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CUBE CubeSmart

Filed: 6 Nov 20, 5:08pm

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 September 30, 2020.

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 November 4, 2020

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

195,266,443

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended September 30, 2020 of CubeSmart (the “Parent Company” or “CubeSmart”) and CubeSmart, L.P. (the “Operating Partnership”). The Parent Company is a Maryland real estate investment trust, or REIT, that owns its assets and conducts its operations through the Operating Partnership, a Delaware limited partnership, and subsidiaries of the Operating Partnership. The Parent Company, the Operating Partnership and their consolidated subsidiaries are collectively referred to in this report as the “Company”. In addition, terms such as “we”, “us” or “our” used in this report may refer to the Company, the Parent Company or the Operating Partnership.

The Parent Company is the sole general partner of the Operating Partnership and, as of September 30, 2020, owned a 98.9% interest in the Operating Partnership. The remaining 1.1% 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, 2019 and in the Parent Company’s and the Operating Partnership’s combined Quarterly Report on Form 10-Q for the quarter ended March 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 and other pandemics, 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;

5

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

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, or war that affect the markets in which we operate;

potential environmental and other liabilities;

governmental, administrative and executive orders, 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, 2019 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)

September 30, 

December 31,

 

    

2020

    

2019

 

(unaudited)

ASSETS

Storage properties

$

4,814,261

$

4,699,844

Less: Accumulated depreciation

 

(980,312)

 

(925,359)

Storage properties, net (including VIE assets of $86,409 and $92,612, respectively)

 

3,833,949

 

3,774,485

Cash and cash equivalents

 

3,903

 

54,857

Restricted cash

 

2,815

 

3,584

Loan procurement costs, net of amortization

 

3,382

 

4,059

Investment in real estate ventures, at equity

 

92,249

 

91,117

Other assets, net

 

92,272

 

101,443

Total assets

$

4,028,570

$

4,029,545

LIABILITIES AND EQUITY

Unsecured senior notes, net

$

1,837,219

$

1,835,725

Revolving credit facility

 

37,300

 

Mortgage loans and notes payable, net

 

93,707

 

96,040

Accounts payable, accrued expenses and other liabilities

 

153,568

 

137,880

Distributions payable

 

64,711

 

64,688

Deferred revenue

 

27,595

 

25,313

Security deposits

 

491

 

475

Total liabilities

 

2,214,591

 

2,160,121

Noncontrolling interests in the Operating Partnership

 

69,573

 

62,088

Commitments and contingencies

Equity

Common shares $.01 par value, 400,000,000 shares authorized, 193,748,023 and 193,557,024 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

 

1,937

 

1,936

Additional paid-in capital

 

2,682,671

 

2,674,745

Accumulated other comprehensive loss

 

(669)

 

(729)

Accumulated deficit

 

(947,477)

 

(876,606)

Total CubeSmart shareholders’ equity

 

1,736,462

 

1,799,346

Noncontrolling interests in subsidiaries

 

7,944

 

7,990

Total equity

 

1,744,406

 

1,807,336

Total liabilities and equity

$

4,028,570

$

4,029,545

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 September 30, 

Nine Months Ended September 30, 

 

    

2020

    

2019

    

2020

    

2019

 

REVENUES

Rental income

$

146,507

$

142,207

$

427,976

$

409,826

Other property related income

 

18,916

 

18,054

 

52,340

 

50,651

Property management fee income

 

7,088

 

6,286

 

20,074

 

17,932

Total revenues

 

172,511

 

166,547

 

500,390

 

478,409

OPERATING EXPENSES

Property operating expenses

 

57,101

53,465

168,186

 

155,010

Depreciation and amortization

 

38,084

43,379

118,815

 

122,484

General and administrative

 

10,193

10,011

30,101

 

28,958

Total operating expenses

 

105,378

 

106,855

 

317,102

 

306,452

OTHER (EXPENSE) INCOME

Interest:

Interest expense on loans

 

(18,984)

 

(18,207)

 

(56,367)

 

(53,858)

Loan procurement amortization expense

 

(753)

 

(687)

 

(2,260)

 

(2,082)

Equity in (losses) earnings of real estate ventures

 

(37)

 

152

 

(216)

 

10,940

Other

 

45

 

1,647

 

208

 

1,304

Total other expense

 

(19,729)

 

(17,095)

 

(58,635)

 

(43,696)

NET INCOME

 

47,404

 

42,597

 

124,653

 

128,261

NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS

Noncontrolling interests in the Operating Partnership

 

(474)

(426)

(1,246)

 

(1,283)

Noncontrolling interest in subsidiaries

 

(39)

(17)

(115)

 

94

NET INCOME ATTRIBUTABLE TO THE COMPANY’S COMMON SHAREHOLDERS

$

46,891

$

42,154

$

123,292

$

127,072

Basic earnings per share attributable to common shareholders

$

0.24

$

0.22

$

0.64

$

0.67

Diluted earnings per share attributable to common shareholders

$

0.24

$

0.22

$

0.63

$

0.67

Weighted average basic shares outstanding

193,745

192,927

193,652

189,970

Weighted average diluted shares outstanding

194,539

193,817

194,386

190,774

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 September 30, 

Nine Months Ended September 30, 

    

2020

    

2019

    

2020

    

2019

NET INCOME

$

47,404

$

42,597

$

124,653

$

128,261

Other comprehensive income:

Unrealized gains on interest rate swaps

 

 

232

Reclassification of realized losses on interest rate swaps

 

20

 

20

60

50

OTHER COMPREHENSIVE INCOME

 

20

 

20

 

60

 

282

COMPREHENSIVE INCOME

 

47,424

 

42,617

 

124,713

 

128,543

Comprehensive income attributable to noncontrolling interests in the Operating Partnership

 

(474)

 

(426)

 

(1,246)

 

(1,285)

Comprehensive (income) loss attributable to noncontrolling interest in subsidiaries

 

(39)

 

(17)

 

(115)

 

94

COMPREHENSIVE INCOME ATTRIBUTABLE TO THE COMPANY

$

46,911

$

42,174

$

123,352

$

127,352

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, 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 interests 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

Distributions paid to noncontrolling interests in subsidiaries

(42)

(42)

Issuance of common shares, net

 

(70)

 

(70)

 

(70)

Issuance of restricted shares

 

28

 

 

Conversion from units to shares

 

100

1

2,823

 

2,824

 

2,824

 

(2,824)

Exercise of stock options

 

14

135

 

135

 

135

Amortization of restricted shares

1,249

 

1,249

 

1,249

Share compensation expense

464

 

464

 

464

Adjustment for noncontrolling interests in the Operating Partnership

(615)

 

(615)

 

(615)

 

615

Net income

38,505

 

38,505

 

38

 

38,543

 

389

Other comprehensive income, net

20

20

20

Common share distributions ($0.33 per share)

(64,081)

 

(64,081)

 

(64,081)

 

(618)

Balance at June 30, 2020

 

193,729

$

1,937

$

2,680,468

$

(689)

$

(920,964)

$

1,760,752

$

7,965

$

1,768,717

$

51,407

Distributions paid to noncontrolling interests in subsidiaries

(60)

(60)

Issuance of common shares, net

 

(44)

 

(44)

 

(44)

Issuance of restricted shares

 

1

 

 

Issuance of OP units

9,000

Exercise of stock options

 

18

491

 

491

 

491

Amortization of restricted shares

1,277

 

1,277

 

1,277

Share compensation expense

479

 

479

 

479

Adjustment for noncontrolling interests in the Operating Partnership

(9,312)

 

(9,312)

 

(9,312)

 

9,312

Net income

46,891

 

46,891

 

39

 

46,930

 

474

Other comprehensive income, net

20

20

20

Common share distributions ($0.33 per share)

(64,092)

 

(64,092)

 

(64,092)

 

(620)

Balance at September 30, 2020

193,748

$

1,937

$

2,682,671

$

(669)

$

(947,477)

$

1,736,462

$

7,944

$

1,744,406

$

69,573

See accompanying notes to the unaudited consolidated financial statements.

