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

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

(Mark one)
x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended June 30, 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)

 

 

 

(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.

 

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

 

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

 

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

 

Class		Outstanding at August 5, 2009
common shares, $.01 par value		60,664,846

 

 

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U-STORE-IT TRUST

TABLE OF CONTENTS

 

Part I. FINANCIAL INFORMATION
Item 1.	Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	29
Part II. OTHER INFORMATION
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 4.	Submission of Matters to a Vote of Security Holders	30
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. 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 entirely 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 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;

 

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·                  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;

 

·                  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)

 

		June 30,			December 31,
		2009			2008
ASSETS
Storage facilities		$	1,869,114		$	1,888,123
Less: Accumulated depreciation		(344,029		)	(328,165		)
Storage facilities, net		1,525,085			1,559,958
Cash and cash equivalents		1,657			3,744
Restricted cash		18,798			16,217
Loan procurement costs, net of amortization		5,392			4,453
Assets held for sale		—			2,378
Other assets, net		11,780			10,909
Total assets		$	1,562,712		$	1,597,659
LIABILITIES AND EQUITY
Revolving credit facility		$	104,000		$	172,000
Unsecured term loan		200,000			200,000
Secured term loan		46,447			57,419
Mortgage loans and notes payable		593,182			548,085
Accounts payable, accrued expenses and other liabilities		32,212			39,410
Distributions payable		1,630			1,572
Deferred revenue		9,484			9,725
Security deposits		472			472
Other liabilities held for sale		—			22
Total liabilities		987,427			1,028,705
Noncontrolling interests of the Company		45,649			46,026
Commitments and contingencies
Shareholders’ equity:
Common shares $.01 par value, 200,000,000 shares authorized, 60,137,647 and 57,623,491 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively		601			576
Additional paid-in capital		812,247			801,029
Accumulated other comprehensive loss		(4,165		)	(7,553		)
Accumulated deficit		(279,047		)	(271,124		)
Total shareholders’ equity		529,636			522,928
Total liabilities and equity		$	1,562,712		$	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 June 30,						Six Months EndedJune 30,
		2009			2008			2009			2008
REVENUES
Rental income		$	52,336		$	54,274		$	105,890		$	108,399
Other property related income		4,676			4,096			8,511			7,625
Total revenues		57,012			58,370			114,401			116,024
OPERATING EXPENSES
Property operating expenses		26,002			24,777			50,370			49,168
Depreciation and amortization		18,700			19,817			37,365			39,289
General and administrative		5,626			6,469			11,102			11,964
Total operating expenses		50,328			51,063			98,837			100,421
OPERATING INCOME		6,684			7,307			15,564			15,603
OTHER INCOME (EXPENSE)
Interest:
Interest expense on loans		(11,473		)	(12,965		)	(22,826		)	(26,791		)
Loan procurement amortization expense		(545		)	(486		)	(1,028		)	(957		)
Interest income		55			32			100			91
Other		(1		)	71			(13		)	139
Total other expense		(11,964		)	(13,348		)	(23,767		)	(27,518		)
LOSS FROM CONTINUING OPERATIONS		(5,280		)	(6,041		)	(8,203		)	(11,915		)
DISCONTINUED OPERATIONS
Income from discontinued operations		72			1,031			209			2,001
Net gain on disposition of discontinued operations		2,122			5,308			2,622			5,880
Total discontinued operations		2,194			6,339			2,831			7,881
NET INCOME (LOSS)		(3,086		)	298			(5,372		)	(4,034		)
NET LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTERESTS		242			(35		)	419			315
NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY		$	(2,844	)	$	263		$	(4,953	)	$	(3,719	)
Basic and diluted loss per share from continuing operations attributable to common shareholders		$	(0.08	)	$	(0.10	)	$	(0.13	)	$	(0.19	)
Basic and diluted earnings per share from discontinued operations attributable to common shareholders		0.03			0.11			0.04			0.13
Basic and diluted earnings (loss) per share attributable to common shareholders		$	(0.05	)	$	0.01		$	(0.09	)	$	(0.06	)
Weighted-average basic and diluted shares outstanding		58,165			57,620			57,928			57,606
AMOUNTS ATTRIBUTABLE TO THE COMPANY’S COMMON SHAREHOLDERS:
Loss from continuing operations		$	(4,860	)	$	(5,634	)	$	(7,554	)	$	(11,094	)
Total discontinued operations		2,016			5,897			2,601			7,375
Net income (loss)		$	(2,844	)	$	263		$	(4,953	)	$	(3,719	)

