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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
Commission File Number: 1-13820
SOVRAN SELF STORAGE, INC.
(Exact name of Registrant as specified in its charter)
     
Maryland   16-1194043
     
(State of incorporation or organization)   (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   Exchanges on which Registered
     
Common Stock, $.01 Par Value   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 þ No o
     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 o No þ
     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 þ No o
     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. þ
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the exchange Act).
Large Accelerated Filer þ      Accelerated Filer o     Non-accelerated Filer o
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
     As of June 30, 2006, 16,419,848 shares of Common Stock, $.01 par value per share, were outstanding, and the aggregate market value of the Common Stock held by non-affiliates was approximately $868,483,402 (based on the closing price of the Common Stock on the New York Stock Exchange on June 30, 2006).
     As of February 15, 2007, 20,502,580 shares of Common Stock, $.01 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
          Portions of the Definitive Proxy Statement for the Annual Meeting of Shareholders of the Registrant to be held on May 21, 2007 (Part III).
 
 

 


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-10.6
EX-10.21
EX-12.1
EX-21
EX-23
EX-31.1
EX-31.2
EX-32


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Part I
          When used in this discussion and elsewhere in this document, the words “intends,” “believes,” “expects,” “anticipates,” and similar expressions are intended to identify “forward-looking statements” within the meaning of that term in Section 27A of the Securities Exchange Act of 1933 and in Section 21F of the Securities Act of 1934. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company to be materially different from those expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the effect of competition from new self-storage facilities, which would cause rents and occupancy rates to decline; the Company’s ability to evaluate, finance and integrate acquired businesses into the Company’s existing business and operations; the Company’s ability to effectively compete in the industry in which it does business; the Company’s existing indebtedness may mature in an unfavorable credit environment, preventing refinancing or forcing refinancing of the indebtedness on terms that are not as favorable as the existing terms; interest rates may fluctuate, impacting costs associated with the Company’s outstanding floating rate debt; the Company’s ability to successfully expand its truck move-in program for new customers and Dri-guard product roll-out; the Company’s reliance on its call center; the Company’s cash flow may be insufficient to meet required payments of principal, interest and dividends; and tax law changes that may change the taxability of future income.
Item 1. Business
          Sovran Self Storage, Inc. together with its direct and indirect subsidiaries and the consolidated joint ventures, to the extent appropriate in the applicable context, (the “Company,” “We,” “Our,” or ”Sovran”) is a self-administered and self-managed real estate investment trust (“REIT”) that acquires, owns and manages self-storage properties. We refer to the self-storage properties owned and managed by us as “Properties.” We began operations on June 26, 1995. At February 15, 2007, we owned and managed 328 Properties consisting of approximately 20.3 million net rentable square feet, situated in 22 states. Among our 328 self-storage facilities are 38 properties that we manage for two joint ventures of which we are a majority owner. We are the fifth largest operator of self-storage properties in the United States based on facilities owned and managed. Our Properties conduct business under the user-friendly name Uncle Bob’s Self-Storage ®.
          We were formed to continue the business of our predecessor company, which had engaged in the self-storage business since 1985. We own an indirect interest in each of the Properties through a limited partnership (the “Partnership”). In total, we own a 97.9% economic interest in the Partnership and unaffiliated third parties own collectively a 2.1% limited partnership interest at December 31, 2006. We believe that this structure, commonly known as an umbrella partnership real estate investment trust (“UPREIT”), facilitates our ability to acquire properties by using units of the Partnership as currency. By utilizing interests in the Partnership as currency in facility acquisitions, we may partially defer the seller’s income tax liability which in turn may allow us to obtain more favorable pricing.
          We were incorporated on April 19, 1995 under Maryland law. Our principal executive offices are located at 6467 Main Street, Williamsville, New York 14221, our telephone number is (716) 633-1850 and our web site is www.sovranss.com.
          We seek to enhance shareholder value through internal growth and acquisition of additional storage properties. Internal growth is achieved through aggressive property management: increasing rents, increasing

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occupancy levels, controlling costs, maximizing collections and strategically expanding and improving the Properties. Should economic conditions warrant, we may develop new properties. We believe that there continue to be opportunities for growth through acquisitions, and constantly seek to acquire self-storage properties that are susceptible to realization of increased economies of scale and enhanced performance through application of our expertise.
Industry Overview
          We believe that self-storage facilities offer inexpensive storage space to residential and commercial users. In addition to fully enclosed and secure storage space, many facilities also offer outside storage for automobiles, recreational vehicles and boats. Better facilities are usually fenced and well lighted with gates that are either manually operated or automated and have a full-time manager. Customers have access to their storage area during business hours and in certain circumstances are provided with 24-hour access. Individual storage units are secured by the customer’s lock, and the customer has sole control of access to the unit.
          According to published data, of the approximately 43,000 facilities in the United States, less than 12% are managed by the ten largest operators. The remainder of the industry is characterized by numerous small, local operators. The shortage of skilled operators, the scarcity of equity capital available to small operators for acquisitions and expansions, and the potential for savings through economies of scale are factors that are leading to consolidation in the industry. We believe that, as a result of this trend, significant growth opportunities exist for operators with proven management systems and sufficient capital resources.
Property Management
          We believe that we have developed substantial expertise in managing self-storage facilities. Key elements of our management system include the following:
Personnel:
          Property managers attend a thorough orientation program and undergo continuous training that emphasizes closing techniques, identification of selected marketing opportunities, networking with possible referral sources, and familiarization with our customized management information system. In addition to frequent contact with Area Managers and other Company personnel, property managers receive periodic newsletters via our intranet regarding a variety of operational issues, and from time to time attend “roundtable” seminars with other property managers.
Marketing and Sales:
          Responding to the increased customer demand for services, we have implemented several programs expected to increase occupancy and profitability. These programs include:
  -   A Customer Care Center (call center) that services new and existing customers’ inquiries and facilitates the capture of sales leads that were previously lost;
 
  -   Internet marketing, which provides customers information about all of our stores via numerous portals and e-mail;
 
  -   A rate management system, that matches product availability with market demand for each type of storage unit at each store, and determines appropriate pricing. The Company credits this program in achieving higher yields and controlling discounting;
 
  -   Dri-guard, providing humidity-controlled spaces. We became the first self-storage operator to utilize this humidity protection technology. These environmental control systems are a premium storage feature intended to protect metal, electronics, furniture, fabrics and paper from moisture; and
 
  -   Uncle Bob’s trucks, that provide customers with convenient, affordable access to vehicles to help move-in their goods, while serving as moving billboards to help advertise our storage facilities.
Ancillary Income:
          Our stores are essentially retail operations and we have in excess of 140,000 customers. As a convenience to those customers, we sell items such as locks, boxes, tarps, etc. to make their storage experience easier. We also make available renters insurance through a third party carrier, on which we earn a commission. Income from incidental truck rentals, billboards and cell towers is also earned by our Company.

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Information Systems:
          Our customized computer system performs billing, collections and reservation functions for each Property. It also tracks information used in developing marketing plans based on occupancy levels and tenant demographics and histories. The system generates daily, weekly and monthly financial reports for each Property that are transmitted to our principal office each night. The system also requires a property manager to input a descriptive explanation for all debit and credit transactions, paid-to-date changes, and all other discretionary activities, which allows the accounting staff at our principal office to promptly review all such transactions. Late charges are automatically imposed. More sensitive activities, such as rental rate changes and unit size or number changes, are completed only by Area Managers. Our customized management information system permits us to add new facilities to our portfolio with minimal additional overhead expense.
Property Maintenance:
          All of our Properties are subject to regular and routine maintenance procedures, which are designed to maintain the structure and appearance of our buildings and grounds. A staff headquartered in our principal office is responsible for the upkeep of the Properties, and all maintenance service is contracted through local providers, such as lawn service, snowplowing, pest control, gate maintenance, HVAC repairs, paving, painting, roofing, etc. A codified set of specifications has been designed and is applied to all work performed on our Uncle Bob’s stores. As with many other aspects of our Company, our size has allowed us to enjoy relatively low maintenance costs because we have the benefit of economies of scale in purchasing, travel and overhead absorption.
Environmental and Other Regulations
          We are subject to federal, state, and local environmental regulations that apply generally to the ownership of real property and the operation of self-storage facilities. We have not received notice from any governmental authority or private party of any material environmental noncompliance, claim, or liability in connection with any of the Properties, and are not aware of any environmental condition with respect to any of the Properties that could have a material adverse effect on our financial condition or results of operations.
          The Properties are also generally subject to the same types of local regulations governing other real property, including zoning ordinances. We believe that the Properties are in substantial compliance with all such regulations.
Insurance
          Each of the Properties is covered by fire and property insurance (including comprehensive liability), and all-risk property insurance policies, which are provided by reputable companies and on commercially reasonable terms. In addition, we maintain a policy insuring against environmental liabilities resulting from tenant storage on terms customary for the industry, and title insurance insuring fee title to the Company-owned Properties in an aggregate amount that we believe to be adequate.
Federal Income Tax
          We operate, and intend to continue to operate, in such a manner as to continue to qualify as a REIT under the Internal Revenue Code of 1986 (the “Code”), but no assurance can be given that we will at all times so qualify. To the extent that we continue to qualify as a REIT, we will not be taxed, with certain limited exceptions, on the taxable income that is distributed to our shareholders. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — REIT Qualification and Distribution Requirements.”
Competition
          The primary factors upon which competition in the self-storage industry is based are location, rental rates, suitability of the property’s design to prospective customers’ needs, and the manner in which the property is operated and marketed. We believe we compete successfully on these bases. The extent of competition depends significantly on local market conditions. We seek to locate facilities so as not to cause our Properties to compete with one

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another for customers, but the number of self-storage facilities in a particular area could have a material adverse effect on the performance of any of the Properties.
          Several of our competitors, including Public Storage, U-Haul, and Extra Space Storage, are larger and have substantially greater financial resources than we do. These larger operators may, among other possible advantages, be capable of greater leverage and the payment of higher prices for acquisitions.
Investment Policy
          While we emphasize equity real estate investments, we may, at our discretion, invest in mortgage and other real estate interests related to self-storage properties in a manner consistent with our qualification as a REIT. We may also retain a purchase money mortgage for a portion of the sale price in connection with the disposition of Properties from time to time. Should investment opportunities become available, we may look to acquire self-storage properties via a joint-venture partnership or similar entity. We may or may not elect to have a significant investment in such a venture, but would use such an opportunity to expand our portfolio of branded and managed properties.
          Subject to the percentage of ownership limitations and gross income tests necessary for REIT qualification, we also may invest in securities of entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities.
Disposition Policy
          We periodically review the assets comprising our portfolio. Any disposition decision will be based on a variety of factors, including, but not limited to, the (i) potential to continue to increase cash flow and value, (ii) sale price, (iii) strategic fit with the rest of our portfolio, (iv) potential for, or existence of, environmental or regulatory issues, (v) alternative uses of capital, and (vi) maintaining qualification as a REIT.
          No storage facilities were sold in 2006 or 2005, but during 2004, as part of an asset management program, we sold five non-strategic storage facilities located in Pennsylvania, Tennessee, Ohio, and South Carolina to unaffiliated parties for $11.7 million, resulting in a net gain of $1.1 million.
Distribution Policy
          We intend to pay regular quarterly distributions to our shareholders. However, future distributions by us will be at the discretion of the Board of Directors and will depend on the actual cash available for distribution, our financial condition and capital requirements, the annual distribution requirements under the REIT provisions of the Code and such other factors as the Board of Directors deems relevant. In order to maintain our qualification as a REIT, we must make annual distributions to shareholders of at least 90% of our REIT taxable income (which does not include capital gains). Under certain circumstances, we may be required to make distributions in excess of cash available for distribution in order to meet this requirement.
Borrowing Policy
          Our Board of Directors currently limits the amount of debt that may be incurred by us to less than 50% of the sum of the market value of our issued and outstanding Common and Preferred Stock plus our debt. We, however, may from time to time re-evaluate and modify our borrowing policy in light of then current economic conditions, relative costs of debt and equity capital, market values of properties, growth and acquisition opportunities and other factors.
          The Company has a $100 million (expandable to $200 million) unsecured line of credit that matures in September 2007 (with our option to extend to September 2008) and a $100 million unsecured term note that matures in September 2009. The line of credit bears interest at LIBOR plus 0.90% and requires a 0.20% facility fee. The term note bears interest at LIBOR plus 1.20%. In April 2006, the Company entered into a $150 million unsecured term note maturing in April 2016 bearing interest at 6.38%. The Company also maintains a $80 million term note maturing September 2013 bearing interest at a fixed rate of 6.26% and a $20 million term note maturing September

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2013 bearing interest at a variable rate equal to LIBOR plus 1.50%. At December 31, 2006, there was $100 million available on the revolving line of credit, excluding the amount available on the expansion feature.
          To the extent that we desire to obtain additional capital to pay distributions, to provide working capital, to pay existing indebtedness or to finance acquisitions, expansions or development of new properties, we may utilize amounts available under the revolving line of credit, common or preferred stock offerings, floating or fixed rate debt financing, retention of cash flow (subject to satisfying our distribution requirements under the REIT rules) or a combination of these methods. Additional debt financing may also be obtained through mortgages on our Properties, which may be recourse, non-recourse, or cross-collateralized and may contain cross-default provisions. We have not established any limit on the number or amount of mortgages that may be placed on any single Property or on our portfolio as a whole. For additional information regarding borrowings, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - - Liquidity and Capital Resources” and Note 7 to the Consolidated Financial Statements filed herewith.
Employees
          We currently employ a total of 961 employees, including 328 property managers, 22 area managers, and 487 assistant managers and part-time employees. At our headquarters, in addition to our three executive officers, we employ 121 people engaged in various support activities, including accounting, customer care, and management information systems. None of our employees are covered by a collective bargaining agreement. We consider our employee relations to be excellent.
Available Information
          We file with the U.S. Securities and Exchange Commission quarterly and annual reports on Forms 10-Q and 10-K, respectively, current reports on Form 8-K, and proxy statements pursuant to the Securities Exchange Act of 1934, in addition to other information as required. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1 (800) SEC-0330. We file this information with the SEC electronically, and the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available free of charge on our web site at http://www.sovranss.com as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. In addition, our codes of ethics and Charters of our Governance, Audit Committee, and Compensation Committee are available free of charge on our website at http://www.sovranss.com.
          Also, copies of our annual report and Charters of our Governance, Audit Committee, and Compensation Committee will be made available, free of charge, upon written request to Sovran Self Storage, Inc., Attn: Investor Relations, 6467 Main Street, Williamsville, NY 14221.
Item 1A. Risk Factors
          You should carefully consider the risks described below, together with all of the other information included in or incorporated by reference into our Form 10-K, as part of your evaluation of the Company. If any of the following risks actually occur, our business could be harmed. In such case, the trading price of our securities could decline, and you may lose all or part of your investment.
Our Acquisitions May Not Perform as Anticipated
          We have completed many acquisitions of self-storage facilities since our initial public offering of common stock in June 1995. Our strategy is to continue to grow by acquiring additional self-storage facilities. Acquisitions entail risks that investments will fail to perform in accordance with our expectations and that our judgments with respect to the prices paid for acquired self-storage facilities and the costs of any improvements required to bring an acquired property up to standards established for the market position intended for that property will prove inaccurate. Acquisitions also involve general investment risks associated with any new real estate investment.

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We May Incur Problems with Our Real Estate Financing
          Unsecured Credit Facility. We have a line of credit with a syndicate of financial institutions, which are our “lenders.” This unsecured credit facility is recourse to us and the required payments are not reduced if the economic performance of any of the properties declines. The unsecured credit facility limits our ability to make distributions to our shareholders, except in limited circumstances. If there is an event of default, our lenders may seek to exercise their rights under the unsecured credit facility, which could have a material adverse effect on us and our ability to make expected distributions to shareholders and distributions required by the real estate investment trust provisions of the Internal Revenue Code of 1986.
          Rising Interest Rates. Indebtedness that we incur under the unsecured credit facility bears interest at a variable rate. Accordingly, increases in interest rates could increase our interest expense, which would reduce our cash available for distribution and our ability to pay expected distributions to our shareholders. We manage our exposure to rising interest rates using interest rate swaps and other available mechanisms. If the amount of our indebtedness bearing interest at a variable rate increases, our unsecured credit facility may require us to use those arrangements.
          Refinancing May Not Be Available. It may be necessary for us to refinance our unsecured credit facility through additional debt financing or equity offerings. If we were unable to refinance this indebtedness on acceptable terms, we might be forced to dispose of some of our self-storage facilities upon disadvantageous terms, which might result in losses to us and might adversely affect the cash available for distribution. If prevailing interest rates or other factors at the time of refinancing result in higher interest rates on refinancings, our interest expense would increase, which would adversely affect our cash available for distribution and our ability to pay expected distributions to shareholders.
Our Debt Levels May Increase
          Our Board of Directors currently has a policy of limiting the amount of our debt at the time of incurrence to less than 50% of the sum of the market value of our issued and outstanding common stock and preferred stock plus the amount of our debt at the time that debt is incurred. However, our organizational documents do not contain any limitation on the amount of indebtedness we might incur. Accordingly, our Board of Directors could alter or eliminate the current policy limitation on borrowing without a vote of our shareholders. We could become highly leveraged if this policy were changed. However, our ability to incur debt is limited by covenants in our bank credit arrangements and in our securities purchase agreement with holders of our Series C preferred stock.
We Are Subject to the Risks Posed by Fluctuating Demand and Significant Competition in the Self-Storage Industry
     Our self-storage facilities are subject to all operating risks common to the self-storage industry. These risks include but are not limited to the following:
    Decreases in demand for rental spaces in a particular locale;
 
    Changes in supply of, or demand for, similar or competing self-storage facilities in an area;
 
    Changes in market rental rates; and
 
    Inability to collect rents from customers.
          Our current strategy is to acquire interests only in self-storage facilities. Consequently, we are subject to risks inherent in investments in a single industry. Our self-storage facilities compete with other self-storage facilities in their geographic markets. As a result of competition, the self-storage facilities could experience a decrease in occupancy levels and rental rates, which would decrease our cash available for distribution. We compete in operations and for acquisition opportunities with companies that have substantial financial resources. Competition may reduce the number of suitable acquisition opportunities offered to us and increase the bargaining power of

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property owners seeking to sell. The self-storage industry has at times experienced overbuilding in response to perceived increases in demand. A recurrence of overbuilding might cause us to experience a decrease in occupancy levels, limit our ability to increase rents and compel us to offer discounted rents.
Our Real Estate Investments Are Illiquid and Are Subject to Uninsurable Risks and Government Regulation
          General Risks. Our investments are subject to varying degrees of risk generally related to the ownership of real property. The underlying value of our real estate investments and our income and ability to make distributions to our shareholders are dependent upon our ability to operate the self-storage facilities in a manner sufficient to maintain or increase cash available for distribution. Income from our self-storage facilities may be adversely affected by the following factors:
    Changes in national economic conditions;
 
    Changes in general or local economic conditions and neighborhood characteristics;
 
    Competition from other self-storage facilities;
 
    Changes in interest rates and in the availability, cost and terms of mortgage funds;
 
    The impact of present or future environmental legislation and compliance with environmental laws;
 
    The ongoing need for capital improvements, particularly in older facilities;
 
    Changes in real estate tax rates and other operating expenses;
 
    Adverse changes in governmental rules and fiscal policies;
 
    Uninsured losses resulting from casualties associated with civil unrest, acts of God, including natural disasters, and acts of war;
 
    Adverse changes in zoning laws; and
 
    Other factors that are beyond our control.
          Illiquidity of Real Estate May Limit its Value. Real estate investments are relatively illiquid. Our ability to vary our portfolio of self-storage facilities in response to changes in economic and other conditions is limited. In addition, provisions of the Code may limit our ability to profit on the sale of self-storage facilities held for fewer than four years. We may be unable to dispose of a facility when we find disposition advantageous or necessary and the sale price of any disposition may not equal or exceed the amount of our investment.
          Uninsured and Underinsured Losses Could Reduce the Value of our Self Storage Facilities. Some losses, generally of a catastrophic nature, that we potentially face with respect to our self-storage facilities may be uninsurable or not insurable at an acceptable cost. Our management uses its discretion in determining amounts, coverage limits and deductibility provisions of insurance, with a view to acquiring appropriate insurance on our investments at a reasonable cost and on suitable terms. These decisions may result in insurance coverage that, in the event of a substantial loss, would not be sufficient to pay the full current market value or current replacement cost of our lost investment. Inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make it infeasible to use insurance proceeds to replace a property after it has been damaged or destroyed. Under those circumstances, the insurance proceeds received by us might not be adequate to restore our economic position with respect to a particular property.
          Possible Liability Relating to Environmental Matters. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in that property. Those laws often impose liability even if the owner or operator did not cause or know of the presence of hazardous or toxic substances and

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even if the storage of those substances was in violation of a tenant’s lease. In addition, the presence of hazardous or toxic substances, or the failure of the owner to address their presence on the property, may adversely affect the owner’s ability to borrow using that real property as collateral. In connection with the ownership of the self-storage facilities, we may be potentially liable for any of those costs.
          Americans with Disabilities Act. The Americans with Disabilities Act of 1990, or ADA, generally requires that buildings be made accessible to persons with disabilities. A determination that we are not in compliance with the ADA could result in imposition of fines or an award of damages to private litigants. If we were required to make modifications to comply with the ADA, our results of operations and ability to make expected distributions to our shareholders could be adversely affected.
There Are Limitations on the Ability to Change Control of Sovran
          Limitation on Ownership and Transfer of Shares. To maintain our qualification as a REIT, not more than 50% in value of our outstanding shares of stock may be owned, directly or indirectly, by five or fewer individuals, as defined in the Code. To limit the possibility that we will fail to qualify as a REIT under this test, our Amended and Restated Articles of Incorporation include ownership limits and transfer restrictions on shares of our stock. Our Articles of Incorporation limit ownership of our issued and outstanding stock by any single shareholder to 9.8% of the aggregate value of our outstanding stock, except that the ownership by some of our shareholders is limited to 15%.
     These ownership limits may:
    Have the effect of precluding an acquisition of control of Sovran by a third party without consent of our Board of Directors even if the change in control would be in the interest of shareholders; and
 
    Limit the opportunity for shareholders to receive a premium for shares of our common stock they hold that might otherwise exist if an investor were attempting to assemble a block of common stock in excess of 9.8% or 15%, as the case may be, of the outstanding shares of our stock or to otherwise effect a change in control of Sovran.
          Our Board of Directors may waive the ownership limits if it is satisfied that ownership by those shareholders in excess of those limits will not jeopardize our status as a REIT under the Code or in the event it determines that it is no longer in our best interests to be a REIT. Waivers have been granted to the holders of our Series C preferred stock, FMR Corporation and Cohen & Steers, Inc. A transfer of our common stock and/or preferred stock to a person who, as a result of the transfer, violates the ownership limits may not be effective under some circumstances.
          Other Limitations. Other limitations could have the effect of discouraging a takeover or other transaction in which holders of some, or a majority, of our outstanding common stock might receive a premium for their shares of our common stock that exceeds the then prevailing market price or that those holders might believe to be otherwise in their best interest. The issuance of additional shares of preferred stock could have the effect of delaying or preventing a change in control of Sovran even if a change in control were in the shareholders’ interest. In addition, the Maryland General Corporation Law, or MGCL, imposes restrictions and requires that specified procedures with respect to the acquisition of stated levels of share ownership and business combinations, including combinations with interested shareholders. These provisions of the MGCL could have the effect of delaying or preventing a change in control of Sovran even if a change in control were in the shareholders’ interest. Waivers and exemptions have been granted to the initial purchasers of our Series C preferred stock in connection with these provisions of the MGCL. In addition, under the operating partnership’s agreement of limited partnership, in general, we may not merge, consolidate or engage in any combination with another person or sell all or substantially all of our assets unless that transaction includes the merger or sale of all or substantially all of the assets of the operating partnership, which requires the approval of the holders of 75% of the limited partnership interests thereof. If we were to own less than 75% of the limited partnership interests in the operating partnership, this provision of the limited partnership agreement could have the effect of delaying or preventing us from engaging in some change of control transactions.

