Life Storage
Annual Report 2006

Plain-text annual report

Sovran Self Storage, Inc. Annual Report 2006 Number of Stores as of December 31, 2006 266 2003 264 2002 327 2006 285 2005 271 2004 2 4 14 4 5 4 7 4 4 16 26 19 6 18 15 8 52 9 7 12 77 14 Store Details by State as of December 31, 2006 State Stores Square Feet Number of Spaces Alabama ........................................... Arizona ............................................. Connecticut ...................................... Florida .............................................. Georgia ............................................ Louisiana .......................................... Maine ............................................... Maryland .......................................... Massachusetts .................................. Michigan ........................................... Mississippi ........................................ Missouri ............................................ New Hampshire ................................ New York .......................................... North Carolina .................................. Ohio ................................................. Pennsylvania ..................................... Rhode Island .................................... South Carolina .................................. Tennessee ........................................ Texas ............................................... Virginia ............................................. 12 9 5 52 26 14 2 4 14 7 4 7 4 19 15 16 6 4 8 4 77 18 747,153 505,880 303,989 3,266,913 1,552,621 749,210 115,400 173,307 758,424 450,521 200,191 437,118 234,148 1,064,012 796,731 1,024,693 498,885 168,146 426,733 281,424 5,396,943 1,063,000 5,812 4,489 2,863 29,902 12,582 6,568 1,012 2,039 6,874 4,270 1,548 3,798 2,150 10,050 6,955 8,524 2,880 1,562 3,584 2,361 43,473 9,822 Total .............................................. 327 20,215,442 173,118 Dear Fellow Shareholder: Sovran became a bigger, stronger and better company in 2006. For the 4th consecutive year, our same store revenues increased by more than 5% over those of the previous year. This is a tremendous accomplishment, and has been made possible by our relentless application of sound and proven management practices. Target marketing, rigorous rate management and intensive employee training have been tactics we’ve employed throughout our 22 years in the storage business. These, combined with innovations we’ve brought to our industry (such as Uncle Bob’s Trucks and Dri-guard humidity control systems) have been the primary drivers of these c o n t i n u i n g s t r o n g r e s u l t s . “ The discipline, expertise and intensity we’ve exhibited over the past two decades will serve us well as we continue to grow our Company.” We invested heavily in properties this year, spending $166 million to acquire 42 stores. As a result, Uncle Bob’s is now in two new markets – St. Louis, MO and Columbus, GA, and our presence in Dallas, Houston, San Antonio, Tampa and Southeast Louisiana has been significantly increased. Pursuant to the plan we announced last year, we expanded and improved many of our existing stores, purchasing 10 parcels of adjacent land, adding 300,000 sq. ft. of space and enhancing another 126,000 sq. ft. with climate control and Dri-guard. We also spent $8.6 million to acquire controlling interests in the two joint ventures we formed in 2000 and 2001. Our balance sheet was greatly strengthened. We refinanced $150 million of short term debt obligations with a 10-year fixed rate note and we issued 2.8 million shares of common stock, netting $148 million of equity. At year’s end, our outstanding debt was a conservative 27% of total market capitalization, and considerable liquidity was available to acquire new assets and improve existing properties. For the 11th straight year, we increased the dividend on our common shares, which contributed to a 27.9% overall return on your investment in Sovran Self Storage for 2006. We remain focused on creating value. The discipline, expertise and intensity we’ve exhibited over the past two decades will serve us well as we continue to grow our Company. Thank you for your continued support. Robert J. Attea Chairman and CEO Kenneth F. Myszka President and COO David Rogers CFO UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2006 Commission File Number: 1-13820 SOVRAN SELF STORAGE, INC. (Exact name of Registrant as specified in its charter) Maryland (State of incorporation or organization) 16-1194043 (I.R.S. Employer Identification No.) 6467 Main Street Williamsville, NY 14221 (Address of principal executive offices) (Zip code) (716) 633-1850 (Registrant's telephone number including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Securities Common Stock, $.01 Par Value Exchanges on which Registered New York Stock Exchange Securities registered pursuant to section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ X ] No [ ] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [ X ] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non- accelerated filer (as defined in Rule 12b-2 of the exchange Act). Large Accelerated Filer [ X ] Accelerated Filer [ ] Non-accelerated Filer [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ] 1 As of June 30, 2006, 16,419,848 shares of Common Stock, $.01 par value per share, were outstanding, and the aggregate market value of the Common Stock held by non-affiliates was approximately $868,483,402 (based on the closing price of the Common Stock on the New York Stock Exchange on June 30, 2006). As of February 15, 2007, 20,502,580 shares of Common Stock, $.01 par value per share, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Definitive Proxy Statement for the Annual Meeting of Shareholders of the Registrant to be held on May 21, 2007 (Part III). Part I 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 Exchange Act of 1933 and in Section 21F of the Securities Act of 1934. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company 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 successfully expand its truck move-in program for new customers and Dri-guard product roll-out; the Company's reliance on its call center; the Company's cash flow may be insufficient to meet required payments of principal, interest and dividends; and tax law changes that may change the taxability of future income. Item 1. Business Sovran Self Storage, Inc. together with its direct and indirect subsidiaries and the consolidated joint ventures, to the extent appropriate in the applicable context, (the “Company,” “We,” “Our,” or ”Sovran”) is a self- administered and self-managed real estate investment trust ("REIT") that acquires, owns and manages self-storage properties. We refer to the self-storage properties owned and managed by us as "Properties." We began operations on June 26, 1995. At February 15, 2007, we owned and managed 328 Properties consisting of approximately 20.3 million net rentable square feet, situated in 22 states. Among our 328 self-storage facilities are 38 properties that we manage for two joint ventures of which we are a majority owner. We are the fifth largest operator of self-storage properties in the United States based on facilities owned and managed. Our Properties conduct business under the user-friendly name Uncle Bob's Self-Storage ®. We were formed to continue the business of our predecessor company, which had engaged in the self- storage business since 1985. We own an indirect interest in each of the Properties through a limited partnership (the "Partnership"). In total, we own a 97.9% economic interest in the Partnership and unaffiliated third parties own collectively a 2.1% limited partnership interest at December 31, 2006. We believe that this structure, commonly known as an umbrella partnership real estate investment trust ("UPREIT"), facilitates our ability to acquire properties by using units of the Partnership as currency. By utilizing interests in the Partnership as currency in facility acquisitions, we may partially defer the seller’s income tax liability which in turn may allow us to obtain more favorable pricing. We were incorporated on April 19, 1995 under Maryland law. Our principal executive offices are located at 6467 Main Street, Williamsville, New York 14221, our telephone number is (716) 633-1850 and our web site is www.sovranss.com. We seek to enhance shareholder value through internal growth and acquisition of additional storage properties. Internal growth is achieved through aggressive property management: increasing rents, increasing 2 occupancy levels, controlling costs, maximizing collections and strategically expanding and improving the Properties. Should economic conditions warrant, we may develop new properties. We believe that there continue to be opportunities for growth through acquisitions, and constantly seek to acquire self-storage properties that are susceptible to realization of increased economies of scale and enhanced performance through application of our expertise. Industry Overview We believe that self-storage facilities offer inexpensive storage space to residential and commercial users. In addition to fully enclosed and secure storage space, many facilities also offer outside storage for automobiles, recreational vehicles and boats. Better facilities are usually fenced and well lighted with gates that are either manually operated or automated and have a full-time manager. Customers have access to their storage area during business hours and in certain circumstances are provided with 24-hour access. Individual storage units are secured by the customer's lock, and the customer has sole control of access to the unit. According to published data, of the approximately 43,000 facilities in the United States, less than 12% are managed by the ten largest operators. The remainder of the industry is characterized by numerous small, local operators. The shortage of skilled operators, the scarcity of equity capital available to small operators for acquisitions and expansions, and the potential for savings through economies of scale are factors that are leading to consolidation in the industry. We believe that, as a result of this trend, significant growth opportunities exist for operators with proven management systems and sufficient capital resources. Property Management We believe that we have developed substantial expertise in managing self-storage facilities. Key elements of our management system include the following: Personnel: Property managers attend a thorough orientation program and undergo continuous training that emphasizes closing techniques, identification of selected marketing opportunities, networking with possible referral sources, and familiarization with our customized management information system. In addition to frequent contact with Area Managers and other Company personnel, property managers receive periodic newsletters via our intranet regarding a variety of operational issues, and from time to time attend "roundtable" seminars with other property managers. Marketing and Sales: Responding to the increased customer demand for services, we have implemented several programs expected to increase occupancy and profitability. These programs include: - - - - - A Customer Care Center (call center) that services new and existing customers' inquiries and facilitates the capture of sales leads that were previously lost; Internet marketing, which provides customers information about all of our stores via numerous portals and e-mail; A rate management system, that matches product availability with market demand for each type of storage unit at each store, and determines appropriate pricing. The Company credits this program in achieving higher yields and controlling discounting; Dri-guard, providing humidity-controlled spaces. We became the first self-storage operator to utilize this humidity protection technology. These environmental control systems are a premium storage feature intended to protect metal, electronics, furniture, fabrics and paper from moisture; and Uncle Bob's trucks, that provide customers with convenient, affordable access to vehicles to help move-in their goods, while serving as moving billboards to help advertise our storage facilities. Ancillary Income: Our stores are essentially retail operations and we have in excess of 140,000 customers. As a convenience to those customers, we sell items such as locks, boxes, tarps, etc. to make their storage experience easier. We also make available renters insurance through a third party carrier, on which we earn a commission. Income from incidental truck rentals, billboards and cell towers is also earned by our Company. 3 Information Systems: Our customized computer system performs billing, collections and reservation functions for each Property. It also tracks information used in developing marketing plans based on occupancy levels and tenant demographics and histories. The system generates daily, weekly and monthly financial reports for each Property that are transmitted to our principal office each night. The system also requires a property manager to input a descriptive explanation for all debit and credit transactions, paid-to-date changes, and all other discretionary activities, which allows the accounting staff at our principal office to promptly review all such transactions. Late charges are automatically imposed. More sensitive activities, such as rental rate changes and unit size or number changes, are completed only by Area Managers. Our customized management information system permits us to add new facilities to our portfolio with minimal additional overhead expense. Property Maintenance: All of our Properties are subject to regular and routine maintenance procedures, which are designed to maintain the structure and appearance of our buildings and grounds. A staff headquartered in our principal office is responsible for the upkeep of the Properties, and all maintenance service is contracted through local providers, such as lawn service, snowplowing, pest control, gate maintenance, HVAC repairs, paving, painting, roofing, etc. A codified set of specifications has been designed and is applied to all work performed on our Uncle Bob's stores. As with many other aspects of our Company, our size has allowed us to enjoy relatively low maintenance costs because we have the benefit of economies of scale in purchasing, travel and overhead absorption. Environmental and Other Regulations 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. We have not received notice from any governmental authority or private party of any material environmental noncompliance, claim, or liability in connection with any of the Properties, and are not aware of any environmental condition with respect to any of the Properties that could have a material adverse effect on our financial condition or results of operations. The Properties are also generally subject to the same types of local regulations governing other real property, including zoning ordinances. We believe that the Properties are in substantial compliance with all such regulations. Insurance Each of the Properties is covered by fire and property insurance (including comprehensive liability), and all-risk property insurance policies, which are provided by reputable companies and on commercially reasonable terms. In addition, we maintain a policy insuring against environmental liabilities resulting from tenant storage on terms customary for the industry, and title insurance insuring fee title to the Company-owned Properties in an aggregate amount that we believe to be adequate. Federal Income Tax We operate, and intend to continue to operate, in such a manner as to continue to qualify as a REIT under the Internal Revenue Code of 1986 (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. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - REIT Qualification and Distribution Requirements." Competition The primary factors upon which competition in the self-storage industry is based are location, rental rates, suitability of the property's design to prospective customers' needs, and the manner in which the property is operated and marketed. We believe we compete successfully on these bases. The extent of competition depends significantly on local market conditions. We seek to locate facilities so as not to cause our Properties to compete with one 4 another for customers, but the number of self-storage facilities in a particular area could have a material adverse effect on the performance of any of the Properties. Several of our competitors, including Public Storage, U-Haul, and Extra Space Storage, are larger and have substantially greater financial resources than we do. These larger operators may, among other possible advantages, be capable of greater leverage and the payment of higher prices for acquisitions. Investment Policy While we emphasize equity real estate investments, we may, at our discretion, invest in mortgage and other real estate interests related to self-storage properties in a manner consistent with our qualification as a REIT. We may also retain a purchase money mortgage for a portion of the sale price in connection with the disposition of Properties from time to time. Should investment opportunities become available, we may look to acquire self- storage properties via a joint-venture partnership or similar entity. We may or may not elect to have a significant investment in such a venture, but would use such an opportunity to expand our portfolio of branded and managed properties. Subject to the percentage of ownership limitations and gross income tests necessary for REIT qualification, we also may invest in securities of entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities. Disposition Policy We periodically review the assets comprising our portfolio. Any disposition decision will be based on a variety of factors, including, but not limited to, the (i) potential to continue to increase cash flow and value, (ii) sale price, (iii) strategic fit with the rest of our portfolio, (iv) potential for, or existence of, environmental or regulatory issues, (v) alternative uses of capital, and (vi) maintaining qualification as a REIT. No storage facilities were sold in 2006 or 2005, but during 2004, as part of an asset management program, we sold five non-strategic storage facilities located in Pennsylvania, Tennessee, Ohio, and South Carolina to unaffiliated parties for $11.7 million, resulting in a net gain of $1.1 million. Distribution Policy We intend to pay regular quarterly distributions to our shareholders. However, future distributions by us will be at the discretion of the Board of Directors and will depend on the actual cash available for distribution, our financial condition and capital requirements, the annual distribution requirements under the REIT provisions of the Code and such other factors as the Board of Directors deems relevant. In order to maintain our qualification as a REIT, we must make annual distributions to shareholders of at least 90% of our REIT taxable income (which does not include capital gains). Under certain circumstances, we may be required to make distributions in excess of cash available for distribution in order to meet this requirement. Borrowing Policy Our Board of Directors currently limits the amount of debt that may be incurred by us to less than 50% of the sum of the market value of our issued and outstanding Common and Preferred Stock plus our debt. We, however, may from time to time re-evaluate and modify our borrowing policy in light of then current economic conditions, relative costs of debt and equity capital, market values of properties, growth and acquisition opportunities and other factors. The Company has a $100 million (expandable to $200 million) unsecured line of credit that matures in September 2007 (with our option to extend to September 2008) and a $100 million unsecured term note that matures in September 2009. The line of credit bears interest at LIBOR plus 0.90% and requires a 0.20% facility fee. The term note bears interest at LIBOR plus 1.20%. In April 2006, the Company entered into a $150 million unsecured term note maturing in April 2016 bearing interest at 6.38%. The Company also maintains a $80 million term note maturing September 2013 bearing interest at a fixed rate of 6.26% and a $20 million term note maturing September 5 2013 bearing interest at a variable rate equal to LIBOR plus 1.50%. At December 31, 2006, there was $100 million available on the revolving line of credit, excluding the amount available on the expansion feature. To the extent that we desire to obtain additional capital to pay distributions, to provide working capital, to pay existing indebtedness or to finance acquisitions, expansions or development of new properties, we may utilize amounts available under the revolving line of credit, common or preferred stock offerings, floating or fixed rate debt financing, retention of cash flow (subject to satisfying our distribution requirements under the REIT rules) or a combination of these methods. Additional debt financing may also be obtained through mortgages on our Properties, which may be recourse, non-recourse, or cross-collateralized and may contain cross-default provisions. We have not established any limit on the number or amount of mortgages that may be placed on any single Property or on our portfolio as a whole. For additional information regarding borrowings, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and Note 7 to the Consolidated Financial Statements filed herewith. Employees We currently employ a total of 961 employees, including 328 property managers, 22 area managers, and 487 assistant managers and part-time employees. At our headquarters, in addition to our three executive officers, we employ 121 people engaged in various support activities, including accounting, customer care, and management information systems. None of our employees are covered by a collective bargaining agreement. We consider our employee relations to be excellent. Available Information We file with the U.S. Securities and Exchange Commission quarterly and annual reports on Forms 10-Q and 10-K, respectively, current reports on Form 8-K, and proxy statements pursuant to the Securities Exchange Act of 1934, in addition to other information as required. The public may read and copy any materials that we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1 (800) SEC-0330. We file this information with the SEC electronically, and the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8- K, and all amendments to those reports are available free of charge on our web site at http://www.sovranss.com as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. In addition, our codes of ethics and Charters of our Governance, Audit Committee, and Compensation Committee are available free of charge on our website at http://www.sovranss.com. Also, copies of our annual report and Charters of our Governance, Audit Committee, and Compensation Committee will be made available, free of charge, upon written request to Sovran Self Storage, Inc., Attn: Investor Relations, 6467 Main Street, Williamsville, NY 14221. Item 1A. Risk Factors You should carefully consider the risks described below, together with all of the other information included in or incorporated by reference into our Form 10-K, as part of your evaluation of the Company. If any of the following risks actually occur, our business could be harmed. In such case, the trading price of our securities could decline, and you may lose all or part of your investment. Our Acquisitions May Not Perform as Anticipated We have completed many acquisitions of self-storage facilities since our initial public offering of common stock in June 1995. Our strategy is to continue to grow by acquiring additional self-storage facilities. Acquisitions entail risks that investments will fail to perform in accordance with our expectations and that our judgments with respect to the prices paid for acquired self-storage facilities and the costs of any improvements required to bring an acquired property up to standards established for the market position intended for that property will prove inaccurate. Acquisitions also involve general investment risks associated with any new real estate investment. 