UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

Commission file number: 001-32324

U-STORE-IT TRUST

(Exact Name of Registrant as Specified in its Charter)

 

(440) 234-0700

(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 is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one).

 

Indicate by check mark whether the registrant is a shell company (as determined 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:

 

 

U-STORE-IT TRUST

TABLE OF CONTENTS

Part I. FINANCIAL INFORMATION
Item 1. Financial Statements		3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3. Quantitative and Qualitative Disclosures About Market Risk		23
Item 4. Controls and Procedures		24
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security holders		26
Item 6. Exhibits		26

 

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 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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. Risks, uncertainties and other factors that might cause such differences, some of which could be material, include, but are not limited to:

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

·         the competitive environment in which we operate;

·         the execution of our business plan;

·         financing risks;

·         increases in interest rates and operating costs;

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

·         acquisition and development risks;

·         changes in real estate and zoning laws or regulations;

·         risks related to natural disasters;

·         potential environmental and other liabilities;

·         material weaknesses in our internal control over financial reporting;

·         other factors affecting the real estate industry generally or the self-storage industry in particular; and

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

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
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)

		March 31,			December 31,
		2007			2006
ASSETS
Storage facilities		$	1,794,139		$	1,771,864
Accumulated depreciation		(221,752		)	(205,049		)
		1,572,387			1,566,815
Cash and cash equivalents		5,649			19,716
Restricted cash		15,508			14,126
Loan procurement costs—net of amortization		7,132			7,575
Other assets		6,205			6,475
Due from related parties		554			632
Total assets		$	1,607,435		$	1,615,339
LIABILITIES AND SHAREHOLDERS’ EQUITY
Revolving credit facility		$	107,500		$	90,500
Unsecured term loan		200,000			200,000
Mortgage loans and notes payable		586,804			588,930
Accounts payable and accrued expenses		20,994			22,590
Due to related parties		119			336
Distributions payable		18,192			18,197
Deferred revenue		10,429			9,740
Security deposits		632			655
Total liabilities		944,670			930,948
Minority interests		55,009			56,898
Commitments and contingencies
Shareholders’ Equity
Common shares $.01 par value, 200,000,000 shares authorized, 57,408,819 and 57,335,490 shares issued and outstanding at March 31, 2007 and December 31, 2006, respectively		574			573
Additional paid in capital		794,901			794,632
Accumulated deficit		(187,719		)	(167,712		)
Total shareholders’ equity		607,756			627,493
Total liabilities and shareholders’ equity		$	1,607,435		$	1,615,339

 

See accompanying notes to the unaudited condensed consolidated financial statements.

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U-STORE-IT TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

		Three Months Ended March 31,
		2007			2006
					(as restated,
					see note 2)
REVENUES
Rental income		$	51,133		$	44,994
Other property related income		4,282			3,101
Other—related party		117			115
Total revenues		55,532			48,210
OPERATING EXPENSES
Property operating expenses		23,239			18,917
Property operating expenses—related party		37			20
Depreciation		16,767			14,672
General and administrative		5,888			5,389
General and administrative—related party		101			177
Total operating expenses		46,032			39,175
OPERATING INCOME		9,500			9,035
OTHER INCOME (EXPENSE)
Interest:
Interest expense on loans		(12,826		)	(10,000		)
Loan procurement amortization expense		(445		)	(462		)
Write-off of loan procurement cost due to early extinguishment of debt		—			(1,273		)
Interest income		115			884
Other		(6		)	42
Total other expense		(13,162		)	(10,809		)
LOSS BEFORE MINORITY INTERESTS		(3,662		)	(1,774		)
MINORITY INTERESTS		304			149
NET LOSS		$	(3,358	)	$	(1,625	)
Basic and diluted loss per share		$	(0.06	)	$	(0.03	)
Weighted-average basic and diluted shares outstanding		57,421			57,257
Distributions declared per common share and unit		$	0.29		$	0.29

 

See accompanying notes to the unaudited condensed consolidated financial statements.

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U-STORE-IT TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

		Three Months Ended March 31,
		2007			2006
					(as restated, see note 2)
Operating Activities
Net loss		$	(3,358	)	$	(1,625	)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization		17,212			15,134
Equity compensation expense		228			210
Accretion of fair market value of debt		(66		)	(213		)
Early extinguishment of debt		—			1,273
Minority interests		(304		)	(149		)
Changes in other operating accounts:
Other assets		348			(2,029		)
Accounts payable and accrued expenses		(1,688		)	(4,342		)
Other liabilities		572			67
Net cash provided by operating activities		$	12,944		$	8,326
Investing Activities
Acquisitions, additions and improvements to storage facilities		(22,355		)	(220,892		)
Acquisitions, additions and improvements to storage facilities—related party		—			(26		)
Proceeds from sales of assets		—			20
Proceeds from sales of marketable securities		—			114,170
Investment in marketable securities		—			(19,000		)
Insurance settlements		—			1,712
Decrease (increase) in restricted cash		(1,382		)	958
Net cash used in investing activities		$	(23,737	)	$	(123,058	)
Financing Activities
Proceeds from:
Revolving credit facility		21,500			46,000
Short-term financing		—			30,000
Principal payments on:
Revolving credit facility		(4,500		)	—
Mortgage loans and notes payable		(2,060		)	(2,313		)
Short term financing		—			(30,000		)
Capital lease obligations		(17		)	(12		)
Distributions paid to shareholders		(16,627		)	(16,624		)
Distributions paid to minority partners		(1,570		)	(1,507		)
Loan procurement costs		—			(945		)
Proceeds from exercise of stock options		—			1,465
Net cash from (used in) financing activities		$	(3,274	)	$	26,064
Decrease in cash and cash equivalents		(14,067		)	(88,668		)
Cash and cash equivalents at beginning of period		19,716			101,679
Cash and cash equivalents at end of period		$	5,649		$	13,011
Supplemental Cash Flow Information
Cash paid for interest, net of interest capitalized		$	12,785		$	9,644
Supplemental disclosure of noncash activities:
Storage facilities acquired through the assumption of a mortgage loan		$	—		$	7,072
Other assets and liabilites (net) acquired as part of storage facility acquisitions		$	—		$	447