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Our Failure to Qualify as a REIT Would Have Adverse Consequences
          We intend to operate in a manner that will permit us to qualify as a REIT under the Code. Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. Continued qualification as a REIT depends upon our continuing ability to meet various requirements concerning, among other things, the ownership of our outstanding stock, the nature of our assets, the sources of our income and the amount of our distributions to our shareholders.
          In addition, a REIT is limited with respect to the services it can provide for its tenants. We have provided certain conveniences for our tenants, including property insurance underwritten by a third party insurance company that pays us commissions. We believe the insurance provided by the insurance company would not constitute a prohibited service to our tenants. No assurances can be given, however, that the IRS will not challenge our position. If the IRS successfully challenged our position, our qualification as a REIT could be adversely affected.
          If we were to fail to qualify as a REIT in any taxable year, we would not be allowed a deduction for distributions to shareholders in computing our taxable income and would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Unless entitled to relief under certain Code provisions, we also would be ineligible for qualification as a REIT for the four taxable years following the year during which our qualification was lost. As a result, distributions to the shareholders would be reduced for each of the years involved. Although we currently intend to operate in a manner designed to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause our Board of Directors to revoke our REIT election.
Market Interest Rates May Influence the Price of Our Common Stock
          One of the factors that may influence the price of our common stock in public trading markets or in private transactions is the annual yield on our common stock as compared to yields on other financial instruments. An increase in market interest rates will result in higher yields on other financial instruments, which could adversely affect the price of our common stock.
Regional Concentration of Our Business May Subject Us to Economic Downturns in the States of Texas and Florida.
          As of December 31, 2006, 129 of our 327 self-storage facilities are located in the states of Texas and Florida. For the year ended December 31, 2006, these facilities accounted for approximately 43.4% of our total revenues. This concentration of business in Texas and Florida exposes us to potential losses resulting from a downturn in the economies of those states. If economic conditions in those states deteriorate, we may experience a reduction in existing and new business, which may have an adverse effect on our business, financial condition and results of operations.
Changes in Taxation of Corporate Dividends May Adversely Affect the Value of Our Common Stock
          The maximum marginal rate of tax payable by domestic noncorporate taxpayers on dividends received from a regular “C” corporation under current law is 15% through 2010, as opposed to higher ordinary income rates. The reduced tax rate, however, does not apply to distributions paid to domestic noncorporate taxpayers by a REIT on its stock, except for certain limited amounts. Although the earnings of a REIT that are distributed to its stockholders generally remain subject to less federal income taxation than earnings of a non-REIT “C” corporation that are distributed to its stockholders net of corporate-level income tax, legislation that extends the application of the 15% rate to dividends paid after 2010 by “C” corporations could cause domestic noncorporate investors to view the stock of regular “C” corporations as more attractive relative to the stock of a REIT, because the dividends from regular “C” corporations would continue to be taxed at a lower rate while distributions from REITs (other than distributions designated as capital gain dividends) are generally taxed at the same rate as the individual’s other ordinary income.

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Terrorist Attacks and the Possibility of Armed Conflict May Have an Adverse Effect on Our Business, Financial Condition and Operating Results and Could Decrease the Value of Our Assets
          Terrorist attacks and other acts of violence or war, such as those that took place on September 11, 2001, or the recent war with Iraq, could have a material adverse effect on our business and operating results. There may be further terrorist attacks against the United States. Attacks or armed conflicts that directly impact one or more of our properties could significantly affect our ability to operate those properties and, as a result, impair our ability to achieve our expected results. Furthermore, we may not have insurance coverage for losses caused by a terrorist attack. That insurance may not be available or, if it is available and we decide, or are required by our lenders, to obtain terrorism coverage, the cost for the insurance may be significant in relationship to the risk covered. In addition, the adverse effects terrorist acts and threats of future attacks could have on the U.S. economy could similarly have a material adverse effect on our business, financial condition and results of operations. Finally, further terrorist acts could cause the United States to enter into armed conflict, which could further impact our business, financial and operating results.
Item 1B. Unresolved Staff Comments
          None.

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Item 2. Properties
          At December 31, 2006, we owned and managed a total of 327 Properties situated in twenty-two states. We manage 38 of the Properties for two joint ventures of which we are a majority owner.
          Our self-storage facilities offer inexpensive, easily accessible, enclosed storage space to residential and commercial users on a month-to-month basis. Most of our Properties are fenced with computerized gates and are well lighted. A majority of the Properties are single-story, thereby providing customers with the convenience of direct vehicle access to their storage spaces. Our stores range in size from 22,000 to 188,000 net rentable square feet, with an average of approximately 62,000 net rentable square feet. The Properties generally are constructed of masonry or steel walls resting on concrete slabs and have standing seam metal, shingle, or tar and gravel roofs. All Properties have a property manager on-site during business hours. Customers have access to their storage areas during business hours, and some commercial customers are provided 24-hour access. Individual storage spaces are secured by a lock furnished by the customer to provide the customer with control of access to the space.
          All of the Properties conduct business under the user-friendly name Uncle Bob’s Self-Storage ®.
          The following table provides certain information regarding the Properties owned and managed as of December 31, 2006:
                                 
    Number of                    
    Stores at                   Percentage
    December 31,   Square   Number of   of Store
    2006   Feet   Spaces   Revenue
Alabama
    12       747,153       5,812       2.8 %
Arizona
    9       505,880       4,489       2.9 %
Connecticut
    5       303,989       2,863       2.5 %
Florida
    52       3,266,913       29,902       20.2 %
Georgia
    26       1,552,621       12,582       6.5 %
Louisiana
    14       749,210       6,568       3.6 %
Maine
    2       115,400       1,012       0.6 %
Maryland
    4       173,307       2,039       1.2 %
Massachusetts
    14       758,424       6,874       4.5 %
Michigan
    7       450,521       4,270       1.8 %
Mississippi
    4       200,191       1,548       1.1 %
Missouri
    7       437,118       3,798       1.2 %
New Hampshire
    4       234,148       2,150       0.7 %
New York
    19       1,064,012       10,050       7.2 %
North Carolina
    15       796,731       6,955       3.6 %
Ohio
    16       1,024,693       8,524       4.7 %
Pennsylvania
    6       498,885       2,880       1.7 %
Rhode Island
    4       168,146       1,562       1.1 %
South Carolina
    8       426,733       3,584       2.1 %
Tennessee
    4       281,424       2,361       1.1 %
Texas
    77       5,396,943       43,473       23.2 %
Virginia
    18       1,063,000       9,822       5.7 %
 
                               
Total
    327       20,215,442       173,118       100.0 %
 
                               
Item 3. Legal Proceedings
          In the normal course of business, we are subject to various claims and litigation. While the outcome of any litigation is inherently unpredictable, we do not believe that any of these matters will have a material adverse impact on our financial condition, results of operations or cash flows.

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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   High   Low
2005
               
1st
    43.2400       37.8000  
2nd
    46.9300       38.5600  
3rd
    49.7000       44.0900  
4th
    50.5200       43.5000  
                 
Quarter   High     Low  
2006
               
1st
    55.7100       46.3900  
2nd
    55.2000       45.7100  
3rd
    56.3500       49.0000  
4th
    60.0000       54.6300  
          As of February 15, 2007, there were approximately 1,481 holders of record of our Common Stock.
          We have paid quarterly dividends to our shareholders since our inception. Reflected in the table below are the dividends paid in the last two years.
          For federal income tax purposes, distributions to shareholders are treated as ordinary income, capital gain, return of capital or a combination thereof. Distributions to shareholders for 2006 represent 87% ordinary income and 13% return of capital.
         
History of Dividends Declared on Common Stock
   
1st Quarter, 2005
  $0.6050 per share
2nd Quarter, 2005
  $0.6050 per share
3rd Quarter, 2005
  $0.6150 per share
4th Quarter, 2005
  $0.6150 per share
 
       
1st Quarter, 2006
  $0.6150 per share
2nd Quarter, 2006
  $0.6150 per share
3rd Quarter, 2006
  $0.6200 per share
4th Quarter, 2006
  $0.6200 per share

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EQUITY COMPENSATION PLAN INFORMATION
          The following table sets forth certain information as of December 31, 2006, with respect to equity compensation plans under which shares of the Company’s Common Stock may be issued.
                         
    Number of        
    securities to be        
    issued upon   Weighted average   Number of
    exercise of   exercise price of   securities
    outstanding   outstanding   remaining available
    options, warrants   options, warrants   for future issuance
Plan Category   and rights (#)   and rights ($)   (#)
Equity compensation plans approved by shareholders:
                       
2005 Award and Option Plan
    30,000     $ 48.58       1,429,945  
1995 Award and Option Plan
    61,225     $ 26.78       0  
1995 Outside Directors’ Stock Option Plan
    22,000     $ 43.34       18,724  
Deferred Compensation Plan for Directors (1)
    30,246       N/A       14,754  
Equity compensation plans not approved by shareholders:
    N/A       N/A       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.

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CORPORATE PERFORMANCE GRAPH
          The following chart and line-graph presentation compares (i) the Company’s shareholder return on an indexed basis since December 31, 2001 with (ii) the S&P Stock Index and (iii) the National Association of Real Estate Investment Trusts Equity Index.
(PERFORMANCE GRAPH)
CUMULATIVE TOTAL SHAREHOLDER RETURN
SOVRAN SELF STORAGE, INC.
DECEMBER 31, 2001 — DECEMBER 31, 2006
                                                 
    Dec. 31,   Dec. 31,   Dec. 31,   Dec. 31,   Dec. 31,   Dec. 31,
    2001   2002   2003   2004   2005   2006
S&P
    100.00       77.89       100.24       111.14       116.60       135.01  
NAREIT
    100.00       103.82       142.37       187.33       210.10       283.76  
SSS
    100.00       98.25       137.06       164.37       193.78       247.84  
The foregoing item assumes $100.00 invested on December 31, 2001, with dividends reinvested.

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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:
                                         
    At or For Year Ended December 31,
(dollars in thousands, except per share data)   2006   2005   2004   2003   2002
Operating Data
                                       
Operating revenues
  $ 166,295     $ 138,305     $ 123,286     $ 111,414     $ 100,507  
Income from continuing operations
    36,610       34,790       30,698       27,586       25,526  
Income from discontinued operation (1)
                1,306       837       775  
Net income
    36,610       34,790       32,004       28,423       26,301  
Income from continuing operations per common share – diluted
    1.89       1.84       1.44       1.40       1.58  
Net income per common share – basic
    1.90       1.86       1.54       1.47       1.66  
Net income per common share – diluted
    1.89       1.84       1.53       1.46       1.64  
Dividends declared per common share
    2.47       2.44       2.42       2.41       2.38  
 
                                       
Balance Sheet Data
                                       
Investment in storage facilities at cost
  $ 1,143,904     $ 893,980     $ 811,516     $ 727,289     $ 698,334  
Total assets
    1,053,210       784,376       719,573       683,336       652,213  
Total debt
    462,027       339,144       289,075       255,819       252,452  
Total liabilities
    495,352       365,037       315,108       285,755       278,631  
Series B preferred stock
                      28,585       28,585  
Series C preferred stock
    26,613       26,613       53,227       67,129       67,129  
 
                                       
Other Data
                                       
Net cash provided by operating activities
  $ 64,533     $ 60,234     $ 53,914     $ 51,003     $ 44,544  
Net cash provided by operating activities – discontinued operations
                287       1,124       1,066  
Net cash used in investing activities
    (176,567 )     (79,156 )     (71,034 )     (31,284 )     (99,065 )
Net cash used in investing activities – discontinued operations
                      (41 )     (179 )
Net cash provided by (used in) financing activities
    154,853       20,728       (163 )     (2,764 )     53,814  
 
(1)   In 2004 we sold five stores whose operations and gain are classified as discontinued operations for all previous years presented.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
          The following discussion and analysis of the consolidated financial condition and results of operations should be read in conjunction with the financial statements and notes thereto included elsewhere in this report.
Disclosure Regarding Forward-Looking Statements
          When used in this discussion and elsewhere in this document, the words “intends,” “believes,” “expects,” “anticipates,” and similar expressions are intended to identify “forward-looking statements” within the meaning of that term in Section 27A of the Securities Exchange Act of 1933 and in Section 21F of the Securities Act of 1934. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the effect of competition from new self-storage facilities, which would cause rents and occupancy rates to decline; our ability to evaluate, finance and integrate acquired businesses into our existing business and operations; our ability to effectively compete in the industry in which we do business; our existing indebtedness may mature in an unfavorable credit environment, preventing refinancing or forcing refinancing of the indebtedness on terms that are not as favorable as the existing terms; interest rates may fluctuate, impacting costs associated with our outstanding floating rate debt; our ability to successfully extend our truck move-in program for new customers and Dri-guard product roll-out; our reliance on our call center; our cash flow may be insufficient to meet required payments of principal, interest and dividends; and tax law changes that may change the taxability of future income.
Business and Overview
          We believe we are the fifth largest operator of self-storage properties in the United States based on facilities owned and managed. All of our stores are operated under the user-friendly name “Uncle Bob’s Self-Storage.”
Operating Strategy:
Our operating strategy is designed to generate growth and enhance value by:
  A.   Increasing operating performance and cash flow through aggressive management of our stores:
  -   Operating performance continues to improve as a result of revenue drivers implemented by us over the past five years, including:
  -   The formation of our Customer Care Center, which answers sales inquiries and makes reservations for all of our properties on a centralized basis,
 
  -   The rollout of the Uncle Bob’s truck move-in program, under which, at present, 248 of our stores offer a free Uncle Bob’s truck to assist our customers in moving into their spaces, and
 
  -   An increase in internet marketing and sales.
  -   In addition to increasing revenue, we have worked to improve services and amenities at our stores. While this has caused operating expenses to increase over the past five years, it has resulted in a superior storage experience for our customers. Our managers are better qualified and receive a significantly higher level of training than they did five years ago, customer access and security are greatly enhanced as a result of advances in technology, and property appearance and functionality have been improved.
 
  -   Our customized property management systems enable us to improve our ability to track trends, set optimal pricing levels, enjoy considerable economies of scale in vendor and supply pricing, and control collections and accounts receivable.

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  B.   Acquiring additional stores:
  -   In markets where we already operate facilities, we seek to acquire new stores one or two at a time from independent operators. By so doing, we can add to our existing base, which should improve market penetration in those areas, and contribute to the benefits achieved from economies of scale.
 
  -   We will seek to enter new markets if we can do so by acquiring a group of stores in those markets. We feel that our marketing efforts and control systems would enhance even those portfolios that have been managed efficiently by independent operators, and that attractive returns can be generated by such acquisitions.
  C.   Expanding and enhancing our existing stores:
  -   We intend to continue to install climate controlled and Dri-guard space at select stores, providing our customers with better storage solutions and improving yields on our portfolio.
 
  -   We intend to add buildings to a number of our stores, providing additional rental units of a size and type to meet existing demand.
 
  -   We will seek to acquire parcels of land contiguous to some of our stores and add to the available rental space at those stores.
 
  -   We intend to modify existing buildings to better match size and type of rental units to existing demand. At some stores, this may be as simple as reconfiguring walls and doors; at others, it may entail rebuilding in a configuration more in tune with market conditions.
 
  -   As announced in 2004, we have begun to implement a program that will add 450,000 to 600,000 square feet of rentable space at existing stores and convert up to an additional 250,000 to 300,000 square feet to premium (climate and humidity controlled) space. The projected cost of these revenue enhancing improvements is estimated at between $32 and $40 million. During 2006 we spent approximately $12.6 million on revenue enhancing improvements. Funding is expected to be provided primarily from borrowings on the Company’s line of credit, and issuance of common shares in our Dividend Reinvestment Program and Stock Purchase Plan.
Supply and Demand
          We believe the supply and demand model in the self-storage industry is micro market specific in that a majority of our business comes from within a five mile radius of our stores. However, the historically low interest rates available to developers over the past four years have resulted in increased supply on a national basis. We have experienced some of this excess supply in certain markets in Texas and New England, but because of the demand model, we have not seen a widespread effect on our stores. We have also observed an increase in the sales price of existing facilities as a result of the low interest rates, such that the capitalization rates on acquisitions (expected annual return on investment) have decreased from approximately 10% six years ago to 7.25% today. In 2004, we took advantage of these favorable capitalization rates by selling five stores for a gain of $1.1 million. With the increase in interest rates over the last year we have seen capitalization rates level off at approximately 7.25% and are forecasting acquisitions of $100 million in 2007.
Operating Trends
          In 2006, our industry had another good year as the overall economy remained strong and our industry continued the momentum from the recovery that commenced in 2003. We experienced same store revenue growth of approximately 5% in each of the last four years. We attribute the same store growth to implementation of the call center, the free truck program for new move-in customers, use of improved technology and practices in the management of our rental rates and, to a lesser degree, general economic factors. We expect conditions in most of our markets to remain stable and are forecasting 4% revenue growth on a same store basis in 2007.

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          Expenses related to operating a self-storage facility have increased substantially over the last five years as a result of expanded hours, increased health care costs, property insurance costs, and the costs of amenities (such as Uncle Bob’s trucks). We expect the trend of increasing costs to continue at a moderate pace and, while current operating margins are expected to be sustained, it is unlikely that much improvement in operating margins will be seen in the coming years as a result of cost reductions.
Critical Accounting Policies and Estimates
          The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts reported in our financial statements and the accompanying notes. On an on-going basis, we evaluate our estimates and judgments, including those related to carrying values of storage facilities, bad debts, and contingencies and litigation. We base these estimates on experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
          Carrying value of storage facilities: We believe our judgment regarding the impairment of the carrying value of our storage facilities is a critical accounting policy. Our policy is to assess any impairment of value whenever events or circumstances indicate that the carrying value of a storage facility may not be recoverable. Such events or circumstances would include negative operating cash flow or significant declining revenue per storage facility. Impairment is evaluated based upon comparing the sum of the expected undiscounted future cash flows to the carrying value of the storage facility, on a property by property basis. If the sum of the undiscounted cash flow is less than the carrying amount, an impairment loss is recognized for the amount by which the carrying amount exceeds the fair value of the asset. If cash flow projections are inaccurate and in the future it is determined that storage facility carrying values are not recoverable, impairment charges may be required at that time and could materially affect our operating results and financial position. At December 31, 2006 and 2005, no assets had been determined to be impaired under this policy.
          Estimated useful lives of long-lived assets: We believe that the estimated lives used for our depreciable, long-lived assets is a critical accounting policy. Changes in estimated useful lives of these assets could have a material adverse impact on our financial condition or results of operations.
          Qualification as a REIT: We operate, and intend to continue to operate, as a REIT under the Internal Revenue Code of 1986 (the Code), but no assurance can be given that we will at all times so qualify. To the extent that we continue to qualify as a REIT, we will not be taxed, with certain limited exceptions, on the taxable income that is distributed to our shareholders. If we fail to qualify as a REIT, any requirement to pay federal income taxes could have a material adverse impact on our financial conditions and results of operations.
YEAR ENDED DECEMBER 31, 2006 COMPARED TO
YEAR ENDED DECEMBER 31, 2005
          We recorded rental revenues of $160.9 million for the year ended December 31, 2006, an increase of $27.1 million or 20.2% when compared to 2005 rental revenues of $133.9 million. As of April 1, 2006, the consolidated income statement includes the results of a previously unconsolidated joint venture (Locke Sovran I, LLC) that has been consolidated as a result of an additional investment in that entity by us. The rental income related to Locke Sovran I that was included in our consolidated results for the year ended December 31, 2006, was $5.1 million. Of the remaining $22.0 million increase in rental income, $6.6 million resulted from a 5.2% increase in rental revenues at the 255 core properties considered in same store sales (those properties included in the consolidated results of operations since January 1, 2005 that were at a stable occupancy). The increase in same store rental revenues was achieved primarily through rate increases on select units averaging 3.8%, and a slight occupancy increase, which we believe resulted from improved responsiveness to customer demand created by our centralized call center and the increased demand in areas damaged by the 2005 hurricanes. The remaining $15.4 million increase in rental revenues resulted from the acquisition of 42 stores during 2006 and from having the 2005 acquisitions included for a full year of operations. Other income increased $0.9 million due to increased merchandise and insurance sales and the additional incidental revenue generated by truck rentals.

