News Column

SOVRAN SELF STORAGE INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

February 27, 2014

The following discussion and analysis of the consolidated financial condition and results of operations should be read in conjunction with the financial statements and notes thereto included elsewhere in this report.

Disclosure Regarding Forward-Looking Statements When used in this discussion and elsewhere in this document, the words "intends," "believes," "expects," "anticipates," and similar expressions are intended to identify "forward-looking statements" within the meaning of that term in Section 27A of the Securities Act of 1933 and in Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the effect of competition from new self-storage facilities, which would cause rents and occupancy rates to decline; the Company's ability to evaluate, finance and integrate acquired businesses into the Company's existing business and operations; the Company's ability to effectively compete in the industry in which it does business; the Company's existing indebtedness may mature in an unfavorable credit environment, preventing refinancing or forcing refinancing of the indebtedness on terms that are not as favorable as the existing terms; interest rates may fluctuate, impacting costs associated with the Company's outstanding floating rate debt; the Company's ability to comply with debt covenants; any future ratings on the Company's debt instruments; the regional concentration of the Company's business may subject it to economic downturns in the states of Florida and Texas; the Company's reliance on its call center; the Company's cash flow may be insufficient to meet required payments of operating expenses, principal, interest and dividends; and tax law changes that may change the taxability of future income. Business and Overview



We believe we are the fifth largest operator of self-storage properties in the United States based on square feet owned and managed. All of our stores are operated under the user-friendly name "Uncle Bob's Self-Storage".

Operating Strategy

Our operating strategy is designed to generate growth and enhance value by:

A. Increasing operating performance and cash flow through aggressive

management of our stores: We seek to differentiate our self-storage facilities from our competition through innovative marketing and value-added product offerings including: Our Customer Care Center, established in 2000, answers sales inquires and makes reservations for all of our Properties on a centralized basis. Further, our call center and customer contact software was developed in-house and is 100% supported by our in-house experts. This provides us flexibility well beyond that of any operator using off the shelf software; The Uncle Bob's truck move-in program, under which, at present, 332 of our stores offer a free Uncle Bob's truck to assist our customers moving into their spaces, and acts as a moving billboard further supporting our branding efforts; Our dehumidification system, known as Dri-guard, which provides our customers with a better environment to store their goods and improves yields on our Properties; Strategic and efficient Web and Mobile marketing that places Uncle Bob's in front of customers in search engines at the right time for conversion; Regional marketing which creates effective brand



awareness in

the cities where we do business. Our customized computer applications link each of our



primary sales

channels (customer care center, web, and store) allowing



for real

time access to space type and inventory, pricing,

promotions, and 22



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other pertinent store information. This also provides us with raw data on historical and current pricing, move-in and move-out activity, specials and occupancies, etc. This data is then used within the advanced pricing analytics programs employed by our revenue management team. Our store managers receive a high level of training. New store employees are assigned a Certified Training Manager as a mentor during their initial training period. In addition, all employees have access to our online Learning and Performance Management System internally named eBOB for initial training as well as continuing education. Finally, we have a company intranet that acts as a communications portal for company policy and procedures, online ordering, incentive rankings, etc. B. Acquiring additional stores: Our objective is to acquire new stores in markets in which we currently operate. This is a proven strategy we have



employed over

the years as it facilitates our branding efforts, grows market share, and allows us to achieve improved economies of scale through shared advertising, payroll, and other services. We also look to enter new markets that are in the top 50 MSA by acquiring established multi-property portfolios. With this strategy we are then able to seek out additional acquisition or third party management opportunities to continue to grow market share, branding and enhance economies of scale. C. Expanding our management business: We see our management business as a source of future



acquisitions.

We hold a minority interest in two joint ventures which hold a total of 55 properties that we manage. In addition, we manage 22 self-storage facilities for which we have no ownership. We may enter into additional management agreements and develop additional joint ventures in the future. The joint venture agreements will give us first right of refusal to purchase the managed properties in the event they are offered for sale. D. Expanding and enhancing our existing stores: Over the past 5 years we have undertaken a program of expanding and

enhancing our Properties. In 2009, we completed



construction of a

new 78,000 square foot facility in Richmond, Virginia, added 175,000 square feet to other existing Properties, and converted 64,000 square feet to premium storage for a total cost of approximately $18 million; in 2010, we added 162,000 square feet to existing Properties, and converted 6,500 square feet to premium storage for a total cost of approximately $9 million; in 2011, we added 118,000 square feet to existing Properties and converted 2,000 square feet to premium storage for a total cost of approximately $7.2 million; in 2012, we added 372,000 square feet to existing Properties and converted 35,000 square feet to premium storage for a total cost of approximately $22.5 million; and in 2013, we added 295,000 square feet to existing Properties and converted 9,000 square feet to premium storage for a total cost of approximately $17.9 million. In 2011, 2012, and 2013 we also installed solar panels at 13 locations for a total cost of approximately $3.3 million. Our solar panel initiative has reduced energy consumption and operating cost at those installed locations.



