UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number
Commission file number
(Exact Name of Registrant as Specified in Its Charter)
(State or Other Jurisdiction of | (IRS Employer | |
Incorporation or Organization) | Identification No.) | |
(Zip Code) | ||
(Address of Principal Executive Offices) |
Registrant’s telephone number, including area code (
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||
Securities registered pursuant to Section 12(g) of the Act: Units of General Partnership Interest of CubeSmart, L.P.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
CubeSmart | ☒ | No | ☐ | |
CubeSmart, L.P. | ☒ | No | ☐ |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
CubeSmart | Yes | ◻ | ⌧ | |
CubeSmart, L.P. | Yes | ◻ | ⌧ |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
CubeSmart | ☒ | No | ☐ | |
CubeSmart, L.P. | ☒ | No | ☐ |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
CubeSmart | ⌧ | No | ◻ | |
CubeSmart, L.P. | ⌧ | No | ◻ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
CubeSmart: | |||||||||
☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | Emerging growth company | |||
CubeSmart, L.P.: | |||||||||
Large accelerated filer | ☐ | Accelerated filer | ☐ | ☒ | Smaller reporting company | Emerging growth company | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
CubeSmart | ◻ |
CubeSmart, L.P. | ◻ |
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
CubeSmart |
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CubeSmart, L.P. |
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If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.
CubeSmart | ◻ |
CubeSmart, L.P. | ◻ |
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.
CubeSmart | ◻ |
CubeSmart, L.P. | ◻ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
CubeSmart | Yes | No | ☒ | |
CubeSmart, L.P. | Yes | No | ☒ | |
As of June 30, 2022, the last business day of CubeSmart’s most recently completed second fiscal quarter, the aggregate market value of common shares held by non-affiliates of CubeSmart was $
As of June 30, 2022, the last business day of CubeSmart, L.P.’s most recently completed second fiscal quarter, the aggregate market value of the 1,460,520 units of limited partnership (the “OP Units”) held by non-affiliates of CubeSmart, L.P. was $
Documents incorporated by reference: Portions of the Proxy Statement for the 2023 Annual Meeting of Shareholders of CubeSmart to be filed subsequently with the SEC are incorporated by reference into Part III of this report.
EXPLANATORY NOTE
This report combines the annual reports on Form 10-K for the year ended December 31, 2022 of CubeSmart (the “Parent Company” or “CubeSmart”) and CubeSmart, L.P. (the “Operating Partnership”). The Parent Company is a Maryland real estate investment trust (“REIT”), that owns its assets and conducts its operations through the Operating Partnership, a Delaware limited partnership, and subsidiaries of the Operating Partnership. The Parent Company, the Operating Partnership and their consolidated subsidiaries are collectively referred to in this report as the “Company”. In addition, terms such as “we”, “us”, or “our” used in this report may refer to the Company, the Parent Company and/or the Operating Partnership.
The Parent Company is the sole general partner of the Operating Partnership and, as of December 31, 2022, owned a 99.4% interest in the Operating Partnership. The remaining 0.6% interest consists of common units of limited partnership interest issued by the Operating Partnership to third parties in exchange for contributions of properties to the Operating Partnership. As the sole general partner of the Operating Partnership, the Parent Company has full and complete authority over the Operating Partnership’s day-to-day operations and management.
Management operates the Parent Company and the Operating Partnership as one enterprise. The management teams of the Parent Company and the Operating Partnership are identical, and their constituents are officers of both the Parent Company and of the Operating Partnership.
There are a few differences between the Parent Company and the Operating Partnership, which are reflected in the note disclosures in this report. The Company believes it is important to understand the differences between the Parent Company and the Operating Partnership in the context of how these entities operate as a consolidated enterprise. The Parent Company is a REIT, whose only material asset is its ownership of the partnership interests of the Operating Partnership. As a result, the Parent Company does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing public equity from time to time and guaranteeing the debt obligations of the Operating Partnership. The Operating Partnership holds substantially all of the assets of the Company and, directly or indirectly, holds the ownership interests in the Company’s real estate ventures. The Operating Partnership conducts the operations of the Company’s business and is structured as a partnership with no publicly traded equity. Except for net proceeds from equity issuances by the Parent Company, which are contributed to the Operating Partnership in exchange for partnership units, the Operating Partnership generates the capital required by the Company’s business through the Operating Partnership’s operations, by the Operating Partnership’s direct or indirect incurrence of indebtedness or through the issuance of partnership units of the Operating Partnership or equity interests in subsidiaries of the Operating Partnership.
The substantive difference between the Parent Company’s and the Operating Partnership’s filings is the fact that the Parent Company is a REIT with public equity, while the Operating Partnership is a partnership with no publicly traded equity. In the financial statements, this difference is primarily reflected in the equity (or capital for the Operating Partnership) section of the consolidated balance sheets and in the consolidated statements of equity (or capital). Apart from the different equity treatment, the consolidated financial statements of the Parent Company and the Operating Partnership are nearly identical.
The Company believes that combining the annual reports on Form 10-K of the Parent Company and the Operating Partnership into a single report will:
| ● | facilitate a better understanding by the investors of the Parent Company and the Operating Partnership by enabling them to view the business as a whole in the same manner as management views and operates the business; |
| ● | remove duplicative disclosures and provide a more straightforward presentation in light of the fact that a substantial portion of the disclosure applies to both the Parent Company and the Operating Partnership; and |
| ● | create time and cost efficiencies through the preparation of one combined report instead of two separate reports. |
In order to highlight the differences between the Parent Company and the Operating Partnership, the separate sections in this report for the Parent Company and the Operating Partnership specifically refer to the Parent Company and the Operating Partnership. In the sections that combine disclosures of the Parent Company and the Operating Partnership, this report refers to such disclosures as those of the Company. Although the Operating Partnership is generally the entity that directly or indirectly enters into contracts and real estate ventures and holds assets and debt, reference to the Company is appropriate because the business is one enterprise and the Parent Company operates the business through the Operating Partnership.
As general partner with control of the Operating Partnership, the Parent Company consolidates the Operating Partnership for financial reporting purposes, and the Parent Company does not have significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities of the Parent Company and the Operating Partnership are the same on their respective financial
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statements. The separate discussions of the Parent Company and the Operating Partnership in this report should be read in conjunction with each other to understand the results of the Company’s operations on a consolidated basis and how management operates the Company.
This report also includes separate Item 9A - Controls and Procedures sections, signature pages and Exhibits 31 and 32, certifications for each of the Parent Company and the Operating Partnership, in order to establish that the Chief Executive Officer and the Chief Financial Officer of the Parent Company and the Chief Executive Officer and the Chief Financial Officer of the Operating Partnership have made the requisite certifications and that the Parent Company and the Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and 18 U.S.C. §1350.
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PART I
Forward-Looking Statements
This Annual Report on Form 10-K, or this Report, together with other statements and information publicly disseminated by the Parent Company and the Operating Partnership, contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. Forward-looking statements include statements concerning the Company’s plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions and other information that is not historical information. In some cases, forward-looking statements can be identified by terminology such as “believes”, “expects”, “estimates”, “may”, “will”, “should”, “anticipates” or “intends” or the negative of such terms or other comparable terminology, or by discussions of strategy. Such statements are based on assumptions and expectations that may not be realized and are inherently subject to risks, uncertainties and other factors, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Although we believe the expectations reflected in these forward-looking statements are based on reasonable assumptions, future events and actual results, performance, transactions or achievements, financial and otherwise, may differ materially from the results, performance, transactions or achievements expressed or implied by the forward-looking statements. As a result, you should not rely on or construe any forward-looking statements in this Report, or which management or persons acting on their behalf may make orally or in writing from time to time, as predictions of future events or as guarantees of future performance. We caution you not to place undue reliance on forward-looking statements, which speak only as of the date of this Report or as of the dates otherwise indicated in such forward-looking statements. All of our forward-looking statements, including those in this Report, are qualified in their entirety by this statement.
There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in or contemplated by this Report. Any forward-looking statements should be considered in light of the risks and uncertainties referred to in Item 1A. “Risk Factors” in this Report and in our other filings with the Securities and Exchange Commission (“SEC”). These risks include, but are not limited to, the following:
| ● | adverse changes in economic conditions in the real estate industry and in the markets in which we own and operate self-storage properties; |
| ● | the effect of competition from existing and new self-storage properties and operators on our ability to maintain or raise occupancy and rental rates; |
| ● | the failure to execute our business plan; |
| ● | adverse impacts from the COVID-19 pandemic, other pandemics, quarantines and stay at home orders, including the impact on our ability to operate our self-storage properties, the demand for self-storage, rental rates and fees and rent collection levels; |
| ● | reduced availability and increased costs of external sources of capital; |
| ● | increases in interest rates and operating costs; |
| ● | financing risks, including the risk of over-leverage and the corresponding risk of default on our mortgage and other debt and potential inability to refinance existing or future debt; |
| ● | counterparty non-performance related to the use of derivative financial instruments; |
| ● | risks related to our ability to maintain our Parent Company’s qualification as a REIT for federal income tax purposes; |
| ● | the failure of acquisitions and developments to close on expected terms, or at all, or to perform as expected; |
| ● | increases in taxes, fees and assessments from state and local jurisdictions; |
| ● | the failure of our joint venture partners to fulfill their obligations to us or their pursuit of actions that are inconsistent with our objectives; |
| ● | reductions in asset valuations and related impairment charges; |
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| ● | cyber security breaches, cyber or ransomware attacks or a failure of our networks, systems or technology, which could adversely impact our business, customer and employee relationships or result in fraudulent payments; |
| ● | changes in real estate, zoning, use and occupancy laws or regulations; |
| ● | risks related to or a consequence of natural disasters or acts of violence, pandemics, active shooters, terrorism, insurrection or war that affect the markets in which we operate; |
| ● | potential environmental and other liabilities; |
| ● | governmental, administrative and executive orders and laws, which could adversely impact our business operations and customer and employee relationships; |
| ● | uninsured or uninsurable losses and the ability to obtain insurance coverage or recovery from insurance against risks and losses; |
| ● | the ability to attract and retain talent in the current labor market; |
| ● | other factors affecting the real estate industry generally or the self-storage industry in particular; and |
| ● | other risks identified in this Report and, from time to time, in other reports that we file with the SEC or in other documents that we publicly disseminate. |
Given these uncertainties and the other risks identified elsewhere in this Report, we caution readers not to place undue reliance on forward-looking statements. We undertake no obligation to publicly update or revise these forward-looking statements, whether as a result of new information, future events or otherwise except as may be required by securities laws. Because of the factors referred to above, the future events discussed in or incorporated by reference in this Report may not occur and actual results, performance or achievement could differ materially from that anticipated or implied in the forward-looking statements.
ITEM 1. BUSINESS
Overview
We are a self-administered and self-managed real estate company focused primarily on the ownership, operation, management, acquisition and development of self-storage properties in the United States.
As of December 31, 2022, we owned (or partially owned and consolidated) 611 self-storage properties located in 24 states and in the District of Columbia containing an aggregate of approximately 44.1 million rentable square feet. As of December 31, 2022, approximately 90.3% of the rentable square footage at our owned stores was leased to approximately 377,000 customers, and no single customer represented a significant concentration of our revenues. As of December 31, 2022, we owned stores in the District of Columbia and the following 24 states: Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois, Indiana, Maryland, Massachusetts, Minnesota, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah and Virginia. In addition, as of December 31, 2022, we managed 668 stores for third parties (including 77 stores containing an aggregate of approximately 5.6 million net rentable square feet as part of six separate unconsolidated real estate ventures) bringing the total number of stores we owned and/or managed to 1,279. As of December 31, 2022, we managed stores for third parties in the District of Columbia and the following 38 states: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Vermont, Virginia, Washington and Wisconsin.
Our self-storage properties are designed to offer affordable and easily-accessible storage space for our residential and commercial customers. Our customers rent storage cubes for their exclusive use, typically on a month-to-month basis. Additionally, some of our stores offer outside storage areas for vehicles and boats. Our stores are designed to accommodate both residential and commercial customers, with features such as wide aisles and load-bearing capabilities for large truck access. All of our stores have a storage associate available to assist our customers during business hours, and 334, or approximately 54.7%, of our owned stores have a manager who resides in an apartment at the store. Our customers can access their storage cubes during business hours, and some of our stores provide customers with 24-hour access through computer-controlled access systems. Our goal is to provide customers with the highest standard of physical attributes and service in the industry. To that end, 510, or approximately 83.5%, of our owned stores include climate-controlled cubes.
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The Parent Company was formed in July 2004 as a Maryland REIT. The Parent Company owns its assets and conducts its business through the Operating Partnership, and its subsidiaries. The Parent Company controls the Operating Partnership as its sole general partner and, as of December 31, 2022, owned a 99.4% interest in the Operating Partnership. The Operating Partnership was formed in July 2004 as a Delaware limited partnership and has been engaged in virtually all aspects of the self-storage business, including the development, acquisition, management, ownership and operation of self-storage properties.
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Acquisition and Disposition Activity
As of December 31, 2022 and 2021, we owned 611 and 607 stores, respectively, that contained an aggregate of 44.1 million and 43.6 million rentable square feet with occupancy levels of 90.3% and 92.0%, respectively. Additional information about our stores is included in Item 2 of this Report. The following is a summary of our 2022, 2021 and 2020 acquisition and disposition activity:
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| Number of |
| Purchase / Sale Price |
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Asset/Portfolio | Metropolitan Statistical Area | Transaction Date | Stores | (in thousands) | ||||||
2022 Acquisitions: | ||||||||||
Maryland Asset | Washington-Arlington-Alexandria, DC-VA-MD-WV | February 2022 | 1 | $ | 32,000 | |||||
Texas Asset | San Antonio, TX | June 2022 | 1 | 23,000 | ||||||
Georgia Asset | Atlanta, GA | July 2022 | 1 | 20,700 | ||||||
3 | $ | 75,700 | ||||||||
2021 Acquisitions: | ||||||||||
Minnesota Asset (1) | Minneapolis-St. Paul-Bloomington, MN-WI | April 2021 | 1 | $ | 12,000 | |||||
Maryland Asset | Baltimore-Towson, MD | June 2021 | 1 | 22,075 | ||||||
New Jersey/Pennsylvania Assets | Philadelphia-Camden-Wilmington, PA-NJ-DE-MD | July 2021 | 2 | 33,000 | ||||||
Florida Asset | Miami-Fort Lauderdale-Pompano Beach, FL | November 2021 | 1 | 14,750 | ||||||
Georgia Asset | Atlanta-Sandy Springs-Marietta, GA | November 2021 | 1 | 15,200 | ||||||
Pennsylvania Asset | Philadelphia-Camden-Wilmington, PA-NJ-DE-MD | November 2021 | 1 | 24,500 | ||||||
Nevada Asset | Las Vegas-Paradise, NV | December 2021 | 1 | 21,000 | ||||||
Storage West Assets | Various (see note 4) | December 2021 | 57 | 1,648,426 | (2) | |||||
Illinois Asset | Chicago-Naperville-Joliet, IL-IN-WI | December 2021 | 1 | 10,300 | ||||||
66 | $ | 1,801,251 | ||||||||
2021 Dispositions: | ||||||||||
Colorado/Nevada Assets | Denver-Aurora, CO / Las Vegas-Paradise, NV | September 2021 | 2 | $ | 16,900 | |||||
North Carolina Assets | Burlington, NC | September 2021 | 2 | 21,700 | ||||||
Texas Asset | Houston-Sugar Land-Baytown, TX | November 2021 | 1 | 5,200 | ||||||
5 | $ | 43,800 | ||||||||
2020 Acquisitions: | ||||||||||
Texas Asset | San Antonio, TX | February 2020 | 1 | $ | 9,025 | |||||
Maryland Asset | Baltimore-Towson, MD | April 2020 | 1 | 17,200 | ||||||
New Jersey Asset | New York-Northern New Jersey-Long Island, NY-NJ-PA | April 2020 | 1 | 48,450 | ||||||
Florida Asset | Palm Bay-Melbourne-Titusville, FL | November 2020 | 1 | 3,900 | ||||||
Texas Asset | Austin-Round Rock, TX | November 2020 | 1 | 10,750 | ||||||
Texas Asset | Dallas-Fort Worth-Arlington, TX | November 2020 | 1 | 10,150 | ||||||
Nevada Asset | Las Vegas-Paradise, NV | December 2020 | 1 | 16,800 | ||||||
New York Asset | New York-Northern New Jersey-Long Island, NY-NJ-PA | December 2020 | 1 | 6,750 | ||||||
Florida Asset | Tampa-St. Petersburg-Clearwater, FL | December 2020 | 1 | 10,000 | ||||||
Virginia Asset | Washington-Arlington-Alexandria, DC-VA-MD-WV | December 2020 | 1 | 17,350 | ||||||
Storage Deluxe Assets | New York-Northern New Jersey-Long Island, NY-NJ-PA | December 2020 | 8 | 540,000 | ||||||
Florida Assets | Orlando-Kissimmee, FL / Deltona-Daytona Beach-Ormond Beach, FL | December 2020 | 3 | 45,500 | ||||||
21 | $ | 735,875 | ||||||||
2020 Disposition: | ||||||||||
New York Asset | New York-Northern New Jersey-Long Island, NY-NJ-PA | December 2020 | 1 | $ | 12,750 | |||||
1 | $ | 12,750 | ||||||||
| (1) | Acquired by a consolidated joint venture in which we hold a 50% interest. |
| (2) | Purchase price represents the acquisition of all 167,557 outstanding partnership units of LAACO, Ltd. (“LAACO”) for $9,838 per unit. At the time of the acquisition, LAACO owned 57 storage properties (the “Storage West Assets”) and 50% ownership interests in two separate joint ventures. Through this acquisition, the Company also acquired LAACO’s wholly-owned subsidiaries, the Los Angeles Athletic Club and the California Yacht Club (the “Club Operations”). The Los Angeles Athletic Club was sold by the Company during the year ended December 31, 2022. The California Yacht Club is classified as held for sale on the Company's consolidated balance sheets as of December 31, 2022. See note 4 to our consolidated financial statements. |
The comparability of our results of operations is affected by the timing of acquisition and disposition activities during the periods reported. As of December 31, 2022, 2021 and 2020, we owned (or partially owned and consolidated) 611, 607 and 543 self-storage properties and related assets, respectively. The following table summarizes the change in number of owned stores from January 1, 2020 through December 31, 2022:
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| 2022 |
| 2021 |
| 2020 |
| |
Balance - January 1 |
| 607 |
| 543 |
| 523 | |
Stores acquired |
| 1 |
| — |
| 1 | |
Stores developed |
| — |
| 1 |
| — | |
Stores combined (1) | — | (1) | — | ||||
Balance - March 31 |
| 608 |
| 543 |
| 524 | |
Stores acquired (2) |
| 1 |
| 2 |
| 2 | |
Stores developed | 1 | 2 | 1 | ||||
Stores combined (1) | (1) | — | — | ||||
Balance - June 30 |
| 609 |
| 547 |
| 527 | |
Stores acquired |
| 1 |
| 2 |
| — | |
Stores developed | 1 | — | — | ||||
Stores sold | — | (4) | — | ||||
Balance - September 30 |
| 611 |
| 545 |
| 527 | |
Stores acquired |
| — |
| 62 |
| 18 | |
Stores developed | — | 1 | — | ||||
Stores combined (3) | — | — | (1) | ||||
Stores sold |
| — |
| (1) |
| (1) | |
Balance - December 31 |
| 611 |
| 607 |
| 543 | |
| (1) | On June 21, 2022 and March 3, 2021, we completed development of new stores located in Vienna, VA and Arlington, VA for approximately $21.8 million and $26.4 million, respectively. In each case, the developed store is located adjacent to an existing consolidated joint venture store. Given this proximity, each developed store has been combined with the adjacent existing store in our store count upon opening, as well as for operational and reporting purposes. |
| (2) | For the quarter ended June 30, 2021, includes one store acquired by a consolidated joint venture in which we hold a 50% interest. |
| (3) | On November 10, 2020, we acquired a store located in Merritt Island, FL for approximately $3.9 million. The store acquired is located in near proximity to an existing wholly-owned store. Given their proximity to each other, the acquired store has been combined with the existing store in our store count, as well as for operational and reporting purposes. |
Financing and Investing Activities
The following summarizes certain financing and investing activities during the year ended December 31, 2022:
| ● | Acquisition Activity. We acquired three wholly-owned stores located in Georgia (1), Maryland (1), and Texas (1) for an aggregate purchase price of approximately $75.7 million. |
| ● | Development Activity. We completed construction of and opened for operation two joint venture development properties located in New York (1) and Virginia (1) for a total cost of $60.8 million. As of December 31, 2022, we had two joint venture development properties under construction located in New Jersey (1) and New York (1), which are expected to be completed by the second quarter of 2024. As of December 31, 2022, we had invested $22.7 million of an expected $57.1 million related to these two projects. |
| ● | Unconsolidated Real Estate Venture Activity. 191 V CUBE LLC ("HVP V"), an existing unconsolidated real estate venture in which we own a 20% interest, acquired one store located in New Jersey for a purchase price of $33.2 million. We contributed $0.1 million towards this purchase, which was primarily funded by HVP V's secured term loan. 191 IV CUBE Southeast LLC (“HVPSE”), an existing unconsolidated real estate venture in which we own a 10% interest, sold all 14 of its stores for an aggregate sales price of $235.0 million. These stores were located in Florida (2), Georgia (8) and South Carolina (4). HVPSE recorded gains which aggregated to approximately $114.1 million in connection with the sale. |
| ● | Credit Facility Amendment. On October 26, 2022, we amended and restated, in its entirety, our credit facility (the "Second Amended and Restated Credit Facility") which, subsequent to the amendment and restatement, is comprised of an $850.0 million unsecured revolving facility (the “Revolver”) maturing on February 15, 2027. Under the Second Amended and Restated Credit Facility, pricing on the Revolver is dependent upon our unsecured debt credit ratings and leverage levels. At our current unsecured debt credit ratings and leverage levels, amounts drawn under the Revolver are priced using a margin of 0.775% plus a facility fee of 0.15% over the Secured Overnight Financing Rate ("SOFR") and a 0.10% SOFR adjustment. |
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| ● | At-The-Market Equity Program Activity. Under our at-the-market equity program, we sold a total of 0.1 million common shares at an average sales price of $50.64 per share, resulting in net proceeds of $4.9 million for the year, after deducting offering costs. As of December 31, 2022, 5.8 million common shares remained available for sale under the program. We used the proceeds from the 2022 sales under the program to fund the acquisition and development of self-storage properties and for general corporate purposes. |
Business Strategy
Our business strategy consists of several elements:
| ● | Maximize cash flow from our stores — We utilize our operating systems and experienced personnel to manage the balance between rental rates, discounts and physical occupancy with an objective of maximizing our rental revenue. |
| ● | Acquire stores within targeted markets — During 2023, we intend to pursue selective acquisitions in markets that we believe have high barriers to entry, strong demographic fundamentals and demand for storage in excess of storage capacity. We believe the self-storage industry will continue to afford us opportunities for growth through acquisitions due to the highly fragmented composition of the industry. In the past, we have formed joint ventures with unaffiliated third parties, and in the future we may form additional joint ventures, to facilitate the funding of future developments or acquisitions. |
| ● | Dispose of stores — During 2023, we intend to continue to evaluate opportunities to dispose of assets that have unattractive risk-adjusted returns. We intend to use proceeds from these transactions to fund acquisitions within targeted markets and for general corporate purposes. |
| ● | Grow our third-party management business — We intend to pursue additional third-party management opportunities and to leverage our current platform to take advantage of consolidation in the industry. We plan to utilize our relationships with third-party owners to help source future acquisitions and other investment opportunities. |
Investment and Market Selection Process
We maintain a disciplined and focused process in the acquisition and development of self-storage properties. Our investment committee is comprised of four senior officers who oversee our investment process. Our investment process involves six stages — identification, initial due diligence, economic assessment, investment committee approval (and when required, the approval of our Board of Trustees (the “Board”)), final due diligence and documentation. Through our investment committee, we intend to focus on the following criteria:
| ● | Targeted markets — Our targeted markets include areas where we currently maintain management that can be extended to additional stores, or where we believe that we can acquire a significant number of stores over time. We evaluate both the broader market and the immediate trade area, typically three miles around the store, for its ability to support above-average demographic growth. We seek to increase our presence primarily in areas with strong demographics and growth, including, but not exclusively limited to, major metropolitan regions within the United States. |
| ● | Quality of store — We focus on self-storage properties that have good visibility, ease of access and are located near retail centers, which typically provide high traffic corridors and are generally located near residential communities and commercial customers. |
| ● | Growth potential — We target acquisitions that offer growth potential through increased operating efficiencies and, in some cases, through additional leasing efforts, renovations or expansions. In addition to acquiring single stores, we seek to invest in portfolio acquisitions, including those offering significant potential for increased operating efficiency and economies of scale |
Segment
We have one reportable segment: we own, operate, develop, manage and acquire self-storage properties.
Concentration
Our self-storage properties are located in major metropolitan areas as well as suburban areas and have numerous customers per store. No single customer represented a significant concentration of our 2022 revenues. Our stores in New York, Florida, California and Texas provided approximately 16%, 15%, 11% and 9%, respectively, of our total revenues for the year ended December 31, 2022. Our stores in New York, Florida, Texas and California provided approximately 19%, 15%, 9% and 8%, respectively, of our total revenues for the year
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ended December 31, 2021. Our stores in New York, Florida, Texas and California provided approximately 16%, 15%, 9% and 8%, respectively, of our total revenues for the year ended December 31, 2020.
Seasonality
We typically experience seasonal fluctuations in occupancy levels at our stores, which are generally slightly higher during the summer months due to increased moving activity.
