# CubeSmart: Form 10-Q for the period ended Jun 30, 2016

- Company: [CubeSmart](/companies/cube.md) (CIK 1298675)
- Form: 10-Q
- Filed: 2016-07-29
- Accepted by EDGAR: Jul 29, 2016, 16:59 ET
- Period: 2016-06-30
- Accession: 0001298675-16-000007
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1298675/000129867516000007/cube-20160630x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1298675/000129867516000007/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Cost of revenue | 3 months, 2016-04-01 to 2016-06-30 | $41.6m | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2016-01-01 to 2016-06-30 | $81.8m | us-gaap:CostOfRevenue |
| Operating income | 3 months, 2016-04-01 to 2016-06-30 | $33.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2016-01-01 to 2016-06-30 | $61.7m | us-gaap:OperatingIncomeLoss |
| Net income | 3 months, 2016-04-01 to 2016-06-30 | $20.4m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2016-01-01 to 2016-06-30 | $36.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-04-01 to 2016-06-30 | $0.11 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2016-01-01 to 2016-06-30 | $0.19 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2016-04-01 to 2016-06-30 | $0.11 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2016-01-01 to 2016-06-30 | $0.19 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2016-04-01 to 2016-06-30 | 179,221,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2016-01-01 to 2016-06-30 | 178,172,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2016-01-01 to 2016-06-30 | $124.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Dividends paid | 6 months, 2016-01-01 to 2016-06-30 | $74.0m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2016-06-30 | $3.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2016-06-30 | $3.36bn | us-gaap:Assets |
| Total liabilities | at 2016-06-30 | $1.59bn | us-gaap:Liabilities |
| Shareholders' equity | at 2016-06-30 | $1.70bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 61,902 characters.

*The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this Report. Some of the statements we make in this section are forward-looking statements within the meaning of the federal securities laws. For a discussion of forward-looking statements, see the section in this Report entitled “Forward-Looking Statements”. Certain risk factors may cause actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a complete discussion of such risk factors, see the section entitled “Risk Factors” in the Parent Company’s and Operating Partnership’s combined Annual Report on Form 10-K for the year ended December 31, 2015.*

### 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 June 30, 2016 and December 31, 2015, we owned 464 and 445 self-storage facilities, respectively, totaling approximately 32.0 million and 30.4 million rentable square feet, respectively. As of June 30, 2016, we owned facilities in the District of Columbia and the following 22 states: Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois, Indiana, Maryland, Massachusetts, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, Tennessee, Texas, Utah and Virginia. In addition, as of June 30, 2016, we managed 277 facilities for third parties (including 35 facilities containing an aggregate of approximately 2.4 million rentable square feet as part of an unconsolidated real estate venture in which we own a 50% interest, and 67 facilities containing an aggregate of approximately 3.6 million rentable square feet as part of a separate unconsolidated real estate venture in which we own a 10% interest) bringing the total number of facilities which we owned and/or managed to 741. As of June 30, 2016, we managed facilities for third parties in the following 25 states: Alabama, Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Rhode Island, South Carolina, Tennessee, Texas and Virginia.

We derive revenues principally from rents received from customers who rent cubes at our 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 experience seasonal fluctuations in the occupancy levels of our facilities, which are generally slightly higher during the summer months due to increased moving activity.

Our results of operations may be sensitive to changes in overall economic conditions that impact consumer spending, including discretionary spending, as well as to increased bad debts due to recessionary pressures. Adverse economic conditions affecting disposable consumer income, such as employment levels, business conditions, interest rates, tax rates, fuel and energy costs, and other matters could reduce consumer spending or cause consumers to shift their spending to other products and services. A general reduction in the level of discretionary spending or shifts in consumer discretionary spending could adversely affect our growth and profitability.

We continue our focus on maximizing internal growth opportunities and selectively pursuing targeted acquisitions and developments of self-storage 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. Our facilities in Florida, New York, Texas and California provided approximately 18%, 16%, 10% and 8%, respectively, of total revenues for the six months ended June 30, 2016.

### Summary of Critical Accounting Policies and Estimates

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

### Basis of Presentation

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

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

### Self-Storage 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 their respective fair values as estimated by management.

In allocating the purchase price for an acquisition, the Company determines whether the acquisition includes intangible assets or liabilities. The Company allocates a portion of the purchase price to an intangible asset attributable to the value of in-place leases. This intangible asset is generally amortized to expense over the expected remaining term of the respective leases. Substantially all of the leases in place at acquired 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 facility’s basis is recoverable. If a facility’s basis is not considered recoverable, an impairment loss is recorded to the extent the net carrying value of the asset exceeds the fair value. The impairment loss recognized equals the excess of net carrying value over the related fair value of the asset. There were no impairment losses recognized in accordance with these procedures during the six months ended June 30, 2016 and 2015.

