| U-Store-It Trust ITEM 1A RISK FACTORS Overview Investors should carefully consider, among other factors, the risks set forth below |
| We have separated the risks into three groups: • risks related to our operations; • risks related to our organization and structure; and • tax risks |
| Additional risks not presently known to us or that we currently consider immaterial may also impair our business operations and hinder our ability to make expected distributions to our shareholders |
| 11 _________________________________________________________________ [67]Table of Contents Risks Related to Our Operations Our rental revenues are significantly influenced by the economies and other conditions of the markets in which we operate, particularly in Florida, California, Ohio, Illinois and Texas where we have high concentrations of self-storage facilities |
| We are susceptible to adverse developments in the markets in which we operate, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors |
| Our facilities in Florida, California, Ohio, Illinois and Texas accounted for approximately 18prca, 12prca, 8prca, 8prca and 8prca, respectively, of our total rentable square feet as of December 31, 2005 |
| As a result of this geographic concentration of our facilities, we are particularly susceptible to adverse market conditions in these particular areas |
| Any adverse economic or real estate developments in these markets, or in any of the other markets in which we operate, or any decrease in demand for self-storage space resulting from the local business climate could adversely affect our rental revenues, which could impair our ability to satisfy our debt service obligations and pay distributions to our shareholders |
| Because we are primarily focused on the ownership, operation, acquisition and development of self-storage facilities, our rental revenues are significantly influenced by demand for self-storage space generally, and a decrease in such demand would likely have a greater adverse effect on our rental revenues than if we owned a more diversified real estate portfolio |
| Because our portfolio of facilities consists primarily of self-storage facilities, we are subject to risks inherent in investments in a single industry |
| A decrease in the demand for self-storage space would likely have a greater adverse effect on our rental revenues than if we owned a more diversified real estate portfolio |
| Demand for self-storage space has been and could be adversely affected by weakness in the national, regional and local economies, changes in supply of, or demand for, similar or competing self-storage facilities in an area and the excess amount of self-storage space in a particular market |
| To the extent that any of these conditions occur, they are likely to affect market rents for self-storage space, which could cause a decrease in our rental revenue |
| Any such decrease could impair our ability to satisfy debt service obligations and make distributions to our shareholders |
| We face significant competition in the self-storage industry, which may impede our ability to retain customers or re-let space when existing customers vacate, or impede our ability to make, or increase the cost of, future acquisitions or developments |
| We compete with numerous developers, owners and operators in the self-storage industry, including other REITs, some of which own or may in the future own facilities similar to ours in the same markets in which our facilities are located, and some of which may have greater capital resources |
| In addition, due to the low cost of each individual self-storage facility, other developers, owners and operators have the capability to build additional facilities that may compete with our facilities |
| If our competitors build new facilities that compete with our facilities or offer space at rental rates below current market rates or below the rental rates we currently charge our customers, we may lose potential customers and we may be pressured to discount our rental rates below those we currently charge in order to retain customers |
| As a result, our rental revenues may decrease, which could impair our ability to satisfy our debt service obligations and to pay distributions to our shareholders |
| In addition, increased competition for customers may require us to make capital improvements to facilities that we would not have otherwise made |
| Any unbudgeted capital improvements we undertake may reduce cash available for distributions to our shareholders |
| Our rental revenues and operating costs, as well as the value of our self-storage facilities, are subject to risks associated with real estate assets and with the real estate industry |
| Our ability to make expected distributions to our shareholders depends on our ability to generate substantial revenues from our facilities |
| Events and conditions generally applicable to owners and operators of 12 _________________________________________________________________ [68]Table of Contents real property that are beyond our control may decrease cash available for distribution and the value of our facilities |
| These events and conditions include: • changes in the national, regional and local economic climate; • hurricanes and other natural disasters that could damage our facilities, cause service interruptions and result in uninsured damages; • local or regional oversupply, increased competition or reduction in demand for self-storage space; • inability to collect rent from customers; • inability to finance facility acquisitions, capital improvements and development on favorable terms; • increased operating costs, including maintenance, insurance premiums and real estate taxes; • costs of complying with changes in laws and governmental regulations, including those governing usage, zoning, the environment and taxes; and • the relative illiquidity of real estate investments |
| In addition, prolonged periods of economic slowdown or recession, rising interest rates or declining demand for self-storage, or the public perception that any of these events may occur, could result in a general decline in rental revenues, which could impair our ability to satisfy our debt service obligations and to make distributions to our shareholders |
| If we are unable to promptly re-let units within our facilities or if the rates upon such re-letting are significantly lower than expected, our rental revenues would be adversely affected and our growth may be impeded |
| Virtually all of our leases are on a month-to-month basis |
| Delays in re-letting units as vacancies arise would reduce our revenues and could adversely affect our operating performance |
| In addition, lower than expected rental rates upon re-letting could adversely affect our rental revenues and impede our growth |
| We may not be successful in identifying and completing acquisitions or development projects that meet our criteria, which may impede our growth, and even if we are able to identify suitable projects, our future acquisitions and developments may not yield the returns we expect or may result in shareholder dilution |
| Our business strategy involves expansion through acquisitions and development projects |
| These activities require us to identify acquisition or development candidates or investment opportunities that meet our criteria and are compatible with our growth strategy |