10

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, 2018

    

187,145

$

1,871

$

2,500,751

$

(1,029)

$

(791,915)

$

1,709,678

$

6,771

$

1,716,449

$

55,819

Contributions from noncontrolling interests in subsidiaries

4,828

 

4,828

Distributions paid to noncontrolling interests in subsidiaries

(66)

(66)

Acquisition of noncontrolling interest in subsidiary

(9,728)

(9,728)

(272)

(10,000)

Issuance of common shares, net

 

773

8

24,572

 

24,580

 

24,580

Issuance of restricted shares

 

19

 

 

Conversion from units to shares

 

60

1

1,841

 

1,842

 

1,842

 

(1,842)

Exercise of stock options

 

140

1

1,048

 

1,049

 

1,049

Amortization of restricted shares

798

 

798

 

798

Share compensation expense

468

 

468

 

468

Adjustment for noncontrolling interest in the Operating Partnership

(6,681)

 

(6,681)

 

(6,681)

 

6,681

Net income (loss)

35,498

 

35,498

 

(70)

 

35,428

 

358

Other comprehensive income, net

240

240

240

2

Common share distributions ($0.32 per share)

(60,375)

 

(60,375)

 

(60,375)

 

(604)

Balance at March 31, 2019

 

188,137

$

1,881

$

2,519,750

$

(789)

$

(823,473)

$

1,697,369

$

11,191

$

1,708,560

$

60,414

Distributions paid to noncontrolling interests in subsidiaries

(8)

(8)

Acquisition of noncontrolling interest in subsidiary

(22,573)

(22,573)

(5,045)

(27,618)

Issuance of common shares, net

 

3,353

34

110,487

 

110,521

 

110,521

Issuance of restricted shares

 

31

 

 

Conversion from units to shares

 

20

644

 

644

 

644

 

(644)

Exercise of stock options

 

85

1

961

 

962

 

962

Amortization of restricted shares

1,231

 

1,231

 

1,231

Share compensation expense

439

 

439

 

439

Adjustment for noncontrolling interest in the Operating Partnership

(2,713)

 

(2,713)

 

(2,713)

 

2,713

Net income (loss)

49,420

 

49,420

 

(41)

 

49,379

 

499

Other comprehensive income, net

20

20

20

Common share distributions ($0.32 per share)

(61,431)

 

(61,431)

 

(61,431)

 

(597)

Balance at June 30, 2019

 

191,626

$

1,916

$

2,610,939

$

(769)

$

(838,197)

$

1,773,889

$

6,097

$

1,779,986

$

62,385

Contributions from noncontrolling interests in subsidiaries

2,548

 

2,548

Distributions paid to noncontrolling interests in subsidiaries

(68)

(68)

Acquisition of noncontrolling interest in subsidiary

(2,020)

(2,020)

(598)

(2,618)

Issuance of common shares, net

 

1,773

18

61,214

 

61,232

 

61,232

Issuance of restricted shares

 

1

 

 

Exercise of stock options

 

154

2

1,653

 

1,655

 

1,655

Amortization of restricted shares

1,214

 

1,214

 

1,214

Share compensation expense

440

 

440

 

440

Adjustment for noncontrolling interest in the Operating Partnership

(2,894)

 

(2,894)

 

(2,894)

 

2,894

Net income

42,154

 

42,154

 

17

 

42,171

 

426

Other comprehensive income, net

20

20

20

Common share distributions ($0.32 per share)

(62,048)

 

(62,048)

 

(62,048)

 

(597)

Balance at September 30, 2019

193,554

$

1,936

$

2,673,440

$

(749)

$

(860,985)

$

1,813,642

$

7,996

$

1,821,638

$

65,108

See accompanying notes to the unaudited consolidated financial statements.

11

CUBESMART AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

Nine Months Ended September 30, 

    

2020

    

2019

Operating Activities

Net income

$

124,653

$

128,261

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

Depreciation and amortization

 

121,075

 

124,566

Equity in losses (earnings) of real estate ventures

 

216

 

(10,940)

Equity compensation expense

 

5,374

 

4,990

Accretion of fair market value adjustment of debt

 

(530)

 

(541)

Changes in other operating accounts:

Other assets

 

(6,964)

 

(8,094)

Accounts payable and accrued expenses

 

21,854

 

19,336

Other liabilities

 

2,153

 

2,274

Net cash provided by operating activities

$

267,831

$

259,852

Investing Activities

Acquisitions of storage properties

(82,968)

(63,499)

Additions and improvements to storage properties

 

(41,968)

 

(28,520)

Development costs

 

(34,163)

 

(94,251)

Cash paid for partner's interest in real estate venture, net of cash, cash equivalents and restricted cash acquired

 

 

(117,959)

Investment in real estate ventures

 

(5,914)

 

(6,558)

Cash distributed from real estate ventures

 

4,566

 

5,513

Net cash used in investing activities

$

(160,447)

$

(305,274)

Financing Activities

Proceeds from:

Unsecured senior notes

 

 

347,746

Revolving credit facility

273,774

856,011

Principal payments on:

Revolving credit facility

 

(236,474)

 

(917,494)

Unsecured term loans

 

 

(200,000)

Mortgage loans and notes payable

 

(1,898)

 

(11,027)

Loan procurement costs

 

 

(3,104)

Settlement of hedge transactions

 

 

(807)

Acquisition of noncontrolling interest in subsidiary, net

(35,408)

Proceeds from issuance of common shares, net

 

(232)

 

196,333

Cash paid upon vesting of restricted shares

(665)

(400)

Exercise of stock options

 

626

 

3,666

Contributions from noncontrolling interests in subsidiaries

 

 

48

Distributions paid to noncontrolling interests in subsidiaries

(161)

(142)

Distributions paid to common shareholders

 

(192,160)

 

(181,811)

Distributions paid to noncontrolling interests in Operating Partnership

 

(1,917)

 

(1,823)

Net cash (used in) provided by financing activities

$

(159,107)

$

51,788

Change in cash, cash equivalents and restricted cash

 

(51,723)

 

6,366

Cash, cash equivalents and restricted cash at beginning of period

 

58,441

6,482

Cash, cash equivalents and restricted cash at end of period

$

6,718

$

12,848

Supplemental Cash Flow and Noncash Information

Cash paid for interest, net of interest capitalized

$

62,937

$

53,176

Supplemental disclosure of noncash activities:

Acquisitions of storage properties

$

(2,623)

$

Proceeds held in escrow from real estate venture's sale of real estate (see note 4)

$

$

8,288

Noncash consideration for acquisition of partner's interest in real estate venture (see note 4)

$

$

(8,288)

Discount on issuance of unsecured senior notes

$

$

2,254

Noncash drawdown on revolving credit facility

$

$

103,938

Repayment of unsecured term loan through noncash drawdown on revolving credit facility

$

$

(100,000)

Accretion of put liability

$

4,716

$

4,671

Derivative valuation adjustment

$

60

$

282

Loan procurement costs

$

$

(3,770)

Issuance of OP units (see note 4)

$

9,000

$

Acquisition of noncontrolling interest in subsidiary

$

$

(4,828)

Contributions from noncontrolling interests in subsidiaries

$

$

7,328

See accompanying notes to the unaudited consolidated financial statements.

12

CUBESMART, L.P. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

September 30, 

December 31,

 

    

2020

    

2019

 

(unaudited)

ASSETS

Storage properties

$

4,814,261

$

4,699,844

Less: Accumulated depreciation

 

(980,312)

 

(925,359)

Storage properties, net (including VIE assets of $86,409 and $92,612, respectively)

 

3,833,949

 

3,774,485

Cash and cash equivalents

 

3,903

 

54,857

Restricted cash

 

2,815

 

3,584

Loan procurement costs, net of amortization

 

3,382

 

4,059

Investment in real estate ventures, at equity

 

92,249

 

91,117

Other assets, net

 

92,272

 

101,443

Total assets

$

4,028,570

$

4,029,545

LIABILITIES AND CAPITAL

Unsecured senior notes, net

$

1,837,219

$

1,835,725

Revolving credit facility

 

37,300

 

Mortgage loans and notes payable, net

 

93,707

 

96,040

Accounts payable, accrued expenses and other liabilities

 

153,568

 

137,880

Distributions payable

 

64,711

 

64,688

Deferred revenue

 

27,595

 

25,313

Security deposits

 

491

 

475

Total liabilities

 

2,214,591

 

2,160,121

Limited Partnership interests of third parties

 

69,573

 

62,088

Commitments and contingencies

Capital

Operating Partner

 

1,737,131

 

1,800,075

Accumulated other comprehensive loss

 

(669)

 

(729)

Total CubeSmart, L.P. capital

 

1,736,462

 

1,799,346

Noncontrolling interests in subsidiaries

 

7,944

 

7,990

Total capital

 

1,744,406

 

1,807,336

Total liabilities and capital

$

4,028,570

$

4,029,545

See accompanying notes to the unaudited consolidated financial statements.