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 from 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. The 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 March 2016, the FASB issued Accounting Standard Update (“ASU“) No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which is intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The new guidance allows for entities to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. In addition, the guidance allows employers to withhold shares to satisfy minimum statutory tax withholding requirements up to the employees’ maximum individual tax rate without causing the award to be classified as a liability. The guidance also stipulates that cash paid by an employer to a taxing authority when directly withholding shares for tax-withholding purposes should be classified as a financing activity on the statement of cash flows. The standard is effective on January 1, 2017, however early adoption is permitted. The Company is in the process of evaluating the impact of this new guidance.

In February 2016, the FASB issued ASU No. 2016-02 - Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either financing or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The standard is effective on January 1, 2019, however early adoption is permitted. The Company is in the process of evaluating the impact of this new guidance.

In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which amends the current business combination guidance to require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, as opposed to having to revise prior period information. The standard also requires additional disclosure about the impact on current-period income statement line items of adjustments that would have been recognized in prior periods if prior period information had been revised. The new standard became effective for the Company on January 1, 2016. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position or results of operations as there have been no measurement-period adjustments recorded.

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, an update to the accounting standard relating to the presentation of debt issuance costs. Under the new guidance, debt issuance costs related to a recognized debt liability will be presented on the balance sheet as a direct deduction from the debt liability. In the event that there is not an associated debt liability recorded in the consolidated financial statements, the debt issuance costs will continue to be recorded on the consolidated balance sheet as an asset until the debt liability is recorded. The new standard became effective for the Company on January 1, 2016. The adoption of this guidance did not have a material impact on the

Company’s consolidated financial position or results of operations as the update only related to changes in financial statement presentation.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation – Amendments to the Consolidation Analysis, which amends the current consolidation guidance affecting both the variable interest entity (“VIE”) and voting interest entity (“VOE”) consolidation models. The standard does not add or remove any of the characteristics in determining if an entity is a VIE or VOE, but rather enhances the way the Company assesses some of these characteristics. The new standard became effective for the Company on January 1, 2016. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position or results of operations as none of its existing consolidation conclusions were changed.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance under GAAP when it becomes effective. The new standard will be effective for the Company beginning on January 1, 2018, however early application beginning on January 1, 2017 is permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method nor has it determined the effect of the standard on its financial statements and related disclosures.

### 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. We consider our 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 facility to be stabilized once it has achieved an occupancy rate that we believe, based on our assessment of market-specific data, is representative of similar self-storage assets in the applicable market for a full year measured as of the most recent January 1 and has not been significantly damaged by natural disaster or undergone significant renovation. We believe that same-store results are useful to investors in evaluating our performance because they provide information relating to changes in facility-level operating performance without taking into account the effects of acquisitions, developments or dispositions. At June 30, 2016, we owned 407 same-store facilities and 57 non-same-store facilities. For analytical presentation, all percentages are calculated using the numbers presented in the financial statements contained in this Report.

### Acquisition and Development Activities

The comparability of our results of operations is affected by the timing of acquisition and disposition activities during the periods reported. At June 30, 2016 and 2015, we owned 464 and 433 self-storage facilities and related assets, respectively. The following table summarizes the change in number of owned self-storage facilities from January 1, 2015 through June 30, 2016:

|  | 2016 | 2015 |
| --- | ---: | ---: |
| Balance - January 1 | 445 | 421 |
| Facilities acquired | 10 | 7 |
| Facilities developed | 1 | — |
| Balance - March 31 | 456 | 428 |
| Facilities acquired | 7 | 4 |
| Facilities developed | 1 | 1 |
| Balance - June 30 | 464 | 433 |
| Facilities acquired |  | 5 |
| Balance - September 30 |  | 438 |
| Facilities acquired |  | 13 |
| Facilities developed |  | 2 |
| Facilities sold |  | (8) |
| Balance - December 31 |  | 445 |