| We may not be successful in identifying self-storage facilities that meet our acquisition or development criteria or in completing acquisitions, developments or investments on satisfactory terms |
| Similarly, although we currently have the option to purchase 15 self-storage facilities, consisting of 13 facilities owned by Rising Tide Development and two facilities which Rising Tide Development has the right to acquire from unaffiliated third parties, Rising Tide Development may not acquire either or both of the option facilities it currently has under contract, which would reduce the number of facilities available to us pursuant to the option agreement |
| Failure to identify or complete acquisitions or developments or to purchase either or both of the option facilities could slow our growth |
| We also face significant competition for acquisitions and development opportunities |
| Some of our competitors have greater financial resources than we do and a greater ability to borrow funds to acquire facilities |
| These competitors may also be willing and/or able to accept more risk than we can prudently manage, including risks with respect to the geographic proximity of investments and the payment of higher facility acquisition prices |
| This competition for investments may reduce the number of suitable investment opportunities available to us, may increase acquisition costs and may reduce demand for self-storage space in certain areas where our facilities are located and, as a result, adversely affect our operating results |
| 13 _________________________________________________________________ [69]Table of Contents In addition, even if we are successful in identifying suitable acquisitions or development projects, newly acquired facilities may fail to perform as expected and our management may underestimate the costs associated with the integration of the acquired facilities |
| In addition, any developments we undertake in the future are subject to a number of risks, including, but not limited to, construction delays or cost overruns that may increase project costs, financing risks, the failure to meet anticipated occupancy or rent levels, failure to receive required zoning, occupancy, land use and other governmental permits and authorizations and changes in applicable zoning and land use laws |
| If any of these problems occur, development costs for a project will increase, and there may be significant costs incurred for projects that are not completed |
| In deciding whether to acquire or develop a particular facility, we make certain assumptions regarding the expected future performance of that facility |
| If our acquisition or development facilities fail to perform as expected or incur significant increases in projected costs, our rental revenues could be lower, and our operating expenses higher, than we expect |
| In addition, the issuance of equity securities for any acquisitions could be substantially dilutive to our shareholders |
| We may not be able to adapt our management and operation systems to respond to the integration of additional facilities without disruption or expense |
| From the completion of our IPO in October 2004 through December 31, 2005, we have acquired 192 facilities, containing approximately 10dtta9 million rentable square feet for an aggregate cost of approximately dlra769dtta7 million as of December 31, 2005, and in 2006 we have acquired or entered into agreements to acquire an additional 48 self-storage facilities |
| In addition, we expect to acquire additional self-storage facilities in the future |
| We cannot assure you that we will be able to adapt our management, administrative, accounting and operational systems or hire and retain sufficient operational staff to integrate these facilities into our portfolio and manage any future acquisition or development of additional facilities without operating disruptions or unanticipated costs |
| As we acquire or develop additional facilities, we will be subject to risks associated with managing new facilities, including customer retention and mortgage default |
| In addition, acquisitions or developments may cause disruptions in our operations and divert management’s attention away from day-to-day operations |
| Furthermore, our profitability may suffer because of acquisition-related costs or amortization costs for acquired goodwill and other intangible assets |
| Our failure to successfully integrate any future facilities into our portfolio could have an adverse effect on our operating costs and our ability to make distributions to our shareholders |
| We depend on our on-site personnel to maximize customer satisfaction at each of our facilities; any difficulties we encounter in hiring, training and retaining skilled field personnel may adversely affect our rental revenues |
| As of December 31, 2005, we had approximately 735 field personnel involved in the management and operation of our facilities |
| The customer service, marketing skills and knowledge of local market demand and competitive dynamics of our facility managers are contributing factors to our ability to maximize our rental income and to achieve the highest sustainable rent levels at each of our facilities |
| If we are unable to successfully recruit, train and retain qualified field personnel, our rental revenues may be adversely affected, which could impair our ability to satisfy new debt obligations and make distributions to our shareholders |
| We had approximately dlra669dtta3 million of indebtedness outstanding as of December 31, 2005, and this level of indebtedness will result in significant debt service obligations, impede our ability to incur additional indebtedness to fund our growth and expose us to refinancing risk |
| We had approximately dlra669dtta3 million of indebtedness outstanding as of December 31, 2005 |
| We also intend to incur additional debt in connection with the future acquisition and development of facilities |
| We also may incur or increase our mortgage debt by obtaining loans secured by some or all of the real estate facilities we acquire or develop |
| In addition, we may borrow funds if necessary to satisfy the requirement that we distribute to shareholders at least 90prca of our annual REIT taxable income, or otherwise as is necessary or advisable, to ensure that we maintain our qualification as a REIT for federal income tax purposes or otherwise avoid paying taxes that can be eliminated through distributions to our shareholders |
| 14 _________________________________________________________________ [70]Table of Contents Our substantial debt may harm our business and operating results by: • requiring us to use a substantial portion of our cash flow from operations to pay interest, which reduces the amount available for distributions; • making us more vulnerable to economic and industry downturns and reducing our flexibility in responding to changing business and economic conditions; and • limiting our ability to borrow more money for operating or capital needs or to finance acquisitions in the future |
| In addition to the risks discussed above and those normally associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest, we also are subject to the risk that we will not be able to refinance the existing indebtedness on our facilities (which, in most cases, will not have been fully amortized at maturity) and that the terms of any refinancing we could obtain would not be as favorable as the terms of our existing indebtedness |
