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CubeSmart - Quarter Report: 2016 September (Form 10-Q)

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sts

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

December 30, 2016

 

(Mark one)

 

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

For the quarterly period ended September 30, 2016.

 

 

 

or

 

 

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                                       to                                        .

 

Commission file number:
001-32324 (CubeSmart)
000-54462 (CubeSmart, L.P.)

 


 

CUBESMART

CUBESMART, L.P.

(Exact Name of Registrant as Specified in its Charter)

 


 

 

 

 

Maryland (CubeSmart)
Delaware (CubeSmart, L.P.)

 

20-1024732
34-1837021

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

5 Old Lancaster Road

 

 

Malvern, Pennsylvania

 

19355

(Address of Principal Executive Offices)

 

(Zip Code)

 

(610) 535-5000

(Registrant’s Telephone Number, Including Area Code)

 


 

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.

 

 

 

CubeSmart

Yes ☑ No ☐

CubeSmart, L.P.

Yes ☑ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

 

 

CubeSmart

Yes ☑ No ☐

CubeSmart, L.P.

Yes ☑ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

CubeSmart:

 

 

 

Large accelerated filer ☑

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☐

 

 

 

 

CubeSmart, L.P.:

 

 

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☑

Smaller reporting company ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

 

 

CubeSmart

Yes ☐ No ☑

CubeSmart, L.P.

Yes ☐ No ☑

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

 

 

 

Class

 

Outstanding at October 26, 2016

Common shares, $0.01 par value per share, of CubeSmart

 

180,038,120

 

 

 

 

 


 

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EXPLANATORY NOTE

 

This report combines the quarterly reports on Form 10-Q for the period ended September 30, 2016 of CubeSmart (the “Parent Company” or “CubeSmart”) and CubeSmart, L.P. (the “Operating Partnership”). The Parent Company is a Maryland real estate investment trust, or REIT, that owns its assets and conducts its operations through the Operating Partnership, a Delaware limited partnership, and subsidiaries of the Operating Partnership.  The Parent Company, the Operating Partnership and their consolidated subsidiaries are collectively referred to in this report as the “Company”. In addition, terms such as “we”, “us”, or “our” used in this report may refer to the Company, the Parent Company or the Operating Partnership.

 

The Parent Company is the sole general partner of the Operating Partnership and, as of September 30, 2016, owned a 98.8% interest in the Operating Partnership. The remaining 1.2% interest consists of common units of limited partnership interest issued by the Operating Partnership to third parties in exchange for contributions of facilities to the Operating Partnership. As the sole general partner of the Operating Partnership, the Parent Company has full and complete authority over the Operating Partnership’s day-to-day operations and management.

 

Management operates the Parent Company and the Operating Partnership as one enterprise. The management teams of the Parent Company and the Operating Partnership are identical, and their constituents are officers of both the Parent Company and of the Operating Partnership.

 

There are few differences between the Parent Company and the Operating Partnership, which are reflected in the note disclosures in this report. The Company believes it is important to understand the differences between the Parent Company and the Operating Partnership in the context of how these entities operate as a consolidated enterprise. The Parent Company is a REIT, whose only material asset is its ownership of the partnership interests of the Operating Partnership.  As a result, the Parent Company does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing public equity from time to time and guaranteeing the debt obligations of the Operating Partnership. The Operating Partnership holds substantially all the assets of the Company and, directly or indirectly, holds the ownership interests in the Company’s real estate ventures. The Operating Partnership conducts the operations of the Company’s business and is structured as a partnership with no publicly traded equity. Except for net proceeds from equity issuances by the Parent Company, which are contributed to the Operating Partnership in exchange for partnership units, the Operating Partnership generates the capital required by the Company’s business through the Operating Partnership’s operations, by the Operating Partnership’s direct or indirect incurrence of indebtedness or through the issuance of partnership units of the Operating Partnership or equity interests in subsidiaries of the Operating Partnership.

 

The substantive difference between the Parent Company’s and the Operating Partnership’s filings is the fact that the Parent Company is a REIT with public equity, while the Operating Partnership is a partnership with no publicly traded equity. In the financial statements, this difference is primarily reflected in the equity (or capital for the Operating Partnership) section of the consolidated balance sheets and in the consolidated statements of equity (or capital). Apart from the different equity treatment, the consolidated financial statements of the Parent Company and the Operating Partnership are nearly identical.

 

The Company believes that combining the quarterly reports on Form 10-Q of the Parent Company and the Operating Partnership into a single report will:

 

·

facilitate a better understanding by the investors of the Parent Company and the Operating Partnership by enabling them to view the business as a whole in the same manner as management views and operates the business;

·

remove duplicative disclosures and provide a more straightforward presentation in light of the fact that a substantial portion of the disclosure applies to both the Parent Company and the Operating Partnership; and

·

create time and cost efficiencies through the preparation of one combined report instead of two separate reports.

 

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In order to highlight the differences between the Parent Company and the Operating Partnership, the separate sections in this report for the Parent Company and the Operating Partnership specifically refer to the Parent Company and the Operating Partnership. In the sections that combine disclosures of the Parent Company and the Operating Partnership, this report refers to such disclosures as those of the Company. Although the Operating Partnership is generally the entity that directly or indirectly enters into contracts and real estate ventures and holds assets and debt, reference to the Company is appropriate because the business is one enterprise and the Parent Company operates the business through the Operating Partnership.

 

As general partner with control of the Operating Partnership, the Parent Company consolidates the Operating Partnership for financial reporting purposes, and the Parent Company does not have significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities of the Parent Company and the Operating Partnership are the same on their respective financial statements. The separate discussions of the Parent Company and the Operating Partnership in this report should be read in conjunction with each other to understand the results of the Company’s operations on a consolidated basis and how management operates the Company.

 

This report also includes separate Item 4 - Controls and Procedures sections, signature pages and Exhibit 31 and 32 certifications for each of  the Parent Company and the Operating Partnership in order to establish that the Chief Executive Officer and the Chief Financial Officer of the Parent Company and the Chief Executive Officer and the Chief Financial Officer of the Operating Partnership have made the requisite certifications and that the Parent Company and the Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350.

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TABLE OF CONTENTS

 

 

 

Part I. FINANCIAL INFORMATION 

 

Item 1.     Financial Statements 

7

Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations 

33

Item 3.     Quantitative and Qualitative Disclosures About Market Risk 

48

Item 4.     Controls and Procedures 

48

 

 

Part II. OTHER INFORMATION 

 

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds 

50

Item 6.     Exhibits 

51

 

Filing Format

 

This combined Form 10-Q is being filed separately by CubeSmart and CubeSmart, L.P.

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Forward-Looking Statements

 

This Quarterly Report on Form 10-Q, or “this Report”, together with other statements and information publicly disseminated by the Parent Company and the Operating Partnership, contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the “Exchange Act.” Forward-looking statements include statements concerning the Company’s plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions and other information that is not historical information.  In some cases, forward-looking statements can be identified by terminology such as “believes”, “expects”, “estimates”, “may”, “will”, “should”, “anticipates”, or “intends” or the negative of such terms or other comparable terminology, or by discussions of strategy.  Such statements are based on assumptions and expectations that may not be realized and are inherently subject to risks, uncertainties and other factors, many of which cannot be predicted with accuracy and some of which might not even be anticipated.  Although we believe the expectations reflected in these forward-looking statements are based on reasonable assumptions, future events and actual results, performance, transactions or achievements, financial and otherwise, may differ materially from the results, performance, transactions or achievements expressed or implied by the forward-looking statements.  As a result, you should not rely on or construe any forward-looking statements in this Report, or which management may make orally or in writing from time to time, as predictions of future events or as guarantees of future performance.  We caution you not to place undue reliance on forward-looking statements, which speak only as of the date of this Report or as of the dates otherwise indicated in the statements.  All of our forward-looking statements, including those in this Report, are qualified in their entirety by this statement.

 

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in or contemplated by this Report.  Any forward-looking statements should be considered in light of the risks and uncertainties referred to in Item 1A. “Risk Factors” in the Parent Company’s and the Operating Partnership’s combined Annual Report on Form 10-K for the year ended December 31, 2015 and in our other filings with the Securities and Exchange Commission (“SEC”).  These risks include, but are not limited to, the following:

 

·

national and local economic, business, real estate and other market conditions;

 

·

the competitive environment in which we operate, including our ability to maintain or raise occupancy and rental rates;

 

·

the execution of our business plan;

 

·

the availability of external sources of capital;

 

·

financing risks, including the risk of over-leverage and the corresponding risk of default on our mortgage and other debt and potential inability to refinance existing indebtedness;

 

·

increases in interest rates and operating costs;

 

·

counterparty non-performance related to the use of derivative financial instruments;

 

·

our ability to maintain our Parent Company’s qualification as a real estate investment trust for federal income tax purposes;

 

·

acquisition and development risks;

 

·

increases in taxes, fees, and assessments from state and local jurisdictions;

 

·

risks of investing through joint ventures;

 

·

changes in real estate and zoning laws or regulations;

 

·

risks related to natural disasters;

 

·

potential environmental and other liabilities;

 

·

other factors affecting the real estate industry generally or the self-storage industry in particular; and

 

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·

other risks identified in the Parent Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2015 and, from time to time, in other reports that we file with the SEC or in other documents that we publicly disseminate.

 

Given these uncertainties and the other risks identified elsewhere in this Report, we caution readers not to place undue reliance on forward-looking statements.  We undertake no obligation to publicly update or revise these forward-looking statements, whether as a result of new information, future events or otherwise except as may be required by securities laws.  Because of the factors referred to above, the future events discussed in or incorporated by reference in this Report may not occur and actual results, performance or achievement could differ materially from that anticipated or implied in the forward-looking statements.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

CUBESMART AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

   

2016

   

2015

 

 

 

(unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Storage facilities

 

$

3,968,754

 

$

3,467,032

 

Less: Accumulated depreciation

 

 

(685,771)

 

 

(594,049)

 

Storage facilities, net (including VIE assets of $194,167 and $136,274, respectively)

 

 

3,282,983

 

 

2,872,983

 

Cash and cash equivalents

 

 

87,379

 

 

62,869

 

Restricted cash

 

 

8,052

 

 

24,600

 

Loan procurement costs, net of amortization

 

 

2,313

 

 

2,800

 

Investment in real estate ventures, at equity

 

 

97,405

 

 

97,281

 

Other assets, net

 

 

41,067

 

 

43,631

 

Total assets

 

$

3,519,199

 

$

3,104,164

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Unsecured senior notes, net

 

$

1,038,728

 

$

741,904

 

Revolving credit facility

 

 

 —

 

 

 —

 

Unsecured term loans, net

 

 

398,608

 

 

398,183

 

Mortgage loans and notes payable, net

 

 

115,393

 

 

111,455

 

Accounts payable, accrued expenses and other liabilities

 

 

93,854

 

 

85,034

 

Distributions payable

 

 

39,781

 

 

38,685

 

Deferred revenue

 

 

20,141

 

 

17,519

 

Security deposits

 

 

420

 

 

403

 

Total liabilities

 

 

1,706,925

 

 

1,393,183

 

 

 

 

 

 

 

 

 

Noncontrolling interests in the Operating Partnership

 

 

60,541

 

 

66,128

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

7.75% Series A Preferred shares $.01 par value, 3,220,000 shares authorized, 3,100,000 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively

 

 

31

 

 

31

 

Common shares $.01 par value, 400,000,000 shares authorized, 179,858,650 and 174,667,870 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively

 

 

1,799

 

 

1,747

 

Additional paid-in capital

 

 

2,381,836

 

 

2,231,181

 

Accumulated other comprehensive loss

 

 

(3,247)

 

 

(4,978)

 

Accumulated deficit

 

 

(634,248)

 

 

(584,654)

 

Total CubeSmart shareholders’ equity

 

 

1,746,171

 

 

1,643,327

 

Noncontrolling interests in subsidiaries

 

 

5,562

 

 

1,526

 

Total equity

 

 

1,751,733

 

 

1,644,853

 

Total liabilities and equity

 

$

3,519,199

 

$

3,104,164

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

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CUBESMART AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

   

2016

    

2015

   

2016

    

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

116,416

 

$

102,385

 

$

332,951

 

$

290,744

 

Other property related income

 

 

13,007

 

 

11,827

 

 

37,413

 

 

33,755

 

Property management fee income

 

 

2,673

 

 

1,758

 

 

7,129

 

 

5,030

 

Total revenues

 

 

132,096

 

 

115,970

 

 

377,493

 

 

329,529

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

41,805

 

 

39,297

 

 

123,631

 

 

114,938

 

Depreciation and amortization

 

 

41,827

 

 

38,744

 

 

122,631

 

 

114,725

 

General and administrative

 

 

8,065

 

 

7,002

 

 

24,184

 

 

21,289

 

Acquisition related costs

 

 

888

 

 

1,222

 

 

5,793

 

 

2,485

 

Total operating expenses

 

 

92,585

 

 

86,265

 

 

276,239

 

 

253,437

 

OPERATING INCOME

 

 

39,511

 

 

29,705

 

 

101,254

 

 

76,092

 

OTHER (EXPENSE) INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense on loans

 

 

(12,787)

 

 

(10,399)

 

 

(37,071)

 

 

(32,324)

 

Loan procurement amortization expense

 

 

(655)

 

 

(537)

 

 

(1,871)

 

 

(1,742)

 

Equity in (losses) earnings of real estate ventures

 

 

(581)

 

 

139

 

 

(1,817)

 

 

(199)

 

Other

 

 

(397)

 

 

(288)

 

 

834

 

 

(812)

 

Total other expense

 

 

(14,420)

 

 

(11,085)

 

 

(39,925)

 

 

(35,077)

 

NET INCOME

 

 

25,091

 

 

18,620

 

 

61,329

 

 

41,015

 

NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling interests in the Operating Partnership

 

 

(283)

 

 

(223)

 

 

(682)

 

 

(475)

 

Noncontrolling interest in subsidiaries

 

 

76

 

 

41

 

 

411

 

 

56

 

NET INCOME ATTRIBUTABLE TO THE COMPANY

 

 

24,884

 

 

18,438

 

 

61,058

 

 

40,596

 

Distribution to preferred shareholders

 

 

(1,502)

 

 

(1,502)

 

 

(4,506)

 

 

(4,506)

 

NET INCOME ATTRIBUTABLE TO THE COMPANY’S COMMON SHAREHOLDERS

 

$

23,382

 

$

16,936

 

$

56,552

 

$

36,090

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share attributable to common shareholders

 

$

0.13

 

$

0.10

 

$

0.32

 

$

0.22

 

Diluted earnings per share attributable to common shareholders

 

$

0.13

 

$

0.10

 

$

0.32

 

$

0.21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average basic shares outstanding

 

 

179,223

 

 

169,304

 

 

177,639

 

 

167,177

 

Weighted-average diluted shares outstanding

 

 

180,478

 

 

170,901

 

 

178,937

 

 

168,705

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

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CUBESMART AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

   

2016

    

2015

 

2016

    

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

25,091

 

$

18,620

 

$

61,329

 

$

41,015

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on interest rate swaps

 

 

458

 

 

(1,821)

 

 

(1,777)

 

 

(4,507)

 

Reclassification of realized losses on interest rate swaps

 

 

935

 

 

1,576

 

 

3,529

 

 

4,713

 

Unrealized loss on foreign currency translation

 

 

 —

 

 

(215)

 

 

 —

 

 

(284)

 

OTHER COMPREHENSIVE INCOME (LOSS)

 

 

1,393

 

 

(460)

 

 

1,752

 

 

(78)

 

COMPREHENSIVE INCOME

 

 

26,484

 

 

18,160

 

 

63,081

 

 

40,937

 

Comprehensive income attributable to noncontrolling interests in the Operating Partnership

 

 

(300)

 

 

(217)

 

 

(703)

 

 

(473)

 

Comprehensive loss attributable to noncontrolling interest in subsidiaries

 

 

76

 

 

49

 

 

411

 

 

67

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO THE COMPANY

 

$

26,260

 

$

17,992

 

$

62,789

 

$

40,531

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

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CUBESMART AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

    

    

    

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

Noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Accumulated Other

 

 

 

 

Total

 

Noncontrolling

 

 

 

 

Interests in the

 

 

 

Common Shares

 

Preferred Shares

 

Paid in

 

Comprehensive

 

Accumulated

 

Shareholders’

 

Interest in

 

Total

 

Operating

 

 

 

Number

 

Amount

 

Number

 

Amount

 

Capital

 

(Loss) Income

 

Deficit

 

Equity

 

Subsidiaries

 

Equity

 

Partnership

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2015

 

174,668

 

$

1,747

 

3,100

 

$

31

 

$

2,231,181

 

$

(4,978)

 

$

(584,654)

 

$

1,643,327

 

$

1,526

 

$

1,644,853

 

$

66,128

 

Contributions from noncontrolling interests in subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,447

 

 

4,447

 

 

 

 

Issuance of common shares

 

4,408

 

 

44

 

 

 

 

 

 

 

136,106

 

 

 

 

 

 

 

 

136,150

 

 

 

 

 

136,150

 

 

 

 

Issuance of restricted shares

 

123

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

1

 

 

 

 

Issuance of OP units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,500

 

Exercise of stock options

 

660

 

 

7

 

 

 

 

 

 

 

12,566

 

 

 

 

 

 

 

 

12,573

 

 

 

 

 

12,573

 

 

 

 

Amortization of restricted shares

 

 

 

 

 

 

 

 

 

 

 

 

1,041

 

 

 

 

 

 

 

 

1,041

 

 

 

 

 

1,041

 

 

 

 

Share compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

942

 

 

 

 

 

 

 

 

942

 

 

 

 

 

942

 

 

 

 

Adjustment for noncontrolling interest in the Operating Partnership

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,404

 

 

6,404

 

 

 

 

 

6,404

 

 

(6,404)

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

61,058

 

 

61,058

 

 

(411)

 

 

60,647

 

 

682

 

Other comprehensive income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,731

 

 

 

 

 

1,731

 

 

 

 

 

1,731

 

 

21

 

Preferred share distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,506)

 

 

(4,506)

 

 

 

 

 

(4,506)

 

 

 

 

Common share distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(112,550)

 

 

(112,550)

 

 

 

 

 

(112,550)

 

 

(1,386)

 

Balance at September 30, 2016

 

179,859

 

$

1,799

 

3,100

 

$

31

 

$

2,381,836

 

$

(3,247)

 

$

(634,248)

 

$

1,746,171

 

$

5,562

 

$

1,751,733

 

$

60,541

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

    

    

    

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

Noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Accumulated Other

 

 

 

 

Total

 

Noncontrolling

 

 

 

 

Interests in the

 

 

 

Common Shares

 

Preferred Shares

 

Paid in

 

Comprehensive

 

Accumulated

 

Shareholders’

 

Interest in

 

Total

 

Operating

 

 

 

Number

 

Amount

 

Number

 

Amount

 

Capital

 

Loss

 

Deficit

 

Equity

 

Subsidiaries

 

Equity

 

Partnership

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2014

    

163,957

    

$

1,639

    

3,100

    

$

31

    

$

1,974,308

    

$

(8,759)

    

$

(519,193)

    

$

1,448,026

    

$

1,592

    

