CubeSmart - Quarter Report: 2009 September (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

For the transition period from                            to                            .

 

Commission file number: 001-32324

 

 

U-STORE-IT TRUST

(Exact Name of Registrant as Specified in its Charter)

 

 

 

(610) 293-5700

(Registrant’s Telephone Number, Including Area Code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

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

 

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

 

 

 

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U-STORE-IT TRUST

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Part I. FINANCIAL INFORMATION
Item 1.	Financial Statements		4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		28
Item 4.	Controls and Procedures		28
Part II. OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		29
Item 6.	Exhibits		30

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q, together with other statements and information publicly disseminated by U-Store-It Trust (“we,” “us,” “our” or the “Company”), contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions and other information that is not historical information. In some cases, forward-looking statements can be identified by terminology such as “believes,” “expects,” “estimates,” “may,” “will,” “should,” “anticipates,” or “intends” or the negative of such terms or other comparable terminology, or by discussions of strategy. Such statements are based on assumptions and expectations that may not be realized and are inherently subject to risks, uncertainties and other factors, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Although we believe the expectations reflected in these forward-looking statements are based on reasonable assumptions, future events and actual results, performance, transactions or achievements, financial and otherwise, may differ materially from the results, performance, transactions or achievements expressed or implied by the forward-looking statements. As a result, you should not rely on any forward-looking statements in this Report, or which management may make orally or in writing from time to time, as predictions of future events nor guarantees of future performance.  We caution you not to place undue reliance on forward-looking statements, which speak only as the date of this Report or as of the dates indicated in the statements.  All of our forward-looking statements, including those in this Report, are qualified in their entirety by this statement.

 

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in or contemplated by this Report. Any forward-looking statements should be considered in light of the risks referenced in Item 1A. “Risk Factors” in the U-Store-It Trust Annual Report on Form 10-K for the year ended December 31, 2008, in Part II. Item 1A. “Risk Factors” set forth below and in our other filings with the Securities and Exchange Commission (“SEC”). These risks include, but are not limited to, the following:

 

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

 

·      the effect of competition from new and existing self-storage facilities or other storage alternatives, which would cause rents and occupancy rates to decline;

 

·      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 our potential inability to refinance existing indebtedness;

 

·      recent disruptions in the credit and financial markets and resulting difficulties in raising capital or obtaining credit at reasonable rates, or at all;

 

·      increases in insurance premiums, property tax assessments and other operating and maintenance expenses;

 

·      risks related to our participation in joint ventures;

 

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

 

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

 

·                  difficulties in our ability to evaluate, finance and integrate acquired and developed properties into our existing operations and to lease up those properties, which could adversely affect our profitability;

 

·                  delays in the development and construction process, which could adversely affect our profitability;

 

·                  the impact of the regulatory environment as well as national, state, and local laws and regulations including, without limitation, those governing REITs, which could increase our expenses and reduce our cash available for distribution;

 

·                  potential liability for uninsured losses and environmental contamination;

 

·                  risks associated with international operations including, but not limited to, unfavorable foreign currency rate fluctuations that could adversely affect our earnings and cash flows;

 

·                  disruptions or shutdowns of our automated processes and systems; and

 

·                  general risks associated with the ownership and operation of real estate including changes in demand, adverse changes in tax, real estate and zoning laws and regulations, the impact of natural disasters and potential terrorist attacks and acts of war.

 

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 in securities laws.

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

U-STORE-IT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

 

		September 30,			December 31,
		2009			2008
ASSETS
Storage facilities		$	1,784,520		$	1,888,123
Less: Accumulated depreciation		(338,407		)	(328,165		)
Storage facilities, net		1,446,113			1,559,958
Cash and cash equivalents		60,967			3,744
Restricted cash		16,524			16,217
Loan procurement costs, net of amortization		5,924			4,453
Assets held for sale		6,417			2,378
Other assets, net		31,578			10,909
Total assets		$	1,567,523		$	1,597,659
LIABILITIES AND EQUITY
Revolving credit facility		$	—		$	172,000
Unsecured term loan		200,000			200,000
Secured term loan		—			57,419
Mortgage loans and notes payable		528,118			548,085
Accounts payable, accrued expenses and other liabilities		38,908			39,410
Distributions payable		2,445			1,572
Deferred revenue		8,653			9,725
Security deposits		457			472
Other liabilities held for sale		157			22
Total liabilities		778,738			1,028,705
Noncontrolling interests in the Operating Partnership		46,057			46,026
Commitments and contingencies
Equity:
Common shares $.01 par value, 200,000,000 shares authorized, 92,382,990 and 57,623,491 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively		923			576
Additional paid-in capital		974,111			801,029
Accumulated other comprehensive loss		(2,480		)	(7,553		)
Accumulated deficit		(274,554		)	(271,124		)
Total U-Store-It Trust shareholders’ equity		698,000			522,928
Noncontrolling interests in subsidiaries		44,728			—
Total equity		742,728			522,928
Total liabilities and equity		$	1,567,523		$	1,597,659

 

See accompanying notes to the unaudited consolidated financial statements.