| In particular, as of December 31, 2005, we had dlra104dtta2 million of indebtedness outstanding pursuant to two multi-facility mortgage loans with anticipated repayment dates in 2006 |
| If we are not successful in refinancing debt when it becomes due, we may be forced to dispose of facilities on disadvantageous terms, which might adversely affect our ability to service other debt and to meet our other obligations |
| Our mortgage indebtedness contains covenants that restrict our operating, acquisition and disposition activities |
| Our mortgage indebtedness contains covenants, including limitations on our ability to incur secured and unsecured indebtedness, sell all or substantially all of our assets and engage in mergers and consolidations and various acquisitions |
| In addition, our mortgage indebtedness contains limitations on our ability to transfer or encumber the mortgaged facilities without lender consent |
| These provisions may restrict our ability to pursue business initiatives or acquisition transactions that may be in our best interests |
| They also may prevent us from selling facilities at times when, due to market conditions, it may be advantageous to do so |
| In addition, failure to meet any of the covenants could cause an event of default under and/or acceleration of some or all of our indebtedness, which would have an adverse effect on us |
| Mortgage debt obligations expose us to the possibility of foreclosure, which could result in the loss of our investment in a facility or group of facilities subject to mortgage debt |
| Most of the facilities we own are pledged as collateral for mortgage debt |
| If a facility or group of facilities is mortgaged and we are unable to meet mortgage payments, the lender could foreclose on the facility or group of facilities, resulting in the loss of our investment |
| Any foreclosure on a mortgaged facility or group of facilities could adversely affect the overall value of our portfolio of self-storage facilities |
| We could have substantial variable rate debt, and therefore increases in interest rates would likely increase our debt service obligations |
| As of December 31, 2005, we did not have any variable rate debt outstanding |
| However, we intend to finance future acquisitions in part by borrowing under our revolving credit facility, which bears interest at a variable rate |
| The interest expense on our variable rate indebtedness increases when interest rates increase |
| Interest rates are currently low relative to historical levels and may increase significantly in the future |
| A significant increase in interest expense could adversely affect our results of operations |
| Our organizational documents contain no limitation on the amount of debt we may incur |
| Our organizational documents contain no limitations on the amount of indebtedness that we or our operating partnership may incur |
| We could alter the balance between our total outstanding indebtedness and the value of our assets at any time |
| If we become more highly leveraged, then the resulting increase in debt service could adversely affect our ability to make payments on our outstanding indebtedness and to pay our anticipated distributions and/or the distributions required to maintain our REIT status, and could harm our financial condition |
| 15 _________________________________________________________________ [71]Table of Contents We may not be able to sell facilities when appropriate or on favorable terms, which could significantly impede our ability to respond to economic or other market conditions or adverse changes in the performance of our facilities |
| Real estate property investments generally cannot be sold quickly |
| Also, the tax laws applicable to REITs require that we hold our facilities for investment, rather than sale in the ordinary course of business, which may cause us to forgo or defer sales of facilities that otherwise would be in our best interest |
| Therefore, we may not be able to dispose of facilities promptly, or on favorable terms, in response to economic or other market conditions, which may adversely affect our financial position |
| Potential losses may not be covered by insurance, which could result in the loss of our investment in a facility and the future cash flows from the facility |
| We carry comprehensive liability, fire, extended coverage and rental loss insurance covering all of the facilities in our portfolio |
| We believe the policy specifications and insured limits are appropriate and adequate given the relative risk of loss, the cost of the coverage and industry practice |
| We do not carry insurance for losses such as loss from riots, war or acts of God, and, in some cases, flooding, because such coverage is not available or is not available at commercially reasonable rates |
| Some of our policies, such as those covering losses due to terrorism, floods and earthquakes, are insured subject to limitations involving large deductibles or co-payments and policy limits that may not be sufficient to cover losses |
| If we experience a loss at a facility that is uninsured or that exceeds policy limits, we could lose the capital invested in that facility as well as the anticipated future cash flows from that facility |
| Inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make it impractical or undesirable to use insurance proceeds to replace a facility after it has been damaged or destroyed |
| In addition, if the damaged facilities are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these facilities were irreparably damaged |
| Rising operating expenses could reduce our cash flow and funds available for future distributions |
| Our facilities and any other facilities we acquire or develop in the future are and will be subject to operating risks common to real estate in general, any or all of which may negatively affect us |
| The facilities will be subject to increases in real estate and other tax rates, utility costs, operating expenses, insurance costs, repairs and maintenance and administrative expenses |
| If rents are being paid in an amount that is insufficient to cover operating expenses, then we could be required to expend funds for that facility’s operating expenses |
| We could incur significant costs related to government regulation and environmental matters |
| We are subject to federal, state and local environmental regulations that apply generally to the ownership of real property and the operation of self-storage facilities |
| If we fail to comply with those laws, we could be subject to significant fines or other governmental sanctions |
| Under various federal, state and local laws, ordinances and regulations, an owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at a facility and may be held liable to a governmental entity or to third parties for property damage and for investigation and clean up costs incurred by such parties in connection with contamination |
| Such liability may be imposed whether or not the owner or operator knew of, or was responsible for, the presence of these hazardous or toxic substances |
| The cost of investigation, remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to properly remediate such substances, may adversely affect the owner’s ability to sell or rent such facility or to borrow using such facility as collateral |
