# CubeSmart: Form 10-Q for the period ended Mar 31, 2014

- Company: [CubeSmart](/companies/cube.md) (CIK 1298675)
- Form: 10-Q
- Filed: 2014-05-02
- Accepted by EDGAR: May 2, 2014, 16:07 ET
- Period: 2014-03-31
- Accession: 0001104659-14-034098
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1298675/000110465914034098/a14-9506_110q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1298675/000110465914034098/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2014-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Cost of revenue | 3 months, 2014-01-01 to 2014-03-31 | $32.3m | us-gaap:CostOfRevenue |
| Operating income | 3 months, 2014-01-01 to 2014-03-31 | $20.3m | us-gaap:OperatingIncomeLoss |
| Net income | 3 months, 2014-01-01 to 2014-03-31 | $4.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2014-01-01 to 2014-03-31 | $0.02 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2014-01-01 to 2014-03-31 | $0.02 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2014-01-01 to 2014-03-31 | 142,774,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2014-01-01 to 2014-03-31 | $30.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Dividends paid | 3 months, 2014-01-01 to 2014-03-31 | $18.2m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2014-03-31 | $3.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2014-03-31 | $2.44bn | us-gaap:Assets |
| Total liabilities | at 2014-03-31 | $1.28bn | us-gaap:Liabilities |
| Shareholders' equity | at 2014-03-31 | $1.12bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 48,885 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, 2013.*

### Overview

We are an integrated self-storage real estate company, and as such we have in-house capabilities in the operation, design, development, leasing, management and acquisition of self-storage facilities. The Parent Company’s operations are conducted solely through the Operating Partnership and its subsidiaries. The Parent Company has elected to be taxed as a REIT for U.S. federal income tax purposes. As of March 31, 2014 and December 31, 2013, we owned 378 and 366 self-storage facilities, respectively, totaling approximately 25.5 million and 24.7 million rentable square feet, respectively. As of March 31, 2014, we owned facilities in the District of Columbia and the following 20 states: Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois, Maryland, Massachusetts, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Utah and Virginia. In addition, as of March 31, 2014, we managed 161 facilities for third parties (including 35 facilities as part of an unconsolidated real estate venture) bringing the total number of facilities which it owned and/or managed to 539. As of March 31, 2014, the Company managed facilities in the following 22 states: Alabama, California, Colorado, Florida, Georgia, Illinois, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, and Virginia.

We derive 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. Our approach to the management and operation of our facilities combines centralized marketing, revenue management and other operational support with local operations teams that provide market-level oversight and control. We believe this approach allows us to respond quickly and effectively to changes in local market conditions, and to maximize revenues by managing rental rates and occupancy levels.

We typically 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.

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

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

Our self-storage facilities are located in major metropolitan and suburban areas and have numerous customers per facility. No single customer represents a significant concentration of our revenues. The facilities in New York, Florida, Texas and California provided approximately 17%, 16%, 10% and 8%, respectively, of total revenues for the three months ended March 31, 2014.

### 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. 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 from estimates calculated and utilized by management.

### Basis of Presentation

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

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

### Self-Storage Facilities

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

When facilities are acquired, the purchase price is allocated to the tangible and intangible assets acquired and liabilities assumed based on estimated fair values. When a portfolio of facilities is acquired, the purchase price is allocated to the individual facilities based upon an income approach or a cash flow analysis using appropriate risk adjusted capitalization rates, which take into account the relative size, age and location of the individual facility along with current and projected occupancy and rental rate levels or appraised values, if available. Allocations to the individual assets and liabilities are based upon 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 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 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 2014 and 2013.

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

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

### Revenue Recognition

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

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

### Share-Based Payments

We apply the fair value method of accounting for contingently issued shares and share options issued under our equity incentive plans. 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 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.

### Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (“FASB”) issued an update to the accounting standard for the reporting of discontinued operations. The update redefines discontinued operations, changing the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. This amendment becomes effective for annual periods beginning on or after December 15, 2014, and interim periods beginning on or after December 15, 2015, however early adoption is permitted. The adoption of this guidance in 2014 did not have a material impact on the Company’s consolidated financial position or results of operations as the Company did not dispose of any assets during the three months ended March 31, 2014.

### 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 periods 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. We believe that same-store results are 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, 2014, there were 346 same-store facilities and 32 non-same-store facilities. All of the non-same-store facilities were 2013 and 2014 acquisitions or developed facilities.

