# CubeSmart: Form 10-Q for the period ended Mar 31, 2019

- Company: [CubeSmart](/companies/cube.md) (CIK 1298675)
- Form: 10-Q
- Filed: 2019-04-26
- Accepted by EDGAR: Apr 26, 2019, 16:43 ET
- Period: 2019-03-31
- Accession: 0001298675-19-000015
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1298675/000129867519000015/cube-20190331x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1298675/000129867519000015/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-01-01 to 2019-03-31 | $152.8m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2019-01-01 to 2019-03-31 | $51.4m | us-gaap:CostOfRevenue |
| Diluted EPS | 3 months, 2019-01-01 to 2019-03-31 | $0.19 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-01-01 to 2019-03-31 | $0.19 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-01-01 to 2019-03-31 | 187,984,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2019-01-01 to 2019-03-31 | $75.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Dividends paid | 3 months, 2019-01-01 to 2019-03-31 | $60.0m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2019-03-31 | $3.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2019-03-31 | $3.81bn | us-gaap:Assets |
| Total liabilities | at 2019-03-31 | $2.05bn | us-gaap:Liabilities |
| Shareholders' equity | at 2019-03-31 | $1.70bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 44,581 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, 2018.*

### Overview

We are an integrated self-storage real estate company, and as such we have in-house capabilities in the operation, design, development, leasing, management and acquisition of self-storage properties. The Parent Company’s operations are conducted solely through the Operating Partnership and its subsidiaries. The Parent Company has elected to be taxed as a REIT for U.S. federal income tax purposes. As of March 31, 2019 and December 31, 2018, we owned 494 and 493 self-storage properties, respectively, totaling approximately 34.7 million rentable square feet. As of March 31, 2019, we owned stores in the District of Columbia and the following 23 states: Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois, Indiana, Maryland, Massachusetts, Minnesota, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, Tennessee, Texas, Utah and Virginia. In addition, as of March 31, 2019, we managed 619 stores for third parties (including 151 stores containing an aggregate of approximately 9.1 million rentable square feet as part of five separate unconsolidated real estate ventures) bringing the total number of stores which we owned and/or managed to 1,113. As of March 31, 2019, we managed stores for third parties in the District of Columbia and the following 35 states: Alabama, Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington and Wisconsin.

We derive revenues principally from rents received from customers who rent cubes at our self-storage properties under month-to-month leases. Therefore, our operating results depend materially on our ability to retain our existing customers and lease our available self-storage cubes to new customers while maintaining and, where possible, increasing our pricing levels. In addition, our operating results depend on the ability of our customers to make required rental payments to us. Our approach to the management and operation of our stores combines centralized marketing, revenue management and other operational support with local operations teams that provide market-level oversight and 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 stores, which are generally slightly higher during the summer months due to increased moving activity.

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

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

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

Our self-storage properties are located in major metropolitan and suburban areas and have numerous customers per store. No single customer represents a significant concentration of our revenues. Our stores in Florida, New York, Texas and California provided approximately 16%, 16%, 10% and 8%, respectively, of total revenues for the three months ended March 31, 2019.

### Summary of Critical Accounting Policies and Estimates

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

### Basis of Presentation

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

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

### Self-Storage Properties

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

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

Long-lived assets classified as “held for use” are reviewed for impairment when events and circumstances such as declines in occupancy and operating results indicate that there may be an impairment. The carrying value of these long-lived assets is compared to the undiscounted future net operating cash flows, plus a terminal value, attributable to the assets to determine if the store’s basis is recoverable. If a store’s basis is not considered recoverable, an impairment loss is recorded to the extent the net carrying value of the asset exceeds the fair value. The impairment loss recognized equals the excess of net carrying value over the related fair value of the asset. There were no impairment losses recognized in accordance with these procedures during the three months ended March 31, 2019 and 2018.

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

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

### Investments in Unconsolidated Real Estate Ventures

The Company accounts for its investments in unconsolidated real estate ventures under the equity method of accounting when it is determined that the Company has the ability to exercise significant influence over the venture. Under the equity method, investments in unconsolidated real estate ventures are recorded initially at cost, as investments in real estate entities, and subsequently adjusted for equity in earnings (losses), cash contributions, less distributions and impairments. On a periodic basis, management also assesses whether there are any indicators that the carrying value of the Company’s investments in unconsolidated real estate entities may be other than temporarily impaired. An investment is impaired only if the fair value of the investment, as estimated by management, is less than the carrying value of the investment and the decline is other than temporary. To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the investment over the fair value of the investment, as estimated by management. The determination as to whether impairment exists requires significant management judgment about the fair value of its ownership interest. Fair value is determined through various valuation techniques, including but not limited to, discounted cash flow models, quoted market values and third party appraisals. There were no impairment losses related to the Company’s investments in unconsolidated real estate ventures recognized during the three months ended March 31, 2019 and 2018.

