in overall economic conditions that impact consumer spending, includingdiscretionary spending, as well as to increased bad debts due to recessionarypressures.  A continuation of ongoingadverse economic conditions affecting disposable consumer income, such asemployment levels, business conditions, interest rates, tax rates, fuel andenergy costs, and other matters could reduce consumer spending or causeconsumers to shift their spending to other products and services.  A general reduction in the level ofdiscretionary spending or shifts in consumer discretionary spending couldadversely affect our growth and profitability.

 

In the future, the Company intends to focus oninternal growth opportunities and selectively pursuing targeted acquisitionsand developments of self-storage facilities. We intend to incur additional debt in connection with any such futureacquisitions or developments.

 

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

 

The Company’s self-storage facilities are located inmajor metropolitan and rural areas and have numerous tenants per facility.  No single tenant represents a significantconcentration of our revenues.  The facilitiesin Florida, California, Texas and Illinois provided approximately 18%, 16%, 10%and 8%, respectively, of total revenues for the three months ended March 31,2010.

 

**Summary of Critical AccountingPolicies and Estimates**

 

Set forth below is a summary of the accountingpolicies and estimates that management believes are critical to anunderstanding of the unaudited consolidated financial statements included inthis report.  These policies require theapplication 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.

 

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***Self-StorageFacilities***

 

The Company records self-storage facilities at costless accumulated depreciation. Depreciation on the buildings and equipment is recorded on astraight-line basis over their estimated useful lives, which range from five to40 years.  Expenditures for significantrenovations or improvements that extend the useful lives of assets arecapitalized. Repairs and maintenance costs are expensed as incurred.

 

When facilities are acquired, the purchase price isallocated to the tangible and intangible assets acquired and liabilitiesassumed based on estimated fair values. When a portfolio of facilities is acquired, the purchase price isallocated to the individual facilities at fair value which may include anincome approach or a cash flow analysis using appropriate risk adjustedcapitalization rates, which take into account the relative size, age andlocation of the individual facility along with current and projected occupancyand 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 purchase price, the Companydetermines whether the acquisition includes intangible assets or liabilities,which may include the value of in-place leases, above or below market leaseintangibles, and tenant relationships. Substantially all of the leases in place at acquired facilities are atmarket rates, as the majority of the leases are month-to-month contracts.  Accordingly, to date no portion of thepurchase price has been allocated to above- or below-market leaseintangibles.  To date, no intangibleasset has been recorded for the value of tenant relationships, because theCompany does not have any concentrations of significant tenants and the averagetenant turnover is fairly frequent.

 

Long-lived assets classified as “held for use” arereviewed for impairment when events and circumstances indicate that there may beimpairment.  The carrying values of theselong-lived assets are compared to the undiscounted future net operating cashflows attributable to the assets.  Animpairment loss is recorded if the net carrying value of the asset exceeds theundiscounted future net operating cash flows attributable to the asset.  The impairment loss recognized equals theexcess of net carrying value over the related fair value of the asset.  Future events, or facts and circumstancesthat currently exist, that we have not yet identified, could cause us toconclude in the future that our long-lived assets are impaired.  Any resulting impairment loss could have amaterial adverse impact on our financial condition and results of operations.  No impairment was recorded for the threemonths ended March 31, 2010 and 2009.

 

The Company considers long-lived assets to be “heldfor sale” upon satisfaction of the following criteria: (a) managementcommits to a plan to sell a facility (or group of facilities), (b) thefacility is available for immediate sale in its present condition subject onlyto terms that are usual and customary for sales of such facilities, (c) anactive program to locate a buyer and other actions required to complete theplan to sell the facility have been initiated, (d) the sale of thefacility is probable and transfer of the asset is expected to be completedwithin one year, (e) the facility is being actively marketed for sale at aprice that is reasonable in relation to its current fair value, and (f) actionsrequired to complete the plan indicate that it is unlikely that significantchanges to the plan will be made or that the plan will be withdrawn.