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          Property operating and real estate tax expense increased $10.9 million, or 22.6%, in 2006 compared to 2005. Of this increase, $6.5 million were expenses incurred by the facilities acquired in 2006 and from having expenses from the 2005 acquisitions included for a full year of operations. $2.6 million of the increase was due to increased property insurance, utilities, maintenance expenses, and increased property taxes at the 255 core properties considered same stores. The consolidation of Locke Sovran I, LLC as of April 1, 2006 resulted in a $1.8 million increase in property operating and real estate tax expense in 2006. We expect the trend of increasing operating costs to continue at a moderate to high pace primarily attributable to utilities and property insurance costs.
          General and administrative expenses increased $1.2 million or 9.6% from 2005 to 2006. The increase primarily resulted from the costs associated with operating the properties acquired in 2006 and 2005.
          Depreciation and amortization expense increased to $25.3 million in 2006 from $21.2 million in 2005, primarily as a result of additional depreciation taken on real estate assets acquired in 2006, a full year of depreciation on 2005 acquisitions, and the consolidation of Locke Sovran I, LLC.
          Income from operations increased from $55.9 million in 2005 to $67.6 million in 2006 as a result of the net effect of the aforementioned items.
          Interest expense increased from $20.2 million in 2005 to $29.5 million in 2006 as a result of higher interest rates, additional borrowings under our line of credit and term notes to purchase 42 stores in 2006, and the consolidation of Locke Sovran I, LLC as of April 1, 2006.
          The decrease in preferred stock dividends from 2005 to 2006 was a result of the conversion of 1,200,000 shares of our Series C Preferred Stock into 920,244 shares of common stock in 2005.
YEAR ENDED DECEMBER 31, 2005 COMPARED TO
YEAR ENDED DECEMBER 31, 2004
          We recorded rental revenues of $133.9 million for the year ended December 31, 2005, an increase of $14.3 million or 11.9% when compared to 2004 rental revenues of $119.6 million. Of this increase, $6.4 million resulted from a 5.5% increase in rental revenues at the 250 core properties considered in same store sales (those properties included in the consolidated results of operations since January 1, 2004). The increase in same store rental revenues was achieved primarily through rate increases on select units, and a slight occupancy increase, which we believe resulted from improved responsiveness to customer demand created by our centralized call center and the availability of rental trucks at 219 of our stores. The remaining $7.9 million increase in rental revenues resulted from the acquisition of fourteen stores during 2005 and from having the 2004 acquisitions included for a full year of operations. Other income increased $0.8 million due to increased merchandise and insurance sales and the additional incidental revenue generated by truck rentals.
          Property operating and real estate tax expense increased $5.2 million or 12.0% in 2005 compared to 2004. Of this increase, $3.4 million was incurred by the facilities acquired in 2005 and from having the 2004 acquisitions included for a full year of operations. $1.8 million of the increase was due to increased personnel, utilities, maintenance expenses, and increased property taxes at the 250 core properties considered same stores. We also incurred approximately $0.3 million of uninsured losses relating to the hurricanes that hit the United States in 2005 as compared to $0.7 million uninsured losses from hurricanes in 2004. We expect the trend of increasing operating costs to continue at a moderate pace with upward pressure related to utilities and property insurance costs.
          General and administrative expenses increased $1.8 million or 16.2% from 2004 to 2005. The increase primarily resulted from bonuses earned by our home office personnel including our executive officers, increased costs in our call center, and the increased costs associated with operating the properties acquired in 2005 and 2004.
          Depreciation and amortization expense increased to $21.2 million in 2005 from $19.2 million in 2004, primarily as a result of additional depreciation taken on real estate assets acquired in 2005 and a full year of depreciation on 2004 acquisitions.

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          Income from operations increased from $49.9 million in 2004 to $55.9 million in 2005 as a result of the net effect of the aforementioned items.
          Interest expense increased from $18.1 million in 2004 to $20.2 million in 2005 as a result of higher interest additional borrowings under our line of credit to purchase fourteen stores in 2005.
          During 2004, the Company sold five non-strategic storage facilities for net cash proceeds of $11.7 million, resulting in a gain of $1.1 million. The operations of these five facilities and the gain on sale in 2004 are reported as discontinued operations. No storage facilities were sold in 2005.
          The decrease in preferred stock dividends from 2004 to 2005 was a result of the redemption of all 1,200,000 outstanding shares of our 9.85% Series B Cumulative Preferred Stock in August of 2004 and the conversion of 1,200,000 shares of our Series C Preferred Stock to 920,244 shares of common stock in 2005.
FUNDS FROM OPERATIONS
          We believe that Funds from Operations (“FFO”) provides relevant and meaningful information about our operating performance that is necessary, along with net earnings and cash flows, for an understanding of our operating results. FFO adds back historical cost depreciation, which assumes the value of real estate assets diminishes predictably in the future. In fact, real estate asset values increase or decrease with market conditions. Consequently, we believe FFO is a useful supplemental measure in evaluating our operating performance by disregarding (or adding back) historical cost depreciation.
          FFO is defined by the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”) as net income computed in accordance with generally accepted accounting principles (“GAAP”), excluding gains or losses on sales of properties, plus depreciation and amortization and after adjustments to record unconsolidated partnerships and joint ventures on the same basis. We believe that to further understand our performance, FFO should be compared with our reported net income and cash flows in accordance with GAAP, as presented in our consolidated financial statements.
          Our computation of FFO may not be comparable to FFO reported by other REITs or real estate companies that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently. FFO does not represent cash generated from operating activities determined in accordance with GAAP, and should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of our performance, as an alternative to net cash flows from operating activities (determined in accordance with GAAP) as a measure of our liquidity, or as an indicator of our ability to make cash distributions.
Reconciliation of Net Income to Funds From Operations
                                         
    For Year Ended December 31,  
(dollars in thousands)   2006     2005     2004     2003     2002  
Net income
  $ 36,610     $ 34,790     $ 32,004     $ 28,423     $ 26,301  
Minority interest in income
    2,434       1,529       1,542       1,790       1,990  
Depreciation of real estate and amortization of intangible assets exclusive of deferred financing fees
    25,305       21,222       19,175       17,856       16,207  
Depreciation of real estate included in discontinued operations
                90       293       290  
Depreciation and amortization from unconsolidated joint ventures
    168       484       473       460       400  
Gain on sale of real estate
                (1,137 )            
Preferred stock dividends
    (2,512 )     (4,123 )     (7,168 )     (8,818 )     (4,863 )
Redemption amount in excess of carrying value of Series B Preferred Stock
                (1,415 )            

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    For Year Ended December 31,  
(dollars in thousands)   2006     2005     2004     2003     2002  
Funds from operations allocable to minority interest in Operating Partnership
    (1,450 )     (1,519 )     (1,333 )     (1,563 )     (1,647 )
Funds from operations allocable to minority interest in Locke Sovran I and Locke Sovran II
    (1,785 )     (1,499 )     (1,475 )     (1,539 )     (1,645 )
 
                             
Funds from operations available to common shareholders
  $ 58,770     $ 50,884     $ 40,756     $ 36,902     $ 37,033  
 
                             
LIQUIDITY AND CAPITAL RESOURCES
          Our ability to retain cash flow is limited because we operate as a REIT. In order to maintain our REIT status, a substantial portion of our operating cash flow must be used to pay dividends to our shareholders. We believe that our internally generated net cash provided by operating activities will continue to be sufficient to fund ongoing operations, capital improvements, dividends and debt service requirements through September 2007, at which time our revolving line of credit matures unless renewed at our option for one additional year.
          Cash flows from operating activities were $64.5 million, $60.2 million and $53.9 million for the years ended December 31, 2006, 2005, and 2004, respectively. The increase for each year is primarily attributable to increased net income and increased non-cash charges for depreciation and amortization. These increases were partially offset by an increase in prepaid expenses mainly relating to property insurance premiums.
          Cash used in investing activities was $176.6 million, $79.2 million, and $71.0 million for the years ended December 31, 2006, 2005, and 2004 respectively. The increase in cash used from 2004 to 2005 was attributable to increased acquisition activity in 2005. The increase from 2005 to 2006 was due to increased acquisition activity, an increase in improvements to existing facilities, and additional investment in our consolidated joint ventures.
          Cash provided by financing activities was $154.9 million in 2006 compared to $20.7 million in 2005 and uses of $0.2 million in 2004, respectively. In April 2006, the Company entered into a $150 million unsecured term note maturing in April 2016 bearing interest at 6.38%. The proceeds from this term note were used to pay down the outstanding balance on the Company’s line of credit, to repay a $25 million term note entered in January 2006 and a $15 million term note entered in April 2006, and to make an additional investment into Locke Sovran I, LLC and Locke Sovran II, LLC (consolidated joint ventures). In December 2006, we issued 2.3 million shares of our common stock and realized net proceeds of $122.4 million. A portion of the proceeds were used to repay the entire outstanding balance on our line of credit that had been drawn on to finance acquisitions subsequent to April 2006. The remaining proceeds from the common stock offering will be used to fund 2007 acquisitions.
          We have a $100 million (expandable to $200 million) unsecured line of credit that matures in September 2007 and a $100 million unsecured term note that matures in September 2009. We have the right to extend the term of the credit line until September 2008. The line of credit bears interest at LIBOR plus 0.90% and requires a 0.20% facility fee. The term note bears interest at LIBOR plus 1.20%. We also maintain a $80 million term note maturing September 2013 bearing interest at a fixed rate of 6.26% and a $20 million term note maturing September 2013 bearing interest at a variable rate equal to LIBOR plus 1.50%. At December 31, 2006, there was $100 million available on the revolving line of credit, excluding the amount available on the expansion feature.
          The line of credit facility and term notes currently have investment grade ratings from Standard and Poor’s (BBB-) and Fitch (BBB-).
          Our line of credit and term notes require us to meet certain financial covenants, including prescribed leverage, fixed charge coverage, minimum net worth, limitations on additional indebtedness and limitations on dividend payouts. As of December 31, 2006, we were in compliance with all covenants.
          In addition to the unsecured financing mentioned above, our consolidated financial statements also include $112.0 million of mortgages payable as detailed below:

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*   7.80% mortgage note due December 2011, secured by 11 self-storage facilities (Locke Sovran I) with an aggregate net book value of $41.6 million, principal and interest paid monthly. The outstanding balance at December 31, 2006 on this mortgage was $29.5 million.
 
*   7.19% mortgage note due March 2012, secured by 27 self-storage facilities (Locke Sovran II) with an aggregate net book value of $78.4 million, principal and interest paid monthly. The outstanding balance at December 31, 2006 on this mortgage was $44.6 million.
 
*   7.25% mortgage note due December 2011, secured by 1 self-storage facility with an aggregate net book value of $6.0 million, principal and interest paid monthly. Estimated market rate at time of acquisition 5.40%. The outstanding balance at December 31, 2006 on this mortgage was $3.8 million.
 
*   6.76% mortgage note due September 2013, secured by 1 self-storage facility with an aggregate net book value of $2.1 million, principal and interest paid monthly. The outstanding balance at December 31, 2006 on this mortgage was $1.0 million.
 
*   6.35% mortgage note due March 2014, secured by 1 self-storage facility with an aggregate net book value of $1.9 million, principal and interest paid monthly. The outstanding balance at December 31, 2006 on this mortgage was $1.1 million.
 
*   5.55% mortgage notes due November 2009, secured by 8 self-storage facilities with an aggregate net book value of $36.2 million, interest only paid monthly. Estimated market rate at time of acquisition 6.44%. The outstanding balance at December 31, 2006 on this mortgage was $25.5 million.
 
*   7.50% mortgage notes due August 2011, secured by 3 self-storage facilities with an aggregate net book value of $14.9 million, principal and interest paid monthly. Estimated market rate at time of acquisition 6.42%. The outstanding balance at December 31, 2006 on this mortgage was $6.5 million.
          The 7.80% and 7.19% mortgages were incurred in 2001 and 2002 respectively as part of the financing of the consolidated joint ventures. The Company assumed the 7.25%, 6.76%, 6.35%, 5.55% and 7.5% mortgage notes in connection with the acquisitions of storage facilities in 2005 and 2006.
          In July 1999, we issued 1,200,000 shares of 9.85% Series B Cumulative Redeemable Preferred Stock. We redeemed all outstanding shares of our Series B Preferred Stock on August 2, 2004 at a total cost of $30 million plus accrued but unpaid dividends on those shares. In accordance with Emerging Issues Task Force (“EITF”) Topic D-42, “The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock”, we recorded a reduction of $1.4 million from 2004 net income to arrive at net income available to common shareholders relating to the difference between the Series B Preferred Stock carrying value and the redemption amount.
          On July 3, 2002, we entered into an agreement providing for the issuance of 2,800,000 shares of 8.375% Series C Convertible Cumulative Preferred Stock and warrants to purchase 379,166 shares of common stock at $32.60 per share in a privately negotiated transaction. The offering price was $25.00 per share and the net proceeds of $67.9 million were used to reduce indebtedness that was incurred in the June 2002 acquisition of seven self-storage properties and to repay a portion of our borrowings under the line of credit. During 2005, we issued 920,244 shares of our common stock in connection with a written notice from one of the holders of our Series C Preferred Stock requesting the conversion of 1,200,000 shares of Series C Preferred Stock into common stock. In 2004, we issued 306,748 shares of our common stock in connection the conversion of 400,000 shares of Series C Preferred Stock into common stock. All converted shares of Series C Preferred Stock were retired leaving 1,200,000 shares outstanding at December 31, 2006.
          During 2006 and 2005, we did not acquire any shares of our common stock via the Share Repurchase Program authorized by the Board of Directors. From the inception of the Share Repurchase Program through December 31, 2006, we have reacquired a total of 1,171,886 shares pursuant to this program. From time to time, subject to market price and certain loan covenants, we may reacquire additional shares.
          During 2006, we issued 501,089 shares via our Dividend Reinvestment and Stock Purchase Plan and Employee Stock Option Plan. We realized $24.9 million from the sale of such shares. We expect to issue shares when our share price and capital needs warrant such issuance.
          Future acquisitions, share repurchases and repayment of the credit line are expected to be funded with the remaining proceeds from the December 2006 common stock issuance, draws on the revolving line of credit,

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issuance of secured or unsecured term notes, issuance of common or preferred stock, sale of properties, private placement solicitation of joint venture equity and other sources of capital.
CONTRACTUAL OBLIGATIONS
          The following table summarizes our future contractual obligations:
                                         
    Payments due by period  
Contractual obligations   Total     2007     2008-2009     2010-2011     2012 and thereafter  
Line of credit
                     
Term notes
  $ 350.0 million       $ 100.0 million       $ 250.0 million  
Mortgages payable
  $ 112.0 million   $ 1.6 million   $ 29.1 million   $ 40.2 million   $ 41.1 million  
Interest payments
  $ 179.4 million   $ 30.5 million   $ 52.7 million   $ 43.2 million   $ 53.0 million  
Land lease
  $ 1.2 million   $ 0.1 million   $ 0.1 million   $ 0.1 million   $ 0.9 million  
Building lease
  $ 1.5 million   $ 0.5 million   $ 1.0 million          
 
                     
Total
  $ 644.1 million   $ 32.7 million   $ 182.9 million   $ 83.5 million   $ 345.0 million  
ACQUISITION OF PROPERTIES
          During 2006, we used operating cash flow, borrowings pursuant to the line of credit, borrowings under the $150 million 10 year term note, and proceeds from our Dividend Reinvestment and Stock Purchase Plan to acquire 42 Properties in Alabama, Georgia, Florida, Louisiana, Missouri, New Hampshire, New York, Tennessee, and Texas comprising 2.6 million square feet from unaffiliated storage operators. During 2005, we used operating cash flow, borrowings pursuant to the line of credit, and proceeds from our Dividend Reinvestment and Stock Purchase Plan to acquire fourteen Properties in Alabama, Connecticut, Georgia, Louisiana, Massachusetts, New York, and Texas comprising one million square feet from unaffiliated storage operators. During 2004, we used operating cash flow and borrowings pursuant to the line of credit to acquire ten Properties in Connecticut, Florida, Tennessee, and Texas comprising one million square feet from unaffiliated storage operators. At December 31, 2006, we owned and operated 327 self-storage facilities in 22 states. Of these facilities, 38 are managed by us for two consolidated joint ventures of which we are a majority owner.
FUTURE ACQUISITION AND DEVELOPMENT PLANS
          Our external growth strategy is to increase the number of facilities we own by acquiring suitable facilities in markets in which we already have operations, or to expand into new markets by acquiring several facilities at once in those new markets.
          At December 31, 2006, we were in negotiations to acquire ten stores for approximately $31 million. One of these stores was purchased in January 2007 for $5.6 million.
          In addition, as announced in 2004, we have begun to implement a program that will add 450,000 to 600,000 square feet of rentable space at existing stores and convert up to an additional 250,000 to 300,000 square feet to premium (climate and humidity controlled) space. The projected cost of these revenue enhancing improvements is estimated at between $32 and $40 million. During 2006 we spent approximately $12.6 million on revenue enhancing improvements. Funding of these and the above-mentioned improvements is expected to be provided primarily from borrowings under our line of credit, and issuance of common shares through our Dividend Reinvestment and Stock Purchase Plan.
          We also expect to accelerate, by two to three years, the required capital expenditures on 50 to 70 of our Properties. This includes repainting, paving, and remodeling of the office buildings at these facilities. For 2006 we spent approximately $17 million on such improvements and we expect to spend approximately $18 million in 2007.

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DISPOSITION OF PROPERTIES
          During 2004, as part of an asset management program, we sold five non-strategic storage facilities located in Pennsylvania, Tennessee, Ohio, and South Carolina to unaffiliated parties for $11.7 million resulting in a net gain of $1.1 million. No sales took place in 2005 or 2006.
          Also, during 2001, we sold eight Properties for approximately $24.5 million to Locke Sovran II, LLC. Because Locke Sovran II, LLC is a consolidated joint venture, no gain was recognized on the sale.
          We may seek to sell additional Properties to similar joint venture programs or third parties in 2007.
OFF-BALANCE SHEET ARRANGEMENTS
          Our off-balance sheet arrangement includes an ownership interest in Iskalo Office Holdings, LLC, which owns the building that houses our headquarters and other tenants.
          The Company has a 49% ownership interest in Iskalo Office Holdings, LLC at December 31, 2006. During 2004, Iskalo Office Holdings obtained long-term financing and used the proceeds to repay the note payable to the Company of $1.1 million. The Company’s remaining investment includes a capital contribution of $49. For the years ended December 31, 2006 and 2005, the Company’s share of Iskalo Office Holdings, LLC’s income (loss) was $80,000 and ($8,000), respectively. The Company paid rent to Iskalo Office Holdings, LLC of $583,000, $445,000 and $426,000 in 2006, 2005, and 2004, respectively. Future minimum lease payments under the lease are $0.6 million per year through 2009. Also, the Company purchased land from Iskalo Office Holdings, LLC for $0.4 million and $1.2 million in 2004 and 2003, respectively.
          In April 2006, the Company made an additional investment of $2.8 million in a former off-balance sheet arrangement known as Locke Sovran I, LLC that increased the Company’s ownership to over 70%. As a result of this transaction the Company has consolidated the results of operations of Locke Sovran I, LLC in its financial statements since April 1, 2006, the date that it acquired its controlling interest. For the years ended December 31, 2005 and 2004, the Company’s share of Locke Sovran I, LLC’s income was $171,000 and $141,000, respectively, and the amortization of the deferred gain was $40,000, each of which are recorded as equity in income of joint ventures on the consolidated statements of operations for those years. The Company manages the storage facilities for Locke Sovran I, LLC and received fees of $332,000, and $322,000 for the years ended 2005, and 2004. Locke Sovran I, LLC, owns 11 self-storage facilities throughout the United States.
          A summary of the unconsolidated joint venture’s financial statements as of and for the year ended December 31, 2006 is as follows:
         
    Iskalo Office  
(dollars in thousands)   Holdings, LLC  
Balance Sheet Data:
       
Investment in office building
  $ 5,842  
Other assets
    808  
 
     
Total Assets
  $ 6,650  
 
     
 
       
Mortgage payable
  $ 7,410  
Other liabilities
    253  
 
     
Total Liabilities
    7,663  
Unaffiliated partners’ deficiency
    (592 )
Company deficiency
    (421 )
 
     
Total Liabilities and Partners’ Deficiency
  $ 6,650  
 
     

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    Iskalo Office  
(dollars in thousands)   Holdings, LLC  
Income Statement Data:
       
Total revenues
  $ 1,351  
Total expenses
    1,189  
 
     
Net income
  $ 162  
 
     
          We do not expect to have material future cash outlays relating to this joint venture and we do not guarantee the debt of Iskalo Office Holdings, LLC. A summary of our cash flows arising from the off-balance sheet arrangements with Iskalo Office Holdings, LLC for the three years ended December 31, 2006, and with Locke Sovran I, LLC for the two years ended December 31, 2005 and for the three months ended March 31, 2006 (the date it has been included in our consolidated results of operations) are as follows:
                         
    Year ended December 31,
(dollars in thousands)   2006   2005   2004
Statement of Operations
                       
Other income (management fees income)
  $ 85     $ 332     $ 322  
General and administrative expenses (corporate office rent)
    583       445       426  
Equity in income of joint ventures
    172       202       207  
 
                       
Investing activities
                       
Reimbursement of advances to (advances to) joint ventures
    17       (187 )     958  
 
