CubeSmart - Annual Report: 2009 (Form 10-K)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-K

 

x      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2009

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from            to            

 

Commission file number 001-32324

 

U-STORE-IT TRUST

(Exact Name of Registrant as Specified in Its Charter)

 

 

Registrant’s telephone number, including area code (610) 293-5700

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES o NO x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  YES o NO x

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.  YES x NO o

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

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

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o NO x

 

As of June 30, 2009, the last business day of the registrant’s most recently completed second quarter, the aggregate market value of common shares held by non-affiliates of the registrant was $294,674,470.

 

As of February 26, 2010 the number of common shares of the registrant outstanding was 92,864,448.

 

Documents incorporated by reference: Portions of the Proxy Statement for the 2010 Annual Meeting of Shareholders of the Registrant to be filed subsequently with the SEC are incorporated by reference into Part III of this report.

 

 

Table of Contents

 

TABLE OF CONTENTS

 

PART I		3
Item 1.	Business	4
Item 1A.	Risk Factors	9
Item 1B.	Unresolved Staff Comments	21
Item 2.	Properties	22
Item 3.	Legal Proceedings	30
Item 4.	Reserved	30
PART II		31
Item 5.	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	31
Item 6.	Selected Financial Data	34
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	52
Item 8.	Financial Statements and Supplementary Data	52
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	52
Item 9A.	Controls and Procedures	52
Item 9B.	Other Information	53
PART III		53
Item 10.	Trustees, Executive Officers and Corporate Governance	53
Item 11.	Executive Compensation	53
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	53
Item 13.	Certain Relationships and Related Transactions, and Trustee Independence	54
Item 14.	Principal Accountant Fees and Services	54
PART IV		54
Item 15.	Exhibits and Financial Statement Schedules	54

 

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PART I

 

Forward-Looking Statements

 

This Annual Report on Form 10-K and other statements and information publicly disseminated by U-Store-It Trust (“we,” “us,” “our” or the “Company”), contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such statements are based on estimates, assumptions and expectations that may not be realized and are inherently subject to risks and uncertainties, many of which we cannot predict with accuracy and some of which we might not even anticipate. Although we believe the estimates, assumptions and expectations reflected in these forward-looking statements are reasonable, our actual performance may differ materially from the results expressed or implied by the forward-looking statements.  Risks, uncertainties and other factors that might cause such differences, some of which could be material, include, but are not limited to:

 

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

 

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

 

·         the execution of our business plan;

 

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

 

·         increases in interest rates and operating costs;

 

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

 

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

 

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

 

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

 

·         changes in real estate and zoning laws or regulations;

 

·         risks related to natural disasters;

 

·         potential environmental and other liabilities; and

 

·         other risks identified in Item 1A of this Annual Report on Form 10-K and, from time to time, in other reports we file with the Securities and Exchange Commission (the “SEC”) or in other documents that we publicly disseminate.

 

Given these uncertainties and the other risks identified elsewhere in this Annual Report on Form 10-K, we caution readers not to place undue reliance on forward-looking statements.  We undertake no obligation to publicly update or revise these forward-looking statements, whether as a result of new information, future events or otherwise except as may be required by securities laws.

 

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ITEM 1.  BUSINESS

 

Overview

 

We are a self-administered and self-managed real estate company focused primarily on the ownership, operation, acquisition and development of self-storage facilities in the United States.

 

As of December 31, 2009, we owned 367 self-storage facilities located in 26 states and in the District of Columbia containing an aggregate of approximately 23.7 million rentable square feet.  As of December 31, 2009, approximately 75.2% of the rentable square footage at our facilities was leased to approximately 150,000 tenants, and no single tenant represented a significant concentration of our revenues.

 

Our self-storage facilities are designed to offer affordable, easily-accessible and secure storage space for our residential and commercial customers. Our customers rent storage units for their exclusive use, typically on a month-to-month basis. Additionally, some of our facilities offer outside storage areas for vehicles and boats. Our facilities are specifically designed to accommodate both residential and commercial customers, with features such as security systems and wide aisles and load-bearing capabilities for large truck access. All of our facilities have an on-site manager during business hours, and 249, or approximately 68%, of our facilities have a manager who resides in an apartment at the facility. Our customers can access their storage units during business hours, and some of our facilities provide customers with 24-hour access through computer controlled access systems. Our goal is to provide customers with the highest standard of facilities and service in the industry. To that end, approximately 68% of our facilities include climate controlled units, compared to the national average of 49% reported by the 2009 Self-Storage Almanac.

 

We were formed in July 2004 as a Maryland REIT.  We own our assets and conduct our business through our operating partnership, U-Store-It, L.P. (our “Operating Partnership”), and its subsidiaries.  We control the Operating Partnership as its sole general partner and, as of December 31, 2009, we owned an approximately 95.1% interest in the Operating Partnership.  Our Operating Partnership has been engaged in virtually all aspects of the self-storage business, including the development, acquisition, ownership and operation of self-storage facilities.

 

Acquisition and Disposition Activity

 

As of December 31, 2009 and 2008, we owned 367 and 387 facilities, respectively, that contained an aggregate of 23.7 million and 25.0 million rentable square feet with occupancy rates of 75.2% and 78.9%, respectively.  As of December 31, 2009 we had facilities in the District of Columbia and the following 26 states: Alabama, Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois, Indiana, Louisiana, Maryland, Massachusetts, Michigan, Mississippi, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Utah, Virginia and Wisconsin.   A complete listing of, and additional information about, our facilities is included in Item 2 of this Annual Report on Form 10-K.  The following is a summary of our 2009 and 2008 acquisition and disposition activity:

 

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Facility/Portfolio		Location		Transaction Date		Number of Facilities		Purchase / Sales Price (in thousands)
2009 Dispositions:
68th Street Asset		Miami, FL		January 2009		1		$	2,973
Albuquerque, NM Asset		Albuquerque, NM		April 2009		1		2,825
S. Palmetto Asset		Ontario, CA		June 2009		1		5,925
Hotel Circle Asset		Albuquerque, NM		July 2009		1		3,600
Jersey City Asset		Jersey City, NJ		August 2009		1		11,625
Dale Mabry Asset		Tampa, FL		August 2009		1		2,800
Winner Assets		Multiple locations in CO		September 2009		6		17,300
Baton Rouge Asset (Eminent Domain)		Baton Rouge, LA		September 2009		(b)		1,918
North H Street Asset (Eminent Domain)		San Bernardino, CA		September 2009		1		(c)
Boulder Assets (a)		Boulder, CO		September 2009		4		32,000
Winner Assets		Multiple locations in CO		October 2009		2		6,600
Brecksville Asset		Brecksville, OH		November 2009		1		3,300
						20		$	90,866
2008 Acquisitions:
Uptown Asset		Washington, DC		January 2008		1		$	13,300
2008 Dispositions:
77th Street Asset		Miami, FL		March 2008		1		$	2,175
Leesburg Asset		Leesburg, FL		March 2008		1		2,400
Lakeland Asset		Lakeland, FL		April 2008		1		2,050
Endicott Asset		Union, NY		May 2008		1		2,250
Linden Asset		Linden, NJ		June 2008		1		2,825
Baton Rouge/Prairieville Assets		Multiple locations in LA		June 2008		2		5,400
Churchill Assets		Multiple locations in MS		August 2008		4		8,333
Biloxi/Gulf Breeze Assets		Multiple locations in MS/FL		September 2008		2		10,760
Deland Asset		Deland, FL		September 2008		1		2,780
Mobile Assets		Mobile, AL		September 2008		2		6,140
Hudson Assets		Hudson, OH		October 2008		2		2,640
Stuart/Vero Beach Assets		Multiple locations in FL		October 2008		2		4,550
Skipper Road Assets		Multiple locations in FL		November 2008		2		5,020
Waterway Asset		Miami, FL		December 2008		1		4,635
						23		$	61,958

 

(a)          We provided $17.6 million in seller financing to the buyer as part of the Boulder Assets disposition.

(b)         Approximately one third of the Baton Rouge Asset was taken in conjunction with eminent domain proceedings.  We continue to own and operate the remaining two thirds of the asset and include the asset in our total portfolio property count.

(c)          The entirety of the North H Street Asset was taken in conjunction with eminent domain proceedings and we have removed this asset from our total portfolio asset count.  We expect to finalize compensatory terms with discussions with the State of California by the fourth quarter of 2010.

