Life Storage
Annual Report 2008

Plain-text annual report

Dear Fellow Shareholder: In our letter to you last year, we expressed our concerns about a general slowdown in the economy, a decrease in the availability of equity and debt funding, and a slump in the nation’s housing markets. While anticipating these issues, we certainly did not foresee the magnitude with which they impacted the nation’s (and world’s) well being. Fortunately, as 2008 began, our Company was well positioned to defend against the effects of both the credit crunch and the recession. Because we have always been conservative in our use of leverage, in June we were able to consolidate all of our short term and near term debt maturities into an attractive $250 million long term note and an accompanying $125 million credit line. Now, virtually all of our loans are at fixed interest rates, we have no significant debt repayments until 2012, and our balance sheet is among the strongest in the industry. Further, we have sufficient liquidity and capital resources ready to deploy when we see conditions right for growth. In July, we expanded our portfolio and the Uncle Bob’s brand through the auspices of a joint venture we formed with an affiliate of Heitman, LLC, an international leader in real estate investment management. The venture acquired 25 properties, allowing us to enter the Denver, Columbus and Louisville markets while growing our presence in Tampa, Miami, Houston, Dallas, San Antonio and Atlanta. We are very pleased with the arrangement, and look forward to a long and mutually beneficial relationship with Heitman. On the operating front, we are in an increasingly competitive battle to win customers. Compared to most in the industry though, we have the advantage. As a result of our size and scale, we can more effectively market our spaces by utilizing internet advertising and our centralized call center. Our enhanced revenue management system and our website with its ‘real time’ rates and availability schedule enable us to better serve prospective and existing customers – another advantage most of our peers can’t match. We have been able to further our use of technology to efficiently manage (and reduce) costs associated with vendor services, payroll, utilities and other property costs. We plan to grow our Company’s value by focusing on management fundamentals – marketing, pricing, cost containment and property upkeep. In 2009, our primary focus will be on shoring up occupancy and maintaining our solid balance sheet while patiently remaining on the ready for opportunities that are expected to arise from the current calamities in the real estate sector. We believe that self-storage is a strong and resilient real estate class, and that it serves the needs of all demographics in all geographic areas in all types of economic conditions. In our 25 years in the business, we have helped hundreds of thousands of customers with their storage needs, and while we learn every day, we feel confident that we have the people, the properties and the resources to not only survive difficult times, but to grow stronger as a result of them. We appreciate 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, 2008 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, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ X ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ] As of June 30, 2008, 21,890,727 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 $882,013,334 (based on the closing price of the Common Stock on the New York Stock Exchange on June 30, 2008). As of February 15, 2009, 22,040,654 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, 2009 (Part III). 1 TABLE OF CONTENTS Part I Item 1. Business Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders Part II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6. Selected Financial Data Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Item 9a. Controls and Procedures Part III Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accountant Fees and Services Part IV Item 15. Exhibits, Financial Statement Schedules SIGNATURES EX-10.3 – see SEC filing EX-10.4 – see SEC filing EX-10.5– see SEC filing EX-10.13– see SEC filing EX-12.1 EX-23 .1– see SEC filing EX-31.1– see SEC filing EX-31.2– see SEC filing EX-32.1– see SEC filing 2 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 21E 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 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 in which we have an ownership interest and are managed by us as "Properties." We began operations on June 26, 1995. We were formed to continue the business of our predecessor company, which had engaged in the self-storage business since 1985. At February 15, 2009, we held ownership interests in and managed 385 Properties consisting of approximately 25.0 million net rentable square feet, situated in 24 states. Among our 385 self-storage facilities are 27 properties that we manage for a consolidated joint venture of which we are a majority owner and 25 properties that we manage for a joint venture of which we are a 20% owner. We believe 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 own an indirect interest in each of the Properties through a limited partnership (the "Partnership"). In total, we own a 98.1% economic interest in the Partnership and unaffiliated third parties own collectively a 1.9% limited partnership interest at December 31, 2008. 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 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. Our customers rent space on a month-to-month basis 3 and 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 the 2009 Self-Storage Almanac, of the approximately 47,500 facilities in the United States, less than 11% 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 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 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, that provides 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, and which also serve as moving billboards to help advertise our storage facilities. Ancillary Income: Our stores are essentially retail operations and we have in excess of 160,000 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. 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 4 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. 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 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 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. 5 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 our Properties. 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. During 2008 we sold one non-strategic storage facility located in Michigan for net cash proceeds of $7.0 million resulting in a gain of $0.7 million. No storage facilities were sold in 2007 or 2006. 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. On June 25, 2008, we entered into agreements relating to new unsecured credit arrangements, and received funds under those arrangements. As part of the agreements, we entered into a $250 million unsecured term note maturing in June 2012 bearing interest at LIBOR plus 1.625%. The proceeds from this term note were used to repay the Company’s previous line of credit that was to mature in September 2008, the Company’s term note that was to mature in September 2009, the term note maturing in July 2008, and to provide for working capital. The new agreements also provide for a $125 million (expandable to $150 million) revolving line of credit maturing June 2011 bearing interest at a variable rate equal to LIBOR plus 1.375%, and requires a 0.25% facility fee. At December 31, 2008, there was $111 million available on the unsecured line of credit. We also maintain an $80 million term note maturing September 2013 bearing interest at a fixed rate of 6.26%, a $20 million term note maturing September 2013 bearing interest at a variable rate equal to LIBOR plus 1.50%, and a $150 million unsecured term note maturing in April 2016 bearing interest at 6.38%. 6 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 expanded 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, although certain of our existing term loans contain limits on overall mortgage indebtedness. 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 1,069 employees, including 385 property managers, 23 area managers, and 531 assistant managers and part-time employees. At our headquarters, in addition to our three senior executive officers, we employ 127 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. 7 We May Incur Problems with Our Real Estate Financing Unsecured Credit Facility. We have a line of credit with a syndicate of financial institutions. 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 and bank term note 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. Recent turmoil in the credit markets could affect our ability to obtain debt financing on reasonable terms and have other adverse effects on us. The United States credit markets have recently experienced significant dislocations and liquidity disruptions which have caused the spreads on available debt financings to widen considerably. These circumstances have materially impacted liquidity in the debt markets, making financing terms for borrowers less attractive. A prolonged downturn in the credit markets could cause us to seek alternative sources of potentially less attractive financing, and may require us to adjust our business plan accordingly. Continued uncertainty in the credit markets may negatively impact our ability to make acquisitions. 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. 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 similar or competing self-storage facilities in an area; • Changes in market rental rates; and • Inability to collect rents from customers. 8 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 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 financing; • 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 9 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 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 former 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 former Series C preferred stock in connection with 10 these provisions of the MGCL. In addition, under the 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 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 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. 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, 2008, 147 of our 385 self-storage facilities are located in the states of Texas and Florida. For the year ended December 31, 2008, these facilities accounted for approximately 40.9% of store 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 continue to deteriorate, we will 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 11 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. Item 1B. Unresolved Staff Comments None. 12 Item 2. Properties At December 31, 2008, we held ownership interests in and managed a total of 385 Properties situated in twenty-four states. Among the 385 self-storage facilities are 27 properties that we manage for a consolidated joint venture of which we are a majority owner and 25 properties that we manage for a joint venture of which we are a 20% 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 21,000 to 187,000 net rentable square feet, with an average of approximately 65,000 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 in which we have an ownership interest and manage as of December 31, 2008: Alabama................................................ Arizona ................................................. Connecticut........................................... Colorado ............................................... Florida................................................... Georgia ................................................. Kentucky............................................... Louisiana .............................................. Maine .................................................... Maryland............................................... Massachusetts ....................................... Michigan............................................... Mississippi ............................................ Missouri ................................................ New Hampshire .................................... New York ............................................. North Carolina ...................................... Ohio ...................................................... Pennsylvania ......................................... Rhode Island ......................................... South Carolina ...................................... Tennessee.............................................. Texas..................................................... Virginia................................................. Total.................................................... Number of Stores at December 31, 2008 22 9 5 4 57 27 2 14 2 4 14 6 12 7 4 28 15 23 6 4 8 4 90 18 385 Square Feet 1,602,986 506,034 304,859 276,827 3,652,019 1,717,646 145,708 867,593 114,145 173,181 790,282 348,843 925,621 436,069 260,503 1,598,164 796,123 1,576,639 365,520 167,901 445,528 295,122 6,571,320 1,065,013 25,003,646 Number of Spaces 11,885 4,474 2,866 2,376 33,327 13,937 1,322 7,744 1,004 2,040 7,178 3,010 7,079 3,786 2,330 14,501 6,959 12,900 2,919 1,567 3,770 2,430 53,847 9,896 213,147 Percentage of Store Revenue 5.1% 2.4% 2.1% 0.5% 15.6% 6.3% 0.3% 3.7% 0.5% 0.9% 3.8% 1.2% 3.5% 2.1% 1.0% 8.6% 3.2% 4.4% 1.4% 0.9% 1.8% 1.0% 25.3% 4.4% 100.0% 13 At December 31, 2008, the Properties had an average occupancy of 80.5% and an annualized rent per occupied square foot of $10.54. 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 matters currently pending against the Company will have a material adverse impact on our financial condition, results of operations or cash flows. 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 2007 1st .............................................................................. 2nd ............................................................................. 3rd.............................................................................. 4th.............................................................................. Quarter 2008 1st .............................................................................. 2nd ............................................................................. 3rd.............................................................................. 4th.............................................................................. High $63.93 56.56 50.25 50.43 High $44.62 46.50 46.15 44.16 Low $54.98 47.18 40.40 39.75 Low $33.56 41.37 35.77 19.18 As of February 15, 2009, there were approximately 1,316 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 2008 represent 76.5% ordinary income, 1.5% section 1250 capital gain, and 22% return of capital. History of Dividends Declared on Common Stock 1st Quarter, 2007 ....................................................... 2nd Quarter, 2007 ...................................................... 