 

See accompanying notes to the unaudited condensed consolidated financial statements.

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U-STORE-IT TRUST AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.  ORGANIZATION AND NATURE OF OPERATIONS

U-Store-It Trust, a Maryland real estate investment trust (collectively with its subsidiaries, “we” 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.  As of March 31, 2007, the Company owned 402 self-storage facilities (collectively, the “Properties”) containing an aggregate of approximately 25.5 million square feet.  The Properties are located in 27 states throughout the United States. All references to building square footage, occupancy percentage, and the number of buildings are unaudited.

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 March 31, 2007, owned a 91.7% 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.  In addition to managing the Properties, the Management Company managed approximately 1.1 million square feet related to facilities owned by related parties as of March 31, 2007. The Company owns 100% of U-Store-It Mini Warehouse Co. (the “TRS”), which it has elected to treat 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.  RESTATEMENTS OF PREVIOUSLY ISSUED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Subsequent to the issuance of the Company’s 2005 financial statements, the Audit Committee of the Board of Trustees of the Company, upon recommendation from management, concluded that the previously issued financial statements contained errors related to the Company’s classification of auction rate securities held at December 31, 2005 as cash and cash equivalents.  As a result, the Company is restating its previously issued financial statements.

In the quarter ended September 30, 2006, the Company early adopted Staff Accounting Bulletin No. 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”).  As a result of the discovery of the error described above, the Company is restating its previously issued financial statements to reflect, in the appropriate periods, the correction of the errors originally corrected via an adjustment of the Company’s January 1, 2006 accumulated deficit in accordance with SAB 108.

The following is a description of the nature of the errors being corrected in the restatement:

Cash and Cash Equivalents

The Company adjusted its Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2006 to change the classification of outstanding checks from “Accounts payable and accrued expenses” to “Cash and cash equivalents.”  This adjustment had no effect on the Condensed Consolidated  Statement of Operations.

Auction Rate and Other Marketable Securities

The Company adjusted its Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2006 to change the classification of approximately $89.8 million of auction rate and approximately $5.4 million of other variable rate demand note securities from “Cash and cash equivalents” to “Marketable Securities.” Auction rate and variable rate demand note securities are securities that have stated maturities beyond three months, but are priced and traded as short-term investments due to the liquidity provided through an auction mechanism. The definition of a cash equivalent does not include these securities. This adjustment resulted in changes to the opening cash and cash equivalents balance in the Statement of Cash Flows for the three months ended March 31, 2006, and had no effect on the Condensed Consolidated  Statement of Operations.

Restricted Cash

The Company adjusted its Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2006 to change the classification of certain deposits related to facilities encumbered with mortgage loans from “Cash and cash equivalents” to “Restricted Cash.”  This adjustment resulted in changes to the opening cash and cash equivalents balance in the Statement of Cash Flows for the three months ended March 31, 2006, and had no effect on the Condensed Consolidated  Statement of Operations.

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Loan Procurement Costs

The Company adjusted its Condensed Consolidated Statement of Operations for the three months ended March 31, 2006 to reflect a change in amortization period of certain loan procurement costs, associated with debt instruments with increasing interest rates. The loan procurement costs were being amortized over a period inconsistent with the determination of the debt instruments’ interest cost.

Other Assets / Rental Income

The Company adjusted its Condensed Consolidated Statement of Operations for the three months ended March 31, 2006 for adjustments to certain leasing transactions. The misstatement related to the period in which the revenue related to certain tenants had been recognized.

Accounts Payable and Accrued Expense

The Company adjusted its Condensed Consolidated Statement of Operations for the three months ended March 31, 2006 to accrue for utility costs at period end and workers compensation expense that had been understated as a result of erroneous information used to previously calculate the expense.

Related Party Revenue

The Company adjusted its Condensed Consolidated Statement of Operations for the three months ended March 31, 2006 to change the classification of management fee revenue earned through the Company’s management of certain facilities owned by related parties from “Rental income” to “Other-Related party”.

In addition, the Company adjusted its Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2006 to correct the presentation of the change in accounts payable related to real estate investment as an Investing Activity where it had previously been reported as an Operating Activity, and the Company added a disclosure regarding cash paid for interest, net of interest capitalized.