 

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U-STORE-IT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

		Three Months Ended September 30,										Nine Months Ended September 30,
		2009					2008					2009				2008
REVENUES
Rental income		$	50,498				$	52,895				$	151,813			$	156,372
Other property related income		4,361					4,412					12,545				11,703
Total revenues		54,859					57,307					164,358				168,075
OPERATING EXPENSES
Property operating expenses		23,153					24,741					71,791				72,201
Depreciation and amortization		17,894					18,433					53,535				56,004
General and administrative		5,556					5,849					16,658				17,813
Total operating expenses		46,603					49,023					141,984				146,018
OPERATING INCOME		8,256					8,284					22,374				22,057
OTHER INCOME (EXPENSE)
Interest:
Interest expense on loans		(12,008				)	(12,786				)	(34,834			)	(39,577			)
Loan procurement amortization expense		(489				)	(486				)	(1,517			)	(1,443			)
Interest income		150					34					249				126
Other		—					49					(13			)	188
Total other expense		(12,347				)	(13,189				)	(36,115			)	(40,706			)
LOSS FROM CONTINUING OPERATIONS		(4,091				)	(4,905				)	(13,741			)	(18,649			)
DISCONTINUED OPERATIONS
Income from discontinued operations		684					1,735					2,342				5,566
Net gain on disposition of discontinued operations		10,910					7,544					13,530				13,424
Total discontinued operations		11,594					9,279					15,872				18,990
NET INCOME		7,503					4,374					2,131				341
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
Noncontrolling interests in the Operating Partnership		$		(512		)	$		(354		)	$		(93	)	$	(39		)
Noncontrolling interests in subsidiaries		(173				)	—					(173			)	—
NET INCOME ATTRIBUTABLE TO THE COMPANY		$		6,818			$		4,020			$		1,865		$	302
Basic and diluted loss per share from continuing operations attributable to common shareholders		$		(0.05		)	$		(0.08		)	$		(0.20	)	$	(0.30		)
Basic and diluted earnings per share from discontinued operations attributable to common shareholders		0.14					0.15					0.23				0.31
Basic and diluted earnings per share attributable to common shareholders		$		0.09			$		0.07			$		0.03		$	0.01
Weighted-average basic and diluted shares outstanding		75,248					57,635					63,764				57,616
AMOUNTS ATTRIBUTABLE TO THE COMPANY’S COMMON SHAREHOLDERS:
Loss from continuing operations		$		(4,011		)	$		(4,507		)	$		(12,801	)	$		(17,150	)
Total discontinued operations		10,829					8,527					14,666				17,452
Net income		$			6,818		$			4,020		$		1,865		$		302

 

See accompanying notes to the unaudited consolidated financial statements.

 

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U-STORE-IT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

		Nine Months Ended September 30,
		2009			2008
Operating Activities
Net income		$	2,131		$	341
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		57,689			61,397
Gain on disposition of discontinued operations		(13,532		)	(13,424		)
Equity compensation expense		2,589			2,545
Accretion of fair market value adjustment of debt		(348		)	(441		)
Changes in other operating accounts:
Other assets		(2,860		)	2,256
Accounts payable and accrued expenses		1,905			6
Other liabilities		(592		)	525
Net cash provided by operating activities		$	46,982		$	53,205
Investing Activities
Acquisitions, additions and improvements to storage facilities		(13,142		)	(25,817		)
Proceeds from sales of properties, net		61,227			43,206
Proceeds from sales to noncontrolling interests		48,674			—
Increase in restricted cash		(307		)	(2,800		)
Net cash provided by investing activities		$	96,452		$	14,589
Financing Activities
Proceeds from:
Revolving credit facility		9,500			33,400
Secured term loans		—			9,975
Mortgage loans and notes payable		73,246			—
Principal payments on:
Revolving credit facility		(181,500		)	(69,700		)
Secured term loans		(57,419		)	—
Mortgage loans and notes payable		(92,865		)	(9,361		)
Proceeds from issuance of common shares, net		170,851			—
Distributions paid to shareholders		(4,416		)	(31,209		)
Distributions paid to noncontrolling interests in Operating Partnership		(381		)	(2,742		)
Distributions paid to noncontrolling interests in subsidiaries		(239		)	—
Loan procurement costs		(2,988		)	(134		)
Net cash used in financing activities		$	(86,211	)	$	(69,771	)
Increase (decrease) in cash and cash equivalents		57,223			(1,977		)
Cash and cash equivalents at beginning of period		3,744			4,517
Cash and cash equivalents at end of period		$	60,967		$	2,540
Supplemental Cash Flow and Noncash Information
Cash paid for interest, net of interest capitalized		$	34,266		$	39,589
Supplemental disclosure of noncash activities:
Additions to storage facilities		$	—		$	1,023
Notes receivable originated upon disposition of property		$	17,600		$	—
Derivative valuation adjustment		$	4,915		$	1,301
Foreign currency translation adjustment		$	572		$	409
Gain deferral on sales to noncontrolling interests		$	3,992		$	—