### 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, 2014 and 2013, the Company owned 378 and 377 self-storage facilities and related assets, respectively. The following table summarizes the change in number of owned self-storage facilities from January 1, 2013 through March 31, 2014:

|  | 2014 | 2013 |
| --- | ---: | ---: |
| Balance - January 1 | 366 | 381 |
| Facilities acquired | 10 | 1 |
| Facilities developed | 2 | - |
| Facilities sold | - | (5) |
| Balance - March 31 | 378 | 377 |
| Facilities acquired |  | 9 |
| Facilities developed |  | - |
| Facilities sold |  | - |
| Balance - June 30 |  | 386 |
| Facilities acquired |  | 4 |
| Facilities developed |  | - |
| Facilities sold |  | (8) |
| Balance - September 30 |  | 382 |
| Facilities acquired |  | 6 |
| Facilities developed |  | - |
| Facilities sold |  | (22) |
| Balance - December 31 |  | 366 |

33

### Comparison of the three months ended March 31, 2014 to the three months ended March 31, 2013 (in thousands)

| REVENUES | Same-Store Property Portfolio 2014 | 2013 | Increase/% (Decrease) | Change | Non Same-Store Properties 2014 | 2013 | Other/ Eliminations 2014 | 2013 | Total Portfolio 2014 | 2013 | Increase/% (Decrease) | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Rental income | $69,748 | $65,692 | $4,056 | 6.2% | $5,966 | $560 | $- | $- | $75,714 | $66,252 | $9,462 | 14.3% |
| Other property related income | 7,625 | 6,638 | 987 | 14.9% | 1,688 | 66 | 834 | 554 | 10,147 | 7,258 | 2,889 | 39.8% |
| Property management fee income | - | - | - | - | - | - | 1,406 | 1,145 | 1,406 | 1,145 | 261 | 22.8% |
| Total revenues | 77,373 | 72,330 | 5,043 | 7.0% | 7,654 | 626 | 2,240 | 1,699 | 87,267 | 74,655 | 12,612 | 16.9% |
| OPERATING EXPENSES |  |  |  |  |  |  |  |  |  |  |  |  |
| Property operating expenses | 25,999 | 25,198 | 801 | 3.2% | 2,630 | 197 | 3,661 | 3,766 | 32,290 | 29,161 | 3,129 | 10.7% |
| NET OPERATING INCOME | $51,374 | $47,132 | $4,242 | 9.0% | $5,024 | $429 | $(1,421) | $(2,067) | $54,977 | $45,494 | $9,483 | 20.8% |
| Property count | 346 | 346 |  |  | 32 | 1 |  |  | 378 | 347 |  |  |
| Total square footage | 23,167 | 23,167 |  |  | 2,293 | 57 |  |  | 25,460 | 23,224 |  |  |
| Period End Occupancy (1) | 89.5% | 85.6% |  |  | 79.7% | 86.6% |  |  | 88.6% | 85.6% |  |  |
| Period Average Occupancy (2) | 89.1% | 85.1% |  |  |  |  |  |  |  |  |  |  |
| Realized annual rent per occupied square foot (3) | $13.52 | $13.33 |  |  |  |  |  |  |  |  |  |  |
| Depreciation and amortization |  |  |  |  |  |  |  |  | 28,115 | 28,982 | (867) | -3.0% |
| General and administrative |  |  |  |  |  |  |  |  | 6,569 | 7,613 | (1,044) | -13.7% |
| Subtotal |  |  |  |  |  |  |  |  | 34,684 | 36,595 | (1,911) | -5.2% |
| OPERATING INCOME |  |  |  |  |  |  |  |  | 20,293 | 8,899 | 11,394 | 128.0% |
| OTHER INCOME (EXPENSE) |  |  |  |  |  |  |  |  |  |  |  |  |
| Interest: |  |  |  |  |  |  |  |  |  |  |  |  |
| Interest expense on loans |  |  |  |  |  |  |  |  | (11,871) | (10,272) | (1,599) | -15.6% |
| Loan procurement amortization expense |  |  |  |  |  |  |  |  | (541) | (476) | (65) | -13.7% |
| Acquisition related costs |  |  |  |  |  |  |  |  | (1,679) | (115) | (1,564) | -1360.0% |
| Equity in losses of real estate venture |  |  |  |  |  |  |  |  | (1,369) | - | (1,369) | -100.0% |
| Other |  |  |  |  |  |  |  |  | (593) | (73) | (520) | -712.3% |
| Total other expense |  |  |  |  |  |  |  |  | (16,053) | (10,936) | (5,117) | -46.8% |
| INCOME (LOSS) FROM CONTINUING OPERATIONS |  |  |  |  |  |  |  |  | 4,240 | (2,037) | 6,277 | 308.1% |
| DISCONTINUED OPERATIONS |  |  |  |  |  |  |  |  |  |  |  |  |
| Income from discontinued operations |  |  |  |  |  |  |  |  | 336 | 1,381 | (1,045) | -75.7% |
| Gain on disposition of discontinued operations |  |  |  |  |  |  |  |  | - | 228 | (228) | -100.0% |
| Total discontinued operations |  |  |  |  |  |  |  |  | 336 | 1,609 | (1,273) | -79.1% |
| NET INCOME (LOSS) |  |  |  |  |  |  |  |  | 4,576 | (428) | 5,004 | 1169.2% |
| NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS |  |  |  |  |  |  |  |  |  |  |  |  |
| Noncontrolling interests in the Operating Partnership |  |  |  |  |  |  |  |  | (49) | 35 | 84 | 240.0% |
| Noncontrolling interests in subsidiaries |  |  |  |  |  |  |  |  | 3 | 1 | (2) | -200.0% |
| NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY |  |  |  |  |  |  |  |  | 4,530 | (392) | 4,922 | 1255.6% |

