5. INVESTMENT IN UNCONSOLIDATED REAL ESTATE VENTURES
Capital Storage Partners, LLC (“Capital Storage”)
On September 5, 2018, the Company invested $5.0 million in exchange for 100% of the Class A Preferred Units of Capital Storage Partners, LLC, a newly formed venture that acquired 22 self-storage properties located in Florida (4), Oklahoma (5), and Texas (13). The Class A Preferred Units earn an 11% cumulative dividend prior to any other distributions. The Company’s investment in Capital Storage and the related dividends are included in Other assets, net on the Company’s consolidated balance sheets and in Other income on the Company’s consolidated statements of operations, respectively.
191 IV CUBE LLC (“HVP IV”)
On October 16, 2017, the Company acquired a self-storage property located in Texas for $9.4 million, which it then contributed to a newly-formed joint venture on November 1, 2017. In return for contributing the property to HVP IV, the Company received approximately $7.5 million in cash and a 20% ownership interest in the venture. During the nine months ended September 30, 2018, HVP IV acquired ten additional stores located in Arizona (2), Florida (3), Georgia (2), Maryland (1), and Texas (2) for an aggregate purchase price of $114.4 million, of which the Company has contributed $14.1 million.
On May 16, 2018 and August 15, 2018, HVP IV received $43.7 million and $24.4 million advances, respectively, on its $107.0 million loan facility, which encumbers the 11 stores that are owned by the venture as of September 30, 2018. The loan bears interest at LIBOR plus 1.70% and matures on May 16, 2021 with options to extend the maturity date through May 16, 2023, subject to satisfaction of certain conditions and payment of the extension fees as stipulated in the loan agreement. As of September 30, 2018, HVP IV was under contract, and had made aggregate deposits of $0.2 million, to acquire two stores located in Connecticut for an aggregate purchase price of $15.1 million.
CUBE HHF Northeast Venture LLC (“HHFNE”)
On December 15, 2016, the Company invested a 10% ownership interest in a newly-formed joint venture that acquired 13 self-storage properties located in Connecticut (3), Massachusetts (6), Rhode Island (2), and Vermont (2). HHFNE paid $87.5 million for these stores, of which $6.0 million was allocated to the value of the in-place lease intangible. The acquisition was funded primarily through an advance totaling $44.5 million on the venture’s 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 HHFNE related to this portfolio acquisition was $3.8 million.
The loan bears interest at LIBOR plus 1.90% and matures on December 15, 2019 with options to extend the maturity date through December 15, 2021, subject to satisfaction of certain conditions and payment of the extension fees as stipulated in the loan agreement.
191 III CUBE LLC (“HVP III”)
During the fourth quarter of 2015, the Company invested a 10% ownership interest in a newly-formed joint venture that agreed to acquire a property portfolio comprised of 37 self-storage properties located in Michigan (17), Tennessee (10), Massachusetts (7), and Florida (3). HVP III paid $242.5 million for these 37 stores, of which $18.9 million was allocated to the value of the in-place lease intangible. HVP III acquired 30 of the stores on December 8, 2015 for $193.7 million, one of the stores on January 26, 2016 for $5.7 million, five of the stores on April 21, 2016 for $36.1 million, and one store on June 15, 2016 for $7.0 million. In connection with six of the acquired stores, HVP III 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 III 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.
represented by these OP Units were a component of the consideration that the Operating Partnership paid to acquire certain self-storage properties. 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 January 31, 2018, the Company acquired a store in Texas for $12.2 million and assumed an existing mortgage loan with an outstanding balance of approximately $7.2 million and immediately repaid the loan. In conjunction with the closing, the Company paid $0.2 million in cash and issued 168,011 OP Units, valued at approximately $4.8 million, to pay the remaining consideration.
On April 12, 2017, the Company acquired a store in Illinois for $11.2 million. In conjunction with the closing, the Company paid $9.7 million and issued 58,400 Class C OP Units to pay the remaining consideration. On July 23, 2018, all of the 58,400 Class C OP Units were exchanged for an aggregate of 46,322 common units of the Operating Partnership.
On May 9, 2017, the Company acquired a store in Maryland for $18.2 million and assumed an existing mortgage loan with an outstanding balance of approximately $5.9 million. In conjunction with the closing, the Company issued 440,160 OP Units, valued at approximately $12.3 million, to pay the remaining consideration.
As of September 30, 2018 and December 31, 2017, 2,048,570 and 1,878,253 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, 2018 and December 31, 2017. As of September 30, 2018, the Operating Partnership recorded increases to OP Units owned by third parties and corresponding increases to capital of $0.2 million. As of December 31, 2017, the Operating Partnership recorded increases to OP Units owned by third parties and corresponding decreases to capital of $ $4.0 million.
13. COMMITMENTS AND CONTINGENCIES
The Company is involved in claims from time to time, which arise in the ordinary course of business. In accordance with applicable accounting guidance, management establishes an accrued liability for litigation when those matters present loss contingencies that are both probable and reasonably estimable. In such cases, there may be exposure to loss in excess of those amounts accrued. The estimated loss, if any, is based upon currently available information and is subject to significant judgment, a variety of assumptions, and known and unknown uncertainties. In the opinion of management, the Company has made adequate provisions for potential liabilities, arising from any such matters, which are included in Accounts payable, accrued expenses and other liabilities on the Company’s consolidated balance sheets. However, litigation is inherently unpredictable, and the costs and other effects of pending or future litigation, governmental investigations, legal and administrative cases and proceedings (whether civil or criminal), settlements, judgments and investigations, claims, and changes in any such matters, could have a material adverse effect the Company’s business, financial condition, and operating results.
On July 13, 2015, a putative class action was filed against the Company in the Federal District Court of New Jersey seeking to obtain declaratory, injunctive and monetary relief for a class of New Jersey consumers based upon alleged violations by the Company of the New Jersey Truth in Customer Contract, Warranty and Notice Act and the New Jersey Consumer Fraud Act. On April 19, 2018, the court granted final approval of a settlement for the class action. The settlement and associated expenses, which were previously reserved for, did not have a material impact on the Company’s consolidated financial position or results of operations.
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, 2017.