Supply and Demand / Operating Trends

We believe the supply and demand model in the self-storage industry is micro market specific in that a majority of our business comes from within a five mile radius of our stores. The recent economic conditions and the credit market environment have resulted in a decrease in new supply on a national basis in the last five years. With the recent loosening of the debt and equity markets, we have seen capitalization rates on quality acquisitions (expected annual return on investment) decrease from approximately 6.25% to 5.75%. 23



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We believe our industry weathered the most recent recession very well. Although our industry experienced softness in 2008 through 2011, our same store sales showed positive increases save for 2009, when we showed a 3.1% decrease in same store revenue. That was the first time in recent history that we recorded lower same store sales. We feel our recent performance further supports the notion that the self-storage industry holds up well through recessions. We believe our same-store move-ins in 2013 were lower than 2012 due to the fact that our stores were higher occupied in 2013, resulting in less space to rent. Although same store move outs showed an increase in 2013 over 2012, the actual move outs as a percentage of occupied spaces was lower in 2013 than 2012. 2013 2012 Change Same store move ins 151,134 157,722 (6,588 ) Same store move outs 148,837 146,265 2,572 Difference 2,297 11,457 9,160 We expect conditions in most of our markets to continue the recovery that we saw in 2011 through 2013 and are forecasting 5% to 6% revenue growth on a same store basis in 2014. We were able to maintain relatively flat expenses at the store operating level from 2009 through 2012, but did see above average increases in property taxes and insurance in 2013. We do expect same store expense growth to continue to see pressure from property tax increases in 2014. We believe the expense increases, even with the pressure from property taxes, will be at a manageable level of between 5% and 6%. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts reported in our financial statements and the accompanying notes. On an on-going basis, we evaluate our estimates and judgments, including those related to carrying values of storage facilities, bad debts, and contingencies and litigation. We base these estimates on experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Assigning purchase price to assets acquired: The purchase price of acquired storage facilities is assigned primarily to land, land improvements, building, equipment, and in-place customer leases based on the fair values of these assets as of the date of acquisition. We use significant unobservable inputs in our determination of the fair values of these assets. The determination of these inputs involves judgments and estimates that can vary for each individual property based on a number of factors specific to the properties and the functional, economic and other factors affecting each property. To determine the fair value of land, we use prices per acre derived from observed transactions involving comparable land in similar locations. To determine the fair value of buildings, equipment and improvements, we use current replacement cost based on information derived from construction industry data by geographic region as adjusted for the age, condition, and economic obsolescence associated with these assets. The fair values of in-place customer leases is based on the rent lost due to the amount of time required to replace existing customers which is based on our historical experience with turnover in our facilities. Carrying value of storage facilities: We believe our judgment regarding the impairment of the carrying value of our storage facilities is a critical accounting policy. Our policy is to assess any impairment of value whenever events or circumstances indicate that the carrying value of a storage facility may not be recoverable. Such events or circumstances would include negative operating cash flow, significant declining revenue per storage facility, significant damage sustained from accidents or natural disasters, or an expectation that, more likely than not, a property will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. Impairment is evaluated based upon comparing the sum of the expected undiscounted future cash flows to the 24



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carrying value of the storage facility, on a property by property basis. If the sum of the undiscounted cash flow is less than the carrying amount, an impairment loss is recognized for the amount by which the carrying amount exceeds the fair value of the asset. If cash flow projections are inaccurate and in the future it is determined that storage facility carrying values are not recoverable, impairment charges may be required at that time and could materially affect our operating results and financial position. Estimates of undiscounted cash flows could change based upon changes in market conditions, expected occupancy rates, etc. During 2011 we recorded an impairment charge at one of our stores as of a result of a structural deficiency that we decided to address by demolishing the buildings in 2012. No assets had been determined to be impaired under this policy in 2013. Estimated useful lives of long-lived assets: We believe that the estimated lives used for our depreciable, long-lived assets is a critical accounting policy. We periodically evaluate the estimated useful lives of our long-lived assets to determine if any changes are warranted based upon various factors, including changes in the planned usage of the assets, customer demand, etc. Changes in estimated useful lives of these assets could have a material adverse impact on our financial condition or results of operations. We have not made significant changes to the estimated useful lives of our long-lived assets in the past and we do not have any current expectation of making significant changes in 2014. Consolidation and investment in joint ventures: We consolidate all wholly owned subsidiaries. Partially owned subsidiaries and joint ventures are consolidated when we control the entity or have the power to direct the activities most significant to the economic performance of the entity. Investments in joint ventures that we do not control but over which we have significant influence are reported using the equity method. Under the equity method, our investment in joint ventures are stated at cost and adjusted for our share of net earnings or losses and reduced by distributions. Equity in earnings of real estate ventures is generally recognized based on our ownership interest in the earnings of each of the unconsolidated real estate ventures. Revenue and Expense Recognition: Rental income is recognized when earned pursuant to month-to-month leases for storage space. Promotional discounts are recognized as a reduction to rental income over the promotional period, which is generally during the first month of occupancy. Rental income received prior to the start of the rental period is included in deferred revenue. Qualification as a REIT: We operate, and intend to continue to operate, as a REIT under the Code, but no assurance can be given that we will at all times so qualify. To the extent that we continue to qualify as a REIT, we will not be taxed, with certain limited exceptions, on the taxable income that is distributed to our shareholders. If we fail to qualify as a REIT, any requirement to pay federal income taxes could have a material adverse impact on our financial condition and results of operations. Recent Accounting Pronouncements In February 2013, the FASB issued Accounting Standards Update ("ASU") 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, an amendment to FASB ASC Topic 220. The update requires disclosure of amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present either on the face of the statement of operations or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts not reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. This ASU is effective prospectively for the Company's fiscal years, and interim periods within those years beginning after December 15, 2012. The Company adopted ASU No. 2013-02 in 2013. The adoption of ASU No. 2013-02 did not have a material impact on the Company's consolidated financial statements. 25