### Recent Accounting Pronouncements

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

### Results of Operations

The following discussion of our results of operations should be read in conjunction with the consolidated financial statements and the accompanying notes thereto. Historical results set forth in the consolidated statements of operations reflect only the existing stores and should not be taken as indicative of future operations. We consider our same-store portfolio to consist of only those stores owned and operated on a stabilized basis at the beginning and at the end of the applicable periods presented. We consider a store to be stabilized once it has achieved an occupancy rate that we believe, based on our assessment of market-specific data, is representative of similar self-storage assets in the applicable market for a full year measured as of the most recent January 1 and has not been significantly damaged by natural disaster or undergone significant renovation. We believe that same-store results are useful to investors in evaluating our performance because they provide information relating to changes in store-level operating performance without taking into account the effects of acquisitions, developments or dispositions. As of March 31, 2019, we owned 468 same-store properties and 26 non-same-store properties. For analytical presentation, all percentages are calculated using the numbers presented in the financial statements contained in this Report.

### Acquisition and Development Activities

The comparability of our results of operations is affected by the timing of acquisition and disposition activities during the periods reported. As of March 31, 2019 and 2018, we owned 494 and 485 self-storage properties and related assets, respectively. The following table summarizes the change in number of owned stores from January 1, 2018 through March 31, 2019:

|  | 2019 | 2018 |
| --- | ---: | ---: |
| Balance - January 1 | 493 | 484 |
| Stores acquired | 1 | 1 |
| Balance - March 31 | 494 | 485 |
| Stores acquired |  | 1 |
| Balance - June 30 |  | 486 |
| Stores acquired |  | 3 |
| Stores developed |  | 1 |
| Balance - September 30 |  | 490 |
| Stores acquired |  | 5 |
| Stores sold |  | (2) |
| Balance - December 31 |  | 493 |

36

### Comparison of the three months ended March 31, 2019 to the three months ended March 31, 2018 (in thousands)

| Non Same-Store Same-Store Property Portfolio Properties Increase/% 2019 2018 (Decrease) Change 2019 REVENUES: | 2018 | Other/ Eliminations 2019 | 2018 | Total Portfolio 2019 | 2018 | Increase/% (Decrease) | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Rental income $124,247 $121,177 $3,070 2.5% $7,345 | $2,984 | $— | $— | $131,592 | $124,161 | $7,431 | 6.0% |
| Other property related income 12,985 12,576 409 3.3% 779 | 408 | 1,911 | 1,263 | 15,675 | 14,247 | 1,428 | 10.0% |
| Property management fee income — — — 0.0% — | — | 5,578 | 4,469 | 5,578 | 4,469 | 1,109 | 24.8% |
| Total revenues 137,232 133,753 3,479 2.6% 8,124 | 3,392 | 7,489 | 5,732 | 152,845 | 142,877 | 9,968 | 7.0% |
| OPERATING EXPENSES: |  |  |  |  |  |  |  |
| Property operating expenses 40,995 40,099 896 2.2% 3,413 | 1,736 | 7,017 | 6,919 | 51,425 | 48,754 | 2,671 | 5.5% |
| NET OPERATING INCOME (LOSS): 96,237 93,654 2,583 2.8% 4,711 | 1,656 | 472 | (1,187) | 101,420 | 94,123 | 7,297 | 7.8% |
| Store count 468 468 26 | 17 |  |  | 494 | 485 |  |  |
| Total square footage 32,449 32,449 2,234 | 1,390 |  |  | 34,683 | 33,839 |  |  |
| Period End Occupancy (1) 92.1% 92.1% 62.3% | 47.8% |  |  | 90.2% | 90.3% |  |  |
| Period Average Occupancy (2) 91.5% 91.5% |  |  |  |  |  |  |  |
| Realized annual rent per occupied sq. ft. (3) $16.74 $16.32 |  |  |  |  |  |  |  |
| Depreciation and amortization |  |  |  | 38,442 | 34,966 | 3,476 | 9.9% |
| General and administrative |  |  |  | 9,147 | 8,744 | 403 | 4.6% |
| Subtotal |  |  |  | 47,589 | 43,710 | 3,879 | 8.9% |
| OTHER (EXPENSE) INCOME |  |  |  |  |  |  |  |
| Interest: |  |  |  |  |  |  |  |
| Interest expense on loans |  |  |  | (17,517) | (15,155) | (2,362) | (15.6)% |
| Loan procurement amortization expense |  |  |  | (624) | (579) | (45) | (7.8)% |
| Equity in earnings (losses) of real estate ventures |  |  |  | 261 | (184) | 445 | 241.8% |
| Other |  |  |  | (165) | 304 | (469) | (154.3)% |
| Total other expense |  |  |  | (18,045) | (15,614) | (2,431) | (15.6)% |
| NET INCOME |  |  |  | 35,786 | 34,799 | 987 | 2.8% |
| NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS |  |  |  |  |  |  |  |
| Noncontrolling interests in the Operating Partnership |  |  |  | (358) | (383) | 25 | 6.5% |
| Noncontrolling interests in subsidiaries |  |  |  | 70 | 7 | 63 | 900.0% |
| NET INCOME ATTRIBUTABLE TO THE COMPANY’S COMMON SHAREHOLDERS |  |  |  | $35,498 | $34,423 | $1,075 | 3.1% |