 

Typically these criteria are all met when the relevantassets are under contract, significant non-refundable deposits have been madeby the potential buyer, the assets are immediately available for transfer andthere are no contingencies related to the sale that may prevent the transactionfrom closing.  In most transactions,these contingencies are not satisfied until the actual closing of thetransaction; and, accordingly, the facility is generally not identified as heldfor sale until the closing actually occurs. However, each potential transaction is evaluated based on its separatefacts and circumstances.  Propertiesclassified as held for sale are reported as the lesser of carrying value orfair value less estimated costs to sell.

 

***Revenue Recognition***

 

Management has determined that all of our leases withtenants are operating leases.  Rentalincome is recognized in accordance with the terms of the lease agreements orcontracts, which generally are month-to-month.

 

The Company recognizes gains on disposition ofproperties only upon closing in accordance with the guidance on sales of realestate.  Payments received frompurchasers 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 the Company is 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.

 

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***Share-BasedPayments***

 

We apply the fair value method of accounting forcontingently issued shares and share options issued under our equity incentiveplans.  Accordingly, share compensationexpense is recorded ratably over the vesting period relating to suchcontingently issued shares and options. The Company has elected to recognize compensation expense on astraight-line method over the requisite service period.

 

***NoncontrollingInterests***

 

Noncontrolling interests are the portion of equity(net assets) in a subsidiary not attributable, directly or indirectly, to aparent.  The ownership interests in thesubsidiary that are held by owners other than the parent are noncontrollinginterests.  Noncontrolling interests arereported on the consolidated balance sheets within equity, separately from theCompany’s equity.  On the consolidatedstatements of operations, revenues, expenses and net income or loss fromless-than-wholly-owned subsidiaries are reported at the consolidated amounts,including both the amounts attributable to the Company and noncontrollinginterests.  Presentation of consolidatedequity activity is included for both quarterly and annual financial statements,including beginning balances, activity for the period and ending balances forshareholders’ equity, noncontrolling interests and total equity.  TheCompany has adjusted the carrying value of its noncontrolling interests subjectto redemption value to the extent applicable.

 

**RecentAccounting Pronouncements**

 

The 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 U.S. GAAP guidance is referenced, but did not have an impact on ourconsolidated financial position, results of operations or cash flows.

 

The FASB issuedauthoritative 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 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 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 interestentity.  It also requires additionaldisclosures about a company’s involvement in variable interest entities and anysignificant changes 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 of Operations**

 

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

 

***Acquisition and DevelopmentActivities***

 

The comparability of the Company’s results ofoperations is affected by the timing of acquisition and disposition activitiesduring the periods reported.  At March 31,2010 and 2009, the Company owned 367 and 386 self-storage facilities andrelated assets, respectively.  Thefollowing table summarizes the change in number of self-storage facilities fromJanuary 1, 2009 through March 31, 2010:

 

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| ** **                  | ** ** | **Self-Storage Facilities** | ** ** |
|-----------------------------|------------|-----------------------------|------------|
| Balance - January 1, 2009   |       | 387                         |       |
| Facilities acquired         |       | —                      |       |
| Facilities sold             |       | (20                         | )          |
| Balance - December 31, 2009 |       | 367                         |       |
| Facilities acquired         |       | —                      |       |
| Facilities sold             |       | —                      |       |
| Balance - March 31, 2010    |       | 367                         |       |

 

***Comparison of thethree months ended March 31, 2010 to the three months ended March 31,2009***

 

The following table and subsequent discussion providesinformation pertaining to our portfolio for the three months ended March 31,2010 and 2009.  The Company considers itssame-store portfolio to consist of only those facilities owned, and operated ona stabilized basis, at the beginning and at the end of the applicable periodspresented.  Same-store results areconsidered to be useful to investors in evaluating our performance as theyprovide information relating to changes in facility-level operating performancewithout taking into account the effects of acquisitions, developments ordispositions.