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YEAR ENDED DECEMBER 31, 2013 COMPARED TO YEAR ENDED DECEMBER 31, 2012

We recorded rental revenues of $253.4 million for the year ended December 31, 2013, an increase of $35.5 million or 16.3% when compared to 2012 rental revenues of $217.9 million. Of the increase in rental revenue, $15.8 million resulted from a 7.4% increase in rental revenues at the 358 core properties considered in same store sales (those properties included in the consolidated results of operations since January 1, 2012, excluding the properties we sold in 2012 and 2013). The increase in same store rental revenues was a result of a 340 basis point increase in average occupancy and a 2.6% increase in rental income per square foot. The remaining increase in rental revenue of $19.7 million resulted from the revenues from the acquisition of 39 properties and the lease of four properties completed since January 1, 2012. Other operating income, which includes merchandise sales, insurance commissions, truck rentals, management fees and acquisition fees, increased by $3.9 million for the year ended December 31, 2013 compared to 2012 primarily as a result of increased commissions earned on customer insurance. Property operations and maintenance expenses increased $6.2 million or 11.2% in 2013 compared to 2012. The 358 core properties considered in the same store pool experienced a $1.1 million or 2.0% increase in operating expenses as a result of increases in payroll, credit card fees and snow removal costs. The same store pool benefited from reduced yellow page advertising expense. In addition to the same store operating expense increase, operating expenses increased $5.1 million from the acquisition of 39 properties and the lease of four properties completed since January 1, 2012. Real estate tax expense increased $4.4 million as a result of a 7.4% increase in property taxes on the 358 same store pool and the inclusion of taxes on the properties acquired or leased in 2013 and 2012. Our 2013 same store results consist of only those properties that were included in our consolidated results since January 1, 2012, excluding the properties we sold in 2013 and 2012. The following table sets forth operating data for our 358 same store properties. These results provide information relating to property operating changes without the effects of acquisition. Same Store Summary Year ended December 31, Percentage (dollars in thousands) 2013 2012 Change Same store rental income $ 228,357$ 212,596 7.4 % Same store other operating income 12,284 10,745 14.3 % Total same store operating income 240,641 223,341 7.7 % Payroll and benefits 22,521 22,277 1.1 % Real estate taxes 22,999 21,417 7.4 % Utilities 9,262 9,167 1.0 % Repairs and maintenance 8,734 8,488 2.9 % Office and other operating expenses 8,776 8,339 5.2 % Insurance 3,819 3,435 11.2 % Advertising and yellow pages 1,411 1,734 -18.6 % Total same store operating expenses 77,522 74,857 3.6 % Same store net operating income $ 163,119$ 148,484 9.9 %



Net operating income increased $28.9 million or 18.4% as a result of a 9.9% increase in our same store net operating income and the acquisitions and property leases completed since January 1, 2012.

Net operating income or "NOI" is a non-GAAP (generally accepted accounting principles) financial measure that we define as total continuing revenues less continuing property operating expenses. NOI also can be calculated by adding back to net income: interest expense, impairment and casualty losses, operating lease expense, depreciation and amortization expense, acquisition related costs, general and administrative expense, and deducting from net income: income from discontinued operations, interest income, gain on sale of real estate, and equity in income of joint ventures. We believe that NOI is a meaningful measure of operating performance because we utilize NOI in making decisions with respect to capital allocations, in determining current property values, and in 26



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comparing period-to-period and market-to-market property operating results. 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. 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. The following table reconciles NOI generated by our self-storage facilities to our net income presented in the 2013 and 2012 consolidated financial statements. Year ended December 31, (dollars in thousands) 2013 2012 Net operating income Same store $ 163,119 $



148,484

Other stores and management fee income 22,576 8,359

Total net operating income 185,695



156,843

General and administrative (34,939 )



(32,313 )

Acquisition related costs (3,129 )



(4,328 )

Operating leases of storage facilities (1,331 ) - Depreciation and amortization (45,233 ) (40,542 ) Interest expense (32,000 ) (33,166 ) Interest income 40 4 Gain on sale of real estate 421 687 Equity in income of joint ventures 1,948 936 Income from discontinued operations 3,123

7,520 Net income $ 74,595$ 55,641 General and administrative expenses increased $2.6 million or 8.1% from 2012 to 2013. The key drivers of the increase were a $1.6 million increase in salaries and performance incentives, and a $1.0 million increase in internet advertising. Acquisition related costs decreased by $1.2 million as a result of the $94.9 million of stores acquired or leased in 2013 compared to the $189.1 million of stores acquired in 2012. The Operating leases of storage facilities in 2013 relates to lease agreements entered in November 2013 with respect to four self storage facilities in New York (2) and Connecticut (2). Such leases have annual lease payments of $6 million with a provision for 4% annual increases, and an exclusive option to purchase the facilities for $120 million. Depreciation and amortization expense increased to $45.2 million in 2013 from $40.5 million in 2012, primarily as a result of depreciation on the properties acquired in 2012 and 2013. Interest expense decreased from $33.2 million in 2012 to $32.0 million in 2013. The decrease was mainly due to the refinancing of our bank line of credit and term notes in June 2013 which reduced our interest rate on those obligations. In addition, in September 2013 we replaced a maturing fixed rate term note with a bank term loan with a lower interest rate.