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

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

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

#### Revenues

Rental income increased from $66.3 million during the three months ended March 31, 2013 to $75.7 million during the three months ended March 31, 2014, an increase of $9.4 million, or 14.3%. This increase is primarily attributable to $5.4 million of additional income from the facilities acquired in 2013 and 2014 and increases in average occupancy on the same-store portfolio which contributed $4.1 million to the increase in rental income during the three months ended March 31, 2014 as compared to the three months ended March 31, 2013.

Other property related income increased from $7.3 million during the three months ended March 31, 2013 to $10.1 million during the three months ended March 31, 2014, an increase of $2.8 million, or 39.8%. This increase is primarily attributable to increased tenant insurance commissions on the same-store and non-same-store portfolios of $0.9 million and $1.4 million, respectively, during the three months ended March 31, 2014 as compared to the three months ended March 31, 2013.

#### Operating Expenses

Property operating expenses increased from $29.2 million during the three months ended March 31, 2013 to $32.3 million during the three months ended March 31, 2014, an increase of $3.1 million, or 10.7%. This increase is primarily attributable to $2.4 million of increased expenses associated with newly acquired facilities as well as increased expenses on the same store portfolio. The increases in same store expenses were associated with snow removal and utilities due to a relatively colder winter in 2014 than in the prior year.

#### General and administrative

General and administrative expenses decreased from $7.6 million for the three months ended March 31, 2013 to $6.6 million for the three months ended March 31, 2014, a decrease of $1.0 million, or 13.7%. The decrease in primarily attributable to lower share based compensation expense and payroll expenses of $0.9 million.

#### Other Income (Expenses)

Interest expense increased from $10.3 million during the three months ended March 31, 2013 to $11.9 million during the three months ended March 31, 2014, an increase of $1.6 million, or 15.6%. The increase is attributable to a higher amount of outstanding debt in the 2014 period. To fund a portion of the Company’s growth, the average debt balance during the three months ended March 31, 2014 increased approximately $164 million from the same period in 2013 from $1,025 million to $1,189 million. This increase was offset by a decrease in the weighted average effective interest rate of our outstanding debt from 4.05% for the three months ended March 31, 2013 to 3.99% for the three months ended March 31, 2014.

Acquisition related costs increased from $0.1 million during the three months ended March 31, 2013 to $1.7 million during the three months ended March 31, 2014. Acquisition costs are non-recurring and fluctuate based on quarterly investment activity. The increase was the result of the acquisition of 10 self-storage facilities in the 2014 period compared to one facility during the 2013 period.

Equity in losses of real estate venture was $1.4 million for the three months ended March 31, 2014 with no comparable amount during the 2013 period. This expense is related to the Company’s share of the losses attributable to HHF, a partnership in which the Company acquired a 50% ownership interest during the fourth quarter of 2013.