 
| ** **                                                  | ** ** | ** **                        | ** ** | ** **   | ** ** | ** **       | ** ** | ** **          | ** ** | **Properties**              | ** ** | **Other/** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------|------------|--------------|------------|------------------|------------|---------------------|------------|-----------------------------|------------|------------|------------|------------|------------|
| ** **                                                  | ** ** | **Same Store Property Portfolio** | ** ** | **Acquired** | ** ** | **Eliminations** | ** ** | **Total Portfolio** | ** ** |
| ** **                                                  | ** ** | ** **                        | ** ** | ** **   | ** ** | ** **       | ** ** | ** **          | ** ** | **(dolloars in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                  | ** ** | ** **                        | ** ** | ** **   | ** ** | **Increase/**    | ** ** | **%**               | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase/** | ** ** | ** ** | ** ** |
| *** ***                                                | ** ** | **2010**                          | ** ** | **2009**     | ** ** | **(Decrease)**   | ** ** | **Change**          | ** ** | **2010**                    | ** ** | **2009**   | ** ** | **2010**   | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| REVENUES:                                                   |       |                              |       |         |       |             |       |                |       |                        |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Rental income                                               |       | $                                 | 48,717     |         | $          | 50,790           |       | $                   | (2,073     | )                           | -4         | %          | $          | 281        |       | $ | 453 |   | $ | 44 |   | $ | — |   | $ | 49,042 |   | $ | 51,243 |   | $ | (2,201 | ) | -4 | % |
| Other property related  income                              |       | 3,941                             |       | 3,621        |       | 320              |       | 9                   | %          | 140                         |       | 69         |       | —     |       | — |   | 4,081 |   | 3,690 |   | 391 |   | 11 | % |
| Total revenues                                              |       | 52,658                            |       | 54,411       |       | (1,753           | )          | -3                  | %          | 421                         |       | 522        |       | 44         |       | — |   | 53,123 |   | 54,933 |   | (1,810 | ) | -3 | % |
|                                                        |       |                              |       |         |       |             |       |                |       |                        |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| OPERATING EXPENSES:                                         |       |                              |       |         |       |             |       |                |       |                        |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Property operating  expenses                                |       | 20,974                            |       | 21,548       |       | (574             | )          | -3                  | %          | 301                         |       | 318        |       | 1,698      |       | 1,747 |   | 22,973 |   | 23,613 |   | (640 | ) | -3 | % |
| NET OPERATING INCOME:                                       |       | 31,684                            |       | 32,863       |       | (1,179           | )          | -4                  | %          | 120                         |       | 204        |       | (1,654     | )          | (1,747 | ) | 30,150 |   | 31,320 |   | (1,170 | ) | -4 | % |
|                                                        |       |                              |       |         |       |             |       |                |       |                        |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation and  amortization                              |       |                              |       |         |       |             |       |                |       |                        |       |       |       |       |       |   |   | 16,378 |   | 17,825 |   | (1,447 | ) | -8 | % |
| General and  administrative                                 |       |                              |       |         |       |             |       |                |       |                        |       |       |       |       |       |   |   | 5,868 |   | 5,476 |   | 392 |   | 7 | % |
| Subtotal                                                    |       |                              |       |         |       |             |       |                |       |                        |       |       |       |       |       |   |   | 22,246 |   | 23,301 |   | (1,055 | ) | -5 | % |
| Operating income                                            |       |                              |       |         |       |             |       |                |       |                        |       |       |       |       |       |   |   | 7,904 |   | 8,019 |   | (115 | ) | -1 | % |