| In addition, in connection with the ownership, operation and management of real properties, we are potentially liable for property damage or injuries to persons and property |
| Our practice is to conduct or obtain environmental assessments in connection with the acquisition or development of additional facilities |
| We obtain or examine environmental assessments from qualified and reputable environmental consulting firms (and intend to conduct such assessments prior to the acquisition or development of additional facilities) |
| The environmental assessments received to date have not revealed, nor 16 _________________________________________________________________ [72]Table of Contents are we aware of, any environmental liability that we believe will have a material adverse effect on us |
| However, we cannot assure you that any environmental assessments performed have identified or will identify all material environmental conditions, that any prior owner of any facility did not create a material environmental condition not known to us or that a material environmental condition does not otherwise exist with respect to any of our facilities |
| We must comply with the Americans with Disabilities Act of 1990, which may require unanticipated expenditures |
| Under the Americans with Disabilities Act of 1990 (the “ADA”), all places of public accommodation are required to meet federal requirements related to physical access and use by disabled persons |
| A number of other US federal, state and local laws may also impose access and other similar requirements at our facilities |
| A failure to comply with the ADA or similar state or local requirements could result in the governmental imposition of fines or the award of damages to private litigants affected by the noncompliance |
| Although we believe that our facilities comply in all material respects with these requirements (or would be eligible for applicable exemptions from material requirements because of adaptive assistance provided), a determination that one or more of our facilities is not in compliance with the ADA or similar state or local requirements would result in the incurrence of additional costs associated with bringing the facilities into compliance |
| If we are required to make substantial modifications to comply with the ADA or similar state or local requirements, we may be required to incur significant unanticipated expenditures |
| We may become subject to litigation or threatened litigation which may divert management time and attention, require us to pay damages and expenses or restrict the operation of our business |
| We may become subject to disputes with commercial parties with whom we maintain relationships or other parties with whom we do business |
| Any such dispute could result in litigation between us and the other parties |
| Whether or not any dispute actually proceeds to litigation, we may be required to devote significant management time and attention to its successful resolution (through litigation, settlement or otherwise), which would detract from our management’s ability to focus on our business |
| Any such resolution could involve the payment of damages or expenses by us, which may be significant |
| In addition, any such resolution could involve our agreement with terms that restrict the operation of our business |
| One type of commercial dispute could involve our use of our brand name and other intellectual property (for example, logos, signage and other marks), for which we generally have common law rights but no federal trademark registration |
| There are other commercial parties, at both a local and national level, that may assert that our use of our brand names and other intellectual property conflict with their rights to use brand names and other intellectual property that they consider to be similar to ours |
| Any such commercial dispute and related resolution would involve all of the risks described above, including, in particular, our agreement to restrict the use of our brand name or other intellectual property |
| If in the future we elect to make joint venture investments, we could be adversely affected by a lack of sole decision-making authority, reliance on joint venture partners’ financial condition and any disputes that might arise between us and our joint venture partners |
| Although we currently have no joint venture investments, we may in the future co-invest with third parties through joint ventures |
| In any such joint venture, we may not be in a position to exercise sole decision-making authority regarding the facilities owned through joint ventures |
| Investments in joint ventures may, under certain circumstances, involve risks not present when a third party is not involved, including the possibility that joint venture partners might become bankrupt or fail to fund their share of required capital contributions |
| Joint venture partners may have business interests or goals that are inconsistent with our business interests or goals and may be in a position to take actions contrary to our policies or objectives |
| Such investments also have the potential risk of impasse on strategic decisions, such as a sale, because neither we nor the joint venture partner would have full control over the joint venture |
| Any disputes that may arise between us and our joint venture partners could result in litigation or arbitration that could increase our expenses and distract our officers and/or trustees from focusing their time and effort on our business |
| In 17 _________________________________________________________________ [73]Table of Contents addition, we might in certain circumstances be liable for the actions of our joint venture partners, and the activities of a joint venture could adversely affect our ability to qualify as a REIT, even though we do not control the joint venture |
| Risks Related to Our Organization and Structure Our organizational documents contain provisions that may have an anti-takeover effect, which may discourage third parties from conducting a tender offer or seeking other change of control transactions that could involve a premium price for our shares or otherwise benefit our shareholders |
| Our declaration of trust and bylaws contain provisions that may have the effect of delaying, deferring or preventing a change in control of our company or the removal of existing management and, as a result, could prevent our shareholders from being paid a premium for their common shares over the then-prevailing market price |
| These provisions include limitations on the ownership of our common shares, advance notice requirements for shareholder proposals, our board of trustees’ power to reclassify shares and issue additional common shares or preferred shares and the absence of cumulative voting rights |
| Our charter prohibits any person (other than members of the Amsdell family and related family trusts and entities which, as a group, may own up to 29prca of our common shares) from beneficially owning more than 5prca of our common shares (or up to 9dtta8prca in the case of certain designated investment entities, as defined in our declaration of trust) |
| There are ownership limits and restrictions on transferability in our declaration of trust |