This table recaps the adjustments described above:

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		Previously						As
		Reported			Adjustment			Restated
		(in thousands)
For the three months ended March 31, 2006
Statement of Operations
Rental income		$	45,027		$	(33	)	$	44,994
Other—related party		$	—		$	115		$	115
Total revenues		$	48,128		$	82		$	48,210
Property operating expenses		$	18,860		$	57		$	18,917
Total operating expenses		$	39,118		$	57		$	39,175
Operating income		$	9,010		$	25		$	9,035
Loan procurement amortization expense		$	(395	)	$	(67	)	$	(462	)
Total other expense		$	(10,742	)	$	(67	)	$	(10,809	)
Loss before minority interest		$	(1,732	)	$	(42	)	$	(1,774	)
Minority interests		$	145		$	4		$	149
Net loss		$	(1,587	)	$	(38	)	$	(1,625	)
Statement of Cash Flows
Cash Flows from Operating Activities:
Net loss		$	(1,587	)	$	(38	)	$	(1,625	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		$	15,067		$	67		$	15,134
Minority interests		$	(145	)	$	(4	)	$	(149	)
Changes in other operating accounts
Other assets		$	(1,947	)	$	(82	)	$	(2,029	)
Accounts payable and accrued expenses		$	(2,635	)	$	(1,707	)	$	(4,342	)
Net cash provided by operating activities		$	10,090		$	(1,764	)	$	8,326
Cash Flows from Investing Activities:
Acquisitions, additions and improvements to storage facilities		$	(219,859	)	$	(1,033	)	$	(220,892	)
Proceeds from sale of marketable securities		$	—		$	114,170		$	114,170
Investment in marketable securities		$	—		$	(19,000	)	$	(19,000	)
Decrease in restricted cash		$	690		$	268		$	958
Net cash used in investing activities		$	(217,463	)	$	94,405		$	(123,058	)
Decrease in cash and cash equivalents		$	(181,309	)	$	92,641		$	(88,668	)
Cash and cash equivalents at beginning of period		$	201,098		$	(99,419	)	$	101,679
Cash and cash equivalents at end of period		$	19,789		$	(6,778	)	$	13,011

 

3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation—The accompanying unaudited condensed 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 (“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, 2006, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006 (Commission File No. 001-32324), 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 the three months ended March 31, 2007 and 2006 are not necessarily indicative of the results of operations to be expected for any future period or the full year.

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4.  STORAGE FACILITIES

The following summarizes the real estate assets of the Company as of:

 

The carrying value of storage facilities has increased from December 31, 2006 to March 31, 2007, primarily as a result of the acquisition of three self-storage facilities in 2007.

The Company completed the following acquisitions during the period January 1, 2006 to March 31, 2007:

 

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5.  REVOLVING CREDIT FACILITY AND UNSECURED TERM LOAN

As of March 31, 2007, the Company and its Operating Partnership had in place a three-year $450 million unsecured credit facility, including $200 million in an unsecured term loan and $250 million in unsecured revolving loans, for which the outstanding balance was $307.5 million and was comprised of $200 million of term loan borrowings and $107.5 million of unsecured revolving loans.  As of March 31, 2007, the Company had approximately $142.5 million available under the Company’s credit facility.  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.  This credit facility is scheduled to terminate on November 20, 2009, with an option for the Company to extend the termination date to November 20, 2010. At March 31, 2007, borrowings under the unsecured credit facility had a weighted average interest rate of 6.47%.

6.  MORTGAGE LOANS AND NOTES PAYABLE

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

 

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The following table presents the future principal payment requirements on outstanding mortgage loans at March 31, 2007 (in thousands):

 

7.  MINORITY INTERESTS

Operating Partnership minority interests relate to the interests in the Operating Partnership that are not owned by the Company, which, at March 31, 2007 and December 31, 2006, amounted to approximately 8.3%.

In conjunction with the formation of the Company, certain former owners contributed facilities to the Operating Partnership and received units in the Operating Partnership concurrently with the closing of the IPO. Limited partners who acquired Operating Partnership units in the formation transactions have the right, effective October 27, 2005, to require the Operating Partnership to redeem part or all of their Operating Partnership units for cash or, at the Company’s option, common shares, based upon the fair market value of an equivalent number of common shares for which the Operating Partnership units would have been redeemed if the Company had assumed and satisfied the Operating Partnership’s obligation by paying common shares. The market value of the Company’s common shares for this purpose 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 day on which the Company received the redemption notice. Upon consummation of the IPO, the carrying value of the net assets of the Operating Partnership was allocated to minority interests. Pursuant to three contribution agreements and three option exercises in 2005, entities owned by the Company’s former Chief Executive Officer and one of its former Trustees received an aggregate of 1,524,358 Operating Partnership units for six facilities with a net historical basis of $7.3 million.

In conjunction with the National Self Storage acquisition, National Self Storage received 3,674,497 Operating Partnership units. As provided in the partnership agreement of the Operating Partnership, these units are redeemable by the unitholders for cash or, at the Company’s option, common shares, on a one-for-one basis.

8.  RELATED PARTY TRANSACTIONS

Robert J. Amsdell, former Chief Executive Officer and Chairman of the Board of Trustees, retired from the Board effective as of February 13, 2007.  Barry L. Amsdell submitted his letter of resignation from the Board on February 20, 2007.  Effective as of February 19, 2007 the Amended and Restated Employment Agreement of Todd C. Amsdell, President of U-Store-It Development LLC, a subsidiary of the Company, was terminated.