 

See accompanying notes to the unaudited consolidated financial statements.

 

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U-STORE-IT TRUST AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1.  ORGANIZATION AND NATURE OF OPERATIONS

 

U-Store-It Trust, a Maryland real estate investment trust (collectively with its subsidiaries, “we”, “us” or the “Company”), is a self-administered and self-managed real estate investment trust, or REIT, active in acquiring, developing and operating self-storage properties for business and personal use under month-to-month leases.  The Company’s self-storage facilities (collectively, the “Properties”) are located in 26 states throughout the United States, and in the District of Columbia and are managed under one reportable operating segment: we own, operate, develop, and acquire self-storage facilities.  The Company owns substantially all of its assets through U-Store-It, L.P., a Delaware limited partnership (the “Operating Partnership”).  The Company is the sole general partner of the Operating Partnership and, as of September 30, 2009, owned a 94.8% interest in the Operating Partnership.  The Company manages its assets through YSI Management, LLC (the “Management Company”), a wholly owned subsidiary of the Operating Partnership.  The Company owns 100% of U-Store-It Mini Warehouse Co. (the “TRS”) in addition to three other subsidiaries, each of which has elected to be treated as a taxable REIT subsidiary. In general, a taxable REIT subsidiary may perform non-customary services for tenants, hold assets that the Company cannot hold directly and generally may engage in any real estate or non-real estate related business.

 

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the SEC regarding interim financial reporting and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods presented in accordance with generally accepted accounting principles in the United States (“GAAP”). Accordingly, readers of this Quarterly Report on Form 10-Q should refer to the Company’s audited financial statements prepared in accordance with GAAP, and the related notes thereto, for the year ended December 31, 2008, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 as certain footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report pursuant to the rules of the SEC. The results of operations for each of the three and nine months ended September 30, 2009 and 2008 are not necessarily indicative of the results of operations to be expected for any future period or the full year.

 

New Accounting Pronouncements

 

The Financial Accounting Standards Board (“FASB”) established the FASB Accounting Standards Codification™ (“Codification”) as the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements issued for interim and annual periods ending after September 15, 2009. The Codification has changed the manner in which GAAP guidance is referenced, but did not have an impact on our consolidated financial position, results of operations or cash flows.

 

The FASB issued authoritative guidance on accounting for transfers of financial assets in June 2009, which we will adopt on a prospective basis beginning November 15, 2009.  The guidance requires entities to provide more information regarding sales of securitized financial assets and similar transactions, particularly if the entity has continuing exposure to the risks related to transferred financial assets.  It also eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets and requires additional disclosures.  The application will not have an impact on our consolidated financial position, results of operations or cash flows.

 

The FASB issued authoritative guidance on how a company determines when an entity should be consolidated in June 2009, which we will adopt on a prospective basis beginning November 15, 2009.  The guidance clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance.  The guidance requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity.  It also requires additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement.  The application will not have an impact on our consolidated financial position, results of operations or cash flows.

 

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The FASB issued authoritative guidance on determining whether instruments granted in share-based payment transactions are participating securities in June 2008, which we adopted on a prospective basis beginning January 1, 2009.  The guidance states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and should be included in the computation of earnings per share pursuant to the two-class method.  The application did not have an impact on our consolidated financial position, results of operations or cash flows.

 

The FASB issued authoritative guidance regarding disclosures about derivative instruments and hedging activities in March 2008, which we adopted on a prospective basis beginning January 1, 2009.  The guidance enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under prior guidance and the impact of derivative instruments and related hedged items on an entity’s financial position, financial performance and cash flows.  The application did not have an impact on our consolidated financial position, results of operations or cash flows.