(1) Represents occupancy at March 31st 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 $124.2 million during the three months ended March 31, 2018 to $131.6 million during the three months ended March 31, 2019, an increase of $7.4 million, or 6.0%. The increase in same-store rental income was due primarily to higher rental rates. Realized annual rent per square foot on our same-store portfolio increased 2.6% as a result of higher asking rates for new and existing customers for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. The remaining increase is primarily attributable to $4.4 million of additional rental income from the stores acquired or opened in 2018 and 2019 included in our non-same store portfolio.

Other property related income increased from $14.2 million during the three months ended March 31, 2018 to $15.7 million during the three months ended March 31, 2019, an increase of $1.4 million, or 10.0%. The $0.4 million increase in same-store other property related income is mainly attributable to increased customer insurance participation. The remainder of the increase is attributable to $0.4 million of additional other property related income derived from the stores acquired or opened in 2018 and 2019 included in our non-same store portfolio and $0.6 million resulting primarily from increased customer insurance participation at our managed stores.

Property management fee income increased from $4.5 million during the three months ended March 31, 2018 to $5.6 million during the three months ended March 31, 2019, an increase of $1.1 million, or 24.8%. This increase was attributable to an increase in management fees related to the third-party management business resulting from more stores under management (619 stores as of March 31, 2019 compared to 496 stores as of March 31, 2018) and higher revenue at these managed stores.

#### Operating Expenses

Property operating expenses increased from $48.8 million during the three months ended March 31, 2018 to $51.4 million during the three months ended March 31, 2019, an increase of $2.7 million, or 5.5%. This increase was primarily attributable to a $1.7 million increase in costs associated with newly acquired or developed stores and a $0.9 million increase in property operating expenses on the same-store portfolio primarily due to higher property taxes and payroll expenses resulting from additional employee headcount to support our growth.

Depreciation and amortization increased from $35.0 million during the three months ended March 31, 2018 to $38.4 million during the three months ended March 31, 2019, an increase of $3.5 million, or 9.9%. This increase is primarily attributable to depreciation and amortization expense related to the 2018 and 2019 property acquisitions.

#### Other (Expense) Income

Interest expense increased from $15.2 million during the three months ended March 31, 2018 to $17.5 million during the three months ended March 31, 2019, an increase of $2.4 million, or 15.6%. The increase is attributable to a higher amount of outstanding debt during the three months ended March 31, 2019 as compared to the three months ended March 31, 2018, and higher interest rates during the 2019 period. The average outstanding debt balance increased $130.3 million to $1.8 billion during the three months ended March 31, 2019 as compared to $1.7 billion during the three months ended March 31, 2018 as the result of borrowings to fund a portion of the Company’s acquisition activity. The weighted average effective interest rate on our outstanding debt increased from 3.87% for the three months ended March 31, 2018 to 4.10% for the three months ended March 31, 2019.