Financing Strategy
We maintain a capital structure that we believe is reasonable and prudent and that will enable us to have ample cash flow to cover debt service and make distributions to our shareholders. As of December 31, 2022, our debt to total market capitalization ratio (determined by dividing the carrying value of our total indebtedness by the sum of (a) the market value of the Parent Company’s outstanding common shares and units of the Operating Partnership held by third parties and (b) the carrying value of our total indebtedness) was approximately 24.8% compared to approximately 19.7% as of December 31, 2021. Our ratio of debt to the undepreciated cost of our total assets as of December 31, 2022 was approximately 39.6% compared to approximately 41.2% as of December 31, 2021. We expect to finance additional investments in self-storage properties through the most attractive sources of capital available at the time of the transaction, in a manner consistent with maintaining a strong financial position and future financial flexibility, subject to limitations on incurrence of indebtedness in our unsecured credit facilities and the indenture that governs our unsecured notes. These capital sources may include existing cash, borrowings under our revolving credit facility, additional secured or unsecured financings, sales of common or preferred shares of the Parent Company in public offerings or private placements, additional issuances of debt securities, issuances of common or preferred units in our Operating Partnership in exchange for contributed properties and formations of joint ventures. We also may sell stores that have unattractive risk-adjusted returns and use the sales proceeds to fund other acquisitions.
Competition
Self-storage properties compete based on a number of factors, including location, rental rates, occupancy, security, suitability of the store’s design to prospective customers’ needs and the manner in which the store is operated and marketed. In particular, the number of competing self-storage properties in a market could have a material effect on our occupancy levels, rental rates and on the overall operating performance of our stores. We believe that the primary competition for potential customers of any of our self-storage properties comes from other self-storage providers within a three-mile radius of that store. We believe our stores are well-positioned within their respective markets, and we emphasize customer service, convenience, security, professionalism and cleanliness.
Our key competitors include local and regional operators as well as the other public self-storage REITs, including Public Storage, Extra Space Storage Inc., Life Storage, Inc. and National Storage Affiliates Trust. These companies, some of which operate significantly more stores than we do and have greater resources than we have, and other entities may be able to accept more risk than we determine is prudent for us, including risks with respect to the geographic proximity of investments and the payment of higher acquisition prices. This competition may reduce the number of suitable acquisition opportunities available to us, increase the price required to acquire stores and reduce the demand for self-storage space at our stores. Nevertheless, we believe that our experience in operating, managing, acquiring, developing and obtaining financing for self-storage properties should enable us to compete effectively.
Government Regulation
We are subject to various laws, ordinances and regulations, including regulations relating to lien sale rights and procedures and various federal, state and local regulations that apply generally to the ownership of real property and the operation of self-storage properties.
Under the Americans with Disabilities Act of 1990 and applicable state accessibility act laws (collectively, the “ADA”), all places of public accommodation are required to meet federal requirements related to physical access and use by disabled persons. A number of other federal, state and local laws may also impose access and other similar requirements at our stores. A failure to comply with the ADA or similar state or local requirements could result in the governmental imposition of fines or the award of damages to private litigants affected by the noncompliance. Although we believe that our stores comply in all material respects with these requirements (or would be eligible for applicable exemptions from material requirements because of adaptive assistance provided), a determination that one or more of our stores or websites is not in compliance with the ADA or similar state or local requirements would result in the incurrence of additional costs associated with bringing them into compliance.
Under various federal, state and local laws, ordinances and regulations, an owner or operator of real property may become liable for the costs of removal or remediation of hazardous substances released on or in its property. These laws often impose liability without regard to
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whether the owner or operator knew of, or was responsible for, the release of such hazardous substances. The presence of hazardous substances, or the failure to properly remediate such substances, when released, may adversely affect the property owner’s ability to sell the real estate or to borrow using the real estate as collateral, and may cause the property owner to incur substantial remediation costs. In addition to claims for cleanup costs, the presence of hazardous substances on a property could result in a claim by a private party for personal injury or a claim by an adjacent property owner or user for property damage. We may also become liable for the costs of removal or remediation of hazardous substances stored at our properties by a customer even though storage of hazardous substances would be without our knowledge or approval and in violation of the customer’s storage lease agreement with us.
Our practice is to conduct or obtain environmental assessments in connection with the acquisition or development of properties. Whenever the environmental assessment for one of our stores indicates that a store is impacted by soil or groundwater contamination from prior owners/operators or other sources, we work with our environmental consultants and, where appropriate, state governmental agencies, to ensure that the store is either cleaned up, that no cleanup is necessary because the low level of contamination poses no significant risk to public health or the environment, or that the responsibility for cleanup rests with a third party. In certain cases, we have purchased environmental liability insurance coverage to indemnify us against claims for contamination or other adverse environmental conditions that may affect a property.
We are not aware of any environmental cleanup liability that we believe will have a material adverse effect on us. We cannot provide assurance, however, that these environmental assessments and investigations have revealed or will reveal all potential environmental liabilities, that no prior owner created any material environmental condition not known to us or the independent consultant or that future events or changes in environmental laws will not result in the imposition of environmental liability on us.
We have not received notice from any governmental authority of any material noncompliance, claim or liability in connection with any of our stores, nor have we been notified of a claim for personal injury or property damage by a private party in connection with any of our stores relating to environmental conditions.
We are not aware of any environmental condition with respect to any of our stores that could reasonably be expected to have a material adverse effect on our financial condition or results of operations, and we do not expect that the cost of compliance with environmental regulations will have a material adverse effect on our financial condition or results of operations. We cannot provide assurance, however, that this will continue to be the case.
Insurance
We carry comprehensive liability, fire, casualty, extended coverage and rental loss insurance covering all of the properties in our portfolio. We also carry environmental insurance coverage on certain stores in our portfolio. We believe the policy specifications and insured limits are appropriate and adequate given the relative risk of loss, the cost of the coverage and industry practice. We do not carry insurance for losses such as loss from civil unrest, riots, war or acts of God, and, in some cases, flood and environmental hazards, because such coverage is either not available or not available at commercially reasonable rates. Some of our policies, such as those covering losses due to terrorism, hurricanes, floods and earthquakes, are insured subject to limitations involving large deductibles or co-payments and policy limits that may not be sufficient to cover losses. Additionally, we use a combination of insurance products to provide risk mitigation for potential liabilities associated with automobiles, workers’ compensation, employment practices, general contractors, directors and officers, employee health-care benefits and personal injuries that might be sustained at our stores.
Offices
Our principal executive offices are located at 5 Old Lancaster Road, Malvern, PA 19355. Our telephone number is (610) 535-5000.
Human Capital
At CubeSmart, we refer to our employees as teammates, because collaboration towards shared goals defines our workplace. We care deeply about the experience our teammates have working with us. The CubeSmart work experience takes a holistic approach to our teammates’ total wellbeing at work. Our teammate value proposition includes promoting a sense of belonging to a team; providing opportunities to make a meaningful difference at work and in their communities; supporting our teammates’ ongoing personal and professional development; and offering competitive pay and rewards.
As of December 31, 2022, we employed 2,804 teammates, all within the United States. Of the total employees, approximately 89% were hourly and approximately 11% were salaried. We have no union presence or collective bargaining agreements. Our average teammate tenure as of December 31, 2022 was 3.63 years.
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Company Culture and Teammate Experience
We measure our teammates’ experience each year through our Teammate Engagement Survey. In 2022, our annual engagement survey participation rate was 88%. Results are communicated within individual teams to share what we learned and discuss both the positive aspects about working at CubeSmart and where we have opportunities to improve. Leaders whose team engagement is below a certain threshold are provided with coaching and set goals for improvement. Of the teams we identified as having engagement below the applicable threshold in 2021, 73% moved above that threshold in 2022 as a result of our support and focus. In addition to the survey and our commitment to support teams who need it, we have ongoing conversations and commit to continuous improvement. Every CubeSmart teammate plays a role in building our company culture and making the experience working here the best it can be.
Teammate Development and Wellbeing
As part of our culture, we seek to help teammates grow with us and leverage their development both at CubeSmart and beyond. We believe in providing all teammates with training and development opportunities to succeed in their role. We plan, design and deliver training programs for all levels of the organization, from orientation and general job skills to enhancing leadership capabilities through skills trainings and mentoring. In 2022, we provided an average of 16 hours of training per teammate.
When recruiting new teammates, our talent management team engages with our store management teams and corporate leaders to identify a pool of potential candidates to serve our customers and deliver best-in-class customer service. We recruited, hired and trained 1,505 teammates during the year ended December 31, 2022. Teammate referrals were a significant source for the candidates we hired, accounting for 20% of our new teammates. Additionally, 446 teammates were promoted into new roles and/or transitioned into new positions to further their career development.
We believe that career growth and personal development is an important part of our teammates’ personal and professional success. To further support our teammates’ success, we offer a number of benefits aimed at supporting the wellbeing of our teammates and their families. Those benefits include: medical, dental, vision, disability and life insurance coverage. We also offer a variety of programs designed to provide teammates with the ability to rest, rejuvenate and take care of their families such as paid holidays, vacation and sick time, and parental leave. Our Employee Assistance Program is available to all teammates, providing extra support as they and their families experience life changes and challenges.
Another important part of our teammates’ wellbeing is their connection to a larger sense of purpose. We empower our teammates to find this with us and provide programs and opportunities for them. Our Idea Center provides a forum where teammates can submit ideas to enhance the workplace, streamline systems and processes and identify solutions and best practices. We encourage our teammates to participate in community service and philanthropy, and provide paid time off for teammates who participate in these activities. Also, through our matching gifts program, we match qualified charitable contributions made by teammates up to $100 per teammate each year.
In April of 2022, we launched a program called Connections to help our teammates build relationships with others across the organization. Through this program, teammates are randomly paired and encouraged to make time for a brief meeting to learn about one another. As of December 31, 2022, 323 teammates were participating in this program.
Diversity, Equity and Inclusion
Our Philosophy Regarding Respect in the Workplace defines our approach to diversity, inclusion and treatment of differences. Our Philosophy is acknowledged by teammates and states:
At CubeSmart, we respect, value, and celebrate the unique attributes, characteristics and perspectives that make each teammate who they are. We believe that our business is better because of the diversity of participation, thought, and action that comes from the unique individuals who come to work here. Every teammate deserves the right to come to work as their authentic self. Our goal for CubeSmart is to be a place where people feel supported, listened to, and able to do their personal best. Our philosophy isn’t any different from our philosophy regarding Customer interactions, namely to “treat our customers as they want to be treated.” When it comes to our teammates, we ask that every teammate “treat our teammates as they want to be treated.”
As of December 31, 2022, of our total teammate population, 56% were female and 44% were male. Approximately 48% have self-identified as Black or African American, Hispanic or Latino, Asian, American Indian, or of two or more races. The average teammate age was 41.8; 36% of our teammates were 34 and younger while 40% of our teammates were 45 or older.
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Sustainability
We are focused on building our company for the long-term to generate sustainable growth. To that end, we have established a cross-functional ESG (Environmental, Social, & Governance) committee responsible for establishing our sustainability priorities and objectives. Management regularly evaluates sustainability risks faced by our portfolio and believe the low obsolescence, geographic diversification, and low emissions of our portfolio help to mitigate those risks. Our Senior Management team reports annually to the Board of Trustees on the status of our ESG program, our progress against the goals we’ve set, and provides updates on the various initiatives we’ve undertaken to improve our sustainability. Our efforts to enact change are highlighted by our sustainability targets which look to track improvements across key ESG metrics and are aligned to the United Nations Sustainable Development Goals.
A key area of focus from a sustainability perspective is minimizing the impact we make on the environment. Self-storage remains a low-environmental impact business as it consumes less energy and water while emitting fewer greenhouse gases than other real estate property types. We continue to look for ways to further reduce our low impact through a variety of initiatives including solar panel installations, HVAC upgrades, high-efficiency lighting retrofits, energy management systems, and paper reduction through our online rental platform.
We encourage you to review our Sustainability Report (located on our internet website at www.cubesmart.com) for more detailed information regarding our sustainability programs and initiatives. Nothing on our website, including our Sustainability Report or sections thereof, shall be deemed incorporated by reference into this Annual Report.
Information Security
We face risks associated with security breaches through cyber-attacks, cyber intrusions, or otherwise, as well as other significant disruptions of our information technology networks and related systems. The audit committee of the Company’s Board of Trustees is responsible for overseeing management’s risk assessment and risk management processes designed to monitor and control information security risk. A cross-organizational cyber task force meets regularly and management briefs the audit committee on information security matters at least once a year.
We have adopted and implemented an approach to identify and mitigate information security risks that we believe are commercially reasonable for real estate companies. We leverage the Center for Internet Security Critical Security Control Framework as the core of our governance program and include additional best practices from the Cloud Security Alliance, vendors, and other sources as necessary. Since January 1, 2020, we have not experienced any information security breaches that resulted in financial loss. We have insurance coverage designed to help us mitigate cyber risk exposure by offsetting costs involved with recovery and remediation after an information security breach or similar event. We regularly engage independent third parties to test our information security processes and systems as part of our overall enterprise risk management. We also regularly conduct information security training to ensure all employees, including those who may come into possession of confidential financial or personally identifiable information, are aware of information security risks and to enable them to take steps to mitigate such risks.
Available Information
We file registration statements, proxy statements, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports with the SEC. You may obtain copies of these documents by accessing the SEC’s website at www.sec.gov. Our website address is www.cubesmart.com. You also can obtain on our website, free of charge, copies of our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports, after we electronically file such reports or amendments with, or furnish them to, the SEC. Our website and the information contained therein or connected thereto are not intended to be incorporated by reference into this Report.
Also available on our website, free of charge, are copies of our Code of Business Conduct and Ethics, our Corporate Governance Guidelines and the charters for each of the committees of our Board — the Audit Committee, the Corporate Governance and Nominating Committee and the Compensation Committee. Copies of each of these documents are also available in print free of charge, upon request by any shareholder. You can obtain copies of these documents by contacting Investor Relations at 5 Old Lancaster Road, Malvern, PA 19355 or by telephoning 610-535-5000.
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ITEM 1A. RISK FACTORS
Overview
An investment in our securities involves various risks. Investors should carefully consider the risks set forth below together with other information contained in this Report. These risks are not the only ones that we may face. Additional risks not presently known to us, or that we currently consider immaterial, may also impair our business, financial condition, operating results and ability to make distributions to our shareholders.
Risks Related to our Business and Operations
Adverse macroeconomic and business conditions may significantly and negatively affect our rental rates, occupancy levels and therefore our results of operations.
We are susceptible to the effects of adverse macro-economic events that can result in higher unemployment, shrinking demand for products, large-scale business failures and tight credit markets. Our results of operations are 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, inflation, interest rates, tax rates and fuel and energy costs, 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.
It is difficult to determine the breadth and duration of economic and financial market disruptions and the many ways in which they may affect our customers and our business in general. Nonetheless, financial and macroeconomic disruptions could have a significant adverse effect on our sales, profitability and results of operations.
Our financial performance is dependent upon economic and other conditions of the markets in which our stores are located.
We are susceptible to adverse developments in the markets in which we operate, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors. Our stores in New York, Florida, California and Texas accounted for approximately 16%, 15%, 11% and 9%, respectively, of our total 2022 revenues. As a result of this geographic concentration of our stores, we are particularly susceptible to adverse market conditions in these areas. Any adverse economic or real estate developments in these markets, or in any of the other markets in which we operate, or any decrease in demand for self-storage space resulting from the local business climate, could adversely affect our rental revenues, which could impair our ability to satisfy our debt service obligations and pay distributions to our shareholders.
Our business, financial condition, results of operations and share price have, and may in the future be, impacted by the COVID-19 pandemic and other potential future pandemics and such impact could be materially adverse.
Since the first quarter of 2020, the world has been impacted by the COVID-19 pandemic, which has resulted in global business disruptions and significant volatility in U.S. and international debt and equity markets. The extent to which the COVID-19 pandemic and any other potential future pandemics ultimately impact our business, results of operations, financial condition and share price will depend on numerous evolving factors, including, among others: the duration and scope of such pandemic; actions that have been and continue to be taken by governmental entities, individuals and businesses in response to such pandemic; the impact on economic activity from such pandemic and actions taken in response thereto; the impact on capital availability and costs of capital; the impact on our employees any other operational disruptions or difficulties we may face; and, the effect on our customers and their ability to make rental payments. Any of these events, individually or in aggregate, could have a material adverse impact on the Company’s business, financial condition, results of operations and share price.
We face risks associated with property acquisitions.
We intend to continue to acquire individual and portfolios of self-storage properties. The purchase agreements that we enter into in connection with acquisitions typically contain closing conditions that need to be satisfied before the acquisitions can be consummated. The satisfaction of many of these conditions is outside of our control, and we therefore cannot assure that any of our pending or future acquisitions will be consummated. These conditions include, among other things, satisfactory examination of the title, zoning and entitlements to the properties, the ability to obtain title insurance and customary closing deliverables and conditions. Moreover, in the
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event we are unable to complete pending or future acquisitions, we may have incurred significant legal, accounting, due diligence and other transaction costs in connection with such acquisitions without realizing the expected benefits.
Those acquisitions that we do consummate would increase our size and may potentially alter our capital structure. Although we believe that future acquisitions that we complete will enhance our financial performance, the success of acquisitions is subject to the risks that:
| ● | acquisitions may fail to perform as expected; |
| ● | the actual costs of repositioning or redeveloping acquired properties may be higher than our estimates; |
| ● | we may be unable to obtain acquisition financing on favorable terms; |
| ● | acquisitions may be located in new markets where we may have limited knowledge and understanding of the local economy, an absence of business relationships in the area or an unfamiliarity with local governmental and permitting procedures; and |
| ● | there is only limited recourse, or no recourse, to the former owners of newly acquired properties for unknown or undisclosed liabilities such as the clean-up of undisclosed environmental contamination; claims by customers, vendors or other persons arising on account of actions or omissions of the former owners of the properties; and claims by local governments, adjoining property owners, property owner associations and easement holders for fees, assessments or taxes on other property-related changes. As a result, if a liability were asserted against us based upon ownership of an acquired property, we might be required to pay significant sums to settle it, which could adversely affect our financial results and cash flow. |
In addition, we often do not obtain third-party appraisals of acquired properties and instead rely on internal value determinations.
We will incur costs and will face integration challenges when we acquire additional stores.
As we acquire or develop additional self-storage properties and bring additional self-storage properties onto our third-party management platform, we will be subject to risks associated with integrating and managing new stores, including customer retention and mortgage default risks. In the case of a large portfolio purchase, we could experience strains in our existing systems and management capacities. In addition, acquisitions or developments may cause disruptions in our operations and divert management’s attention away from day-to-day operations. Furthermore, our income may decline because we will be required to depreciate/amortize in future periods costs for acquired real property and intangible assets. Our failure to successfully integrate any future acquisitions into our portfolio could have an adverse effect on our operating costs and our ability to make distributions to our shareholders.
The acquisition of new stores that lack operating history with us will make it more difficult to predict financial performance.
We intend to continue to acquire individual and portfolios of self-storage properties. These acquisitions could fail to perform in accordance with expectations. If we fail to accurately estimate occupancy levels, rental rates, operating costs or costs of improvements to bring an acquired store up to the standards established for our intended market position, the performance of the store may be below expectations. Acquired stores may have characteristics or deficiencies affecting their valuation or revenue potential that we have not yet discovered. We cannot assure that the performance of stores acquired by us will increase or be maintained under our management.
Our development activities may be more costly or difficult to complete than we anticipate.
We intend to continue to develop self-storage properties where market conditions warrant such investment. Once made, these investments may not produce results in accordance with our expectations. Risks associated with development and construction activities include:
| ● | the unavailability of favorable financing sources in the debt and equity markets; |
| ● | construction cost overruns, including on account of rising interest rates, diminished availability of materials and labor, and increases in the costs of materials and labor; |
| ● | construction delays and failure to achieve target occupancy levels and rental rates, resulting in a lower than projected return on our investment; |
| ● | complications (including building moratoriums and anti-growth legislation) in obtaining necessary zoning, occupancy and other governmental permits; and |
| ● | unexpected, competitive development that is proposed or announced after our development activities have begun. |
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We depend on external sources of capital that are outside of our control; the unavailability of capital from external sources could adversely affect our ability to acquire or develop stores, satisfy our debt obligations and/or make distributions to shareholders.
We depend on external sources of capital to fund acquisitions and development, to satisfy our debt obligations and to make distributions to our shareholders required to maintain our status as a REIT, and these sources of capital may not be available on favorable terms, if at all. Our access to external sources of capital depends on a number of factors, including general market conditions, the market’s perception of our growth potential, our current and potential future earnings, our cash flow and our ability to continue to qualify as a REIT for federal income tax purposes. If we are unable to obtain external sources of capital, we may not be able to acquire or develop properties when strategic opportunities exist, satisfy our debt obligations, make distributions to shareholders that would permit us to qualify as a REIT or avoid paying tax on our REIT taxable income.
If we are unable to promptly re-lease our cubes or if the rates upon such re-letting are significantly lower than expected, our business and results of operations would be adversely affected.
We derive revenues principally from rents received from customers who rent cubes at our self-storage properties under month-to-month leases. Any delay in re-leasing cubes as vacancies arise would reduce our revenues and harm our operating results. In addition, lower than expected rental rates upon re-leasing could adversely affect our revenues and impede our growth.
Store ownership through joint ventures may limit our ability to act exclusively in our interest.
We co-invest with, and we may continue to co-invest with, third parties through joint ventures. In any such joint venture, we may not be in a position to exercise sole decision-making authority regarding the stores owned through joint ventures. Investments in joint ventures may, under certain circumstances, involve risks not present when a third party is not involved, including the possibility that joint venture partners might become bankrupt or fail to fund their share of required capital contributions. Joint venture partners may have business interests or goals that are inconsistent with our business interests or goals and may be in a position to take actions contrary to our policies or objectives. Such investments also have the potential risk of impasse on strategic decisions, such as a sale, in cases where neither we nor the joint venture partner would have full control over the joint venture. In other circumstances, joint venture partners may have the ability without our agreement to make certain major decisions, including decisions about sales, capital expenditures, and/or financing. Any disputes that may arise between us and our joint venture partners could result in litigation or arbitration that could increase our expenses and distract our officers and/or Trustees from focusing their time and effort on our business. In addition, we might in certain circumstances be liable for the actions of our joint venture partners, and the activities of a joint venture could adversely affect our ability to qualify as a REIT, even though we do not control the joint venture.
We face significant competition for customers and acquisition and development opportunities.
Actions by our competitors may decrease or prevent increases of the occupancy and rental rates of our stores. We compete with numerous developers, owners and operators of self-storage properties, including other REITs, as well as on-demand storage providers, some of which own or may in the future own stores similar to ours in the same submarkets in which our stores are located and some of which may have greater capital resources. In addition, due to the relatively low cost of each individual self-storage property, other developers, owners and operators have the capability to build additional stores that may compete with our stores.
If our competitors build new stores that compete with our stores or offer space at rental rates near or below the rental rates we currently charge our customers, we may lose potential customers, and we may be pressured to reduce our rental rates below those we currently charge in order to retain customers when our customers’ leases expire. As a result, our financial condition, cash flow, cash available for distribution, market price of our shares and ability to satisfy our debt service obligations could be materially adversely affected. In addition, increased competition for customers may require us to make capital improvements to our stores that we would not have otherwise made. Any unbudgeted capital improvements we undertake may reduce cash available for distributions to our shareholders or for satisfaction of our debt service obligations.
We also face significant competition for acquisitions and development opportunities. Some of our competitors have greater financial resources than we do and a greater ability to borrow funds to acquire stores. These competitors may also be willing to accept more risk than we can prudently manage, including risks with respect to the geographic proximity of investments and the payment of higher acquisition prices. This competition for investments may reduce the number of suitable investment opportunities available to us, may increase acquisition costs and may reduce demand for self-storage space in certain areas where our stores are located and, as a result, adversely affect our operating results.
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Potential losses may not be covered by insurance.
We carry comprehensive liability, fire, casualty, extended coverage and rental loss insurance covering all of the properties in our portfolio. We also carry environmental insurance coverage on certain stores in our portfolio. We believe the policy specifications and insured limits are appropriate and adequate given the relative risk of loss, the cost of the coverage and industry practice. We do not carry insurance for losses such as loss from civil unrest, riots, war or acts of God, and, in some cases, flood and environmental hazards, because such coverage is either not available or is not available at commercially reasonable rates. Some of our policies, such as those covering losses due to terrorism, hurricanes, floods and earthquakes, are insured subject to limitations involving large deductibles or co-payments and policy limits that may not be sufficient to cover losses. In particular, certain of our stores are located in areas that are prone to or at risk of flooding, including coastal flooding, and some of our stores have been previously damaged or otherwise impacted by hurricanes and other flooding events. Climate change may result in more frequent severe weather events, potential changes in precipitation patterns and extreme variability in weather patterns, which may affect those stores in areas prone to or at risk of flooding. If we experience a loss at a store that is uninsured or that exceeds policy limits, we could lose the capital invested in that store as well as the anticipated future cash flows from that store. Inflation, changes in building codes and ordinances, environmental considerations and other factors also might make it impractical or undesirable to use insurance proceeds to replace a store after it has been damaged or destroyed. In addition, if the damaged stores are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these stores were irreparably damaged.
Additionally, we use a combination of insurance products, some of which include deductibles and self-insured retention amounts, to provide risk mitigation for potential liabilities associated with automobiles, workers’ compensation, employment practices, general contractors, cyber risks, crime, directors and officers, employee health-care benefits and personal injuries that might be sustained at our stores. Liabilities associated with the risks that are retained by us are estimated, in part, by considering historical claims experience and actuarial assumptions. Our results of operations could be materially impacted by claims and other expenses related to such insurance plans if future occurrences and claims differ from these assumptions and historical trends.