|                                                        |       |                              |       |         |       |             |       |                |       |                        |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Other Income (Expense):                                     |       |                              |       |         |       |             |       |                |       |                        |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Interest:                                                   |       |                              |       |         |       |             |       |                |       |                        |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Interest expense on loans                                   |       |                              |       |         |       |             |       |                |       |                        |       |       |       |       |       |   |   | (10,051 | ) | (11,353 | ) | 1,302 |   | -11 | % |
| Loan procurement  amortization expense                      |       |                              |       |         |       |             |       |                |       |                        |       |       |       |       |       |   |   | (1,539 | ) | (483 | ) | (1,056 | ) | 219 | % |
| Interest income                                             |       |                              |       |         |       |             |       |                |       |                        |       |       |       |       |       |   |   | 535 |   | 43 |   | 492 |   | 1144 | % |
| Other                                                       |       |                              |       |         |       |             |       |                |       |                        |       |       |       |       |       |   |   | (41 | ) | (12 | ) | (29 | ) | 242 | % |
| Total other expense                                         |       |                              |       |         |       |             |       |                |       |                        |       |       |       |       |       |   |   | (11,096 | ) | (11,805 | ) | 709 |   | -6 | % |
|                                                        |       |                              |       |         |       |             |       |                |       |                        |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| LOSS FROM CONTINUING  OPERATIONS                            |       |                              |       |         |       |             |       |                |       |                        |       |       |       |       |       |   |   | (3,192 | ) | (3,786 | ) | 594 |   | -16 | % |
|                                                        |       |                              |       |         |       |             |       |                |       |                        |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| DISCONTINUED OPERATIONS                                     |       |                              |       |         |       |             |       |                |       |                        |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Income from discontinued  operations                        |       |                              |       |         |       |             |       |                |       |                        |       |       |       |       |       |   |   | — |   | 1,000 |   | (1,000 | ) | -100 | % |
| Net gain on disposition  of discontinued operations         |       |                              |       |         |       |             |       |                |       |                        |       |       |       |       |       |   |   | — |   | 500 |   | (500 | ) | -100 | % |
| Total discontinued  operations                              |       |                              |       |         |       |             |       |                |       |                        |       |       |       |       |       |   |   | — |   | 1,500 |   | (1,500 | ) | -100 | % |
| NET LOSS                                                    |       |                              |       |         |       |             |       |                |       |                        |       |       |       |       |       |   |   | (3,192 | ) | (2,286 | ) | $ | (906 | ) | 40 | % |
| NET LOSS (INCOME)  ATTRIBUTABLE TO NONCONTROLLING INTERESTS |       |                              |       |         |       |             |       |                |       |                        |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Noncontrolling interests  in the Operating Partnership      |       |                              |       |         |       |             |       |                |       |                        |       |       |       |       |       |   |   | 178 |   | 177 |   | 1 |   | 1 | % |
| Noncontrolling interests  in subsidiaries                   |       |                              |       |         |       |             |       |                |       |                        |       |       |       |       |       |   |   | (461 | ) | — |   | (461 | ) | -100 | % |
| NET LOSS ATTRIBUTABLE TO  THE COMPANY                       |       |                              |       |         |       |             |       |                |       |                        |       |       |       |       |       |   |   | $ | (3,475 | ) | $ | (2,109 | ) | $ | (1,366 | ) | 65 | % |
|                                                             |            |                                   |            |              |            |                  |            |                     |            |                             |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Total Portfolio**

