Table of Contents

 

 

 

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

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**(Mark one)**

 

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

** **

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

** **

**or**

** **

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

** **

**For the transition period from                       to                      .**

 

**Commission file number: 001-32324**

 

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**U-STORE-IT TRUST**

(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’s Telephone Number, Including AreaCode)

 

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

 

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

 

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

 

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

 

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

 

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

 

| **Class**                      | ** ** | **Outstanding at August 2, 2010** |
|--------------------------------|------------|-------------------------------------------------------|
| common  shares, $.01 par value |       | 93,642,380                                            |

 

 

 

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Table ofContents

 

**U-STORE-IT TRUST**

**TABLE OF CONTENTS**

 
| Part I.  FINANCIAL INFORMATION |                                                                                        |   |
|-------------------------------------|---------------------------------------------------------------------------------------------|--------|
| Item 1.                             | Financial Statements                                                                        |   | 4 |
| Item 2.                             | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   | 15 |
| Item 3.                             | Quantitative  and Qualitative Disclosures About Market Risk                                 |   | 26 |
| Item 4.                             | Controls and  Procedures                                                                    |   | 26 |
| Part II.  OTHER INFORMATION    |                                                                                        |   |
| Item 2.                             | Unregistered  Sales of Equity Securities and Use of Proceeds                                |   | 27 |
| Item 5.                             | Other Information                                                                           |   | 27 |
| Item 6.                             | Exhibits                                                                                    |   | 28 |

 

**Forward-Looking Statements**

 

ThisQuarterly Report on Form 10-Q, together with other statements andinformation publicly disseminated by U-Store-It Trust (“we,” “us,” “our” or the“Company”), contains certain forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended, or the Exchange Act.Forward-looking statements include statements concerning our plans, objectives,goals, strategies, future events, future revenues or performance, capitalexpenditures, financing needs, plans or intentions relating to acquisitions andother information that is not historical information.  In some cases, forward-looking statements canbe identified by terminology such as “believes,” “expects,” “estimates,” “may,”“will,” “should,” “anticipates,” or “intends” or the negative of such terms orother comparable terminology, or by discussions of strategy.  Such statements are based on assumptions andexpectations that may not be realized and are inherently subject to risks,uncertainties and other factors, many of which cannot be predicted withaccuracy and some of which might not even be anticipated.  Although we believe the expectationsreflected in these forward-looking statements are based on reasonableassumptions, future events and actual results, performance, transactions orachievements, financial and otherwise, may differ materially from the results,performance, transactions or achievements expressed or implied by theforward-looking statements.  As a result,you should not rely on or construe any forward-looking statements in thisReport, or which management may make orally or in writing from time to time, aspredictions of future events or as guarantees of future performance.  We caution you not to place undue reliance onforward-looking statements, which speak only as of the date of this Report oras of the dates otherwise indicated in the statements.  All of our forward-looking statements,including those in this Report, are qualified in their entirety by thisstatement.

 

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

 

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

 

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

 

·                  the execution of our business plan;

 

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

 

·                  increases in interest rates and operatingcosts;

 

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

 

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

 

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

 

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

 

·                  changes in real estate and zoning laws orregulations;

 

·                  risks related to natural disasters;

 

·                  potential environmental and otherliabilities; and

 

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

 

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

 

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**PART I.FINANCIAL INFORMATION**

**ITEM 1.FINANCIAL STATEMENTS**

 

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

**CONSOLIDATED BALANCE SHEETS**

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

**(unaudited)**

** **
| ** **                                                                                                                                                                             | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                             | ** ** | **2010**          | ** ** | **2009**              | ** ** |
|                                                                                                                                                                                   |       |              |       |                  |       |
| **ASSETS**                                                                                                                                                                             |       |              |       |                  |       |
| Storage  facilities                                                                                                                                                                    |       | $                 | 1,739,617  |                  | $          | 1,774,542 |   |
| Less:  Accumulated depreciation                                                                                                                                                        |       | (336,392          | )          | (344,009              | )          |
| Storage  facilities, net                                                                                                                                                               |       | 1,403,225         |       | 1,430,533             |       |
| Cash  and cash equivalents                                                                                                                                                             |       | 31,877            |       | 102,768               |       |
| Restricted  cash                                                                                                                                                                       |       | 13,961            |       | 16,381                |       |
| Loan  procurement costs, net of amortization                                                                                                                                           |       | 16,458            |       | 18,366                |       |
| Notes  receivable                                                                                                                                                                      |       | 256               |       | 20,112                |       |
| Other  assets, net                                                                                                                                                                     |       | 19,257            |       | 10,710                |       |
| Total  assets                                                                                                                                                                          |       | $                 | 1,485,034  |                  | $          | 1,598,870 |   |
|                                                                                                                                                                                   |       |              |       |                  |       |
| **LIABILITIES AND EQUITY**                                                                                                                                                             |       |              |       |                  |       |
|                                                                                                                                                                                   |       |              |       |                  |       |
| Secured  term loan                                                                                                                                                                     |       | $                 | 200,000    |                  | $          | 200,000 |   |
| Mortgage  loans and notes payable                                                                                                                                                      |       | 465,854           |       | 569,026               |       |
| Accounts  payable, accrued expenses and other liabilities                                                                                                                              |       | 35,400            |       | 33,767                |       |
| Distributions  payable                                                                                                                                                                 |       | 2,435             |       | 2,448                 |       |
| Deferred  revenue                                                                                                                                                                      |       | 8,932             |       | 8,449                 |       |
| Security  deposits                                                                                                                                                                     |       | 428               |       | 456                   |       |
| Total  liabilities                                                                                                                                                                     |       | 713,049           |       | 814,146               |       |
|                                                                                                                                                                                   |       |              |       |                  |       |
| Noncontrolling  interests in the Operating Partnership                                                                                                                                 |       | 44,731            |       | 45,394                |       |
|                                                                                                                                                                                   |       |              |       |                  |       |
| Commitments  and contingencies                                                                                                                                                         |       |              |       |                  |       |
|                                                                                                                                                                                   |       |              |       |                  |       |
| Equity                                                                                                                                                                                 |       |              |       |                  |       |
| Common  shares $.01 par value, 200,000,000 shares authorized, 92,958,089 and  92,654,979 shares issued and outstanding at June 30, 2010 and  December 31, 2009, respectively |       | 930               |       | 927                   |       |
| Additional  paid in capital                                                                                                                                                            |       | 977,211           |       | 974,926               |       |
| Accumulated  other comprehensive loss                                                                                                                                                  |       | (1,104            | )          | (874                  | )          |
| Accumulated  deficit                                                                                                                                                                   |       | (292,350          | )          | (279,670              | )          |
| Total  U-Store-It Trust shareholders’ equity                                                                                                                                      |       | 684,687           |       | 695,309               |       |
| Noncontrolling  interest in subsidiaries                                                                                                                                               |       | 42,567            |       | 44,021                |       |
| Total  equity                                                                                                                                                                          |       | 727,254           |       | 739,330               |       |
| Total  liabilities and equity                                                                                                                                                          |       | $                 | 1,485,034  |                  | $          | 1,598,870 |   |

 

See accompanying notes to the unaudited consolidated financialstatements.

 