$

1,449,618

   

$

49,823

 

Contributions from noncontrolling interests in subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

178

 

 

178

 

 

 

 

Issuance of common shares

 

5,515

 

 

56

 

 

 

 

 

 

 

136,606

 

 

 

 

 

 

 

 

136,662

 

 

 

 

 

136,662

 

 

 

 

Issuance of restricted shares

 

161

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

1

 

 

 

 

Issuance of OP units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

500

 

Conversion from units to shares

 

66

 

 

1

 

 

 

 

 

 

 

1,704

 

 

 

 

 

 

 

 

1,705

 

 

 

 

 

1,705

 

 

(1,705)

 

Exercise of stock options

 

1,228

 

 

12

 

 

 

 

 

 

 

13,384

 

 

 

 

 

 

 

 

13,396

 

 

 

 

 

13,396

 

 

 

 

Amortization of restricted shares

 

 

 

 

 

 

 

 

 

 

 

 

509

 

 

 

 

 

 

 

 

509

 

 

 

 

 

509

 

 

 

 

Share compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

741

 

 

 

 

 

 

 

 

741

 

 

 

 

 

741

 

 

 

 

Adjustment for noncontrolling interest in the Operating Partnership

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,166)

 

 

(12,166)

 

 

 

 

 

(12,166)

 

 

12,166

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40,596

 

 

40,596

 

 

(56)

 

 

40,540

 

 

475

 

Other comprehensive loss, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(65)

 

 

 

 

 

(65)

 

 

(11)

 

 

(76)

 

 

(2)

 

Preferred share distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,506)

 

 

(4,506)

 

 

 

 

 

(4,506)

 

 

 

 

Common share distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(80,817)

 

 

(80,817)

 

 

 

 

 

(80,817)

 

 

(1,077)

 

Balance at September 30, 2015

 

170,927

 

$

1,709

 

3,100

 

$

31

 

$

2,127,252

 

$

(8,824)

 

$

(576,086)

 

$

1,544,082

 

$

1,703

 

$

1,545,785

 

$

60,180

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

10


 

Table of Contents

CUBESMART AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

    

2016

    

2015

Operating Activities

 

 

 

 

 

 

Net income

 

$

61,329

 

$

41,015

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

124,502

 

 

116,467

Equity in losses of real estate ventures

 

 

1,817

 

 

199

Equity compensation expense

 

 

1,983

 

 

1,250

Accretion of fair market value adjustment of debt

 

 

(913)

 

 

(1,173)

Changes in other operating accounts:

 

 

 

 

 

 

Restricted cash

 

 

404

 

 

507

Other assets

 

 

(6,833)

 

 

(3,277)

Accounts payable and accrued expenses

 

 

17,561

 

 

6,086

Other liabilities

 

 

1,571

 

 

1,417

Net cash provided by operating activities

 

$

201,421

 

$

162,491

Investing Activities

 

 

 

 

 

 

Acquisitions of storage facilities

 

 

(313,954)

 

 

(161,852)

Additions and improvements to storage facilities

 

 

(23,072)

 

 

(18,336)

Development costs

 

 

(134,136)

 

 

(58,399)

Investment in real estate ventures, at equity

 

 

(7,911)

 

 

 —

Cash distributed from real estate ventures

 

 

5,970

 

 

4,685

Fundings of notes receivable

 

 

 —

 

 

(4,100)

Change in restricted cash

 

 

970

 

 

99

Net cash used in investing activities

 

$

(472,133)

 

$

(237,903)

Financing Activities

 

 

 

 

 

 

Proceeds from:

 

 

 

 

 

 

Unsecured senior notes

 

 

298,512

 

 

 —

Revolving credit facility

 

 

830,000

 

 

671,800

Principal payments on:

 

 

 

 

 

 

Revolving credit facility

 

 

(830,000)

 

 

(582,000)

Mortgage loans and notes payable

 

 

(36,648)

 

 

(76,929)

Loan procurement costs

 

 

(2,467)

 

 

(2,283)

Proceeds from issuance of common shares, net

 

 

136,151

 

 

136,663

Exercise of stock options

 

 

12,573

 

 

13,396

Contributions from noncontrolling interests in subsidiaries

 

 

4,447

 

 

178

Distributions paid to common shareholders

 

 

(111,466)

 

 

(79,706)

Distributions paid to preferred shareholders

 

 

(4,506)

 

 

(4,506)

Distributions paid to noncontrolling interests in Operating Partnership

 

 

(1,374)

 

 

(1,084)

Net cash provided by financing activities

 

$

295,222

 

$

75,529

Change in cash and cash equivalents

 

 

24,510

 

 

117

Cash and cash equivalents at beginning of period

 

 

62,869

 

 

2,901

Cash and cash equivalents at end of period

 

$

87,379

 

$

3,018

Supplemental Cash Flow and Noncash Information

 

 

 

 

 

 

Cash paid for interest, net of interest capitalized

 

$

38,110

 

$

35,567

Supplemental disclosure of noncash activities:

 

 

 

 

 

 

Restricted cash - acquisition of storage facilities

 

$

(22,019)

 

$

 —

Accretion of liability

 

$

23,393

 

$

11,421

Derivative valuation adjustment

 

$

1,752

 

$

206

Foreign currency translation adjustment

 

$

 —

 

$

(284)

Discount on issuance of unsecured senior notes

 

$

1,488

 

$

 —

Mortgage loan assumptions

 

$

41,513

 

$

2,695

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

11


 

Table of Contents

CUBESMART, L.P. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31,

 

 

    

2016

    

2015

 

 

 

(unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Storage facilities

 

$

3,968,754

 

$

3,467,032

 

Less: Accumulated depreciation

 

 

(685,771)

 

 

(594,049)

 

Storage facilities, net (including VIE assets of $194,167 and $136,274, respectively)

 

 

3,282,983

 

 

2,872,983

 

Cash and cash equivalents

 

 

87,379

 

 

62,869

 

Restricted cash

 

 

8,052

 

 

24,600

 

Loan procurement costs, net of amortization

 

 

2,313

 

 

2,800

 

Investment in real estate ventures, at equity

 

 

97,405

 

 

97,281

 

Other assets, net

 

 

41,067

 

 

43,631

 

Total assets

 

$

3,519,199

 

$

3,104,164

 

 

 

 

 

 

 

 

 

LIABILITIES AND CAPITAL

 

 

 

 

 

 

 

Unsecured senior notes, net

 

$

1,038,728

 

$

741,904

 

Revolving credit facility

 

 

 —

 

 

 —

 

Unsecured term loans, net

 

 

398,608

 

 

398,183

 

Mortgage loans and notes payable, net

 

 

115,393

 

 

111,455

 

Accounts payable, accrued expenses and other liabilities

 

 

93,854

 

 

85,034

 

Distributions payable

 

 

39,781

 

 

38,685

 

Deferred revenue

 

 

20,141

 

 

17,519

 

Security deposits

 

 

420

 

 

403

 

Total liabilities

 

 

1,706,925

 

 

1,393,183

 

 

 

 

 

 

 

 

 

Limited Partnership interests of third parties

 

 

60,541

 

 

66,128

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital

 

 

 

 

 

 

 

Operating Partner

 

 

1,749,418

 

 

1,648,305

 

Accumulated other comprehensive loss

 

 

(3,247)

 

 

(4,978)

 

Total CubeSmart, L.P. capital

 

 

1,746,171

 

 

1,643,327

 

Noncontrolling interests in subsidiaries

 

 

5,562

 

 

1,526

 

Total capital

 

 

1,751,733

 

 

1,644,853

 

Total liabilities and capital

 

$

3,519,199

 

$

3,104,164

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

12


 

Table of Contents

CUBESMART, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per common unit data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

 

2016

    

2015

    

2016

    

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

116,416

 

$

102,385

 

$

332,951

 

$

290,744

 

Other property related income

 

 

13,007

 

 

11,827

 

 

37,413

 

 

33,755

 

Property management fee income

 

 

2,673

 

 

1,758

 

 

7,129

 

 

5,030

 

Total revenues

 

 

132,096

 

 

115,970

 

 

377,493

 

 

329,529

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

41,805

 

 

39,297

 

 

123,631

 

 

114,938

 

Depreciation and amortization

 

 

41,827

 

 

38,744

 

 

122,631

 

 

114,725

 

General and administrative

 

 

8,065

 

 

7,002

 

 

24,184

 

 

21,289

 

Acquisition related costs

 

 

888

 

 

1,222

 

 

5,793

 

 

2,485

 

Total operating expenses

 

 

92,585

 

 

86,265

 

 

276,239

 

 

253,437

 

OPERATING INCOME

 

 

39,511

 

 

29,705

 

 

101,254

 

 

76,092

 

OTHER (EXPENSE) INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense on loans

 

 

(12,787)

 

 

(10,399)

 

 

(37,071)

 

 

(32,324)

 

Loan procurement amortization expense

 

 

(655)

 

 

(537)

 

 

(1,871)

 

 

(1,742)

 

Equity in (losses) earnings of real estate ventures

 

 

(581)

 

 

139

 

 

(1,817)

 

 

(199)

 

Other

 

 

(397)

 

 

(288)

 

 

834

 

 

(812)

 

Total other expense

 

 

(14,420)

 

 

(11,085)

 

 

(39,925)

 

 

(35,077)

 

NET INCOME

 

 

25,091

 

 

18,620

 

 

61,329

 

 

41,015

 

NET LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling interest in subsidiaries

 

 

76

 

 

41

 

 

411

 

 

56

 

NET INCOME ATTRIBUTABLE TO CUBESMART L.P.

 

 

25,167

 

 

18,661

 

 

61,740

 

 

41,071

 

Operating Partnership interests of third parties

 

 

(283)

 

 

(223)

 

 

(682)

 

 

(475)

 

NET INCOME ATTRIBUTABLE TO OPERATING PARTNER

 

 

24,884

 

 

18,438

 

 

61,058

 

 

40,596

 

Distribution to preferred unitholders

 

 

(1,502)

 

 

(1,502)

 

 

(4,506)

 

 

(4,506)

 

NET INCOME ATTRIBUTABLE TO COMMON UNITHOLDERS

 

$

23,382

 

$

16,936

 

$

56,552

 

$

36,090

 

 

    

 

    

 

 

    

 

 

    

 

 

    

 

Basic earnings per unit attributable to common unitholders

 

$

0.13

 

$

0.10

 

$

0.32

 

$

0.22

 

Diluted earnings per unit attributable to common unitholders

 

$

0.13

 

$

0.10

 

$

0.32

 

$

0.21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average basic units outstanding

 

 

179,223

 

 

169,304

 

 

177,639

 

 

167,177

 

Weighted-average diluted units outstanding

 

 

180,478

 

 

170,901

 

 

178,937

 

 

168,705

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

13


 

Table of Contents

CUBESMART, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

   

2016

    

2015

    

2016

    

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

25,091

 

$

18,620

 

$

61,329

 

$

41,015

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on interest rate swaps

 

 

458

 

 

(1,821)

 

 

(1,777)

 

 

(4,507)

 

Reclassification of realized losses on interest rate swaps

 

 

935

 

 

1,576

 

 

3,529

 

 

4,713

 

Unrealized loss on foreign currency translation

 

 

 —

 

 

(215)

 

 

 —

 

 

(284)

 

OTHER COMPREHENSIVE INCOME (LOSS)

 

 

1,393

 

 

(460)

 

 

1,752

 

 

(78)

 

COMPREHENSIVE INCOME

 

 

26,484

 

 

18,160

 

 

63,081

 

 

40,937

 

Comprehensive income attributable to Operating Partnership interests of third parties

 

 

(300)

 

 

(217)

 

 

(703)

 

 

(473)

 

Comprehensive loss attributable to noncontrolling interest in subsidiaries

 

 

76

 

 

49

 

 

411

 

 

67

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO OPERATING PARTNER

 

$

26,260

 

$

17,992

 

$

62,789

 

$

40,531

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

14


 

Table of Contents

CUBESMART, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CAPITAL

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

Operating

 

 

 

Number of OP Units

 

 

 

 

Accumulated Other

 

CubeSmart

 

Noncontrolling

 

 

 

 

Partnership

 

 

 

Outstanding

 

Operating

 

Comprehensive

 

L.P.

 

Interests in

 

Total

 

Interest

 

 

 

Common

 

Preferred

 

Partner

 

(Loss) Income

 

Capital

 

Subsidiaries

 

Capital

 

of Third Parties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2015

    

174,668

    

3,100

    

$

1,648,305

    

$

(4,978)

    

$

1,643,327

    

$

1,526

    

$

1,644,853

    

$

66,128

 

Contributions from noncontrolling interests in subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,447

 

 

4,447

 

 

 

 

Issuance of common OP units

 

4,408

 

 

 

 

136,150

 

 

 

 

 

136,150

 

 

 

 

 

136,150

 

 

 

 

Issuance of restricted OP units

 

123

 

 

 

 

1

 

 

 

 

 

1

 

 

 

 

 

1

 

 

 

 

Issuance of  OP Units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,500

 

Exercise of OP unit options

 

660

 

 

 

 

12,573

 

 

 

 

 

12,573

 

 

 

 

 

12,573

 

 

 

 

Amortization of restricted OP units

 

 

 

 

 

 

1,041

 

 

 

 

 

1,041

 

 

 

 

 

1,041

 

 

 

 

OP unit compensation expense

 

 

 

 

 

 

942

 

 

 

 

 

942

 

 

 

 

 

942

 

 

 

 

Adjustment for Limited Partnership interest of third parties

 

 

 

 

 

 

6,404

 

 

 

 

 

6,404

 

 

 

 

 

6,404

 

 

(6,404)

 

Net income (loss)

 

 

 

 

 

 

61,058

 

 

 

 

 

61,058

 

 

(411)

 

 

60,647

 

 

682

 

Other comprehensive income, net

 

 

 

 

 

 

 

 

 

1,731

 

 

1,731

 

 

 

 

 

1,731

 

 

21

 

Preferred OP unit distributions

 

 

 

 

 

 

(4,506)

 

 

 

 

 

(4,506)

 

 

 

 

 

(4,506)

 

 

 

 

Common OP unit distributions

 

 

 

 

 

 

(112,550)

 

 

 

 

 

(112,550)

 

 

 

 

 

(112,550)

 

 

(1,386)

 

Balance at September 30, 2016

 

179,859

 

3,100

 

$

1,749,418

 

$

(3,247)

 

$

1,746,171

 

$

5,562

 

$

1,751,733

 

$

60,541

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

Operating

 

 

 

Number of OP Units

 

 

 

 

Accumulated Other

 

CubeSmart

 

Noncontrolling

 

 

 

 

Partnership

 

 

 

Outstanding

 

Operating

 

Comprehensive

 

L.P.

 

Interests in

 

Total

 

Interest

 

 

 

Common

 

Preferred

 

Partner

 

Loss

 

Capital

 

Subsidiaries

 

Capital

 

of Third Parties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2014

    

163,957

    

3,100

    

$

1,456,785

    

$

(8,759)

    

$

1,448,026

    

$

1,592

    

$

1,449,618

    

$

49,823

 

Contributions from noncontrolling interests in subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

178

 

 

178

 

 

 

 

Issuance of common OP units

 

5,515

 

 

 

 

136,662

 

 

 

 

 

136,662

 

 

 

 

 

136,662

 

 

 

 

Issuance of restricted OP units

 

161

 

 

 

 

1

 

 

 

 

 

1

 

 

 

 

 

1

 

 

 

 

Issuance of OP units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

500

 

Conversion from units to shares

 

66

 

 

 

 

1,705

 

 

 

 

 

1,705

 

 

 

 

 

1,705

 

 

(1,705)

 

Exercise of OP unit options

 

1,228

 

 

 

 

13,396

 

 

 

 

 

13,396

 

 

 

 

 

13,396

 

 

 

 

Amortization of restricted OP units

 

 

 

 

 

 

509

 

 

 

 

 

509

 

 

 

 

 

509

 

 

 

 

OP unit compensation expense

 

 

 

 

 

 

741

 

 

 

 

 

741

 

 

 

 

 

741

 

 

 

 

Adjustment for Operating Partnership interest of third parties

 

 

 

 

 

 

(12,166)

 

 

 

 

 

(12,166)

 

 

 

 

 

(12,166)

 

 

12,166

 

Net income (loss)

 

 

 

 

 

 

40,596

 

 

 

 

 

40,596

 

 

(56)

 

 

40,540

 

 

475

 

Other comprehensive loss, net

 

 

 

 

 

 

 

 

 

(65)

 

 

(65)

 

 

(11)

 

 

(76)

 

 

(2)

 

Preferred OP unit distributions

 

 

 

 

 

 

(4,506)

 

 

 

 

 

(4,506)

 

 

 

 

 

(4,506)

 

 

 

 

Common OP unit distributions

 

 

 

 

 

 

(80,817)

 

 

 

 

 

(80,817)

 

 

 

 

 

(80,817)

 

 

(1,077)

 

Balance at September 30, 2015

 

170,927

 

3,100

 

$

1,552,906

 

$

(8,824)

 

$

1,544,082

 

$

1,703

 

$

1,545,785

 

$

60,180

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

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CUBESMART, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

    

2016

    

2015

Operating Activities

 

 

 

 

 

 

Net income

 

$

61,329

 

$

41,015

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

124,502

 

 

116,467

Equity in losses of real estate ventures

 

 

1,817

 

 

199

Equity compensation expense

 

 

1,983

 

 

1,250

Accretion of fair market value adjustment of debt

 

 

(913)

 

 

(1,173)

Changes in other operating accounts:

 

 

 

 

 

 

Restricted cash

 

 

404

 

 

507

Other assets

 

 

(6,833)

 

 

(3,277)

Accounts payable and accrued expenses

 

 

17,561

 

 

6,086

Other liabilities

 

 

1,571

 

 

1,417

Net cash provided by operating activities

 

$

201,421

 

$

162,491

Investing Activities

 

 

 

 

 

 

Acquisitions of storage facilities

 

 

(313,954)

 

 

(161,852)

Additions and improvements to storage facilities

 

 

(23,072)

 

 

(18,336)

Development costs

 

 

(134,136)

 

 

(58,399)

Investment in real estate ventures, at equity

 

 

(7,911)

 

 

 —

Cash distributed from real estate ventures

 

 

5,970

 

 

4,685

Fundings of notes receivable

 

 

 —

 

 

(4,100)

Change in restricted cash

 

 

970

 

 

99

Net cash used in investing activities

 

$

(472,133)

 

$

(237,903)

Financing Activities

 

 

 

 

 

 

Proceeds from:

 

 

 

 

 

 

Unsecured senior notes

 

 

298,512

 

 

 —

Revolving credit facility

 

 

830,000

 

 

671,800

Principal payments on:

 

 

 

 

 

 

Revolving credit facility

 

 

(830,000)

 

 

(582,000)

Mortgage loans and notes payable

 

 

(36,648)

 

 

(76,929)

Loan procurement costs

 

 

(2,467)

 

 

(2,283)

Proceeds from issuance of common OP units

 

 

136,151

 

 

136,663

Exercise of OP unit options

 

 

12,573

 

 

13,396

Contributions from noncontrolling interests in subsidiaries

 

 

4,447

 

 

178

Distributions paid to common OP unitholders

 

 

(112,840)

 

 

(80,790)

Distributions paid to preferred OP unitholders

 

 

(4,506)

 

 

(4,506)

Net cash provided by financing activities

 

$

295,222

 

$

75,529

Change in cash and cash equivalents

 

 

24,510

 

 

117

Cash and cash equivalents at beginning of period

 

 

62,869

 

 

2,901

Cash and cash equivalents at end of period

 

$

87,379

 

$

3,018

Supplemental Cash Flow and Noncash Information

 

 

 

 

 

 

Cash paid for interest, net of interest capitalized

 

$

38,110

 

$

35,567

Supplemental disclosure of noncash activities:

 

 

 

 

 

 

Restricted cash - acquisition of storage facilities

 

$

(22,019)

 

$

 —

Accretion of liability

 

$

23,393

 

$

11,421

Derivative valuation adjustment

 

$

1,752

 

$

206

Foreign currency translation adjustment

 

$

 —

 

$

(284)

Discount on issuance of unsecured senior notes

 

$

1,488

 

$

 —

Mortgage loan assumptions

 

$

41,513

 

$

2,695

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

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CUBESMART AND CUBESMART, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1. ORGANIZATION AND NATURE OF OPERATIONS

 

CubeSmart (the “Parent Company”) operates as a self-managed and self-administered real estate investment trust (“REIT”) with its operations conducted solely through CubeSmart, L.P. and its subsidiaries. CubeSmart, L.P., a Delaware limited partnership (the “Operating Partnership”), operates through an umbrella partnership structure, with the Parent Company, a Maryland REIT, as its sole general partner. In the notes to the consolidated financial statements, we use the terms “the Company”, “we” or “our” to refer to the Parent Company and the Operating Partnership together, unless the context indicates otherwise. As of September 30, 2016, the Company owned self-storage facilities located in 23 states throughout the United States and the District of Columbia that are presented under one reportable segment: the Company owns, operates, develops, manages and acquires self-storage facilities.

