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CUBE CubeSmart

Filed: 30 Apr 21, 4:31pm

sts

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended March 31, 2021.

or

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

For the transition period from                                      to                                      .

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

CUBESMART

CUBESMART, L.P.

(Exact Name of Registrant as Specified in its Charter)

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

20-1024732
34-1837021

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)

5 Old Lancaster Rd. Malvern, Pennsylvania

19355

(Address of Principal Executive Offices)

(Zip Code)

(610) 535-5000

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

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

CUBE

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

CubeSmart

Yes No

CubeSmart, L.P.

Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

CubeSmart

Yes No

CubeSmart, L.P.

Yes No

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

CubeSmart:

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

CubeSmart, L.P.:

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

CubeSmart

CubeSmart, L.P.

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

CubeSmart

Yes No

CubeSmart, L.P.

Yes No

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

Class

Outstanding at April 28, 2021

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

201,516,797

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended March 31, 2021 of CubeSmart (the “Parent Company” or “CubeSmart”) and CubeSmart, L.P. (the “Operating Partnership”). The Parent Company is a Maryland real estate investment trust, or REIT, that owns its assets and conducts its operations through the Operating Partnership, a Delaware limited partnership, and subsidiaries of the Operating Partnership. The Parent Company, the Operating Partnership and their consolidated subsidiaries are collectively referred to in this report as the “Company”. In addition, terms such as “we”, “us” or “our” used in this report may refer to the Company, the Parent Company or the Operating Partnership.

The Parent Company is the sole general partner of the Operating Partnership and, as of March 31, 2021, owned a 96.5% interest in the Operating Partnership. The remaining 3.5% interest consists of common units of limited partnership interest issued by the Operating Partnership to third parties in exchange for contributions of properties to the Operating Partnership. As the sole general partner of the Operating Partnership, the Parent Company has full and complete authority over the Operating Partnership’s day-to-day operations and management.

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

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

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

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

facilitate a better understanding by the investors of the Parent Company and the Operating Partnership by enabling them to view the business as a whole in the same manner as management views and operates the business;
remove duplicative disclosures and provide a more straightforward presentation in light of the fact that a substantial portion of the disclosure applies to both the Parent Company and the Operating Partnership; and
create time and cost efficiencies through the preparation of one combined report instead of two separate reports.

2

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

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

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

3

Forward-Looking Statements

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

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in or contemplated by this Report.  Any forward-looking statements should be considered in light of the risks and uncertainties referred to in Item 1A. “Risk Factors” in the Parent Company’s and the Operating Partnership’s combined Annual Report on Form 10-K for the year ended December 31, 2020 and in our other filings with the Securities and Exchange Commission (“SEC”). These risks include, but are not limited to, the following:

adverse changes in the national and local economic, business, real estate and other market conditions;

the effect of competition from existing and new self-storage properties and operators on our ability to maintain or raise occupancy and rental rates;

the failure to execute our business plan;

adverse impacts from the COVID-19 pandemic, other pandemics, quarantines and stay at home orders, including the impact on our ability to operate our self-storage properties, the demand for self-storage, rental rates and fees and rent collection levels;

reduced availability and increased costs of external sources of capital;

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

increases in interest rates and operating costs;

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

risks related to our ability to maintain our Parent Company’s qualification as a REIT for federal income tax purposes;

the failure of acquisitions and developments to close on expected terms, or at all, or to perform as expected;

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

the failure of our joint venture partners to fulfill their obligations to us or their pursuit of actions that are inconsistent with our objectives;

reductions in asset valuations and related impairment charges;

cyber security breaches, cyber attacks or a failure of our networks, systems or technology, which could adversely impact our business, customer and employee relationships;

5

changes in real estate, zoning, use and occupancy laws or regulations;

risks related to or a consequence of natural disasters or acts of violence, pandemics, active shooters, terrorism, insurrection or war that affect the markets in which we operate;

potential environmental and other liabilities;

governmental, administrative and executive orders and laws, which could adversely impact our business operations and customer and employee relationships;

uninsured or uninsurable losses and the ability to obtain insurance coverage against risks and losses;

the ability to attract and retain talent in the current labor market;

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

other risks identified in the Parent Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2020 and, from time to time, in other reports that we file with the SEC or in other documents that we publicly disseminate.

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

6

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CUBESMART AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

March 31, 

December 31,

 

    

2021

    

2020

 

(unaudited)

ASSETS

Storage properties

$

5,492,183

$

5,489,754

Less: Accumulated depreciation

 

(997,712)

 

(983,940)

Storage properties, net (including VIE assets of $136,141 and $119,345, respectively)

 

4,494,471

 

4,505,814

Cash and cash equivalents

 

3,650

 

3,592

Restricted cash

 

2,342

 

2,637

Loan procurement costs, net of amortization

 

3,029

 

3,275

Investment in real estate ventures, at equity

 

93,797

 

92,071

Other assets, net

 

157,189

 

170,753

Total assets

$

4,754,478

$

4,778,142

LIABILITIES AND EQUITY

Unsecured senior notes, net

$

2,030,999

$

2,030,372

Revolving credit facility

 

52,800

 

117,800

Mortgage loans and notes payable, net

 

171,189

 

216,504

Lease liabilities - finance leases

65,710

65,599

Accounts payable, accrued expenses and other liabilities

 

166,025

 

159,140

Distributions payable

 

70,854

 

68,301

Deferred revenue

 

30,974

 

29,087

Security deposits

 

1,079

 

1,077

Total liabilities

 

2,589,630

 

2,687,880

Noncontrolling interests in the Operating Partnership

 

278,649

 

249,414

Commitments and contingencies

Equity

Common shares $.01 par value, 400,000,000 shares authorized, 200,421,556 and 197,405,989 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively

 

2,004

 

1,974

Additional paid-in capital

 

2,909,730

 

2,805,673

Accumulated other comprehensive loss

 

(613)

 

(632)

Accumulated deficit

 

(1,033,519)

 

(974,799)

Total CubeSmart shareholders’ equity

 

1,877,602

 

1,832,216

Noncontrolling interests in subsidiaries

 

8,597

 

8,632

Total equity

 

1,886,199

 

1,840,848

Total liabilities and equity

$

4,754,478

$

4,778,142

See accompanying notes to the unaudited consolidated financial statements.

7

CUBESMART AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

Three Months Ended March 31, 

    

2021

    

2020

    

REVENUES

Rental income

$

162,476

$

140,985

Other property related income

 

19,304

 

16,902

Property management fee income

 

7,061

 

6,194

Total revenues

 

188,841

 

164,081

OPERATING EXPENSES

Property operating expenses

 

61,228

55,740

Depreciation and amortization

 

53,810

40,838

General and administrative

 

10,916

10,365

Total operating expenses

 

125,954

 

106,943

OTHER (EXPENSE) INCOME

Interest:

Interest expense on loans

 

(19,234)

 

(18,681)

Loan procurement amortization expense

 

(1,035)

 

(754)

Equity in earnings (losses) of real estate ventures

 

20

 

(5)

Other

 

677

 

619

Total other expense

 

(19,572)

 

(18,821)

NET INCOME

 

43,315

 

38,317

NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

Noncontrolling interests in the Operating Partnership

 

(1,549)

(383)

Noncontrolling interest in subsidiaries

 

(34)

(38)

NET INCOME ATTRIBUTABLE TO THE COMPANY’S COMMON SHAREHOLDERS

$

41,732

$

37,896

Basic earnings per share attributable to common shareholders

$

0.21

$

0.20

Diluted earnings per share attributable to common shareholders

$

0.21

$

0.20

Weighted average basic shares outstanding

199,160

193,582

Weighted average diluted shares outstanding

200,233

194,264

See accompanying notes to the unaudited consolidated financial statements.

8

CUBESMART AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

Three Months Ended March 31, 

 

    

2021

    

2020

    

 

NET INCOME

$

43,315

$

38,317

Other comprehensive income:

Reclassification of realized losses on interest rate swaps

 

20

 

20

OTHER COMPREHENSIVE INCOME:

 

20

 

20

COMPREHENSIVE INCOME

 

43,335

 

38,337

Comprehensive income attributable to noncontrolling interests in the Operating Partnership

 

(1,550)

 

(383)

Comprehensive income attributable to noncontrolling interest in subsidiaries

 

(34)

 

(38)

COMPREHENSIVE INCOME ATTRIBUTABLE TO THE COMPANY

$

41,751

$

37,916

See accompanying notes to the unaudited consolidated financial statements.

9

CUBESMART AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY

(in thousands)

(unaudited)

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

Noncontrolling

 

Additional

Accumulated Other

Total

Noncontrolling

Interests in the

 

Common Shares

Paid in

Comprehensive

Accumulated

Shareholders’

Interest in

Total

Operating

 

Number

Amount

Capital

(Loss) Income

Deficit

Equity

Subsidiaries

Equity

Partnership

 

Balance at December 31, 2020

 

197,406

$

1,974

$

2,805,673

$

(632)

$

(974,799)

$

1,832,216

$

8,632

$

1,840,848

$

249,414

Distributions paid to noncontrolling interests in subsidiaries

(69)

(69)

Issuance of common shares, net

 

2,837

28

99,660

 

99,688

 

99,688

Issuance of restricted shares

 

32

 

 

Conversion from units to shares

 

55

1

1,912

 

1,913

 

1,913

 

(1,913)

Exercise of stock options

 

92

1

1,171

 

1,172

 

1,172

Amortization of restricted shares

705

 

705

 

705

Share compensation expense

609

 

609

 

609

Adjustment for noncontrolling interests in the Operating Partnership

(32,102)

 

(32,102)

 

(32,102)

 

32,102

Net income

41,732

 

41,732

 

34

 

41,766

 

1,549

Other comprehensive income, net

19

19

19

1

Common share distributions ($0.34 per share)

(68,350)

 

(68,350)

 

(68,350)

 

(2,504)

Balance at March 31, 2021

 

200,422

$

2,004

$

2,909,730

$

(613)

$

(1,033,519)

$

1,877,602

$

8,597

$

1,886,199

$

278,649

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

Noncontrolling

 

Additional

Accumulated Other

Total

Noncontrolling

Interests in the

 

Common Shares

Paid in

Comprehensive

Accumulated

Shareholders’

Interest in

Total

Operating

 

Number

Amount

Capital

(Loss) Income

Deficit

Equity

Subsidiaries

Equity

Partnership

 

Balance at December 31, 2019

    

193,557

$

1,936

$

2,674,745

$

(729)

$

(876,606)

$

1,799,346

$

7,990

$

1,807,336

$

62,088

Distributions paid to noncontrolling interests in subsidiaries

(59)

(59)

Issuance of common shares, net

 

(118)

 

(118)

 

(118)

Issuance of restricted shares

 

30

 

 

Amortization of restricted shares

710

 

710

 

710

Share compensation expense

530

 

530

 

530

Adjustment for noncontrolling interest in the Operating Partnership

7,976

 

7,976

 

7,976

 

(7,976)

Net income

37,896

 

37,896

 

38

 

37,934

 

383

Other comprehensive income, net

20

20

20

Common share distributions ($0.33 per share)

(64,039)

 

(64,039)

 

(64,039)

 

(650)

Balance at March 31, 2020

 

193,587

$

1,936

$

2,675,867

$

(709)

$

(894,773)

$

1,782,321

$

7,969

$

1,790,290

$

53,845

See accompanying notes to the unaudited consolidated financial statements.