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

**CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(unaudited)**

** **
| ** **                                                                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                              | ** ** | **2010**                              | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                                                    |       |                                  |       |                                |       |   |   |   |   |
| **REVENUES**                                                                                            |       |                                  |       |                                |       |   |   |   |   |
| Rental  income                                                                                          |       | $                                     | 49,465     |                                | $          | 49,807 |   | $ | 98,461 |   | $ | 101,052 |   |
| Other  property related income                                                                          |       | 4,702                                 |       | 4,480                               |       | 8,780 |   | 8,170 |   |
| Property  management fee income                                                                         |       | 590                                   |       | —                              |       | 634 |   | — |   |
| Total  revenues                                                                                         |       | 54,757                                |       | 54,287                              |       | 107,875 |   | 109,222 |   |
| **OPERATING EXPENSES**                                                                                  |       |                                  |       |                                |       |   |   |   |   |
| Property  operating expenses                                                                            |       | 24,421                                |       | 24,920                              |       | 47,390 |   | 48,568 |   |
| Depreciation  and amortization                                                                          |       | 16,363                                |       | 17,756                              |       | 32,741 |   | 35,583 |   |
| General  and administrative                                                                             |       | 6,844                                 |       | 5,628                               |       | 12,711 |   | 11,102 |   |
| Total  operating expenses                                                                               |       | 47,628                                |       | 48,304                              |       | 92,842 |   | 95,253 |   |
| **OPERATING INCOME**                                                                                    |       | 7,129                                 |       | 5,983                               |       | 15,033 |   | 13,969 |   |
| **OTHER INCOME (EXPENSE)**                                                                              |       |                                  |       |                                |       |   |   |   |   |
| Interest:                                                                                               |       |                                  |       |                                |       |   |   |   |   |
| Interest  expense on loans                                                                              |       | (9,625                                | )          | (11,473                             | )          | (19,676 | ) | (22,826 | ) |
| Loan  procurement amortization expense                                                                  |       | (1,620                                | )          | (545                                | )          | (3,159 | ) | (1,028 | ) |
| Interest  income                                                                                        |       | 62                                    |       | 55                                  |       | 597 |   | 100 |   |
| Acquisition  related costs                                                                              |       | (300                                  | )          | —                              |       | (300 | ) | — |   |
| Other                                                                                                   |       | (35                                   | )          | (1                                  | )          | (76 | ) | (13 | ) |
| Total  other expense                                                                                    |       | (11,518                               | )          | (11,964                             | )          | (22,614 | ) | (23,767 | ) |
|                                                                                                    |       |                                  |       |                                |       |   |   |   |   |
| **LOSS FROM CONTINUING OPERATIONS**                                                                     |       | (4,389                                | )          | (5,981                              | )          | (7,581 | ) | (9,798 | ) |
|                                                                                                    |       |                                  |       |                                |       |   |   |   |   |
| **DISCONTINUED OPERATIONS**                                                                             |       |                                  |       |                                |       |   |   |   |   |
| Income  from discontinued operations                                                                    |       | —                                |       | 775                                 |       | — |   | 1,804 |   |
| Net  gain on disposition of discontinued operations                                                     |       | —                                |       | 2,120                               |       | — |   | 2,622 |   |
| Total  discontinued operations                                                                          |       | —                                |       | 2,895                               |       | — |   | 4,426 |   |
| **NET LOSS**                                                                                            |       | (4,389                                | )          | (3,086                              | )          | (7,581 | ) | (5,372 | ) |
| **NET LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTERESTS**                                          |       |                                  |       |                                |       |   |   |   |   |
| Noncontrolling  interests in the Operating Partnership                                                  |       | 233                                   |       | 242                                 |       | 411 |   | 419 |   |
| Noncontrolling  interest in subsidiaries                                                                |       | (365                                  | )          | —                              |       | (826 | ) | — |   |
| **NET LOSS ATTRIBUTABLE TO THE COMPANY**                                                                |       | $                                     | (4,521     | )                                   | $          | (2,844 | ) | $ | (7,996 | ) | $ | (4,953 | ) |
|                                                                                                    |       |                                  |       |                                |       |   |   |   |   |
| Basic  and diluted loss per share from continuing operations attributable to common shareholders        |       | $                                     | (0.05      | )                                   | $          | (0.09 | ) | $ | (0.09 | ) | $ | (0.16 | ) |
| Basic  and diluted earnings per share from discontinued operations attributable to  common shareholders |       | $                                     | —     |                                | $          | 0.04 |   | $ | — |   | $ | 0.07 |   |
| Basic  and diluted loss per share attributable to common shareholders                                   |       | $                                     | (0.05      | )                                   | $          | (0.05 | ) | $ | (0.09 | ) | $ | (0.09 | ) |
|                                                                                                    |       |                                  |       |                                |       |   |   |   |   |
| Weighted-average  basic and diluted shares outstanding                                                  |       | 92,925                                |       | 58,165                              |       | 92,880 |   | 57,928 |   |
|                                                                                                    |       |                                  |       |                                |       |   |   |   |   |
| **AMOUNTS ATTRIBUTABLE TO THE COMPANY’S COMMON SHAREHOLDERS:**                                     |       |                                  |       |                                |       |   |   |   |   |
| Loss  from continuing operations                                                                        |       | $                                     | (4,521     | )                                   | $          | (5,507 | ) | $ | (7,996 | ) | $ | (9,020 | ) |
| Total  discontinued operations                                                                          |       | —                                |       | 2,663                               |       | — |   | 4,067 |   |
| Net  loss                                                                                               |       | $                                     | (4,521     | )                                   | $          | (2,844 | ) | $ | (7,996 | ) | $ | (4,953 | ) |

 

See accompanying notes to the unaudited consolidated financialstatements.

 

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

**CONSOLIDATED STATEMENTS OF EQUITY**

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

**(in thousands)**

**(unaudited)**

 
| ** **                                                   | ** ** | ** **         | ** ** | ** **              | ** ** | ** **                            | ** ** | ** **      | ** ** | ** **                    | ** ** | ** **                      | ** ** | ** **       | ** ** | ** **                       | ** ** | **Noncontrolling** | ** ** |
|--------------------------------------------------------------|------------|--------------------|------------|-------------------------|------------|---------------------------------------|------------|-----------------|------------|-------------------------------|------------|---------------------------------|------------|------------------|------------|----------------------------------|------------|--------------------|------------|
| ** **                                                   | ** ** | **Common  Shares** | ** ** | **Additional  Paid in** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Accumulated** | ** ** | **Total  Shareholders’** | ** ** | **Noncontrolling  Interest in** | ** ** | **Total**        | ** ** | **Interests  in the  Operating** | ** ** |
| ** **                                                   | ** ** | **Number**         | ** ** | **Amount**              | ** ** | **Capital**                           | ** ** | **Loss**        | ** ** | **Deficit**                   | ** ** | **Equity**                      | ** ** | **Subsidiaries** | ** ** | **Equity**                       | ** ** | **Partnership**    | ** ** |
|                                                         |       |               |       |                    |       |                                  |       |            |       |                          |       |                            |       |             |       |                             |       |               |       |
| **Balance  at December 31, 2009**                       |       | 92,655             |       | $                       | 927        |                                  | $          | 974,926         |       | $                             | (874       | )                               | $          | (279,670         | )          | $                                | 695,309    |               | $          | 44,021 |   | $ | 739,330 |   | $ | 45,394 |   |
| Contributions from  noncontrolling interests in subsidiaries |       | —             |       | —                  |       | —                                |       | —          |       | —                        |       | —                          |       | 16               |       | 16                               |       | —             |       |
| Issuance of restricted  shares                               |       | 201                |       | 2                       |       | —                                |       | —          |       | —                        |       | 2                               |       | —           |       | 2                                |       | —             |       |
| Issuance of common  shares                                   |       | 46                 |       | —                  |       | 371                                   |       | —          |       | —                        |       | 371                             |       | —           |       | 371                              |       | —             |       |
| Exercise of stock  options                                   |       | 52                 |       | 1                       |       | 180                                   |       | —          |       | —                        |       | 181                             |       | —           |       | 181                              |       | —             |       |
| Conversion from units to  shares                             |       | 4                  |       | —                  |       | —                                |       | —          |       | —                        |       | —                          |       | —           |       | —                           |       | —             |       |
| Amortization of  restricted shares                           |       | —             |       | —                  |       | 753                                   |       | —          |       | —                        |       | 753                             |       | —           |       | 753                              |       | —             |       |
| Share compensation  expense                                  |       | —             |       | —                  |       | 981                                   |       | —          |       | —                        |       | 981                             |       | —           |       | 981                              |       | —             |       |
| Net (loss) income                                            |       | —             |       | —                  |       | —                                |       | —          |       | (7,996                        | )          | (7,996                          | )          | 826              |       | (7,170                           | )          | (411               | )          |
| Other comprehensive  income:                                 |       |               |       |                    |       |                                  |       |            |       |                          |       |                            |       |             |       |                             |       |               |       |
| Unrealized loss on  foreign currency translation             |       | —             |       | —                  |       | —                                |       | (230            | )          | —                        |       | (230                            | )          | (7               | )          | (237                             | )          | (12                | )          |
| Distributions                                                |       | —             |       | —                  |       | —                                |       | —          |       | (4,684                        | )          | (4,684                          | )          | (2,289           | )          | (6,973                           | )          | (240               | )          |
| **Balance  at June 30, 2010**                           |       | 92,958             |       | $                       | 930        |                                  | $          | 977,211         |       | $                             | (1,104     | )                               | $          | (292,350         | )          | $                                | 684,687    |               | $          | 42,567 |   | $ | 727,254 |   | $ | 44,731 |   |

 
| ** **                                       | ** ** | **Common  Shares** | ** ** | **Additional  Paid in** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Accumulated** | ** ** | **Total  Shareholders’** | ** ** | **Noncontrolling  Interest in** | ** ** | **Total**        | ** ** | **Noncontrolling  Interests in the  Operating** | ** ** |
|--------------------------------------------------|------------|--------------------|------------|-------------------------|------------|---------------------------------------|------------|-----------------|------------|-------------------------------|------------|---------------------------------|------------|------------------|------------|-------------------------------------------------|------------|
| ** **                                       | ** ** | **Number**         | ** ** | **Amount**              | ** ** | **Capital**                           | ** ** | **Loss**        | ** ** | **Deficit**                   | ** ** | **Equity**                      | ** ** | **Subsidiaries** | ** ** | **Equity**                                      | ** ** | **Partnership** | ** ** |
|                                             |       |               |       |                    |       |                                  |       |            |       |                          |       |                            |       |             |       |                                            |       |   |   |
| **Balance  at December 31, 2008**           |       | 57,623             |       | $                       | 576        |                                  | $          | 801,029         |       | $                             | (7,553     | )                               | $          | (271,124         | )          | $                                               | 522,928    |   | $ | — |   | $ | 522,928 |   | $ | 46,026 |   |
| Issuance of restricted  shares                   |       | 84                 |       | 1                       |       | —                                |       | —          |       | —                        |       | 1                               |       | —           |       | 1                                               |       | — |   |
| Issuance of common  shares                       |       | 2,431              |       | 24                      |       | 9,503                                 |       | —          |       | —                        |       | 9,527                           |       | —           |       | 9,527                                           |       | — |   |
| Amortization of  restricted shares               |       | —             |       | —                  |       | 825                                   |       | —          |       | —                        |       | 825                             |       | —           |       | 825                                             |       | — |   |
| Share compensation  expense                      |       | —             |       | —                  |       | 890                                   |       | —          |       | —                        |       | 890                             |       | —           |       | 890                                             |       | — |   |
| Net loss                                         |       | —             |       | —                  |       | —                                |       | —          |       | (4,953                        | )          | (4,953                          | )          | —           |       | (4,953                                          | )          | (419 | ) |
| Other comprehensive  income:                     |       |               |       |                    |       |                                  |       |            |       |                          |       |                            |       |             |       |                                            |       |   |   |
| Unrealized gain on  interest rate swap           |       | —             |       | —                  |       | —                                |       | 2,680           |       | —                        |       | 2,680                           |       | —           |       | 2,680                                           |       | 235 |   |
| Unrealized gain on  foreign currency translation |       | —             |       | —                  |       | —                                |       | 708             |       | —                        |       | 708                             |       | —           |       | 708                                             |       | 61 |   |
| Distributions                                    |       | —             |       | —                  |       | —                                |       | —          |       | (2,970                        | )          | (2,970                          | )          | —           |       | (2,970                                          | )          | (254 | ) |
| **Balance  at June 30, 2009**               |       | 60,138             |       | $                       | 601        |                                  | $          | 812,247         |       | $                             | (4,165     | )                               | $          | (279,047         | )          | $                                               | 529,636    |   | $ | — |   | $ | 529,636 |   | $ | 45,649 |   |

 

See accompanying notes to the unaudited consolidated financialstatements.