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 properties. 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, 2018 and December 31, 2017, we owned 490 and 484 self-storage properties, respectively, totaling approximately 34.5 million rentable square feet. As of September 30, 2018, we owned stores 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, 2018, we managed 582 stores for third parties (including 149 stores containing an aggregate of approximately 8.9 million rentable square feet as part of five separate unconsolidated real estate ventures) bringing the total number of stores which we owned and/or managed to 1,072. As of September 30, 2018, we managed stores for third parties in the District of Columbia and the following 35 states: Alabama, Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, and Wisconsin.
We derive revenues principally from rents received from customers who rent cubes at our self-storage properties 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 stores 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 stores, 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 properties.
We have one reportable segment: we own, operate, develop, manage and acquire self-storage properties.
Our self-storage properties are located in major metropolitan and suburban areas and have numerous customers per store. No single customer represents a significant concentration of our revenues. Our stores 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, 2018.
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 Properties
The Company records self-storage properties 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 stores 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 stores is acquired, the purchase price is allocated to the individual stores 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 store 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 stores 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.
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 store’s basis is recoverable. If a store’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, 2018 and 2017.
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 store (or group of stores), (b) the store is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such stores, (c) an active program to locate a buyer and other actions required to complete the plan to sell the store have been initiated, (d) the sale of the store is probable and transfer of the asset is expected to be completed within one year, (e) the store 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. Stores 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 stores in accordance with the guidance on transfer of nonfinancial assets. Payments received from purchasers prior to closing are recorded as deposits. Profit on real estate sold is recognized when a valid contract exists, the collectability of the sales price is reasonably assured and the control of the property has transferred.
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.
Investments in Unconsolidated Real Estate Ventures
The Company accounts for its investments in unconsolidated real estate ventures under the equity method of accounting when it is determined that the Company has the ability to exercise significant influence over the venture. 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, 2018 and 2017.
Recent Accounting Pronouncements
In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2017-12 – Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. The transition guidance provides companies with the option of early adopting the new standard using a modified retrospective transition method in any interim period after issuance of the update, or alternatively requires adoption for fiscal years beginning after December 15, 2018. This adoption method will require the Company to recognize the cumulative effect of initially applying the new guidance as an adjustment to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that the Company adopts the update. The adoption of this guidance is not expected to have an impact on the Company’s consolidated financial statements as the Company currently does not have any outstanding
derivative financial instruments.
In February 2017, as part of the new revenue standard, the FASB issued ASU No. 2017-05 – Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance, which focuses on recognizing gains and losses from the transfer of nonfinancial assets in contracts with non-customers. Specifically, the new guidance defines “in substance nonfinancial asset”, unifies guidance related to partial sales of nonfinancial assets, eliminates rules specifically addressing sales of real estate, removes exceptions to the financial asset derecognition model, and clarifies the accounting for contributions of nonfinancial assets to joint ventures. The new guidance became effective on January 1, 2018 when the Company adopted the new revenue standard. Upon adoption, the majority of the Company’s sale transactions are now treated as dispositions of nonfinancial assets rather than dispositions of a business given the FASB’s recently revised definition of a business (see ASU No. 2017-01 below). Additionally, in partial sale transactions where the Company sells a controlling interest in real estate but retains a noncontrolling interest, the Company will now fully recognize a gain or loss on the fair value measurement of the retained interest as the new guidance eliminates the partial profit recognition model.
The adoption of this guidance did not have a material impact on the Company’s consolidated financial position or results of operations.
In January 2017, the FASB issued ASU 2017-01 - Business Combinations (Topic 805): Clarifying the Definition of a Business, which changes the definition of a business to include an input and a substantive process that together significantly contribute to the ability to create outputs. A framework is provided to evaluate when an input and a substantive process are present. The new guidance also narrows the definition of outputs, which are defined as the results of inputs and substantive processes that provide goods or services to customers, other revenue, or investment income. The standard became effective on January 1, 2018. Upon adoption of the new guidance, the majority of the Company’s future property acquisitions will now be considered asset acquisitions, resulting in the capitalization of acquisition related costs incurred in connection with these transactions and the allocation of purchase price and acquisition related costs to the assets acquired based on their relative fair values.
The adoption of this guidance did not have a material impact on the Company’s consolidated financial position or results of operations.
In November 2016, the FASB issued ASU No. 2016-18 - Statement of Cash Flows (Topic 230): Restricted Cash, which requires the statement of cash flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The new guidance also requires entities to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. The standard became effective on January 1, 2018 and requires the use of the retrospective transition method. The adoption of this guidance
did not have a material impact on the Company’s consolidated financial statements as the update primarily relates to financial statement presentation and disclosures.
In August 2016, the 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) contingent 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 predominance principle.
The standard became effective on January 1, 2018 and requires the use of the retrospective transition method.
The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements as the update primarily relates to financial statement presentation and 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 Company plans to adopt the standard on January 1, 2019, the date it becomes effective for public companies, using the modified retrospective approach. Upon adoption, the Company anticipates that it will elect the package of practical expedients permitted within the standard, which among other things, allows for the carryforward of historical lease classification. At this time, the primary impact is expected to be related to the Company’s ten ground leases in which it serves as lessee.
In May 2014, the FASB issued ASU No. 2014-09 - Revenue from Contracts with Customers (Topic 606), 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 new guidance outlines a five-step process for customer contract revenue recognition that focuses on transfer of control as opposed to transfer of risk and rewards. The new guidance also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenues and cash flows from contracts with customers. In May 2016, the FASB issued ASU No. 2016-12 - Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which amends ASU No. 2014-09 and is intended to address implementation issues that were raised by stakeholders. ASU No. 2016-12 provides practical expedients on collectability, noncash consideration, presentation of sales tax and contract modifications and completed contracts in transition. Both standards became effective on January 1, 2018. The Company finalized the impact of the adoption of ASU No. 2014-09 and ASU No. 2016-12 on the Company’s consolidated financial statements and related disclosures and adopted the standards using the modified retrospective transition method. The standards did not have a material impact on the Company’s consolidated statements of financial position or results of operations primarily because most of its revenue is derived from lease contracts, which are excluded from the scope of the new guidance. The Company’s insurance fee revenue, property management fee revenue, and merchandise sale revenue are included in the scope of the new guidance, however, the Company identified similar performance obligations under this standard as compared with deliverables and separate units of account identified under its previous revenue recognition methodology. Accordingly, revenue recognized under the new guidance does not differ materially from revenue recognized under previous guidance and there is no material prior year impact.