10

CUBESMART AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

Three Months Ended March 31, 

    

2021

    

2020

Operating Activities

Net income

$

43,315

$

38,317

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

Depreciation and amortization

 

54,845

 

41,592

Non-cash portion of interest expense related to finance leases

111

Equity in (earnings) losses of real estate ventures

 

(20)

 

5

Equity compensation expense

 

2,042

 

1,871

Accretion of fair market value adjustment of debt

 

(607)

 

(176)

Changes in other operating accounts:

Other assets

 

(1,718)

 

2,743

Accounts payable and accrued expenses

 

(1,675)

 

(3,743)

Other liabilities

 

1,889

 

340

Net cash provided by operating activities

$

98,182

$

80,949

Investing Activities

Acquisitions of storage properties

(9,090)

Additions and improvements to storage properties

 

(7,894)

 

(11,923)

Development costs

 

(10,932)

 

(9,709)

Investment in real estate ventures

 

(6,664)

 

(5,877)

Cash distributed from real estate ventures

 

4,958

 

1,815

Net cash used in investing activities

$

(20,532)

$

(34,784)

Financing Activities

Proceeds from:

Revolving credit facility

268,111

5,127

Principal payments on:

Revolving credit facility

 

(333,111)

 

(5,127)

Mortgage loans and notes payable

 

(44,649)

 

(633)

Proceeds from issuance of common shares, net

 

99,688

 

(118)

Cash paid upon vesting of restricted shares

(728)

(631)

Exercise of stock options

 

1,172

 

Distributions paid to noncontrolling interests in subsidiaries

(69)

(59)

Distributions paid to common shareholders

 

(67,368)

 

(64,036)

Distributions paid to noncontrolling interests in Operating Partnership

 

(933)

 

(650)

Net cash used in financing activities

$

(77,887)

$

(66,127)

Change in cash, cash equivalents and restricted cash

 

(237)

 

(19,962)

Cash, cash equivalents and restricted cash at beginning of period

 

6,229

58,441

Cash, cash equivalents and restricted cash at end of period

$

5,992

$

38,479

Supplemental Cash Flow and Noncash Information

Cash paid for interest, net of interest capitalized

$

23,534

$

23,652

Supplemental disclosure of noncash activities:

Accretion of put liability

$

2,823

$

896

Derivative valuation adjustment

$

20

$

20

See accompanying notes to the unaudited consolidated financial statements.

11

CUBESMART, L.P. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

March 31, 

December 31,

 

    

2021

    

2020

 

(unaudited)

ASSETS

Storage properties

$

5,492,183

$

5,489,754

Less: Accumulated depreciation

 

(997,712)

 

(983,940)

Storage properties, net (including VIE assets of $136,141 and $119,345, respectively)

 

4,494,471

 

4,505,814

Cash and cash equivalents

 

3,650

 

3,592

Restricted cash

 

2,342

 

2,637

Loan procurement costs, net of amortization

 

3,029

 

3,275

Investment in real estate ventures, at equity

 

93,797

 

92,071

Other assets, net

 

157,189

 

170,753

Total assets

$

4,754,478

$

4,778,142

LIABILITIES AND CAPITAL

Unsecured senior notes, net

$

2,030,999

$

2,030,372

Revolving credit facility

 

52,800

 

117,800

Mortgage loans and notes payable, net

 

171,189

 

216,504

Lease liabilities - finance leases

65,710

65,599

Accounts payable, accrued expenses and other liabilities

 

166,025

 

159,140

Distributions payable

 

70,854

 

68,301

Deferred revenue

 

30,974

 

29,087

Security deposits

 

1,079

 

1,077

Total liabilities

 

2,589,630

 

2,687,880

Limited Partnership interests of third parties

 

278,649

 

249,414

Commitments and contingencies

Capital

Operating Partner

 

1,878,215

 

1,832,848

Accumulated other comprehensive loss

 

(613)

 

(632)

Total CubeSmart, L.P. capital

 

1,877,602

 

1,832,216

Noncontrolling interests in subsidiaries

 

8,597

 

8,632

Total capital

 

1,886,199

 

1,840,848

Total liabilities and capital

$

4,754,478

$

4,778,142

See accompanying notes to the unaudited consolidated financial statements.

12

CUBESMART, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per common unit data)

(unaudited)

Three Months Ended March 31, 

2021

    

2020

    

REVENUES

Rental income

$

162,476

$

140,985

Other property related income

 

19,304

 

16,902

Property management fee income

 

7,061

 

6,194

Total revenues

 

188,841

 

164,081

OPERATING EXPENSES

Property operating expenses

 

61,228

 

55,740

Depreciation and amortization

 

53,810

 

40,838

General and administrative

 

10,916

 

10,365

Total operating expenses

 

125,954

 

106,943

OTHER (EXPENSE) INCOME

Interest:

Interest expense on loans

 

(19,234)

 

(18,681)

Loan procurement amortization expense

 

(1,035)

 

(754)

Equity in earnings (losses) of real estate ventures

 

20

 

(5)

Other

 

677

 

619

Total other expense

 

(19,572)

 

(18,821)

NET INCOME

 

43,315

 

38,317

NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

Noncontrolling interest in subsidiaries

 

(34)

 

(38)

NET INCOME ATTRIBUTABLE TO CUBESMART L.P.

 

43,281

 

38,279

Operating Partnership interests of third parties

 

(1,549)

 

(383)

NET INCOME ATTRIBUTABLE TO COMMON UNITHOLDERS

$

41,732

$

37,896

    

 

    

 

    

Basic earnings per unit attributable to common unitholders

$

0.21

$

0.20

Diluted earnings per unit attributable to common unitholders

$

0.21

$

0.20

Weighted average basic units outstanding

 

199,160

193,582

Weighted average diluted units outstanding

 

200,233

194,264

See accompanying notes to the unaudited consolidated financial statements.

13

CUBESMART, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

Three Months Ended March 31, 

    

2021

    

2020

NET INCOME

$

43,315

$

38,317

Other comprehensive income:

Reclassification of realized losses on interest rate swaps

 

20

 

20

OTHER COMPREHENSIVE INCOME:

 

20

 

20

COMPREHENSIVE INCOME

 

43,335

 

38,337

Comprehensive income attributable to Operating Partnership interests of third parties

 

(1,550)

 

(383)

Comprehensive income attributable to noncontrolling interest in subsidiaries

 

(34)

 

(38)

COMPREHENSIVE INCOME ATTRIBUTABLE TO OPERATING PARTNER

$

41,751

$

37,916

See accompanying notes to the unaudited consolidated financial statements.

14

CUBESMART, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CAPITAL

(in thousands)

(unaudited)

Number of

Total

Operating

 

Common

Accumulated Other

CubeSmart

Noncontrolling

Partnership

 

OP Units

Operating

Comprehensive

L.P.

Interests in

Total

Interest

 

Outstanding

Partner

(Loss) Income

Capital

Subsidiaries

Capital

of Third Parties

 

Balance at December 31, 2020

    

197,406

    

$

1,832,848

    

$

(632)

    

$

1,832,216

    

$

8,632

    

$

1,840,848

    

$

249,414

Distributions to noncontrolling interests in subsidiaries

(69)

(69)

Issuance of common OP units, net

 

2,837

99,688

99,688

99,688

Issuance of restricted OP units

 

32

Conversion from OP units to shares

 

55

1,913

1,913

1,913

(1,913)

Exercise of OP unit options

 

92

1,172

1,172

1,172

Amortization of restricted OP units

705

705

705

OP unit compensation expense

609

609

609

Adjustment for Limited Partnership interests of third parties

(32,102)

(32,102)

(32,102)

32,102

Net income

41,732

41,732

34

41,766

1,549

Other comprehensive income, net

19

19

19

1

Common OP unit distributions ($0.34 per unit)

(68,350)

(68,350)

(68,350)

(2,504)

Balance at March 31, 2021

 

200,422

 

$

1,878,215

$

(613)

$

1,877,602

$

8,597

$

1,886,199

$

278,649

Number of

Total

Operating

 

Common

Accumulated Other

CubeSmart

Noncontrolling

Partnership

 

OP Units

Operating

Comprehensive

L.P.