13

CUBESMART, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per common unit data)

(unaudited)

Three Months Ended September 30, 

Nine Months Ended September 30, 

2020

    

2019

    

2020

    

2019

REVENUES

Rental income

$

146,507

$

142,207

$

427,976

$

409,826

Other property related income

 

18,916

 

18,054

 

52,340

 

50,651

Property management fee income

 

7,088

 

6,286

 

20,074

 

17,932

Total revenues

 

172,511

 

166,547

 

500,390

 

478,409

OPERATING EXPENSES

Property operating expenses

 

57,101

 

53,465

 

168,186

 

155,010

Depreciation and amortization

 

38,084

 

43,379

 

118,815

 

122,484

General and administrative

 

10,193

 

10,011

 

30,101

 

28,958

Total operating expenses

 

105,378

 

106,855

 

317,102

 

306,452

OTHER (EXPENSE) INCOME

Interest:

Interest expense on loans

 

(18,984)

 

(18,207)

 

(56,367)

 

(53,858)

Loan procurement amortization expense

 

(753)

 

(687)

 

(2,260)

 

(2,082)

Equity in (losses) earnings of real estate ventures

 

(37)

 

152

 

(216)

 

10,940

Other

 

45

 

1,647

 

208

 

1,304

Total other expense

 

(19,729)

 

(17,095)

 

(58,635)

 

(43,696)

NET INCOME

 

47,404

 

42,597

 

124,653

 

128,261

NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS

Noncontrolling interest in subsidiaries

 

(39)

 

(17)

 

(115)

 

94

NET INCOME ATTRIBUTABLE TO CUBESMART L.P.

 

47,365

 

42,580

 

124,538

 

128,355

Operating Partnership interests of third parties

 

(474)

 

(426)

 

(1,246)

 

(1,283)

NET INCOME ATTRIBUTABLE TO COMMON UNITHOLDERS

$

46,891

$

42,154

$

123,292

$

127,072

   

 

    

 

    

 

    

 

    

Basic earnings per unit attributable to common unitholders

$

0.24

$

0.22

$

0.64

$

0.67

Diluted earnings per unit attributable to common unitholders

$

0.24

$

0.22

$

0.63

$

0.67

Weighted average basic units outstanding

 

193,745

192,927

193,652

189,970

Weighted average diluted units outstanding

 

194,539

193,817

194,386

190,774

See accompanying notes to the unaudited consolidated financial statements.

14

CUBESMART, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2020

    

2019

    

2020

    

2019

NET INCOME

$

47,404

$

42,597

$

124,653

$

128,261

Other comprehensive income:

Unrealized gains on interest rate swaps

 

 

 

 

232

Reclassification of realized losses on interest rate swaps

 

20

 

20

 

60

 

50

OTHER COMPREHENSIVE INCOME

 

20

 

20

 

60

 

282

COMPREHENSIVE INCOME

 

47,424

 

42,617

 

124,713

 

128,543

Comprehensive income attributable to Operating Partnership interests of third parties

 

(474)

 

(426)

 

(1,246)

 

(1,285)

Comprehensive (income) loss attributable to noncontrolling interest in subsidiaries

 

(39)

 

(17)

 

(115)

 

94

COMPREHENSIVE INCOME ATTRIBUTABLE TO OPERATING PARTNER

$

46,911

$

42,174

$

123,352

$

127,352

See accompanying notes to the unaudited consolidated financial statements.

15

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, 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

Distributions to noncontrolling interests in subsidiaries

(42)

(42)

Issuance of common OP units, net

 

(70)

(70)

(70)

Issuance of restricted OP units

 

28

Conversion from OP units to shares

 

100

2,824

2,824

2,824

(2,824)

Exercise of OP unit options

 

14

135

135

135

Amortization of restricted OP units

1,249

1,249

1,249

OP unit compensation expense

464

464

464

Adjustment for Limited Partnership interests of third parties

(615)

(615)

(615)

615

Net income

38,505

38,505

38

38,543

389

Other comprehensive income, net

20

20

20

Common OP unit distributions ($0.33 per unit)

(64,081)

(64,081)

(64,081)

(618)

Balance at June 30, 2020

 

193,729

 

$

1,761,441

$

(689)

$

1,760,752

$

7,965

$

1,768,717

$

51,407

Distributions to noncontrolling interests in subsidiaries

(60)

(60)

Issuance of common OP units, net

 

(44)

(44)

(44)

Issuance of restricted OP units

 

1

Issuance of OP units

9,000

Exercise of OP unit options

 

18

491

491

491

Amortization of restricted OP units

1,277

1,277

1,277

OP unit compensation expense

479

479

479

Adjustment for Limited Partnership interests of third parties

(9,312)

(9,312)

(9,312)

9,312

Net income

46,891

46,891

39

46,930

474

Other comprehensive income, net

20

20

20

Common OP unit distributions ($0.33 per unit)

(64,092)

(64,092)

(64,092)

(620)

Balance at September 30, 2020

 

193,748

 

$

1,737,131

$

(669)

$

1,736,462

$

7,944

$

1,744,406

$

69,573

See accompanying notes to the unaudited consolidated financial statements.

16

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, 2018

    

187,145

    

$

1,710,707

    

$

(1,029)

    

$

1,709,678

    

$

6,771

    

$

1,716,449

    

$

55,819

Contributions from noncontrolling interests in subsidiaries

4,828

 

4,828

Distributions to noncontrolling interests in subsidiaries

(66)

(66)

Acquisition of noncontrolling interest in subsidiary

(9,728)

(9,728)

(272)

(10,000)

Issuance of common OP units, net

 

773

 

24,580

 

24,580

 

24,580

Issuance of restricted OP units

 

19

 

 

Conversion from OP units to shares

 

60

 

1,842

 

1,842

 

1,842

 

(1,842)

Exercise of OP unit options

 

140

 

1,049

 

1,049

 

1,049

Amortization of restricted OP units

 

798

 

798

 

798

OP unit compensation expense

 

468

 

468

 

468

Adjustment for Limited Partnership interests of third parties

 

(6,681)

 

(6,681)

 

(6,681)

 

6,681

Net income (loss)

 

35,498

 

35,498

 

(70)

 

35,428

 

358

Other comprehensive income, net

240

240

240

2

Common OP unit distributions ($0.32 per unit)

 

(60,375)

 

(60,375)

 

(60,375)

 

(604)

Balance at March 31, 2019

 

188,137

 

$

1,698,158

$

(789)

$

1,697,369

$

11,191

$

1,708,560

$

60,414

Distributions to noncontrolling interests in subsidiaries

(8)

(8)

Acquisition of noncontrolling interest in subsidiary

(22,573)

(22,573)

(5,045)

(27,618)

Issuance of common OP units, net

 

3,353

110,521

110,521

110,521

Issuance of restricted OP units

 

31

Conversion from OP units to shares

 

20

644

644

644

(644)

Exercise of OP unit options

 

85

962

962

962

Amortization of restricted OP units

1,231

1,231

1,231

OP unit compensation expense

439

439

439

Adjustment for Limited Partnership interests of third parties

(2,713)

(2,713)

(2,713)

2,713

Net income (loss)

49,420

49,420

(41)

49,379

499

Other comprehensive income, net

20

20

20

Common OP unit distributions ($0.32 per unit)

(61,431)

(61,431)

(61,431)

(597)

Balance at June 30, 2019

 

191,626

 

$

1,774,658

$

(769)

$

1,773,889

$

6,097

$

1,779,986

$

62,385

Contributions from noncontrolling interests in subsidiaries

2,548

2,548

Distributions to noncontrolling interests in subsidiaries

(68)

(68)

Acquisition of noncontrolling interest in subsidiary

(2,020)

(2,020)

(598)

(2,618)

Issuance of common OP units, net

 

1,773

61,232

61,232

61,232

Issuance of restricted OP units

 

1

Exercise of OP unit options

 

154

1,655

1,655

1,655

Amortization of restricted OP units

1,214

1,214

1,214

OP unit compensation expense

440

440

440

Adjustment for Operating Partnership interests of third parties

(2,894)

(2,894)

(2,894)

2,894

Net income

42,154

42,154

17

42,171

426

Other comprehensive income, net

20

20

20

Common OP unit distributions ($0.32 per unit)

(62,048)

(62,048)

(62,048)

(597)

Balance at September 30, 2019

 

193,554

 

$

1,814,391

$

(749)

$

1,813,642

$

7,996

$

1,821,638

$

65,108

See accompanying notes to the unaudited consolidated financial statements.

