# CubeSmart: Form 10-Q for the period ended Mar 31, 2012

- Company: [CubeSmart](/companies/cube.md) (CIK 1298675)
- Form: 10-Q
- Filed: 2012-05-07
- Accepted by EDGAR: May 7, 2012, 17:06 ET
- Period: 2012-03-31
- Accession: 0001104659-12-033886
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1298675/000110465912033886/a12-8492_110q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1298675/000110465912033886/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2012-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Cost of revenue | 3 months, 2012-01-01 to 2012-03-31 | $27.3m | us-gaap:CostOfRevenue |
| Operating income | 3 months, 2012-01-01 to 2012-03-31 | $7.7m | us-gaap:OperatingIncomeLoss |
| Net income | 3 months, 2012-01-01 to 2012-03-31 | −$3.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2012-01-01 to 2012-03-31 | −$0.04 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted shares (weighted) | 3 months, 2012-01-01 to 2012-03-31 | 122,266,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2012-01-01 to 2012-03-31 | $20.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Dividends paid | 3 months, 2012-01-01 to 2012-03-31 | $11.0m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2012-03-31 | $7.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2012-03-31 | $1.94bn | us-gaap:Assets |
| Total liabilities | at 2012-03-31 | $906.9m | us-gaap:Liabilities |
| Shareholders' equity | at 2012-03-31 | $936.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 45,417 characters.

*The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. The Company makes certain statements in this section that 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 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, 2011.*

### Overview

The Company is an integrated self-storage real estate company, and as such we have in-house capabilities in the operation, design, development, leasing, management and acquisition of self-storage facilities. The Parent Company’s operations are conducted solely through the Operating Partnership and its subsidiaries. The Parent Company has elected to be taxed as a REIT for U.S. federal income tax purposes. As of March 31, 2012 and December 31, 2011, the Company owned 376 and 370 self-storage facilities, respectively, totaling approximately 24.8 million rentable square feet and 24.4 million rentable square feet, respectively. As of March 31, 2012, the Company owned facilities in the District of Columbia and the following 26 states: Alabama, Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois, Indiana, Louisiana, Maryland, Massachusetts, Michigan, Mississippi, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Utah, Virginia and Wisconsin. In addition, as of March 31, 2012, the Company managed 102 properties for third parties bringing the total number of properties which it owned and/or managed to 478. As of March 31, 2012, the Company managed facilities in the District of Columbia and the following 20 states: Arkansas, California, Colorado, Connecticut, Florida, Georgia, Illinois, Massachusetts, Maryland, Michigan, New Hampshire, Minnesota, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, Tennessee, Texas and Virginia.

The Company derives revenues principally from rents received from its customers who rent cubes at its self-storage facilities under month-to-month leases. Therefore, our operating results depend materially on our ability to retain our existing customers and lease our available self-storage cubes to new customers while maintaining and, where possible, increasing our pricing levels. In addition, our operating results depend on the ability of our customers to make required rental payments to us. We have a decentralized approach to the management and operation of our facilities, which places an emphasis on local, market level oversight and control. We believe this approach allows us to respond quickly and effectively to changes in local market conditions, and to maximize revenues by managing rental rates and occupancy levels.

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

The United States continues to recover from an economic downturn that resulted in higher unemployment, stagnant employment growth, shrinking demand for products, large-scale business failures and tight credit markets. 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. A continuation of — or slow recovery from — ongoing adverse economic conditions affecting disposable consumer income, such as employment levels, business conditions, interest rates, tax rates, fuel and energy costs, and other matters could reduce consumer spending or cause consumers to shift their spending to other products and services. A general reduction in the level of discretionary spending or shifts in consumer discretionary spending could adversely affect our growth and profitability.

In the future, the Company intends to focus on maximizing internal growth opportunities and selectively pursuing targeted acquisitions and developments of self-storage facilities.

The Company has one reportable segment: we own, operate, develop, manage and acquire self-storage facilities.