 

As of September 30, 2016, the Parent Company owned approximately 98.8% of the partnership interests (“OP Units”) of the Operating Partnership. The remaining OP Units, consisting exclusively of limited partner interests, are held by persons who contributed their interests in facilities to the Operating Partnership in exchange for OP Units. Under the partnership agreement, these persons have the right to tender their OP Units for redemption to the Operating Partnership at any time for cash equal to the fair value of an equivalent number of common shares of the Parent Company. In lieu of delivering cash, however, the Parent Company, as the Operating Partnership’s general partner, may, at its option, choose to acquire any OP Units so tendered by issuing common shares in exchange for the tendered OP Units. If the Parent Company so chooses, its common shares will be exchanged for OP Units on a one-for-one basis. This one-for-one exchange ratio is subject to adjustment to prevent dilution. With each such exchange or redemption, the Parent Company’s percentage ownership in the Operating Partnership will increase. In addition, whenever the Parent Company issues common or other classes of its shares, it contributes the net proceeds it receives from the issuance to the Operating Partnership and the Operating Partnership issues to the Parent Company an equal number of OP Units or other partnership interests having preferences and rights that mirror the preferences and rights of the shares issued. This structure is commonly referred to as an umbrella partnership REIT or “UPREIT”.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC regarding interim financial reporting and, in the opinion of each of the Parent Company’s and Operating Partnership’s respective management, include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of financial position, results of operations and cash flows for each respective company for the interim periods presented in accordance with generally accepted accounting principles in the United States (“GAAP”). Accordingly, readers of this Quarterly Report on Form 10-Q should refer to the Parent Company’s and the Operating Partnership’s audited financial statements prepared in accordance with GAAP, and the related notes thereto, for the year ended December 31, 2015, which are included in the Parent Company’s and the Operating Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015. The results of operations for the three and nine months ended September 30, 2016 and 2015 are not necessarily indicative of the results of operations to be expected for any future period or the full year.

 

The Company adopted Accounting Standard Update (“ASU“) No. 2015-02, Consolidation – Amendments to the Consolidation Analysis, as of January 1, 2016. The Company evaluated the application of this guidance and concluded that there were no changes to any previous conclusions with respect to consolidation accounting for any of its interests in less than wholly owned joint ventures. However, the Operating Partnership now meets the criteria as a variable interest entity. The Parent Company’s sole significant asset is its investment in the Operating Partnership. As a result, substantially all of the Parent Company’s assets and liabilities represent those assets and liabilities of the Operating Partnership. All of the Parent Company’s debt is an obligation of the Operating Partnership.

 

 

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Reclassifications

 

        During the first quarter of 2016, the Company adopted ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires the Company to reclassify debt financing costs, which were previously included in loan procurement costs, net of amortization on the Company’s consolidated balance sheets, and present them as a direct deduction from the carrying amount of the related debt liability. Net costs of $10.7 million have been reclassified in the December 31, 2015 consolidated balance sheets from the loan procurement costs line and netted against the related debt liability. See Recent Accounting Pronouncements below for revisions to the accounting guidance for debt issuance costs.

 

Recent Accounting Pronouncements

   

    In August 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-15 – Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The eight items that the ASU provides classification guidance on include (1) debt prepayment and extinguishment costs, (2) settlement of zero-coupon debt instruments, (3) contigent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (6) distributions received from equity method investments, (7) beneficial interests in securitization transactions, and (8) separately identifiable cash flows and application of the predominace principle. The standard is effective on January 1, 2018, however early adoption is permitted. The standard requires the use of the retrospective transition method. The Company is in the process of evaluating the impact of this new guidance.

 

    In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which is intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The new guidance allows for entities to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. In addition, the guidance allows employers to withhold shares to satisfy minimum statutory tax withholding requirements up to the employees’ maximum individual tax rate without causing the award to be classified as a liability. The guidance also stipulates that cash paid by an employer to a taxing authority when directly withholding shares for tax-withholding purposes should be classified as a financing activity on the statement of cash flows. The standard is effective on January 1, 2017, however early adoption is permitted.  The Company is currently assessing the impact of the adoption of ASU No. 2016-09 on the Company’s consolidated financial statements and related disclosures.

 

    In February 2016, the FASB issued ASU No. 2016-02 - Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either financing or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification.  Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The standard is effective on January 1, 2019, however early adoption is permitted.  The Company is currently assessing the impact of the adoption of ASU No. 2016-02 on the Company’s consolidated financial statements and related disclosures.

 

    In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which amends the current business combination guidance to require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, as opposed to having to revise prior period information.  The standard also requires additional disclosure about the impact on current-period income statement line items of adjustments that would have been recognized in prior periods if prior period information had been revised. The new standard became effective for the

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Company on January 1, 2016. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position or results of operations as there have been no measurement-period adjustments recorded.

 

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, an update to the accounting standard relating to the presentation of debt issuance costs. Under the new guidance, debt issuance costs related to a recognized debt liability will be presented on the balance sheet as a direct deduction from the debt liability. In the event that there is not an associated debt liability recorded in the consolidated financial statements, the debt issuance costs will continue to be recorded on the consolidated balance sheet as an asset until the debt liability is recorded.  The new standard became effective for the Company on January 1, 2016. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position or results of operations as the update only related to changes in financial statement presentation as discussed in note 7 and in “Reclassifications” above.

 

In February 2015, the FASB issued ASU No. 2015-02, Consolidation – Amendments to the Consolidation Analysis, which amends the current consolidation guidance affecting both the variable interest entity (“VIE”) and voting interest entity (“VOE”) consolidation models. The standard does not add or remove any of the characteristics in determining if an entity is a VIE or VOE, but rather enhances the way the Company assesses some of these characteristics. The new standard became effective for the Company on January 1, 2016. As discussed under Basis of Presentation above, the adoption of this guidance did not have a material impact on the Company’s consolidated financial position or results of operations as none of its existing consolidation conclusions were changed.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance under GAAP when it becomes effective. The new standard will be effective for the Company beginning on January 1, 2018, however early application beginning on January 1, 2017 is permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method. The Company is currently assessing the impact of the adoption of ASU No. 2014-09 on the Company’s consolidated financial statements and related disclosures.

 

3. STORAGE FACILITIES

 

The book value of the Company’s real estate assets is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2016

    

2015

 

 

 

(in thousands)

 

Land

 

$

658,077

 

$

588,503

 

Buildings and improvements

 

 

2,850,974

 

 

2,534,193

 

Equipment

 

 

269,829

 

 

243,442

 

Construction in progress

 

 

189,874

 

 

100,894

 

Storage facilities

 

 

3,968,754

 

 

3,467,032

 

Less Accumulated depreciation

 

 

(685,771)

 

 

(594,049)

 

Storage facilities, net

 

$

3,282,983

 

$

2,872,983

 

 

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The following table summarizes the Company’s acquisition and disposition activity from the period beginning on January 1, 2015 through September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

Number of

    

Purchase / Sale Price

 

Asset/Portfolio

 

Market

 

Transaction Date

 

Facilities

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

2016 Acquisitions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Metro DC Asset

 

Baltimore / DC

 

January 2016

 

1

 

$

21,000

 

Texas Assets

 

Texas Markets - Major

 

January 2016

 

2

 

 

24,800

 

New York Asset

 

New York / Northern NJ

 

January 2016

 

1

 

 

48,500

 

Texas Asset

 

Texas Markets - Major

 

January 2016

 

1

 

 

11,600

 

Connecticut Asset

 

Connecticut

 

February 2016

 

1

 

 

19,000

 

Texas Asset

 

Texas Markets - Major

 

March 2016

 

1

 

 

11,600

 

Florida Assets

 

Florida Markets - Other

 

March 2016

 

3

 

 

47,925

 

Colorado Asset

 

Denver

 

April 2016

 

1

 

 

11,350

 

Texas Asset

 

Texas Markets - Major

 

April 2016

 

1

 

 

11,600

 

Texas Asset

 

Texas Markets - Major

 

May 2016

 

1

 

 

10,100

 

Texas Asset

 

Texas Markets - Major

 

May 2016

 

1

 

 

10,800

 

Illinois Asset

 

Chicago

 

May 2016

 

1

 

 

12,350

 

Illinois Asset

 

Chicago

 

May 2016

 

1

 

 

16,000

 

Massachusetts Asset

 

Massachusetts

 

June 2016

 

1

 

 

14,300

 

Nevada Assets

 

Las Vegas

 

July 2016

 

2

 

 

23,200

 

Arizona Asset

 

Phoenix

 

August 2016

 

1

 

 

14,525

 

Minnesota Asset

 

Minneapolis

 

August 2016

 

1

 

 

15,150

 

Colorado Asset

 

Denver

 

August 2016

 

1

 

 

15,600

 

Texas Asset

 

Texas Markets - Major

 

September 2016

 

1

 

 

6,100

 

Texas Asset

 

Texas Markets - Major

 

September 2016

 

1

 

 

5,300

 

 

 

 

 

 

 

24

 

$

350,800

 

 

 

 

 

 

 

 

 

 

 

 

2015 Acquisitions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Texas Asset

 

Texas Markets - Major

 

February 2015

 

1

 

$

7,295

 

HSRE Assets

 

Chicago

 

March 2015

 

4

 

 

27,500

 

Arizona Asset

 

Arizona / Las Vegas

 

March 2015

 

1

 

 

7,900

 

Tennessee Asset

 

Tennessee

 

March 2015

 

1

 

 

6,575

 

Texas Asset

 

Texas Markets - Major

 

April 2015

 

1

 

 

15,795

 

Florida Asset

 

Florida Markets - Other

 

May 2015

 

1

 

 

7,300

 

Arizona Asset

 

Arizona / Las Vegas

 

June 2015

 

1

 

 

10,100

 

Florida Asset

 

Florida Markets - Other

 

June 2015

 

1

 

 

10,500

 

Texas Asset

 

Texas Markets - Major

 

July 2015

 

1

 

 

14,200

 

Maryland Asset

 

Baltimore / DC

 

July 2015

 

1

 

 

17,000

 

Maryland Asset

 

Baltimore / DC

 

July 2015

 

1

 

 

19,200

 

New York/New Jersey Assets

 

New York / Northern NJ

 

August 2015

 

2

 

 

24,823

 

New Jersey Asset

 

New York / Northern NJ

 

December 2015

 

1

 

 

14,350

 

PSI Assets

 

Various (see note 4)

 

December 2015

 

12

 

 

109,824

 

 

 

 

 

 

 

29

 

$

292,362

 

 

 

 

 

 

 

 

 

 

 

 

2015 Dispositions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Texas Assets

 

Texas Markets - Major

 

October 2015

 

7

 

$

28,000

 

Florida Asset

 

Florida Markets - Other

 

October 2015

 

1

 

 

9,800

 

 

 

 

 

 

 

8

 

$

37,800

 

 

 

 

 

 

 

 

 

 

 

4. INVESTMENT ACTIVITY

 

2016 Acquisitions

 

During the nine months ended September 30, 2016, the Company acquired 24 self-storage facilities, including three facilities upon completion of construction and the issuance of a certificate of occupancy, located throughout the United States for an aggregate purchase price of approximately $350.8 million. In connection with these acquisitions, the Company allocated a portion of the purchase price to the intangible value of in-place leases, which totaled $15.0 million at the time of the acquisition and prior to any amortization of such amounts. The estimated life of these in-place leases was 12 months, and the amortization expense that was recognized during the nine months ended September 30, 2016 was approximately $6.1 million. In connection with one of the acquired facilities, the Company assumed mortgage debt that was recorded at a fair value of $6.5 million, which fair value includes an outstanding principal balance totaling $6.3 million and a net premium of $0.2 million to reflect the estimated fair value of the debt at the time of assumption.

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As final information regarding fair value of the assets acquired and liabilities assumed is received and estimates are refined, appropriate adjustments, if necessary, will be made to the purchase price allocation, in no case later than twelve months of the acquisition date. There have been no adjustments made to the purchase price allocation of assets acquired and liabilities assumed during 2015 and 2016.

 

As of September 30, 2016, the Company was under contract and had made aggregate deposits of $1.5 million associated with three facilities under construction for a total purchase price of $43.3 million. In connection with one of the facilities, the Company provided a $4.1 million loan, which was repaid to the Company in full in December 2015, for the purpose of acquiring the premises on which the facility will be built. The deposits are reflected in Other assets, net on the Company’s consolidated balance sheets. The purchase of these three facilities is expected to occur by the fourth quarter of 2017 after the completion of construction and the issuance of a certificate of occupancy. These acquisitions are subject to due diligence and other customary closing conditions and no assurance can be provided that these acquisitions will be completed on the terms described, or at all.

 

2015 Acquisitions

 

On December 15, 2015, the Company acquired all of the issued and outstanding uncertificated shares of common stock of a privately held self-storage REIT (“PSI”) for $115.8 million. As of the date of the acquisition, PSI owned real property consisting of 12 fully operational self-storage facilities which were acquired for $109.8 million, and one self-storage facility that remains under construction, which was acquired for $6.0 million (the “PSI Assets”). The PSI Assets are located in Arizona, Florida, Georgia, Massachusetts, New York, North Carolina, Tennessee, and Texas. In connection with this acquisition, the Company allocated a portion of the purchase price to the intangible value of in-place leases, which totaled $6.7 million at the time of the acquisition and prior to any amortization of such amounts. The estimated life of these in-place leases was 12 months, and the amortization expense that was recognized during the nine months ended September 30, 2016 was approximately $5.0 million.

 

During 2014, the Operating Partnership entered into an Agreement for Purchase and Sale with certain limited liability companies controlled by HSRE REIT I and HSRE REIT II, both Maryland real estate investment trusts, to acquire (the “HSRE Acquisition”) 26 self-storage facilities for an aggregate purchase price of $223.0 million plus customary closing costs. During 2014, the Company closed on the first tranche of 22 facilities comprising the HSRE Acquisition for an aggregate purchase price of $195.5 million. On March 18, 2015, the Company closed on the second tranche of the remaining four self-storage facilities comprising the HSRE Acquisition, for an aggregate purchase price of $27.5 million. The four facilities purchased in the second tranche are located in Illinois. In connection with this acquisition, the Company allocated a portion of the purchase price to the intangible value of in-place leases, which aggregated to $2.7 million at the time of the acquisition and prior to any amortization of such amounts. The estimated life of these in-place leases was 12 months, and the amortization expense that was recognized during the nine months ended September 30, 2016 was approximately $0.7 million. 

 

During the year ended December 31, 2015, the Company acquired 13 additional self-storage facilities, including one facility upon completion of construction and the issuance of a certificate of occupancy, located throughout the United States for an aggregate purchase price of approximately $155.0 million. In connection with these acquisitions, the Company allocated a portion of the purchase price to the tangible and intangible assets acquired based on fair value. Intangible assets consist of in-place leases, which aggregated $10.7 million at the time of the acquisitions and prior to any amortization of such amounts. The estimated life of these in-place leases was 12 months, and the amortization expense that was recognized during the nine months ended September 30, 2016 was approximately $5.8 million. In connection with one of the acquired facilities, the Company assumed mortgage debt that was recorded at a fair value of $2.7 million, which fair value includes an outstanding principal balance totaling $2.5 million and a net premium of $0.2 million to reflect the estimated fair value of the debt at the time of assumption.

 

2015 Dispositions 

   

On October 8, 2015, the Company sold seven assets in Texas and one asset in Florida for an aggregate sales price of approximately $37.8 million. In connection with these sales, the Company recorded gains that totaled $14.4 million. The

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proceeds from these sales were held in escrow to fund future acquisitions under a tax free like kind exchange. The total net proceeds of $36.4 million were subsequently applied to three separate acquisitions, of which one closed in December 2015 and two closed in January 2016.

   

On October 2, 2015, USIFB, LLP (“USIFB”), a consolidated real estate joint venture in which the Company owned a 97% interest, sold its remaining asset in London, England, for an aggregate sales price of £6.5 million (approximately $9.9 million). In connection with the sale, the Company recorded a gain of $3.0 million net of a foreign currency translation loss of $1.2 million.

 

Development

 

As of September 30, 2016, the Company had five contracts through joint ventures for the construction of five self-storage facilities located in New York (see note 12). As part of the acquisition of the PSI Assets, the Company also acquired a self-storage facility that is under construction in North Palm Beach, FL. Additionally, during the second quarter of 2016, the Company issued 61,224 OP Units, valued at approximately $1.5 million, to pay the remaining consideration on its self-storage facility that is under construction in Washington, D.C. and was previously owned by a joint venture.  Construction for all projects is expected to be completed by the fourth quarter of 2018. As of September 30, 2016, development costs for these projects totaled $161.3 million. Total construction costs for these projects are expected to be $312.4 million. These costs are capitalized to construction in progress while the projects are under development and are reflected in Storage facilities on the Company’s consolidated balance sheets.

 

During the second quarter of 2016, the Company, through a joint venture in which the Company owned a 51% interest, completed the construction, and opened for operation, a self-storage facility located in Bronx, NY. Total costs for this project were $32.2 million. These costs are capitalized to land, building, and improvements as well as equipment and are reflected in Storage facilities on the Company’s consolidated balance sheets. On August 12, 2016, the noncontrolling member put its 49% ownership interest in the venture to the Company for $17.0 million.