17

CUBESMART, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

Nine Months Ended September 30, 

    

2020

    

2019

Operating Activities

Net income

$

124,653

$

128,261

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

Depreciation and amortization

 

121,075

 

124,566

Equity in losses (earnings) of real estate ventures

 

216

 

(10,940)

Equity compensation expense

 

5,374

 

4,990

Accretion of fair market value adjustment of debt

 

(530)

 

(541)

Changes in other operating accounts:

Other assets

 

(6,964)

 

(8,094)

Accounts payable and accrued expenses

 

21,854

 

19,336

Other liabilities

 

2,153

 

2,274

Net cash provided by operating activities

$

267,831

$

259,852

Investing Activities

Acquisitions of storage properties

 

(82,968)

 

(63,499)

Additions and improvements to storage properties

 

(41,968)

 

(28,520)

Development costs

 

(34,163)

 

(94,251)

Cash paid for partner's interest in real estate venture, net of cash, cash equivalents and restricted cash acquired

(117,959)

Investment in real estate ventures

(5,914)

(6,558)

Cash distributed from real estate ventures

4,566

 

5,513

Net cash used in investing activities

$

(160,447)

$

(305,274)

Financing Activities

Proceeds from:

Unsecured senior notes

347,746

Revolving credit facility

273,774

856,011

Principal payments on:

 

Revolving credit facility

(236,474)

(917,494)

Unsecured term loans

(200,000)

Mortgage loans and notes payable

(1,898)

(11,027)

Loan procurement costs

(3,104)

Settlement of hedge transactions

(807)

Acquisition of noncontrolling interest in subsidiary, net

(35,408)

Proceeds from issuance of common OP units

(232)

196,333

Cash paid upon vesting of restricted OP units

(665)

(400)

Exercise of OP unit options

626

3,666

Contributions from noncontrolling interests in subsidiaries

 

48

Distributions paid to noncontrolling interests in subsidiaries

 

(161)

(142)

Distributions paid to common OP unitholders

(194,077)

(183,634)

Net cash (used in) provided by financing activities

$

(159,107)

$

51,788

Change in cash, cash equivalents and restricted cash

 

(51,723)

 

6,366

Cash, cash equivalents and restricted cash at beginning of period

 

58,441

 

6,482

Cash, cash equivalents and restricted cash at end of period

$

6,718

$

12,848

Supplemental Cash Flow and Noncash Information

Cash paid for interest, net of interest capitalized

$

62,937

$

53,176

Supplemental disclosure of noncash activities:

Acquisitions of storage properties

$

(2,623)

$

Proceeds held in escrow from real estate venture's sale of real estate (see note 4)

$

$

8,288

Noncash consideration for acquisition of partner's interest in real estate venture (see note 4)

$

$

(8,288)

Discount on issuance of unsecured senior notes

$

$

2,254

Noncash drawdown on revolving credit facility

$

$

103,938

Repayment of unsecured term loan through noncash drawdown on revolving credit facility

$

$

(100,000)

Accretion of put liability

$

4,716

$

4,671

Derivative valuation adjustment

$

60

$

282

Loan procurement costs

$

$

(3,770)

Issuance of OP units (see note 4)

$

9,000

$

Acquisition of noncontrolling interest in subsidiary

$

$

(4,828)

Contributions from noncontrolling interests in subsidiaries

$

$

7,328

See accompanying notes to the unaudited consolidated financial statements.

18

CUBESMART AND CUBESMART, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND NATURE OF OPERATIONS

CubeSmart (the “Parent Company”) operates as a self-managed and self-administered real estate investment trust (“REIT”) with its operations conducted solely through CubeSmart, L.P. and its subsidiaries. CubeSmart, L.P., a Delaware limited partnership (the “Operating Partnership”), operates through an umbrella partnership structure, with the Parent Company, a Maryland REIT, as its sole general partner. In the notes to the consolidated financial statements, we use the terms “the Company”, “we” or “our” to refer to the Parent Company and the Operating Partnership together, unless the context indicates otherwise. As of September 30, 2020, 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 September 30, 2020, the Parent Company owned approximately 98.9% 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”.

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

Since the first quarter of 2020, the world has been impacted by the spread of a novel strain of coronavirus and the disease that it causes known as COVID-19, which has limited the Company’s ability to operate its business using traditional means. Since mid-March, federal, state and local government agencies in the markets within which the Company operates have issued public health responses aimed at reducing the spread of COVID-19, which include quarantines, stay-at-home orders and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. As a result, the United States has experienced, among other things, an unprecedented increase in unemployment, significant volatility within its debt and equity capital markets and extreme economic contraction.

Despite the operating restrictions placed on many businesses by governmental mandates that promote distancing, self-storage has been designated as an essential business. Accordingly, the Company’s stores have remained open throughout the pandemic to allow for customers to move in, move out, pay rent and access their belongings at all locations. Additionally, with the health and welfare of its teammates and customers in mind, the Company has implemented SmartRentalTM, a contactless online rental process that eliminates the need for face-to-face interaction, and shifted its corporate headquarters, divisional offices and sales center to remote work.

In late March, in response to the pandemic and certain state and local government orders, the Company paused all rate increases to existing customers and suspended its normal delinquency processes temporarily, which have impacted revenue growth. In May, as permitted by governmental mandates, the Company began resuming its delinquency and rental rate increase processes on a jurisdiction by jurisdiction basis. To date, the Company has not experienced any material degradation in rent collections or occupancy, however future customer behavior and their ability to pay rent will be determined by the duration and scope of the pandemic; actions that have been and continue to be taken by

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governmental entities, individuals and businesses in response to the pandemic, and; the continued impact on economic activity from the pandemic and actions taken in response thereto.

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, 2019, 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, 2019. The results of operations for the three and nine months ended September 30, 2020 and 2019 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.

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 Company is currently assessing the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.

In May 2020, the SEC adopted amendments to requirements for companies relating to significant acquisitions and dispositions of businesses as well as amendments to the significance tests in the ‘significant subsidiary’ definition. The amendments are effective on January 1, 2021, with early adoption permitted. The Company has elected to early adopt the amendments.

In June 2016, the FASB issued ASU No. 2016-13 – Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new guidance changes how entities measure credit losses for most financial assets. This standard requires an entity to estimate its lifetime expected credit loss and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. In November 2018, the FASB issued ASU No. 2018-19 – Codification Improvements to Topic 326, Financial Instruments - Credit Losses, which clarifies that receivables arising from operating leases are within the scope of the leasing standard (ASU No. 2016-02), and not within the scope of ASU No. 2016-13. The standard became effective on January 1, 2020. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

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3. STORAGE PROPERTIES

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

September 30, 

December 31,

    

2020

    

2019

(in thousands)

Land

$

908,051

$

858,541

Buildings and improvements

 

3,692,519

 

3,619,594

Equipment

 

125,204

 

128,111

Construction in progress

 

88,487

 

93,598

Storage properties

 

4,814,261

 

4,699,844

Less: Accumulated depreciation

 

(980,312)

 

(925,359)

Storage properties, net

$

3,833,949

$

3,774,485

The following table summarizes the Company’s acquisition and disposition activity during the period beginning on January 1, 2019 through September 30, 2020.

    

    

    

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

3

$

74,675

2019 Acquisitions:

Maryland Asset

Baltimore-Towson, MD

March 2019

1

$

22,000

Florida Assets

Cape Coral-Fort Myers, FL

April 2019

2

19,000

Arizona Asset

Phoenix-Mesa-Scottsdale, AZ

May 2019

1

1,550

HVP III Assets

Various (see note 4)

June 2019

18

128,250

(1)

Georgia Asset

Atlanta-Sandy Springs-Marietta, GA

August 2019

1

14,600

South Carolina Asset

Charleston-North Charleston, SC

August 2019

1

3,300

Texas Asset

Dallas-Fort Worth-Arlington, TX

October 2019

1

7,300

Florida Assets

Orlando-Kissimmee, FL

November 2019

3

32,100

California Asset

Los Angeles-Long Beach-Santa Ana, CA

December 2019

1

18,500

29

$

246,600

2019 Disposition:

Texas Asset

College Station-Bryan, TX

October 2019

1

$

4,146

1

$

4,146

(1)Amount represents the purchase price for 90% of the ownership interest in 191 III CUBE LLC (“HVP III”), which, at the time of the acquisition, owned 18 storage properties (see note 4).

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4. INVESTMENT ACTIVITY

2020 Acquisitions

During the nine months ended September 30, 2020, the Company acquired 3 stores located in Maryland (1), New Jersey (1) and Texas (1) for an aggregate purchase price of approximately $74.7 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 $2.5 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 and nine months ended September 30, 2020 was approximately $0.6 million and $1.1 million, 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.