 

*Total Revenues*

 

Rental income decreased from $51.2 million forthe three months ended March 31, 2009 to $49.0 million for the threemonths ended March 31, 2010, a decrease of $2.2 million, or 4%.  This decrease is primarily attributable to adecrease of rental income from the same-store properties of $2.1 million due todecreased occupancy levels during 2010 as compared to 2009.

 

Other property relatedincome increased from $3.7 million for the three months ended March 31, 2009to $4.1 million for the three months ended March 31, 2010, an increase of$0.4 million, or 11%.  This increase isprimarily attributable to increased tenant insurance commissions and feerevenue of $0.4 million across the portfolio of storage facilities during thefirst quarter 2010 as compared to the first quarter 2009.

 

*Total Operating Expenses*

 

Property operating expenses decreased from $23.6million for the three months ended March 31, 2009 to $23.0 millionfor the three months ended March 31, 2010, a decrease of$0.6 million, or 3%.  The decreaseis primarily attributable to a $0.6 million decrease in marketing expensesduring the 2010 period as compared to the 2009 period.

 

Depreciation and amortization decreased from $17.8million for the three months ended March 31, 2009 to $16.4 millionfor the three months ended March 31, 2010, a decrease of$1.4 million, or 8%.  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.

 

*Total Other Expenses*

 

Interest expensedecreased from $11.4 million for the three months ended March 31,2009 to $10.1 million for the three months ended March 31, 2010, adecrease of $1.3 million, or 11%. The decrease is attributable to the payoff of the $83.3 million YSI 1loan during the first quarter of 2010 and lower outstanding borrowings on thecredit facility during the 2010 period as compared to the 2009 period resultingin an overall decrease in interest expense.

 

*Discontinued Operations*

 

Income from discontinuedoperations decreased from $1.0 million for the three months ended March 31,2009 to no such income for the three months ended March 31, 2010.  The income from discontinued operations in2009 represents the income during the three months ended March 31, 2009,from properties sold throughout 2009. Net gains on disposition of discontinued operations decreased from $0.5million for the three months ended March 31, 2009 to no such gains for thethree months ended March 31, 2010 as a result of the sale of one assetduring the three months ended March 31, 2009 compared to no asset salesduring the 2010 period.

 

**Same-Store Property Portfolio**

 

Same-store revenues decreased from $54.4 millionfor the three months ended March 31, 2009 to $52.7 million for thethree months ended March 31, 2010, a decrease of $1.7 million, or 3%,primarily attributable to a 2% decrease in average occupancy rates and a 2% decreasein realized annual rent per occupied square foot on the same-store portfolio inthe 2010 period as compared to the 2009 period. Same-store property operating expenses decreased from $21.5 millionfor the three months ended March 31, 2009 to $21.0 million for thethree months ended March 31, 2010, a decrease of $0.5 million or 3%.  The decrease is primarily attributable to adecrease of $0.4 million in advertising expenses.

 

**Non-GAAP Financial Measures**

 

***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 amortization 

 

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expense, amountsattributable to noncontrolling interests, other expense, depreciation andamortization expense, general and administrative expense, and deducting fromnet income: income from discontinued operations, gains on disposition ofdiscontinued operations, other income, and interest income.  NOI is not a measure of performancecalculated in accordance with GAAP.

 

We useNOI as a measure of operating performance at each of our facilities, and forall 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 to investors in evaluatingour operating performance because:

 

·         Itis one of the primary measures used by our management and our facility managersto evaluate the economic productivity of our facilities, including our abilityto lease our facilities, increase pricing and occupancy, and control ourproperty operating expenses;

 

·         Itis widely used in the real estate industry and the self-storage industry tomeasure the performance and value of real estate assets without regard tovarious items included in net income that do not relate to or are notindicative of operating performance, such as depreciation and amortizationexpense, which can vary depending upon accounting methods and the book value ofassets; and

 

·         Ithelps our investors to meaningfully compare the results of our operatingperformance from period to period by removing the impact of our capitalstructure (primarily interest expense on our outstanding indebtedness) anddepreciation of our basis in our assets 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 thethree months ended March 31, 2010 to the three months ended March 31,2009***

 

A comparison of cash flow from operating, investingand financing activities for the three months ended March 31, 2010 and2009 is as follows (in thousands):

 
| ** **                           | ** ** | **Three  Months Ended March 31,** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|------------|------------|
| ** **                           | ** ** | **2010**                               | ** ** | **2009**   | ** ** | **Change** | ** ** |
| Net cash flow provided by (used in): |       |                                   |       |       |       |   |   |
| Operating  activities                |       | $                                      | 10,884     |       | $          | 11,289 |   | $ | (405 | ) |
| Investing  activities                |       | $                                      | 17,828     |       | $          | (376 | ) | $ | 18,204 |   |
| Financing  activities                |       | $                                      | (89,956    | )          | $          | (13,080 | ) | $ | (76,876 | ) |