The Company’s self-storage facilities are located in major metropolitan and rural areas and have numerous tenants per facility. No single tenant represents a significant concentration of our revenues. The facilities in Florida, New York, California and Texas provided approximately 16%, 14%, 11% and 9%, respectively, of total revenues for the three months ended March 31, 2012.

### 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 an understanding of the unaudited consolidated financial statements included in this report. 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 from estimates calculated and utilized by management.

### Self-Storage Facilities

The Company records self-storage facilities at cost less accumulated depreciation. Depreciation on the buildings and equipment is recorded on a straight-line basis over their estimated useful lives, which range from five to 40 years. Expenditures for significant renovations or improvements that extend the useful life of assets are capitalized. Repairs and maintenance costs are expensed as incurred.

When facilities are acquired, the purchase price is allocated to the tangible and intangible assets acquired and liabilities assumed based on estimated fair values. When a portfolio of facilities is acquired, the purchase price is allocated to the individual facilities based upon an income approach or a cash flow analysis using appropriate risk adjusted capitalization rates, which take into account the relative size, age and location of the individual facility along with current and projected occupancy and rental rate levels or appraised values, if available. Allocations to the individual assets and liabilities are based upon comparable market sales information for land, buildings and improvements and estimates of depreciated replacement cost of equipment.

In allocating the purchase price for an acquisition, the Company determines whether the acquisition includes intangible assets or liabilities. The Company allocates a portion of the purchase price to an intangible asset attributable to the value of in-place leases. This intangible asset is generally amortized to expense over the expected remaining term of the in-place leases. Substantially all of the leases in place at acquired facilities are at market rates, as the majority of the leases are month-to-month contracts. Accordingly, to date no portion of the purchase price for an acquired property has been allocated to above- or below-market lease intangibles. To date, no intangible asset has been recorded for the value of tenant relationships, because the Company does not have any concentrations of significant tenants and the average tenant 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 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 property’s basis is recoverable. If a property’s basis is not considered recoverable, an impairment loss is recorded to the extent the net carrying value of the asset exceeds the fair value. The impairment loss recognized equals the excess of net carrying value over the related fair value of the asset. There were no impairment losses recognized in accordance with these procedures during 2012, 2011 and 2010.

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

Typically these criteria are all met when the relevant asset is under contract, significant non-refundable deposits have been made by the potential buyer, the assets are immediately available for transfer and there are no contingencies related to the sale that may prevent the transaction from closing. In most transactions, these contingencies are not satisfied until the actual closing of the transaction; accordingly, the facility is not identified as held for sale until the closing actually occurs. However, each potential transaction is evaluated based on its separate facts and circumstances. Properties classified as held for sale are reported at the lesser of carrying value or fair value less estimated costs to sell.

#### Storage Deluxe Acquisition

During February 2012, as part of the $560 million Storage Deluxe transaction involving 22 Class A self-storage facilities primarily located in the greater New York City area, the Company acquired four properties with a purchase price of approximately $74.4 million. The four properties purchased are located in New York and Connecticut. In connection with the acquisitions, the Company allocated a portion of the purchase price to the intangible value of in-place leases which aggregated $4.7 million. The estimated life of these in-place leases is 12 months and the amortization expense that was recognized during the three months ended March 31, 2012 was approximately $0.4 million. In connection with the four acquired facilities, the Company assumed mortgage debt, at fair value, with a net book value of $37.0 million, which includes an outstanding principal balance totaling $34.9 million and a net premium of $2.1 million in addition to the face value of the assumed debt to reflect the fair values of the debt at the time of assumption.

On November 3, 2011, the Company acquired 16 properties from Storage Deluxe with a purchase price of approximately $357.3 million. The 16 properties purchased are located in New York, Connecticut and Pennsylvania. In connection with this acquisition, the Company allocated a portion of the purchase price to the intangible value of in-place leases which aggregated $18.1 million. The estimated life of these in-place leases is 12 months and the amortization expense that was recognized during the three months ended March 31, 2012 was approximately $4.5 million.