During 2013, we sold our equity interest and mortgage note in a formerly consolidated joint venture for $4.4 million resulting in a gain on the sale of $0.4 million. During 2012, we sold a portion of one of our facilities and a parcel of land for net proceeds of $3.3 million resulting in a gain of $0.7 million.

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In the 4th quarter of 2013, we sold four non-strategic facilities in Ohio, Florida (2), and Virginia for net proceeds of approximately $11.7 million resulting in a gain of approximately 2.4 million. In July and August of 2012, the Company sold 17 non-strategic storage facilities in Maryland (1), Michigan (4) and Texas (12) for net proceeds of approximately $47.7 million resulting in a gain of approximately $4.5 million. The 2013 and 2012 operations of these facilities are reported in income from discontinued operations for all periods presented. YEAR ENDED DECEMBER 31, 2012 COMPARED TO YEAR ENDED DECEMBER 31, 2011 We recorded rental revenues of $217.9 million for the year ended December 31, 2012, an increase of $29.5 million or 15.7% when compared to 2011 rental revenues of $188.4 million. Of the increase in rental revenue, $10.8 million resulted from a 5.9% increase in rental revenues at the 329 core properties considered in same store sales (those properties included in the consolidated results of operations since January 1, 2011, excluding the one property we developed in 2009 and the 21 properties we sold in 2012 and 2013). The increase in same store rental revenues was a result of a 520 basis point increase in average occupancy which was offset by a 1.4% decrease in rental income per square foot. The remaining increase in rental revenue of $18.8 million resulted from the continued lease-up of our Richmond, Virginia property constructed in 2009 and the revenues from the acquisition of 57 properties completed in 2011 and 2012. Other operating income, which includes merchandise sales, insurance commissions, truck rentals, management fees and acquisition fees, increased by $3.7 million for the year ended December 31, 2012 compared to 2011 primarily as a result of increased commissions earned on customer insurance and from having a full year of fees for managing the properties in the joint venture (Sovran HHF Storage Holdings II LLC) which began operations in July 2011. We also earned a $0.1 million acquisition fee from this joint venture in 2012 compared to an acquisition fee of $0.7 million earned from the joint venture in 2011. Property operations and maintenance expenses increased $3.4 million or 6.5% in 2012 compared to 2011. The 329 core properties considered in the same store pool experienced a $1.1 million or 2.3% decrease in operating expenses as a result of lower utilities due to a mild winter and energy savings initiatives. The same store pool also benefited from reduced yellow page advertising expense and reduced credit card fees. The decrease in same store operating expenses was offset by the $4.5 million increase in operating expenses resulting from the 57 properties acquired in 2011 and 2012. Real estate tax expense increased $2.9 million as a result of a 2.3% increase in property taxes on the 329 same store pool and the inclusion of taxes on the properties acquired in 2012 and 2011. Our 2012 same store results consist of only those properties that were included in our consolidated results since January 1, 2011, excluding the one property we developed in 2009 and the 21 properties we sold in 2012 and 2013. The following table sets forth operating data for our 329 same store properties. These results provide information relating to property operating changes without the effects of acquisition. Same Store Summary Year ended December 31, Percentage (dollars in thousands) 2012 2011 Change

Same store rental income $ 193,179$ 182,424 5.9 % Same store other operating income 10,088 8,774 15.0 % Total same store operating income 203,267 191,198 6.3 % Payroll and benefits 20,479 20,088 1.9 % Real estate taxes 18,836 18,417 2.3 % Utilities 8,236 8,713 -5.5 % Repairs and maintenance 7,676 7,329 4.7 % Office and other operating expenses 7,568 7,800 -3.0 % Insurance 2,953 2,926 0.9 % Advertising and yellow pages 1,632 2,820 -42.1 % Total same store operating expenses 67,380 68,093 -1.0 % Same store net operating income $ 135,887$ 123,105 10.4 % 28



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Net operating income increased $27.0 million or 20.8% as a result of a 10.4% increase in our same store net operating income and the acquisitions completed since January 1, 2011. Net operating income or "NOI" is a non-GAAP (generally accepted accounting principles) financial measure that we define as total continuing revenues less continuing property operating expenses. NOI also can be calculated by adding back to net income: interest expense, impairment and casualty losses, depreciation and amortization expense, acquisition related costs, general and administrative expense, and deducting from net income: income from discontinued operations, interest income, gain on sale of real estate, and equity in income of joint ventures. We believe that NOI is a meaningful measure of operating performance because we utilize NOI in making decisions with respect to capital allocations, in determining current property values, and in comparing period-to-period and market-to-market property operating results. 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. 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. The following table reconciles NOI generated by our self-storage facilities to our net income presented in the 2012 and 2011 consolidated financial statements. Year ended December 31, (dollars in thousands) 2012 2011 Net operating income Same store $ 135,887$ 123,105 Other stores and management fee income 20,956



6,777

Total net operating income 156,843



129,882

General and administrative (32,313 )



(25,986 )

Acquisition related costs (4,328 )



(3,278 )

Impairment of storage facility -



(1,047 )

Depreciation and amortization (40,542 ) (34,836 ) Interest expense (33,166 ) (38,549 ) Interest income 4 83 Casualty loss - (126 ) Gain on sale of real estate 687



1,511

Equity in income (losses) of joint ventures 936



(340 )

Income from discontinued operations 7,520 4,215 Net income $ 55,641$ 31,529 General and administrative expenses increased $6.3 million or 24.3% from 2011 to 2012. The key drivers of the increase were a $3.9 million increase in salaries and performance incentives, and a $1.5 million increase in internet advertising. The remaining $0.9 million increase is the result of increases in various other administrative costs as a result of managing the increased number of stores in our portfolio as compared to 2011.