### Cash Flows

### Comparison of the three months ended March 31, 2019 to the three months ended March 31, 2018

A comparison of cash flow from operating, investing and financing activities for the three months ended March 31, 2019 and 2018 is as follows:

*(in thousands)*

| Net cash provided by (used in): | Three Months Ended March 31, 2019 | 2018 | Change |
| --- | ---: | ---: | ---: |
| Operating activities | $75,458 | $66,132 | $9,326 |
| Investing activities | $(79,033) | $(57,154) | $(21,879) |
| Financing activities | $3,634 | $(9,154) | $12,788 |

Cash provided by operating activities for the three months ended March 31, 2019 and 2018 was $75.5 million and $66.1 million, respectively, reflecting an increase of $9.3 million. Our increased cash flow from operating activities was primarily attributable to our 2018 and 2019 acquisitions and increased net operating income levels on the same-store portfolio in the 2019 period as compared to the 2018 period.

Cash used in investing activities increased from $57.2 million for the three months ended March 31, 2018 to $79.0 million for the three months ended March 31, 2019, reflecting an increase of $21.9 million. The change was primarily driven by an increase in cash used for acquisitions of storage properties. Cash used during the three months ended March 31, 2019 related to the acquisition of one store for an aggregate purchase price of $22.0 million, while cash used during the three months ended March 31, 2018 related to the acquisition of one store for an aggregate purchase price of $12.2 million, inclusive of $7.2 million of assumed debt and $4.8 million of OP units issued.

Cash provided by financing activities was $3.6 million during the three months ended March 31, 2019 compared to $9.2 million of cash used in financing activities during the three months ended March 31, 2018, reflecting a change of $12.8 million. This change was primarily the result of a $24.6 million increase in proceeds received from the issuance of common shares, offset by a $5.3 million increase in cash distributions paid to common shareholders and noncontrolling interests in the Operating Partnership during the three months ended March 31, 2019 compared to the three months ended March 31, 2018, resulting from the increase in the common dividend per share and number of shares outstanding.

The change is also impacted by the $5.2 million net cash outlay for the acquisition of a noncontrolling member’s interest in a consolidated joint venture during the three months ended March 31, 2019.

### 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 stores and fees earned from managing stores. 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 properties in which we invest, self-storage properties, are less sensitive than other real estate product types to near-term economic downturns. However, prolonged economic downturns 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 stores, refinancing of certain mortgage indebtedness, interest expense and scheduled principal payments on debt, expected distributions to limited partners and shareholders, capital expenditures and the development of new stores. These funding requirements will vary from year to year, in some cases significantly. For the remainder of the 2019 fiscal year, we expect recurring capital expenditures to be approximately $8.0 million to $13.0 million, planned capital improvements and store upgrades to be approximately $4.0 million to $9.0 million and costs associated with the development of new stores to be approximately $26.0 million to $41.0 million. Our currently scheduled principal payments on debt, including borrowings outstanding on the Credit Facility and Term Loan Facility, are approximately $11.0 million for the remainder of 2019.

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 2019 consist primarily of contractual obligations which include repayments of indebtedness at maturity, as well as potential discretionary expenditures such as (i) non-recurring capital expenditures; (ii) redevelopment of operating stores; (iii) acquisitions of additional stores; and (iv) development of new stores. We will have to satisfy the portion of our needs not covered by cash flow from operations through additional borrowings, including borrowings under our Credit Facility, sales of common or preferred shares of the Parent Company and common or preferred units of the Operating Partnership and/or cash generated through store dispositions and joint venture transactions.

We believe that, as a publicly traded REIT, we will have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional debt and the issuance of additional equity. However, we cannot provide any assurance that this will be the case. Our ability to incur additional debt will be dependent on a number of factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions that may be imposed by lenders. In addition, dislocation in the United States debt markets may significantly reduce the availability and increase the cost of 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, 2019, we had approximately $3.5 million in available cash and cash equivalents. In addition, we had approximately $403.2 million of availability for borrowings under our Credit Facility.

### Unsecured Senior Notes

On January 30, 2019, we issued $350.0 million in aggregate principal amount of unsecured senior notes due February 15, 2029 which bear interest at a rate of 4.375% per annum (the “2029 Notes”). The 2029 Notes were priced at 99.356% of the principal amount to yield 4.455% to maturity. Net proceeds from the offering were used to repay all of the outstanding indebtedness under our $200.0 million unsecured term loan portion of our credit facility that was scheduled to mature in January 2019. The remaining proceeds from the offering were used to repay a portion of the outstanding indebtedness under the revolving portion of our credit facility.