3rd Quarter, 2007....................................................... 4th Quarter, 2007....................................................... $0.620 per share $0.620 per share $0.630 per share $0.630 per share 1st Quarter, 2008 ....................................................... 2nd Quarter, 2008 ...................................................... 3rd Quarter, 2008....................................................... 4th Quarter, 2008....................................................... $0.630 per share $0.630 per share $0.640 per share $0.640 per share 14 EQUITY COMPENSATION PLAN INFORMATION The following table sets forth certain information as of December 31, 2008, with respect to equity compensation plans under which shares of the Company’s Common Stock may be issued. Plan Category Equity compensation plans approved by shareholders: 2005 Award and Option Plan.............................. 1995 Award and Option Plan.............................. 1995 Outside Directors' Stock Option Plan ........ Deferred Compensation Plan for Directors (1) ... Equity compensation plans not approved by shareholders:.................................................... Number of securities to be issued upon exercise of outstanding options, warrants and rights (#) Weighted average exercise price of outstanding options, warrants and rights ($) Number of securities remaining available for future issuance (#) 274,163 50,525 36,000 33,512 N/A $45.72 $26.74 $45.74 N/A N/A 1,096,464 0 0 35,347 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. 15 CORPORATE PERFORMANCE GRAPH The following chart and line-graph presentation compares (i) the Company’s shareholder return on an indexed basis since December 31, 2003 with (ii) the S&P Stock Index and (iii) the National Association of Real Estate Investment Trusts Equity Index. 250 200 150 100 50 0 Dec. 31, 2003 Dec. 31, 2004 Dec. 31, 2005 Dec. 31, 2006 Dec. 31, 2007 Dec. 31, 2008 S&P 500 NAREIT SSS CUMULATIVE TOTAL SHAREHOLDER RETURN SOVRAN SELF STORAGE, INC. DECEMBER 31, 2003 - DECEMBER 31, 2008 S&P NAREIT SSS Dec. 31, 2003 Dec. 31, 2004 Dec. 31, 2005 Dec. 31, 2006 Dec. 31, 2007 Dec. 31, 2008 100.00 100.00 100.00 110.87 131.58 119.93 116.32 147.59 141.39 134.69 199.33 180.83 142.09 168.05 132.79 89.52 104.65 126.89 The foregoing item assumes $100.00 invested on December 31, 2003, with dividends reinvested. 16 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 operations (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, 2008 2007 2006 2005 2004 $ 203,003 36,605 794 37,399 $ 192,857 38,780 434 39,214 $ 165,369 $ 137,373 $ 122,381 30,232 1,772 32,004 34,318 472 34,790 36,163 447 36,610 1.68 1.72 1.72 2.54 1.79 1.81 1.81 2.50 1.87 1.90 1.89 2.47 1.81 1.86 1.84 2.44 1.41 1.54 1.53 2.42 Balance Sheet Data Investment in storage facilities at cost........ $1,389,201 1,212,626 Total assets ................................................. 623,261 Total debt.................................................... 692,479 Total liabilities............................................ - Series C preferred stock.............................. $1,322,708 1,164,588 566,517 610,757 - $1,136,052 1,053,159 462,027 495,301 26,613 $886,191 784,319 339,144 364,980 26,613 $804,106 719,514 289,075 315,049 53,227 Other Data Net cash provided by operating activities... Net cash used in investing activities ........... Net cash provided by (used in) $77,132 (82,711) $85,175 (190,267) $64,656 (176,567) $60,724 (79,156) $54,803 (71,034) financing activities ................................ 6,055 61,372 154,730 20,238 (765) (1) In 2008 we sold one store and in 2004 we sold five stores whose operations and gain are classified as discontinued operations for all previous years presented. 17 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 21E 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 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: - - - Revenues continue to improve as a result of drivers implemented by us, including: - Our Customer Care Center, which answers sales inquiries and makes reservations for all of our properties on a centralized basis, The Uncle Bob’s truck move-in program, under which, at present, 259 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. 18 B. Acquiring additional stores: - - - In conjunction with the joint venture agreement entered in late May 2008, potential acquisition opportunities over the first nine months of the agreement will be offered to the joint venture. The Company’s acquisitions over this period will therefore be limited to facilities that do not fit the joint venture’s investment objectives, but do meet ours. Our objective is to acquire new stores one or two at a time in markets we currently operate in. 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 may also 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 our management business: - We see our management business as a source of future acquisitions. We may develop additional joint ventures in which we are minority owners and managers of the self-storage facilities acquired by these joint ventures. The joint venture agreements will give us first right of refusal to purchase the managed properties in the event they are offered for sale. D. Expanding and enhancing our existing stores: - Over the past four years, we have undertaken an announced program of expanding and enhancing our properties. Primarily, we have worked to add premium storage (i.e., air-conditioned and/or humidity controlled) space to our portfolio. In 2007, we expended approximately $25 million to add some 444,000 square feet of such space to our properties; in 2008, we spent approximately $26 million to add 403,000 square feet and to convert 95,000 square feet to premium storage. The program entailed construction of new buildings, acquisition of parcels of land contiguous to stores deemed suitable for expansion, and demolition of certain structures to make room for more optimally configured spaces. In 2009, we expect to curtail our expansion program with new expenditures of approximately $15 million on projects that began in 2008. 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. The current turmoil in the credit markets has resulted in a decrease in new supply on a national basis. With the decrease of debt and equity capital brought about by the credit market tightening in the past year, we have seen capitalization rates on acquisitions (expected annual return on investment) increase to approximately 7.5% and expect continued increases in 2009. From 2003 to 2007 the historically low interest rates available to developers resulted in increased supply on a national basis. We experienced some of this excess supply in certain markets in Texas and Florida from 2003 to 2007, but because of the demand model, we did not see a widespread effect on our stores in those years. In 2008, the Florida market was negatively effected by the current economic downturn and we expect many markets will be effected in 2009 as consumers continue to pull back spending. Operating Trends In 2008 and 2007, our industry experienced some softness in demand. This was due to the economic slowdown that began in late 2007, and in part to regional issues, such as the reduction of hurricane driven demand in Florida and the Gulf Coast states, and to an overall slowdown in the housing sector. We believe the housing slowdown has impacted our industry in two ways: 1.) a reduction in lease-up activity resulting from fewer residential real estate transactions (both buyers and sellers of residences use our product in times of transition) and 2.) a contraction of housing construction activity which has reduced the number of people working in the 19 construction trades (trades people are a measurable part of our usual tenant base.) While we enjoyed same store revenue growth of approximately 3% to 5% in each of the prior five years, we were only able to achieve 0.5% same store revenue growth in 2008, primarily because of the aforementioned issues. We expect conditions in most of our markets to remain challenging and are forecasting -1% to -2% revenue growth on a same store basis in 2009. 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). While we do not foresee further expansion of our cost base, we do expect the trend of increasing expenses to continue at a pace commensurate with CPI growth. Because almost all of our costs are fixed, should revenue growth fall significantly, operating margins will be reduced. 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, 2008 and 2007, 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, 2008 COMPARED TO YEAR ENDED DECEMBER 31, 2007 We recorded rental revenues of $195.2 million for the year ended December 31, 2008, an increase of $8.6 million or 4.6% when compared to 2007 rental revenues of $186.6 million. Of the increase in rental revenue, $1.2 million resulted from a 0.7% increase in rental revenues at the 326 core properties considered in same store sales (those properties included in the consolidated results of operations since January 1, 2007). The increase in same store rental revenues was achieved primarily through rate increases on select units averaging 1.9%, offset by a decrease in square foot occupancy of 150 basis points, which we believe resulted from general economic conditions, 20 in particular the housing sector. The remaining $7.4 million increase in rental revenues resulted from the acquisition of three stores during 2008 and from having the 31 stores acquired in 2007 included for a full year of operations. Other income, which includes merchandise sales, insurance commissions, truck rentals, management fees and acquisition fees, increased in 2008 primarily as a result of $1.1 million of management and acquisition fees generated from our unconsolidated joint venture, Sovran HHF Storage Holdings LLC. Property operating and real estate tax expense increased $5.1 million, or 7.3%, in 2008 compared to 2007. Of this increase, $2.7 million were expenses incurred by the facilities acquired in 2008 and from having expenses from the 2007 acquisitions included for a full year of operations. $2.4 million of the increase was due to increased payroll, property taxes, utilities, and maintenance expenses at the 326 core properties considered same stores. We expect same-store operating costs to increase only moderately in 2009 with increases primarily attributable to utilities and property taxes. General and administrative expenses increased $2.0 million or 13.4% from 2007 to 2008. The increase primarily resulted from the costs associated with operating the properties acquired in 2008 and 2007, and from managing the 25 properties acquired by our joint venture in 2008. Depreciation and amortization expense increased to $34.4 million in 2008 from $33.9 million in 2007, primarily as a result of additional depreciation taken on real estate assets acquired in 2008, and a full year of depreciation on 2007 acquisitions, offset by a decrease in amortization of in-place customers leases relating to these acquisitions. Interest expense increased from $33.9 million in 2007 to $38.1 million in 2008 as a result of additional borrowings under our line of credit and term notes to purchase three stores in 2008, as well as an increase in interest rates as a result of our debt refinancing in June 2008. As described in Note 5 to the financial statements, in 2008, the Company sold one non-strategic storage facility located in Michigan for net cash proceeds of $7.0 million resulting in a gain of $0.7 million. The 2007 operations of this facility are reported as discontinued operations. The decrease in preferred stock dividends from 2007 to 2008 was a result of the conversion of all remaining 1,200,000 shares of our Series C Preferred Stock into 920,244 shares of common stock in July 2007. YEAR ENDED DECEMBER 31, 2007 COMPARED TO YEAR ENDED DECEMBER 31, 2006 We recorded rental revenues of $186.6 million for the year ended December 31, 2007, an increase of $26.6 million or 16.6% when compared to 2006 rental revenues of $160.0 million. Of the increase in rental revenue, $4.8 million resulted from a 3.2% increase in rental revenues at the 284 core properties considered in same store sales (those properties included in the consolidated results of operations since January 1, 2006). The increase in same store rental revenues was achieved primarily through rate increases on select units averaging 4.4%, offset by a decrease in square foot occupancy of 175 basis points, which we believe resulted from general economic conditions, in particular the housing sector, and the return to normalcy in Florida after the hurricanes. 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 results for the year ended December 31, 2007 was $1.7 million higher than that included in 2006 as a result of the consolidation in April 2006. The remaining $20.1 million increase in rental revenues resulted from the acquisition of 31 stores during 2007 and from having the 42 stores acquired in 2006 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. Property operating and real estate tax expense increased $10.7 million, or 18.1%, in 2007 compared to 2006. Of this increase, $8.2 million were expenses incurred by the facilities acquired in 2007 and from having expenses from the 2006 acquisitions included for a full year of operations. $1.9 million of the increase was due to increased property insurance, utilities, maintenance expenses, and increased property taxes at the 284 core properties 21 considered same stores. The property operating and real estate tax expense related to Locke Sovran I that was included in our results for the year ended December 31, 2007, was $0.6 million higher than that included in 2006 as a result of the consolidation in April 2006. General and administrative expenses increased $1.1 million or 8.1% from 2006 to 2007. The increase primarily resulted from the costs associated with operating the properties acquired in 2007 and 2006. Depreciation and amortization expense increased to $33.9 million in 2007 from $25.2 million in 2006, primarily as a result of additional depreciation taken on real estate assets acquired in 2007, a full year of depreciation on 2006 acquisitions, and the amortization of in-place customers leases relating to these acquisitions. Interest expense increased from $29.5 million in 2006 to $33.9 million in 2007 as a result of higher interest rates, additional borrowings under our line of credit and term notes to purchase 31 stores in 2007, and the consolidation of Locke Sovran I, LLC as of April 1, 2006. The casualty gain recorded in 2007 relates to insurance proceeds received in excess of the carrying value of a building damaged by a fire at one of our facilities. The decrease in preferred stock dividends from 2006 to 2007 was a result of the conversion of all remaining 1,200,000 shares of our Series C Preferred Stock into 920,244 shares of common stock in July 2007. 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. 22 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 For Year Ended December 31, 2004 2006 2007 2005 2008 $37,399 2,284 $39,214 2,631 $36,610 2,434 $34,790 1,529 $32,004 1,542 34,421 33,851 25,121 21,040 19,002 discontinued operations........................ 