#### Other 2012 Acquisitions

During the three months ended March 31, 2012, the Company acquired two self-storage facilities located in Texas and Georgia for an aggregate purchase price of approximately $12.0 million. In connection with these acquisitions, the Company allocated a portion of the purchase price to the intangible value of in-place leases which aggregated $1.2 million. The estimated life of these in-place leases is 12 months and the amortization expense that was recognized during the three months ended March 31, 2012 was approximately $0.2 million.

#### Other 2011 Acquisitions

During 2011, the Company acquired 11 self-storage facilities located throughout the United States for an aggregate purchase price of approximately $109.8 million. In connection with these acquisitions, the Company allocated a portion of the purchase price to the intangible value of in-place leases which aggregated $7.0 million. The estimated life of these in-place leases is 12 months and the amortization expense that was recognized during the three months ended March 31, 2012 was approximately $1.7 million. In connection with three of the acquisitions, the Company assumed mortgage debt, at fair value, with a net book value of $21.8 million, which includes an outstanding principal balance totaling $21.4 million and a net premium of $0.4 million in addition to the face value of the assumed debt to reflect the fair values of the debt at the time of assumption.

### Revenue Recognition

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

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

### Share-Based Payments

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

### Noncontrolling Interests

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

### Investments in Unconsolidated Real Estate Ventures

The Company accounts for its investments in unconsolidated real estate ventures under the equity method of accounting. Under the equity method, investments in unconsolidated joint ventures are recorded initially at cost, as investments in real estate entities, and subsequently adjusted for equity in earnings (losses), cash contributions, less distributions and impairments. On a periodic basis, management also assesses whether there are any indicators that the fair 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 an 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.

### Recent Accounting Pronouncements

In June 2011, the FASB issued an amendment to the accounting standard for the presentation of comprehensive income. The amendment requires entities to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In addition, the amendment requires entities to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. This amendment became effective for fiscal years and interim periods beginning after December 15, 2011. The Company’s adoption of the new standard as of January 1, 2012 did not have a material impact on its consolidated financial position or results of operations as the amendment relates only to changes in financial statement presentation.

In May 2011, the FASB issued an update to the accounting standard for measuring and disclosing fair value. The update modifies the wording used to describe the requirements for fair value measuring and for disclosing information about fair value measurements to improve consistency between U.S. GAAP and International Financial Reporting Standards (“IFRS”). This update is effective for the annual and interim periods beginning after December 15, 2011. The adoption of this guidance in 2012 did not have a material impact on our consolidated financial position or results of operations as its impact was limited to disclosure requirements.

### Results of Operations

The following discussion of our results of operations should be read in conjunction with the consolidated financial statements and the accompanying notes thereto. Historical results set forth in the consolidated statements of operations reflect only the existing facilities and should not be taken as indicative of future operations. The Company considers its same-store portfolio to consist of only those facilities owned and operated on a stabilized basis at the beginning and at the end of the applicable years presented. We consider a property to be stabilized once it has achieved an occupancy rate representative of similar self-storage assets in the respective markets for a full year measured as of the most recent January 1 or has otherwise been placed in-service and has not been significantly damaged by natural disaster or undergone significant renovation. Same-store results are considered to be useful to investors in evaluating our performance because it provides information relating to changes in facility-level operating performance without taking into account the effects of acquisitions, developments or dispositions. At March 31, 2012, there were 339 same-store properties and 37 non same-store properties, of which 27 were 2011 acquisitions, six were 2012 acquisitions, and four were properties that were not stabilized, damaged by natural disaster or undergone significant renovation.

### Acquisition and Development Activities

The comparability of the Company’s results of operations is affected by the timing of acquisition and disposition activities during the periods reported. At March 31, 2012 and 2011, the Company owned 376 and 364 self-storage facilities and related assets, respectively. The following table summarizes the change in number of owned self-storage facilities from January 1, 2011 through March 31, 2012:

|  | 2012 | 2011 |
| --- | ---: | ---: |
| Balance - January 1 | 370 | 363 |
| Facilities acquired | 6 | 1 |
| Facilities sold | — | — |
| Balance - March 31 | 376 | 364 |
| Facilities acquired |  | 4 |
| Facilities consolidated |  | (1) |
| Facilities sold |  | — |
| Balance - June 30 |  | 367 |
| Facilities acquired |  | 4 |
| Facilities sold |  | (18) |
| Balance - September 30 |  | 353 |
| Facilities acquired |  | 18 |
| Facilities sold |  | (1) |
| Balance - December 31 |  | 370 |