 

The following table summarizes the change in number of our self-storage facilities from January 1, 2008 through December 31, 2009:

 

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		2009		2008
Balance - Beginning of year		387		409
Facilities acquired		—		1
Facilities sold/ eminent domain		(20	)	(23	)
Balance - End of year		367		387

 

Financing Activities

 

The following summarizes certain financing activities during the year ended December 31, 2009:

 

·      New Credit Facility.  On December 8, 2009, we and our Operating Partnership entered into a three-year, $450 million secured credit facility with Wells Fargo Securities, LLC and Banc of America Securities LLC, as joint lead arrangers.  Our new credit facility is comprised of a $200 million secured term loan and a $250 million secured revolving credit facility.  Our new credit facility replaced our previous $450 million unsecured credit facility.  As of December 31, 2009, $200 million was outstanding under the term loan portion of the new credit facility and no amounts were outstanding under the revolving portion of the new credit facility.  The interest rate under the credit facility depends on our leverage levels and ranges from 3.25% to 4.00% over LIBOR, with a LIBOR floor of 1.5%. Amounts that we repay under the term loan may not be re-borrowed.  We, together with our wholly-owned subsidiaries, USI II, LLC and YSI XXIX, L.P., are guarantors under the new credit facility.  The new credit facility contains customary affirmative and negative covenants, including restrictions on distributions to our shareholders, and financial covenants, including liquidity and net worth requirements.  Our ability to borrow from time to time under the revolver is subject to our ongoing compliance with these covenants.

 

·      Small Mortgages — Regional Bank Financings.  During 2009, we obtained an aggregate of $119.8 million in secured financings with 17 community and regional banks.  These loans, which range in size from $1.1 million to $25.6 million, are secured by mortgages on 45 of our properties.  The weighted average maturity of these loans at December 31, 2009 was 6.6 years and the weighted average interest rate of the loans is 7.01%.  These loans contain customary affirmative, negative and financial covenants.  We or the Operating Partnership are guarantors under each of these loans for customary non-recourse carve-outs.

 

·      Joint Venture.  On August 13, 2009, we consummated a joint venture with an affiliate of Heitman, LLC. We contributed 22 properties to this joint venture, which are located in eight states, and received a distribution of approximately $51 million in cash at closing and a 50% interest in this joint venture, which we consolidate.  We used the proceeds distributed to us by the joint venture to reduce the outstanding balance under our prior unsecured credit facility and for general corporate purposes.  We provide day-to-day management services for the properties of the joint venture in exchange for a market-rate management fee.

 

·      Public Offering.  On August 19, 2009, we sold 32.2 million common shares of beneficial interest for net proceeds of approximately $161.9 million.  Additionally, during 2009 we sold 2.5 million shares in conjunction with our at the market program for net proceeds of approximately $9.7 million.  We used the net proceeds from these issuances to repay existing indebtedness, including under our prior unsecured credit facility, and for general corporate purposes.

 

Business Strategy

 

Our business strategy consists of several elements:

 

·         Maximize cash flow from our facilities — Our operating strategy focuses on maximizing sustainable rents at our facilities while achieving and sustaining occupancy targets. We utilize our operating systems and experienced personnel to manage the balance between rental rates, discounts, and physical occupancy with an objective of maximizing our rental revenue.

 

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·         Acquire facilities within targeted markets — Although our business plan does not contemplate significant facilities acquisitions in 2010, we expect to continue selective acquisitions in markets that we believe have high barriers to entry, strong demographic fundamentals and demand for storage in excess of storage capacity.  We expect to focus our evaluation of acquisition opportunities in markets where we currently maintain management that can be extended to additional facilities.  We believe the self-storage industry will continue to afford us opportunities for growth through acquisitions due to the highly fragmented composition of the industry.

 

Investment and Market Selection Process

 

We maintain a disciplined and focused process in the acquisition and development of self-storage facilities. Our investment committee, comprised of executive officers and led by Dean Jernigan, our Chief Executive Officer, oversees our investment process.  Our investment process involves six stages — identification, initial due diligence, economic assessment, investment committee approval (and when required, Board approval), final due diligence, and documentation. Through our investment committee, we intend to focus on the following criteria:

 

·         Targeted markets — Our targeted markets include areas where we currently maintain management that can be extended to additional facilities, or where we believe that we can acquire a significant number of facilities efficiently and within a short period of time. We evaluate both the broader market and the immediate area, typically five miles around the facility, for their ability to support above-average demographic growth. We seek to increase our presence primarily in areas that we expect will experience growth, including areas within Illinois, Texas, Florida and the Northeastern United States and to enter new markets should suitable opportunities arise.

 

·         Quality of facility — We focus on self-storage facilities that have good visibility and are located near retail centers, which typically provide high traffic corridors and are generally located near residential communities and commercial customers.

 

·         Growth potential — We target acquisitions that offer growth potential through increased operating efficiencies and, in some cases, through additional leasing efforts, renovations or expansions. In addition to acquiring single facilities, we seek to invest in portfolio acquisitions, including those offering significant potential for increased operating efficiency and the ability to spread our fixed costs across a large base of facilities.

 

Operating Segment

 

We have one reportable operating segment: we own, operate, develop, and acquire self-storage facilities.

 

Concentration

 

Our self-storage facilities are located in major metropolitan areas as well as rural areas and have numerous tenants per facility.  No single tenant represented a significant concentration of our 2009 revenues. Our facilities in Florida, California, Texas and Illinois provided approximately 18%, 15%, 10% and 7%, respectively, of our total 2009 revenues.  Our facilities in these states provided approximately 19%, 15%, 9% and 7%, respectively, of our total 2008 revenues.

 

Seasonality

 

We typically experience seasonal fluctuations in occupancy levels at our facilities, with the levels generally slightly higher during the summer months due to increased moving activity.

 

Financing Strategy

 

Although our organizational documents contain no limitation on the amount of debt we may incur, we maintain a capital structure that we believe is reasonable and prudent and that will enable us to have ample cash flow to cover debt service and make distributions to our shareholders. As of December 31, 2009, our debt to total capitalization ratio (determined by dividing the carrying value of our total indebtedness by the sum of (a) the market value of our outstanding common shares and operating partnership units and (b) the carrying value of our total indebtedness) was approximately 51.9%. Our ratio of debt to the depreciated cost of our real estate assets as of December 31, 2009 was approximately 53.7% compared to approximately 62.7% as of December 31, 2008.  We expect to finance additional investments in self-storage facilities through the most attractive available source of capital at the time of the transaction, in a manner consistent with maintaining a strong

 

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financial position and future financial flexibility. These capital sources may include borrowings under the revolving portion of our secured credit facility and through additional secured financings, sales of common or preferred shares in public offerings or private placements, issuances of common or preferred units in our Operating Partnership in exchange for contributed properties or cash and formations of joint ventures. We also may sell facilities that we no longer view as core assets and reallocate the sales proceeds to fund other growth.

 

Competition

 

New self-storage facility development has intensified the competition among self-storage operators in many market areas in which we operate. Self-storage facilities compete based on a number of factors, including location, rental rates, security, suitability of the facility’s design to prospective customers’ needs and the manner in which the facility is operated and marketed. In particular, the number of competing self-storage facilities in a particular market could have a material effect on our occupancy levels, rental rates and on the overall operating performance of our facilities. We believe that the primary competition for potential customers of any of our self-storage facilities comes from other self-storage facilities within a three-mile radius of that facility. We believe we have positioned our facilities within their respective markets as high-quality operators that emphasize customer convenience, security and professionalism.

 

Our key competitors include local and regional operators as well as the other public self-storage REITS, including Public Storage, Sovran Self Storage and Extra Space Storage Inc. These companies, some of which operate significantly more facilities than we do and have greater resources than we have, and other entities may generally be able to accept more risk than we determine is prudent, including risks with respect to the geographic proximity of facility investments and the payment of higher facility acquisition prices. This competition may generally reduce the number of suitable acquisition opportunities available to us, increase the price required to be able to consummate the acquisition of particular facilities and reduce the demand for self-storage space in certain areas where our facilities are located. Nevertheless, we believe that our experience in operating, acquiring, developing and obtaining financing for self-storage facilities should enable us to compete effectively.

 

Government Regulation

 

We are subject to various laws, ordinances and regulations, including regulations relating to lien sale rights and procedures and various federal, state and local environmental regulations that apply generally to the ownership of real property and the operation of self-storage facilities.