| In order for us to qualify as a REIT, no more than 50prca of the value of our outstanding shares may be owned, actually or constructively, by five or fewer individuals at any time during the last half of each taxable year |
| To make sure that we will not fail to satisfy this requirement and for anti-takeover reasons, subject to some exceptions, our declaration of trust generally prohibits any shareholder (other than an excepted holder or certain designated investment entities, as defined in our declaration of trust) from owning (actually, constructively or by attribution), more than 5prca of the value or number of our outstanding common shares |
| Our declaration of trust provides an excepted holder limit that allows members of the Amsdell family, certain trusts established for the benefit of members of the Amsdell family and related entities to own up to 29prca of our common shares, subject to limitations contained in our declaration of trust |
| Entities that are defined as designated investment entities in our declaration of trust, which generally includes pension funds, mutual funds, and certain investment management companies, are permitted to own up to 9dtta8prca of our outstanding common shares, so long as each beneficial owner of the shares owned by such designated investment entity would satisfy the 5prca ownership limit if those beneficial owners owned directly their proportionate share of the common shares owned by the designated investment entity |
| Our board of trustees may, but is not required to, except a shareholder who is not an individual for tax purposes from the 5prca ownership limit or the 9dtta8prca designated investment entity limit if such shareholder provides information and makes representations to the board that are satisfactory to the board in its reasonable discretion demonstrating that exceeding the 5prca ownership limit or the 9dtta8prca designated investment entity limit as to such person would not jeopardize our qualification as a REIT These restrictions may: • discourage a tender offer or other transactions or a change in management or control that might involve a premium price for our shares or otherwise be in the best interests of our shareholders; or • compel a shareholder who has acquired our shares in excess of these ownership limitations to dispose of the additional shares and, as a result, to forfeit the benefits of owning the additional shares |
| Any acquisition of our common shares in violation of these ownership restrictions will be void ab initio and will result in automatic transfers of our common shares to a charitable trust, which will be responsible for selling the common shares to permitted transferees and distributing at least a portion of the proceeds to the prohibited transferees |
| 18 _________________________________________________________________ [74]Table of Contents Our declaration of trust permits our board of trustees to issue preferred shares with terms that may discourage third parties from conducting a tender offer or seeking other change of control transactions that could involve a premium price for our shares or otherwise benefit our shareholders |
| Our declaration of trust permits our board of trustees to issue up to 40cmam000cmam000 preferred shares, having those preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications, or terms or conditions of redemption as determined by our board |
| In addition, our board may reclassify any unissued common shares into one or more classes or series of preferred shares |
| Thus, our board could authorize, without shareholder approval, the issuance of preferred shares with terms and conditions that could have the effect of discouraging a takeover or other transaction in which holders of some or a majority of our shares might receive a premium for their shares over the then-prevailing market price of our shares |
| We currently do not expect that the board would require shareholder approval prior to such a preferred issuance |
| In addition, any preferred shares that we issue would rank senior to our common shares with respect to the payment of distributions, in which case we could not pay any distributions on our common shares until full distributions have been paid with respect to such preferred shares |
| Our management has limited experience operating a REIT and a public company and therefore, may not be able to successfully operate our company as a REIT and as a public company |
| We completed our IPO in October 2004 and believe that we qualify for taxation as a REIT for federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”) beginning with our short taxable year ended December 31, 2004 |
| Our board of trustees and executive officers have overall responsibility for our management and, while certain of our officers and trustees have extensive experience in real estate marketing, development, management, finance and law, our executive officers have limited experience in operating a business in accordance with the Internal Revenue Code requirements for maintaining qualification as a REIT and in operating a public company |
| In addition, we have developed control systems and procedures required to operate as a public REIT, and these systems and procedures could place a significant strain on our management systems, infrastructure and other resources |
| We cannot assure you that our past experience will be sufficient to enable us to successfully operate our company as a REIT and as a public company |
| If we fail to qualify as a REIT, and are not able to avail ourselves of certain savings provisions set forth in the Internal Revenue Code, our distributions to shareholders will not be deductible for federal income tax purposes, and therefore we will be required to pay corporate tax at applicable rates on our taxable income, which will substantially reduce our earnings and may reduce the value of our common shares and adversely affect our ability to raise additional capital |
| We would not be able to elect to be taxed as a REIT for four years following the year we first failed to qualify unless the Internal Revenue Service (the “IRS”) were to grant us relief under certain statutory provisions |
| Certain provisions of Maryland law could inhibit changes in control, which may discourage third parties from conducting a tender offer or seeking other change of control transactions that could involve a premium price for our shares or otherwise benefit our shareholders |
| Certain provisions of Maryland law may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the holders of our common shares with the opportunity to realize a premium over the then-prevailing market price of those shares, including: • “business combination moratorium/fair price” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested shareholder” (defined generally as any person who beneficially owns 10prca or more of the voting power of our shares or an affiliate thereof) for five years after the most recent date on which the shareholder becomes an interested shareholder, and thereafter imposes stringent fair price and super-majority shareholder voting requirements on these combinations; and 19 _________________________________________________________________ [75]Table of Contents • “control share” provisions that provide that “control shares” of our company (defined as shares which, when aggregated with other shares controlled by the shareholder, entitle the shareholder to exercise one of three increasing ranges of voting power in electing trustees) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares” from a party other than the issuer) have no voting rights except to the extent approved by our shareholders by the affirmative vote of at least two thirds of all the votes entitled to be cast on the matter, excluding all interested shares, and are subject to redemption in certain circumstances |