34

### Comparison of the three months ended March 31, 2012 to the three months ended March 31, 2011 (in thousands)

| REVENUES: | Same-Store Property Portfolio 2012 | 2011 | Increase/% (Decrease) | Change | Non Same-Store Properties 2012 | 2011 | Other/ Eliminations 2012 | 2011 | Total Portfolio 2012 | 2011 | Increase/% (Decrease) | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Rental income | $50,294 | $49,323 | $971 | 2.0% | $9,813 | $920 | $— | $— | $60,107 | $50,243 | $9,864 | 19.6% |
| Other property related income | 4,634 | 4,155 | 479 | 11.5% | 929 | 158 | 509 | 287 | 6,072 | 4,600 | 1,472 | 32.0% |
| Property management fee income | — | — | — | 0.0% | — | — | 1,020 | 909 | 1,020 | 909 | 111 | 12.2% |
| Total revenues | 54,928 | 53,478 | 1,450 | 2.7% | 10,742 | 1,078 | 1,529 | 1,196 | 67,199 | 55,752 | 11,447 | 20.5% |
| OPERATING EXPENSES: |  |  |  |  |  |  |  |  |  |  |  |  |
| Property operating expenses | 20,477 | 21,396 | (919) | -4.3% | 3,484 | 583 | 3,324 | 2,766 | 27,285 | 24,745 | 2,540 | 10.3% |
| NET OPERATING INCOME | 34,451 | 32,082 | 2,369 | 7.4% | 7,258 | 495 | (1,795) | (1,570) | 39,914 | 31,007 | 8,907 | 28.7% |
| Property count | 339 | 339 |  |  | 37 |  |  |  | 376 |  |  |  |
| Total square footage | 22,247 | 22,247 |  |  | 2,513 |  |  |  | 24,760 |  |  |  |
| Period Average Occupancy (1) | 78.4% | 76.6% |  |  | 76.9% |  |  |  | 78.3% |  |  |  |
| Period End Occupancy (2) | 78.7% | 76.8% |  |  | 77.2% |  |  |  | 78.6% |  |  |  |
| Realized annual rent per occupied square foot (3) | $11.53 | $11.57 |  |  | $21.80 |  |  |  | $12.61 |  |  |  |
| Scheduled annual rent per square foot (4) | $12.37 | $12.35 |  |  | $25.54 |  |  |  | $13.32 |  |  |  |
| Depreciation and amortization |  |  |  |  |  |  |  |  | 25,763 | 15,211 | 10,552 | 69.4% |
| General and administrative |  |  |  |  |  |  |  |  | 6,444 | 6,033 | 411 | 6.8% |
| Subtotal |  |  |  |  |  |  |  |  | 32,207 | 21,244 | 10,963 | 51.6% |
| Operating income |  |  |  |  |  |  |  |  | 7,707 | 9,763 | (2,056) | -21.1% |
| Other Income (Expense): |  |  |  |  |  |  |  |  |  |  |  |  |
| Interest: |  |  |  |  |  |  |  |  |  |  |  |  |
| Interest expense on loans |  |  |  |  |  |  |  |  | (9,321) | (8,113) | 1,208 | 14.9% |
| Loan procurement amortization expense |  |  |  |  |  |  |  |  | (771) | (1,636) | (865) | -52.9% |
| Acquisition related costs |  |  |  |  |  |  |  |  | (551) | (109) | 442 | 405.5% |
| Equity in losses of real estate entities |  |  |  |  |  |  |  |  | (251) | — | 251 | 100.0% |
| Other |  |  |  |  |  |  |  |  | (71) | 6 | 77 | -1283.3% |
| Total other expense |  |  |  |  |  |  |  |  | (10,965) | (9,852) | (1,113) | 11.3% |
| LOSS FROM CONTINUING OPERATIONS |  |  |  |  |  |  |  |  | (3,258) | (89) | (3,169) | -3560.7% |
| DISCONTINUED OPERATIONS |  |  |  |  |  |  |  |  |  |  |  |  |
| Income from discontinued operations |  |  |  |  |  |  |  |  | — | 565 | (565) | -100.0% |
| Total discontinued operations |  |  |  |  |  |  |  |  | — | 565 | (565) | -100.0% |
| NET (LOSS) INCOME |  |  |  |  |  |  |  |  | (3,258) | 476 | (3,734) | 784.5% |
| NET LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTERESTS |  |  |  |  |  |  |  |  |  |  |  |  |
| Noncontrolling interests in the Operating Partnership |  |  |  |  |  |  |  |  | 149 | 5 | (144) | 2880.0% |
| Noncontrolling interests in subsidiaries |  |  |  |  |  |  |  |  | (734) | (598) | (136) | 22.7% |
| NET LOSS ATTRIBUTABLE TO THE COMPANY |  |  |  |  |  |  |  |  | (3,843) | (117) | (3,726) | -3184.6% |