6 We May Incur Problems with Our Real Estate Financing Unsecured Credit Facility. We have a line of credit with a syndicate of financial institutions, which are our “lenders.” This unsecured credit facility is recourse to us and the required payments are not reduced if the economic performance of any of the properties declines. The unsecured credit facility limits our ability to make distributions to our shareholders, except in limited circumstances. If there is an event of default, our lenders may seek to exercise their rights under the unsecured credit facility, which could have a material adverse effect on us and our ability to make expected distributions to shareholders and distributions required by the real estate investment trust provisions of the Internal Revenue Code of 1986. Rising Interest Rates. Indebtedness that we incur under the unsecured credit facility bears interest at a variable rate. Accordingly, increases in interest rates could increase our interest expense, which would reduce our cash available for distribution and our ability to pay expected distributions to our shareholders. We manage our exposure to rising interest rates using interest rate swaps and other available mechanisms. If the amount of our indebtedness bearing interest at a variable rate increases, our unsecured credit facility may require us to use those arrangements. Refinancing May Not Be Available. It may be necessary for us to refinance our unsecured credit facility through additional debt financing or equity offerings. If we were unable to refinance this indebtedness on acceptable terms, we might be forced to dispose of some of our self-storage facilities upon disadvantageous terms, which might result in losses to us and might adversely affect the cash available for distribution. If prevailing interest rates or other factors at the time of refinancing result in higher interest rates on refinancings, our interest expense would increase, which would adversely affect our cash available for distribution and our ability to pay expected distributions to shareholders. Our Debt Levels May Increase Our Board of Directors currently has a policy of limiting the amount of our debt at the time of incurrence to less than 50% of the sum of the market value of our issued and outstanding common stock and preferred stock plus the amount of our debt at the time that debt is incurred. However, our organizational documents do not contain any limitation on the amount of indebtedness we might incur. Accordingly, our Board of Directors could alter or eliminate the current policy limitation on borrowing without a vote of our shareholders. We could become highly leveraged if this policy were changed. However, our ability to incur debt is limited by covenants in our bank credit arrangements and in our securities purchase agreement with holders of our Series C preferred stock. We Are Subject to the Risks Posed by Fluctuating Demand and Significant Competition in the Self-Storage Industry Our self-storage facilities are subject to all operating risks common to the self-storage industry. These risks include but are not limited to the following: • Decreases in demand for rental spaces in a particular locale; • Changes in supply of, or demand for, similar or competing self-storage facilities in an area; • Changes in market rental rates; and • Inability to collect rents from customers. Our current strategy is to acquire interests only in self-storage facilities. Consequently, we are subject to risks inherent in investments in a single industry. Our self-storage facilities compete with other self-storage facilities in their geographic markets. As a result of competition, the self-storage facilities could experience a decrease in occupancy levels and rental rates, which would decrease our cash available for distribution. We compete in operations and for acquisition opportunities with companies that have substantial financial resources. Competition may reduce the number of suitable acquisition opportunities offered to us and increase the bargaining power of 7 property owners seeking to sell. The self-storage industry has at times experienced overbuilding in response to perceived increases in demand. A recurrence of overbuilding might cause us to experience a decrease in occupancy levels, limit our ability to increase rents and compel us to offer discounted rents. Our Real Estate Investments Are Illiquid and Are Subject to Uninsurable Risks and Government Regulation General Risks. Our investments are subject to varying degrees of risk generally related to the ownership of real property. The underlying value of our real estate investments and our income and ability to make distributions to our shareholders are dependent upon our ability to operate the self-storage facilities in a manner sufficient to maintain or increase cash available for distribution. Income from our self-storage facilities may be adversely affected by the following factors: • Changes in national economic conditions; • Changes in general or local economic conditions and neighborhood characteristics; • Competition from other self-storage facilities; • Changes in interest rates and in the availability, cost and terms of mortgage funds; • The impact of present or future environmental legislation and compliance with environmental laws; • The ongoing need for capital improvements, particularly in older facilities; • Changes in real estate tax rates and other operating expenses; • Adverse changes in governmental rules and fiscal policies; • Uninsured losses resulting from casualties associated with civil unrest, acts of God, including natural disasters, and acts of war; • Adverse changes in zoning laws; and • Other factors that are beyond our control. Illiquidity of Real Estate May Limit its Value. Real estate investments are relatively illiquid. Our ability to vary our portfolio of self-storage facilities in response to changes in economic and other conditions is limited. In addition, provisions of the Code may limit our ability to profit on the sale of self-storage facilities held for fewer than four years. We may be unable to dispose of a facility when we find disposition advantageous or necessary and the sale price of any disposition may not equal or exceed the amount of our investment. Uninsured and Underinsured Losses Could Reduce the Value of our Self Storage Facilities. Some losses, generally of a catastrophic nature, that we potentially face with respect to our self-storage facilities may be uninsurable or not insurable at an acceptable cost. Our management uses its discretion in determining amounts, coverage limits and deductibility provisions of insurance, with a view to acquiring appropriate insurance on our investments at a reasonable cost and on suitable terms. These decisions may result in insurance coverage that, in the event of a substantial loss, would not be sufficient to pay the full current market value or current replacement cost of our lost investment. Inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make it infeasible to use insurance proceeds to replace a property after it has been damaged or destroyed. Under those circumstances, the insurance proceeds received by us might not be adequate to restore our economic position with respect to a particular property. Possible Liability Relating to Environmental Matters. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in that property. Those laws often impose liability even if the owner or operator did not cause or know of the presence of hazardous or toxic substances and 8 even if the storage of those substances was in violation of a tenant’s lease. In addition, the presence of hazardous or toxic substances, or the failure of the owner to address their presence on the property, may adversely affect the owner’s ability to borrow using that real property as collateral. In connection with the ownership of the self-storage facilities, we may be potentially liable for any of those costs. Americans with Disabilities Act. The Americans with Disabilities Act of 1990, or ADA, generally requires that buildings be made accessible to persons with disabilities. A determination that we are not in compliance with the ADA could result in imposition of fines or an award of damages to private litigants. If we were required to make modifications to comply with the ADA, our results of operations and ability to make expected distributions to our shareholders could be adversely affected. There Are Limitations on the Ability to Change Control of Sovran Limitation on Ownership and Transfer of Shares. To maintain our qualification as a REIT, not more than 50% in value of our outstanding shares of stock may be owned, directly or indirectly, by five or fewer individuals, as defined in the Code. To limit the possibility that we will fail to qualify as a REIT under this test, our Amended and Restated Articles of Incorporation include ownership limits and transfer restrictions on shares of our stock. Our Articles of Incorporation limit ownership of our issued and outstanding stock by any single shareholder to 9.8% of the aggregate value of our outstanding stock, except that the ownership by some of our shareholders is limited to 15%. These ownership limits may: • Have the effect of precluding an acquisition of control of Sovran by a third party without consent of our Board of Directors even if the change in control would be in the interest of shareholders; and • Limit the opportunity for shareholders to receive a premium for shares of our common stock they hold that might otherwise exist if an investor were attempting to assemble a block of common stock in excess of 9.8% or 15%, as the case may be, of the outstanding shares of our stock or to otherwise effect a change in control of Sovran. Our Board of Directors may waive the ownership limits if it is satisfied that ownership by those shareholders in excess of those limits will not jeopardize our status as a REIT under the Code or in the event it determines that it is no longer in our best interests to be a REIT. Waivers have been granted to the holders of our Series C preferred stock, FMR Corporation and Cohen & Steers, Inc. A transfer of our common stock and/or preferred stock to a person who, as a result of the transfer, violates the ownership limits may not be effective under some circumstances. Other Limitations. Other limitations could have the effect of discouraging a takeover or other transaction in which holders of some, or a majority, of our outstanding common stock might receive a premium for their shares of our common stock that exceeds the then prevailing market price or that those holders might believe to be otherwise in their best interest. The issuance of additional shares of preferred stock could have the effect of delaying or preventing a change in control of Sovran even if a change in control were in the shareholders’ interest. In addition, the Maryland General Corporation Law, or MGCL, imposes restrictions and requires that specified procedures with respect to the acquisition of stated levels of share ownership and business combinations, including combinations with interested shareholders. These provisions of the MGCL could have the effect of delaying or preventing a change in control of Sovran even if a change in control were in the shareholders’ interest. Waivers and exemptions have been granted to the initial purchasers of our Series C preferred stock in connection with these provisions of the MGCL. In addition, under the operating partnership’s agreement of limited partnership, in general, we may not merge, consolidate or engage in any combination with another person or sell all or substantially all of our assets unless that transaction includes the merger or sale of all or substantially all of the assets of the operating partnership, which requires the approval of the holders of 75% of the limited partnership interests thereof. If we were to own less than 75% of the limited partnership interests in the operating partnership, this provision of the limited partnership agreement could have the effect of delaying or preventing us from engaging in some change of control transactions. 9 Our Failure to Qualify as a REIT Would Have Adverse Consequences We intend to operate in a manner that will permit us to qualify as a REIT under the Code. Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. Continued qualification as a REIT depends upon our continuing ability to meet various requirements concerning, among other things, the ownership of our outstanding stock, the nature of our assets, the sources of our income and the amount of our distributions to our shareholders. In addition, a REIT is limited with respect to the services it can provide for its tenants. We have provided certain conveniences for our tenants, including property insurance underwritten by a third party insurance company that pays us commissions. We believe the insurance provided by the insurance company would not constitute a prohibited service to our tenants. No assurances can be given, however, that the IRS will not challenge our position. If the IRS successfully challenged our position, our qualification as a REIT could be adversely affected. If we were to fail to qualify as a REIT in any taxable year, we would not be allowed a deduction for distributions to shareholders in computing our taxable income and would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Unless entitled to relief under certain Code provisions, we also would be ineligible for qualification as a REIT for the four taxable years following the year during which our qualification was lost. As a result, distributions to the shareholders would be reduced for each of the years involved. 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. Market Interest Rates May Influence the Price of Our Common Stock One of the factors that may influence the price of our common stock in public trading markets or in private transactions is the annual yield on our common stock as compared to yields on other financial instruments. An increase in market interest rates will result in higher yields on other financial instruments, which could adversely affect the price of our common stock. Regional Concentration of Our Business May Subject Us to Economic Downturns in the States of Texas and Florida. As of December 31, 2006, 129 of our 327 self-storage facilities are located in the states of Texas and Florida. For the year ended December 31, 2006, these facilities accounted for approximately 43.4% of our total revenues. This concentration of business in Texas and Florida exposes us to potential losses resulting from a downturn in the economies of those states. If economic conditions in those states deteriorate, we may experience a reduction in existing and new business, which may have an adverse effect on our business, financial condition and results of operations. Changes in Taxation of Corporate Dividends May Adversely Affect the Value of Our Common Stock The maximum marginal rate of tax payable by domestic noncorporate taxpayers on dividends received from a regular “C” corporation under current law is 15% through 2010, as opposed to higher ordinary income rates. The reduced tax rate, however, does not apply to distributions paid to domestic noncorporate taxpayers by a REIT on its stock, except for certain limited amounts. Although the earnings of a REIT that are distributed to its stockholders generally remain subject to less federal income taxation than earnings of a non-REIT “C” corporation that are distributed to its stockholders net of corporate-level income tax, legislation that extends the application of the 15% rate to dividends paid after 2010 by “C” corporations could cause domestic noncorporate investors to view the stock of regular “C” corporations as more attractive relative to the stock of a REIT, because the dividends from regular “C” corporations would continue to be taxed at a lower rate while distributions from REITs (other than distributions designated as capital gain dividends) are generally taxed at the same rate as the individual’s other ordinary income. 10 Terrorist Attacks and the Possibility of Armed Conflict May Have an Adverse Effect on Our Business, Financial Condition and Operating Results and Could Decrease the Value of Our Assets Terrorist attacks and other acts of violence or war, such as those that took place on September 11, 2001, or the recent war with Iraq, could have a material adverse effect on our business and operating results. There may be further terrorist attacks against the United States. Attacks or armed conflicts that directly impact one or more of our properties could significantly affect our ability to operate those properties and, as a result, impair our ability to achieve our expected results. Furthermore, we may not have insurance coverage for losses caused by a terrorist attack. That insurance may not be available or, if it is available and we decide, or are required by our lenders, to obtain terrorism coverage, the cost for the insurance may be significant in relationship to the risk covered. In addition, the adverse effects terrorist acts and threats of future attacks could have on the U.S. economy could similarly have a material adverse effect on our business, financial condition and results of operations. Finally, further terrorist acts could cause the United States to enter into armed conflict, which could further impact our business, financial and operating results. Item 1B. Unresolved Staff Comments None. 11 Item 2. Properties At December 31, 2006, we owned and managed a total of 327 Properties situated in twenty-two states. We manage 38 of the Properties for two joint ventures of which we are a majority owner. Our self-storage facilities offer inexpensive, easily accessible, enclosed storage space to residential and commercial users on a month-to-month basis. Most of our Properties are fenced with computerized gates and are well lighted. A majority of the Properties are single-story, thereby providing customers with the convenience of direct vehicle access to their storage spaces. Our stores range in size from 22,000 to 188,000 net rentable square feet, with an average of approximately 62,000 net rentable square feet. The Properties generally are constructed of masonry or steel walls resting on concrete slabs and have standing seam metal, shingle, or tar and gravel roofs. All Properties have a property manager on-site during business hours. Customers have access to their storage areas during business hours, and some commercial customers are provided 24-hour access. Individual storage spaces are secured by a lock furnished by the customer to provide the customer with control of access to the space. All of the Properties conduct business under the user-friendly name Uncle Bob's Self-Storage ®. The following table provides certain information regarding the Properties owned and managed as of December 31, 2006: Number of Stores at December 31, 2006 12 9 5 52 26 14 2 4 14 7 4 7 4 19 15 16 6 4 8 4 77 18 327 Square Feet 747,153 505,880 303,989 3,266,913 1,552,621 749,210 115,400 173,307 758,424 450,521 200,191 437,118 234,148 1,064,012 796,731 1,024,693 498,885 168,146 426,733 281,424 5,396,943 1,063,000 20,215,442 Number of Spaces 5,812 4,489 2,863 29,902 12,582 6,568 1,012 2,039 6,874 4,270 1,548 3,798 2,150 10,050 6,955 8,524 2,880 1,562 3,584 2,361 43,473 9,822 173,118 Percentage of Store Revenue 2.8% 2.9% 2.5% 20.2% 6.5% 3.6% 0.6% 1.2% 4.5% 1.8% 1.1% 1.2% 0.7% 7.2% 3.6% 4.7% 1.7% 1.1% 2.1% 1.1% 23.2% 5.7% 100.0% Alabama................................................ Arizona ................................................. Connecticut........................................... Florida................................................... Georgia ................................................. Louisiana .............................................. Maine .................................................... Maryland............................................... Massachusetts ....................................... Michigan............................................... Mississippi ............................................ Missouri ................................................ New Hampshire .................................... New York ............................................. North Carolina ...................................... Ohio ...................................................... Pennsylvania ......................................... Rhode Island ......................................... South Carolina ...................................... Tennessee.............................................. Texas..................................................... Virginia................................................. Total.................................................... Item 3. Legal Proceedings In the normal course of business, we are subject to various claims and litigation. While the outcome of any litigation is inherently unpredictable, we do not believe that any of these matters will have a material adverse impact on our financial condition, results of operations or cash flows. 12 Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise. Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our Common Stock is traded on the New York Stock Exchange under the symbol "SSS." Set forth below are the high and low sales prices for our Common Stock for each full quarterly period within the two most recent fiscal years. Quarter 2005 1st ................................................................................ 2nd ............................................................................... 3rd................................................................................ 4th................................................................................ Quarter 2006 1st ................................................................................ 2nd ............................................................................... 3rd................................................................................ 4th................................................................................ High 43.2400 46.9300 49.7000 50.5200 High 55.7100 55.2000 56.3500 60.0000 Low 37.8000 38.5600 44.0900 43.5000 Low 46.3900 45.7100 49.0000 54.6300 As of February 15, 2007, there were approximately 1,481 holders of record of our Common Stock. We have paid quarterly dividends to our shareholders since our inception. Reflected in the table below are the dividends paid in the last two years. For federal income tax purposes, distributions to shareholders are treated as ordinary income, capital gain, return of capital or a combination thereof. Distributions to shareholders for 2006 represent 87% ordinary income and 13% return of capital. History of Dividends Declared on Common Stock 1st Quarter, 2005 ......................................................... 2nd Quarter, 2005 ........................................................ 3rd Quarter, 2005......................................................... 4th Quarter, 2005......................................................... $0.6050 per share $0.6050 per share $0.6150 per share $0.6150 per share 1st Quarter, 2006 ......................................................... 2nd Quarter, 2006 ........................................................ 3rd Quarter, 2006......................................................... 4th Quarter, 2006......................................................... $0.6150 per share $0.6150 per share $0.6200 per share $0.6200 per share 13 EQUITY COMPENSATION PLAN INFORMATION The following table sets forth certain information as of December 31, 2006, with respect to equity compensation plans under which shares of the Company’s Common Stock may be issued. Plan Category Equity compensation plans approved by shareholders: 2005 Award and Option Plan.............................. 1995 Award and Option Plan.............................. 1995 Outside Directors' Stock Option Plan ........ Deferred Compensation Plan for Directors (1) ... Equity compensation plans not approved by shareholders:.................................................... Number of securities to be issued upon exercise of outstanding options, warrants and rights (#) Weighted average exercise price of outstanding options, warrants and rights ($) Number of securities remaining available for future issuance (#) 30,000 61,225 22,000 30,246 N/A $48.58 $26.78 $43.34 N/A N/A 1,429,945 0 18,724 14,754 N/A (1) Under the Deferred Compensation Plan for Directors, non-employee Directors may defer all or part of their Directors’ fees that are otherwise payable in cash. Directors’ fees that are deferred under the Plan will be credited to each Directors’ account under the Plan in the form of Units. The number of Units credited is determined by dividing the amount of Directors’ fees deferred by the closing price of the Company’s Common Stock on the New York Stock Exchange on the day immediately preceding the day upon which Directors’ fees otherwise would be paid by the Company. A Director is credited with additional Units for dividends on the shares of Common Stock represented by Units in such Directors’ Account. A Director may elect to receive the shares in a lump sum on a date specified by the Director or in quarterly or annual installments over a specified period and commencing on a specified date. 14 CORPORATE PERFORMANCE GRAPH The following chart and line-graph presentation compares (i) the Company’s shareholder return on an indexed basis since December 31, 2001 with (ii) the S&P Stock Index and (iii) the National Association of Real Estate Investment Trusts Equity Index. 300 250 200 150 100 50 0 Dec. 31, 2001 Dec. 31, 2002 Dec. 31, 2003 Dec. 31, 2004 Dec. 31, 2005 Dec. 31, 2006 S&P 500 NAREIT SSS CUMULATIVE TOTAL SHAREHOLDER RETURN SOVRAN SELF STORAGE, INC. DECEMBER 31, 2001 - DECEMBER 31, 2006 S&P NAREIT SSS Dec. 31, 2001 Dec. 31, 2002 Dec. 31, 2003 Dec. 31, 2004 Dec. 31, 2005 Dec. 31, 2006 100.00 100.00 100.00 77.89 103.82 98.25 100.24 142.37 137.06 111.14 187.33 164.37 116.60 210.10 193.78 135.01 283.76 247.84 The foregoing item assumes $100.00 invested on December 31, 2001, with dividends reinvested. 15 Item 6. Selected Financial Data The following selected financial and operating information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the financial statements and related notes included elsewhere in this Annual Report on Form 10-K: (dollars in thousands, except per share data) Operating Data Operating revenues ..................................... Income from continuing operations............ Income from discontinued operation (1) .... Net income.................................................. Income from continuing operations per common share – diluted .......................... Net income per common share – basic ....... Net income per common share – diluted .... Dividends declared per common share....... At or For Year Ended December 31, 2006 2005 2004 2003 2002 $ 166,295 36,610 - 36,610 $ 138,305 34,790 - 34,790 $ 123,286 $ 111,414 $ 100,507 25,526 775 26,301 27,586 837 28,423 30,698 1,306 32,004 1.89 1.90 1.89 2.47 1.84 1.86 1.84 2.44 1.44 1.54 1.53 2.42 1.40 1.47 1.46 2.41 1.58 1.66 1.64 2.38 Balance Sheet Data Investment in storage facilities at cost........ $1,143,904 Total assets ................................................. 1,053,210 Total debt.................................................... 462,027 Total liabilities............................................ 495,352 Series B preferred stock.............................. - Series C preferred stock.............................. 26,613 $893,980 784,376 339,144 365,037 - 26,613 $811,516 719,573 289,075 315,108 - 53,227 $727,289 683,336 255,819 285,755 28,585 67,129 $698,334 652,213 252,452 278,631 28,585 67,129 Other Data Net cash provided by operating activities... Net cash provided by operating activities – discontinued operations........................ Net cash used in investing activities ........... Net cash used in investing activities – discontinued operations........................... Net cash provided by (used in) $64,533 $60,234 $53,914 $ 51,003 $ 44,544 - (176,567) - (79,156) 287 (71,034) 1,124 (31,284) 1,066 (99,065) - - - (41) (179) financing activities ................................ 154,853 20,728 (163) (2,764) 53,814 (1) In 2004 we sold five stores whose operations and gain are classified as discontinued operations for all previous years presented. 