| However, our board of trustees may opt to make these provisions applicable to us at any time |
| Robert J Amsdell, Barry L Amsdell, Todd C Amsdell and the Amsdell Entities collectively own an approximate 16dtta8prca beneficial interest in our company on a fully diluted basis and therefore have the ability to exercise significant influence on our company and any matter presented to our shareholders |
| Robert J Amsdell, Barry L Amsdell, Todd C Amsdell and the Amsdell Entities collectively own approximately 15dtta1prca of our outstanding common shares, and an approximate 16dtta8prca beneficial interest in our company on a fully diluted basis |
| Consequently, these persons and entities may be able to significantly influence the outcome of matters submitted for shareholder action, including the election of our board of trustees and approval of significant corporate transactions, including business combinations, consolidations and mergers and the determination of our day-to-day business decisions and management policies |
| As a result, Robert J Amsdell, Barry L Amsdell and Todd C Amsdell have substantial influence on us and could exercise their influence in a manner that conflicts with the interests of our other shareholders |
| Robert J Amsdell, our Chairman and Chief Executive Officer, and Barry L Amsdell, one of our trustees, have interests, through their ownership of limited partner units in our operating partnership and their ownership, through Rising Tide Development, of the option facilities, that may conflict with the interests of our other shareholders |
| Robert J Amsdell, our Chairman and Chief Executive Officer, and Barry L Amsdell, one of our trustees, own limited partner units in our operating partnership |
| These individuals may have personal interests that conflict with the interests of our shareholders with respect to business decisions affecting us and our operating partnership, such as interests in the timing and pricing of facility sales or refinancings in order to obtain favorable tax treatment |
| As a result, the effect of certain transactions on these unitholders may influence our decisions affecting these facilities |
| In addition, Robert J Amsdell and Barry L Amsdell own all of the equity interests in Rising Tide Development, which currently owns 13 of the option facilities and has the right to acquire two option facilities from unaffiliated third parties |
| We have options to purchase these 15 option facilities from Rising Tide Development |
| As a result of their ownership interest in Rising Tide Development, Robert J Amsdell and Barry L Amsdell may have personal interests that conflict with the interests of our shareholders with respect to decisions affecting our exercise of our right to purchase any or all of the option facilities or our management of the option facilities |
| For example, it could be in the best interests of Rising Tide Development, at some time during the term of the option agreement, to seek our agreement to permit it to sell any or all of the option facilities to an outside third party rather than to our operating partnership |
| Under these circumstances, our interests would conflict with the fiduciary obligations of Robert J Amsdell and Barry L Amsdell as officers and directors of the entity that manages Rising Tide Development and their economic interests as the holders of the equity of Rising Tide Development |
| Although we expect that our decisions regarding our relationship with Rising Tide Development will be made by the independent members of our board of trustees, we cannot assure you that we will not be adversely affected by conflicts arising from Robert J Amsdell and Barry L Amsdell’s relationship with Rising Tide Development |
| 20 _________________________________________________________________ [76]Table of Contents Our Chairman and Chief Executive Officer has outside business interests that could require significant time and attention and may interfere with his ability to devote time to our business and affairs |
| Robert J Amsdell, our Chairman and Chief Executive Officer, has outside business interests which could require significant time and attention |
| These interests include the ownership and operation of certain office and industrial properties and ownership of the entity that owns or in some cases has a right to purchase the option facilities |
| Amsdell’s employment agreement permits him to devote time to his outside business interests, so long as such activities do not materially or adversely interfere with his duties to us |
| Amsdell may have fiduciary obligations associated with these business interests that interfere with his ability to devote time to our business and affairs and that could adversely affect our operations |
| Amsdell also serves as an officer or on the board of directors or comparable governing body of various entities owned and controlled by him and Barry L Amsdell, which entities manage the office and industrial properties and own the option facilities referred to above |
| As a result of the customary requirement of a fiduciary to exercise the level of care a prudent person would exercise, Mr |
| Amsdell may be required, through his service as an officer and director of these various entities, to maintain significant familiarity with the businesses and operations of such entities |
| Amsdell may be required from time to time to take action as an officer or director with respect to these entities |
| These activities could require significant time and attention of Mr |
| Our business could be harmed if any of our key personnel, Robert J Amsdell, Steven G Osgood, Todd C Amsdell and Tedd D Towsley, all of whom have long-standing business relationships in the self-storage industry, terminated his employment with us |
| Our continued success depends on the continued services of our Chairman and Chief Executive Officer and our other executive officers |
| Four of our top executives, Robert J Amsdell, Steven G Osgood, Todd C Amsdell and Tedd D Towsley, have an average of approximately 23 years of real estate experience and have worked in the self-storage industry for an average of approximately 17 years |
| Although we have employment agreements with our Chairman and Chief Executive Officer and the other members of our senior management team, we cannot provide any assurance that any of them will remain in our employ |
| The loss of services of one or more members of our senior management team, particularly our Chairman and Chief Executive Officer, could adversely affect our operations and our future growth |
| We depend on external sources of capital that are outside of our control; the unavailability of capital from external sources could adversely affect our ability to acquire or develop facilities, satisfy our debt obligations and/or make distributions to shareholders |