### Cash Flows

### Comparison of the three months ended March 31, 2014 to the three months ended March 31, 2013

A comparison of cash flow from operating, investing and financing activities for the three months ended March 31, 2014 and 2013 is as follows (in thousands):

| Net cash flow provided by (used in): | Three Months Ended March 31, 2014 | 2013 | Change |
| --- | ---: | ---: | ---: |
| Operating activities | $30,581 | $26,461 | $4,120 |
| Investing activities | $(88,439) | $2,373 | $(90,812) |
| Financing activities | $57,917 | $(30,704) | $88,621 |

Cash flows provided by operating activities for the quarters ended March 31, 2014 and 2013 were $30.6 million and $26.5 million, respectively, an increase of $4.1 million. Our principal source of cash flow is from the operation of our facilities. Our increased cash flow from operating activities is primarily attributable to our 2013 acquisitions, the majority of which were completed subsequent to the three months ended March 31, 2013, and increased net operating income levels on the same-store portfolio in the 2014 period as compared to the 2013 period.

For the three months ended March 31, 2014 cash flows used in investing activities were $88.4 million and for the three months ended March 31, 2013 cash flows provided by investing activities were $2.4 million, a change of $90.8 million. The change was driven by more acquisition activity compared to the three months ended March 31, 2013 as we acquired only one property in the 2013 period for an aggregate purchase price of $6.9 million compared to the acquisition of 10 facilities in the 2014 period for an aggregate purchase price of $103.3 million, inclusive of $27.5 million of assumed debt. In addition, we sold five facilities providing approximately $11.0 million of cash proceeds during the three months ended March 31, 2013, while we sold no facilities during the three months ended March 31, 2014. Additionally, cash used for development activities increased $4.8 million from $2.7 million in the 2013 period to $7.5 million in the same period in 2014.

For the three months ended March 31, 2014 cash flows provided by financing activities were $57.9 million and for the three months ended March 31, 2013 cash flows used in financing activities were $30.7 million, a change of $88.6 million. This change is the result of a $47.0 million net increase in revolving credit facility borrowings during the three months ended March 31, 2014 compared to the same period in 2013 as we raised debt levels to fund acquisitions during the three months ended March 31, 2014. In addition, we received proceeds of $46.2 million from the issuance of common shares under our “at-the-market” equity program during the three months ended March 31, 2014 compared to proceeds of $1.5 million during the three months ended March 31, 2013.

### 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 the majority 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 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, capital expenditures and the development of new facilities. These funding requirements will vary from year to year, in some cases significantly. In the 2014 fiscal year, we expect remaining capital expenditures to be approximately $6 million to $10 million and remaining costs associated with the development of new facilities to be approximately $31 million to $35 million. Our currently scheduled principal payments on debt, including debt maturities and borrowings outstanding on the Credit Facility and Term Loan Facility, are approximately $6.5 million for the remainder of 2014.

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

Our liquidity needs beyond 2014 consist primarily of contractual obligations which include repayments of indebtedness at maturity, as well as potential discretionary expenditures such as (i) non-recurring capital expenditures; (ii) redevelopment of operating facilities; (iii) acquisitions of additional facilities; and (iv) development of new facilities. We will have to satisfy the portion of our needs not covered by cash flow from operations through additional borrowings, including borrowings under our Credit Facility, sales of common or preferred shares of the Parent Company and common or preferred units of the Operating Partnership and/or cash generated through facility dispositions and joint venture transactions.

We believe that, as a publicly traded REIT, we will have access to multiple sources of capital to fund 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, 2014, we had approximately $3.2 million in available cash and cash equivalents. In addition, we had approximately $229.2 million of availability for borrowings under our Credit Facility.

### Unsecured Senior Notes

On December 17, 2013, the Operating Partnership issued $250 million in aggregate principal amount of unsecured senior notes due December 15, 2023 (the “2023 Senior Notes”) which bear interest at a rate of 4.375%. On June 26, 2012, the Operating Partnership issued $250 million in aggregate principal amount of unsecured senior notes due July 15, 2022 (the “2022 Senior Notes”) which bear interest at a rate of 4.80%. The 2023 Senior Notes along with the 2022 Senior Notes are collectively referred to as the “Senior Notes.” The indenture under which the Senior Notes were issued restricts the ability of the Operating Partnership and its subsidiaries to incur debt unless the Operating Partnership and its consolidated subsidiaries comply with a leverage ratio not to exceed 60% and an interest coverage ratio of more than 1.5:1 after giving effect to the incurrence of the debt. The indenture also restricts the ability of the Operating Partnership and its subsidiaries to incur secured debt unless the Operating Partnership and its consolidated subsidiaries comply with a secured debt leverage ratio not to exceed 40% after giving effect to the incurrence of the debt. The indenture also contains other financial and customary covenants, including a covenant not to own unencumbered assets with a value less than 150% of the unsecured indebtedness of the Operating Partnership and its consolidated subsidiaries. The Operating Partnership is currently in compliance with all of the financial covenants under the Senior Notes.