 

Under various federal, state and local laws, ordinances and regulations, an owner or operator of real property may become liable for the costs of removal or remediation of hazardous substances released on or in its property. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances. The presence of hazardous substances, or the failure to properly remediate such substances, when released, may adversely affect the property owner’s ability to sell the real estate or to borrow using real estate as collateral, and may cause the property owner to incur substantial remediation costs. In addition to claims for cleanup costs, the presence of hazardous substances on a property could result in a claim by a private party for personal injury or a claim by an adjacent property owner or user for property damage. We may also become liable for the costs of removal or remediation of hazardous substances stored at the facilities by a customer even though storage of hazardous substances would be without our knowledge or approval and in violation of the customer’s storage lease agreement with us.

 

Our practice is to conduct or obtain environmental assessments in connection with the acquisition or development of additional facilities. Whenever the environmental assessment for one of our facilities indicates that a facility is impacted by soil or groundwater contamination from prior owners/operators or other sources, we will work with our environmental consultants and where appropriate, state governmental agencies, to ensure that the facility is either cleaned up, that no cleanup is necessary because the low level of contamination poses no significant risk to public health or the environment, or that the responsibility for cleanup rests with a third party.

 

We are not aware of any environmental cleanup liability that we believe will have a material adverse effect on us. We cannot assure you, however, that these environmental assessments and investigations have revealed or will reveal all potential environmental liabilities, that no prior owner created any material environmental condition not known to us or the independent consultant or that future events or changes in environmental laws will not result in the imposition of environmental liability on us.

 

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We have not received notice from any governmental authority of any material noncompliance, claim or liability in connection with any of our facilities, nor have we been notified of a claim for personal injury or property damage by a private party in connection with any of our facilities relating to environmental conditions.

 

We are not aware of any environmental condition with respect to any of our facilities that could reasonably be expected to have a material adverse effect on our financial condition or results of operations, and we do not expect that the cost of compliance with environmental regulations will have a material adverse effect on our financial condition or results of operations. We cannot assure you, however, that this will continue to be the case.

 

Insurance

 

We carry comprehensive liability, fire, extended coverage and rental loss insurance covering all of the facilities in our portfolio. We believe the policy specifications and insured limits are appropriate and adequate given the relative risk of loss, the cost of the coverage and industry practice. We do not carry insurance for losses such as loss from riots, war or acts of God, and, in some cases, environmental hazards, because such coverage is not available or is not available at commercially reasonable rates. Some of our policies, such as those covering losses due to terrorist activities, hurricanes, floods and earthquakes, are insured subject to limitations involving large deductibles or co-payments and policy limits that may not be sufficient to cover losses.  We also carry liability insurance to insure against personal injuries that might be sustained on our properties and director and officer liability insurance.

 

Offices

 

Our principal executive office is located at 460 E. Swedesford Road, Suite 3000, Wayne, PA  19087. Our telephone number is (610) 293-5700. We believe that our current facilities are adequate for our present and future operations.

 

Employees

 

As of December 31, 2009, we employed 953 employees, of whom 145 were corporate executive and administrative personnel and 808 were property level personnel. We believe that our relations with our employees are good.  Our employees are not unionized.

 

Available Information

 

We file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports with the Securities and Exchange Commission (the “SEC”).  You may obtain copies of these documents by visiting the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549, by calling the SEC at 1-800-SEC-0330 or by accessing the SEC’s website at www.sec.gov. Our internet website address is www.ustoreit.com.  You also can obtain on our website, free of charge, a copy of our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we electronically file such reports or amendments with, or furnish them to, the SEC. Our internet website and the information contained therein or connected thereto are not intended to be incorporated by reference into this Annual Report on Form 10-K.

 

Also available on our website, free of charge, are copies of our Code of Business Conduct and Ethics, our Corporate Governance Guidelines, and the charters for each of the committees of our Board of Trustees — the Audit Committee, the Corporate Governance and Nominating Committee, and the Compensation Committee. Copies of each of these documents are also available in print free of charge, upon request by any shareholder. You can obtain copies of these documents by contacting Investor Relations by mail at 460 E. Swedesford Road, Suite 3000, Wayne, PA 19087.

 

ITEM 1A.  RISK FACTORS

 

Overview

 

Investors should carefully consider, among other factors, the risks set forth below. These risks are not the only ones that we may face. Additional risks not presently known to us or that we currently consider immaterial may also impair our business operations and hinder our ability to make expected distributions to our shareholders.

 

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We face risks related to current debt maturities, including refinancing and counterparty risk.

 

Approximately 15% (or approximately $115 million) of the aggregate principal amount of our total debt, including our mortgage and revolving indebtedness is due on or before December 31, 2010.  Certain of our mortgages will have significant outstanding balances on their maturity dates, commonly known as “balloon payments.”  We may not have the cash resources available to repay those amounts, and we may have to raise funds for such repayment either through the issuance of capital stock, additional borrowings (which may include extension of maturity dates), joint ventures or asset sales.  There can be no assurance that we will be able to refinance the debt on favorable terms or at all. To the extent we cannot refinance debt on favorable terms or at all, we may be forced to dispose of properties on disadvantageous terms or pay higher interest rates, either of which would have an adverse impact on our financial performance and ability to pay dividends to investors

 

In addition, we may be exposed to the potential risk of counterparty default or non-payment with respect to interest rate hedges, swap agreements, floors, caps and other interest rate hedging contracts that we may enter into from time to time, in which event we could suffer a material loss on the value of those agreements.  Although these agreements may lessen the impact of rising interest rates on us, they also expose us to the risk that other parties to the agreements will not perform or that we cannot enforce the agreements.  There is no assurance that our potential counterparties on these agreements are likely to perform their obligations under such agreements.

 

Financing our future growth plan or refinancing existing debt maturities could be impacted by negative capital market conditions.

 

Recently, domestic financial markets have experienced extreme volatility and uncertainty. Overall liquidity has tightened in the domestic financial markets, including the investment grade debt and equity capital markets for which we historically sought financing. Consequently, there is greater uncertainty regarding our ability to access the credit markets in order to attract financing on reasonable terms nor can there be any assurance we can issue common or preferred equity securities at a reasonable price. Our ability to finance new acquisitions and refinance future debt maturities could be adversely impacted by our inability to secure permanent financing on reasonable terms, if at all.

 

The terms and covenants relating to our indebtedness could adversely impact our economic performance.

 

Like other real estate companies that incur debt, we are subject to risks associated with debt financing, such as the insufficiency of cash flow to meet required debt service payment obligations and the inability to refinance existing indebtedness.  If our debt cannot be paid, refinanced or extended at maturity, we may not be able to make distributions to shareholders at expected levels or at all and may not be able to acquire new properties.  Failure to make distributions to our shareholders could result in our failure to qualify as a REIT for federal income tax purposes.  Furthermore, an increase in our interest expense could adversely affect our cash flow and ability to make distributions to shareholders.  If we do not meet our debt service obligations, any facilities securing such indebtedness could be foreclosed on, which would have a material adverse effect on our cash flow and ability to make distributions and, depending on the number of facilities foreclosed on, could threaten our continued viability.

 

Our secured credit facility contains (and any new or amended facility we may enter into from time to time will likely contain) customary affirmative and negative covenants, including financial covenants that, among other things, require us to comply with certain liquidity and net worth tests.  Our ability to borrow under our credit facility is (and any new or amended facility we may enter into from time to time will be) subject to compliance with such financial and other covenants.  In the event that we fail to satisfy these covenants, we would be in default under the credit facility and may be required to repay such debt with capital from other sources.  Under such circumstances, other sources of debt or equity capital may not be available to us, or may be available only on unattractive terms.  Moreover, the presence of such covenants in our credit agreements could cause us to operate our business with a view toward compliance with such covenants, which might not produce optimal returns for shareholders.

 

Increases in interest rates on variable rate indebtedness would increase our interest expense, which could adversely affect our cash flow and ability to make distributions to shareholders.  Rising interest rates could also restrict our ability to refinance existing debt when it matures.  In addition, an increase in interest rates could decrease the amounts that third parties are willing to pay for our assets, thereby limiting our ability to alter our portfolio promptly in relation to economic or other conditions.  We may enter into, from time to time, agreements such as interest rate hedges, swap agreements, floors, caps and other interest rate hedging contracts with respect to a portion of our variable rate debt.  Although such agreements may lessen

 

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the impact of rising interest rates on us, they also expose us to the risk that other parties to the agreements will not perform or that we cannot enforce the agreements.  There is no assurance that our potential counterparties on swap agreements are likely to perform their obligations under such agreements.