| To continue to qualify as a REIT, we are required to distribute to our shareholders each year at least 90prca of our REIT taxable income, excluding net capital gains or pay applicable income taxes |
| In order to eliminate federal income tax, we will be required to distribute annually 100prca of our net taxable income, including capital gains |
| Because of these distribution requirements, we likely will not be able to fund all future capital needs, including capital for acquisitions and facility development, with income from operations |
| We therefore will have to rely on third-party sources of capital, which may or may not be available on favorable terms, if at all |
| Our access to third-party sources of capital depends on a number of things, including the market’s perception of our growth potential and our current and potential future earnings and our ability to continue to qualify as a REIT for federal income tax purposes |
| If we are unable to obtain third-party sources of capital, we may not be able to acquire or develop facilities when strategic opportunities exist, satisfy our debt obligations or make distributions to shareholders that would permit us to qualify as a REIT or avoid paying tax on our REIT taxable income |
| Our shareholders have limited control to prevent us from making any changes to our investment and financing policies that they believe could harm our business, prospects, operating results or share price |
| Our board of trustees has adopted policies with respect to certain activities |
| These policies may be amended or revised from time to time at the discretion of our board of trustees without a vote of our shareholders |
| This means that our shareholders have limited control over changes in our policies |
| Such changes 21 _________________________________________________________________ [77]Table of Contents in our policies intended to improve, expand or diversify our business may not have the anticipated effects and consequently may adversely affect our business and prospects, results of operations and share price |
| Our rights and the rights of our shareholders to take action against our trustees and officers are limited, and therefore our and our shareholders’ ability to recover damages from our trustees and officers is limited |
| Maryland law provides that a director or officer has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances |
| Our declaration of trust and bylaws require us to indemnify our trustees and officers for actions taken by them in those capacities to the extent permitted by Maryland law |
| Accordingly, in the event that actions taken in good faith by any trustee or officer impede our performance, our and our shareholders’ ability to recover damages from that trustee or officer will be limited |
| We may have assumed unknown liabilities in connection with our formation transactions that occurred at the time of our IPO and will not have recourse to Robert J Amsdell, Barry L Amsdell, Todd C Amsdell and the Amsdell Entities for any of these liabilities |
| As part of our formation transactions that occurred at the time of our IPO, we acquired certain entities and/or assets that are subject to existing liabilities, some of which may be unknown at the present time |
| Unknown liabilities might include liabilities for cleanup or remediation of undisclosed environmental conditions, claims by customers, vendors or other persons dealing with our predecessor entities (that have not been asserted or threatened to date), tax liabilities, and accrued but unpaid liabilities incurred in the ordinary course of business |
| While in some instances we may have the right to seek reimbursement against an insurer or another third party for certain of these liabilities, we will not have recourse to Robert J Amsdell, Barry L Amsdell, Todd C Amsdell or any of the Amsdell Entities for any of these liabilities |
| Our share price could be volatile and could decline, resulting in a substantial or complete loss on your investment |
| At times the stock markets, including the New York Stock Exchange, on which our common shares are listed, have experienced significant price and volume fluctuations |
| As a result, the market price of our common shares could be similarly volatile, and investors in our common shares may experience a decrease in the value of their shares, including decreases unrelated to our operating performance or prospects |
| The price of our common shares could fluctuate in response to a number of factors, including: • our operating performance and the performance of other similar companies; • actual or anticipated differences in our quarterly operating results; • changes in our revenues or earnings estimates or recommendations by securities analysts; • publication of research reports about us or our industry by securities analysts; • additions and departures of key personnel; • changes in market interest rates; • strategic decisions by us or our competitors, such as acquisitions, divestments, spin-offs, joint ventures, strategic investments or changes in business strategy; • the passage of legislation or other regulatory developments that adversely affect us or our industry; • speculation in the press or investment community; • actions by institutional shareholders or hedge funds; • changes in accounting principles; 22 _________________________________________________________________ [78]Table of Contents • terrorist acts; and • general market conditions, including factors unrelated to our performance |
| In the past, securities class action litigation has been instituted against companies following periods of volatility in their stock price |
| If this type of litigation were to be initiated in respect of our shares, it could result in substantial costs and divert our management’s attention and resources |
| If a large number of our common shares are sold in the public market, the sales could reduce the trading price of our common shares and impede our ability to raise future capital |
| We cannot predict what effect, if any, future sales of our common shares, or the availability of common shares for future sale, will have on the market price of our common shares |
| If our shareholders sell, or the market perceives that our shareholders intend to sell, substantial amounts of our common shares in the public market, the market price of our common shares could decline significantly |
| These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate |
| As of December 31, 2005, we had outstanding approximately 57dtta0 million common shares |
| Of these shares, the approximately 48dtta4 million shares sold in our IPO and our October 2005 public offering are freely tradable, except for any shares held by our “affiliates,” as that term is defined by Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”) |
| Robert J Amsdell, Barry L Amsdell, Todd C Amsdell and the Amsdell Entities have been granted registration rights that will enable them to sell shares received in our formation transactions or upon redemption of operating partnership units in market transactions, subject to certain limitations |
| Beginning in October 2005, Robert J Amsdell, Barry L Amsdell, Todd C Amsdell and the Amsdell Entities became entitled to require us to register their shares for public sale subject to certain exceptions, limitations and conditions precedent |