(1) Represents the weighted average occupancy for the period.

(2) Represents occupancy at March 31 of the respective year.

(3) Realized annual rent per occupied square foot is computed by dividing rental income by the weighted average occupied square feet for the period. Square footage for non same-store assets acquired during 2012 are prorated based on the portion of the period the properties were owned.

(4) Scheduled annual rent per square foot represents annualized asking rents per available square foot for the period. Square footage for non same-store assets acquired during 2012 are prorated based on the portion of the period the properties were owned.

#### Revenues

Rental income increased from $50.2 million during the three months ended March 31, 2011 to $60.1 million during the three months ended March 31, 2012, an increase of $9.9 million, or 20%. This increase is primarily attributable to $8.9 million of additional income from the properties acquired in 2011 and 2012 and increases in average occupancy and scheduled annual rent per square foot on the same-store portfolio which contributed $1.0 million to the increase in rental income during the three months ended March 31, 2012 as compared to the three months ended March 31, 2011.

Other property related income increased from $4.6 million during the three months ended March 31, 2011 to $6.1 million during the three months ended March 31, 2012, an increase of $1.5 million, or 32%. This increase is primarily attributable to $0.8 million of additional income from the 2011 and 2012 acquisitions and increased insurance commissions of $0.7 million during the three months ended March 31, 2012 as compared to the three months ended March 31, 2011.

#### Operating Expenses

Property operating expenses increased from $24.7 million during the three months ended March 31, 2011 to $27.3 million during the three months ended March 31, 2012, an increase of $2.5 million, or 10%. This increase is primarily attributable to $2.9 million of increased expenses associated with newly acquired properties, offset by reductions on the same-store portfolio related to decreased snow removal and utility costs.

Depreciation and amortization increased from $15.2 million in three months ended March 31, 2011 to $25.8 million in three months ended March 31, 2012, an increase of $10.6 million, or 69%. This increase is primarily attributable to depreciation and amortization expense related to the 2011 and 2012 acquisitions including the amortization of lease intangibles of $6.8 million recognized in the 2012 period, with no corresponding expense recognized in the 2011 period.

#### Other Income (Expenses)

Interest expense increased from $8.1 million during the three months ended March 31, 2011 to $9.3 million during the three months ended March 31, 2012, an increase of $1.2 million, or 15%. The increase is attributable to a higher amount of outstanding debt in the 2012 period primarily resulting from the debt assumed in conjunction with the 2012 and 2011 Storage Deluxe Acquisitions and other acquisitions, offset by lower interest rates on the Credit Facility in the 2012 period as compared to the 2011 period.

Loan procurement amortization expense decreased from $1.6 million during 2011 to $0.8 million during 2012. This decrease primarily relates to loan procurement fees incurred in the three months ended March 31, 2011 associated with the previous facility. Due to the early repayment of debt during the year ended December 31, 2011, these fees were non-recurring in the three months ended March 31, 2012.