Acquisition of Facilities

In connection with the IPO, the Company entered into option agreements with Rising Tide Development, a company owned and controlled by Robert J. Amsdell and Barry L. Amsdell to acquire 18 self-storage facilities, consisting, as of March 31, 2007, of 14 facilities owned by Rising Tide Development, one facility which Rising Tide Development has the right to acquire from an unaffiliated third party and three facilities which have since been acquired by the Company pursuant to the exercise of its options. The options become exercisable with respect to each particular self-storage facility if and when that facility achieves a month-end occupancy level of 85% for three consecutive months. None of the remaining self-storage facilities that we have the option to purchase met the occupancy requirement as of March 31, 2007. The purchase price will be equal to the lower of (i) a price determined by multiplying in-place net operating income at the time of purchase by 12.5 and (ii) the fair market value of the option facility as determined by an appraisal process involving third party appraisers. The Company’s option to acquire these facilities will expire on

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October 27, 2008. The determination to purchase any of the option facilities will be made by the independent members of the Company’s Board of Trustees.  During 2005, the Company exercised its option to purchase three of these facilities for an aggregate purchase price of approximately $17.4 million, consisting of an aggregate of $6.8 million in Operating Partnership units and $10.6 million in cash after a price reduction of $1.7 million of consideration in May 2005. The price reduction resulted from a discovery that the calculation of the March purchase price was not made in accordance with the terms specified in the option agreement, which resulted in the overpayment. On May 14, 2005, the Company entered into an agreement with Rising Tide Development pursuant to which 100,202 units in the Operating Partnership previously issued to Rising Tide Development were cancelled and $28,057 in cash (representing the distribution paid with respect to such units in April 2005) was returned to the Company.

The Company, in accordance with a contract signed on April 3, 2006, acquired nine self-storage facilities from Jernigan Property Group on July 27, 2006 for consideration of approximately $45.3 million. Our President and Chief Executive Officer, Dean Jernigan, serves as President of Jernigan Property Group and has a 20% beneficial interest in one self-storage facility partially owned by Jernigan Property Group and related companies and partnerships. Mr. Jernigan has agreed that he will not expand his interest, ownership or activity in the self-storage business. Given Mr. Jernigan’s appointment as a Trustee and the President and Chief Executive Officer of the Company on April 24, 2006, this transaction was subject to review and final approval by a majority of the independent members of the Company’s Board of Trustees. Mr. Jernigan has discontinued all involvement in the day-to-day management or operation of the Jernigan Property Group.

Management Services

Effective October 27, 2004, YSI Management LLC, a wholly-owned subsidiary of the Operating Partnership, entered into a management contract with Rising Tide Development to provide property management services to the option facilities for a fee equal to the greater of 5.35% of the gross revenues of each facility or $1,500 per facility per month. Management fees earned by YSI Management LLC, from Rising Tide Development, were approximately $0.1 million for each of the three month periods ended March 31, 2007 and 2006, and are included in other related party revenues. Accounts receivable from Rising Tide Development at March 31, 2007 and December 31, 2006 were each approximately $0.6 million, and are included in due from related parties. These amounts represent expenses paid on behalf of Rising Tide Development by YSI Management LLC and proceeds from the sale of ancillary items that will be reimbursed under standard business terms.

Historically, the Company engaged Amsdell Construction, a company owned by Robert J. Amsdell and Barry L. Amsdell, to maintain and improve its self-storage facilities. The total payments incurred by the Company to Amsdell Construction during 2006 was approximately $42,000 (approximately $11,000 for the three months ended March 31, 2006). The Company did not engage Amsdell Construction during 2007.

Corporate Office Leases

During 2005 and 2006, our Operating Partnership entered into various office lease agreements with Amsdell and Amsdell, an entity owned by Robert J. Amsdell and Barry L. Amsdell.  Pursuant to these lease agreements, during 2006 we rented office space from Amsdell and Amsdell at The Parkview Building, a multi-tenant office building of approximately 40,000 square feet located at 6745 Engle Road, an office building of approximately 18,000 square feet located at 6751 Engle Road, and an office building of approximately 28,000 square feet located at 6779 Engle Road.  Each of these properties is part of Airport Executive Park, a 50-acre office and flex development located in Cleveland, Ohio, which is owned by Amsdell and Amsdell. Our independent Trustees approved the terms of, and entry into, each of the office lease agreements by our Operating Partnership.  The table below shows the office space subject to these lease agreements and certain key terms, including the term of each lease agreement, the period for which our Operating Partnership may extend the term of each lease agreement, and the minimum and maximum rents payable per month during the term.

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(1)            Our Operating Partnership may extend the lease agreement beyond the termination date by the period set forth in this column at prevailing market rates upon the same terms and conditions contained in each of the lease agreements.

(2)            In June 2006, our Operating Partnership terminated this lease agreement which had a month-to-month term.

In addition to monthly rent, the office lease agreements provide that our 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 March 31, 2007 and 2006 was approximately $0.1 million.

Total future minimum rental payments under the related party lease agreements entered into as of March 31, 2007 are as follows:

 

Aircraft Lease

The Company chartered an aircraft from Aqua Sun Investments, L.L.C. (“Aqua Sun”), a company owned by Robert J. Amsdell and Barry L. Amsdell. The Company was under contract pursuant to a timesharing agreement to reimburse Aqua Sun at the rate of $1,250 for each hour of use of the aircraft and the payment of certain expenses associated with the use of the aircraft. As described in the paragraph below, effective June 30, 2005 the timesharing agreement was terminated by mutual agreement of the parties thereto and was replaced on July 1, 2005 with a non-exclusive aircraft lease agreement with Aqua Sun (the “Aircraft Lease”). The Company’s independent Trustees approved the terms of, and the entry into, the Aircraft Lease by the Operating Partnership.