 

Our organizational documents contain no limitation on the amount of debt we may incur.  As a result, we may become highly leveraged in the future.

 

Our organizational documents contain no limitations on the amount of indebtedness that we or our operating partnership may incur. We could alter the balance between our total outstanding indebtedness and the value of our assets at any time. If we become more highly leveraged, then the resulting increase in debt service could adversely affect our ability to make payments on our outstanding indebtedness and to pay our anticipated distributions and/or the distributions required to maintain our REIT status, and could harm our financial condition.

 

We depend on external sources of capital that are outside of our control; the unavailability of capital from external sources could adversely affect our ability to acquire or develop facilities, satisfy our debt obligations and/or make distributions to shareholders.

 

To continue to qualify as a REIT, we are required to distribute to our shareholders each year at least 90% of our REIT taxable income, excluding net capital gains or pay applicable income taxes. In order to eliminate federal income tax, we will be required to distribute annually 100% of our net taxable income, including capital gains. Because of these distribution requirements, we likely will not be able to fund all future capital needs, including capital for acquisitions and facility development, with income from operations. We therefore will have to rely on third-party sources of capital, which may or may not be available on favorable terms, if at all. Our access to third-party sources of capital depends on a number of things, including the market’s perception of our growth potential and our current and potential future earnings and our ability to continue to qualify as a REIT for federal income tax purposes. If we are unable to obtain third-party sources of capital, we may not be able to acquire or develop facilities when strategic opportunities exist, satisfy our debt obligations or make distributions to shareholders that would permit us to qualify as a REIT or avoid paying tax on our REIT taxable income.

 

Additional issuances of equity securities may be dilutive to shareholders.

 

The interests of our shareholders could be diluted if we issue additional equity securities to finance future developments or acquisitions or to repay indebtedness.  Our Board of Trustees may authorize the issuance of additional equity securities without shareholder approval.  Our ability to execute our business strategy depends upon our access to an appropriate blend of debt financing, including unsecured lines of credit and other forms of secured and unsecured debt, and equity financing, including the issuance of common and preferred equity.

 

Because real estate is illiquid, we may not be able to sell properties when appropriate.

 

Real estate property investments generally cannot be sold quickly. Also, the tax laws applicable to REITs require that we hold our facilities for investment, rather than sale in the ordinary course of business, which may cause us to forgo or defer sales of facilities that otherwise would be in our best interest. Therefore, we may not be able to dispose of facilities promptly, or on favorable terms, in response to economic or other market conditions, which may adversely affect our financial position.

 

Rising operating expenses could reduce our cash flow and funds available for future distributions.

 

Our facilities and any other facilities we acquire or develop in the future are and will be subject to operating risks common to real estate in general, any or all of which may negatively affect us. Our facilities are subject to increases in operating expenses such as real estate and other taxes, utilities, insurance, administrative expenses and costs for repairs and maintenance. If operating expenses increase without a corresponding increase in revenues, our profitability could diminish and limit our ability to make distributions to our shareholders.

 

Our insurance coverage may not comply fully with certain loan requirements.

 

We maintain comprehensive insurance on each of our self-storage facilities in amounts sufficient to permit replacement of the property, subject to applicable deductibles. Certain of our properties serve as collateral for our mortgage-backed debt, some of which was assumed in connection with our acquisition of facilities, that requires us to maintain insurance at levels and on terms that are not commercially reasonable in the current insurance environment. We may be unable to obtain

 

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required insurance coverage if the cost and/or availability make it impractical or impossible to comply with debt covenants. If we cannot comply with a lender’s requirements in any respect, the lender could declare a default that could affect our ability to obtain future financing and could have a material adverse effect on our results of operations and cash flows and our ability to obtain future financing. In addition, we may be required to self-insure against certain losses or the Company’s insurance costs may increase.

 

Potential losses may not be covered by insurance, which could result in the loss of our investment in a facility and the future cash flows from the facility.

 

We carry comprehensive liability, fire, extended coverage and rental loss insurance covering all of the facilities in our portfolio. We believe the policy specifications and insured limits are appropriate and adequate given the relative risk of loss, the cost of the coverage and industry practice. We do not carry insurance for losses such as loss from riots, war or acts of God, and, in some cases, flooding and environmental hazards, because such coverage is not available or is not available at commercially reasonable rates. Some of our policies, such as those covering losses due to terrorism, hurricanes, floods and earthquakes, are insured subject to limitations involving large deductibles or co-payments and policy limits that may not be sufficient to cover losses. If we experience a loss at a facility that is uninsured or that exceeds policy limits, we could lose the capital invested in that facility as well as the anticipated future cash flows from that facility. Inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make it impractical or undesirable to use insurance proceeds to replace a facility after it has been damaged or destroyed. In addition, if the damaged facilities are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these facilities were irreparably damaged.

 

We cannot assure you of our ability to pay dividends in the future.

 

Historically, we have paid quarterly distributions to our shareholders, and we intend to pay quarterly dividends and to make distributions to our shareholders in amounts such that all or substantially all of our taxable income in each year, subject to certain adjustments, is distributed.  This, along with other factors, should enable us to qualify for the tax benefits accorded to a REIT under the Internal Revenue Code.  We have not established a minimum dividends payment level and all future distributions will be made at the discretion of our Board of Trustees. Our ability to pay dividends will depend upon, among other factors:

 

·                  the operational and financial performance of our facilities;

 

·                  capital expenditures with respect to existing and newly acquired facilities;

 

·                  general and administrative costs associated with our operation as a publicly-held REIT;

 

·                  maintenance of our REIT status;

 

·                  the amount of, and the interest rates on, our debt;

 

·                  the absence of significant expenditures relating to environmental and other regulatory matters; and

 

·                  other risk factors described in this Annual Report on Form 10-K.

 

Certain of these matters are beyond our control and any significant difference between our expectations and actual results could have a material adverse effect on our cash flow and our ability to make distributions to shareholders.

 

Our performance and the value of our self-storage facilities are subject to risks associated with our properties and with the real estate industry.

 

Our rental revenues and operating costs and the value of our real estate assets, and consequently the value of our securities, are subject to the risk that if our facilities do not generate revenues sufficient to meet our operating expenses, including debt service and capital expenditures, our cash flow and ability to pay distributions to our shareholders will be adversely affected.  Events or conditions beyond our control that may adversely affect our operations or the value of our facilities include:

 

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·                  downturns in the national, regional and local economic climate;

 

·                  local or regional oversupply, increased competition or reduction in demand for self-storage space;

 

·                  vacancies or changes in market rents for self-storage space;

 

·                  inability to collect rent from customers;

 

·                  increased operating costs, including maintenance, insurance premiums and real estate taxes;

 

·                  changes in interest rates and availability of financing;

 

·                  hurricanes, earthquakes and other natural disasters, civil disturbances, terrorist acts or acts of war that may result in uninsured or underinsured losses;

 

·                  significant expenditures associated with acquisitions and development projects, such as debt service payments, real estate taxes, insurance and maintenance costs which are generally not reduced when circumstances cause a reduction in revenues from a property;

 

·                  costs of complying with changes in laws and governmental regulations, including those governing usage, zoning, the environment and taxes; and

 

·                  the relative illiquidity of real estate investments.

 

In addition, prolonged periods of economic slowdown or recession, rising interest rates or declining demand for self-storage, or the public perception that any of these events may occur, could result in a general decline in rental revenues, which could impair our ability to satisfy our debt service obligations and to make distributions to our shareholders.

 

Rental revenues are significantly influenced by demand for self-storage space generally, and a decrease in such demand would likely have a greater adverse effect on our rental revenues than if we owned a more diversified real estate portfolio.

 

Because our portfolio of facilities consists primarily of self-storage facilities, we are subject to risks inherent in investments in a single industry. A decrease in the demand for self-storage space would have a greater adverse effect on our rental revenues than if we owned a more diversified real estate portfolio. Demand for self-storage space has been and could be adversely affected by ongoing weakness in the national, regional and local economies, changes in supply of, or demand for, similar or competing self-storage facilities in an area and the excess amount of self-storage space in a particular market. To the extent that any of these conditions occur, they are likely to affect market rents for self-storage space, which could cause a decrease in our rental revenue. Any such decrease could impair our ability to satisfy debt service obligations and make distributions to our shareholders.