37

### Comparison of the three months ended June 30, 2016 to the three months ended June 30, 2015 (in thousands)

| REVENUES: | Same-Store Property Portfolio 2016 | 2015 (Decrease) | Increase/% | Properties Change 2016 | Non Same-Store 2015 | Eliminations 2016 | Other/ | 2015 | Total Portfolio 2016 2015 | (Decrease) | Increase/% | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Rental income | $100,491 | $92,943 | $7,548 | 8.1% | $11,047 | $3,860 | $— | $— | $111,538 | $96,803 | $14,735 | 15.2% |
| Other property related income | 10,647 | 10,184 | 463 | 4.5% | 1,294 | 497 | 702 | 704 | 12,643 | 11,385 | 1,258 | 11.0% |
| Property management fee income | — | — | — | —% | — | — | 2,345 | 1,683 | 2,345 | 1,683 | 662 | 39.3% |
| Total revenues | 111,138 | 103,127 | 8,011 | 7.8% | 12,341 | 4,357 | 3,047 | 2,387 | 126,526 | 109,871 | 16,655 | 15.2% |
| OPERATING EXPENSES: |  |  |  |  |  |  |  |  |  |  |  |  |
| Property operating expenses | 32,096 | 31,938 | 158 | 0.5% | 4,710 | 1,899 | 4,801 | 4,373 | 41,607 | 38,210 | 3,397 | 8.9% |
| NET OPERATING INCOME (LOSS): | 79,042 | 71,189 | 7,853 | 11.0% | 7,631 | 2,458 | (1,754) | (1,986) | 84,919 | 71,661 | 13,258 | 18.5% |
| Property count | 407 | 407 |  |  | 57 | 26 |  |  | 464 | 433 |  |  |
| Total square footage | 27,803 | 27,803 |  |  | 4,156 | 1,755 |  |  | 31,959 | 29,558 |  |  |
| Period End Occupancy (1) | 94.3% | 93.8% |  |  | 75.0% | 75.4% |  |  | 91.8% | 92.7% |  |  |
| Period Average Occupancy (2) | 93.6% | 92.8% |  |  |  |  |  |  |  |  |  |  |
| Realized annual rent per occupied sq. ft. (3) | $15.44 | $14.40 |  |  |  |  |  |  |  |  |  |  |
| Depreciation and amortization |  |  |  |  |  |  |  |  | 41,448 | 38,086 | 3,362 | 8.8% |
| General and administrative |  |  |  |  |  |  |  |  | 7,891 | 7,114 | 777 | 10.9% |
| Acquisition related costs |  |  |  |  |  |  |  |  | 2,563 | 753 | 1,810 | 240.4% |
| Subtotal |  |  |  |  |  |  |  |  | 51,902 | 45,953 | 5,949 | 12.9% |
| OPERATING INCOME |  |  |  |  |  |  |  |  | 33,017 | 25,708 | 7,309 | 28.4% |
| OTHER (EXPENSE) INCOME |  |  |  |  |  |  |  |  |  |  |  |  |
| Interest: |  |  |  |  |  |  |  |  |  |  |  |  |
| Interest expense on loans |  |  |  |  |  |  |  |  | (12,200) | (10,868) | (1,332) | (12.3)% |
| Loan procurement amortization expense |  |  |  |  |  |  |  |  | (611) | (659) | 48 | 7.3% |
| Equity in losses of real estate ventures |  |  |  |  |  |  |  |  | (724) | (100) | (624) | (624.0)% |
| Other |  |  |  |  |  |  |  |  | 901 | (208) | 1,109 | 533.2% |
| Total other expense |  |  |  |  |  |  |  |  | (12,634) | (11,835) | (799) | (6.8)% |
| NET INCOME |  |  |  |  |  |  |  |  | 20,383 | 13,873 | 6,510 | 46.9% |
| NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS |  |  |  |  |  |  |  |  |  |  |  |  |
| Noncontrolling interests in the Operating Partnership |  |  |  |  |  |  |  |  | (227) | (161) | (66) | (41.0)% |
| Noncontrolling interests in subsidiaries |  |  |  |  |  |  |  |  | 268 | 12 | 256 | (2,133.3)% |
| NET INCOME ATTRIBUTABLE TO THE COMPANY |  |  |  |  |  |  |  |  | $20,424 | $13,724 | $6,700 | 48.8% |
| Distribution to preferred shareholders |  |  |  |  |  |  |  |  | (1,502) | (1,502) | — | —% |
| NET INCOME ATTRIBUTABLE TO THE COMPANY’S COMMON SHAREHOLDERS |  |  |  |  |  |  |  |  | $18,922 | $12,222 | $6,700 | 54.8% |

(1) Represents occupancy at June 30th of the respective period.

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

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

#### Revenues

Rental income increased from $96.8 million during the three months ended June 30, 2015 to $111.5 million during the three months ended June 30, 2016, an increase of $14.7 million, or 15.2%. The increase in same-store revenue was due primarily to an increase in average occupancy of 80 basis points and higher rental rates. Realized annual rent per square foot on our same-store portoflio increased 7.2% as a result of higher asking rates for new and existing customers and lower levels of promotional discounts for the three months ended June 30, 2016 as compared to the three months ended June 30, 2015. The remaining increase is primarily attributable to $7.2 million of additional income from the facilities acquired in 2015 and 2016 included in our non-same store portfolio.