 

3.  STORAGE FACILITIES

 

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

 

		September 30, 2009			December 31, 2008
		(in thousands)
Land and improvements		$	370,283		$	387,831
Buildings and improvements		1,246,853			1,300,711
Equipment		165,196			198,981
Construction in progress		2,188			600
Total		1,784,520			1,888,123
Less accumulated depreciation		(338,407		)	(328,165		)
Storage facilities, net		$	1,446,113		$	1,559,958

 

The following table summarizes the Company’s disposition activity during the period January 1, 2009 to September 30, 2009:

 

						Total Number		Gross Sale Price
Facility/Portfolio		Location		Transaction Date		of Facilities		(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		Colorado		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
						17		$	80,966

 

(a)          The Company issued financing in the amount of $17.6 million to the buyer in conjunction with the Boulder Assets disposition.

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

(c)          The entirety of the North H Street Asset was taken in conjunction with eminent domain proceedings.  The Company is currently finalizing compensatory discussions with the State of California.  Accordingly, the property has been removed from the Company’s property account.

 

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4.  REVOLVING CREDIT FACILITY, UNSECURED TERM LOAN AND SECURED TERM LOAN

 

New Credit Facility

 

On August 6, 2009, the Company received a commitment letter and term sheet from Wells Fargo Securities, LLC and Bank of America Merrill Lynch, with respect to a new credit facility.  The Company launched the syndication process in early July and by September 30, 2009 had received in excess of $450 million of lender commitments for a new, senior secured credit facility.  The term sheet contemplates, and the Company expects, the facility to be comprised of a $200 million secured term loan and a $250 million secured revolving credit facility. The new credit facility will have a three-year term and will be secured by the real and personal property interests in certain of the Company’s properties. The Company will use the proceeds from the new credit facility to repay outstanding balances under, and to replace, its existing $450 million credit facility, which is scheduled to mature on November 20, 2009.

 

The term sheet provides for customary covenants including a maximum leverage ratio of 65% (67.5% during the initial year of the agreement), a minimum fixed charge coverage ratio of 1.45x, a minimum tangible net worth covenant, and limitations on certain permitted investments, dividends and distributions, and the amount of floating rate interest exposure. Pricing on the new facility will range, depending on leverage levels, from 3.25 to 4.00% over LIBOR, with a LIBOR floor of 1.5%.

 

The new credit facility is subject to lender due diligence, formal documentation and closing requirements, and is expected to close in the fourth quarter of 2009.  If the Company and its lenders are unable to reach agreement on definitive documentation for the new credit facility with the lenders or the new credit facility otherwise does not close and/or is not funded on or before November 20, 2009, then the Company will utilize its extension options described below with respect to its existing credit facility and existing secured term loan to extend the maturity dates of those loans to November 20, 2010.

 

Current Credit Facility

 

As of September 30, 2009, the Company and its Operating Partnership had in place a three-year $450 million unsecured credit facility, which was entered into in November 2006, consisting of $200 million in an unsecured term loan and $250 million in unsecured revolving loans. The outstanding balance on the Company’s credit facility as of September 30, 2009 was comprised of $200 million of term loan borrowings.  As of September 30, 2009, approximately $250 million was available under the Company’s credit facility.  The facility has a November 20, 2009 maturity date, subject to a one year extension to November 20, 2010 at the Company’s option provided we pay an extension fee of 15 basis points, or $675,000, and are not in default under the facility.  The Company exercised its extension option during August 2009 and will be required to pay the extension fee unless the Company closes the replacement credit facility described above prior to November 15, 2009.  Borrowings under the credit facility bear interest, at our option, at either an alternative base rate or a Eurodollar rate, in each case, plus an applicable margin based on our leverage ratio or our credit rating.  The alternative base interest rate is a fluctuating rate equal to the higher of the prime rate or the sum of the federal funds effective rate plus 50 basis points.  The applicable margin for the alternative base rate will vary from 0.00% to 0.50% depending on our leverage ratio prior to achieving an investment grade rating, and will vary from 0.00% to 0.25% depending on our credit rating after achieving an investment grade rating.  The Eurodollar rate is a rate of interest that is fixed for interest periods of one, two, three or six months based on the LIBOR rate determined two business days prior to the commencement of the applicable interest period.  The applicable margin for the Eurodollar rate will vary from 1.00% to 1.50% depending on our leverage ratio prior to achieving an investment grade rating, and will vary from 0.425% to 1.00% depending on our credit rating after achieving an investment grade rating. At September 30, 2009, borrowings under the unsecured credit facility had a weighted average interest rate of 1.75% and the Company was in compliance with all financial covenants of the agreement.