 

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

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

**(unaudited)**

 
| ** **                                                                   | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                   | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| ** **                                                                   | ** ** | ** **                         | ** ** | ** ** | ** ** |
| **Operating Activities**                                                     |       |                               |       |   |   |
| Net  loss                                                                    |       | $                                  | (7,581     | ) | $ | (5,372 | ) |
| Adjustments  to reconcile net loss to cash provided by operating activities: |       |                               |       |   |   |
| Depreciation  and amortization                                               |       | 35,880                             |       | 38,503 |   |
| Gain  on disposition of discontinued operations                              |       | —                             |       | (2,622 | ) |
| Equity  compensation expense                                                 |       | 1,734                              |       | 1,714 |   |
| Accretion  of fair market value adjustment of debt                           |       | (187                               | )          | (233 | ) |
| Changes  in other operating accounts:                                        |       |                               |       |   |   |
| Other  assets                                                                |       | (2,681                             | )          | (1,257 | ) |
| Accounts  payable and accrued expenses                                       |       | (182                               | )          | (3,374 | ) |
| Other  liabilities                                                           |       | 455                                |       | (197 | ) |
| Net  cash provided by operating activities                                   |       | $                                  | 27,438     |   | $ | 27,162 |   |
|                                                                         |       |                               |       |   |   |
| **Investing Activities**                                                     |       |                               |       |   |   |
| Acquisitions,  additions and improvements to storage facilities              |       | $                                  | (9,944     | ) | $ | (8,339 | ) |
| Proceeds  from sales of properties, net                                      |       | —                             |       | 11,180 |   |
| Proceeds  from repayment of notes receivable                                 |       | 19,856                             |       | — |   |
| Decrease  (increase) in restricted cash                                      |       | 2,420                              |       | (2,581 | ) |
| Net  cash provided by investing activities                                   |       | $                                  | 12,332     |   | $ | 260 |   |
|                                                                         |       |                               |       |   |   |
| **Financing Activities**                                                     |       |                               |       |   |   |
| Proceeds  from:                                                              |       |                               |       |   |   |
| Revolving  credit facility                                                   |       | $                                  | —     |   | $ | 9,500 |   |
| Mortgage  loans and notes payable                                            |       | —                             |       | 51,900 |   |
| Principal  payments on:                                                      |       |                               |       |   |   |
| Revolving  credit facility                                                   |       | —                             |       | (77,500 | ) |
| Secured  term loans                                                          |       | —                             |       | (10,972 | ) |
| Mortgage  loans and notes payable                                            |       | (102,753                           | )          | (6,570 | ) |
| Proceeds  from issuance of common shares, net                                |       | 371                                |       | 9,530 |   |
| Exercise  of stock options                                                   |       | 181                                |       | — |   |
| Contributions  from noncontrolling interests in subsidiaries                 |       | 16                                 |       | — |   |
| Distributions  paid to shareholders                                          |       | (4,694                             | )          | (2,900 | ) |
| Distributions  paid to noncontrolling interests in Operating Partnership     |       | (242                               | )          | (254 | ) |
| Distributions  paid to noncontrolling interests in subsidiaries              |       | (2,289                             | )          | — |   |
| Loan  procurement costs                                                      |       | (1,251                             | )          | (2,243 | ) |
| Net  cash used in financing activities                                       |       | $                                  | (110,661   | ) | $ | (29,509 | ) |
|                                                                         |       |                               |       |   |   |
| Decrease  in cash and cash equivalents                                       |       | (70,891                            | )          | (2,087 | ) |
|                                                                         |       |                               |       |   |   |
| Cash  and cash equivalents at beginning of period                            |       | 102,768                            |       | 3,744 |   |
| Cash  and cash equivalents at end of period                                  |       | $                                  | 31,877     |   | $ | 1,657 |   |
|                                                                         |       |                               |       |   |   |
| **Supplemental Cash Flow and Noncash Information**                           |       |                               |       |   |   |
| Cash  paid for interest, net of interest capitalized                         |       | $                                  | 19,940     |   | $ | 22,700 |   |
| Supplemental  disclosure of noncash activities:                              |       |                               |       |   |   |
| Acquisition  related contingent consideration                                |       | $                                  | 1,849      |   | $ | — |   |
| Derivative  valuation adjustment                                             |       | $                                  | —     |   | $ | 2,915 |   |
| Foreign  currency translation adjustment                                     |       | $                                  | (249       | ) | $ | 769 |   |

 

Seeaccompanying notes to the unaudited consolidated financial statements.

 

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

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.  ORGANIZATIONAND NATURE OF OPERATIONS**

 

U-Store-It Trust, a Marylandreal estate investment trust (collectively with its subsidiaries, “we”, “us” orthe “Company”), is a self-administered and self-managed real estate investmenttrust, or REIT, active in acquiring, developing, managing and operatingself-storage properties for business and personal use under month-to-monthleases.  The Company’s self-storagefacilities (collectively, the “Properties”) are located in 26 states throughoutthe United States, and in theDistrict of Columbia and are managed under one reportable operating segment: weown, operate, develop, manage and acquire self-storage facilities.  The Company owns substantially all of itsassets through U-Store-It, L.P., a Delaware limited partnership (the “OperatingPartnership”).  The Company is the solegeneral partner of the Operating Partnership and, as of June 30, 2010,owned a 95.1% interest in the Operating Partnership.  The Company managesits owned assets through YSI Management, LLC (the “Management Company”), awholly owned subsidiary of the Operating Partnership, and manages its managedassets through Storage Asset Management, LLC. The Company owns four subsidiaries that have elected to be treated astaxable REIT subsidiaries.  In general, ataxable REIT subsidiary may perform non-customary services for tenants, holdassets that the Company, as a REIT, cannot hold directly and generally mayengage in any real estate or non-real estate related business.

 

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

 

*Basis ofPresentation*

 

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

 

*NewAccounting Pronouncements*

 

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

 

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

 

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

 

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

 
| ** **                     | ** ** | **June 30,**   | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2010**            | ** ** | **2009**              | ** ** |
| ** **                     | ** ** | **(in  thousands)** | ** ** |
|                           |       |                |       |                  |       |
| Land  and improvements         |       | $                   | 369,656    |                  | $          | 369,842 |   |
| Buildings  and improvements    |       | 1,244,579           |       | 1,243,047             |       |
| Equipment                      |       | 122,745             |       | 157,452               |       |
| Construction  in progress      |       | 2,637               |       | 4,201                 |       |
| Total                          |       | 1,739,617           |       | 1,774,542             |       |
| Less  accumulated depreciation |       | (336,392            | )          | (344,009              | )          |
| Storage  facilities, net       |       | $                   | 1,403,225  |                  | $          | 1,430,533 |   |

 

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

 

**4.  ACQUISITIONS**

 

TheCompany entered into an acquisition accounted for as a business combination of85 management contracts from United Stor-All Management, LLC (“United Stor-All”)on April 28, 2010.  The 85 contractsrelate to facilities located in 16 states and the District of Columbia.  The Company recorded the fair value of theassets acquired which include the intangible value related to the managementcontracts and are included in other assets, net on the Company’s consolidatedbalance sheet.  The Company’s estimationof the fair value of the acquired assets and liabilities utilized Level 3inputs and considered the probability of the expected period the contractswould remain in place, including estimated renewal periods, and the amount ofthe discounted future contingent payments to be made.  The Company paid $4.1 million in cash for thecontracts and recognized $1.8 million in contingent consideration.  The Company will account for the contingentconsideration liability by recording the changes in fair value of the liabilityrecorded in earnings.  The Company hasrecognized $0.2 million of amortization during the three months ended June 30,2010.  The Company expensed $0.3 millionin transition related costs that are included in acquisition related costs onthe Company’s consolidated statement of operations.  The estimated life of the intangible value ofthe management contracts is 56 months and the estimated remaining amortizationexpense that will be recognized during 2010 is $0.6 million.

 

**5.  SECUREDCREDIT 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 June 30, 2010, $200 million ofsecured term loan borrowings were outstanding under the secured creditfacility.  At June 30, 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 the Company’s leverage ratio.  At June 30, 2010, borrowings under thesecured credit facility had a weighted average interest rate of 5.0% and theCompany was in compliance with all covenants of the agreement.