Our unsecured senior notes are summarized as follows (collectively referred to as the “Senior Notes”):

*(in thousands)*

| Unsecured Senior Notes | March 31, 2019 | December 31, 2018 | Effective Interest Rate | Issuance Date | Maturity Date |
| --- | ---: | ---: | ---: | --- | --- |
| $250M 4.800% Guaranteed Notes due 2022 | $250,000 | $250,000 | 4.82% | Jun-12 | Jul-22 |
| $300M 4.375% Guaranteed Notes due 2023 (1) | 300,000 | 300,000 | 4.33% | Various (1) | Dec-23 |
| $300M 4.000% Guaranteed Notes due 2025 (2) | 300,000 | 300,000 | 3.99% | Various (2) | Nov-25 |
| $300M 3.125% Guaranteed Notes due 2026 | 300,000 | 300,000 | 3.18% | Aug-16 | Sep-26 |
| $350M 4.375% Guaranteed Notes due 2029 | 350,000 | — | 4.46% | Jan-19 | Feb-29 |
| Principal balance outstanding | 1,500,000 | 1,150,000 |  |  |  |
| Less: Discount on issuance of unsecured senior notes, net | (2,773) | (568) |  |  |  |
| Less: Loan procurement costs, net | (8,535) | (5,908) |  |  |  |
| Total unsecured senior notes, net | $1,488,692 | $1,143,524 |  |  |  |

(1) On April 4, 2017, the Operating Partnership issued $50.0 million of its 4.375% senior notes due 2023, which are part of the same series as the $250.0 million principal amount of the Operating Partnership’s 4.375% senior notes due December 15, 2023 issued on December 17, 2013. The $50.0 million and $250.0 million tranches were priced at 105.040% and 98.995%, respectively, of the principal amount to yield 3.495% and 4.501%, respectively, to maturity. The combined weighted-average effective interest rate of the 2023 notes is 4.330%.

(2) On April 4, 2017, the Operating Partnership issued $50.0 million of its 4.000% senior notes due 2025, which are part of the same series as the $250.0 million principal amount of the Operating Partnership’s 4.000% senior notes due November 15, 2025 issued on October 26, 2015. The $50.0 million and $250.0 million tranches were priced at 101.343% and 99.735%, respectively, of the principal amount to yield 3.811% and 4.032%, respectively, to maturity. The combined weighted-average effective interest rate of the 2025 notes is 3.994%.

The indenture under which the Senior Notes were issued restricts the ability of the Operating Partnership and its subsidiaries to incur debt unless the Operating Partnership and its consolidated subsidiaries comply with a leverage ratio not to exceed 60% and an interest coverage ratio of more than 1.5:1 after giving effect to the incurrence of the debt. The indenture also restricts the ability of the Operating Partnership and its subsidiaries to incur secured debt unless the Operating Partnership and its consolidated subsidiaries comply with a secured debt leverage ratio not to exceed 40% after giving effect to the incurrence of the debt. The indenture also contains other financial and customary covenants, including a covenant not to own unencumbered assets with a value less than 150% of the unsecured indebtedness of the Operating Partnership and its consolidated subsidiaries. As of March 31, 2019, the Operating Partnership was in compliance with all of the financial covenants under the Senior Notes.

### Revolving Credit Facility and Unsecured Term Loans

On December 9, 2011, the Company entered into a credit agreement (the “Credit Facility”), which was subsequently amended on April 5, 2012, June 18, 2013 and April 22, 2015 to provide for, amongst other things, a $200.0 million unsecured term loan with a maturity date of January 31, 2019 and a $500.0 million unsecured revolving facility (the “Revolver”) with a maturity date of April 22, 2020. Pricing on the Revolver is dependent 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%. As of March 31, 2019, $403.2 million was available for borrowing under the Revolver. The available balance under the Revolver is reduced by an outstanding letter of credit of $0.7 million.

On June 20, 2011, we entered into an unsecured term loan agreement (the “Term Loan Facility”), which was subsequently amended on June 18, 2013 and August 5, 2014, consisting of, amongst other things, a $100.0 million unsecured term loan with a seven-year maturity.