As of September 30, 2020, the Company had made aggregate deposits of $0.3 million associated with 2 stores that were under contract to be acquired for an aggregate acquisition price of $14.7 million. The deposits are reflected in Other assets, net on the Company’s consolidated balance sheets.

2019 Acquisitions

During the year ended December 31, 2019, the Company acquired 11 stores located in Arizona (1), California (1), Florida (5), Georgia (1), Maryland (1), South Carolina (1) and Texas (1) for an aggregate purchase price of approximately $118.3 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 $6.2 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 and nine months ended September 30, 2020 was approximately $1.0 million and $3.7 million, respectively. The amortization expense that was recognized during the three and nine months ended September 30, 2019 was approximately $0.5 million and $1.0 million, respectively. In connection with one of the acquisitions, the Company paid $14.9 million of cash and issued OP Units that were valued at approximately $3.6 million as consideration for the purchase price (see note 12).

Additionally, on June 6, 2019, the Company acquired its partner’s 90% ownership interest in HVP III, an unconsolidated real estate venture in which the Company previously owned a 10% noncontrolling interest and that was accounted for under the equity method of accounting. As of the date of acquisition, HVP III owned 18 stores located in Georgia (1), Massachusetts (7), North Carolina (1), South Carolina (7) and Tennessee (2) (the “HVP III Assets”). The purchase price for the 90% ownership interest was $128.3 million, which was comprised of cash consideration of $120.0 million and $8.3 million of the Company’s escrowed proceeds from HVP III’s sale of 50 properties to an unaffiliated buyer on June 5, 2019 (see note 5). The HVP III Assets were recorded by the Company at $137.5 million, which consisted of the $128.3 million purchase price plus the Company’s $10.6 million carryover basis of its previously held equity interest in HVP III, offset by $1.4 million of acquired cash. As a result of the transaction, which was accounted for as an asset acquisition, the HVP III Assets became wholly-owned by the Company and are now consolidated within its financial statements. NaN gain or loss was recognized as a result of the transaction. In connection with the transaction, the Company allocated the value of the HVP III Assets 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 $14.3 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 nine months ended September 30, 2020 was approximately $6.0 million. The amortization expense that was recognized during the three and nine months ended September 30, 2019 was approximately $3.6 million and $4.8 million, respectively.

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2019 Disposition

On October 7, 2019, the Company sold a self-storage property located in Texas for a sales price of $4.1 million. The Company recorded a $1.5 million gain in connection with the sale.

Development Activity

As of September 30, 2020, 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 first quarter of 2022 (see note 12). As of September 30, 2020, development costs incurred to date for these projects totaled $71.8 million. Total construction costs for these projects are expected to be $132.4 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, 2019 through September 30, 2020. The costs associated with the construction of these stores are 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)

Brooklyn, NY (1)

1

Q2 2020

100%

$

45,900

Waltham, MA (2)

1

Q3 2019

100%

18,000

Queens, NY (1)

1

Q2 2019

100%

47,500

Bayonne, NJ (1) (3)

1

Q2 2019

100%

25,100

4

$

136,500

(1)These stores were previously owned by 3 separate consolidated joint ventures, of which the Company held a 51% ownership interest in each. On June 25, 2019, the noncontrolling member in the venture that owned the Bayonne, NJ store put its 49% interest in the venture to the Company for $11.5 million. On September 17, 2019, the noncontrolling member in the venture that owned the Queens, NY store put its 49% interest in the venture to the Company for $15.2 million. On September 29, 2020, the noncontrolling member in the venture that owned the Brooklyn, NY store put its 49% interest in the venture to the Company for $10.0 million, of which $1.0 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 12). The cash payments related to these transactions are included in Development costs in the consolidated statements of cash flows.

(2)On August 8, 2019, the Company, through a joint venture in which the Company owned a 90% interest and that it previously consolidated, completed the construction and opened for operation a store located in Waltham, MA. On September 6, 2019, the Company acquired the noncontrolling member’s 10% interest in the venture for $2.6 million. Prior to this transaction, the noncontrolling member’s interest was reported in Noncontrolling interests in subsidiaries on the consolidated balance sheets. Since the Company retained its controlling interest in the joint venture and the store is now wholly owned, this transaction was accounted for as an equity transaction. The carrying amount of the noncontrolling interest was reduced to 0 to reflect the purchase and the $2.0 million difference between the purchase price paid by the Company and the carrying amount of the noncontrolling interest was recorded as an adjustment to equity attributable to the Company, with 0 gain or loss recorded. In conjunction with the Company’s acquisition of the noncontrolling interest, the $10.5 million related party loan extended by the Company to the venture during the construction period was repaid in full.

(3)This property is subject to a ground lease.

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During the fourth quarter of 2015 and the third quarter of 2017, the Company, through 2 separate joint ventures in which it owned a 90% interest in each and that were previously consolidated, completed the construction and opened for operation a store located in Queens, NY and a store located in New York, NY, respectively. On June 25, 2019, the Company acquired the noncontrolling member’s 10% interest in the venture that owned the New York, NY store for $18.5 million, and on June 28, 2019, the Company acquired the noncontrolling member’s 10% interest in the venture that owned the Queens, NY store for $9.0 million. Prior to these transactions, the noncontrolling members’ interest in each venture was reported in Noncontrolling interests in subsidiaries on the consolidated balance sheets. Since the Company retained its controlling interest in each joint venture and the stores are now wholly owned, these transactions were accounted for as equity transactions. In each case, the carrying amount of the noncontrolling interest was reduced to 0 to reflect the purchase, and the difference between the purchase price paid by the Company and the carrying amount of the noncontrolling interest, which aggregated to $22.6 million, was recorded as an adjustment to equity attributable to the Company, with 0 gain or loss recorded. The $12.4 million related party loan extended by the Company to the venture that owned the Queens, NY store was repaid in conjunction with the Company’s acquisition of the noncontrolling member’s ownership interest.

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

September 30, 

December 31,

September 30, 

December 31,

Unconsolidated Real Estate Ventures

    

Interest

2020

2019

    

2020

2019

191 IV CUBE Southeast LLC ("HVPSE") (1)

10%

14

$

5,171

$

191 IV CUBE LLC ("HVP IV") (2)

20%

21

21

22,012

23,112

CUBE HHF Northeast Venture LLC ("HHFNE") (3)

���

10%

13

13

1,739

1,998

CUBE HHF Limited Partnership ("HHF") (4)

50%

35

35

63,327

66,007

83

69

$

92,249

$

91,117

(1)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.

(2)The stores owned by HVP IV are located in Arizona (2), Connecticut (2), Florida (4), Georgia (2), Maryland (1), Minnesota (1), Pennsylvania (1) and Texas (8). The Company’s total contribution to HVP IV in connection with these store acquisitions was $26.3 million. As of September 30, 2020, HVP IV had $82.2 million outstanding on its $107.0 million secured loan facility, which bears interest at LIBOR plus 1.70% per annum, and matures on May 16, 2021 with options to extend the maturity date through May 16, 2023, subject to satisfaction of certain conditions and payment of the extension fees as stipulated in the loan agreement. As of September 30, 2020, 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.

(3)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 September 30, 2020, 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.

24

(4)The stores owned by HHF are located in North Carolina (1) and Texas (34). As of September 30, 2020, HHF had an outstanding $100.0 million secured loan, which bears interest at 3.59% per annum and matures on April 30, 2021.

On June 5, 2019, HVP III sold 50 stores located in Florida (3), Georgia (4), Michigan (17), North Carolina (3), South Carolina (15) and Tennessee (8), to an unaffiliated third-party buyer for an aggregate sales price of $293.5 million. As of the transaction date, HVP III had 5 mortgage loans with an aggregate outstanding balance of $22.9 million, as well as $179.5 million outstanding on its $185.5 million loan facility, all of which were defeased or repaid in full at the time of the sale. Net proceeds to the venture from the transaction totaled $82.9 million. The venture recorded gains which aggregated to approximately $106.7 million in connection with the sale. Subsequent to the sale, the Company acquired its partner’s 90% ownership interest in HVP III, which at the time of the acquisition, owned the remaining 18 storage properties (see note 4).

Based upon the facts and circumstances at formation of 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 (except for HVP III, which was consolidated as of June 6, 2019). 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 September 30, 2020 and December 31, 2019.

    

September 30, 

December 31,

2020

 

2019 (1)

Assets

(in thousands)

Storage properties, net

$

668,474

$

552,791

Other assets

 

22,605

 

11,997

Total assets

$

691,079

$

564,788

Liabilities and equity

Other liabilities

$

16,779

$

10,064

Debt

 

361,690

 

280,392

Equity

CubeSmart

 

92,249

91,117

Joint venture partners

 

220,361

183,215

Total liabilities and equity

$

691,079

$

564,788

(1)Excludes HVPSE as it acquired its initial assets on March 19, 2020.