 

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

 

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**6.  MORTGAGELOANS AND NOTES PAYABLE**

 

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

 
| ** **                              | ** ** | **Carrying Value as of:** | ** ** | ** **            | ** ** | ** **        | ** ** |
|-----------------------------------------|------------|------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                              | ** ** | **June 30,**                        | ** ** | **December 31,** | ** ** | **Effective**     | ** ** | **Maturity** | ** ** |
| **Mortgage Loan**                  | ** ** | **2010**                                 | ** ** | **2009**              | ** ** | **Interest Rate** | ** ** | **Date** | ** ** |
| ** **                              | ** ** | **(in  thousands)**                      | ** ** | ** **            | ** ** | ** **        | ** ** |
| YSI  1                                  |       | $                                        | —     |                  | $          | 83,342            |       | 5.19 | % | May-10 |   |
| YSI  4                                  |       | —                                   |       | 6,065                 |       | 5.25              | %          | Jul-10 |   |
| YSI  26                                 |       | —                                   |       | 9,475                 |       | 5.00              | %          | Aug-10 |   |
| YSI  25                                 |       | 7,912                                    |       | 7,975                 |       | 5.00              | %          | Oct-10 |   |
| USIFB                                   |       | 3,603                                    |       | 3,834                 |       | 4.59              | %          | Dec-10 |   |
| YSI  2                                  |       | 82,572                                   |       | 83,480                |       | 5.33              | %          | Jan-11 |   |
| YSI  12                                 |       | 1,499                                    |       | 1,520                 |       | 5.97              | %          | Sep-11 |   |
| YSI  13                                 |       | 1,288                                    |       | 1,307                 |       | 5.97              | %          | Sep-11 |   |
| YSI  6                                  |       | 76,755                                   |       | 77,370                |       | 5.13              | %          | Aug-12 |   |
| YASKY                                   |       | 80,000                                   |       | 80,000                |       | 4.96              | %          | Sep-12 |   |
| YSI  14                                 |       | 1,786                                    |       | 1,812                 |       | 5.97              | %          | Jan-13 |   |
| YSI  7                                  |       | 3,132                                    |       | 3,163                 |       | 6.50              | %          | Jun-13 |   |
| YSI  8                                  |       | 1,790                                    |       | 1,808                 |       | 6.50              | %          | Jun-13 |   |
| YSI  9                                  |       | 1,968                                    |       | 1,988                 |       | 6.50              | %          | Jun-13 |   |
| YSI  17                                 |       | 4,184                                    |       | 4,246                 |       | 6.32              | %          | Jul-13 |   |
| YSI  27                                 |       | 507                                      |       | 516                   |       | 5.59              | %          | Nov-13 |   |
| YSI  30                                 |       | 7,443                                    |       | 7,567                 |       | 5.59              | %          | Nov-13 |   |
| YSI  11                                 |       | 2,453                                    |       | 2,486                 |       | 5.87              | %          | Dec-13 |   |
| YSI  5                                  |       | 3,238                                    |       | 3,281                 |       | 5.25              | %          | Jan-14 |   |
| YSI  28                                 |       | 1,576                                    |       | 1,598                 |       | 5.59              | %          | Feb-14 |   |
| YSI  34                                 |       | 14,889                                   |       | 14,955                |       | 8.00              | %          | Jun-14 |   |
| YSI  37                                 |       | 2,227                                    |       | 2,244                 |       | 7.25              | %          | Aug-14 |   |
| YSI  40                                 |       | 2,551                                    |       | 2,581                 |       | 7.25              | %          | Aug-14 |   |
| YSI  44                                 |       | 1,108                                    |       | 1,121                 |       | 7.00              | %          | Sep-14 |   |
| YSI  41                                 |       | 3,928                                    |       | 3,976                 |       | 6.60              | %          | Sep-14 |   |
| YSI  38                                 |       | 4,026                                    |       | 4,078                 |       | 6.35              | %          | Sep-14 |   |
| YSI  45                                 |       | 5,485                                    |       | 5,527                 |       | 6.75              | %          | Oct-14 |   |
| YSI  46                                 |       | 3,458                                    |       | 3,486                 |       | 6.75              | %          | Oct-14 |   |
| YSI  43                                 |       | 2,957                                    |       | 2,994                 |       | 6.50              | %          | Nov-14 |   |
| YSI  48                                 |       | 25,465                                   |       | 25,652                |       | 7.25              | %          | Nov-14 |   |
| YSI  50                                 |       | 2,351                                    |       | 2,380                 |       | 6.75              | %          | Dec-14 |   |
| YSI  10                                 |       | 4,128                                    |       | 4,166                 |       | 5.87              | %          | Jan-15 |   |
| YSI  15                                 |       | 1,899                                    |       | 1,920                 |       | 6.41              | %          | Jan-15 |   |
| YSI  20                                 |       | 63,372                                   |       | 64,258                |       | 5.97              | %          | Nov-15 |   |
| YSI  31                                 |       | 13,777                                   |       | 13,891                |       | 6.75              | %          | Jun-19 | (a) |
| YSI  35                                 |       | 4,499                                    |       | 4,499                 |       | 6.90              | %          | Jul-19 | (a) |
| YSI  32                                 |       | 6,110                                    |       | 6,160                 |       | 6.75              | %          | Jul-19 | (a) |
| YSI  33                                 |       | 11,472                                   |       | 11,570                |       | 6.42              | %          | Jul-19 |   |
| YSI  42                                 |       | 3,224                                    |       | 3,263                 |       | 6.88              | %          | Aug-19 | (a) |
| YSI  39                                 |       | 3,961                                    |       | 3,991                 |       | 6.50              | %          | Nov-19 | (a) |
| YSI  47                                 |       | 3,217                                    |       | 3,250                 |       | 6.63              | %          | Jan-20 | (a) |
| Unamortized  fair value adjustment      |       | 44                                       |       | 231                   |       |              |       |   |   |
|                                    |       |                                     |       |                  |       |              |       |   |   |
| Total  mortgage loans and notes payable |       | $                                        | 465,854    |                  | $          | 569,026           |       |   |   |   |   |

 

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

 

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

 
| 2010                         |   | $       | 15,393  |   |
|------------------------------|--------|---------|---------|--------|
| 2011                         |   | 90,544  |    |
| 2012                         |   | 159,984 |    |
| 2013                         |   | 26,240  |    |
| 2014                         |   | 88,261  |    |
| 2015  and thereafter         |   | 85,388  |    |
| Total  mortgage payments     |   | 465,810 |    |
| Plus:  Fair value adjustment |   | 44      |    |
| Total  mortgage indebtedness |   | $       | 465,854 |   |

 

The Company currentlyintends to fund the remainder of its 2010 principal payment requirements withavailable cash and from cash provided by operating activities.

** **

**7.  FAIRVALUE MEASUREMENTS**

 

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

 

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

 

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

 

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

 

Indetermining fair value, the Company utilizes valuation techniques that maximizethe use of observable inputs and minimize the use of unobservable inputs to theextent possible as well as considering counterparty credit risk in itsassessment of fair value.

 

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

 

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

 

**8.  NONCONTROLLINGINTERESTS**

 

**Variable Interests inConsolidated Real Estate Joint Ventures**

 

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

 

TheCompany determined that HART is a variable interest entity under GAAP, and thatit is the primary beneficiary. Accordingly, the assets, liabilities, and results of operations of HARTare consolidated.  The 50% interest thatis owned by Heitman is reflected as noncontrolling interest in subsidiarieswithin permanent equity, separate from the Company’s equity on the consolidatedbalance sheet.  At June 30, 2010,HART had total assets of $91.5 million, including $89.5 million of storagefacilities, net and total liabilities of $2.3 million.

 

USIFB,LLP (“the Venture”) was formed to own, operate, acquire and developself-storage facilities in England.  TheCompany owns a 97% interest in the Venture through a wholly-owned subsidiaryand the Venture commenced operations at one facility in London, England during2008.  The Company determined that theVenture is a variable interest entity under GAAP, and that it is the primarybeneficiary.  Accordingly, the assets,liabilities and results of operations of the Venture are consolidated.  At June 30, 2010, the Venture had totalassets of $7.5 million and total liabilities of $3.8 million including amortgage loan of $3.6 million secured by storage facilities, net with a bookvalue of $7.2 million.  At June 30,2010, the Venture’s creditors had no recourse to the general credit of theCompany.

** **

**Operating Partnership Ownership**

 

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

 

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

 

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

 

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

 

**9.  RELATEDPARTY TRANSACTIONS**

 

During 2005 and 2006, theOperating Partnership entered into various office lease agreements with Amsdelland Amsdell, an entity owned by Robert Amsdell and Barry Amsdell (each a formerTrustee).  Pursuant to these lease agreements,the Operating Partnership rented office space in the Airport Executive Park, anoffice and flex development located in Cleveland, Ohio, which is owned byAmsdell and Amsdell.  The Company’sindependent Trustees approved the terms of, and entry into, each of the officelease agreements by the Operating Partnership. In addition to monthly rent, the office lease agreements provide thatthe Operating Partnership reimburse Amsdell and Amsdell for certain maintenanceand improvements to the leased office space. The aggregate amount of payments by the Company to Amsdell and Amsdellunder these lease agreements for each of the three months ended June 30,2010 and June 30, 2009 was approximately $0.1 million.  Additionally, the aggregate amount ofpayments for each of the six months ended June 30, 2010 and June 30,2009 was approximately $0.2 million.  We vacated the office space owned byAmsdell and Amsdell in 2007, but remain obligated under certain of the leaseagreements through 2014.  Subsequently,the Company entered into a sublease agreement for a portion of the space with athird party for the remainder of the lease term.