                       
Financing activities
                       
Distributions from unconsolidated joint ventures
    123       490       602  
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 2007 may be applied toward our 2006 distribution requirement.
          As a REIT, we must derive at least 95% of our total gross income from income related to real property, interest and dividends. In 2006, our percentage of revenue from such sources exceeded 98%, thereby passing the 95% test, and no special measures are expected to be required to enable us to maintain our REIT designation. Although we currently intend to operate in a manner designed to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause our Board of Directors to revoke our REIT election.
INTEREST RATE RISK
          We have entered into interest rate swap agreements in order to mitigate the effects of fluctuations in interest rates on our floating rate debt. At December 31, 2006, we have three outstanding interest rate swap agreements as summarized below:
                                 
                    Fixed   Floating Rate
Notional Amount   Effective Date   Expiration Date   Rate Paid   Received
$50 Million
    11/14/05       9/1/09       5.590 %   1 month LIBOR
$20 Million
    9/4/05       9/4/13       5.935 %   6 month LIBOR
$50 Million
    10/10/06       9/1/09       5.680 %   1 month LIBOR

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          Upon renewal or replacement of the credit facility, our total interest may change dependent on the terms we negotiate with the lenders; however, the LIBOR base rates have been contractually fixed on $120 million of our debt through the interest rate swap termination dates.
          Through September 2009, all of our $350 million of unsecured debt is on a fixed rate basis after taking into account the interest rate swaps noted above. Based on our outstanding unsecured debt of $350 million at December 31, 2006, a 1% increase in interest rates would have no effect on our interest expense annually.
          The table below summarizes our debt obligations and interest rate derivatives at December 31, 2006. The estimated fair value of financial instruments is subjective in nature and is dependent on a number of important assumptions, including discount rates and relevant comparable market information associated with each financial instrument. The use of different market assumptions and estimation methodologies may have a material effect on the reported estimated fair value amounts. Accordingly, the estimates presented below are not necessarily indicative of the amounts we would realize in a current market exchange.
                                                                 
    Expected Maturity Date Including Discount            
(dollars in thousands)   2007   2008   2009   2010   2011   Thereafter   Total   Fair Value
Line of credit — variable rate LIBOR + 0.9%
                                               
 
                                                               
Notes Payable:
                                                               
Term note — variable rate LIBOR+1.20%
                    $ 100,000                 $ 100,000     $ 100,000  
Term note — variable rate LIBOR+1.50%
                                $ 20,000     $ 20,000     $ 20,000  
Term note — fixed rate 6.26%
                                $ 80,000     $ 80,000     $ 78,334  
Term note — fixed rate 6.38%
                                $ 150,000     $ 150,000     $ 147,688  
 
                                                               
Mortgage note — fixed rate 7.80%
  $ 342     $ 363     $ 400     $ 433     $ 27,948           $ 29,486     $ 30,858  
Mortgage note — fixed rate 7.19%
  $ 937     $ 998     $ 1,083     $ 1,164     $ 1,252     $ 39,189     $ 44,623     $ 45,874  
Mortgage note — fixed rate 7.25%
  $ 126     $ 133     $ 141     $ 149     $ 3,220           $ 3,769     $ 3,620  
Mortgage note — fixed rate 6.76%
  $ 20     $ 22     $ 23     $ 25     $ 27     $ 926     $ 1,043     $ 1,062  
Mortgage note — fixed rate 6.35%
  $ 23     $ 24     $ 26     $ 28     $ 30     $ 1,013     $ 1,144     $ 1,141  
Mortgage notes — fixed rate 5.55%
              $ 25,496                       $ 25,496     $ 26,138  
Mortgage notes — fixed rate 7.50%
  $ 183     $ 194     $ 208     $ 222     $ 5,659           $ 6,466     $ 6,471  
 
                                                               
Interest rate derivatives – asset
                                            $ 2,128  
INFLATION
          We do not believe that inflation has had or will have a direct effect on our operations. Substantially all of the leases at the facilities are on a month-to-month basis which provides us with the opportunity to increase rental rates as each lease matures.
SEASONALITY
          Our revenues typically have been higher in the third and fourth quarters, primarily because we increase rental rates on most of our storage units at the beginning of May and because self-storage facilities tend to experience greater occupancy during the late spring, summer and early fall months due to the greater incidence of residential moves during these periods. However, we believe that our customer mix, diverse geographic locations, rental structure and expense structure provide adequate protection against undue fluctuations in cash flows and net revenues during off-peak seasons. Thus, we do not expect seasonality to affect materially distributions to shareholders.

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RECENT ACCOUNTING PRONOUNCEMENTS
     On December 16, 2004, the FASB issued FASB Statement No. 123(R), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative under Statement 123(R). The Company adopted Statement 123(R) on January 1, 2006 and uses the modified-prospective method. Under the modified-prospective method, the Company will recognize compensation cost in the financial statements issued subsequent to January 1, 2006 for all share based payments granted, modified, or settled after the date of adoption as well as for any awards that were granted prior to the adoption date for which the requisite service period has not been completed as of the adoption date.
     Prior to the adoption of FAS 123(R) non-vested shares issued to employees and non-employee directors were recorded as unearned compensation (a component of stockholders’ equity), at an amount equivalent to the fair market value of the shares on the date of grant. Upon the adoption of FAS 123(R) on January 1, 2006, the non-vested stock balance of approximately $1.8 million was reclassified as additional-paid-in-capital. Under the provisions of FAS 123(R), compensation expense and a corresponding increase to additional paid-in capital are recorded for non-vested share grants on a straight-line basis as the restriction periods lapse. As a result of the adoption of FAS 123(R), the Company recorded compensation expense of $119,000 related to stock options. The adoption of FAS 123(R) did not have a significant impact on the determination of compensation expense related to non-vested stock grants.
     In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations. Interpretation 47 clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. However, the obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Interpretation 47 requires that the uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. Interpretation 47 was effective December 31, 2005 for the Company. The application of Interpretation 47 did not have a material impact on the Company’s financial position or results of operations.
     In June 2005, the FASB ratified the EITF’s consensus on Issue No. 04-5 “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights.” This consensus established the presumption that general partners in a limited partnership control that limited partnership (or similar entity such as an LLC) regardless of the extent of the general partners’ ownership interest in the limited partnership. The consensus further establishes that the rights of the limited partners can overcome the presumption of control by the general partners, if the limited partners have either (a) the substantive ability to dissolve (liquidate) the limited partnership or otherwise remove the general partners without cause or (b) substantive participating rights. EITF 04-5 is effective for all agreements entered into or modified after June 29, 2005. For pre-existing agreements that are not modified, the consensus was effective as of the beginning of the first fiscal reporting period beginning after December 15, 2005. The implementation of this standard did not have a material effect on our consolidated financial position or results of operations.
     In July 2006, the Financial Accounting Standards Board issued Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes, which applies to all tax positions related to income taxes subject to SFAS 109, Accounting for Income Taxes. FIN 48 requires a new evaluation process for all tax positions taken. If the probability for sustaining said tax position is greater than 50%, then the tax position is warranted and recognition should be at the highest amount which would be expected to be realized upon ultimate settlement. Interpretation 48 requires expanded disclosure at each annual reporting period unless a significant change occurs in an interim period. Differences between the amounts recognized in the statements of financial position prior to the adoption of Interpretation 48 and the amounts reported after adoption are to be accounted for as an adjustment to the beginning

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balance of retained earnings.
     The Company has completed its initial evaluation of the impact of the January 1, 2007, adoption of Interpretation 48 and determined that such adoption is not expected to have a material impact on the Company’s financial position or results from operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
     The information required is incorporated by reference to the information appearing under the caption “Interest Rate Risk” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” above.
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Sovran Self Storage, Inc.
     We have audited the accompanying consolidated balance sheets of Sovran Self Storage, Inc. as of December 31, 2006 and 2005, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
     In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sovran Self Storage, Inc. at December 31, 2006 and 2005, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
     As discussed in Note 2 to the consolidated financial statements, in 2006 the Company adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment”.
     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Sovran Self Storage, Inc.’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2007 expressed an unqualified opinion thereon.
         
     
  /s/ Ernst & Young LLP    
     
     
 
Buffalo, New York
March 1, 2007

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SOVRAN SELF STORAGE, INC. CONSOLIDATED BALANCE SHEETS
                 
    December 31,  
(dollars in thousands, except share data)   2006     2005  
Assets
               
Investment in storage facilities:
               
Land
  $ 208,644     $ 162,900  
Building, equipment, and construction in progress
    935,260       731,080  
 
           
 
    1,143,904       893,980  
Less: accumulated depreciation
    (155,843 )     (130,550 )
 
           
Investment in storage facilities, net
    988,061       763,430  
Cash and cash equivalents
    47,730       4,911  
Accounts receivable
    2,166       1,643  
Receivable from related parties
    37       75  
Receivable from joint ventures
          2,780  
Investment in joint ventures
          825  
Prepaid expenses
    5,336       3,075  
Fair value of interest rate swap agreements
    2,274       1,411  
Other assets
    7,606       6,226  
 
           
Total Assets
  $ 1,053,210     $ 784,376  
 
           
 
               
Liabilities
               
Line of credit
  $     $ 90,000  
Term notes
    350,000       200,000  
Accounts payable and accrued liabilities
    15,358       10,865  
Deferred revenue
    5,292       4,227  
Accrued dividends
    12,675       10,801  
Mortgages payable
    112,027       49,144  
 
           
Total Liabilities
    495,352       365,037  
 
               
Minority interest — Operating Partnership
    10,164       11,132  
Minority interest — consolidated joint venture
    16,783       14,122  
 
               
Shareholders’ Equity
               
8.375% Series C Convertible Cumulative Preferred Stock, $.01 par value, 1,200,000 shares issued and outstanding at December 31, 2006 and December 31, 2005, $30,000 liquidation value
    26,613       26,613  
Common stock $.01 par value, 100,000,000 shares authorized, 20,443,529 shares outstanding (17,563,046 at December 31, 2005)
    216       187  
Additional paid-in capital
    612,738       466,839  
Non-vested stock
          (1,838 )
Dividends in excess of net income
    (83,609 )     (71,995 )
Accumulated other comprehensive income
    2,128       1,454  
Treasury stock at cost, 1,171,886 shares
    (27,175 )     (27,175 )
 
           
Total Shareholders’ Equity
    530,911       394,085  
 
           
Total Liabilities and Shareholders’ Equity
  $ 1,053,210     $ 784,376  
 
           
See notes to financial statements.

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SOVRAN SELF STORAGE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
                         
    Year Ended December 31,  
(dollars in thousands, except per share data)   2006     2005     2004  
Revenues
                       
Rental income
  $ 160,924     $ 133,856     $ 119,605  
Other operating income
    5,371       4,449       3,681  
 
                 
Total operating revenues
    166,295       138,305       123,286  
 
                       
Expenses
                       
Property operations and maintenance
    44,034       35,954       32,166  
Real estate taxes
    15,260       12,407       11,014  
General and administrative
    14,095       12,863       11,071  
Depreciation and amortization
    25,347       21,222       19,175  
 
                 
Total operating expenses
    98,736       82,446       73,426  
 
                 
 
                       
Income from operations
    67,559       55,859       49,860  
 
                       
Other income (expenses)
                       
Interest expense
    (29,494 )     (20,229 )     (18,128 )
Interest income
    807       487       301  
Minority interest — Operating Partnership
    (905 )     (1,039 )     (1,043 )
Minority interest — consolidated joint ventures
    (1,529 )     (490 )     (499 )
Equity in income of joint ventures
    172       202       207  
 
                 
 
                       
Income from continuing operations
    36,610       34,790       30,698  
Income from discontinued operations (including gain on disposal in 2004 of $1,083)
                1,306  
 
                 
 
                       
Net Income
    36,610       34,790       32,004  
Redemption amount in excess of carrying value of Series B Preferred Stock
                (1,415 )
Preferred stock dividends
    (2,512 )     (4,123 )     (7,168 )
 
                 
Net income available to common shareholders
  $ 34,098     $ 30,667     $ 23,421  
 
                 
 
                       
Per Common Share — basic:
                       
Continuing operations
  $ 1.90     $ 1.86     $ 1.45  
Discontinued operations
  $     $     $ 0.09  
 
                 
Earnings per common share — basic
  $ 1.90     $ 1.86     $ 1.54  
 
                       
Per Common Share — diluted:
                       
Continuing operations
  $ 1.89     $ 1.84     $ 1.44  
Discontinued operations
  $     $     $ 0.09  
 
                 
Earnings per common share — diluted
  $ 1.89     $ 1.84     $ 1.53  
 
                       
Dividends declared per common share
  $ 2.47     $ 2.44     $ 2.42  
See notes to financial statements.

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SOVRAN SELF STORAGE, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
                                                                                                 
    9.85%             8.375%                                                                  
    Series B     9.85%     Series C     8.375%                                             Accumulated              
    Preferred     Series B     Preferred     Series C     Common             Additional     Non-      Dividends in     Other              
    Stock     Preferred     Stock     Preferred     Stock     Common     Paid-in     vested     Excess of     Comprehensive     Treasury     Total  
(dollars in thousands, except share data)   Shares     Stock     Shares     Stock     Shares     Stock     Capital     Stock     Net Income     Income (loss)     Stock     Equity  
Balance January 1, 2004
    1,200,000     $ 28,585       2,800,000     $ 67,129       14,259,863     $ 154     $ 356,875     $ (1,722 )   $ (48,069 )   $ (7,580 )   $ (27,175 )   $ 368,197  
Net proceeds from issuance of stock through Dividend Reinvestment and Stock Purchase Plan
                            1,163,651       12       43,482                               43,494  
Exercise of stock options
                            225,750       2       5,500                               5,502  
Issuance of non-vested stock
                            12,058             463       (463 )                        
Earned portion of non-vested stock
                                              411                         411  
Deferred compensation outside directors
                                        129                               129  
Conversion of Series C Preferred Stock to common stock and exercise of related stock warrants
                (400,000 )     (8,871 )     310,905       3       8,868                                
Exercise of Series C Preferred Stock placement certificate
                      (5,031 )                 2,958                               (2,073 )
Carrying value less than redemption value on redeemed partnership units
                                        (268 )                             (268 )
Redemption of 9.85% Series B Preferred Stock
    (1,200,000 )     (28,585 )                                                           (28,585 )
Redemption amount in excess of carrying value of 9.85% Series B Preferred Stock
                                                    (1,415 )                 (1,415 )
Net income
                                                    32,004                   32,004  
Change in fair value of derivatives
                                                          4,326             4,326  
 
                                                                                             
Total comprehensive income
                                                                      36,330  
Dividends
                                                    (44,271 )                 (44,271 )
 
                                                                       
Balance December 31, 2004
                2,400,000       53,227       15,972,227       171       418,007       (1,774 )     (61,751 )     (3,254 )     (27,175 )     377,451  
Net proceeds from issuance of stock through Dividend Reinvestment and Stock Purchase Plan
                            283,379       3       11,929                               11,932  
Exercise of stock options
                            129,015       1       3,238                               3,239  
Issuance of non-vested stock
                            13,778             582       (582 )                        
Earned portion of non-vested stock
                                              518                         518  
Deferred compensation outside directors
                                        125                               125  
Conversion of Series C Preferred Stock to common stock and exercise of related stock warrants
                (1,200,000 )     (26,614 )     1,164,647       12       32,958                               6,356  
Net income
                                                    34,790                   34,790  
Change in fair value of derivatives
                                                          4,708             4,708  
 
                                                                                             
Total comprehensive income
                                                                      39,498  
Dividends
                                                    (45,034 )                 (45,034 )
 
                                                                       
Balance December 31, 2005
                1,200,000       26,613       17,563,046       187       466,839       (1,838 )     (71,995 )     1,454       (27,175 )     394,085  
Net proceeds from the issuance of common stock
                            2,300,000       23       122,388                               122,411  
Net proceeds from issuance of stock through Dividend Reinvestment and Stock Purchase Plan
                            501,089       5       24,862                               24,867  
Exercise of stock options
                            37,675             1,142                               1,142  

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    9.85%             8.375%                                                                  
    Series B     9.85%     Series C     8.375%                                             Accumulated              
    Preferred     Series B     Preferred     Series C     Common             Additional     Non-      Dividends in     Other              
    Stock     Preferred     Stock     Preferred     Stock     Common     Paid-in     vested     Excess of     Comprehensive     Treasury     Total  
(dollars in thousands, except share data)   Shares     Stock     Shares     Stock     Shares     Stock     Capital     Stock     Net Income     Income (loss)     Stock     Equity  
Reclass of unearned non-vested stock to additional paid in capital
                                        (1,838 )     1,838                          
Issuance of non-vested stock
                            41,719       1       (1 )                              
Earned portion of non-vested stock
                                        876                               876  
Stock option expense
                                        119                               119  
Deferred compensation outside directors
                                        181                               181  
Carrying value less than redemption value on redeemed partnership units
                                        (1,830 )                             (1,830 )
Net income
                                                    36,610                   36,610  
Change in fair value of derivatives
                                                          674             674  
 
                                                                                             
Total comprehensive income
                                                                      37,284  
Dividends
                                                    (48,224 )                 (48,224 )
 
                                                                       
Balance December 31, 2006
        $       1,200,000     $   26,613       20,443,529     $ 216     $ 612,738     $     $ (83,609 )   $ 2,128     $ (27,175 )   $ 530,911  
 
                                                                       
See notes to financial statements.

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SOVRAN SELF STORAGE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
                         
    Year Ended December 31,  
(dollars in thousands)   2006     2005     2004  
Operating Activities
                       
Net income from continuing operations
  $ 36,610     $ 34,790     $ 30,698  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation and amortization
    26,340       22,012       19,895  
Equity in income of joint ventures
    (172 )     (202 )     (207 )
Minority interest
    2,434       1,529       1,542  
Non-vested stock earned
    876       518       411  
Stock option expense
    119              
Changes in assets and liabilities:
                       
Accounts receivable
    (407 )     (74 )     103  
Prepaid expenses
    (2,029 )     183       (124 )
Accounts payable and other liabilities
    1,011       1,445       1,644  
Deferred revenue
    (249 )     33       (48 )
 
                 
Net cash provided by operating activities — continuing operations
    64,533       60,234       53,914  
 
                       
Net cash provided by operating activities — discontinued operations
                287  
 
                       
Investing Activities
                       
Acquisition of storage facilities
    (130,251 )     (60,681 )     (65,629 )
Improvements, equipment additions, and construction in progress
    (37,021 )     (17,885 )     (17,961 )
Additional investment in consolidated joint ventures net of cash acquired
    (8,181 )            
Net proceeds from the sale of storage facilities
                11,640  
Reimbursement of advances to (advances to) joint ventures
    17       (187 )     958  
Other assets
    (1,169 )     (418 )     (47 )
Receipts from related parties
    38       15       5  
 
                 
Net cash used in investing activities
    (176,567 )     (79,156 )     (71,034 )
 
                       
Financing Activities
                       
Net proceeds from sale of common stock
    148,601       21,652       49,125  
Proceeds from line of credit
    94,000       56,000       74,000  
Paydown of line of credit
    (184,000 )     (9,000 )     (40,000 )
Proceeds from term notes
    150,000              
Financing costs
    (632 )     (352 )     (735 )
Dividends paid — common stock
    (43,837 )     (39,773 )     (36,032 )
Dividends paid — preferred stock
    (2,513 )     (4,123 )     (7,168 )
Distributions from unconsolidated joint venture
    123       490       602  
Minority interest distributions
    (2,815 )     (2,567 )     (2,422 )
Redemption of operating partnership units
    (2,788 )     (722 )     (1,758 )
Redemption of Series B Preferred Stock
                (30,000 )
Series C Preferred Stock placement certificate payment
                (5,031 )
Mortgage principal and capital lease payments
    (1,286 )     (877 )     (744 )
 
                 
Net cash provided by (used in) financing activities
    154,853       20,728       (163 )
 
                 
Net increase (decrease) in cash
    42,819       1,806       (16,996 )
Cash at beginning of period
    4,911       3,105       20,101  
 
                 
Cash at end of period
  $ 47,730     $ 4,911     $ 3,105  
 
                 
 
                       
Supplemental cash flow information
                       
Cash paid for interest
  $ 26,647     $ 19,097     $ 17,403  
 
                       
Fair value of net liabilities assumed on the acquisition of storage facilities
    65,650       4,320       744  
Dividends declared but unpaid at December 31, 2006, 2005 and 2004 were $12,675, $10,801, and $9,663, respectively.
See notes to financial statements.