 

Adverse macroeconomic and business conditions may significantly and negatively affect our revenues, profitability and results of operations.

 

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

 

It is difficult to determine the breadth and duration of the economic and financial market problems and the many ways in which they may affect our customers and our business in general. Nonetheless, continuation or further worsening of these difficult financial and macroeconomic conditions could have a significant adverse effect on our sales, profitability and results of operations.

 

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Our financial performance is dependent upon the economic and other conditions of the markets in which our facilities are located.

 

We are susceptible to adverse developments in the markets in which we operate, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors. Our facilities in California, Florida, Texas, Ohio, Tennessee, Illinois and Arizona accounted for approximately 17%, 16%, 11%, 8%, 7%, 7% and 5%, respectively, of our total rentable square feet as of December 31, 2009. As a result of this geographic concentration of our facilities, we are particularly susceptible to adverse market conditions in these areas. Any adverse economic or real estate developments in these markets, or in any of the other markets in which we operate, or any decrease in demand for self-storage space resulting from the local business climate could adversely affect our rental revenues, which could impair our ability to satisfy our debt service obligations and pay distributions to our shareholders.

 

Many states and local jurisdictions are facing severe budgetary problems which may have an adverse impact on our business and financial results.

 

Many states and jurisdictions are facing severe budgetary problems. Action that may be taken in response to these problems, such as increases in property taxes on commercial properties, changes to sales taxes or other governmental efforts, including mandating medical insurance for employees, could adversely impact our business and results of operations.

 

Terrorist attacks and other acts of violence or war may adversely impact our performance and may affect the markets on which our securities are traded.

 

Terrorist attacks against our facilities, the United States or our interests, may negatively impact our operations and the value of our securities.  Attacks or armed conflicts could negatively impact the demand for self-storage facilities and increase the cost of insurance coverage for our facilities, which could reduce our profitability and cash flow.  Furthermore, any terrorist attacks or armed conflicts could result in increased volatility in or damage to the United States and worldwide financial markets and economy.

 

We face risks and significant competition associated with actions taken by our competitors.

 

Actions by our competitors may decrease or prevent increases of the occupancy and rental rates of our properties.  We compete with numerous developers, owners and operators of self-storage, including other REITs, some of which own or may in the future own properties similar to ours in the same submarkets in which our properties are located and some of which may have greater capital resources.  In addition, due to the relatively low cost of each individual self-storage facility, other developers, owners and operators have the capability to build additional facilities that may compete with our facilities.

 

If our competitors build new facilities that compete with our facilities or offer space at rental rates below current market rates or below the rental rates we currently charge our tenants, we may lose potential tenants, and we may be pressured to reduce our rental rates below those we currently charge in order to retain tenants when our tenants’ leases expire.  As a result, our financial condition, cash flow, cash available for distribution, market price of our stock and ability to satisfy our debt service obligations could be materially adversely affected.  In addition, increased competition for customers may require us to make capital improvements to facilities that we would not have otherwise made. Any unbudgeted capital improvements we undertake may reduce cash available for distributions to our shareholders.

 

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We also face significant competition for acquisitions and development opportunities.  Some of our competitors have greater financial resources than we do and a greater ability to borrow funds to acquire facilities.  These competitors may also be willing and/or able to accept more risk than we can prudently manage, including risks with respect to the geographic proximity of investments and the payment of higher facility acquisition prices.  This competition for investments may reduce the number of suitable investment opportunities available to us, may increase acquisition costs and may reduce demand for self-storage space in certain areas where our facilities are located and, as a result, adversely affect our operating results.

 

We face risks associated with facility acquisitions.

 

We have in the past acquired, and intend at some time in the future to acquire, individual and portfolios of self-storage facilities that would increase our size and potentially alter our capital structure.  Although we believe that the acquisitions that we expect to undertake in the future will enhance our future financial performance, the success of such transactions is subject to a number of factors, including the risks that:

 

·                  we may not be able to obtain financing for acquisitions on favorable terms;

 

·                  acquisitions may fail to perform as expected;

 

·                  the actual costs of repositioning or redeveloping acquired facilities may be higher than our estimates;

 

·                  acquisitions may be located in new markets where we may have limited knowledge and understanding of the local economy, an absence of business relationships in the area or an unfamiliarity with local governmental and permitting procedures;

 

·                  there is only limited recourse, or no recourse, to the former owners of newly acquired facilities for unknown or undisclosed liabilities such as the clean-up of undisclosed environmental contamination; claims by tenants, vendors or other persons arising on account of actions or omissions of the former owners of the facilities; ordinary course of business expenses; and claims by local governments, adjoining property owners, property owner associations, and easement holders for fees, assessments, taxes on other property-related changes.

 

As a result, if a liability were asserted against us based upon ownership of an acquired facility, we might be required to pay significant sums to settle it, which could adversely affect our financial results and cash flow.

 

We will incur costs and will face integration challenges when we acquire additional facilities.

 

As we acquire or develop additional self-storage facilities, we will be subject to risks associated with integrating and managing new facilities, including customer retention and mortgage default risks. In the case of a large portfolio purchase, we could experience strains in our existing management information capacity.  In addition, acquisitions or developments may cause disruptions in our operations and divert management’s attention away from day-to-day operations. Furthermore, our profitability may suffer because we will be required to expense acquisition-related costs and amortize in future periods costs for acquired goodwill and other intangible assets. Our failure to successfully integrate any future facilities into our portfolio could have an adverse effect on our operating costs and our ability to make distributions to our shareholders.

 

The acquisition of new facilities that lack operating history with us will give rise to difficulties in predicting revenue potential.

 

We intend to continue to acquire additional facilities.  These acquisitions could fail to perform in accordance with expectations.  If we fail to accurately estimate occupancy levels, operating costs or costs of improvements to bring an acquired facility up to the standards established for our intended market position, the performance of the facility may be below expectations.  Acquired facilities may have characteristics or deficiencies affecting their valuation or revenue potential that we have not yet discovered.  We cannot assure you that the performance of facilities acquired by us will increase or be maintained under our management.

 

Property ownership through joint ventures may limit our ability to act exclusively in our interest.

 

We have in the past, and may continue to, co-invest with third parties through joint ventures. In any such joint venture, we may not be in a position to exercise sole decision-making authority regarding the facilities owned through joint ventures.

 

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Investments in joint ventures may, under certain circumstances, involve risks not present when a third party is not involved, including the possibility that joint venture partners might become bankrupt or fail to fund their share of required capital contributions. Joint venture partners may have business interests or goals that are inconsistent with our business interests or goals and may be in a position to take actions contrary to our policies or objectives. Such investments also have the potential risk of impasse on strategic decisions, such as a sale, in cases where neither we nor the joint venture partner would have full control over the joint venture. In other circumstances, joint venture partners may have the ability without our agreement to make certain major decisions, including decisions about sales, capital expenditures and/or financing. Any disputes that may arise between us and our joint venture partners could result in litigation or arbitration that could increase our expenses and distract our officers and/or Trustees from focusing their time and effort on our business. In addition, we might in certain circumstances be liable for the actions of our joint venture partners, and the activities of a joint venture could adversely affect our ability to qualify as a REIT, even though we do not control the joint venture.

 

We face system security risks as we depend upon automated processes and the Internet.

 

We are increasingly dependent upon automated information technology processes.  While we attempt to mitigate this risk through offsite backup procedures and contracted data centers that include, in some cases, redundant operations, we could still be severely impacted by a catastrophic occurrence, such as a natural disaster or a terrorist attack. In addition, an increasing portion of our business operations are conducted over the Internet, increasing the risk of viruses that could cause system failures and disruptions of operations despite our deployment of anti-virus measures. Experienced computer programmers may be able to penetrate our network security and misappropriate our confidential information, create system disruptions or cause shutdowns.

 

Potential liability for environmental contamination could result in substantial costs.

 

We are subject to federal, state and local environmental regulations that apply generally to the ownership of real property and the operation of self-storage facilities. If we fail to comply with those laws, we could be subject to significant fines or other governmental sanctions.

 

Under various federal, state and local laws, ordinances and regulations, an owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at a facility and may be held liable to a governmental entity or to third parties for property damage and for investigation and clean up costs incurred by such parties in connection with contamination. Such liability may be imposed whether or not the owner or operator knew of, or was responsible for, the presence of these hazardous or toxic substances. The cost of investigation, remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to properly remediate such substances, may adversely affect the owner’s ability to sell or rent such facility or to borrow using such facility as collateral. In addition, in connection with the ownership, operation and management of real properties, we are potentially liable for property damage or injuries to persons and property.