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 stores and should not be taken as indicative of future operations. We consider our same-store portfolio to consist of only those stores owned and operated on a stabilized basis at the beginning and at the end of the applicable periods presented. We consider a store 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. We believe that same-store results are useful to investors in evaluating our performance because they provide information relating to changes in store-level operating performance without taking into account the effects of acquisitions, developments or dispositions. As of September 30, 2018, we owned 458 same-store properties and 32 non-same-store properties. For analytical presentation, all percentages are calculated using the numbers presented in the financial statements contained in this Report.
Acquisition and Development Activities
The comparability of our results of operations is affected by the timing of acquisition and disposition activities during the periods reported. As of September 30, 2018 and 2017, we owned 490 and 480 self-storage properties and related assets, respectively. The following table summarizes the change in number of owned stores from January 1, 2017 through September 30, 2018:
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2018
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2017
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Balance - January 1
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484
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475
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Stores acquired
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1
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—
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Stores developed
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—
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1
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Balance - March 31
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485
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476
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Stores acquired
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1
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3
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Stores combined
(1)
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—
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(1)
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Balance - June 30
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486
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478
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Stores acquired
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3
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—
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Stores developed
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1
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2
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Balance - September 30
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490
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480
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Stores acquired
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4
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Stores developed
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1
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Stores combined
(2)
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(1)
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Balance - December 31
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484
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(1)
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On May 16, 2017, the Company acquired a store located in Sacramento, CA for approximately $3.7 million, which is located directly adjacent to an existing wholly-owned store. Given their proximity to each other, the stores have been combined in our store count, as well as for operational and reporting purposes.
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(2)
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On October 2, 2017, the Company acquired a store located in Keller, TX for approximately $4.1 million, which is located directly adjacent to an existing wholly-owned store. Given their proximity to each other, the stores have been combined in our store count, as well as for operational and reporting purposes.
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Comparison of the three months ended September 30, 2018 to the three months ended September 30, 2017 (in thousands)
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Non Same-Store
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Other/
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Same-Store Property Portfolio
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Properties
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Eliminations
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Total Portfolio
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Increase/
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%
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Increase/
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%
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2018
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2017
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(Decrease)
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Change
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2018
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2017
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2018
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2017
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2018
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2017
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(Decrease)
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Change
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REVENUES:
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|
Rental income
|
$
|
124,017
|
|
$
|
120,500
|
|
$
|
3,517
|
|
2.9
|
%
|
$
|
8,459
|
|
$
|
5,199
|
|
$
|
—
|
|
$
|
—
|
|
$
|
132,476
|
|
$
|
125,699
|
|
$
|
6,777
|
|
5.4
|
%
|
Other property related income
|
|
12,794
|
|
|
12,386
|
|
|
408
|
|
3.3
|
%
|
|
1,058
|
|
|
662
|
|
|
1,642
|
|
|
1,193
|
|
|
15,494
|
|
|
14,241
|
|
|
1,253
|
|
8.8
|
%
|
Property management fee income
|
|
—
|
|
|
—
|
|
|
—
|
|
0.0
|
%
|
|
—
|
|
|
—
|
|
|
5,400
|
|
|
3,925
|
|
|
5,400
|
|
|
3,925
|
|
|
1,475
|
|
37.6
|
%
|
Total revenues
|
|
136,811
|
|
|
132,886
|
|
|
3,925
|
|
3.0
|
%
|
|
9,517
|
|
|
5,861
|
|
|
7,042
|
|
|
5,118
|
|
|
153,370
|
|
|
143,865
|
|
|
9,505
|
|
6.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses
|
|
37,941
|
|
|
37,733
|
|
|
208
|
|
0.6
|
%
|
|
3,968
|
|
|
2,634
|
|
|
6,846
|
|
|
6,785
|
|
|
48,755
|
|
|
47,152
|
|
|
1,603
|
|
3.4
|
%
|
NET OPERATING INCOME (LOSS):
|
|
98,870
|
|
|
95,153
|
|
|
3,717
|
|
3.9
|
%
|
|
5,549
|
|
|
3,227
|
|
|
196
|
|
|
(1,667)
|
|
|
104,615
|
|
|
96,713
|
|
|
7,902
|
|
8.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store count
|
|
458
|
|
|
458
|
|
|
|
|
|
|
|
32
|
|
|
22
|
|
|
|
|
|
|
|
|
490
|
|
|
480
|
|
|
|
|
|
|
Total square footage
|
|
31,616
|
|
|
31,616
|
|
|
|
|
|
|
|
2,840
|
|
|
1,737
|
|
|
|
|
|
|
|
|
34,456
|
|
|
33,353
|
|
|
|
|
|
|
Period End Occupancy
(1)
|
|
92.7
|
%
|
|
93.5
|
%
|
|
|
|
|
|
|
65.1
|
%
|
|
62.5
|
%
|
|
|
|
|
|
|
|
90.4
|
%
|
|
91.9
|
%
|
|
|
|
|
|
Period Average Occupancy
(2)
|
|
93.3
|
%
|
|
93.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized annual rent per occupied sq. ft.