Our unsecured term loans under the Credit Facility and Term Loan Facility are summarized below:

*(in thousands)*

| Unsecured Term Loans Credit Facility | Carrying Value as of: March 31, 2019 | December 31, 2018 | Effective Interest Rate as of March 31, 2019 (1) | Maturity Date |
| --- | ---: | ---: | ---: | --- |
| Unsecured term loan (2) | $— | $200,000 | —% | Jan-19 |
| **Term Loan Facility** |  |  |  |  |
| Unsecured term loan | 100,000 | 100,000 | 3.64% | Jan-20 |
| Principal balance outstanding | 100,000 | 300,000 |  |  |
| Less: Loan procurement costs, net | (139) | (201) |  |  |
| Total unsecured term loans, net | $99,861 | $299,799 |  |  |

(1) Pricing on the Term Loan Facility and the unsecured term loan under the Credit Facility is dependent on our unsecured debt credit ratings. At our current Baa2/BBB level, amounts drawn under the term loan that matured in January 2019 were priced at 1.30% over LIBOR, while amounts drawn under the term loan scheduled to mature in January 2020 are priced at 1.15% over LIBOR. As of March 31, 2019, borrowings under the Credit Facility, inclusive of the Revolver, and Term Loan Facility, as amended, had an effective weighted average interest rate of 3.69%.

(2) On January 31, 2019, the Company used a portion of the net proceeds from the issuance of the 2029 Notes to repay all of the outstanding indebtedness under the unsecured term loan portion of the Credit Facility that matured in January 2019.

No further borrowings may be made under the Term Loan Facility or the unsecured term loan portion of the Credit Facility. Our ability to borrow under the Revolver 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 March 31, 2019, we were in compliance with all of our financial covenants, and we 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

We maintain an “at-the-market” equity program that enables us to sell up to 50.0 million common shares through sales agents pursuant to equity distribution agreements (the “Equity Distribution Agreements”).

During the three months ended March 31, 2019, we sold a total of 0.8 million common shares under the Equity Distribution Agreements at an average sales price of $32.20 per share, resulting in gross proceeds of $24.9 million under the program. We incurred $0.3 million of offering costs in conjunction with the 2019 sales. We used proceeds from the sales conducted during the three months ended March 31, 2019 to fund acquisitions of self-storage properties and for general corporate purposes. As of March 31, 2019, 9.7 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, other expense, depreciation and amortization expense, general and administrative expense, and deducting from net income (loss): gains from sale of real estate, net, other income, gains from remeasurement of investments in real estate ventures and interest income. NOI is not a measure of performance calculated in accordance with GAAP.

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

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

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

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

### FFO

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

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

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

### FFO, as adjusted

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

The following table presents a reconciliation of net income attributable to the Company’s common shareholders to FFO attributable to common shareholders and OP unitholders for the three months ended March 31, 2019 and 2018 (in thousands).

|  | Three Months Ended March 31, 2019 | 2018 |
| --- | ---: | ---: |
| **Net income attributable to the Company’s common shareholders** | $35,498 | $34,423 |
| Add: |  |  |
| Real estate depreciation and amortization: |  |  |
| Real property | 37,726 | 34,259 |
| Company’s share of unconsolidated real estate ventures | 1,944 | 2,418 |
| Noncontrolling interests in the Operating Partnership | 358 | 383 |
| **FFO attributable to common shareholders and OP unitholders (1)** | $75,526 | $71,483 |
| Weighted-average diluted shares outstanding | 187,984 | 183,222 |
| Weighted-average diluted units outstanding | 1,927 | 1,990 |
| Weighted-average diluted shares and units outstanding | 189,911 | 185,212 |

(1) There were no adjustments from FFO attributable to common shareholders and OP unitholders to FFO, as adjusted, attributable to common shareholders and OP Unit holders for the three months ended March 31, 2019 and 2018.

### 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, 2,942 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 March 31, 2019, our consolidated debt consisted of $1.6 billion of outstanding mortgages and unsecured senior notes that are subject to fixed rates. Additionally, as of March 31, 2019, there were $96.1 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 $2.0 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 $2.0 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 $84.5 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 $97.9 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 Apr 26, 2019.
Source: SEC EDGAR, the filing index for accession 0001298675-19-000015. Last ingested by Listed: Nov 7, 2026, 12:41 ET. No prices; not investment advice.