 

Our practice is to conduct or obtain environmental assessments in connection with the acquisition or development of additional facilities. We obtain or examine environmental assessments from qualified and reputable environmental consulting firms (and intend to conduct such assessments prior to the acquisition or development of additional facilities). The environmental assessments received to date have not revealed, nor do we have actual knowledge of, any environmental liability that we believe will have a material adverse effect on us. However, we cannot assure you that any environmental assessments performed have identified or will identify all material environmental conditions, that any prior owner of any facility did not create a material environmental condition not actually known to us or that a material environmental condition does not otherwise exist with respect to any of our facilities.

 

Americans with Disabilities Act and applicable state accessibility act compliance may require unanticipated expenditures.

 

Under the Americans with Disabilities Act of 1990 and applicable state accessibility act laws (collectively, the “ADA”), all places of public accommodation are required to meet federal requirements related to physical access and use by disabled persons. A number of other federal, state and local laws may also impose access and other similar requirements at our facilities. A failure to comply with the ADA or similar state or local requirements could result in the governmental imposition of fines or the award of damages to private litigants affected by the noncompliance. Although we believe that our facilities comply in all material respects with these requirements (or would be eligible for applicable exemptions from material requirements because of adaptive assistance provided), a determination that one or more of our facilities is not in compliance with the ADA or similar state or local requirements would result in the incurrence of additional costs associated with

 

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bringing the facilities into compliance. If we are required to make substantial modifications to comply with the ADA or similar state or local requirements, we may be required to incur significant unanticipated expenditures, which could have an adverse effect on our operating costs and our ability to make distributions to our shareholders.

 

We may become subject to litigation or threatened litigation which may divert management’s time and attention, require us to pay damages and expenses or restrict the operation of our business.

 

We may become subject to disputes with commercial parties with whom we maintain relationships or other parties with whom we do business. Any such dispute could result in litigation between us and the other parties. Whether or not any dispute actually proceeds to litigation, we may be required to devote significant management time and attention to its successful resolution (through litigation, settlement or otherwise), which would detract from our management’s ability to focus on our business. Any such resolution could involve the payment of damages or expenses by us, which may be significant. In addition, any such resolution could involve our agreement with terms that restrict the operation of our business.

 

One type of commercial dispute could involve our use of our brand name and other intellectual property (for example, logos, signage and other marks), for which we generally have common law rights but no federal trademark registration. There are other commercial parties, at both a local and national level, that may assert that our use of our brand names and other intellectual property conflict with their rights to use brand names and other intellectual property that they consider to be similar to ours. Any such commercial dispute and related resolution would involve all of the risks described above, including, in particular, our agreement to restrict the use of our brand name or other intellectual property.

 

We also could be sued for personal injuries and/or property damage occurring on our properties.  We maintain liability insurance with limits that we believe adequate to provide for the defense and/or payment of any damages arising from such lawsuits.  There can be no assurance that such coverage will cover all costs and expenses from such suits.

 

Failure to qualify as a REIT would subject us to U.S. federal income tax which would reduce the cash available for distribution to our shareholders.

 

We operate our business to qualify to be taxed as a REIT for federal income tax purposes. We have not requested and do not plan to request a ruling from the IRS that we qualify as a REIT, and the statements in this Annual Report on Form 10-K are not binding on the IRS or any court. As a REIT, we generally will not be subject to federal income tax on the income that we distribute currently to our shareholders. Many of the REIT requirements, however, are highly technical and complex. The determination that we are a REIT requires an analysis of various factual matters and circumstances that may not be totally within our control. For example, to qualify as a REIT, at least 95% of our gross income must come from specific passive sources, such as rent, that are itemized in the REIT tax laws. In addition, to qualify as a REIT, we cannot own specified amounts of debt and equity securities of some issuers. We also are required to distribute to our shareholders with respect to each year at least 90% of our REIT taxable income (excluding net capital gains). The fact that we hold substantially all of our assets through the operating partnership and its subsidiaries further complicates the application of the REIT requirements for us. Even a technical or inadvertent mistake could jeopardize our REIT status and, given the highly complex nature of the rules governing REITs and the ongoing importance of factual determinations, we cannot provide any assurance that we will continue to qualify as a REIT. Furthermore, Congress and the IRS might make changes to the tax laws and regulations, and the courts might issue new rulings, that make it more difficult, or impossible, for us to remain qualified as a REIT. If we fail to qualify as a REIT for federal income tax purposes and are able to avail ourselves of one or more of the statutory savings provisions in order to maintain our REIT status, we would nevertheless be required to pay penalty taxes of $50,000 or more for each such failure.

 

If we fail to qualify as a REIT for federal income tax purposes, and are unable to avail ourselves of certain savings provisions set forth in the Internal Revenue Code, we would be subject to federal income tax at regular corporate rates on all of our income. As a taxable corporation, we would not be allowed to take a deduction for distributions to shareholders in computing our taxable income or pass through long term capital gains to individual shareholders at favorable rates. We also could be subject to the federal alternative minimum tax and possibly increased state and local taxes. We would not be able to elect to be taxed as a REIT for four years following the year we first failed to qualify unless the IRS were to grant us relief under certain statutory provisions. If we failed to qualify as a REIT, we would have to pay significant income taxes, which would reduce our net earnings available for investment or distribution to our shareholders. This likely would have a significant adverse effect on our earnings and likely would adversely affect the value of our securities. In addition, we would no longer be required to pay any distributions to shareholders.

 

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To maintain our REIT status, we may be forced to borrow funds on a short term basis during unfavorable market conditions.

 

As a REIT, we are subject to certain distribution requirements, including the requirement to distribute 90% of our REIT taxable income that may result in our having to make distributions at disadvantageous time or to borrow funds at unfavorable rates.  Compliance with this requirement may hinder our ability to operate solely on the basis of maximizing profits.

 

We will pay some taxes even if we qualify as a REIT, which will reduce the cash available for distribution to our shareholders.

 

Even if we qualify as a REIT for federal income tax purposes, we will be required to pay certain federal, state and local taxes on our income and property. For example, we will be subject to income tax to the extent we distribute less than 100% of our REIT taxable income, including capital gains. Additionally, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which dividends paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. Moreover, if we have net income from “prohibited transactions,” that income will be subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property held primarily for sale to customers in the ordinary course of business. The determination as to whether a particular sale is a prohibited transaction depends on the facts and circumstances related to that sale. We cannot guarantee that sales of our properties would not be prohibited transactions unless we comply with certain statutory safe-harbor provisions.

 

In addition, any net taxable income earned directly by our taxable REIT subsidiaries, or through entities that are disregarded for federal income tax purposes as entities separate from our taxable REIT subsidiaries, will be subject to federal and possibly state corporate income tax. We have elected to treat U-Store-It Mini Warehouse Co. as a taxable REIT subsidiary, and we may elect to treat other subsidiaries as taxable REIT subsidiaries in the future. In this regard, several provisions of the laws applicable to REITs and their subsidiaries ensure that a taxable REIT subsidiary will be subject to an appropriate level of federal income taxation. For example, a taxable REIT subsidiary is limited in its ability to deduct certain interest payments made to an affiliated REIT. In addition, the REIT has to pay a 100% penalty tax on some payments that it receives or on some deductions taken by a taxable REIT subsidiary if the economic arrangements between the REIT, the REIT’s customers, and the taxable REIT subsidiary are not comparable to similar arrangements between unrelated parties. Finally, some state and local jurisdictions may tax some of our income even though as a REIT we are not subject to federal income tax on that income because not all states and localities follow the federal income tax treatment of REITs. To the extent that we and our affiliates are required to pay federal, state and local taxes, we will have less cash available for distributions to our shareholders.

 

We are dependent upon our key personnel whose continued service is not guaranteed.

 

Our top executives, Dean Jernigan, Christopher Marr and Timothy Martin, have extensive self-storage, real estate and public company experience.  Although we have employment agreements with these members of our senior management team, we cannot provide any assurance that any of them will remain in our employment.  The loss of services of one or more members of our senior management team, particularly Dean Jernigan, our Chief Executive Officer, could adversely affect our operations and our future growth.

 

Privacy concerns could result in regulatory changes that may harm our business.