(3)
|
$
|
16.81
|
|
$
|
16.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,239
|
|
|
35,971
|
|
|
(732)
|
|
(2.0)
|
%
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,780
|
|
|
8,228
|
|
|
1,552
|
|
18.9
|
%
|
Acquisition related costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
235
|
|
|
(235)
|
|
(100.0)
|
%
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,019
|
|
|
44,434
|
|
|
585
|
|
1.3
|
%
|
OPERATING INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,596
|
|
|
52,279
|
|
|
7,317
|
|
14.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER (EXPENSE) INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,191)
|
|
|
(14,454)
|
|
|
(737)
|
|
(5.1)
|
%
|
Loan procurement amortization expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(578)
|
|
|
(577)
|
|
|
(1)
|
|
(0.2)
|
%
|
Equity in losses of real estate ventures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(292)
|
|
|
(280)
|
|
|
(12)
|
|
(4.3)
|
%
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(233)
|
|
|
741
|
|
|
(974)
|
|
(131.4)
|
%
|
Total other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,294)
|
|
|
(14,570)
|
|
|
(1,724)
|
|
(11.8)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,302
|
|
|
37,709
|
|
|
5,593
|
|
14.8
|
%
|
NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests in the Operating Partnership
|
|
|
|
|
|
|
|
|
|
|
(476)
|
|
|
(490)
|
|
|
14
|
|
2.9
|
%
|
Noncontrolling interests in subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
|
|
|
78
|
|
|
(4)
|
|
(5.1)
|
%
|
NET INCOME ATTRIBUTABLE TO THE COMPANY’S COMMON SHAREHOLDERS
|
|
|
|
|
|
|
|
|
|
|
$
|
42,900
|
|
$
|
37,297
|
|
$
|
5,603
|
|
15.0
|
%
|
|
(1)
|
|
Represents occupancy at September 30
th
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.
|
Revenues
Rental income increased from $125.7 million during the three months ended September 30, 2017 to $132.5 million during the three months ended September 30, 2018, an increase of $6.8 million, or 5.4%. The $3.5 million increase in same-store rental income was due primarily to higher rental rates. Realized annual rent per occupied square foot on our same-store portfolio increased 3.4% as a result of higher rates for new and existing customers for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017. The remaining increase was primarily attributable to $3.3 million of additional rental income from the stores acquired or opened in 2017 and 2018 included in our non-same store portfolio.
Other property related income increased from $14.2 million during the three months ended September 30, 2017 to $15.5 million during the three months ended September 30, 2018, an increase of $1.3 million, or 8.8%. The $0.4 million increase in same-store property related income was mainly attributable to increased insurance participation. The remainder of the increase was attributable to $0.4 million of additional other property related income derived from the stores acquired or opened in 2017 and 2018 included in our non-same store portfolio and $0.5 million resulting primarily from increased insurance participation at our managed stores.
Property management fee income increased from $3.9 million during the three months ended September 30, 2017 to $5.4 million during the three months ended September 30, 2018, an increase of $1.5 million, or 37.6%. This increase was 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 (582 stores as of September 30, 2018 compared to 428 stores as of September 30, 2017).
Operating Expenses
Property operating expenses increased from $47.2 million during the three months ended September 30, 2017 to $48.8 million during the three months ended September 30, 2018, an increase of $1.6 million, or 3.4%. This increase was primarily attributable to a $0.2 million increase in property operating expenses on the same-store portfolio primarily due to higher property taxes and $1.3 million of increased expenses associated with newly acquired or developed stores. The remaining $0.1 million increase was attributable to increased costs associated with the growth in our third-party management program.
Depreciation and amortization decreased from $36.0 million during the three months ended September 30, 2017 to $35.2 million during the three months ended September 30, 2018, a decrease of $0.7 million, or 2.0%. This decrease was primarily attributable to five-year assets acquired as part of the Company’s acquisitions in 2012 that became fully depreciated during 2017.
General and administrative expenses increased from $8.2 million during the three month ended September 30, 2017 to $9.8 million during the three months ended September 30, 2018, an increase of $1.6 million, or 18.9%. The increase was primarily attributable to an increase in professional fees and payroll expenses resulting from additional employee headcount to support our growth.
Acquisition related costs decreased $0.2 million from the three months ended September 30, 2017 to the three months ended September 30, 2018 as a result of the Company’s January 1, 2018 adoption of
ASU 2017-01 (see note 2), which now categorizes the majority of our property acquisitions as asset acquisitions, resulting in the capitalization of acquisition related costs.
Other (Expense) Income
Interest expense increased from $14.5 million during the three months ended September 30, 2017 to $15.2 million during the three months ended September 30, 2018, an increase of $0.7 million, or 5.1%. The increase was attributable to a higher amount of outstanding debt during the three months ended September 30, 2018 as compared to the three months ended September 30, 2017, and higher interest rates during the 2018 period. The average outstanding debt balance increased from $1.6 billion during the three months ended September 30, 2017 to $1.7 billion during the three months ended September 30, 2018 as the result of borrowings to fund a portion of the Company’s acquisition and development activity. The weighted average effective interest rate on our outstanding debt increased from 3.83% for the three months ended September 30, 2017 to 3.95% for the three months ended September 30, 2018.
Comparison of the nine months ended September 30, 2018 to the nine months ended September 30, 2017 (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non Same-Store
|
|
Other/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-Store Property Portfolio
|
|
Properties
|
|
Eliminations
|
|
Total Portfolio
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
%
|
|
|
|
2018
|
|
2017
|
|
(Decrease)
|
|
Change
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(Decrease)
|
|
Change
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
$
|
362,264
|
|
$
|
350,662
|
|
$
|
11,602
|
|
3.3
|
%
|
$
|
22,216
|
|
$
|
13,318
|
|
$
|
—
|
|
$
|
—
|
|
$
|
384,480
|
|
$
|
363,980
|
|
$
|
20,500
|
|
5.6
|
%
|
|
Other property related income
|
|
37,672
|
|
|
36,379
|
|
|
1,293
|
|
3.6
|
%
|
|
2,729
|
|
|
1,686
|
|
|
4,387
|
|
|
3,039
|
|
|
44,788
|
|
|
41,104
|
|
|
3,684
|
|
9.0
|
%
|
|
Property management fee income
|
|
—
|
|
|
—
|
|
|
—
|
|
0.0
|
%
|
|
—
|
|
|
—
|
|
|
14,794
|
|
|
10,377
|
|
|
14,794
|
|
|
10,377
|
|
|
4,417
|
|
42.6
|
%
|
|
Total revenues
|
|
399,936
|
|
|
387,041
|
|
|
12,895
|
|
3.3
|
%
|
|
24,945
|
|
|
15,004
|
|
|
19,181
|
|
|
13,416
|
|
|
444,062
|
|
|
415,461
|
|
|
28,601
|
|
6.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses
|
|
115,048
|
|
|
112,392
|
|
|
2,656
|
|
2.4
|
%
|
|
10,595
|
|
|
7,290
|
|
|
21,394
|
|
|
17,165
|
|
|
147,037
|
|
|
136,847
|
|
|
10,190
|
|
7.4
|
%
|
|
NET OPERATING INCOME (LOSS):
|
|
284,888
|
|
|
274,649
|
|
|
10,239
|
|
3.7
|
%
|
|
14,350
|
|
|
7,714
|
|
|
(2,213)
|
|
|
(3,749)
|
|
|
297,025
|
|
|
278,614
|
|
|
18,411
|
|
6.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store count
|
|
458
|
|
|
458
|
|
|
|
|
|
|
|
32
|
|
|
22
|
|
|
|
|
|
|
|
|
490
|
|
|
480
|
|
|
|
|
|
|
|
Total square footage
|
|
31,616
|
|
|
31,616
|
|
|
|
|
|
|
|
2,840
|
|
|
1,737
|
|
|
|
|
|
|
|
|
34,456
|
|
|
33,353
|
|
|
|
|
|
|
|
Period End Occupancy
(1)
|
|
92.7
|
%
|
|
93.5
|
%
|
|
|
|
|
|
|
65.1
|
%
|
|
62.5
|
%
|
|
|
|
|
|
|
|
90.4
|
%
|
|
91.9
|
%
|
|
|
|
|
|
|
Period Average Occupancy
(2)
|
|
93.0
|
%
|
|
93.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized annual rent per occupied sq. ft.