The Operating Partnership may lease for corporate use from time to time an airplane owned by Aqua Sun at an hourly rate of $1,450 per flight hour. Aqua Sun is responsible for various costs associated with operation of the airplane, including insurance, storage and maintenance and repair, but the Operating Partnership is responsible for fuel costs and the costs of pilots and other cabin personnel required for its use of the airplane. The Aircraft Lease, which was effective as of July 1, 2005, had a one-year term and was terminated on June 30, 2006. The total amounts incurred for such aircraft charters described above by the Company for the three months ended March 31, 2006 was approximately $0.1 million. No amounts were incurred during 2007.

Other

During the fourth quarter of 2006, the Company engaged a consultant to assist us in establishing certain development protocols and processes. In connection with that assignment, our outside consultant utilized the services of Dean Jernigan’s son-in-law. Our payments for his son-in-law’s services totaled $4,750 in 2006.

The Company engaged Dunlevy Building Systems Inc., a company owned by John Dunlevy, a brother-in-law of Robert J. Amsdell and Barry L. Amsdell, for construction, zoning consultant and general contractor services at certain of its self-storage facilities. The

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total payments incurred by the Company to Dunlevy Building Systems Inc. for the three months ended March 31, 2006 was approximately $11,000.  No payments were incurred in 2007.

Registration Rights

Robert J. Amsdell, Barry L. Amsdell, Todd C. Amsdell and the “Amsdell Entities” that acquired common shares or Operating Partnership units in the formation transactions which took place at the time of the IPO received certain registration rights. An aggregate of approximately 9.7 million common shares acquired in the formation transactions were subject to a registration rights agreement (including approximately 1.1 million shares issuable upon redemption of approximately 1.1 million Operating Partnership units issued in the formation transactions).

In addition, Rising Tide Development received registration rights with respect to the Operating Partnership units it received in connection with the Company’s acquisition of three option facilities. An aggregate of approximately 0.4 million common shares (which shares are issuable upon redemption of approximately 0.4 million Operating Partnership units issued in connection with the Company’s option exercises) were subject to a registration rights agreement.

In March 2007, the Company filed a Registration Statement on Form S-3 to satisfy all of the abovementioned registration rights.

9.  PRO FORMA FINANCIAL INFORMATION

During 2006, the Company acquired 60 self-storage facilities for an aggregate purchase price of approximately $362.4 million. During 2007, the Company acquired three self-storage facilities for an aggregate purchase price of approximately $19.5 million.

The unaudited condensed consolidated pro forma financial information set forth below reflects adjustments to the Company’s historical financial data to give effect to each of the acquisitions and related financing activity that occurred subsequent to January 1, 2006 as if each had occurred on January 1, 2006.  The unaudited pro forma information presented below does not purport to represent what the Company’s actual results of operations would have been for the periods indicated, nor does it purport to represent the Company’s future results of operations.

The following table summarizes, on a pro forma basis, our consolidated results of operations for the three months ended March 31, 2007 and 2006 based on the assumptions described above:

 

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

The following Management’s Discussion and Analysis gives effect to the restatements discussed in Note 2 to the unaudited condensed consolidated financial statements.

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. The Company makes certain statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this report entitled “Forward-Looking Statements.” Certain risk factors may cause actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see the section in this report entitled “Risk Factors.”

Overview

On October 27, 2004, the Company completed its IPO, pursuant to which it sold an aggregate of 28,750,000 common shares (including 3,750,000 shares pursuant to the exercise of the underwriters’ over-allotment option) at an offering price of $16.00 per share. The IPO resulted in gross proceeds to the Company of $460.0 million. On October 7, 2005, the Company completed a follow-on public offering, pursuant to which it sold an aggregate of 19,665,000 common shares (including 2,565,000 shares pursuant to the exercise of the underwriters’ over-allotment option) at an offering price of $20.35 per share, for gross proceeds of approximately $400.2 million.

The Company is an integrated self-storage real estate company, which means that it has in-house capabilities in the operation, design, development, leasing, and acquisition of self-storage facilities. The Company has elected to be taxed as a REIT for federal tax purposes. At March 31, 2007 and December 31, 2006, the Company owned 402 and 399 self-storage facilities, respectively, totaling approximately 25.5 and 25.4 million square feet, respectively.

The Company derives revenues principally from rents received from its customers who rent units at its self-storage facilities under month-to-month leases. Therefore, our operating results depend materially on our ability to retain our existing customers and lease our available self-storage units to new customers while maintaining and, where possible, increasing our pricing levels. In addition, our operating results depend on the ability of our customers to make required rental payments to us. We believe that our decentralized approach to the management and operation of our facilities, which places an emphasis on local, market level oversight and control, allows us to respond quickly and effectively to changes in local market conditions, where appropriate increasing rents while maintaining occupancy levels, or increasing occupancy levels while maintaining pricing levels.

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

In the future, the Company intends to focus on increasing our internal growth and selectively pursuing targeted acquisitions and developments of self-storage facilities. We intend to incur additional debt in connection with any such future acquisitions or developments.