 

During the first quarter of 2016, the Company, through a joint venture in which the Company owned a 51% interest, completed the construction, and opened for operation, a self-storage facility located in Queens, NY. Total costs for this project were $31.8 million. These costs are capitalized to land, building, and improvements as well as equipment and are reflected in Storage facilities on the Company’s consolidated balance sheets. On April 5, 2016, the noncontrolling member put its 49% ownership interest in the venture to the Company for $12.5 million.

 

During the fourth quarter of 2015, the Company, through two separate joint ventures in which the Company owns a 90% interest in each, completed the construction of two self-storage facilities located in Brooklyn, NY and the facilities opened for operation. Total costs for these projects were $32.2 million in aggregate. These costs are capitalized to land, building, and improvements as well as equipment and are reflected in Storage facilities on the Company’s consolidated balance sheets.

   

During the second quarter of 2015, the Company, through a joint venture in which the Company owns a 90% interest, completed the construction, and opened for operation, a self-storage facility located in Arlington, VA. Total costs for this project were $17.1 million. These costs are capitalized to land, building, and improvements as well as equipment and are reflected in Storage facilities on the Company’s consolidated balance sheets.

 

The following table summarizes the Company’s revenue and earnings associated with the 2016 and 2015 acquisitions from the respective acquisition dates, included in the consolidated statements of operations for the three and nine months ended September 30, 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

    

2016

    

2015

 

2016

    

2015

 

 

 

(in thousands)

 

Total revenue

 

$

4,765

 

$

3,157

 

$

9,163

 

$

4,901

 

Net loss

 

 

(3,354)

 

 

(2,048)

 

 

(7,330)

 

 

(3,172)

 

 

 

 

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5. INVESTMENT IN UNCONSOLIDATED REAL ESTATE VENTURES

 

During the fourth quarter of 2015, the Company invested a 10% ownership interest in a newly-formed joint venture (“HVP”) that agreed to acquire a property portfolio comprised of 37 self-storage facilities located in Michigan (17), Tennessee (10), Massachusetts (7), and Florida (3). HVP paid $242.5 million for these 37 facilities, of which $18.9 million was allocated to the value of the in-place lease intangible. HVP acquired 30 of the facilities on December 8, 2015 for $193.7 million, one of the facilities on January 26, 2016 for $5.7 million, five of the facilities on April 21, 2016 for $36.1 million, and one of the facilities on June 15, 2016 for $7.0 million. In connection with six of the acquired facilities, HVP assumed mortgage debt that was recorded at a fair value of $25.3 million, which includes an outstanding principal balance totaling $23.7 million and a net premium of $1.6 million to reflect the estimated fair value of the debt at the time of assumption. The remainder of the purchase price was funded through advances totaling $116.0 million on the venture’s $122.0 million loan facility and amounts contributed pro-rata by the Company and its unaffiliated joint venture partner. The Company’s total contribution to HVP related to this portfolio acquisition was $10.7 million. The loan facility bears interest at LIBOR plus 2.00% per annum and matures on December 7, 2018 with options to extend the maturity date through December 7, 2020, subject to satisfaction of certain conditions and payment of the extension fees as stipulated in the loan agreement.

 

During the first quarter of 2016, HVP agreed to acquire a property portfolio comprised of 31 self-storage facilities located in South Carolina (22), Georgia (5), and North Carolina (4) that were previously managed by the Company for $115.5 million. HVP acquired 30 of the facilities on March 30, 2016 for $112.8 million, of which $10.3 million was allocated to the value of the in-place lease intangible. The remaining property is under contract to be acquired subsequent to September 30, 2016. In conjunction with the acquisition, HVP refinanced its existing loan facility by entering into an increased amended and restated loan facility not to exceed $185.5 million. The acquisition was funded primarily through an advance totaling $61.8 million on the venture’s amended and restated loan facility. The remainder of the purchase price was contributed pro-rata by the Company and its unaffiliated joint venture partner. The Company’s total contribution to HVP related to this portfolio acquisition was $5.3 million, bringing its total investment in HVP to $16.0 million as of September 30, 2016. The amended and restated loan facility bears interest at LIBOR plus 2.00% per annum. The initial maturity date was extended to March 30, 2019 with options to extend through March 30, 2021, subject to satisfaction of certain conditions and payment of the extension fees as stipulated in the amended and restated loan agreement.

 

On December 10, 2013, the Company invested a 50% ownership interest in a newly-formed joint venture (“HHF”) that acquired 35 self-storage facilities located in Texas (34) and North Carolina (1). HHF paid $315.7 million for these facilities, of which $12.1 million was allocated to the value of the in-place lease intangible. The Company and the unaffiliated joint venture partner, collectively the “HHF Partners”, each contributed cash equal to 50% of the capital required to fund the acquisition. On May 1, 2014, HHF obtained a $100.0 million loan secured by the 34 self-storage facilities located in Texas that are owned by the venture. There is no recourse to the Company, subject to customary exceptions to non-recourse provisions. The loan bears interest at 3.59% per annum and matures on April 30, 2021. This financing completed the planned capital structure of HHF and proceeds (net of closing costs) of $99.2 million were distributed proportionately to the partners.

 

Based upon the facts and circumstances at formation of HVP and HHF, the Company determined that neither entity is a VIE in accordance with the accounting standard for the consolidation of VIEs. As a result, the Company used the voting interest model under the accounting standard for consolidation in order to determine whether to consolidate HVP and HHF. Based upon each member's substantive participating rights over the activities of each entity as stipulated in the operating agreements, HVP and HHF are not consolidated by the Company and are accounted for under the equity method of accounting. The Company’s investments in HVP and HHF are included in Investment in real estate ventures, at equity on the Company’s consolidated balance sheets and the Company’s earnings from its investments in HVP and HHF are presented in Equity in losses of real estate ventures on the Company’s consolidated statements of operations.

 

The amounts reflected in the following table are based on the historical financial information of the real estate ventures.

 

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The following is a summary of the financial position of the HVP and HHF ventures as of September 30, 2016 and December 31, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2016

 

2015

 

Assets

 

 

 

 

 

 

 

Storage facilities, net

 

$

589,182

 

$

456,452

 

Other assets

 

 

18,829

 

 

17,536

 

Total assets

 

$

608,011

 

$

473,988

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

Other liabilities

 

$

8,406

 

$

4,470

 

Debt

 

 

300,006

 

 

210,525

 

Equity

 

 

 

 

 

 

 

CubeSmart

 

 

97,405

 

 

97,281

 

Joint venture partners

 

 

202,194

 

 

161,712

 

Total liabilities and equity

 

$

608,011

 

$

473,988

 

 

The following is a summary of results of operations of HVP and HHF for the three and nine months ended September 30, 2016 and 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

 

    

2016

    

2015

    

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

17,919

 

$

7,821

 

$

46,902

 

$

22,346

 

 

Operating expenses

 

 

7,098

 

 

3,045

 

 

20,958

 

 

9,272

 

 

Interest expense, net

 

 

2,506

 

 

931

 

 

6,831

 

 

2,793

 

 

Depreciation and amortization

 

 

14,960

 

 

3,567

 

 

39,147

 

 

10,679

 

 

Net (loss) income

 

$

(6,645)

 

$

278

 

$

(20,034)

 

$

(398)

 

 

Company’s share of net (loss) income

 

$

(581)

 

$

139

 

$

(1,817)

 

$

(199)

 

 

 

 

 

 

6. UNSECURED SENIOR NOTES

 

The Company’s unsecured senior notes are summarized as follows (collectively referred to as the “Senior Notes”):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

    

Effective

    

Issuance

 

Maturity

 

Unsecured Senior Notes

    

2016

    

2015

    

Interest Rate

    

Date

 

Date

 

 

 

(in thousands)

 

 

 

 

 

 

 

$250M 4.800% Guaranteed Notes due 2022

 

$

250,000

 

$

250,000

 

4.82

%  

Jun-12

 

Jul-22

 

$250M 4.375% Guaranteed Notes due 2023

 

 

250,000

 

 

250,000

 

4.50

%  

Dec-13

 

Dec-23

 

$250M 4.000% Guaranteed Notes due 2025

 

 

250,000

 

 

250,000

 

4.03

%  

Oct-15

 

Nov-25

 

$300M 3.125% Guaranteed Notes due 2026

 

 

300,000

 

 

 —

 

3.18

%  

Aug-16

 

Sep-26

 

Principal balance outstanding

 

 

1,050,000

 

 

750,000

 

 

 

 

 

 

 

Less: Discount on issuance of unsecured senior  notes, net

 

 

(4,099)

 

 

(2,888)

 

 

 

 

 

 

 

Less: Loan procurement costs, net

 

 

(7,173)

 

 

(5,208)

 

 

 

 

 

 

 

Total unsecured senior notes, net

 

$

1,038,728

 

$

741,904

 

 

 

 

 

 

 

 

The indenture under which the Senior Notes were issued restricts the ability of the Operating Partnership and its subsidiaries to incur debt unless the Operating Partnership and its consolidated subsidiaries comply with a leverage ratio not to exceed 60% and an interest coverage ratio of more than 1.5:1 after giving effect to the incurrence of the debt. The indenture also restricts the ability of the Operating Partnership and its subsidiaries to incur secured debt unless the Operating Partnership and its consolidated subsidiaries comply with a secured debt leverage ratio not to exceed 40% after giving effect to the incurrence of the debt. The indenture also contains other financial and customary covenants, including a covenant not to own unencumbered assets with a value less than 150% of the unsecured indebtedness of the

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Operating Partnership and its consolidated subsidiaries. As of September 30, 2016, the Operating Partnership was in compliance with all of the financial covenants under the Senior Notes. 

 

7. REVOLVING CREDIT FACILITY AND UNSECURED TERM LOANS

 

On June 20, 2011, the Company entered into an unsecured term loan agreement (the “Term Loan Facility”) which consisted of a $100.0 million term loan with a five-year maturity (“Term Loan A”) and a $100.0 million term loan with a seven-year maturity (“Term Loan B”). On December 9, 2011, the Company entered into a credit facility (the “Credit Facility”) comprised of a $100.0 million unsecured term loan maturing in December 2014 (“Term Loan C”); a $200.0 million unsecured term loan maturing in March 2017 (“Term Loan D”); and a $300.0 million unsecured revolving facility maturing in December 2015 (“Revolver”).

 

On June 18, 2013, the Company amended both the Term Loan Facility and Credit Facility. With respect to the Term Loan Facility, among other things, the amendment extended the maturity date to June 2018 and decreased the pricing of Term Loan A, while Term Loan B remained unchanged by the amendment. With respect to the Credit Facility, among other things, the amendment extended the maturity date to January 2019 and decreased the pricing of Term Loan D. On August 5, 2014, the Company further amended the Term Loan Facility to extend the maturity date to January 2020 and decrease the pricing of Term Loan B. On December 17, 2013, the Company repaid the $100.0 million balance under Term Loan C that was scheduled to mature in December 2014.

 

Pricing on the Term Loan Facility depends on the Company’s unsecured debt credit ratings. At the Company’s current Baa2/BBB level, amounts drawn under Term Loan A are priced at 1.30% over LIBOR, while amounts drawn under Term Loan B are priced at 1.15% over LIBOR.

 

On April 22, 2015, the Company further amended its Credit Facility with respect to the Revolver. Among other things, the amendment increased the aggregate amount of the Revolver from $300.0 million to $500.0 million, decreased the facility fee from 0.20% to 0.15% and extended the maturity date to April 22, 2020.

 

Pricing on the Credit Facility depends on the Company’s unsecured debt credit ratings. At the Company’s current Baa2/BBB level, amounts drawn under the Revolver are priced at 1.25% over LIBOR, inclusive of a facility fee of 0.15%, while amounts drawn under Term Loan D are priced at 1.30% over LIBOR.

 

The Company incurred costs of $2.3 million in 2015 in connection with amending the Credit Facility and capitalized such costs as a component of loan procurement costs, net of amortization on the consolidated balance sheets.  Additionally, in connection with the amendment, $0.1 million of unamortized costs were written-off. All remaining unamortized costs, along with costs incurred in connection with the amendment, are amortized as an adjustment to interest expense over the remaining term of the modified facilities.

 

During the first quarter of 2016, the Company adopted ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires the Company to reclassify debt financing costs, which were previously included in loan procurement costs, net of amortization on the Company’s consolidated balance sheets, and present them as a direct deduction from the carrying amount of the related debt liability. As of September 30, 2016 and December, 31, 2015, unsecured term loans are presented net of unamortized loan procurement costs of $1.4 million and $1.8 million, respectively, on the consolidated balance sheets. Deferred financing costs associated with the Revolver remain in loan procurement costs, net of amortization on the Company’s consolidated balance sheets.

 

As of September 30, 2016, $200.0 million of unsecured term loan borrowings were outstanding under the Term Loan Facility, $200.0 million of unsecured term loan borrowings were outstanding under the Credit Facility, and $499.3 million was available for borrowing under the unsecured revolving portion of the Credit Facility. The available balance under the unsecured revolving portion of the Credit Facility is reduced by an outstanding letter of credit of $0.7 million. In connection with a portion of the unsecured borrowings, the Company had interest rate swaps as of September 30, 2016 that fix 30-day LIBOR (see note 10). As of September 30, 2016, borrowings under the Credit Facility and Term Loan Facility, as amended and after giving effect to the interest rate swaps, had an effective weighted average interest rate of 2.68%.

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The Term Loan Facility and the term loan under the Credit Facility were fully drawn at September 30, 2016 and no further borrowings may be made under the term loans. The Company’s ability to borrow under the revolving portion of the Credit Facility is subject to ongoing compliance with certain financial covenants which include:

 

·

Maximum total indebtedness to total asset value of 60.0% at any time;

 

·

Minimum fixed charge coverage ratio of 1.50:1.00; and

 

·

Minimum tangible net worth of $821,211,200 plus 75% of net proceeds from equity issuances after June 30, 2010.

 

Further, under the Credit Facility and Term Loan Facility, the Company is restricted from paying distributions on the Parent Company’s common shares in excess of the greater of (i) 95% of funds from operations, and (ii) such amount as may be necessary to maintain the Parent Company’s REIT status.

 

As of September 30, 2016, the Company was in compliance with all of its financial covenants and anticipates being in compliance with all of its financial covenants through the terms of the Credit Facility and Term Loan Facility.

 

8. MORTGAGE LOANS AND NOTES PAYABLE

 

The Company’s mortgage loans and notes payable are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying Value as of:

 

 

 

 

 

 

    

September 30, 

    

December 31, 

    

Effective

    

Maturity

 

Mortgage Loans and Notes Payable

    

2016

    

2015

    

Interest Rate

    

Date

 

 

 

(in thousands)

 

 

 

 

 

YSI 59

 

$

 —

 

$

9,012

 

4.82

%  

Mar-16

 

YSI 60

 

 

 —

 

 

3,546

 

5.04

%  

Aug-16

 

YSI 51

 

 

 —

 

 

6,984

 

5.15

%  

Sep-16

 

YSI 64

 

 

 —

 

 

7,781

 

3.54

%  

Oct-16

 

YSI 62

 

 

 —

 

 

7,835

 

3.54

%  

Dec-16

 

YSI 67

 

 

6,254

 

 

 —

 

2.55

%  

Mar-17

 

YSI 33

 

 

9,935

 

 

10,154

 

6.42

%  

Jul-19

 

YSI 26

 

 

8,470

 

 

8,606

 

4.56

%  

Nov-20

 

YSI 57

 

 

2,974

 

 

3,021

 

4.61

%  

Nov-20

 

YSI 55

 

 

23,060

 

 

23,369

 

4.85

%  

Jun-21

 

YSI 24

 

 

26,650

 

 

27,185

 

4.64

%  

Jun-21

 

YSI 65

 

 

2,468

 

 

2,500

 

3.85

%  

Jun-23

 

YSI 66

 

 

32,386

 

 

 —

 

3.51

%  

Jun-23

 

Principal balance outstanding

 

 

112,197

 

 

109,993

 

 

 

 

 

Plus: Unamortized fair value adjustment

 

 

3,967

 

 

2,219

 

 

 

 

 

Less: Loan procurement costs, net

 

 

(771)

 

 

(757)

 

 

 

 

 

Total mortgage loans and notes payable, net

 

$

115,393

 

$

111,455

 

 

 

 

 

 

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As of September 30, 2016 and December 31, 2015, the Company’s mortgage loans payable were secured by certain of its self-storage facilities with net book values of approximately $209.5 million and $195.4 million, respectively. The following table represents the future principal payment requirements on the outstanding mortgage loans and notes payable as of September 30, 2016 (in thousands):

 

 

 

 

 

2016

    

$

612

2017

 

 

8,576

2018

 

 

2,490

2019

 

 

11,485

2020

 

 

12,615

2021 and thereafter

 

 

76,419

Total mortgage payments

 

 

112,197

Plus: Unamortized fair value adjustment

 

 

3,967

Less: Loan procurement costs, net

 

 

(771)

Total mortgage indebtedness

 

$

115,393

 

 

 

 

 

 

9. ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The following table summarizes the changes in accumulated other comprehensive loss by component for the nine months ended September 30, 2016 (in thousands):

 

 

 

 

 

 

    

Unrealized losses

 

 

 

on interest rate

 

 

 

swaps

 

 

 

 

 

 

Other comprehensive loss before reclassifications

 

$

(1,755)

 

Amounts reclassified from accumulated other comprehensive loss

 

 

3,486

 

Net current-period other comprehensive income

 

 

1,731

 

Balance at December 31, 2015

 

 

(4,978)

 

Balance at September 30, 2016

 

$

(3,247)

 


(a)

See note 10 for additional information about the effects of the amounts reclassified.

 

10. RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS

 

The Company’s use of derivative instruments is limited to the utilization of interest rate swap agreements or other instruments to manage interest rate risk exposures and not for speculative purposes. The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company’s operating and financial structure, as well as to hedge specific transactions. The counterparties to these arrangements are major financial institutions with which the Company and its subsidiaries may also have other financial relationships. The Company is potentially exposed to credit loss in the event of non-performance by these counterparties. However, because of the high credit ratings of the counterparties, the Company does not anticipate that any of the counterparties will fail to meet these obligations as they come due. The Company does not hedge credit or property value market risks.

 

The Company has entered into interest rate swap agreements that qualify and are designated as cash flow hedges designed to reduce the impact of interest rate changes on its 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 loss. 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.

 

The Company formally assesses, both at inception of a hedge and on an on-going basis, whether each derivative is highly-effective in offsetting changes in cash flows of the hedged item. If management determines that a derivative is

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highly-effective as a hedge, then the Company accounts for the derivative using hedge accounting, pursuant to which gains or losses inherent in the derivative do not impact the Company’s results of operations. If management determines that a derivative is not highly-effective as a hedge or if a derivative ceases to be a highly-effective hedge, the Company will discontinue hedge accounting prospectively and will reflect in its statement of operations realized and unrealized gains and losses in respect of the derivative.