Interests in

Total

Interest

 

Outstanding

Partner

(Loss) Income

Capital

Subsidiaries

Capital

of Third Parties

 

Balance at December 31, 2019

    

193,557

    

$

1,800,075

    

$

(729)

    

$

1,799,346

    

$

7,990

    

$

1,807,336

    

$

62,088

Distributions to noncontrolling interests in subsidiaries

(59)

(59)

Issuance of common OP units, net

 

 

(118)

 

(118)

 

(118)

Issuance of restricted OP units

 

30

 

 

Amortization of restricted OP units

 

710

 

710

 

710

OP unit compensation expense

 

530

 

530

 

530

Adjustment for Limited Partnership interests of third parties

 

7,976

 

7,976

 

7,976

 

(7,976)

Net income

 

37,896

 

37,896

 

38

 

37,934

 

383

Other comprehensive income, net

20

20

20

Common OP unit distributions ($0.33 per unit)

 

(64,039)

 

(64,039)

 

(64,039)

 

(650)

Balance at March 31, 2020

 

193,587

 

$

1,783,030

$

(709)

$

1,782,321

$

7,969

$

1,790,290

$

53,845

See accompanying notes to the unaudited consolidated financial statements.

15

CUBESMART, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

Three Months Ended March 31, 

    

2021

    

2020

Operating Activities

Net income

$

43,315

$

38,317

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

Depreciation and amortization

 

54,845

 

41,592

Non-cash portion of interest expense related to finance leases

111

Equity in (earnings) losses of real estate ventures

 

(20)

 

5

Equity compensation expense

 

2,042

 

1,871

Accretion of fair market value adjustment of debt

 

(607)

 

(176)

Changes in other operating accounts:

Other assets

 

(1,718)

 

2,743

Accounts payable and accrued expenses

 

(1,675)

 

(3,743)

Other liabilities

 

1,889

 

340

Net cash provided by operating activities

$

98,182

$

80,949

Investing Activities

Acquisitions of storage properties

 

 

(9,090)

Additions and improvements to storage properties

 

(7,894)

 

(11,923)

Development costs

 

(10,932)

 

(9,709)

Investment in real estate ventures

(6,664)

(5,877)

Cash distributed from real estate ventures

4,958

 

1,815

Net cash used in investing activities

$

(20,532)

$

(34,784)

Financing Activities

Proceeds from:

Revolving credit facility

268,111

5,127

Principal payments on:

 

Revolving credit facility

(333,111)

(5,127)

Mortgage loans and notes payable

(44,649)

(633)

Proceeds from issuance of common OP units

99,688

(118)

Cash paid upon vesting of restricted OP units

(728)

(631)

Exercise of OP unit options

1,172

Distributions paid to noncontrolling interests in subsidiaries

 

(69)

(59)

Distributions paid to common OP unitholders

(68,301)

(64,686)

Net cash used in financing activities

$

(77,887)

$

(66,127)

Change in cash, cash equivalents and restricted cash

 

(237)

 

(19,962)

Cash, cash equivalents and restricted cash at beginning of period

 

6,229

 

58,441

Cash, cash equivalents and restricted cash at end of period

$

5,992

$

38,479

Supplemental Cash Flow and Noncash Information

Cash paid for interest, net of interest capitalized

$

23,534

$

23,652

Supplemental disclosure of noncash activities:

Accretion of put liability

$

2,823

$

896

Derivative valuation adjustment

$

20

$

20

See accompanying notes to the unaudited consolidated financial statements.

16

CUBESMART AND CUBESMART, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND NATURE OF OPERATIONS

CubeSmart (the “Parent Company”) operates as a self-managed and self-administered real estate investment trust (“REIT”) with its operations conducted solely through CubeSmart, L.P. and its subsidiaries. CubeSmart, L.P., a Delaware limited partnership (the “Operating Partnership”), operates through an umbrella partnership structure, with the Parent Company, a Maryland REIT, as its sole general partner. In the notes to the consolidated financial statements, we use the terms “the Company”, “we” or “our” to refer to the Parent Company and the Operating Partnership together, unless the context indicates otherwise. As of March 31, 2021, the Company owned self-storage properties located in 24 states throughout the United States and the District of Columbia that are presented under 1 reportable segment: the Company owns, operates, develops, manages and acquires self-storage properties.

As of March 31, 2021, the Parent Company owned approximately 96.5% of the partnership interests (“OP Units”) of the Operating Partnership. The remaining OP Units, consisting exclusively of limited partner interests, are held by persons who contributed their interests in properties to the Operating Partnership in exchange for OP Units. Under the partnership agreement, these persons have the right to tender their OP Units for redemption to the Operating Partnership at any time following a specified restricted period for cash equal to the fair value of an equivalent number of common shares of the Parent Company. In lieu of delivering cash, however, the Parent Company, as the Operating Partnership’s general partner, may, at its option, choose to acquire any OP Units so tendered by issuing common shares in exchange for the tendered OP Units. If the Parent Company so chooses, its common shares will be exchanged for OP Units on a 1-for-one basis. This 1-for-one exchange ratio is subject to adjustment to prevent dilution. With each such exchange or redemption, the Parent Company’s percentage ownership in the Operating Partnership will increase. In addition, whenever the Parent Company issues common or other classes of its shares, it contributes the net proceeds it receives from the issuance to the Operating Partnership and the Operating Partnership issues to the Parent Company an equal number of OP Units or other partnership interests having preferences and rights that mirror the preferences and rights of the shares issued. This structure is commonly referred to as an umbrella partnership REIT or “UPREIT”.

The Company typically experiences seasonal fluctuations in the occupancy levels of its stores, which are generally slightly higher during the summer months due to increased moving activity.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting and, in the opinion of each of the Parent Company’s and Operating Partnership’s respective management, include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of financial position, results of operations and cash flows for each respective company for the interim periods presented in accordance with generally accepted accounting principles in the United States (“GAAP”). Accordingly, readers of this Quarterly Report on Form 10-Q should refer to the Parent Company’s and the Operating Partnership’s audited financial statements prepared in accordance with GAAP, and the related notes thereto, for the year ended December 31, 2020, which are included in the Parent Company’s and the Operating Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020. The results of operations for the three months ended March 31, 2021 and 2020 are not necessarily indicative of the results of operations to be expected for any future period or the full year.

The Operating Partnership meets the criteria as a variable interest entity (“VIE”). The Parent Company’s sole significant asset is its investment in the Operating Partnership. As a result, substantially all of the Parent Company’s assets and liabilities represent those assets and liabilities of the Operating Partnership. All of the Parent Company’s debt is an obligation of the Operating Partnership, and the Parent Company guarantees the unsecured debt obligations of the Operating Partnership.

17

Recent Accounting Pronouncements

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2020-06 – Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in an Entity’s Own Equity (Subtopic 815-40). The new guidance eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of certain settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted earnings per share computation. The standard is effective on January 1, 2022, with early adoption permitted, but only as of the beginning of an entity’s annual fiscal year. The standard is not expected to have a material impact on the Company’s consolidated financial statements.

3. STORAGE PROPERTIES

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

March 31, 

December 31,

    

2021

    

2020

(in thousands)

Land

$

1,100,598

$

1,093,503

Buildings and improvements

 

4,130,146

 

4,122,995

Equipment

 

120,871

 

123,044

Construction in progress

 

98,913

 

108,316

Right-of-use assets - finance leases

41,655

41,896

Storage properties

 

5,492,183

 

5,489,754

Less: Accumulated depreciation

 

(997,712)

 

(983,940)

Storage properties, net

$

4,494,471

$

4,505,814

The following table summarizes the Company’s acquisition and disposition activity during the period beginning on January 1, 2020 through March 31, 2021.

    

    

    

Number of

    

Purchase / Sale Price

 

Asset/Portfolio

Metropolitan Statistical Area

Transaction Date

Stores

(in thousands)

2020 Acquisitions:

Texas Asset

San Antonio, TX

February 2020

1

$

9,025

Maryland Asset

Baltimore-Towson, MD

April 2020

1

17,200

New Jersey Asset

New York-Northern New Jersey-Long Island, NY-NJ-PA

April 2020

1

48,450

Florida Asset

Palm Bay-Melbourne-Titusville, FL

November 2020

1

3,900

Texas Asset

Austin-Round Rock, TX

November 2020

1

10,750

Texas Asset

Dallas-Fort Worth-Arlington, TX

November 2020

1

10,150

Nevada Asset

Las Vegas-Paradise, NV

December 2020

1

16,800

New York Asset

New York-Northern New Jersey-Long Island, NY-NJ-PA

December 2020

1

6,750

Florida Asset

Tampa-St. Petersburg-Clearwater, FL

December 2020

1

10,000

Virginia Asset

Washington-Arlington-Alexandria, DC-VA-MD-WV

December 2020

1

17,350

Storage Deluxe Assets

New York-Northern New Jersey-Long Island, NY-NJ-PA

December 2020

8

540,000

Florida Assets

Orlando-Kissimmee, FL / Deltona-Daytona Beach-Ormond Beach, FL

December 2020

3

45,500

21

$

735,875

2020 Disposition:

New York Asset

New York-Northern New Jersey-Long Island, NY-NJ-PA

December 2020

1

$

12,750

1

$

12,750

18

4. INVESTMENT ACTIVITY

The Company did not acquire or dispose of any wholly-owned stores during the three months ended March 31, 2021.

2020 Acquisitions

The Company acquired a portfolio of 8 stores located in the outer boroughs of New York City (the “Storage Deluxe Assets”), in 2 separate tranches during December 2020, for an aggregate purchase price of $540.0 million. In connection with the acquisition of the Storage Deluxe Assets, the Company assumed 6 mortgage loans with an aggregate outstanding principal amount of $154.4 million at the time of acquisition, one of which had an outstanding principal balance of $33.2 million and was repaid immediately. The assumed mortgage debt was recorded at a fair value of $169.2 million, which includes an aggregate net premium of $14.8 million to reflect the estimated fair value of the debt at the time of assumption. The remainder of the purchase price was funded with $210.5 million of cash and $175.1 million through the issuance of 5,272,023 OP Units (see note 13). In connection with the acquisition of the Storage Deluxe Assets, which was accounted for as an asset acquisition, the Company allocated the purchase price and acquisition related costs to the tangible and intangible assets acquired based on fair value. Intangible assets consisted of in-place leases, which aggregated to $48.6 million at the time of the acquisition and prior to amortization of such amounts. The estimated life of these in-place leases was 12 months and the amortization expense that was recognized during the three months ended March 31, 2021 was approximately $12.1 million. Additionally, as part of the transaction, the Company assumed 3 existing ground leases as lessee, 2 of which have been classified as finance leases and 1 of which has been classified as an operating lease (see note 14).