Other property related income increased from $11.4 million during the three months ended June 30, 2015 to $12.6 million during the three months ended June 30, 2016, an increase of $1.3 million, or 11.0%. This increase is primarily attributable to $0.7 million of increased tenant insurance commissions and $0.4 million of increased fee income for the three months ended June 30, 2016 as compared to the three months ended June 30, 2015.

Property management fee income increased from $1.7 million during the three months ended June 30, 2015 to $2.3 million during the three months ended June 30, 2016, an increase of 0.7 million, or 39.3%. This increase is attributable to an increase in management fees related to the third-party management business resulting from more stores under management and higher revenue at managed stores.

#### Operating Expenses

Property operating expenses increased from $38.2 million during the three months ended June 30, 2015 to $41.6 million during the three months ended June 30, 2016, an increase of $3.4 million, or 8.9%. This increase is attributable to $2.8 million of increased expenses associated with newly acquired facilities and the $0.2 million increase, or 0.5%, in property operating expenses on the same-store portfolio primarily due to increases in real estate taxes.

Depreciation and amortization increased from $38.1 million during the three months ended June 30, 2015 to $41.4 million during the three months ended June 30, 2016, an increase of $3.4 million, or 8.8%. This increase is primarily attributable to depreciation and amortization expenses related to the 2015 and 2016 acquisitions.

General and administrative expenses increased from $7.1 million during the three months ended June 30, 2015 to $7.9 million, an increase of $0.8 million, or 10.9%. The change is attributable to $0.8 million of increased payroll expenses resulting from additional employee headcount to support our growth.

Acquisition-related costs increased from $0.8 million during the three months ended June 30, 2015 to $2.6 million during the three months ended June 30, 2016. Acquisition costs are non-recurring and fluctuate based on quarterly investment activity.

#### Other (Expense) Income

Interest expense increased from $10.9 million during the three months ended June 30, 2015 to $12.2 million during the three months ended June 30, 2016, an increase of $1.3 million, or 12.3%. The increase is primarily attributable to a higher amount of outstanding debt during the three months ended June 30, 2016 as compared to the three months ended June 30, 2015. The average debt balance increased $196.8 million to $1.4 billion during the three months ended June 30, 2016 as compared to $1.2 billion during the three months ended June 30, 2015 as the result of borrowings to fund a portion of the Company’s acquisition activity.

Other (expense) income increased $1.1 million from the three months ended June 30, 2015 to the three months ended June 30, 2015 primarily due to acquisition fees earned in conjunction with HVP’s acquisition of 67 self storage facilities.