Acquisition related costs increased from $0.1 million during the three months ended March 31, 2011 to $0.6 million during the three months ended March 31, 2012 as a result of the acquisition of six self-storage facilities in the 2012 period, including four facilities in the Storage Deluxe Acquisition, compared to one acquisition during the 2011 period.

Equity in losses of real estate ventures was $0.3 million for the three months ended March 31, 2012, with no comparable amount during the 2011 period. This expense is related to earnings attributable to HSREV, which was formed in September 2011.

### Cash Flows

### Comparison of the three months ended March 31, 2012 to the three months ended March 31, 2011

A comparison of cash flow from operating, investing and financing activities for the three months ended March 31, 2012 and 2011 is as follows (in thousands):

| Net cash flow provided by (used in): | Three Months Ended March 31, 2012 | 2011 | Change |
| --- | ---: | ---: | ---: |
| Operating activities | $20,753 | $15,247 | $5,506 |
| Investing activities | $(52,795) | $(8,170) | $(44,625) |
| Financing activities | $30,438 | $(8,879) | $39,317 |

Cash flows provided by operating activities for the quarters ended March 31, 2012 and 2011 were $20.8 million and $15.2 million, respectively, an increase of $5.6 million. Our principal source of cash flows is from the operation of our properties. Our increased cash flow from operating activities is primarily attributable to our 2011 and 2012 acquisitions.

Cash used in investing activities increased from $8.2 million in the 2011 period to $52.8 million in the 2012 period, an increase of $44.6 million. The increase primarily relates to increased property acquisitions in 2012 (Storage Deluxe Acquisition with a purchase price totaling $74.4 million and two other property acquisitions with purchase prices totaling $12.0 million), which was offset by mortgage loan assumptions that aggregated $34.9 million, compared to 2011 (one property acquisition with purchase price of $14.0 million).

Cash (used in) provided by financing activities increased from ($8.9) million in 2011 to $30.4 million in 2012, an increase of $39.3 million. The increase relates to a net increase in revolving credit facility borrowings of $52.5 million that were used to finance the 2012 Storage Deluxe Acquisitions; offset by increased distributions of $4.1 million (additional shares and increased distributions paid per share in the 2012 period) and increased net debt repayments of $9.7 million in 2012 as compared to 2011.

### Liquidity and Capital Resources

### Liquidity Overview

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

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

Our short-term liquidity needs consist primarily of funds necessary to pay operating expenses associated with our facilities, refinancing of certain mortgage indebtedness, interest expense and scheduled principal payments on debt, expected distributions to limited partners and shareholders and recurring capital expenditures. These funding requirements will vary from year to year, in some cases significantly. We expect remaining recurring capital expenditures in the 2012 fiscal year to be approximately $5 million to $7 million. In addition, we expect capital improvements totaling approximately $5 million related to our store upgrade and rebranding initiatives, through December 31, 2012. Our currently scheduled principal payments on debt are approximately $167.7 million in 2012.

Our most restrictive debt covenants limit the amount of additional leverage we can add; however, we believe cash flow from operations, access to our “at the market” equity program and access to our Credit Facility are adequate to execute our current business plan and remain in compliance with our debt covenants.

Our liquidity needs beyond 2012 consist primarily of contractual obligations which include repayments of indebtedness at maturity, as well as potential discretionary expenditures such as (i) non-recurring capital expenditures; (ii) redevelopment of operating facilities; (iii) acquisitions of additional facilities; and (iv) development of new facilities. We will have to satisfy our needs through either additional borrowings, including borrowings under the revolving portion of our Credit Facility, sales of common or preferred shares and/or cash generated through facility dispositions and joint venture transactions.

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

As of March 31, 2012, we had approximately $7.5 million in available cash and cash equivalents. In addition, we had approximately $350 million of availability for borrowings under our Credit Facility.