| If they exercise all of their registration rights, approximately 9dtta7 million shares (which number includes the shares issuable upon the redemption of units in our operating partnership) will become available for sale into the market, subject only to applicable securities rules and regulations, which could reduce the market price for our common shares |
| In addition, Rising Tide Development is entitled to require us to register approximately 0dtta2 million of our common shares that it owns for public sale and, beginning as early as March 2006, Rising Tide Development will be entitled to require us to register another approximately 0dtta2 million common shares for public sale, both subject to certain exceptions, limitations and conditions precedent |
| Tax Risks If we fail to qualify as a REIT, our distributions to shareholders would not be deductible for federal income tax purposes, and therefore we would be required to pay corporate tax at applicable rates on our taxable income, which would substantially reduce our earnings and may substantially reduce the value of our common shares and adversely affect our ability to raise additional capital |
| We have elected to be taxed as a REIT for federal income tax purposes commencing with our first taxable year ending December 31, 2004, and we plan to continue to operate so that we can meet the requirements for qualification and taxation as a REIT We have not requested and do not plan to request a ruling from the IRS that we qualify as a REIT, and the statements in this Annual Report on Form 10-K are not binding on the IRS or any court |
| As a REIT, we generally will not be subject to federal income tax on our income that we distribute currently to our shareholders |
| Many of the REIT requirements, however, are highly technical and complex |
| The determination that we are a REIT requires an analysis of various factual matters and circumstances that may not be totally within our control |
| For example, to qualify as a REIT, at least 95prca of our gross income must come from specific passive sources, such as rent, that are itemized in the REIT tax laws |
| In addition, to qualify as a REIT, we cannot own specified amounts of debt and equity securities of some issuers |
| We also are required to distribute to our shareholders with respect to each year at least 90prca of our REIT taxable income (excluding net capital gains) |
| The fact that we hold substantially all of our assets through the operating partnership and its subsidiaries further complicates the application of the REIT 23 _________________________________________________________________ [79]Table of Contents requirements for us |
| Even a technical or inadvertent mistake could jeopardize our REIT status and, given the highly complex nature of the rules governing REITs and the ongoing importance of factual determinations, we cannot provide any assurance that we will continue to qualify as a REIT Furthermore, Congress and the IRS might make changes to the tax laws and regulations, and the courts might issue new rulings, that make it more difficult, or impossible, for us to remain qualified as a REIT If we fail to qualify as a REIT for federal income tax purposes and are able to avail ourselves of one or more of the statutory savings provisions in order to maintain our REIT status, we would nevertheless be required to pay penalty taxes of dlra50cmam000 or more for each such failure |
| If we fail to qualify as a REIT for federal income tax purposes, and are unable to avail ourselves of certain savings provisions set forth in the Internal Revenue Code, we would be subject to federal income tax at regular corporate rates on all of our income |
| As a taxable corporation, we would not be allowed to take a deduction for distributions to shareholders in computing our taxable income or pass through long term capital gains to individual shareholders at favorable rates |
| We also could be subject to the federal alternative minimum tax and possibly increased state and local taxes |
| We would not be able to elect to be taxed as a REIT for four years following the year we first failed to qualify unless the IRS were to grant us relief under certain statutory provisions |
| If we failed to qualify as a REIT, we would have to pay significant income taxes, which would reduce our net earnings available for investment or distribution to our shareholders |
| This likely would have a significant adverse effect on our earnings and likely would adversely affect the value of our securities |
| In addition, we would no longer be required to pay any distributions to shareholders |
| We will pay some taxes even if we qualify as a REIT Even if we qualify as a REIT for federal income tax purposes, we will be required to pay certain federal, state and local taxes on our income and property |
| For example, we will be subject to income tax to the extent we distribute less than 100prca of our REIT taxable income, including capital gains |
| Additionally, we will be subject to a 4prca nondeductible excise tax on the amount, if any, by which dividends paid by us in any calendar year are less than the sum of 85prca of our ordinary income, 95prca of our capital gain net income and 100prca of our undistributed income from prior years |
| Moreover, if we have net income from “prohibited transactions,” that income will be subject to a 100prca penalty tax |
| In general, prohibited transactions are sales or other dispositions of property held primarily for sale to customers in the ordinary course of business |
| The determination as to whether a particular sale is a prohibited transaction depends on the facts and circumstances related to that sale |
| We cannot guarantee that sales of our properties would not be prohibited transactions unless we comply with certain statutory safe-harbor provisions |
| The need to avoid prohibited transactions could cause us to forego or defer sales of facilities that our predecessors otherwise would have sold or that might otherwise be in our best interest to sell |
| In addition, any net taxable income earned directly by our taxable REIT subsidiaries, or through entities that are disregarded for federal income tax purposes as entities separate from our taxable REIT subsidiaries, will be subject to federal and possibly state corporate income tax |
| as a taxable REIT subsidiary, and we may elect to treat other subsidiaries as taxable REIT subsidiaries in the future |
| In this regard, several provisions of the laws applicable to REITs and their subsidiaries ensure that a taxable REIT subsidiary will be subject to an appropriate level of federal income taxation |
| For example, a taxable REIT subsidiary is limited in its ability to deduct certain interest payments made to an affiliated REIT In addition, the REIT has to pay a 100prca penalty tax on some payments that it receives or on some deductions taken by a taxable REIT subsidiary if the economic arrangements between the REIT, the REIT’s customers, and the taxable REIT subsidiary are not comparable to similar arrangements between unrelated parties |
| Finally, some state and local jurisdictions may tax some of our income even though as a REIT we are not subject to federal income tax on that income because not all states and localities follow the federal income tax treatment of REITs |
| To the extent that we and our affiliates are required to pay federal, state and local taxes, we will have less cash available for distributions to our shareholders |