 

Cash flows provided byoperating activities for the three months ended March 31, 2010 and 2009were $10.9 million and $11.3 million, respectively, reflecting a decrease of$0.4 million.  The decrease primarilyrelates to reduced levels of net operating income during the three months endedMarch 31, 2010 as compared to the three months ended March 31, 2009of $1.2 million and a $0.8 million decrease in the change in other assetsduring the 2010 period as compared to the 2009 period, offset by a $1.5 millionincrease in the change in accounts payable and accrued expenses during the 2010period as compared to the 2009 period as a result of the timing of certainpayments.

 

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Cash used in or providedby investing activities changed from a use of $0.4 million in 2009 to proceedsof $17.8 million in 2010, a change of $18.2 million.  The change primarily relates to cash receiptsof $17.5 million related to proceeds in 2010 from the repayment of a notereceivable that originated in conjunction with an asset disposition during 2009.

 

Cash used in financingactivities increased from $13.1 million to $90.0 million during the threemonths ended March 31, 2009 and 2010, respectively.  The increase relates primarily to increasednet debt payoffs of $73.9 million, including the payoff of the $83.3 millionYSI 1 loan with cash on hand, an increase of $1.2 million in loan procurementcosts related to the origination of the new secured credit facility in 2009,and increased distributions paid to shareholders and non-controlling interestsof $2.0 million during the first quarter of 2010 as compared to the firstquarter of 2009 due to additional outstanding shares during the 2010 period asa result of equity offered during 2009.

 

**Liquidity and Capital Resources**

 

***Liquidity Overview***

 

Our cash flow from operations has historically beenone of our primary sources of liquidity to fund debt service, distributions andcapital expenditures.  We derivesubstantially all of our revenue from customers who lease space from us at ourfacilities.  Therefore, our ability togenerate cash from operations is dependent on the rents that we are able tocharge and collect from our customers. We believe that the facilities in which weinvest — self-storage facilities — are less sensitive thanother real estate product types to current near-term economic downturns.  However, prolonged economic downturns willadversely affect our cash flows from operations.

 

In order to qualify as a REIT for federal income taxpurposes, we are required to distribute at least 90% of our REIT taxableincome, excluding capital gains, to our shareholders on an annual basis or payfederal income tax.  The nature of ourbusiness, coupled with the requirement that we distribute a substantial portionof our income on an annual basis, will cause us to have substantial liquidityneeds over both the short term and the long term.

 

Our short term liquidity needs consist primarily offunds necessary to pay operating expenses associated with our facilities,refinancing of certain mortgage indebtedness, interest expense and scheduledprincipal payments on debt, expected distributions to limited partners andshareholders and recurring capital expenditures.  These liquidity needs will vary from year toyear, in some cases significantly.  Weexpect recurring capital expenditures remaining in the 2010 fiscal year to beapproximately $6 million to $8 million.  In addition, our currently scheduled principalpayments on debt, including borrowings outstanding on the credit facility andsecured term loans, are approximately $29.1 million during the remainder of2010 and $90.5 million in 2011.

 

Our most restrictive debt covenants limit the amountof additional leverage that we can incur; however, we believe the sources ofcapital described above will allow us to execute our current business plan andremain in compliance with our debt covenants.

 

Our liquidity needs beyond 2010 consist primarily ofcontractual obligations which include repayments of indebtedness at maturity,as well as potential discretionary expenditures such as (i) non-recurringcapital expenditures; (ii) redevelopment of operating facilities; (iii) acquisitionsof additional facilities; and (iv) development of new facilities.  We will have to satisfy our needs througheither additional borrowings, including borrowings under a new or revisedrevolving credit facility, sales of common or preferred shares and/or cashgenerated through facility dispositions and joint venture transactions.