Our insurance coverage may not comply with certain loan requirements.
Certain of our stores serve as collateral for our mortgage-backed debt, some of which we assumed in connection with our acquisition of stores and requires us to maintain insurance, deductibles, retentions and other policy terms at levels that may not be commercially reasonable in the current insurance environment. We may be unable to obtain required insurance coverage if the cost and/or availability make it impractical or impossible to comply with debt covenants. If we cannot comply with a lender’s requirements, the lender could declare a default, which could affect our ability to obtain future financing and have a material adverse effect on our results of operations and cash flows and our ability to obtain future financing. In addition, we may be required to self-insure against certain losses or our insurance costs may increase.
Potential liability for environmental contamination could result in substantial costs.
We are subject to federal, state and local environmental laws, ordinances and regulations that apply generally to the ownership of real property and the operation of self-storage properties. If we fail to comply with those laws, ordinances and regulations, we could be subject to significant fines or other governmental sanctions.
Under various federal, state and local laws, ordinances and regulations, an owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at a property and may be held liable to a governmental entity or to third parties for property damage and for investigation and clean-up costs incurred by such parties in connection with contamination. Such liability may be imposed whether or not the owner or operator knew of, or was responsible for, the presence of these hazardous or toxic substances. The cost of investigation, remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to properly remediate such substances, may adversely affect our ability to sell or rent such property or to borrow using such property as collateral. In addition, in connection with the ownership, operation and management of properties, we are potentially liable for property damage or injuries to persons and property.
Our practice is to conduct or obtain environmental assessments in connection with the acquisition or development of additional stores. We carry environmental insurance coverage on certain stores in our portfolio. We obtain or examine environmental assessments from qualified and reputable environmental consulting firms (and intend to conduct such assessments prior to the acquisition or development of additional stores). The environmental assessments received to date have not revealed, nor do we have actual knowledge of, any environmental liability that we believe will have a material adverse effect on us. However, we cannot assure that our environmental assessments have identified or will identify all material environmental conditions, that any prior owner of any property did not create a material environmental condition not actually known to or discoverable by us, that environmental conditions on neighboring properties
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will not have an impact on any of our properties, or that a material environmental condition does not otherwise exist with respect to any of our properties.
Americans with Disabilities Act and applicable state accessibility act compliance may require unanticipated expenditures.
Under the ADA, all places of public accommodation are required to meet federal requirements related to access and use by disabled persons. A number of other federal, state and local laws may also impose access and other similar requirements at our properties or websites. A failure to comply with the ADA or similar state or local requirements could result in the governmental imposition of fines or the award of damages to private litigants affected by the noncompliance. Although we believe that our properties and websites comply in all material respects with these requirements (or would be eligible for applicable exemptions from material requirements because of adaptive assistance provided), a determination that one or more of our properties or websites is not in compliance with the ADA or similar state or local requirements would result in the incurrence of additional costs associated with bringing the properties or websites into compliance. If we are required to make substantial modifications to comply with the ADA or similar state or local requirements, we may be required to incur significant unanticipated expenditures, which could have an adverse effect on our operating costs and our ability to make distributions to our shareholders.
We face system security risks as we depend upon automated processes and the internet, and breaches of, or failures in the performance of, our information technology systems could damage our reputation, cause us to incur substantial additional costs and subject us to litigation.
We are increasingly dependent upon automated information technology processes and internet commerce, and many of our new customers come from the telephone or over the internet. Moreover, the nature of our business involves the receipt and retention of personal information about our customers. We also rely extensively on third-party vendors to retain data, process transactions and provide other systems and services. These systems, and our systems, are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, malware, ransomware and other destructive or disruptive security breaches and catastrophic events, such as a natural disaster or a terrorist event or cyber-attack. In addition, experienced computer programmers and hackers may be able to penetrate our security systems and misappropriate or make unavailable to us our confidential information, create system disruptions or cause shutdowns. Such data security breaches as well as system disruptions and shutdowns could result in additional costs to repair or replace such networks or information systems and possible legal liability, including government enforcement actions and private litigation. In addition, our customers could lose confidence in our ability to protect their personal information, which could cause them to discontinue leasing at our stores.
If we are unable to attract and retain team members or contract with third parties having the specialized skills or technologies needed to support our systems, implement improvements to our customer-facing technology in a timely manner, allow accurate visibility to product availability when customers are ready to rent, quickly and efficiently fulfill our customers rental and payment methods they demand or provide a convenient and consistent experience for our customers regardless of the ultimate sales channel, our ability to compete and our results of operations could be adversely affected.
Risks Related to the Real Estate Industry
Our performance and the value of our self-storage properties are subject to risks associated with our properties and with the real estate industry.
Our rental revenues, operating costs and the value of our real estate assets, and consequently the value of our securities, are subject to the risk that if our stores do not generate revenues sufficient to meet our operating expenses, including debt service and capital expenditures, our cash flow and ability to pay distributions to our shareholders will be adversely affected. Events or conditions beyond our control that may adversely affect our operations or the value of our properties include but are not limited to:
| ● | downturns in the national, regional and local economic climate; |
| ● | local or regional oversupply, increased competition or reduction in demand for self-storage space; |
| ● | vacancies or changes in market rents for self-storage space; |
| ● | inability to collect or delay in collecting rent from customers; |
| ● | increased operating costs, including maintenance, personnel, insurance premiums, customer acquisition costs and real estate taxes; |
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| ● | changes in interest rates and availability of financing; |
| ● | hurricanes, earthquakes and other natural disasters, civil disturbances, terrorist acts or acts of war that may result in uninsured or underinsured losses; |
| ● | significant expenditures associated with acquisitions and development projects, such as debt service payments, real estate taxes, insurance and maintenance costs which are generally not reduced when circumstances cause a reduction in revenues from a property; |
| ● | costs of complying with changes in laws and governmental regulations, including those governing usage, zoning, the environment and taxes; and |
| ● | the relative illiquidity of real estate investments. |
In addition, prolonged periods of economic slowdown or recession, rising interest rates, declining demand for self-storage or the public perception that any of these events may occur, could result in a general decline in rental revenues, which could impair our ability to satisfy our debt service obligations and to make distributions to our shareholders.
Rental revenues are significantly influenced by demand for self-storage space generally, and a decrease in such demand would likely have a greater adverse effect on our rental revenues than if we owned a more diversified real estate portfolio.
Because our real estate portfolio consists primarily of self-storage properties, we are subject to risks inherent in investments in a single industry. A decrease in the demand for self-storage space would have a greater adverse effect on our rental revenues than if we owned a more diversified real estate portfolio. Demand for self-storage space could be adversely affected by weakness in the national, regional and local economies, changes in supply of, or demand for, similar or competing self-storage properties in an area and the excess amount of self-storage space in a particular market. To the extent that any of these conditions occur, they are likely to affect market rents for self-storage space, which could cause a decrease in our rental revenue. Any such decrease could impair our ability to satisfy debt service obligations and make distributions to our shareholders.
Because real estate is illiquid, we may not be able to sell properties when appropriate.
Real estate property investments generally cannot be sold quickly. Also, the tax laws applicable to REITs require that we hold our properties for investment, rather than for sale in the ordinary course of business, which may cause us to forgo or defer sales of properties that may otherwise be in our best interest. Therefore, we may not be able to dispose of properties promptly, or on favorable terms, in response to economic or other market conditions, which may adversely affect our financial position.
Risks Related to our Qualification and Operation as a REIT
Failure to qualify as a REIT would subject us to U.S. federal income tax which would reduce the cash available for distribution to our shareholders.
We operate our business to qualify to be taxed as a REIT for federal income tax purposes. We have not requested and do not plan to request a ruling from the Internal Revenue Service (“IRS”) that we qualify as a REIT, and the statements in this Report are not binding on the IRS or any court. As a REIT, we generally will not be subject to federal income tax on the income that we distribute currently to our shareholders. Many of the REIT requirements, however, are highly technical and complex. The determination that we are a REIT requires an analysis of various factual matters and circumstances that may not be totally within our control. For example, to qualify as a REIT, at least 95% of our gross income must come from specific passive sources, such as rent, that are itemized in the REIT tax laws. In addition, to qualify as a REIT, we cannot own specified amounts of debt and equity securities of some issuers. We also are required to distribute to our shareholders with respect to each year at least 90% of our REIT taxable income, excluding net capital gains. The fact that we hold substantially all of our assets through the Operating Partnership and its subsidiaries and joint ventures further complicates the application of the REIT requirements for us. Even a technical or inadvertent mistake could jeopardize our REIT status, and, given the highly complex nature of the rules governing REITs and the ongoing importance of factual determinations, we cannot provide any assurance that we will continue to qualify as a REIT. Congress and the IRS may make changes to the tax laws and regulations, and the courts might issue new rulings that make it more difficult, or impossible, for us to remain qualified as a REIT. If we fail to qualify as a REIT for federal income tax purposes and are able to avail ourselves of one or more of the statutory savings provisions in order to maintain our REIT status, we would nevertheless be required to pay penalty taxes of $50,000 or more for each such failure.
If we fail to qualify as a REIT for federal income tax purposes, and are unable to avail ourselves of certain savings provisions set forth in the Internal Revenue Code, we would be subject to federal income tax at regular corporate rates on all of our income. As a taxable
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corporation, we would not be allowed to take a deduction for distributions to shareholders in computing our taxable income or pass through long-term capital gains to individual shareholders at favorable rates. We also could be subject to increased state and local taxes. We would not be able to elect to be taxed as a REIT until the fifth taxable year that begins after the taxable year we first failed to qualify unless the IRS were to grant us relief under certain statutory provisions. If we failed to qualify as a REIT, we would have to pay significant income taxes, which would reduce our net earnings available for investment or distribution to our shareholders. This likely would have a significant adverse effect on our earnings and likely would adversely affect the value of our securities. In addition, we would no longer be required to pay any distributions to shareholders.
Furthermore, we owned a subsidiary REIT (“PSI”) that was liquidated on December 31, 2018. Prior to liquidation, PSI was independently subject to, and was required to comply with, the same REIT requirements that we must satisfy in order to qualify as a REIT, together with all other rules applicable to REITs. If PSI failed to qualify as a REIT during our period of ownership, and certain statutory relief provisions do not apply, as a result of a protective election made jointly by PSI and CubeSmart, PSI should be taxed as a taxable REIT subsidiary. See the section entitled “Taxation of CubeSmart−Requirements for Qualification−Taxable REIT Subsidiaries” in Exhibit 99.1 for more information regarding taxable REIT subsidiaries.
LAACO was a publicly traded partnership immediately prior to our acquisition of it on December 9, 2021. Failure of 90% or more of a publicly traded partnership’s gross income to be “qualifying income” under Section 7704 of the Internal Revenue Code in each of its tax years could result in such entity being taxed as a corporation rather than a partnership for U.S. federal income tax purposes. If LAACO failed to qualify as a partnership for U.S. federal income tax purposes immediately prior to our acquisition of it, and certain relief provisions do not apply, it might adversely affect our ability to satisfy the income and asset tests for REIT qualification. In addition, LAACO’s classification as a corporation for U.S. federal income tax purposes would mean that it has corporate income tax liabilities for all tax years during which it is classified as a corporation for U.S. federal income tax purposes.
Failure of the Operating Partnership (or a subsidiary partnership or joint venture) to be treated as a partnership would have serious adverse consequences to our shareholders.
If the IRS were to successfully challenge the tax status of the Operating Partnership or any of its subsidiary partnerships or joint ventures for federal income tax purposes, the Operating Partnership or the affected subsidiary partnership or joint venture would be taxable as a corporation. In such event, we likely would cease to qualify as a REIT and the imposition of a corporate tax on the Operating Partnership, a subsidiary partnership or joint venture would reduce the amount of cash available for distribution from the Operating Partnership to us and ultimately to our shareholders.
To maintain our REIT status, we may be forced to borrow funds on a short-term basis during unfavorable market conditions.
As a REIT, we are subject to certain distribution requirements, including the requirement to distribute 90% of our REIT taxable income, excluding net capital gains, which may result in our having to make distributions at a disadvantageous time or to borrow funds at unfavorable rates. Compliance with this requirement may hinder our ability to operate solely on the basis of maximizing profits.
We will pay some taxes even if we qualify as a REIT, which will reduce the cash available for distribution to our shareholders.
Even if we qualify as a REIT for federal income tax purposes, we will be required to pay certain federal, state and local taxes on our income and property. For example, we will be subject to income tax to the extent we distribute less than 100% of our REIT taxable income, including capital gains. Additionally, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which dividends paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. Moreover, if we have net income from “prohibited transactions,” that income will be subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property held primarily for sale to customers in the ordinary course of business. The determination as to whether a particular sale is a prohibited transaction depends on the facts and circumstances related to that sale. We cannot guarantee that sales of our properties would not be prohibited transactions unless we comply with certain statutory safe-harbor provisions.
In addition, any net taxable income earned directly by our taxable REIT subsidiaries, or through entities that are disregarded for federal income tax purposes as entities separate from our taxable REIT subsidiaries, will be subject to federal and possibly state corporate income tax. We have elected to treat some of our subsidiaries as taxable REIT subsidiaries, and we may elect to treat other subsidiaries as taxable REIT subsidiaries in the future. In this regard, several provisions of the laws applicable to REITs and their subsidiaries ensure that a taxable REIT subsidiary will be subject to an appropriate level of federal income taxation. For example, a taxable REIT subsidiary is limited in its ability to deduct certain interest payments made to an affiliated REIT. In addition, the REIT has to pay a 100% penalty tax on some payments that it receives or on some deductions taken by a taxable REIT subsidiary if the economic arrangements between the
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REIT, the REIT’s customers, and the taxable REIT subsidiary are not comparable to similar arrangements between unrelated parties. Finally, some state and local jurisdictions may tax some of our income even though as a REIT we are not subject to federal income tax on that income because not all states and localities follow the federal income tax treatment of REITs. To the extent that we and our affiliates are required to pay federal, state and local taxes, we will have less cash available for distributions to our shareholders.
We face possible federal, state and local tax audits.
Because we are organized and qualify as a REIT, we are generally not subject to federal income taxes, but are subject to certain state and local taxes. Certain entities through which we own real estate either have undergone, or are currently undergoing, tax audits. Although we believe that we have substantial arguments in favor of our positions in audits, in some instances there may be no controlling precedent or interpretive guidance on the specific point at issue. Collectively, tax deficiency notices received to date from the jurisdictions conducting the ongoing audits have not been material. However, there can be no assurance that future audits will not occur with increased frequency or that the ultimate result of such audits will not have a material adverse effect on our results of operations.
Legislative or regulatory tax changes related to REITs could materially and adversely affect our business.
At any time, the federal income tax laws or regulations governing REITs or the administrative interpretations of those laws or regulations may be changed, possibly with retroactive effect. We cannot predict if or when any new federal income tax law, regulation or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective or whether any such law, regulation or interpretation may take effect retroactively. We and our shareholders could be adversely affected by any such change in, or any new, federal income tax law, regulation or administrative interpretation.
Shareholders are urged to consult with their tax advisors with respect to the status of any regulatory or administrative developments and proposals and their potential effect on investment in our capital stock.
Dividends paid by REITs do not qualify for the reduced tax rates provided under current law.
Dividends paid by REITs are generally not eligible for the reduced 15% maximum tax rate for dividends paid to individuals (20% for those with taxable income above certain thresholds that are adjusted annually under current law). The more favorable rates applicable to regular corporate dividends could cause shareholders who are individuals to perceive investments in REITs to be relatively less attractive than investments in the stock of non-REIT corporations that pay dividends to which more favorable rates apply, which could reduce the value of REIT stocks.
Partnership tax audit rules could have a material adverse effect on us.
Under the rules applicable to U.S. federal income tax audits of partnerships, subject to certain exceptions, any audit adjustment to items of income, gain, loss, deduction, or credit of a partnership (and any partner’s distributive share thereof) is determined, and taxes, interest, or penalties attributable thereto could be assessed and collected, at the partnership level. Absent available elections, it is possible that the Operating Partnership, and any other partnership in which we directly or indirectly invest, could be required to pay additional taxes, interest and penalties as a result of an audit adjustment, and we, as a direct or indirect partner of a partnership, could be required to bear the economic burden of those taxes, interest, and penalties even though we may not otherwise have been required to pay additional taxes had we owned the assets of these partnerships directly. There can be no assurance that these rules will not have a material adverse effect on us.
Risks Related to our Debt Financings
We face risks related to current debt maturities, including refinancing risk.
Certain of our mortgages, bank loans and unsecured debt (including our senior notes) will have significant outstanding balances on their maturity dates, commonly known as “balloon payments.” We may not have the cash resources available to repay those amounts, and we may have to raise funds for such repayment either through the issuance of equity or debt securities, additional bank borrowings (which may include extension of maturity dates), joint ventures or asset sales. Furthermore, we are restricted from incurring certain additional indebtedness and making certain other changes to our capital and debt structure under the terms of the Credit Facility (defined below) and senior notes and the indentures governing the Credit Facility and senior notes.
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There can be no assurance that we will be able to refinance our debt on favorable terms or at all. To the extent we cannot refinance debt on favorable terms or at all, we may be forced to dispose of properties on disadvantageous terms or pay higher interest rates, either of which would have an adverse impact on our financial performance and ability to pay dividends to our shareholders.
As a result of our interest rate hedges, swap agreements and other, similar arrangements, we face counterparty risks.
We may be exposed to the potential risk of counterparty default or non-payment with respect to interest rate hedges, swap agreements, floors, caps and other interest rate hedging contracts that we may enter into from time to time, in which event we could suffer a material loss on the value of those agreements. Although these agreements may lessen the impact of rising interest rates on us, they also expose us to the risk that other parties to the agreements will not perform or that we cannot enforce the agreements. There is no assurance that our potential counterparties on these agreements will perform their obligations under such agreements.
Financing our future growth plan or refinancing existing debt maturities could be impacted by negative capital market conditions.
From time to time, domestic financial markets experience volatility and uncertainty. At times in recent years liquidity has tightened in the domestic financial markets, including the investment grade debt and equity capital markets from which we historically sought financing. Consequently, there is greater uncertainty regarding our ability to access the credit markets in order to attract financing on reasonable terms, and there can be no assurance that we will be able to continue to issue common or preferred equity securities at a reasonable price. Our ability to finance new acquisitions and refinance future debt maturities could be adversely impacted by our inability to secure financing on reasonable terms, if at all.
The terms and covenants relating to our indebtedness could adversely impact our financial performance.
Like other real estate companies that incur debt, we are subject to risks associated with debt financing, such as the insufficiency of cash flow to meet required debt service payment obligations and the inability to refinance outstanding indebtedness at maturity. If our debt cannot be paid, refinanced or extended at maturity, we may not be able to make distributions to shareholders at expected levels or at all and may not be able to acquire new stores. Failure to make distributions to our shareholders could result in our failure to qualify as a REIT for federal income tax purposes. Furthermore, an increase in our interest expense could adversely affect our cash flow and ability to make distributions to shareholders. If we do not meet our debt service obligations, any stores securing such indebtedness could be foreclosed on, which would have a material adverse effect on our cash flow and ability to make distributions and, depending on the number of stores foreclosed on, could threaten our continued viability.
Our Credit Facility (defined below) contains (and any new or amended facility we may enter into from time to time will likely contain) customary affirmative and negative covenants, including financial covenants that, among other things, require us to comply with certain liquidity and other tests. Our ability to borrow under the Credit Facility is (and any new or amended facility we may enter into from time to time will be) subject to compliance with such financial and other covenants. In the event that we fail to satisfy these covenants, we would be in default under the Credit Facility and may be required to repay such debt with capital from other sources. Under such circumstances, other sources of debt or equity capital may not be available to us, or may be available only on unattractive terms. Moreover, the presence of such covenants in our credit agreements could cause us to operate our business with a view toward compliance with such covenants, which might not produce optimal returns for shareholders. Similarly, the indenture under which we have issued unsecured senior notes contains customary financial covenants, including limitations on incurrence of additional indebtedness.
Increases in interest rates on variable-rate indebtedness would increase our interest expense, which could adversely affect our cash flow and ability to make distributions to shareholders. Rising interest rates could also restrict our ability to refinance existing debt when it matures. In addition, an increase in interest rates could decrease the amounts that third parties are willing to pay for our assets, thereby limiting our ability to alter our portfolio promptly in relation to economic or other conditions.
Our organizational documents contain no limitation on the amount of debt we may incur. As a result, we may become highly leveraged in the future.
Our organizational documents do not limit the amount of indebtedness that we may incur. We could alter the balance between our total outstanding indebtedness and the value of our assets at any time. If we become more highly leveraged, then the resulting increase in debt service could adversely affect our ability to make payments on our outstanding indebtedness and to pay our anticipated distributions and/or the distributions required to maintain our REIT status, and could harm our financial condition.
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Risks Related to our Organization and Structure
We are dependent upon our senior management team whose continued service is not guaranteed.
Our executive team, including our named executive officers, has extensive self-storage, real estate and public company experience. Our Chief Executive Officer, Chief Financial Officer, Chief Legal Officer and Chief Operating Officer are parties to the Company’s executive severance plan, however, we cannot provide assurance that any of them will remain in our employment. The loss of services of one or more members of our senior management team could adversely affect our operations and our future growth.
The loss of key personnel, including our on-site personnel, or difficulties we encounter in hiring, training and retaining personnel, including skilled field personnel, may adversely affect our rental revenues.
Our performance depends on our ability to recruit and retain high-quality employees, both in our stores, in our sales staff and in our corporate headquarters. Our ability to attract and retain corporate, sales, store and other personnel is also acutely impacted in markets where the competition for a relatively small number of qualified employees is intense. Furthermore, we have experienced, and could continue to experience, a shortage of labor for certain positions, including due to market trends and conditions such as continued concerns around the COVID-19 pandemic, the availability of new telecommuting employment options and other factors, which could decrease the pool of available qualified talent for key functions.
As of December 31, 2022, we had 2,332 property-level personnel involved in the management and operation of our stores. The customer service, marketing skills and knowledge of local market demand and competitive dynamics of our store managers are contributing factors to our ability to maximize our rental income and to achieve the highest sustainable rent levels at each of our stores.
Competitive pressures and the impact of inflation may require that we enhance our pay and benefits package to compete effectively for such personnel. If there is an increase in these costs or if we fail to attract and retain qualified and skilled personnel, our business and operating results could be adversely affected.
Certain provisions of Maryland law could inhibit changes in control, which may discourage third parties from conducting a tender offer or seeking other change of control transactions that could involve a premium price for our shares or otherwise benefit our shareholders.
Certain provisions of Maryland law may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the holders of our common shares with the opportunity to realize a premium over the then-prevailing market price of those shares, including:
| ● | “business combination moratorium/fair price” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested shareholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate thereof) for five years after the most recent date on which the shareholder becomes an interested shareholder, and thereafter imposes stringent fair price and super-majority shareholder voting requirements on these combinations; and |
| ● | “control share” provisions that provide that “control shares” of our company (defined as shares which, when aggregated with other shares controlled by the shareholder, entitle the shareholder to exercise one of three increasing ranges of voting power in electing Trustees) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares” from a party other than the issuer) have no voting rights except to the extent approved by our shareholders by the affirmative vote of at least two thirds of all the votes entitled to be cast on the matter, excluding all interested shares, and are subject to redemption in certain circumstances. |
We have opted out of these provisions of Maryland law. However, our Board may opt to make these provisions applicable to us at any time without shareholder approval.
Our Trustees also have the discretion, granted in our bylaws and Maryland law, without shareholder approval to, among other things (1) create a staggered Board, (2) amend our bylaws or repeal individual bylaws in a manner that provides the Board with greater authority, and (3) issue additional equity securities. Any such action could inhibit or impede a third party from making a proposal to acquire us at a price that could be beneficial to our shareholders.
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Our shareholders have limited control to prevent us from making any changes to our investment and financing policies.
Our Board has adopted policies with respect to certain activities. These policies may be amended or revised from time to time at the discretion of our Board without a vote of our shareholders. This means that our shareholders have limited control over changes in our policies. Such changes in our policies intended to improve, expand or diversify our business may not have the anticipated effects and consequently may adversely affect our business and prospects, results of operations and share price.
Our rights and the rights of our shareholders to take action against our Trustees and officers are limited.
Maryland law provides that a trustee or officer has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our declaration of trust and bylaws require us to indemnify our Trustees and officers for actions taken by them in those capacities on our behalf, to the extent permitted by Maryland law. Accordingly, in the event that actions taken in good faith by any Trustee or officer impede our performance, our shareholders’ ability to recover damages from that Trustee or officer will be limited.
Our declaration of trust permits our Board to issue preferred shares with terms that may discourage third parties from conducting a tender offer or seeking other change of control transactions that could involve a premium price for our shares or otherwise benefit our shareholders.
Our declaration of trust permits our Board to issue up to 40,000,000 preferred shares, having those preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications or terms or conditions of redemption as determined by our Board. In addition, our Board may reclassify any unissued common shares into one or more classes or series of preferred shares. Thus, our Board could authorize, without shareholder approval, the issuance of preferred shares with terms and conditions that could have the effect of discouraging a takeover or other transaction in which holders of some or a majority of our shares might receive a premium for their shares over the then-prevailing market price of our shares. We currently do not expect that the Board would require shareholder approval prior to such a preferred issuance. In addition, any preferred shares that we issue would rank senior to our common shares with respect to the payment of distributions, in which case we could not pay any distributions on our common shares until full distributions have been paid with respect to such preferred shares.