During the year ended December 31, 2020 the Company acquired 13 additional stores located in Florida (5), Maryland (1), Nevada (1), New Jersey (1), New York (1), Texas (3) and Virginia (1) for an aggregate purchase price of approximately $195.9 million. In connection with these transactions, which were accounted for as asset acquisitions, the Company allocated the purchase price and acquisition related costs to the tangible and intangible assets acquired based on fair value. Intangible assets consisted of in-place leases, which aggregated to $11.4 million at the time of the acquisitions and prior to amortization of such amounts. The estimated life of these in-place leases was 12 months and the amortization expense that was recognized during the three months ended March 31, 2021 and March 31, 2020 was approximately $2.8 million and thirty-two thousand dollars, respectively.

Additionally, on July 20, 2020, the Company acquired land underlying a wholly-owned store located in Bronx, New York for $9.5 million. The land was previously subject to a ground lease in which the Company served as lessee. As a result of the transaction, which was accounted for as an asset acquisition, the Company was released from its obligations under the ground lease, and the right-of-use asset and lease liability totaling $5.1 million and $5.0 million, respectively, were removed from the Company’s consolidated balance sheets.

2020 Dispositions

On December 22, 2020, the Company sold a self-storage property located in New York for a sales price of $12.8 million. The Company recorded a $6.7 million gain in connection with the sale.

Development Activity

As of March 31, 2021, the Company had invested in joint ventures to develop 5 self-storage properties located in Massachusetts (1), New York (2), Pennsylvania (1) and Virginia (1). Construction for all projects is expected to be completed by the second quarter of 2022 (see note 13). As of March 31, 2021, development costs incurred to date for these projects totaled $85.7 million. Total construction costs for these projects are expected to be $124.3 million. These costs are capitalized to construction in progress while the projects are under development and are reflected in Storage properties on the Company’s consolidated balance sheets.

The Company has completed the construction and opened for operation the following stores during the period beginning on January 1, 2020 through March 31, 2021. The costs associated with the construction of these stores are

19

capitalized to land, building and improvements, as well as equipment and are reflected in Storage properties on the Company’s consolidated balance sheets.

CubeSmart

Number of

Ownership

Total

Store Location

    

Stores

    

Date Opened

Interest

Construction Costs

(in thousands)

Arlington, VA (1)

1

Q1 2021

90%

$

26,400

Brooklyn, NY (2)

1

Q2 2020

100%

45,900

2

$

72,300

(1)This store is located adjacent to an existing consolidated joint venture store. Given their proximity to each other, the stores have been combined in our store count, as well as for operational and reporting purposes (see note 13).

(2)This store was previously owned by a consolidated joint venture, in which the Company held a 51% ownership interest. On September 29, 2020, the noncontrolling member in the venture that owned the store put its 49% interest in the venture to the Company for $10.0 million, of which $1.0 million was paid in cash. The Company issued 276,497 OP Units that were valued at approximately $9.0 million as consideration for the remainder of the purchase price (see note 13).

5. INVESTMENT IN UNCONSOLIDATED REAL ESTATE VENTURES

The Company’s investments in unconsolidated real estate ventures, in which it holds common ownership interests, are summarized as follows (in thousands):

CubeSmart

Number of Stores as of

Carrying Value of Investment as of

Ownership

March 31, 

December 31,

March 31, 

December 31,

Unconsolidated Real Estate Ventures

    

Interest

2021

2020

    

2021

2020

191 V CUBE LLC ("HVP V") (1)

20%

1

-

$

2,819

$

-

191 IV CUBE Southeast LLC ("HVPSE") (2)

10%

14

14

4,829

5,015

191 IV CUBE LLC ("HVP IV") (3)

20%

22

21

25,348

21,760

CUBE HHF Northeast Venture LLC ("HHFNE") (4)

10%

13

13

1,524

1,628

CUBE HHF Limited Partnership ("HHF") (5)

50%

35

35

59,277

63,668

85

83

$

93,797

$

92,071

(1)On March 17, 2021, the Company invested a 20% ownership interest in a newly-formed real estate venture that acquired its initial self-storage property located in Florida. HVP V paid $14.0 million for this store, of which $0.9 million was allocated to the value of the in-place lease intangible. The purchase price was contributed pro-rata by the Company and its unaffiliated joint venture partner. The Company’s total contribution to HVP V related to this acquisition was $2.8 million.

(2)On March 19, 2020, the Company invested a 10% ownership interest in a newly-formed real estate venture that acquired 14 self-storage properties located in Florida (2), Georgia (8) and South Carolina (4). HVPSE paid $135.3 million for these stores, of which $7.7 million was allocated to the value of the in-place lease intangible. The acquisition was funded primarily through the venture’s $81.6 million secured term loan. 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 HVPSE related to this portfolio acquisition was $5.6 million. The secured loan bears interest at LIBOR plus 1.60% and matures on March 19, 2023 with options to extend the maturity date through March 19, 2025, subject to satisfaction of certain conditions and payment of the extension fees as stipulated in the loan agreement.

(3)The stores owned by HVP IV are located in Arizona (2), Connecticut (2), Florida (4), Georgia (2), Maryland (2), Minnesota (1), Pennsylvania (1) and Texas (8). The Company’s total contribution to HVP IV in connection with these store acquisitions was $30.1 million. As of March 31, 2021, HVP IV had $82.2 million outstanding

20

on its $107.0 million secured loan facility, which bears interest at LIBOR plus 1.70% per annum, and matures on May 16, 2021. As of March 31, 2021, HVP IV also had $55.5 million outstanding under a separate secured loan that bears interest at LIBOR plus 2.75% per annum, and matures on June 9, 2022 with options to extend the maturity date through June 9, 2024, subject to satisfaction of certain conditions and payment of the extension fees as stipulated in the loan agreement. On April 19, 2021, HVP IV entered into a new secured loan and received $121.3 million in proceeds from the initial advance of the loan, which it used to repay the $82.2 million outstanding on its $107.0 million secured loan facility. The new secured loan bears interest at 1.95% over LIBOR and matures on April 19, 2025.

(4)The stores owned by HHFNE are located in Connecticut (3), Massachusetts (6), Rhode Island (2) and Vermont (2). The Company’s total contribution to HHFNE in connection with these store acquisitions was $3.8 million. As of March 31, 2021, HHFNE had an outstanding $45.0 million secured loan facility, which bears interest at LIBOR plus 1.20% per annum and matures on December 16, 2024.

(5)The stores owned by HHF are located in North Carolina (1) and Texas (34). On January 21, 2021, HHF entered into a new $105.0 million secured loan, which bears interest at 2.58% per annum and matures on February 5, 2028. HHF used the proceeds from this loan to repay its existing outstanding $100.0 million loan in full.

Based upon the facts and circumstances at formation of HVP V, HVPSE, HVP IV, HHFNE and HHF (the “Ventures”), the Company determined that the Ventures are not VIEs in accordance with the accounting standard for the consolidation of VIEs. As a result, the Company used the voting interest model under the accounting standard for consolidation in order to determine whether to consolidate the Ventures. Based upon each member's substantive participating rights over the activities of each entity as stipulated in the operating agreements, the Ventures are not consolidated by the Company and are accounted for under the equity method of accounting. The Company’s investments in the Ventures are included in Investment in real estate ventures, at equity on the Company’s consolidated balance sheets and the Company’s earnings from its investments in the Ventures are presented in Equity in earnings (losses) of real estate ventures on the Company’s consolidated statements of operations.

The amounts reflected in the following table are based on the historical financial information of the Ventures.

The following is a summary of the financial position of the Ventures as of March 31, 2021 and December 31, 2020.

    

March 31, 

December 31,

2021

 

2020 (1)

Assets

(in thousands)

Storage properties, net

$

686,849

$

662,833

Other assets

 

22,924

 

18,112

Total assets

$

709,773

$

680,945

Liabilities and equity

Debt

$

367,547

$

359,985

Other liabilities

12,494

11,588

Equity

CubeSmart

 

93,797

92,071

Joint venture partners

 

235,935

217,301

Total liabilities and equity

$

709,773

$

680,945

(1)Excludes HVP V as it acquired its initial asset on March 17, 2021.

21

The following is a summary of results of operations of the Ventures for the three months ended March 31, 2021 and 2020.

Three Months Ended March 31, 

 

    

2021 (1)

    

2020 (2)

    

 

(in thousands)

Total revenues

$

18,823

$

14,605

Operating expenses

 

(8,605)

(6,942)

Other income (expenses)

3

(113)

Interest expense, net

 

(3,535)

(2,720)

Depreciation and amortization

 

(8,713)

 

(6,423)

Net loss

$

(2,027)

$

(1,593)

Company’s share of net income (loss)

$

20

$

(5)

(1)Represents a partial quarter of HVP V as it acquired its initial asset on March 17, 2021.

(2)Excludes HVP V as it acquired its initial asset on March 17, 2021 and represents a partial quarter of HVPSE as it acquired its initial assets on March 19, 2020.

6. OTHER ASSETS

Other assets are comprised of the following as of March 31, 2021 and December 31, 2020:

March 31, 

December 31,

    

2021

    

2020

(in thousands)

Intangible assets, net of accumulated amortization of $16,688 and $2,123

$

42,867

$

57,820

Accounts receivable, net

 

5,313

 

5,829

Prepaid property taxes

 

5,403

 

6,334

Prepaid property and casualty insurance

 

1,540

 

2,626

Amounts due from affiliates (see note 15)

15,048

13,130

Assets held in trust related to deferred compensation arrangements

19,345

17,207

Right-of-use assets - operating leases (see note 14)

54,989

55,302

Equity investment recorded at cost (1)

5,000

5,000

Other

 

7,684

 

7,505

Total other assets, net

$

157,189

$

170,753

(1)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 (“Capital Storage”), 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.