46 185 184 182 263 Depreciation and amortization from unconsolidated joint ventures............... Casualty gain ........................................... Gain on sale of real estate........................ Preferred stock dividends ........................ Redemption amount in excess of carrying value of Series B Preferred Stock .................................................... 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 333 - (716) - 59 (114) - (1,256) 168 - - (2,512) 484 - - (4,123) 473 - (1,137) (7,168) - - - - (1,415) (1,366) (1,425) (1,450) (1,519) (1,333) (1,564) (1,848) (1,785) (1,499) (1,475) common shareholders .......................... $70,837 $71,297 $58,770 $50,884 $40,756 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 and our availability on our line of credit will continue to be sufficient to fund ongoing operations, capital improvements, dividends and debt service requirements through June 2011, at which time our revolving line of credit matures. Cash flows from operating activities were $77.1 million, $85.2 million and $64.7 million for the years ended December 31, 2008, 2007, and 2006, respectively. The decrease in operating cash flows from 2007 to 2008 was primarily due to a decrease in net income and accounts payable remaining consistent from year to year. The increase in operating cash from 2006 to 2007 was primarily attributable to increased net income, increased non-cash charges for depreciation and amortization, an increase in accounts payable related to property taxes, and a decrease in prepaid insurance. Cash used in investing activities was $82.7 million, $190.3 million, and $176.6 million for the years ended December 31, 2008, 2007, and 2006 respectively. The decrease in cash used from 2007 to 2008 was attributable to reduced acquisition activity in 2008 as many of the properties acquired were acquired through a joint venture of which we are a 20% owner. The increase from 2006 to 2007 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 $6.0 million in 2008 compared to $61.4 million in 2007 and $154.7 million in 2006, respectively. Our reduced acquisition activity in 2008 was the driver behind the decrease in cash provided from financing activities from 2007 to 2008. The decrease in cash provided from financing activities from 2006 to 2007 was a result of the proceeds received from our common stock offering in December of 2006 noted below. On June 25, 2008, we entered into agreements relating to new unsecured credit arrangements, and received 23 funds under those arrangements. As part of the agreements, we entered into a $250 million unsecured term note maturing in June 2012 bearing interest at LIBOR plus 1.625%. The proceeds from this term note were used to repay the Company’s previous line of credit that was to mature in September 2008, the Company’s term note that was to mature in September 2009, the term note maturing in July 2008, and to provide for working capital. The new agreements also provide for a $125 million (expandable to $150 million) revolving line of credit maturing June 2011 bearing interest at a variable rate equal to LIBOR plus 1.375%, and requires a 0.25% facility fee. The revolving line of credit maturity can be extended at our option until June 2012. At December 31, 2008, there was $111 million available on the unsecured line of credit. We also maintain a $80 million term note maturing September 2013 bearing interest at a fixed rate of 6.26%, a $20 million term note maturing September 2013 bearing interest at a variable rate equal to LIBOR plus 1.50%, and a $150 million unsecured term note maturing in April 2016 bearing interest at 6.38%. 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 2006 common stock offering were used along with 2007 borrowings under our line of credit to fund 2007 acquisitions. 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, 2008, we were in compliance with all covenants. In addition to the unsecured financing mentioned above, our consolidated financial statements also include $109.3 million of mortgages payable as detailed below: * 7.80% mortgage note due December 2011, secured by 11 self-storage facilities (Locke Sovran I) with an aggregate net book value of $43.8 million, principal and interest paid monthly. The outstanding balance at December 31, 2008 on this mortgage was $29.0 million. * 7.19% mortgage note due March 2012, secured by 27 self-storage facilities (Locke Sovran II) with an * * * aggregate net book value of $81.2 million, principal and interest paid monthly. The outstanding balance at December 31, 2008 on this mortgage was $42.6 million. 7.25% mortgage note due December 2011, secured by 1 self-storage facility with an aggregate net book value of $5.8 million, principal and interest paid monthly. Estimated market rate at time of acquisition 5.40%. The outstanding balance at December 31, 2008 on this mortgage was $3.5 million. 6.76% mortgage note due September 2013, secured by 1 self-storage facility with an aggregate net book value of $2.0 million, principal and interest paid monthly. The outstanding balance at December 31, 2008 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 $3.8 million, principal and interest paid monthly. The outstanding balance at December 31, 2008 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 $34.9 million, interest only paid monthly. Estimated market rate at time of acquisition 6.44%. The outstanding balance at December 31, 2008 on this mortgage was $25.9 million. * 7.50% mortgage notes due August 2011, secured by 3 self-storage facilities with an aggregate net book value of $14.3 million, principal and interest paid monthly. Estimated market rate at time of acquisition 6.42%. The outstanding balance at December 31, 2008 on this mortgage was $6.1 million. 24 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 7.50% mortgage notes in connection with the acquisitions of storage facilities in 2005 and 2006. On July 7, 2007, we issued 920,244 shares of our common stock to the holder of our 8.375% Series C Preferred Stock upon the holder's election to convert the remaining 1,200,000 shares of Series C Preferred Stock into common stock. As a result of the 2007 conversion, $26.6 million recorded in shareholders' equity as 8.375% Series C Convertible Cumulative Preferred Stock was reclassified to additional paid-in capital in July 2007. During 2008, we issued approximately 285,000 shares via our Dividend Reinvestment and Stock Purchase Plan and Employee Stock Option Plan. We received $10.7 million from the sale of such shares. We expect to issue shares when our share price and capital needs warrant such issuance. During 2008 and 2007, 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, 2008, we have reacquired a total of 1,171,886 shares pursuant to this program. From time to time, subject to market price and certain loan covenants, we may reacquire additional shares. Future acquisitions, our expansion and enhancement program, and share repurchases are expected to be funded with draws on our line of credit, sale of properties and private placement solicitation of joint venture equity. Current capital market conditions may prevent us from accessing other traditional sources of capital including the issuance of common and preferred stock and the issuance of unsecured term notes. Should these capital market conditions persist, we may have to curtail acquisitions, our expansion and enhancement program, and share repurchases as we approach June 2011, when our line of credit matures. CONTRACTUAL OBLIGATIONS The following table summarizes our future contractual obligations: Contractual obligations Total 2009 2010-2011 2012-2013 2014 and thereafter Payments due by period Line of credit............ Term notes ............... Mortgages payable ... Interest payments ..... Land lease ................ Building leases ......... Total ......................... $14.0 million $500.0 million $109.3 million $136.2 million $1.1 million $3.9 million $764.5 million - - $28.0 million $28.8 million $0.1 million $0.6 million $57.5 million $14.0 million - $40.3 million $53.3 million $0.1 million $0.3 million $108.0 million - $350.0 million $40.0 million $32.6 million $0.1 million $0.1 million $422.8 million - $150.0 million $1.0 million $21.5 million $0.8 million $2.9 million $176.2 million Interest payments includes actual interest on fixed rate debt and estimated interest for floating-rate debt based on December 31, 2008 rates. ACQUISITION OF PROPERTIES During 2008, we used operating cash flow, borrowings pursuant to the line of credit, borrowings under the bank term note, and proceeds from our Dividend Reinvestment and Stock Purchase Plan to acquire three Properties in Mississippi and Ohio comprising 0.2 million square feet from unaffiliated storage operators. During 2007, we used operating cash flow, borrowings pursuant to the line of credit, borrowings under the bank term note, proceeds from our Dividend Reinvestment and Stock Purchase Plan, and proceeds from the December 2006 common stock offering to acquire 31 Properties in Alabama, Florida, Mississippi, New York, and Texas comprising 2.3 million square feet from unaffiliated storage operators. 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, 25 New Hampshire, New York, Tennessee, and Texas comprising 2.6 million square feet from unaffiliated storage operators. 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 in new markets by acquiring several facilities at once in those new markets. In conjunction with the joint venture agreement entered in May 2008 (see Note 13 to the financial statements), potential acquisition opportunities over the first nine months of the agreement will be offered to the joint venture. The Company’s acquisitions over this period will therefore be limited to facilities that do not fit the joint venture’s investment objectives, but do meet ours. In 2008, the Company’s joint venture (Sovran HHF Storage Holdings LLC) acquired 25 properties for approximately $171.5 million. The Company’s equity contribution to the joint venture for these purchases was approximately $18.6 million, which was financed through draws on our line of credit. In 2008 we continued our program of expanding and enhancing our existing properties. During 2008 we spent approximately $25.6 million on such revenue enhancing improvements. In 2009 we expect to curtail our expansion of current properties with total new expenditures less than $15 million on projects started in 2008. Funding of the expansions are 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. DISPOSITION OF PROPERTIES During 2008, we sold one non-strategic storage facility located in Michigan for net cash proceeds of $7.0 million resulting in a gain of $0.7 million. In 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 through 2007. We may seek to sell additional Properties to joint venture programs or third parties in 2009. OFF-BALANCE SHEET ARRANGEMENTS The Company has a 20% ownership interest in Sovran HHF Storage Holdings LLC (“Sovran HHF”), a joint venture that was formed in May 2008 to acquire self-storage properties that will be managed by the Company. The carrying value of the Company’s investment at December 31, 2008 was $20.1 million. Twenty five properties were acquired by Sovran HHF as of December 31, 2008 for approximately $171.5 million. The Company contributed $18.6 million to the joint venture as its share of capital required to fund the acquisitions. As manager of Sovran HHF, the Company earns a management and call center fee of 7% of gross revenues which totaled $0.5 million for 2008. The Company also received an acquisition fee of 0.5% of purchase price for securing purchases for the joint venture. During 2008, the Company recorded $0.6 million in acquisition fees. The Company’s share of Sovran HHF’s income for 2008 was $0.1 million. At December 31, 2008, Sovran HHF owed the Company $0.3 million for payments made by the Company on behalf of the joint venture for normal operating expenses of the joint venture. The Company also has a 49% ownership interest in Iskalo Office Holdings, LLC, which owns the building that houses the Company's headquarters and other tenants. The Company's investment includes a capital contribution of $49. The carrying value of the Company's investment is a liability of $0.5 million at December 31, 2008 and $0.4 million at December 31, 2007, and is included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets. For the years ended December 31, 2008, 2007 and 2006, the Company's share of Iskalo Office Holdings, LLC's (loss) income was ($6,000), $80,000, and $80,000, respectively. The Company paid rent to Iskalo Office Holdings, LLC of $600,000, $561,000 and $583,000 in 2008, 2007, and 2006, respectively. Future minimum lease payments under the lease are $0.6 million per year through 2010. 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 26 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. In June 2008, the Company made an additional investment of $6.1 million in Locke Sovran I, LLC that increased the Company's ownership from approximately 70% to 100%. 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, 2008 is as follows: (dollars in thousands) Balance Sheet Data: Investment in storage facilities, net Investment in office building Other assets Total Assets Due to the Company Mortgages payable Other liabilities Total Liabilities Unaffiliated partners' equity (deficiency) Company equity (deficiency) Total Liabilities and Partners' Equity (deficiency) Income Statement Data: Total revenues Total expenses Net income (loss) Sovran HHF Storage Holdings LLC Iskalo Office Holdings, LLC $ 170,176 - 3,912 $ 174,088 ======= $ 336 79,937 1,942 82,215 73,499 18,374 $ 174,088 ======= $ - 5,507 568 $ 6,075 ======= $ - 7,169 168 7,337 (718) (544) $ 6,075 ====== $ 6,652 6,301 $ 351 ======= $ 1,127 1,139 $ (12) ====== We do not expect to have material future cash outlays relating to these joint ventures outside our share of capital for future acquisitions of properties by Sovran HHF. We do not guarantee the debt of Sovran HHF or Iskalo Office Holdings, LLC. A summary of our cash flows arising from the off-balance sheet arrangements with Sovran HHF and Iskalo Office Holdings, LLC for the three years ended December 31, 2008, and with Locke Sovran I, LLC for the three months ended March 31, 2006 (the date prior to which it began to be included in our consolidated results of operations) are as follows: (dollars in thousands) Year ended December 31, 2008 2007 2006 Statement of Operations Other income (management fees and acquisition fee income) .... General and administrative expenses (corporate office rent)....... Equity in income of joint ventures............................................... Distributions from unconsolidated joint ventures ........................ Investing activities Investment in joint ventures......................................................... (Advances to) reimbursement of advances to joint ventures ....... $ 1,135 600 104 345 (20,287) (336) $ - 561 119 98 - - $85 583 172 123 - 17 27 REIT QUALIFICATION AND DISTRIBUTION REQUIREMENTS As a REIT, we are not required to pay federal income tax on income that we distribute to our shareholders, provided that 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 2008 may be applied toward our 2007 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 2008, our percentage of revenue from such sources was approximately 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 variable rate debt. At December 31, 2008, we have seven outstanding interest rate swap agreements as summarized below: Notional Amount Effective Date Expiration Date $50 Million ........................... $20 Million ........................... $50 Million ........................... $50 Million ........................... $100 Million ......................... $75 Million ........................... $25 Million ........................... 11/14/05 9/4/05 10/10/06 7/1/08 7/1/08 9/1/09 9/1/09 9/1/09 9/4/13 9/1/09 6/25/12 6/22/12 6/22/12 6/22/12 Fixed Rate Paid Floating Rate Received 4.3900% 4.4350% 4.4800% 4.2825% 4.2965% 4.7100% 4.2875% 1 month LIBOR 6 month LIBOR 1 month LIBOR 1 month LIBOR 1 month LIBOR 1 month LIBOR 1 month LIBOR 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 $270 million of our debt through the interest rate swap termination dates. Through June 2012, $500 million of our $514 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 $514 million at December 31, 2008, a 100 basis point increase in interest rates would increase our interest expense $0.1 million annually. The table below summarizes our debt obligations and interest rate derivatives at December 31, 2008. 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. 28 (dollars in thousands) 2009 2010 2011 2012 2013 Thereafter Total Fair Value Expected Maturity Date Including Discount Line of credit - variable rate LIBOR + 1.375.... - - $14,000 - - - $14,000 $14,000 Notes Payable: Term note - variable rate LIBOR+1.625%........ Term note - variable rate LIBOR+1.50%.......... Term note - fixed rate 6.26%............................. Term note - fixed rate 6.38%............................. - - - - - - - - - - - - Mortgage note - fixed rate 7.80% ...................... $ 587 $ 630 $ 27,816 - - - - $250,000 - $ 20,000 $ 80,000 - - - $250,000 $250,000 $ 20,000 $ 20,000 $ 80,000 $ 78,865 - $ 150,000 $150,000 $147,899 Mortgage note - fixed rate 7.19% ...................... $ 1,128 $ 1,211 $ 1,301 $ 38,963 Mortgage note - fixed rate 7.25% ...................... $ 141 $ 149 $ 3,220 - Mortgage note - fixed rate 6.76% ...................... $ 23 $ 25 $ 27 $ 29 $ 896 - - - - - - - $ 29,033 $ 30,031 $ 42,603 $ 44,205 $ 3,510 $ 3,478 $ 1,000 $ 1,018 Mortgage note - fixed rate 6.35% ...................... $ 26 $ 28 $ 30 $ 31 $ 34 $ 949 $ 1,098 $ 1,100 Mortgage notes - fixed rate 5.55% .................... $ 25,930 - - Mortgage notes - fixed rate 7.50% .................... $ 208 $ 222 $ 5,657 Interest rate derivatives – liability ..................... - - - - - - - - - - - - $ 25,930 $ 26,422 $ 6,087 $ 6,188 - $ 25,490 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. RECENT ACCOUNTING PRONOUNCEMENTS In September 2006, FASB Statement 157, “Fair Value Measurements” (“SFAS 157”) was issued. SFAS 157 establishes a framework for measuring fair value by providing a standard definition of fair value as it applies to assets and liabilities. SFAS 157, which does not require any new fair value measurements, clarifies the application of other accounting pronouncements that require or permit fair value measurements. The effective date for the Company is January 1, 2008 for all financial instruments – see Note 10 to our Consolidated Financial Statements. However, the FASB has delayed the effective date of Statement 157 for all nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15, 2008. The Company is evaluating the impact of adopting SFAS 157 on its consolidated financial statements for nonfinancial assets and nonfinancial liabilities. In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 allows entities to voluntarily choose, at specified election dates, to measure many financial assets and liabilities at fair value. The effective date for the Company is January 1, 2008. The adoption of SFAS 159 did not impact the Company’s consolidated financial statements. 29 In December 2007, FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (SFAS No. 160), which amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. SFAS No. 160 establishes accounting and reporting standards that require the ownership interests in subsidiaries not held by the parent to be clearly identified, labeled and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity. This statement also requires the amount of consolidated net income attributable to the parent and to the non- controlling interest to be clearly identified and presented on the face of the consolidated statement of income. This Statement applies prospectively to all entities that prepare consolidated financial statements and applies prospectively for fiscal years, and interim periods within those fiscal years, beginning January 1, 2009 for the Company. The Company is evaluating the impact of SFAS 160 on its consolidated financial statements. In December 2007, the FASB Statement 141R, “Business Combinations” (“SFAS 141R”) was issued. SFAS 141R replaces SFAS 141. SFAS 141R requires the acquirer of a business to recognize and measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at fair value. SFAS 141R also requires transactions costs related to the business combination to be expensed as incurred. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The effective date for the Company will be January 1, 2009. We have not yet determined the impact of SFAS 141R related to future acquisitions, if any, on our consolidated financial statements. In March 2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 expands quarterly disclosure requirements in SFAS No. 133 about an entity’s derivative instruments and hedging activities. SFAS No. 161 is effective for the Company as of January 1, 2009. The Company is currently assessing the impact of SFAS No. 161 on our consolidated financial statements. 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. 30 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, 2008 and 2007, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008. 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, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, 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, presents fairly in all material respects the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Sovran Self Storage, Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2009 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Buffalo, New York February 25, 2009 31 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 unconsolidated joint venture .............................................. Investment in unconsolidated joint venture ................................................... Prepaid expenses ........................................................................................... Other assets.................................................................................................... Net assets of discontinued operations............................................................ Total Assets ................................................................................................. Liabilities Line of credit ................................................................................................. Term notes ..................................................................................................... Accounts payable and accrued liabilities....................................................... Deferred revenue ........................................................................................... Fair value of interest rate swap agreements................................................... Accrued dividends ......................................................................................... Mortgages payable......................................................................................... Total Liabilities ........................................................................................... December 31, 2007 2008 $ 240,525 1,148,676 1,389,201 (216,644) 1,172,557 4,486 2,971 14 336 20,111 4,691 7,460 - $ 1,212,626 $ 14,000 500,000 23,979 5,659 25,490 14,090 109,261 692,479 $ 236,349 1,086,359 1,322,708 (183,679) 1,139,029 4,010 2,794 27 - - 4,771 7,574 6,383 $ 1,164,588 $ 100,000 356,000 23,752 5,602 1,230 13,656 110,517 610,757 Minority interest – Operating Partnership ..................................................... Minority interest – consolidated joint venture ............................................... 9,265 13,082 9,659 16,783 Shareholders' Equity Common stock $.01 par value, 100,000,000 shares authorized, 22,016,348 shares outstanding (21,676,586 at December 31, 2007) ............................ Additional paid-in capital .............................................................................. 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. 232 666,633 (116,728) (25,162) (27,175) 497,800 $ 1,212,626 228 654,141 (98,437) (1,368) (27,175) 527,389 $ 1,164,588 32 SOVRAN SELF STORAGE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands, except per share data) 2008 2007 2006 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 ..................................................... $ 195,220 7,783 203,003 $ 186,581 6,276 192,857 $ 160,011 5,358 165,369 55,739 19,004 17,279 34,421 126,443 52,317 17,370 15,234 33,851 118,772 43,833 15,166 14,095 25,163 98,257 Income from operations......................................................... 76,560 74,085 67,112 Other income (expenses) Interest expense ...................................................................... Interest income ....................................................................... Casualty gain .......................................................................... 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 disposal of $716 in 2008) ..................................................... Net income............................................................................. Preferred stock dividends ....................................................... Net income available to common shareholders ...................... Earnings per common share - basic Continuing operations............................................................. Discontinued operations ......................................................... Earning per share - basic....................................................... Earnings per common share - diluted Continuing operations............................................................. Discontinued operations ......................................................... Earning per share - diluted.................................................... (38,097) 322 - (721) (1,563) 104 (33,861) 954 114 (783) (1,848) 119 (29,494) 807 - (905) (1,529) 172 36,605 38,780 36,163 794 37,399 - $ 37,399 434 39,214 (1,256) $ 37,958 447 36,610 (2,512) $ 34,098 $ 1.68 0.04 $ 1.72 $ 1.68 0.04 $ 1.72 $ 1.79 0.02 $ 1.81 $ 1.79 0.02 $ 1.81 $ 1.87 0.03 $ 1.90 $ 1.86 0.03 $ 1.89 Dividends declared per common share ............................... $ 2.54 $ 2.50 $ 2.47 See notes to financial statements. 33 SOVRAN SELF STORAGE, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (dollars in thousands, except share data) Balance January 1, 2006 ...................................................... 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 ................................................ 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 ..................................... Stock option expense............................................................ Deferred compensation outside directors............................. Conversion of Series C Preferred Stock to common stock and exercise of related stock warrants............................. Conversion of operating partnership units to common stock.................................................................................. 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, 2007 ................................................ 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 ..................................... 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, 2008 ................................................ See notes to financial statements 8.375% Series C Preferred Stock Shares 8.375% Series C Preferred Stock Common Stock Shares Common Stock 1,200,000 - $ 26,613 - 17,563,046 2,300,000 $ 187 23 - - - - - - - - - - - - 1,200,000 - - - - - - - - - - - - - - - - - - 26,613 - - - - - - (1,200,000) (26,613) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - $ - 501,089 37,675 - 41,719 - - - - - - - - 20,443,529 252,816 13,100 43,989 - - - 920,244 2,908 - - - - - 21,676,586 285,308 2,600 45,713 - - 6,141 - - - - - 22,016,348 5 - - 1 - - - - - - - - 216 3 - - - - - 9 - - - - - - 228 3 - 1 - - - - - - - - $ 232 34 SOVRAN SELF STORAGE, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Additional Paid-in Capital Non- vested Stock Dividends in Excess of Net Income Accumulated Other Comprehensive Income (loss) Treasury Stock $ 466,839 122,388 $ (1,838) - $ (71,995) - $ 1,454 - $(27,175) - 24,862 1,142 (1,838) (1) 876 119 181 (1,830) - - - - 612,738 12,756 425 - 1,224 183 161 26,604 167 (117) - - - - 654,141 10,654 72 - 1,444 279 112 (69) - - - - $ 666,633 - - 1,838 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - $ - - - - - - - - - 36,610 - - (48,224) (83,609) - - - - - - - - - 39,214 - - (54,042) (98,437) - - - - - - - 37,399 - - (55,690) $ (116,728) - - - - - - - - - - - - - - - - 674 - - 2,128 - - - - - (27,175) - - - - - - - - - - - - - - - - - - (3,496) - - (1,368) - - - - - (27,175) - - - - - - - - - - - - - - (23,794) - - $ (25,162) - - - - - $ (27,175) Total Equity $ 394,085 122,411 24,867 1,142 - - 876 119 181 (1,830) 36,610 674 37,284 (48,224) 530,911 12,759 425 - 1,224 183 161 - 167 (117) 39,214 (3,496) 35,718 (54,042) 527,389 10,657 72 1 1,444 279 112 (69) 37,399 (23,794) 13,605 (55,690) $497,800 35 SOVRAN SELF STORAGE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) Operating Activities Net income ..................................................................................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ........................................................................................ Gain on sale ..................................................................................................................... Casualty gain ................................................................................................................... Equity in income of joint ventures.................................................................................. Distributions from unconsolidated joint venture ............................................................ 