Risks Related to our Securities
Additional issuances of equity securities may be dilutive to shareholders.
The interests of our shareholders could be diluted if we issue additional equity securities to finance future acquisitions or developments or to repay indebtedness. Our Board may authorize the issuance of additional equity securities, including preferred shares, without shareholder approval. Our ability to execute our business strategy depends upon our access to an appropriate blend of debt financing, including unsecured lines of credit and other forms of secured and unsecured debt, and equity financing, including common and preferred equity.
Many factors could have an adverse effect on the market value of our securities.
A number of factors might adversely affect the price of our securities, many of which are beyond our control. These factors include:
| ● | increases in market interest rates, relative to the dividend yield on our shares. If market interest rates go up, prospective purchasers of our securities may require a higher yield. Higher market interest rates would not, however, result in more funds for us to distribute and, to the contrary, would likely increase our borrowing costs and potentially decrease funds available for distribution. Thus, higher market interest rates could cause the market price of our equity securities to go down; |
| ● | anticipated benefit of an investment in our securities as compared to investment in securities of companies in other industries (including benefits associated with tax treatment of dividends and distributions); |
| ● | perception by market professionals of REITs generally and REITs comparable to us in particular; |
| ● | level of institutional investor interest in our securities; |
| ● | relatively low trading volumes in securities of REITs; |
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| ● | our results of operations and financial condition; |
| ● | investor confidence in the stock market generally; and |
| ● | additions and departures of key personnel. |
The market value of our equity securities is based primarily upon the market’s perception of our growth potential and our current and potential future earnings and cash distributions. Consequently, our equity securities may trade at prices that are higher or lower than our net asset value per equity security. If our future earnings or cash distributions are less than expected, it is likely that the market price of our equity securities will diminish.
The market price of our common shares has been, and may continue to be, particularly volatile, and our shareholders may be unable to resell their shares at a profit.
The market price of our common shares has been subject to fluctuation and may continue to fluctuate or decline. Between January 1, 2020 and December 31, 2022, the closing price per share of our common shares has ranged from a high of $57.02 (on December 30, 2021) to a low of $20.85 (on March 23, 2020). In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. If our share price is volatile, we may become the target of securities litigation, which could result in substantial costs and divert our management’s attention and resources from our business.
General Risk Factors
Many states and local jurisdictions are facing severe budgetary problems which may have an adverse impact on our business and financial results.
Many states and jurisdictions are facing severe budgetary problems. Action that may be taken in response to these problems, such as increases in property taxes on commercial properties, changes to sales taxes or other governmental efforts, including mandating medical insurance, paid time off and severance payments for employees, could adversely impact our business and results of operations.
We may incur impairment charges.
We evaluate on a quarterly basis our real estate portfolio for indicators of impairment. Impairment charges reflect management’s judgment of the probability and severity of the decline in the value of real estate assets we own. These charges and provisions may be required in the future as a result of factors beyond our control, including, among other things, changes in the economic environment and market conditions affecting the value of real property assets or natural or man-made disasters. If we are required to take impairment charges, our results of operations will be adversely impacted.
Inflation and rising operating expenses could reduce our cash flow and funds available for future distributions.
Our stores and any other stores we acquire or develop in the future are, and will be, subject to operating risks common to real estate in general, any or all of which may negatively affect us. Our stores are subject to increases in operating expenses such as real estate, sales and other taxes, personnel costs including mandated minimum hourly wage rates and the cost of providing specific medical coverage and governmental mandated benefits to our employees, utilities, customer acquisition costs, insurance, administrative expenses and costs for repairs and maintenance. If operating expenses continue to increase without a corresponding increase in revenues, our profitability could diminish and limit our ability to make distributions to our shareholders.
We cannot assure our ability to pay dividends in the future.
Historically, we have paid quarterly distributions to our shareholders, and we intend to continue to pay quarterly dividends and to make distributions to our shareholders in amounts such that all or substantially all of our taxable income in each year, subject to certain adjustments, is distributed. This, along with other factors, should enable us to continue to qualify for the tax benefits accorded to a REIT under the Internal Revenue Code. We have not established a minimum dividends payment level, and all future distributions will be made at the discretion of our Board. Our ability to pay dividends will depend upon, among other factors:
| ● | the operational and financial performance of our stores; |
| ● | capital expenditures with respect to existing and newly acquired stores; |
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| ● | general and administrative costs associated with our operation as a publicly-held REIT; |
| ● | maintenance of our REIT status; |
| ● | the amount of, and the interest rates on, our debt; |
| ● | the absence of significant expenditures relating to environmental and other regulatory matters; and |
| ● | other risk factors described in this Report. |
Certain of these matters are beyond our control and any significant difference between our expectations and actual results could have a material adverse effect on our cash flow and our ability to make distributions to shareholders.
We may become subject to litigation or threatened litigation which may divert management’s time and attention, require us to pay damages and expenses or restrict the operation of our business.
We may become subject to disputes with commercial parties with whom we maintain relationships or other parties with whom we do business. Any such dispute could result in litigation between us and the other parties. Whether or not any dispute actually proceeds to litigation, we may be required to devote significant management time and attention to its successful resolution (through litigation, settlement or otherwise), which would detract from our management’s ability to focus on our business. Any such resolution could involve the payment of damages or expenses by us, which may be significant. In addition, any such resolution could involve our agreement with terms that restrict the operation of our business.
There are other commercial parties, at both a local and national level, that may assert that our use of our brand names and other intellectual property conflict with their rights to use brand names, internet domains and other intellectual property that they consider to be similar to ours. Any such commercial dispute and related resolution would involve all of the risks described above, including, in particular, our agreement to restrict the use of our brand name or other intellectual property.
We also could be sued for personal injuries and/or property damage occurring on our properties. We maintain liability insurance with limits that we believe are adequate to provide for the defense and/or payment of any damages arising from such lawsuits. There can be no assurance that such coverage will cover all costs and expenses from such suits.
Legislative actions and changes may cause our general and administrative costs and compliance costs to increase.
In order to comply with laws adopted by federal, state or local government or regulatory bodies, we may be required to increase our expenditures and hire additional personnel and additional outside legal, accounting and advisory services, all of which may cause our general and administrative and compliance costs to increase. Significant workforce-related legislative changes could increase our expenses and adversely affect our operations. Examples of possible workforce-related legislative changes include changes to an employer's obligation to recognize collective bargaining units, the process by which collective bargaining agreements are negotiated or imposed, minimum wage requirements and health care and medical and family leave mandates. In addition, changes in the regulatory environment affecting health care reimbursements, and increased compliance costs related to enforcement of federal and state wage and hour statutes and common law related to overtime, among others, could cause our expenses to increase without an ability to pass through any increased expenses through higher prices.
Privacy concerns could result in regulatory changes that may harm our business.
Personal privacy has become a significant issue in the jurisdictions in which we operate. Many jurisdictions in which we operate, including California and New York, have imposed restrictions and requirements on the use of personal information by those collecting such information. The regulatory framework for privacy issues is rapidly evolving and future enactment of more restrictive laws, rules or regulations and/or future enforcement actions or investigations could have a materially adverse impact on us through increased costs or restrictions on our business. Failure to comply with such laws and regulations could result in consent orders or regulatory penalties and significant legal liability, including fines, which could damage our reputation and have an adverse effect on our results of operations or financial condition.
Terrorist attacks, active shooter incidents and other acts of violence or war may adversely impact our performance and may affect the markets on which our securities are traded.
Terrorist attacks at or against our stores, our interests or the United States, may negatively impact our operations and the value of our securities. Attacks, armed conflicts or active-shooter situations could negatively impact the demand for self-storage and increase the cost
27
of insurance coverage for our stores, which could reduce our profitability and cash flow. Furthermore, any terrorist attacks, armed conflicts or active-shooter situations could result in increased volatility in or damage to the United States and worldwide financial markets and economy.
Environmental, social and governance (“ESG”) issues, including those related to climate change and sustainability, may have an adverse effect on our business, financial condition and results of operations and damage our reputation.
Companies across all industries are facing increasing scrutiny relating to their ESG policies. Concern over climate change may result in new or increased legal and regulatory requirements. Increased regulatory requirements related to environmental causes, and related ESG disclosure rules, including the SEC’s recent disclosure proposal on climate change, may result in increased compliance costs or increased energy and other costs.
In addition to environmental issues, these constituencies are also focused on social and other governance issues, including matters such as human capital and social issues. We have established several policies and procedures related to diversity, equity and inclusion as part of our ESG initiative. Our initiatives also extend from individuals to entire communities, including those we serve.
Any failure to achieve our ESG goals or a perception (whether or not valid) of our failure to act responsibly with respect to the environmental, social, or governance issues, or to effectively respond to new, or changes in, legal or regulatory requirements concerning ESG matters, or increased operating costs due to increased regulation or environmental causes could adversely affect our business, financial condition, results of operations, access to capital and reputation and increase our risk of litigation.
Failure to maintain effective internal control over financial reporting could have a material adverse effect on our business, results of operations, financial condition, and stock price.
Pursuant to the Sarbanes-Oxley Act of 2002, we are required to provide a report by management on internal control over financial reporting, including management’s assessment of the effectiveness of internal control. Changes to our business will necessitate ongoing changes to our internal control systems and processes. Internal control over financial reporting may not prevent or detect misstatement because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business, results of operations, and financial condition could be materially harmed, we could fail to meet our reporting obligations, and there could be a material adverse effect on the market price of our common shares.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
As of December 31, 2022, we owned 611 self-storage properties that contain approximately 44.1 million rentable square feet and are located in 24 states and the District of Columbia. The following table sets forth summary information regarding our stores by state as of December 31, 2022.
|
|
|
|
| Total |
| % of Total |
|
|
| |
Number of | Number of | Rentable | Rentable | Ending |
| ||||||
State | Stores | Units | Square Feet | Square Feet | Occupancy |
| |||||
Florida |
| 90 |
| 65,171 |
| 6,796,098 |
| 15.4 | % | 92.5 | % |
Texas |
| 76 | 46,909 |
| 5,446,871 | 12.3 | % | 91.8 | % | ||
California |
| 63 | 45,131 |
| 4,765,486 | 10.8 | % | 91.4 | % | ||
New York |
| 59 | 83,893 |
| 4,742,378 | 10.8 | % | 90.5 | % | ||
Arizona |
| 48 | 28,180 |
| 3,089,826 | 7.0 | % | 86.3 | % | ||
Illinois |
| 43 | 25,916 |
| 2,760,969 | 6.3 | % | 92.2 | % | ||
New Jersey |
| 28 | 20,479 |
| 1,983,356 | 4.5 | % | 90.9 | % | ||
Nevada |
| 22 | 14,645 |
| 1,702,416 | 3.9 | % | 86.9 | % | ||
Maryland | 20 | 17,319 |
| 1,683,821 | 3.8 | % | 92.3 | % | |||
Georgia |
| 22 | 14,082 |
| 1,657,378 | 3.8 | % | 87.4 | % | ||
Ohio |
| 20 | 11,130 |
| 1,294,303 | 2.9 | % | 91.3 | % | ||
Massachusetts | 20 | 13,035 |
| 1,252,577 | 2.8 | % | 86.2 | % | |||
Connecticut |
| 22 | 10,781 |
| 1,200,002 | 2.7 | % | 92.7 | % | ||
Virginia |
| 11 | 11,076 |
| 1,060,480 | 2.4 | % | 80.1 | % | ||
Pennsylvania |
| 12 | 9,051 |
| 890,385 | 2.0 | % | 82.3 | % | ||
Tennessee |
| 9 | 5,699 |
| 755,655 | 1.7 | % | 91.3 | % | ||
Colorado |
| 10 | 5,544 |
| 654,252 | 1.5 | % | 90.9 | % | ||
North Carolina |
| 9 | 5,348 |
| 611,792 | 1.4 | % | 91.7 | % | ||
South Carolina |
| 8 | 3,879 |
| 432,389 | 1.0 | % | 91.6 | % | ||
Washington D.C. |
| 5 | 5,321 |
| 410,676 | 0.9 | % | 90.5 | % | ||
Rhode Island |
| 4 | 2,037 |
| 247,305 | 0.6 | % | 90.6 | % | ||
Utah |
| 4 | 2,351 |
| 239,388 | 0.5 | % | 90.4 | % | ||
New Mexico |
| 3 | 1,694 |
| 182,261 | 0.4 | % | 90.9 | % | ||
Minnesota | 2 | 1,828 |
| 176,296 | 0.4 | % | 85.1 | % | |||
Indiana |
| 1 | 583 |
| 70,386 | 0.2 | % | 94.2 | % | ||
Total/Weighted average |
| 611 | 451,082 | 44,106,746 | 100.0 | % | 90.3 | % |
We have grown by adding stores to our portfolio through acquisitions and development. The tables set forth below show the ending occupancy, annual rent per occupied square foot and total revenues related to our stores owned as of December 31, 2022, and for each of the previous three years, grouped by the year during which we first owned or operated the store.
Stores by Year Acquired/Developed– Ending Occupancy
Rentable | Ending Occupancy |
| |||||||||
Year Acquired/Developed (1) |
| # of Stores |
| Square Feet |
| 2022 |
| 2021 |
| 2020 |
|
2019 and earlier |
| 516 |
| 36,571,449 |
| 91.8 | % | 92.9 | % | 92.7 | % |
2020 |
| 21 |
| 1,851,162 |
| 89.3 | % | 87.6 | % | 83.7 | % |
2021 |
| 69 |
| 5,160,761 |
| 83.3 | % | 87.5 | % | — | |
2022 |
| 5 |
| 523,374 |
| 55.5 | % | — | — | ||
All stores owned as of December 31, 2022 |
| 611 |
| 44,106,746 |
| 90.3 | % | 92.0 | % | 92.3 | % |
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Stores by Year Acquired/Developed - Annual Rent Per Occupied Square Foot (2)
Annual Rent per Square Foot |
| |||||||||||
Year Acquired/Developed (1) |
| # of Stores |
| 2022 |
| 2021 |
| 2020 |
| |||
| ||||||||||||
2019 and earlier |
| 516 | $ | 22.35 | $ | 19.79 | $ | 17.89 | ||||
2020 |
| 21 | 30.62 | 29.21 | 26.62 | |||||||
2021 |
| 69 | 20.99 | 19.71 | — | |||||||
2022 |
| 5 | 23.42 | — | — | |||||||
All stores owned as of December 31, 2022 |
| 611 | $ | 22.44 | $ | 20.00 | $ | 18.10 | ||||
Stores by Year Acquired/Developed - Total Revenues (dollars in thousands)
Total Revenues |
| |||||||||||
Year Acquired/Developed (1) |
| # of Stores |
| 2022 |
| 2021 |
| 2020 |
| |||
| ||||||||||||
2019 and earlier |
| 516 | $ | 805,699 | $ | 717,630 | $ | 630,750 | ||||
2020 |
| 21 |
| 53,194 |
| 46,822 |
| 4,337 | ||||
2021 |
| 69 |
| 96,047 |
| 8,668 |
| — | ||||
2022 |
| 5 |
| 4,436 |
| — |
| — | ||||
All stores owned as of December 31, 2022 |
| 611 | $ | 959,376 | $ | 773,120 | $ | 635,087 | ||||
| (1) | Represents the year acquired/developed for those stores we acquired from a third party or the year placed in service for those stores we developed. |
| (2) | Determined by dividing the aggregate rental revenue for each twelve-month period by the average of the month-end occupied square feet for the period. Rental revenue includes the impact of promotional discounts, which reduce rental income over the promotional period, of $19.2 million, $19.7 million and $15.3 million for the periods ended December 31, 2022, 2021 and 2020, respectively. |
Unconsolidated Real Estate Ventures
As of December 31, 2022, we held ownership interests ranging from 10% to 50% in seven unconsolidated real estate ventures for an aggregate investment carrying value of $106.0 million. We hold interests in these real estate ventures with unaffiliated third parties to acquire, own and operate self-storage properties in select markets. As of December 31, 2022, one of these unconsolidated joint ventures did not own any self-storage properties, while the other six unconsolidated real estate ventures owned a total of 77 self-storage properties that contained an aggregate of approximately 5.6 million net rentable square feet. The self-storage properties owned by these real estate ventures are managed by us and are located in Arizona (2), California (2), Connecticut (6), Florida (6), Georgia (2), Illinois (5), Maryland (2), Massachusetts (6), Minnesota (1), New Jersey (3), New York (1), North Carolina (1), Pennsylvania (1), Rhode Island (2), Texas (35) and Vermont (2).
Each of the seven real estate ventures has assets and liabilities that we do not consolidate in our financial statements.
We account for our investments in real estate ventures using the equity method when it is determined that we have the ability to exercise significant influence over the venture. See note 5 to our consolidated financial statements for further disclosure regarding the assets, liabilities and operating results of our unconsolidated real estate ventures which we account for using the equity method of accounting.
Capital Expenditures
We have a capital improvement program that covers office upgrades, addition of climate control to select cubes, construction of parking areas and other store upgrades. For 2023, we anticipate spending approximately $11.0 million to $16.0 million associated with these capital expenditures. For 2023, we also anticipate spending approximately $15.0 million to $20.0 million on recurring capital expenditures and approximately $20.0 million to $30.0 million on the development of new self-storage properties.
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ITEM 3. LEGAL PROCEEDINGS
To our knowledge, no legal proceedings are pending against us, other than routine actions and administrative proceedings, and other actions not deemed material, and which, in the aggregate, are not expected to have a material adverse effect on our financial condition, results of operations or cash flows.
ITEM 4. MINING SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Repurchase of Parent Company Common Shares
The following table provides information about repurchases of the Parent Company’s common shares during the three months ended December 31, 2022:
| Total |
| Average |
| Total |
| Maximum |
| ||
October 1 - October 31 | 364 | $ | 40.06 | N/A | 3,000,000 | |||||
November 1 - November 30 | 121 | $ | 40.17 | N/A | 3,000,000 | |||||
December 1 - December 31 | — | $ | — | N/A | 3,000,000 | |||||
Total |
| 485 | $ | 40.09 |
| N/A |
| 3,000,000 | ||
| (1) | Represents common shares withheld by the Parent Company upon the vesting of restricted shares to cover employee tax obligations. |
The Parent Company adopted a share repurchase program in 2007 for up to 3.0 million of the Parent Company’s outstanding common shares. Unless terminated earlier by resolution of the Board of Trustees, the program will expire when the number of authorized shares has been repurchased. The Parent Company has made no repurchases under this program to date.
Market Information for and Holders of Record of Common Shares
As of December 31, 2022, there were 155 registered record holders of the Parent Company’s common shares and 21 holders (other than the Parent Company) of the Operating Partnership’s common units. These amounts do not include common shares held by brokers and other institutions on behalf of shareholders. The Parent Company’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol CUBE. There is no established trading market for units of the Operating Partnership.
Tax Characterization of Distributions
Since our initial quarter as a publicly-traded REIT, we have made regular quarterly distributions to our shareholders. Distributions to shareholders are usually taxable as ordinary income, although a portion of the distribution may be designated as a capital gain or may constitute a tax-free return of capital. Annually, we provide each of the Parent Company’s common shareholders a statement detailing the tax characterization of dividends paid during the preceding year as ordinary income, capital gain or return of capital. The characterization of the Parent Company’s dividends for 2022 consisted of an 88.7377% ordinary income distribution and an 11.2623% capital gain distribution.
We intend to continue to declare quarterly distributions. However, we cannot provide any assurance as to the amount or timing of future distributions.
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To the extent that we make distributions in excess of our earnings and profits, as computed for federal income tax purposes, these distributions will represent a return of capital, rather than a dividend, for federal income tax purposes. Distributions that are treated as a return of capital for federal income tax purposes generally will not be taxable as a dividend to a U.S. shareholder, but will reduce the shareholder’s basis in its shares (but not below zero) and therefore can result in the shareholder having a higher gain upon a subsequent sale of such shares. Return of capital distributions in excess of a shareholder’s basis generally will be treated as gain from the sale of such shares for federal income tax purposes.
Recent Sales of Unregistered Equity Securities and Use of Proceeds
Recent Sales of Operating Partnership Unregistered Equity Securities
None.
Share Performance Graph
The SEC requires us to present a chart comparing the cumulative total shareholder return, assuming reinvestment of dividends, on our common shares with the cumulative total shareholder return of (i) a broad equity index and (ii) a published industry or peer group index. The following chart compares the yearly cumulative total shareholder return for our common shares with the cumulative shareholder return of companies on (i) the S&P 500 Index, (ii) the Russell 2000 Index and (iii) the FTSE NAREIT All Equity REIT Index as provided by NAREIT for the period beginning December 31, 2017 and ending December 31, 2022.
For the year ended December 31, |
| ||||||||||||
Index |
| 2017 |
| 2018 |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
|
CubeSmart |
| 100.00 |
| 103.42 | 118.02 | 131.79 | 230.09 | 169.55 | |||||
S&P 500 Index |
| 100.00 |
| 95.62 | 125.72 | 148.85 | 191.58 | 156.88 | |||||
Russell 2000 Index |
| 100.00 |
| 88.99 | 111.70 | 134.00 | 153.85 | 122.41 | |||||
FTSE NAREIT All Equity REIT Index |
| 100.00 |
| 95.96 | 123.46 | 117.14 | 165.51 | 124.22 | |||||
ITEM 6. [Reserved]
32
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this Report. Some of the statements we make in this section are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this Report entitled “Forward-Looking Statements”. Certain risk factors may cause actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see the section in this Report entitled “Risk Factors”.
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 December 31, 2022 and 2021, we owned (or partially owned and consolidated) 611 self-storage properties totaling approximately 44.1 million rentable square feet and 607 self-storage properties totaling approximately 43.6 million rentable square feet, respectively. As of December 31, 2022, we owned stores in the District of Columbia and the following 24 states: Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois, Indiana, Maryland, Massachusetts, Minnesota, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah and Virginia. In addition, as of December 31, 2022, we managed 668 stores for third parties (including 77 stores containing an aggregate of approximately 5.6 million net rentable square feet as part of six separate unconsolidated real estate ventures), bringing the total number of stores we owned and/or managed to 1,279. As of December 31, 2022, we managed stores for third parties in the District of Columbia and the following 38 states: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Vermont, Virginia, Washington and Wisconsin.
We derive revenues principally from rents received from customers who rent cubes at our self-storage properties under month-to-month leases. Therefore, our operating results depend materially on our ability to retain our existing customers and lease our available self-storage cubes to new customers while maintaining and, where possible, increasing our pricing levels. In addition, our operating results depend on the ability of our customers to make required rental payments to us. Our approach to the management and operation of our stores combines centralized marketing, revenue management and other operational support with local operations teams that provide market-level oversight and management. We believe this approach allows us to respond quickly and effectively to changes in local market conditions and 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 and moving trends, 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 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 New York, Florida, California and Texas provided approximately 16%, 15%, 11% and 9%, respectively, of total revenues for the year ended December 31, 2022.
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 consolidated financial statements included in this Report. Certain of the accounting policies used in the preparation of these consolidated
33
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 note 2 to our 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. To the extent that the Company (i) has the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE and (ii) has the obligation or rights to absorb the VIE's losses or receive its benefits, then the Company is considered the primary beneficiary. The Company may also consider additional factors included in the authoritative guidance, such as whether or not it is the partner in the VIE that is most closely associated with the VIE. 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 nor substantive participating rights.
Self-Storage Properties
The Company records self-storage properties at cost less accumulated depreciation. Depreciation on the buildings, improvements 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 is allocated to the tangible and intangible assets acquired and liabilities assumed based on estimated fair values.
Allocations to land, building and improvements and equipment are recorded based upon their respective fair values as estimated by management. If appropriate, the Company allocates a portion of the purchase price to an intangible asset attributed 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 storage 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 has been allocated to above- or below-market lease intangibles associated with storage leases assumed at acquisition. Above- or below- market lease intangibles associated with assumed leases in which the Company serves as lessee are recorded as an adjustment to the right-of-use asset and reflect the difference between the contractual amounts to be paid pursuant to each in-place lease and management’s estimate of fair market lease rates. These amounts are amortized over the term of the lease. 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 years ended December 31, 2022, 2021 and 2020.
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 an asset (or group of assets), (b) the asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets, (c) an active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated, (d) the sale of the asset is probable and transfer of the asset is expected to be completed within one year,
34
(e) the asset 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. Assets classified as held for sale are reported at the lesser of carrying value or fair value less estimated costs to sell and are not depreciated. The California Yacht Club, which we acquired through our acquisition of LAACO in 2021, has been classified as held for sale as of December 31, 2022. There were no stores classified as held for sale as of December 31, 2022.
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) and cash contributions, less cash 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 that is other than temporary 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. 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 years ended December 31, 2022, 2021 and 2020.
Differences between the Company's net investment in unconsolidated real estate ventures and its underlying equity in the net assets of the ventures are primarily a result of the Company acquiring interests in existing unconsolidated real estate ventures. As of December 31, 2022 and 2021, the Company’s net investment in unconsolidated real estate ventures was greater than its underlying equity in the net assets of the unconsolidated real estate ventures by an aggregate of $32.7 million and $33.6 million, respectively. These differences are amortized over the lives of the self-storage properties owned by the real estate ventures. This amortization is included in equity in earnings of real estate ventures on the Company’s consolidated statements of operations.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements affecting our business, see note 2 to the Company’s 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 for each period presented 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 years 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 December 31, 2022, we owned 521 same-store properties and 90 non same-store properties. All of the non same-store properties were 2021 and 2022 acquisitions, dispositions, developed stores, stores with a significant portion of net rentable square footage taken out of service or stores that have not yet reached stabilization as defined above. For analytical presentation, all percentages are calculated using the numbers presented in the financial statements contained in this Report.