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

The Company’s self-storage facilities are located in major metropolitan areas and have numerous tenants per facility. All our operations are within the United States and no single tenant represents 1% or more of our revenues. The facilities in Florida, California, Illinois and New Jersey provided approximately 19%, 16%, 7% and 6%, respectively, of total revenues for the three months ended March 31, 2007.

Summary of Critical Accounting Policies and Estimates

Set forth below is a summary of the accounting policies that management believes are critical to the preparation of the unaudited condensed consolidated  financial statements included in this report. Certain of the accounting policies used in the preparation of these condensed consolidated financial statements are particularly important for an understanding of the financial position and results of operations presented in the historical condensed consolidated financial statements included in this report. These policies require the application of

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judgment and assumptions by management and, as a result, are subject to a degree of uncertainty. Due to this uncertainty, actual results could differ from estimates calculated and utilized by management.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include all of the accounts of the Company, the Operating Partnership and the wholly-owned subsidiaries of the Operating Partnership.

For analytical presentation, all percentages are calculated using the numbers presented in the financial statements contained in Item 1 of this Form 10-Q.

Self-Storage Facilities

The Company records self-storage facilities at cost less accumulated depreciation. Depreciation on the buildings and equipment is recorded on a straight-line basis over their estimated useful lives, which range from five to 39 years. Expenditures for significant renovations or improvements that extend the useful life of assets are capitalized. Repairs and maintenance costs are expensed as incurred.

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

In allocating the purchase price, the Company determines whether the acquisition includes intangible assets or liabilities. Substantially all of the leases in place at acquired facilities are at market rates, as the majority of the leases are month-to-month contracts. Accordingly, to date no portion of the purchase price has been allocated to above- or below-market lease intangibles. The Company also considers whether the in-place, at market leases for any facility represent an intangible asset. Based upon the Company’s experience, leases of this nature generally re-let in less than 30 days and lease-up costs are minimal. Accordingly, the Company has no intangible assets recorded for in-place, at market leases as of March 31, 2007 and December 31, 2006.  Additionally, to date no intangible asset has been recorded for the value of tenant relationships, because the Company does not have any concentrations of significant tenants and the average tenant turnover is fairly frequent.

Long-lived assets classified as “held for use” are reviewed for impairment when events and circumstances indicate that there may be an impairment. The carrying values of these long-lived assets are compared to the undiscounted future net operating cash flows attributable to the assets. An impairment loss is recorded if the net carrying value of the asset exceeds the fair value based on its undiscounted future net operating cash flows attributable to the asset and circumstances indicate that the carrying value of the real estate asset may not be recoverable. The impairment loss recognized equals the excess of net carrying value over the related fair value of the asset.

The Company considers long-lived assets to be “held for sale” upon satisfaction of the following criteria: (a) management commits to a plan to sell a facility (or group of facilities), (b) the facility is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such facilities, (c) an active program to locate a buyer and other actions required to complete the plan to sell the facility have been initiated, (d) the sale of the facility is probable and transfer of the asset is expected to be completed within one year, (e) the facility is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and (f) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

Typically these criteria are all met when the relevant asset is under contract, significant non-refundable deposits have been made by the potential buyer, the assets are immediately available for transfer and there are no contingencies related to the sale that may prevent the transaction from closing. In most transactions, these contingencies are not satisfied until the actual closing of the transaction; and, accordingly, the facility is not identified as held for sale until the closing actually occurs. However, each potential transaction is evaluated based on its separate facts and circumstances.

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Revenue Recognition

Management has determined that all of our leases with tenants are operating leases. Rental income is recognized in accordance with the terms of the lease agreements or contracts, which generally are month-to-month. Revenues from long-term operating leases are recognized on a straight-line basis over the term of the lease. The excess of rents recognized over amounts contractually due pursuant to the underlying leases is included in deferred revenue, and contractually due but unpaid rents are included in other assets.

Share-Based Payments

We apply the fair value method of accounting for contingently issued shares and share options issued under our incentive award plan. Accordingly, share compensation expense was recorded ratably over the vesting period relating to such contingently issued shares and options. The Company has elected to recognize compensation expense on a straight-line method over the requisite service period.  Compensation expense recorded for the three months ended March 31, 2007 and 2006 was approximately $0.2 million.

Minority Interests

Minority Interests include income allocated to holders of the Operating Partnership units. Income is allocated to the minority interests based on their ownership percentage of the Operating Partnership. This ownership percentage, as well as the total net assets of the Operating Partnership, changes when additional shares of our common stock or Operating Partnership units are issued. Such changes result in an allocation between shareholders’ equity and Minority Interests in the Consolidated Balance Sheets. Due to the number of such capital transactions that occur each period, we present the single net effect of all such allocations for the period as “Adjustment for Minority Interest in Operating Partnership” in our Consolidated Statements of Shareholders’ Equity (rather than separately allocating the minority interests for each individual capital transaction).

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 provides guidance for using fair value to measure assets and liabilities. This statement clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing the asset or liability. SFAS No. 157 establishes a fair value hierarchy, giving the highest priority to quoted prices in active markets and the lowest priority to unobservable data. SFAS No. 157 applies whenever other standards require assets or liabilities to be measured at fair value. This statement is effective in fiscal years beginning after November 15, 2007. The Company believes that the adoption of this standard on January 1, 2008 will not have a material effect on our consolidated financial statements.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (“FIN 48”).  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance on description, classification, interest and penalties, accounting in interim periods, disclosure and transition.  FIN 48 became effective for the Company on January 1, 2007.  The adoption of this standard had no impact on the consolidated financial statements.