 

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

 
| ** ** | ** ** | **Due to Related Party** | ** ** | **Due from Subtenant** | ** ** |
|------------|------------|--------------------------|------------|------------------------|------------|
| ** ** | ** ** | **Amount**               | ** ** | **Amount**             | ** ** |
| ** ** | ** ** | **(in  thousands)**      | ** ** |
|       |       |                     |       |                   |       |
| 2010       |       | $                        | 227        |                   | $          | 139 |   |
| 2011       |       | 475                      |       | 278                    |       |
| 2012       |       | 475                      |       | 278                    |       |
| 2013       |       | 499                      |       | 278                    |       |
| 2014       |       | 499                      |       | 278                    |       |
|       |       | $                        | 2,175      |                   | $          | 1,251 |   |

 

**10.  DISCONTINUEDOPERATIONS**

 

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

 

The following tablesummarizes the revenue and expense information for the properties classified asdiscontinued operations for the three and six months ended June 30, 2009 (inthousands):

 

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| ** **                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**   | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                          | ** ** | **June 30, 2009** | ** ** | **June 30, 2009** | ** ** |
|                                                |       |                   |       |                   |       |
| REVENUES                                            |       |                   |       |                   |       |
| Rental  income                                      |       | $                      | 2,584      |                   | $          | 5,292 |   |
| Other  property related income                      |       | 211                    |       | 391                    |       |
| Total  revenues                                     |       | 2,795                  |       | 5,683                  |       |
|                                                |       |                   |       |                   |       |
| OPERATING EXPENSES                                  |       |                   |       |                   |       |
| Property  operating expenses                        |       | 1,088                  |       | 1,987                  |       |
| Depreciation                                        |       | 932                    |       | 1,892                  |       |
| Total  operating expenses                           |       | 2,020                  |       | 3,879                  |       |
|                                                |       |                   |       |                   |       |
| INCOME FROM  DISCONTINUED OPERATIONS                |       | 775                    |       | 1,804                  |       |
|                                                |       |                   |       |                   |       |
| Net  gain on disposition of discontinued operations |       | 2,120                  |       | 2,622                  |       |
| Income  from discontinued operations                |       | $                      | 2,895      |                   | $          | 4,426 |   |

 

**11.  PROFORMA FINANCIAL INFORMATION**

 

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

 

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

 

The following tablesummarizes, on a pro forma basis, our consolidated results of operations forthe six months ended June 30, 2010 and 2009 based on the assumptionsdescribed above:

 
| ** **                        | ** ** | **Six Months Ended June 30,**         | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|
| ** **                        | ** ** | **2010**                                   | ** ** | **2009** | ** ** |
| ** **                        | ** ** | **(in  thousands, except per share data)** | ** ** |
|                              |       |                                       |       |   |   |
| Pro  forma revenue                |       | $                                          | 109,046    |   | $ | 110,979 |   |
| Pro  forma net loss               |       | $                                          | (8,158     | ) | $ | (4,981 | ) |
| Net  loss per common share        |       |                                       |       |   |   |
| Basic  and diluted - as reported  |       | $                                          | (0.09      | ) | $ | (0.16 | ) |
| Basic  and diluted - as pro forma |       | $                                          | (0.09      | ) | $ | (0.16 | ) |

 

**12.  COMPREHENSIVEINCOME (LOSS)**

** **
| ** **                                              | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                              | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                              | ** ** | **(in thousands)**                   | ** ** | **(in thousands)**                 | ** ** |
| NET  LOSS                                               |       | $                                    | (4,389     | )                                  | $          | (3,086 | ) | $ | (7,581 | ) | $ | (5,372 | ) |
| Other  comprehensive income (loss):                     |       |                                 |       |                               |       |   |   |   |   |
| Unrealized  gain on derivative financial instruments    |       | —                               |       | 1,821                              |       | — |   | 2,915 |   |
| Unrealized  gain (loss) on foreign currency translation |       | (52                                  | )          | 501                                |       | (249 | ) | 769 |   |
| COMPREHENSIVE  LOSS                                     |       | $                                    | (4,441     | )                                  | $          | (764 | ) | $ | (7,830 | ) | $ | (1,688 | ) |

 

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

 

*Thefollowing discussion should be read in conjunction with the financialstatements**and notesthereto appearing elsewhere in this report. The Company makes certain**statementsin this section that are forward-looking statements within the meaning of**the federal securities laws.  For a complete discussion of forward-lookingstatements,**see the section inthis 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 subsequentquarterly reports.*

 

**Overview**

 

The Company is an integratedself-storage real estate company, which means that it has in-house capabilitiesin the operation, design, development, leasing, management and acquisition ofself-storage facilities.  The Company haselected to be taxed as a REIT for federal tax purposes.  As of June 30, 2010 and December 31,2009, the Company owned 367 self-storage facilities that contain approximately23.7 million rentable square feet.  Inaddition, as of June 30, 2010, the Company managed 114 properties forthird parties bringing the total number of properties which it owned and/ormanaged to 481.

 

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

 

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

 

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

 

In the future, the Companyintends to focus on internal growth opportunities and selectively pursuingtargeted acquisitions and developments of self-storage facilities.  We intend to incur additional debt inconnection with any such future acquisitions or developments.

 

The Company has onereportable operating segment: we own, operate, develop, manage, and acquireself-storage facilities.

 

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

 

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**Summary ofCritical Accounting Policies and Estimates**

 

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

 

***Self-Storage Facilities***

 

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

 

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

 

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

 

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

 

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

 

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

 

***Revenue Recognition***

 

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

 

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

 

The Company recognizes gainson disposition of properties only upon closing in accordance with the guidanceon sales of real estate.  Paymentsreceived from purchasers prior to closing are recorded as deposits.  Profit on real estate sold is recognizedusing the full accrual method upon closing when the collectability of the salesprice is reasonably assured and the Company is not obligated to performsignificant activities after the sale. Profit may be deferred in whole or part until the sale meets therequirements of profit recognition on sales under this guidance.

 

***Share-Based Payments***

 

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

 

***Noncontrolling Interests***

 

Noncontrolling interests arethe portion of equity (net assets) in a subsidiary not attributable, directlyor indirectly, to a parent.  Theownership interests in the subsidiary that are held by owners other than theparent are noncontrolling interests. Noncontrolling interests are reported on the consolidated balance sheetswithin equity, separately from the Company’s equity.  On the consolidated statements of operations,revenues, expenses and net income or loss related to these noncontrollinginterests is excluded from net income or loss attributable to the Company.  Presentation of consolidated equity activityis included for both quarterly and annual financial statements, includingbeginning 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.

 

**Recent Accounting Pronouncements**

 

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

 

TheFASB issued authoritative guidance on accountingfor transfers of financial assets**inJune 2009, which was adopted on a prospective basis beginning January 1,2010.  The guidance requires entities toprovide more information regarding sales of securitized financial assets 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 ofOperations**

 

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

 

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***Acquisitionand Development Activities***

 

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

 
| ** **                        | ** ** | **Self-Storage  Facilities** | ** ** |
|-----------------------------------|------------|------------------------------|------------|
|                              |       |                         |       |
| Balance  - January 1, 2009   |       | 387                          |       |
| Facilities  acquired              |       | —                       |       |
| Facilities  sold                  |       | (20                          | )          |
| Balance  - December 31, 2009 |       | 367                          |       |
| Facilities  acquired              |       | —                       |       |
| Facilities  sold                  |       | —                       |       |
| Balance  - June 30, 2010     |       | 367                          |       |

 

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

 

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

 