 

The following table summarizes the terms and fair values of the Company’s derivative financial instruments as of September 30, 2016 and December 31, 2015, respectively (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedge

 

Hedge

 

Notional Amount

 

 

 

 

 

 

 

Fair Value

 

Product

 

Type (a)

 

September 30, 2016

   

December 31, 2015

  

Strike

    

Effective Date

    

Maturity

    

September 30, 2016

    

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Swap

 

Cash flow

 

$

 —

 

$

40,000

 

1.8025

%  

6/20/2011

 

6/20/2016

 

$

 —

 

$

(243)

 

Swap

 

Cash flow

 

 

 —

 

 

40,000

 

1.8025

%  

6/20/2011

 

6/20/2016

 

 

 —

 

 

(243)

 

Swap

 

Cash flow

 

 

 —

 

 

20,000

 

1.8025

%  

6/20/2011

 

6/20/2016

 

 

 —

 

 

(122)

 

Swap

 

Cash flow

 

 

75,000

 

 

75,000

 

1.3360

%  

12/30/2011

 

3/31/2017

 

 

(273)

 

 

(540)

 

Swap

 

Cash flow

 

 

50,000

 

 

50,000

 

1.3360

%  

12/30/2011

 

3/31/2017

 

 

(182)

 

 

(360)

 

Swap

 

Cash flow

 

 

50,000

 

 

50,000

 

1.3360

%  

12/30/2011

 

3/31/2017

 

 

(182)

 

 

(360)

 

Swap

 

Cash flow

 

 

25,000

 

 

25,000

 

1.3375

%  

12/30/2011

 

3/31/2017

 

 

(91)

 

 

(180)

 

Swap

 

Cash flow

 

 

40,000

 

 

40,000

 

2.4590

%  

6/20/2011

 

6/20/2018

 

 

(1,180)

 

 

(1,350)

 

Swap

 

Cash flow

 

 

40,000

 

 

40,000

 

2.4725

%  

6/20/2011

 

6/20/2018

 

 

(1,189)

 

 

(1,364)

 

Swap

 

Cash flow

 

 

20,000

 

 

20,000

 

2.4750

%  

6/20/2011

 

6/20/2018

 

 

(596)

 

 

(683)

 

 

 

 

 

$

300,000

 

$

400,000

 

 

 

 

 

 

 

$

(3,693)

 

$

(5,445)

 


(a)

Hedging unsecured variable rate debt by fixing 30-day LIBOR.

 

The Company measures its derivative instruments at fair value and records them in the balance sheet as either an asset or liability. As of September 30, 2016 and December 31, 2015, all derivative instruments were included in accounts payable, accrued expenses and other liabilities in the accompanying consolidated balance sheets. The effective portions of changes in the fair value of the derivatives are reported in accumulated other comprehensive income (loss). Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. The change in unrealized loss on interest rate swap reflects a reclassification of $3.5 million of unrealized losses from accumulated other comprehensive loss as an increase to interest expense during the nine months ended September 30, 2016.  The Company estimates that $2.5 million will be reclassified as an increase to interest expense within the next 12 months.

 

11. FAIR VALUE MEASUREMENTS

 

The Company applies the methods of determining fair value as described in authoritative guidance, to value its financial assets and liabilities. As defined in the guidance, fair value is based on the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, the guidance establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

 

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

 

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

 

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

 

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In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs, to the extent possible, as well as considering counterparty credit risk in its assessment of fair value.

 

Financial assets and liabilities carried at fair value as of September 30, 2016 are classified in the table below in one of the three categories described above (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Level 1

    

Level 2

    

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Swap Derivative Liabilities

 

$

 —

 

$

3,693

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities at fair value

 

$

 —

 

$

3,693

 

$

 —

 

 

Financial assets and liabilities carried at fair value as of December 31, 2015 are classified in the table below in one of the three categories described above (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Level 1

    

Level 2

    

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Swap Derivative Liabilities

 

$

 

$

5,445

 

$

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities at fair value

 

$

 

$

5,445

 

$

 

 

Financial assets and liabilities carried at fair value were classified as Level 2 inputs. For financial liabilities that utilize Level 2 inputs, the Company utilizes both direct and indirect observable price quotes, including LIBOR yield curves, bank price quotes for forward starting swaps, NYMEX futures pricing and common stock price quotes. Below is a summary of valuation techniques for Level 2 financial liabilities:

 

·

Interest rate swap derivative assets and liabilities – valued using LIBOR yield curves at the reporting date. Counterparties to these contracts are most often highly rated financial institutions, none of which experienced any significant downgrades in 2016 that would reduce the amount owed by the Company. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with the Company’s derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and the counterparties. However, as of September 30, 2016, the Company has assessed the significance of the effect of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

 

The fair values of financial instruments, including cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate their respective carrying values at September 30, 2016 and December 31, 2015. The aggregate carrying value of the Company’s debt was $1.6 billion and $1.3 billion at September 30, 2016 and December 31, 2015, respectively. The estimated fair value of the Company’s debt was $1.7 billion and $1.3 billion at September 30, 2016 and December 31, 2015, respectively. These estimates were based on a discounted cash flow analysis assuming market interest rates for comparable obligations at September 30, 2016 and December 31, 2015. The Company estimates the fair value of its fixed rate debt and the credit spreads over variable market rates on its variable rate debt by discounting the future cash flows of each instrument at estimated market rates or credit spreads consistent with the maturity of the debt obligation with similar credit policies, which is classified within level 2 of the fair value hierarchy. Rates and credit spreads take into consideration general market conditions and maturity.

 

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12. NONCONTROLLING INTERESTS

 

Interests in Consolidated Real Estate Joint Ventures

 

Noncontrolling interests in subsidiaries represent the ownership interests of third parties in the Company’s  consolidated real estate ventures. The Company has determined that these ventures are variable interest entities, and that the Company is the primary beneficiary. Accordingly, the Company consolidates the assets, liabilities, and results of operations of the real estate ventures in the table below (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Date Opened /

 

CubeSmart

 

 

 

 

 

 

 

 

 

Number of

 

 

 

Estimated

 

Ownership

 

September 30, 2016

 

Development Ventures

    

Facilities

    

Location

    

Opening

 

Interest

 

Total Assets

 

Total Liabilities

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2225 46th St, LLC ("46th St") (1)

 

1

 

Queens, NY

 

Q4 2018 (est.)

 

51%

 

$

13,617

 

$

267

 

CS SJM E 92nd Street, LLC ("92nd St")

 

1

 

New York, NY

 

Q2 2018 (est.)

 

90%

 

 

182

 

 

81

 

2880 Exterior St, LLC ("Exterior St") (1)

 

1

 

Bronx, NY

 

Q2 2018 (est.)

 

51%

 

 

30,402

 

 

10,636

 

444 55th Street Holdings, LLC ("55th St") (2)

 

1

 

New York, NY

 

Q1 2018 (est.)

 

90%

 

 

77,038

 

 

35,024

 

3068 Cropsey Avenue, LLC ("Cropsey Ave") (1)

 

1

 

Brooklyn, NY

 

Q4 2017 (est.)

 

51%

 

 

19,565

 

 

9,743

 

CS SNL New York Ave, LLC ("SNL I") (3)

 

1

 

Brooklyn, NY

 

Q4 2015

 

90%

 

 

13,779

 

 

9,437

 

186 Jamaica Avenue, LLC ("SNL II") (3)

 

1

 

Brooklyn, NY

 

Q4 2015

 

90%

 

 

18,088

 

 

12,196

 

Shirlington Rd, LLC ("SRLLC") (3)

 

1

 

Arlington, VA

 

Q2 2015

 

90%

 

 

16,309

 

 

12,887

 

 

 

8

 

 

 

 

 

 

 

$

188,980

 

$

90,271

 

 

(1)

The noncontrolling members of 46th St, Cropsey Ave, and Exterior St have the option to put their ownership interest in the ventures to the Company for $14.2 million, $20.4 million and $37.8 million, respectively, within the one-year period after construction of each facility is substantially complete. Additionally, the Company has a one-year option to call the ownership interest of the noncontrolling members of 46th St, Cropsey Ave, and Exterior St for $14.2 million, $20.4 million and $37.8 million, respectively, beginning on the second anniversary of the facilities’ construction being substantially complete. The Company is accreting the respective liabilities during the development periods and, as of September 30, 2016, has accrued $0.3 million, $9.0 million and $10.5 million related to 46th St, Cropsey Ave, and Exterior St, respectively.

 

(2)

In connection with the acquired property, 55th St assumed mortgage debt that was recorded at a fair value of $35.0 million, which fair value includes an outstanding principal balance totaling $32.5 million and a net premium of $2.5 million to reflect the estimated fair value of the debt at the time of assumption. The loan accrues interest at a fixed rate of 4.68%, matures on June 7, 2023, and is fully guaranteed by the Company. 

 

(3)

The Company has a related party loan commitment to these ventures to fund all or a portion of the construction costs. As of September 30, 2016, the Company has provided $9.2 million of a total $9.8 million loan commitment to SNL I, $11.7 million of a total $12.8 million loan commitment to SNL II, and $12.9 million of a total $14.6 million loan commitment to SRLLC, which are included in the total liability amounts within the table above. These loans and related interest were eliminated during consolidation.

 

USIFB, LLP (“USIFB”) was formed to own, operate, acquire and develop self-storage facilities in England. The Company owned a 97% interest in the USIFB through a wholly-owned subsidiary and USIFB commenced operations at two facilities in London, England during 2008. The Company determined that USIFB is a variable interest entity, and that the Company is the primary beneficiary. Accordingly, the Company consolidated the assets, liabilities and results of operations of USIFB. On December 31, 2013, the Company provided a $6.8 million (£4.1 million) loan secured by a mortgage on real estate assets of USIFB. On June 30, 2014, one of the assets was sold for net proceeds of $7.0 million and the loan was repaid with proceeds from the sale.  The loan and any related interest were eliminated during consolidation.  On October 2, 2015, USIFB sold its remaining asset in London, England, for an aggregate sales price of £6.5 million (approximately $9.9 million as of the date of the sale). In connection with the sale during the fourth quarter of 2015, the Company recorded a gain of $3.0 million net of a foreign currency translation loss of $1.2 million.

 

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Operating Partnership Ownership

 

The Company follows guidance regarding the classification and measurement of redeemable securities. Under this guidance, securities that are redeemable for cash or other assets, at the option of the holder and not solely within the control of the issuer, must be classified outside of permanent equity/capital. This classification results in certain outside ownership interests being included as redeemable noncontrolling interests outside of permanent equity/capital in the consolidated balance sheets. The Company makes this determination based on terms in applicable agreements, specifically in relation to redemption provisions.

 

Additionally, with respect to redeemable ownership interests in the Operating Partnership held by third parties for which CubeSmart has a choice to settle the redemption by delivery of its own shares, the Operating Partnership considered the guidance regarding accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own shares, to evaluate whether CubeSmart controls the actions or events necessary to presume share settlement. The guidance also requires that noncontrolling interests classified outside of permanent capital be adjusted each period to the greater of the carrying value based on the accumulation of historical cost or the redemption value.

 

Approximately 1.2% of the outstanding OP Units as of September 30, 2016 and December 31, 2015, were not owned by CubeSmart, the sole general partner. The interests in the Operating Partnership represented by these OP Units were a component of the consideration that the Operating Partnership paid to acquire certain self-storage facilities. The holders of the OP Units are limited partners in the Operating Partnership and have the right to require CubeSmart to redeem all or part of their OP Units for, at the general partner’s option, an equivalent number of common shares of CubeSmart or cash based upon the fair value of an equivalent number of common shares of CubeSmart. However, the partnership agreement contains certain provisions that could result in a settlement outside the control of CubeSmart and the Operating Partnership, as CubeSmart does not have the ability to settle in unregistered shares. Accordingly, consistent with the guidance, the Operating Partnership will record the OP Units owned by third parties outside of permanent capital in the consolidated balance sheets. Net income or loss related to the OP Units owned by third parties is excluded from net income or loss attributable to Operating Partner in the consolidated statements of operations.

 

On May 14, 2015, the Company closed on the acquisition of real property that will be developed into a self-storage facility in Washington, D.C.  In conjunction with the closing, the Company issued 20,408 OP Units, valued at approximately $0.5 million to pay a portion of the consideration. On April 18, 2016, upon the completion of certain milestones, the Company issued 61,224 additional OP Units, valued at approximately $1.5 million, to pay the remaining consideration. The facility is expected to commence operations during 2016.

 

As of September 30, 2016 and December 31, 2015, 2,220,874 and 2,159,650 OP units, respectively, were held by third parties. The per unit cash redemption amount of the outstanding OP units was calculated based upon the average of the closing prices of the common shares of CubeSmart on the New York Stock Exchange for the final 10 trading days of the quarter. Based on the Company’s evaluation of the redemption value of the redeemable noncontrolling interest, the Company has reflected these interests at their redemption value at September 30, 2016 and December 31, 2015, as the estimated redemption value exceeded their carrying value. As of September 30, 2016, the Operating Partnership recorded an increase to OP Units owned by third parties and a corresponding increase to capital of $6.4 million. As of December 31, 2015, the Operating Partnership recorded an increase to OP Units owned by third parties and a corresponding decrease to capital of $19.6 million.

 

13. RELATED PARTY TRANSACTIONS

 

Affiliated Real Estate Investments

 

The Company provides management services to certain joint ventures and other related party facilities. Management agreements provide generally for management fees of between 5-6% of cash collections at the managed facilities. Total management fees for unconsolidated joint ventures or other entities in which the Company held an ownership interest for the three and nine months ended September 30, 2016 totaled $0.8 million and $2.0 million, respectively. Total management fees for unconsolidated joint ventures or other entities in which the Company held an ownership interest for the three and nine months ended September 30, 2015 totaled $0.2 million and $0.7 million, respectively.

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The management agreements for certain joint ventures, other related parties and third-party facilities provide for the reimbursement to the Company for certain expenses incurred to manage the facilities. These amounts consist of amounts due for management fees, payroll, and other expenses incurred on behalf of the facilities. The amounts due to the Company were $2.7 million and $1.9 million as of September 30, 2016 and December 31, 2015, respectively, and are reflected in Other assets, net on the Company’s consolidated balance sheets. Additionally, as discussed in note 12, the Company has outstanding mortgage loans receivable from consolidated joint ventures of $33.8 million and $29.6 million as of September 30, 2016 and December 31, 2015, respectively, which are eliminated for consolidation purposes. The Company believes that all of these related-party receivables are fully collectible.

 

The HVP operating agreement provides for an acquisition fee payable from HVP to the Company in an amount equal to 0.5% of the purchase price upon the closing of an acquisition by HVP or any of its subsidiaries. During the nine months ended September 30, 2016, the Company recognized $1.8 million in acquisition fees in conjunction with HVP’s acquisition of 67 self storage facilities, which are included in Other income on the consolidated statements of operations. The Company did not recognize any acquisition fees during the three months ended September 30, 2016.

 

14. PRO FORMA FINANCIAL INFORMATION

 

During the nine months ended September 30, 2016 and the year ended December 31, 2015, the Company acquired 24 self-storage facilities for an aggregate purchase price of approximately $350.8 million (see note 4) and 29 self-storage facilities for an aggregate purchase price of approximately $292.4 million, respectively.

 

The condensed consolidated pro forma financial information set forth below reflects adjustments to the Company’s historical financial data to give effect to each of the acquisitions and related financing activity (including the issuance of common shares) that occurred during 2016 and 2015 as if each had occurred as of January 1, 2015 and 2014, respectively. The unaudited pro forma information presented below does not purport to represent what the Company’s actual results of operations would have been for the periods indicated, nor does it purport to represent the Company’s future results of operations.

 

The following table summarizes, on a pro forma basis, the Company’s consolidated results of operations for the nine months ended September 30, 2016 and 2015 based on the assumptions described above:

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

    

2016

    

2015

 

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

Pro forma revenue

 

$

384,515

 

$

359,402

 

Pro forma net income

 

$

85,419

 

$

51,058

 

Earnings per common share:

 

 

 

 

 

 

 

Basic - as reported

 

$

0.32

 

$

0.22

 

Diluted - as reported

 

$

0.32

 

$

0.21

 

Basic - as pro forma

 

$

0.45

 

$

0.28

 

Diluted - as pro forma

 

$

0.45

 

$

0.27

 

 

 

 

 

 

 

 

15. SUBSEQUENT EVENTS

 

Subsequent to September 30, 2016, the Company acquired one self-storage facility in Nevada for a purchase price of approximately $13.3 million.

 

On September 2, 2016, the Company announced that it will redeem all of the 3.1 million outstanding shares of its 7.75% Series A Cumulative Redeemable Preferred Shares (the “Preferred Shares”) with a par value of $77.5 million on November 2, 2016. The Preferred Shares will be redeemed at a redemption price of $25.00 per share, plus accumulated and unpaid dividends up to and including the redemption date of $0.17374 per share. In connection with the redemption of the Preferred Shares, in accordance with EITF D-42, the Company expects to recognize a charge of approximately $2.8 million in the fourth quarter related to excess redemption costs over the original net issuance proceeds.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this Report.  Some of the statements we make in this section are forward-looking statements within the meaning of the federal securities laws.  For a discussion of forward-looking statements, see the section in this Report entitled “Forward-Looking Statements”.  Certain risk factors may cause actual results, performance or achievements to differ materially from those expressed or implied by the following discussion.  For a complete discussion of such risk factors, see the section entitled “Risk Factors” in the Parent Company’s and Operating Partnership’s combined Annual Report on Form 10-K for the year ended December 31, 2015.

 

Overview

 

We are an integrated self-storage real estate company, and as such we have in-house capabilities in the operation, design, development, leasing, management and acquisition of self-storage facilities.  The Parent Company’s operations are conducted solely through the Operating Partnership and its subsidiaries.  The Parent Company has elected to be taxed as a REIT for U.S. federal income tax purposes.  As of September 30, 2016 and December 31, 2015, we owned 471 and 445 self-storage facilities, respectively, totaling approximately 32.5 million and 30.4 million rentable square feet, respectively.  As of September 30, 2016, we owned facilities in the District of Columbia and the following 23 states:  Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois, Indiana, Maryland, Massachusetts, Minnesota, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, Tennessee, Texas, Utah and Virginia.  In addition, as of September 30, 2016, we managed 291 facilities for third parties (including 35 facilities containing an aggregate of approximately 2.4 million rentable square feet as part of an unconsolidated real estate venture in which we own a 50% interest, and 67 facilities containing an aggregate of approximately 3.6 million rentable square feet as part of a separate unconsolidated real estate venture in which we own a 10% interest) bringing the total number of facilities which we owned and/or managed to 762.  As of September 30, 2016, we managed facilities for third parties in the following 25 states: Alabama, Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois, Louisiana, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas and Virginia.

 

We derive revenues principally from rents received from customers who rent cubes at our self-storage facilities under month-to-month leases.  Therefore, our operating results depend materially on our ability to retain our existing customers and lease our available self-storage cubes to new customers while maintaining and, where possible, increasing our pricing levels.  In addition, our operating results depend on the ability of our customers to make required rental payments to us.  Our approach to the management and operation of our facilities combines centralized marketing, revenue management and other operational support with local operations teams that provide market-level oversight and control.  We believe this approach allows us to respond quickly and effectively to changes in local market conditions, and to maximize revenues by managing rental rates and occupancy levels.

 

We typically experience seasonal fluctuations in the occupancy levels of our facilities, which are generally slightly higher during the summer months due to increased moving activity.