The comparability of our results of operations is affected by the timing of acquisition and disposition activities during the periods reported. As of December 31, 2022, 2021 and 2020, we owned (or partially owned and consolidated) 611, 607 and 543 self-storage properties and related assets, respectively.
The following table summarizes the change in number of owned stores from January 1, 2020 through December 31, 2022:
35
| 2022 |
| 2021 |
| 2020 |
| |
Balance - January 1 |
| 607 |
| 543 |
| 523 | |
Stores acquired |
| 1 |
| — |
| 1 | |
Stores developed |
| — |
| 1 |
| — | |
Stores combined (1) | — | (1) | — | ||||
Balance - March 31 |
| 608 |
| 543 |
| 524 | |
Stores acquired (2) |
| 1 |
| 2 |
| 2 | |
Stores developed | 1 | 2 | 1 | ||||
Stores combined (1) | (1) | — | — | ||||
Balance - June 30 |
| 609 |
| 547 |
| 527 | |
Stores acquired |
| 1 |
| 2 |
| — | |
Stores developed | 1 | — | — | ||||
Stores sold | — | (4) | — | ||||
Balance - September 30 |
| 611 |
| 545 |
| 527 | |
Stores acquired |
| — |
| 62 |
| 18 | |
Stores developed | — | 1 | — | ||||
Stores combined (3) | — | — | (1) | ||||
Stores sold |
| — |
| (1) |
| (1) | |
Balance - December 31 |
| 611 |
| 607 |
| 543 | |
| (1) | On June 21, 2022 and March 3, 2021, we completed development of new stores located in Vienna, VA and Arlington, VA for approximately $21.8 million and $26.4 million, respectively. In each case, the developed store is located adjacent to an existing consolidated joint venture store. Given this proximity, each developed store has been combined with the adjacent existing store in our store count upon opening, as well as for operational and reporting purposes. |
| (2) | For the quarter ended June 30, 2021, includes one store acquired by a consolidated joint venture in which we hold a 50% interest. |
| (3) | On November 10, 2020, we acquired a store located in Merritt Island, FL for approximately $3.9 million. The store acquired is located in near proximity to an existing wholly-owned store. Given their proximity to each other, the acquired store has been combined with the existing store in our store count, as well as for operational and reporting purposes. |
36
Comparison of the Year Ended December 31, 2022 to the Year Ended December 31, 2021 (dollars in thousands)
Non Same-Store | Other/ | |||||||||||||||||||||||||||||||||
Same-Store Property Portfolio | Properties | Eliminations | Total Portfolio | |||||||||||||||||||||||||||||||
|
|
|
|
| % |
|
|
|
|
|
|
|
|
|
|
|
|
|
| % | ||||||||||||||
2022 | 2021 | Change | Change | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | Change | Change | |||||||||||||||||||||||
REVENUES: | ||||||||||||||||||||||||||||||||||
Rental income | $ | 744,094 | $ | 661,989 | $ | 82,105 |
| 12.4 | % | $ | 135,195 | $ | 45,762 | $ | — | $ | — | $ | 879,289 | $ | 707,751 | $ | 171,538 |
| 24.2 | % | ||||||||
Other property related income |
| 32,844 |
| 27,469 |
| 5,375 |
| 19.6 | % |
| 4,755 |
| 1,836 |
| 58,567 |
| 54,300 |
| 96,166 |
| 83,605 |
| 12,561 |
| 15.0 | % | ||||||||
Property management fee income |
| — |
| — |
| — |
| 0.0 | % |
| — |
| — |
| 34,169 |
| 31,208 |
| 34,169 |
| 31,208 |
| 2,961 |
| 9.5 | % | ||||||||
Total revenues |
| 776,938 |
| 689,458 |
| 87,480 |
| 12.7 | % |
| 139,950 |
| 47,598 |
| 92,736 |
| 85,508 |
| 1,009,624 |
| 822,564 |
| 187,060 |
| 22.7 | % | ||||||||
OPERATING EXPENSES: | ||||||||||||||||||||||||||||||||||
Property operating expenses |
| 207,023 |
| 201,070 |
| 5,953 |
| 3.0 | % |
| 42,814 |
| 15,331 |
| 43,423 |
| 35,703 |
| 293,260 |
| 252,104 |
| 41,156 |
| 16.3 | % | ||||||||
NET OPERATING INCOME: |
| 569,915 |
| 488,388 |
| 81,527 |
| 16.7 | % |
| 97,136 |
| 32,267 |
| 49,313 |
| 49,805 |
| 716,364 |
| 570,460 |
| 145,904 |
| 25.6 | % | ||||||||
Store count |
| 521 |
| 521 |
| 90 |
| 86 |
| 611 |
| 607 | ||||||||||||||||||||||
Total square footage |
| 36,850 |
| 36,850 |
| 7,257 |
| 6,745 |
| 44,107 |
| 43,595 | ||||||||||||||||||||||
Period end occupancy |
| 92.1 | % |
| 93.3 | % |
| 81.0 | % |
| 85.1 | % |
| 90.3 | % |
| 92.0 | % | ||||||||||||||||
Period average occupancy |
| 94.0 | % |
| 94.6 | % | ||||||||||||||||||||||||||||
Realized annual rent per occupied sq. ft. (1) | $ | 21.49 | $ | 18.99 | ||||||||||||||||||||||||||||||
Depreciation and amortization |
| 310,610 |
| 232,049 |
| 78,561 |
| 33.9 | % | |||||||||||||||||||||||||
General and administrative |
| 54,623 |
| 47,809 |
| 6,814 |
| 14.3 | % | |||||||||||||||||||||||||
Subtotal |
| 365,233 |
| 279,858 |
| 85,375 |
| 30.5 | % | |||||||||||||||||||||||||
OTHER (EXPENSE) INCOME | ||||||||||||||||||||||||||||||||||
Interest: | ||||||||||||||||||||||||||||||||||
Interest expense on loans |
| (93,284) |
| (78,448) |
| (14,836) |
| (18.9) | % | |||||||||||||||||||||||||
Loan procurement amortization expense |
| (3,897) |
| (8,168) |
| 4,271 |
| 52.3 | % | |||||||||||||||||||||||||
Loss on early extinguishment of debt |
| — |
| (20,328) |
| 20,328 |
| 100.0 | % | |||||||||||||||||||||||||
Equity in earnings of real estate ventures |
| 48,877 |
| 25,275 |
| 23,602 |
| 93.4 | % | |||||||||||||||||||||||||
Gains from sales of real estate, net | — | 32,698 | (32,698) | (100.0) | % | |||||||||||||||||||||||||||||
Other |
| (10,355) |
| (10,818) |
| 463 |
| 4.3 | % | |||||||||||||||||||||||||
Total other expense |
| (58,659) |
| (59,789) |
| 1,130 |
| 1.9 | % | |||||||||||||||||||||||||
NET INCOME |
| 292,472 |
| 230,813 |
| 61,659 |
| 26.7 | % | |||||||||||||||||||||||||
NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | ||||||||||||||||||||||||||||||||||
Noncontrolling interests in the Operating Partnership |
| (1,931) |
| (7,873) |
| 5,942 |
| 75.5 | % | |||||||||||||||||||||||||
Noncontrolling interests in subsidiaries |
| 722 |
| 542 |
| 180 |
| 33.2 | % | |||||||||||||||||||||||||
NET INCOME ATTRIBUTABLE TO THE COMPANY’S COMMON SHAREHOLDERS | $ | 291,263 | $ | 223,482 | $ | 67,781 |
| 30.3 | % | |||||||||||||||||||||||||
| (1) | 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 $707.8 million in 2021 to $879.3 million in 2022, an increase of $171.5 million, or 24.2%. This increase was primarily attributable to $89.4 million of additional rental income from the stores acquired or opened in 2021 and 2022 included in our non-same-store portfolio. The $82.1 million increase in same-store rental income was due primarily to an increase in rental rates for new and existing customers. Realized annual rent per occupied square foot in our same-store portfolio increased 13.2% as a result of higher rental rates for new and existing customers for 2022 compared to 2021.
Other property related income increased from $83.6 million in 2021 to $96.2 million in 2022, an increase of $12.6 million, or 15.0%. The $5.4 million increase in same-store other property related income was mainly attributable to a $4.4 million increase in fee revenue. The increase was also due to a $4.2 million increase in customer storage protection plan participation at our owned and managed stores.
Operating Expenses
Property operating expenses increased from $252.1 million in 2021 to $293.3 million in 2022, an increase of $41.2 million, or 16.3%. This increase was primarily attributable to $27.5 million of increased expenses associated with newly acquired or developed stores. The $6.0 million increase in property operating expenses in the same-store portfolio was primarily due to a $4.7 million increase in property taxes.
Depreciation and amortization increased from $232.0 million in 2021 to $310.6 million in 2022, an increase of $78.6 million, or 33.9%. This increase was primarily attributable to depreciation and amortization associated with newly acquired or developed stores.
General and administrative expenses increased from $47.8 million in 2021 to $54.6 million in 2022, an increase of $6.8 million, or 14.3%. This increase was primarily attributable to increased personnel expenses.
Other (expense) income
Interest expense on loans increased from $78.4 million in 2021 to $93.3 million in 2022, an increase of $14.8 million, or 18.9%. The increase was attributable to a higher amount of outstanding debt during 2022 compared to 2021. To fund a portion of our growth, our
37
average outstanding debt balance increased by $788.2 million to $3.14 billion during 2022 as compared to $2.35 billion during 2021, partially offset by lower interest rates during the 2022 period. The weighted average effective interest rate on the Company's outstanding debt for the years ended December 31, 2022 and 2021 was 2.94% and 3.36%, respectively.
Loss on early extinguishment of debt was $20.3 million for the year ended December 31, 2021. This amount was related to the early redemption of $300.0 million of outstanding 4.375% senior notes due 2023 (the “2023 Notes”). There were no such losses for the year ended December 31, 2022.
Equity in earnings of real estate ventures increased from $25.3 million in 2021 to $48.9 million in 2022, an increase of $23.6 million, or 93.4%. The increase was mainly due to gains associated with sales of real estate within our unconsolidated real estate ventures. During the year ended December 31, 2022, our portion of the gains related to HVPSE's sale of all 14 of its stores was $45.7 million. During the year ended December 31, 2021, our portion of the gains related to HHF’s sale of seven stores was $23.5 million. See note 5 to our consolidated financial statements.
Gains from sales of real estate, net were $32.7 million for the year ended December 31, 2021. There were no such gains for the year ended December 31, 2022. These gains are determined on a transactional basis and, accordingly, are not comparable across reporting periods.
For the years ended December 31, 2022 and 2021, the component of other (expense) income designated as other includes $10.5 million and $15.0 million, respectively, of transaction-related expenses comprised primarily of severance costs associated with the acquisition of LAACO.
Comparison of the Year Ended December 31, 2021 to the Year Ended December 31, 2020
Refer to the section entitled “Results of Operations” within Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2021 for a comparison of the year ended December 31, 2021 to the year ended December 31, 2020.
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, loss on early extinguishment 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): equity in earnings of real estate ventures, gains from sales 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. |
38
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, 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 investors, analysts and other stakeholders consider 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.
39
The following table presents a reconciliation of net income to FFO and FFO, as adjusted, for the years ended December 31, 2022 and 2021:
Year Ended December 31, | ||||||
| 2022 |
| 2021 | |||
Net income attributable to the Company’s common shareholders | $ | 291,263 | $ | 223,482 | ||
Add (deduct): | ||||||
Real estate depreciation and amortization: | ||||||
Real property |
| 305,845 |
| 226,599 | ||
Company’s share of unconsolidated real estate ventures |
| 9,320 |
| 8,510 | ||
Gains from sales of real estate, net (1) |
| (45,705) |
| (56,181) | ||
Noncontrolling interests in the Operating Partnership |
| 1,931 |
| 7,873 | ||
FFO attributable to the Company's common shareholders and OP unitholders | $ | 562,654 | $ | 410,283 | ||
Add (deduct): | ||||||
Loss on early repayment of debt (2) | — | 20,884 | ||||
Transaction-related expenses (3) |
| 10,546 |
| 14,986 | ||
Loan forgiveness income (4) | — | (1,546) | ||||
Bridge loan fee (5) | — |
| 4,000 | |||
Property damage related to hurricane, net of expected insurance proceeds | 1,266 |
| — | |||
FFO, as adjusted, attributable to the Company's common shareholders and OP unitholders | $ | 574,466 | $ | 448,607 | ||
Weighted average diluted shares outstanding | 225,881 |
| 205,009 | |||
Weighted average diluted units outstanding |
| 1,521 |
| 7,117 | ||
Weighted average diluted shares and units outstanding |
| 227,402 | 212,126 | |||
| (1) | The years ended December 31, 2022 and 2021 included gains of $45.7 million and $23.5 million, respectively, related to sales of real estate within the Company's unconsolidated real estate ventures. These amounts are included in the Company's share of equity in earnings of real estate ventures. |
| (2) | For the year ended December 31, 2021, $20.0 million relates to a prepayment premium and $0.3 million relates to a write-off of unamortized loan procurement costs associated with the Company’s redemption, in full, of its $300.0 million of outstanding 4.380% senior notes due on December 23, 2021. Additionally, for the year ended December 31, 2021, $0.6 million relates to debt modification costs that are included in the Company's share of equity in earnings of real estate ventures. |
| (3) | For the year ended December 31, 2022, transaction-related expenses include severance expenses ($10.3 million) and other transaction expenses ($0.2 million). For the year ended December 31, 2021, transaction-related expenses include severance expenses ($14.8 million) and other transaction expenses ($0.2 million). Prior to our acquisition of LAACO on December 9, 2021, the predecessor company entered into severance agreements with certain employees, including members of their executive team. These costs were known to us and the assumption of the obligation to make these payments post-closing was contemplated in our net consideration paid in the transaction. In accordance with GAAP, and based on the specific details of the arrangements with the employees prior to closing, these costs are considered post-combination compensation expenses. Transaction-related expenses are included in the component of other (expense) income designated as Other. |
| (4) | The Company assumed a Paycheck Protection Program loan in conjunction with the LAACO transaction. This loan was subsequently forgiven by the Small Business Administration and the associated income is included in the component of other (expense) income designated as Other. |
| (5) | Relates to a nonrefundable commitment fee to obtain bridge financing in the event that the Company's November 2021 senior note offerings were delayed, or could not be executed, in advance of the LAACO transaction. Upon issuance of the senior notes, the bridge financing commitment expired and the fee was fully amortized. The amortization of this fee is included in loan procurement amortization expense. |
40
Cash Flows
Comparison of the Year Ended December 31, 2022 to the Year Ended December 31, 2021
A comparison of cash flow related to operating, investing and financing activities for the years ended December 31, 2022 and 2021 is as follows:
Year Ended December 31, |
| |||||||||
Net cash provided by (used in): |
| 2022 |
| 2021 |
| Change |
| |||
(in thousands) |
| |||||||||
Operating activities | $ | 591,466 | $ | 449,185 | $ | 142,281 | ||||
Investing activities | $ | (48,767) | $ | (1,852,668) | $ | 1,803,901 | ||||
Financing activities | $ | (547,092) | $ | 1,410,572 | $ | (1,957,664) | ||||
Cash provided by operating activities increased from $449.2 million for the year ended December 31, 2021 to $591.5 million for the year ended December 31, 2022, reflecting an increase of $142.3 million. Our increased cash flow from operating activities was primarily attributable to stores acquired and developed during 2021 and 2022 and increased net operating income levels in the same-store portfolio in the 2022 period as compared to the corresponding 2021 period.
Cash used in investing activities decreased from $1,852.7 million for the year ended December 31, 2021 to $48.8 million for the year ended December 31, 2022, reflecting a decrease of $1,803.9 million. The change was primarily driven by the $1,679.0 million of cash used for the acquisition of LAACO in 2021. There were no acquisitions of the scale of the LAACO transaction during the 2022 period. Excluding the storage properties acquired through the acquisition of LAACO, cash used during the year ended December 31, 2021 included the acquisition of nine stores (including the acquisition of a 50% membership interest in a consolidated joint venture that owns a single store) for an aggregate net purchase price of $152.8 million. Cash used during the year ended December 31, 2022 related to the acquisition of three stores and land for an aggregate net purchase price of $89.3 million. The change was also driven by a decrease in development costs of $45.5 million due to fewer development projects under construction. We completed the development of six stores during 2021 and 2022 and began construction on two new stores during the same time period.
Cash provided by financing activities was $1,410.6 million for the year ended December 31, 2021 compared to cash used in financing activities of $547.1 million for the year ended December 31, 2022, reflecting a change of $1,957.7 million. During the year ended December 31, 2021, we received net proceeds from unsecured senior notes of $1,043.4 million while making principal payments of $300.0 million on unsecured senior notes. There were no senior note transactions during the 2022 period. There was also a decrease of $960.8 million in proceeds received from the issuance of common shares, primarily as a result of our underwritten offering of 15.5 million common shares to partially fund the LAACO acquisition in 2021 with no similar transactions during the 2022 period. Additionally, cash distributions paid to common shareholders increased $113.3 million due to increases in the common dividend per share and the number of shares outstanding. These changes were offset by an $84.8 million decrease in principal payments on mortgage loans due to the repayment of two secured loans and the repayment of LAACO's outstanding long-term debt at closing during the 2021 period with no comparable repayments during the 2022 period.
Comparison of the Year Ended December 31, 2021 to the Year Ended December 31, 2020
Refer to the section entitled “Cash Flows” within Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2021 for a comparison of the year ended December 31, 2021 to the year ended December 31, 2020.
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 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.
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In order to qualify as a REIT for federal income tax purposes, the Parent Company is required to distribute at least 90% of its REIT taxable income, excluding capital gains, to its shareholders on an annual basis and must pay federal income tax on undistributed income to the extent it distributes less than 100% of its REIT taxable income. 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 and 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. In the 2023 fiscal year, we expect recurring capital expenditures to be approximately $15.0 million to $20.0 million, planned capital improvements and store upgrades to be approximately $11.0 million to $16.0 million and costs associated with the development of new stores to be approximately $20.0 million to $30.0 million. Our currently scheduled principal payments on debt are approximately $32.6 million in 2023.
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 Revolver (defined below) 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 2023 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 Revolver, 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 December 31, 2022, we had approximately $6.1 million in available cash and cash equivalents. In addition, we had approximately $788.5 million of availability for borrowings under our Revolver.
Unsecured Senior Notes
Our unsecured senior notes are summarized as follows (collectively referred to as the “Senior Notes”):
| December 31, |
| Effective | Issuance | Maturity |
| ||||||||
Unsecured Senior Notes |
| 2022 |
| 2021 |
| Interest Rate | Date | Date |
| |||||
(in thousands) |
| |||||||||||||
$300M 4.000% Guaranteed Notes due 2025 (1) | $ | 300,000 | $ | 300,000 |
| 3.99 | % | Various (1) | Nov-25 | |||||
$300M 3.125% Guaranteed Notes due 2026 | 300,000 | 300,000 | 3.18 | % | Aug-16 | Sep-26 | ||||||||
$550M 2.250% Guaranteed Notes due 2028 | 550,000 | 550,000 | 2.33 | % | Nov-21 | Dec-28 | ||||||||
$350M 4.375% Guaranteed Notes due 2029 | 350,000 | 350,000 | 4.46 | % | Jan-19 | Feb-29 | ||||||||
$350M 3.000% Guaranteed Notes due 2030 | 350,000 | 350,000 | 3.04 | % | Oct-19 | Feb-30 | ||||||||
$450M 2.000% Guaranteed Notes due 2031 | 450,000 | 450,000 | 2.10 | % | Oct-20 | Feb-31 | ||||||||
$500M 2.500% Guaranteed Notes due 2032 | 500,000 | 500,000 | 2.59 | % | Nov-21 | Feb-32 | ||||||||
Principal balance outstanding | 2,800,000 | 2,800,000 | ||||||||||||
Less: Discount on issuance of unsecured senior notes, net | (11,801) | (13,455) | ||||||||||||
Less: Loan procurement costs, net | (15,849) | (18,336) | ||||||||||||
Total unsecured senior notes, net | $ | 2,772,350 | $ | 2,768,209 | ||||||||||
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| (1) | On April 4, 2017, the Operating Partnership issued $50.0 million of its 4.000% senior notes due 2025, which are part of the same series as the $250.0 million principal amount of the Operating Partnership’s 4.000% senior notes due November 15, 2025 issued on October 26, 2015. The $50.0 million and $250.0 million tranches were priced at 101.343% and 99.735%, respectively, of the principal amount to yield 3.811% and 4.032%, respectively, to maturity. The combined weighted average effective interest rate of the 2025 notes is 3.994%. |
The indenture under which the Senior Notes were issued restricts the ability of the Operating Partnership and its subsidiaries to incur debt unless the Operating Partnership and its consolidated subsidiaries comply with a leverage ratio not to exceed 60% and an interest coverage ratio of more than 1.5:1.0 after giving effect to the incurrence of the debt. The indenture also restricts the ability of the Operating Partnership and its subsidiaries to incur secured debt unless the Operating Partnership and its consolidated subsidiaries comply with a secured debt leverage ratio not to exceed 40% after giving effect to the incurrence of the debt. The indenture also contains other financial and customary covenants, including a covenant not to own unencumbered assets with a value less than 150% of the unsecured indebtedness of the Operating Partnership and its consolidated subsidiaries. As of and for the year ended December 31, 2022, the Operating Partnership was in compliance with all of the financial covenants under the Senior Notes.
Revolving Credit Facility
On December 9, 2011, we entered into a credit agreement (the “Credit Facility”), which was subsequently amended and restated. On October 26, 2022, we again amended and restated, in its entirety, our Credit Facility (the “Second Amended and Restated Credit Facility”) which, subsequent to the amendment and restatement, is comprised of an $850.0 million unsecured revolving facility (the “Revolver”) maturing on February 15, 2027. Under the Second Amended and Restated Credit Facility, pricing on the Revolver is dependent upon our unsecured debt credit ratings and leverage levels. At our current unsecured debt credit ratings and leverage levels, amounts drawn under the Revolver are priced using a margin of 0.775% plus a facility fee of 0.15% over SOFR and a 0.10% SOFR adjustment.
As of December 31, 2022, borrowings under the Revolver had an interest rate of 5.33%. Additionally, as of December 31, 2022, $788.5 million was available for borrowing under the Revolver. The available balance under the Revolver is reduced by an outstanding letter of credit of $0.6 million.
Under the Second Amended and Restated Credit Facility, our ability to borrow under the Revolver is subject to ongoing compliance with certain financial covenants which include, among other things, (1) a maximum total indebtedness to total asset value of 60.0%, and (2) a minimum fixed charge coverage ratio of 1.5:1.0. As of and for the year ended December 31, 2022, the Operating Partnership was in compliance with all of its financial covenants.
Issuance of Common Shares
On November 19, 2021 we closed an underwritten offering of 15.5 million common shares at a public offering price of $51.00 per share, resulting in net proceeds of $765.6 million, after deducting offering costs.
We maintain an at-the-market equity program that enables us to offer and sell up to 60.0 million common shares through sales agents pursuant to equity distribution agreements (the “Equity Distribution Agreements”). Our sales activity under the program for the years ended December 31, 2022, 2021 and 2020 is summarized below:
For the year ended December 31, | |||||||||
2022 | 2021 | 2020 | |||||||
(dollars and shares in thousands, except per share amounts) | |||||||||
Number of shares sold | 102 | 4,982 | 3,627 | ||||||
Average sales price per share | $ | 50.64 | $ | 40.57 | $ | 33.69 | |||
Net proceeds after deducting offering costs | $ | 4,936 | $ | 199,977 | $ | 120,727 | |||
We used proceeds from sales of common shares under the program during the years ended December 31, 2022, 2021 and 2020 to fund the acquisition and development of storage properties and for general corporate purposes. As of December 31, 2022, 2021 and 2020, 5.8 million common shares, 5.9 million common shares and 10.9 million common shares, respectively, remained available for issuance under the Equity Distribution Agreements.
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Other Material Changes in Financial Position
December 31, |
| |||||||||
| 2022 |
| 2021 |
| Change |
| ||||
(in thousands) |
| |||||||||
Selected Assets | ||||||||||
Storage properties, net | $ | 6,048,003 | $ | 6,097,670 | $ | (49,667) | ||||
Investment in real estate ventures, at equity | 105,993 | 119,751 | (13,758) | |||||||
Assets held for sale | 3,745 | 49,313 | (45,568) | |||||||
Other assets, net | 153,982 | 265,705 | (111,723) | |||||||
Selected Liabilities | ||||||||||
Revolving credit facility | 60,900 | 209,900 | (149,000) | |||||||
Noncontrolling interests in the Operating Partnership | $ | 57,419 | $ | 108,220 | $ | (50,801) | ||||
Storage properties, net decreased $49.7 million from December 31, 2021 to December 31, 2022, primarily as a result of an increase in accumulated depreciation on existing assets partially offset by the acquisition of three storage properties, additions and improvements to storage properties, and development costs incurred during the year.
Investment in real estate ventures, at equity decreased $13.8 million from December 31, 2021 to December 31, 2022, primarily as the result of the sale by HVPSE of all 14 of its stores during 2022.
Assets held for sale decreased $45.6 million from December 31, 2021 to December 31, 2022 primarily as the result of the sale during 2022 of the Los Angeles Athletic Club, which was acquired in the LAACO acquisition in 2021.
Other assets, net decreased $111.7 million from December 31, 2021 to December 31, 2022, primarily due to the amortization of the value assigned to the in-place leases at the 66 storage properties acquired during 2021.