Acquisition related costs increased by $1.1 million as a result of the $189.1 million of stores acquired in 2012 compared to the $155.1 million of stores acquired in 2011.

Depreciation and amortization expense increased to $40.5 million in 2012 from $34.8 million in 2011, primarily as a result of depreciation on the 57 properties acquired in 2011 and 2012.

The 2011 impairment charge related to a building that was determined to have a structural deficiency. There were no such impairments in 2012.

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Interest expense decreased from $38.5 million in 2011 to $33.2 million in 2012. The decrease was mainly due to expensing $5.5 million that was paid to terminate two interest rate swap agreements related to the $150 million term note that we repaid as part of our debt refinancing in August 2011. The casualty loss recorded in 2011 was the result of clean-up and repair costs incurred in excess of insurance proceeds received from two buildings that were damaged by fire. During 2012, we sold a portion of one of our facilities and a parcel of land for net proceeds of $3.3 million resulting in a gain of $0.7 million. During 2011, we sold three parcels of land to various municipalities for their use as part of road widening projects for net cash proceeds of $2.0 million resulting in a gain on sale of $1.5 million. In July and August of 2012, the Company sold 17 non-strategic storage facilities in Maryland (1), Michigan (4) and Texas (12) for net proceeds of approximately $47.7 million resulting in a gain of approximately $4.5 million. The 2012 and 2011 operations of these facilities, as well as the operations of the 4 stores disposed of in 2013, are reported in income from discontinued operations for all periods presented. Net income attributable to noncontrolling interest decreased from $0.9 million in 2011 to $0.5 million in 2012 primarily as a result of our May 2011 additional investment in Locke Sovran II, LLC in which we purchased the remaining noncontrolling interest in that entity. In addition, the redemption of Operating Partnership Units by a noncontrolling unitholder in 2012 resulted in a decrease in the attribution of net income to noncontrolling interests in 2012 as compared to 2011. FUNDS FROM OPERATIONS We believe that Funds from Operations ("FFO") provides relevant and meaningful information about our operating performance that is necessary, along with net earnings and cash flows, for an understanding of our operating results. FFO adds back historical cost depreciation, which assumes the value of real estate assets diminishes predictably in the future. In fact, real estate asset values increase or decrease with market conditions. Consequently, we believe FFO is a useful supplemental measure in evaluating our operating performance by disregarding (or adding back) historical cost depreciation. FFO is defined by the National Association of Real Estate Investment Trusts, Inc. ("NAREIT") as net income available to common shareholders computed in accordance with generally accepted accounting principles ("GAAP"), excluding gains or losses on sales of properties, plus impairment of real estate assets, plus depreciation and amortization and after adjustments to record unconsolidated partnerships and joint ventures on the same basis. We believe that to further understand our performance, FFO should be compared with our reported net income and cash flows in accordance with GAAP, as presented in our consolidated financial statements. In October and November of 2011, NAREIT issued guidance for reporting FFO that reaffirmed NAREIT's view that impairment write-downs of depreciable real estate should be excluded from the computation of FFO. This view is based on the fact that impairment write-downs are akin to and effectively reflect the early recognition of losses on prospective sales of depreciable property or represent adjustments of previously charged depreciation. Since depreciation of real estate and gains/losses from sales are excluded from FFO, it is NAREIT's view that it is consistent and appropriate for write-downs of depreciable real estate to also be excluded. Our calculation of FFO excludes impairment write-downs of investments in storage facilities. Our computation of FFO may not be comparable to FFO reported by other REITs or real estate companies that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently. FFO does not represent cash generated from operating activities determined in accordance with GAAP, and should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of our performance, as an alternative to net cash flows from operating activities (determined in accordance with GAAP) as a measure of our liquidity, or as an indicator of our ability to make cash distributions. 30



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Reconciliation of Net Income to Funds From Operations

For Year Ended December 31, (dollars in thousands) 2013 2012 2011 2010 2009 Net income attributable to common shareholders $ 74,126$ 55,128$ 30,592$ 40,642$ 19,916 Net income attributable to noncontrolling interests 469 513 937 1,899 1,738 Depreciation of real estate and amortization of intangible assets exclusive of deferred financing fees 44,369 40,153 34,835 31,218 31,026 Depreciation of real estate included in discontinued operations 313 1,137 1,742 1,938 2,793 Depreciation and amortization from unconsolidated joint ventures 1,496 1,595 1,018 788 820 Casualty and impairment loss - - 1,173 - - (Gain) loss on sale of real estate (2,852 ) (5,185 ) (1,511 ) (6,944 ) 509 Funds from operations allocable to noncontrolling interest in Operating Partnership (742 ) (881 ) (812 ) (885 ) (984 ) Funds from operations allocable to noncontrolling interest in consolidated joint ventures - -



(567 ) (1,360 ) (1,360 )