(3)
|
$
|
16.44
|
|
$
|
15.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,251
|
|
|
110,826
|
|
|
(5,575)
|
|
(5.0)
|
%
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,865
|
|
|
26,522
|
|
|
343
|
|
1.3
|
%
|
|
Acquisition related costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
1,062
|
|
|
(1,062)
|
|
(100.0)
|
%
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132,116
|
|
|
138,410
|
|
|
(6,294)
|
|
(4.5)
|
%
|
|
OPERATING INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
164,909
|
|
|
140,204
|
|
|
24,705
|
|
17.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER (EXPENSE) INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45,797)
|
|
|
(42,028)
|
|
|
(3,769)
|
|
(9.0)
|
%
|
|
Loan procurement amortization expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,735)
|
|
|
(2,059)
|
|
|
324
|
|
15.7
|
%
|
|
Equity in losses of real estate ventures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(785)
|
|
|
(1,305)
|
|
|
520
|
|
39.8
|
%
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
260
|
|
|
941
|
|
|
(681)
|
|
(72.4)
|
%
|
|
Total other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48,057)
|
|
|
(44,451)
|
|
|
(3,606)
|
|
(8.1)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116,852
|
|
|
95,753
|
|
|
21,099
|
|
22.0
|
%
|
|
NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests in the Operating Partnership
|
|
|
|
|
|
|
|
|
(1,285)
|
|
|
(1,194)
|
|
|
(91)
|
|
(7.6)
|
%
|
|
Noncontrolling interests in subsidiaries
|
|
|
|
|
|
|
|
|
166
|
|
|
182
|
|
|
(16)
|
|
(8.8)
|
%
|
|
NET INCOME ATTRIBUTABLE TO THE COMPANY’S COMMON SHAREHOLDERS
|
|
|
|
|
|
|
$
|
115,733
|
|
$
|
94,741
|
|
$
|
20,992
|
|
22.2
|
%
|
|
|
(1)
|
|
Represents occupancy at September 30
th
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.
|
Revenues
Rental income increased from $364.0 million during the nine months ended September 30, 2017 to $384.5 million during the nine months ended September 30, 2018, an increase of $20.5 million, or 5.6%. The $11.6 million increase in same-store rental income was due primarily to higher rental rates. Realized annual rent per occupied square foot on our same-store portfolio increased 3.5% as a result of higher rates for new and existing customers for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The remaining increase was primarily attributable to $8.9 million of additional rental income from the stores acquired or opened in 2017 and 2018 included in our non-same store portfolio.
Other property related income increased from $41.1 million during the nine months ended September 30, 2017 to $44.8 million during the nine months ended September 30, 2018, an increase of $3.7 million, or 9.0%. The $1.3 million increase in same-store property related income was mainly attributable to increased insurance participation. The remainder of the increase was attributable to $1.0 million of additional other property related income derived from the stores acquired or opened in 2017 and 2018 included in our non-same store portfolio and $1.3 million resulting primarily from increased insurance participation at our managed stores.
Property management fee income increased from $10.4 million during the nine months ended September 30, 2017 to $14.8 million during the nine months ended September 30, 2018, an increase of $4.4 million, or 42.6%. This increase was 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 (582 stores as of September 30, 2018 compared to 428 stores as of September 30, 2017).
Operating Expenses
Property operating expenses increased from $136.8 million during the nine months ended September 30, 2017 to $147.0 million during the nine months ended September 30, 2018, an increase of $10.2 million, or 7.4%. This increase was primarily attributable to a $4.2 million increase in costs associated with the growth in our third-party management program as well as system enhancements, a $2.7 million increase in property operating expenses on the same-store portfolio primarily due to higher property taxes, payroll, and snow removal expenses, and $3.3 million of increased expenses associated with newly acquired or developed stores.
Depreciation and amortization decreased from $110.8 million during the nine months ended September 30, 2017 to $105.3 million during the nine months ended September 30, 2018, a decrease of $5.6 million, or 5.0%. This decrease was primarily attributable to five-year assets acquired as part of the Company’s acquisitions in 2012 that became fully depreciated during 2017.
Acquisition related costs decreased $1.1 million from the nine months ended September 30, 2017 to the nine months ended September 30, 2018 as a result of the Company’s January 1, 2018 adoption of
ASU 2017-01 (see note 2), which now categorizes the majority of our property acquisitions as asset acquisitions, resulting in the capitalization of acquisition related costs.