Results of Operations

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

Acquisition and Development Activities

The comparability of the Company’s results of operations is affected by acquisition activities in 2007 and 2006. At March 31, 2007 and 2006, the Company owned 402 and 374 self-storage facilities and related assets, respectively.

The following table summarizes the acquisitions that the Company completed during the three months ended March 31, 2007:

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Facility/Portfolio		Acquisition Date		Total Rentable Square Feet		Number of Units		Occupancy as of March 31, 2007		Total Number of Facilities		Purchase Price (000s)
Sanford Portfolio		January 2007		72,550		593		17.51	%	1		$	6,300
Grand Central Portfolio		January 2007		166,090		1,474		86.17	%	2		13,200
		2007 Total		238,640		2,067				3		$	19,500

 

The acquisitions listed are included in the Company’s results of operation from and after the acquisition date.

A comparison of net loss for the three months ended March 31, 2007 and March 31, 2006 is as follows (in thousands):

		Three Months Ended March 31,
		2007			2006
REVENUES
Rental income		$	51,133		$	44,994
Other property related income		4,282			3,101
Other—related party		117			115
Total revenues		55,532			48,210
OPERATING EXPENSES
Property operating expenses		23,239			18,917
Property operating expenses—related party		37			20
Depreciation		16,767			14,672
General and administrative		5,888			5,389
General and administrative—related party		101			177
Total operating expenses		46,032			39,175
OPERATING INCOME		9,500			9,035
OTHER INCOME (EXPENSE)
Interest:
Interest expense on loans		(12,826		)	(10,000		)
Loan procurement amortization expense		(445		)	(462		)
Write-off of loan procurement cost due to early extinguishment of debt		—			(1,273		)
Interest income		115			884
Other		(6		)	42
Total other expense		(13,162		)	(10,809		)
LOSS BEFORE MINORITY INTERESTS		(3,662		)	(1,774		)
MINORITY INTERESTS		304			149
NET LOSS		$	(3,358	)	$	(1,625	)

 

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Comparison of Operating Results for the Three Months Ended March 31, 2007 and March 31, 2006

Total Revenues

Rental income increased from $45.0 million for the three months ended March 31, 2006 to $51.1 million for the three months ended March 31, 2007, an increase of $6.1 million, or 14%. This increase is primarily attributable to additional rental income from the 2006 and 2007 Acquisitions and an increase in rental income from our pool of “same-store” facilities of approximately $0.5 million.

Other property related income, including Other- related party, increased from $3.2 million for the three months ended March 31, 2006 to $4.4 million for the three months ended March 31, 2007, an increase of $1.1 million, or 37%. This increase is primarily attributable to the other property income from the 2006 and 2007 Acquisitions.

Total Operating Expenses

Property operating expenses increased from $18.9 million for the three months ended March 31, 2006 to $23.3 million for the three months ended March 31, 2007, an increase of $4.3 million, or 23%. This increase is primarily attributable to additional operating expenses from the 2006 and 2007 Acquisitions and an increase in operating expenses from our “same-store” facilities of approximately $1.1 million.

General and administrative expenses, including General and administrative — related party, increased from $5.6 million for the three months ended March 31, 2006 to $6.0 million for the three months ended March 31, 2007, an increase of $0.4 million, or 8%.  The 2007 period includes approximately $1.0 million of legal and other costs associated with the previously disclosed restatements and inquiry.  Depreciation increased from $14.7 million for the three months ended March 31, 2006 to $16.8 million for the three months ended March 31, 2007, an increase of $2.1 million, or 14%. The increase is primarily attributable to additional depreciation expense related to the 2006 and 2007 Acquisitions.

Total Other Expenses

Interest expense increased from $10.0 million for the three months ended March 31, 2006 to $12.8 million for the three months ended March 31, 2007, an increase of $2.8 million, or 28%. The increase is attributable to a higher amount of outstanding debt during the three months ended March 31, 2007, primarily resulting from the financing of certain of the 2006 and 2007 Acquisitions with additional borrowings.

In conjunction with replacing the credit facility in February 2006, the Company incurred charges of $1.3 million relating to the write-off of unamortized loan procurement costs.

Interest income decreased to $0.1 million for the three months ended March 31, 2007 from $0.9 million for the three months ended March 31, 2006. This decrease is primarily attributable to the Company’s 2005 follow-on public offering.  The Company invested excess proceeds from the follow-on offering in interest bearing accounts and in short-term marketable securities until the excess proceeds were used to fund acquisitions or pay down existing debt during the three months ended March 31, 2006.

Same-Store Facility Results

The Company considers its same-store portfolio to consist of only those facilities owned at the beginning and at the end of the applicable periods presented. The following same-store presentation is considered to be useful to investors in evaluating our performance because it provides information relating to changes in facility-level operating performance without taking into account the effects of acquisitions, developments or dispositions. The following table sets forth operating data for our same-store portfolio for the periods presented.