### Bank Credit Facilities

On June 20, 2011, we entered into an unsecured term loan agreement (the “Term Loan Facility”) which consisted of a $100 million term loan with a five-year maturity (“Term Loan A”) and a $100 million term loan with a seven-year maturity (“Term Loan B”). 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.

On December 9, 2011, we entered into a credit facility (the “Credit Facility”) comprised of a $100 million unsecured term loan maturing in December 2014 (“Term Loan C”); a $200 million unsecured term loan maturing in March 2017 (“Term Loan D”); and a $300 million unsecured revolving facility maturing in December 2015 (“Revolver”). We incurred costs of $3.4 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.

On June 18, 2013, we amended both the Term Loan Facility and Credit Facility. With respect to the Term Loan Facility, among other things, the amendment extended the maturity and decreased the pricing of Term Loan A, while Term Loan B remained unchanged by the amendment. Pricing on the Term Loan Facility depends on our unsecured debt credit ratings. At our current Baa3/BBB- level, amounts drawn under Term Loan A are priced at 1.50% over LIBOR, with no LIBOR floor, while amounts drawn under Term Loan B are priced at 2.00% over LIBOR, with no LIBOR floor.

|  | Amount | Term Loan Facility Prior to Amendment Maturity Date | LIBOR Spread | Term Loan Facility As Amended Maturity Date | LIBOR Spread |
| --- | --- | --- | ---: | --- | ---: |
| Term Loan A | $100 million | June 2016 | 1.85% | June 2018 | 1.50% |
| Term Loan B | $100 million | June 2018 | 2.00% | June 2018 | 2.00% |

With respect to the Credit Facility, among other things, the amendment extended the maturities of the Revolver and Term Loan D and decreased the pricing of the Revolver, Term Loan C and Term Loan D. Pricing on the Credit Facility depends on our unsecured debt credit ratings. At our current Baa3/BBB- level, amounts drawn under the Revolver are priced at 1.60% over LIBOR, inclusive of a facility fee of 0.30%, with no LIBOR floor, while amounts drawn under Term Loan C and Term Loan D are priced at 1.50% over LIBOR, with no LIBOR floor.

|  | Amount | Credit Facility Prior to Amendment Maturity Date | LIBOR Spread | Credit Facility As Amended Maturity Date | LIBOR Spread |
| --- | --- | --- | ---: | --- | ---: |
| Revolver | $300 million | December 2015 | 1.80% | June 2017 | 1.60% |
| Term Loan C (1) | $100 million | December 2014 | 1.75% | December 2014 | 1.50% |
| Term Loan D | $200 million | March 2017 | 1.75% | January 2019 | 1.50% |

(1) On December 17, 2013, we repaid the $100 million balance under Term Loan C that was scheduled to mature in December 2014.

We incurred costs of $2.1 million in connection with amending the agreements and capitalized such costs as a component of loan procurement costs, net of amortization on the consolidated balance sheet. Unamortized costs, along with costs incurred in connection with the amendments, are amortized as an adjustment to interest expense over the remaining term of the modified facilities. In connection with the repayment of Term Loan C, we recognized loan procurement amortization expense – early repayment of debt of $0.4 million related to the write-off of unamortized loan procurement costs associated with the term loan.

As of March 31, 2014, $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, $70.6 million of unsecured revolving credit facility borrowings were outstanding under the Credit Facility, and $229.2 million was available for borrowing on the unsecured revolving portion of the Credit Facility. The available balance under the unsecured revolving portion of the Credit Facility is reduced by an outstanding letter of credit of $0.2 million. In connection with a portion of the unsecured borrowings, we maintained interest rate swaps as of March 31, 2014 that fixed 30-day LIBOR (see note 10). As of March 31, 2014, borrowings under the Credit Facility and Term Loan Facility, as amended and after giving effect to the interest rate swaps, had an effective weighted average interest rate of 3.12%.

The Term Loan Facility and the term loan under our Credit Facility were fully drawn at March 31, 2014 and no further borrowings may be made under the term loans. Our ability to borrow under the revolving 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.

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

We are currently in compliance with all of our financial covenants and we anticipate remaining in compliance with all of our financial covenants.