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SOVRAN SELF STORAGE, INC. — DECEMBER 31, 2006
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
     Sovran Self Storage, Inc. (the “Company,” “We,” “Our,” or “Sovran”), a self-administered and self-managed real estate investment trust (a “REIT”), was formed on April 19, 1995 to own and operate self-storage facilities throughout the United States. On June 26, 1995, the Company commenced operations effective with the completion of its initial public offering. At December 31, 2006, we owned and operated 327 self-storage properties in 22 states under the name Uncle Bob’s Self Storage ®. Among our 327 self-storage properties are 38 properties that we manage for two consolidated joint ventures of which we are a majority owner.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     Basis of Presentation: All of the Company’s assets are owned by, and all its operations are conducted through, Sovran Acquisition Limited Partnership (the “Operating Partnership”). Sovran Holdings, Inc., a wholly-owned subsidiary of the Company (the “Subsidiary”), is the sole general partner of the Operating Partnership; the Company is a limited partner of the Operating Partnership, and through its ownership of the Subsidiary and its limited partnership interest controls the operations of the Operating Partnership, holding a 97.9% ownership interest therein as of December 31, 2006. The remaining ownership interests in the Operating Partnership (the “Units”) are held by certain former owners of assets acquired by the Operating Partnership subsequent to its formation.
     We consolidate all wholly owned subsidiaries. Partially owned subsidiaries and joint ventures are consolidated when we control the entity. We evaluate partially-owned subsidiaries and joint ventures held in partnership form in accordance with the provisions of Statement of Positions (SOP) 78-9, “Accounting for Investments in Real Estate Ventures”, and FASB Staff Position SOP 78-9-1, “Interaction of AICPA SOP 78-9 and EITF Issue 04-5”, to determine whether the rights held by other investors constitute “kick-out rights” or “substantive participating rights” as defined therein. For pre-existing joint venture agreements that have not been modified, effective January 1, 2006 we were required to adopt the provisions of the EITF’s consensus on Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights.” Under this consensus we presume that general partners in a limited partnership control that limited partnership (or similar entity like a limited liability company) regardless of the extent of the general partners’ ownership interest in the limited partnership. We also consider whether the rights of the limited partners can overcome the presumption of control by the general partners, if the limited partners have either (a) the substantive ability to dissolve (liquidate) the limited partnership or otherwise remove the general partners without cause or (b) substantive participating rights. For partially-owned subsidiaries or joint ventures held in corporate form, we consider the guidance of SFAS No. 94 “Consolidation of All Majority-Owned Subsidiaries” and Emerging Issues Task Force (EITF) 96-16, “Investor’s Accounting for an Investee When the Investor has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights”, and in particular, whether rights held by other investors would be viewed as “participation rights” as defined therein. To the extent that any minority investor has important rights in a partnership or substantive participating rights in a corporation, including substantive veto rights, the related entity will generally not be consolidated. We also consider the provisions of SFAS Interpretation No. 46(R), “Consolidation of Variable Interest Entities — An Interpretation of ARB No. 51” in evaluating whether consolidation of entities which are considered to be variable interest entities is warranted and we are the primary beneficiary of the expected losses or residual gains of such entities. Our consolidated financial statements include the accounts of the Company, the Operating Partnership, and Locke Sovran I, LLC and Locke Sovran II, LLC, which are majority owned joint ventures. All intercompany transactions and balances have been eliminated. Investments in joint ventures that we do not control but for which we have significant influence over are reported using the equity method.
     In April 2006, the Company made additional investments of $8,475,000 in Locke Sovran I, LLC and Locke Sovran II, LLC that increased the Company’s ownership from approximately 45% to over 70% in each of these joint ventures. As a result of this transaction, from the date that its controlling interest was acquired, the Company has consolidated the accounts of Locke Sovran I, LLC in its financial statements. The accounts of Locke Sovran II, LLC were already being included in the Company’s financial statements as it has been a majority controlled joint

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venture since 2001. A summary of the Locke Sovran I, LLC balance sheet as of April 1, 2006 was as follows:
         
    Locke Sovran I,  
(dollars in thousands)   LLC  
Investment in storage facilities, net
  $ 38,000  
Other assets
    1,240  
 
     
Total Assets
  $ 39,240  
 
     
 
       
Due to the Company
  $ 2,763  
Mortgage payable
    29,379  
Other liabilities
    579  
 
     
Total Liabilities
    32,721  
 
       
Unaffiliated partners’ equity
    3,521  
Company equity
    2,998  
 
     
Total Liabilities and Partners’ Equity
  $ 39,240  
 
     
     Cash and Cash Equivalents: The Company considers all highly liquid investments purchased with maturities of three months or less to be cash equivalents. The cash balance includes $3.1 million and $2.0 million, respectively, held in escrow for encumbered properties at December 31, 2006 and 2005.
     Revenue and Expense Recognition: Rental income is recorded when earned. Rental income received prior to the start of the rental period is included in deferred revenue. Advertising costs are expensed as incurred and for the years ended December 31, 2006, 2005, and 2004 were $1.0 million, $0.6 million, and $0.5 million, respectively.
     Other Income: Consists primarily of sales of storage-related merchandise (locks and packing supplies), management fees, insurance commissions, and incidental truck rentals.
   Investment in Storage Facilities: Storage facilities are recorded at cost. The purchase price of acquired facilities is allocated to land, building, and equipment based on the fair value of each component. No intangible asset has been recorded for the value of tenant relationships because the Company does not have any concentrations of significant tenants, the majority of leases are month-to-month, and the average tenant turnover is fairly frequent. Depreciation is computed using the straight-line method over estimated useful lives of forty years for buildings and improvements, and five to twenty years for furniture, fixtures and equipment. Expenditures for significant renovations or improvements that extend the useful life of assets are capitalized. Repair and maintenance costs are expensed as incurred.
     Whenever events or changes in circumstances indicate that the basis of the Company’s property may not be recoverable, the Company’s policy is to assess any impairment of value. Impairment is evaluated based upon comparing the sum of the expected undiscounted future cash flows to the carrying value of the property, on a property by property basis. If the sum of the undiscounted cash flow is less than the carrying amount, an impairment loss is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. At December 31, 2006 and 2005, no assets had been determined to be impaired under this policy and, accordingly, this policy had no impact on the Company’s financial position or results of operations.
     Other Assets: Included in other assets are net loan acquisition costs, a note receivable, and property deposits. The loan acquisition costs were $5.9 million and $4.7 million at December 31, 2006, and 2005, respectively. Accumulated amortization on the loan acquisition costs was approximately $2.9 million and $1.9 million at December 31, 2006, and 2005, respectively. Loan acquisition costs are amortized over the terms of the related debt. Amortization expense was $1.0 million, $0.8 million and $0.7 million for the periods ended December 31, 2006, 2005 and 2004, respectively. The note receivable of $2.8 million represents a note from certain investors of Locke Sovran II, LLC. The note bears interest at LIBOR plus 2.4% and matures upon the dissolution of Locke Sovran II, LLC. Property deposits were $1.7 million and $0.6 million at December 31, 2006 and 2005, respectively.

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     Accounts Payable and Accrued Liabilities: Accounts payable and accrued liabilities consists primarily of trade payables, accrued interest, and property tax accruals. The Company accrues property tax expense based on estimates and historical trends. Actual expense could differ from these estimates.
     Minority Interest: The minority interest reflects the outside ownership interest of the limited partners of the Operating Partnership and the joint venture partner’s interest in Locke Sovran I, LLC and Locke Sovran II, LLC. Amounts allocated to these interests are reflected as an expense in the income statement and increase the minority interest in the balance sheet. Distributions to these partners reduce this balance. At December 31, 2006, Operating Partnership minority interest ownership was 429,035 Units, or 2.1%. At December 31, 2005, Operating Partnership minority interest ownership was 479,277 Units, or 2.7%. The redemption value of the Units at December 31, 2006 and 2005 was $24.6 million and $22.5 million, respectively. The Operating Partnership is obligated to redeem each Unit at the request of the holder thereof for cash equal to the fair market value of a share of the Company’s common stock, at the time of such redemption, provided that the Company at its option may elect to acquire any such Unit presented for redemption for one common share or cash.
     Income Taxes: The Company qualifies as a REIT under the Internal Revenue Code of 1986, as amended, and will generally not be subject to corporate income taxes to the extent it distributes at least 90% of its taxable income to its shareholders and complies with certain other requirements. Accordingly, no provision has been made for federal income taxes in the accompanying financial statements.
     Comprehensive Income: Comprehensive income consists of net income and the change in value of derivatives used for hedging purposes and is reported in the consolidated statements of shareholders’ equity. Comprehensive income was $37.3 million, $39.5 million and $36.3 million for the years ended December 31, 2006, 2005, and 2004, respectively.
     Derivative Financial Instruments: On January 1, 2001, the Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, which requires companies to carry all derivatives on the balance sheet at fair value. The Company determines the fair value of derivatives by reference to quoted market prices. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, the reason for holding it. The Company’s use of derivative instruments is limited to cash flow hedges, as defined in SFAS No. 133, of certain interest rate risks.
     Recent Accounting Pronouncements: In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations. Interpretation 47 clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. However, the obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Interpretation 47 requires that the uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. Interpretation 47 was effective December 15, 2005 for the Company. The application of Interpretation 47 did not have a material impact on the Company’s financial position or results of operations.
     In June 2005, the FASB ratified the EITF’s consensus on Issue No. 04-5 “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights.” This consensus established the presumption that general partners in a limited partnership control that limited partnership (or similar entity such as an LLC) regardless of the extent of the general partners’ ownership interest in the limited partnership. The consensus further establishes that the rights of the limited partners can overcome the presumption of control by the general partners, if the limited partners have either (a) the substantive ability to dissolve (liquidate) the limited partnership or otherwise remove the general partners without cause or (b) substantive participating rights. EITF 04-5 is effective for all agreements entered into or modified after June 29, 2005. For pre-existing agreements that are not modified, the consensus was effective as of the beginning of the first fiscal reporting period beginning after December 15, 2005. The implementation of this standard did not have a material effect on our consolidated financial position or results of operations.

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     In July 2006, the Financial Accounting Standards Board issued Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes, which applies to all tax positions related to income taxes subject to SFAS 109, Accounting for Income Taxes. FIN 48 requires a new evaluation process for all tax positions taken. If the probability for sustaining said tax position is greater than 50%, then the tax position is warranted and recognition should be at the highest amount which would be expected to be realized upon ultimate settlement. Interpretation 48 requires expanded disclosure at each annual reporting period unless a significant change occurs in an interim period. Differences between the amounts recognized in the statements of financial position prior to the adoption of Interpretation 48 and the amounts reported after adoption are to be accounted for as an adjustment to the beginning balance of retained earnings.
     The Company has completed its initial evaluation of the impact of the January 1, 2007, adoption of Interpretation 48 and determined that such adoption is not expected to have a material impact on the Company’s financial position or results from operations.
     Stock-Based Compensation: On December 16, 2004, the FASB issued FASB Statement No. 123(R), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative under Statement 123(R). The Company adopted Statement 123(R) on January 1, 2006 and uses the modified-prospective method. Under the modified-prospective method, the Company will recognize compensation cost in the financial statements issued subsequent to January 1, 2006 for all share based payments granted, modified, or settled after the date of adoption as well as for any awards that were granted prior to the adoption date for which the requisite service period has not been completed as of the adoption date. The Company’s shared-based payment arrangements are described below.
     Prior to the adoption of FAS 123(R) non-vested shares issued to employees and non-employee directors were recorded as unearned compensation (a component of stockholders’ equity), at an amount equivalent to the fair market value of the shares on the date of grant. Upon the adoption of FAS 123(R) on January 1, 2006, the non-vested stock balance of approximately $1.8 million was reclassified as additional-paid-in-capital. Under the provisions of FAS 123(R), compensation expense and a corresponding increase to additional paid-in capital are recorded for non-vested share grants on a straight-line basis as the restriction periods lapse.
     For the year ended December 31, 2006, the Company recorded compensation expense (included in general and administrative expense) of $119,000 related to stock options under Statement 123(R) and $876,000 related to amortization of non-vested stock grants. The Company uses the Black-Scholes Merton option pricing model to estimate the fair value of stock options granted subsequent to the adoption of FAS 123(R). For stock option awards that were granted prior to the adoption date of FAS 123(R) for which the requisite service period had not been provided as of the adoption date and for the 14,000 stock options issued to outside directors and employees in 2006, the fair value of each option was estimated on the date of grant using the Black-Scholes Merton option pricing model with the following weighted assumptions:
                 
    Weighted Average   Range
Expected life (years)
    6.87       5.00 - 7.00  
Risk free interest rate
    4.23 %     4.00 - 5.03 %
Expected volatility
    20.61 %     19.40% - 21.00 %
Expected dividend yield
    6.72 %     4.55% - 8.00 %
Fair value
  $ 3.70     $ 1.93-$8.47  
     To determine expected volatility, the Company uses historical volatility based on daily closing prices of its Common Stock over periods that correlate with the expected terms of the options granted. The risk-free rate is based on the United States Treasury yield curve at the time of grant for the expected life of the options granted. Expected dividends are based on the Company’s history and expectation of dividend payouts. The expected life of stock options is based on the midpoint between the vesting date and the end of the contractual term.

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     As permitted by Statement 123, through the fourth quarter of 2005 and previous years, the Company accounted for share-based payments to employees using APB Opinion 25’s intrinsic value method and, as such, generally recognized no compensation cost for employee stock options when the stock option price at the grant date was equal to or greater than the fair market value of the stock at that date. Had the Company adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described below:
                 
    Pro Forma  
(dollars in thousands, except per share data)   2005     2004  
Net income available to common shareholders as reported
  $ 30,667     $ 23,421  
Add: Total stock-based compensation expense recorded
    518       411  
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards
    (657 )     (566 )
 
           
Pro forma net income available to common shareholders
  $ 30,528     $ 23,266  
 
               
Earnings per common share
               
Basic — as reported
  $ 1.86     $ 1.54  
Basic — pro forma
  $ 1.85     $ 1.53  
Diluted — as reported
  $ 1.85     $ 1.53  
Diluted — pro forma
  $ 1.84     $ 1.52  
     Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
     Reclassification: Certain amounts from the 2005 and 2004 financial statements have been reclassified to conform to the current year presentation.
3. EARNINGS PER SHARE
     The Company reports earnings per share data in accordance with Statement of Financial Accounting Standards No. 128, “Earnings Per Share.” In computing earnings per share, the Company excludes preferred stock dividends from net income to arrive at net income available to common shareholders. The following table sets forth the computation of basic and diluted earnings per common share.
                         
    Year Ended December 31,  
(Amounts in thousands, except per share data)   2006     2005     2004  
Numerator:
                       
Net income available to common shareholders
  $ 34,098     $ 30,667     $ 23,421  
 
                       
Denominator:
                       
Denominator for basic earnings per share - weighted average shares
    17,951       16,506       15,161  
Effect of Dilutive Securities:
                       
Stock options and warrants and non-vested stock
    70       127       134  
 
                 
 
                       
Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversion
    18,021       16,633       15,295  
 
                       
Basic Earnings per Common Share
  $ 1.90     $ 1.86     $ 1.54  
 
                       
Diluted Earnings per Common Share
  $ 1.89     $ 1.84     $ 1.53  

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     Potential common shares from the Series C Convertible Cumulative Preferred Stock (see Note 13) were excluded from the 2006, 2005, and 2004 diluted earnings per share calculation because their inclusion would have had an antidilutive effect on earnings per share.
4. INVESTMENT IN STORAGE FACILITIES
     The following summarizes activity in storage facilities during the years ended December 31, 2006 and December 31, 2005.
                 
(Dollars in thousands)   2006     2005  
Cost:
               
Beginning balance
  $ 893,980     $ 811,516  
Acquisition of storage facilities
    166,310       65,001  
Consolidation of Locke Sovran I, LLC as of April 1, 2006
    38,000        
Additional investment in consolidated joint ventures
    8,647        
Improvements and equipment additions
    30,480       18,236  
Construction in progress
    6,586        
Dispositions
    (99 )     (773 )
 
           
Ending balance
  $ 1,143,904     $ 893,980  
 
               
Accumulated Depreciation:
               
Beginning balance
  $ 130,550     $ 109,750  
Additions during the year
    25,347       21,222  
Dispositions
    (54 )     (422 )
 
           
Ending balance
  $ 155,843     $ 130,550  
     During 2006 the Company acquired 42 storage facilities for $166.3 million. Substantially all of the purchase price of these facilities was allocated to land ($32.3 million), building ($132.2 million) and equipment ($1.8 million) and the operating results of the acquired facilities have been included in the Company’s operations since the respective acquisition dates. The purchase price for the 2006 acquisitions was preliminarily allocated to tangible assets only. The Company expects to finalize its purchase price allocation during the first quarter of 2007.
5. DISCONTINUED OPERATIONS
     SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” addresses accounting for discontinued operations. The Statement requires the segregation of all disposed components of an entity with operations that (i) can be distinguished from the rest of the entity and (ii) will be eliminated from the ongoing operations of the entity in a disposal transaction.
     Based on the criteria of SFAS No. 144, five properties that were sold by the Company in 2004 required presentation as discontinued operations as of December 31, 2004. There were no property sales in 2005 or 2006.
     During 2004, the Company sold five non-strategic storage facilities located in Pennsylvania, Tennessee, Ohio, and South Carolina for net cash proceeds of $11.7 million resulting in a gain of $1.1 million. The operations of these five facilities and the gain on sale are reported as discontinued operations. The following is a summary of the amounts reported as discontinued operations:
                         
    Year Ended December 31,  
(dollars in thousands)   2006     2005     2004  
Total revenue
  $     $     $ 544  
Property operations and maintenance expense
                (193 )
Real estate tax expense
                (38 )
Depreciation and amortization expense
                (90 )
Net realized gain on properties sold
                1,083  
 
                 
Total income from discontinued operations
  $     $     $ 1,306  
 
                 

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6. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
     The following unaudited pro forma Condensed Statement of Operations is presented as if (i) the additional investment in Locke Sovran I, LLC and Locke Sovran II, LLC, (ii) the 42 storage facilities purchased during 2006, (iii) the 14 storage facilities purchased in 2005, and (iv) the related indebtedness incurred and assumed on these transactions had all occurred at January 1, 2005. Such unaudited pro forma information is based upon the historical statements of operations of the Company. It should be read in conjunction with the financial statements of the Company and notes thereto included elsewhere herein. In management’s opinion, all adjustments necessary to reflect the effects of these transactions have been made. This unaudited pro forma statement does not purport to represent what the actual results of operations of the Company would have been assuming such transactions had been completed as set forth above nor does it purport to represent the results of operations for future periods.
                 
    Year Ended December 31,  
(dollars in thousands, except share data)   2006     2005  
Pro forma total operating revenues
  $ 177,123     $ 165,952  
 
               
Pro forma net income
  $ 32,293     $ 24,957  
 
               
Pro forma earnings per common share — diluted
  $ 1.79     $ 1.46  
7. UNSECURED LINE OF CREDIT AND TERM NOTES
     The Company has a $100 million (expandable to $200 million) unsecured line of credit that matures in September 2007 and a $100 million unsecured term note that matures in September 2009. The line of credit bears interest at LIBOR plus 0.90% and requires a 0.20% facility fee. The term note bears interest at LIBOR plus 1.20%. The Company also maintains a $80 million term note maturing September 2013 bearing interest at a fixed rate of 6.26% and a $20 million term note maturing September 2013 bearing interest at a variable rate equal to LIBOR plus 1.50%. The interest rate at December 31, 2006 on the Company’s available line of credit was approximately 6.2% (5.40% at December 31, 2005). At December 31, 2006, there was $100 million available on the revolving line of credit, excluding the amount available on the expansion feature.
     In April 2006, the Company entered into a $150 million unsecured term note maturing in April 2016 bearing interest at 6.38%. The proceeds from this term note were used to pay down the outstanding balance on the Company’s line of credit, to repay a $25 million term note entered in January 2006 and a $15 million term note entered in April 2006, and to make an additional investment into Locke Sovran I, LLC (see Note 11) and Locke Sovran II, LLC (see Note 2).
8. MORTGAGES PAYABLE
     Mortgages payable at December 31, 2006 and December 31, 2005 consist of the following:
                 
    December 31,     December 31,  
(dollars in thousands)   2006     2005  
7.80% mortgage note due December 2011, secured by 11 self-storage facilities (Locke Sovran I) with an aggregate net book value of $41.6 million, principal and interest paid monthly
  $ 29,486     $  
7.19% mortgage note due March 2012, secured by 27 self-storage facilities (Locke Sovran II) with an aggregate net book value of $78.4 million, principal and interest paid monthly
    44,623       45,255  
7.25% mortgage note due December 2011, secured by 1 self-storage facility with an aggregate net book value of $6.0 million, principal and interest paid monthly. Estimated market rate at time of acquisition 5.40%
    3,769       3,889  

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    December 31,     December 31,  
(dollars in thousands)   2006     2005  
6.76% mortgage note due September 2013, secured by 1 self-storage facility with an aggregate net book value of $2.1 million, principal and interest paid monthly
    1,043        
6.35% mortgage note due March 2014, secured by 1 self-storage facility with an aggregate net book value of $1.9 million, principal and interest paid monthly
    1,144        
5.55% mortgage notes due November 2009, secured by 8 self-storage facilities with an aggregate net book value of $36.2 million, interest only paid monthly. Estimated market rate at time of acquisition 6.44%
    25,496        
7.50% mortgage notes due August 2011, secured by 3 self-storage facilities with an aggregate net book value of $14.9 million, principal and interest paid monthly. Estimated market rate at time of acquisition 6.42%
    6,466        
 
           
Total mortgages payable
  $ 112,027     $ 49,144  
 
           
     The Company assumed the 7.25%, 6.76%, 6.35%, 5.55% and 7.5% mortgage notes in connection with the acquisitions of storage facilities in 2005 and 2006. The 7.25%, 5.55%, and 7.5% mortgages were recorded at their estimated fair value based upon the estimated market rates at the time of the acquisitions ranging from 5.40% to 6.44%. These three mortgages are carried at a discount of approximately $0.1 million below the actual principal balance of the mortgages payable. The discount will be amortized over the remaining term of the mortgages based on the effective interest method.
     The table below summarizes the Company’s debt obligations and interest rate derivatives at December 31, 2006. The estimated fair value of financial instruments is subjective in nature and is dependent on a number of important assumptions, including discount rates and relevant comparable market information associated with each financial instrument. The fair value of the fixed rate term note and mortgage note were estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The use of different market assumptions and estimation methodologies may have a material effect on the reported estimated fair value amounts. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company would realize in a current market exchange.
                                                                 
    Expected Maturity Date Including Discount           Fair
(dollars in thousands)   2007   2008   2009   2010   2011   Thereafter   Total   Value
Line of credit — variable rate LIBOR + 0.9%
                                               
 
                                                               
Notes Payable:
                                                               
Term note — variable rate LIBOR+1.20%
                    $ 100,000                 $ 100,000     $ 100,000  
Term note — variable rate LIBOR+1.50%
                                $ 20,000     $ 20,000     $ 20,000  
Term note — fixed rate 6.26%
                                $ 80,000     $ 80,000     $ 78,334  
Term note — fixed rate 6.38%
                                $ 150,000     $ 150,000     $ 147,688  
 
                                                               
Mortgage note — fixed rate 7.80%
  $ 342     $ 363     $ 400     $ 433     $ 27,948           $ 29,486     $ 30,858  
Mortgage note — fixed rate 7.19%
  $ 937     $ 998     $ 1,083     $ 1,164     $ 1,252     $ 39,189     $ 44,623     $ 45,874  
Mortgage note — fixed rate 7.25%
  $ 126     $ 133     $ 141     $ 149     $ 3,220           $ 3,769     $ 3,620  
Mortgage note — fixed rate 6.76%
  $ 20     $ 22     $ 23     $ 25     $ 27     $ 926     $ 1,043     $ 1,062  
Mortgage note — fixed rate 6.35%
  $ 23     $ 24     $ 26     $ 28     $ 30     $ 1,013     $ 1,144     $ 1,141  
Mortgage notes — fixed rate 5.55%
              $ 25,496                       $ 25,496     $ 26,138  
Mortgage notes — fixed rate 7.50%
  $ 183     $ 194     $ 208     $ 222     $ 5,659           $ 6,466     $ 6,471  
 
                                                               
Interest rate derivatives — asset
                                            $ 2,128  

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9. DERIVATIVE FINANCIAL INSTRUMENTS
     Interest rate swaps are used to adjust the proportion of total debt that is subject to variable interest rates. The interest rate swaps require the Company to pay an amount equal to a specific fixed rate of interest times a notional principal amount and to receive in return an amount equal to a variable rate of interest times the same notional amount. The notional amounts are not exchanged. No other cash payments are made unless the contract is terminated prior to its maturity, in which case the contract would likely be settled for an amount equal to its fair value. The Company enters interest rate swaps with a number of major financial institutions to minimize counterparty credit risk.
     The interest rate swaps qualify and are designated as hedges of the amount of future cash flows related to interest payments on variable rate debt. Therefore, the interest rate swaps are recorded in the consolidated balance sheet at fair value and the related gains or losses are deferred in shareholders’ equity as Accumulated Other Comprehensive Income (“AOCI”). These deferred gains and losses are amortized into interest expense during the period or periods in which the related interest payments affect earnings. However, to the extent that the interest rate swaps are not perfectly effective in offsetting the change in value of the interest payments being hedged, the ineffective portion of these contracts is recognized in earnings immediately. Ineffectiveness was immaterial in 2006 and 2005.
     The Company has entered into three interest rate swap agreements as detailed below to effectively convert a total of $120 million of variable-rate debt to fixed-rate debt.
                     