Other (Expense) Income
Interest expense increased from $42.0 million during the nine months ended September 30, 2017 to $45.8 million during the nine months ended September 30, 2018, an increase of $3.8 million, or 9.0%. The increase was attributable to a higher amount of outstanding debt during the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, and higher interest rates during the 2018 period. The average outstanding debt balance increased from $1.6 billion during the nine months ended September 30, 2017 to $1.7 billion during the nine months ended September 30, 2018 as the result of borrowings to fund a portion of the Company’s acquisition and development activity. The weighted average effective interest rate on our outstanding debt increased from 3.78% for the nine months ended September 30, 2017 to 3.92% for the nine months ended September 30, 2018.
Equity in losses of real estate ventures fluctuated from a loss of $1.3 million during the nine months ended September 30, 2017 to a loss of $0.8 million during the nine months ended September 30, 2018, a change of $0.5 million, or 39.8%. The change was mainly driven by our share of the losses attributable to HVP III and HHFNE, real estate ventures in which we own a 10% interest in each. The losses incurred in 2017 were primarily the result of amortization expense associated with the in-place lease intangibles that were recorded in connection with HVP III’s and HHFNE’s acquisition of 38 and 13 properties, respectively, during 2016.
Cash Flows
Comparison of the nine months ended September 30, 2018 to the nine months ended September 30, 2017
A comparison of cash flow from operating, investing and financing activities for the nine months ended September 30, 2018 and 2017 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
Net cash provided by (used in):
|
|
2018
|
|
2017
|
|
Change
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
234,562
|
|
$
|
223,662
|
|
$
|
10,900
|
|
Investing activities
|
|
$
|
(185,023)
|
|
$
|
(84,151)
|
|
$
|
(100,872)
|
|
Financing activities
|
|
$
|
(52,218)
|
|
$
|
(139,958)
|
|
$
|
87,740
|
|
Cash provided by operating activities for the nine months ended September 30, 2018 and 2017 was $234.6 million and $223.7 million, respectively, reflecting an increase of $10.9 million. Our increased cash flow from operating activities was primarily attributable to our 2017 and 2018 acquisitions and increased net operating income levels on the same-store portfolio in the 2018 period as compared to the 2017 period.
Cash used in investing activities increased from $84.2 million for the nine months ended September 30, 2017 to $185.0 million for the nine months ended September 30, 2018, reflecting an increase of $100.9 million.
The change was primarily driven by an increase in cash used for acquisitions of storage properties. Cash used during the nine months ended September 30, 2018 related to the acquisition of five stores for an aggregate purchase price of $90.8 million, inclusive of $7.2 million of assumed debt and $4.8 million of OP units issued, while cash used during the nine months ended September 30, 2017 related to the acquisition of three stores for an aggregate purchase price of $33.1 million, inclusive of $6.2 million of assumed debt and $12.3 million of OP units issued. The change was also driven by a $19.0 million increase in our investment in real estate ventures primarily due to $14.1 million used to fund the acquisition of ten properties during the nine months ended September 30, 2018 by HVP IV and $5.0 million to fund our preferred investment in Capital Storage (see note 5). The remainder of the increase was primarily due to a $16.0 million increase in development costs resulting from the acquisition of the noncontrolling interest in a previously consolidated development joint venture for $20.4 million during the first quarter of 2018.
Cash used in financing activities decreased from $140.0 million for the nine months ended September 30, 2017 to $52.2 million for the nine months ended September 30, 2018, reflecting a decrease of $87.7 million. This change was primarily the result of a
$108.6 million increase in proceeds received from the issuance of common shares
, offset by a $19.4 million increase
in cash distributions paid to common shareholders and noncontrolling interests in the Operating Partnership during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, resulting from the increase in the common dividend per share and number of shares outstanding.
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 stores and fees earned from managing stores. 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 properties in which we invest, self-storage properties, 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 stores, 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 stores. These funding requirements will vary from year to year, in some cases significantly. For the remainder of the 2018 fiscal year, we expect recurring capital expenditures to be approximately $4.0 million to $8.0 million, planned capital improvements and store upgrades to be approximately $0.5 million to $2.0 million and costs associated with the development of new stores to be approximately $15.0 million to $25.0 million. Our currently scheduled principal payments on debt, including borrowings outstanding on the Credit Facility and Term Loan Facility, are approximately $0.7 million for the remainder of 2018.
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 2018 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 stores; (iii) acquisitions of additional stores; and (iv) development of new stores. 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 store 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, 2018, we had approximately $3.4 million in available cash and cash equivalents. In addition, we had approximately $405.1 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”):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
Effective
|
|
Issuance
|
|
Maturity
|
|
Unsecured Senior Notes
|
|
2018
|
|
2017
|
|
Interest Rate
|
|
Date
|
|
Date
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
$250M 4.800% Guaranteed Notes due 2022
|
|
$
|
250,000
|
|
$
|
250,000
|
|
4.82
|
%
|
|
Jun-12
|
|
Jul-22
|
|
$300M 4.375% Guaranteed Notes due 2023
(1)
|
|
|
300,000
|
|
|
300,000
|
|
4.33
|
%
|
|
Various
(1)
|
|
Dec-23
|
|
$300M 4.000% Guaranteed Notes due 2025
(2)
|
|
|
300,000
|
|
|
300,000
|
|
3.99
|
%
|
|
Various
(2)
|
|
Nov-25
|
|
$300M 3.125% Guaranteed Notes due 2026
|
|
|
300,000
|
|
|
300,000
|
|
3.18
|
%
|
|
Aug-16
|
|
Sep-26
|
|
Principal balance outstanding
|
|
|
1,150,000
|
|
|
1,150,000
|
|
|
|
|
|
|
|
|
Less: Discount on issuance of unsecured senior notes, net
|
|
|
(581)
|
|
|
(617)
|
|
|
|
|
|
|
|
|
Less: Loan procurement costs, net
|
|
|
(6,161)
|
|
|
(6,923)
|
|
|
|
|
|
|
|
|
Total unsecured senior notes, net
|
|
$
|
1,143,258
|
|
$
|
1,142,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
On April 4, 2017, the Operating Partnership issued $50.0 million of its 4.375% senior notes due 2023, which are part of the same series as the $250.0 million principal amount of the Operating Partnership’s 4.375% senior notes due December 15, 2023 issued on December 17, 2013. The $50.0 million and $250.0 million tranches were priced at 105.040% and 98.995%, respectively, of the principal amount to yield 3.495% and 4.501%, respectively, to maturity. The combined weighted-average effective interest rate of the 2023 notes is 4.330%.
|
|
(2)
|
|
On April 4, 2017, the Operating Partnership issued $50.0 million of its 4.000% senior notes due 2025, which are part of the same series as the $250.0 million principal amount of the Operating Partnership’s 4.000% senior notes due November 15, 2025 issued on October 26, 2015. The $50.0 million and $250.0 million tranches were priced at 101.343% and 99.735%, respectively, of the principal amount to yield 3.811% and 4.032%, respectively, to maturity. The combined weighted-average effective interest rate of the 2025 notes is 3.994%.
|
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, 2018, the Operating Partnership was in compliance with all of the financial covenants under the Senior Notes.