 

On September 14, 2007, the Company and its Operating Partnership entered into a credit agreement that allowed for total secured term loan borrowings of $50.0 million and subsequently amended the agreement on April 3, 2008 to allow for total secured term loan borrowings of $57.4 million.  The term loans each had a November 20, 2009 maturity date, subject to a one year extension to November 20, 2010 at the Company’s option.  Each term loan bore interest at either an alternative base rate or a Eurodollar rate, at our option, in each case plus an applicable margin. The applicable margin for the alternative base rate will vary from 0.10% to 0.60% depending on our leverage ratio prior to achieving an investment grade rating, and will vary from 0.00% to 0.25% depending on our credit rating after achieving an investment grade rating.  The Eurodollar rate is a rate of interest that is fixed for interest periods of one, two, three or six months based on the LIBOR rate determined two business days prior to the commencement of the applicable interest

 

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period.  The applicable margin for the Eurodollar rate will vary from 1.10% to 1.60% depending on our leverage ratio prior to achieving an investment grade rating, and will vary from 0.425% to 1.00% depending on our credit rating after achieving an investment grade rating.   The outstanding term loans were secured by a pledge by our Operating Partnership of all equity interests in YSI RT LLC, the wholly-owned subsidiary of the Operating Partnership that acquired eight self-storage facilities in September 2007 and one self-storage facility in May 2008.   The balance of the term loans was paid off on August 11, 2009.

 

5.  MORTGAGE LOANS AND NOTES PAYABLE

 

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

 

		Carrying Value as of:
		September 30,			December 31,			Effective Interest		Maturity
Mortgage Loan		2009			2008			Rate		Date
		(in thousands)
Acq VI		$	—		$	1,701		8.43	%	Aug-09
YSI III		—			85,020			5.09	%	Nov-09
YSI I		83,792			85,105			5.19	%	May-10
YSI IV		6,087			6,150			5.25	%	Jul-10
YSI XXVI		9,539			9,724			5.00	%	Aug-10
YSI XXV		8,006			8,093			5.00	%	Oct-10
Promissory notes		—			75			5.97	%	Nov-10
YSI II		83,925			85,213			5.33	%	Jan-11
YSI XII		1,531			1,561			5.97	%	Sep-11
YSI XIII		1,316			1,342			5.97	%	Sep-11
YSI VI		77,672			78,543			5.13	%	Aug-12
YASKY		80,000			80,000			4.96	%	Sep-12
USIFB		3,865			3,509			4.28	%	Oct-12
YSI XIV		1,825			1,862			5.97	%	Jan-13
YSI VII		3,179			3,224			6.50	%	Jun-13
YSI VIII		1,816			1,842			6.50	%	Jun-13
YSI IX		1,998			2,026			6.50	%	Jun-13
YSI XVII		4,277			4,365			6.32	%	Jul-13
YSI XXVII		520			532			5.59	%	Nov-13
YSI XXX		7,628			7,804			5.59	%	Nov-13
YSI XI		2,502			2,548			5.87	%	Dec-13
YSI V		3,302			3,363			5.25	%	Jan-14
YSI XXVIII		1,608			1,638			5.59	%	Feb-14
YSI XXXIV		14,984			—			8.00	%	Jun-14
YSI XXXVII		2,253			—			7.25	%	Aug-14
YSI XXXX		2,596			—			7.25	%	Aug-14
YSI XXXXII		3,275			—			6.88	%	Aug-14
YSI XXXXIV		1,128			—			7.00	%	Sep-14
YSI XXXXI		4,000			—			6.60	%	Sep-14
YSI XXXVIII		4,095			—			6.35	%	Sep-14
YSI XXXIX		4,000			—			6.50	%	Nov-14
YSI X		4,184			4,237			5.87	%	Jan-15
YSI XV		1,931			1,961			6.41	%	Jan-15
YSI XX		64,691			65,953			5.97	%	Nov-15
YSI XXXI		13,946			—			6.75	%	Jun-19
YSI XXXV		4,499			—			6.90	%	Jul-19
YSI XXXII		6,184			—			6.75	%	Jul-19
YSI XXXIII		11,618			—			6.42	%	Jul-19
Unamortized fair value adjustment		346			694
Total mortgage loans and notes payable		$	528,118		$	548,085

 

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The following table presents the future principal payment requirements on outstanding mortgage loans and notes payable at September 30, 2009 (in thousands):

 

2009		$		2,241
2010		113,811
2011		89,762
2012		163,019
2013		25,340
2014 and thereafter		133,599
Total mortgage payments		527,772
Plus: Fair value adjustment		346
Total mortgage indebtedness		$	528,118

 

The Company currently intends to fund its 2009 future principal payment requirements with cash on hand.   As of September 30, 2009, we were in compliance with all events of default covenants under the applicable loan agreements.

 

6.  DERIVATIVE FINANCIAL INSTRUMENTS

 

The Company’s use of derivative instruments is limited to the utilization of interest rate agreements or other instruments to manage interest rate risk exposures and not for speculative purposes. The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company’s operating and financial structure, as well as to hedge specific transactions. The counterparties to these arrangements are major financial institutions with which the Company and its subsidiaries may also have other financial relationships. The Company is potentially exposed to credit loss in the event of non-performance by these counterparties. However, because of the high credit ratings of the counterparties, the Company does not anticipate that any of the counterparties will fail to meet these obligations as they come due. The Company does not hedge credit or property value market risks.