            Fixed   Floating Rate
Notional Amount   Effective Date   Expiration Date   Rate Paid   Received
$50 Million
  11/14/05   9/1/09     5.590 %   1 month LIBOR
$20 Million
      9/4/05   9/4/13     5.935 %   6 month LIBOR
$50 Million
  10/10/06   9/1/09     5.680 %   1 month LIBOR
     The interest rate swap agreements are the only derivative instruments, as defined by SFAS No. 133, held by the Company. During 2006, 2005, and 2004, the net reclassification from AOCL to interest expense was ($0.5) million, $2.2 million and $4.7 million, respectively, based on (receipts) payments received or made under the swap agreements. Based on current interest rates, the Company estimates that receipts under the interest rate swaps will be approximately $0.9 million in 2007. Receipts made under the interest rate swap agreements will be reclassified to interest expense as settlements occur. The fair value of the swap agreements including accrued interest was an asset of $2.3 million and a liability of $1.4 million at December 31, 2006, and 2005 respectively. In conjunction with the Company entering a $150 million term note in April 2006, the Company terminated the $30 million notional swap that was to expire in September of 2008. The Company received $255,000 for terminating this interest rate swap.
10. STOCK OPTIONS AND NON-VESTED STOCK
     The Company established the 2005 Award and Option Plan (the “Plan”) which replaced the expiring 1995 Award and Option Plan for the purpose of attracting and retaining the Company’s executive officers and other key employees. 1,500,000 shares were authorized for issuance under the Plan. The options vest ratably over four and five years, and must be exercised within ten years from the date of grant. The exercise price for qualified incentive stock options must be at least equal to the fair market value of the common shares at the date of grant. As of December 31, 2006, options for 91,225 shares were outstanding under the Plans and options for 1,429,945 shares of common stock were available for future issuance.
     The Company also established the 1995 Outside Directors’ Stock Option Plan (the Non-employee Plan) for the purpose of attracting and retaining the services of experienced and knowledgeable outside directors. The Non-employee Plan provides for the initial granting of options to purchase 3,500 shares of common stock and for the annual granting of options to purchase 2,000 shares of common stock to each eligible director. Such options vest over a one-year period for initial awards and immediately upon subsequent grants. In addition, effective in 2004 each outside director receives non-vested shares annually equal to 80% of the annual fees paid to them. During the

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restriction period, the non-vested shares may not be sold, transferred, or otherwise encumbered. The holder of the non-vested shares has all rights of a holder of common shares, including the right to vote and receive dividends. During 2006, 1,664 non-vested shares were issued to outside directors. Such non-vested shares vest over a one-year period. The total shares reserved under the Non-employee Plan is 150,000. The exercise price for options granted under the Non-employee Plan is equal to the fair market value at the date of grant. As of December 31, 2006, options for 22,000 common shares and non-vested shares of 5,776 were outstanding under the Non-employee Plan and options for 18,724 shares of common stock were available for future issuance.
     A summary of the Company’s stock option activity and related information for the years ended December 31 follows:
                                                 
    2006     2005     2004  
            Weighted             Weighted             Weighted  
            average             average             average  
            exercise             exercise             exercise  
    Options     price     Options     price     Options     price  
Outstanding at beginning of year:
    142,900     $ 32.68       247,415     $ 27.00       443,665     $ 24.71  
 
                                               
Granted
    14,000       51.78       38,000       45.26       38,000       37.43  
Exercised
    (37,675 )     30.33       (129,015 )     25.11       (225,750 )     24.18  
Forfeited
    (6,000 )     33.05       (13,500 )     36.39       (8,500 )     29.12  
 
                                   
 
                                               
Outstanding at end of year
    113,225     $ 35.77       142,900     $ 32.68       247,415     $ 27.00  
 
                                               
Exercisable at end of year
    74,225     $ 31.14       72,650     $ 27.26       91,940     $ 25.25  
     A summary of the Company’s stock options outstanding at December 31, 2006 follows:
                                 
    Outstanding     Exercisable  
            Weighted             Weighted  
            average             average  
            exercise             exercise  
Exercise Price Range   Options     price     Options     price  
$19.06 – 29.99
    38,625     $ 21.66       37,125     $ 21.43  
$30.00 – 39.99
    25,600     $ 34.55       15,100     $ 32.22  
$40.00 – 48.11
    49,000     $ 47.53       22,000     $ 46.77  
 
                       
Total
    113,225     $ 35.77       74,225     $ 31.14  
 
                               
Intrinsic value of outstanding stock options at December 31, 2006   $ 2,435,000  
Intrinsic value of exercisable stock options at December 31, 2006   $ 1,940,000  
Intrinsic value of stock options exercised in 2006   $ 824,536  
     The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock at December 31, 2006, or the price on the date of exercise for those exercised during the year. As of December 31, 2006, there was approximately $0.2 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under our stock award plans. That cost is expected to be recognized over a weighted-average period of approximately two years. The weighted average remaining contractual life of all options is 6.8 years, and for exercisable options is 5.9 years. As disclosed further in Note 13, warrants to purchase 357,500 common shares of the Company at a price of $32.60 per share were exercised in 2005.
Non-vested Stock
     The Company has also issued 194,119 shares of non-vested stock to employees which vest over two to nine

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year periods. During the restriction period, the non-vested shares may not be sold, transferred, or otherwise encumbered. The holder of the non-vested shares has all rights of a holder of common shares, including the right to vote and receive dividends. At December 31, 2006, the fair market value of the non-vested stock on the date of grant ranged from $20.38 to $55.21. During 2006, 40,055 shares of non-vested stock were issued to employees with a fair value of $2.2 million. The Company charges additional paid-in capital for the market value of shares as they are issued. The unearned portion is then amortized and charged to expense over the vesting period. The Company uses the average of the high and low price of its common stock on the date the award is granted as the fair value for non-vested stock awards.
     A summary of the status of unvested shares of stock issued to employees and directors as of and during the years ended December 31 follows:
                                                 
    2006     2005     2004  
            Weighted             Weighted             Weighted  
            average     Non-     average             average  
    Non-vested     grant date     vested     grant date     Non-vested     grant date  
    Shares     fair value     Shares     fair value     Shares     fair value  
Unvested at beginning of year:
    71,411     $ 30.39       71,904     $ 27.83       74,094     $ 25.40  
 
                                               
Granted
    41,719       53.86       13,778       42.24       12,058       38.40  
Vested
    (16,677 )     32.29       (14,271 )     28.94       (14,248 )     24.11  
Forfeited
                                   
 
                                   
 
                                               
Unvested at end of year
    96,453     $ 40.21       71,411     $ 30.39       71,904     $ 27.83  
     Compensation expense of $0.9 million, $0.5 million and $0.4 million was recognized for the vested portion of non-vested stock grants in 2006, 2005 and 2004, respectively. The fair value of non-vested stock that vested during 2006, 2005 and 2004 was $0.3 million, $0.4 million and $0.5 million, respectively. The total compensation cost related to non-vested stock was $3.2 million at December 31, 2006, and the remaining weighted-average period over which this expense will be recognized was 4.6 years.
11. RETIREMENT PLAN
     Employees of the Company qualifying under certain age and service requirements are eligible to be a participant in a 401(k) Plan. The Company contributes to the Plan at the rate of 50% of the first 4% of gross wages that the employee contributes. Total expense to the Company was approximately $166,000, $149,000, and $125,000 for the years ended December 31, 2006, 2005 and 2004, respectively.
12. INVESTMENT IN JOINT VENTURES
     The Company has a 49% ownership interest in Iskalo Office Holdings, LLC at December 31, 2006. During 2004, Iskalo Office Holdings obtained long-term financing and used the proceeds to repay the note payable to the Company of $1.1 million. The Company’s remaining investment includes a capital contribution of $49. For the years ended December 31, 2006 and 2005, the Company’s share of Iskalo Office Holdings, LLC’s income (loss) was $80,000 and ($8,000), respectively. The Company paid rent to Iskalo Office Holdings, LLC of $583,000, $445,000, and $426,000 in 2006, 2005, and 2004 respectively. Future minimum lease payments under the lease are $0.6 million per year through 2009. Also, the Company purchased land from Iskalo Office Holdings, LLC for $0.4 million and $1.2 million in 2004 and 2003, respectively.
     A summary of the unconsolidated joint ventures’ financial statements as of and for the year ended December 31, 2006 is as follows:

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    Iskalo Office  
(dollars in thousands)   Holdings, LLC  
Balance Sheet Data:
       
Investment in office building
  $ 5,842  
Other assets
    808  
 
     
Total Assets
  $ 6,650  
 
     
 
       
Mortgage payable
  $ 7,410  
Other liabilities
    253  
 
     
Total Liabilities
    7,663  
Unaffiliated partners’ deficiency
    (592 )
Company deficiency
    (421 )
 
     
Total Liabilities and Partners’ Deficiency
  $ 6,650  
 
     
 
       
Income Statement Data:
       
Total revenues
  $ 1,351  
Total expenses
    1,189  
 
     
Net income
  $ 162  
 
     
     The Company does not guarantee the debt of Iskalo Office Holdings, LLC.
     Through March 31, 2006, investment in joint ventures also included an ownership interest in Locke Sovran I, LLC, which owns 11 self-storage facilities throughout the United States. In December 2000, the Company contributed seven self-storage properties to Locke Sovran I, LLC with a fair market value of $19.8 million, in exchange for a $15 million one year note receivable bearing interest at LIBOR plus 1.75% which was repaid in 2001, and a 45% interest in Locke Sovran I, LLC.
     In April 2006, the Company made an additional investment of $2.8 million in Locke Sovran I, LLC that increased the Company’s ownership to over 70%. As a result of this transaction the Company has consolidated the results of operations of Locke Sovran I, LLC in its financial statements since April 1, 2006, the date that it acquired its controlling interest. For the years ended December 31, 2005 and 2004, the Company’s share of Locke Sovran I, LLC’s income was $171,000 and $141,000, respectively, and the amortization of the deferred gain was $40,000, each of which are recorded as equity in income of joint ventures on the consolidated statements of operations for those years. The Company manages the storage facilities for Locke Sovran I, LLC and received fees of $332,000, and $322,000 for the years ended 2005, and 2004.
13. PREFERRED STOCK
Series B
     On July 30, 1999, the Company issued 1,200,000 shares of 9.85% Series B Cumulative Redeemable Preferred Stock. The offering price was $25 per share resulting in net proceeds of $28.6 million after expenses. On August 2, 2004, the Company redeemed all 1,200,000 outstanding shares of its 9.85% Series B Cumulative Preferred Stock for $30 million plus accrued but unpaid dividends on those shares. The excess of the redemption amount over the carrying value of the Series B Preferred Stock was $1.4 million and has been shown as a reduction in 2004 net income available to common shareholders in accordance with EITF Abstract Topic D-42, “The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock.”
Series C
     On July 3, 2002, the Company entered into an agreement providing for the issuance of 2,800,000 shares of 8.375% Series C Convertible Cumulative Preferred Stock (“Series C Preferred”) in a privately negotiated transaction. The Company immediately issued 1,600,000 shares of the Series C Preferred and issued the remaining 1,200,000 shares on November 27, 2002. The offering price was $25.00 per share resulting in net proceeds for the Series C Preferred and related common stock warrants of $67.9 million after expenses. During 2005, the Company

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issued 920,244 shares of its common stock in connection with a written notice from one of the holders of the Series C Preferred Stock requesting the conversion of 1,200,000 shares of Series C Preferred Stock into common stock. In 2004, the Company issued 306,748 shares of its common stock in connection the conversion of 400,000 shares of Series C Preferred Stock into common stock. All converted shares of Series C Preferred Stock were retired leaving 1,200,000 preferred shares outstanding at December 31, 2006.
     The Series C Preferred has a fixed annual dividend rate equal to the greater of 8.375% or the actual dividend paid on the number of the Company’s common shares into which the Series C Preferred is convertible. The Series C Preferred is convertible at a ratio of .76687 common shares for each Series C Preferred share and can be redeemed at the Company’s option on or after November 30, 2007 at $25.00 per share ($30,000,000 aggregate at December 31, 2006) plus accrued and unpaid dividends. Dividends on the Series C Preferred are cumulative from the date of original issue and are payable quarterly in arrears on the last day of each March, June, September, and December at a rate of $2.09375 per annum per share.
     Holders of the Series C Preferred generally have no voting rights. However, if the Company does not pay dividends on the Series C Preferred shares for six or more quarterly periods (whether or not consecutive), the holders of the shares, voting as a class with the holders of any other class or series of stock with similar voting rights, will be entitled to vote for the election of two additional directors to serve on the Board of Directors until the Series C Preferred dividends are paid.
     In addition, the Company issued warrants to the Series C Preferred investors to purchase 379,166 common shares of the Company at a price of $32.60 per share that expire November 30, 2007. Using the Black-Scholes method, the warrants had a fair value at the issue date of $1.97 per common share covered by the warrants. During 2005 and 2004 respectively, warrants for 357,500 and 21,666 were exercised leaving none remaining at December 31, 2006. Also, an entity related to one of the investors received a placement certificate that entitles it to receive cash from the Company in the amount of 650,000 multiplied by the excess of the fair market value of the Company’s common stock over $32.60 on the date the certificate is exercised. The placement certificate was exercised in 2004, resulting in a $5 million payment by the Company.
14. SUPPLEMENTARY QUARTERLY FINANCIAL DATA (UNAUDITED)
     The following is a summary of quarterly results of operations for the years ended December 31, 2006 and 2005 (dollars in thousands, except per share data).
                                 
    2006 Quarter Ended
    March 31   June 30   Sept. 30   Dec. 31
Operating revenue
  $ 36,657     $ 40,296     $ 44,784     $ 44,558  
Net Income
  $ 8,595     $ 9,386     $ 9,465     $ 9,165  
Net income available to common shareholders
  $ 7,967     $ 8,758     $ 8,837     $ 8,537  
Net Income Per Common Share
                               
Basic
  $ 0.45     $ 0.50     $ 0.49     $ 0.46  
Diluted
  $ 0.45     $ 0.50     $ 0.49     $ 0.45  
                                 
    2005 Quarter Ended
    March 31   June 30   Sept. 30   Dec. 31
Operating revenue
  $ 32,149     $ 34,007     $ 36,003     $ 36,147  
Net Income
  $ 7,768     $ 8,878     $ 9,611     $ 8,533  
Net income available to common shareholders
  $ 6,512     $ 7,622     $ 8,628     $ 7,905  
Net Income Per Common Share
                               
Basic
  $ 0.41     $ 0.47     $ 0.52     $ 0.46  
Diluted
  $ 0.40     $ 0.47     $ 0.52     $ 0.46  

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15. COMMITMENTS AND CONTINGENCIES
     The Company’s current practice is to conduct environmental investigations in connection with property acquisitions. At this time, the Company is not aware of any environmental contamination of any of its facilities that individually or in the aggregate would be material to the Company’s overall business, financial condition, or results of operations.
     At December 31, 2006, the Company was in negotiations to acquire ten stores for approximately $31 million. One of these stores was purchased in January of 2007 for $5.6 million.

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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
     None.
Item 9A. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
     Our management conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), under the supervision of and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective at December 31, 2006. There have not been changes in the Company’s internal controls or in other factors that could significantly affect these controls during the quarter ended December 31, 2006.
Management’s Report on Internal Control Over Financial Reporting
     Our management is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2006. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our system of internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
     Our management performed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 based upon criteria in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (''COSO’’). Based on our assessment, management determined that our internal control over financial reporting was effective as of December 31, 2006 based on the criteria in Internal Control-Integrated Framework issued by COSO.
     Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which appears herein.
     
/S/ Robert J. Attea
  /S/ David L. Rogers
Chief Executive Officer
  Chief Financial Officer

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Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
The Board of Directors and Shareholders of Sovran Self Storage, Inc.
     We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Sovran Self Storage, Inc. maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Sovran Self Storage, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
     We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
     A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
     In our opinion, management’s assessment that Sovran Self Storage, Inc. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Sovran Self Storage, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.
     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Sovran Self Storage, Inc. as of December 31, 2006 and 2005, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006 of Sovran Self Storage, Inc. and our report dated March 1, 2007 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Buffalo, New York
March 1, 2007

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Part III
Item 10. Directors, Executive Officers and Corporate Governance
     The information contained in the Proxy Statement for the Annual Meeting of Shareholders of the Company to be held on May 21, 2007, with respect to directors, executive officers, audit committee, and audit committee financial experts of the Company and Section 16(a) beneficial ownership reporting compliance, is incorporated herein by reference in response to this item.
     The Company has adopted a code of ethics that applies to all of its directors, officers, and employees. The Company has made the Code of Ethics available on its website at http://www.sovranss.com.
Item 11. Executive Compensation
     The information required is incorporated by reference to “Executive Compensation” and “Compensation of Directors” in the Company’s Proxy Statement for the Annual Meeting of Shareholders of the Company to be held on May 21, 2007.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
     The information required herein is incorporated by reference to “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement for the Annual Meeting of Shareholders of the Company to be held on May 21, 2007.
Item 13. Certain Relationships and Related Transactions, and Director Independence
     The information required herein is incorporated by reference to “Certain Relationships and Related Transactions” and “Election of Directors—Independence of Directors” in the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held on May 21, 2007.
Item 14. Principal Accountant Fees and Services
     The information required herein is incorporated by reference to “Appointment of Independent Accountants” in the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held on May 21, 2007.
Part IV
Item 15. Exhibits, Financial Statement Schedules
     (a) Documents filed as part of this Annual Report on Form 10-K:
1.   The following consolidated financial statements of Sovran Self Storage, Inc. are included in Item 8.
  (i)   Consolidated Balance Sheets as of December 31, 2006 and 2005.
 
  (ii)   Consolidated Statements of Operations for Years Ended December 31, 2006, 2005, and 2004.
 
  (iii)   Consolidated Statements of Shareholders’ Equity for Years Ended December 31, 2006, 2005, and 2004.
 
  (iv)   Consolidated Statements of Cash Flows for Years Ended December 31, 2006, 2005, and 2004.
 
  (v)   Notes to Consolidated Financial Statements.
2.   The following financial statement Schedule as of the period ended December 31, 2006 is included in this Annual Report on Form 10-K.
 
    Schedule III Real Estate and Accumulated Depreciation.

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     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
  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).
 
   
3.2
  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.)
 
   
3.3
  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).
 
   
3.4
  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).
 
   
4.1
  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).
 
   
4.2
  Form of Series C Convertible Cumulative Preferred Stock Certificate (incorporated by reference to Exhibit 4.2 to Registrant’s Current Report on Form 8-K filed July 12, 2002).
 
   
4.3
  Shareholder Rights Plan. (incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-A filed December 3, 1996.)
 
   
4.4
  Registration Rights Agreement (incorporated by reference to Exhibit 10.3 to Registrant’s Current Report on Form 8-K filed July 12, 2002).
 
   
4.5
  Amendment No. 1 to Shareholders Rights Agreement (incorporated by reference to Exhibit 4.5 to Registrant’s Current Report on Form 8-K filed July 12, 2002).
 
   
4.6
  Amendment to Shareholders Rights Agreement (incorporated by reference to Exhibit 4.4 to Registrant’s Current Report on Form 8-K filed May 4, 2006).
 
   
4.7
  Amendment to Shareholders Rights Agreement (incorporated by reference to Exhibit 4.5 to Registrant’s Current Report on Form 8-K filed September 1, 2006).
 
   
10.1+
  Sovran Self Storage, Inc. 2005 Award and Option Plan, as amended (incorporated by reference to the Registrant’s Proxy Statement filed April 11, 2005).
 
   
10.2+
  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 (incorporated by reference to Exhibit 10.19 as filed in the Company’s Annual Report on Form 10-K/A, filed June 27, 2002).
 
   
10.4+
  Employment Agreement between the Registrant and Kenneth F. Myszka (incorporated by reference to Exhibit 10.20 as filed in the Company’s Annual Report on Form 10-K/A, filed June 27, 2002).
 
   
10.5+
  Employment Agreement between the Registrant and David L. Rogers (incorporated by reference to

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  Exhibit 10.21 as filed in the Company’s Annual Report on Form 10-K/A, filed June 27, 2002).
 