 

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)

 

		Six Months Ended June 30,
		2009			2008
Operating Activities
Net loss		$	(5,372	)	$	(4,034	)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization		38,503			41,127
Gain on disposition of discontinued operations		(2,622		)	(5,880		)
Equity compensation expense		1,714			1,669
Accretion of fair market value adjustment of debt		(233		)	(266		)
Changes in other operating accounts:
Other assets		(1,257		)	1,430
Accounts payable and accrued expenses		(3,374		)	(5,905		)
Other liabilities		(197		)	749
Net cash provided by operating activities		$	27,162		$	28,890
Investing Activities
Acquisitions, additions and improvements to storage facilities		(8,339		)	(22,613		)
Proceeds from sales of properties		11,180			16,173
Increase in restricted cash		(2,581		)	(2,381		)
Net cash provided by (used in) investing activities		$	260		$	(8,821	)
Financing Activities
Proceeds from:
Revolving credit facility		9,500			36,700
Secured term loans		—			9,975
Mortgage loans and notes payable		51,900			—
Principal payments on:
Revolving credit facility		(77,500		)	(43,500		)
Secured term loans		(10,972		)	—
Mortgage loans and notes payable		(6,570		)	(4,350		)
Proceeds from issuance of common shares, net		9,530			—
Distributions paid to shareholders		(2,900		)	(20,799		)
Distributions paid to noncontrolling interests		(254		)	(1,828		)
Loan procurement costs		(2,243		)	(133		)
Net cash used in financing activities		$	(29,509	)	$	(23,935	)
Decrease in cash and cash equivalents		(2,087		)	(3,866		)
Cash and cash equivalents at beginning of period		3,744			4,517
Cash and cash equivalents at end of period		$	1,657		$	651
Supplemental Cash Flow Information
Cash paid for interest, net of interest capitalized		$	22,700		$	27,231
Supplemental disclosure of noncash activities:
Acquisition of facilities
Additions to storage facilities		$	—		$	1,023
Derivative valuation adjustment		$	2,915		$	945
Foreign currency translation adjustment		$	769		$	3

 

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 June 30, 2009, owned a 92.2% 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, which it has elected to treat as taxable REIT subsidiaries. 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 Securities and Exchange Commission (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 six months ended June 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

 

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140 (“SFAS 166”) [ASC 860], which 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.  SFAS 166 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets and requires additional disclosures.  SFAS 166 is effective for fiscal years beginning after November 15, 2009. We have not completed our assessment of the impact SFAS 166 will have on our financial condition, results of operations or cash flows.

 

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (“FAS 167”) [ASC 810-10], which modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. SFAS 167 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.  SFAS 167 requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity.  SFAS 167 also requires additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement.  SFAS 167 is effective for fiscal years beginning after November 15, 2009. We have not completed our assessment of the impact SFAS 167 will have on our financial condition, results of operations or cash flows.

 

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles a Replacement of FASB Statement No. 162 (“SFAS

 

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168”). This Standard establishes the FASB Accounting Standards Codification™ (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. The Codification is effective for interim and annual periods ending after September 15, 2009, and as of the effective date, all existing accounting standard documents will be superseded. The Codification is effective for us in the third quarter of 2009, and accordingly, our Quarterly Report on Form 10-Q for the quarter ending September 30, 2009 and all subsequent public filings will reference the Codification as the sole source of authoritative literature.