Funds from operations available to common shareholders $ 117,179$ 92,460$ 67,407$ 67,296$ 54,458 LIQUIDITY AND CAPITAL RESOURCES Our line of credit and term notes require us to meet certain financial covenants measured on a quarterly basis, including prescribed leverage, fixed charge coverage, minimum net worth, limitations on additional indebtedness, and limitations on dividend payouts. At December 31, 2013, the Company was in compliance with all debt covenants. The most sensitive covenant is the leverage ratio covenant contained in certain of our term note agreements. This covenant limits our total consolidated liabilities to 55% of our gross asset value. At December 31, 2013, our leverage ratio as defined in the agreements was approximately 34.1%. The agreements define total consolidated liabilities to include the liabilities of the Company plus our share of liabilities of unconsolidated joint ventures. The agreements also define a prescribed formula for determining gross asset value which incorporates the use of a 9.25% capitalization rate applied to annualized earnings before interest, taxes, depreciation and amortization and other items ("Adjusted EBITDA") as defined in the agreements. In the event that the Company violates its debt covenants in the future, the amounts due under the agreements could be callable by the lenders and could adversely affect our credit rating requiring us to pay higher interest and other debt-related costs. We believe that if operating results remain consistent with historical levels and levels of other debt and liabilities remain consistent with amounts outstanding at December 31, 2013, the entire availability under our line of credit could be drawn without violating our debt covenants.



Our ability to retain cash flow is limited because we operate as a REIT. In order to maintain our REIT status, a substantial portion of our operating cash flow must be used to pay dividends to our shareholders. We believe that our internally generated net cash provided by operating activities and the availability on our line of credit will be sufficient to fund ongoing operations, capital improvements, dividends and debt service requirements through April 2016, at which time $150 million of term notes mature.

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Cash flows from operating activities were $120.6 million, $98.8 million and $79.9 million for the years ended December 31, 2013, 2012, and 2011, respectively. The increase in operating cash flows from 2012 to 2013 and from 2011 to 2012 was primarily due to an increase in net income.

Cash used in investing activities was $114.3 million, $175.7 million, and $189.9 million for the years ended December 31, 2013, 2012, and 2011 respectively. The decrease in cash used from 2012 to 2013 was primarily due to $186.9 million spent in 2012 to purchase 28 storage facilities compared to the $94.8 million spent in 2013 on the acquisition of 11 storage facilities. Also, in 2012 we received $47.7 million from the sale of storage facilities as compared to the $11.7 million we received in 2013 from the sale of storage facilities. The decrease in cash used from 2011 to 2012 was primarily due to $47.7 million in proceeds from the sale of storage facilities in 2012. No facilities were sold in 2011. The decrease in cash used as a result of the sales proceeds was partially offset by the $186.9 million spent in 2012 to purchase storage facilities compared to the $150.4 million spent in 2011 on the acquisition of storage facilities. Cash used in financing activities was $4.0 million in 2013 compared to cash provided by financing activities of $76.8 million and $111.5 million in 2012 and 2011, respectively. In 2013, we used the $119.5 million net proceeds from the sale of common stock to paydown our line of credit and to fund a portion of the property acquisitions. In 2012 we realized $78.9 million from the sale of our common stock through our at the market equity offering and stock option plans, and $59.0 million in net proceeds from draws on our line of credit to fund a portion of our acquisitions and capital improvements. In 2011, we realized $47.0 million from the sale of our common stock through our at the market equity offering and $211.0 million in proceeds, net of repayments, from our new credit agreements to fund our acquisitions, joint venture activity and mortgage payoffs of $77.0 million. On June 4, 2013, the Company entered into an amendment to its unsecured credit arrangement. As part of the amended agreement, the Company entered into a $225 million unsecured term note maturing June 4, 2020 bearing interest at LIBOR plus a margin based on the Company's credit rating (at December 31, 2013 the margin is 1.65%). The agreement also provides for a $175 million (expandable to $250 million) revolving line of credit bearing interest at a variable rate equal to LIBOR plus a margin based on the Company's credit rating (at December 31, 2013 the margin is 1.50%), and requires a 0.20% facility fee. The interest rate at December 31, 2013 on the Company's available line of credit was approximately 1.67% (2.21% at December 31, 2012). At December 31, 2013, there was $125.3 million available on the unsecured line of credit without considering the additional availability under the expansion feature. The revolving line of credit has a maturity date of June 4, 2018, but can be extended for two one-year periods at the Company's option with the payment of an extension fee equal to 0.125% of the total line of credit commitment. In January and February 2014, the Company acquired six storage facilities for cash consideration of approximately $86.7 million. These acquisitions were funded with draws on the Company's line of credit. The line of credit balance outstanding after the funding of the six acquisitions was $141.0 million. In addition, on June 4, 2013, as part of the amendment to its unsecured credit arrangement, the Company secured an additional $100 million term note with a delayed draw feature that was used to fund the Company's term notes that matured in September 2013. The delayed draw term note matures June 4, 2020 and bears interest at LIBOR plus a margin based on the Company's credit rating (at December 31, 2013 the margin is 1.65%). On August 5, 2011, the Company entered into a $100 million term note maturing August 2021 bearing interest at a fixed rate of 5.54%. The interest rate on the term note increases to 7.29% if the notes are not rated by at least one rating agency, the credit rating on the notes is downgraded or if the Company's credit rating is downgraded. The proceeds from this term note were used to fund acquisitions and investments in unconsolidated joint ventures. The Company also maintains a $150 million unsecured term note maturing in April 2016 bearing interest at 6.38%. The interest rate on the $150 million unsecured term note increases to 8.13% if the notes are not rated by at least one rating agency, the credit rating on the notes is downgraded or the Company's credit rating is downgraded. 32



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Our line of credit facility and term notes have an investment grade rating from Standard and Poor's and Fitch Ratings (BBB-).