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The following is a summary of results of operations of the Ventures for the three and nine months ended September 30, 2020 and 2019.

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2020

    

2019 (1)

    

2020

2019 (1) (2)

(in thousands)

Total revenues

$

17,622

$

14,027

$

49,024

$

58,305

Operating expenses

 

(8,424)

(6,518)

 

(23,344)

 

(25,762)

Other expenses

(100)

(34)

(334)

(3,113)

Interest expense, net

 

(2,934)

(2,606)

 

(8,638)

 

(11,911)

Depreciation and amortization

 

(8,823)

 

(5,908)

 

(24,346)

 

(23,829)

Gains from sale of real estate, net

106,667

Net (loss) income

$

(2,659)

$

(1,039)

$

(7,638)

$

100,357

Company’s share of net (loss) income

$

(37)

$

152

$

(216)

$

10,940

(1)Excludes HVPSE as it acquired its initial assets on March 19, 2020.

(2)Includes HVP III’s results of operations through June 6, 2019 (date of consolidation).

Capital Storage Partners, LLC (“Capital Storage”)

On September 5, 2018, the Company invested $5.0 million in exchange for 100% of the Class A Preferred Units of Capital Storage Partners, LLC, a then 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.

6. UNSECURED SENIOR NOTES

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

    

September 30, 

December 31,

    

Effective

Issuance

Maturity

 

Unsecured Senior Notes

    

2020

    

2019

    

Interest Rate

Date

Date

 

(in thousands)

 

$250M 4.800% Guaranteed Notes due 2022 (1)

$

250,000

$

250,000

 

4.82

%  

Jun-12

Jul-22

$300M 4.375% Guaranteed Notes due 2023 (2)

 

300,000

 

300,000

 

4.33

%  

Various (2)

Dec-23

$300M 4.000% Guaranteed Notes due 2025 (3)

 

300,000

 

300,000

 

3.99

%  

Various (3)

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

Principal balance outstanding

1,850,000

1,850,000

Less: Discount on issuance of unsecured senior notes, net

(3,558)

(3,860)

Less: Loan procurement costs, net

(9,223)

(10,415)

Total unsecured senior notes, net

$

1,837,219

$

1,835,725

(1)On October 30, 2020, the Operating Partnership redeemed, in full, its $250.0 million of outstanding 4.800% senior notes due 2022 with proceeds from its $450.0 million of 2.000% senior notes due 2031 issued on October 6, 2020 (see note 16).

(2)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

26

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%.

(3)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 September 30, 2020, the Operating Partnership was in compliance with all of the financial covenants under the Senior Notes.

7. REVOLVING CREDIT FACILITY AND UNSECURED TERM LOANS

On December 9, 2011, the Company entered into a credit agreement (the “Credit Facility”), which was subsequently amended on April 5, 2012, June 18, 2013 and April 22, 2015 to provide for, among other things, a $200.0 million unsecured term loan with a maturity date of January 31, 2019 and a $500.0 million unsecured revolving facility with a maturity date of April 22, 2020. 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%. The Company incurred costs of $3.9 million in 2019 in connection with amending and restating the Credit Facility and capitalized such costs as a component of Loan procurement costs, net of amortization on the consolidated balance sheets.

On January 31, 2019, the Company used a portion of the net proceeds from the issuance of $350.0 million of 4.375% Senior Notes due 2029 (the “2029 Notes”) to repay all of the outstanding indebtedness under the $200.0 million unsecured term loan portion of the Credit Facility. 

As of September 30, 2020, borrowings under the Revolver had an effective weighted average interest rate of 1.25%. Additionally, as of September 30, 2020, $712.0 million was available for borrowing under the Revolver. The available balance under the Revolver is reduced by an outstanding letter of credit of $0.7 million.

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 September 30, 2020, the Company was in compliance with all of its financial covenants.

On June 20, 2011, the Company entered into an unsecured term loan agreement (the “Term Loan Facility”), which was subsequently amended on June 18, 2013 and August 5, 2014, consisting of, among other things, a $100.0 million unsecured term loan that was scheduled to mature in January 2020. On June 19, 2019, the Company used an initial advance at closing of the Amended and Restated Credit Facility to repay all of the outstanding indebtedness under the unsecured term loan portion of the Term Loan Facility. Unamortized loan procurement costs of $0.1 million were written off in conjunction with the repayment.

27

8. MORTGAGE LOANS AND NOTES PAYABLE

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

Carrying Value as of:

 

    

September 30, 

December 31,

    

Effective

Maturity

 

Mortgage Loans and Notes Payable

    

2020

    

2019

    

Interest Rate

Date

 

(in thousands)

 

YSI 26 (1)

$

7,635

$

7,805

 

4.56

%  

Nov-20

YSI 57 (1)

 

2,680

 

2,740

 

4.61

%  

Nov-20

YSI 55

 

21,163

 

21,547

 

4.85

%  

Jun-21

YSI 24

 

23,378

 

24,042

 

4.64

%  

Jun-21

YSI 65

2,275

2,313

3.85

%  

Jun-23

YSI 66

30,137

30,588

3.51

%  

Jun-23

YSI 68

5,328

5,459

3.78

%  

May-24

Principal balance outstanding

92,596

94,494

Plus: Unamortized fair value adjustment

1,303

 

1,833

Less: Loan procurement costs, net

(192)

(287)

Total mortgage loans and notes payable, net

$

93,707

$

96,040

(1)These mortgage loans were repaid in full on November 2, 2020.

As of September 30, 2020 and December 31, 2019, the Company’s mortgage loans payable were secured by certain of its self-storage properties with net book values of approximately $202.3 million and $206.3 million, respectively. The following table represents the future principal payment requirements on the outstanding mortgage loans and notes payable as of September 30, 2020 (in thousands):

2020

    

$

10,893

2021

 

45,057

2022

 

923

2023

 

31,019

2024

 

4,704

2025 and thereafter

 

Total mortgage payments

 

92,596

Plus: Unamortized fair value adjustment

 

1,303

Less: Loan procurement costs, net

(192)

Total mortgage loans and notes payable, net

$

93,707

9. ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table summarizes the changes in accumulated other comprehensive loss by component for the nine months ended September 30, 2020 (in thousands):

    

Unrealized Gains (Losses)

 

on Interest Rate Swaps

 

(in thousands)

Balance at December 31, 2019

$

(729)

Amounts reclassified from accumulated other comprehensive loss

 

60

(1)

Balance at September 30, 2020

(669)

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

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10. RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS

The Company’s use of derivative instruments is limited to the utilization of interest rate swap agreements or other instruments to manage interest rate risk 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 September 30, 2020 and December 31, 2019, 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 and 60 thousand dollars of unrealized losses from accumulated other comprehensive loss as an increase to interest expense during the three and nine months ended September 30, 2020, respectively. The Company estimates that $0.1 million will be reclassified as an increase to interest expense in the next 12 months.

11. FAIR VALUE MEASUREMENTS

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

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

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

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

29

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 September 30, 2020 or December 31, 2019.

The fair values of financial instruments, including cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate their respective carrying values at September 30, 2020 and December 31, 2019. The aggregate carrying value of the Company’s debt was $1,968.2 million and $1,931.8 million at September 30, 2020 and December 31, 2019, respectively. The estimated fair value of the Company’s debt was $2,174.2 million and $2,037.6 million at September 30, 2020 and December 31, 2019, respectively. The fair value of debt estimates were based on a discounted cash flow analysis assuming market interest rates for comparable obligations at September 30, 2020 and December 31, 2019. 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.

12. 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

September 30, 2020

Consolidated Joint Ventures

    

of Stores

    

Location

    

Opening

Interest

Total Assets

Total Liabilities

    

(in thousands)

CS 750 W Merrick Rd, LLC ("Merrick") (1)

1

Valley Stream, NY

Q1 2022 (est.)

51%

$

9,228

$

2,501

CS Valley Forge Village Storage, LLC ("VFV") (2)

1

King of Prussia, PA

Q2 2021 (est.)

70%

13,479

5,155

Shirlington Rd II, LLC ("SH2") (3)

1

Arlington, VA

Q1 2021 (est.)

90%

16,167

1,533

CS 2087 Hempstead Tpk, LLC ("Hempstead") (1)

1

East Meadow, NY

Q1 2021 (est.)

51%

17,508

6,745

CS SDP Newtonville, LLC ("Newton") (2)

1

Newton, MA

Q4 2020 (est.)