22

7. UNSECURED SENIOR NOTES

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

    

March 31, 

December 31,

    

Effective

Issuance

Maturity

 

Unsecured Senior Notes

    

2021

    

2020

    

Interest Rate

Date

Date

 

(in thousands)

 

$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

$350M 4.375% Guaranteed Notes due 2029

350,000

350,000

4.46

%  

Jan-19

Feb-29

$350M 3.000% Guaranteed Notes due 2030

350,000

350,000

3.04

%  

Oct-19

Feb-30

$450M 2.000% Guaranteed Notes due 2031

450,000

450,000

2.10

%  

Oct-20

Feb-31

Principal balance outstanding

2,050,000

2,050,000

Less: Discount on issuance of unsecured senior notes, net

(7,278)

(7,470)

Less: Loan procurement costs, net

(11,723)

(12,158)

Total unsecured senior notes, net

$

2,030,999

$

2,030,372

(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 1.5:1.0 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 March 31, 2021, the Operating Partnership was in compliance with all of the financial covenants under the Senior Notes.

8. REVOLVING CREDIT FACILITY

On December 9, 2011, the Company entered into a credit agreement (the “Credit Facility”). On June 19, 2019, the Company amended and restated, in its entirety, the Credit Facility (the “Amended and Restated Credit Facility”) which, subsequent to the amendment and restatement, is comprised of a $750.0 million unsecured revolving facility (the “Revolver”) maturing on June 19, 2024. Under the Amended and Restated Credit Facility, pricing on the Revolver is dependent upon the Company’s unsecured debt credit ratings. At the Company’s current Baa2/BBB level, amounts drawn under the Revolver are priced at 1.10% over LIBOR, inclusive of a facility fee of 0.15%.

As of March 31, 2021, borrowings under the Revolver had an effective interest rate of 1.21%. Additionally, as of March 31, 2021, $696.6 million was available for borrowing under the Revolver. The available balance under the Revolver is reduced by an outstanding letter of credit of $0.6 million.

23

Under the Amended and Restated Credit Facility, the Company’s ability to borrow under the Revolver is subject to ongoing compliance with certain financial covenants which include, among other things, (1) a maximum total indebtedness to total asset value of 60.0%, and (2) a minimum fixed charge coverage ratio of 1.5:1.0. As of March 31, 2021, the Company was in compliance with all of its financial covenants.

9. MORTGAGE LOANS AND NOTES PAYABLE

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

Carrying Value as of

 

    

March 31, 

December 31,

    

Effective

Maturity

 

Mortgage Loans and Notes Payable

    

2021

    

2020

    

Interest Rate

Date

 

(in thousands)

 

Bronx IX, NY (1)

$

$

21,030

 

4.85

%  

Jun-21

Bronx X, NY (1)

 

 

23,148

 

4.64

%  

Jun-21

Nashville V, TN

2,247

2,261

3.85

%  

Jun-23

New York, NY

29,819

29,981

3.51

%  

Jun-23

Annapolis I, MD

5,238

5,283

3.78

%  

May-24

Brooklyn XV, NY

15,658

15,713

2.15

%  

May-24

Long Island City IV, NY

12,801

12,852

2.15

%  

May-24

Long Island City II, NY

19,034

19,094

2.25

%  

Jul-26

Long Island City III, NY

19,022

19,106

2.25

%  

Aug-26

Flushing II, NY

54,300

54,300

2.15

%  

Jul-29

Principal balance outstanding

158,119

202,768

Plus: Unamortized fair value adjustment

15,080

 

15,879

Less: Loan procurement costs, net

(2,010)

(2,143)

Total mortgage loans and notes payable, net

$

171,189

$

216,504

(1)These mortgage loans were repaid in full on March 1, 2021.

As of March 31, 2021 and December 31, 2020, the Company’s mortgage loans payable were secured by certain of its self-storage properties with net book values of approximately $457.0 million and $539.2 million, respectively. The following table represents the future principal payment requirements on the outstanding mortgage loans and notes payable as of March 31, 2021 (in thousands):

2021

    

$

1,733

2022

 

2,426

2023

 

32,591

2024

 

32,329

2025

 

979

2026 and thereafter

 

88,061

Total mortgage payments

 

158,119

Plus: Unamortized fair value adjustment

 

15,080

Less: Loan procurement costs, net

(2,010)

Total mortgage loans and notes payable, net

$

171,189

24

10. ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table summarizes the changes in accumulated other comprehensive loss by component for the three months ended March 31, 2021 (in thousands):

March 31, 

2021

(in thousands)

Beginning balance

$

(656)

Reclassification of realized losses on interest rate swaps (1)

20

Ending balance

(636)

Less: portion included in noncontrolling interests in the Operating Partnership

23

Total accumulated other comprehensive loss included in equity

$

(613)

(1)See note 11 for additional information about the effects of the amounts reclassified.

11. RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS

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

The Company formally assesses, both at inception of a hedge and on an on-going basis, whether each derivative is highly-effective in offsetting changes in cash flows of the hedged item. If management determines that the derivative is highly-effective as a hedge, then the Company accounts for the derivative using hedge accounting, pursuant to which gains or losses inherent in the derivative do not impact the Company’s results of operations. If management determines that the derivative is not highly-effective as a hedge or if a derivative ceases to be a highly-effective hedge, the Company discontinues hedge accounting prospectively and reflects in its statement of operations realized and unrealized gains and losses with respect to the derivative. As of March 31, 2021 and December 31, 2020, all derivative instruments entered into by the Company had been settled.

On December 24, 2018, the Company entered into interest rate swap agreements with notional amounts that aggregated to $150.0 million (the “Interest Rate Swaps”) to protect the Company against adverse fluctuations in interest rates by reducing exposure to variability in cash flows relating to interest payments on a forecasted issuance of long-term debt. The Interest Rate Swaps qualified and were designated as cash flow hedges. Accordingly, the Interest Rate Swaps were recorded on the consolidated balance sheet at fair value and the related gains or losses were deferred in shareholders’ equity as accumulated other comprehensive income or loss. These deferred gains and losses were amortized into interest expense during the period or periods in which the related interest payments affected earnings. On January 24, 2019, in conjunction with the issuance of the 2029 Notes, the Company settled the Interest Rate Swaps for $0.8 million. The $0.8 million termination premium will be reclassified from accumulated other comprehensive loss as an increase to interest expense over the life of the 2029 Notes, which mature on February 15, 2029. The change in unrealized losses on interest rate swaps reflects a reclassification of 20 thousand dollars of unrealized losses from accumulated other comprehensive loss as an increase to interest expense during the three months ended March 31, 2021. The Company estimates that $0.1 million will be reclassified as an increase to interest expense in the next 12 months.

12. FAIR VALUE MEASUREMENTS

The Company applies the methods of determining fair value as described in authoritative guidance, to value its financial assets and liabilities. As defined in the guidance, fair value is based on the price that would be received from

25

the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, the guidance establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

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

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

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

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

There were 0 financial assets or liabilities carried at fair value as of March 31, 2021 or December 31, 2020.

The fair values of financial instruments, including cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate their respective carrying values at March 31, 2021 and December 31, 2020.

The following table summarizes the carrying value and estimated fair value of the Company’s debt as of March 31, 2021 and December 31, 2020:

March 31,

December 31,

2021

2020

(in thousands)

Carrying value

$

2,254,988

$

2,364,676

Fair value

2,348,913

2,571,300

The fair value of debt estimates were based on a discounted cash flow analysis assuming market interest rates for comparable obligations at March 31, 2021 and December 31, 2020. The Company estimates the fair value of its fixed-rate debt and the credit spreads over variable market rates on its variable-rate debt by discounting the future cash flows of each instrument at estimated market rates or credit spreads consistent with the maturity of the debt obligation with similar credit policies, which is classified within level 2 of the fair value hierarchy. Rates and credit spreads take into consideration general market conditions and maturity.

26

13. NONCONTROLLING INTERESTS

Interests in Consolidated Joint Ventures

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

Date Opened /

CubeSmart

Number

Estimated

Ownership

March 31, 2021

Consolidated Joint Ventures

    

of Stores

    

Location

    

Opening

Interest

Total Assets

Total Liabilities

    

(in thousands)

CS Vienna, LLC ("Vienna") (1)

1

Vienna, VA

Q2 2022 (est.)

72%

$

17,865

$

6,553

CS 750 W Merrick Rd, LLC ("Merrick") (2)

1

Valley Stream, NY

Q1 2022 (est.)

51%

15,626

8,181

CS Valley Forge Village Storage, LLC ("VFV") (3)

1

King of Prussia, PA

Q2 2021 (est.)

70%

20,654

12,333

CS 2087 Hempstead Tpk, LLC ("Hempstead") (2)

1

East Meadow, NY

Q2 2021 (est.)

51%

24,336

7,104

CS SDP Newtonville, LLC ("Newton") (3)

1

Newton, MA

Q2 2021 (est.)

90%

18,345

11,828

SH3, LLC ("SH3") (4)

1

Arlington, VA

 

Q2 2015/Q1 2021

90%

39,659

6,667

6

$

136,485

$

52,666

(1)On December 23, 2020, the Company and the noncontrolling member contributed a previously wholly-owned operating property (the “Vienna Operating Property”) and a parcel of land (the “Vienna Land”), respectively, to Vienna. The Vienna Operating Property and the Vienna Land are located in close proximity to each other in Vienna, VA. The members intend to construct a new store on the Vienna Land, which, upon completion, will be combined with the Vienna Operating Property and operated by the venture as a single store. The Company has a related party commitment to Vienna to fund all or a portion of the construction costs. As of March 31, 2021, the Company has funded $5.4 million of a total $17.0 million loan commitment to Vienna, which is included in the total liabilities amount within the table above. This loan and the related interest were eliminated for consolidation purposes.

(2)The noncontrolling members of Merrick and Hempstead have the option to put their ownership interest in the ventures to the Company for $17.1 million and $6.6 million (the “Put Option”), respectively, within the two-year period after construction of each store is substantially complete (the “Put Option Period”). In the event the Put Option is not exercised, the Company has a one-year option to call the ownership interest of the noncontrolling members of Merrick and Hempstead for $17.1 million and $6.6 million, respectively, beginning twelve months after the end of the Put Option Period. The Company, at its sole discretion, may pay cash and/or issue OP Units, in exchange for the noncontrolling member’s interest in Merrick and Hempstead. The Company is accreting the respective liabilities during the development periods and, as of March 31, 2021, has accrued $7.3 million and $6.2 million, related to Merrick and Hempstead, respectively, which are included in Accounts payable, accrued expenses and other liabilities on the Company’s consolidated balance sheets.