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....................................................................... Investing Activities Acquisition of storage facilities ..................................................................................... Improvements, equipment additions, and construction in progress .............................. Net proceeds from the sale of storage facility ............................................................... Casualty insurance proceeds received ........................................................................... Investment in unconsolidated joint venture ................................................................... Additional investment in consolidated joint ventures net of cash acquired .................. (Advances to) reimbursement of advances to joint ventures......................................... Reimbursement of (payment of) property deposits ....................................................... Receipts from related parties.......................................................................................... Net cash used in investing activities ............................................................................... Financing Activities Net proceeds from sale of common stock...................................................................... Proceeds from line of credit ........................................................................................... Repayment of line of credit and term note .................................................................... Proceeds from term notes............................................................................................... Financing costs............................................................................................................... Dividends paid - common stock..................................................................................... Dividends paid - preferred stock.................................................................................... Minority interest distributions........................................................................................ Redemption of operating partnership units.................................................................... Mortgage principal and capital lease payments............................................................. Net cash provided by financing activities....................................................................... Net increase (decrease) in cash ....................................................................................... Cash at beginning of period ............................................................................................ Cash at end of period ...................................................................................................... Year Ended December 31, 2006 2007 2008 $ 37,399 $ 39,214 $ 36,610 35,659 (716) - (104) 345 2,284 1,444 279 (171) 118 619 (24) 77,132 (18,547) (45,709) 7,002 - (20,287) (6,106) (336) 1,259 13 (82,711) 10,842 14,000 (206,000) 250,000 (3,085) (55,256) - (2,633) (114) (1,699) 6,055 476 4,010 $ 4,486 34,999 - (114) (119) 98 2,631 1,224 183 (599) 822 7,082 (246) 85,175 (138,059) (52,441) - 1,692 - - - (1,469) 10 (190,267) 13,345 112,000 (12,000) 6,000 (316) (51,805) (1,256) (2,912) (174) (1,510) 61,372 (43,720) 47,730 $ 4,010 26,340 - - (172) 123 2,434 876 119 (407) (2,029) 1,011 (249) 64,656 (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) (2,815) (2,788) (1,286) 154,730 42,819 4,911 $ 47,730 Supplemental cash flow information Cash paid for interest, net of interest capitalized............................................................ $ 37,970 $ 32,313 $ 26,647 Fair value of net liabilities assumed on the acquisition of storage facilities.................. 107 1,580 65,650 Dividends declared but unpaid at December 31, 2008, 2007 and 2006 were $14,090, $13,656, and $12,675, respectively. See notes to financial statements. 36 SOVRAN SELF STORAGE, INC. - DECEMBER 31, 2008 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, 2008, we had an ownership interest in and managed 385 self-storage properties in 24 states under the name Uncle Bob's Self Storage ®. Among our 385 self-storage properties are 27 properties that we manage for a consolidated joint venture of which we are a majority owner and 25 properties that we manage for an unconsolidated joint venture of which we are a 20% owner. Over 40% of the Company’s revenue is derived from stores in the states of Texas and Florida. 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 98.1% ownership interest therein as of December 31, 2008. 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. Our consolidated financial statements include the accounts of the Company, the Operating Partnership, Locke Sovran I, LLC, and Locke Sovran II, LLC, which is a majority owned joint venture. 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 venture since 2001. In June 2008, the Company made an additional investment of $6.1 million in Locke Sovran I, LLC that increased the Company's ownership from approximately 70% to 100%. 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 $3.8 million and $3.2 million, respectively, held in escrow for encumbered properties at December 31, 2008 and 2007. Revenue and Expense Recognition: Rental income is recognized when earned pursuant to month-to-month leases for storage space. Promotional discounts are recognized as a reduction to rental income over the promotional period, which is generally during the first month of occupancy. Rental income received prior to the start of the rental period is included in deferred revenue. Equity in earnings of real estate joint ventures that we have significant influence over is recognized based on our ownership interest in the earnings of these entities. Cost of operations, general and administrative expense, interest expense and advertising costs are expensed as incurred. For the years ended December 31, 2008, 2007, and 2006, advertising costs were $1.4 million, $1.4 million, and $1.0 million, respectively. The Company accrues property taxes based on estimates and historical trends. If these estimates are incorrect, the timing and amount of expense recognition would be affected. Other Income: Consists primarily of sales of storage-related merchandise (locks and packing supplies), insurance commissions, incidental truck rentals, and management fees from unconsolidated joint ventures. 37 Investment in Storage Facilities: Storage facilities are recorded at cost. The purchase price of acquired facilities is allocated to land, building, equipment, and in-place customer leases based on the fair value of each component. 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. Interest and other costs incurred during the construction period of major expansions are capitalized. Capitalized interest during the years ended December 31, 2008 and 2007 was $0.4 million. No interest was capitalized during 2006. 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, 2008 and 2007, 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, property deposits, and the value placed on in-place customer leases at the time of acquisition. The loan acquisition costs were $6.8 million and $6.2 million at December 31, 2008, and 2007, respectively. Accumulated amortization on the loan acquisition costs was approximately $2.5 million and $3.8 million at December 31, 2008, and 2007, respectively. Loan acquisition costs are amortized over the terms of the related debt. 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 $0.1 million and $1.5 million at December 31, 2008 and 2007, respectively. The Company allocates a portion of the purchase price of acquisitions to in-place customer leases. The value of in-place customer leases is based on the Company's experience with customer turnover. The Company amortizes in-place customer leases on a straight-line basis over 12 months (the estimated future benefit period). At December 31, 2008, the gross carrying amount of in-place customer leases was $5.4 million and the accumulated amortization was $5.2 million Amortization expense, including amortization of in-place customer leases, was $1.3 million, $4.8 million and $1.0 million for the periods ended December 31, 2008, 2007 and 2006, respectively. 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 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, 2008, Operating Partnership minority interest ownership was 419,952 Units, or 1.9% (at December 31, 2007 422,727 Units, or 1.9%). The redemption value of the Units at December 31, 2008 and 2007 was $15.1 million and $17.0 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. On an aggregate basis, the Company's reported amounts of net assets exceeds the tax basis by approximately $74 million and $72 million at December 31, 2008 and 2007, respectively. 38 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 $13.6 million, $35.7 million and $37.3 million for the years ended December 31, 2008, 2007, and 2006, respectively. Derivative Financial Instruments: 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 February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 allows entities to voluntarily choose, at specified election dates, to measure many financial assets and liabilities at fair value. The effective date for the Company is January 1, 2008. The adoption of SFAS 159 did not impact the Company’s consolidated financial statements. In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No. 160”), which amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. SFAS No. 160 establishes accounting and reporting standards that require the ownership interests in subsidiaries not held by the parent to be clearly identified, labeled and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity. This statement also requires the amount of consolidated net income attributable to the parent and to the non- controlling interest to be clearly identified and presented on the face of the consolidated statement of income. The effective date for the Company will be January 1, 2009. The Company has not yet determined the impact of SFAS 160 on our consolidated financial statements In December 2007, the FASB Statement 141R, “Business Combinations” (“SFAS 141R”) was issued. SFAS 141R replaces SFAS 141. SFAS 141R requires the acquirer of a business to recognize and measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at fair value. SFAS 141R also requires transaction costs related to the business combination to be expensed as incurred. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The effective date for the Company will be January 1, 2009. The Company has not yet determined the impact of SFAS 141R related to future acquisitions, if any, on our consolidated financial statements. In March 2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 expands quarterly disclosure requirements in SFAS No. 133 about an entity’s derivative instruments and hedging activities. The effective date for the Company will be January 1, 2009. The Company is currently assessing the impact of SFAS No. 161 on our consolidated financial statements. Stock-Based Compensation: Effective January 1, 2006, the Company adopted Statement 123(R) and uses the modified-prospective method. Under the modified-prospective method, the Company recognizes 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 recorded compensation expense (included in general and administrative expense) of $279,000, $183,000 and $119,000 related to stock options under Statement 123(R) and $1.4 million, $1.2 million and $876,000 related to amortization of non-vested stock grants for the years ended December 31, 2008, 2007 and 2006, respectively. 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). The application of this pricing model involves assumptions that are judgmental and sensitive in the determination of compensation expense. The weighted average 39 for key assumptions used in determining the fair value of options granted during 2008 follows: Expected life (years)..................................... Risk free interest rate.................................... Expected volatility........................................ Expected dividend yield ............................... Fair value ...................................................... Weighted Average 6.53 3.78% 22.61% 6.1% $4.79 Range 4.50 - 7.00 2.65 – 3.94% 22.40% - 24.30% 6.00% - 7.00% $3.21 - $5.10 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. 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. 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 from continuing operations 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 from continuing operations ............................................. Basic Earnings per Common Share ............................ Diluted Earnings per Common Share from continuing operations ............................................. Diluted Earnings per Common Share ......................... Year Ended December 31, 2008 2007 2006 $ 36,605 $ 37,524 $ 33,651 21,762 21 20,955 49 17,951 70 21,783 21,004 18,021 $ 1.68 $ 1.72 $ 1.68 $ 1.72 $ 1.79 $ 1.81 $ 1.79 $ 1.81 $ 1.87 $ 1.90 $ 1.86 $ 1.89 40 4. INVESTMENT IN STORAGE FACILITIES The following summarizes activity in storage facilities during the years ended December 31, 2008 and December 31, 2007. (Dollars in thousands) Cost: Beginning balance ................................................................ Acquisition of storage facilities ............................................ Additional investment in consolidated joint ventures........... Improvements and equipment additions ............................... Increase in construction in progress...................................... Dispositions .......................................................................... Ending balance ....................................................................... 2008 2007 $1,322,708 18,454 2,473 44,998 761 (193) $1,389,201 $1,136,052 136,653 - 45,806 6,621 (2,424) $1,322,708 Accumulated Depreciation: Beginning balance ................................................................ Additions during the year ..................................................... Dispositions .......................................................................... Ending balance ....................................................................... $ 183,679 33,100 (135) $ 216,644 $ 154,449 30,011 (781) $ 183,679 The Company allocates purchase price to the tangible and intangible assets and liabilities acquired based on their estimated fair values. The value of land and buildings are determined at replacement cost. Intangible assets, which represent the value of existing customer leases, are recorded at their estimated fair values. During 2008, the Company acquired three storage facilities for $18.9 million. Substantially all of the purchase price of these facilities was allocated to land ($3.7 million), building ($14.7 million), equipment ($0.1 million) and in-place customer leases ($0.4 million) and the operating results of the acquired facilities have been included in the Company's operations since the respective acquisition dates. During 2007, the Company acquired 31 storage facilities for $141.3 million. Substantially all of the purchase price of these facilities was allocated to land ($27.7 million), building ($110.0 million), equipment ($1.5 million) and in-place customer leases ($2.1 million) and the operating results of the acquired facilities have been included in the Company's operations since the respective acquisition dates. 