### Bank Credit Facilities

On June 20, 2011, we entered into an unsecured Term Loan Facility which consisted of a $100 million term loan with a five-year maturity and a $100 million term loan with a seven-year maturity. The Term Loan Facility permits the Company to request additional advances of five-year or seven-year loans in minimum increments of $5 million provided that the aggregate of such additional advances does not exceed $50 million. We incurred costs of $2.1 million in connection with executing the agreement and capitalized such costs as a component of loan procurement costs, net of amortization on the consolidated balance sheet. During 2011, we received two investment grade ratings, and therefore pricing on the Term Loan Facility now ranges from 1.45% to 2.10% over LIBOR for the five-year loan, and from 1.60% to 2.25% over LIBOR for the seven-year loan.

On December 9, 2011, we entered into our Credit Facility comprised of a $100 million unsecured term loan maturing in December 2014; a $200 million unsecured term loan maturing in March 2017; and a $300 million unsecured revolving facility maturing in December 2015. The Credit Facility replaces in its entirety our previous facility. In connection with obtaining the Credit Facility, we paid additional deferred financing costs of $3.4 million and wrote off deferred financing fees related to our previous facility of $6.1 million.

Pricing on the Credit Facility depends on the Company’s unsecured debt credit rating. At our current Baa3/BBB- level, amounts drawn under the revolving facility are priced at 1.80% over LIBOR, with no LIBOR floor. Amounts drawn under the term loan portion of the Credit Facility are priced at 1.75% over LIBOR, with no LIBOR floor.

As of March 31, 2012, $200 million of unsecured term loan borrowings were outstanding under the Term Loan Facility, $200 million of unsecured term loan borrowings were outstanding under the Credit Facility, $50 million of unsecured revolving credit facility borrowings were outstanding and $350 million was available for borrowing under the Credit Facility. We had interest rate swaps as of March 31, 2012, that fix LIBOR on $200 million of borrowings under the Credit Facility maturing in March 2017 at 1.34%. In addition, at March 31, 2012, we had interest rate swaps that fix LIBOR on both the five and seven-year term loans under the Term Loan Facility through their respective maturity dates. The interest rate swap agreements fix thirty day LIBOR over the terms of the five and seven-year term loans at 1.80% and 2.47%, respectively.

As of March 31, 2012, borrowings under the Credit Facility and Term Loan Facility had a weighted average interest rate of 3.37% and the effective interest rates on the five and seven-year term loans were 3.65% and 4.47%, respectively, after giving consideration to the interest rate swaps described elsewhere in this report.

The Term Loan Facility was fully drawn at March 31, 2012 and no further borrowings may be made under that facility. Our ability to borrow under the Credit Facility is subject to ongoing compliance with certain financial covenants which include:

- Maximum total indebtedness to total asset value of 60.0% at any time;
- Minimum fixed charge coverage ratio of 1.50:1.00; and
- Minimum tangible net worth of $821,211,200 plus 75% of net proceeds from equity issuances after June 30, 2010.

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

We are currently in compliance with all of its financial covenants and anticipate being in compliance with all of its financial covenants through the terms of the Credit Facility and Term Loan Facility.

Pursuant to our sales agreement with Cantor Fitzgerald & Co. (the “Sales Agent”), dated April 3, 2009, as amended on January 26, 2011 and September 16, 2011 (as amended, the “Sales Agreement”), we may sell up to 20 million common shares at “at the market” prices. During the quarter ended March 31, 2012, we did not sell any shares under the program. Since the inception of the program in 2009, we have sold 8.2 million shares with an average sales price of $7.30 per share, resulting in net proceeds of $60.1 million used to fund the acquisition of storage facilities and for general corporate purposes. At March 31, 2012, we had 11.8 million shares available for sale under the program.

### Non-GAAP Financial Measures

### NOI

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

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

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

- It is one of the primary measures used by our management and our facility managers to evaluate the economic productivity of our facilities, including our ability to lease our facilities, increase pricing and occupancy, and control our property operating expenses;
- It is widely used in the real estate industry and the self-storage industry to measure the performance and value of real estate assets without regard to various items included in net income that do not relate to or are not indicative of operating performance, such as depreciation and amortization expense, which can vary depending upon accounting methods and the book value of assets; and
- It helps our investors to meaningfully compare the results of our operating performance from period to period by removing the impact of our capital structure (primarily interest expense on our outstanding indebtedness) and depreciation of our basis in our assets from our operating results.