 

The Company has entered into interest rate swap agreements that qualify and are designated as cash flow hedges designed to reduce the impact of interest rate changes on its variable rate debt.  Therefore, the interest rate swaps are recorded in the consolidated balance sheet at fair value and the related gains or losses are deferred in shareholders’ equity as Accumulated Other Comprehensive Loss.  These deferred gains and losses are amortized into interest expense during the period or periods in which the related interest payments affect earnings.  However, to the extent that the interest rate swaps are not perfectly effective in offsetting the change in value of the interest payments being hedged, the ineffective portion of these contracts is recognized in earnings immediately.  Ineffectiveness was immaterial for all periods presented.

 

The Company formally assesses, both at inception of the hedge and on an on-going basis, whether each derivative is highly-effective in offsetting changes in cash flows of the hedged item. If management determines that a derivative is highly-effective as a hedge, it accounts for the derivative using hedge accounting, pursuant to which gains or losses inherent in the derivative do not impact the Company’s results of operations.  If management determines that a derivative is not highly-effective as a hedge or if a derivative ceases to be a highly-effective hedge, the Company will discontinue hedge accounting prospectively and will reflect in its statement of operations realized and unrealized gains and losses in respect of the derivative.

 

The Company had an interest rate cap agreement that effectively limited the interest rate on $40 million of credit facility borrowings at 5.50% per annum through June 2008.  The following table summarizes the terms and fair values of the Company’s derivative financial instruments at September 30, 2009 (dollars in thousands):

 

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Hedge				Notional									September 30,			December 31,
Product		Hedge Type		Amount			Strike		Effective Date		Maturity		2009			2008
Swap		Cash flow		$	50,000		4.7725	%	8/24/2007		11/20/2009		$	(313	)	$	(1,683	)
Swap		Cash flow		25,000			4.7160	%	9/4/2007		11/20/2009		(155		)	(830		)
Swap		Cash flow		25,000			2.3400	%	3/28/2008		11/20/2009		(73		)	(326		)
Swap		Cash flow		200,000			2.7625	%	5/28/2008		11/20/2009		(697		)	(3,314		)
													$	(1,238	)	$	(6,153	)

 

The fair value of the Company’s derivative financial instruments is classified in accounts payable, accrued expenses and other liabilities on our consolidated balance sheets.

 

7.  FAIR VALUE MEASUREMENTS

 

In January 2008, the FASB issued a pronouncement regarding the methods to value financial assets and liabilities. The Company has adopted this pronouncement effective January 1, 2009.  Per this pronouncement, fair value is based on the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, the pronouncement establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

 

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

 

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

 

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

 

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and considers counterparty credit risk in determining fair value.

 

To comply with the provisions of the pronouncement, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements.  Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties.  However, as of September 30, 2009, the Company has assessed the significance of the effect of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives.  As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

 

For financial liabilities that utilize Level 2 inputs, the Company utilizes both direct and indirect observable price quotes, including LIBOR yield curves, bank price quotes for forward starting swaps, New York Mercantile Exchange futures pricing and common stock price quotes. Below is a summary of valuation techniques for Level 2 financial liabilities:

 

·  Interest rate swap derivative assets and liabilities — valued using LIBOR yield curves at the reporting date. Counterparties to these contracts are most often highly rated financial institutions none of which experienced any significant downgrades during the three and nine months ended September 30, 2009.

 

In April 2009, the FASB issued a pronouncement regarding disclosures about fair value of financial instruments and a pronouncement which amends GAAP as follows: a) to require disclosures about fair value of financial instruments for interim

 

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reporting periods of publicly traded companies as well as in annual financial statements and b) to require disclosures in summarized financial information at interim reporting periods. This pronouncement is effective for interim reporting periods ending after June 15, 2009. Accordingly, the Company adopted this pronouncement during the quarter ended September 30, 2009. Disclosures about fair value of financial instruments are based on pertinent information available to management as of the valuation date. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, the estimates presented are not necessarily indicative of the amounts at which these instruments could be purchased, sold or settled. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

The Company estimates the fair value of its fixed rate debt and the credit spreads over variable market rates on its variable rate debt by discounting the future cash flows of each instrument at estimated market rates or credit spreads consistent with the maturity of the debt obligation with similar credit policies. Credit spreads take into consideration general market conditions and maturity. As of September 30, 2009, the carrying value and estimated fair value of the Company’s debt was $728.1 million and $695.8 million, respectively.  As of December 31, 2008, the carrying value and estimated fair value of the Company’s debt was $977.5 million and $951.0 million, respectively. The carrying value of the Company’s other financial instruments approximates fair value due to the short-term nature of these financial instruments.