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Comparison of the Three Months Ended March 31, 2007 to the Three Months Ended March 31, 2006

The following table provides information pertaining to our same-store portfolio for the three months ended March 31, 2007 and 2006 (dollars in thousands):

		Same Store Property Portfolio											Properties Acquired						Other/ Eliminations						Total Portfolio
								Increase/			%																				Increase/			%
		2007			2006			(Decrease)			Change		2007			2006			2007			2006			2007			2006			(Decrease)			Change
REVENUES:
Rental income		$	42,449		$	42,047		$	402		1	%	$	8,684		$	2,947		$	—		$	—		$	51,133		$	44,994		$	6,139		14	%
Other property related income		3,456			2,875			581			20	%	826			226			—			—			4,282			3,101			1,181			38	%
Other—related party		—			—			—			—		—			—			117			115			117			115			2			2	%
Total revenues		45,905			44,922			983			2	%	9,510			3,173			117			115			55,532			48,210			7,322			15	%
OPERATING EXPENSES:
Property operating expenses		18,295			17,172			1,123			7	%	4,944			1,745			—			—			23,239			18,917			4,322			23	%
Property operating expenses—related party		—			—			—			—		—			—			37			20			37			20			17			85	%
Subtotal		18,295			17,172			1,123			7	%	4,944			1,745			37			20			23,276			18,937			4,339			23	%
NET OPERATING INCOME:		$	27,610		$	27,750		$	(140	)	-1	%	$	4,566		$	1,428		$	80		$	95		$	32,256		$	29,273		$	2,983		10	%
Depreciation																									16,767			14,672			2,095			14	%
General and administrative																									5,888			5,389			499			9	%
General and administrative—related party																									101			177			(76		)	-43	%
Subtotal																									22,756			20,238			2,518			12	%
Operating income																									9,500			9,035			465			5	%
Other Income (Expense):
Interest:
Interest expense on loans																									(12,826		)	(10,000		)	(2,826		)	28	%
Loan procurement amortization expense																									(445		)	(462		)	17			-4	%
Write-off of loan procurement cost due to early extinguishment of debt																									—			(1,273		)	1,273			-100	%
Interest income																									115			884			(769		)	-87	%
Other																									(6		)	42			(48		)	-114	%
Total other expense																									(13,162		)	(10,809		)	(2,353		)	22	%
LOSS BEFORE MINORITY INTERESTS																									(3,662		)	(1,774		)	(1,888		)	106	%
MINORITY INTERESTS																									304			149			155			104	%
NET LOSS																									$	(3,358	)	$	(1,625	)	$	(1,733	)	107	%

 

Same-store revenues increased from $44.9 million for the three months ended March 31, 2006 to $45.9 million for the three months ended March 31, 2007, an increase of $1.0 million, or 2%. Same-store property operating expenses increased from $17.2 million for the three months ended March 31, 2006 to $18.3 million for the three months ended March 31, 2007, an increase of $1.1 million, or 2%. This increase was primarily attributable to increased insurance and real estate tax expenses.

Non-GAAP Financial Measures

NOI

We define net operating income, which we refer to as “NOI,” as total continuing revenues less continuing property operating expenses. NOI also can be calculated by adding back to net income: interest expense on loans, loan procurement amortization expense, early extinguishment of debt, minority interest, loss on sale of storage facilities, other, depreciation and general and administrative; and deducting from net income: income from discontinued operations, gains on sale of self-storage facilities and interest income. NOI is not a measure of performance calculated in accordance with GAAP.

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

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

·                                          It is one of the primary measures used by our management and our facility managers to evaluate the economic productivity of our facilities, including our ability to lease our facilities, increase pricing and occupancy and control our property operating expenses;

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

·                                          We believe it helps our investors to meaningfully compare the results of our operating performance from period to period by removing the impact of our capital structure (primarily interest expense on our outstanding indebtedness) and depreciation of our basis in our assets from our operating results.

There are material limitations to using a measure such as NOI, including the difficulty associated with comparing results among more than one company and the inability to analyze certain significant items, including depreciation and interest expense, that directly affect our net income. We compensate for these limitations by considering the economic effect of the excluded expense items independently as well as in connection with our analysis of net income. NOI should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP, such as total revenues, operating income and net income.

Cash Flows

Comparison of the Three Months Ended March 31, 2007 to the Three Months Ended March 31, 2006

A comparison of cash flow operating, investing and financing activities for the three months ended March 31, 2007 and 2006 is as follows:

 

Cash provided by operating activities increased from $8.3 million in 2006 to $12.9 million in 2007, an increase of $4.6 million, or 55%. The increase is primarily attributable to the incremental impact of the 2006 and 2007 Acquisitions.

Cash used in investing activities decreased from $123.1 million in 2006 to $23.7 million in 2007, a decrease of $99.4 million, or 81%. The decrease in cash used in investing activities is primarily attributable to (i) significantly higher acquisition activity in the 2006 period (35 facilities for an aggregate purchase price of $222.4 million) relative to the 2007 period (3 facilities for an aggregate purchase price of $19.5 million), offset by (ii) proceeds from the sale of marketable securities in the 2006 period of $95.2 million compared to no similar activity in the 2007 period.

Cash provided by financing activities decreased by $29.4 million year over year primarily attributable to more borrowings on revolving credit facilities to fund acquisitions in the 2006 period ($46.0 million of borrowings) than in the 2007 period ($17.0 million of net borrowings).

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