   
10.6*+
  Standard form of Employment Agreement to which Andrew J. Gregoire, Edward F. Killeen, and Paul T. Powell employees are parties
 
   
10.7+
  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).
 
   
10.8+
  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).
10.9+
  Form of restricted stock grant pursuant to Sovran Self Storage, Inc. 1995 Award and Option Plan (incorporated by reference to Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q/A filed November 24, 2006).
 
   
10.10+
  Form of stock option grant pursuant to Sovran Self Storage, Inc. 1995 Award and Option Plan (incorporated by reference to Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q/A filed November 24, 2006).
 
   
10.11+
  Deferred Compensation Plan for Directors (incorporated by reference to Schedule 14A Proxy Statement filed April 8, 2004).
 
   
10.12
  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).
 
   
10.13
  Securities Purchase Agreement among Registrant, Sovran Acquisition Limited Partnership, The Prudential Insurance Company of America, Teachers Insurance and Annuity Association of America and other institutional investors (incorporated by reference to Exhibit 10.1 as filed in the Company’s Current Report on Form 8-K, filed July 12, 2002).
 
   
10.14
  Amendments to Agreement of Limited Partnership of Sovran Acquisition Limited Partnership (incorporated by reference to Exhibit 10.2 filed in the Company’s Current Report on Form 8-K, filed July 12, 2002).
 
   
10.15
  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).
 
   
10.16
  Second Amended and Restated Revolving Credit and Term Loan Agreement among Registrant, the Partnership, Fleet National Bank and other lenders named therein (incorporated by reference to Exhibit 10.25 filed in the Company’s Current Report on Form 8-K, filed December 21, 2004).
 
   
10.17
  Note Purchase Agreement among Registrant, the Partnership and the purchaser named therein (incorporated by reference to Exhibit 10.24 filed in the Company’s Quarterly Report on Form 10-Q, filed November 12, 2003).
 
   
10.18
  Amendment to Note Purchase Agreement dated September 3, 2003 (incorporated by reference to Exhibit 10.26 of Registrant’s Current Report on Form 8-K filed May 20, 2005).
 
   
10.19
  Cornerstone Acquisition Agreement and Amendments to Certain Loan Agreements (incorporated by reference to Exhibits 10.30, 10.31, 10.32, 10.33 and 10.34 of Registrant’s Current Report on Form 8-K filed June 26, 2006).
 
   
10.20
  $150 million, 6.38% Senior Guaranteed Notes, Series C due April 26, 2016, and Amendments to Second

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  Amendment Restated Revolving Credit and Term Loan Agreement dated December 16, 2004 and Amendment to Note Purchase Agreement dated September 4, 2003 (incorporated by reference to Exhibits 10.27, 10.28, and 10.29 of the Registrant’s Current Report on Form 8-K filed May 1, 2006).
 
   
10.21*
  Promissory Note between Locke Sovran I, LLC and GMAC Commercial Mortgage Corporation.
 
   
12.1*
  Statement Re: Computation of Earnings to Fixed Charges.
 
   
21*
  Subsidiary of the Company.
 
   
23*
  Consent of Independent Registered Public Accounting Firm.
 
   
24.1*
  Powers of Attorney (included on signature pages).
 
   
31.1*
  Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
 
   
31.2*
  Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
 
   
32*
  Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
     
*
  Filed herewith.
 
   
+
  Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K.

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SIGNATURES
     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.
             
    SOVRAN SELF STORAGE, INC.    
 
           
March 1, 2007
  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
  Chairman of the Board of Directors   March 1, 2007
 
Robert J. Attea
  Chief Executive Officer and Director (Principal Executive Officer)    
 
       
/s/ Kenneth F. Myszka
  President, Chief Operating   March 1, 2007
 
Kenneth F. Myszka
  Officer and Director    
 
       
/s/ David L. Rogers
  Chief Financial Officer (Principal   March 1, 2007
 
David L. Rogers
  Financial and Accounting Officer)    
 
       
/s/ John Burns
  Director   March 1, 2007
 
John Burns
       
 
       
/s/ Michael A. Elia
  Director   March 1, 2007
 
Michael A. Elia
       
 
       
/s/ Anthony P. Gammie
  Director   March 1, 2007
 
Anthony P. Gammie
       
 
       
/s/ Charles E. Lannon
  Director   March 1, 2007
 
Charles E. Lannon
       

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Sovran Self Storage, Inc.
Schedule III
Combined Real Estate and Accumulated Depreciation
(in thousands)
December 31, 2006
                                                                                                 
                                    Cost                                      
                                    Capitalized                                      
                                    Subsequent to     Gross Amount at Which                                
                    Initial Cost to Company     Acquisition     Carried at Close of Period                             Life on which  
                            Building,     Building,             Building,                                     depreciation  
                            Equipment     Equipment             Equipment                                     in latest  
            Encum-             and     and             and             Accumulated     Date of     Date     income statement  
Description   State     brance     Land     Improvements     Improvements     Land     Improvements     Total     Depreciation     Construction     Acquired     is computed  
Boston-Metro I
  MA           $ 363     $ 1,679     $ 356     $ 363     $ 2,035     $ 2,398     $ 586       1980       6/26/1995       5 to 40 years  
Boston-Metro II
  MA             680       1,616       319       680       1,935       2,615       568       1986       6/26/1995       5 to 40 years  
E. Providence
  RI             345       1,268       373       345       1,641       1,986       463       1984       6/26/1995       5 to 40 years  
Charleston l
  SC             416       1,516       435       416       1,951       2,367       584       1985       6/26/1995       5 to 40 years  
Lakeland I
  FL             397       1,424       283       397       1,707       2,104       515       1985       6/26/1995       5 to 40 years  
Charlotte
  NC             308       1,102       889       747       1,552       2,299       453       1986       6/26/1995       5 to 40 years  
Tallahassee I
  FL             770       2,734       1,789       770       4,523       5,293       1,220       1973       6/26/1995       5 to 40 years  
Youngstown
  OH             239       1,110       1,195       239       2,305       2,544       480       1980       6/26/1995       5 to 40 years  
Cleveland-Metro II
  OH             701       1,659       669       701       2,328       3,029       619       1987       6/26/1995       5 to 40 years  
Tallahassee II
  FL             204       734       853       198       1,593       1,791       391       1975       6/26/1995       5 to 40 years  
Pt. St. Lucie
  FL             395       1,501       416       395       1,917       2,312       627       1985       6/26/1995       5 to 40 years  
Deltona
  FL             483       1,752       1,788       483       3,540       4,023       707       1984       6/26/1995       5 to 40 years  
Middletown
  NY             224       808       736       224       1,544       1,768       438       1988       6/26/1995       5 to 40 years  
Buffalo I
  NY             423       1,531       1,584       497       3,041       3,538       827       1981       6/26/1995       5 to 40 years  
Rochester I
  NY             395       1,404       355       395       1,759       2,154       491       1981       6/26/1995       5 to 40 years  
Salisbury
  MD             164       760       363       164       1,123       1,287       313       1979       6/26/1995       5 to 40 years  
New Bedford
  MA             367       1,325       363       367       1,688       2,055       540       1982       6/26/1995       5 to 40 years  
Fayetteville
  NC             853       3,057       498       853       3,555       4,408       993       1980       6/26/1995       5 to 40 years  
Jacksonville I
  FL             152       728       854       687       1,047       1,734       349       1985       6/26/1995       5 to 40 years  
Columbia I
  SC             268       1,248       407       268       1,655       1,923       511       1985       6/26/1995       5 to 40 years  
Rochester II
  NY             230       847       314       234       1,157       1,391       338       1980       6/26/1995       5 to 40 years  
Savannah l
  GA             463       1,684       1,754       816       3,085       3,901       829       1981       6/26/1995       5 to 40 years  
Greensboro
  NC             444       1,613       447       444       2,060       2,504       654       1986       6/26/1995       5 to 40 years  
Raleigh I
  NC             649       2,329       708       649       3,037       3,686       859       1985       6/26/1995       5 to 40 years  

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                                    Cost                                      
                                    Capitalized                                      
                                    Subsequent to     Gross Amount at Which                                
                    Initial Cost to Company     Acquisition     Carried at Close of Period                             Life on which  
                            Building,     Building,             Building,                                     depreciation  
                            Equipment     Equipment             Equipment                                     in latest  
            Encum-             and     and             and             Accumulated     Date of     Date     income statement  
Description   State     brance     Land     Improvements     Improvements     Land     Improvements     Total     Depreciation     Construction     Acquired     is computed  
New Haven
  CT             387       1,402       644       387       2,046       2,433       525       1985       6/26/1995       5 to 40 years  
Atlanta-Metro I
  GA             844       2,021       621       844       2,642       3,486       741       1988       6/26/1995       5 to 40 years  
Atlanta-Metro II
  GA             302       1,103       304       303       1,406       1,709       447       1988       6/26/1995       5 to 40 years  
Buffalo II
  NY             315       745       1,075       315       1,820       2,135       394       1984       6/26/1995       5 to 40 years  
Raleigh II
  NC             321       1,150       424       321       1,574       1,895       443       1985       6/26/1995       5 to 40 years  
Columbia II
  SC             361       1,331       461       374       1,779       2,153       526       1987       6/26/1995       5 to 40 years  
Columbia III
  SC             189       719       729       189       1,448       1,637       386       1989       6/26/1995       5 to 40 years  
Columbia IV
  SC             488       1,188       358       488       1,546       2,034       485       1986       6/26/1995       5 to 40 years  
Atlanta-Metro III
  GA             430       1,579       493       602       1,900       2,502       611       1988       6/26/1995       5 to 40 years  
Orlando I
  FL             513       1,930       402       513       2,332       2,845       727       1988       6/26/1995       5 to 40 years  
Sharon
  PA             194       912       321       194       1,233       1,427       371       1975       6/26/1995       5 to 40 years  
Ft. Lauderdale
  FL             1,503       3,619       577       1,503       4,196       5,699       1,295       1985       6/26/1995       5 to 40 years  
West Palm l
  FL             398       1,035       225       398       1,260       1,658       426       1985       6/26/1995       5 to 40 years  
Atlanta-Metro IV
  GA             423       1,015       346       424       1,360       1,784       422       1989       6/26/1995       5 to 40 years  
Atlanta-Metro V
  GA             483       1,166       256       483       1,422       1,905       447       1988       6/26/1995       5 to 40 years  
Atlanta-Metro VI
  GA             308       1,116       443       308       1,559       1,867       505       1986       6/26/1995       5 to 40 years  
Atlanta-Metro VII
  GA             170       786       444       174       1,226       1,400       375       1981       6/26/1995       5 to 40 years  
Atlanta-Metro VIII
  GA             413       999       571       413       1,570       1,983       498       1975       6/26/1995       5 to 40 years  
Baltimore I
  MD             154       555       1,287       306       1,690       1,996       309       1984       6/26/1995       5 to 40 years  
Baltimore II
  MD             479       1,742       1,074       479       2,816       3,295       706       1988       6/26/1995       5 to 40 years  
Augusta I
  GA             357       1,296       654       357       1,950       2,307       531       1988       6/26/1995       5 to 40 years  
Macon I
  GA             231       1,081       355       231       1,436       1,667       426       1989       6/26/1995       5 to 40 years  
Melbourne I
  FL             883       2,104       1,494       883       3,598       4,481       953       1986       6/26/1995       5 to 40 years  
Newport News
  VA             316       1,471       684       316       2,155       2,471       624       1988       6/26/1995       5 to 40 years  
Pensacola I
  FL             632       2,962       865       651       3,808       4,459       1,167       1983       6/26/1995       5 to 40 years  
Augusta II
  GA             315       1,139       504       315       1,643       1,958       466       1987       6/26/1995       5 to 40 years  
Hartford-Metro I
  CT             715       1,695       704       715       2,399       3,114       635       1988       6/26/1995       5 to 40 years  
Atlanta-Metro IX
  GA             304       1,118       2,318       619       3,121       3,740       536       1988       6/26/1995       5 to 40 years  
Alexandria
  VA             1,375       3,220       993       1,376       4,212       5,588       1,187       1984       6/26/1995       5 to 40 years  
Pensacola II
  FL             244       901       361       244       1,262       1,506       437       1986       6/26/1995       5 to 40 years  
Melbourne II
  FL             834       2,066       1,023       1,591       2,332       3,923       787       1986       6/26/1995       5 to 40 years  
Hartford-Metro II
  CT             234       861       1,665       612       2,148       2,760       437       1992       6/26/1995       5 to 40 years  
Atlanta-Metro X
  GA             256       1,244       1,627       256       2,871       3,127       571       1988       6/26/1995       5 to 40 years  
Norfolk I
  VA             313       1,462       742       313       2,204       2,517       617       1984       6/26/1995       5 to 40 years  
Norfolk II
  VA             278       1,004       274       278       1,278       1,556       417       1989       6/26/1995       5 to 40 years  
Birmingham I
  AL             307       1,415       451       384       1,789       2,173       549       1990       6/26/1995       5 to 40 years  

57


Table of Contents

     
                                                                                                 
                                    Cost                                      
                                    Capitalized                                      
                                    Subsequent to     Gross Amount at Which                                
                    Initial Cost to Company     Acquisition     Carried at Close of Period                             Life on which  
                            Building,     Building,             Building,                                     depreciation  
                            Equipment     Equipment             Equipment                                     in latest  
            Encum-             and     and             and             Accumulated     Date of     Date     income statement  
Description   State     brance     Land     Improvements     Improvements     Land     Improvements     Total     Depreciation     Construction     Acquired     is computed  
Birmingham II
  AL             730       1,725       477       730       2,202       2,932       681       1990       6/26/1995       5 to 40 years  
Montgomery l
  AL             863       2,041       535       863       2,576       3,439       768       1982       6/26/1995       5 to 40 years  
Jacksonville II
  FL             326       1,515       373       326       1,888       2,214       547       1987       6/26/1995       5 to 40 years  
Pensacola III
  FL             369       1,358       1,553       369       2,911       3,280       701       1986       6/26/1995       5 to 40 years  
Pensacola IV
  FL             244       1,128       638       719       1,291       2,010       422       1990       6/26/1995       5 to 40 years  
Pensacola V
  FL             226       1,046       518       226       1,564       1,790       463       1990       6/26/1995       5 to 40 years  
Tampa I
  FL             1,088       2,597       813       1,088       3,410       4,498       1,028       1989       6/26/1995       5 to 40 years  
Tampa II
  FL             526       1,958       622       526       2,580       3,106       800       1985       6/26/1995       5 to 40 years  
Tampa III
  FL             672       2,439       481       672       2,920       3,592       873       1988       6/26/1995       5 to 40 years  
Jackson I
  MS             343       1,580       717       796       1,844       2,640       575       1990       6/26/1995       5 to 40 years  
Jackson II
  MS             209       964       529       209       1,493       1,702       474       1990       6/26/1995       5 to 40 years  
Richmond
  VA             443       1,602       601       443       2,203       2,646       639       1987       8/25/1995       5 to 40 years  
Orlando II
  FL             1,161       2,755       810       1,162       3,564       4,726       1,044       1986       9/29/1995       5 to 40 years  
Birmingham III
  AL             424       1,506       606       424       2,112       2,536       696       1970       1/16/1996       5 to 40 years  
Macon II
  GA             431       1,567       613       431       2,180       2,611       592       1989/94       12/1/1995       5 to 40 years  
Harrisburg I
  PA             360       1,641       502       360       2,143       2,503       602       1983       12/29/1995       5 to 40 years  
Harrisburg II
  PA     (1 )     627       2,224       815       692       2,974       3,666       774       1985       12/29/1995       5 to 40 years  
Syracuse I
  NY             470       1,712       1,145       472       2,855       3,327       650       1987       12/27/1995       5 to 40 years  
Ft. Myers
  FL             205       912       233       206       1,144       1,350       434       1988       12/28/1995       5 to 40 years  
Ft. Myers II
  FL             412       1,703       393       413       2,095       2,508       763       1991/94       12/28/1995       5 to 40 years  
Newport News II
  VA             442       1,592       234       442       1,826       2,268       520       1988/93       1/5/1996       5 to 40 years  
Montgomery II
  AL             353       1,299       261       353       1,560       1,913       494       1984       1/23/1996       5 to 40 years  
Charleston II
  SC             237       858       506       232       1,369       1,601       394       1985       3/1/1996       5 to 40 years  
Tampa IV
  FL             766       1,800       598       766       2,398       3,164       623       1985       3/28/1996       5 to 40 years  
Arlington I
  TX             442       1,767       247       442       2,014       2,456       560       1987       3/29/1996       5 to 40 years  
Arlington II
  TX             408       1,662       527       408       2,189       2,597       649       1986       3/29/1996       5 to 40 years  
Ft. Worth
  TX             328       1,324       250       328       1,574       1,902       445       1986       3/29/1996       5 to 40 years  
San Antonio I
  TX             436       1,759       1,091       436       2,850       3,286       689       1986       3/29/1996       5 to 40 years  
San Antonio II
  TX             289       1,161       356       289       1,517       1,806       451       1986       3/29/1996       5 to 40 years  
Syracuse II
  NY             481       1,559       2,106       671       3,475       4,146       691       1983       6/5/1996       5 to 40 years  
Montgomery III
  AL             279       1,014       989       433       1,849       2,282       428       1988       5/21/1996       5 to 40 years  
West Palm II
  FL             345       1,262       247       345       1,509       1,854       438       1986       5/29/1996       5 to 40 years  
Ft. Myers III
  FL             229       884       285       229       1,169       1,398       310       1986       5/29/1996       5 to 40 years  
Pittsburgh
  PA             545       1,940       381       545       2,321       2,866       610       1990       6/19/1996       5 to 40 years  
Lakeland II
  FL             359       1,287       987       359       2,274       2,633       603       1988       6/26/1996       5 to 40 years  
Springfield
  MA             251       917       2,073       297       2,944       3,241       607       1986       6/28/1996       5 to 40 years  

58


Table of Contents

     
                                                                                                 
                                    Cost                                      
                                    Capitalized                                      
                                    Subsequent to     Gross Amount at Which                                
                    Initial Cost to Company     Acquisition     Carried at Close of Period                             Life on which  
                            Building,     Building,             Building,                                     depreciation  
                            Equipment     Equipment             Equipment                                     in latest  
            Encum-             and     and             and             Accumulated     Date of     Date     income statement  
Description   State     brance     Land     Improvements     Improvements     Land     Improvements     Total     Depreciation     Construction     Acquired     is computed  
Ft. Myers IV
  FL             344       1,254       219       310       1,507       1,817       428       1987       6/28/1996       5 to 40 years  
Cincinnati
  OH     (2 )     557       1,988       495       652       2,388       3,040       56       1988       7/23/1996       5 to 40 years  
Dayton
  OH     (2 )     667       2,379       121       646       2,521       3,167       66       1988       7/23/1996       5 to 40 years  
Baltimore III
  MD             777       2,770       240       777       3,010       3,787       797       1990       7/26/1996       5 to 40 years  
Jacksonville III
  FL             568       2,028       879       568       2,907       3,475       769       1987       8/23/1996       5 to 40 years  
Jacksonville IV
  FL             436       1,635       427       436       2,062       2,498       601       1985       8/26/1996       5 to 40 years  
Pittsburgh II
  PA             627       2,257       933       631       3,186       3,817       880       1983       8/28/1996       5 to 40 years  
Jacksonville V
  FL             535       2,033       246       538       2,276       2,814       701       1987/92       8/30/1996       5 to 40 years  
Charlotte II
  NC             487       1,754       309       487       2,063       2,550       501       1995       9/16/1996       5 to 40 years  
Charlotte III
  NC             315       1,131       273       315       1,404       1,719       359       1995       9/16/1996       5 to 40 years  
Orlando III
  FL             314       1,113       817       314       1,930       2,244       495       1975       10/30/1996       5 to 40 years  
Rochester III
  NY             704       2,496       1,049       707       3,542       4,249       733       1990       12/20/1996       5 to 40 years  
Youngstown ll
  OH             600       2,142       421       693       2,470       3,163       614       1988       1/10/1997       5 to 40 years  
Cleveland lll
  OH             751       2,676       1,465       751       4,141       4,892       906       1986       1/10/1997       5 to 40 years  
Cleveland lV
  OH             725       2,586       1,074       725       3,660       4,385       867       1978       1/10/1997       5 to 40 years  
Cleveland V
  OH     (1 )     637       2,918       1,494       701       4,348       5,049       1,106       1979       1/10/1997       5 to 40 years  
Cleveland Vl
  OH             495       1,781       672       495       2,453       2,948       597       1979       1/10/1997       5 to 40 years  
Cleveland Vll
  OH             761       2,714       903       761       3,617       4,378       920       1977       1/10/1997       5 to 40 years  
Cleveland Vlll
  OH             418       1,921       1,375       418       3,296       3,714       794       1970       1/10/1997       5 to 40 years  
Cleveland lX
  OH             606       2,164       518       606       2,682       3,288       657       1982       1/10/1997       5 to 40 years  
Grand Rapids l
  MI     (2 )     455       1,631       690       591       2,185       2,776       56       1976       1/17/1997       5 to 40 years  
Grand Rapids ll
  MI             219       790       784       219       1,574       1,793       376       1983       1/17/1997       5 to 40 years  
Kalamazoo
  MI     (2 )     516       1,845       720       657       2,424       3,081       62       1978       1/17/1997       5 to 40 years  
Lansing
  MI     (2 )     327       1,332       1,286       513       2,432       2,945       58       1987       1/17/1997       5 to 40 years  
Holland
  MI             451       1,830       1,256       451       3,086       3,537       808       1978       1/17/1997       5 to 40 years  
San Antonio lll
  TX     (1 )     474       1,686       352       504       2,008       2,512       475       1981       1/30/1997       5 to 40 years  
Universal
  TX             346       1,236       201       346       1,437       1,783       378       1985       1/30/1997       5 to 40 years  
San Antonio lV
  TX             432       1,560       1,562       432       3,122       3,554       625       1995       1/30/1997       5 to 40 years  
Houston-Eastex
  TX             634       2,565       1,091       634       3,656       4,290       807       1993/95       3/26/1997       5 to 40 years  
Houston-Nederland
  TX             566       2,279       219       566       2,498       3,064       617       1995       3/26/1997       5 to 40 years  
Houston-College
  TX             293       1,357       252       293       1,609       1,902       408       1995       3/26/1997       5 to 40 years  
Lynchburg-Lakeside
  VA             335       1,342       1,009       335       2,351       2,686       500       1982       3/31/1997       5 to 40 years  
Lynchburg-Timberlake
  VA             328       1,315       691       328       2,006       2,334       502       1985       3/31/1997       5 to 40 years  
Lynchburg-Amherst
  VA             155       710       267       152       980       1,132       266       1987       3/31/1997       5 to 40 years  
Christiansburg
  VA             245       1,120       395       245       1,515       1,760       332       1985/90       3/31/1997       5 to 40 years  
Chesapeake
  VA             260       1,043       1,032       260       2,075       2,335       404       1988/95       3/31/1997       5 to 40 years  