In addition to the unsecured financing mentioned above, our consolidated financial statements also include $2.3 million of mortgages payable that are secured by a storage facility.

On February 27, 2013, the Company entered into a continuous equity offering program ("Equity Program") with Wells Fargo Securities, LLC ("Wells Fargo"), Jefferies LLC fka Jefferies & Company, Inc. ("Jefferies") and SunTrust Robinson Humphrey, Inc. ("SunTrust") pursuant to which the Company may sell from time to time up to $175 million in aggregate offering price of shares of the Company's common stock. Actual sales under the Equity Program will depend on a variety of factors and conditions, including, but not limited to, market conditions, the trading price of the Company's common stock, and determinations of the appropriate sources of funding for the Company. The Company expects to continue to offer, sell, and issue shares of common stock under the Equity Program from time to time based on various factors and conditions, although the Company is under no obligation to sell any shares under the Equity Program. During 2013, the Company issued 1,667,819 shares under this Equity Program at a weighted average issue price of $65.66 per share, generating net proceeds of $107.8 million after deducting $0.5 million of sales commissions payable to SunTrust, $0.5 million to Wells Fargo, and $0.5 million to Jefferies. In addition to sales commissions, the Company incurred expenses of $0.2 million in connection with the Equity Program during 2013. The Company used the proceeds from the Equity Program to reduce the outstanding balance under the Company's revolving line of credit and to fund the acquisition of 11 storage facilities. As of December 31, 2013, the Company had $65.5 million available for issuance under the Equity Program. During 2012, the Company issued 1,391,425 shares under its previously available equity offering program with Wells Fargo at a weighted average issue price of $55.20 per share, generating net proceeds of $75.3 million after deducting $1.5 million of sales commissions payable to Wells Fargo. In addition to sales commissions paid to Wells Fargo, the Company incurred expenses of $58,000 in connection with this equity offering program during 2012. The Company used the proceeds from this offering to reduce the outstanding balance under the Company's revolving line of credit.



We implemented a new Dividend Reinvestment Plan in March 2013 which replaced our previous plan which was suspended in November 2009. We issued 68,957 shares under the new plan in 2013.

During 2013 and 2012, we did not acquire any shares of our common stock via the Share Repurchase Program authorized by the Board of Directors. From the inception of the Share Repurchase Program through December 31, 2013, we have reacquired a total of 1,171,886 shares pursuant to this program. From time to time, subject to market price and certain loan covenants, we may reacquire additional shares. Future acquisitions, our expansion and enhancement program, and share repurchases are expected to be funded with draws on our line of credit, issuance of common and preferred stock, the issuance of unsecured term notes, sale of properties, and private placement solicitation of joint venture equity. Should the capital markets deteriorate, we may have to curtail acquisitions, our expansion and enhancement program, and share repurchases as we approach April 2016, when certain term notes mature. 33



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CONTRACTUAL OBLIGATIONS



The following table summarizes our future contractual obligations:

Payments due by period (in thousands) Contractual obligations Total 2014 2015 - 2016 2017 - 2018 2019 and thereafter Line of credit $ 49,000 - - $ 49,000 - Term notes 575,000 - $ 150,000 - $ 425,000 Mortgages payable 2,254 $ 126 276 311 1,541 Interest payments 107,605 22,325 37,449 24,769 23,062 Interest rate swap payments 7,523 5,468 626 790 639 Standby letter of credit 652 652 - - - Limited partnership commitments 2,500 2,500 - - - Land lease 854 52 106 106 590 Expansion and enhancement contracts 14,639 14,639 - - - Building leases 129,260 6,916 14,635 15,712 91,997 Self storage facility acquisitions 92,775 92,775 - - - Total $ 982,062$ 145,453$ 203,092$ 90,688 $ 542,829 Interest payments include actual interest on fixed rate debt and estimated interest for floating-rate debt based on December 31, 2013 rates. Interest rate swap payments include estimated net settlements of swap liabilities based on forecasted variable rates. At December 31, 2013, the Company was under contract to acquire seven self-storage facilities for approximately $92.8 million. Six of the properties were acquired in January and February 2014 for $86.7 million. The purchase of the remaining facility by the Company is subject to customary conditions to closing, and there is no assurance that this facility will be acquired. The Company has committed up to $2.5 million for a 16.7% limited partnership interest in an entity that is developing self storage facilities that will be managed by the Company. At December 31, 2013 none of the commitment has been funded. ACQUISITION OF PROPERTIES In 2013, we acquired 11 self storage facilities comprising 0.6 million square feet in Colorado (1), Connecticut (1), Florida (1), Massachusetts (1), New Jersey (2), New York (3), and Texas (2) for a total purchase price of $94.9 million. Based on the trailing financials of the entities from which the properties were acquired, the weighted average capitalization rate was 4.8% on these purchases and ranged from 2.3% to 6.5%. In addition to the properties acquired, in November 2013 the Company entered into lease agreements with respect to four self storage facilities in New York (2) and Connecticut (2). Such leases have annual lease payments of $6 million with a provision for 4% annual increases, and an exclusive option to purchase the facilities for $120 million. In 2012, we acquired 28 self storage facilities comprising 2.2 million square feet in Arizona (1), Florida (8), Georgia (5), Illinois (9), North Carolina (1), Texas (3), and Virginia (1) for a total purchase price of $189.1 million. In 2011, we acquired 29 self storage facilities comprising 2.0 million square feet in New Jersey (3), Florida (1), Georgia (1), Missouri (1), Texas (22), and Virginia (1) for a total purchase price of $155.1 million. 34