 

Personal privacy has become a significant issue in the jurisdictions in which we operate. Many jurisdictions in which we operate have imposed restrictions and requirements on the use of personal information by those collecting such information. Changes to law or regulations affecting privacy, if applicable to our business, could impose additional costs and liability on us and could limit our use and disclosure of such information.

 

We are dependent upon our on-site personnel to maximize customer satisfaction; any difficulties we encounter in hiring, training and retaining skilled field personnel may adversely affect our rental revenues.

 

As of December 31, 2009, we had 808 field personnel involved in the management and operation of our facilities. The customer service, marketing skills and knowledge of local market demand and competitive dynamics of our facility managers are contributing factors to our ability to maximize our rental income and to achieve the highest sustainable rent levels at each of our facilities. We compete with various other companies in attracting and retaining qualified and skilled personnel.

 

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Competitive pressures may require that we enhance our pay and benefits package to compete effectively for such personnel.  If there is an increase in these costs or if we fail to attract and retain qualified and skilled personnel, our business and operating results could be harmed.

 

Certain provisions of Maryland law could inhibit changes in control, which may discourage third parties from conducting a tender offer or seeking other change of control transactions that could involve a premium price for our shares or otherwise benefit our shareholders.

 

Certain provisions of Maryland law may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the holders of our common shares with the opportunity to realize a premium over the then-prevailing market price of those shares, including:

 

·         “business combination moratorium/fair price” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested shareholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate thereof) for five years after the most recent date on which the shareholder becomes an interested shareholder, and thereafter imposes stringent fair price and super-majority shareholder voting requirements on these combinations; and

 

·         “control share” provisions that provide that “control shares” of our company (defined as shares which, when aggregated with other shares controlled by the shareholder, entitle the shareholder to exercise one of three increasing ranges of voting power in electing Trustees) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares” from a party other than the issuer) have no voting rights except to the extent approved by our shareholders by the affirmative vote of at least two thirds of all the votes entitled to be cast on the matter, excluding all interested shares, and are subject to redemption in certain circumstances.

 

We have opted out of these provisions of Maryland law. However, our Board of Trustees may opt to make these provisions applicable to us at any time without shareholder approval.

 

Our Trustees also have the discretion, granted in our bylaws and Maryland law, without shareholder approval to, among other things (1) create a staggered Board of Trustees, and (2) amend our bylaws or repeal individual bylaws in a manner that provides the Board of Trustees with greater authority.  Any such action could inhibit or impede a third party from making a proposal to acquire us at a price that could be beneficial to our shareholders.

 

Robert J. Amsdell, our former Chairman and Chief Executive Officer; Barry L. Amsdell, a former Trustee; Todd C. Amsdell, our former Chief Operating Officer and former President of our development subsidiary; and the Amsdell Entities (collectively, “The Amsdell Family”) collectively own an approximate 13.96 % beneficial interest in our company on a fully diluted basis and therefore have the ability to exercise significant influence on any matter presented to our shareholders.

 

The Amsdell Family collectively owns approximately 12.6% of our outstanding common shares, and an approximate 13.96% beneficial interest in our company on a fully diluted basis. Consequently, the Amsdell Family may be able to significantly influence the outcome of matters submitted for shareholder action, including the election of our Board of Trustees and approval of significant corporate transactions, including business combinations, consolidations and mergers. As a result, Robert J. Amsdell, Barry L. Amsdell and Todd C. Amsdell have substantial influence on us and could exercise their influence in a manner that conflicts with the interests of our other shareholders.

 

Our shareholders have limited control to prevent us from making any changes to our investment and financing policies.

 

Our Board of Trustees has adopted policies with respect to certain activities. These policies may be amended or revised from time to time at the discretion of our Board of Trustees without a vote of our shareholders. This means that our shareholders have limited control over changes in our policies. Such changes in our policies intended to improve, expand or diversify our business may not have the anticipated effects and consequently may adversely affect our business and prospects, results of operations and share price.

 

Our rights and the rights of our shareholders to take action against our Trustees and officers are limited.

 

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Maryland law provides that a trustee or officer has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our declaration of trust and bylaws require us to indemnify our Trustees and officers for actions taken by them in those capacities to the extent permitted by Maryland law. Accordingly, in the event that actions taken in good faith by any Trustee or officer impede our performance, our and our shareholders’ ability to recover damages from that Trustee or officer will be limited.

 

Our declaration of trust permits our Board of Trustees to issue preferred shares with terms that may discourage third parties from conducting a tender offer or seeking other change of control transactions that could involve a premium price for our shares or otherwise benefit our shareholders.

 

Our declaration of trust permits our Board of Trustees to issue up to 40,000,000 preferred shares, having those preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications, or terms or conditions of redemption as determined by our Board. In addition, our Board may reclassify any unissued common shares into one or more classes or series of preferred shares. Thus, our Board could authorize, without shareholder approval, the issuance of preferred shares with terms and conditions that could have the effect of discouraging a takeover or other transaction in which holders of some or a majority of our shares might receive a premium for their shares over the then-prevailing market price of our shares. We currently do not expect that the Board would require shareholder approval prior to such a preferred issuance. In addition, any preferred shares that we issue would rank senior to our common shares with respect to the payment of distributions, in which case we could not pay any distributions on our common shares until full distributions have been paid with respect to such preferred shares.

 

Many factors could have an adverse effect on the market value of our securities.

 

A number of factors might adversely affect the price of our securities, many of which are beyond our control.  These factors include:

 

·                  increases in market interest rates, relative to the dividend yield on our shares.  If market interest rates go up, prospective purchasers of our securities may require a higher yield.  Higher market interest rates would not, however, result in more funds for us to distribute and, to the contrary, would likely increase our borrowing costs and potentially decrease funds available for distribution.  Thus, higher market interest rates could cause the market price of our common shares to go down;

 

·                  anticipated benefit of an investment in our securities as compared to investment in securities of companies in other industries (including benefits associated with tax treatment of dividends and distributions);

 

·                  perception by market professionals of REITs generally and REITs comparable to us in particular;

 

·                  level of institutional investor interest in our securities;

 

·                  relatively low trading volumes in securities of REITs;

 

·                  our results of operations and financial condition;

 

·                  investor confidence in the stock market generally; and

 

·                  additions and departures of key personnel.

 

The market value of our common shares is based primarily upon the market’s perception of our growth potential and our current and potential future earnings and cash distributions.  Consequently, our common shares may trade at prices that are higher or lower than our net asset value per common share.  If our future earnings or cash distributions are less than expected, it is likely that the market price of our common shares will diminish.

 

The market price of our common shares has been, and may continue to be, particularly volatile, and our shareholders may be unable to resell their shares at a profit.

 

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The market price of our common shares has been subject to significant fluctuations and may continue to fluctuate or decline.  Since March 2009, our common stock has been particularly volatile as the price of our common stock has ranged from a high of $7.83 to a low of $1.34.  In the past several years, REIT stocks have experienced high levels of volatility and significant declines in value from their historic highs. Additionally, as a result of the current global credit crisis and the concurrent economic downturn in the U.S. and globally, there have been significant declines in the values of equity securities generally in the U.S. and abroad.

 

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. If our stock price is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management’s attention and resources from our business.

 

ITEM 1B.  UNRESOLVED STAFF COMMENTS

 

None.

 

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ITEM 2.  PROPERTIES

 

Overview

 

As of December 31, 2009, we owned 367 self-storage facilities located in 26 states and the District of Columbia; and aggregating approximately 23.7 million rentable square feet. The following table sets forth certain summary information regarding our facilities by state as of December 31, 2009.