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

### FFO

Pursuant to the revised definition of Funds from Operations adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”), we calculate Funds from Operations, or “FFO,” by adjusting net income (computed in accordance with GAAP, including non-recurring items) for gains (or losses) from sales of properties, impairments of depreciable properties, real estate related depreciation and amortization, and after adjustment for unconsolidated partnerships and joint ventures. FFO is a non-GAAP financial measure. The use of FFO, combined with the required primary GAAP presentations, has been fundamentally beneficial in improving the understanding of operating results of REITs among the investing public and making comparisons of REIT operating results more meaningful. Management generally considers FFO to be a useful measure for reviewing our comparative operating and financial performance because, by excluding gains and losses related to sales of previously depreciated operating real estate assets, impairments of depreciable assets, and excluding real estate asset depreciation and amortization (which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates), FFO can help one compare the operating performance of a company’s real estate between periods or as compared to different companies. Our computation of FFO may not be comparable to FFO reported by other REITs or real estate companies that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently.

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

The following table presents a reconciliation of net income to FFO for the three months ended March 31, 2012 and 2011 (in thousands):

|  | Three months ended March 31, 2012 | 2011 |
| --- | ---: | ---: |
| **Net loss attributable to common shareholders** | $(5,345) | $(117) |
| Add (deduct): |  |  |
| Real estate depreciation and amortization |  |  |
| Real property - continuing operations | 25,403 | 14,895 |
| Real property - discontinued operations | — | 354 |
| Company’s share of unconsolidated real estate ventures | 514 | — |
| Noncontrolling interest’s share of consolidated real estate ventures | (434) | (458) |
| Noncontrolling interests in the Operating Partnership | (149) | (5) |
| **FFO** | $19,989 | $14,669 |
| Weighted-average diluted shares and units outstanding | 128,470 | 105,008 |

### Off-Balance Sheet Arrangements

We do not currently have any off-balance sheet arrangements.

## Market risk

As filed, 2,830 characters.

The Company’s future income, cash flows and fair values relevant to financial instruments depend upon prevailing interest rates.

### Market Risk

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

### Effect of Changes in Interest Rates on our Outstanding Debt

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

As of March 31, 2012 our consolidated debt consisted of $787.8 million of outstanding mortgages and unsecured term loans that are subject to fixed rates, including variable rate debt that is effectively fixed through our use of interest rate swaps. There was $50 million of outstanding revolving credit facility borrowings subject to floating rates. Changes in interest rates have different impacts on the fixed and variable rate portions of our debt portfolio. A change in interest rates on the fixed portion of the debt portfolio impacts the net financial instrument position, but has no impact on interest incurred or cash flows. A change in interest rates on the variable portion of the debt portfolio impacts the interest incurred and cash flows, but does not impact the net financial instrument position.

If market rates of interest on our variable rate debt increase by 1%, the increase in annual interest expense on our variable rate debt would decrease future earnings and cash flows by approximately $0.5 million a year. If market rates of interest on our variable rate debt decrease by 1%, the decrease in interest expense on our variable rate debt would increase future earnings and cash flows by approximately $0.5 million a year.

If market rates of interest increase by 1%, the fair value of our outstanding fixed-rate mortgage debt and unsecured term loans would decrease by approximately $14.1 million. If market rates of interest decrease by 1%, the fair value of our outstanding fixed-rate mortgage debt and unsecured term loans would increase by approximately $13.6 million.

## Controls and procedures

As filed, 3,345 characters.

### Controls and Procedures (Parent Company)

### Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, the Parent Company carried out an evaluation, under the supervision and with the participation of its management, including its chief executive officer and chief financial officer, of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)).

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

### Changes in Internal Controls Over Financial Reporting

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

### Controls and Procedures (Operating Partnership)

### Evaluation of Disclosure Controls and Procedures

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

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

### Changes in Internal Controls Over Financial Reporting

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

Filed May 7, 2012.
Source: SEC EDGAR, the filing index for accession 0001104659-12-033886. Last ingested by Listed: Nov 7, 2026, 12:41 ET. No prices; not investment advice.