5. DISCONTINUED OPERATIONS In April 2008, the Company sold one non-strategic storage facility located in Michigan for net cash proceeds of $7.0 million resulting in a gain of $0.7 million. The operations of this facility and the gain on sale are reported as discontinued operations. The amounts in the 2007 and 2006 financial statements related to the operations and the net assets of this property have been reclassified and are presented as discontinued operations and net assets from discontinued operations, respectively. Cash flows of discontinued operations have not been segregated from the cash flows of continuing operations on the accompanying consolidated statement of cash flows for the years ended December 31, 2008, 2007 and 2006. The following is a summary of the amounts reported as discontinued operations: (dollars in thousands) Year Ended December 31, 2006 2008 2007 Total revenue Property operations and maintenance expense ................ Real estate tax expense .................................................... Depreciation and amortization expense........................... Net realized gain on sale of property ............................... Total income from discontinued operations ...................... $ 233 (76) (33) (46) 716 $ 794 $ 912 (196) (97) (185) - $ 434 $ 927 (202) (94) (184) - $ 447 41 6. PRO FORMA FINANCIAL INFORMATION (UNAUDITED) The following unaudited pro forma Condensed Statement of Operations is presented as if (i) the 31 storage facilities purchased during 2007, (ii) the 42 storage facilities purchased during 2006, (iii) the additional investment in Locke Sovran I, LLC and Locke Sovran II, LLC in April 2006, and (iv) the related indebtedness incurred and assumed on these transactions had all occurred at January 1, 2006. 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. In management's opinion, all adjustments necessary to reflect the effects of these transactions have been made. This unaudited pro forma information 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, 2006 2007 Pro forma total operating revenues............................................ $199,569 $191,505 Pro forma net income ................................................................ $ 41,749 $ 33,985 Pro forma earnings per common share – diluted ....................... $ 1.92 $ 1.54 7. UNSECURED LINE OF CREDIT AND TERM NOTES On June 25, 2008, the Company entered into agreements relating to new unsecured credit arrangements, and received funds under those arrangements. As part of the agreements, the Company entered into a $250 million unsecured term note maturing in June 2012 bearing interest at LIBOR plus 1.625%. The proceeds from this term note were used to repay the Company’s previous line of credit that was to mature in September 2008, the Company’s term note that was to mature in September 2009, the term note maturing in July 2008, and to provide for working capital. The new agreements also provide for a $125 million (expandable to $150 million) revolving line of credit maturing June 2011 bearing interest at a variable rate equal to LIBOR plus 1.375%, and requires a 0.25% facility fee. The interest rate at December 31, 2008 on the Company's available line of credit was approximately 1.8% (5.5% at December 31, 2007). At December 31, 2008, there was $111 million available on the unsecured line of credit. The Company also maintains an $80 million term note maturing September 2013 bearing interest at a fixed rate of 6.26%, a $20 million term note maturing September 2013 bearing interest at a variable rate equal to LIBOR plus 1.50%, and a $150 million unsecured term note maturing in April 2016 bearing interest at 6.38%. 8. MORTGAGES PAYABLE AND OTHER DEBT DISCLOSURES Mortgages payable at December 31, 2008 and December 31, 2007 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 $43.8 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 $81.2 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 $5.8 million, principal and interest paid monthly. Estimated market rate at time of acquisition 5.40%................. 6.76% mortgage note due September 2013, secured by 1 self-storage facility with an aggregate net book value of $2.0 million, principal and interest paid monthly .................................................................................................... December 31, 2008 December 31, 2007 $ 29,033 $ 29,084 42,603 43,645 3,510 3,643 1,000 1,022 42 6.35% mortgage note due March 2014, secured by 1 self-storage facility with an aggregate net book value of $3.8 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 $34.9 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 $14.3 million, principal and interest paid monthly. Estimated market rate at time of acquisition 6.42%................. Total mortgages payable...................................................................................... 1,098 1,122 25,930 25,719 6,087 $ 109,261 6,282 $ 110,517 The Company assumed the 7.25%, 6.76%, 6.35%, 5.55% and 7.50% mortgage notes in connection with the acquisitions of storage facilities in 2005 and 2006. The 7.25%, 5.55%, and 7.50% 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%. The carrying value of these three mortgages approximates the actual principal balance of the mortgages payable. An immaterial premium exists at December 31, 2008, which 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, 2008. 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) 2009 2010 2011 2012 2013 Thereafter Total Fair Value Expected Maturity Date Including Discount - - $14,000 - - - $14,000 $14,000 Line of credit - variable rate LIBOR + 1.375 (1.84% at December 31, 2008) ..................... Notes Payable: Term note - variable rate LIBOR+1.625% (2.09% at December 31, 2008) ..................... Term note - variable rate LIBOR+1.50% (4.62% at December 31, 2008) ..................... Term note - fixed rate 6.26%............................. Term note - fixed rate 6.38%............................. - - - - - - - - - $250,000 - - $250,000 $250,000 - - - $ 20,000 $ 80,000 - - $ 20,000 $ 20,000 $ 80,000 $ 78,865 - $ 150,000 $150,000 $147,899 - - - - Mortgage note - fixed rate 7.80% ...................... $ 587 $ 630 $ 27,816 Mortgage note - fixed rate 7.19% ...................... $ 1,128 $ 1,211 $ 1,301 $ 38,963 Mortgage note - fixed rate 7.25% ...................... $ 141 $ 149 $ 3,220 - Mortgage note - fixed rate 6.76% ...................... $ 23 $ 25 $ 27 $ 29 $ 896 - - - - - - - $ 29,033 $ 30,031 $ 42,603 $ 44,205 $ 3,510 $ 3,478 $ 1,000 $ 1,018 Mortgage note - fixed rate 6.35% ...................... $ 26 $ 28 $ 30 $ 31 $ 34 $ 949 $ 1,098 $ 1,100 Mortgage notes - fixed rate 5.55% .................... $ 25,930 - - Mortgage notes - fixed rate 7.50% .................... $ 208 $ 222 $ 5,657 Interest rate derivatives – liability ..................... - - - - - - - - - - - - $ 25,930 $ 26,422 $ 6,087 $ 6,188 - $ 25,490 43 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 2008, 2007, and 2006. The Company has entered into seven interest rate swap agreements as detailed below to effectively convert a total of $270 million of variable-rate debt to fixed-rate debt. Notional Amount Effective Date Expiration Date $50 Million ........................... $20 Million ........................... $50 Million ........................... $50 Million ........................... $100 Million ......................... $75 Million ........................... $25 Million ........................... 11/14/05 9/4/05 10/10/06 7/1/08 7/1/08 9/1/09 9/1/09 9/1/09 9/4/13 9/1/09 6/25/12 6/22/12 6/22/12 6/22/12 Fixed Rate Paid Floating Rate Received 4.3900% 4.4350% 4.4800% 4.2825% 4.2965% 4.7100% 4.2875% 1 month LIBOR 6 month LIBOR 1 month LIBOR 1 month LIBOR 1 month LIBOR 1 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 2008, 2007, and 2006, the net reclassification from AOCI to interest expense was $2.6 million, ($1.1) million and ($0.5) million, respectively, based on payments (receipts) made or received under the swap agreements. Based on current interest rates, the Company estimates that payments under the interest rate swaps will be approximately $10.6 million in 2009. 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 a liability of $25.5 million and $1.2 million at December 31, 2008, and 2007 respectively. 10. FAIR VALUE MEASUREMENTS In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (SFAS 157. This statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. This statement applies under other accounting pronouncements that require or permit fair value measurements. The statement indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. SFAS 157 defines fair value based upon an exit price model. Relative to SFAS 157, the FASB issued FASB Staff Positions (FSP) 157-1, 157-2, and 157-3. FSP 157-1 amends SFAS 157 to exclude SFAS No. 13, “Accounting for Leases,” (SFAS 13) and its related interpretive accounting pronouncements that address leasing transactions, while FSP 157-2 delays the effective date of the application of SFAS 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and 44 nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. FSP 157-3 addresses considerations in determining the fair value of a financial asset when the market for that asset is not active. We adopted SFAS 157 as of January 1, 2008, with the exception of the application of the statement to non- recurring nonfinancial assets and nonfinancial liabilities. Non-recurring nonfinancial assets and nonfinancial liabilities for which we have not applied the provisions of SFAS 157 include those measured at fair value in a business combination. SFAS 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2008 (in thousands): Interest rate swaps .................. (25,490) Asset (Liability) Level 1 - Level 2 (25,490) Level 3 - Interest rate swaps are over the counter securities with no quoted readily available Level 1 inputs, and therefore are measured at fair value using inputs that are directly observable in active markets and are classified within Level 2 of the valuation hierarchy, using the income approach. 11. STOCK OPTIONS AND NON-VESTED STOCK The Company established the 2005 Award and Option Plan (the "Plan") which replaced the expired 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 eight 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, 2008, options for 324,688 shares were outstanding under the Plans and options for 1,096,464 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 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 2008, 1,820 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, 2008, options for 36,000 common shares and non-vested shares of 9,160 were outstanding under the Non-employee Plan and options for no shares of common stock were available for future issuance. 45 A summary of the Company's stock option activity and related information for the years ended December 31 follows: 2008 2007 2006 Weighted average exercise price Options Weighted average exercise price Options Weighted average exercise price Options Outstanding at beginning of year: ................................ 168,125 $ 42.54 113,225 $ 35.77 142,900 $ 32.68 Granted ................................... Exercised ................................ Forfeited ................................. 201,163 (2,600) (6,000) 43.12 27.78 36.86 74,000 (13,100) (6,000) 52.49 32.44 59.62 14,000 (37,675) (6,000) 51.78 30.33 33.05 Outstanding at end of year...... 360,688 $ 43.06 168,125 $ 42.54 113,225 $ 35.77 Exercisable at end of year....... 118,025 $ 38.84 82,625 $ 34.45 74,225 $ 31.14 A summary of the Company's stock options outstanding at December 31, 2008 follows: Outstanding Exercisable Exercise Price Range $20.375 – 29.99 ...................................... $30.00 – 39.99 ........................................ $40.00 – 57.79 ........................................ Total........................................................ Options 31,475 33,050 296,163 360,688 Weighted average exercise price $ 21.58 $ 35.35 $ 46.21 $ 43.06 Options 31,475 19,550 67,000 118,025 Intrinsic value of outstanding stock options at December 31, 2008 ........................................ Intrinsic value of exercisable stock options at December 31, 2008......................................... Intrinsic value of stock options exercised in 2008................................................................... Weighted average exercise price $ 21.58 $ 34.11 $ 48.33 $ 38.84 $ 506,184 $ 506,184 $ 37,691 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, 2008, or the price on the date of exercise for those exercised during the year. As of December 31, 2008, there was approximately $1.1 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 5.2 years. The weighted average remaining contractual life of all options is 8.0 years, and for exercisable options is 5.7 years. Non-vested Stock The Company has also issued 289,587 shares of non-vested stock to employees which vest over two to nine 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. For the year ended December 31, 2008, the fair market value of the non-vested stock on the date of grant ranged from $20.38 to $59.81. During 2008, 43,893 shares of non-vested stock were issued to employees with an aggregate fair value of $1.8 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. 46 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: 2008 2007 2006 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: ................................ 115,896 $ 45.54 96,453 $ 40.21 71,411 $ 30.39 Granted ................................... Vested..................................... Forfeited ................................. 45,713 (30,802) - 41.50 42.71 - 43,989 (24,546) - 53.79 39.39 - 41,719 (16,677) - 53.86 32.29 - Unvested at end of year .......... 130,807 $ 44.79 115,896 $ 45.54 96,453 $ 40.21 Compensation expense of $1.4 million, $1.2 million and $0.9 million was recognized for the vested portion of non-vested stock grants in 2008, 2007 and 2006, respectively. The fair value of non-vested stock that vested during 2008, 2007 and 2006 was $1.3 million, $1.0 million and $0.5 million, respectively. The total unrecognized compensation cost related to non-vested stock was $4.8 million at December 31, 2008, and the remaining weighted- average period over which this expense will be recognized was 6 years. 12. 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 $284,000, $256,000, and $166,000 for the years ended December 31, 2008, 2007 and 2006, respectively. 