### At The Market Equity Program

Pursuant to our previous sales agreement with Cantor Fitzgerald & Co. (the “Previous Sales Agent”), dated April 3, 2009, as amended on January 26, 2011 and September 16, 2011 (as amended, the “Previous Sales Agreement”), we had a program to enable us to sell up to 20 million common shares in “at the market” offerings. On May 7, 2013, we terminated the Previous Sales Agreement with the Previous Sales Agent and entered into separate Equity Distribution Agreements (the “Equity Distribution Agreements”) with each of Wells Fargo Securities LLC; BMO Capital Markets Corp.; Jefferies LLC; Merrill Lynch, Pierce, Fenner & Smith Incorporated; and RBC Capital Markets, LLC (collectively, the “Sales Agents”). Pursuant to the Equity Distribution Agreements, we may sell, from time to time, up to 12 million common shares of beneficial interest through the Sales Agents.

During the three months ended March 31, 2014, we sold a total of 2.7 million common shares under the Equity Distribution Agreements at an average sales price of $17.34 per share, resulting in gross proceeds of $46.9 million under the program. We incurred $0.7 million of offering costs in conjunction with the 2014 sales. We used proceeds from the sales conducted during the three months ended March 31, 2014 to fund acquisitions of storage facilities and for general corporate purposes. As of March 31, 2014, 3.7 million common shares remained available for issuance under the Equity Distribution Agreements.

### 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, gains from remeasurement of investments in real estate ventures and interest income. NOI is not a measure of performance calculated in accordance with GAAP.

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

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

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

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

### FFO

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

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

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

### FFO, as adjusted

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

The following table presents a reconciliation of net income (loss) to FFO and FFO, as adjusted, for the three months ended March 31, 2014 and 2013 (in thousands):

|  | Three months ended March 31, 2014 | 2013 |
| --- | ---: | ---: |
| **Net income (loss) attributable to the Company’s common shareholders** | $3,028 | $(1,894) |
| Add (deduct): |  |  |
| Real estate depreciation and amortization |  |  |
| Real property - continuing operations | 27,710 | 29,462 |
| Real property - discontinued operations | - | 57 |
| Company’s share of unconsolidated real estate ventures | 3,240 | - |
| Gains from sale of real estate | - | (228) |
| Noncontrolling interests in the Operating Partnership | 49 | (35) |
| **FFO** | $34,027 | $27,362 |
| Add: |  |  |
| Acquisition related costs | 1,679 | 115 |
| **FFO, as adjusted** | $35,706 | $27,477 |
| Weighted-average diluted shares and units outstanding | 145,043 | 137,738 |

### Off-Balance Sheet Arrangements

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

## Market risk

As filed, 2,951 characters.

Our 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 of derivative financial instruments such as interest rate swaps or caps to mitigate our interest rate risk on a related financial instrument or to effectively lock the interest rate on a portion of our variable rate debt. The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market rates. The range of changes chosen reflects our view of changes which are reasonably possible over a one-year period. Market values are the present value of projected future cash flows based on the market rates chosen.

As of March 31, 2014, our consolidated debt consisted of $1,126.0 million of outstanding mortgages, unsecured senior notes and unsecured term loans that are subject to fixed rates, including variable rate debt that is effectively fixed through our use of interest rate swaps. There was also $70.6 million of outstanding 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 100 basis points, the increase in annual interest expense on our variable rate debt would decrease future earnings and cash flows by approximately $0.7 million a year. If market rates of interest on our variable rate debt decrease by 100 basis points, the decrease in interest expense on our variable rate debt would increase future earnings and cash flows by approximately $0.7 million a year.

If market rates of interest increase by 100 basis points, the fair value of our outstanding fixed-rate mortgage debt, unsecured senior notes and unsecured term loans would decrease by approximately $59.6 million. If market rates of interest decrease by 100 basis points, the fair value of our outstanding fixed-rate mortgage debt, unsecured senior notes and unsecured term loans would increase by approximately $64.8 million.

## Controls and procedures

As filed, 3,343 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 Control Over Financial Reporting

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

### Controls and Procedures (Operating Partnership)

### Evaluation of Disclosure Controls and Procedures

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

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

### Changes in Internal Control Over Financial Reporting

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

Filed May 2, 2014.
Source: SEC EDGAR, the filing index for accession 0001104659-14-034098. Last ingested by Listed: Nov 7, 2026, 12:41 ET. No prices; not investment advice.