59


Table of Contents

     
                                                                                                 
                                    Cost                                      
                                    Capitalized                                      
                                    Subsequent to     Gross Amount at Which                                
                    Initial Cost to Company     Acquisition     Carried at Close of Period                             Life on which  
                            Building,     Building,             Building,                                     depreciation  
                            Equipment     Equipment             Equipment                                     in latest  
            Encum-             and     and             and             Accumulated     Date of     Date     income statement  
Description   State     brance     Land     Improvements     Improvements     Land     Improvements     Total     Depreciation     Construction     Acquired     is computed  
Danville
  VA             326       1,488       151       326       1,639       1,965       391       1988       3/31/1997       5 to 40 years  
Orlando-W 25th St
  FL             289       1,160       687       616       1,520       2,136       365       1984       3/31/1997       5 to 40 years  
Delray l-Mini
  FL             491       1,756       542       491       2,298       2,789       623       1969       4/11/1997       5 to 40 years  
Savannah ll
  GA             296       1,196       244       296       1,440       1,736       365       1988       5/8/1997       5 to 40 years  
Delray ll-Safeway
  FL             921       3,282       344       921       3,626       4,547       938       1980       5/21/1997       5 to 40 years  
Cleveland X-Avon
  OH             301       1,214       1,166       304       2,377       2,681       463       1989       6/4/1997       5 to 40 years  
Dallas-Skillman
  TX             960       3,847       1,023       960       4,870       5,830       1,251       1975       6/30/1997       5 to 40 years  
Dallas-Centennial
  TX             965       3,864       1,087       943       4,973       5,916       1,233       1977       6/30/1997       5 to 40 years  
Dallas-Samuell
  TX     (1 )     570       2,285       680       611       2,924       3,535       761       1975       6/30/1997       5 to 40 years  
Dallas-Hargrove
  TX             370       1,486       371       370       1,857       2,227       541       1975       6/30/1997       5 to 40 years  
Houston-Antoine
  TX             515       2,074       427       515       2,501       3,016       653       1984       6/30/1997       5 to 40 years  
Atlanta-Alpharetta
  GA             1,033       3,753       381       1,033       4,134       5,167       1,066       1994       7/24/1997       5 to 40 years  
Atlanta-Marietta
  GA     (1 )     769       2,788       414       825       3,146       3,971       757       1996       7/24/1997       5 to 40 years  
Atlanta-Doraville
  GA             735       3,429       228       735       3,657       4,392       888       1995       8/21/1997       5 to 40 years  
GreensboroHilltop
  NC             268       1,097       200       268       1,297       1,565       312       1995       9/25/1997       5 to 40 years  
GreensboroStgCch
  NC             89       376       1,276       89       1,652       1,741       288       1997       9/25/1997       5 to 40 years  
Baton Rouge-Airline
  LA     (1 )     396       1,831       515       421       2,321       2,742       549       1982       10/9/1997       5 to 40 years  
Baton Rouge-Airline2
  LA             282       1,303       191       282       1,494       1,776       389       1985       11/21/1997       5 to 40 years  
Harrisburg-Peiffers
  PA             635       2,550       382       637       2,930       3,567       633       1984       12/3/1997       5 to 40 years  
Chesapeake-Military
  VA             542       2,210       196       542       2,406       2,948       584       1996       2/5/1998       5 to 40 years  
Chesapeake-Volvo
  VA             620       2,532       818       620       3,350       3,970       727       1995       2/5/1998       5 to 40 years  
Virginia Beach-Shell
  VA             540       2,211       186       540       2,397       2,937       583       1991       2/5/1998       5 to 40 years  
Virginia Beach-Central
  VA             864       3,994       652       864       4,646       5,510       1,067       1993/95       2/5/1998       5 to 40 years  
Norfolk-Naval Base
  VA             1,243       5,019       632       1,243       5,651       6,894       1,288       1975       2/5/1998       5 to 40 years  
Tampa-E.Hillsborough
  FL             709       3,235       693       709       3,928       4,637       987       1985       2/4/1998       5 to 40 years  
Northbridge
  MA     (2 )     441       1,788       743       657       2,315       2,972       51       1988       2/9/1998       5 to 40 years  
Harriman
  NY             843       3,394       344       843       3,738       4,581       889       1989/95       2/4/1998       5 to 40 years  
Greensboro-High Point
  NC             397       1,834       388       397       2,222       2,619       517       1993       2/10/1998       5 to 40 years  
Lynchburg-Timberlake
  VA             488       1,746       398       488       2,144       2,632       465       1990/96       2/18/1998       5 to 40 years  
Titusville
  FL     (2 )     492       1,990       543       652       2,373       3,025       53       1986/90       2/25/1998       5 to 40 years  
Salem
  MA             733       2,941       707       733       3,648       4,381       874       1979       3/3/1998       5 to 40 years  
Chattanooga-Lee Hwy
  TN             384       1,371       482       384       1,853       2,237       430       1987       3/27/1998       5 to 40 years  
Chattanooga-Hwy 58
  TN             296       1,198       995       414       2,075       2,489       423       1985       3/27/1998       5 to 40 years  
Ft. Oglethorpe
  GA             349       1,250       431       349       1,681       2,030       387       1989       3/27/1998       5 to 40 years  
Birmingham-Walt
  AL             544       1,942       733       544       2,675       3,219       670       1984       3/27/1998       5 to 40 years  
East Greenwich
  RI             702       2,821       842       702       3,663       4,365       783       1984/88       3/26/1998       5 to 40 years  

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                                    Cost                                      
                                    Capitalized                                      
                                    Subsequent to     Gross Amount at Which                                
                    Initial Cost to Company     Acquisition     Carried at Close of Period                             Life on which  
                            Building,     Building,             Building,                                     depreciation  
                            Equipment     Equipment             Equipment                                     in latest  
            Encum-             and     and             and             Accumulated     Date of     Date     income statement  
Description   State     brance     Land     Improvements     Improvements     Land     Improvements     Total     Depreciation     Construction     Acquired     is computed  
Durham-Hillsborough
  NC             775       3,103       562       775       3,665       4,440       810       1988/91       4/9/1998       5 to 40 years  
Durham-Cornwallis
  NC             940       3,763       549       940       4,312       5,252       939       1990/96       4/9/1998       5 to 40 years  
Salem-Policy
  NH             742       2,977       403       742       3,380       4,122       687       1980       4/7/1998       5 to 40 years  
Warren-Elm
  OH     (1 )     522       1,864       977       569       2,794       3,363       537       1986       4/22/1998       5 to 40 years  
Warren-Youngstown
  OH             512       1,829       1,497       675       3,163       3,838       464       1986       4/22/1998       5 to 40 years  
Waterford-Highland
  MI             1,487       5,306       1,059       1,487       6,365       7,852       1,395       1978       4/28/1998       5 to 40 years  
Indian Harbor Beach
  FL             662       2,654       279       662       2,933       3,595       676       1985       6/2/1998       5 to 40 years  
Jackson 3 - I55
  MS             744       3,021       103       744       3,124       3,868       710       1995       5/13/1998       5 to 40 years  
Katy-N.Fry
  TX             419       1,524       854       419       2,378       2,797       434       1994       5/20/1998       5 to 40 years  
Hollywood-Sheridan
  FL             1,208       4,854       254       1,208       5,108       6,316       1,141       1988       7/1/1998       5 to 40 years  
Pompano Beach-Atlantic
  FL             944       3,803       234       944       4,037       4,981       920       1985       7/1/1998       5 to 40 years  
Pompano Beach-Sample
  FL             903       3,643       335       903       3,978       4,881       884       1988       7/1/1998       5 to 40 years  
Boca Raton-18th St
  FL             1,503       6,059       635       1,503       6,694       8,197       1,476       1991       7/1/1998       5 to 40 years  
Vero Beach
  FL             489       1,813       81       489       1,894       2,383       451       1997       6/12/1998       5 to 40 years  
Humble
  TX             447       1,790       916       740       2,413       3,153       529       1986       6/16/1998       5 to 40 years  
Houston-Old Katy
  TX     (1 )     659       2,680       306       698       2,947       3,645       586       1996       6/19/1998       5 to 40 years  
Webster
  TX             635       2,302       108       635       2,410       3,045       531       1997       6/19/1998       5 to 40 years  
Carrollton
  TX             548       1,988       267       548       2,255       2,803       484       1997       6/19/1998       5 to 40 years  
Hollywood-N.21st
  FL             840       3,373       274       840       3,647       4,487       832       1987       8/3/1998       5 to 40 years  
San Marcos
  TX             324       1,493       586       324       2,079       2,403       444       1994       6/30/1998       5 to 40 years  
Austin-McNeil
  TX             492       1,995       227       510       2,204       2,714       528       1994       6/30/1998       5 to 40 years  
Austin-FM
  TX             484       1,951       382       481       2,336       2,817       504       1996       6/30/1998       5 to 40 years  
Jacksonville-Center
  NC             327       1,329       599       327       1,928       2,255       332       1995       8/6/1998       5 to 40 years  
Jacksonville-Gum Branch
  NC             508       1,815       1,166       508       2,981       3,489       475       1989       8/17/1998       5 to 40 years  
Jacksonville-N.Marine
  NC             216       782       453       216       1,235       1,451       330       1985       9/24/1998       5 to 40 years  
Euless
  TX             550       1,998       613       550       2,611       3,161       493       1996       9/29/1998       5 to 40 years  
N. Richland Hills
  TX             670       2,407       821       670       3,228       3,898       601       1996       10/9/1998       5 to 40 years  
Batavia
  OH             390       1,570       257       390       1,827       2,217       427       1988       11/19/1998       5 to 40 years  
Jackson-N.West
  MS             460       1,642       376       460       2,018       2,478       526       1984       12/1/1998       5 to 40 years  
Katy-Franz
  TX             507       2,058       153       507       2,211       2,718       458       1993       12/15/1998       5 to 40 years  
W.Warwick
  RI             447       1,776       673       447       2,449       2,896       476       1986/94       2/2/1999       5 to 40 years  
Lafayette-Pinhook 1
  LA             556       1,951       795       556       2,746       3,302       702       1980       2/17/1999       5 to 40 years  
Lafayette-Pinhook2
  LA             708       2,860       202       708       3,062       3,770       631       1992/94       2/17/1999       5 to 40 years  
Lafayette-Ambassador
  LA             314       1,095       579       314       1,674       1,988       457       1975       2/17/1999       5 to 40 years  
Lafayette-Evangeline
  LA             188       652       1,394       188       2,046       2,234       423       1977       2/17/1999       5 to 40 years  
Lafayette-Guilbeau
  LA             963       3,896       747       963       4,643       5,606       853       1994       2/17/1999       5 to 40 years  

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                                    Cost                                      
                                    Capitalized                                      
                                    Subsequent to     Gross Amount at Which                                
                    Initial Cost to Company     Acquisition     Carried at Close of Period                             Life on which  
                            Building,     Building,             Building,                                     depreciation  
                            Equipment     Equipment             Equipment                                     in latest  
            Encum-             and     and             and             Accumulated     Date of     Date     income statement  
Description   State     brance     Land     Improvements     Improvements     Land     Improvements     Total     Depreciation     Construction     Acquired     is computed  
Gilbert-Elliot Rd
  AZ             651       2,600       652       772       3,131       3,903       584       1995       5/18/1999       5 to 40 years  
Glendale-59th Ave
  AZ             565       2,596       447       565       3,043       3,608       569       1997       5/18/1999       5 to 40 years  
Mesa-Baseline
  AZ             330       1,309       172       326       1,485       1,811       293       1986       5/18/1999       5 to 40 years  
Mesa-E.Broadway
  AZ             339       1,346       400       339       1,746       2,085       318       1986       5/18/1999       5 to 40 years  
Mesa-W.Broadway
  AZ             291       1,026       517       291       1,543       1,834       254       1976       5/18/1999       5 to 40 years  
Mesa-Greenfield
  AZ             354       1,405       198       354       1,603       1,957       323       1986       5/18/1999       5 to 40 years  
Phoenix-Camelback
  AZ             453       1,610       502       453       2,112       2,565       405       1984       5/18/1999       5 to 40 years  
Phoenix-Bell
  AZ             872       3,476       647       872       4,123       4,995       834       1984       5/18/1999       5 to 40 years  
Phoenix-35th Ave
  AZ             849       3,401       616       849       4,017       4,866       734       1996       5/21/1999       5 to 40 years  
Westbrook
  ME             410       1,626       1,571       410       3,197       3,607       429       1988       8/2/1999       5 to 40 years  
Cocoa
  FL             667       2,373       594       667       2,967       3,634       565       1982       9/29/1999       5 to 40 years  
Cedar Hill
  TX             335       1,521       231       335       1,752       2,087       380       1985       11/9/1999       5 to 40 years  
Monroe
  NY             276       1,312       1,080       276       2,392       2,668       297       1998       2/2/2000       5 to 40 years  
N.Andover
  MA             633       2,573       123       633       2,696       3,329       474       1989       2/15/2000       5 to 40 years  
Seabrook
  TX             633       2,617       276       633       2,893       3,526       517       1996       3/1/2000       5 to 40 years  
Plantation
  FL             384       1,422       142       384       1,564       1,948       312       1994       5/2/2000       5 to 40 years  
Birmingham-Bessemer
  AL             254       1,059       1,098       254       2,157       2,411       234       1998       11/15/2000       5 to 40 years  
Brewster
  NY     (2 )     1,716       6,920       286       1,876       7,046       8,922       155       1991/97       12/27/2000       5 to 40 years  
Austin-Lamar
  TX     (2 )     837       2,977       154       914       3,054       3,968       76       1996/99       2/22/2001       5 to 40 years  
Houston-E.Main
  TX     (2 )     733       3,392       217       796       3,546       4,342       82       1993/97       3/2/2001       5 to 40 years  
Ft.Myers-Abrams
  FL     (2 )     787       3,249       89       854       3,271       4,125       79       1997       3/13/2001       5 to 40 years  
Dracut
  MA     (1 )     1,035       3,737       498       1,104       4,166       5,270       527       1986       12/1/2001       5 to 40 years  
Methuen
  MA     (1 )     1,024       3,649       485       1,091       4,067       5,158       505       1984       12/1/2001       5 to 40 years  
Columbia 5
  SC     (1 )     883       3,139       500       942       3,580       4,522       482       1985       12/1/2001       5 to 40 years  
Myrtle Beach
  SC     (1 )     552       1,970       606       589       2,539       3,128       345       1984       12/1/2001       5 to 40 years  
Kingsland
  GA     (1 )     470       1,902       624       501       2,495       2,996       356       1989       12/1/2001       5 to 40 years  
Saco
  ME     (1 )     534       1,914       230       570       2,108       2,678       266       1988       12/3/2001       5 to 40 years  
Plymouth
  MA             1,004       4,584       141       1,004       4,725       5,729       600       1996       12/19/2001       5 to 40 years  
Sandwich
  MA     (1 )     670       3,060       392       714       3,408       4,122       438       1984       12/19/2001       5 to 40 years  
Syracuse
  NY     (1 )     294       1,203       330       313       1,514       1,827       218       1987       2/5/2002       5 to 40 years  
Houston-Westward
  TX     (1 )     853       3,434       750       912       4,125       5,037       523       1976       2/13/2002       5 to 40 years  
Houston-Boone
  TX     (1 )     250       1,020       455       268       1,457       1,725       177       1983       2/13/2002       5 to 40 years  
Houston-Cook
  TX     (1 )     285       1,160       253       306       1,392       1,698       182       1986       2/13/2002       5 to 40 years  
Houston-Harwin
  TX     (1 )     449       1,816       557       480       2,342       2,822       285       1981       2/13/2002       5 to 40 years  
Houston-Hempstead
  TX     (1 )     545       2,200       738       583       2,900       3,483       324       1974/78       2/13/2002       5 to 40 years  
Houston-Kuykendahl
  TX     (1 )     517       2,090       614       553       2,668       3,221       346       1979/83       2/13/2002       5 to 40 years  

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                                    Cost                                      
                                    Capitalized                                      
                                    Subsequent to     Gross Amount at Which                                
                    Initial Cost to Company     Acquisition     Carried at Close of Period                             Life on which  
                            Building,     Building,             Building,                                     depreciation  
                            Equipment     Equipment             Equipment                                     in latest  
            Encum-             and     and             and             Accumulated     Date of     Date     income statement  
Description   State     brance     Land     Improvements     Improvements     Land     Improvements     Total     Depreciation     Construction     Acquired     is computed  
Houston-Hwy 249
  TX     (1 )     299       1,216       877       320       2,072       2,392       218       1983       2/13/2002       5 to 40 years  
Mesquite-Hwy 80
  TX     (1 )     463       1,873       490       496       2,330       2,826       278       1985       2/13/2002       5 to 40 years  
Mesquite-Franklin
  TX     (1 )     734       2,956       638       784       3,544       4,328       398       1984       2/13/2002       5 to 40 years  
Dallas-Plantation
  TX     (1 )     394       1,595       247       421       1,815       2,236       225       1985       2/13/2002       5 to 40 years  
San Antonio-Hunt
  TX     (1 )     381       1,545       319       408       1,837       2,245       223       1980       2/13/2002       5 to 40 years  
Humble-5250 FM
  TX             919       3,696       270       919       3,966       4,885       450       1998/02       6/19/2002       5 to 40 years  
Pasadena
  TX             612       2,468       75       612       2,543       3,155       295       1999       6/19/2002       5 to 40 years  
League City-E.Main
  TX             689       3,159       228       689       3,387       4,076       378       1994/97       6/19/2002       5 to 40 years  
Montgomery
  TX             817       3,286       52       817       3,338       4,155       381       1998       6/19/2002       5 to 40 years  
Texas City
  TX             817       3,286       96       817       3,382       4,199       389       1999       6/19/2002       5 to 40 years  
Houston-Hwy 6
  TX             407       1,650       120       407       1,770       2,177       205       1997       6/19/2002       5 to 40 years  
Lumberton
  TX             817       3,287       141       817       3,428       4,245       395       1996       6/19/2002       5 to 40 years  
The Hamptons l
  NY             2,207       8,866       386       2,207       9,252       11,459       938       1989/95       12/16/2002       5 to 40 years  
The Hamptons 2
  NY             1,131       4,564       416       1,131       4,980       6,111       500       1998       12/16/2002       5 to 40 years  
The Hamptons 3
  NY             635       2,918       213       635       3,131       3,766       315       1997       12/16/2002       5 to 40 years  
The Hamptons 4
  NY             1,251       5,744       235       1,252       5,978       7,230       606       1994/98       12/16/2002       5 to 40 years  
Duncanville
  TX             1,039       4,201       29       1,039       4,230       5,269       364       1995/99       8/26/2003       5 to 40 years  
Dallas-Harry Hines
  TX             827       3,776       189       827       3,965       4,792       316       1998/01       10/1/2003       5 to 40 years  
Stamford
  CT             2,713       11,013       51       2,713       11,064       13,777       784       1998       3/17/2004       5 to 40 years  
Houston-Tomball
  TX             773       3,170       1,723       773       4,893       5,666       250       2000       5/19/2004       5 to 40 years  
Houston-Conroe
  TX             1,195       4,877       32       1,195       4,909       6,104       334       2001       5/19/2004       5 to 40 years  
Houston-Spring
  TX             1,103       4,550       193       1,103       4,743       5,846       327       2001       5/19/2004       5 to 40 years  
Houston-Bissonnet
  TX             1,061       4,427       34       1,061       4,461       5,522       318       2003       5/19/2004       5 to 40 years  
Houston-Alvin
  TX             388       1,640       25       388       1,665       2,053       123       2003       5/19/2004       5 to 40 years  
Clearwater
  FL             1,720       6,986       14       1,720       7,000       8,720       472       2001       6/3/2004       5 to 40 years  
Houston-Missouri City
  TX             1,167       4,744       434       1,566       4,779       6,345       312       1998       6/23/2004       5 to 40 years  
Chattanooga-Hixson
  TN             1,365       5,569       642       1,365       6,211       7,576       397       1998/02       8/4/2004       5 to 40 years  
Austin-Round Rock
  TX             2,047       5,857       586       2,051       6,439       8,490       381       2000       8/5/2004       5 to 40 years  
East Falmouth
  MA             1,479       5,978       86       1,479       6,064       7,543       286       1998       2/23/2005       5 to 40 years  
Cicero
  NY             527       2,121       278       527       2,399       2,926       107       1988/02       3/16/2005       5 to 40 years  
Bay Shore
  NY             1,131       4,609       26       1,131       4,635       5,766       223       2003       3/15/2005       5 to 40 years  
Springfield-Congress
  MA             612       2,501       17       612       2,518       3,130       117       1965/75       4/12/2005       5 to 40 years  
Stamford-Hope
  CT             1,612       6,585       44       1,612       6,629       8,241       306       2002       4/14/2005       5 to 40 years  
Houston-Jones
  TX   $ 3,769       1,214       4,949       35       1,215       4,983       6,198       205       1997/99       6/6/2005       5 to 40 years  
Montgomery-Richard
  AL             1,906       7,726       29       1,906       7,755       9,661       318       1997       6/1/2005       5 to 40 years  
Oxford
  MA             470       1,902       48       470       1,950    <