 

Our results of operations may be sensitive to changes in overall economic conditions that impact consumer spending, including discretionary spending, as well as to increased bad debts due to recessionary pressures.  Adverse economic conditions affecting disposable consumer income, such as employment levels, business conditions, interest rates, tax rates, fuel and energy costs, and other matters could reduce consumer spending or cause consumers to shift their spending to other products and services.  A general reduction in the level of discretionary spending or shifts in consumer discretionary spending could adversely affect our growth and profitability.

 

We continue our focus on maximizing internal growth opportunities and selectively pursuing targeted acquisitions and developments of self-storage facilities.

 

We have one reportable segment:  we own, operate, develop, manage and acquire self-storage facilities.

 

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Our self-storage facilities are located in major metropolitan and suburban areas and have numerous customers per facility.  No single customer represents a significant concentration of our revenues.  Our facilities in Florida, New York, Texas and California provided approximately 17%, 16%, 10% and 8%, respectively, of total revenues for the nine months ended September 30, 2016.

 

Summary of Critical Accounting Policies and Estimates

 

Set forth below is a summary of the accounting policies and estimates that management believes are critical to the preparation of the unaudited consolidated financial statements included in this Report.  Certain of the accounting policies used in the preparation of these consolidated financial statements are particularly important for an understanding of the financial position and results of operations presented in the historical consolidated financial statements included in this Report.  A summary of significant accounting policies is also provided in the aforementioned notes to our consolidated financial statements (see note 2 to the unaudited consolidated financial statements).  These policies require the application of judgment and assumptions by management and, as a result, are subject to a degree of uncertainty.  Due to this uncertainty, actual results could differ materially from estimates calculated and utilized by management.

 

Basis of Presentation

 

The accompanying consolidated financial statements include all of the accounts of the Company, and its majority-owned and/or controlled subsidiaries.  The portion of these entities not owned by the Company is presented as noncontrolling interests as of and during the periods presented.  All significant intercompany accounts and transactions have been eliminated in consolidation.

 

When the Company obtains an economic interest in an entity, the Company evaluates the entity to determine if the entity is deemed a variable interest entity (“VIE”), and if the Company is deemed to be the primary beneficiary, in accordance with authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) on the consolidation of VIEs.  When an entity is not deemed to be a VIE, the Company considers the provisions of additional FASB guidance to determine 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.  The Company consolidates (i) entities that are VIEs and of which the Company is deemed to be the primary beneficiary and (ii) entities that are non-VIEs which the Company controls and in which the limited partners do not have substantive participating rights, or the ability to dissolve the entity or remove the Company without cause.

 

Self-Storage Facilities

 

The Company records self-storage facilities at cost less accumulated depreciation.  Depreciation on the buildings and equipment is recorded on a straight-line basis over their estimated useful lives, which range from five to 39 years. Expenditures for significant renovations or improvements that extend the useful life of assets are capitalized.  Repairs and maintenance costs are expensed as incurred.

 

When facilities are acquired, the purchase price is allocated to the tangible and intangible assets acquired and liabilities assumed based on estimated fair values.  When a portfolio of facilities is acquired, the purchase price is allocated to the individual facilities based upon an income approach or a cash flow analysis using appropriate risk adjusted capitalization rates, which take into account the relative size, age and location of the individual facility along with current and projected occupancy and rental rate levels or appraised values, if available.  Allocations to the individual assets and liabilities are based upon their respective fair values as estimated by management.

 

In allocating the purchase price for an acquisition, the Company determines whether the acquisition includes intangible assets or liabilities.  The Company allocates a portion of the purchase price to an intangible asset attributable to the value of in-place leases.  This intangible asset is generally amortized to expense over the expected remaining term of the respective leases.  Substantially all of the leases in place at acquired facilities are at market rates, as the majority of the leases are month-to-month contracts.   Accordingly, to date no portion of the purchase price for an acquired property has been allocated to above- or below-market lease intangibles.  To date, no intangible asset has been recorded for the value of customer relationships, because the Company does not have any concentrations of significant customers and the average customer turnover is fairly frequent.

 

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Long-lived assets classified as “held for use” are reviewed for impairment when events and circumstances such as declines in occupancy and operating results indicate that there may be an impairment.  The carrying value of these long-lived assets is compared to the undiscounted future net operating cash flows, plus a terminal value, attributable to the assets to determine if the facility’s basis is recoverable.  If a facility’s basis is not considered recoverable, an impairment loss is recorded to the extent the net carrying value of the asset exceeds the fair value.  The impairment loss recognized equals the excess of net carrying value over the related fair value of the asset.  There were no impairment losses recognized in accordance with these procedures during the nine months ended September 30, 2016 and 2015.

 

The Company considers long-lived assets to be “held for sale” upon satisfaction of the following criteria: (a) management commits to a plan to sell a facility (or group of facilities), (b) the facility is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such facilities, (c) an active program to locate a buyer and other actions required to complete the plan to sell the facility have been initiated, (d) the sale of the facility is probable and transfer of the asset is expected to be completed within one year, (e) the facility is being actively marketed for sale at a price that is reasonable in relation to its current fair value and (f) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

 

Typically these criteria are all met when the relevant asset is under contract, significant non-refundable deposits have been made by the potential buyer, the assets are immediately available for transfer and there are no contingencies related to the sale that may prevent the transaction from closing.  However, each potential transaction is evaluated based on its separate facts and circumstances.  Facilities classified as held for sale are reported at the lesser of carrying value or fair value less estimated costs to sell. 

 

Revenue Recognition

 

Management has determined that all of our leases with customers are operating leases.  Rental income is recognized in accordance with the terms of the lease agreements or contracts, which generally are month-to-month.

 

The Company recognizes gains from disposition of facilities only upon closing in accordance with the guidance on sales of real estate.  Payments received from purchasers prior to closing are recorded as deposits.  Profit on real estate sold is recognized using the full accrual method upon closing when the collectability of the sales price is reasonably assured and the Company is not obligated to perform significant activities after the sale.  Profit may be deferred in whole or part until the sale meets the requirements of profit recognition on sales under this guidance.

 

Share-Based Payments

 

We apply the fair value method of accounting for contingently issued shares and share options issued under our equity incentive plans.  The share compensation expense is recorded ratably over the vesting period relating to such contingently issued shares and options.   The Company has elected to recognize compensation expense on a straight-line method over the requisite service period.

 

Noncontrolling Interests

 

Noncontrolling interests are the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent.  The ownership interests in the subsidiary that are held by owners other than the parent are noncontrolling interests.  In accordance with authoritative guidance issued on noncontrolling interests in consolidated financial statements, such noncontrolling interests are reported on the consolidated balance sheets within equity/capital, separately from the Parent Company’s equity/capital.  The guidance also requires that noncontrolling interests are adjusted each period so that the carrying value equals the greater of its carrying value based on the accumulation of historical cost or its redemption value.  On the consolidated statements of operations, revenues, expenses and net income or loss from less-than-wholly-owned subsidiaries are reported at the consolidated amounts, including both the amounts attributable to the Parent Company and noncontrolling interests.  Presentation of consolidated equity/capital activity is included for both quarterly and annual financial statements, including beginning balances, activity for the period and ending balances for shareholders’ equity/capital, noncontrolling interests and total equity/capital.

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Investments in Unconsolidated Real Estate Ventures

 

The Company accounts for its investments in unconsolidated real estate ventures under the equity method of accounting.  Under the equity method, investments in unconsolidated joint ventures are recorded initially at cost, as investments in real estate entities, and subsequently adjusted for equity in earnings (losses), cash contributions, less distributions and impairments. On a periodic basis, management also assesses whether there are any indicators that the carrying value of the Company’s investments in unconsolidated real estate entities may be other than temporarily impaired. An investment is impaired only if the fair value of the investment, as estimated by management, is less than the carrying value of the investment and the decline is other than temporary. To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the investment over the fair value of the investment, as estimated by management. The determination as to whether impairment exists requires significant management judgment about the fair value of its ownership interest. Fair value is determined through various valuation techniques, including but not limited to, discounted cash flow models, quoted market values and third party appraisals. There were no impairment losses related to the Company’s investments in unconsolidated real estate ventures recognized during the nine months ended September 30, 2016 and 2015.

 

Recent Accounting Pronouncements

 

    In August 2016, the FASB issued Accounting Standard Update (“ASU”) No. 2016-15 – Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The eight items that the ASU provides classification guidance on include (1) debt prepayment and extinguishment costs, (2) settlement of zero-coupon debt instruments, (3) contigent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (6) distributions received from equity method investments, (7) beneficial interests in securitization trnasactions, and (8) separately identifiable cash flows and application of the predominace principle. The standard is effective on January 1, 2018, however early adoption is permitted. The standard requires the use of the retrospective transition method. The Company is in the process of evaluating the impact of this new guidance.

 

    In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which is intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The new guidance allows for entities to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. In addition, the guidance allows employers to withhold shares to satisfy minimum statutory tax withholding requirements up to the employees’ maximum individual tax rate without causing the award to be classified as a liability. The guidance also stipulates that cash paid by an employer to a taxing authority when directly withholding shares for tax-withholding purposes should be classified as a financing activity on the statement of cash flows. The standard is effective on January 1, 2017, however early adoption is permitted.  The Company is currently assessing the impact of the adoption of ASU No. 2016-09 on the Company’s financial statements and related disclosures.

 

    In February 2016, the FASB issued ASU No. 2016-02 - Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either financing or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification.  Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The standard is effective on January 1, 2019, however early adoption is permitted.  The Company is currently assessing the impact of the adoption of ASU No. 2016-02 on the Company’s financial statements and related disclosures.

 

    In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which amends the current business combination guidance to require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts

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are determined, as opposed to having to revise prior period information.  The standard also requires additional disclosure about the impact on current-period income statement line items of adjustments that would have been recognized in prior periods if prior period information had been revised. The new standard became effective for the Company on January 1, 2016. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position or results of operations as there have been no measurement-period adjustments recorded.

 

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, an update to the accounting standard relating to the presentation of debt issuance costs. Under the new guidance, debt issuance costs related to a recognized debt liability will be presented on the balance sheet as a direct deduction from the debt liability. In the event that there is not an associated debt liability recorded in the consolidated financial statements, the debt issuance costs will continue to be recorded on the consolidated balance sheet as an asset until the debt liability is recorded.  The new standard became effective for the Company on January 1, 2016. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position or results of operations as the update only related to changes in financial statement presentation. 

 

In February 2015, the FASB issued ASU No. 2015-02, Consolidation – Amendments to the Consolidation Analysis, which amends the current consolidation guidance affecting both the variable interest entity (“VIE”) and voting interest entity (“VOE”) consolidation models. The standard does not add or remove any of the characteristics in determining if an entity is a VIE or VOE, but rather enhances the way the Company assesses some of these characteristics. The new standard became effective for the Company on January 1, 2016. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position or results of operations as none of its existing consolidation conclusions were changed.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance under GAAP when it becomes effective. The new standard will be effective for the Company beginning on January 1, 2018, however early application beginning on January 1, 2017 is permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method.  The Company is currently assessing the impact of the adoption of ASU No. 2014-09 on the Company’s financial statements and related disclosures.

 

Results of Operations

 

The following discussion of our results of operations should be read in conjunction with the consolidated financial statements and the accompanying notes thereto.  Historical results set forth in the consolidated statements of operations reflect only the existing facilities and should not be taken as indicative of future operations.  We consider our same-store portfolio to consist of only those facilities owned and operated on a stabilized basis at the beginning and at the end of the applicable periods presented.   We consider a facility to be stabilized once it has achieved an occupancy rate that we believe, based on our assessment of market-specific data, is representative of similar self-storage assets in the applicable market for a full year measured as of the most recent January 1 and has not been significantly damaged by natural disaster or undergone significant renovation.  We believe that same-store results are useful to investors in evaluating our performance because they provide information relating to changes in facility-level operating performance without taking into account the effects of acquisitions, developments or dispositions.  At September 30, 2016, we owned 407 same-store facilities and 64 non-same-store facilities.  For analytical presentation, all percentages are calculated using the numbers presented in the financial statements contained in this Report.

 

Acquisition and Development Activities

 

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The comparability of our results of operations is affected by the timing of acquisition and disposition activities during the periods reported.  At September 30, 2016 and 2015, we owned 471 and 438 self-storage facilities and related assets, respectively.  The following table summarizes the change in number of owned self-storage facilities from January 1, 2015 through September 30, 2016:

 

 

 

 

 

 

    

2016

    

2015

 

 

 

 

 

Balance - January 1

 

445

 

421

Facilities acquired

 

10

 

7

Facilities developed

 

1

 

 —

Balance - March 31

 

456

 

428

Facilities acquired

 

7

 

4

Facilities developed

 

1

 

1

Balance - June 30

 

464

 

433

Facilities acquired

 

7

 

5

Balance - September 30

 

471

 

438

Facilities acquired

 

 

 

13

Facilities developed

 

 

 

2

Facilities sold

 

 

 

(8)

Balance - December 31

 

 

 

445

 

Comparison of the three months ended September 30, 2016 to the three months ended September 30, 2015 (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non Same-Store

 

Other/

 

 

 

 

 

 

 

 

 

 

 

 

 

Same-Store Property Portfolio

 

Properties

 

Eliminations

 

Total Portfolio

 

 

    

 

    

    

 

    

Increase/

    

%  

    

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

Increase/

    

%  

 

 

2016

 

2015

 

(Decrease)

 

Change

 

2016

 

2015

 

2016

 

2015

 

2016

 

2015

 

(Decrease)

 

Change

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

$

103,231

 

$

96,934

 

$

6,297

 

6.5

%  

$

13,185

 

$

5,451

 

$

 —

 

$

 —

 

$

116,416

 

$

102,385

 

$

14,031

 

13.7

%  

Other property related income

 

10,836

 

 

10,451

 

 

385

 

3.7

%  

 

1,444

 

 

674

 

 

727

 

 

702

 

 

13,007

 

 

11,827

 

 

1,180

 

10.0

%  

Property management fee income

 

 —

 

 

 —

 

 

 —

 

0.0

%  

 

 —

 

 

 —

 

 

2,673

 

 

1,758

 

 

2,673

 

 

1,758

 

 

915

 

52.0

%  

Total revenues

 

114,067

 

 

107,385

 

 

6,682

 

6.2

%  

 

14,629

 

 

6,125

 

 

3,400

 

 

2,460

 

 

132,096

 

 

115,970

 

 

16,126

 

13.9

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

31,871

 

 

32,149

 

 

(278)

 

(0.9)

%  

 

5,657

 

 

2,749

 

 

4,277

 

 

4,399

 

 

41,805

 

 

39,297

 

 

2,508

 

6.4

%  

NET OPERATING INCOME (LOSS):

 

82,196

 

 

75,236

 

 

6,960

 

9.3

%  

 

8,972

 

 

3,376

 

 

(877)

 

 

(1,939)

 

 

90,291

 

 

76,673

 

 

13,618

 

17.8

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property count

 

407

 

 

407

 

 

 

 

 

 

 

64

 

 

31

 

 

 

 

 

 

 

 

471

 

 

438

 

 

 

 

 

 

Total square footage

 

27,810

 

 

27,810

 

 

 

 

 

 

 

4,679

 

 

2,088

 

 

 

 

 

 

 

 

32,489

 

 

29,898

 

 

 

 

 

 

Period End Occupancy (1)

 

93.1

%  

 

92.7

%  

 

 

 

 

 

 

78.0

%  

 

80.6

%  

 

 

 

 

 

 

 

90.9

%  

 

91.9

%  

 

 

 

 

 

Period Average Occupancy (2)

 

93.8

%  

 

93.4

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized annual rent per occupied sq. ft. (3)

$

15.83

 

$

14.93

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

41,827

 

 

38,744

 

 

3,083

 

8.0

%  

General and administrative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,065

 

 

7,002

 

 

1,063

 

15.2

%  

Acquisition related costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

888

 

 

1,222

 

 

(334)

 

(27.3)

%  

Subtotal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

50,780

 

 

46,968

 

 

3,812

 

8.1

%  

OPERATING INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39,511

 

 

29,705

 

 

9,806

 

33.0

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER (EXPENSE) INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense on loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,787)

 

 

(10,399)

 

 

(2,388)

 

(23.0)

%  

Loan procurement amortization expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(655)

 

 

(537)

 

 

(118)

 

(22.0)

%  

Equity in (losses) earnings of real estate ventures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(581)

 

 

139

 

 

(720)

 

(518.0)

%  

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(397)

 

 

(288)

 

 

(109)

 

(37.8)

%  

Total other expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14,420)

 

 

(11,085)

 

 

(3,335)

 

(30.1)

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25,091

 

 

18,620

 

 

6,471

 

34.8

%  

NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling interests in the Operating Partnership

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(283)

 

 

(223)

 

 

(60)

 

(26.9)

%  

Noncontrolling interests in subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

76

 

 

41

 

 

35

 

85.4

%  

NET INCOME ATTRIBUTABLE TO THE COMPANY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

24,884

 

$

18,438

 

$

6,446

 

35.0

%  

Distribution to preferred shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,502)

 

 

(1,502)

 

 

 —

 

0.0

%  

NET INCOME ATTRIBUTABLE TO THE COMPANY’S COMMON SHAREHOLDERS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

23,382

 

$

16,936

 

$

6,446

 

38.1

%  


(1)

Represents occupancy at September 30th of the respective period.

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(2)

Represents the weighted average occupancy for the period.

(3)

Realized annual rent per occupied square foot is computed by dividing rental income by the weighted average occupied square feet for the period.

 

Revenues

 

Rental income increased from $102.4 million during the three months ended September 30, 2015 to $116.4 million during the three months ended September 30, 2016, an increase of $14.0 million, or 13.7%.  The increase in same-store revenue was due primarily to an increase in average occupancy of 40 basis points and higher rental rates.  Realized annual rent per square foot on our same-store portoflio increased 6.0% as a result of higher asking rates for new and existing customers and lower levels of promotional discounts for the three months ended September 30, 2016 as compared to the three months ended September 30, 2015.  The remaining increase is primarily attributable to $7.7 million of additional income from the facilities acquired in 2015 and 2016 included in our non-same store portfolio.

 

Other property related income increased from $11.8 million during the three months ended September 30, 2015 to $13.0 million during the three months ended September 30, 2016, an increase of $1.2 million, or 10.0%.  This increase is primarily attributable to $0.7 million of increased tenant insurance commissions and $0.4 million of increased fee income for the three months ended September 30, 2016 as compared to the three months ended September 30, 2015.

 

Property management fee income increased from $1.8 million during the three months ended September 30, 2015 to $2.7 million during the three months ended September 30, 2016, an increase of $0.9 million, or 52.0%.  This increase is attributable to an increase in management fees related to the third-party management business resulting from more stores under management and higher revenue at managed stores.

 

Operating Expenses

 

Property operating expenses increased from $39.3 million during the three months ended September 30, 2015 to $41.8 million during the three months ended September 30, 2016, an increase of $2.5 million, or 6.4%.  This increase is primarily attributable to $2.9 million of increased expenses associated with newly acquired facilities offset by a $0.3 million decrease, or 0.9%, in property operating expenses on the same-store portfolio primarily due to lower utility expenses.