90%

15,820

9,300

Shirlington Rd, LLC ("SH1") (3)

1

Arlington, VA

 

Q2 2015

90%

14,411

166

6

$

86,613

$

25,400

(1)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 September 30, 2020, has accrued $2.4 million and $5.1 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.

(2)The Company has related party loan commitments to VFV and Newton to fund a portion of the construction costs. As of September 30, 2020, the Company has funded $1.8 million of the total $12.4 million loan commitment to VFV and $7.5 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.

30

(3)On March 7, 2019, the Company acquired the noncontrolling member’s ownership interest in SH1, inclusive of its promoted interest in the venture, for $10.0 million. Prior to this transaction, the noncontrolling member’s interest was reported in Noncontrolling interests in subsidiaries on the consolidated balance sheets. Since the Company retained its controlling interest in the joint venture, this transaction was accounted for as an equity transaction. The carrying amount of the noncontrolling interest was reduced to 0 to reflect the purchase, and the $9.7 million difference between the purchase price paid by the Company and the carrying amount of the noncontrolling interest was recorded as an adjustment to equity attributable to the Company. In conjunction with the Company’s acquisition of the noncontrolling interest in SH1, the $12.2 million related party loan extended by the Company to the venture during the construction period was repaid in full. Subsequently, the noncontrolling member re-acquired a 10% interest in SH1 and a 10% interest in SH2 for a combined $4.8 million, which is included in Noncontrolling interests in subsidiaries on the consolidated balance sheets.

On May 30, 2019, the Company sold its 90% ownership interest in CS SJM E 92nd Street, LLC, a previously consolidated development joint venture, for $3.7 million. In conjunction with the sale, $0.7 million of the $1.7 million related party loan extended by the Company to the venture was repaid. The remaining $1.0 million was recorded as a note receivable and was repaid during the third quarter of 2019. Additionally, as a result of the transaction, the Company was released from its obligations under the venture’s ground lease, and the right-of-use asset and lease liability totaling $13.4 million and $14.6 million, respectively, were removed from the Company’s consolidated balance sheets.

Operating Partnership Ownership

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

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

Approximately 1.1% and 1.0% of the outstanding OP Units, as of September 30, 2020 and December 31, 2019, respectively, 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.

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.

31

On December 16, 2019, the Company acquired a store in California for $18.5 million. In conjunction with the closing, the Company paid $14.9 million and issued 106,738 OP Units, valued at approximately $3.6 million, to pay the remaining consideration.

As of September 30, 2020 and December 31, 2019, 2,148,805 and 1,972,308 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 September 30, 2020 and December 31, 2019. As of September 30, 2020 and December 31, 2019, the Operating Partnership recorded an increase in the value of OP Units owned by third parties and a corresponding decrease to capital of $2.0 million and $5.9 million, respectively.

13. 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 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 and nine months ended September 30, 2020, administrative and late fees totaled $5.1 million and $15.0 million, respectively. For the three and nine months ended September 30, 2019, administrative and late fees totaled $5.9 million and $17.0 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 ranging from one year to 44 years. Certain of the Company’s leases contain provisions that (1) provide for one or more options to renew, with renewal options that can extend the lease term from one year 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. As a result of the Company’s election of the package of practical expedients permitted within ASC 842, which among other things, allows for the carryforward of historical lease classification, all of the Company’s lease agreements have been classified as operating leases. 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

32

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.

The Company’s right-of-use assets, lease liabilities and other supplemental balance sheet information associated with its operating leases as of September 30, 2020 and December 31, 2019 are summarized in the table below.

September 30, 

December 31,

    

2020

2019

(dollars in thousands)

Right-of-use assets (1)

$

36,034

$

41,698

Lease liabilities (1)

$

41,410

$

46,391

Weighted average lease term

35.4

years

35.9

years

Weighted average discount rate

4.74

%

4.74

%

(1)Right-of-use assets and lease liabilities are included in Other assets, net and Accounts payable, accrued expenses and other liabilities, respectively, on the Company’s consolidated balance sheets.

For the three and nine months ended September 30, 2020 and 2019, the Company’s lease cost consists of the following components, each of which is included in Property operating expenses within the Company’s consolidated statements of operations:

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2020

 

2019

2020

 

2019

(in thousands)

Operating lease cost

$

674

$

749

$

2,167

$

2,558

Short-term lease cost (1)

 

298

294

 

881

907

Total lease cost

$

972

$

1,043

$

3,048

$

3,465

(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.

The following table represents the future operating lease liability maturities as of September 30, 2020 (in thousands):

2020

    

$

508

2021

 

2,024

2022

 

2,144

2023

 

2,195

2024

 

2,045

2025 and thereafter

 

83,230

Total operating lease payments

 

92,146

Less: Imputed interest

(50,736)

Present value of operating lease liabilities

$

41,410

During the three and nine months ended September 30, 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 $1.7 million, respectively, which is included as an operating cash outflow within the consolidated statements of cash flows. During the three and nine months ended September 30, 2019, the cash paid for amounts included in the measurement of lease

33

liabilities related to the Company’s operating leases was approximately $0.6 million and $1.9 million, respectively, which is included as an operating cash outflow within the consolidated statements of cash flows. During the three and nine months ended September 30, 2020 and 2019, the Company did not enter into any lease agreements set to commence in the future.

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

15. 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 and nine months ended September 30, 2020 totaled $1.0 million and $2.8 million, respectively. Total management fees for unconsolidated real estate ventures or other entities in which the Company held an ownership interest for the three and nine months ended September 30, 2019 totaled $0.7 million and $3.1 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 $12.9 million and $10.5 million as of September 30, 2020 and December 31, 2019, respectively, and are reflected in Other assets, net on the Company’s consolidated balance sheets. Additionally, as discussed in note 12, the Company had outstanding mortgage loans receivable from consolidated joint ventures of $9.3 million and $3.1 million as of September 30, 2020 and December 31, 2019, respectively, which are eliminated for consolidation purposes. The Company believes that all of these related-party receivables are fully collectible.

The HVPSE, HVP IV and HHFNE operating agreements provide for acquisition, disposition and other fees payable from HVPSE, HVP IV and HHFNE to the Company upon the closing of a property transaction by HVPSE, HVP IV and HHFNE, or any of their subsidiaries and completion of certain measures as defined in the operating agreements. During the nine months ended September 30, 2020, the Company recognized $0.7 million in fees associated with property transactions. There were 0 property transaction fees recognized during the three months ended September 30, 2020. During the three and nine months ended September 30, 2019, the Company recognized $1.7 million and $1.9 million, respectively, in fees associated with property transactions (including fees associated with HVP III). Property transaction fees are included in Other income on the consolidated statements of operations.

16. SUBSEQUENT EVENTS

On October 6, 2020, the Operating Partnership issued $450.0 million in aggregate principal amount of unsecured senior notes due February 15, 2031, which bear interest at a rate of 2.000% per annum (the “2031 Notes”). The 2031 Notes were priced at 99.074% of the principal amount to yield 2.100% to maturity. Net proceeds from the offering, after deducting underwriting discounts and other transaction expenses, were $442.1 million.

On September 30, 2020, the Operating Partnership provided notice of redemption, in full, of its $250.0 million of outstanding 4.800% senior notes due 2022 (the “2022 Notes”). The Operating Partnership completed the redemption of the 2022 Notes on October 30, 2020, with proceeds from its issuance of the 2031 Notes, at a cash redemption price of $1,084.34 per $1,000 principal amount of the 2022 Notes (inclusive of the make-whole prepayment charge and accrued

34

interest to the redemption date). The remaining net proceeds from the issuance of the 2031 Notes were used to repay all of the outstanding indebtedness under the Revolver and for working capital and other general corporate purposes.

On October 21, 2020, the Company entered into a purchase agreement to acquire a portfolio of 8 open and operating self-storage properties for an aggregate purchase price of approximately $540.0 million. The properties are located in Brooklyn, NY, Long Island City, NY, Flushing (Queens), NY, College Point (Brooklyn), NY and Bronx, NY. Consideration for the properties will consist of approximately $201.7 million payable in cash, approximately $183.7 million payable in OP Units and the assumption of approximately $154.6 million of existing fixed-rate secured debt. The Company expects to consummate the acquisition in 2 tranches in December 2020.

Subsequent to September 30, 2020, the Company also entered into purchase agreements to acquire 7 additional self-storage properties for an aggregate purchase price of $89.2 million, that are expected to close at various times during the fourth quarter of 2020.