 

8.  NONCONTROLLING INTERESTS

 

In December 2007, the FASB issued a pronouncement regarding noncontrolling interests in consolidated financial statements effective for fiscal years beginning on or after December 15, 2008.  The Company has adopted this pronouncement effective January 1, 2009.  Per this pronouncement, noncontrolling interests are the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. The ownership interests in the subsidiary that are held by owners other than the parent are noncontrolling interests. Under this pronouncement, such noncontrolling interests are reported on the consolidated balance sheets within equity, separately from the Company’s equity. On the consolidated statements of operations, revenues, expenses and net income or loss from less-than-wholly-owned subsidiaries are reported at the consolidated amounts, including both the amounts attributable to the Company and noncontrolling interests. Presentation of consolidated equity activity is included for both quarterly and annual financial statements, including beginning balances, activity for the period and ending balances for shareholders’ equity, noncontrolling interests and total equity.

 

Variable Interests in Consolidated Real Estate Joint Ventures

 

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

 

The Company recognizes gains on disposition of properties only upon closing in accordance with the guidance on sales of real estate. Payments received from purchasers prior to closing are recorded as deposits. Profit on real estate sold is recognized using the full accrual method upon closing when the collectability of the sales price is reasonably assured and the Company is not obligated to perform significant activities after the sale. Profit may be deferred in whole or part until the sale meets the requirements of profit recognition on sales under this guidance. The Company concluded that this transaction should be accounted for in accordance with the guidance on sales of real estate for which the gain on the partial sale of these properties is required to be deferred given the Company’s continuing involvement with the transferred properties.

 

In December 2003, the FASB issued a pronouncement regarding variable interest entities.  The Company determined HART is a variable interest entity as defined by the pronouncement, and that we are the primary beneficiary.  The 50% interest that is owned by Heitman is reflected in noncontrolling interest in subsidiaries within permanent equity and separate from the Company’s equity on the consolidated balance sheet. Accordingly, the assets, liabilities and results of operations of HART are consolidated in our consolidated financial statements.  At September 30, 2009, HART had total assets of $95.6 million and total liabilities of $2.7 million.

 

The Company has a 97% interest in USIFB, LLP (“USIFB”), and through a wholly-owned subsidiary and together with its joint venture partner, operations began at one facility in London, England during 2008.  USIFB was formed to own, operate, acquire and develop self-storage facilities in England.  We have determined that USIFB is a variable interest entity as defined by the pronouncement, and that we are the primary beneficiary.  The 3% interest that is owned by our joint venture partner is reflected in noncontrolling interest in subsidiaries within permanent equity and separate from the Company’s equity on the consolidated balance sheets. Accordingly, the assets, liabilities and results of operations of USIFB are consolidated in our consolidated financial statements.  At September 30, 2009, USIFB had total assets of $6.9 million and total liabilities of $4.0 million and a mortgage loan of $3.9 million secured by assets with a net book value of $6.5 million.

 

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Operating Partnership Ownership

 

In July 2001, the FASB issued guidance regarding the classification and measurement of redeemable securities.  Per this guidance, securities that are redeemable for cash or other assets at the option of the holder, not solely within the control of the issuer, must be classified outside of permanent equity. This would result in certain outside ownership interests being included as redeemable noncontrolling interests outside of permanent equity in the consolidated balance sheets. The Company makes this determination based on terms in applicable agreements, specifically in relation to redemption provisions. Additionally, with respect to noncontrolling interests for which the Company has a choice to settle the contract by delivery of its own shares, the Company considered the guidance regarding accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock, to evaluate whether the Company controls the actions or events necessary to presume share settlement.  The guidance also requires that noncontrolling interests be adjusted each period so that the carrying value equals the greater of its carrying value based on the accumulation of historical cost or its redemption value.

 

The consolidated results of the Company include results attributable to units of the Operating Partnership that are not owned by the Company, which amounted to approximately 5.2% and 8.1% of all outstanding Partnership units as of September 30, 2009 and December 31, 2008, respectively.  These interests were issued in the form of Operating Partnership units and were a component of the consideration the Company paid to acquire certain self-storage facilities. Limited partners who acquired Operating Partnership units have the right to require the Operating Partnership to redeem part or all of their Operating Partnership units for, at the Company’s option, an equivalent number of common shares of the Company or cash based upon the fair market value of an equivalent number of common shares of the Company.  However, the partnership agreement contains certain circumstances that could result in a settlement outside the control of the Company. Accordingly, consistent with the guidance, the Company will record these noncontrolling interests outside of permanent equity in the consolidated balance sheets.  Net income or loss related to these noncontrolling interests is excluded from net income or loss in the consolidated statements of operations.