Revolving Credit Facility and Unsecured Term Loans
On December 9, 2011, we entered into a credit agreement (the “Credit Facility”), which was subsequently amended on April 5, 2012, June 18, 2013, and April 22, 2015 to provide for, amongst other things, a $500.0 million unsecured revolving facility (the “Revolver”) with a maturity date of April 22, 2020. Pricing on the Revolver is dependent 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%. As of September 30, 2018, $405.1 million was available for borrowing under the Revolver. The available balance under the Revolver is reduced by an outstanding letter of credit of $0.7 million. As of September 30, 2018, we also had a $200.0 million unsecured term loan outstanding under the Credit Facility, which is included in the table below.
On June 20, 2011, we entered into an unsecured term loan agreement (the “Term Loan Facility”), which was subsequently amended on June 18, 2013 and August 5, 2014, consisting of a $100.0 million unsecured term loan with a five-year maturity and a $100.0 million unsecured term loan with a seven-year maturity. On April 6, 2017, the Company used the net proceeds from the issuance of $50.0 million of its 4.375% Senior Notes due 2023 and $50.0 million of its 4.000% Senior Notes due 2025 to repay all of the outstanding indebtedness under its five-year $100.0 million unsecured term loan that was scheduled to mature in June 2018.
Our unsecured term loans under the Credit Facility and Term Loan Facility are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value as of:
|
|
Effective Interest
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
Rate as of
|
|
Maturity
|
|
Unsecured Term Loans
|
|
2018
|
|
2017
|
|
September 30, 2018
(1)
|
|
Date
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
Credit Facility
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured term loan
|
|
$
|
200,000
|
|
$
|
200,000
|
|
3.56
|
%
|
|
Jan-19
|
|
Term Loan Facility
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured term loan
|
|
|
100,000
|
|
|
100,000
|
|
3.41
|
%
|
|
Jan-20
|
|
Principal balance outstanding
|
|
|
300,000
|
|
|
300,000
|
|
|
|
|
|
|
Less: Loan procurement costs, net
|
|
|
(301)
|
|
|
(604)
|
|
|
|
|
|
|
Total unsecured term loans, net
|
|
$
|
299,699
|
|
$
|
299,396
|
|
|
|
|
|
|
|
(1)
|
|
Pricing on the Term Loan Facility and the unsecured term loan under the Credit Facility is dependent on our unsecured debt credit ratings. At our current Baa2/BBB level, amounts drawn under the term loan scheduled to mature in January 2019 are priced at 1.30% over LIBOR, while amounts drawn under the term loan scheduled to mature in January 2020 are priced at 1.15% over LIBOR. As of September 30, 2018, borrowings under the Credit Facility, inclusive of the Revolver, and Term Loan Facility, as amended, had an effective weighted average interest rate of 3.51%.
|
The Term Loan Facility and the unsecured term loan under the Credit Facility were fully drawn at September 30, 2018 and no further borrowings may be made under the term loans. Our ability to borrow under the Revolver is subject to ongoing compliance with certain financial covenants which include:
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·
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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, 2018, we were in compliance with all of our financial covenants, and we 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
We maintain an “at-the-market” equity program that enables us to sell up to 50.0 million common shares through sales agents pursuant to equity distribution agreements (the “Equity Distribution Agreements”).
During the nine months ended September 30, 2018, we sold a total of 3.6 million common shares under the Equity Distribution Agreements at an average sales price of $30.85 per share, resulting in gross proceeds of $109.7 million under the program. We incurred $1.3 million of offering costs in conjunction with the 2018 sales. We used proceeds from the sales conducted during the nine months ended September 30, 2018 to fund acquisitions of storage facilities and for general corporate purposes. As of September 30, 2018, 11.2 million common shares remained available for issuance under the Equity Distribution Agreements.
Recent Developments
Subsequent to September 30, 2018, we acquired two self-storage properties located in California and Texas for an aggregate purchase price of $76.4 million.
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 stores, and for all of our stores 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:
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·
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it is one of the primary measures used by our management and our store managers to evaluate the economic productivity of our stores, including our ability to lease our stores, increase pricing and occupancy and control our property operating expenses;
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·
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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
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|
·
|
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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.
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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.
Management uses FFO as a key performance indicator in evaluating the operations of our stores. 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 attributable to the Company’s common shareholders to FFO attributable to common shareholders and OP unitholders and FFO, as adjusted, attributable to common shareholders and OP Unit holders for the three and nine months ended September 30, 2018 and 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to the Company’s common shareholders
|
|
$
|
42,900
|
|
$
|
37,297
|
|
$
|
115,733
|
|
$
|
94,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real property
|
|
|
34,537
|
|
|
35,271
|
|
|
103,142
|
|
|
108,825
|
Company’s share of unconsolidated real estate ventures
|
|
|
2,752
|
|
|
2,457
|
|
|
7,763
|
|
|
7,716
|
Noncontrolling interests in the Operating Partnership
|
|
|
476
|
|
|
490
|
|
|
1,285
|
|
|
1,194
|
FFO attributable to common shareholders and OP unitholders
|
|
$
|
80,665
|
|
$
|
75,515
|
|
$
|
227,923
|
|
$
|
212,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan procurement amortization expense - early repayment of debt
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
190
|
Acquisition related costs
|
|
|
—
|
|
|
235
|
|
|
—
|
|
|
1,062
|
Property damage related to hurricanes, net of expected insurance proceeds
(1)
|
|
|
—
|
|
|
1,424
|
|
|
—
|
|
|
1,424
|
FFO, as adjusted, attributable to common shareholders and OP unitholders
|
|
$
|
80,665
|
|
$
|
77,174
|
|
$
|
227,923
|
|
$
|
215,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average diluted shares outstanding
|
|
|
186,916
|
|
|
181,286
|
|
|
184,829
|
|
|
181,225
|
Weighted-average diluted units outstanding
|
|
|
2,038
|
|
|
2,401
|
|
|
2,017
|
|
|
2,221
|
Weighted-average diluted shares and units outstanding
|
|
|
188,954
|
|
|
183,687
|
|
|
186,846
|
|
|
183,446
|
|
(1)
|
|
Property damage related to hurricanes, net of expected insurance proceeds for the three and nine months ended September 30, 2017 includes $0.1 million of storm damage 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 RIS
K
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, 2018, our consolidated debt consisted of $1.3 billion of outstanding mortgages and unsecured senior notes that are subject to fixed rates. Additionally, as of September 30, 2018, there were $94.3 million and $300.0 million of outstanding credit facility and unsecured term loan borrowings, respectively, 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 $3.9 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 $3.9 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 $63.5 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 $68.7 million.