### Comparison of the six months ended June 30, 2016 to the six months ended June 30, 2015 (in thousands)

| REVENUES: | Same-Store Property Portfolio 2016 | 2015 | Increase/% (Decrease) | Change | Non Same-Store Properties 2016 | 2015 | Other/ Eliminations 2016 | 2015 | Total Portfolio 2016 | 2015 | Increase/% (Decrease) | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Rental income | $197,059 | $181,884 | $15,175 | 8.3% | $19,476 | $6,475 | $— | $— | $216,535 | $188,359 | $28,176 | 15.0% |
| Other property related income | 20,720 | 19,659 | 1,061 | 5.4% | 2,160 | 815 | 1,526 | 1,454 | 24,406 | 21,928 | 2,478 | 11.3% |
| Property management fee income | — | — | — | —% | — | — | 4,456 | 3,272 | 4,456 | 3,272 | 1,184 | 36.2% |
| Total revenues | 217,779 | 201,543 | 16,236 | 8.1% | 21,636 | 7,290 | 5,982 | 4,726 | 245,397 | 213,559 | 31,838 | 14.9% |
| OPERATING EXPENSES: |  |  |  |  |  |  |  |  |  |  |  |  |
| Property operating expenses | 63,914 | 64,073 | (159) | (0.2)% | 8,529 | 3,198 | 9,383 | 8,370 | 81,826 | 75,641 | 6,185 | 8.2% |
| NET OPERATING INCOME (LOSS): | 153,865 | 137,470 | 16,395 | 11.9% | 13,107 | 4,092 | (3,401) | (3,644) | 163,571 | 137,918 | 25,653 | 18.6% |
| Property count | 407 | 407 |  |  | 57 | 26 |  |  | 464 | 433 |  |  |
| Total square footage | 27,803 | 27,803 |  |  | 4,156 | 1,755 |  |  | 31,959 | 29,558 |  |  |
| Period End Occupancy (1) | 94.3% | 93.8% |  |  | 75.0% | 75.4% |  |  | 91.8% | 92.7% |  |  |
| Period Average Occupancy (2) | 92.8% | 91.6% |  |  |  |  |  |  |  |  |  |  |
| Realized annual rent per occupied sq. ft. (3) | $15.28 | $14.28 |  |  |  |  |  |  |  |  |  |  |
| Depreciation and amortization |  |  |  |  |  |  |  |  | 80,804 | 75,981 | 4,823 | 6.3% |
| General and administrative |  |  |  |  |  |  |  |  | 16,119 | 14,287 | 1,832 | 12.8% |
| Acquisition related costs |  |  |  |  |  |  |  |  | 4,905 | 1,263 | 3,642 | 288.4% |
| Subtotal |  |  |  |  |  |  |  |  | 101,828 | 91,531 | 10,297 | 11.2% |
| OPERATING INCOME |  |  |  |  |  |  |  |  | 61,743 | 46,387 | 15,356 | 33.1% |
| OTHER (EXPENSE) INCOME |  |  |  |  |  |  |  |  |  |  |  |  |
| Interest: |  |  |  |  |  |  |  |  |  |  |  |  |
| Interest expense on loans |  |  |  |  |  |  |  |  | (24,284) | (21,925) | (2,359) | (10.8)% |
| Loan procurement amortization expense |  |  |  |  |  |  |  |  | (1,216) | (1,205) | (11) | (0.9)% |
| Equity in losses of real estate ventures |  |  |  |  |  |  |  |  | (1,236) | (338) | (898) | (265.7)% |
| Other |  |  |  |  |  |  |  |  | 1,231 | (524) | 1,755 | 334.9% |
| Total other expense |  |  |  |  |  |  |  |  | (25,505) | (23,992) | (1,513) | (6.3)% |
| NET INCOME |  |  |  |  |  |  |  |  | 36,238 | 22,395 | 13,843 | 61.8% |
| NET (INCOME) LOSS ATTRIBUTABLE TO |  |  |  |  |  |  |  |  |  |  |  |  |
| NONCONTROLLING INTERESTS |  |  |  |  |  |  |  |  |  |  |  |  |
| Noncontrolling interests in the Operating Partnership |  |  |  |  |  |  |  |  | (399) | (252) | (147) | (58.3)% |
| Noncontrolling interests in subsidiaries |  |  |  |  |  |  |  |  | 335 | 15 | 320 | (2,133.3)% |
| NET INCOME ATTRIBUTABLE TO THE COMPANY |  |  |  |  |  |  |  |  | $36,174 | $22,158 | $14,016 | 63.3% |
| Distribution to preferred shareholders |  |  |  |  |  |  |  |  | (3,004) | (3,004) | — | —% |
| NET INCOME ATTRIBUTABLE TO THE COMPANY’S COMMON SHAREHOLDERS |  |  |  |  |  |  |  |  | $33,170 | $19,154 | $14,016 | 73.2% |

(1) Represents occupancy at June 30th of the respective period.

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

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

#### Revenues

Rental income increased from $188.4 million during the six months ended June 30, 2015 to $216.5 million during the six months ended June 30, 2016, an increase of $28.2 million, or 15.0%. The increase in same-store revenue was due primarily to an increase in average occupancy of 120 basis points and higher rental rates. Realized annual rent per square foot on our same-store portfolio increased 7.0% as a result of higher asking rates for new and existing customers and lower levels of promotional discounts for the six months ended June 30, 2016 as compared to the six months ended June 30, 2015. The remaining increase is primarily attributable to $13.0 million of additional income from the facilities acquired in 2015 and 2016 included in our non-same store portfolio.

Other property related income increased from $21.9 million during the six months ended June 30, 2015 to $24.4 million during the six months ended June 30, 2016, an increase of $2.5 million, or 11.3%. The increase is primarily attributable to $1.6 million of increased tenant insurance commissions and $0.8 million of increased fee income for the six months ended June 30, 2016 as compared to the six months ended June 30, 2015.

Property management fee income increased from $3.3 million during the six months ended June 30, 2015 to $4.5 million during the six months ended June 30, 2016, an increase of $1.2 million, or 36.2%. This increase is attributable to an increase in management fees related to the third-party management business resulting from more stores under management and higher revenue at managed stores.

#### Operating Expenses

Property operating expenses increased from $75.6 million during the six months ended June 30, 2015 to $81.8 million during the six months ended June 30, 2016, an increase of $6.2 million, or 8.2%. This increase is attributable to $5.3 million of increased expenses associated with newly acquired facilities and $1.0 million of increased costs to manage our portfolio and support our growth, offset by a $0.2 million decrease in property operating expenses on the same-store portfolio primarily due to reduced snow removal costs.

Depreciation and amortization increased from $76.0 million during the six months ended June 30, 2015 to $80.8 million during the six months ended June 30, 2016, an increase of $4.8 million, or 6.3%. This increase is primarily attributable to depreciation and amortization expenses related to the 2015 and 2016 acquisitions.