 

Depreciation and amortization increased from $38.7 million during the three months ended September 30, 2015 to $41.8 million during the three months ended September 30, 2016, an increase of $3.1 million, or 8.0%. This increase is primarily attributable to depreciation and amortization expenses related to the 2015 and 2016 acquisitions.

 

General and administrative expenses increased from $7.0 million during the three months ended September 30, 2015 to $8.1 million, an increase of $1.1 million, or 15.2%. The change is attributable to $1.3 million of increased payroll expenses resulting from additional employee headcount to support our growth.

 

Acquisition-related costs decreased from $1.2 million during the three months ended September 30, 2015 to $0.9 million during the three months ended September 30, 2016, a decrease of $0.3 million, or 27.3%.  Acquisition costs are non-recurring and fluctuate based on quarterly investment activity.

 

Other (Expense) Income

 

Interest expense increased from $10.4 million during the three months ended September 30, 2015 to $12.8 million during the three months ended September 30, 2016, an increase of $2.4 million, or 23.0%.  The increase is attributable to a higher weighted average effective interest rate and a higher amount of outstanding debt during the three months ended September 30, 2016 as compared to the three months ended September 30, 2015. The weighted average effective interest rate of our outstanding debt increased from 3.67% for the three months ended September 30, 2015 to 3.73% for the three months ended September 30, 2016 as a result of of the issuance of $300.0 million in aggregate principal amount of 3.125% unsecured senior notes and repayment of the revolving portion of the Company’s credit facility at an average effective interest rate of 1.74% during the third quarter of 2016. The average outstanding debt balance increased $281.4

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million to $1.5 billion during the three months ended September 30, 2016 as compared to $1.2 billion during the three months ended September 30, 2015 as the result of borrowings to fund a portion of the Company’s acquisition activity.

 

Equity in (losses) earnings of real estate ventures decreased $0.7 million during the three months ended September 30, 2016 compared to the three months ended September 30, 2015. This decrease is mainly driven by our share of the losses attributable to HVP, a real estate venture in which we own a 10% interest. The loss incurred in 2016 was primarily the result of amortization expense associated with the in-place lease intangible that was recorded in connection with the venture’s acquisition of 67 properties, which took place during the fourth quarter of 2015 and the first two quarters of 2016.

 

Comparison of the nine months ended September 30, 2016 to the nine months ended September 30, 2015 (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non Same-Store

 

Other/

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same-Store Property Portfolio

 

Properties

 

Eliminations

 

Total Portfolio

 

 

 

    

 

    

    

 

    

Increase/

    

%  

    

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

Increase/

    

%  

 

 

 

2016

 

2015

 

(Decrease)

 

Change

 

2016

 

2015

 

2016

 

2015

 

2016

 

2015

 

(Decrease)

 

Change

 

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

$

300,290

 

$

278,818

 

$

21,472

 

7.7

%  

$

32,661

 

$

11,926

 

$

 —

 

$

 —

 

$

332,951

 

$

290,744

 

$

42,207

 

14.5

%  

 

Other property related income

 

31,556

 

 

30,110

 

 

1,446

 

4.8

%  

 

3,604

 

 

1,489

 

 

2,253

 

 

2,156

 

 

37,413

 

 

33,755

 

 

3,658

 

10.8

%  

 

Property management fee income

 

 —

 

 

 —

 

 

 —

 

0.0

%  

 

 —

 

 

 —

 

 

7,129

 

 

5,030

 

 

7,129

 

 

5,030

 

 

2,099

 

41.7

%  

 

Total revenues

 

331,846

 

 

308,928

 

 

22,918

 

7.4

%  

 

36,265

 

 

13,415

 

 

9,382

 

 

7,186

 

 

377,493

 

 

329,529

 

 

47,964

 

14.6

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

95,785

 

 

96,222

 

 

(437)

 

(0.5)

%  

 

14,186

 

 

5,947

 

 

13,660

 

 

12,769

 

 

123,631

 

 

114,938

 

 

8,693

 

7.6

%  

 

NET OPERATING INCOME (LOSS):

 

236,061

 

 

212,706

 

 

23,355

 

11.0

%  

 

22,079

 

 

7,468

 

 

(4,278)

 

 

(5,583)

 

 

253,862

 

 

214,591

 

 

39,271

 

18.3

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property count

 

407

 

 

407

 

 

 

 

 

 

 

64

 

 

31

 

 

 

 

 

 

 

 

471

 

 

438

 

 

 

 

 

 

 

Total square footage

 

27,810

 

 

27,810

 

 

 

 

 

 

 

4,679

 

 

2,088

 

 

 

 

 

 

 

 

32,489

 

 

29,898

 

 

 

 

 

 

 

Period End Occupancy (1)

 

93.1

%  

 

92.7

%  

 

 

 

 

 

 

78.0

%  

 

80.6

%  

 

 

 

 

 

 

 

90.9

%  

 

91.9

%  

 

 

 

 

 

 

Period Average Occupancy (2)

 

93.1

%  

 

92.2

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized annual rent per occupied sq. ft. (3)

$

15.46

 

$

14.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

122,631

 

 

114,725

 

 

7,906

 

6.9

%  

 

General and administrative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24,184

 

 

21,289

 

 

2,895

 

13.6

%  

 

Acquisition related costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,793

 

 

2,485

 

 

3,308

 

133.1

%  

 

Subtotal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

152,608

 

 

138,499

 

 

14,109

 

10.2

%  

 

OPERATING INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101,254

 

 

76,092

 

 

25,162

 

33.1

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER (EXPENSE) INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense on loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(37,071)

 

 

(32,324)

 

 

(4,747)

 

(14.7)

%  

 

Loan procurement amortization expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,871)

 

 

(1,742)

 

 

(129)

 

(7.4)

%  

 

Equity in losses of real estate ventures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,817)

 

 

(199)

 

 

(1,618)

 

(813.1)

%  

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

834

 

 

(812)

 

 

1,646

 

202.7

%  

 

Total other expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(39,925)

 

 

(35,077)

 

 

(4,848)

 

(13.8)

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

61,329

 

 

41,015

 

 

20,314

 

49.5

%  

 

NET (INCOME) LOSS ATTRIBUTABLE TO

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NONCONTROLLING INTERESTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling interests in the Operating Partnership

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(682)

 

 

(475)

 

 

(207)

 

(43.6)

%  

 

Noncontrolling interests in subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

411

 

 

56

 

 

355

 

633.9

%  

 

NET INCOME ATTRIBUTABLE TO THE COMPANY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

61,058

 

$

40,596

 

$

20,462

 

50.4

%  

 

Distribution to preferred shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,506)

 

 

(4,506)

 

 

 —

 

0.0

%  

 

NET INCOME ATTRIBUTABLE TO THE COMPANY’S COMMON SHAREHOLDERS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

56,552

 

$

36,090

 

$

20,462

 

56.7

%  

 


(1)

Represents occupancy at September 30th of the respective period.

(2)

Represents the weighted average occupancy for the period.

(3)

Realized annual rent per occupied square foot is computed by dividing rental income by the weighted average occupied square feet for the period.

 

40


 

Table of Contents

Revenues

 

Rental income increased from $290.7 million during the nine months ended September 30, 2015 to $333.0 million during the nine months ended September 30, 2016, an increase of $42.2 million, or 14.5%.  The increase in same-store revenue was due primarily to an increase in average occupancy of 90 basis points and higher rental rates.  Realized annual rent per square foot on our same-store portfolio increased 6.6% as a result of higher asking rates for new and existing customers and lower levels of promotional discounts for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015.  The remaining increase is primarily attributable to $20.7 million of additional income from the facilities acquired in 2015 and 2016 included in our non-same store portfolio.

 

Other property related income increased from $33.8 million during the nine months ended September 30, 2015 to $37.4 million during the nine months ended September 30, 2016, an increase of $3.7 million, or 10.8%.  The increase is primarily attributable to $2.3 million of increased tenant insurance commissions and $1.1 million of increased fee income for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015.

 

Property management fee income increased from $5.0 million during the nine months ended September 30, 2015 to $7.1 million during the nine months ended September 30, 2016, an increase of $2.1 million, or 41.7%.  This increase is attributable to an increase in management fees related to the third-party management business resulting from more stores under management and higher revenue at managed stores.

 

Operating Expenses

 

Property operating expenses increased from $114.9 million during the nine months ended September 30, 2015 to $123.6 million during the nine months ended September 30, 2016, an increase of $8.7 million, or 7.6%. This increase is attributable to $8.2 million of increased expenses associated with newly acquired facilities and $0.9 million of increased costs to manage our portfolio and support our growth, offset by a $0.4 million decrease in property operating expenses on the same-store portfolio primarily due to reduced utilities and snow removal costs.

 

Depreciation and amortization increased from $114.7 million during the nine months ended September 30, 2015 to $122.6 million during the nine months ended September 30, 2016, an increase of $7.9 million, or 6.9%. This increase is primarily attributable to depreciation and amortization expenses related to the 2015 and 2016 acquisitions.

 

General and administrative expenses increased from $21.3 million during the nine months ended September 30, 2015 to $24.2 million during the nine months ended September 30, 2016, an increase of $2.9 million, or 13.6%. The change is primarily attributable to $2.8 million of increased payroll expenses resulting from additional employee headcount to support our growth.

 

Acquisition-related costs increased from $2.5 million during the nine months ended September 30, 2015 to $5.8 million during the nine months ended September 30, 2016, an increase of $3.3 million, or 133.1%.  Acquisition costs are non-recurring and fluctuate based on quarterly investment activity.

 

Other (Expense) Income

 

Interest expense increased from $32.3 million during the nine months ended September 30, 2015 to $37.1 million during the nine months ended September 30, 2016, an increase of $4.7 million, or 14.7%.  The increase is primarily attributable to a higher amount of outstanding debt during the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015. The average debt balance increased $197.0 million to $1.4 billion during the nine months ended September 30, 2016 as compared to $1.2 billion during the nine months ended September 30, 2015 as the result of borrowings to fund a portion of the Company’s acquisition activity.

 

Equity in losses of real estate ventures decreased $1.6 million during the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The decrease is mainly driven by our share of the losses attributable to HVP, a real estate venture in which we own a 10% interest. The loss incurred in 2016 was the result of amortization expense associated with the in-place lease intangible that was recorded in connection with the venture’s

41


 

Table of Contents

acquisition of 67 properties. The amortization expense did not exist in the 2015 period as the acquisitions took place during the fourth quarter of 2015 and the first two quarters of 2016.

 

Other (expense) income increased $1.6 million from the nine months ended September 30, 2015 to the nine months ended September 30, 2016 due to acquisition fees earned in conjunction with HVP’s acquisition of 67 self storage facilities.

 

Cash Flows

 

Comparison of the nine months ended September 30, 2016 to the nine months ended September 30, 2015

 

A comparison of cash flow from operating, investing and financing activities for the nine months ended September 30, 2016 and 2015 is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

 

 

Net cash provided by (used in):

   

2016

   

2015

   

Change

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

201,421

 

$

162,491

 

$

38,930

 

Investing activities

 

$

(472,133)

 

$

(237,903)

 

$

(234,230)

 

Financing activities

 

$

295,222

 

$

75,529

 

$

219,693

 

 

Cash provided by operating activities for the nine months ended September 30, 2016 and 2015 was $201.4 million and $162.5 million, respectively, reflecting an increase of $38.9 million.  Our principal source of cash flow is from the operation of our facilities. During the nine months ended September 30, 2016, our increased cash flow from operating activities was primarily attributable to our 2016 and 2015 acquisitions and increased net operating income levels on the same-store portfolio in the 2016 period as compared to the 2015 period.

 

Cash used in investing activities increased from $237.9 million for the nine months ended September 30, 2015 to $472.1 million for the nine months ended September 30, 2016, reflecting an increase of $234.2 million.  The change is primarily driven by an increase in cash used for acquisitions of self-storage facilities. Cash used during the nine months ended September 30, 2016, relates to the acquisition of 24 facilities for an aggregate purchase price of $350.8 million, inclusive of $6.5 million of assumed debt, while cash used in investing activities during the nine months ended September 30, 2015 relates to the acquisition of 16 facilities for an aggregate purchase price of $168.2 million, inclusive of $2.7 million of assumed debt. The change is also driven by a $75.7 million increase in cash used for development costs, resulting primarily from the acquisition of a development property by a consolidated joint venture in the second quarter of 2016 for $67.2 million, inclusive of $35.0 million of assumed debt.

 

For the nine months ended September 30, 2016 and 2015, cash provided by financing activities was $295.2 million and $75.5 million, respectively, reflecting an increase of $219.7 million.  The increase is primarily a result of $298.5 million in net proceeds received from our issuance of unsecured senior notes in August 2016 with no similar transaction during the nine months ended September 30, 2015, as well as a $40.3 million decrease in principal payments on mortgage loans, resulting primarily from the repayment of five secured loans during the nine months ended September 30, 2016 for $34.9 million compared to three repayments during the nine months ended September 30, 2015 for $73.8 million. These increases were offset by an $89.8 million net decrease in revolving credit facility borrowings during the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 as well as a $32.1 million increase in cash distributions paid to common shareholders, preferred shareholders and noncontrolling interests in the Operating Partnership during the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015, resulting from the increase in the common dividend per share and number of shares outstanding.

 

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Table of Contents

Liquidity and Capital Resources

 

Liquidity Overview

 

Our cash flow from operations has historically been one of our primary sources of liquidity used to fund debt service, distributions and capital expenditures.  We derive substantially all of our revenue from customers who lease space from us at our facilities and fees earned from managing facilities.  Therefore, our ability to generate cash from operations is dependent on the rents that we are able to charge and collect from our customers.  We believe that the facilities in which we invest, self-storage facilities, are less sensitive than other real estate product types to near-term economic downturns.  However, prolonged economic downturns will adversely affect our cash flows from operations.

 

In order to qualify as a REIT for federal income tax purposes, the Parent Company is required to distribute at least 90% of REIT taxable income, excluding capital gains, to its shareholders on an annual basis or pay federal income tax.  The nature of our business, coupled with the requirement that we distribute a substantial portion of our income on an annual basis, will cause us to have substantial liquidity needs over both the short term and the long term.

 

Our short-term liquidity needs consist primarily of funds necessary to pay operating expenses associated with our facilities, refinancing of certain mortgage indebtedness, interest expense and scheduled principal payments on debt, expected distributions to limited partners and shareholders, capital expenditures and the development of new facilities.  These funding requirements will vary from year to year, in some cases significantly.  For the remainder of the 2016 fiscal year, we expect recurring capital expenditures to be approximately $4.0 million to $9.0 million, planned capital improvements and facility upgrades to be approximately $2.0 million to $5.0 million and costs associated with the development of new facilities to be approximately $18.0 million to $23.0 million.  Our currently scheduled principal payments on debt, including borrowings outstanding on the Credit Facility and Term Loan Facility, are approximately $0.6 million for the remainder of 2016.

 

Our most restrictive financial covenants limit the amount of additional leverage we can add; however, we believe cash flows from operations, access to equity financing, including through our “at the market” equity program, and available borrowings under our Credit Facility provide adequate sources of liquidity to enable us to execute our current business plan and remain in compliance with our covenants.

 

Our liquidity needs beyond 2016 consist primarily of contractual obligations which include repayments of indebtedness at maturity, as well as potential discretionary expenditures such as (i) non-recurring capital expenditures; (ii) redevelopment of operating facilities; (iii) acquisitions of additional facilities; and (iv) development of new facilities.  We will have to satisfy the portion of our needs not covered by cash flow from operations through additional borrowings, including borrowings under our Credit Facility, sales of common or preferred shares of the Parent Company and common or preferred units of the Operating Partnership and/or cash generated through facility dispositions and joint venture transactions.

 

We believe that, as a publicly traded REIT, we will have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional debt and the issuance of additional equity.  However, we cannot provide any assurance that this will be the case.  Our ability to incur additional debt will be dependent on a number of factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions that may be imposed by lenders.  In addition, dislocation in the United States debt markets may significantly reduce the availability and increase the cost of long-term debt capital, including conventional mortgage financing and commercial mortgage-backed securities financing.  There can be no assurance that such capital will be readily available in the future.  Our ability to access the equity capital markets will be dependent on a number of factors as well, including general market conditions for REITs and market perceptions about us.

 

As of September 30, 2016, we had approximately $87.4 million in available cash and cash equivalents.  In addition, we had approximately $499.3 million of availability for borrowings under our Credit Facility.

 

Unsecured Senior Notes

 

Our unsecured senior notes are summarized as follows (collectively referred to as the “Senior Notes”):

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

    

Effective

    

Issuance

 

Maturity

 

Unsecured Senior Notes

    

2016

    

2015

    

Interest Rate

    

Date

 

Date

 

 

 

(in thousands)

 

 

 

 

 

 

 

$250M 4.800% Guaranteed Notes due 2022

 

$

250,000

 

$

250,000

 

4.82

%  

Jun-12

 

Jul-22

 

$250M 4.375% Guaranteed Notes due 2023

 

 

250,000

 

 

250,000

 

4.50

%  

Dec-13

 

Dec-23

 

$250M 4.000% Guaranteed Notes due 2025

 

 

250,000

 

 

250,000

 

4.03

%  

Oct-15

 

Nov-25

 

$300M 3.125% Guaranteed Notes due 2026

 

 

300,000

 

 

 —

 

3.18

%  

Aug-16

 

Sep-26

 

Principal balance outstanding

 

 

1,050,000

 

 

750,000

 

 

 

 

 

 

 

Less: Discount on issuance of unsecured senior notes, net

 

 

(4,099)

 

 

(2,888)

 

 

 

 

 

 

 

Less: Loan procurement costs, net

 

 

(7,173)

 

 

(5,208)

 

 

 

 

 

 

 

Total unsecured senior notes, net

 

$

1,038,728

 

$

741,904

 

 

 

 

 

 

 

 

The indenture under which the Senior Notes were issued restricts the ability of the Operating Partnership and its subsidiaries to incur debt unless the Operating Partnership and its consolidated subsidiaries comply with a leverage ratio not to exceed 60% and an interest coverage ratio of more than 1.5:1 after giving effect to the incurrence of the debt.  The indenture also restricts the ability of the Operating Partnership and its subsidiaries to incur secured debt unless the Operating Partnership and its consolidated subsidiaries comply with a secured debt leverage ratio not to exceed 40% after giving effect to the incurrence of the debt.  The indenture also contains other financial and customary covenants, including a covenant not to own unencumbered assets with a value less than 150% of the unsecured indebtedness of the Operating Partnership and its consolidated subsidiaries. As of September 30, 2016, the Operating Partnership was in compliance with all of the financial covenants under the Senior Notes.

 

Revolving Credit Facility and Unsecured Term Loans

 

On June 20, 2011, we entered into an unsecured term loan agreement (the “Term Loan Facility”) which consisted of a $100.0 million term loan with a five-year maturity (“Term Loan A”) and a $100.0 million term loan with a seven-year maturity (“Term Loan B”).  On December 9, 2011, we entered into a credit facility (the “Credit Facility”) comprised of a $100.0 million unsecured term loan maturing in December 2014 (“Term Loan C”); a $200.0 million unsecured term loan maturing in March 2017 (“Term Loan D”); and a $300.0 million unsecured revolving facility maturing in December 2015 (“Revolver”). 