(3)The Company has related party loan commitments to VFV and Newton to fund a portion of the construction costs. As of March 31, 2021, the Company has funded $9.6 million of the total $12.4 million loan commitment to VFV and $11.1 million of the total $12.1 million loan commitment to Newton, which are included in the total liability amounts within the table above. These loans and the related interest were eliminated for consolidation purposes.

(4)SH3 owns 2 stores located in close proximity to each other in Arlington, VA, the first of which was developed and opened for operation in April 2015 (“Shirlington I”) and the second of which was developed and opened for operation in March 2021 (“Shirlington II”). Given their close proximity to each other, the two stores were combined in our store count, as well as for operational and reporting purposes, upon the opening of Shirlington II in March 2021.

27

Operating Partnership Ownership

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

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

Approximately 3.5% and 3.6% of the outstanding OP Units, as of March 31, 2021 and December 31, 2020 were not owned by CubeSmart, the sole general partner. The interests in the Operating Partnership represented by these OP Units were a component of the consideration that the Operating Partnership paid to acquire certain self-storage 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.

In 2 separate tranches during December 2020, the Company acquired the Storage Deluxe Assets for an aggregate purchase price of $540.0 million. In connection with the acquisition of the Storage Deluxe Assets, the Company issued 5,272,023 OP Units valued at approximately $175.1 million to fund a portion of the purchase price.

On September 29, 2020, the Company acquired the noncontrolling interest in a previously consolidated joint venture that owned a store in New York for $10.0 million. In conjunction with the closing, the Company paid $1.0 million in cash and issued 276,497 OP Units, valued at approximately $9.0 million, to pay the remaining consideration.

As of March 31, 2021 and December 31, 2020, 7,365,828 and 7,420,828 OP units, respectively, were held by third parties. The per unit cash redemption amount of the outstanding OP units was calculated based upon the closing price of the common shares of CubeSmart on the New York Stock Exchange on the final trading day 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 the greater of the carrying value based on the accumulation of historical cost or the redemption value at March 31, 2021 and December 31, 2020. As of March 31, 2021 and December 31, 2020, the Operating Partnership recorded an increase in the value of OP Units owned by third parties and a corresponding decrease to capital of $32.1 million and $4.2 million, respectively.

14. LEASES

CubeSmart as Lessor

The Company derives revenue primarily from rents received from customers who rent cubes at its self-storage properties under month-to-month leases for personal or business use. The self-storage lease agreements utilized by the Company vary slightly to comply with state-specific laws and regulations, but, subject to such laws and regulations, generally provide for automatic monthly renewals, flexibility to increase rental rates over time as market conditions permit and the collection of contingent fees such as administrative and late fees. None of the self-storage lease

28

agreements contain options that allow the customer to purchase the leased space at any time during, or at the expiration of, the lease term. All self-storage leases in which the Company serves as lessor have been classified as operating leases. Accordingly, storage cubes are carried at historical cost less accumulated depreciation and impairment, if any, and are included in Storage properties on the Company’s consolidated balance sheets. Operating lease income for amounts received under the Company’s self-storage lease agreements is recognized on a straight-line basis which, due to the month-to-month nature of the leases, results in the recognition of income during the initial term and each subsequent monthly renewal using the then-in-place rent amount. Operating lease income is included in Rental income within the Company’s consolidated statements of operations. Variable lease income related to the Company’s self-storage lease agreements consists of administrative and late fees charged to customers. For the three months ended March 31, 2021 and 2020, administrative and late fees totaled $4.8 million and $5.4 million, respectively. Administrative and late fees are included in Other property related income within the Company’s consolidated statements of operations.

CubeSmart as Lessee

The Company serves as lessee in lease agreements for land, office space, automobiles and certain equipment, which have remaining lease terms of up to 44 years. Certain of the Company’s leases (1) provide for one or more options to renew, with renewal options that can extend the lease up to 69 years, (2) allow for early termination at certain points during the lease term and/or (3) give the Company the option to purchase the leased property. In all cases, the exercise of the lease renewal, termination and purchase options, if provided for in the lease, are at the Company’s sole discretion. Certain of the Company’s lease agreements, particularly its land leases, require rental payments that are periodically adjusted for inflation using a defined index. None of the Company’s lease agreements contain any material residual value guarantees or material restrictive covenants. Lease expense for payments related to the Company’s finance leases is recognized as interest expense using the interest method over the related lease term. Lease expense for payments related to the Company’s operating leases is recognized on a straight-line basis over the related lease term, which includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

Right-of-use assets represent the Company’s right to use an underlying asset during the lease term and lease liabilities represent the Company’s obligation to make lease payments as specified in the lease. Right-of-use assets and lease liabilities related to the Company’s operating leases are recognized at the lease commencement date based on the present value of the remaining lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available surrounding the Company’s unsecured borrowing rates and implied secured spread at the lease commencement date in determining the present value of lease payments. The right-of-use asset also includes any lease payments made at or before lease commencement less any lease incentives.

For the three months ended March 31, 2021 and 2020, the Company’s lease cost consists of the following components:

Three Months Ended March 31, 

    

2021

 

2020

(in thousands)

Finance lease cost:

Amortization of finance lease right-of-use assets

$

241

$

Interest expense related to finance lease liabilities

526

Operating lease cost

822

746

Short-term lease cost (1)

 

306

308

Total lease cost

$

1,895

$

1,054

(1)Represents automobile leases that have a lease term of 12 months. The Company has made an accounting policy election not to apply the recognition requirements of ASC 842 to this asset class. The lease cost associated with these leases is recognized on a straight-line basis over the related lease term.

29

The following table represents supplemental balance sheet information related to leases as of March 31, 2021 and December 31, 2020.

March 31, 

December 31,

    

2021

2020

(dollars in thousands)

Finance Leases

Right-of-use assets included in Storage properties, net

$

41,655

$

41,896

Lease liabilities included in Lease liabilities - finance leases

$

65,710

$

65,599

Operating Leases

Right-of-use assets included in Other assets, net

$

54,989

$

55,302

Lease liabilities included in Accounts payable, accrued expenses and other liabilities

$

53,541

$

53,595

Weighted Average Lease Term (in years)

Finance leases

43.3

43.5

Operating leases

34.6

34.8

Weighted Average Discount Rate

Finance leases

3.25

%

3.25

%

Operating leases

4.47

%

4.46

%

The following table represents the future lease liability maturities as of March 31, 2021 (in thousands):

Finance

Operating

2021

    

$

1,520

    

$

1,893

2022

 

2,183

 

2,639

2023

 

2,183

 

2,690

2024

 

2,183

 

2,540

2025

 

2,224

 

2,539

2026 and thereafter

 

122,932

 

99,290

Total lease payments

 

133,225

 

111,591

Less: Imputed interest

(67,515)

(58,050)

Present value of lease liabilities

$

65,710

$

53,541

During the three months ended March 31, 2021 and 2020, the cash paid for amounts included in the measurement of lease liabilities related to the Company’s operating leases was approximately $0.5 million and $0.6 million, respectively. During the three months ended March 31, 2021, the cash paid for amounts included in the measurement of lease liabilities related to the Company’s finance leases was approximately $0.4 million. There were 0 such payments during the three months ended March 31, 2020. These amounts are included as operating cash outflows within the consolidated statements of cash flows. During the three months ended March 31, 2021 and 2020, the Company did not enter into any lease agreements set to commence in the future.

15. 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 claim expenses, insurance retention and litigation costs 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

30

liabilities, arising from any such matters, which are included in Accounts payable, accrued expenses and other liabilities on the Company’s consolidated balance sheets. 

16. RELATED PARTY TRANSACTIONS

The Company provides management services to certain joint ventures and other related parties. Management agreements provide for fee income to the Company based on a percentage of revenues at the managed stores. Total management fees for unconsolidated real estate ventures or other entities in which the Company held an ownership interest for the three months ended March 31, 2021 and 2020 totaled $1.0 million and $0.9 million, respectively.

The management agreements for certain joint ventures, other related parties and third-party stores provide for the reimbursement to the Company for certain expenses incurred to manage the stores. These amounts consist of amounts due for management fees, payroll, and other store expenses. The amounts due to the Company were $15.0 million and $13.1 million as of March 31, 2021 and December 31, 2020, respectively, and are reflected in Other assets, net on the Company’s consolidated balance sheets. Additionally, as discussed in note 13, the Company had outstanding mortgage loans receivable from consolidated joint ventures of $26.2 million and $21.4 million as of March 31, 2021 and December 31, 2020, respectively, which are eliminated for consolidation purposes. The Company believes that all of these related-party receivables are fully collectible.

The HVP V, HVPSE, HVP IV and HHFNE operating agreements provide for acquisition, disposition and other fees payable from HVP V, HVPSE, HVP IV and HHFNE to the Company upon the closing of a property transaction by HVP V, HVPSE, HVP IV and HHFNE or any of their subsidiaries and completion of certain measures as defined in the operating agreements. During the three months ended March 31, 2021 and 2020, the Company recognized fees associated with property transactions of $0.2 million and $0.7 million, respectively. Property transaction fees are included in Other income on the consolidated statements of operations.

17. SUBSEQUENT EVENTS

On April 16, 2021, the Company contributed $3.4 million to acquire a 50% interest in a joint venture that owns a self-storage property located in Minnesota. In addition, the Company has a $6.1 million related party loan commitment to the joint venture, of which $5.5 million was funded in conjunction with the membership interest acquisition.

31

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, 2020.