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FUTURE ACQUISITION AND DEVELOPMENT PLANS Our external growth strategy is to increase the number of facilities we own by acquiring suitable facilities in markets in which we already have operations, or to expand into new markets by acquiring several facilities at once in those new markets. We are actively pursuing acquisitions in 2014 and at December 31, 2013 we had seven properties under contract to be purchased for $92.8 million. Six of the properties were acquired in January and February 2014. During 2013, we added 295,000 square feet to existing Properties and converted 9,000 square feet to premium storage for a total cost of approximately $17.9 million. During 2012, we added 372,000 square feet to existing Properties, and converted 35,000 square feet to premium storage for a total cost of approximately $22.5 million. In 2011, we added 118,000 square feet to existing Properties, and converted 2,000 square feet to premium storage for a total cost of approximately $7.2 million. In 2011, 2012, and 2013 we also installed solar panels at 13 locations for a total cost of approximately $3.3 million. Although we do not expect to construct any new facilities in 2014, we do plan to complete approximately $30 million in expansions and enhancements to existing facilities of which $8.2 million was paid prior to December 31, 2013. In 2013, the Company spent approximately $13.7 million for recurring capitalized expenditures including roofing, paving, and office renovations. We expect to spend $17.1 million in 2014 on similar capital expenditures. DISPOSITION OF PROPERTIES During 2013, we sold four non-strategic storage facilities in Florida, Ohio, and Virginia for net proceeds of approximately $11.7 million resulting in a gain of approximately $2.4 million. During 2012, we sold 17 non-strategic storage facilities in Maryland, Michigan, and Texas for net proceeds of approximately $47.7 million resulting in a gain of approximately $4.5 million. During 2010 we sold ten non-strategic storage facilities located in Georgia, Michigan, North Carolina and Virginia for net cash proceeds of $23.7 million resulting in a gain of $6.9 million.



We may seek to sell additional Properties to third parties or joint venture partners in 2014.

OFF-BALANCE SHEET ARRANGEMENTS Our off-balance sheet arrangements consist of our investment in two self storage joint ventures in which we have a 20% and 15% ownership, as well as our investment in the entity that owns the building that houses our corporate office in which we have a 49% ownership. We account for these real estate entities under the equity method. The debt held by the unconsolidated real estate entity is secured by the real estate owned by these entities, and is non-recourse to us. See Note 12 to our consolidated financial statements appearing elsewhere in this annual report on Form 10-K. REIT QUALIFICATION AND DISTRIBUTION REQUIREMENTS As a REIT, we are not required to pay federal income tax on income that we distribute to our shareholders, provided that we satisfy certain requirements, including distributing at least 90% of our REIT taxable income for a taxable year. These distributions must be made in the year to which they relate, or in the following year if declared before we file our federal income tax return, and if they are paid not later than the date of the first regular dividend of the following year. As a REIT, we must derive at least 95% of our total gross income from income related to real property, interest and dividends. In 2013, our percentage of revenue from such sources was approximately 97%, thereby passing the 95% test, and no special measures are expected to be required to enable us to maintain our REIT designation. Although we currently intend to operate in a manner designed to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause our Board of Directors to revoke our REIT election. 35



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INTEREST RATE RISK The primary market risk to which we believe we are exposed is interest rate risk, which may result from many factors, including government monetary and tax policies, domestic and international economic and political considerations, and other factors that are beyond our control. We have entered into interest rate swap agreements in order to mitigate the effects of fluctuations in interest rates on our variable rate debt. Upon renewal or replacement of the credit facility, our total interest may change dependent on the terms we negotiate with the lenders; however, the LIBOR base rates have been contractually fixed on $325 million of our debt through the interest rate swap termination dates. See Note 8 to our consolidated financial statements appearing elsewhere in this annual report on Form 10-K. Through September 2018, $325 million of our $374 million of floating rate unsecured debt is on a fixed rate basis after taking into account our interest rate swap agreements. Based on our outstanding unsecured floating rate debt of $374 million at December 31, 2013, a 100 basis point increase in interest rates would have a $0.5 million effect on our interest expense. These amounts were determined by considering the impact of the hypothetical interest rates on our borrowing cost and our interest rate hedge agreements in effect on December 31, 2013. These analyses do not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, we would consider taking actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in our capital structure. INFLATION We do not believe that inflation has had or will have a direct effect on our operations. Substantially all of the leases at the facilities are on a month-to-month basis which provides us with the opportunity to increase rental rates as each lease matures. SEASONALITY Our revenues typically have been higher in the third and fourth quarters, primarily because self-storage facilities tend to experience greater occupancy during the late spring, summer and early fall months due to the greater incidence of residential moves and college student activity during these periods. However, we believe that our customer mix, diverse geographic locations, rental structure and expense structure provide adequate protection against undue fluctuations in cash flows and net revenues during off-peak seasons. Thus, we do not expect seasonality to affect materially distributions to shareholders.


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