ITEM 4. CONTROLS AND PROCEDURE
S
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, 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.
PART II. OTHER INFORMATIO
N
ITEM 1. LEGAL PROCEEDINGS
We are involved in claims from time to time, which arise in the ordinary course of business. In accordance with applicable accounting guidance, management establishes an accrued liability for litigation when those matters present loss contingencies that are both probable and reasonably estimable. In such cases, there may be exposure to loss in excess of those amounts accrued. The estimated loss, if any, is based upon currently available information and is subject to significant judgment, a variety of assumptions, and known and unknown uncertainties. In the opinion of management, we have made adequate provisions for potential liabilities, arising from any such matters, which are included in Accounts payable, accrued expenses and other liabilities on the Company’s consolidated balance sheets. However, litigation is inherently unpredictable, and the costs and other effects of pending or future litigation, governmental investigations, legal and administrative cases and proceedings (whether civil or criminal), settlements, judgments and investigations, claims, and changes in any such matters, could have a material adverse effect on our business, financial condition, and operating results.
On July 13, 2015, a putative class action was filed against the Company in the Federal District Court of New Jersey seeking to obtain declaratory, injunctive and monetary relief for a class of New Jersey consumers based upon alleged violations by the Company of the New Jersey Truth in Customer Contract, Warranty and Notice Act and the New Jersey Consumer Fraud Act. On April 19, 2018, the court granted final approval of a settlement for the class action. The settlement and associated expenses, which were previously reserved for, did not have a material impact on our consolidated financial position or results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEED
S
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, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1 - July 31
|
|
349
|
|
$
|
32.00
|
|
N/A
|
|
3,000,000
|
|
August 1 - August 31
|
|
229
|
|
$
|
30.70
|
|
N/A
|
|
3,000,000
|
|
September 1 - September 30
|
|
232
|
|
$
|
29.59
|
|
N/A
|
|
3,000,000
|
|
Total
|
|
810
|
|
$
|
30.94
|
|
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.
|
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 dat
e.
Repurchases of Unregistered Securities
On July 23, 2018, the Company exercised its right to require redemption of the 58,400 Class C OP Units that were originally issued on April 12, 2017. The redemption was satisfied through the issuance of 46,322 common units of the Operating Partnership. The issuance of common units in exchange for the Class C OP Units was exempt from the registration requirements of the Securities Act of 1933 (the “Securities Act”) pursuant to Section 4(a)(2) of the Securities Act.
ITEM 6. EXHIBITS
Exhibit No.
|
|
Exhibit Description
|
|
|
|
10.1
|
|
Amended and Restated Equity Distribution Agreement, dated July 27, 2018, by and among CubeSmart, CubeSmart, L.P. and Wells Fargo Securities, LLC, incorporated by reference to Exhibit 1.1 to the Company’s Current Report on Form 8-K, filed on July 27, 2018.
|
|
|
|
10.2
|
|
Amended and Restated Equity Distribution Agreement, dated July 27, 2018, by and among CubeSmart, CubeSmart, L.P. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, incorporated by reference to Exhibit 1.2 to the Company’s Current Report on Form 8-K, filed on July 27, 2018.
|
|
|
|
10.3
|
|
Amended and Restated Equity Distribution Agreement, dated July 27, 2018, by and among CubeSmart, CubeSmart, L.P. and BMO Capital Markets Corp., incorporated by reference to Exhibit 1.3 to the Company’s Current Report on Form 8-K, filed on July 27, 2018.
|
|
|
|
10.4
|
|
Amended and Restated Equity Distribution Agreement, dated July 27, 2018, by and among CubeSmart, CubeSmart, L.P. and Jeffries LLC, incorporated by reference to Exhibit 1.4 to the Company’s Current Report on Form 8-K, filed on July 27, 2018.
|
|
|
|
10.5
|
|
Amended and Restated Equity Distribution Agreement, dated July 27, 2018, by and among CubeSmart, CubeSmart, L.P. and RBC Capital Markets, LLC, incorporated by reference to Exhibit 1.5 to the Company’s Current Report on Form 8-K, filed on July 27, 2018.
|
|
|
|
10.6
|
|
Amended and Restated Equity Distribution Agreement, dated July 27, 2018, by and among CubeSmart, CubeSmart, L.P. and Barclays Capital Inc., incorporated by reference to Exhibit 1.6 to the Company’s Current Report on Form 8-K, filed on July 27, 2018.
|
|
|
|
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, 2018, 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)
|
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 26, 2018
|
By:
|
/s/ Christopher P. Marr
|
|
|
|
Christopher P. Marr, Chief Executive Officer
|
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
Date: October 26, 2018
|
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 26, 2018
|
By:
|
/s/ Christopher P. Marr
|
|
|
|
Christopher P. Marr, Chief Executive Officer
|
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
Date: October 26, 2018
|
By:
|
/s/ Timothy M. Martin
|
|
|
|
Timothy M. Martin, Chief Financial Officer
|
|
|
(Principal Financial Officer)
|
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