 

						Total		% of Total		% of
		Number of		Number of		Rentable		Rentable		Occupied
State		Facilities		Units		Square Feet		Square Feet		Square Feet
California		58		33,821		3,954,013		16.7	%	67.6	%
Florida		51		36,094		3,795,690		16.0	%	75.5	%
Texas		43		20,878		2,643,421		11.1	%	79.9	%
Ohio		33		15,347		1,879,352		7.9	%	72.4	%
Illinois		27		13,879		1,609,823		6.8	%	81.5	%
Tennessee		24		12,855		1,682,687		7.1	%	76.0	%
Arizona		24		11,713		1,246,619		5.3	%	75.3	%
Connecticut		17		7,076		848,086		3.6	%	78.0	%
New Jersey		13		9,004		876,505		3.7	%	74.1	%
Georgia		9		6,092		759,215		3.2	%	76.3	%
Indiana		9		5,171		592,742		2.5	%	71.3	%
New Mexico		9		3,437		387,665		1.6	%	80.4	%
Colorado		8		4,067		491,394		2.1	%	76.6	%
North Carolina		8		4,756		557,721		2.4	%	76.0	%
Maryland		5		4,191		517,782		2.2	%	83.0	%
New York		5		2,871		311,883		1.3	%	77.7	%
Michigan		4		1,885		270,869		1.1	%	70.7	%
Utah		4		2,255		241,524		1.0	%	79.8	%
Louisiana		3		1,423		195,267		0.8	%	81.0	%
Massachusetts		3		1,784		173,413		0.7	%	75.1	%
Pennsylvania		2		1,614		173,869		0.7	%	79.9	%
Virginia		2		1,174		130,682		0.6	%	69.0	%
Nevada		2		884		97,068		0.4	%	82.0	%
Alabama		1		798		128,951		0.5	%	73.7	%
Washington, DC		1		752		62,695		0.3	%	89.5	%
Mississippi		1		509		61,251		0.2	%	77.7	%
Wisconsin		1		485		58,515		0.2	%	76.4	%
Total/Weighted Average		367		204,815		23,748,702		100.0	%	75.2	%

 

Our Facilities

 

The following table sets forth certain additional information with respect to each of our facilities as of December 31, 2009. Our ownership of each facility consists of a fee interest in the facility held by U-Store-It, L.P., our operating partnership, or one of its subsidiaries, except for our Morris Township, NJ facility, where we have a ground lease. In addition, small parcels of land at five of our other facilities are subject to ground leases.

 

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		Year Acquired/		Year		Rentable						Manager		% Climate
Facility Location		Developed (1)		Built		Square Feet		Occupancy (2)		Units		Apartment (3)		Controlled (4)
Mobile, AL †		1997		1974/90		128,951		73.7	%	798		Y		1.6	%
Chandler, AZ		2005		1985		47,520		81.7	%	439		Y		6.9	%
Glendale, AZ		1998		1987		56,850		76.5	%	529		Y		0.0	%
Green Valley, AZ		2005		1985		25,050		68.9	%	257		N		8.0	%
Mesa I, AZ		2006		1985		52,375		80.5	%	495		N		0.0	%
Mesa II, AZ		2006		1981		45,145		78.0	%	389		Y		8.4	%
Mesa III, AZ		2006		1986		58,264		68.1	%	482		Y		4.5	%
Phoenix I, AZ		2006		1987		100,762		66.4	%	757		Y		8.7	%
Phoenix II, AZ		2006		1974		45,270		85.3	%	409		Y		4.7	%
Scottsdale, AZ		1998		1995		80,925		79.9	%	635		Y		9.5	%
Tempe, AZ		2005		1975		53,890		72.9	%	403		Y		13.0	%
Tucson I, AZ		1998		1974		59,350		74.6	%	491		Y		0.0	%
Tucson II, AZ		1998		1988		43,950		76.6	%	525		Y		100.0	%
Tucson III, AZ		2005		1979		49,822		68.6	%	494		N		0.0	%
Tucson IV, AZ		2005		1982		48,040		81.1	%	508		Y		3.7	%
Tucson V, AZ		2005		1982		45,234		69.4	%	419		Y		3.0	%
Tucson VI, AZ		2005		1982		40,841		69.4	%	417		Y		3.4	%
Tucson VII, AZ		2005		1982		52,688		75.7	%	605		Y		2.0	%
Tucson VIII, AZ		2005		1979		46,650		73.9	%	466		Y		0.0	%
Tucson IX, AZ		2005		1984		67,656		73.9	%	610		Y		2.0	%
Tucson X, AZ		2005		1981		46,350		72.5	%	430		N		0.0	%
Tucson XI, AZ		2005		1974		42,700		75.4	%	433		Y		0.0	%
Tucson XII, AZ		2005		1974		42,325		83.7	%	437		Y		4.8	%
Tucson XIII, AZ		2005		1974		45,792		75.4	%	522		Y		0.0	%
Tucson XIV, AZ		2005		1976		49,170		85.8	%	561		Y		8.8	%
Apple Valley I, CA		1997		1984		73,250		48.1	%	552		N		0.0	%
Apple Valley II, CA		1997		1988		61,555		67.3	%	471		Y		5.9	%
Benicia, CA		2005		1988/93/05		74,770		83.8	%	734		Y		0.0	%
Bloomington I, CA		1997		1987		28,425		67.0	%	216		N		0.0	%
Bloomington II, CA †		1997		1987		25,860		67.4	%	20		N		0.0	%
Cathedral City, CA †		2006		1982/92		109,745		59.4	%	708		Y		2.3	%
Citrus Heights, CA		2005		1987		75,620		60.6	%	658		Y		0.0	%
Diamond Bar, CA		2005		1988		103,034		81.1	%	898		Y		0.0	%
Escondido, CA		2007		2002		142,970		74.5	%	1226		Y		6.6	%
Fallbrook, CA		1997		1985/88		46,370		88.6	%	446		Y		0.0	%
Hemet, CA		1997		1989		66,040		66.1	%	433		Y		0.0	%
Highland I, CA		1997		1987		76,765		52.3	%	841		Y		0.0	%
Highland II, CA		2006		1982		62,257		57.8	%	519		Y		1.0	%
Lancaster, CA		2001		1987		60,665		42.7	%	385		Y		0.0	%
Long Beach, CA		2006		1974		124,363		60.7	%	1349		Y		0.0	%
Murrieta, CA		2005		1996		49,790		81.7	%	426		Y		2.9	%
North Highlands, CA		2005		1980		57,244		84.0	%	471		N		0.0	%
Orangevale, CA		2005		1980		51,142		70.5	%	523		Y		0.0	%
Palm Springs I, CA		2006		1989		72,675		59.4	%	570		Y		0.0	%
Palm Springs II, CA †		2006		1982/89		122,370		61.6	%	626		Y		8.7	%
Pleasanton, CA		2005		2003		85,195		81.2	%	693		Y		0.0	%
Rancho Cordova, CA		2005		1979		53,928		64.7	%	460		Y		0.0	%
Redlands, CA		1997		1985		62,805		64.8	%	538		N		0.0	%
Rialto I, CA		1997		1987		57,371		68.8	%	497		Y		0.0	%
Rialto II, CA		2006		1980		99,783		74.3	%	749		Y		0.0	%
Riverside I, CA		1997		1989		28,310		76.8	%	226		N		0.0	%
Riverside II, CA †		1997		1989		20,420		67.6	%	18		N		0.0	%
Riverside III, CA		1998		1989		46,809		66.0	%	429		Y		0.0	%
Riverside IV, CA		2006		1977		67,220		76.7	%	663		Y		0.0	%
Riverside V, CA		2006		1985		85,346		50.0	%	830		Y		3.9	%
Riverside VI, CA		2007		2004		74,900		76.9	%	409		Y		12.7	%
Roseville, CA		2005		1979		60,094		75.2	%	547		N		0.0	%
Sacramento I, CA		2005		1979		51,114		66.2	%	543		Y		0.0	%
Sacramento II, CA		2005		1986		62,130		65.9	%	575		Y		0.0	%
San Bernardino I, CA		1997		1987		83,253		58.8	%	578		Y		2.0	%
San Bernardino II, CA		1997		1987		31,070		53.7	%	253		N		0.0	%
San Bernardino III, CA		1997		1989		57,215		71.1	%	584		Y		0.0	%
San Bernardino IV, CA		1997		1991		41,546		69.3	%	375		Y		0.0	%
San Bernardino V, CA		1997		1985/92		35,671		63.9	%	402		N		0.0	%
San Bernardino VI, CA		2005		2002/04		83,507		63.9	%	749		N		11.8	%
San Bernardino VII, CA		2006		1974		56,795		58.8	%	499		Y		4.2	%
San Bernardino VIII, CA		2006		1975		103,860		54.8	%	951		N		0.0	%
San Bernardino IX, CA		2006		1978		78,839		73.9	%	645		Y		1.3	%
San Bernardino X, CA		2006		1977		95,154		63.2	%	889		Y		0.0	%
San Marcos, CA		2005		1979		37,430		76.0	%	246		Y		0.0	%
Santa Ana, CA		2006		1984		64,571		69.6	%	710		N		2.4	%
South Sacramento, CA		2005		1979		51,740		48.8	%	417		Y		0.0	%
Spring Valley, CA		2006		1980		55,045		68.4	%	711		Y		0.0	%

 

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