 

On June 18, 2013, we amended both the Term Loan Facility and Credit Facility. With respect to the Term Loan Facility, among other things, the amendment extended the maturity date to June 2018 and decreased the pricing of Term Loan A, while Term Loan B remained unchanged by the amendment. With respect to the Credit Facility, among other things, the amendment extended the maturity date to January 2019 and decreased the pricing of Term Loan D. On August 5, 2014, we further amended the Term Loan Facility to extend the maturity date to January 2020 and decrease the pricing of Term Loan B. On December 17, 2013, we repaid the $100.0 million balance under Term Loan C that was scheduled to mature in December 2014.

 

Pricing on the Term Loan Facility depends on our unsecured debt credit ratings. At our current Baa2/BBB level, amounts drawn under Term Loan A are priced at 1.30% over LIBOR, while amounts drawn under Term Loan B are priced at 1.15% over LIBOR.

 

On April 22, 2015, we further amended the Credit Facility with respect to the Revolver. Among other things, the amendment increased the aggregate amount of the Revolver from $300.0 million to $500.0 million, decreased the facility fee from 0.20% to 0.15% and extended the maturity date from June 18, 2017 to April 22, 2020.

 

Pricing on the Credit Facility depends on our unsecured debt credit ratings. At our current Baa2/BBB level, amounts drawn under the Revolver are priced at 1.25% over LIBOR, inclusive of a facility fee of 0.15%, while amounts drawn under Term Loan D are priced at 1.30% over LIBOR.

 

We incurred costs of $2.3 million in 2015 in connection with amending the Credit Facility and capitalized such costs as a component of loan procurement costs, net of amortization on the consolidated balance sheet.  Additionally, in connection with the amendment, $0.1 million of unamortized costs were written-off. All remaining unamortized costs,

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along with costs incurred in connection with the amendment, are amortized as an adjustment to interest expense over the remaining term of the modified facilities.

 

As of September 30, 2016, $200.0 million of unsecured term loan borrowings were outstanding under the Term Loan Facility, $200.0 million of unsecured term loan borrowings were outstanding under the Credit Facility, and $499.3 million was available for borrowing under the unsecured revolving portion of the Credit Facility. The available balance under the unsecured revolving portion of the Credit Facility is reduced by an outstanding letter of credit of $0.7 million. In connection with a portion of the unsecured borrowings, we had interest rate swaps as of September 30, 2016 that fix 30-day LIBOR (see note 10 to the unaudited consolidated financial statements).  As of September 30, 2016, borrowings under the Credit Facility and Term Loan Facility, as amended and after giving effect to the interest rate swaps, had an effective weighted average interest rate of 2.68%.

 

The Term Loan Facility and the term loan under our Credit Facility were fully drawn at September 30, 2016 and no further borrowings may be made under the term loans.  Our ability to borrow under the revolving portion of the Credit Facility is subject to ongoing compliance with certain financial covenants which include:

 

·

Maximum total indebtedness to total asset value of 60.0% at any time;

 

·

Minimum fixed charge coverage ratio of 1.50:1.00; and

 

·

Minimum tangible net worth of $821,211,200 plus 75% of net proceeds from equity issuances after June 30, 2010.

 

Further, under the Credit Facility and Term Loan Facility, we are restricted from paying distributions on the Parent Company’s common shares in excess of the greater of (i) 95% of funds from operations, and (ii) such amount as may be necessary to maintain the Parent Company’s REIT status.

 

As of September 30, 2016, we were in compliance with all of our financial covenants and anticipate being in compliance with all of our financial covenants through the terms of the Credit Facility and Term Loan Facility.

 

At The Market Equity Program

 

Pursuant to a previous sales agreement, we had an “at-the-market” equity program that enabled us to sell common shares through a sales agent. On May 7, 2013, we terminated the previous sales agreement with our previous sales agent and entered into separate equity distribution agreements (the “Equity Distribution Agreements”) with a group of sales agents (collectively, the “Sales Agents”). The Equity Distribution Agreements replaced the previous sale agreement and were amended on May 5, 2014, October 2, 2014, and December 30, 2015 to increase the number of common shares authorized for sale through “at-the-market” equity offerings. Pursuant to the Equity Distribution Agreements, as amended, we may sell, from time to time, up to 40.0 million common shares of beneficial interest through the Sales Agents.

 

During the nine months ended September 30, 2016, we sold a total of 4.4 million common shares under the Equity Distribution Agreements at an average sales price of $31.25 per share, resulting in gross proceeds of $137.7 million under the program.  We incurred $1.6 million of offering costs in conjunction with the 2016 sales.  We used proceeds from the sales conducted during the nine months ended September 30, 2016 to fund acquisitions of storage facilities and for general corporate purposes.  As of September 30, 2016, 5.8 million common shares remained available for issuance under the Equity Distribution Agreements.

 

Recent Developments

 

Subsequent to September 30, 2016, we acquired one self-storage facility in Nevada for a purchase price of approximately $13.3 million.

 

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On September 2, 2016, we announced that we will redeem all of our 3.1 million outstanding shares of its 7.75% Series A Cumulative Redeemable Preferred Shares (the “Preferred Shares”) with a par value of $77.5 million on November 2, 2016. The Preferred Shares will be redeemed at a redemption price of $25.00 per share, plus accumulated and unpaid dividends up to and including the redemption date of $0.17374 per share. In connection with the redemption of the Preferred Shares, in accordance with EITF D-42, we expect to recognize a charge of approximately $2.8 million in the fourth quarter related to excess redemption costs over the original net issuance proceeds.

 

Non-GAAP Financial Measures

 

NOI

 

We define net operating income, which we refer to as “NOI”, as total continuing revenues less continuing property operating expenses.  NOI also can be calculated by adding back to net income (loss): interest expense on loans, loan procurement amortization expense, loan procurement amortization expense — early repayment of debt, acquisition related costs, equity in losses of real estate ventures, other expense, depreciation and amortization expense, general and administrative expense, and deducting from net income (loss): gains from sale of real estate, net, other income, gains from remeasurement of investments in real estate ventures and interest income.  NOI is not a measure of performance calculated in accordance with GAAP.

 

We use NOI as a measure of operating performance at each of our facilities, and for all of our facilities in the aggregate. NOI should not be considered as a substitute for operating income, net income, cash flows provided by operating, investing and financing activities, or other income statement or cash flow statement data prepared in accordance with GAAP.

 

We believe NOI is useful to investors in evaluating our operating performance because:

 

·

it is one of the primary measures used by our management and our facility managers to evaluate the economic productivity of our facilities, including our ability to lease our facilities, increase pricing and occupancy and control our property operating expenses;

 

·

it is widely used in the real estate industry and the self-storage industry to measure the performance and value of real estate assets without regard to various items included in net income that do not relate to or are not indicative of operating performance, such as depreciation and amortization, which can vary depending upon accounting methods and the book value of assets; and

 

·

it helps our investors to meaningfully compare the results of our operating performance from period to period by removing the impact of our capital structure (primarily interest expense on our outstanding indebtedness) and depreciation of our basis in our assets from our operating results.

 

There are material limitations to using a measure such as NOI, including the difficulty associated with comparing results among more than one company and the inability to analyze certain significant items, including depreciation and interest expense, that directly affect our net income.  We compensate for these limitations by considering the economic effect of the excluded expense items independently as well as in connection with our analysis of net income.  NOI should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP, such as total revenues, operating income and net income.

 

FFO

 

Funds from operations (“FFO”) is a widely used performance measure for real estate companies and is provided here as a supplemental measure of operating performance.  The April 2002 National Policy Bulletin of the National Association of Real Estate Investment Trusts (the “White Paper”), as amended, defines FFO as net income (computed in accordance with GAAP), excluding gains (or losses) from sales of real estate and related impairment charges, plus real estate depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.

 

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Management uses FFO as a key performance indicator in evaluating the operations of our facilities. Given the nature of our business as a real estate owner and operator, we consider FFO a key measure of our operating performance that is not specifically defined by accounting principles generally accepted in the United States.  We believe that FFO is useful to management and investors as a starting point in measuring our operational performance because FFO excludes various items included in net income that do not relate to or are not indicative of our operating performance such as gains (or losses) from sales of real estate, gains from remeasurement of investments in real estate ventures, impairments of depreciable assets, and depreciation, which can make periodic and peer analyses of operating performance more difficult. Our computation of FFO may not be comparable to FFO reported by other REITs or real estate companies.

 

FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of our performance. FFO does not represent cash generated from operating activities determined in accordance with GAAP and is not a measure of liquidity or an indicator of our ability to make cash distributions. We believe that to further understand our performance, FFO should be compared with our reported net income and considered in addition to cash flows computed in accordance with GAAP, as presented in our Consolidated Financial Statements.

 

FFO, as adjusted

 

FFO, as adjusted represents FFO as defined above, excluding the effects of acquisition related costs, gains or losses from early extinguishment of debt, and non-recurring items, which we believe are not indicative of the Company’s operating results.  We present FFO, as adjusted because we believe it is a helpful measure in understanding our results of operations insofar as we believe that the items noted above that are included in FFO, but excluded from FFO, as adjusted are not indicative of our ongoing operating results.  We also believe that the analyst community considers our FFO, as adjusted (or similar measures using different terminology) when evaluating us.  Because other REITs or real estate companies may not compute FFO, as adjusted in the same manner as we do, and may use different terminology, our computation of FFO, as adjusted may not be comparable to FFO, as adjusted reported by other REITs or real estate companies.

 

The following table presents a reconciliation of net income to FFO and FFO, as adjusted, for the three and nine months ended September 30, 2016 and 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to the Company’s common shareholders

 

$

23,382

 

$

16,936

 

$

56,552

 

$

36,090

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Add:

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate depreciation and amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

Real property

 

 

41,195

 

 

38,328

 

 

120,925

 

 

113,422

 

Company’s share of unconsolidated real estate ventures

 

 

2,905

 

 

1,784

 

 

8,148

 

 

5,340

 

Noncontrolling interests in the Operating Partnership

 

 

283

 

 

223

 

 

682

 

 

475

 

FFO attributable to common shareholders and OP unitholders

 

$

67,765

 

$

57,271

 

$

186,307

 

$

155,327

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Add:

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition related costs (1)

 

 

888

 

 

1,222

 

 

5,970

 

 

2,485

 

FFO attributable to common shareholders and OP unitholders, as adjusted

 

$

68,653

 

$

58,493

 

$

192,277

 

$

157,812

 

Weighted-average diluted shares and units outstanding

 

 

182,699

 

 

173,138

 

 

181,134

 

 

170,956

 

______________________

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(1)

Acquisition related costs for the nine months ended September 30, 2016 include $0.2 million of acquisition related costs that are included in the Company’s share of equity in losses of real estate ventures.

 

Off-Balance Sheet Arrangements

 

We do not have off-balance sheet arrangements, financings or other relationships with other unconsolidated entities (other than our co-investment partnerships) or other persons, also known as variable interest entities not previously discussed.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Our future income, cash flows and fair values relevant to financial instruments depend upon prevailing market interest rates.

Market Risk

 

Our investment policy relating to cash and cash equivalents is to preserve principal and liquidity while maximizing the return through investment of available funds.

 

Effect of Changes in Interest Rates on our Outstanding Debt

 

Our interest rate risk objectives are to limit the impact of interest rate fluctuations on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, we manage our exposure to fluctuations in market interest rates for a portion of our borrowings through the use of derivative financial instruments such as interest rate swaps or caps to mitigate our interest rate risk on a related financial instrument or to effectively lock the interest rate on a portion of our variable rate debt.  The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market rates.  The range of changes chosen reflects our view of changes which are reasonably possible over a one-year period.  Market values are the present value of projected future cash flows based on the market rates chosen.

 

As of September 30, 2016, our consolidated debt consisted of $1.5 billion of outstanding mortgages, unsecured senior notes and unsecured term loans that are subject to fixed rates, including variable rate debt that is effectively fixed through our use of interest rate swaps.  Additionally, as of September 30, 2016, there were $100.0 million of outstanding unsecured term loan borrowings, subject to floating rates.  Changes in market interest rates have different impacts on the fixed and variable rate portions of our debt portfolio.  A change in market interest rates on the fixed portion of the debt portfolio impacts the net financial instrument position, but has no impact on interest incurred or cash flows.  A change in market interest rates on the variable portion of the debt portfolio impacts the interest incurred and cash flows, but does not impact the net financial instrument position.

 

If market interest rates on our variable rate debt increase by 100 basis points, the increase in annual interest expense on our variable rate debt would decrease future earnings and cash flows by approximately $1.0 million a year.  If market interest rates on our variable rate debt decrease by 100 basis points, the decrease in interest expense on our variable rate debt would increase future earnings and cash flows by approximately $1.0 million a year.

 

If market rates of interest increase by 100 basis points, the fair value of our outstanding fixed-rate mortgage debt, unsecured senior notes and unsecured term loans would decrease by approximately $84.2 million.  If market rates of interest decrease by 100 basis points, the fair value of our outstanding fixed-rate mortgage debt, unsecured senior notes and unsecured term loans would increase by approximately $97.8 million.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Controls and Procedures (Parent Company)

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this Report, the Parent Company carried out an evaluation, under the supervision and with the participation of its management, including its chief executive officer and chief financial officer,

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of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act).

 

Based on that evaluation, the Parent Company’s chief executive officer and chief financial officer have concluded that the Parent Company’s disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information required to be disclosed by the Parent Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to the Parent Company’s management, including its chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

There has been no change in the Parent Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during its most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

 

Controls and Procedures (Operating Partnership)

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this Report, the Operating Partnership carried out an evaluation, under the supervision and with the participation of its management, including the Operating Partnership’s chief executive officer and chief financial officer, of the effectiveness of the design and operation of the Operating Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act).

 

Based on that evaluation, the Operating Partnership’s chief executive officer and chief financial officer have concluded that the Operating Partnership’s disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information required to be disclosed by the Operating Partnership in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to the Operating Partnership’s management, including the Operating Partnership’s chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

There has been no change in the Operating Partnership’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during its most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Operating Partnership’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Repurchases of Parent Company Common Shares

 

The following table provides information about repurchases of the Parent Company’s common shares during the three months ended September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

    

Total
Number of
Shares
Purchased
 (1)

    

Average
Price Paid
Per Share

     

Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans or Programs

    

Maximum
Number of
Shares that
May Yet Be
Purchased
Under the
Plans or
Programs (2)

 

 

 

 

 

 

 

 

 

 

 

 

July 1 - July 31

 

223

 

$

30.37

 

N/A

 

3,000,000

 

August 1 - August 31

 

251

 

$

28.16

 

N/A

 

3,000,000

 

September 1 - September 30

 

265

 

$

27.31

 

N/A

 

3,000,000

 

Total

 

739

 

$

28.52

 

N/A

 

3,000,000

 


(1)

Represents common shares withheld by the Parent Company upon the vesting of restricted shares to cover employee tax obligations.

(2)

On September 27, 2007, the Parent Company announced that the Board of Trustees approved a share repurchase program for up to 3.0 million of the Parent Company’s outstanding common shares.  Unless terminated earlier by resolution of the Board of Trustees, the program will expire when the number of authorized shares has been repurchased.  The Parent Company has made no repurchases under this program to date.

 

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ITEM 6.  EXHIBITS

 

 

 

 

Exhibit No.

    

Exhibit Description

 

 

 

4.1

 

Fourth Supplemental Indenture, dated as of August 15, 2016, among CubeSmart, CubeSmart, L.P. and U.S. Bank National Association (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed on August 15, 2016).

 

 

 

4.2

 

Form of $300 million aggregate principal amount of 3.125% senior notes due September 1, 2026 (incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K, filed on August 15, 2016).

 

 

 

4.3

 

Form of CubeSmart Guarantee (incorporated herein by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K, filed on August 15, 2016).

 

 

 

10.1

 

First Amendment to Executive Employment Agreement, dated as of September 30, 2016, by and between CubeSmart and Christopher P. Marr (incorporated herein by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K, filed on September 30, 2016).

 

 

 

12.1

 

Statement regarding Computation of Ratios of Earnings to Fixed Charges of CubeSmart. (filed herewith)

 

 

 

12.2

 

Statement regarding Computation of Ratios of Earnings to Fixed Charges of CubeSmart L.P. (filed herewith)

 

 

 

31.1

 

Certification of Chief Executive Officer of CubeSmart as required by Rule 13a-14(a)/15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith)

 

 

 

31.2

 

Certification of Chief Financial Officer of CubeSmart as required by Rule 13a-14(a)/15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith)

 

 

 

31.3

 

Certification of Chief Executive Officer of CubeSmart, L.P., as required by Rule 13a-14(a)/15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith)

 

 

 

31.4

 

Certification of Chief Financial Officer of CubeSmart, L.P., as required by Rule 13a-14(a)/15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith)

 

 

 

32.1

 

Certification of Chief Executive Officer and Chief Financial Officer of CubeSmart pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (furnished herewith)

 

 

 

32.2

 

Certification of Chief Executive Officer and Chief Financial Officer of CubeSmart, L.P., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (furnished herewith)

 

 

 

101

 

The following CubeSmart and CubeSmart, L.P. financial information for the nine months ended September 30, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text. (filed herewith)

 

 

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SIGNATURES OF REGISTRANT

 

Pursuant to the requirements 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.

 

 

CUBESMART

 

(Registrant)

 

 

 

 

 

 

Date: October 28, 2016

By:

/s/ Christopher P. Marr

 

 

 

Christopher P. Marr, Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

 

 

Date: October 28, 2016

By:

/s/ Timothy M. Martin

 

 

 

Timothy M. Martin, Chief Financial Officer

 

 

(Principal Financial Officer)

 

 

SIGNATURES OF REGISTRANT

 

Pursuant to the requirements 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.

 

 

 

 

 

 

CUBESMART, L.P.

 

(Registrant)

 

 

 

 

 

 

Date: October 28, 2016

By:

/s/ Christopher P. Marr

 

 

 

Christopher P. Marr, Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

 

 

Date: October 28, 2016

By:

/s/ Timothy M. Martin

 

 

 

Timothy M. Martin, Chief Financial Officer

 

 

(Principal Financial Officer)

 

 

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EXHIBIT LIST

 

Exhibit No.

    

Exhibit Description

 

 

 

12.1

 

Statement regarding Computation of Ratios of Earnings to Fixed Charges of CubeSmart.

 

 

 

12.2

 

Statement regarding Computation of Ratios of Earnings to Fixed Charges of CubeSmart L.P.

 

 

 

31.1

 

Certification of Chief Executive Officer of CubeSmart as required by Rule 13a-14(a)/15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification of Chief Financial Officer of CubeSmart as required by Rule 13a-14(a)/15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.3

 

Certification of Chief Executive Officer of CubeSmart, L.P., as required by Rule 13a-14(a)/15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.4

 

Certification of Chief Financial Officer of CubeSmart, L.P., as required by Rule 13a-14(a)/15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Certification of Chief Executive Officer and Chief Financial Officer of CubeSmart pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification of Chief Executive Officer and Chief Financial Officer of CubeSmart, L.P., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101

 

The following CubeSmart and CubeSmart, L.P. financial information for the nine months ended September 30, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.

 

 

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