Revolving credit facility decreased $149.0 million from December 31, 2021 to December 31, 2022 primarily due to an increase in net cash provided by operating activities and a decrease in costs for the acquisition and development of storage properties, which allowed us to use excess cash to pay down the outstanding balance.
Noncontrolling interests in the Operating Partnership decreased $50.8 million from December 31, 2021 to December 31, 2022, primarily due to the decrease in redemption value of the OP units as a result of the decrease in the closing price of the common shares of CubeSmart on the New York Stock Exchange during 2022. In addition, 0.5 million OP units were redeemed for common shares of CubeSmart during 2022.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 may choose to 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
44
sensitivity of the market value of our financial instruments to selected changes in market interest 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 interest rates chosen.
As of December 31, 2022 our consolidated debt consisted of $2.95 billion of outstanding mortgage loans and notes payable and unsecured senior notes that are subject to fixed rates. Additionally, as of December 31, 2022, there were $60.9 million of outstanding unsecured credit facility borrowings 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 $0.6 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 $0.6 million a year.
If market interest rates increase by 100 basis points, the fair value of our outstanding fixed-rate mortgage debt and unsecured senior notes would decrease by approximately $135.2 million. If market interest rates decrease by 100 basis points, the fair value of our outstanding fixed-rate mortgage debt and unsecured senior notes would increase by approximately $139.0 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements required by this item appear with an Index to Financial Statements and Schedules, starting on page F-1 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
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.
Management’s Report on Internal Control Over Financial Reporting
Management’s report on internal control over financial reporting of the Parent Company is set forth on page F-2 of this Report, and is incorporated herein by reference. The effectiveness of the Parent Company’s internal control over financial reporting as of December 31, 2022 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in its report which is included herein.
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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 our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Operating Partnership’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management’s report on internal control over financial reporting of the Operating Partnership is set forth on page F-3 of this Report, and is incorporated herein by reference. The effectiveness of the Operating Partnership’s internal control over financial reporting as of December 31, 2022 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in its report which is included herein.
ITEM 9B. OTHER INFORMATION
Amendments to Bylaws
On February 22, 2023, upon the recommendation of the Corporate Governance & Nominating Committee of CubeSmart’s Board of Trustees (the “Board”), the Board amended and restated CubeSmart’s Fourth Amended and Restated Bylaws by adopting the Fifth Amended and Restated Bylaws (the “Amended and Restated Bylaws”), effective as of such date, to, among other things, implement a proxy access framework.
Implementation of Proxy Access
Section 17 of Article II of the Amended and Restated Bylaws has been added to permit a shareholder, or a group of up to 20 shareholders, to nominate and include trustee candidates constituting up to the greater of two or 20% of the number of trustees in office as of the last day on which notice of a nomination may be delivered pursuant to Section 17 of Article II of the Amended and Restated Bylaws, provided that (i) such shareholder or shareholder group, as applicable, owns 3% or more of CubeSmart’s outstanding shares that are entitled to vote in the election of trustees continuously for at least three years, and (ii) such shareholder or shareholder group, as applicable, and the nominee(s) satisfy certain procedural, eligibility and disclosure requirements set forth in Article II, Section 17 of the Amended and Restated Bylaws.
The procedural and eligibility requirements set forth in Article II, Section 17 of the Amended and Restated Bylaws include a requirement that, subject to certain exceptions, a notice of proxy access nomination must be received at the principal executive offices of CubeSmart no later than the 120th day, and no earlier than the 150th day, prior to the first anniversary of the date that the preceding year’s proxy statement was first sent to shareholders. Article II, Section 17 of the Amended and Restated Bylaws also includes requirements that the nominating shareholder or shareholder group, as applicable, and the nominee(s) provide certain information, representations and agreements to CubeSmart in order to be eligible for proxy access.
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Additional Bylaw Amendments
In addition to the Board’s implementation of proxy access, the Amended and Restated Bylaws were also updated to reflect certain procedural requirements related to the Securities and Exchange Commission’s recently adopted “universal proxy” rules, as well as certain technical, conforming and clarifying changes in connection therewith. In particular, the Amended and Restated Bylaws provide that, among other things, with respect to shareholder nominees to the Board, (i) the scope of disclosures required by a proposing shareholder seeking to submit a trustee nomination have been expanded to include representations as to whether the shareholder (x) has complied, and will comply, with appliable state law and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in connection with the solicitation of such proxies, and (y) intends to solicit proxies in support of trustee nominees other than individuals nominated by the Board in compliance with the requirements of Rule 14a-19 under the Exchange Act, (ii) shareholders are not permitted to solicit proxies from other shareholders using a white colored proxy card, which has been reserved for use by the Board, and (iii) certain other updated procedures and information requirements apply to shareholder nominations of trustees.
The foregoing description of the Amended and Restated Bylaws is qualified in its entirety by reference to a copy of the Amended and Restated Bylaws filed as Exhibit 3.12 to this Annual Report on Form 10-K, which is incorporated by reference herein.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
We have adopted a Code of Ethics for all of our employees, officers and trustees, including our principal executive officer and principal financial officer, which is available on our website at www.cubesmart.com. We intend to disclose any amendment to, or a waiver from, a provision of our Code of Ethics on our website within four business days following the date of the amendment or waiver.
The remaining information required by this item regarding trustees, executive officers and corporate governance is hereby incorporated by reference to the material appearing in the Parent Company’s Proxy Statement for the Annual Shareholders Meeting to be held in 2023 (the “Proxy Statement”) under the captions “Proposal 1: Election of Trustees,” “Executive Officers,” “Meetings and Committees of the Board of Trustees,” and “Shareholder Proposals and Nominations for the 2023 Annual Meeting.” The information required by this item regarding compliance with Section 16(a) of the Exchange Act, if any, is hereby incorporated by reference to the material appearing in the Parent Company’s Proxy Statement under the caption “Delinquent Section 16(a) Reports,” if applicable.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by reference to the material appearing in the Parent Company’s Proxy Statement under the captions “Compensation Committee Report,” “Meetings and Committees of the Board of Trustees Compensation Committee Interlocks and Insider Participation,” “Compensation Discussion and Analysis,” “Executive Compensation,” “Severance Plan and Potential Payments Upon Termination or Change in Control,” and “Trustee Compensation.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The following table sets forth certain information regarding our equity compensation plans as of December 31, 2022.
|
|
| Number of securities remaining |
| ||||
Number of securities to | Weighted average | available for future issuance under |
| |||||
be issued upon exercise | exercise price of | equity compensation plans |
| |||||
of outstanding options, | outstanding options, | (excluding securities |
| |||||
Plan Category | warrants and rights |
| warrants and rights |
| reflected in column(a)) |
| ||
| (a) | (b) | (c) | |||||
Equity compensation plans approved by shareholders |
| 2,537,038 | $ | 33.10 | (1) | 1,941,786 | ||
Equity compensation plans not approved by shareholders |
| — | — | — | ||||
Total |
| 2,537,038 | $ | 33.10 | 1,941,786 | |||
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| (1) | This number reflects the weighted average exercise price of outstanding options and has been calculated exclusive of outstanding restricted unit awards. |
The information regarding security ownership of certain beneficial owners and management required by this item is hereby incorporated by reference to the material appearing in the Parent Company’s Proxy Statement under the caption “Security Ownership of Management” and “Security Ownership of Beneficial Owners.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND TRUSTEE INDEPENDENCE
The information required by this item is hereby incorporated by reference to the material appearing in the Parent Company’s Proxy Statement under the captions “Corporate Governance - Independence of Trustees,” “Policies and Procedures Regarding Review, Approval or Ratification of Transactions With Related Persons,” and “Transactions With Related Persons.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is hereby incorporated by reference to the material appearing in the Parent Company’s Proxy Statement under the captions “Audit Committee Matters - Fees Paid to Our Independent Registered Public Accounting Firm” and “- Audit Committee Pre-Approval Policies and Procedures.”
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report:
1. Financial Statements.
The response to this portion of Item 15 is submitted as a separate section of this report.
2. Financial Statement Schedules.
The response to this portion of Item 15 is submitted as a separate section of this report.
3. Exhibits.
The list of exhibits filed with this Report is set forth in response to Item 15(b). The required exhibit index has been filed with the exhibits.
(b) Exhibits. The following documents are filed as exhibits to this report:
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50
Form of Indemnification Agreement for Trustees and Executive Officers, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on May 17, 2022. | ||
51
52
53
Consent of KPMG LLP relating to financial statements of CubeSmart. | ||
Consent of KPMG LLP relating to financial statements of CubeSmart, L.P. | ||
101 | The following CubeSmart and CubeSmart, L.P. financial information for the year ended December 31, 2022, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statement of Equity, (iv) the Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements, detailed tagged and filed herewith. | |
104 | Cover Page Interactive Data File – embedded within the Inline XBRL document (included as Exhibit 101). |
* | Incorporated herein by reference as above indicated. | |
† | Denotes a management contract or compensatory plan, contract or arrangement. |
ITEM 16. FORM 10-K SUMMARY
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
CUBESMART | |||
By: | /s/ Timothy M. Martin | ||
Timothy M. Martin | |||
Chief Financial Officer | |||
Date: February 24, 2023
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature | Title | Date | ||
/s/ Deborah Ratner Salzberg | Chair of the Board of Trustees | February 24, 2023 | ||
Deborah Ratner Salzberg | ||||
/s/ Christopher P. Marr | Chief Executive Officer and Trustee | February 24, 2023 | ||
Christopher P. Marr | (Principal Executive Officer) | |||
/s/ Timothy M. Martin | Chief Financial Officer | February 24, 2023 | ||
Timothy M. Martin | (Principal Financial and Accounting Officer) | |||
/s/ Piero Bussani | Trustee | February 24, 2023 | ||
Piero Bussani | ||||
/s/ Jit Kee Chin | Trustee | February 24, 2023 | ||
Jit Kee Chin | ||||
/s/ Dorothy Dowling | Trustee | February 24, 2023 | ||
Dorothy Dowling | ||||
/s/ John W. Fain | Trustee | February 24, 2023 | ||
John W. Fain | ||||
/s/ Jair K. Lynch | Trustee | February 24, 2023 | ||
Jair K. Lynch | ||||
/s/ John F. Remondi | Trustee | February 24, 2023 | ||
John F. Remondi | ||||
/s/ Jeffrey F. Rogatz | Trustee | February 24, 2023 | ||
Jeffrey F. Rogatz | ||||
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FINANCIAL STATEMENTS
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page No. | ||
Consolidated Financial Statements of CUBESMART and CUBESMART, L.P. (the “Company”) | ||
Management’s Report on CubeSmart Internal Control Over Financial Reporting | F-2 | |
Management’s Report on CubeSmart, L.P. Internal Control Over Financial Reporting | F-3 | |
Reports of Independent Registered Public Accounting Firm (PCAOB ID | F-4 | |
CubeSmart and Subsidiaries Consolidated Balance Sheets as of December 31, 2022 and 2021 | F-10 | |
F-11 | ||
F-12 | ||
F-13 | ||
F-14 | ||
CubeSmart, L.P. and Subsidiaries Consolidated Balance Sheets as of December 31, 2022 and 2021 | F-15 | |
F-16 | ||
F-17 | ||
F-18 | ||
F-19 | ||
F-20 |
F-1
MANAGEMENT’S REPORT ON CUBESMART INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of CubeSmart (the “REIT”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under Section 404 of the Sarbanes-Oxley Act of 2002, the REIT’s management is required to assess the effectiveness of the REIT’s internal control over financial reporting as of the end of each fiscal year, and report on the basis of that assessment whether the REIT’s internal control over financial reporting is effective.
The REIT’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. The REIT’s internal control over financial reporting includes those policies and procedures that:
| ● | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and the disposition of the assets of the REIT; |
| ● | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that the receipts and expenditures of the REIT are being made only in accordance with the authorization of the REIT’s management and its Board of Trustees; and |
| ● | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the REIT’s assets that could have a material effect on the financial statements. |
There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of an internal control system may vary over time.
Under the supervision, and with the participation, of the REIT’s management, including the principal executive officer and principal financial officer, management conducted a review, evaluation and assessment of the effectiveness of our internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In performing its assessment of the effectiveness of internal control over financial reporting, management has concluded that, as of December 31, 2022, the REIT’s internal control over financial reporting was effective based on the COSO framework.
The effectiveness of our internal control over financial reporting as of December 31, 2022, has been audited by KPMG LLP (Philadelphia, Pennsylvania; PCAOB ID #185), an independent registered public accounting firm, as stated in their report that appears herein.
February 24, 2023
F-2
MANAGEMENT’S REPORT ON CUBESMART, L.P. INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of CubeSmart, L.P. (the “Partnership”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under Section 404 of the Sarbanes-Oxley Act of 2002, the Partnership’s management is required to assess the effectiveness of the Partnership’s internal control over financial reporting as of the end of each fiscal year, and report on the basis of that assessment whether the Partnership’s internal control over financial reporting is effective.
The Partnership’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. The Partnership’s internal control over financial reporting includes those policies and procedures that:
| ● | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and the disposition of the assets of the Partnership; |
| ● | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that the receipts and expenditures of the Partnership are being made only in accordance with the authorization of the Partnership’s management and its Board of Trustees; and |
| ● | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Partnership’s assets that could have a material effect on the financial statements. |
There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of an internal control system may vary over time.
Under the supervision, and with the participation, of the Partnership’s management, including the principal executive officer and principal financial officer, management conducted a review, evaluation and assessment of the effectiveness of our internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In performing its assessment of the effectiveness of internal control over financial reporting, management has concluded that, as of December 31, 2022, the Partnership’s internal control over financial reporting was effective based on the COSO framework.
The effectiveness of our internal control over financial reporting as of December 31, 2022, has been audited by
February 24, 2023
F-3
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees of CubeSmart:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of CubeSmart and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes and financial statement schedule III (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 24, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of storage properties for impairment
As discussed in notes 2 and 3 to the consolidated financial statements, the Company had $6.0 billion of storage properties, net of accumulated depreciation as of December 31, 2022. The Company performs an impairment assessment whenever events or changes in circumstances indicate that there may be an impairment. This involves comparing the undiscounted future net operating cash flows plus a terminal value to the carrying amount of the storage property.
We identified the evaluation of storage properties for impairment as a critical audit matter. The Company uses revenue and expense growth rates, and terminal value capitalization rate assumptions in determining estimated future cash flows as part of its impairment assessment. Changes to these assumptions could have a significant impact on the determination of recoverability of the carrying amount of a storage property and involved subjective auditor judgement.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s storage property impairment process, including controls related to the use of the revenue and expense growth rates, and terminal value capitalization rate assumptions. We assessed the Company’s forecasted growth rates against the Company’s historical growth rates and published reports of industry data. We
F-4
evaluated the Company’s expected terminal value capitalization rates by comparing them to published reports of industry data and historical transactions of the Company. We also identified the threshold rates at which the revenue and expense growth rates and terminal value capitalization rate assumptions would indicate the storage property may be impaired and analyzed those threshold rates against the published industry data and historical results.
/s/
We have served as the Company’s auditor since 2009.
February 24, 2023
F-5
Report of Independent Registered Public Accounting Firm
To the Partners of CubeSmart, L.P. and the Board of Trustees of CubeSmart:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of CubeSmart, L.P. and subsidiaries (the Partnership) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), capital, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes and financial statement schedules III (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Partnership as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Partnership’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 24, 2023 expressed an unqualified opinion on the effectiveness of the Partnership’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of storage properties for impairment
As discussed in notes 2 and 3 to the consolidated financial statements, the Partnership had $6.0 billion of storage properties, net of accumulated depreciation as of December 31, 2022. The Partnership performs an impairment assessment whenever events or changes in circumstances indicate that there may be an impairment. This involves comparing the undiscounted future net operating cash flows plus a terminal value to the carrying amount of the storage property.
We identified the evaluation of storage properties for impairment as a critical audit matter. The Partnership uses revenue and expense growth rates, and terminal value capitalization rate assumptions in determining estimated future cash flows as part of its impairment assessment. Changes to these assumptions could have a significant impact on the determination of recoverability of the carrying amount of a storage property and involved subjective auditor judgement.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s storage property impairment process, including controls related to the use of the revenue and expense growth rates, and terminal value capitalization rate assumptions. We assessed the Company’s forecasted growth rates against the Company’s historical growth rates and published reports of industry data. We
F-6
evaluated the Company’s expected terminal value capitalization rates by comparing them to published reports of industry data and historical transactions of the Company. We also identified the threshold rates at which the revenue and expense growth rates and terminal value capitalization rate assumptions would indicate the storage property may be impaired and analyzed those threshold rates against the published industry data and historical results.
/s/ KPMG LLP
We have served as the Partnership’s auditor since 2009.
Philadelphia, Pennsylvania
February 24, 2023
F-7
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees of CubeSmart:
Opinion on Internal Control Over Financial Reporting
We have audited CubeSmart and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes and financial statement schedule III (collectively, the consolidated financial statements), and our report dated February 24, 2023 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on CubeSmart Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Philadelphia, Pennsylvania
February 24, 2023
F-8
Report of Independent Registered Public Accounting Firm
To the Partners of CubeSmart, L.P. and the Board of Trustees of CubeSmart:
Opinion on Internal Control Over Financial Reporting
We have audited CubeSmart, L.P. and subsidiaries' (the Partnership) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Partnership maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Partnership as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), capital, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes and financial statement schedule III (collectively, the consolidated financial statements), and our report dated February 24, 2023 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Partnership’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on CubeSmart, L.P. Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Partnership’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Philadelphia, Pennsylvania
February 24, 2023
F-9
CUBESMART AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, | ||||||
| 2022 |
| 2021 | |||
ASSETS | ||||||
Storage properties | $ | | $ | | ||
Less: Accumulated depreciation |
| ( |
| ( | ||
Storage properties, net (including VIE assets of $ |
| |
| | ||
Cash and cash equivalents |
| |
| | ||
Restricted cash |
| |
| | ||
Loan procurement costs, net of amortization |
| |
| | ||
Investment in real estate ventures, at equity |
| |
| | ||
Assets held for sale | | | ||||
Other assets, net |
| |
| | ||
Total assets | $ | | $ | | ||
LIABILITIES AND EQUITY | ||||||
Unsecured senior notes, net | $ | | $ | | ||
Revolving credit facility |
| |
| | ||
Mortgage loans and notes payable, net |
| |
| | ||
Lease liabilities - finance leases | | | ||||
Accounts payable, accrued expenses and other liabilities |
| |
| | ||
Distributions payable |
| |
| | ||
Deferred revenue |
| |
| | ||
Security deposits |
| |
| | ||
Liabilities held for sale | | | ||||
Total liabilities |
| |
| | ||
Noncontrolling interests in the Operating Partnership |
| |
| | ||
Commitments and contingencies | ||||||
Equity | ||||||
Common shares $ issued and at and 2021, respectively |
| |
| | ||
Additional paid-in capital |
| |
| | ||
Accumulated other comprehensive loss |
| ( |
| ( | ||
Accumulated deficit |
| ( |
| ( | ||
Total CubeSmart shareholders’ equity |
| |
| | ||
Noncontrolling interests in subsidiaries |
| |
| | ||
Total equity |
| |
| | ||
Total liabilities and equity | $ | | $ | | ||
See accompanying notes to the consolidated financial statements.
F-10
CUBESMART AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For the year ended December 31, |
| |||||||||
| 2022 |
| 2021 |
| 2020 |
| ||||
REVENUES | ||||||||||
Rental income | $ | | $ | | $ | | ||||
Other property related income |
| |
| |
| | ||||
Property management fee income |
| |
| |
| | ||||
Total revenues |
| |
| |
| |||||
OPERATING EXPENSES | ||||||||||
Property operating expenses |
| |
| |
| | ||||
Depreciation and amortization |
| |
| |
| | ||||
General and administrative |
| |
| |
| | ||||
Total operating expenses |
| |
| |
| |||||
OTHER (EXPENSE) INCOME | ||||||||||
Interest: | ||||||||||
Interest expense on loans |
| ( |
| ( |
| ( | ||||
Loan procurement amortization expense |
| ( |
| ( |
| ( | ||||
Loss on early extinguishment of debt |
| — |
| ( |
| ( | ||||
Equity in earnings of real estate ventures |
| |
| |
| | ||||
Gains from sales of real estate, net | — | | | |||||||
Other |
| ( |
| ( |
| ( | ||||
Total other expense |
| ( |
| ( |
| ( | ||||
NET INCOME |
| |
| |
| | ||||
NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | ||||||||||
Noncontrolling interests in the Operating Partnership |
| ( |
| ( |
| ( | ||||
Noncontrolling interest in subsidiaries |
| |
| |
| ( | ||||
NET INCOME ATTRIBUTABLE TO THE COMPANY’S COMMON SHAREHOLDERS | $ | | $ | | $ | | ||||
Basic earnings per share attributable to common shareholders | $ | | $ | | $ | | ||||
Diluted earnings per share attributable to common shareholders | $ | | $ | | $ | | ||||
Weighted average basic shares outstanding |
| |
| |
| | ||||
Weighted average diluted shares outstanding |
| |
| |
| | ||||
See accompanying notes to the consolidated financial statements.
F-11
CUBESMART AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
For the year ended December 31, |
| |||||||||
| 2022 |
| 2021 |
| 2020 |
| ||||
NET INCOME | $ | | $ | | $ | | ||||
Other comprehensive income: | ||||||||||
Reclassification of realized losses on interest rate swaps |
| |
| |
| |||||
OTHER COMPREHENSIVE INCOME: |
| |
|
| ||||||
COMPREHENSIVE INCOME |
| |
|
| ||||||
Comprehensive income attributable to noncontrolling interests in the Operating Partnership |
| ( |
| ( |
| ( | ||||
Comprehensive loss (income) attributable to noncontrolling interest in subsidiaries |
| |
| |
| ( | ||||
COMPREHENSIVE INCOME ATTRIBUTABLE TO THE COMPANY | $ | | $ | $ | ||||||
See accompanying notes to the consolidated financial statements.
F-12
CUBESMART AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands)
Noncontrolling | ||||||||||||||||||||||||||
Interests | ||||||||||||||||||||||||||
Common | Additional | Accumulated Other | Total | Noncontrolling | in the | |||||||||||||||||||||
Shares | Paid-in | Comprehensive | Accumulated | Shareholders’ | Interests in | Total | Operating | |||||||||||||||||||
| Number |
| Amount |
| Capital |
| Income (Loss) |
| Deficit |
| Equity |
| Subsidiaries |
| Equity |
| Partnership | |||||||||
Balance at December 31, 2019 |
| | $ | |
| $ | | $ | ( | $ | ( | $ | | $ | | $ | | $ | | |||||||
Contributions from noncontrolling interest in subsidiaries | | | ||||||||||||||||||||||||
Distributions paid to noncontrolling interest in subsidiaries | ( | ( | ||||||||||||||||||||||||
Issuance of common shares, net |
| | | |||||||||||||||||||||||
Issuance of restricted shares |
| |||||||||||||||||||||||||
Issuance of OP units | ||||||||||||||||||||||||||
Conversion from units to shares |
| | | | ( | |||||||||||||||||||||
Exercise of stock options |
| | | |||||||||||||||||||||||
Amortization of restricted shares | | | ||||||||||||||||||||||||
Share compensation expense | | | ||||||||||||||||||||||||
Adjustment for noncontrolling interests in the Operating Partnership | ( | ( | ( | |||||||||||||||||||||||
Net income | | | ||||||||||||||||||||||||
Other comprehensive income (loss), net | | | ( | |||||||||||||||||||||||
Common share distributions ($ | ( | ( | ( | ( | ||||||||||||||||||||||
Balance at December 31, 2020 |
| | $ | |
| $ | | $ | ( | $ | ( | $ | | $ | | $ | | $ | | |||||||
Contributions from noncontrolling interest in subsidiaries | | | ||||||||||||||||||||||||
Distributions paid to noncontrolling interest in subsidiaries | ( | ( | ||||||||||||||||||||||||
Acquisition of noncontrolling interest in subsidiary |
| ( | ( | ( | ( | |||||||||||||||||||||
Issuance of common shares, net |
| | | | | | ||||||||||||||||||||
Issuance of restricted shares | | |||||||||||||||||||||||||
Conversion from units to shares | | | | | | ( | ||||||||||||||||||||
Exercise of stock options | | | | | | |||||||||||||||||||||
Amortization of restricted shares | | | | |||||||||||||||||||||||
Share compensation expense | | | | |||||||||||||||||||||||
Adjustment for noncontrolling interests in the Operating Partnership | ( | ( | ( | | ||||||||||||||||||||||
Net income (loss) | | | ( | | | |||||||||||||||||||||
Other comprehensive income, net | | | | | ||||||||||||||||||||||
Common share distributions ($ | ( | ( | ( | ( | ||||||||||||||||||||||
Balance at December 31, 2021 |
| | $ | |
| $ | | $ | ( | $ | ( | $ | | $ | | $ | | $ | | |||||||
Contributions from noncontrolling interest in subsidiaries | | | ||||||||||||||||||||||||
Distributions paid to noncontrolling interest in subsidiaries | ( | ( | ||||||||||||||||||||||||
Issuance of common shares, net | | | | | | |||||||||||||||||||||
Issuance of restricted shares | | | | | ||||||||||||||||||||||
Conversion from units to shares | | | | | | ( | ||||||||||||||||||||
Exercise of stock options | | | | | | |||||||||||||||||||||
Amortization of restricted shares | | | | |||||||||||||||||||||||
Share compensation expense | | | | |||||||||||||||||||||||
Adjustment for noncontrolling interests in the Operating Partnership | | | | ( | ||||||||||||||||||||||
Net income (loss) | | | ( | | | |||||||||||||||||||||
Other comprehensive income, net | | | | | ||||||||||||||||||||||
Common share distributions ($ | ( | ( | ( | ( | ||||||||||||||||||||||
Balance at December 31, 2022 |
| $ |
| $ | $ | ( | $ | ( | $ | $ | $ | $ | ||||||||||||||
See accompanying notes to the consolidated financial statements.