35

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, 2019 and in the Parent Company’s and Operating Partnership’s combined Quarterly Report on Form 10-Q for the quarter ended March 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 September 30, 2020 and December 31, 2019, we owned 527 self-storage properties totaling approximately 37.1 million rentable square feet and 523 self-storage properties totaling approximately 36.6 million rentable square feet, respectively. As of September 30, 2020, 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 September 30, 2020, we managed 733 stores for third parties (including 105 stores containing an aggregate of approximately 7.5 million rentable square feet as part of five separate unconsolidated real estate ventures) bringing the total number of stores which we owned and/or managed to 1,260. As of September 30, 2020, we managed stores for third parties in the following 38 states: Alabama, Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, 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.

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Our self-storage properties are located in major metropolitan and suburban areas and have numerous customers per store. No single customer represents a significant concentration of our revenues. Our stores in Florida, New York, Texas and California provided approximately 16%, 16%, 9% and 8%, respectively, of total revenues for the nine months ended September 30, 2020.

Summary of Critical Accounting Policies and Estimates

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

Basis of Presentation

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

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

Self-Storage Properties

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

When stores are acquired, the purchase price and acquisition related costs are allocated to the tangible and intangible assets acquired and liabilities assumed based on estimated fair values. Allocations to the individual assets and liabilities are based upon their respective fair values as estimated by management.

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

Long-lived assets classified as “held for use” are reviewed for impairment when events and circumstances such as declines in occupancy and operating results indicate that there may be an impairment. The carrying value of these long-lived assets is compared to the undiscounted future net operating cash flows, plus a terminal value, attributable to the assets to determine if the store’s basis is recoverable. If a store’s basis is not considered recoverable, an impairment loss

37

is recorded to the extent the net carrying value of the asset exceeds the fair value. The impairment loss recognized equals the excess of net carrying value over the related fair value of the asset. There were no impairment losses recognized in accordance with these procedures during the nine months ended September 30, 2020 and 2019.

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 September 30, 2020.

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 nine months ended September 30, 2020 and 2019.

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 performance because they provide information relating to changes in store-level operating performance without taking into account the effects of acquisitions, developments or dispositions. As of September 30, 2020, we owned 477 same-store properties and 50 non-same-store properties. For analytical presentation, all percentages are calculated using the numbers presented in the financial statements contained in this Report.

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Acquisition and Development Activities

The comparability of our results of operations is affected by the timing of acquisition and disposition activities during the periods reported. As of September 30, 2020 and 2019, we owned 527 and 519 self-storage properties and related assets, respectively. The following table summarizes the change in number of owned stores from January 1, 2019 through September 30, 2020:

    

2020

    

2019

Balance - January 1

 

523

 

493

Stores acquired

 

1

 

1

Balance - March 31

 

524

 

494

Stores acquired

 

2

 

21

Stores developed

1

2

Stores combined (1)

(1)

Balance - June 30

 

527

 

516

Stores acquired

 

 

2

Stores developed

1

Balance - September 30

 

527

 

519

Stores acquired

 

 

5

Stores sold

 

 

(1)

Balance - December 31

 

 

523

(1)On May 24, 2019, the Company acquired a store located in Tempe, AZ for approximately $1.6 million, which is located adjacent to an existing wholly-owned store. Given their proximity to each other, the stores have been combined in our store count, as well as for operational and reporting purposes.

Factors that Have Impacted and May Continue to Impact Results of Operations

We are not aware of any material trends or uncertainties other than those risks identified in Part I. Item 1A. "Risk Factors," of our Annual Report on Form 10-K for the year ended December 31, 2019 and in Part II. Item 1A. "Risk Factors," of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020, that may reasonably be expected to have a material impact, favorable or unfavorable, on our results of operations. However, due to the economic impact of the recent outbreak of a novel coronavirus in the United States, and the disease that it causes known as COVID-19, our ability to operate our business using traditional means has been impacted. Since mid-March, federal, state and local government agencies in the markets within which we operate have issued public health responses aimed at reducing the spread of COVID-19, which include quarantines, stay-at-home orders and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. As a result, the United States has experienced, among other things, an unprecedented increase in unemployment, significant volatility within its debt and equity capital markets and extreme economic contraction.

Despite the operating restrictions placed on many businesses by governmental mandates that promote distancing, self-storage has been designated as an essential business. Accordingly, our stores have remained open throughout the pandemic to allow for customers to move in, move out, pay rent and access their belongings at all locations. Additionally, with the health and welfare of our teammates and customers in mind, we have implemented SmartRentalTM, our contactless online rental process that eliminates the need for face-to-face interaction, and shifted our corporate headquarters, divisional offices and sales center to remote work.

In late March, in response to the pandemic and certain state and local government orders, we paused all rate increases to existing customers and suspended our normal delinquency processes temporarily, which have impacted our revenue growth. In May, as permitted by governmental mandates, we began resuming our delinquency and rental rate increase processes on a jurisdiction by jurisdiction basis. To date, we have not experienced any material degradation in rent collections or occupancy, however future customer behavior and their ability to pay rent will be determined by the duration and scope of the pandemic; actions that have been and continue to be taken by governmental entities,

39

individuals and businesses in response to the pandemic, and; the continued impact on economic activity from the pandemic and actions taken in response thereto.

We anticipate that if the above-described impacts from the COVID-19 pandemic, and the volatile economic, business and financial market conditions resulting therefrom, continue for an extended period of time, we may see a reduction in customer activity, net effective rental rates and our customers’ ability to make rental payments, all of which would adversely impact our cash flow from operations.

Comparison of the three months ended September 30, 2020 to the three months ended September 30, 2019 (in thousands)

Non Same-Store

Other/

 

Same-Store Property Portfolio

Properties

Eliminations

Total Portfolio

 

    

    

    

    

Increase/

    

%  

    

    

    

    

    

    

    

    

    

    

    

    

    

Increase/

    

%  

 

2020

2019

(Decrease)

Change

2020

2019

2020

2019

2020

2019

(Decrease)

Change

 

REVENUES:

Rental income

$

133,700

$

133,277

$

423

 

0.3

%  

$

12,807

$

8,930

$

$

$

146,507

$

142,207

$

4,300

 

3.0

%  

Other property related income

 

13,938

 

14,226

 

(288)

 

(2.0)

%  

 

1,678

 

1,199

 

3,300

 

2,629

 

18,916

 

18,054

 

862

 

4.8

%  

Property management fee income

 

 

 

 

0.0

%  

 

 

 

7,088

 

6,286

 

7,088

 

6,286

 

802

 

12.8

%  

Total revenues

 

147,638

 

147,503

 

135

 

0.1

%  

 

14,485

 

10,129

 

10,388

 

8,915

 

172,511

 

166,547

 

5,964

 

3.6

%  

OPERATING EXPENSES:

Property operating expenses

 

44,543

 

42,741

 

1,802

 

4.2

%  

 

5,143

 

3,979

 

7,415

 

6,745

 

57,101

 

53,465

 

3,636

 

6.8

%  

NET OPERATING INCOME:

 

103,095

 

104,762

 

(1,667)

 

(1.6)

%  

 

9,342

 

6,150

 

2,973

 

2,170

 

115,410

 

113,082

 

2,328

 

2.1

%  

Store count

 

477

 

477

 

50

 

42

 

527

 

519

Total square footage

 

33,281

 

33,281

 

3,808

 

3,010

 

37,089

 

36,291

Period end occupancy (1)

 

94.3

%  

 

92.5

%  

 

83.4

%  

 

70.4

%  

 

93.2

%  

 

90.6

%  

Period average occupancy (2)

 

94.4

%  

 

93.0

%  

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

$

17.03

$

17.27

Depreciation and amortization

 

38,084

 

43,379

 

(5,295)

 

(12.2)

%  

General and administrative

 

10,193

 

10,011

 

182

 

1.8

%  

Subtotal

 

48,277

 

53,390

 

(5,113)

 

(9.6)

%  

OTHER (EXPENSE) INCOME

Interest:

Interest expense on loans

 

(18,984)

 

(18,207)

 

(777)

 

(4.3)

%  

Loan procurement amortization expense

 

(753)

 

(687)

 

(66)

 

(9.6)

%  

Equity in (losses) earnings of real estate ventures

 

(37)

 

152

 

(189)

 

(124.3)

%  

Other

 

45

 

1,647

 

(1,602)

 

(97.3)

%  

Total other expense

 

(19,729)

 

(17,095)

 

(2,634)

 

(15.4)

%  

NET INCOME

 

47,404

 

42,597

 

4,807

 

11.3

%  

NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

Noncontrolling interests in the Operating Partnership