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 March 31, 2021 and December 31, 2020, we owned 543 self-storage properties. These properties totaled approximately 38.7 million and 38.5 million rentable square feet, respectively, as of such dates. As of March 31, 2021, we owned stores in the District of Columbia and the following 24 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, South Carolina, Tennessee, Texas, Utah and Virginia. In addition, as of March 31, 2021, we managed 701 stores for third parties (including 107 stores containing an aggregate of approximately 7.6 million rentable square feet as part of six separate unconsolidated real estate ventures) bringing the total number of stores which we owned and/or managed to 1,244. As of March 31, 2021, we managed stores for third parties in the following 36 states: Alabama, Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Vermont, Virginia, Washington 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 management. 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, inflation 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.

32

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 New York, Florida, Texas and California provided approximately 19%, 15%, 9% and 8%, respectively, of total revenues for the three months ended March 31, 2021.

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. To the extent that the Company (i) has the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE and (ii) has the obligation or rights to absorb the VIE's losses or receive its benefits, then the Company is considered the primary beneficiary. 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 nor substantive participating rights.

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. Allocations to land, building and improvements and equipment are recorded based upon their respective fair values as estimated by management. If appropriate, the Company allocates a portion of the purchase price to an intangible asset attributed 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 storage 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 has been allocated to above- or below-market lease intangibles associated with storage leases assumed at acquisition. Above- or below- market lease intangibles associated with assumed ground leases in which the Company serves as lessee are recorded as an adjustment to the right-of-use asset and reflect the difference between the contractual amounts to be paid pursuant to each in-place ground lease and management’s estimate of fair market lease rates. These amounts are amortized over the term of the lease. 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.

33

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 three months ended March 31, 2021 and 2020.

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. There were no stores classified as held for sale as of March 31, 2021.

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 real estate 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 three months ended March 31, 2021 and 2020.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements affecting our business, see note 2 to the consolidated financial statements.

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 or undergone significant renovation. We believe that same-store results are useful to investors in evaluating our

34

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 March 31, 2021, we owned 511 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 March 31, 2021 and 2020, we owned 543 and 524 self-storage properties and related assets, respectively. The following table summarizes the change in number of owned stores from January 1, 2020 through March 31, 2021:

    

2021

    

2020

Balance - January 1

 

543

 

523

Stores acquired

 

 

1

Stores developed

 

1

 

Stores combined (1)

(1)

Balance - March 31

 

543

 

524

Stores acquired

 

 

2

Stores developed

1

Balance - June 30

 

 

527

Stores acquired

 

 

Stores developed

Balance - September 30

 

 

527

Stores acquired

 

 

18

Stores combined (2)

(1)

Stores sold

 

 

(1)

Balance - December 31

 

 

543

(1)On March 3, 2021, the Company completed development of a store located in Arlington, VA for a total cost of approximately $26.4 million. The developed store is located adjacent to an existing consolidated joint venture store. Given their proximity to each other, the stores have been combined in our store count, as well as for operational and reporting purposes.

(2)On November 10, 2020, the Company acquired a store located in Merritt Island, FL for approximately $3.9 million. The acquired store is located in near proximity 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.

Impact of COVID-19 on the Consolidated Financial Statements and Business Operations

Our assessment of the impact of COVID-19 on the consolidated financial statements and business operations has not changed materially from the description provided in Part I. Item 1. “Business,” of our Annual Report on Form 10-K for the year ended December 31, 2020. However, the duration and scope of the pandemic; actions that have been and continue to be taken by governmental entities, individuals and businesses in response to the pandemic; and the continued impact on economic activity from the pandemic may, individually or in aggregate, impact our future business, financial condition, results of operations, access to capital and share price.

35

Comparison of the three months ended March 31, 2021 to the three months ended March 31, 2020 (in thousands)

Non Same-Store

Other/

 

Same-Store Property Portfolio

Properties

Eliminations

Total Portfolio

 

    

    

    

    

    

%  

    

    

    

    

    

    

    

    

    

    

    

    

    

    

%  

 

2021

2020

Change

Change

2021

2020

2021

2020

2021

2020

Change

Change

 

REVENUES:

Rental income

$

147,322

$

137,414

$

9,908

 

7.2

%  

$

15,154

$

3,571

$

$

$

162,476

$

140,985

$

21,491

 

15.2

%  

Other property related income (1)

 

5,985

 

6,286

 

(301)

 

(4.8)

%  

 

509

 

189

 

12,810

 

10,427

 

19,304

 

16,902

 

2,402

 

14.2

%  

Property management fee income

 

 

 

 

0.0

%  

 

 

 

7,061

 

6,194

 

7,061

 

6,194

 

867

 

14.0

%  

Total revenues

 

153,307

 

143,700

 

9,607

 

6.7

%  

 

15,663

 

3,760

 

19,871

 

16,621

 

188,841

 

164,081

 

24,760

 

15.1

%  

OPERATING EXPENSES:

Property operating expenses (2)

 

47,779

 

46,824

 

955

 

2.0

%  

 

4,815

 

1,735

 

8,634

 

7,181

 

61,228

 

55,740

 

5,488

 

9.8

%  

NET OPERATING INCOME:

 

105,528

 

96,876

 

8,652

 

8.9

%  

 

10,848

 

2,025

 

11,237

 

9,440

 

127,613

 

108,341

 

19,272

 

17.8

%  

Store count

 

511

 

511

 

32

 

13

 

543

 

524

Total square footage

 

35,682

 

35,682

 

2,971

 

1,053

 

38,653

 

36,735

Period end occupancy

 

94.4

%  

 

91.3

%  

 

76.2

%  

 

56.7

%  

 

93.0

%  

 

90.2

%  

Period average occupancy

 

93.8

%  

 

91.0

%  

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

$

17.60

$

16.94

Depreciation and amortization

 

53,810

 

40,838

 

12,972

 

31.8

%  

General and administrative

 

10,916

 

10,365

 

551

 

5.3

%  

Subtotal

 

64,726

 

51,203

 

13,523

 

26.4

%  

OTHER (EXPENSE) INCOME

Interest:

Interest expense on loans

 

(19,234)

 

(18,681)

 

(553)

 

(3.0)

%  

Loan procurement amortization expense

 

(1,035)

 

(754)

 

(281)

 

(37.3)

%  

Equity in earnings (losses) of real estate ventures

 

20

 

(5)

 

25

 

500.0

%  

Other

 

677

 

619

 

58

 

9.4

%  

Total other expense

 

(19,572)

 

(18,821)

 

(751)

 

(4.0)

%  

NET INCOME

 

43,315

 

38,317

 

4,998

 

13.0

%  

NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS

Noncontrolling interests in the Operating Partnership

 

(1,549)

 

(383)

 

(1,166)

 

(304.4)

%  

Noncontrolling interests in subsidiaries

 

(34)

 

(38)

 

4

 

10.5

%  

NET INCOME ATTRIBUTABLE TO THE COMPANY’S COMMON SHAREHOLDERS

$

41,732

$

37,896

$

3,836

 

10.1

%  

(1)Protection plan revenue, which historically has been included in our same-store and non same-store portfolio results, is now recorded in indirect property overhead. Prior periods have been adjusted for comparability.
(2)For comparability purposes, current year amounts related to the expiration of certain real estate tax abatements have been excluded from the same-store portfolio results ($60k for the three months ended March 31, 2021).
(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 $141.0 million during the three months ended March 31, 2020 to $162.5 million for the three months ended March 31, 2021, an increase of $21.5 million, or 15.2%. The $9.9 million increase in same-store rental income was primarily due to a 3.1% increase in average occupancy for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020. The remaining increase is primarily attributable to $11.6 million of additional rental income from the stores acquired or opened in 2020 and 2021 included in our non-same store portfolio.

Other property related income increased from $16.9 million during the three months ended March 31, 2020 to $19.3 million for the three months ended March 31, 2021, an increase of $2.4 million, or 14.2%. The $0.3 million decrease in same-store other property related income is mainly attributable to a decrease in fee revenue. This decrease is offset by a $0.3 million increase in other property related income derived from the stores acquired or opened in 2020 and 2021 included in our non-same store portfolio as well as a $1.8 million increase in customer storage protection plan participation at our owned and managed stores.

Property management fee income increased from $6.2 million during the three months ended March 31, 2020 to $7.1 million for the three months ended March 31, 2021, an increase of $0.9 million, or 14.0%. This increase was primarily due to an increase in rental income at our managed stores for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020.

Operating Expenses

Property operating expenses increased from $55.7 million during the three months ended March 31, 2020 to $61.2 million for the three months ended March 31, 2021, an increase of $5.5 million, or 9.8%. The $1.0 million increase in property operating expenses on the same-store portfolio was primarily due to an increase in snow removal fees of $0.8

36

million. The remainder of the increase is primarily attributable to $3.1 million of increased expenses associated with newly acquired or developed stores.

Depreciation and amortization increased from $40.8 million during the three months ended March 31, 2020 to $53.8 million for the three months ended March 31, 2021, an increase of $13.0 million, or 31.8%. This increase is primarily attributable to depreciation and amortization associated with newly acquired or developed stores.

General and administrative increased from $10.4 million during the three months ended March 31, 2020 to $10.9 million for the three months ended March 31, 2021, an increase of $0.6 million, or 5.3%. This increase is primarily attributable to increased personnel expenses resulting from additional employee headcount to support our growth.

Other (Expense) Income

Interest expense increased from $18.7 million during the three months ended March 31, 2020 to $19.2 million for the three months ended March 31, 2021, an increase of $0.6 million, or 3.0%. The increase is attributable to a higher amount of outstanding debt during the three months ended March 31, 2021, partially offset by lower interest rates during the three months ended March 31, 2021. The average outstanding debt balance increased $382.2 million to $2,326.4 million during the three months ended March 31, 2021 as compared to $1,944.2 million during the three months ended March 31, 2020 as the result of borrowings to fund a portion of the Company’s growth. The weighted average effective interest rate on the Company’s outstanding debt for the three months ended March 31, 2021 and 2020 was 3.39% and 3.96%, respectively.