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| ** **                                                  | ** ** | ** **                        | ** ** | ** **     | ** ** | ** **       | ** ** | ** **          | ** ** | **Non Same-Store** | ** ** | **Other/** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------|------------|----------------|------------|------------------|------------|---------------------|------------|--------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                  | ** ** | **Same Store Property Portfolio** | ** ** | **Properties** | ** ** | **Eliminations** | ** ** | **Total Portfolio** | ** ** |
| ** **                                                  | ** ** | **(dolloars in thousands)**       | ** ** |
| ** **                                                  | ** ** | ** **                        | ** ** | ** **     | ** ** | **Increase/**    | ** ** | **%**               | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase/** | ** ** | ** ** | ** ** |
| ** **                                                  | ** ** | **2010**                          | ** ** | **2009**       | ** ** | **(Decrease)**   | ** ** | **Change**          | ** ** | **2010**           | ** ** | **2009**   | ** ** | **2010**   | ** ** | **2009**   | ** ** | **2010**   | ** ** | **2009**   | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| REVENUES:                                                   |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |
| Rental income                                               |       | $                                 | 49,269     |           | $          | 49,672           |       | $                   | (403       | )                  | -1         | %          | $          | 296        |       | $          | 135        |       | $          | (100       | )          | $ | — |   | $ | 49,465 |   | $ | 49,807 |   | $ | (342 | ) | -1 | % |
| Other property related  income                              |       | 4,467                             |       | 4,393          |       | 74               |       | 2                   | %          | 235                |       | 87         |       | —     |       | —     |       | 4,702      |       | 4,480      |       | 222 |   | 5 | % |
| Property management fee  income                             |       | —                            |       | —         |       | —           |       | 0                   | %          | —             |       | —     |       | 590        |       | —     |       | 590        |       | —     |       | 590 |   | 100 | % |
| Total revenues                                              |       | 53,736                            |       | 54,065         |       | (329             | )          | -1                  | %          | 531                |       | 222        |       | 490        |       | —     |       | 54,757     |       | 54,287     |       | 470 |   | 1 | % |
| OPERATING EXPENSES:                                         |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |
| Property operating  expenses                                |       | 21,838                            |       | 22,834         |       | (996             | )          | -4                  | %          | 463                |       | 101        |       | 2,120      |       | 1,985      |       | 24,421     |       | 24,920     |       | (499 | ) | -2 | % |
| NET OPERATING INCOME:                                       |       | 31,898                            |       | 31,231         |       | 667              |       | 2                   | %          | 68                 |       | 121        |       | (1,630     | )          | (1,985     | )          | 30,336     |       | 29,367     |       | 969 |   | 3 | % |
|                                                        |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |
| Depreciation and  amortization                              |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | 16,363     |       | 17,756     |       | (1,393 | ) | -8 | % |
| General and  administrative                                 |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | 6,844      |       | 5,628      |       | 1,216 |   | 22 | % |
| Subtotal                                                    |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | 23,207     |       | 23,384     |       | (177 | ) | -1 | % |
| Operating income                                            |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | 7,129      |       | 5,983      |       | 1,146 |   | 19 | % |
|                                                        |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |
| Other Income (Expense):                                     |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |
| Interest:                                                   |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |
| Interest expense on  loans                                  |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | (9,625     | )          | (11,473    | )          | 1,848 |   | -16 | % |
| Loan procurement  amortization expense                      |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | (1,620     | )          | (545       | )          | (1,075 | ) | 197 | % |
| Interest income                                             |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | 62         |       | 55         |       | 7 |   | 13 | % |
| Acquisition related  costs                                  |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | (300       | )          | —     |       | (300 | ) | -100 | % |
| Other                                                       |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | (35        | )          | (1         | )          | (34 | ) | 3400 | % |
| Total other expense                                         |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | (11,518    | )          | (11,964    | )          | 446 |   | -4 | % |
|                                                        |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |
| LOSS FROM CONTINUING OPERATIONS                             |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | (4,389     | )          | (5,981     | )          | 1,592 |   | -27 | % |
| DISCONTINUED OPERATIONS                                     |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |
| Income from discontinued  operations                        |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | —     |       | 775        |       | (775 | ) | -100 | % |
| Net gain on disposition  of discontinued operations         |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | —     |       | 2,120      |       | (2,120 | ) | -100 | % |
| Total discontinued  operations                              |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | —     |       | 2,895      |       | (2,895 | ) | -100 | % |
| NET LOSS                                                    |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | $          | (4,389     | )          | $          | (3,086 | ) | $ | (1,303 | ) | 42 | % |
| NET LOSS (INCOME)  ATTRIBUTABLE TO NONCONTROLLING INTERESTS |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |
| Noncontrolling interests  in the Operating Partnership      |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | 233        |       | 242        |       | (9 | ) | -4 | % |
| Noncontrolling interests  in subsidiaries                   |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | (365       | )          | —     |       | (365 | ) | -100 | % |
| NET LOSS ATTRIBUTABLE TO  THE COMPANY                       |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | $          | (4,521     | )          | $          | (2,844 | ) | $ | (1,677 | ) | 59 | % |
|                                                             |            |                                   |            |                |            |                  |            |                     |            |                    |            |            |            |            |            |            |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**TotalPortfolio**

 

*TotalRevenues*

 

Rental income decreased from$49.8 million for the three months ended June 30, 2009 to $49.5 millionfor the three months ended June 30, 2010, a decrease of $0.3 million.  This decrease is primarily attributable to adecrease of rental income from the same-store properties of $0.4 million duringthe three months ended June 30, 2010 as compared to the three months endedJune 30, 2010, offset by an increase in rental income of $0.1 million fromassets that do not meet the same-store criteria

 

Otherproperty related income increased from $4.5 million for the three months ended June 30,2009 to $4.7 million for the three months ended June 30, 2010, an increaseof $0.2 million, or 5%.  This increase isprimarily attributable to increased tenant insurance commissions andconvenience fee income across the portfolio of storage facilities during thesecond quarter 2010 as compared to the second quarter 2009.

 

Propertymanagement fee income increased to $0.6 million for the three months endedJune 30, 2010 from no such income for the three months ended June 30,2009, an increase of $0.6 million, or 100%. This increase is primarilyattributable to a $0.6 million increase in management fees related to theCompany’s managed properties.

 

*TotalOperating Expenses*

 

Property operating expensesdecreased from $24.9 million for the three months ended June 30, 2009 to$24.4 million for the three months ended June 30, 2010, a decrease of$0.5 million, or 2%.  This decreaseis primarily attributable to a $1.1 million decrease in

 

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real estate tax expense,offset by an increase in other property related expense of $0.5 million duringthe 2010 period as compared to the 2009 period.

 

Depreciation andamortization decreased from $17.8 million for the three months ended June 30,2009 to $16.4 million for the three months ended June 30, 2010, adecrease of $1.4 million, or 8%. This decrease is primarily attributable to depreciation expenserecognized in the 2009 period related to assets that became fully depreciatedduring 2009, with no similar activity on these fully depreciated assets in the2010 period.

 

General and administrativeexpenses increased from $5.6 million for the three months ended June 30,2009 to $6.8 million for the three months ended June 30, 2010, an increaseof $1.2 million, or 22%.  Thisincrease is primarily attributable to $1.0 million in professional fee andcontract related costs during the 2010 period that the Company did not incurduring the 2009 period, and a $0.2 million increase in legal expenses incurredduring 2010 as compared to 2009.

 

*TotalOther Expenses*

 

Interestexpense decreased from $11.5 million for the three months ended June 30,2009 to $9.6 million for the three months ended June 30, 2010, adecrease of $1.9 million, or 16%. The decrease is attributable to the payoffs of the $9.4 million YSI 26loan and the $6.0 million YSI 4 loan during the second quarter of 2010, andlower outstanding borrowings on the credit facility during the 2010 period ascompared to the 2009 period resulting in an overall decrease in interestexpense.

 

*DiscontinuedOperations*

 

Incomefrom discontinued operations decreased from $0.8 million for the three monthsended June 30, 2009 to no such income for the three months ended June 30,2010.  The income from discontinuedoperations in 2009 represents the income during the three months ended June 30,2009, from properties sold throughout 2009. Net gains on disposition of discontinued operations decreased from $2.1million for the three months ended June 30, 2009 to no such gains for thethree months ended June 30, 2010 as a result of the sale of two assetsduring the three months ended June 30, 2009 compared to no asset salesduring the 2010 period.

 

**Same-StoreProperty Portfolio**

 

Same-store revenuesdecreased from $54.1 million for the three months ended June 30, 2009to $53.7 million for the three months ended June 30, 2010, a decreaseof $0.4 million, or 1%.  Thedecrease is primarily attributable a 2% decrease in realized annual rent peroccupied square foot on the same-store portfolio in the 2010 period as comparedto the 2009 period.  Same-store propertyoperating expenses decreased from $22.8 million for the three months endedJune 30, 2009 to $21.8 million for the three months ended June 30,2010, a decrease of $1.0 million or 4%. The decrease is primarily attributable to a $0.6 million decrease inreal estate tax expense, a $0.3 million decrease in utility expenses and a $0.1million decrease in repairs and maintenance expenses during the 2010 period ascompared to the 2009 period.

 

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***Comparison of Operating Results for the SixMonths Ended June 30, 2010 and June 30, 2009***