 

The fair value of the Company’s common shares when calculated for the purposes of unit redemption will be equal to the average of the closing trading price of the Company’s common shares on the New York Stock Exchange for the 10 trading days before the date the Company receives the redemption notice.  At December 31, 2008 and September 30, 2009, 5,079,923 units were outstanding, and as of September 30, 2009, the calculated aggregate redemption value of outstanding Operating Partnership units based upon the Company’s share price was approximately $32.7 million.  Based on the Company’s evaluation of the redemption value of the redeemable noncontrolling interest, the Company has reflected these interests at their carrying value as of September 30, 2009 and December 31, 2008 as carrying cost exceeded the estimated redemption value.

 

The table below presents consolidated equity and noncontrolling interest activity for the period January 1, 2008 through September 30, 2008 as well as for the period January 1, 2009 through September 30, 2009 (in thousands):

 

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		Shareholders’ Equity						Noncontrolling Interest in the Operating Partnership						Noncontrolling Interest in subsidiaries
		2009			2008			2009			2008			2009			2008
Balance at January 1		$	522,928		$	555,619		$	46,026		$	48,982		—			—
Issuance of restricted shares		1			—			—			—			—			—
Amortization of restricted shares		415			474			—			—			—			—
Share compensation expense		443			382			—			—			—			—
Net loss		(2,109		)	(4,037		)	(177		)	(298		)	—			—
Adjustment for noncontrolling interest in the Operating Partnership		—			(9		)	—			9			—			—
Other comprehensive income (loss):														—			—
Unrealized gain (loss) on interest rate swap		1,005			(1,548		)	89			—			—			—
Unrealized gain on foreign currency translation		246			3			22			—			—			—
Distributions		(1,456		)	(10,412		)	(127		)	(923		)	—			—
Balance at March 31		$	521,473		$	540,472		$	45,833		$	47,770		$	—		$	—
Issuance of restricted shares		1			—			—			—			—			—
Issuance of common shares		9,529			—			—			—			—			—
Amortization of restricted shares		409			344			—			—			—			—
Share compensation expense		447			469			—			—			—			—
Net income (loss)		(2,844		)	263			(242		)	35			—			—
Adjustment for noncontrolling interest in the Operating Partnership		—			(242		)	—			242			—			—
Other comprehensive income:
Unrealized gain on interest rate swap		1,675			2,493			146			—			—			—
Unrealized gain on foreign currency translation		462			—			39			—			—			—
Distributions		(1,516		)	(10,410		)	(127		)	(923		)	—			—
Balance at June 30		$	529,636		$	533,389		$	45,649		$	47,124		$	—		$	—
Contribution from noncontrolling interests in subsidiaries, net		—			—			(114		)	—			44,794			—
Issuance of common shares, net		161,322			—			—			—			—			—
Amortization of restricted shares		436			416			—			—			—			—
Share compensation expense		439			460			—			—			—			—
Net income		6,818			4,020			512			354			173			—
Adjustment for noncontrolling interest in the Operating Partnership		—			(138		)	—			138			—			—
Other comprehensive income (loss):
Unrealized gain on interest rate swap		1,848			324			152			29			—			—
Unrealized gain (loss) on foreign currency translation		(182		)	376			(15		)	33			—			—
Distributions		(2,317		)	(10,304		)	(127		)	(926		)	(239		)	—
Balance at September 30		$	698,000		$	528,543		$	46,057		$	46,752		$	44,728		$	—

 

9.  RELATED PARTY TRANSACTIONS

 

During 2005 and 2006, the Operating Partnership entered into various office lease agreements with Amsdell and Amsdell, an entity owned by Robert Amsdell and Barry Amsdell (each a former Trustee).  Pursuant to these lease agreements, we rented office space in the Airport Executive Park, an office and flex development located in Cleveland, Ohio, which is owned by Amsdell and Amsdell. The Company’s independent Trustees approved the terms of, and entry into, each of the office lease agreements by the Operating Partnership.  In addition to monthly rent, the office lease agreements provide that the Operating Partnership reimburse Amsdell and Amsdell for certain maintenance and improvements to the leased office space.  The aggregate amount of payments by us to Amsdell and Amsdell under these lease agreements for each of the three months ended September 30, 2009 and September 30, 2008 was approximately $0.1 million.  Additionally, the aggregate amount of payments for each of the nine months ended September 30, 2009 and September 30, 2008 was approximately $0.3 million.  We vacated the office space owned by Amsdell and Amsdell in 2007, but

 

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