General and administrative expenses increased from $14.3 million during the six months ended June 30, 2015 to $16.1 million, an increase of $1.8 million, or 12.8%. The change is primarily attributable to $1.5 million of increased payroll expenses resulting from additional employee headcount to support our growth.

Acquisition-related costs increased from $1.3 million during the six months ended June 30, 2015 to $4.9 million during the six months ended June 30, 2016. Acquisition costs are non-recurring and fluctuate based on quarterly investment activity.

#### Other (Expense) Income

Interest expense increased from $21.9 million during the six months ended June 30, 2015 to $24.3 million during the six months ended June 30, 2016, an increase of $2.4 million, or 10.8%. The increase is primarily attributable to a higher amount of outstanding debt during the six months ended June 30, 2016 as compared to the six months ended June 30, 2015. The average debt balance increased $154.5 million to $1.3 billion during the six months ended June 30, 2016 as compared to $1.2 billion during the six months ended June 30, 2015 as the result of borrowings to fund a portion of the Company’s acquisition activity.

Other (expense) income increased $1.8 million from the six months ended June 30, 2015 to the six months ended June 30, 2015 due to acquisition fees earned in conjunction with HVP’s acquisition of 67 self storage facilities.

### Cash Flows

### Comparison of the six months ended June 30, 2016 to the six months ended June 30, 2015

A comparison of cash flow from operating, investing and financing activities for the six months ended June 30, 2016 and 2015 is as follows (in thousands):

*(in thousands)*

| Net cash provided by (used in): | Six Months Ended June 30, 2016 | 2015 | Change |
| --- | ---: | ---: | ---: |
| Operating activities | $123,977 | $100,688 | $23,289 |
| Investing activities | $(347,067) | $(135,690) | $(211,377) |
| Financing activities | $163,644 | $35,268 | $128,376 |

Cash provided by operating activities for the six months ended June 30, 2016 and 2015 was $124.0 million and $100.7 million, respectively, reflecting an increase of $23.3 million. Our principal source of cash flow is from the operation of our facilities. During the six months ended June 30, 2016, our increased cash flow from operating activities was primarily attributable to our 2016 and 2015 acquisitions and increased net operating income levels on the same-store portfolio in the 2016 period as compared to the 2015 period.

Cash used in investing activities increased from $135.7 million for the six months ended June 30, 2015 to $347.1 million for the six months ended June 30, 2016, reflecting an increase of $211.4 million. The change is primarily driven by an increase in cash used for acquisitions of self-storage facilities. Cash used during the six months ended June 30, 2016, relates to the acquisition of 17 facilities for an aggregate purchase price of $270.9 million, inclusive of $6.5 million of assumed debt, while cash used in investing activities during the six months ended June 30, 2015 relates to the acquisition of 11 facilities for an aggregate purchase price of $93.0 million, inclusive of $2.7 million of assumed debt. The change is also driven by an increase in cash used for development costs resulting from the acquisition of a development property by a consolidated joint venture for $67.2 million, inclusive of $35.0 million of assumed debt.

For the six months ended June 30, 2016 and 2015, cash provided by financing activities was $163.6 million and $35.3 million, respectively, reflecting an increase of $128.4 million. This change is primarily a result of a $66.4 million net increase in revolving credit facility borrowings during the six months ended June 30, 2016 compared to the six months ended June 30, 2015 to fund a portion of the Company’s growth. There was also a $41.8 million decrease in principal payments on mortgage loans, resulting primarily from the repayment of two secured loans during the six months ended June 30, 2016 for $12.5 million compared to one repayment during the six months ended June 30, 2015 for $52.9 million. Additionally, net proceeds from the issuance of common shares under our “at-the-market” equity program increased $32.1 million during the six months ended June 30, 2016 compared to the same period in 2015. These increases were offset by the $21.3 million increase in cash distributions paid to common shareholders, preferred shareholders and noncontrolling interests in the Operating Partnership during the six months ended June 30, 2016 compared to the six months ended June 30, 2015, resulting from the increase in the common dividend per share and number of shares outstanding.

### Liquidity and Capital Resources

### Liquidity Overview

Our cash flow from operations has historically been one of our primary sources of liquidity used to fund debt service, distributions and capital expenditures. We derive substantially all of our revenue from customers who lease space from us at our facilities and fees earned from managing 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 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. For the remainder of the 2016 fiscal year, we expect recurring capital expenditures to be approximately $8.0 million to $13.0 million, planned capital improvements and facility upgrades to be approximately $3.0 million to $8.0 million and costs associated with the development of new facilities to be approximately $29.0 million to $34.0 million. Our currently scheduled principal payments on debt, including borrowings outstanding on the Credit Facility and Term Loan Facility, are approximately $23.6 million for the remainder of 2016.