F-13
CUBESMART AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the year ended December 31, | |||||||||
| 2022 |
| 2021 |
| 2020 | ||||
Operating Activities | |||||||||
Net income | $ | | $ | | $ | | |||
Adjustments to reconcile net income to cash provided by operating activities: | |||||||||
Depreciation and amortization |
| |
| |
| | |||
Non-cash portion of interest expense related to finance leases | ( | | — | ||||||
Loss on early extinguishment of debt |
| — |
| |
| | |||
Equity in earnings of real estate ventures |
| ( |
| ( |
| ( | |||
Gains from sales of real estate, net |
| — |
| ( |
| ( | |||
Equity compensation expense |
| |
| |
| ||||
Accretion of fair market value adjustment of debt |
| ( |
| ( |
| ( | |||
Changes in other operating accounts: | |||||||||
Other assets |
| |
| ( |
| ( | |||
Accounts payable and accrued expenses |
| |
| |
| ||||
Other liabilities |
| |
| |
| ||||
Net cash provided by operating activities | $ | | $ | $ | |||||
Investing Activities | |||||||||
Acquisitions of storage properties |
| ( |
| ( |
| ( | |||
Acquisition of LAACO, Ltd., net of cash acquired | — | ( | — | ||||||
Additions and improvements to storage properties |
| ( |
| ( |
| ( | |||
Development costs |
| ( |
| ( |
| ( | |||
Investment in real estate ventures |
| ( |
| ( |
| ( | |||
Cash distributed from real estate ventures |
| |
| |
| ||||
Proceeds from sale of real estate, net |
| |
| |
| | |||
Net cash used in investing activities | $ | ( | $ | ( | $ | ( | |||
Financing Activities | |||||||||
Proceeds from: | |||||||||
Unsecured senior notes |
| — |
| |
| | |||
Revolving credit facility |
| |
| |
| | |||
Principal payments on: | |||||||||
Unsecured senior notes | — | ( |
| ( | |||||
Revolving credit facility |
| ( |
| ( |
| ( | |||
Mortgage loans and notes payable |
| ( |
| ( |
| ( | |||
Loan procurement costs |
| ( |
| ( |
| ( | |||
Debt prepayment costs | — | ( | ( | ||||||
Acquisition of noncontrolling interest in subsidiary, net | — | ( | — | ||||||
Proceeds from issuance of common shares, net |
| |
| |
| ||||
Cash paid upon vesting of restricted shares | ( | ( | ( | ||||||
Exercise of stock options |
| |
| |
| ||||
Contributions from noncontrolling interests in subsidiaries |
| |
| |
| — | |||
Distributions paid to noncontrolling interests in subsidiaries | ( | ( | ( | ||||||
Distributions paid to common shareholders |
| ( |
| ( |
| ( | |||
Distributions paid to noncontrolling interests in Operating Partnership |
| ( |
| ( |
| ( | |||
Net cash (used in) provided by financing activities | $ | ( | $ | | $ | | |||
Change in cash, cash equivalents and restricted cash |
| ( |
|
| ( | ||||
Cash, cash equivalents and restricted cash at beginning of period |
| |
|
| | ||||
Cash, cash equivalents and restricted cash at end of period | $ | $ | $ | ||||||
Supplemental Cash Flow and Noncash Information | |||||||||
Cash paid for interest, net of interest capitalized | $ | | $ | $ | |||||
Supplemental disclosure of noncash activities: | |||||||||
Acquisitions of storage properties | $ | ( | $ | — | $ | ( | |||
Right-of-use assets obtained in exchange for lease liabilities | $ | — | $ | — | $ | | |||
Discount on issuance of unsecured senior notes | $ | — | $ | $ | | ||||
Mortgage loan assumptions | $ | — | $ | $ | | ||||
Accretion of put liability | $ | | $ | $ | |||||
Derivative valuation adjustment | $ | | $ | $ | | ||||
Issuance of OP units (see note 4) | $ | — | $ | — | $ | | |||
Contributions from noncontrolling interests in subsidiaries | $ | | $ | $ | | ||||
See accompanying notes to the consolidated financial statements.
F-14
CUBESMART, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, |
| ||||||
| 2022 |
| 2021 |
| |||
ASSETS | |||||||
Storage properties | $ | | $ | ||||
Less: Accumulated depreciation |
| ( |
| ( | |||
Storage properties, net (including VIE assets of $ |
| |
| ||||
Cash and cash equivalents |
| |
| ||||
Restricted cash |
| |
| ||||
Loan procurement costs, net of amortization |
| |
| ||||
Investment in real estate ventures, at equity |
| |
| ||||
Assets held for sale | |
| | ||||
Other assets, net |
| |
| ||||
Total assets | $ | | $ | ||||
LIABILITIES AND CAPITAL | |||||||
Unsecured senior notes, net | $ | | $ | ||||
Revolving credit facility |
| |
| | |||
Mortgage loans and notes payable, net |
| |
| ||||
Lease liabilities - finance leases | | | |||||
Accounts payable, accrued expenses and other liabilities |
| |
| ||||
Distributions payable |
| |
| ||||
Deferred revenue |
| |
| ||||
Security deposits |
| |
| ||||
Liabilities held for sale | | | |||||
Total liabilities |
| |
| | |||
Limited Partnership interests of third parties |
| |
| ||||
Commitments and contingencies | |||||||
Capital | |||||||
Operating Partner |
| |
| ||||
Accumulated other comprehensive loss |
| ( |
| ( | |||
Total CubeSmart, L.P. capital |
| |
| ||||
Noncontrolling interests in subsidiaries |
| |
| ||||
Total capital |
| |
| ||||
Total liabilities and capital | $ | | $ | ||||
See accompanying notes to the consolidated financial statements.
F-15
CUBESMART, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per common unit data)
For the year ended December 31, | |||||||||
2022 |
| 2021 |
| 2020 | |||||
REVENUES | |||||||||
Rental income | $ | | $ | | $ | | |||
Other property related income |
| | | | |||||
Property management fee income |
| | | | |||||
Total revenues |
| |
|
| |||||
OPERATING EXPENSES | |||||||||
Property operating expenses |
| | | | |||||
Depreciation and amortization |
| | | | |||||
General and administrative |
| | | | |||||
Total operating expenses |
| |
|
| |||||
OTHER (EXPENSE) INCOME | |||||||||
Interest: | |||||||||
Interest expense on loans |
| ( | ( | ( | |||||
Loan procurement amortization expense |
| ( | ( | ( | |||||
Loss on early extinguishment of debt |
| — | ( | ( | |||||
Equity in earnings of real estate ventures |
| |
| |
| | |||
Gains from sales of real estate, net | — |
| |
| | ||||
Other |
| ( |
| ( |
| ( | |||
Total other expense |
| ( |
| ( |
| ( | |||
NET INCOME |
| |
| |
| | |||
NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | |||||||||
Noncontrolling interest in subsidiaries |
| |
| |
| ( | |||
NET INCOME ATTRIBUTABLE TO CUBESMART L.P. |
| |
|
| |||||
Operating Partnership interests of third parties |
| ( |
| ( |
| ( | |||
NET INCOME ATTRIBUTABLE TO COMMON UNITHOLDERS | $ | | $ | | $ | | |||
|
|
|
|
|
|
|
| ||
Basic earnings per unit attributable to common unitholders | $ | | $ | | $ | | |||
Diluted earnings per unit attributable to common unitholders | $ | | $ | | $ | | |||
Weighted average basic units outstanding | | | | ||||||
Weighted average diluted units outstanding | | | | ||||||
See accompanying notes to the consolidated financial statements.
F-16
CUBESMART, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
For the year ended December 31, |
| |||||||||
| 2022 |
| 2021 |
| 2020 |
| ||||
NET INCOME | $ | | $ | | $ | | ||||
Other comprehensive income: | ||||||||||
Reclassification of realized losses on interest rate swaps |
| |
| |
| | ||||
OTHER COMPREHENSIVE INCOME: |
| |
| |
| | ||||
COMPREHENSIVE INCOME |
| |
| |
| | ||||
Comprehensive income attributable to Operating Partnership interests of third parties |
| ( |
| ( |
| ( | ||||
Comprehensive loss (income) attributable to noncontrolling interest in subsidiaries |
| |
| |
| ( | ||||
COMPREHENSIVE INCOME ATTRIBUTABLE TO OPERATING PARTNER | $ | | $ | | $ | | ||||
See accompanying notes to the consolidated financial statements.
F-17
CUBESMART, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITAL
(in thousands)
Number of Common OP | Accumulated Other | Total | Noncontrolling | Operating Partnership | ||||||||||||||||
Units | Operating | Comprehensive | CubeSmart L.P. | Interests in | Total | Interests | ||||||||||||||
| Outstanding | Partner |
| Income (Loss) | Capital | Subsidiaries | Capital | of Third Parties | ||||||||||||
Balance at December 31, 2019 | | $ | | $ | ( | $ | | $ | | $ | | $ | | |||||||
Contributions from noncontrolling interest in subsidiaries | | | ||||||||||||||||||
Distributions paid to noncontrolling interest in subsidiaries | ( | ( | ||||||||||||||||||
Acquisition of noncontrolling interest in subsidiary |
| — | — | — | — | |||||||||||||||
Issuance of common OP units, net |
| | | | | |||||||||||||||
Issuance of restricted OP units |
| | ||||||||||||||||||
Issuance of OP units | | |||||||||||||||||||
Conversion from OP units to shares |
| | | | | ( | ||||||||||||||
Exercise of OP unit options |
| | | | | |||||||||||||||
Amortization of restricted OP units | | | | |||||||||||||||||
OP unit compensation expense | | | | |||||||||||||||||
Adjustment for Operating Partnership interests of third parties | ( | ( | ( | | ||||||||||||||||
Net income | | | | | | |||||||||||||||
Other comprehensive income (loss), net | — | | | | ( | |||||||||||||||
Common OP unit distributions ($ | ( | ( | ( | ( | ||||||||||||||||
Balance at December 31, 2020 |
| | $ | | $ | ( | $ | | $ | | $ | | $ | | ||||||
Contributions from noncontrolling interest in subsidiaries | | | ||||||||||||||||||
Distributions paid to noncontrolling interest in subsidiaries | ( | ( | ||||||||||||||||||
Acquisition of noncontrolling interest in subsidiary | ( | ( | ( | ( | ||||||||||||||||
Issuance of common OP units, net | | | | | ||||||||||||||||
Issuance of restricted OP units | | |||||||||||||||||||
Issuance of OP units | — | |||||||||||||||||||
Conversion from OP units to shares | | | | | ( | |||||||||||||||
Exercise of OP unit options | | | | | ||||||||||||||||
Amortization of restricted OP units | | | | |||||||||||||||||
OP unit compensation expense | | | | |||||||||||||||||
Adjustment for Operating Partnership interests of third parties | ( | ( | ( | | ||||||||||||||||
Net income (loss) | | | ( | | | |||||||||||||||
Other comprehensive income, net | | | | | ||||||||||||||||
Common OP unit distributions ($ | ( | ( | ( | ( | ||||||||||||||||
Balance at December 31, 2021 |
| | $ | | $ | ( | $ | | $ | | $ | | $ | | ||||||
Contributions from noncontrolling interest in subsidiaries | | | ||||||||||||||||||
Distributions paid to noncontrolling interest in subsidiaries |
| ( | ( | |||||||||||||||||
Issuance of common OP units, net | | | ||||||||||||||||||
Issuance of restricted OP units | | | ||||||||||||||||||
Conversion from OP units to shares | | | ( | |||||||||||||||||
Exercise of OP unit options | | | ||||||||||||||||||
Amortization of restricted OP units | | | ||||||||||||||||||
OP unit compensation expense | | | ||||||||||||||||||
Adjustment for Operating Partnership interests of third parties | | | ( | |||||||||||||||||
Net income (loss) | | ( | | |||||||||||||||||
Other comprehensive income, net |
| | | |||||||||||||||||
Common OP unit distributions ($ | ( | ( | ( | ( | ||||||||||||||||
Balance at December 31, 2022 |
| $ | $ | ( | $ | $ | $ | $ | ||||||||||||
See accompanying notes to the consolidated financial statements.
F-18
CUBESMART, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the year ended December 31, | |||||||||
2022 |
| 2021 |
| 2020 | |||||
Operating Activities | |||||||||
Net income | $ | | $ | | $ | | |||
Adjustments to reconcile net income to cash provided by operating activities: | |||||||||
Depreciation and amortization |
| |
| |
| | |||
Non-cash portion of interest expense related to finance leases | ( | | — | ||||||
Loss on early extinguishment of debt |
| — |
| |
| | |||
Equity in earnings of real estate ventures |
| ( |
| ( |
| ( | |||
Gains from sales of real estate, net |
| — |
| ( |
| ( | |||
Equity compensation expense |
| |
| |
| | |||
Accretion of fair market value adjustment of debt |
| ( |
| ( |
| ( | |||
Changes in other operating accounts: | |||||||||
Other assets |
| |
| ( |
| ( | |||
Accounts payable and accrued expenses |
| |
| |
| | |||
Other liabilities |
| |
| |
| | |||
Net cash provided by operating activities | $ | | $ | | $ | | |||
Investing Activities | |||||||||
Acquisitions of storage properties |
| ( |
| ( |
| ( | |||
Acquisition of LAACO, Ltd., net of cash acquired | — | ( | — | ||||||
Additions and improvements to storage properties |
| ( |
| ( |
| ( | |||
Development costs |
| ( |
| ( |
| ( | |||
Investment in real estate ventures | ( | ( | ( | ||||||
Cash distributed from real estate ventures | |
| |
| | ||||
Deposit of escrows | |||||||||
Proceeds from sale of real estate, net | | | | ||||||
Net cash used in investing activities | $ | ( | $ | ( | $ | ( | |||
Financing Activities | |||||||||
Proceeds from: | |||||||||
Unsecured senior notes | — | | | ||||||
Revolving credit facility |
| |
| |
| | |||
Principal payments on: | |||||||||
Unsecured senior notes | — | ( | ( | ||||||
Revolving credit facility | ( | ( | ( | ||||||
Mortgage loans and notes payable | ( | ( | ( | ||||||
Loan procurement costs | ( | ( | ( | ||||||
Debt prepayment costs | — | ( | ( | ||||||
Acquisition of noncontrolling interest in subsidiary, net | — | ( | — | ||||||
Proceeds from issuance of common OP units | | | | ||||||
Cash paid upon vesting of restricted OP units | ( | ( | ( | ||||||
Exercise of OP unit options | | | | ||||||
Contributions from noncontrolling interests in subsidiaries |
| |
| |
| — | |||
Distributions paid to noncontrolling interests in subsidiaries |
| ( |
| ( |
| ( | |||
Distributions paid to common OP unitholders | ( | ( | ( | ||||||
Net cash (used in) provided by financing activities | $ | ( | $ | | $ | | |||
Change in cash, cash equivalents and restricted cash |
| ( |
| |
| ( | |||
Cash, cash equivalents and restricted cash at beginning of period |
| |
| |
| | |||
Cash, cash equivalents and restricted cash at end of period | $ | | $ | | $ | | |||
Supplemental Cash Flow and Noncash Information | |||||||||
Cash paid for interest, net of interest capitalized | $ | | $ | | $ | | |||
Supplemental disclosure of noncash activities: | |||||||||
Acquisitions of storage properties | $ | ( | $ | — | $ | ( | |||
Right-of-use assets obtained in exchange for lease liabilities | $ | — | $ | — | $ | | |||
Discount on issuance of unsecured senior notes | $ | — | $ | | $ | | |||
Mortgage loan assumptions | $ | — | $ | | $ | | |||
Accretion of put liability | $ | | $ | | $ | | |||
Derivative valuation adjustment | $ | | $ | | $ | | |||
Issuance of OP units (see note 4) | $ | — | $ | — | $ | | |||
Contributions from noncontrolling interests in subsidiaries | $ | | $ | | $ | | |||
See accompanying notes to the consolidated financial statements.
F-19
CUBESMART AND CUBESMART L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
CubeSmart (the “Parent Company”) operates as a self-managed and self-administered real estate investment trust (“REIT”) with its operations conducted solely through CubeSmart, L.P. and its subsidiaries. CubeSmart, L.P., a Delaware limited partnership (the “Operating Partnership”), operates through an umbrella partnership structure, with the Parent Company, a Maryland REIT, as its sole general partner. In the notes to the consolidated financial statements, we use the terms the “Company”, “we” or “our” to refer to the Parent Company and the Operating Partnership together, unless the context indicates otherwise. As of December 31, 2022, the Company owned (or partially owned and consolidated) self-storage properties located in the District of Columbia and
As of December 31, 2022, the Parent Company owned approximately
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
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 consolidated. 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 on the consolidation of VIEs. To the extent that the Company (i) has the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE and (ii) has the obligation or rights to absorb the VIE's losses or receive its benefits, then the Company is considered the primary beneficiary. When an entity is not deemed to be a VIE, the Company considers the provisions of additional 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 which the limited partners do not have the ability to dissolve or remove the Company without cause nor substantive participating rights.
The Operating Partnership meets the criteria as a VIE. The Parent Company’s sole significant asset is its investment in the Operating Partnership. As a result, substantially all of the Parent Company’s assets and liabilities represent those assets and liabilities of the Operating Partnership. All of the Parent Company’s debt is an obligation of the Operating Partnership.
Noncontrolling Interests
The Financial Accounting Standards Board (“FASB”) issued authoritative guidance regarding noncontrolling interests in consolidated financial statements which was effective on January 1, 2009. The guidance states that 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. Under the guidance, such noncontrolling interests are reported on the consolidated balance sheets within equity, separately from the Company’s equity. On the consolidated statements of operations, revenues, expenses and net income or loss from controlled or consolidated entities that are less than wholly owned are reported at the consolidated
F-20
amounts, including both the amounts attributable to the Company and noncontrolling interests. Presentation of consolidated equity activity is included for both quarterly and annual financial statements, including beginning balances, activity for the period and ending balances for shareholders’ equity, noncontrolling interests and total equity.
However, per the FASB issued authoritative guidance on the classification and measurement of redeemable securities, securities that are redeemable for cash or other assets at the option of the holder, not solely within the control of the issuer, must be classified outside of permanent equity. This would result in certain outside ownership interests being included as redeemable noncontrolling interests outside of permanent equity in the consolidated balance sheets. The Company makes this determination based on terms in applicable agreements, specifically in relation to redemption provisions. Additionally, with respect to noncontrolling interests for which the Company has a choice to settle the contract by delivery of its own shares, the Company considered the FASB issued guidance on accounting for derivative financial instruments indexed to, and potentially settled in, a Company’s own stock to evaluate whether the Company controls the actions or events necessary to issue the maximum number of shares that could be required to be delivered under share settlement of the contract. 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 fair value.
The consolidated results of the Company include results attributable to units of the Operating Partnership that are not owned by the Company. These interests were issued in the form of OP units and were a component of the consideration the Company paid to acquire certain self-storage properties. Limited partners who acquired OP units have the right to require the Operating Partnership to redeem part or all of their OP units for, at the Company’s option, an equivalent number of common shares of the Company or cash based upon the fair value of an equivalent number of common shares of the Company. However, the operating agreement contains certain circumstances that could result in a net cash settlement outside the control of the Company, as the Company does not have the ability to settle in unregistered shares. Accordingly, consistent with the guidance discussed above, the Company will continue to record these noncontrolling interests outside of permanent equity in the consolidated balance sheets. Net income or loss related to these noncontrolling interests is excluded from net income or loss in the consolidated statements of operations. The Company has adjusted the carrying value of its noncontrolling interests subject to redemption value to the extent applicable. Based on the Company’s evaluation of the redemption value of the redeemable noncontrolling interests, the Operating Partnership reflected these interests at their redemption value as of December 31, 2022, as the estimated redemption value exceeded their carrying value. Disclosure of such redemption provisions is provided in note 12.
Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Although management believes the assumptions and estimates made are reasonable and appropriate, as discussed in the applicable sections throughout these consolidated financial statements, different assumptions and estimates could materially impact the Company’s reported results. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions, and changes in market conditions could impact the Company’s future operating results.
Self-Storage Properties
Self-storage properties are carried at historical cost less accumulated depreciation and impairment losses. The cost of self-storage properties reflects their purchase price or development cost. Acquisition costs are accounted for in accordance with Accounting Standard Update (“ASU”) No. 2017-01 - Business Combinations (Topic 805): Clarifying the Definition of a Business, which was adopted on January 1, 2018, and are generally capitalized. Costs incurred for the renovation of a store are capitalized to the Company’s investment in that store. Ordinary repairs and maintenance are expensed as incurred. Major replacements and betterments, which improve or extend the life of the asset, are capitalized and depreciated over their estimated useful lives. The costs to develop self-storage properties are capitalized to construction in progress while the projects are under development.
Purchase Price Allocation
When stores are acquired, the purchase price is allocated to the tangible and intangible assets acquired and liabilities assumed based on estimated fair values. Allocations to land, building and improvements and equipment are recorded based upon their respective fair values as estimated by management. If appropriate, the Company allocates a portion of the purchase price to an intangible asset attributed to the value of in-place leases. This intangible is generally amortized to expense over the expected remaining term of the respective leases. Substantially all of the storage leases in place at acquired stores are at market rates, as the majority of the leases are month-to-month contracts. Accordingly, to date,
F-21
associated with storage leases assumed at acquisition. Above- or below- market lease intangibles associated with assumed leases in which the Company serves as lessee are recorded as an adjustment to the right-of-use asset and reflect the difference between the contractual amounts to be paid pursuant to each in-place lease and management’s estimate of fair market lease rates. These amounts are amortized over the term of the lease. 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.
Depreciation and Amortization
The costs of self-storage properties and improvements are depreciated using the straight-line method based on useful lives ranging from to
Impairment of Long-Lived Assets
We evaluate long-lived assets 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 asset’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
Long-Lived Assets Held for Sale
We consider long-lived assets to be “held for sale” upon satisfaction of the following criteria: (a) management commits to a plan to sell an asset (or group of assets), (b) the asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets, (c) an active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated, (d) the sale of the asset is probable and transfer of the asset is expected to be completed within
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. Assets classified as held for sale are reported at the lesser of carrying value or fair value less estimated costs to sell and are not depreciated. The California Yacht Club acquired through our acquisition of LAACO (defined below) has been classified as held for sale as of December 31, 2022. There were no stores classified as held for sale as of December 31, 2022.
Cash and Cash Equivalents
Cash and cash equivalents are highly-liquid investments with original maturities of three months or less. The Company may maintain cash equivalents in financial institutions in excess of insured limits, but believes this risk is mitigated by only investing in or through major financial institutions.
Restricted Cash
Restricted cash generally consists of cash deposits required for debt service, capital replacement and expense reserves in connection with the terms of our loan agreements.
Loan Procurement Costs
Loan procurement costs related to borrowings were $
F-22
asset net of accumulated amortization. Loan procurement costs associated with the Company’s revolving credit facility remain in Loan procurement costs, net of amortization on the Company’s consolidated balance sheets. The costs are amortized over the estimated life of the related debt using the effective interest method and are reported as Loan procurement amortization expense on the Company’s consolidated statements of operations.
Other Assets
Other assets are comprised of the following as of December 31, 2022 and 2021:
December 31, | ||||||
| 2022 |
| 2021 | |||
(in thousands) | ||||||
Intangible assets, net of accumulated amortization of $ | $ | | $ | | ||
Accounts receivable, net |
| |
| | ||
Prepaid property taxes |
| |
| | ||
Prepaid property and casualty insurance |
| |
| | ||
Amounts due from affiliates (see note 14) | | | ||||
Assets related to deferred compensation arrangements | | | ||||
Right-of-use assets - operating leases | | | ||||
Ground lease receivable | | — | ||||
Other |
| |
| | ||
Total other assets, net | $ | | $ | | ||
Environmental Costs
Our practice is to conduct or obtain environmental assessments in connection with the acquisition or development of additional stores. Whenever the environmental assessment for one of the Company’s stores indicates that a store is impacted by soil or groundwater contamination from prior owners/operators or other sources, the Company will work with environmental consultants and where appropriate, state governmental agencies, to ensure that the store is either cleaned up, that no cleanup is necessary because the low level of contamination poses no significant risk to public health or the environment or that the responsibility for cleanup rests with a third party.
Revenue Recognition
Management has determined that substantially all of the Company’s leases are operating leases. Rental income is recognized in accordance with the terms of the leases, which generally are month-to-month.
The Company recognizes gains from sales of real estate in accordance with the guidance on transfer of nonfinancial assets. Payments received from purchasers prior to closing are recorded as deposits. Profit on real estate sold is recognized when a valid contract exists, the collectability of the sales price is reasonably assured and the control of the property has transferred.
Advertising and Marketing Costs
The Company incurs advertising and marketing costs primarily attributable to internet marketing and other media advertisements. These costs are expensed as incurred. The Company incurred $
Equity Offering Costs
Underwriting discounts and commissions, financial advisory fees and other offering costs are reflected as a reduction to additional paid-in capital. For the years ended December 31, 2022, 2021 and 2020, the Company recognized $
Other Property Related Income
Other property related income consists of late fees, administrative charges, customer storage protection plan fees, sales of storage supplies and other ancillary revenues and is recognized in the period that it is earned.