 

In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“EITF 03-6-1”).  EITF 03-6-1 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.  EITF 03-6-1 became effective for the Company on January 1, 2009.  The adoption of EITF 03-6-1 in 2009 did not have a material effect on the consolidated financial statements.

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities - an Amendment of FASB Statement No. 133 (“SFAS 161”).  SFAS 161 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 FASB Statement No. 133 and the impact of derivative instruments and related hedged items on an entity’s financial position, financial performance and cash flows.  SFAS 161 became effective for the Company on January 1, 2009.  The adoption of SFAS 161 in 2009 did not have a material effect on the consolidated financial statements.

 

3.  STORAGE FACILITIES

 

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

 

 

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

 

Facility/Portfolio		Location		Transaction Date		Total Number of Facilities		Gross Purchase / Sale 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
								$	11,723

 

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

 

As of June 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 June 30, 2009 was $304 million and was comprised of $200 million of term loan borrowings and $104 million of unsecured revolving loans.  As of June 30, 2009, approximately $146 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 currently intends to exercise this extension option prior to the November 20, 2009 maturity date unless the Company procures a replacement credit facility prior to that time making such extension unnecessary.  See Note 12 - Subsequent Events.  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 grate rating, and will vary from 0.425% to 1.00% depending on our credit rating after achieving an investment grade rating. At June 30, 2009, borrowings under the unsecured credit facility had a weighted average interest rate of 1.81% 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 have a November 20, 2009 termination 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 $86,000, and are not in default under the facility.  The Company currently intends to exercise these extension options prior to the November 20, 2009 termination date unless the Company is able to refinance such term loans prior to that time making such extension unnecessary.  See Note 12 - Subsequent Events.  Each term loan bears 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 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 are 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.   As of June 30, 2009, there was one term loan outstanding totaling $46.4 million that had a weighted average interest rate of 1.91% and the Company was in compliance with all financial covenants of the agreement.

 

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5.  MORTGAGE LOANS AND NOTES PAYABLE

 

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

 

 

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

 

 

The Company currently intends to fund its 2009 future principal payment requirements from cash provided by operating activities, proceeds from property dispositions and additional borrowings under our credit facility (approximately $146 million available as of

 

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June 30, 2009).   As of June 30, 2009 we were in compliance with all events of default covenants under the applicable loan agreements.

 

We believe that, as a publicly traded REIT, we will have access to multiple sources of capital to fund long-term liquidity requirements, including the incurrence of additional debt and the issuance of additional equity. However, we cannot provide any assurance that this will be the case. Our ability to incur additional debt will be dependent on a number of factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions that may be imposed by lenders. In addition, the current dislocation in the United States debt markets has significantly reduced the availability and increased the cost of long-term debt capital, including conventional mortgage financing and commercial mortgage-backed securities financing.  Our ability to access the debt and equity capital markets will also be dependent upon a number of factors, including general market conditions for REITs and market perceptions about us.  Consequently, we can provide no assurance that such capital will be readily available in the foreseeable future.

 

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 June 30, 2009 (dollars in thousands):

 

 

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

 

7.  FAIR VALUE MEASUREMENTS

 

On January 1, 2008, the Company adopted the methods of fair value as described in the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”) to value its financial assets and liabilities. As defined in SFAS No. 157, 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, SFAS No. 157 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.

 

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considering counterparty credit risk in its assessment of fair value.

 

To comply with the provisions of SFAS No. 157, 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 June 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, NYMEX 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 six months ended June 30, 2009 that would reduce the amount owed by the Company.