 

Notwithstanding the discussion above, we believe that,as a publicly traded REIT, we will have access to multiple sources of capitalto fund long term liquidity requirements, including the incurrence ofadditional debt and the issuance of additional equity.  However, we cannot provide any assurance thatthis will be the case.  Our ability toincur additional debt is dependent on a number of factors, including our degreeof leverage, the value of our assets and borrowing restrictions that may beimposed by lenders.  In addition,dislocations in the United States debt markets may significantly reduce theavailability and increase the cost of long term debt capital, includingconventional mortgage financing and commercial mortgage-backed securitiesfinancing.  There can be no assurancethat such capital will be readily available in the future.  Our ability to access the equity capitalmarkets is also dependent on a number of factors, including general marketconditions for REITs and market perceptions about us.

 

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

 

Asof March 31, 2010, we had approximately $41.5 million in available cashand cash equivalents.  In addition, wehad approximately $250.0 million of availability for borrowings under oursecured revolving credit facility.

 

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***Bank Credit Facilities***

 

On December 8, 2009,the Company and its Operating Partnership entered into a three-year, $450million senior secured credit facility (the “secured credit facility”),consisting of a $200 million secured term loan and a $250 million securedrevolving credit facility.  The securedcredit facility is secured by mortgages on borrowing base properties.  At March 31, 2010, $200 million ofsecured term loan borrowings were outstanding under the secured creditfacility.  At March 31, 2010,approximately $250 million was available for borrowing under the securedrevolving credit facility.  Borrowingsunder the secured credit facility bear interest at rates ranging from 3.25% to4.00% over LIBOR, with a LIBOR floor of 1.5%, depending on our leverageratio.  At March 31, 2010,borrowings under the secured credit facility had a weighted average interestrate of 5.0% and the Company was in compliance with all financial covenants ofthe agreement.

 

Our ability to borrow and extend the maturity dateunder this secured credit facility and secured term loan will be subject to ourongoing compliance with the following financial covenants, among others:

 

·         Maximum total indebtedness to totalasset value of 65% (67.5% in first year);

 

·         Minimum fixed charge coverage ratio of1.45:1.0; and

 

·         Minimum tangible net worth of$827.0 million plus 75% of net proceeds from future equity issuances.

 

Further, under our secured credit facility, we arerestricted from paying distributions on our common shares that would exceed anamount equal to the greater of (i) 95% of our funds from operations, and (ii) suchamount as may be necessary to maintain our REIT status.

 

We are currently in compliance with all of ourcovenants and anticipate being in compliance with all of our covenants throughthe duration of the term of the credit facility and secured term loan.

 

The secured credit facility replaced the prior,three-year $450 million unsecured credit facility, which was entered into in November 2006,and consisted of $200 million in an unsecured term loan and $250 million inunsecured revolving loans.  Outstandingbalances under of the unsecured credit facility were repaid in December 2009.  Borrowings under the unsecured creditfacility bore interest, at our option, at either an alternative base rate or aEurodollar rate, in each case, plus an applicable margin based on our leverageratio or our credit rating.  Thealternative base interest rate was a fluctuating rate equal to the higher ofthe prime rate or the sum of the federal funds effective rate plus 50 basispoints.  The applicable margin for thealternative base rate varied from 0.00% to 0.50% depending on our leverageratio.

 

**Off-Balance Sheet Arrangements**

 

We do not currently have any off-balance sheetarrangements**.**

 

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

 

The Company’s future income, cash flows and fairvalues relevant to financial instruments depend upon prevailing interest rates.

 

**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 of Changes in Interest Rateson our Outstanding Debt**

 

The analysis below presents the sensitivity of thefair value of our financial instruments to selected changes in marketrates.  The range of changes chosenreflects our view of changes which are reasonably possible over a one-yearperiod.  Fair values are the presentvalue of projected future cash flows based on the market rates chosen.