 
| ** **                                                  | ** ** | ** **                        | ** ** | ** **     | ** ** | ** **       | ** ** | ** **          | ** ** | **Non Same-Store** | ** ** | **Other/** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------|------------|----------------|------------|------------------|------------|---------------------|------------|--------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                  | ** ** | **Same Store Property Portfolio** | ** ** | **Properties** | ** ** | **Eliminations** | ** ** | **Total Portfolio** | ** ** |
| ** **                                                  | ** ** | **(dolloars in thousands)**       | ** ** |
| ** **                                                  | ** ** | ** **                        | ** ** | ** **     | ** ** | **Increase/**    | ** ** | **%**               | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase/** | ** ** | ** ** | ** ** |
| ** **                                                  | ** ** | **2010**                          | ** ** | **2009**       | ** ** | **(Decrease)**   | ** ** | **Change**          | ** ** | **2010**           | ** ** | **2009**   | ** ** | **2010**   | ** ** | **2009**   | ** ** | **2010**   | ** ** | **2009**   | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| REVENUES:                                                   |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |
| Rental income                                               |       | $                                 | 97,987     |           | $          | 100,462          |       | $                   | (2,475     | )                  | -2         | %          | $          | 574        |       | $          | 590        |       | $          | (100       | )          | $ | — |   | $ | 98,461 |   | $ | 101,052 |   | $ | (2,591 | ) | -3 | % |
| Other property related  income                              |       | 8,408                             |       | 8,014          |       | 394              |       | 5                   | %          | 372                |       | 156        |       | —     |       | —     |       | 8,780      |       | 8,170      |       | 610 |   | 7 | % |
| Property management fee  income                             |       | —                            |       | —         |       | —           |       | 0                   | %          | —             |       | —     |       | 634        |       | —     |       | 634        |       | —     |       | 634 |   | 100 | % |
| Total revenues                                              |       | 106,395                           |       | 108,476        |       | (2,081           | )          | -2                  | %          | 946                |       | 746        |       | 534        |       | —     |       | 107,875    |       | 109,222    |       | (1,347 | ) | -1 | % |
| OPERATING EXPENSES:                                         |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |
| Property operating  expenses                                |       | 42,814                            |       | 44,382         |       | (1,568           | )          | -4                  | %          | 744                |       | 430        |       | 3,832      |       | 3,756      |       | 47,390     |       | 48,568     |       | (1,178 | ) | -2 | % |
| NET OPERATING INCOME:                                       |       | 63,581                            |       | 64,094         |       | (513             | )          | -1                  | %          | 202                |       | 316        |       | (3,298     | )          | (3,756     | )          | 60,485     |       | 60,654     |       | (169 | ) | 0 | % |
|                                                        |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |
| Depreciation and  amortization                              |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | 32,741     |       | 35,583     |       | (2,842 | ) | -8 | % |
| General and  administrative                                 |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | 12,711     |       | 11,102     |       | 1,609 |   | 14 | % |
| Subtotal                                                    |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | 45,452     |       | 46,685     |       | (1,233 | ) | -3 | % |
| Operating income                                            |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | 15,033     |       | 13,969     |       | 1,064 |   | 8 | % |
|                                                        |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |
| Other Income (Expense):                                     |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |
| Interest:                                                   |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |
| Interest expense on  loans                                  |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | (19,676    | )          | (22,826    | )          | 3,150 |   | -14 | % |
| Loan procurement  amortization expense                      |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | (3,159     | )          | (1,028     | )          | (2,131 | ) | 207 | % |
| Interest income                                             |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | 597        |       | 100        |       | 497 |   | 497 | % |
| Acquisition related  costs                                  |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | (300       | )          | —     |       | (300 | ) | -100 | % |
| Other                                                       |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | (76        | )          | (13        | )          | (63 | ) | 485 | % |
| Total other expense                                         |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | (22,614    | )          | (23,767    | )          | 1,153 |   | -5 | % |
|                                                        |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |
| LOSS FROM CONTINUING  OPERATIONS                            |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | (7,581     | )          | (9,798     | )          | 2,217 |   | -23 | % |
| DISCONTINUED OPERATIONS                                     |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |
| Income from discontinued  operations                        |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | —     |       | 1,804      |       | (1,804 | ) | -100 | % |
| Net gain on disposition  of discontinued operations         |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | —     |       | 2,622      |       | (2,622 | ) | -100 | % |
| Total discontinued  operations                              |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | —     |       | 4,426      |       | (4,426 | ) | -100 | % |
| NET LOSS                                                    |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | $          | (7,581     | )          | $          | (5,372 | ) | $ | (2,209 | ) | 41 | % |
| NET LOSS (INCOME)  ATTRIBUTABLE TO NONCONTROLLING INTERESTS |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       |       |       |       |       |   |   |   |   |
| Noncontrolling interests  in the Operating Partnership      |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | 411        |       | 419        |       | (8 | ) | -2 | % |
| Noncontrolling interests  in subsidiaries                   |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | (826       | )          | —     |       | (826 | ) | -100 | % |
| NET LOSS ATTRIBUTABLE TO  THE COMPANY                       |       |                              |       |           |       |             |       |                |       |               |       |       |       |       |       |       |       | $          | (7,996     | )          | $          | (4,953 | ) | $ | (3,043 | ) | 61 | % |
|                                                             |            |                                   |            |                |            |                  |            |                     |            |                    |            |            |            |            |            |            |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Total Revenues*

 

Rentalincome decreased from $101.1 million for the six months endedJune 30, 2009 to $98.5 million for the six months ended June 30,2010, a decrease of $2.6 million, or 3%. This decrease is primarily attributable to a 2% decrease in realizedannual rent per square foot from the same-store properties during the sixmonths ended June 30, 2010 as compared to the six months endedJune 30, 2009.

 

Otherproperty related income increased from $8.2 million for the six monthsended June 30, 2009 to $8.8 million for the six months endedJune 30, 2010, an increase of $0.6 million, or 7%. This increase isprimarily attributable to an increase of $0.5 million in tenant insurancecommissions and convenience fee income across the portfolio of storagefacilities during the six months ended June 30, 2010 as compared to thesix months ended June 30, 2009.

 

Propertymanagement fee income increased to $0.6 million for the six months endedJune 30, 2010 from no such income for the six months ended June 30,2009, an increase of $0.6 million, or 100%. This increase is primarilyattributable to a $0.6 million increase in management fees related to theCompany’s managed properties.

 

*Total Operating Expenses*

 

Propertyoperating expenses decreased from $48.6 million for the six months ended June 30,2009 to $47.4 million for the six months ended June 30, 2010, adecrease of $1.2 million, or 2%.  The decrease is primarily attributableto a decrease of $1.4 million in 

 

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realestate tax expense, offset by a $0.2 million increase in other property relatedexpenses during the 2010 period as compared to the 2009 period.

 

Depreciation andamortization decreased from $35.6 million for the six months endedJune 30, 2009 to $32.7 million for the six months ended June 30,2010, a decrease of $2.9 million, or 8%. This decrease is primarilyattributable to depreciation expense recognized in the 2009 period related toassets that became fully depreciated during 2009, with no similar activity onthese fully depreciated assets in the 2010 period.

 

General and administrativeexpenses increased from $11.1 million for the six months ended June 30,2009 to $12.7 million for the six months ended June 30, 2010, an increaseof $1.6 million, or 14%.  Thisincrease is primarily attributable to $1.0 million in professional fee andcontract related costs incurred during the 2010 period that the Company did notincur during the 2009 period, and a $0.4 million increase in legal expense andrestricted share and option expense during 2010 as compared to 2009.

 

*Total Other Expenses*

 

Interestexpense decreased from $22.8 million for the six months endedJune 30, 2009 to $19.7 million for the six months ended June 30,2010, a decrease of $3.1 million, or 14%. The decrease is attributable tothe payoff of the $83.3 million YSI 1 loan during the first quarter of 2010,the payoffs of the $9.4 million YSI 26 loan and the $6.0 million YSI 4 loanduring the second 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*

 

Incomefrom discontinued operations decreased from $1.8 million for the six monthsended June 30, 2009 to no such income for the six months endedJune 30, 2010.  The income from discontinued operations in 2009represents the income during the six months ended June 30, 2009, fromproperties sold throughout 2009.  Netgains on disposition of discontinued operations decreased from $2.6 million forthe six months ended June 30, 2009 to no such gains for the six monthsended June 30, 2010 as a result of the sale of three assets during the sixmonths ended June 30, 2009 compared to no asset sales during the 2010period.

 

**Same-StoreProperty Portfolio**

 

Same-store revenuesdecreased from $108.5 million for the six months ended June 30, 2009to $106.4 million for the six months ended June 30, 2010, a decreaseof $2.1 million, or 2%.  Thedecrease is primarily attributable a 2% decrease in realized annual rent peroccupied square foot on the same-store portfolio in the 2010 period as comparedto the 2009 period.  Same-store propertyoperating expenses decreased from $44.4 million for the six months ended June 30,2009 to $42.8 million for the six months ended June 30, 2010, adecrease of $1.6 million or 4%.  Thedecrease is primarily attributable to a $0.6 million decrease in real estatetax expense, a $0.4 million decrease in utility expenses and a $0.5 milliondecrease in advertising expenses during the 2010 period as compared to the 2009period.

 

**Non-GAAP FinancialMeasures**

 

***NOI***

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

**Cash Flows**

 

***Comparison of the six months ended June 30, 2010 to the six monthsended June 30, 2009***

 

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

 
| ** **                            | ** ** | **Six Months Ended June 30,** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|------------------------------------|------------|------------|------------|
| ** **                            | ** ** | **2010**                           | ** ** | **2009**   | ** ** | **Change** | ** ** |
|                                  |       |                               |       |       |       |   |   |
| Net  cash flow provided by (used in): |       |                               |       |       |       |   |   |
| Operating  activities                 |       | $                                  | 27,438     |       | $          | 27,162 |   | $ | 276 |   |
| Investing  activities                 |       | $                                  | 12,332     |       | $          | 260 |   | $ | 12,072 |   |
| Financing  activities                 |       | $                                  | (110,661   | )          | $          | (29,509 | ) | $ | (81,152 | ) |

 

Cashflows provided by operating activities for the six months ended June 30,2010 and 2009 were $27.4 million and $27.2 million, respectively, an increaseof $0.2 million.  The increase primarilyrelates to a $0.6 million increase in the change in other liabilities as aresult of the timing of certain payments, offset by reduced levels of NOI of$0.1 million during the 2010 period as compared to the 2009 period.

 

Cashprovided by investing activities changed from $0.3 million in 2009 to$12.3 million in 2010, an increase of $12.0 million.  The increase primarily relates to cash receiptsof $19.9 million related to proceeds in 2010 from the repayment of notesreceivable that originated in conjunction with asset dispositions during 2009and a decrease in restricted cash of $5.0 million, offset by a decrease inproceeds from dispositions during 2010 of $11.2 million.

 

Cashused in financing activities increased from $29.5 million to $110.7 millionduring the six months ended June 30, 2009 and 2010, respectively.  The increase primarily relates to increasednet debt payoffs of $69.1 million and increased distributions paid toshareholders and non-controlling interests of $4.1 million during 2010 ascompared to 2009 due to additional outstanding shares during the 2010 period asa result of equity offered during 2009.