13. INVESTMENT IN JOINT VENTURES The Company has a 20% ownership interest in Sovran HHF Storage Holdings LLC (“Sovran HHF”), a joint venture that was formed in May 2008 to acquire self-storage properties that will be managed by the Company. The carrying value of the Company’s investment at December 31, 2008 was $20.1 million. Twenty five properties were acquired by Sovran HHF as of December 31, 2008 for approximately $171.5 million. The Company contributed $18.6 million to the joint venture as its share of capital required to fund the acquisitions. As of December 31, 2008, the carrying value of the Company's investment in Sovran HHF exceeds its share of the underlying equity in net assets of Sovran HHF by approximately $1.7 million as a result of the capitalization of certain acquisition related costs. This difference is not amortized, it is included in the carrying value of the investment, which is assessed for impairment on a periodic basis. As manager of Sovran HHF, the Company earns a management and call center fee of 7% of gross revenues which totaled $0.5 million for 2008. The Company also received an acquisition fee of 0.5% of purchase price for securing purchases for the joint venture. During 2008, the Company recorded $0.7 million in acquisition fees. The Company’s share of Sovran HHF’s income for 2008 was $0.1 million. At December 31, 2008, Sovran HHF owed the Company $0.3 million for payments made by the Company on behalf of the joint venture. The Company also has a 49% ownership interest in Iskalo Office Holdings, LLC, which owns the building that houses the Company's headquarters and other tenants. The Company's investment includes a capital contribution of $49. The carrying value of the Company's investment is a liability of $0.5 million at December 31, 2008 and $0.4 million at December 31, 2007, and is included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets. For the years ended December 31, 2008, 2007 and 2006, the Company's share of Iskalo Office Holdings, LLC's (loss) income was ($6,000), $80,000, and $80,000, respectively. The 47 Company paid rent to Iskalo Office Holdings, LLC of $600,000, $561,000 and $583,000 in 2008, 2007, and 2006, respectively. Future minimum lease payments under the lease are $0.6 million per year through 2010. A summary of the unconsolidated joint ventures' financial statements as of and for the year ended December 31, 2008 is as follows: (dollars in thousands) Balance Sheet Data: Investment in storage facilities, net Investment in office building Other assets Total Assets Due to the Company Mortgages payable Other liabilities Total Liabilities Unaffiliated partners' equity (deficiency) Company equity (deficiency) Total Liabilities and Partners' Equity (deficiency) Income Statement Data: Total revenues Total expenses Net income (loss) Sovran HHF Storage Holdings LLC Iskalo Office Holdings, LLC $ 170,176 - 3,912 $ 174,088 ======= $ 336 79,937 1,942 82,215 73,499 18,374 $ 174,088 ======= $ - 5,507 568 $ 6,075 ======= $ - 7,169 168 7,337 (718) (544) $ 6,075 ====== $ 6,652 6,301 $ 351 ======= $ 1,127 1,139 $ (12) ====== The Company does not guarantee the debt of Sovran HHF or Iskalo Office Holdings, LLC. 14. PREFERRED STOCK 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. In 2004, the Company issued 306,748 shares of its common stock in connection with the conversion of 400,000 shares of Series C Preferred Stock into common stock. During 2005, the Company 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. On July 7, 2007, we issued 920,244 shares of our common stock to the holder of our Series C Preferred Stock upon the holder's election to convert the remaining 1,200,000 shares of Series C Preferred Stock into common stock. As a result of the conversion, $26.6 million recorded in shareholders' equity as 8.375% Series C Convertible Cumulative Preferred Stock was reclassified to additional paid-in capital in 2007. 48 15. SUPPLEMENTARY QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of quarterly results of operations for the years ended December 31, 2008 and 2007 (dollars in thousands, except per share data). March 31 June 30 Sept. 30 Dec. 31 2008 Quarter Ended Operating revenue........................................ Income from continuing operations (a) ....... Income from discontinued operations (a) .... Net Income .................................................. Net income available to common shareholders............................................... Net Income Per Common Share Basic .......................................................... Diluted ....................................................... $ 49,619 $ 8,871 $ 82 $ 8,953 $ 50,120 $ 9,829 $ 712 $ 10,541 $ 52,497 $ 9,528 $ - $ 9,528 $ 50,767 $ 8,377 $ - $ 8,377 $ 8,953 $ 10,541 $ 9,528 $ 8,377 $ 0.41 $ 0.41 $ 0.49 $ 0.48 $ 0.44 $ 0.44 $ 0.38 $ 0.38 March 31 June 30 Sept. 30 Dec. 31 2007 Quarter Ended Operating revenue (a) .................................. Income from continuing operations (a) ....... Income from discontinued operations (a) .... Net Income .................................................. Net income available to common shareholders............................................... Net Income Per Common Share Basic .......................................................... Diluted ....................................................... $ 44,371 $ 9,437 $ 100 $ 9,537 $ 47,872 $ 7,950 $ 114 $ 8,064 $ 50,765 $ 10,757 $ 118 $ 10,875 $ 49,849 $ 10,636 $ 102 $ 10,738 $ 8,909 $ 7,436 $ 10,875 $ 10,738 $ 0.44 $ 0.44 $ 0.36 $ 0.36 $ 0.51 $ 0.51 $ 0.50 $ 0.50 Data as presented in this table differ from the amounts as presented in the Company’s quarterly reports due (a) to the impact of discontinued operations accounting with respect to the one property sold in 2008 as described in Note 5. 16. 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. 49 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, 2008. 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, 2008. 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, 2008. 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, 2008 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, 2008 based on the criteria in Internal Control-Integrated Framework issued by COSO. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2008 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included in Item 9A herein. /S/ Robert J. Attea Chief Executive Officer /S/ David L. Rogers Chief Financial Officer 50 Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders of Sovran Self Storage, Inc. We have audited Sovran Self Storage, Inc.’s internal control over financial reporting as of December 31, 2008, 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 included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, 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, Sovran Self Storage, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, 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, 2008 and 2007, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008 of Sovran Self Storage, Inc. and our report dated February 25, 2009 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Buffalo, New York February 25, 2009 51 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, 2009, 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 "Director Compensation" in the Company's Proxy Statement for the Annual Meeting of Shareholders of the Company to be held on May 21, 2009. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required herein is incorporated by reference to "Stock Ownership By Directors and Executive Officers" and "Security Ownership of Certain Beneficial Owners" in the Proxy Statement for the Annual Meeting of Shareholders of the Company to be held on May 21, 2009. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required herein is incorporated by reference to "Certain Transactions” and “Election of Directors—Director Independence” in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 21, 2009. Item 14. Principal Accountant Fees and Services The information required herein is incorporated by reference to "Appointment of Independent Auditor" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 21, 2009. 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, 2008 and 2007. Consolidated Statements of Operations for Years Ended December 31, 2008, 2007, and 2006. Consolidated Statements of Shareholders' Equity for Years Ended December 31, 2008, 2007, and 2006. Consolidated Statements of Cash Flows for Years Ended December 31, 2008, 2007, and 2006. Notes to Consolidated Financial Statements. (iv) (v) 2. The following financial statement Schedule as of the period ended December 31, 2008 is included in this Annual Report on Form 10-K. Schedule III Real Estate and Accumulated Depreciation. 52 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 10.1+ 10.2+ 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). 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). 10.3*+ Employment Agreement between the Registrant and Robert J. Attea. 10.4*+ Employment Agreement between the Registrant and Kenneth F. Myszka. 10.5*+ Employment Agreement between the Registrant and David L. Rogers. 10.6+ 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). 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). 10.10+ Deferred Compensation Plan for Directors (incorporated by reference to Schedule 14A Proxy Statement filed April 10, 2008). 53 10.11 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). 10.12 Agreement of Limited Partnership of Sovran Acquisition Limited Partnership (incorporated by reference to Exhibit 3.1 on Form 10 filed April 22, 1998). 10.13* Amendments to the Agreement of Limited Partnership of Sovran Acquisition Limited Partnership dated July 30, 1999 and July 3, 2002. 10.14 10.15 10.16 10.17 10.18 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). Third Amended and Restated Revolving Credit and Term Loan Agreement among Registrant, the Partnership, Manufacturers and Traders Trust Company and other lenders named therein (incorporated by reference to Exhibit 10.1 filed in the Company’s Current Report on Form 8-K, filed June 27, 2008). 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). $150 million, 6.38% Senior Guaranteed Notes, Series C due April 26, 2016, and Amendments to Second 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). Promissory Note between Locke Sovran I, LLC and GMAC Commercial Mortgage Corporation (incorporated by reference to Exhibit 10.21 as filed in the Company’s Annual Report on Form 10-K, filed March 1, 2007). 12.1* Statement Re: Computation of Earnings to Fixed Charges. 21.1* Subsidiaries of the Company (incorporated by reference to Exhibit 21 as filed in the Company’s Annual Report on Form 10-K, filed March 1, 2007). 23.1* Consent of Independent Registered Public Accounting Firm. 24.1* Powers of Attorney (included on signature pages). 31.1* 31.2* 32.1* * + 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. 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 February 27, 2009 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 February 27, 2009 February 27, 2009 February 27, 2009 February 27, 2009 February 27, 2009 February 27, 2009 February 27, 2009 55 Sovran Self Storage, Inc. Schedule III Combined Real Estate and Accumulated Depreciation (in thousands) December 31, 2008 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 $528 $363 680 345 416 397 308 770 239 701 204 395 483 224 423 395 164 367 853 152 268 230 463 444 649 387 844 302 315 321 361 189 488 430 513 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 1,930 361 650 2,029 1,436 1,076 1,869 1,298 768 903 854 2,037 796 1,651 485 451 447 749 961 447 442 3,791 514 844 912 659 349 1,638 654 594 1,079 508 1,884 446 680 345 416 397 747 770 239 701 198 779 483 224 497 395 164 367 853 687 268 234 816 444 649 387 844 303 517 321 374 189 488 602 513 2,207 1,977 1,918 3,545 2,860 1,739 4,603 2,408 2,427 1,643 1,971 3,789 1,604 3,108 1,889 1,211 1,772 3,806 1,154 1,695 1,285 5,122 2,127 3,173 2,314 2,680 1,451 2,181 1,804 1,912 1,798 1,696 3,291 2,376 $2,570 $706 2,657 2,263 3,961 3,257 2,486 699 573 768 626 563 5,373 1,476 2,647 3,128 1,841 2,750 4,272 1,828 628 764 508 758 922 526 3,605 1,015 2,284 1,375 2,139 613 408 635 4,659 1,194 1,841 1,963 1,519 416 613 421 5,938 1,072 2,571 770 3,822 1,029 2,701 3,524 1,754 2,698 2,125 2,286 1,987 2,184 3,893 2,889 657 904 541 530 548 655 506 590 753 864 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 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 56  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 2,755 440 770 265 364 926 497 529 615 1,362 2,783 824 467 1,570 736 1,091 768 1,038 2,443 1,975 464 1,124 1,881 1,753 795 347 1,550 560 624 415 2,724 714 531 951 742 577 2,204 590 720 964 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 1,352 4,389 1,300 1,378 2,092 1,613 1,311 1,614 1,765 4,525 2,120 1,548 3,674 2,207 4,034 1,907 2,733 3,246 5,194 1,365 2,433 2,364 2,997 2,257 1,351 2,888 2,285 2,665 1,930 4,082 1,367 1,577 3,548 2,700 3,016 3,331 1,554 2,322 3,718 1,546 5,892 1,698 1,802 2,575 1,921 1,485 2,027 2,071 5,004 2,477 1,779 450 1,229 515 515 556 620 463 612 413 870 667 524 4,557 1,151 2,523 756 4,685 1,422 2,222 3,448 3,865 590 798 732 6,570 1,445 1,609 4,024 2,976 3,253 2,570 1,629 3,272 3,015 3,528 2,256 4,451 2,086 1,803 535 924 568 755 755 497 701 820 931 679 908 504 564 4,636 1,249 3,226 952 3,688 1,034 4,127 1,763 2,765 725 581 777 4,880 1,272 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 57  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 AL GA PA PA (1) 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 2,918 671 723 596 947 1,291 305 440 1,161 269 624 645 282 1,031 327 1,115 536 2,364 989 325 299 1,326 1,048 2,263 267 757 433 432 929 509 1,395 300 409 337 919 1,208 2,040 1,772 1,350 1,602 424 431 360 692 472 206 413 442 353 232 766 442 408 328 436 289 671 433 345 229 545 359 297 310 688 683 777 568 436 631 538 487 315 314 707 693 751 725 701 2,177 2,290 2,237 3,106 3,001 1,216 2,142 2,753 1,568 1,487 2,445 2,049 2,693 1,651 2,874 1,697 3,733 1,849 1,587 1,183 3,266 2,335 3,134 1,555 2,614 2,796 3,202 2,957 2,144 3,648 2,330 2,163 1,468 2,032 3,701 4,089 4,448 3,936 4,456 2,601 2,721 2,597 3,798 3,473 1,422 2,555 3,195 1,921 1,719 3,211 2,491 3,101 1,979 3,310 1,986 4,404 2,282 1,932 1,412 3,811 2,694 3,431 1,865 3,302 3,479 3,979 3,525 2,580 833 720 745 932 829 530 889 649 588 482 772 675 800 549 852 535 904 526 535 379 795 747 787 522 216 246 985 963 725 4,279 1,116 2,868 2,650 1,783 2,346 4,408 4,782 842 613 441 633 927 819 5,199 1,166 4,661 1,089 5,157 1,412 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 Description Birmingham III Macon II Harrisburg I Harrisburg II 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 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 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 2,550 875 1,272 1,573 1,347 948 833 1,726 1,527 1,888 417 297 1,650 1,255 343 563 1,271 962 323 581 1,180 223 737 630 347 466 2,079 1,127 1,241 786 515 562 429 458 306 377 1,528 908 311 533 495 761 418 606 624 219 694 542 451 504 346 432 634 566 293 335 328 152 245 260 326 616 491 296 921 304 960 943 611 370 515 1,033 825 735 268 89 421 282 637 2,656 3,986 3,494 3,511 2,410 1,623 3,393 2,644 3,718 2,073 1,533 3,210 3,820 2,622 1,920 2,613 2,277 1,036 1,701 2,223 1,711 1,570 