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

Our liquidity needs beyond 2016 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 our long-term liquidity requirements, including the incurrence of additional debt and the issuance of additional equity. However, we cannot provide any assurance that this will be the case. Our ability to incur additional debt will be dependent on a number of factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions that may be imposed by lenders. In addition, dislocation in the United States debt markets may significantly reduce the availability and increase the cost of long-term debt capital, including conventional mortgage financing and commercial mortgage-backed securities financing. There can be no assurance that such capital will be readily available in the future. Our ability to access the equity capital markets will be dependent on a number of factors as well, including general market conditions for REITs and market perceptions about us.

As of June 30, 2016, we had approximately $3.4 million in available cash and cash equivalents. In addition, we had approximately $350.0 million of availability for borrowings under our Credit Facility.

### Unsecured Senior Notes

On October 26, 2015, the Operating Partnership issued $250.0 million in aggregate principal amount of 4.00% unsecured senior notes due November 15, 2025 (the “2025 Senior Notes”). On December 17, 2013, the Operating Partnership issued $250.0 million in aggregate principal amount of 4.375% unsecured senior notes due December 15, 2023 (the “2023 Senior Notes”). On June 26, 2012, the Operating Partnership issued $250.0 million in aggregate principal amount of 4.80% unsecured senior notes due July 15, 2022 (the “2022 Senior Notes”). The 2025 Senior Notes, 2023 Senior Notes, and 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. As of June 30, 2016, the Operating Partnership was in compliance with all of the financial covenants under the Senior Notes.

### Revolving Credit Facility and Unsecured Term Loans

On June 20, 2011, we entered into an unsecured term loan agreement (the “Term Loan Facility”) which consisted of a $100.0 million term loan with a five-year maturity (“Term Loan A”) and a $100.0 million term loan with a seven-year maturity (“Term Loan B”). On December 9, 2011, we entered into a credit facility (the “Credit Facility”) comprised of a $100.0 million unsecured term loan maturing in December 2014 (“Term Loan C”); a $200.0 million unsecured term loan maturing in March 2017 (“Term Loan D”); and a $300.0 million unsecured revolving facility maturing in December 2015 (“Revolver”).

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 date to June 2018 and decreased the pricing of Term Loan A, while Term Loan B remained unchanged by the amendment. With respect to the Credit Facility, among other things, the amendment extended the maturity date to January 2019 and decreased the pricing of Term Loan D. On

August 5, 2014, we further amended the Term Loan Facility to extend the maturity date to January 2020 and decrease the pricing of Term Loan B. On December 17, 2013, we repaid the $100.0 million balance under Term Loan C that was scheduled to mature in December 2014.

Pricing on the Term Loan Facility depends on our unsecured debt credit ratings. At our current Baa2/BBB level, amounts drawn under Term Loan A are priced at 1.30% over LIBOR, while amounts drawn under Term Loan B are priced at 1.15% over LIBOR.

On April 22, 2015, we further amended the Credit Facility with respect to the Revolver. Among other things, the amendment increased the aggregate amount of the Revolver from $300.0 million to $500.0 million, decreased the facility fee from 0.20% to 0.15% and extended the maturity date from June 18, 2017 to April 22, 2020.

Pricing on the Credit Facility depends on our unsecured debt credit ratings. At our current Baa2/BBB level, amounts drawn under the Revolver are priced at 1.25% over LIBOR, inclusive of a facility fee of 0.15%, while amounts drawn under Term Loan D are priced at 1.30% over LIBOR.

We incurred costs of $2.3 million in 2015 in connection with amending the Credit Facility and capitalized such costs as a component of loan procurement costs, net of amortization on the consolidated balance sheet. Additionally, in connection with the amendment, $0.1 million of unamortized costs were written-off. All remaining unamortized costs, along with costs incurred in connection with the amendment, are amortized as an adjustment to interest expense over the remaining term of the modified facilities.

As of June 30, 2016, $200.0 million of unsecured term loan borrowings were outstanding under the Term Loan Facility, $200.0 million of unsecured term loan borrowings were outstanding under the Credit Facility, $150.0 million of unsecured revolving credit facility borrowings were outstanding under the Credit Facility and $350.0 million was available for borrowing under the unsecured revolving portion of the Credit Facility. In connection with a portion of the unsecured borrowings, we had interest rate swaps as of June 30, 2016 that fix 30-day LIBOR (see note 10 to the unaudited consolidated financial statements). As of June 30, 2016, 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 2.41%.

The Term Loan Facility and the term loan under our Credit Facility were fully drawn at June 30, 2016 and no further borrowings may be made under the term loans. Our ability to borrow under the revolving portion of 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 the Parent Company’s common shares in excess of the greater of (i) 95% of funds from operations, and (ii) such amount as may be necessary to maintain the Parent Company’s REIT status.