 

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Our financial instruments consist of both fixed andvariable rate debt.  As of March 31,2010, our consolidated debt consisted of $483.3 million in fixed rate loanspayable and $200.0 million in a variable rate secured term loan.  All financial instruments were entered intofor other than trading purposes and the fair value of these financialinstruments is referred to as the financial position.  Changes in interest rates have differentimpacts on the fixed and variable rate portions of our debt portfolio.  A change in interest rates on the fixedportion of the debt portfolio impacts the financial instrument position, buthas 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 interest on our variable rate debt,excluding the effect of interest rate swap derivatives, increase or decrease by1%, the change in annual interest expense on our variable rate debt would notchange future earnings and cash flows, as a 1% increase in LIBOR would notexceed the minimum LIBOR rate of 1.5% used to calculate interest expense inaccordance with the secured credit facility.

 

If market rates of interest increase by 1%, the fairvalue of our outstanding fixed-rate mortgage debt would decrease byapproximately $11.8 million.  If marketrates of interest decrease by 1%, the fair value of our outstanding fixed-ratemortgage debt would increase by approximately $12.3 million.

 

**ITEM4. CONTROLS AND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

As of the end of theperiod covered by this report, we carried out an evaluation, under thesupervision and with the participation of our management, including the ChiefExecutive 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 are effective.

 

**Changes in Internal Controls OverFinancial Reporting**

 

There has been no change in our internal control overfinancial reporting (as defined in Rule 13a-15(f) under the ExchangeAct) during our most recent fiscal quarter that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II. OTHER INFORMATION**

 

**ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS**

 

Thefollowing table provides information about repurchases of the Company’s commonshares during the three month period ended March 31, 2010:

 
| ** **                        | ** ** | **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)** | ** ** |
|-----------------------------------|------------|--------------------------------------------------|------------|--------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| ** **                        |       |                                             |       |                                 |       |                                                                                               |       |                                                                                                |       |
| January 1- January 31   |       | 24,959                                           |       | $                                    | 6.96       |                                                                                               | N/A        |                                                                                                | 3,000,000  |   |
| February 1- February 28 |       | 2,793                                            |       | $                                    | 6.69       |                                                                                               | N/A        |                                                                                                | 3,000,000  |   |
| March 1- March 31       |       | 1,197                                            |       | $                                    | 7.49       |                                                                                               | N/A        |                                                                                                | 3,000,000  |   |
|                              |       |                                             |       |                                 |       |                                                                                               |       |                                                                                                |       |
| Total                             |       | 28,949                                           |       |                                 |       |                                                                                               |       | 3,000,000                                                                                           |       |

 

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(1)       Representscommon shares withheld by the Company upon the vesting of restricted shares tocover employee tax obligations.

 

(2)       On June 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.** | ** ** | ** **                                                                                                                                                                                                            |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                  |
| 12.1                 |       | Statement regarding Computation of Ratios of  U-Store-It Trust.                                                                                                                                                       |
|                 |       |                                                                                                                                                                                                                  |
| 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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SIGNATURES OF REGISTRANT

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                   | U-STORE-IT TRUST                            |                  |
|------------------------|---------------------------------------------|-----------------------|
|                   | (Registrant)                                |                  |
|                   |                                        |
|                   |                                        |                  |
| Date: May 7, 2010 | By:                                         | /s/ Dean Jernigan     |
|                   | Dean Jernigan, Chief  Executive Officer     |
|                   | (Principal Executive  Officer)              |
|                   |                                        |
|                   |                                        |
| Date: May 7, 2010 | By:                                         | /s/ Timothy M. Martin |
|                   | Timothy M. Martin,  Chief Financial Officer |
|                   | (Principal Financial  Officer)              |
|                        |                                             |                       |  |

 

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