2,386 1,543 3,748 3,290 4,974 5,127 3,030 2,001 2,636 4,182 3,190 3,735 1,474 1,904 2,714 1,614 3,081 Life on which depreciation in latest income statement is computed Accum. Deprec. Date of Construction Date Acquired Total 3,151 4,747 773 1,152 3,912 1,002 4,117 3,034 1,842 4,087 3,186 819 211 480 259 210 4,169 1,022 2,577 1,879 3,642 585 472 825 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 4,454 1,027 1993/95 3/26/1997 5 to 40 years 3,188 2,213 2,948 2,605 1,188 1,946 2,483 2,037 2,186 2,877 1,839 762 518 657 648 335 427 550 502 458 762 471 4,669 1,155 3,594 640 5,934 1,512 6,070 1,498 3,641 2,371 3,151 912 649 797 5,215 1,307 4,015 938 4,470 1,116 1,742 1,993 3,135 1,896 3,718 405 399 710 496 833 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 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 Indian Harbor Beach FL Jackson 3 - I55 Katy-N.Fry 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 Jacksonville-Center TX TX FL TX TX TX NC 709 441 843 397 488 492 733 384 296 349 544 702 775 940 742 522 512 662 744 419 1,208 944 903 1,503 489 447 659 635 548 840 324 492 484 327 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 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 1,329 322 880 229 730 729 740 960 469 551 487 934 1,014 534 2,077 583 807 1,069 672 712 464 1,175 1,817 -619 128 3,268 352 315 329 705 110 2,199 372 129 283 350 629 317 442 672 Building, Equipment and Improvements 2,532 3,412 2,440 4,724 5,748 3,975 2,495 3,863 2,385 2,233 2,728 3,955 1,905 3,157 1,833 2,749 3,890 3,775 4,475 3,441 2,992 3,483 2,035 3,149 4,792 5,206 4,118 3,972 6,764 1,923 3,696 3,013 2,431 2,271 3,723 2,122 2,294 2,396 2,001 Land 542 620 540 864 1,243 709 694 843 397 488 688 733 384 414 349 544 702 775 940 742 569 675 662 744 419 1,208 944 903 1,503 489 740 698 635 548 840 324 510 481 327 Life on which depreciation in latest income statement is computed Accum. Deprec. Date of Construction Date Acquired 717 916 723 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 3,074 4,032 2,980 5,588 1,331 1993/95 2/5/1998 5 to 40 years 6,991 1,604 4,684 1,215 3,189 191 1975 1985 1988 2/5/1998 5 to 40 years 2/4/1998 5 to 40 years 2/9/1998 5 to 40 years 4,706 1,111 1989/95 2/4/1998 5 to 40 years 2,782 2,721 3,416 654 606 203 4,688 1,120 2,289 3,571 2,182 3,293 549 569 517 835 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 4,592 1,023 1984/88 3/26/1998 5 to 40 years 4,550 1,028 1988/91 4/9/1998 5 to 40 years 5,415 1,203 1990/96 4/9/1998 5 to 40 years 4,183 3,561 4,158 2,697 3,893 5,211 891 717 667 612 879 572 6,414 1,411 5,062 1,139 4,875 1,051 8,267 1,850 2,412 4,436 3,711 3,066 2,819 573 721 734 660 606 4,563 1,034 2,446 2,804 2,877 2,328 585 665 646 442 1980 1986 1986 1985 1995 1994 1988 1985 1988 1991 1997 1986 1996 1997 1997 1987 1994 1994 1996 1995 4/7/1998 5 to 40 years 4/22/1998 5 to 40 years 4/22/1998 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 8/6/1998 5 to 40 years 60  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 Description Jacksonville-Gum Branch 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 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 Kingsland MA (1) MA (1) SC (1) SC (1) GA (1) 837 733 787 1,035 1,024 883 552 470 508 216 550 670 390 460 507 447 556 708 314 188 963 651 565 330 339 291 354 453 872 849 410 667 335 276 633 633 384 254 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 1,902 1,272 601 654 1,362 867 462 1,595 793 926 267 627 1,414 767 1,097 539 719 583 583 334 783 828 657 1,753 746 346 1,153 753 315 367 1,151 903 486 568 365 590 560 1,204 841 2,875 508 216 550 670 390 460 507 447 556 708 314 188 963 772 565 733 339 291 354 453 872 849 410 667 335 276 633 633 384 254 1,981 966 841 902 1,104 1,091 942 589 666 3,087 1,383 2,652 3,769 2,437 2,104 3,653 2,569 2,877 3,127 1,722 2,066 4,663 3,576 3,135 1,625 1,929 1,609 1,739 2,393 4,304 4,058 3,379 3,119 1,867 2,465 3,326 2,932 1,789 2,210 7,558 3,334 3,852 3,499 4,258 4,142 4,284 2,774 4,581 3,595 1,599 3,202 4,439 2,827 2,564 4,160 3,016 3,433 3,835 2,036 2,254 663 411 635 801 553 642 634 632 877 807 572 558 5,626 1,099 4,348 3,700 2,358 2,268 1,900 2,093 2,846 767 755 397 433 359 445 570 5,176 1,069 4,907 3,789 3,786 2,202 2,741 3,959 3,565 2,173 2,464 9,539 4,300 4,693 4,401 5,362 5,233 5,226 3,363 5,247 972 623 750 478 439 649 683 411 350 577 285 308 306 762 736 703 503 521 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 1989 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 12/1/2001 5 to 40 years 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 Land 570 1,004 714 327 912 268 306 480 583 553 320 496 784 421 411 919 612 689 817 407 817 2,207 1,131 635 1,252 1,039 827 2,156 6,845 3,416 1,542 4,226 1,486 1,454 2,378 3,097 3,233 2,248 2,460 3,584 1,851 2,181 4,037 2,699 3,426 5,024 3,409 1,828 3,465 9,481 5,043 3,240 6,083 4,242 4,073 2,726 7,849 4,130 1,869 5,138 1,754 1,760 2,858 3,680 3,786 2,568 2,956 4,368 2,272 2,592 4,956 3,311 4,115 6,143 4,226 2,235 4,282 388 868 625 312 772 273 275 433 523 509 357 414 594 335 355 658 439 563 602 576 305 578 1988 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 11,688 1,450 1989/95 12/16/2002 5 to 40 years 6,174 3,875 7,335 5,281 4,900 758 480 919 584 531 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 2,040 1,119 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 Land 534 1,004 670 294 853 250 285 449 545 517 299 463 734 394 381 919 612 689 817 817 407 817 2,207 1,131 635 1,251 1,039 827 Description Saco Plymouth Sandwich Syracuse Encum brance ST ME (1) MA MA (1) NY (1) 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 East Falmouth TN TX MA 278 2,261 400 372 851 484 315 593 935 1,179 1,053 620 678 283 666 341 231 267 123 178 178 615 479 322 340 41 297 298 1,771 106 249 2,646 849 74 456 761 665 153 2,713 11,013 773 1,195 1,103 1,061 388 1,720 1,167 1,365 2,047 1,479 3,170 4,877 4,550 4,427 1,640 6,986 4,744 5,569 5,857 5,978 2,713 11,311 14,024 1,408 773 1,195 1,103 1,061 388 1,720 1,566 1,365 2,051 1,479 4,941 4,983 4,799 7,073 2,489 7,060 4,801 6,330 6,518 6,131 5,714 6,178 5,902 8,134 2,877 8,780 6,367 7,695 8,569 7,610 512 598 585 631 227 837 563 757 727 602 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 1998 8/5/2004 5 to 40 years 2/23/2005 5 to 40 years 62  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 Cicero Bay Shore NY NY Springfield-Congress MA Stamford-Hope CT Land 527 1,131 612 1,612 Houston-Jones TX 3,510 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 1,000 Lafayette-Westgate Broussard LA LA Congress-Lafayette LA 1,098 470 537 556 754 484 811 719 721 867 628 596 937 707 411 463 601 542 832 617 Manchester Nashua Largo 2 NH NH FL 2,478 1,270 Pinellas Park FL Tarpon Springs FL 2,301 929 696 New Orleans LA 4,196 1,220 St Louis-Meramec MO 4,841 1,113 St Louis-Charles Rock MO St Louis-Shackelford MO 2,433 St Louis-W.Washington MO 3,873 St Louis-Howdershell MO St Louis-Lemay Ferry MO St Louis-Manchester MO 3,658 766 828 734 899 890 697 Arlington-Little Rd TX 2,020 1,256 Dallas-Goldmark Dallas-Manana TX TX 605 607 Building, Equipment and Improvements Building, Equipment and Improvements 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 1,621 1,831 2,406 1,319 3,268 2,422 5,037 3,676 2,739 4,805 4,359 3,040 3,290 2,867 3,596 3,552 2,711 4,946 2,434 2,428 499 57 93 192 77 106 1,577 160 202 149 1,357 428 1,935 1,087 94 449 78 111 2,018 131 73 1,231 2,084 57 373 157 104 96 75 176 79 124 533 174 167 92 145 47 107 Land 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 1,256 605 607 2,620 4,666 2,594 6,777 5,025 7,832 3,479 2,343 2,467 3,214 3,334 3,825 4,862 4,081 3,593 2,627 2,489 3,890 4,951 1,752 1,904 3,637 3,403 3,325 2,795 5,194 3,780 2,835 4,880 4,535 3,119 3,414 3,400 3,770 3,719 2,803 5,091 2,481 2,535 3,147 5,797 3,206 8,389 6,240 9,738 3,949 2,880 3,023 3,968 3,818 4,636 5,581 4,802 4,460 3,609 3,085 4,827 5,658 2,163 2,367 4,238 3,945 4,157 3,412 6,464 4,709 3,531 6,100 5,648 3,885 4,242 4,134 4,669 4,609 3,500 6,347 3,086 3,142 270 469 260 666 470 737 191 218 220 293 211 343 280 305 280 205 199 290 315 147 140 216 134 231 175 343 245 184 320 293 200 222 223 248 239 183 329 162 165 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 2004 6/22/2006 5 to 40 years 6/22/2006 5 to 40 years 63  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 Dallas-Manderville TX Ft. Worth-Granbury TX 1,813 Ft. Worth-Grapevine TX 2,150 San Antonio-Blanco TX San Antonio-Broadway TX Land 1,073 549 644 963 773 San Antonio-Huebner TX 2,254 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 Buffalo-Lagner Buffalo-Transit Buffalo-Lake Buffalo-Union NH NY NY NY NY Buffalo-Niagara Falls NY Buffalo-Youngs Buffalo-Sheridan Buffalo-Transit Rochester-Phillips Greenville Port Arthur Beaumont Huntsville Huntsville Gulfport Huntsville Mobile Gulfport Huntsville Foley Pensacola Auburn Gulfport NY NY NY NY MS TX TX AL AL MS AL AL MS AL AL FL AL MS 590 694 736 975 0 439 813 532 437 638 348 323 315 961 375 1,003 1,100 929 1,537 1,607 1,016 1,423 1,206 1,216 1,345 1,164 1,346 1,029 686 1,811 Building, Equipment and Improvements Building, Equipment and Improvements 4,276 2,180 2,542 3,836 3,060 4,624 2,471 2,784 4,639 2,361 2,758 2,905 3,854 3,680 1,745 3,213 2,119 1,794 2,531 1,344 1,331 2,185 3,827 1,498 4,002 4,386 3,647 6,018 6,338 4,013 5,624 4,775 4,819 5,325 4,624 5,474 4,180 2,732 7,152 54 84 49 50 99 98 52 1,862 234 122 67 118 85 64 58 1,912 210 67 241 89 48 84 85 217 58 96 119 195 110 101 18 49 106 22 47 71 86 74 23 Land 1,073 549 644 963 773 1,175 619 699 1,158 590 694 736 975 0 439 813 532 437 638 348 323 316 961 375 1,003 1,100 930 1,537 1,607 1,017 1,423 1,206 1,216 1,345 1,164 1,347 1,029 686 1,811 4,330 2,264 2,591 3,886 3,159 4,722 2,523 4,646 4,873 2,483 2,825 3,023 3,939 3,744 1,803 5,125 2,329 1,861 2,772 1,433 1,379 2,268 3,912 1,715 4,060 4,482 3,765 6,213 6,448 4,113 5,642 4,824 4,925 5,347 4,671 5,544 4,266 2,806 7,175 5,403 2,813 3,235 4,849 3,932 5,897 3,142 5,345 6,031 3,073 3,519 3,759 4,914 3,744 2,242 5,938 2,861 2,298 3,410 1,781 1,702 2,584 4,873 2,090 5,063 5,582 4,695 7,750 8,055 5,130 7,065 6,030 6,141 6,692 5,835 6,891 5,295 3,492 8,986 284 149 169 255 208 300 161 186 296 146 163 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 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 180 2002/04/06 9/28/2006 5 to 40 years 229 224 106 203 102 89 136 67 66 84 177 86 183 239 178 294 262 168 228 196 200 217 190 230 182 117 289 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 1993/07 3/30/2007 5 to 40 years 1998 1997 1998 1998 3/30/2007 5 to 40 years 3/30/2007 5 to 40 years 3/30/2007 5 to 40 years 3/30/2007 5 to 40 years 1999/00 3/30/2007 5 to 40 years 1999 3/30/2007 5 to 40 years 1990/95 3/30/2007 5 to 40 years 1999 1994 3/30/2007 5 to 40 years 1/11/2007 5 to 40 years 2002/04 3/8/2007 5 to 40 years 2003/06 3/8/2007 5 to 40 years 1989/06 6/1/2007 5 to 40 years 1993/07 6/1/2007 5 to 40 years 1998/05 6/1/2007 5 to 40 years 1998/06 6/1/2007 5 to 40 years 2000/07 6/1/2007 5 to 40 years 2002/04 6/1/2007 5 to 40 years 2002/06 6/1/2007 5 to 40 years 2003/06 6/1/2007 5 to 40 years 2003/06 6/1/2007 5 to 40 years 2003 6/1/2007 5 to 40 years 2004/06 6/1/2007 5 to 40 years 64  Initial Cost to Company Cost Capitalized Subsequent to Acquisition Gross Amount at Which Carried at Close of Period Description Pensacola Montgomery Montgomery San Antonio Beaumont Hattiesburg Biloxi Foley Ridgeland Jackson-5111 Cincinnati-Robertson Construction in progress Encum brance ST FL AL AL TX TX MS MS AL MS MS OH Corporate Office NY Land 732 1,075 885 676 742 444 384 437 1,479 1,337 852 0 0 Building, Equipment and Improvements Building, Equipment and Improvements 3,015 4,333 3,586 2,685 3,024 1,799 1,548 1,757 5,965 5,377 3,409 0 68 28 23 13 124 51 55 39 33 51 48 35 13,967 11,075 Land 732 1,076 885 676 742 444 384 437 1,479 1,337 852 Building, Equipment and Improvements Total Accum. Deprec. Date of Construction Date Acquired Life on which depreciation in latest income statement is computed 3,043 4,355 3,599 2,809 3,075 1,854 1,587 1,790 6,016 5,425 3,444 3,775 5,431 4,484 3,485 3,817 2,298 1,971 2,227 7,495 6,762 4,296 132 180 150 116 96 49 42 46 141 127 0 0 2006 2006 2006 6/1/2007 5 to 40 years 6/1/2007 5 to 40 years 6/1/2007 5 to 40 years 2003/06 5/21/2007 5 to 40 years 2002/05 11/14/2007 5 to 40 years 1998 12/19/2007 5 to 40 years 2000 12/19/2007 5 to 40 years 2000 12/19/2007 5 to 40 years 1997/00 1/17/2008 5 to 40 years 2003 1/17/2008 5 to 40 years 2003/04 12/31/2008 5 to 40 years 2006 2000 5/1/2000 5 to 40 years 0 13,967 13,967 1,616 9,527 11,143 7,105 $ 228,114 $ 884,104 $ 276,983 $ 240,525 $1,148,676 $1,389,201 $216,644 (1) These properties are encumbered through one mortgage loan with an outstanding balance of $42.6 million at December 31, 2008. (2) These properties are encumbered through one mortgage loan with an outstanding balance of $29.0 million at December 31, 2008. 65 December 31, 2008 December 31, 2007 December 31, 2006 Cost: Balance at beginning of period ............. Additions during period: Acquisitions through foreclosure ...... Other acquisitions.............................. Improvements, etc. ............................ $ - 18,454 48,232 $1,322,708 $1,136,052 $ 886,191 $ - 136,653 52,427 $ - 212,957 37,003 66,686 189,080 249,960 Deductions during period: Cost of real estate sold ...................... Balance at close of period ..................... (193) (193) $1,389,201 (2,424) (2,424) $1,322,708 (99) (99) $1,136,052 Accumulated Depreciation: Balance at beginning of period.............. Additions during period: Depreciation expense ........................ $ 33,100 $ 183,679 $ 154,449 $ 129,340 $ 30,011 $ 25,163 33,100 30,011 25,163 Deductions during period: Accumulated depreciation of real estate sold .................................... Balance at close of period ..................... (135) (135) $ 216,644 (781) (781) $ 183,679 (54) (54) $ 154,449 66 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) 2008 Year ended December 31, 2007 2006 2005 2004 $38,785 38,097 - 76,882 36,905 1,192 - $38,097 $41,292 35,117 (1,256) 75,153 32,898 963 1,256 $35,117 $38,425 32,006 (2,512) 67,919 28,501 993 2,512 $32,006 $35,645 24,352 (4,123) 55,874 19,439 790 4,123 $24,352 $31,567 25,296 (7,168) 49,695 17,408 720 7,168 $25,296 2.02 2.14 2.12 2.29 1.96 67 68Corporate Headquarters 6467 Main Street Williamsville, 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 Inc. 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 Advisory, 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, 2009 Sovran Self Storage, Inc. Home Office 6467 Main Street Williamsville, 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 2008: 202,414 The Chief Executive Officer has previously filed with the New York Stock Exchange (NYSE) the annual CEO certification for 2008 as required by section 303A.12(a) of the NYSE listed company manual. As of December 31, 2008, there were approximately 1,316 shareholders of record of the common stock. Uncle Bob’s Self Storage Locations at December 31, 2008 Sovran Self Storage, Inc. (360) Sovran HHF JV (25) Sovran Self Storage, Inc. 6467 Main Street Williamsville, NY 14221 www.unclebobs.com 

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