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 Exchange Act of 1933 and in Section 21F of the Securities 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; our ability to evaluate, finance and integrate acquired businesses into our existing business and operations; our ability to effectively compete in the industry in which we do business; our 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 our outstanding floating rate debt; our ability to successfully extend our truck move-in program for new customers and Dri-guard product roll-out; our reliance on our call center; our cash flow may be insufficient to meet required payments of 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 facilities 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: - - - Operating performance continues to improve as a result of revenue drivers implemented by us over the past five years, including: - The formation of our Customer Care Center, which answers sales inquiries and makes reservations for all of our properties on a centralized basis, The rollout of the Uncle Bob’s truck move-in program, under which, at present, 248 of our stores offer a free Uncle Bob’s truck to assist our customers in moving into their spaces, and An increase in internet marketing and sales. - - In addition to increasing revenue, we have worked to improve services and amenities at our stores. While this has caused operating expenses to increase over the past five years, it has resulted in a superior storage experience for our customers. Our managers are better qualified and receive a significantly higher level of training than they did five years ago, customer access and security are greatly enhanced as a result of advances in technology, and property appearance and functionality have been improved. Our customized property management systems enable us to improve our ability to track trends, set optimal pricing levels, enjoy considerable economies of scale in vendor and supply pricing, and control collections and accounts receivable. 17 B. Acquiring additional stores: - - In markets where we already operate facilities, we seek to acquire new stores one or two at a time from independent operators. By so doing, we can add to our existing base, which should improve market penetration in those areas, and contribute to the benefits achieved from economies of scale. We will seek to enter new markets if we can do so by acquiring a group of stores in those markets. We feel that our marketing efforts and control systems would enhance even those portfolios that have been managed efficiently by independent operators, and that attractive returns can be generated by such acquisitions. C. Expanding and enhancing our existing stores: - - - - - We intend to continue to install climate controlled and Dri-guard space at select stores, providing our customers with better storage solutions and improving yields on our portfolio. We intend to add buildings to a number of our stores, providing additional rental units of a size and type to meet existing demand. We will seek to acquire parcels of land contiguous to some of our stores and add to the available rental space at those stores. We intend to modify existing buildings to better match size and type of rental units to existing demand. At some stores, this may be as simple as reconfiguring walls and doors; at others, it may entail rebuilding in a configuration more in tune with market conditions. As announced in 2004, we have begun to implement a program that will add 450,000 to 600,000 square feet of rentable space at existing stores and convert up to an additional 250,000 to 300,000 square feet to premium (climate and humidity controlled) space. The projected cost of these revenue enhancing improvements is estimated at between $32 and $40 million. During 2006 we spent approximately $12.6 million on revenue enhancing improvements. Funding is expected to be provided primarily from borrowings on the Company’s line of credit, and issuance of common shares in our Dividend Reinvestment Program and Stock Purchase Plan. Supply and Demand 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. However, the historically low interest rates available to developers over the past four years have resulted in increased supply on a national basis. We have experienced some of this excess supply in certain markets in Texas and New England, but because of the demand model, we have not seen a widespread effect on our stores. We have also observed an increase in the sales price of existing facilities as a result of the low interest rates, such that the capitalization rates on acquisitions (expected annual return on investment) have decreased from approximately 10% six years ago to 7.25% today. In 2004, we took advantage of these favorable capitalization rates by selling five stores for a gain of $1.1 million. With the increase in interest rates over the last year we have seen capitalization rates level off at approximately 7.25% and are forecasting acquisitions of $100 million in 2007. Operating Trends In 2006, our industry had another good year as the overall economy remained strong and our industry continued the momentum from the recovery that commenced in 2003. We experienced same store revenue growth of approximately 5% in each of the last four years. We attribute the same store growth to implementation of the call center, the free truck program for new move-in customers, use of improved technology and practices in the management of our rental rates and, to a lesser degree, general economic factors. We expect conditions in most of our markets to remain stable and are forecasting 4% revenue growth on a same store basis in 2007. 18 Expenses related to operating a self-storage facility have increased substantially over the last five years as a result of expanded hours, increased health care costs, property insurance costs, and the costs of amenities (such as Uncle Bob’s trucks). We expect the trend of increasing costs to continue at a moderate pace and, while current operating margins are expected to be sustained, it is unlikely that much improvement in operating margins will be seen in the coming years as a result of cost reductions. 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. 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 or significant declining revenue per storage facility. Impairment is evaluated based upon comparing the sum of the expected undiscounted future cash flows to the 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. At December 31, 2006 and 2005, no assets had been determined to be impaired under this policy. 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. Changes in estimated useful lives of these assets could have a material adverse impact on our financial condition or results of operations. Qualification as a REIT: We operate, and intend to continue to operate, as a REIT under the Internal Revenue Code of 1986 (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 conditions and results of operations. YEAR ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005 We recorded rental revenues of $160.9 million for the year ended December 31, 2006, an increase of $27.1 million or 20.2% when compared to 2005 rental revenues of $133.9 million. As of April 1, 2006, the consolidated income statement includes the results of a previously unconsolidated joint venture (Locke Sovran I, LLC) that has been consolidated as a result of an additional investment in that entity by us. The rental income related to Locke Sovran I that was included in our consolidated results for the year ended December 31, 2006, was $5.1 million. Of the remaining $22.0 million increase in rental income, $6.6 million resulted from a 5.2% increase in rental revenues at the 255 core properties considered in same store sales (those properties included in the consolidated results of operations since January 1, 2005 that were at a stable occupancy). The increase in same store rental revenues was achieved primarily through rate increases on select units averaging 3.8%, and a slight occupancy increase, which we believe resulted from improved responsiveness to customer demand created by our centralized call center and the increased demand in areas damaged by the 2005 hurricanes. The remaining $15.4 million increase in rental revenues resulted from the acquisition of 42 stores during 2006 and from having the 2005 acquisitions included for a full year of operations. Other income increased $0.9 million due to increased merchandise and insurance sales and the additional incidental revenue generated by truck rentals. 19 Property operating and real estate tax expense increased $10.9 million, or 22.6%, in 2006 compared to 2005. Of this increase, $6.5 million were expenses incurred by the facilities acquired in 2006 and from having expenses from the 2005 acquisitions included for a full year of operations. $2.6 million of the increase was due to increased property insurance, utilities, maintenance expenses, and increased property taxes at the 255 core properties considered same stores. The consolidation of Locke Sovran I, LLC as of April 1, 2006 resulted in a $1.8 million increase in property operating and real estate tax expense in 2006. We expect the trend of increasing operating costs to continue at a moderate to high pace primarily attributable to utilities and property insurance costs. General and administrative expenses increased $1.2 million or 9.6% from 2005 to 2006. The increase primarily resulted from the costs associated with operating the properties acquired in 2006 and 2005. Depreciation and amortization expense increased to $25.3 million in 2006 from $21.2 million in 2005, primarily as a result of additional depreciation taken on real estate assets acquired in 2006, a full year of depreciation on 2005 acquisitions, and the consolidation of Locke Sovran I, LLC. Income from operations increased from $55.9 million in 2005 to $67.6 million in 2006 as a result of the net effect of the aforementioned items. Interest expense increased from $20.2 million in 2005 to $29.5 million in 2006 as a result of higher interest rates, additional borrowings under our line of credit and term notes to purchase 42 stores in 2006, and the consolidation of Locke Sovran I, LLC as of April 1, 2006. The decrease in preferred stock dividends from 2005 to 2006 was a result of the conversion of 1,200,000 shares of our Series C Preferred Stock into 920,244 shares of common stock in 2005. YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004 We recorded rental revenues of $133.9 million for the year ended December 31, 2005, an increase of $14.3 million or 11.9% when compared to 2004 rental revenues of $119.6 million. Of this increase, $6.4 million resulted from a 5.5% increase in rental revenues at the 250 core properties considered in same store sales (those properties included in the consolidated results of operations since January 1, 2004). The increase in same store rental revenues was achieved primarily through rate increases on select units, and a slight occupancy increase, which we believe resulted from improved responsiveness to customer demand created by our centralized call center and the availability of rental trucks at 219 of our stores. The remaining $7.9 million increase in rental revenues resulted from the acquisition of fourteen stores during 2005 and from having the 2004 acquisitions included for a full year of operations. Other income increased $0.8 million due to increased merchandise and insurance sales and the additional incidental revenue generated by truck rentals. Property operating and real estate tax expense increased $5.2 million or 12.0% in 2005 compared to 2004. Of this increase, $3.4 million was incurred by the facilities acquired in 2005 and from having the 2004 acquisitions included for a full year of operations. $1.8 million of the increase was due to increased personnel, utilities, maintenance expenses, and increased property taxes at the 250 core properties considered same stores. We also incurred approximately $0.3 million of uninsured losses relating to the hurricanes that hit the United States in 2005 as compared to $0.7 million uninsured losses from hurricanes in 2004. We expect the trend of increasing operating costs to continue at a moderate pace with upward pressure related to utilities and property insurance costs. General and administrative expenses increased $1.8 million or 16.2% from 2004 to 2005. The increase primarily resulted from bonuses earned by our home office personnel including our executive officers, increased costs in our call center, and the increased costs associated with operating the properties acquired in 2005 and 2004. Depreciation and amortization expense increased to $21.2 million in 2005 from $19.2 million in 2004, primarily as a result of additional depreciation taken on real estate assets acquired in 2005 and a full year of depreciation on 2004 acquisitions. 20 Income from operations increased from $49.9 million in 2004 to $55.9 million in 2005 as a result of the net effect of the aforementioned items. Interest expense increased from $18.1 million in 2004 to $20.2 million in 2005 as a result of higher interest additional borrowings under our line of credit to purchase fourteen stores in 2005. During 2004, the Company sold five non-strategic storage facilities for net cash proceeds of $11.7 million, resulting in a gain of $1.1 million. The operations of these five facilities and the gain on sale in 2004 are reported as discontinued operations. No storage facilities were sold in 2005. The decrease in preferred stock dividends from 2004 to 2005 was a result of the redemption of all 1,200,000 outstanding shares of our 9.85% Series B Cumulative Preferred Stock in August of 2004 and the conversion of 1,200,000 shares of our Series C Preferred Stock to 920,244 shares of common stock in 2005. 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 computed in accordance with generally accepted accounting principles (“GAAP”), excluding gains or losses on sales of properties, 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. 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. Reconciliation of Net Income to Funds From Operations (dollars in thousands) Net income............................................... Minority interest in income ..................... Depreciation of real estate and amortization of intangible assets exclusive of deferred financing fees..... Depreciation of real estate included in discontinued operations........................ Depreciation and amortization from unconsolidated joint ventures............... Gain on sale of real estate........................ Preferred stock dividends ........................ Redemption amount in excess of carrying value of Series B Preferred Stock .................................................... For Year Ended December 31, 2002 2004 2005 2003 2006 $36,610 2,434 $34,790 1,529 $32,004 1,542 $28,423 1,790 $ 26,301 1,990 25,305 21,222 19,175 17,856 16,207 - - 90 293 290 168 - (2,512) 484 - (4,123) 473 (1,137) (7,168) 460 - (8,818) 400 - (4,863) - - (1,415) - - 21 Funds from operations allocable to minority interest in Operating Partnership ........................................... Funds from operations allocable to minority interest in Locke Sovran I and Locke Sovran II............................. Funds from operations available to (1,450) (1,519) (1,333) (1,563) (1,647) (1,785) (1,499) (1,475) (1,539) (1,645) common shareholders .......................... $58,770 $50,884 $40,756 $36,902 $ 37,033 LIQUIDITY AND CAPITAL RESOURCES 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 will continue to be sufficient to fund ongoing operations, capital improvements, dividends and debt service requirements through September 2007, at which time our revolving line of credit matures unless renewed at our option for one additional year. Cash flows from operating activities were $64.5 million, $60.2 million and $53.9 million for the years ended December 31, 2006, 2005, and 2004, respectively. The increase for each year is primarily attributable to increased net income and increased non-cash charges for depreciation and amortization. These increases were partially offset by an increase in prepaid expenses mainly relating to property insurance premiums. Cash used in investing activities was $176.6 million, $79.2 million, and $71.0 million for the years ended December 31, 2006, 2005, and 2004 respectively. The increase in cash used from 2004 to 2005 was attributable to increased acquisition activity in 2005. The increase from 2005 to 2006 was due to increased acquisition activity, an increase in improvements to existing facilities, and additional investment in our consolidated joint ventures. Cash provided by financing activities was $154.9 million in 2006 compared to $20.7 million in 2005 and uses of $0.2 million in 2004, respectively. In April 2006, the Company entered into a $150 million unsecured term note maturing in April 2016 bearing interest at 6.38%. The proceeds from this term note were used to pay down the outstanding balance on the Company's line of credit, to repay a $25 million term note entered in January 2006 and a $15 million term note entered in April 2006, and to make an additional investment into Locke Sovran I, LLC and Locke Sovran II, LLC (consolidated joint ventures). In December 2006, we issued 2.3 million shares of our common stock and realized net proceeds of $122.4 million. A portion of the proceeds were used to repay the entire outstanding balance on our line of credit that had been drawn on to finance acquisitions subsequent to April 2006. The remaining proceeds from the common stock offering will be used to fund 2007 acquisitions. We have a $100 million (expandable to $200 million) unsecured line of credit that matures in September 2007 and a $100 million unsecured term note that matures in September 2009. We have the right to extend the term of the credit line until September 2008. The line of credit bears interest at LIBOR plus 0.90% and requires a 0.20% facility fee. The term note bears interest at LIBOR plus 1.20%. We also maintain a $80 million term note maturing September 2013 bearing interest at a fixed rate of 6.26% and a $20 million term note maturing September 2013 bearing interest at a variable rate equal to LIBOR plus 1.50%. At December 31, 2006, there was $100 million available on the revolving line of credit, excluding the amount available on the expansion feature. The line of credit facility and term notes currently have investment grade ratings from Standard and Poor's (BBB-) and Fitch (BBB-). Our line of credit and term notes require us to meet certain financial covenants, including prescribed leverage, fixed charge coverage, minimum net worth, limitations on additional indebtedness and limitations on dividend payouts. As of December 31, 2006, we were in compliance with all covenants. In addition to the unsecured financing mentioned above, our consolidated financial statements also include $112.0 million of mortgages payable as detailed below: 22 * 7.80% mortgage note due December 2011, secured by 11 self-storage facilities (Locke Sovran I) with an aggregate net book value of $41.6 million, principal and interest paid monthly. The outstanding balance at December 31, 2006 on this mortgage was $29.5 million. * 7.19% mortgage note due March 2012, secured by 27 self-storage facilities (Locke Sovran II) with an * * * aggregate net book value of $78.4 million, principal and interest paid monthly. The outstanding balance at December 31, 2006 on this mortgage was $44.6 million. 7.25% mortgage note due December 2011, secured by 1 self-storage facility with an aggregate net book value of $6.0 million, principal and interest paid monthly. Estimated market rate at time of acquisition 5.40%. The outstanding balance at December 31, 2006 on this mortgage was $3.8 million. 6.76% mortgage note due September 2013, secured by 1 self-storage facility with an aggregate net book value of $2.1 million, principal and interest paid monthly. The outstanding balance at December 31, 2006 on this mortgage was $1.0 million. 6.35% mortgage note due March 2014, secured by 1 self-storage facility with an aggregate net book value of $1.9 million, principal and interest paid monthly. The outstanding balance at December 31, 2006 on this mortgage was $1.1 million. * 5.55% mortgage notes due November 2009, secured by 8 self-storage facilities with an aggregate net book value of $36.2 million, interest only paid monthly. Estimated market rate at time of acquisition 6.44%. The outstanding balance at December 31, 2006 on this mortgage was $25.5 million. * 7.50% mortgage notes due August 2011, secured by 3 self-storage facilities with an aggregate net book value of $14.9 million, principal and interest paid monthly. Estimated market rate at time of acquisition 6.42%. The outstanding balance at December 31, 2006 on this mortgage was $6.5 million. The 7.80% and 7.19% mortgages were incurred in 2001 and 2002 respectively as part of the financing of the consolidated joint ventures. The Company assumed the 7.25%, 6.76%, 6.35%, 5.55% and 7.5% mortgage notes in connection with the acquisitions of storage facilities in 2005 and 2006. In July 1999, we issued 1,200,000 shares of 9.85% Series B Cumulative Redeemable Preferred Stock. We redeemed all outstanding shares of our Series B Preferred Stock on August 2, 2004 at a total cost of $30 million plus accrued but unpaid dividends on those shares. In accordance with Emerging Issues Task Force ("EITF") Topic D- 42, "The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock", we recorded a reduction of $1.4 million from 2004 net income to arrive at net income available to common shareholders relating to the difference between the Series B Preferred Stock carrying value and the redemption amount. On July 3, 2002, we entered into an agreement providing for the issuance of 2,800,000 shares of 8.375% Series C Convertible Cumulative Preferred Stock and warrants to purchase 379,166 shares of common stock at $32.60 per share in a privately negotiated transaction. The offering price was $25.00 per share and the net proceeds of $67.9 million were used to reduce indebtedness that was incurred in the June 2002 acquisition of seven self- storage properties and to repay a portion of our borrowings under the line of credit. During 2005, we issued 920,244 shares of our common stock in connection with a written notice from one of the holders of our Series C Preferred Stock requesting the conversion of 1,200,000 shares of Series C Preferred Stock into common stock. In 2004, we issued 306,748 shares of our common stock in connection the conversion of 400,000 shares of Series C Preferred Stock into common stock. All converted shares of Series C Preferred Stock were retired leaving 1,200,000 shares outstanding at December 31, 2006. During 2006 and 2005, 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, 2006, 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. During 2006, we issued 501,089 shares via our Dividend Reinvestment and Stock Purchase Plan and Employee Stock Option Plan. We realized $24.9 million from the sale of such shares. We expect to issue shares when our share price and capital needs warrant such issuance. Future acquisitions, share repurchases and repayment of the credit line are expected to be funded with the remaining proceeds from the December 2006 common stock issuance, draws on the revolving line of credit, 23 issuance of secured or unsecured term notes, issuance of common or preferred stock, sale of properties, private placement solicitation of joint venture equity and other sources of capital. CONTRACTUAL OBLIGATIONS The following table summarizes our future contractual obligations: Contractual obligations Total 2007 2008-2009 2010-2011 2012 and thereafter Payments due by period Line of credit............ Term notes ............... Mortgages payable ... Interest payments ..... Land lease ................ Building lease........... Total ......................... - $350.0 million $112.0 million $179.4 million $1.2 million $1.5 million $644.1 million - - $1.6 million $30.5 million $0.1 million $0.5 million $32.7 million - $100.0 million $29.1 million $52.7 million $0.1 million $1.0 million $182.9 million - - $40.2 million $43.2 million $0.1 million - $83.5 million - $250.0 million $41.1 million $53.0 million $0.9 million - $345.0 million ACQUISITION OF PROPERTIES During 2006, we used operating cash flow, borrowings pursuant to the line of credit, borrowings under the $150 million 10 year term note, and proceeds from our Dividend Reinvestment and Stock Purchase Plan to acquire 42 Properties in Alabama, Georgia, Florida, Louisiana, Missouri, New Hampshire, New York, Tennessee, and Texas comprising 2.6 million square feet from unaffiliated storage operators. During 2005, we used operating cash flow, borrowings pursuant to the line of credit, and proceeds from our Dividend Reinvestment and Stock Purchase Plan to acquire fourteen Properties in Alabama, Connecticut, Georgia, Louisiana, Massachusetts, New York, and Texas comprising one million square feet from unaffiliated storage operators. During 2004, we used operating cash flow and borrowings pursuant to the line of credit to acquire ten Properties in Connecticut, Florida, Tennessee, and Texas comprising one million square feet from unaffiliated storage operators. At December 31, 2006, we owned and operated 327 self-storage facilities in 22 states. Of these facilities, 38 are managed by us for two consolidated joint ventures of which we are a majority owner. 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. At December 31, 2006, we were in negotiations to acquire ten stores for approximately $31 million. One of these stores was purchased in January 2007 for $5.6 million. In addition, as announced in 2004, we have begun to implement a program that will add 450,000 to 600,000 square feet of rentable space at existing stores and convert up to an additional 250,000 to 300,000 square feet to premium (climate and humidity controlled) space. The projected cost of these revenue enhancing improvements is estimated at between $32 and $40 million. During 2006 we spent approximately $12.6 million on revenue enhancing improvements. Funding of these and the above-mentioned improvements is expected to be provided primarily from borrowings under our line of credit, and issuance of common shares through our Dividend Reinvestment and Stock Purchase Plan. We also expect to accelerate, by two to three years, the required capital expenditures on 50 to 70 of our Properties. This includes repainting, paving, and remodeling of the office buildings at these facilities. For 2006 we spent approximately $17 million on such improvements and we expect to spend approximately $18 million in 2007. 