As of June 30, 2016, we were in compliance with all of our financial covenants and anticipate being in compliance with all of our financial covenants through the terms of the Credit Facility and Term Loan Facility.

### At The Market Equity Program

Pursuant to a previous sales agreement, we had an “at-the-market” equity program that enabled us to sell common shares through a sales agent. On May 7, 2013, we terminated the previous sales agreement with our previous sales agent and entered into separate equity distribution agreements (the “Equity Distribution Agreements”) with a group of sales agents (collectively, the “Sales Agents”). The Equity Distribution Agreements replaced the previous sale agreement and were amended on May 5, 2014, October 2, 2014, and December 30, 2015 to increase the number of common shares authorized for sale through “at-the-market” equity offerings. Pursuant to the Equity Distribution Agreements, as amended, we may sell, from time to time, up to 40.0 million common shares of beneficial interest through the Sales Agents.

During the six months ended June 30, 2016, we sold a total of 2.8 million common shares under the Equity Distribution Agreements at an average sales price of $31.80 per share, resulting in gross proceeds of $89.7 million under the program. We incurred $1.1 million of offering costs in conjunction with the 2016 sales. We used proceeds from the sales conducted during the six months ended June 30, 2016 to fund acquisitions of storage facilities and for general corporate purposes. As of June 30, 2016, 7.4 million common shares remained available for issuance under the Equity Distribution Agreements.

### Recent Developments

Subsequent to June 30, 2016, we acquired two self-storage facilities in Nevada for an aggregate purchase price of approximately $23.2 million.

### Non-GAAP Financial Measures

### NOI

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

We use NOI as a measure of operating performance at each of our 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
- 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) from sales of real estate, gains from remeasurement of investments in real estate ventures, impairments of depreciable assets, and depreciation, which can make periodic and peer analyses of operating performance more difficult. Our computation of FFO may not be comparable to FFO reported by other REITs or real estate companies.

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

### FFO, as adjusted

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

The following table presents a reconciliation of net income to FFO and FFO, as adjusted, for the three and six months ended June 30, 2016 and 2015 (in thousands):

|  | Three Months Ended June 30, 2016 | 2015 | Six Months Ended June 30, 2016 | 2015 |
| --- | ---: | ---: | ---: | ---: |
| **Net income attributable to the Company’s common shareholders** | $18,922 | $12,222 | $33,170 | $19,154 |
| Add (deduct): |  |  |  |  |
| Real estate depreciation and amortization: |  |  |  |  |
| Real property | 40,831 | 37,630 | 79,730 | 75,094 |
| Company’s share of unconsolidated real estate ventures | 2,852 | 1,780 | 5,243 | 3,556 |
| Noncontrolling interests in the Operating Partnership | 227 | 161 | 399 | 252 |
| **FFO attributable to common shareholders and OP unitholders** | $62,832 | $51,793 | $118,542 | $98,056 |
| Add: |  |  |  |  |
| Acquisition related costs (1) | 2,604 | 753 | 5,082 | 1,263 |
| **FFO attributable to common shareholders and OP unitholders, as adjusted** | $65,436 | $52,546 | $123,624 | $99,319 |
| Weighted-average diluted shares and units outstanding | 181,430 | 170,486 | 180,356 | 169,913 |

(1) Acquisition related costs for the six months ended June 30, 2016 include $0.2 million of acquisition related costs that are included in the Company’s share of equity in losses of real estate ventures.

### Off-Balance Sheet Arrangements

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

## Market risk

As filed, 3,058 characters.

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

### Market Risk

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

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

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

As of June 30, 2016, our consolidated debt consisted of $1.2 billion 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. Additionally, as of June 30, 2016, there were $150.0 million and $100.0 million of outstanding credit facility and unsecured term loan borrowings, respectively, subject to floating rates. Changes in market interest rates have different impacts on the fixed and variable rate portions of our debt portfolio. A change in market interest rates on the fixed portion of the debt portfolio impacts the net financial instrument position, but has no impact on interest incurred or cash flows. A change in market interest rates on the variable portion of the debt portfolio impacts the interest incurred and cash flows, but does not impact the net financial instrument position.

If market interest rates on our variable rate debt increase by 100 basis points, the increase in annual interest expense on our variable rate debt would decrease future earnings and cash flows by approximately $2.5 million a year. If market interest rates on our variable rate debt decrease by 100 basis points, the decrease in interest expense on our variable rate debt would increase future earnings and cash flows by approximately $2.5 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 $61.9 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 $73.7 million.

## Controls and procedures

As filed, 3,290 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 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 Jul 29, 2016.
Source: SEC EDGAR, the filing index for accession 0001298675-16-000007. Last ingested by Listed: Nov 7, 2026, 12:41 ET. No prices; not investment advice.