Cash Flows

Comparison of the three months ended March 31, 2021 to the three months ended March 31, 2020

A comparison of cash flow from operating, investing and financing activities for the three months ended March 31, 2021 and 2020 is as follows:

Three Months Ended March 31, 

 

Net cash provided by (used in):

    

2021

    

2020

    

Change

 

(in thousands)

 

Operating activities

$

98,182

$

80,949

$

17,233

Investing activities

$

(20,532)

$

(34,784)

$

14,252

Financing activities

$

(77,887)

$

(66,127)

$

(11,760)

Cash provided by operating activities increased from $80.9 million for the three months ended March 31, 2020 to $98.2 million for the three months ended March 31, 2021, reflecting an increase of $17.2 million. Our increased cash flow from operating activities was primarily attributable to stores acquired and developed during 2020 and 2021 and increased net operating income levels in the same-store portfolio in the 2021 period as compared to the 2020 period.

Cash used in investing activities decreased from $34.8 million for the three months ended March 31, 2020 to $20.5 million for the three months ended March 31, 2021, reflecting a decrease of $14.3 million. The change was primarily driven by a decrease in cash used for acquisitions of storage properties. Cash used during the three months ended March 31, 2020 related to the acquisition of one store for $9.0 million, with no acquisitions closing during the three months ended March 31, 2021.

Cash used in financing activities was $77.9 million for the three months ended March 31, 2021 compared to $66.1 million for the three months ended March 31, 2020, reflecting an increase of $11.8 million. This change is primarily the result of a $65.0 million increase in net revolving credit facility payments during the three months ended March 31, 2021 compared to the three months ended March 31, 2020. Additionally, principal payments on mortgage loans increased $44.0 million from the three months ended March 31, 2020 to the three months ended March 31, 2021 resulting primarily from the repayment of two secured loans during the 2021 period with no comparable repayments during the 2020 period. These increases in cash outflows were offset by $99.7 million of net proceeds received from the issuance of

37

common shares under our “at-the-market” equity program during the three months ended March 31, 2021, with no comparable cash inflows during the 2020 period.

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 at our stores and fees earned from managing stores. Therefore, our ability to generate cash from operations is dependent on the rents and management fees 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 could 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 2021 fiscal year, we expect recurring capital expenditures to be approximately $8.0 million to $13.0 million, planned capital improvements and store upgrades to be approximately $7.0 million to $12.0 million and costs associated with the development of new stores to be approximately $20.0 million to $30.0 million. Our currently scheduled principal payments on our outstanding debt are approximately $1.7 million for the remainder of 2021.

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 2021 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 Amended and Restated 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 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 March 31, 2021, we had approximately $3.7 million in available cash and cash equivalents. In addition, we had approximately $696.6 million of availability for borrowings under our Amended and Restated Credit Facility.

38

Unsecured Senior Notes

Our unsecured senior notes, which are issued by the Operating Partnership and guaranteed by the Parent Company, are summarized as follows (collectively referred to as the “Senior Notes”):

    

March 31, 

December 31,

    

Effective

Issuance

Maturity

 

Unsecured Senior Notes

    

2021

    

2020

    

Interest Rate

Date

Date

 

(in thousands)

 

$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

$350M 4.375% Guaranteed Notes due 2029

350,000

350,000

4.46

%  

Jan-19

Feb-29

$350M 3.000% Guaranteed Notes due 2030

350,000

350,000

3.04

%  

Oct-19

Feb-30

$450M 2.000% Guaranteed Notes due 2031

450,000

450,000

2.10

%  

Oct-20

Feb-31

Principal balance outstanding

2,050,000

2,050,000

Less: Discount on issuance of unsecured senior notes, net

(7,278)

(7,470)

Less: Loan procurement costs, net

(11,723)

(12,158)

Total unsecured senior notes, net

$

2,030,999

$

2,030,372

(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 1.5:1.0 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 March 31, 2021, the Operating Partnership was in compliance with all of the financial covenants under the Senior Notes.

Revolving Credit Facility

On December 9, 2011, we entered into a credit agreement (the “Credit Facility”). On June 19, 2019, we amended and restated, in its entirety, the Credit Facility (the “Amended and Restated Credit Facility”) which, subsequent to the amendment and restatement, is comprised of a $750.0 million unsecured revolving facility (the “Revolver”) maturing on June 19, 2024. Under the Amended and Restated Credit Facility, pricing on the Revolver is dependent upon our unsecured debt credit ratings. At the Company’s current Baa2/BBB level, amounts drawn under the Revolver are priced at 1.10% over LIBOR, inclusive of a facility fee of 0.15%.

As of March 31, 2021, borrowings under the Revolver had an effective interest rate of 1.21%. Additionally, as of March 31, 2021, $696.6 million was available for borrowing under the Revolver. The available balance under the Revolver is reduced by an outstanding letter of credit of $0.6 million.

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Under the Amended and Restated Credit Facility, our ability to borrow under the Revolver is subject to ongoing compliance with certain financial covenants which include, among other things, (1) a maximum total indebtedness to total asset value of 60.0%, and (2) a minimum fixed charge coverage ratio of 1.5:1.0. As of March 31, 2021, we were in compliance with all of our financial covenants.

At-the-Market Equity Program

We maintain an “at-the-market” equity program that enables us to sell up to 60.0 million common shares through sales agents pursuant to equity distribution agreements (the “Equity Distribution Agreements”).

During the three months ended March 31, 2021, we sold a total of 2.8 million common shares at an average sales price of $35.52 per share, resulting in net proceeds of $99.7 million, after deducting offering costs. We used the proceeds from the 2021 sales under the program to fund the development of self-storage properties and for general corporate purposes. As of March 31, 2021, 8.1 million common shares remained available for issuance under the Equity Distribution Agreements.

Recent Developments

On April 16, 2021, we contributed $3.4 million to acquire a 50% interest in a joint venture that owns a self-storage property located in Minnesota. In addition, we have a $6.1 million related party loan commitment to the joint venture, of which $5.5 million was funded in conjunction with the membership interest acquisition.

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:

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;

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

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

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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 and restated, 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.

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The following table presents a reconciliation of net income attributable to the Company’s common shareholders to FFO (and FFO, as adjusted) attributable to common shareholders and OP unitholders for the three months ended March 31, 2021 and 2020.

Three Months Ended March 31, 

    

2021

    

2020

(in thousands)

Net income attributable to the Company’s common shareholders

$

41,732

$

37,896

Add:

Real estate depreciation and amortization:

Real property

 

52,852

 

40,008

Company’s share of unconsolidated real estate ventures

 

1,873

 

1,709

Noncontrolling interests in the Operating Partnership

 

1,549

 

383

FFO attributable to common shareholders and OP unitholders

$

98,006

$

79,996

Add:

Loss on early repayment of debt (1)

423

FFO, as adjusted, attributable to common shareholders and OP unitholders

$

98,429

$

79,996

Weighted average diluted shares outstanding

200,233

194,264

Weighted average diluted units outstanding

7,384

 

1,972

Weighted average diluted shares and units outstanding

 

207,617

 

196,236

(1)For the three months ended March 31, 2021, loss on early repayment of debt relates to $0.4 million of costs that are included in the Company's share of equity in earnings (losses) of real estate ventures.

Off-Balance Sheet Arrangements

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

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Market Risk

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

Effect of Changes in Interest Rates on our Outstanding Debt

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

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As of March 31, 2021, our consolidated debt consisted of $2,208.1 million of outstanding mortgage loans and notes payable and unsecured senior notes that are subject to fixed rates. Additionally, as of March 31, 2021, there were $52.8 million of outstanding unsecured credit facility borrowings subject to floating rates. Changes in market interest rates have different impacts on the fixed and variable-rate portions of our debt portfolio. A change in market interest rates on the fixed portion of the debt portfolio impacts the net financial instrument position, but has no impact on interest incurred or cash flows. A change in market interest rates on the variable portion of the debt portfolio impacts the interest incurred and cash flows, but does not impact the net financial instrument position.

If market interest rates on our variable-rate debt increase by 100 basis points, the increase in annual interest expense on our variable-rate debt would decrease future earnings and cash flows by approximately $0.5 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 $0.5 million a year.

If market interest rates increase by 100 basis points, the fair value of our outstanding fixed-rate mortgage debt and unsecured senior notes would decrease by approximately $131.1 million. If market rates of interest decrease by 100 basis points, the fair value of our outstanding fixed-rate mortgage debt and unsecured senior notes would increase by approximately $140.9 million.

ITEM 4. CONTROLS AND PROCEDURES

Controls and Procedures (Parent Company)

Evaluation of Disclosure Controls and Procedures

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

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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 INFORMATION

ITEM 1. LEGAL PROCEEDINGS

To our knowledge and except as otherwise disclosed in this quarterly report, no legal proceedings are pending against us, other than routine actions and administrative proceedings, and other actions not deemed material, and which, in the aggregate, are not expected to have a material adverse effect on our financial condition, results of operations or cash flows.

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

Repurchases of Parent Company Common Shares

The following table provides information about repurchases of the Parent Company’s common shares during the three months ended March 31, 2021:

    

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

 

January 1 - January 31

19,450

$

33.95

N/A

3,000,000

February 1 - February 28

1,832

$

35.84

N/A

3,000,000

March 1 - March 31

85

$

37.29

N/A

3,000,000

Total

 

21,367

$

34.12

 

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 (the “Board”) 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, the program will expire when the number of authorized shares has been repurchased. The Parent Company has made no repurchases under this program to date.

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ITEM 6. EXHIBITS

Exhibit No.

    

Exhibit Description

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 three months ended March 31, 2021, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to Unaudited Consolidated Financial Statements, tagged as blocks of text. (filed herewith)

104

Cover Page Interactive Data File – the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

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SIGNATURES OF REGISTRANT

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CUBESMART

(Registrant)

Date: April 30, 2021

By:

/s/ Christopher P. Marr

Christopher P. Marr, Chief Executive Officer

(Principal Executive Officer)

Date: April 30, 2021

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: April 30, 2021

By:

/s/ Christopher P. Marr

Christopher P. Marr, Chief Executive Officer

(Principal Executive Officer)

Date: April 30, 2021

By:

/s/ Timothy M. Martin

Timothy M. Martin, Chief Financial Officer

(Principal Financial Officer)

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