24 DISPOSITION OF PROPERTIES During 2004, as part of an asset management program, we sold five non-strategic storage facilities located in Pennsylvania, Tennessee, Ohio, and South Carolina to unaffiliated parties for $11.7 million resulting in a net gain of $1.1 million. No sales took place in 2005 or 2006. Also, during 2001, we sold eight Properties for approximately $24.5 million to Locke Sovran II, LLC. Because Locke Sovran II, LLC is a consolidated joint venture, no gain was recognized on the sale. We may seek to sell additional Properties to similar joint venture programs or third parties in 2007. OFF-BALANCE SHEET ARRANGEMENTS Our off-balance sheet arrangement includes an ownership interest in Iskalo Office Holdings, LLC, which owns the building that houses our headquarters and other tenants. The Company has a 49% ownership interest in Iskalo Office Holdings, LLC at December 31, 2006. During 2004, Iskalo Office Holdings obtained long-term financing and used the proceeds to repay the note payable to the Company of $1.1 million. The Company’s remaining investment includes a capital contribution of $49. For the years ended December 31, 2006 and 2005, the Company's share of Iskalo Office Holdings, LLC's income (loss) was $80,000 and ($8,000), respectively. The Company paid rent to Iskalo Office Holdings, LLC of $583,000, $445,000 and $426,000 in 2006, 2005, and 2004, respectively. Future minimum lease payments under the lease are $0.6 million per year through 2009. Also, the Company purchased land from Iskalo Office Holdings, LLC for $0.4 million and $1.2 million in 2004 and 2003, respectively. In April 2006, the Company made an additional investment of $2.8 million in a former off-balance sheet arrangement known as Locke Sovran I, LLC that increased the Company's ownership to over 70%. As a result of this transaction the Company has consolidated the results of operations of Locke Sovran I, LLC in its financial statements since April 1, 2006, the date that it acquired its controlling interest. For the years ended December 31, 2005 and 2004, the Company's share of Locke Sovran I, LLC's income was $171,000 and $141,000, respectively, and the amortization of the deferred gain was $40,000, each of which are recorded as equity in income of joint ventures on the consolidated statements of operations for those years. The Company manages the storage facilities for Locke Sovran I, LLC and received fees of $332,000, and $322,000 for the years ended 2005, and 2004. Locke Sovran I, LLC, owns 11 self-storage facilities throughout the United States. A summary of the unconsolidated joint venture's financial statements as of and for the year ended December 31, 2006 is as follows: (dollars in thousands) Balance Sheet Data: Investment in office building........................................................ Other assets................................................................................... Total Assets ................................................................................ Mortgage payable ......................................................................... Other liabilities ............................................................................. Total Liabilities .......................................................................... Unaffiliated partners' deficiency................................................... Company deficiency ..................................................................... Total Liabilities and Partners' Deficiency................................... Iskalo Office Holdings, LLC $ 5,842 808 $ 6,650 ====== $ 7,410 253 7,663 (592) (421) $ 6,650 ====== 25 Income Statement Data: Total revenues .............................................................................. Total expenses .............................................................................. Net income.................................................................................. $ 1,351 1,189 $ 162 ====== We do not expect to have material future cash outlays relating to this joint venture and we do not guarantee the debt of Iskalo Office Holdings, LLC. A summary of our cash flows arising from the off-balance sheet arrangements with Iskalo Office Holdings, LLC for the three years ended December 31, 2006, and with Locke Sovran I, LLC for the two years ended December 31, 2005 and for the three months ended March 31, 2006 (the date it has been included in our consolidated results of operations) are as follows: (dollars in thousands) Year ended December 31, 2005 2006 2004 Statement of Operations Other income (management fees income) .............................. General and administrative expenses (corporate office rent).. Equity in income of joint ventures.......................................... $85 583 172 $332 445 202 Investing activities Reimbursement of advances to (advances to) joint ventures .. 17 (187) Financing activities Distributions from unconsolidated joint ventures ................... 123 490 REIT QUALIFICATION AND DISTRIBUTION REQUIREMENTS $322 426 207 958 602 As a REIT, we are not required to pay federal income tax on income that we distribute to our shareholders, provided that the amount distributed is equal to at least 90% of our taxable income. 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 it is paid before the first regular dividend of the following year. The first distribution of 2007 may be applied toward our 2006 distribution requirement. As a REIT, we must derive at least 95% of our total gross income from income related to real property, interest and dividends. In 2006, our percentage of revenue from such sources exceeded 98%, 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. INTEREST RATE RISK We have entered into interest rate swap agreements in order to mitigate the effects of fluctuations in interest rates on our floating rate debt. At December 31, 2006, we have three outstanding interest rate swap agreements as summarized below: Notional Amount Effective Date Expiration Date Fixed Rate Paid Floating Rate Received $50 Million ....................... $20 Million ....................... $50 Million ....................... 11/14/05 9/4/05 10/10/06 9/1/09 9/4/13 9/1/09 5.590% 5.935% 5.680% 1 month LIBOR 6 month LIBOR 1 month LIBOR 26 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 $120 million of our debt through the interest rate swap termination dates. Through September 2009, all of our $350 million of unsecured debt is on a fixed rate basis after taking into account the interest rate swaps noted above. Based on our outstanding unsecured debt of $350 million at December 31, 2006, a 1% increase in interest rates would have no effect on our interest expense annually. The table below summarizes our debt obligations and interest rate derivatives at December 31, 2006. The estimated fair value of financial instruments is subjective in nature and is dependent on a number of important assumptions, including discount rates and relevant comparable market information associated with each financial instrument. The use of different market assumptions and estimation methodologies may have a material effect on the reported estimated fair value amounts. Accordingly, the estimates presented below are not necessarily indicative of the amounts we would realize in a current market exchange. (dollars in thousands) 2007 2008 2009 2010 2011 Thereafter Total Fair Value Expected Maturity Date Including Discount Line of credit - variable rate LIBOR + 0.9%. - - - - - - - - Notes Payable: Term note - variable rate LIBOR+1.20%...... Term note - variable rate LIBOR+1.50%...... Term note - fixed rate 6.26%......................... Term note - fixed rate 6.38%......................... - - - - - - - - $100,000 - - - - - - - - - - - - $100,000 $100,000 $ 20,000 $ 20,000 $ 20,000 $ 80,000 $ 80,000 $ 78,334 $ 150,000 $ 150,000 $147,688 Mortgage note - fixed rate 7.80% .................. $ 342 $ 363 $ 400 $ 433 $27,948 - $ 29,486 $ 30,858 Mortgage note - fixed rate 7.19% .................. $ 937 $ 998 $ 1,083 $ 1,164 $ 1,252 $ 39,189 $ 44,623 $ 45,874 Mortgage note - fixed rate 7.25% .................. $ 126 $ 133 $ 141 $ 149 $ 3,220 - $ 3,769 $ 3,620 Mortgage note - fixed rate 6.76% .................. $ 20 $ 22 $ 23 $ 25 $ 27 $ 926 $ 1,043 $ 1,062 Mortgage note - fixed rate 6.35% .................. $ 23 $ 24 $ 26 $ 28 $ 30 $ 1,013 $ 1,144 $ 1,141 Mortgage notes - fixed rate 5.55% ................ - - $ 25,496 - - Mortgage notes - fixed rate 7.50% ................ $ 183 $ 194 $ 208 $ 222 $ 5,659 Interest rate derivatives – asset ...................... - - - - - - - - $ 25,496 $ 26,138 $ 6,466 $ 6,471 - $ 2,128 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 we increase rental rates on most of our storage units at the beginning of May and 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 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. 27 RECENT ACCOUNTING PRONOUNCEMENTS On December 16, 2004, the FASB issued FASB Statement No. 123(R), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative under Statement 123(R). The Company adopted Statement 123(R) on January 1, 2006 and uses the modified-prospective method. Under the modified-prospective method, the Company will recognize compensation cost in the financial statements issued subsequent to January 1, 2006 for all share based payments granted, modified, or settled after the date of adoption as well as for any awards that were granted prior to the adoption date for which the requisite service period has not been completed as of the adoption date. Prior to the adoption of FAS 123(R) non-vested shares issued to employees and non-employee directors were recorded as unearned compensation (a component of stockholders' equity), at an amount equivalent to the fair market value of the shares on the date of grant. Upon the adoption of FAS 123(R) on January 1, 2006, the non- vested stock balance of approximately $1.8 million was reclassified as additional-paid-in-capital. Under the provisions of FAS 123(R), compensation expense and a corresponding increase to additional paid-in capital are recorded for non-vested share grants on a straight-line basis as the restriction periods lapse. As a result of the adoption of FAS 123(R), the Company recorded compensation expense of $119,000 related to stock options. The adoption of FAS 123(R) did not have a significant impact on the determination of compensation expense related to non-vested stock grants. In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations. Interpretation 47 clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. However, the obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Interpretation 47 requires that the uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. Interpretation 47 was effective December 31, 2005 for the Company. The application of Interpretation 47 did not have a material impact on the Company's financial position or results of operations. In June 2005, the FASB ratified the EITF's consensus on Issue No. 04-5 "Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights." This consensus established the presumption that general partners in a limited partnership control that limited partnership (or similar entity such as an LLC) regardless of the extent of the general partners' ownership interest in the limited partnership. The consensus further establishes that the rights of the limited partners can overcome the presumption of control by the general partners, if the limited partners have either (a) the substantive ability to dissolve (liquidate) the limited partnership or otherwise remove the general partners without cause or (b) substantive participating rights. EITF 04-5 is effective for all agreements entered into or modified after June 29, 2005. For pre-existing agreements that are not modified, the consensus was effective as of the beginning of the first fiscal reporting period beginning after December 15, 2005. The implementation of this standard did not have a material effect on our consolidated financial position or results of operations. In July 2006, the Financial Accounting Standards Board issued Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes, which applies to all tax positions related to income taxes subject to SFAS 109, Accounting for Income Taxes. FIN 48 requires a new evaluation process for all tax positions taken. If the probability for sustaining said tax position is greater than 50%, then the tax position is warranted and recognition should be at the highest amount which would be expected to be realized upon ultimate settlement. Interpretation 48 requires expanded disclosure at each annual reporting period unless a significant change occurs in an interim period. Differences between the amounts recognized in the statements of financial position prior to the adoption of Interpretation 48 and the amounts reported after adoption are to be accounted for as an adjustment to the beginning 28 balance of retained earnings. The Company has completed its initial evaluation of the impact of the January 1, 2007, adoption of Interpretation 48 and determined that such adoption is not expected to have a material impact on the Company's financial position or results from operations. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information required is incorporated by reference to the information appearing under the caption "Interest Rate Risk" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" above. Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders of Sovran Self Storage, Inc. We have audited the accompanying consolidated balance sheets of Sovran Self Storage, Inc. as of December 31, 2006 and 2005, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sovran Self Storage, Inc. at December 31, 2006 and 2005, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in Note 2 to the consolidated financial statements, in 2006 the Company adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment”. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Sovran Self Storage, Inc.’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2007 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Buffalo, New York March 1, 2007 29 SOVRAN SELF STORAGE, INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands, except share data) Assets Investment in storage facilities: Land.............................................................................................................. Building, equipment, and construction in progress ...................................... Less: accumulated depreciation.................................................................... Investment in storage facilities, net ............................................................... Cash and cash equivalents ............................................................................. Accounts receivable....................................................................................... Receivable from related parties ..................................................................... Receivable from joint ventures ...................................................................... Investment in joint ventures........................................................................... Prepaid expenses ........................................................................................... Fair value of interest rate swap agreements................................................... Other assets.................................................................................................... Total Assets ................................................................................................. Liabilities Line of credit ................................................................................................. Term notes ..................................................................................................... Accounts payable and accrued liabilities....................................................... Deferred revenue ........................................................................................... Accrued dividends ......................................................................................... Mortgages payable......................................................................................... Total Liabilities ........................................................................................... December 31, 2005 2006 $ 208,644 935,260 1,143,904 (155,843) 988,061 47,730 2,166 37 - - 5,336 2,274 7,606 $ 1,053,210 $ - 350,000 15,358 5,292 12,675 112,027 495,352 $ 162,900 731,080 893,980 (130,550) 763,430 4,911 1,643 75 2,780 825 3,075 1,411 6,226 $ 784,376 $90,000 200,000 10,865 4,227 10,801 49,144 365,037 Minority interest – Operating Partnership ..................................................... Minority interest – consolidated joint venture ............................................... 10,164 16,783 11,132 14,122 Shareholders' Equity 8.375% Series C Convertible Cumulative Preferred Stock, $.01 par value, 1,200,000 shares issued and outstanding at December 31, 2006 and December 31, 2005, $30,000 liquidation value.......................................... Common stock $.01 par value, 100,000,000 shares authorized, 20,443,529 shares outstanding (17,563,046 at December 31, 2005) ............................ Additional paid-in capital .............................................................................. Non-vested stock ........................................................................................... Dividends in excess of net income ................................................................ Accumulated other comprehensive income ................................................... Treasury stock at cost, 1,171,886 shares ....................................................... Total Shareholders' Equity........................................................................... Total Liabilities and Shareholders' Equity................................................... See notes to financial statements. 26,613 26,613 216 612,738 - (83,609) 2,128 (27,175) 530,911 $ 1,053,210 187 466,839 (1,838) (71,995) 1,454 (27,175) 394,085 $ 784,376 30 SOVRAN SELF STORAGE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands, except per share data) 2006 2005 2004 Year Ended December 31, Revenues Rental income ........................................................................ Other operating income ......................................................... Total operating revenues....................................................... Expenses Property operations and maintenance .................................... Real estate taxes..................................................................... General and administrative .................................................... Depreciation and amortization............................................... Total operating expenses ..................................................... $ 160,924 5,371 166,295 $ 133,856 4,449 138,305 $ 119,605 3,681 123,286 44,034 15,260 14,095 25,347 98,736 35,954 12,407 12,863 21,222 82,446 32,166 11,014 11,071 19,175 73,426 Income from operations......................................................... 67,559 55,859 49,860 Other income (expenses) Interest expense ...................................................................... Interest income ....................................................................... Minority interest – Operating Partnership .............................. Minority interest – consolidated joint ventures ...................... Equity in income of joint ventures.......................................... Income from continuing operations........................................ Income from discontinued operations (including gain on (29,494) 807 (905) (1,529) 172 (20,229) 487 (1,039) (490) 202 (18,128) 301 (1,043) (499) 207 36,610 34,790 30,698 disposal in 2004 of $1,083)................................................. - - 1,306 Net Income ............................................................................ Redemption amount in excess of carrying value of Series B Preferred Stock ............................................................ Preferred stock dividends ....................................................... Net income available to common shareholders ...................... 36,610 34,790 32,004 - (2,512) $ 34,098 - (4,123) $ 30,667 (1,415) (7,168) $ 23,421 Per Common Share - basic: Continuing operations............................................................. Discontinued operations ......................................................... Earnings per common share – basic ..................................... Per Common Share - diluted: Continuing operations............................................................. Discontinued operations ......................................................... Earnings per common share – diluted................................... $ 1.90 $ - $ 1.90 $ 1.89 $ - $ 1.89 $ 1.86 $ - $ 1.86 $ 1.84 $ - $ 1.84 $ 1.45 $ 0.09 $ 1.54 $ 1.44 $ 0.09 $ 1.53 Dividends declared per common share ............................... $ 2.47 $ 2.44 $ 2.42 See notes to financial statements. 31 SOVRAN SELF STORAGE, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (dollars in thousands, except share data) Balance January 1, 2004 ...................................................... Net proceeds from issuance of stock through Dividend Reinvestment and Stock Purchase Plan........................... Exercise of stock options ..................................................... Issuance of non-vested stock................................................ Earned portion of non-vested stock ..................................... Deferred compensation outside directors............................. Conversion of Series C Preferred Stock to common stock and exercise of related stock warrants............................. Exercise of Series C Preferred Stock placement certificate.............................................. Carrying value less than redemption value on redeemed partnership units............................................................... Redemption of 9.85% Series B Preferred Stock.................. Redemption amount in excess of carrying value of 9.85% Series B Preferred Stock.................................................. Net income ........................................................................... Change in fair value of derivatives ...................................... Total comprehensive income ............................................... Dividends.............................................................................. Balance December 31, 2004 ................................................ Net proceeds from issuance of stock through Dividend Reinvestment and Stock Purchase Plan........................... Exercise of stock options ..................................................... Issuance of non-vested stock................................................ Earned portion of non-vested stock ..................................... Deferred compensation outside directors............................. Conversion of Series C Preferred Stock to common stock and exercise of related stock warrants............................. Net income ........................................................................... Change in fair value of derivatives ...................................... Total comprehensive income ............................................... Dividends.............................................................................. Balance December 31, 2005 ................................................ Net proceeds from the issuance of common stock .............. Net proceeds from issuance of stock through Dividend Reinvestment and Stock Purchase Plan........................... Exercise of stock options ..................................................... Reclass of unearned non-vested stock to additional paid in capital........................................................................... Issuance of non-vested stock................................................ Earned portion of non-vested stock ..................................... Stock option expense............................................................ Deferred compensation outside directors............................. Carrying value less than redemption value on redeemed partnership units............................................................... Net income ........................................................................... Change in fair value of derivatives ...................................... Total comprehensive income ............................................... Dividends.............................................................................. Balance December 31, 2006 ................................................ See notes to financial statements 9.85% Series B Preferred Stock Shares 9.85% Series B Preferred Stock 8.375% Series C Preferred Stock Shares 8.375% Series C Preferred Stock 1,200,000 $28,585 2,800,000 $67,129 - - - - - - - - (28,585) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - $ - - - - - - (400,000) - - - - - - - - 2,400,000 - - - - - (1,200,000) - - - - 1,200,000 - - - - - - - - - - - - - 1,200,000 - - - - - (8,871) (5,031) - - - - - - - 53,227 - - - - - (26,614) - - - - 26,613 - - - - - - - - - - - - - $ 26,613 - - - - - - - - (1,200,000) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 32 SOVRAN SELF STORAGE, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Common Stock Shares Common Stock Additional Paid-in Capital Non- vested Stock Dividends in Excess of Net Income Accumulated Other Comprehensive Income (loss) Treasury Stock Total Equity 14,259,863 $154 $356,875 $ (1,722) $(48,069) $(7,580) $(27,175) $368,197 1,163,651 225,750 12,058 - - 310,905 - - - - - - - - 15,972,227 283,379 129,015 13,778 - - 1,164,647 - - - - 17,563,046 2,300,000 501,089 37,675 - 41,719 - - - - - - - - 20,443,529 12 2 - - - 3 - - - - - - - - 171 3 1 - - - 12 - - - - 187 23 5 - - 1 - - - - - - - - $ 216 43,482 5,500 463 - 129 8,868 2,958 (268) - - - - - - 418,007 11,929 3,238 582 - 125 32,958 - - - - 466,839 122,388 24,862 1,142 (1,838) (1) 876 119 181 (1,830) - - - - $ 612,738 - - (463) 411 - - - - - - - - - - (1,774) - - (582) 518 - - - - - - (1,838) - - - 1,838 - - - - - - - - - $ - - - - - - - - - - (1,415) 32,004 - - (44,271) (61,751) - - - - - - 34,790 - - (45,034) (71,995) - - - - - - - - - 36,610 - - (48,224) $ (83,609) - - - - - - - - - - - 4,326 - - (3,254) - - - - - - - 4,708 - - 1,454 - - - - - - - - - - - - - - - - - - - - - - (27,175) - - - - - - - - - - (27,175) - - - - - - - - - - 674 - - $ 2,128 - - - - - $ (27,175) 43,494 5,502 - 411 129 - (2,073) (268) (28,585) (1,415) 32,004 4,326 36,330 (44,271) 377,451 11,932 3,239 - 518 125 6,356 34,790 4,708 39,498 (45,034) 394,085 122,411 24,867 1,142 - - 876 119 181 (1,830) 36,610 674 37,284 (48,224) $530,911 33 SOVRAN SELF STORAGE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) Operating Activities Net income from continuing operations ......................................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ........................................................................................ Equity in income of joint ventures.................................................................................. Minority interest.............................................................................................................. Non-vested stock earned ................................................................................................. Stock option expense....................................................................................................... Changes in assets and liabilities: Accounts receivable ....................................................................................................... Prepaid expenses ............................................................................................................ Accounts payable and other liabilities ........................................................................... Deferred revenue ............................................................................................................ Net cash provided by operating activities – continuing operations................................ Year Ended December 31, 2004 2005 2006 $ 36,610 $ 34,790 $ 30,698 26,340 (172) 2,434 876 119 (407) (2,029) 1,011 (249) 64,533 22,012 (202) 1,529 518 - (74) 183 1,445 33 60,234 19,895 (207) 1,542 411 - 103 (124) 1,644 (48) 53,914 Net cash provided by operating activities – discontinued operations ............................ - - 287 Investing Activities Acquisition of storage facilities ..................................................................................... Improvements, equipment additions, and construction in progress .............................. Additional investment in consolidated joint ventures net of cash acquired .................. Net proceeds from the sale of storage facilities............................................................. Reimbursement of advances to (advances to) joint ventures ........................................ Other assets..................................................................................................................... Receipts from related parties.......................................................................................... Net cash used in investing activities ............................................................................... Financing Activities Net proceeds from sale of common stock...................................................................... Proceeds from line of credit ........................................................................................... Paydown of line of credit ............................................................................................... Proceeds from term notes............................................................................................... Financing costs............................................................................................................... Dividends paid - common stock..................................................................................... Dividends paid - preferred stock.................................................................................... Distributions from unconsolidated joint venture ........................................................... Minority interest distributions........................................................................................ Redemption of operating partnership units.................................................................... Redemption of Series B Preferred Stock ....................................................................... Series C Preferred Stock placement certificate payment............................................... Mortgage principal and capital lease payments............................................................. Net cash provided by (used in) financing activities........................................................ Net increase (decrease) in cash ....................................................................................... Cash at beginning of period ............................................................................................ Cash at end of period ...................................................................................................... (130,251) (37,021) (8,181) - 17 (1,169) 38 (176,567) 148,601 94,000 (184,000) 150,000 (632) (43,837) (2,513) 123 (2,815) (2,788) - - (1,286) 154,853 42,819 4,911 $ 47,730 (60,681) (17,885) - - (187) (418) 15 (79,156) 21,652 56,000 (9,000) - (352) (39,773) (4,123) 490 (2,567) (722) - - (877) 20,728 1,806 3,105 $ 4,911 (65,629) (17,961) - 11,640 958 (47) 5 (71,034) 49,125 74,000 (40,000) - (735) (36,032) (7,168) 602 (2,422) (1,758) (30,000) (5,031) (744) (163) (16,996) 20,101 $ 3,105 Supplemental cash flow information Cash paid for interest ...................................................................................................... $ 26,647 $ 19,097 $ 17,403 Fair value of net liabilities assumed on the acquisition of storage facilities.................. 65,650 4,320 744 Dividends declared but unpaid at December 31, 2006, 2005 and 2004 were $12,675, $10,801, and $9,663, respectively. See notes to financial statements. 34 SOVRAN SELF STORAGE, INC. - DECEMBER 31, 2006 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION Sovran Self Storage, Inc. (the “Company,” “We,” “Our,” or “Sovran”), a self-administered and self- managed real estate investment trust (a "REIT"), was formed on April 19, 1995 to own and operate self-storage facilities throughout the United States. On June 26, 1995, the Company commenced operations effective with the completion of its initial public offering. At December 31, 2006, we owned and operated 327 self-storage properties in 22 states under the name Uncle Bob's Self Storage ®. Among our 327 self-storage properties are 38 properties that we manage for two consolidated joint ventures of which we are a majority owner. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation: All of the Company's assets are owned by, and all its operations are conducted through, Sovran Acquisition Limited Partnership (the "Operating Partnership"). Sovran Holdings, Inc., a wholly- owned subsidiary of the Company (the "Subsidiary"), is the sole general partner of the Operating Partnership; the Company is a limited partner of the Operating Partnership, and through its ownership of the Subsidiary and its limited partnership interest controls the operations of the Operating Partnership, holding a 97.9% ownership interest therein as of December 31, 2006. The remaining ownership interests in the Operating Partnership (the "Units") are held by certain former owners of assets acquired by the Operating Partnership subsequent to its formation. We consolidate all wholly owned subsidiaries. Partially owned subsidiaries and joint ventures are consolidated when we control the entity. We evaluate partially-owned subsidiaries and joint ventures held in partnership form in accordance with the provisions of Statement of Positions (SOP) 78-9, "Accounting for Investments in Real Estate Ventures", and FASB Staff Position SOP 78-9-1, "Interaction of AICPA SOP 78-9 and EITF Issue 04-5", to determine whether the rights held by other investors constitute "kick-out rights" or "substantive participating rights" as defined therein. For pre-existing joint venture agreements that have not been modified, effective January 1, 2006 we were required to adopt the provisions of the EITF's consensus on Issue No. 04-5, "Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights." Under this consensus we presume that general partners in a limited partnership control that limited partnership (or similar entity like a limited liability company) regardless of the extent of the general partners' ownership interest in the limited partnership. We also consider whether the rights of the limited partners can overcome the presumption of control by the general partners, if the limited partners have either (a) the substantive ability to dissolve (liquidate) the limited partnership or otherwise remove the general partners without cause or (b) substantive participating rights. For partially-owned subsidiaries or joint ventures held in corporate form, we consider the guidance of SFAS No. 94 "Consolidation of All Majority- Owned Subsidiaries" and Emerging Issues Task Force (EITF) 96-16, "Investor's Accounting for an Investee When the Investor has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights", and in particular, whether rights held by other investors would be viewed as "participation rights" as defined therein. To the extent that any minority investor has important rights in a partnership or substantive participating rights in a corporation, including substantive veto rights, the related entity will generally not be consolidated. We also consider the provisions of SFAS Interpretation No. 46(R), "Consolidation of Variable Interest Entities – An Interpretation of ARB No. 51" in evaluating whether consolidation of entities which are considered to be variable interest entities is warranted and we are the primary beneficiary of the expected losses or residual gains of such entities. Our consolidated financial statements include the accounts of the Company, the Operating Partnership, and Locke Sovran I, LLC and Locke Sovran II, LLC, which are majority owned joint ventures. All intercompany transactions and balances have been eliminated. Investments in joint ventures that we do not control but for which we have significant influence over are reported using the equity method. In April 2006, the Company made additional investments of $8,475,000 in Locke Sovran I, LLC and Locke Sovran II, LLC that increased the Company's ownership from approximately 45% to over 70% in each of these joint ventures. As a result of this transaction, from the date that its controlling interest was acquired, the Company has consolidated the accounts of Locke Sovran I, LLC in its financial statements. The accounts of Locke Sovran II, LLC were already being included in the Company's financial statements as it has been a majority controlled joint 35 venture since 2001. A summary of the Locke Sovran I, LLC balance sheet as of April 1, 2006 was as follows: (dollars in thousands) Investment in storage facilities, net .............................................. Other assets................................................................................... Total Assets ................................................................................ Due to the Company ..................................................................... Mortgage payable ......................................................................... Other liabilities ............................................................................. Total Liabilities .......................................................................... Unaffiliated partners' equity ......................................................... Company equity............................................................................ Total Liabilities and Partners' Equity ......................................... Locke Sovran I, LLC $ 38,000 1,240 $ 39,240 $ 2,763 29,379 579 32,721 3,521 2,998 $ 39,240 Cash and Cash Equivalents: The Company considers all highly liquid investments purchased with maturities of three months or less to be cash equivalents. The cash balance includes $3.1 million and $2.0 million, respectively, held in escrow for encumbered properties at December 31, 2006 and 2005. Revenue and Expense Recognition: Rental income is recorded when earned. Rental income received prior to the start of the rental period is included in deferred revenue. Advertising costs are expensed as incurred and for the years ended December 31, 2006, 2005, and 2004 were $1.0 million, $0.6 million, and $0.5 million, respectively. Other Income: Consists primarily of sales of storage-related merchandise (locks and packing supplies), management fees, insurance commissions, and incidental truck rentals. Investment in Storage Facilities: Storage facilities are recorded at cost. The purchase price of acquired facilities is allocated to land, building, and equipment based on the fair value of each component. No intangible asset has been recorded for the value of tenant relationships because the Company does not have any concentrations of significant tenants, the majority of leases are month-to-month, and the average tenant turnover is fairly frequent. Depreciation is computed using the straight-line method over estimated useful lives of forty years for buildings and improvements, and five to twenty years for furniture, fixtures and equipment. Expenditures for significant renovations or improvements that extend the useful life of assets are capitalized. Repair and maintenance costs are expensed as incurred. Whenever events or changes in circumstances indicate that the basis of the Company's property may not be recoverable, the Company's policy is to assess any impairment of value. Impairment is evaluated based upon comparing the sum of the expected undiscounted future cash flows to the carrying value of the property, 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 of the asset exceeds the fair value of the asset. At December 31, 2006 and 2005, no assets had been determined to be impaired under this policy and, accordingly, this policy had no impact on the Company's financial position or results of operations. Other Assets: Included in other assets are net loan acquisition costs, a note receivable, and property deposits. The loan acquisition costs were $5.9 million and $4.7 million at December 31, 2006, and 2005, respectively. Accumulated amortization on the loan acquisition costs was approximately $2.9 million and $1.9 million at December 31, 2006, and 2005, respectively. Loan acquisition costs are amortized over the terms of the related debt. Amortization expense was $1.0 million, $0.8 million and $0.7 million for the periods ended December 31, 2006, 2005 and 2004, respectively. The note receivable of $2.8 million represents a note from certain investors of Locke Sovran II, LLC. The note bears interest at LIBOR plus 2.4% and matures upon the dissolution of Locke Sovran II, LLC. Property deposits were $1.7 million and $0.6 million at December 31, 2006 and 2005, respectively. 36 Accounts Payable and Accrued Liabilities: Accounts payable and accrued liabilities consists primarily of trade payables, accrued interest, and property tax accruals. The Company accrues property tax expense based on estimates and historical trends. Actual expense could differ from these estimates. Minority Interest: The minority interest reflects the outside ownership interest of the limited partners of the Operating Partnership and the joint venture partner's interest in Locke Sovran I, LLC and Locke Sovran II, LLC. Amounts allocated to these interests are reflected as an expense in the income statement and increase the minority interest in the balance sheet. Distributions to these partners reduce this balance. At December 31, 2006, Operating Partnership minority interest ownership was 429,035 Units, or 2.1%. At December 31, 2005, Operating Partnership minority interest ownership was 479,277 Units, or 2.7%. The redemption value of the Units at December 31, 2006 and 2005 was $24.6 million and $22.5 million, respectively. The Operating Partnership is obligated to redeem each Unit at the request of the holder thereof for cash equal to the fair market value of a share of the Company's common stock, at the time of such redemption, provided that the Company at its option may elect to acquire any such Unit presented for redemption for one common share or cash. Income Taxes: The Company qualifies as a REIT under the Internal Revenue Code of 1986, as amended, and will generally not be subject to corporate income taxes to the extent it distributes at least 90% of its taxable income to its shareholders and complies with certain other requirements. Accordingly, no provision has been made for federal income taxes in the accompanying financial statements. Comprehensive Income: Comprehensive income consists of net income and the change in value of derivatives used for hedging purposes and is reported in the consolidated statements of shareholders' equity. Comprehensive income was $37.3 million, $39.5 million and $36.3 million for the years ended December 31, 2006, 2005, and 2004, respectively. Derivative Financial Instruments: On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, which requires companies to carry all derivatives on the balance sheet at fair value. The Company determines the fair value of derivatives by reference to quoted market prices. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, the reason for holding it. The Company's use of derivative instruments is limited to cash flow hedges, as defined in SFAS No. 133, of certain interest rate risks. Recent Accounting Pronouncements: In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations. Interpretation 47 clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. However, the obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Interpretation 47 requires that the uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. Interpretation 47 was effective December 15, 2005 for the Company. The application of Interpretation 47 did not have a material impact on the Company's financial position or results of operations. In June 2005, the FASB ratified the EITF's consensus on Issue No. 04-5 "Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights." This consensus established the presumption that general partners in a limited partnership control that limited partnership (or similar entity such as an LLC) regardless of the extent of the general partners' ownership interest in the limited partnership. The consensus further establishes that the rights of the limited partners can overcome the presumption of control by the general partners, if the limited partners have either (a) the substantive ability to dissolve (liquidate) the limited partnership or otherwise remove the general partners without cause or (b) substantive participating rights. EITF 04-5 is effective for all agreements entered into or modified after June 29, 2005. For pre-existing agreements that are not modified, the consensus was effective as of the beginning of the first fiscal reporting period beginning after December 15, 2005. The implementation of this standard did not have a material effect on our consolidated financial position or results of operations. 37 In July 2006, the Financial Accounting Standards Board issued Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes, which applies to all tax positions related to income taxes subject to SFAS 109, Accounting for Income Taxes. FIN 48 requires a new evaluation process for all tax positions taken. If the probability for sustaining said tax position is greater than 50%, then the tax position is warranted and recognition should be at the highest amount which would be expected to be realized upon ultimate settlement. Interpretation 48 requires expanded disclosure at each annual reporting period unless a significant change occurs in an interim period. Differences between the amounts recognized in the statements of financial position prior to the adoption of Interpretation 48 and the amounts reported after adoption are to be accounted for as an adjustment to the beginning balance of retained earnings. The Company has completed its initial evaluation of the impact of the January 1, 2007, adoption of Interpretation 48 and determined that such adoption is not expected to have a material impact on the Company's financial position or results from operations. Stock-Based Compensation: On December 16, 2004, the FASB issued FASB Statement No. 123(R), Share- Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative under Statement 123(R). The Company adopted Statement 123(R) on January 1, 2006 and uses the modified-prospective method. Under the modified-prospective method, the Company will recognize compensation cost in the financial statements issued subsequent to January 1, 2006 for all share based payments granted, modified, or settled after the date of adoption as well as for any awards that were granted prior to the adoption date for which the requisite service period has not been completed as of the adoption date. The Company's shared-based payment arrangements are described below. Prior to the adoption of FAS 123(R) non-vested shares issued to employees and non-employee directors were recorded as unearned compensation (a component of stockholders' equity), at an amount equivalent to the fair market value of the shares on the date of grant. Upon the adoption of FAS 123(R) on January 1, 2006, the non- vested stock balance of approximately $1.8 million was reclassified as additional-paid-in-capital. Under the provisions of FAS 123(R), compensation expense and a corresponding increase to additional paid-in capital are recorded for non-vested share grants on a straight-line basis as the restriction periods lapse. For the year ended December 31, 2006, the Company recorded compensation expense (included in general and administrative expense) of $119,000 related to stock options under Statement 123(R) and $876,000 related to amortization of non-vested stock grants. The Company uses the Black-Scholes Merton option pricing model to estimate the fair value of stock options granted subsequent to the adoption of FAS 123(R). For stock option awards that were granted prior to the adoption date of FAS 123(R) for which the requisite service period had not been provided as of the adoption date and for the 14,000 stock options issued to outside directors and employees in 2006, the fair value of each option was estimated on the date of grant using the Black-Scholes Merton option pricing model with the following weighted assumptions: Expected life (years)..................................... Risk free interest rate.................................... Expected volatility........................................ Expected dividend yield ............................... Fair value ...................................................... Weighted Average 6.87 4.23% 20.61% 6.72% $3.70 Range 5.00 - 7.00 4.00 - 5.03% 19.40% - 21.00% 4.55% - 8.00% $1.93 - $8.47 To determine expected volatility, the Company uses historical volatility based on daily closing prices of its Common Stock over periods that correlate with the expected terms of the options granted. The risk-free rate is based on the United States Treasury yield curve at the time of grant for the expected life of the options granted. Expected dividends are based on the Company's history and expectation of dividend payouts. The expected life of stock options is based on the midpoint between the vesting date and the end of the contractual term. 38 As permitted by Statement 123, through the fourth quarter of 2005 and previous years, the Company accounted for share-based payments to employees using APB Opinion 25's intrinsic value method and, as such, generally recognized no compensation cost for employee stock options when the stock option price at the grant date was equal to or greater than the fair market value of the stock at that date. Had the Company adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described below: (dollars in thousands, except per share data) Pro Forma 2004 2005 Net income available to common shareholders as reported..................... Add: Total stock-based compensation expense recorded ........................ Deduct: Total stock-based employee compensation expense determined under fair value method for all awards.............................. Pro forma net income available to common shareholders ....................... $ 30,667 518 $ 23,421 411 (657) $ 30,528 (566) $ 23,266 Earnings per common share Basic - as reported ................................................................................ Basic - pro forma .................................................................................. Diluted - as reported ............................................................................. Diluted - pro forma ............................................................................... $ 1.86 $ 1.85 $ 1.85 $ 1.84 $ 1.54 $ 1.53 $ 1.53 $ 1.52 Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Reclassification: Certain amounts from the 2005 and 2004 financial statements have been reclassified to conform to the current year presentation. 3. EARNINGS PER SHARE The Company reports earnings per share data in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share." In computing earnings per share, the Company excludes preferred stock dividends from net income to arrive at net income available to common shareholders. The following table sets forth the computation of basic and diluted earnings per common share. (Amounts in thousands, except per share data) Numerator: Net income available to common shareholders ........ Denominator: Denominator for basic earnings per share - weighted average shares.......................................... Effect of Dilutive Securities: Stock options and warrants and non-vested stock ...... Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversion ............................................................... Basic Earnings per Common Share ............................ Diluted Earnings per Common Share ......................... Year Ended December 31, 2006 2005 2004 $ 34,098 $ 30,667 $ 23,421 17,951 70 18,021 $ 1.90 $ 1.89 39 16,506 127 16,633 $ 1.86 $ 1.84 15,161 134 15,295 $ 1.54 $ 1.53 Potential common shares from the Series C Convertible Cumulative Preferred Stock (see Note 13) were excluded from the 2006, 2005, and 2004 diluted earnings per share calculation because their inclusion would have had an antidilutive effect on earnings per share. 4. INVESTMENT IN STORAGE FACILITIES The following summarizes activity in storage facilities during the years ended December 31, 2006 and December 31, 2005. (Dollars in thousands) Cost: Beginning balance ................................................................ Acquisition of storage facilities ............................................ Consolidation of Locke Sovran I, LLC as of April 1, 2006.. Additional investment in consolidated joint ventures........... Improvements and equipment additions ............................... Construction in progress ....................................................... Dispositions .......................................................................... Ending balance ....................................................................... 2006 2005 $893,980 166,310 38,000 8,647 30,480 6,586 (99) $1,143,904 $811,516 65,001 - - 18,236 - (773) $893,980 Accumulated Depreciation: Beginning balance ................................................................ Additions during the year ..................................................... Dispositions .......................................................................... Ending balance ....................................................................... $ 130,550 25,347 (54) $155,843 $ 109,750 21,222 (422) $130,550 During 2006 the Company acquired 42 storage facilities for $166.3 million. Substantially all of the purchase price of these facilities was allocated to land ($32.3 million), building ($132.2 million) and equipment ($1.8 million) and the operating results of the acquired facilities have been included in the Company's operations since the respective acquisition dates. The purchase price for 2006 acquisitions was preliminarily allocated to tangible assets only. The Company expects to finalize its purchase price allocation during the first quarter of 2007. 5. DISCONTINUED OPERATIONS SFAS No.144 "Accounting for the Impairment or Disposal of Long-Lived Assets" addresses accounting for discontinued operations. The Statement requires the segregation of all disposed components of an entity with operations that (i) can be distinguished from the rest of the entity and (ii) will be eliminated from the ongoing operations of the entity in a disposal transaction. Based on the criteria of SFAS No. 144, five properties that were sold by the Company in 2004 required presentation as discontinued operations as of December 31, 2004. There were no property sales in 2005 or 2006. During 2004, the Company sold five non-strategic storage facilities located in Pennsylvania, Tennessee, Ohio, and South Carolina for net cash proceeds of $11.7 million resulting in a gain of $1.1 million. The operations of these five facilities and the gain on sale are reported as discontinued operations. The following is a summary of the amounts reported as discontinued operations: (dollars in thousands) Year Ended December 31, 2005 2006 2004 Total revenue .......................................................................... Property operations and maintenance expense ....................... Real estate tax expense ........................................................... Depreciation and amortization expense.................................. Net realized gain on properties sold ....................................... Total income from discontinued operations ............................. $ - - - - - $ - $ - - - - - $ - $ 544 (193) (38) (90) 1,083 $ 1,306 40 6. PRO FORMA FINANCIAL INFORMATION (UNAUDITED) The following unaudited pro forma Condensed Statement of Operations is presented as if (i) the additional investment in Locke Sovran I, LLC and Locke Sovran II, LLC, (ii) the 42 storage facilities purchased during 2006, (iii) the 14 storage facilities purchased in 2005, and (iv) the related indebtedness incurred and assumed on these transactions had all occurred at January 1, 2005. Such unaudited pro forma information is based upon the historical statements of operations of the Company. It should be read in conjunction with the financial statements of the Company and notes thereto included elsewhere herein. In management's opinion, all adjustments necessary to reflect the effects of these transactions have been made. This unaudited pro forma statement does not purport to represent what the actual results of operations of the Company would have been assuming such transactions had been completed as set forth above nor does it purport to represent the results of operations for future periods. (dollars in thousands, except share data) Year Ended December 31, 2005 2006 Pro forma total operating revenues............................................ $177,123 $165,952 Pro forma net income ................................................................ $ 32,293 $ 24,957 Pro forma earnings per common share – diluted ....................... $ 1.79 $ 1.46 7. UNSECURED LINE OF CREDIT AND TERM NOTES The Company has a $100 million (expandable to $200 million) unsecured line of credit that matures in September 2007 and a $100 million unsecured term note that matures in September 2009. The line of credit bears interest at LIBOR plus 0.90% and requires a 0.20% facility fee. The term note bears interest at LIBOR plus 1.20%. The Company also maintains a $80 million term note maturing September 2013 bearing interest at a fixed rate of 6.26% and a $20 million term note maturing September 2013 bearing interest at a variable rate equal to LIBOR plus 1.50%. The interest rate at December 31, 2006 on the Company's available line of credit was approximately 6.2% (5.40% at December 31, 2005). At December 31, 2006, there was $100 million available on the revolving line of credit, excluding the amount available on the expansion feature. In April 2006, the Company entered into a $150 million unsecured term note maturing in April 2016 bearing interest at 6.38%. The proceeds from this term note were used to pay down the outstanding balance on the Company's line of credit, to repay a $25 million term note entered in January 2006 and a $15 million term note entered in April 2006, and to make an additional investment into Locke Sovran I, LLC (see Note 11) and Locke Sovran II, LLC (see Note 2). 8. MORTGAGES PAYABLE Mortgages payable at December 31, 2006 and December 31, 2005 consist of the following: (dollars in thousands) 7.80% mortgage note due December 2011, secured by 11 self-storage facilities (Locke Sovran I) with an aggregate net book value of $41.6 million, principal and interest paid monthly .................................................... 7.19% mortgage note due March 2012, secured by 27 self-storage facilities (Locke Sovran II) with an aggregate net book value of $78.4 million, principal and interest paid monthly.................................................................. 7.25% mortgage note due December 2011, secured by 1 self-storage facility with an aggregate net book value of $6.0 million, principal and interest paid monthly. Estimated market rate at time of acquisition 5.40%................. December 31, 2006 December 31, 2005 $ 29,486 $ - 44,623 45,255 3,769 3,889 41 6.76% mortgage note due September 2013, secured by 1 self-storage facility with an aggregate net book value of $2.1 million, principal and interest paid monthly .................................................................................................... 6.35% mortgage note due March 2014, secured by 1 self-storage facility with an aggregate net book value of $1.9 million, principal and interest paid monthly .................................................................................................... 5.55% mortgage notes due November 2009, secured by 8 self-storage facilities with an aggregate net book value of $36.2 million, interest only paid monthly. Estimated market rate at time of acquisition 6.44%................. 7.50% mortgage notes due August 2011, secured by 3 self-storage facilities with an aggregate net book value of $14.9 million, principal and interest paid monthly. Estimated market rate at time of acquisition 6.42%................. Total mortgages payable...................................................................................... 1,043 1,144 25,496 - - - 6,466 $ 112,027 - $ 49,144 The Company assumed the 7.25%, 6.76%, 6.35%, 5.55% and 7.5% mortgage notes in connection with the acquisitions of storage facilities in 2005 and 2006. The 7.25%, 5.55%, and 7.5% mortgages were recorded at their estimated fair value based upon the estimated market rates at the time of the acquisitions ranging from 5.40% to 6.44%. These three mortgages are carried at a discount of approximately $0.1 million below the actual principal balance of the mortgages payable. The discount will be amortized over the remaining term of the mortgages based on the effective interest method. The table below summarizes the Company's debt obligations and interest rate derivatives at December 31, 2006. The estimated fair value of financial instruments is subjective in nature and is dependent on a number of important assumptions, including discount rates and relevant comparable market information associated with each financial instrument. The fair value of the fixed rate term note and mortgage note were estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The use of different market assumptions and estimation methodologies may have a material effect on the reported estimated fair value amounts. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company would realize in a current market exchange. (dollars in thousands) 2007 2008 2009 2010 2011 Thereafter Total Fair Value Expected Maturity Date Including Discount Line of credit - variable rate LIBOR + 0.9%. - - - - - - - - Notes Payable: Term note - variable rate LIBOR+1.20%...... Term note - variable rate LIBOR+1.50%...... Term note - fixed rate 6.26%......................... Term note - fixed rate 6.38%......................... - - - - - - - - $100,000 - - - - - - - - - - - - $100,000 $100,000 $ 20,000 $ 20,000 $ 20,000 $ 80,000 $ 80,000 $ 78,334 $ 150,000 $ 150,000 $147,688 Mortgage note - fixed rate 7.80% .................. $ 342 $ 363 $ 400 $ 433 $27,948 - $ 29,486 $ 30,858 Mortgage note - fixed rate 7.19% .................. $ 937 $ 998 $ 1,083 $ 1,164 $ 1,252 $ 39,189 $ 44,623 $ 45,874 Mortgage note - fixed rate 7.25% .................. $ 126 $ 133 $ 141 $ 149 $ 3,220 - $ 3,769 $ 3,620 Mortgage note - fixed rate 6.76% .................. $ 20 $ 22 $ 23 $ 25 $ 27 $ 926 $ 1,043 $ 1,062 Mortgage note - fixed rate 6.35% .................. $ 23 $ 24 $ 26 $ 28 $ 30 $ 1,013 $ 1,144 $ 1,141 Mortgage notes - fixed rate 5.55% ................ - - $ 25,496 - - Mortgage notes - fixed rate 7.50% ................ $ 183 $ 194 $ 208 $ 222 $ 5,659 Interest rate derivatives – asset ...................... - - - - - - - - $ 25,496 $ 26,138 $ 6,466 $ 6,471 - $ 2,128 42 9. DERIVATIVE FINANCIAL INSTRUMENTS Interest rate swaps are used to adjust the proportion of total debt that is subject to variable interest rates. The interest rate swaps require the Company to pay an amount equal to a specific fixed rate of interest times a notional principal amount and to receive in return an amount equal to a variable rate of interest times the same notional amount. The notional amounts are not exchanged. No other cash payments are made unless the contract is terminated prior to its maturity, in which case the contract would likely be settled for an amount equal to its fair value. The Company enters interest rate swaps with a number of major financial institutions to minimize counterparty credit risk. The interest rate swaps qualify and are designated as hedges of the amount of future cash flows related to interest payments on variable rate debt. Therefore, the interest rate swaps are recorded in the consolidated balance sheet at fair value and the related gains or losses are deferred in shareholders' equity as Accumulated Other Comprehensive Income ("AOCI"). These deferred gains and losses are amortized into interest expense during the period or periods in which the related interest payments affect earnings. However, to the extent that the interest rate swaps are not perfectly effective in offsetting the change in value of the interest payments being hedged, the ineffective portion of these contracts is recognized in earnings immediately. Ineffectiveness was immaterial in 2006 and 2005. The Company has entered into three interest rate swap agreements as detailed below to effectively convert a total of $120 million of variable-rate debt to fixed-rate debt. Notional Amount Effective Date Expiration Date Fixed Rate Paid Floating Rate Received $50 Million ........................... $20 Million ........................... $50 Million ........................... 11/14/05 9/4/05 10/10/06 9/1/09 9/4/13 9/1/09 5.590% 5.935% 5.680% 1 month LIBOR 6 month LIBOR 1 month LIBOR The interest rate swap agreements are the only derivative instruments, as defined by SFAS No. 133, held by the Company. During 2006, 2005, and 2004, the net reclassification from AOCL to interest expense was ($0.5) million, $2.2 million and $4.7 million, respectively, based on (receipts) payments received or made under the swap agreements. Based on current interest rates, the Company estimates that receipts under the interest rate swaps will be approximately $0.9 million in 2007. Receipts made under the interest rate swap agreements will be reclassified to interest expense as settlements occur. The fair value of the swap agreements including accrued interest was an asset of $2.3 million and a liability of $1.4 million at December 31, 2006, and 2005 respectively. In conjunction with the Company entering a $150 million term note in April 2006, the Company terminated the $30 million notional swap that was to expire in September of 2008. The Company received $255,000 for terminating this interest rate swap. 10. STOCK OPTIONS AND NON-VESTED STOCK The Company established the 2005 Award and Option Plan (the "Plan") which replaced the expiring 1995 Award and Option Plan for the purpose of attracting and retaining the Company's executive officers and other key employees. 1,500,000 shares were authorized for issuance under the Plan. The options vest ratably over four and five years, and must be exercised within ten years from the date of grant. The exercise price for qualified incentive stock options must be at least equal to the fair market value of the common shares at the date of grant. As of December 31, 2006, options for 91,225 shares were outstanding under the Plans and options for 1,429,945 shares of common stock were available for future issuance. The Company also established the 1995 Outside Directors' Stock Option Plan (the Non-employee Plan) for the purpose of attracting and retaining the services of experienced and knowledgeable outside directors. The Non- employee Plan provides for the initial granting of options to purchase 3,500 shares of common stock and for the annual granting of options to purchase 2,000 shares of common stock to each eligible director. Such options vest over a one-year period for initial awards and immediately upon subsequent grants. In addition, effective in 2004 each outside director receives non-vested shares annually equal to 80% of the annual fees paid to them. During the 43 restriction period, the non-vested shares may not be sold, transferred, or otherwise encumbered. The holder of the non-vested shares has all rights of a holder of common shares, including the right to vote and receive dividends. During 2006, 1,664 non-vested shares were issued to outside directors. Such non-vested shares vest over a one-year period. The total shares reserved under the Non-employee Plan is 150,000. The exercise price for options granted under the Non-employee Plan is equal to the fair market value at the date of grant. As of December 31, 2006, options for 22,000 common shares and non-vested shares of 5,776 were outstanding under the Non-employee Plan and options for 18,724 shares of common stock were available for future issuance. A summary of the Company's stock option activity and related information for the years ended December 31 follows: 2006 2005 2004 Weighted average exercise price Options Weighted average exercise price Options Weighted average exercise price Options Outstanding at beginning of year: ................................ 142,900 $ 32.68 247,415 $ 27.00 443,665 $ 24.71 Granted ................................... Exercised ................................ Forfeited ................................. 14,000 (37,675) (6,000) 51.78 30.33 33.05 38,000 (129,015) (13,500) 45.26 25.11 36.39 38,000 (225,750) (8,500) 37.43 24.18 29.12 Outstanding at end of year...... 113,225 $ 35.77 142,900 $ 32.68 247,415 $ 27.00 Exercisable at end of year....... 74,225 $ 31.14 72,650 $ 27.26 91,940 $ 25.25 A summary of the Company's stock options outstanding at December 31, 2006 follows: Outstanding Exercisable Exercise Price Range $19.06 – 29.99 ........................................ $30.00 – 39.99 ........................................ $40.00 – 48.11 ........................................ Total........................................................ Options 38,625 25,600 49,000 113,225 Weighted average exercise price $ 21.66 $ 34.55 $ 47.53 $ 35.77 Options 37,125 15,100 22,000 74,225 Weighted average exercise price $ 21.43 $ 32.22 $ 46.77 $ 31.14 Intrinsic value of outstanding stock options at December 31, 2006 ........................................ Intrinsic value of exercisable stock options at December 31, 2006......................................... Intrinsic value of stock options exercised in 2006................................................................... $ 2,435,000 $ 1,940,000 $ 824,536 The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company's common stock at December 31, 2006, or the price on the date of exercise for those exercised during the year. As of December 31, 2006, there was approximately $0.2 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under our stock award plans. That cost is expected to be recognized over a weighted-average period of approximately two years. The weighted average remaining contractual life of all options is 6.8 years, and for exercisable options is 5.9 years. As disclosed further in Note 13, warrants to purchase 357,500 common shares of the Company at a price of $32.60 per share were exercised in 2005. Non-vested Stock The Company has also issued 194,119 shares of non-vested stock to employees which vest over two to nine 44 year periods. During the restriction period, the non-vested shares may not be sold, transferred, or otherwise encumbered. The holder of the non-vested shares has all rights of a holder of common shares, including the right to vote and receive dividends. At December 31, 2006, the fair market value of the non-vested stock on the date of grant ranged from $20.38 to $55.21. During 2006, 40,055 shares of non-vested stock were issued to employees with a fair value of $2.2 million. The Company charges additional paid-in capital for the market value of shares as they are issued. The unearned portion is then amortized and charged to expense over the vesting period. The Company uses the average of the high and low price of its common stock on the date the award is granted as the fair value for non-vested stock awards. A summary of the status of unvested shares of stock issued to employees and directors as of and during the years ended December 31 follows: 2006 2005 2004 Non- vested Shares Weighted average grant date fair value Non- vested Shares Weighted average grant date fair value Non- vested Shares Weighted average grant date fair value Unvested at beginning of year: ................................ 71,411 $ 30.39 71,904 $ 27.83 74,094 $ 25.40 Granted ................................... Vested..................................... Forfeited ................................. 41,719 (16,677) - 53.86 32.29 - 13,778 (14,271) - 42.24 28.94 - 12,058 (14,248) - 38.40 24.11 - Unvested at end of year .......... 96,453 $ 40.21 71,411 $ 30.39 71,904 $ 27.83 Compensation expense of $0.9 million, $0.5 million and $0.4 million was recognized for the vested portion of non-vested stock grants in 2006, 2005 and 2004, respectively. The fair value of non-vested stock that vested during 2006, 2005 and 2004 was $0.3 million, $0.4 million and $0.5 million, respectively. The total compensation cost related to non-vested stock was $3.2 million at December 31, 2006, and the remaining weighted-average period over which this expense will be recognized was 4.6 years. 11. RETIREMENT PLAN Employees of the Company qualifying under certain age and service requirements are eligible to be a participant in a 401(k) Plan. The Company contributes to the Plan at the rate of 50% of the first 4% of gross wages that the employee contributes. Total expense to the Company was approximately $166,000, $149,000, and $125,000 for the years ended December 31, 2006, 2005 and 2004, respectively. 12. INVESTMENT IN JOINT VENTURES The Company has a 49% ownership interest in Iskalo Office Holdings, LLC at December 31, 2006. During 2004, Iskalo Office Holdings obtained long-term financing and used the proceeds to repay the note payable to the Company of $1.1 million. The Company’s remaining investment includes a capital contribution of $49. For the years ended December 31, 2006 and 2005, the Company's share of Iskalo Office Holdings, LLC's income (loss) was $80,000 and ($8,000), respectively. The Company paid rent to Iskalo Office Holdings, LLC of $583,000, $445,000, and $426,000 in 2006, 2005, and 2004 respectively. Future minimum lease payments under the lease are $0.6 million per year through 2009. Also, the Company purchased land from Iskalo Office Holdings, LLC for $0.4 million and $1.2 million in 2004 and 2003, respectively. A summary of the unconsolidated joint ventures' financial statements as of and for the year ended December 31, 2006 is as follows: 45 (dollars in thousands) Balance Sheet Data: Investment in office building........................................................ Other assets................................................................................... Total Assets ................................................................................ Mortgage payable ......................................................................... Other liabilities ............................................................................. Total Liabilities .......................................................................... Unaffiliated partners' deficiency................................................... Company deficiency ..................................................................... Total Liabilities and Partners' Deficiency................................... Income Statement Data: Total revenues .............................................................................. Total expenses .............................................................................. Net income.................................................................................. Iskalo Office Holdings, LLC $ 5,842 808 $ 6,650 ====== $ 7,410 253 7,663 (592) (421) $ 6,650 ====== $ 1,351 1,189 $ 162 ====== The Company does not guarantee the debt of Iskalo Office Holdings, LLC. Through March 31, 2006, investment in joint ventures also included an ownership interest in Locke Sovran I, LLC, which owns 11 self-storage facilities throughout the United States. In December 2000, the Company contributed seven self-storage properties to Locke Sovran I, LLC with a fair market value of $19.8 million, in exchange for a $15 million one year note receivable bearing interest at LIBOR plus 1.75% which was repaid in 2001, and a 45% interest in Locke Sovran I, LLC. In April 2006, the Company made an additional investment of $2.8 million in Locke Sovran I, LLC that increased the Company's ownership to over 70%. As a result of this transaction the Company has consolidated the results of operations of Locke Sovran I, LLC in its financial statements since April 1, 2006, the date that it acquired its controlling interest. For the years ended December 31, 2005 and 2004, the Company's share of Locke Sovran I, LLC's income was $171,000 and $141,000, respectively, and the amortization of the deferred gain was $40,000, each of which are recorded as equity in income of joint ventures on the consolidated statements of operations for those years. The Company manages the storage facilities for Locke Sovran I, LLC and received fees of $332,000, and $322,000 for the years ended 2005, and 2004. 