 

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**Issuance ofCommon Shares**

 

In April 2009, we commenced the sale of up to10 million common shares pursuant to a continuous offering program.  Pursuant to the program, we may sell sharesin amounts and at times to be determined by us. Actual sales will be determined by a variety of factors to be determinedby us, including market conditions, the trading price of our common shares anddeterminations by us of the appropriate sources of funding.  In connection with the offering program, weengaged a sales agent who receives compensation equal to up to three percent ofthe gross sales price per common share for any shares sold pursuant to theprogram.  During the three months ended June 30,2010 we sold 45,800 shares under the program at and average sales price of$8.30 per share resulting in net proceeds of $0.4 million.  We used the net proceeds for generalcorporate purposes.  From its inceptionin April 2009 through June 30, 2010, we have sold 2.5 million sharesunder this program at an average sales price of $4.13 per share resulting innet proceeds of $10.4 million.

 

**Liquidityand Capital Resources**

 

***Liquidity Overview***

 

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

 

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

 

Our short term liquidityneeds consist primarily of funds necessary to pay operating expenses associatedwith our facilities, refinancing of certain mortgage indebtedness, interestexpense and scheduled principal payments on debt, expected distributions tolimited partners and shareholders and recurring capital expenditures.  These liquidity needs will vary from year toyear, in some cases significantly.  Weexpect recurring capital expenditures remaining in fiscal year 2010 to beapproximately $4 million to $6 million. In addition, our currently scheduled principal payments on debt,including borrowings outstanding on the credit facility and secured term loans,are approximately $15.4 million during the remainder of 2010 and $90.5 millionin 2011.

 

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

 

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

 

Notwithstanding thediscussion above, we believe that, as a publicly traded REIT, we will haveaccess to multiple sources of capital to fund long term liquidity requirements,including the incurrence of additional debt and the issuance of additionalequity.  However, we cannot provide anyassurance that this will be the case. Our ability to incur additional debt is dependent on a number offactors, including our degree of leverage, the value of our assets andborrowing restrictions that may be imposed by lenders.  In addition, dislocations in the UnitedStates debt markets may significantly reduce the availability and increase thecost of long term debt capital, including conventional mortgage financing andcommercial mortgage-backed securities financing.  There can be no assurance that such capitalwill be readily available in the future. Our ability to access the equity capital markets is also dependent on anumber of factors, including general market conditions for REITs and marketperceptions about us.

 

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

 

Asof June 30, 2010, we had approximately $31.9 million in available cash andcash equivalents.  In addition, we hadapproximately $250.0 million of availability for borrowings under our securedrevolving 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 June 30, 2010, $200 million ofsecured term loan borrowings were outstanding under the secured creditfacility.  At June 30, 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 June 30, 2010, borrowingsunder the secured credit facility had a weighted average interest rate of 5.0%and the Company was in compliance with all covenants of the agreement.

 

Our ability to borrow andextend the maturity date under this secured credit facility and secured termloan will be subject to our ongoing compliance with the following financialcovenants, among others:

 

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

 

·         Minimum fixed charge coverage ratio of 1.45:1.0; and

 

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

 

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

 

We are currently incompliance with all of our covenants and anticipate being in compliance withall of our covenants through the duration of the term of the credit facilityand secured term loan.

 

The secured credit facilityreplaced the prior, three-year $450 million unsecured credit facility, whichwas entered into in November 2006, and consisted of $200 million in anunsecured term loan and $250 million in unsecured revolving loans.  Outstanding balances under of the unsecuredcredit 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.  The alternativebase interest rate was a fluctuating rate equal to the higher of the prime rateor the sum of the federal funds effective rate plus 50 basis points.  The applicable margin for the alternativebase rate varied from 0.00% to 0.50% depending on our leverage ratio.

 

**Off-BalanceSheet Arrangements**

 

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

 

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

 

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

 

**Market Risk**

 

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

 

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

 

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

 

Our financial instrumentsconsist of both fixed and variable rate debt. As of June 30, 2010, our consolidated debt consisted of $465.9million in fixed rate loans payable and $200.0 million in a variable ratesecured term loan.  All financialinstruments were entered into for other than trading purposes and the fairvalue of these financial instruments is referred to as the financialposition.  Changes in interest rates havedifferent impacts on the fixed and variable rate portions of our debtportfolio.  A change in interest rates onthe fixed portion of the debt portfolio impacts the financial instrumentposition, but has no impact on interest incurred or cash flows.  A change in interest rates on the variableportion of the debt portfolio impacts the interest incurred and cash flows, butdoes not impact the financial instrument position.

 

If market rates of intereston our variable rate debt increase or decrease by 1%, the change in annualinterest expense on our variable rate debt would not change future earnings andcash flows, as a 1% increase in LIBOR would not exceed the minimum LIBOR rateof 1.5% used to calculate interest expense in accordance with the securedcredit facility.

 

If market rates of interestincrease by 1%, the fair value of our outstanding fixed-rate mortgage debtwould decrease by approximately $11.3 million. If market rates of interest decrease by 1%, the fair value of ouroutstanding fixed-rate mortgage debt would increase by approximately $11.8million.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls and Procedures**

 

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

 

**Changes inInternal Controls Over Financial Reporting**

 

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

 

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**PART II.OTHER INFORMATION**

 

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

 

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

 
| ** **                  | ** ** | **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)** | ** ** |
|-----------------------------|------------|--------------------------------------------------|------------|--------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
| April 1- April 30 |       | —                                           |       | —                               |       | N/A                                                                                               |       | 3,000,000                                                                                          |       |
| May 1- May 31     |       | —                                           |       | —                               |       | N/A                                                                                               |       | 3,000,000                                                                                          |       |
| June 1- June 30   |       | 2,798                                            |       | $                                    | 7.54       |                                                                                              | N/A        |                                                                                               | 3,000,000  |   |
|                        |       |                                             |       |                                 |       |                                                                                              |       |                                                                                               |       |
| Total                       |       | 2,798                                            |       |                                 |       |                                                                                              |       | 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 Company announced that the Board of Trustees approved a sharerepurchase program for up to 3.0 million of the Company’s outstanding commonshares.  Unless terminated earlier byresolution of the Board of Trustees, the program will expire when the number ofauthorized shares has been repurchased. The Company has made no repurchases under this program.

 

**ITEM5.      OTHER INFORMATION**

 

Ourdiscussion of federal income tax considerations in Exhibit 99.1 attachedhereto, which is incorporated herein by reference, updates our discussion offederal income tax considerations in our previous SEC filings, including in Exhibit 99.1to our Annual Report on Form 10-K for the year ended December 31,2009.  Our updated discussion addressesrecently enacted tax law changes.  Wehave also attached hereto as Exhibit 8.1, which is incorporated herein byreference, the legal opinion of Pepper Hamilton LLP as to federal income taxmatters summarized in Exhibit 99.1.

 

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**ITEM 6. EXHIBITS**

 
| **Exhibit No.** | ** ** | ** **                                                                                                                                                                                                                                                         |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                         |
| 8.1                  |       | Opinion  of Pepper Hamilton LLP as to certain tax matters                                                                                                                                                                                                          |
|                 |       |                                                                                                                                                                                                                                                               |
| 10.1*                |       | Amended  and Restated U-Store-It Trust 2007 Equity Incentive Plan, incorporated by  reference to the Company’s Current Report on Form 8-K, filed with the  SEC on June 4, 2010                                                                      |
|                 |       |                                                                                                                                                                                                                                                               |
| 10.2*                |       | Amended  and Restated Executive Employment Agreement, dated June 29, 2010, by and  between U-Store-It Trust and Dean Jernigan, incorporated by reference to the  Company’s Current Report on Form 8-K, filed with the SEC on July 2,  2010     |
|                 |       |                                                                                                                                                                                                                                                               |
| 10.3*                |       | Amended  and Restated Executive Employment Agreement, dated June 29, 2010, by and  between U-Store-It Trust and Timothy M. Martin, incorporated by reference to  the Company’s Current Report on Form 8-K, filed with the SEC on  July 2, 2010 |
|                 |       |                                                                                                                                                                                                                                                               |
| 10.4*                |       | Amended  and Restated Non-Competition Agreement, dated June 29, 2010, by and  between U-Store-It Trust and Dean Jernigan, incorporated by reference to the  Company’s Current Report on Form 8-K, filed with the SEC on July 2,  2010          |
|                 |       |                                                                                                                                                                                                                                                               |
| 10.5*                |       | Amended  and Restated Non-Competition Agreement, dated June 29, 2010, by and  between U-Store-It Trust and Timothy M. Martin, incorporated by reference to  the Company’s Current Report on Form 8-K, filed with the SEC on  July 2, 2010      |
|                 |       |                                                                                                                                                                                                                                                               |
| 12.1                 |       | Statement  regarding Computation of Ratios of U-Store-It Trust.                                                                                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                               |
| 23.1                 |       | Consent  of Pepper Hamilton LLP (contained in Exhibit 8.1)                                                                                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                               |
| 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)                                                   |
|                 |       |                                                                                                                                                                                                                                                               |
| 99.1                 |       | Material  Tax Considerations                                                                                                                                                                                                                                       |

 

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* Denotes a contract or compensatory plan, contractor arrangement

 

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SIGNATURES OF REGISTRANT

 

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

 
|                       | U-STORE-IT TRUST                            |
|----------------------------|---------------------------------------------|
|                       | (Registrant)                                |
|                       |                                        |
|                       |                                        |
| Date:  August 6, 2010 | By:                                         | /s/  Dean Jernigan |
|                       | Dean  Jernigan, Chief Executive Officer     |
|                       | (Principal  Executive Officer)              |
|                       |                                        |
|                       |                                        |
| Date:  August 6, 2010 | By:                                         | /s/  Timothy M. Martin |
|                       | Timothy  M. Martin, Chief Financial Officer |
|                       | (Principal  Financial Officer)              |

 

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