 

In April 2009, the FASB issued FASB Staff Position on SFAS 107, “Disclosures about Fair Value of Financial Instruments”, and APB Opinion 28, “Interim Financial Reporting”, entitled “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1 amends SFAS 107 by requiring disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements and APB 28 by requiring disclosures in summarized financial information at interim reporting periods. This FSP is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 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

 

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debt obligation with similar credit policies. Credit spreads take into consideration general market conditions and maturity. As of June 30, 2009, the carrying value and estimated fair value of the Company’s debt was $943.6 million and $904.3 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

 

The Company has adopted SFAS 160 effective January 1, 2009. Per SFAS 160, 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 SFAS 160, 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.

 

However, per FASB Emerging Issues Task Force Topic No. D-98, “Classification and Measurement of Redeemable Securities” (“EITF D-98”), 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 in EITF 00-19 “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.  EITF D-98 also requires that noncontrolling interests are 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 7.8% as of June 30, 2009 and 8.1 % as of December 31, 2008 of all outstanding units.  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 EITF D-98, 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.  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 June 30, 2009 and December 31, 2008 as carrying cost exceeded the estimated redemption value.

 

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

 

		Shareholders’ Equity						Noncontrolling Interest
		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		27			—			—			—
Issuance of common shares		9,503			—			—			—
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 (loss):
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

 

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 June 30, 2009, 5,079,923 units were outstanding, and as of June 30, 2009, the calculated aggregate redemption value of outstanding Operating Partnership units based upon the Company’s share price was approximately $22.9 million.

 

The Company has a 97% interest in USIFB, LLP (“the Venture”), and through a wholly-owned subsidiary and together with its joint venture partner, operations began at one facility in London, England during 2008.  The Venture was formed to own, operate, acquire and develop self-storage facilities in England.  We have determined that the Venture is a variable interest entity as defined by FIN 46R, and that we are the primary beneficiary.  The 3% interest that is owned by our joint venture partner is reflected in noncontrolling interest on the consolidated balance sheet. Accordingly, the assets, liabilities and results of operations of the Venture are consolidated in our consolidated financial statements.  At June 30, 2009, the Venture had total assets of $7.0 million and total liabilities of $4.1 million and a mortgage loan of $4.0 million secured by assets with a net book value of $6.5 million.

 

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 June 30, 2009 and June 30, 2008 was approximately $0.1 million.  Additionally, the aggregate amount of payments for each of the six months ended June 30, 2009 and June 30, 2008 was approximately $0.2 million.  We vacated the office space owned by Amsdell and Amsdell in 2007, but remained obligated under certain of the lease agreements through 2014.  Subsequently, we entered into a sublease agreement for the space with a third party for the remainder of the lease term.

 

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Total future minimum rental payments under the related party lease agreements as of June 30, 2009 are as follows:

 

 

10.  DISCONTINUED OPERATIONS

 

For the three months ended June 30, 2009 and June 30, 2008, income from discontinued operations relates to two properties sold through June 30, 2009 and five properties that the Company sold during 2008.  For the six months ended June 30, 2009 and June 30, 2008, income from discontinued operations relates to three properties sold during 2009 and seven properties sold during 2008.  Each of the sales during 2009 resulted in the recognition of a gain, which in the aggregate totaled $2.1 million and $2.6 million for the three and six months ended June 30, 2009, respectively.

 

The following table summarizes the revenue and expense information for the properties classified as discontinued operations for the three and six months ended June 30, 2009 and June 30, 2008 (in thousands):

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2009			2008			2009			2008
REVENUES
Rental income		$	162		$	2,170		$	454		$	4,630
Other property related income		19			168			48			347
Total revenues		181			2,338			502			4,977
OPERATING EXPENSES
Property operating expenses		69			836			183			1,980
Depreciation		40			471			110			996
Total operating expenses		109			1,307			293			2,976
INCOME FROM DISCONTINUED OPERATIONS		72			1,031			209			2,001
Net gain on disposition of discontinued operations		2,122			5,308			2,622			5,880
Total discontinued operations		$	2,194		$	6,339		$	2,831		$	7,881

 

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