13. PREFERRED STOCK Series B On July 30, 1999, the Company issued 1,200,000 shares of 9.85% Series B Cumulative Redeemable Preferred Stock. The offering price was $25 per share resulting in net proceeds of $28.6 million after expenses. On August 2, 2004, the Company redeemed all 1,200,000 outstanding shares of its 9.85% Series B Cumulative Preferred Stock for $30 million plus accrued but unpaid dividends on those shares. The excess of the redemption amount over the carrying value of the Series B Preferred Stock was $1.4 million and has been shown as a reduction in 2004 net income available to common shareholders in accordance with EITF Abstract Topic D-42, "The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock." Series C On July 3, 2002, the Company entered into an agreement providing for the issuance of 2,800,000 shares of 8.375% Series C Convertible Cumulative Preferred Stock ("Series C Preferred") in a privately negotiated transaction. The Company immediately issued 1,600,000 shares of the Series C Preferred and issued the remaining 1,200,000 shares on November 27, 2002. The offering price was $25.00 per share resulting in net proceeds for the Series C Preferred and related common stock warrants of $67.9 million after expenses. During 2005, the Company 46 issued 920,244 shares of its common stock in connection with a written notice from one of the holders of the Series C Preferred Stock requesting the conversion of 1,200,000 shares of Series C Preferred Stock into common stock. In 2004, the Company issued 306,748 shares of its common stock in connection the conversion of 400,000 shares of Series C Preferred Stock into common stock. All converted shares of Series C Preferred Stock were retired leaving 1,200,000 preferred shares outstanding at December 31, 2006. The Series C Preferred has a fixed annual dividend rate equal to the greater of 8.375% or the actual dividend paid on the number of the Company's common shares into which the Series C Preferred is convertible. The Series C Preferred is convertible at a ratio of .76687 common shares for each Series C Preferred share and can be redeemed at the Company's option on or after November 30, 2007 at $25.00 per share ($30,000,000 aggregate at December 31, 2006) plus accrued and unpaid dividends. Dividends on the Series C Preferred are cumulative from the date of original issue and are payable quarterly in arrears on the last day of each March, June, September, and December at a rate of $2.09375 per annum per share. Holders of the Series C Preferred generally have no voting rights. However, if the Company does not pay dividends on the Series C Preferred shares for six or more quarterly periods (whether or not consecutive), the holders of the shares, voting as a class with the holders of any other class or series of stock with similar voting rights, will be entitled to vote for the election of two additional directors to serve on the Board of Directors until the Series C Preferred dividends are paid. In addition, the Company issued warrants to the Series C Preferred investors to purchase 379,166 common shares of the Company at a price of $32.60 per share that expire November 30, 2007. Using the Black-Scholes method, the warrants had a fair value at the issue date of $1.97 per common share covered by the warrants. During 2005 and 2004 respectively, warrants for 357,500 and 21,666 were exercised leaving none remaining at December 31, 2006. Also, an entity related to one of the investors received a placement certificate that entitles it to receive cash from the Company in the amount of 650,000 multiplied by the excess of the fair market value of the Company's common stock over $32.60 on the date the certificate is exercised. The placement certificate was exercised in 2004, resulting in a $5 million payment by the Company. 14. SUPPLEMENTARY QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of quarterly results of operations for the years ended December 31, 2006 and 2005 (dollars in thousands, except per share data). March 31 June 30 Sept. 30 Dec. 31 2006 Quarter Ended Operating revenue........................................ Net Income .................................................. Net income available to common shareholders............................................... Net Income Per Common Share Basic .......................................................... Diluted ....................................................... $ 36,657 $ 8,595 $ 40,296 $ 9,386 $ 44,784 $ 9,465 $ 44,558 $ 9,165 $ 7,967 $ 8,758 $ 8,837 $ 8,537 $ 0.45 $ 0.45 $ 0.50 $ 0.50 $ 0.49 $ 0.49 $ 0.46 $ 0.45 March 31 June 30 Sept. 30 Dec. 31 2005 Quarter Ended Operating revenue........................................ Net Income .................................................. Net income available to common shareholders............................................... Net Income Per Common Share Basic .......................................................... Diluted ....................................................... $ 32,149 $ 7,768 $ 34,007 $ 8,878 $ 36,003 $ 9,611 $ 36,147 $ 8,533 $ 6,512 $ 7,622 $ 8,628 $ 7,905 $ 0.41 $ 0.40 $ 0.47 $ 0.47 $ 0.52 $ 0.52 $ 0.46 $ 0.46 47 15. COMMITMENTS AND CONTINGENCIES The Company's current practice is to conduct environmental investigations in connection with property acquisitions. At this time, the Company is not aware of any environmental contamination of any of its facilities that individually or in the aggregate would be material to the Company's overall business, financial condition, or results of operations. At December 31, 2006, the Company was in negotiations to acquire ten stores for approximately $31 million. One of these stores was purchased in January of 2007 for $5.6 million. 48 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures Our management conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), under the supervision of and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective at December 31, 2006. There have not been changes in the Company's internal controls or in other factors that could significantly affect these controls during the quarter ended December 31, 2006. Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2006. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our system of internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Our management performed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 based upon criteria in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (''COSO''). Based on our assessment, management determined that our internal control over financial reporting was effective as of December 31, 2006 based on the criteria in Internal Control-Integrated Framework issued by COSO. Our management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which appears herein. /S/ Robert J. Attea Chief Executive Officer /S/ David L. Rogers Chief Financial Officer 49 Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting The Board of Directors and Shareholders of Sovran Self Storage, Inc. We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Sovran Self Storage, Inc. maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Sovran Self Storage, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management’s assessment that Sovran Self Storage, Inc. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Sovran Self Storage, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Sovran Self Storage, Inc. as of December 31, 2006 and 2005, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006 of Sovran Self Storage, Inc. and our report dated March 1, 2007 expressed an unqualified opinion thereon. Buffalo, New York March 1, 2007 /s/ Ernst & Young LLP 50 Item 10. Directors, Executive Officers and Corporate Governance Part III The information contained in the Proxy Statement for the Annual Meeting of Shareholders of the Company to be held on May 21, 2007, with respect to directors, executive officers, audit committee, and audit committee financial experts of the Company and Section 16(a) beneficial ownership reporting compliance, is incorporated herein by reference in response to this item. The Company has adopted a code of ethics that applies to all of its directors, officers, and employees. The Company has made the Code of Ethics available on its website at http://www.sovranss.com. Item 11. Executive Compensation The information required is incorporated by reference to "Executive Compensation" and "Compensation of Directors" in the Company's Proxy Statement for the Annual Meeting of Shareholders of the Company to be held on May 21, 2007. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required herein is incorporated by reference to "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement for the Annual Meeting of Shareholders of the Company to be held on May 21, 2007. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required herein is incorporated by reference to "Certain Relationships and Related Transactions” and “Election of Directors—Independence of Directors” in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 21, 2007. Item 14. Principal Accountant Fees and Services The information required herein is incorporated by reference to "Appointment of Independent Accountants" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 21, 2007. Item 15. Exhibits, Financial Statement Schedules (a) Documents filed as part of this Annual Report on Form 10-K: Part IV 1. The following consolidated financial statements of Sovran Self Storage, Inc. are included in Item 8. (i) (ii) (iii) Consolidated Balance Sheets as of December 31, 2006 and 2005. Consolidated Statements of Operations for Years Ended December 31, 2006, 2005, and 2004. Consolidated Statements of Shareholders' Equity for Years Ended December 31, 2006, 2005, and 2004. Consolidated Statements of Cash Flows for Years Ended December 31, 2006, 2005, and 2004. Notes to Consolidated Financial Statements. (iv) (v) 2. The following financial statement Schedule as of the period ended December 31, 2006 is included in this Annual Report on Form 10-K. Schedule III Real Estate and Accumulated Depreciation. 51 All other Consolidated financial schedules are omitted because they are inapplicable, not required, or the information is included elsewhere in the consolidated financial statements or the notes thereto. 3. Exhibits The exhibits required to be filed as part of this Annual Report on Form 10-K have been included as follows: 3.1 3.2 3.3 3.4 4.1 4.2 4.3 4.4 4.5 4.6 4.7 10.1+ 10.2+ 10.3+ 10.4+ Amended and Restated Articles of Incorporation of the Registrant. (incorporated by reference to Exhibit 3.1 (a) to the Registrant’s Registration Statement on Form S-11 (File No. 33-91422) filed June 19, 1995). Articles Supplementary to the Amended and Restated Articles of Incorporation of the Registrant classifying and designating the series A Junior Participating Cumulative Preferred Stock. (incorporated by reference to Exhibit 3.1 to the Registrant's Form 8-A filed December 3, 1996.) Articles Supplementary to the Amended and Restated Articles of Incorporation of the Registrant classifying and designating the 8.375% Series C Convertible Cumulative Preferred Stock. (incorporated by reference to Exhibit 4.1 to Registrant's Current Report on Form 8-K filed July 12, 2002). Bylaws, as amended, of the Registrant (incorporated by reference to Exhibit 3.2 to Registrant’s Current Report on Form 8-K filed April 7, 2004). Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Registrant’s Registration Statement on Form S-11 (File No. 33-91422) filed June 19, 1995). Form of Series C Convertible Cumulative Preferred Stock Certificate (incorporated by reference to Exhibit 4.2 to Registrant's Current Report on Form 8-K filed July 12, 2002). Shareholder Rights Plan. (incorporated by reference to Exhibit 4.1 to the Registrant's Form 8-A filed December 3, 1996.) Registration Rights Agreement (incorporated by reference to Exhibit 10.3 to Registrant’s Current Report on Form 8-K filed July 12, 2002). Amendment No. 1 to Shareholders Rights Agreement (incorporated by reference to Exhibit 4.5 to Registrant’s Current Report on Form 8-K filed July 12, 2002). Amendment to Shareholders Rights Agreement (incorporated by reference to Exhibit 4.4 to Registrant’s Current Report on Form 8-K filed May 4, 2006). Amendment to Shareholders Rights Agreement (incorporated by reference to Exhibit 4.5 to Registrant’s Current Report on Form 8-K filed September 1, 2006). Sovran Self Storage, Inc. 2005 Award and Option Plan, as amended (incorporated by reference to the Registrant’s Proxy Statement filed April 11, 2005). Sovran Self Storage, Inc. 1995 Outside Directors’ Stock Option Plan, as amended (incorporated by reference to the Registrant’s Proxy Statement filed April 8, 2004) Employment Agreement between the Registrant and Robert J. Attea (incorporated by reference to Exhibit 10.19 as filed in the Company’s Annual Report on Form 10-K/A, filed June 27, 2002). Employment Agreement between the Registrant and Kenneth F. Myszka (incorporated by reference to Exhibit 10.20 as filed in the Company’s Annual Report on Form 10-K/A, filed June 27, 2002). 10.5+ Employment Agreement between the Registrant and David L. Rogers (incorporated by reference to 52 Exhibit 10.21 as filed in the Company’s Annual Report on Form 10-K/A, filed June 27, 2002). 10.6*+ Standard form of Employment Agreement to which Andrew J. Gregoire, Edward F. Killeen, and Paul T. Powell employees are parties 10.7+ 10.8+ 10.9+ Form of restricted stock grant pursuant to Sovran Self Storage, Inc. 2005 Award and Option Plan (incorporated by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q/A filed November 24, 2006). Form of stock option grant pursuant to Sovran Self Storage, Inc. 2005 Award and Option Plan (incorporated by reference to Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q/A filed November 24, 2006). Form of restricted stock grant pursuant to Sovran Self Storage, Inc. 1995 Award and Option Plan (incorporated by reference to Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q/A filed November 24, 2006). 10.10+ Form of stock option grant pursuant to Sovran Self Storage, Inc. 1995 Award and Option Plan (incorporated by reference to Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q/A filed November 24, 2006). 10.11+ Deferred Compensation Plan for Directors (incorporated by reference to Schedule 14A Proxy Statement filed April 8, 2004). 10.12 10.13 10.14 10.15 10.16 10.17 10.18 10.19 Amended Indemnification Agreements with members of the Board of Directors and Executive Officers (incorporated by reference to Exhibit 10.35 and 10.36 to Registrant’s Current Report on Form 8-K filed July 20, 2006). Securities Purchase Agreement among Registrant, Sovran Acquisition Limited Partnership, The Prudential Insurance Company of America, Teachers Insurance and Annuity Association of America and other institutional investors (incorporated by reference to Exhibit 10.1 as filed in the Company’s Current Report on Form 8-K, filed July 12, 2002). Amendments to Agreement of Limited Partnership of Sovran Acquisition Limited Partnership (incorporated by reference to Exhibit 10.2 filed in the Company’s Current Report on Form 8-K, filed July 12, 2002). Promissory Note between Locke Sovran II, LLC and PNC Bank, National Association (incorporated by reference to Exhibit 10.22 to Registrant’s Form 10-K filed March 27, 2003). Second Amended and Restated Revolving Credit and Term Loan Agreement among Registrant, the Partnership, Fleet National Bank and other lenders named therein (incorporated by reference to Exhibit 10.25 filed in the Company’s Current Report on Form 8-K, filed December 21, 2004). Note Purchase Agreement among Registrant, the Partnership and the purchaser named therein (incorporated by reference to Exhibit 10.24 filed in the Company’s Quarterly Report on Form 10-Q, filed November 12, 2003). Amendment to Note Purchase Agreement dated September 3, 2003 (incorporated by reference to Exhibit 10.26 of Registrant’s Current Report on Form 8-K filed May 20, 2005). Cornerstone Acquisition Agreement and Amendments to Certain Loan Agreements (incorporated by reference to Exhibits 10.30, 10.31, 10.32, 10.33 and 10.34 of Registrant’s Current Report on Form 8-K filed June 26, 2006). 10.20 $150 million, 6.38% Senior Guaranteed Notes, Series C due April 26, 2016, and Amendments to Second 53 Amendment Restated Revolving Credit and Term Loan Agreement dated December 16, 2004 and Amendment to Note Purchase Agreement dated September 4, 2003 (incorporated by reference to Exhibits 10.27, 10.28, and 10.29 of the Registrant’s Current Report on Form 8-K filed May 1, 2006). 10.21* Promissory Note between Locke Sovran I, LLC and GMAC Commercial Mortgage Corporation. 12.1* Statement Re: Computation of Earnings to Fixed Charges. 21* 23* Subsidiary of the Company. Consent of Independent Registered Public Accounting Firm. 24.1* Powers of Attorney (included on signature pages). 31.1* 31.2* 32* * + Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith. Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K. 54 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES March 1, 2007 SOVRAN SELF STORAGE, INC. By: /s/ David L. Rogers David L. Rogers, Chief Financial Officer, Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Robert J. Attea Robert J. Attea Chairman of the Board of Directors Chief Executive Officer and Director (Principal Executive Officer) /s/ Kenneth F. Myszka Kenneth F. Myszka President, Chief Operating Officer and Director /s/ David L. Rogers David L. Rogers Chief Financial Officer (Principal Financial and Accounting Officer) /s/ John Burns John Burns /s/ Michael A. Elia Michael A. Elia /s/ Anthony P. Gammie Anthony P. Gammie /s/ Charles E. Lannon Charles E. Lannon Director Director Director Director March 1, 2007 March 1, 2007 March 1, 2007 March 1, 2007 March 1, 2007 March 1, 2007 March 1, 2007 55 Sovran Self Storage, Inc. Schedule III Combined Real Estate and Accumulated Depreciation (in thousands) December 31, 2006 Description Boston-Metro I Boston-Metro II E. Providence Charleston l Lakeland I Charlotte Tallahassee I Youngstown Cleveland-Metro II Tallahassee II Pt. St. Lucie Deltona Middletown Buffalo I Rochester I Salisbury New Bedford Fayetteville Jacksonville I Columbia I Rochester II Savannah l Greensboro Raleigh I New Haven Atlanta-Metro I Atlanta-Metro II Buffalo II Raleigh II Columbia II Columbia III Columbia IV Atlanta-Metro III Orlando I Initial Cost to Company Cost Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period Encum brance ST Land Building, Equipment and Improvements Building, Equipment and Improvements Building, Equipment and Improvements Land Total Accum. Deprec. Date of Construction Date Acquired Life on which depreciation in latest income statement is computed MA MA RI SC FL NC FL OH OH FL FL FL NY NY NY MD MA NC FL SC NY GA NC NC CT GA GA NY NC SC SC SC GA FL $363 $1,679 $356 $363 $2,035 $2,398 $586 680 345 416 397 308 770 239 701 204 395 483 224 423 395 164 367 853 152 268 230 463 444 649 387 844 302 315 321 361 189 488 430 513 1,616 1,268 1,516 1,424 1,102 2,734 1,110 1,659 734 1,501 1,752 808 1,531 1,404 760 1,325 3,057 728 1,248 847 1,684 1,613 2,329 1,402 2,021 1,103 745 1,150 1,331 719 1,188 1,579 1,930 1,935 1,641 1,951 1,707 1,552 4,523 2,305 2,328 1,593 1,917 3,540 1,544 3,041 1,759 1,123 1,688 3,555 1,047 1,655 1,157 3,085 2,060 3,037 2,046 2,642 1,406 1,820 1,574 1,779 1,448 1,546 1,900 2,332 2,615 1,986 2,367 2,104 2,299 568 463 584 515 453 5,293 1,220 2,544 3,029 1,791 2,312 4,023 1,768 3,538 2,154 1,287 2,055 4,408 1,734 1,923 1,391 3,901 2,504 3,686 2,433 3,486 1,709 2,135 1,895 2,153 1,637 2,034 2,502 2,845 480 619 391 627 707 438 827 491 313 540 993 349 511 338 829 654 859 525 741 447 394 443 526 386 485 611 727 319 373 435 283 889 1,789 1,195 669 853 416 1,788 736 1,584 355 363 363 498 854 407 314 1,754 447 708 644 621 304 1,075 424 461 729 358 493 402 680 345 416 397 747 770 239 701 198 395 483 224 497 395 164 367 853 687 268 234 816 444 649 387 844 303 315 321 374 189 488 602 513 56 1980 1986 1984 1985 1985 1986 1973 1980 1987 1975 1985 1984 1988 1981 1981 1979 1982 1980 1985 1985 1980 1981 1986 1985 1985 1988 1988 1984 1985 1987 1989 1986 1988 1988 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years  Initial Cost to Company Cost Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period Building, Equipment and Improvements Total Accum. Deprec. Date of Construction Date Acquired Life on which depreciation in latest income statement is computed Description Encum brance ST Sharon Ft. Lauderdale West Palm l Atlanta-Metro IV Atlanta-Metro V Atlanta-Metro VI Atlanta-Metro VII Atlanta-Metro VIII Baltimore I Baltimore II Augusta I Macon I Melbourne I Newport News Pensacola I Augusta II Hartford-Metro I Atlanta-Metro IX Alexandria Pensacola II Melbourne II Hartford-Metro II Atlanta-Metro X Norfolk I Norfolk II Birmingham I Birmingham II Montgomery l Jacksonville II Pensacola III Pensacola IV Pensacola V Tampa I Tampa II Tampa III Jackson I Jackson II Richmond Orlando II PA FL FL GA GA GA GA GA MD MD GA GA FL VA FL GA CT GA VA FL FL CT GA VA VA AL AL AL FL FL FL FL FL FL FL MS MS VA FL Land 194 1,503 398 423 483 308 170 413 154 479 357 231 883 316 632 315 715 304 1,375 244 834 234 256 313 278 307 730 863 326 369 244 226 1,088 526 672 343 209 443 1,161 Building, Equipment and Improvements Building, Equipment and Improvements 912 3,619 1,035 1,015 1,166 1,116 786 999 555 1,742 1,296 1,081 2,104 1,471 2,962 1,139 1,695 1,118 3,220 901 2,066 861 1,244 1,462 1,004 1,415 1,725 2,041 1,515 1,358 1,128 1,046 2,597 1,958 2,439 1,580 964 1,602 2,755 321 577 225 346 256 443 444 571 1,287 1,074 654 355 1,494 684 865 504 704 2,318 993 361 1,023 1,665 1,627 742 274 451 477 535 373 1,553 638 518 813 622 481 717 529 601 810 Land 194 1,503 398 424 483 308 174 413 306 479 357 231 883 316 651 315 715 619 1,376 244 1,591 612 256 313 278 384 730 863 326 369 719 226 1,088 526 672 796 209 443 1,162 57 1,233 4,196 1,260 1,360 1,422 1,559 1,226 1,570 1,690 2,816 1,950 1,436 3,598 2,155 3,808 1,643 2,399 3,121 4,212 1,262 2,332 2,148 2,871 2,204 1,278 1,789 2,202 2,576 1,888 2,911 1,291 1,564 3,410 2,580 2,920 1,844 1,493 2,203 3,564 1,427 371 5,699 1,295 1,658 1,784 1,905 1,867 1,400 1,983 1,996 3,295 2,307 1,667 4,481 2,471 426 422 447 505 375 498 309 706 531 426 953 624 4,459 1,167 1,958 3,114 3,740 466 635 536 5,588 1,187 1,506 3,923 2,760 3,127 2,517 1,556 2,173 2,932 3,439 2,214 3,280 2,010 1,790 437 787 437 571 617 417 549 681 768 547 701 422 463 4,498 1,028 3,106 3,592 2,640 1,702 2,646 800 873 575 474 639 4,726 1,044 1975 1985 1985 1989 1988 1986 1981 1975 1984 1988 1988 1989 1986 1988 1983 1987 1988 1988 1984 1986 1986 1992 1988 1984 1989 1990 1990 1982 1987 1986 1990 1990 1989 1985 1988 1990 1990 1987 1986 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 6/26/1995 5 to 40 years 8/25/1995 5 to 40 years 9/29/1995 5 to 40 years  Initial Cost to Company Cost Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period Description Encum brance ST Land Building, Equipment and Improvements Building, Equipment and Improvements Building, Equipment and Improvements Land Total Accum. Deprec. Date of Construction Date Acquired Life on which depreciation in latest income statement is computed Birmingham III Macon II Harrisburg I AL GA PA Harrisburg II PA (1) Syracuse I Ft. Myers Ft. Myers II Newport News II Montgomery II Charleston II Tampa IV Arlington I Arlington II Ft. Worth San Antonio I San Antonio II Syracuse II Montgomery III West Palm II Ft. Myers III Pittsburgh Lakeland II Springfield Ft. Myers IV Cincinnati Dayton Baltimore III Jacksonville III Jacksonville IV Pittsburgh II Jacksonville V Charlotte II Charlotte III Orlando III Rochester III Youngstown ll Cleveland lll Cleveland lV Cleveland V NY FL FL VA AL SC FL TX TX TX TX TX NY AL FL FL PA FL MA FL OH (2) OH (2) MD FL FL PA FL NC NC FL NY OH OH OH OH (1) 424 431 360 627 470 205 412 442 353 237 766 442 408 328 436 289 481 279 345 229 545 359 251 344 557 667 777 568 436 627 535 487 315 314 704 600 751 725 637 1,506 1,567 1,641 2,224 1,712 912 1,703 1,592 1,299 858 1,800 1,767 1,662 1,324 1,759 1,161 1,559 1,014 1,262 884 1,940 1,287 917 1,254 1,988 2,379 2,770 2,028 1,635 2,257 2,033 1,754 1,131 1,113 2,496 2,142 2,676 2,586 2,918 2,112 2,180 2,143 2,974 2,855 1,144 2,095 1,826 1,560 1,369 2,398 2,014 2,189 1,574 2,850 1,517 3,475 1,849 1,509 1,169 2,321 2,274 2,944 1,507 2,388 2,521 3,010 2,907 2,062 3,186 2,276 2,063 1,404 1,930 3,542 2,470 4,141 3,660 4,348 2,536 2,611 2,503 3,666 3,327 1,350 2,508 2,268 1,913 1,601 3,164 2,456 2,597 1,902 3,286 1,806 4,146 2,282 1,854 1,398 2,866 2,633 3,241 1,817 3,040 3,167 3,787 3,475 2,498 3,817 2,814 2,550 1,719 2,244 4,249 3,163 4,892 4,385 696 592 602 774 650 434 763 520 494 394 623 560 649 445 689 451 691 428 438 310 610 603 607 428 56 66 797 769 601 880 701 501 359 495 733 614 906 867 5,049 1,106 1970 1/16/1996 5 to 40 years 1989/94 12/1/1995 5 to 40 years 1983 12/29/1995 5 to 40 years 1985 12/29/1995 5 to 40 years 1987 12/27/1995 5 to 40 years 1988 12/28/1995 5 to 40 years 1991/94 12/28/1995 5 to 40 years 1988/93 1/5/1996 5 to 40 years 1984 1985 1985 1987 1986 1986 1986 1986 1983 1988 1986 1986 1990 1988 1986 1987 1988 1988 1990 1987 1985 1983 1/23/1996 5 to 40 years 3/1/1996 5 to 40 years 3/28/1996 5 to 40 years 3/29/1996 5 to 40 years 3/29/1996 5 to 40 years 3/29/1996 5 to 40 years 3/29/1996 5 to 40 years 3/29/1996 5 to 40 years 6/5/1996 5 to 40 years 5/21/1996 5 to 40 years 5/29/1996 5 to 40 years 5/29/1996 5 to 40 years 6/19/1996 5 to 40 years 6/26/1996 5 to 40 years 6/28/1996 5 to 40 years 6/28/1996 5 to 40 years 7/23/1996 5 to 40 years 7/23/1996 5 to 40 years 7/26/1996 5 to 40 years 8/23/1996 5 to 40 years 8/26/1996 5 to 40 years 8/28/1996 5 to 40 years 1987/92 8/30/1996 5 to 40 years 1995 1995 9/16/1996 5 to 40 years 9/16/1996 5 to 40 years 1975 10/30/1996 5 to 40 years 1990 12/20/1996 5 to 40 years 1988 1986 1978 1979 1/10/1997 5 to 40 years 1/10/1997 5 to 40 years 1/10/1997 5 to 40 years 1/10/1997 5 to 40 years 606 613 502 815 1,145 233 393 234 261 506 598 247 527 250 1,091 356 2,106 989 247 285 381 987 2,073 219 495 121 240 879 427 933 246 309 273 817 1,049 421 1,465 1,074 1,494 424 431 360 692 472 206 413 442 353 232 766 442 408 328 436 289 671 433 345 229 545 359 297 310 652 646 777 568 436 631 538 487 315 314 707 693 751 725 701 58  Initial Cost to Company Cost Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period Description Encum brance ST Land Building, Equipment and Improvements Building, Equipment and Improvements Building, Equipment and Improvements Land Total Accum. Deprec. Date of Construction Date Acquired Life on which depreciation in latest income statement is computed Cleveland Vl Cleveland Vll Cleveland Vlll Cleveland lX OH OH OH OH Grand Rapids l MI (2) Grand Rapids ll MI Kalamazoo Lansing Holland MI (2) MI (2) MI San Antonio lll TX (1) Universal San Antonio lV Houston-Eastex Houston-Nederland Houston-College TX TX TX TX TX Lynchburg-Lakeside VA Lynchburg-Timberlake VA Lynchburg-Amherst Christiansburg Chesapeake Danville Orlando-W 25th St Delray l-Mini Savannah ll Delray ll-Safeway Cleveland X-Avon Dallas-Skillman Dallas-Centennial VA VA VA VA FL FL GA FL OH TX TX Dallas-Samuell TX (1) Dallas-Hargrove Houston-Antoine Atlanta-Alpharetta TX TX GA Atlanta-Marietta GA (1) Atlanta-Doraville GreensboroHilltop GreensboroStgCch GA NC NC Baton Rouge-Airline LA (1) Baton Rouge-Airline2 LA Harrisburg-Peiffers PA 495 761 418 606 455 219 516 327 451 474 346 432 634 566 293 335 328 155 245 260 326 289 491 296 921 301 960 965 570 370 515 1,033 769 735 268 89 396 282 635 1,781 2,714 1,921 2,164 1,631 790 1,845 1,332 1,830 1,686 1,236 1,560 2,565 2,279 1,357 1,342 1,315 710 1,120 1,043 1,488 1,160 1,756 1,196 3,282 1,214 3,847 3,864 2,285 1,486 2,074 3,753 2,788 3,429 1,097 376 1,831 1,303 2,550 2,453 3,617 3,296 2,682 2,185 1,574 2,424 2,432 3,086 2,008 1,437 3,122 3,656 2,498 1,609 2,351 2,006 980 1,515 2,075 1,639 1,520 2,298 1,440 3,626 2,377 4,870 4,973 2,924 1,857 2,501 4,134 3,146 3,657 1,297 1,652 2,321 1,494 2,930 2,948 4,378 3,714 3,288 2,776 1,793 3,081 2,945 3,537 2,512 1,783 3,554 4,290 3,064 1,902 2,686 2,334 1,132 1,760 2,335 1,965 2,136 2,789 1,736 4,547 2,681 597 920 794 657 56 376 62 58 808 475 378 625 807 617 408 500 502 266 332 404 391 365 623 365 938 463 5,830 1,251 5,916 1,233 3,535 2,227 3,016 761 541 653 5,167 1,066 3,971 4,392 1,565 1,741 2,742 1,776 3,567 757 888 312 288 549 389 633 1979 1977 1970 1982 1976 1983 1978 1987 1978 1981 1985 1995 1/10/1997 5 to 40 years 1/10/1997 5 to 40 years 1/10/1997 5 to 40 years 1/10/1997 5 to 40 years 1/17/1997 5 to 40 years 1/17/1997 5 to 40 years 1/17/1997 5 to 40 years 1/17/1997 5 to 40 years 1/17/1997 5 to 40 years 1/30/1997 5 to 40 years 1/30/1997 5 to 40 years 1/30/1997 5 to 40 years 1993/95 3/26/1997 5 to 40 years 1995 1995 1982 1985 1987 3/26/1997 5 to 40 years 3/26/1997 5 to 40 years 3/31/1997 5 to 40 years 3/31/1997 5 to 40 years 3/31/1997 5 to 40 years 1985/90 3/31/1997 5 to 40 years 1988/95 3/31/1997 5 to 40 years 1988 1984 1969 1988 1980 1989 1975 1977 1975 1975 1984 1994 1996 1995 1995 1997 1982 3/31/1997 5 to 40 years 3/31/1997 5 to 40 years 4/11/1997 5 to 40 years 5/8/1997 5 to 40 years 5/21/1997 5 to 40 years 6/4/1997 5 to 40 years 6/30/1997 5 to 40 years 6/30/1997 5 to 40 years 6/30/1997 5 to 40 years 6/30/1997 5 to 40 years 6/30/1997 5 to 40 years 7/24/1997 5 to 40 years 7/24/1997 5 to 40 years 8/21/1997 5 to 40 years 9/25/1997 5 to 40 years 9/25/1997 5 to 40 years 10/9/1997 5 to 40 years 1985 11/21/1997 5 to 40 years 1984 12/3/1997 5 to 40 years 672 903 1,375 518 690 784 720 1,286 1,256 352 201 1,562 1,091 219 252 1,009 691 267 395 1,032 151 687 542 244 344 1,166 1,023 1,087 680 371 427 381 414 228 200 1,276 515 191 382 495 761 418 606 591 219 657 513 451 504 346 432 634 566 293 335 328 152 245 260 326 616 491 296 921 304 960 943 611 370 515 1,033 825 735 268 89 421 282 637 59  Initial Cost to Company Cost Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period Description Encum brance ST Land Chesapeake-Military Chesapeake-Volvo VA VA Virginia Beach-Shell VA Virginia Beach-Central VA 542 620 540 864 Norfolk-Naval Base VA 1,243 Tampa-E.Hillsborough FL Northbridge MA (2) Harriman NY Greensboro-High Point NC Lynchburg-Timberlake VA Titusville Salem FL (2) MA Chattanooga-Lee Hwy TN Chattanooga-Hwy 58 TN Ft. Oglethorpe Birmingham-Walt East Greenwich GA AL RI Durham-Hillsborough NC Durham-Cornwallis Salem-Policy Warren-Elm NC NH OH (1) Warren-Youngstown OH Waterford-Highland Indian Harbor Beach Jackson 3 - I55 Katy-N.Fry MI FL MS TX Hollywood-Sheridan FL Pompano Beach-Atlantic FL Pompano Beach-Sample FL Boca Raton-18th St Vero Beach Humble FL FL TX Houston-Old Katy TX (1) Webster Carrollton Hollywood-N.21st San Marcos Austin-McNeil Austin-FM TX TX FL TX TX TX 709 441 843 397 488 492 733 384 296 349 544 702 775 940 742 522 512 1,487 662 744 419 1,208 944 903 1,503 489 447 659 635 548 840 324 492 484 Building, Equipment and Improvements Building, Equipment and Improvements 2,210 2,532 2,211 3,994 5,019 3,235 1,788 3,394 1,834 1,746 1,990 2,941 1,371 1,198 1,250 1,942 2,821 3,103 3,763 2,977 1,864 1,829 5,306 2,654 3,021 1,524 4,854 3,803 3,643 6,059 1,813 1,790 2,680 2,302 1,988 3,373 1,493 1,995 1,951 196 818 186 652 632 693 743 344 388 398 543 707 482 995 431 733 842 562 549 403 977 1,497 1,059 279 103 854 254 234 335 635 81 916 306 108 267 274 586 227 382 Building, Equipment and Improvements 2,406 3,350 2,397 4,646 5,651 3,928 2,315 3,738 2,222 2,144 2,373 3,648 1,853 2,075 1,681 2,675 3,663 3,665 4,312 3,380 2,794 3,163 6,365 2,933 3,124 2,378 5,108 4,037 3,978 6,694 1,894 2,413 2,947 2,410 2,255 3,647 2,079 2,204 2,336 Land 542 620 540 864 1,243 709 657 843 397 488 652 733 384 414 349 544 702 775 940 742 569 675 1,487 662 744 419 1,208 944 903 1,503 489 740 698 635 548 840 324 510 481 60 Life on which depreciation in latest income statement is computed Accum. Deprec. Date of Construction Date Acquired 584 727 583 1996 1995 1991 2/5/1998 5 to 40 years 2/5/1998 5 to 40 years 2/5/1998 5 to 40 years Total 2,948 3,970 2,937 5,510 1,067 1993/95 2/5/1998 5 to 40 years 6,894 1,288 4,637 2,972 4,581 2,619 2,632 3,025 4,381 2,237 2,489 2,030 3,219 4,365 4,440 5,252 4,122 3,363 3,838 987 51 889 517 465 53 874 430 423 387 670 783 810 939 687 537 464 7,852 1,395 3,595 3,868 2,797 676 710 434 6,316 1,141 4,981 4,881 920 884 8,197 1,476 2,383 3,153 3,645 3,045 2,803 4,487 2,403 2,714 2,817 451 529 586 531 484 832 444 528 504 1975 1985 1988 2/5/1998 5 to 40 years 2/4/1998 5 to 40 years 2/9/1998 5 to 40 years 1989/95 2/4/1998 5 to 40 years 1993 2/10/1998 5 to 40 years 1990/96 2/18/1998 5 to 40 years 1986/90 2/25/1998 5 to 40 years 1979 1987 1985 1989 1984 3/3/1998 5 to 40 years 3/27/1998 5 to 40 years 3/27/1998 5 to 40 years 3/27/1998 5 to 40 years 3/27/1998 5 to 40 years 1984/88 3/26/1998 5 to 40 years 1988/91 4/9/1998 5 to 40 years 1990/96 4/9/1998 5 to 40 years 1980 1986 1986 1978 1985 1995 1994 1988 1985 1988 1991 1997 1986 1996 1997 1997 1987 1994 1994 1996 4/7/1998 5 to 40 years 4/22/1998 5 to 40 years 4/22/1998 5 to 40 years 4/28/1998 5 to 40 years 6/2/1998 5 to 40 years 5/13/1998 5 to 40 years 5/20/1998 5 to 40 years 7/1/1998 5 to 40 years 7/1/1998 5 to 40 years 7/1/1998 5 to 40 years 7/1/1998 5 to 40 years 6/12/1998 5 to 40 years 6/16/1998 5 to 40 years 6/19/1998 5 to 40 years 6/19/1998 5 to 40 years 6/19/1998 5 to 40 years 8/3/1998 5 to 40 years 6/30/1998 5 to 40 years 6/30/1998 5 to 40 years 6/30/1998 5 to 40 years  Initial Cost to Company Cost Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period Description Encum brance ST Land Building, Equipment and Improvements Building, Equipment and Improvements Building, Equipment and Improvements Land Total Accum. Deprec. Date of Construction Date Acquired Life on which depreciation in latest income statement is computed Jacksonville-Center Jacksonville-Gum Branch NC NC Jacksonville-N.Marine NC Euless N. Richland Hills Batavia Jackson-N.West Katy-Franz W.Warwick Lafayette-Pinhook 1 Lafayette-Pinhook2 TX TX OH MS TX RI LA LA Lafayette-Ambassador LA Lafayette-Evangeline LA Lafayette-Guilbeau Gilbert-Elliot Rd Glendale-59th Ave Mesa-Baseline Mesa-E.Broadway Mesa-W.Broadway Mesa-Greenfield Phoenix-Camelback Phoenix-Bell Phoenix-35th Ave Westbrook Cocoa Cedar Hill Monroe N.Andover Seabrook Plantation LA AZ AZ AZ AZ AZ AZ AZ AZ AZ ME FL TX NY MA TX FL Birmingham-Bessemer AL 327 508 216 550 670 390 460 507 447 556 708 314 188 963 651 565 330 339 291 354 453 872 849 410 667 335 276 633 633 384 254 Brewster NY (2) 1,716 Austin-Lamar Houston-E.Main TX (2) TX (2) Ft.Myers-Abrams FL (2) Dracut Methuen Columbia 5 Myrtle Beach MA (1) MA (1) SC (1) SC (1) 837 733 787 1,035 1,024 883 552 1,329 1,815 782 1,998 2,407 1,570 1,642 2,058 1,776 1,951 2,860 1,095 652 3,896 2,600 2,596 1,309 1,346 1,026 1,405 1,610 3,476 3,401 1,626 2,373 1,521 1,312 2,573 2,617 1,422 1,059 6,920 2,977 3,392 3,249 3,737 3,649 3,139 1,970 1,928 2,981 1,235 2,611 3,228 1,827 2,018 2,211 2,449 2,746 3,062 1,674 2,046 4,643 3,131 3,043 1,485 1,746 1,543 1,603 2,112 4,123 4,017 3,197 2,967 1,752 2,392 2,696 2,893 1,564 2,157 7,046 3,054 3,546 3,271 4,166 4,067 3,580 2,539 2,255 3,489 1,451 3,161 3,898 2,217 2,478 2,718 2,896 3,302 3,770 1,988 2,234 5,606 3,903 3,608 1,811 2,085 1,834 1,957 2,565 4,995 4,866 3,607 3,634 2,087 2,668 3,329 3,526 1,948 2,411 8,922 3,968 4,342 4,125 5,270 5,158 4,522 3,128 332 475 330 493 601 427 526 458 476 702 631 457 423 853 584 569 293 318 254 323 405 834 734 429 565 380 297 474 517 312 234 155 76 82 79 527 505 482 345 1995 8/6/1998 5 to 40 years 1989 1985 1996 1996 8/17/1998 5 to 40 years 9/24/1998 5 to 40 years 9/29/1998 5 to 40 years 10/9/1998 5 to 40 years 1988 11/19/1998 5 to 40 years 1984 12/1/1998 5 to 40 years 1993 12/15/1998 5 to 40 years 1986/94 2/2/1999 5 to 40 years 1980 2/17/1999 5 to 40 years 1992/94 2/17/1999 5 to 40 years 1975 1977 1994 1995 1997 1986 1986 1976 1986 1984 1984 1996 1988 1982 1985 1998 1989 1996 1994 2/17/1999 5 to 40 years 2/17/1999 5 to 40 years 2/17/1999 5 to 40 years 5/18/1999 5 to 40 years 5/18/1999 5 to 40 years 5/18/1999 5 to 40 years 5/18/1999 5 to 40 years 5/18/1999 5 to 40 years 5/18/1999 5 to 40 years 5/18/1999 5 to 40 years 5/18/1999 5 to 40 years 5/21/1999 5 to 40 years 8/2/1999 5 to 40 years 9/29/1999 5 to 40 years 11/9/1999 5 to 40 years 2/2/2000 5 to 40 years 2/15/2000 5 to 40 years 3/1/2000 5 to 40 years 5/2/2000 5 to 40 years 1998 11/15/2000 5 to 40 years 1991/97 12/27/2000 5 to 40 years 1996/99 2/22/2001 5 to 40 years 1993/97 3/2/2001 5 to 40 years 1997 1986 1984 1985 1984 3/13/2001 5 to 40 years 12/1/2001 5 to 40 years 12/1/2001 5 to 40 years 12/1/2001 5 to 40 years 12/1/2001 5 to 40 years 599 1,166 453 613 821 257 376 153 673 795 202 579 1,394 747 652 447 172 400 517 198 502 647 616 1,571 594 231 1,080 123 276 142 1,098 286 154 217 89 498 485 500 606 327 508 216 550 670 390 460 507 447 556 708 314 188 963 772 565 326 339 291 354 453 872 849 410 667 335 276 633 633 384 254 1,876 914 796 854 1,104 1,091 942 589 61  Initial Cost to Company Cost Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period Building, Equipment and Improvements Building, Equipment and Improvements Building, Equipment and Improvements Total Accum. Deprec. Date of Construction Date Acquired Life on which depreciation in latest income statement is computed Description Kingsland Saco Plymouth Sandwich Syracuse Encum brance ST Land GA (1) ME (1) 470 534 MA 1,004 MA (1) NY (1) 1,902 1,914 4,584 3,060 1,203 3,434 1,020 1,160 1,816 2,200 2,090 1,216 1,873 2,956 1,595 1,545 3,696 2,468 3,159 3,286 3,286 1,650 3,287 8,866 4,564 2,918 5,744 4,201 3,776 670 294 853 250 285 449 545 517 299 463 734 394 381 919 612 689 817 817 407 817 2,207 1,131 635 1,251 1,039 827 2,713 11,013 773 1,195 1,103 1,061 388 1,720 1,167 1,365 2,047 3,170 4,877 4,550 4,427 1,640 6,986 4,744 5,569 5,857 Houston-Westward TX (1) Houston-Boone Houston-Cook TX (1) TX (1) Houston-Harwin TX (1) Houston-Hempstead TX (1) Houston-Kuykendahl TX (1) Houston-Hwy 249 TX (1) Mesquite-Hwy 80 TX (1) Mesquite-Franklin TX (1) Dallas-Plantation TX (1) San Antonio-Hunt TX (1) Humble-5250 FM Pasadena League City-E.Main Montgomery Texas City Houston-Hwy 6 Lumberton The Hamptons l The Hamptons 2 The Hamptons 3 The Hamptons 4 Duncanville Dallas-Harry Hines Stamford Houston-Tomball Houston-Conroe Houston-Spring Houston-Bissonnet Houston-Alvin Clearwater TX TX TX TX TX TX TX NY NY NY NY TX TX CT TX TX TX TX TX FL Houston-Missouri City TX Chattanooga-Hixson Austin-Round Rock TN TX 624 230 141 392 330 750 455 253 557 738 614 877 490 638 247 319 270 75 228 52 96 120 141 386 416 213 235 29 189 51 1,723 32 193 34 25 14 434 642 586 Land 501 570 1,004 714 313 912 268 306 480 583 553 320 496 784 421 408 919 612 689 817 817 407 817 2,207 1,131 635 1,252 1,039 827 2,495 2,108 4,725 3,408 1,514 4,125 1,457 1,392 2,342 2,900 2,668 2,072 2,330 3,544 1,815 1,837 3,966 2,543 3,387 3,338 3,382 1,770 3,428 9,252 4,980 3,131 5,978 4,230 3,965 2,996 2,678 5,729 4,122 1,827 5,037 1,725 1,698 2,822 3,483 3,221 2,392 2,826 4,328 2,236 2,245 4,885 3,155 4,076 4,155 4,199 2,177 4,245 11,459 6,111 3,766 7,230 5,269 4,792 2,713 11,064 13,777 4,893 4,909 4,743 4,461 1,665 7,000 4,779 6,211 6,439 5,666 6,104 5,846 5,522 2,053 8,720 6,345 7,576 8,490 773 1,195 1,103 1,061 388 1,720 1,566 1,365 2,051 62 356 266 600 438 218 523 177 182 285 324 346 218 278 398 225 223 450 295 378 381 389 205 395 938 500 315 606 364 316 784 250 334 327 318 123 472 312 397 381 1989 1988 12/1/2001 5 to 40 years 12/3/2001 5 to 40 years 1996 12/19/2001 5 to 40 years 1984 12/19/2001 5 to 40 years 1987 1976 1983 1986 1981 2/5/2002 5 to 40 years 2/13/2002 5 to 40 years 2/13/2002 5 to 40 years 2/13/2002 5 to 40 years 2/13/2002 5 to 40 years 1974/78 2/13/2002 5 to 40 years 1979/83 2/13/2002 5 to 40 years 1983 1985 1984 1985 1980 2/13/2002 5 to 40 years 2/13/2002 5 to 40 years 2/13/2002 5 to 40 years 2/13/2002 5 to 40 years 2/13/2002 5 to 40 years 1998/02 6/19/2002 5 to 40 years 1999 6/19/2002 5 to 40 years 1994/97 6/19/2002 5 to 40 years 1998 1999 1997 1996 6/19/2002 5 to 40 years 6/19/2002 5 to 40 years 6/19/2002 5 to 40 years 6/19/2002 5 to 40 years 1989/95 12/16/2002 5 to 40 years 1998 12/16/2002 5 to 40 years 1997 12/16/2002 5 to 40 years 1994/98 12/16/2002 5 to 40 years 1995/99 8/26/2003 5 to 40 years 1998/01 10/1/2003 5 to 40 years 1998 2000 2001 2001 2003 2003 2001 1998 3/17/2004 5 to 40 years 5/19/2004 5 to 40 years 5/19/2004 5 to 40 years 5/19/2004 5 to 40 years 5/19/2004 5 to 40 years 5/19/2004 5 to 40 years 6/3/2004 5 to 40 years 6/23/2004 5 to 40 years 1998/02 8/4/2004 5 to 40 years 2000 8/5/2004 5 to 40 years  Initial Cost to Company Cost Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period Building, Equipment and Improvements Total Accum. Deprec. Date of Construction Date Acquired Life on which depreciation in latest income statement is computed Description Encum brance ST East Falmouth Cicero Bay Shore MA NY NY Springfield-Congress MA Stamford-Hope CT Land 1,479 527 1,131 612 1,612 Houston-Jones TX 3,769 1,214 Montgomery-Richard AL 1,906 Oxford Austin-290E MA TX SanAntonio-Marbach TX Austin-South 1st Pinehurst Marietta-Austell Baton Rouge-Florida Cypress Texas City TX TX GA LA TX TX San Marcos-Hwy 35S TX Baytown Webster Houston-Jones Rd 2 TX NY TX Cameron-Scott LA 1,043 Lafayette-Westgate Broussard LA LA Congress-Lafayette LA 1,144 470 537 556 754 484 811 719 721 867 628 596 937 707 411 463 601 542 832 617 Manchester Nashua Largo 2 NH NH FL 2,436 1,270 Pinellas Park FL Tarpon Springs FL 2,262 929 696 New Orleans LA 4,126 1,220 St Louis-Meramec MO 4,761 1,113 St Louis-Charles Rock MO St Louis-Shackelford MO 2,393 St Louis-W.Washington MO 3,808 St Louis-Howdershell MO St Louis-Lemay Ferry MO St Louis-Manchester MO 3,596 766 828 734 899 890 697 Arlington-Little Rd TX 2,146 1,256 Dallas-Goldmark TX 605 Building, Equipment and Improvements Building, Equipment and Improvements 5,978 2,121 4,609 2,501 6,585 4,949 7,726 1,902 2,183 2,265 3,065 1,977 3,397 2,927 2,994 3,499 2,532 2,411 3,779 2,933 1,665 1,887 2,481 1,354 3,346 2,478 5,094 3,750 2,818 4,956 4,490 3,092 3,348 2,980 3,640 3,616 2,817 5,074 2,473 86 278 26 17 44 35 29 48 71 38 34 55 416 53 998 43 394 53 30 17 31 18 33 52 21 89 45 28 13 41 38 24 20 73 80 24 38 24 24 Land 1,479 527 1,131 612 1,612 1,215 1,906 470 537 556 754 484 811 719 721 867 982 596 937 707 411 463 601 542 832 617 1,270 929 696 1,220 1,113 766 828 734 899 890 697 1,256 605 63 6,064 2,399 4,635 2,518 6,629 4,983 7,755 1,950 2,254 2,303 3,099 2,032 3,813 2,980 3,992 3,542 2,572 2,464 3,809 2,950 1,696 1,905 2,514 1,406 3,367 2,567 5,139 3,778 2,831 4,997 4,528 3,116 3,368 3,053 3,720 3,640 2,855 5,098 2,497 7,543 2,926 5,766 3,130 8,241 6,198 9,661 2,420 2,791 2,859 3,853 2,516 4,624 3,699 4,713 4,409 3,554 3,060 4,746 3,657 2,107 2,368 3,115 1,948 4,199 3,184 6,409 4,707 3,527 6,217 5,641 3,882 4,196 3,787 4,619 4,530 3,552 6,354 3,102 286 107 223 117 306 205 318 77 88 90 121 80 132 91 89 92 67 64 90 67 33 37 51 29 57 33 65 48 36 65 58 40 43 40 47 47 37 65 32 1998 2/23/2005 5 to 40 years 1988/02 3/16/2005 5 to 40 years 2003 3/15/2005 5 to 40 years 1965/75 4/12/2005 5 to 40 years 2002 4/14/2005 5 to 40 years 1997/99 6/6/2005 5 to 40 years 1997 2002 2003 2003 2003 6/1/2005 5 to 40 years 6/23/2005 5 to 40 years 7/12/2005 5 to 40 years 7/12/2005 5 to 40 years 7/12/2005 5 to 40 years 2002/04 7/12/2005 5 to 40 years 2003 9/15/2005 5 to 40 years 1984/94 11/15/2005 5 to 40 years 2003 2003 2001 2002 1/13/2006 5 to 40 years 1/10/2006 5 to 40 years 1/10/2006 5 to 40 years 1/10/2006 5 to 40 years 2002/06 2/1/2006 5 to 40 years 2000 1997 3/9/2006 5 to 40 years 4/13/2006 5 to 40 years 2001/04 4/13/2006 5 to 40 years 2002 4/13/2006 5 to 40 years 1997/99 4/13/2006 5 to 40 years 2000 1989 1998 2000 1999 2000 1999 1999 1999 4/26/2006 5 to 40 years 6/29/2006 5 to 40 years 6/22/2006 5 to 40 years 6/22/2006 5 to 40 years 6/22/2006 5 to 40 years 6/22/2006 5 to 40 years 6/22/2006 5 to 40 years 6/22/2006 5 to 40 years 6/22/2006 5 to 40 years 1980/01 6/22/2006 5 to 40 years 2000 1999 2000 6/22/2006 5 to 40 years 6/22/2006 5 to 40 years 6/22/2006 5 to 40 years 1998/03 6/22/2006 5 to 40 years 2004 6/22/2006 5 to 40 years  Initial Cost to Company Cost Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period Building, Equipment and Improvements Building, Equipment and Improvements Building, Equipment and Improvements Total Accum. Deprec. Date of Construction Date Acquired Life on which depreciation in latest income statement is computed Description Encum brance ST Dallas-Manana Dallas-Manderville TX TX Ft. Worth-Granbury TX 1,925 Ft. Worth-Grapevine TX 2,114 San Antonio-Blanco TX San Antonio-Broadway TX Land 607 1,073 549 644 963 773 San Antonio-Huebner TX 2,395 1,175 Chattanooga-Lee Hwy II TN Lafayette-Evangeline LA 619 699 Montgomery-E.S.Blvd AL 1,158 Auburn-Pepperell Pkwy AL Auburn-Gatewood Dr AL Columbus-Williams Rd GA Columbus-Miller Rd GA Columbus-Armour Rd GA Columbus-Amber Dr GA Concord NH Construction in progress Corporate Office NY 590 694 736 975 0 439 813 0 0 2,472 4,369 2,227 2,609 3,923 3,134 4,723 2,512 2,847 4,691 2,401 2,806 3,015 3,941 3,751 1,785 3,264 0 68 Land 607 1,073 549 644 963 773 1,175 619 699 1,158 590 694 736 975 0 439 820 0 23 38 34 21 24 27 24 18 24 33 6 6 42 22 29 4 10 6,586 10,399 1,608 2,495 4,407 2,261 2,630 3,947 3,161 4,747 2,530 2,871 4,724 2,407 2,812 3,057 3,963 3,780 1,789 3,267 6,586 8,859 3,102 5,480 2,810 3,274 4,910 3,934 5,922 3,149 3,570 5,882 2,997 3,506 3,793 4,938 3,780 2,228 4,087 6,586 32 57 29 34 52 41 60 27 31 30 15 17 19 24 24 11 13 0 10,467 4,411 2004 2003 1998 1999 2004 2000 1998 2002 6/22/2006 5 to 40 years 6/22/2006 5 to 40 years 6/22/2006 5 to 40 years 6/22/2006 5 to 40 years 6/22/2006 5 to 40 years 6/22/2006 5 to 40 years 6/22/2006 5 to 40 years 8/7/2006 5 to 40 years 1995/99 8/1/2006 5 to 40 years 1996/97 9/28/2006 5 to 40 years 1998 9/28/2006 5 to 40 years 2002/03 9/28/2006 5 to 40 years 2002/04/06 9/28/2006 5 to 40 years 1995 9/28/2006 5 to 40 years 2004/05 9/28/2006 5 to 40 years 1998 9/28/2006 5 to 40 years 2000 10/31/2006 5 to 40 years 2006 2000 5/1/2000 5 to 40 years $ 198,211 $ 765,728 $ 179,965 $ 208,644 $ 935,260 $ 1,143,904 $ 155,843 (1) These properties are encumbered through one mortgage loan with an outstanding balance of $44.6 million at December 31, 2006. (2) These properties are encumbered through one mortgage loan with an outstanding balance of $29.5 million at December 31, 2006. 64 Cost: Balance at beginning of period ............. Additions during period: Acquisitions through foreclosure ...... Other acquisitions.............................. Improvements, etc. ............................ $ - 212,957 37,066 December 31, 2006 December 31, 2005 December 31, 2004 $ 893,980 $ 811,516 $ 739,836 $ - 65,001 18,236 250,023 $ - 66,373 18,075 (12,768) 84,448 (12,768) $811,516 83,237 (773) $893,980 Deductions during period: Cost of real estate sold ...................... Balance at close of period ..................... (99) (99) $1,143,904 (773) Accumulated Depreciation: Balance at beginning of period.............. Additions during period: Depreciation expense ........................ $ 25,347 $ 130,550 $ 109,750 $ 92,498 $ 21,222 $ 19,175 25,347 21,222 19,175 Deductions during period: Accumulated depreciation of real estate sold .................................... Balance at close of period ..................... (54) (54) $ 155,843 (422) (422) $ 130,550 (1,923) (1,923) $ 109,750 65 Statement Re: Computation of Earnings to Combined Fixed Charges and Preferred Stock Dividends Exhibit 12.1 Amounts in thousands Earnings: Income from continuing operations before minority interest in consolidated subsidiaries and income or loss from equity investees Fixed charges Preferred dividend requirements of consolidated subsidiaries Earnings (1) Fixed charges: Interest expense Amortization of financing fees Preferred stock dividends Fixed charges (2) Ratio of earnings to combined fixed charges and preferred stock dividends (1)/(2) 2006 Year ended December 31, 2005 2004 2003 2002 $38,872 32,006 (2,512) 68,366 28,501 993 2,512 $32,006 $36,117 24,352 (4,123) 56,346 19,439 790 4,123 $24,352 $32,033 25,296 (7,168) 50,161 17,408 720 7,168 $25,296 $29,190 25,534 (8,818) 45,906 15,102 1,614 8,818 $25,534 $27,531 20,805 (5,093) 43,243 14,664 1,048 5,093 $20,805 2.14 2.31 1.98 1.80 2.08 66 Consent of Independent Registered Public Accounting Firm Exhibit 23 We consent to the incorporation by reference in the following Registration Statements and related Prospectuses: (1) Registration Statement (Form S-8 No. 333-21679) of Sovran Self Storage, Inc. (2) Registration Statement (Form S-8 No. 333-42272) pertaining to the 1995 Award and Option Plan and to the 1995 Outside Directors' Stock Option Plan, (3) Registration Statement (Form S-8 No. 333-42270) pertaining to the Deferred Compensation Plan for Directors of Sovran Self Storage, Inc., (4) Registration Statement (Form S-3 No. 333-64735) of Sovran Self Storage, Inc., (5) Registration Statement (Form S-8 No. 333-73806) pertaining to the 1995 Award and Option Plan, (6) Registration Statement (Form S-3 No. 333-97715) of Sovran Self Storage, Inc., (7) Registration Statement (Form S-8 No. 333-107464) pertaining to the 1995 Outside Directors' Stock Option Plan, (8) Registration Statement (Form S-8 No. 333-138937) pertaining to the 2005 Award and Option Plan, (9) Registration Statement (Form S-3 No. 333-51169) of Sovran Self Storage, Inc. and Sovran Acquisition Limited Partnership, (10) Registration Statement (Form S-3 No. 333-118223) of Sovran Self Storage, Inc. and Sovran Acquisition Limited Partnership and, (11) Registration Statement (Form S-3 No. 333-138970) of Sovran Self Storage, Inc.; of our reports dated March 1, 2007, with respect to the consolidated financial statements and schedule of Sovran Self Storage, Inc., Sovran Self Storage, Inc. management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Sovran Self Storage, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 2006. /s/ Ernst & Young LLP Buffalo, New York March 1, 2007 67 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as amended I, Robert J. Attea, certify that: Exhibit 31.1 1. 2. 3. 4. 5. I have reviewed this report on Form 10-K of Sovran Self Storage, Inc.; Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles; evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as the end of the period covered by this report based on such evaluation; and disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the registrant's internal control over financial reporting; and b) c) d) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. b) Date: March 1, 2007 / S / Robert J. Attea Robert J. Attea Chairman of the Board and Chief Executive Officer 68 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as amended I, David L. Rogers, certify that: Exhibit 31.2 1. 2. 3. 4. 5. I have reviewed this report on Form 10-K of Sovran Self Storage, Inc.; Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles; evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as the end of the period covered by this report based on such evaluation; and disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the registrant's internal control over financial reporting; and b) c) d) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. b) Date: March 1, 2007 / S / David L. Rogers David L. Rogers Secretary, Chief Financial Officer 69 Exhibit 32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Each of the undersigned of Sovran Self Storage, Inc. (the "Company") does hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: 1) 2) The report on Form 10-K of the Company for the annual period ended December 31, 2006 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 1, 2007 / S / Robert J. Attea Robert J. Attea Chairman of the Board Chief Executive Officer / S / David L. Rogers David L. Rogers Chief Financial Officer 70 Sovran Self Storage, Inc. Company Information Corporate Headquarters 6467 Main Street Buffalo, New York 14221 (716) 633-1850 Officers & Directors Robert J. Attea Director Chairman of the Board and Chief Executive Officer Kenneth F. Myszka Director President and Chief Operating Officer David Rogers Chief Financial Officer John E. Burns, CPA Director President Altus Capital, L.L.C. Michael A. Elia Director President and Chief Executive Officer Sevenson Environmental Services, Inc. Anthony P. Gammie Director Chairman of the Board Bowater Incorporated (retired) Charles E. Lannon Director President Strategic Capital, Inc. Registrar and Transfer Agent American Stock Transfer & Trust Co. 59 Maiden Lane New York, New York 10038 (718) 921-8200 Annual Meeting May 21, 2007 Buffalo Niagara Marriott 1340 Millersport Hwy. Amherst, New York 14221 11:00 a.m. (e.d.t.) Investor Relations Diane M. Piegza (716) 633-1850 www.sovranss.com Independent Auditors Ernst & Young LLP 1500 Key Tower Buffalo, New York 14202 Corporate Counsel Phillips Lytle LLP 3400 HSBC Center Buffalo, New York 14203 Exchange: New York Stock Exchange Listing Symbol: SSS Average Daily Volume in 2006: 80,755 The Chief Executive Officer has previously filed with the New York Stock Exchange (NYSE) the annual CEO certification for 2006 as required by section 303A.12(a) of the NYSE listed company manual. As of December 31, 2006, there were approximately 1,500 shareholders of record of the common stock, and 1 shareholder of record of the Series C preferred stock. Photography Doug Benz Sovran Self Storage, Inc. Annual Report 2006 Corporate Headquarters 6467 Main Street Buffalo, New York 14221 (716) 633-1850 www.sovranss.com 

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