F-23
Capitalized Interest
The Company capitalizes interest incurred that is directly associated with construction activities until the asset is placed into service. Interest is capitalized to the related asset(s) using the weighted average rate of the Company’s outstanding debt. For the years ended December 31, 2022, 2021 and 2020, the Company capitalized $
Derivative Financial Instruments
The Company carries all derivatives on the balance sheet at fair value. The Company determines the fair value of derivatives by observable prices that are based on inputs not quoted on active markets, but corroborated by market data. The accounting for changes in the fair value of a derivative instrument depends on whether the derivative has been designated and qualifies as part of a hedging relationship and, if so, the reason for holding it. The Company’s use of derivative instruments has been limited to cash flow hedges of certain interest rate risks. The Company had
Income Taxes
The Company has elected to be taxed as a REIT under Sections 856-860 of the Internal Revenue Code since the Company’s commencement of operations in 2004. In management’s opinion, the requirements to maintain these elections are being met. Accordingly, no provision for federal income taxes has been reflected in the consolidated financial statements other than for operations conducted through our taxable REIT subsidiaries.
Earnings and profits, which determine the taxability of distributions to shareholders, differ from net income reported for financial reporting purposes due to differences in cost basis, the estimated useful lives used to compute depreciation, and the allocation of net income and loss for financial versus tax reporting purposes. The net tax basis in the Company’s assets was approximately $
Since the Company’s initial quarter as a publicly-traded REIT, it has made regular quarterly distributions to its shareholders. Distributions to shareholders are usually taxable as ordinary income, although a portion of the distribution may be designated as capital gain or may constitute a tax-free return of capital. Annually, the Company provides each of its shareholders a statement detailing the tax characterization of dividends paid during the preceding year as ordinary income, capital gain or return of capital. The characterization of the Company’s dividends for 2022 consisted of an
The Company is subject to a
Taxable REIT subsidiaries are subject to federal and state income taxes. Our taxable REIT subsidiaries had a net deferred tax liability of $
Earnings per Share and Unit
Basic earnings per share and unit are calculated based on the weighted average number of common shares and restricted shares outstanding during the period. Diluted earnings per share and unit is calculated by further adjusting for the dilutive impact of share options, unvested restricted shares and contingently issuable shares outstanding during the period using the treasury stock method. Potentially dilutive securities calculated under the treasury stock method were
Share-Based Payments
We apply the fair value method of accounting for contingently issued shares and share options issued under our incentive award plan. Accordingly, share compensation expense is recorded ratably over the vesting period relating to such contingently issued shares and options. The Company has recognized compensation expense on a straight-line method over the requisite service period, which is included in general and administrative expense on the Company’s consolidated statement of operations. The Company recognizes forfeitures on share-based payments as they occur.
F-24
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 ventures, and subsequently adjusted for equity in earnings (losses), cash contributions, distributions and impairments. On a periodic basis, management assesses whether there are any indicators that the value of the Company’s investments in unconsolidated real estate ventures 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 that is other than temporary 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 the Company’s 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
Differences between the Company's net investment in unconsolidated real estate ventures and its underlying equity in the net assets of the ventures are primarily a result of the Company acquiring interests in existing unconsolidated real estate ventures. As of December 31, 2022 and 2021, the Company’s net investment in unconsolidated real estate ventures was greater than its underlying equity in the net assets of the unconsolidated real estate ventures by an aggregate of $
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU No. 2020-06 – Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in an Entity’s Own Equity (Subtopic 815-40). The new guidance eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of certain settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted earnings per share computation. The standard was effective on January 1, 2022. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
Concentration of Credit Risk
The Company’s stores are located in major metropolitan and rural areas and have numerous customers per store. No single customer represents a significant concentration of our revenues. The stores in New York, Florida, California and Texas provided approximately
3. STORAGE PROPERTIES
The book value of the Company’s real estate assets is summarized as follows:
December 31, | |||||||
| 2022 |
| 2021 | ||||
(in thousands) | |||||||
Land | $ | | $ | | |||
Buildings and improvements |
| |
| | |||
Equipment |
| |
| | |||
Construction in progress |
| |
| | |||
Right-of-use assets - finance leases | | | |||||
Storage properties |
| |
| | |||
Less: Accumulated depreciation |
| ( |
| ( | |||
Storage properties, net | $ | | $ | | |||
F-25
The following table summarizes the Company’s acquisition and disposition activity for the years ended December 31, 2022, 2021 and 2020:
|
|
| Number of |
| Purchase / Sale Price |
| ||||
Asset/Portfolio | Metropolitan Statistical Area | Transaction Date | Stores | (in thousands) | ||||||
2022 Acquisitions: | ||||||||||
Maryland Asset | Washington-Arlington-Alexandria, DC-VA-MD-WV | February 2022 | $ | | ||||||
Texas Asset | San Antonio, TX | June 2022 | | |||||||
Georgia Asset | Atlanta, GA | July 2022 | | |||||||
$ | ||||||||||
2021 Acquisitions: | ||||||||||
Minnesota Asset (1) | Minneapolis-St. Paul-Bloomington, MN-WI | April 2021 | $ | | ||||||
Maryland Asset | Baltimore-Towson, MD | June 2021 | | |||||||
New Jersey/Pennsylvania Assets | Philadelphia-Camden-Wilmington, PA-NJ-DE-MD | July 2021 | | |||||||
Florida Asset | Miami-Fort Lauderdale-Pompano Beach, FL | November 2021 | | |||||||
Georgia Asset | Atlanta-Sandy Springs-Marietta, GA | November 2021 | | |||||||
Pennsylvania Asset | Philadelphia-Camden-Wilmington, PA-NJ-DE-MD | November 2021 | | |||||||
Nevada Asset | Las Vegas-Paradise, NV | December 2021 | | |||||||
Storage West Assets | Various (see note 4) | December 2021 | | (2) | ||||||
Illinois Asset | Chicago-Naperville-Joliet, IL-IN-WI | December 2021 | | |||||||
$ | ||||||||||
2021 Dispositions: | ||||||||||
Colorado/Nevada Assets | Denver-Aurora, CO / Las Vegas-Paradise, NV | September 2021 | $ | |||||||
North Carolina Assets | Burlington, NC | September 2021 | ||||||||
Texas Asset | Houston-Sugar Land-Baytown, TX | November 2021 | ||||||||
$ | ||||||||||
2020 Acquisitions: | ||||||||||
Texas Asset | San Antonio, TX | February 2020 | $ | | ||||||
Maryland Asset | Baltimore-Towson, MD | April 2020 | | |||||||
New Jersey Asset | New York-Northern New Jersey-Long Island, NY-NJ-PA | April 2020 | | |||||||
Florida Asset | Palm Bay-Melbourne-Titusville, FL | November 2020 | | |||||||
Texas Asset | Austin-Round Rock, TX | November 2020 | | |||||||
Texas Asset | Dallas-Fort Worth-Arlington, TX | November 2020 | | |||||||
Nevada Asset | Las Vegas-Paradise, NV | December 2020 | | |||||||
New York Asset | New York-Northern New Jersey-Long Island, NY-NJ-PA | December 2020 | | |||||||
Florida Asset | Tampa-St. Petersburg-Clearwater, FL | December 2020 | | |||||||
Virginia Asset | Washington-Arlington-Alexandria, DC-VA-MD-WV | December 2020 | | |||||||
Storage Deluxe Assets | New York-Northern New Jersey-Long Island, NY-NJ-PA | December 2020 | | |||||||
Florida Assets | Orlando-Kissimmee, FL / Deltona-Daytona Beach-Ormond Beach, FL | December 2020 | | |||||||
$ | ||||||||||
2020 Disposition: | ||||||||||
New York Asset | New York-Northern New Jersey-Long Island, NY-NJ-PA | December 2020 | $ | | ||||||
$ | ||||||||||
| (1) | Acquired by a consolidated joint venture in which the Company holds a |
| (2) | Purchase price represents the acquisition of all |
4. INVESTMENT ACTIVITY
2022 Acquisitions
During the year ended December 31, 2022, the Company acquired
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such amounts. The estimated life of these in-place leases is
Additionally, on February 2, 2022, the Company acquired land underlying a wholly-owned store located in Bronx, New York for $
Also, on April 28, 2022, the Company acquired land underlying a store owned by 191 IV CUBE LLC, an unconsolidated joint venture in which the Company holds a
2022 Dispositions
During the year December 31, 2022, the Company sold the Los Angeles Athletic Club, which it purchased in December 2021 as part of the LAACO acquisition, for $
Assets Held for Sale
As of December 31, 2022, the Company determined that the California Yacht Club (the "CYC") met the criteria to be classified as held for sale. Accordingly, the assets and liabilities associated with the CYC have been categorized as held for sale within the Company’s consolidated balance sheets. As of December 31, 2022, the estimated fair value less selling costs of the CYC was greater than the carrying value of the CYC, and therefore
Development Activity
As of December 31, 2022, the Company had invested in joint ventures to develop
The Company has completed the construction of and opened for operation the following stores since January 1, 2020. The costs associated with the construction of these stores are capitalized to land, building and improvements, as well as equipment and are reflected in Storage properties on the Company’s consolidated balance sheets.
CubeSmart | |||||||||
Number of | Ownership | Total | |||||||
Store Location |
| Stores |
| Date Opened | Interest | Construction Costs | |||
(in thousands) | |||||||||
Valley Stream, NY | Q3 2022 | $ | | ||||||
Vienna, VA (1) | Q2 2022 | | |||||||
Newton, MA (2) | Q4 2021 | | |||||||
East Meadow, NY (3) | Q2 2021 | | |||||||
King of Prussia, PA | Q2 2021 | | |||||||
Arlington, VA (1) | Q1 2021 | | |||||||
Brooklyn, NY (3) | Q2 2020 | | |||||||
$ | | ||||||||
| (1) | Each of these stores are located adjacent to an existing consolidated joint venture store. Given this proximity, each of these stores has been combined with the adjacent existing store in our store count upon opening, as well as for operational and reporting purposes. |
| (2) | During the fourth quarter of 2021, the Company, through a joint venture in which it owned a |
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| consolidated balance sheets. Since the Company retained its controlling interest in the venture and the store is now wholly owned, this transaction was accounted for as an equity transaction. The carrying amount of the noncontrolling interest was reduced to |
| (3) | These stores were previously owned by |
LAACO Acquisition
On December 9, 2021, the Company acquired all outstanding partnership units of LAACO, the owner of the Storage West Assets and, as a result, LAACO became a wholly-owned subsidiary of the Company. The
The following summarizes the relevant components contemplated in the acquisition of LAACO:
Amount | ||
(in thousands) | ||
Costs contemplated: | ||
Capitalized costs: | ||
LAACO partnership units (1) | $ | |
Long-term debt assumed and repaid at closing | ||
Payments to LAACO management (capitalized) (2) | ||
Other transaction costs (3) | ||
Total capitalized costs | $ | |
Payments and anticipated payments to LAACO management (expensed) (2) | ||
Total costs contemplated | $ | |
Estimated fair value of Club Operations (included in total costs contemplated above) | $ | |
| (1) | Represents the acquisition of all |
| (2) | Upon the acquisition of LAACO, the Company assumed severance obligations payable to certain employees pursuant to pre-existing agreements. Based on the specific details of the arrangements, $ |
| (3) | Includes consulting fees, legal fees, and other costs. |
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The Company accounted for the acquisition of LAACO as an asset acquisition. As a result, the capitalized costs noted above were allocated to LAACO’s real estate assets, intangible assets and real estate venture investments on a relative fair value basis. All other assets acquired and liabilities assumed were recorded at fair value. The following summarizes the accounting for the LAACO acquisition:
Amount | ||
(in thousands) | ||
Storage properties | $ | |
Cash and cash equivalents | | |
Investment in real estate ventures, at equity | | |
Assets held for sale | | |
Other assets, net | | |
Accounts payable, accrued expenses and other liabilities | ( | |
Deferred revenue | ( | |
Security deposits | ( | |
Liabilities held for sale | ( | |
Total | $ | |
Intangible assets (included above in Other assets, net) consisted of in-place leases, which aggregated to $
Other 2021 Acquisitions
During the year ended December 31, 2021, the Company acquired
2021 Dispositions
During the year ended December 31, 2021, the Company sold
2020 Acquisitions
The Company acquired a portfolio of
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During the year ended December 31, 2020, the Company acquired
Additionally, on July 20, 2020, the Company acquired land underlying a wholly-owned store located in the Bronx, New York for $
2020 Disposition
On December 22, 2020, the Company sold a self-storage property located in New York for a sales price of $
5. INVESTMENT IN UNCONSOLIDATED REAL ESTATE VENTURES
The Company’s investments in unconsolidated real estate ventures are summarized as follows (dollars in thousands):
CubeSmart | Number of Stores as of | Carrying Value of Investment as of | ||||||||||
Ownership | December 31, | December 31, | ||||||||||
Unconsolidated Real Estate Ventures |
| Interest | 2022 | 2021 |
| 2022 | 2021 | |||||
Fontana Self Storage, LLC ("Fontana") (1) | $ | | $ | | ||||||||
Rancho Cucamonga Self Storage, LLC ("RCSS") (1) | | | ||||||||||
191 V CUBE LLC ("HVP V") (2) | | | ||||||||||
191 IV CUBE Southeast LLC ("HVPSE") (3) | - | — | | |||||||||
191 IV CUBE LLC ("HVP IV") | | | ||||||||||
CUBE HHF Northeast Venture LLC ("HHFNE") | | | ||||||||||
CUBE HHF Limited Partnership ("HHF") | | | ||||||||||
$ | | $ | | |||||||||
| (1) | On December 9, 2021, the Company completed the acquisition of LAACO, which included a |
| (2) | During the year ended December 31, 2022, HVP V acquired |
| (3) | On August 30, 2022, HVPSE sold all |
Based upon the facts and circumstances at acquisition of Fontana and RCSS and formation of HVP V, HVPSE, HVP IV, HHFNE, and HHF (the “Ventures”), the Company determined that the Ventures are not VIEs in accordance with the accounting standard for the consolidation of VIEs. As a result, the Company used the voting interest model under the accounting standard for consolidation in order to determine whether to consolidate the Ventures. Based upon each member's substantive participating rights over the activities of each entity as stipulated in the operating agreements, the Ventures are not consolidated by the Company and are accounted for under the equity
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method of accounting. The Company’s investments in the Ventures are included in Investment in real estate ventures, at equity on the Company’s consolidated balance sheets and the Company’s earnings from its investments in the Ventures are presented in Equity in earnings of real estate ventures on the Company’s consolidated statements of operations.
The amounts reflected in the following table are based on the historical financial information of the Ventures. The following is a summary of the financial position of the Ventures as of December 31, 2022 and 2021:
| December 31, | |||||
2022 |
| 2021 | ||||
Assets | (in thousands) | |||||
Storage properties, net | $ | | $ | | ||
Other assets |
| |
| | ||
Total assets | $ | | $ | | ||
Liabilities and equity | ||||||
Debt | $ | | $ | | ||
Other liabilities | | | ||||
Equity | ||||||
CubeSmart |
| | | |||
Joint venture partners |
| | | |||
Total liabilities and equity | $ | | $ | | ||
The following is a summary of results of operations of the Ventures for the years ended December 31, 2022, 2021 and 2020:
For the year ended December 31, |
| |||||||||
| 2022 |
| 2021 |
| 2020 |
| ||||
(in thousands) | ||||||||||
Total revenues | $ | | $ | | $ | | ||||
Operating expenses |
| ( |
| ( |
| ( | ||||
Other expenses | ( | ( | ( | |||||||
Interest expense, net |
| ( |
| ( |
| ( | ||||
Depreciation and amortization |
| ( |
| ( |
| ( | ||||
Gains from sale of real estate, net | | | — | |||||||
Net income (loss) | $ | | $ | | $ | ( | ||||
Company’s share of net income (loss) | $ | | $ | | $ | | ||||
6. UNSECURED SENIOR NOTES
The Company’s unsecured senior notes are summarized as follows (collectively referred to as the “Senior Notes”):
| December 31, |
| Effective | Issuance | Maturity | ||||||||
Unsecured Senior Notes |
| 2022 |
| 2021 |
| Interest Rate | Date | Date | |||||
(in thousands) | |||||||||||||
$300M | $ | | $ | |
| | % | Various (1) | Nov-25 | ||||
$300M | | | | % | Aug-16 | Sep-26 | |||||||
$550M | | | | % | Nov-21 | Dec-28 | |||||||
$350M | | | | % | Jan-19 | Feb-29 | |||||||
$350M | | | | % | Oct-19 | Feb-30 | |||||||
$450M | | | | % | Oct-20 | Feb-31 | |||||||
$500M | | | | % | Nov-21 | Feb-32 | |||||||
Principal balance outstanding | | | |||||||||||
Less: Discount on issuance of unsecured senior notes, net | ( | ( | |||||||||||
Less: Loan procurement costs, net | ( | ( | |||||||||||
Total unsecured senior notes, net | $ | | $ | | |||||||||
| (1) | On April 4, 2017, the Operating Partnership issued $ |
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| principal amount to yield |
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
7. REVOLVING CREDIT FACILITY
On December 9, 2011, the Company entered into a credit agreement (the “Credit Facility”), which was subsequently amended and restated. On October 26, 2022, the Company again amended and restated, in its entirety, the Credit Facility (the “Second Amended and Restated Credit Facility”) which, subsequent to the amendment and restatement, is comprised of an $
As of December 31, 2022, borrowings under the Revolver had an interest rate of
Under the Second Amended and Restated Credit Facility, the Company’s ability to borrow under the Revolver is subject to ongoing compliance with certain financial covenants which include, among other things, (1) a maximum total indebtedness to total asset value of
8. MORTGAGE LOANS AND NOTES PAYABLE
The Company’s mortgage loans and notes payable are summarized as follows:
Carrying Value as of | |||||||||||
| December 31, |
| Effective | Maturity | |||||||
Mortgage Loans and Notes Payable |
| 2022 |
| 2021 |
| Interest Rate | Date | ||||
(in thousands) | |||||||||||
Nashville V, TN | $ | | $ | | | % | Jun-23 | ||||
New York, NY | | | | % | Jun-23 | ||||||
Annapolis I, MD | | | | % | May-24 | ||||||
Brooklyn XV, NY | | | | % | May-24 | ||||||
Long Island City IV, NY | | | | % | May-24 | ||||||
Long Island City II, NY | | | | % | Jul-26 | ||||||
Long Island City III, NY | | | | % | Aug-26 | ||||||
Flushing II, NY | | | | % | Jul-29 | ||||||
Principal balance outstanding | | | |||||||||
Plus: Unamortized fair value adjustment | |
| | ||||||||
Less: Loan procurement costs, net | ( | ( | |||||||||
Total mortgage loans and notes payable, net | $ | | $ | ||||||||
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As of December 31, 2022 and 2021, the Company’s mortgage loans and notes payable were secured by certain of its self-storage properties with net book values of approximately $
2023 |
| $ | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
2027 |
| — | |
2028 and thereafter |
| | |
Total mortgage payments |
| | |
Plus: Unamortized fair value adjustment |
| | |
Less: Loan procurement costs, net | ( | ||
Total mortgage loans and notes payable, net | $ | |
9. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss represents unrealized losses on interest rate swaps (see note 10). The following table summarizes the changes in accumulated other comprehensive loss for the years ended December 31, 2022 and 2021.
December 31, | |||||
2022 | 2021 | ||||
(in thousands) | |||||
Beginning balance | $ | ( | $ | ( | |
Reclassification of realized losses on interest rate swaps (1) | | | |||
Ending balance | ( | ( | |||
Less: portion included in noncontrolling interests in the Operating Partnership | | | |||
Total accumulated other comprehensive loss included in equity | $ | ( | $ | ( | |
| (1) | See note 10 for additional information about the effects of the amounts reclassified. |
10. RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS
The Company’s use of derivative instruments is limited to the utilization of interest rate swap agreements or other instruments to manage interest rate risk exposures and not for speculative purposes. The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company’s operating and financial structure, as well as to hedge specific transactions. The counterparties to these arrangements are major financial institutions with which the Company and its subsidiaries may also have other financial relationships. The Company is potentially exposed to credit loss in the event of non-performance by these counterparties. However, because of the high credit ratings of the counterparties, the Company does not anticipate that any of the counterparties will fail to meet these obligations as they come due. The Company does not hedge credit or property value market risks.
The Company formally assesses, both at inception of a hedge and on an on-going basis, whether each derivative is highly-effective in offsetting changes in cash flows of the hedged item. If management determines that the derivative is highly-effective as a hedge, then the Company accounts for the derivative using hedge accounting, pursuant to which gains or losses inherent in the derivative do not impact the Company’s results of operations. If management determines that the derivative is not highly-effective as a hedge or if a derivative ceases to be a highly-effective hedge, the Company discontinues hedge accounting prospectively and reflects in its consolidated statement of operations realized and unrealized gains and losses with respect to the derivative. As of December 31, 2022 and 2021, all derivative instruments entered into by the Company had been settled.
On December 24, 2018, the Company entered into interest rate swap agreements with notional amounts that aggregated to $
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other comprehensive loss as an increase to interest expense over the life of the 2029 Notes, which mature on February 15, 2029. The change in unrealized losses on interest rate swaps reflects a of $
11. FAIR VALUE MEASUREMENTS
The Company applies the methods of determining fair value, as described in authoritative guidance, to value its financial assets and liabilities. As defined in the guidance, fair value is based on the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, the guidance establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs, to the extent possible, as well as considering counterparty credit risk in its assessment of fair value.
The fair values of financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, other financial instruments included in other assets, accounts payable, accrued expenses and other liabilities approximate their respective carrying values at December 31, 2022 and 2021.
The following table summarizes the carrying value and estimated fair value of the Company’s debt as of December 31, 2022 and 2021:
December 31, 2022 | December 31, 2021 | ||||
(in thousands) | |||||
Carrying value | $ | | $ | | |
Fair value | | | |||
The fair value of debt estimates were based on a discounted cash flow analysis assuming market interest rates for comparable obligations as of December 31, 2022 and 2021. The Company estimates the fair value of its fixed-rate debt and the credit spreads over variable market rates on its variable-rate debt by discounting the future cash flows of each instrument at estimated market rates or credit spreads consistent with the maturity of the debt obligation with similar credit policies, which is classified within level 2 of the fair value hierarchy. Rates and credit spreads take into consideration general market conditions and maturity.
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12. NONCONTROLLING INTERESTS
Interests in Consolidated Joint Ventures
Noncontrolling interests in subsidiaries represent the ownership interests of third parties in the Company’s consolidated joint ventures. All consolidated joint ventures were formed to develop, own and operate new stores with the exception of Anoka, which was formed to acquire an existing store that had commenced operations. The following table summarizes the Company’s consolidated joint ventures, each of which are accounted for as VIEs:
CubeSmart | |||||||||||||
Number | Ownership | December 31, 2022 | |||||||||||
Consolidated Joint Ventures |
| of Stores |
| Interest | Total Assets | Total Liabilities | Related Party Loans (1) | ||||||
(in thousands) | |||||||||||||
1074 Raritan Road, LLC ("Clark") | $ | | $ | | $ | — | |||||||
Astoria Investors, LLC ("Astoria") | | | | ||||||||||
CS 750 W Merrick Rd, LLC ("Merrick") | | | — | ||||||||||
CS Lock Up Anoka, LLC ("Anoka") | | | | ||||||||||
CS Valley Forge Village Storage, LLC ("VFV") | | | | ||||||||||
CS Vienna, LLC ("Vienna") | | | | ||||||||||
SH3, LLC ("SH3") | | | — | ||||||||||
$ | | $ | | $ | | ||||||||
| (1) | Related party loans represent amounts payable from the joint venture to the Company and are included in total liabilities within the table above. The loans and related party interest have been eliminated for consolidation purposes. |
Operating Partnership Ownership
The Company follows guidance regarding the classification and measurement of redeemable securities. Under this guidance, securities that are redeemable for cash or other assets, at the option of the holder and not solely within the control of the issuer, must be classified outside of permanent equity/capital. This classification results in certain outside ownership interests being included as redeemable noncontrolling interests outside of permanent equity/capital in the consolidated balance sheets. The Company makes this determination based on terms in applicable agreements, specifically in relation to redemption provisions.
Additionally, with respect to redeemable ownership interests in the Operating Partnership held by third parties for which CubeSmart has a choice to settle the redemption by delivery of its own shares, the Operating Partnership considered the guidance regarding accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own shares, to evaluate whether CubeSmart controls the actions or events necessary to presume share settlement. The guidance also requires that noncontrolling interests classified outside of permanent capital be adjusted each period to the greater of the carrying value based on the accumulation of historical cost or the redemption value.
Approximately
In
On September 29, 2020, the Company acquired the noncontrolling interest in a previously consolidated joint venture that owned a store in New York for $
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During the years ended December 31, 2022, 2021 and 2020,
As of December 31, 2022 and 2021,
13. LEASES
CubeSmart as Lessor
The Company derives revenue primarily from rents received from customers who rent cubes at its self-storage properties under month-to-month leases for personal or business use. The self-storage lease agreements utilized by the Company vary slightly to comply with state-specific laws and regulations, but, subject to such laws and regulations, generally provide for automatic monthly renewals, flexibility to increase rental rates over time as market conditions permit and the collection of contingent fees such as administrative and late fees. None of the self-storage lease agreements contain options that allow the customer to purchase the leased space at any time during, or at the expiration of, the lease term. All self-storage leases in which the Company serves as lessor have been classified as operating leases. Accordingly, storage cubes are carried at historical cost less accumulated depreciation and impairment, if any, and are included in Storage properties on the Company’s consolidated balance sheets. Operating lease income for amounts received under the Company’s self-storage lease agreements is recognized on a straight-line basis which, due to the month-to-month nature of the leases, results in the recognition of income during the initial term and each subsequent monthly renewal using the then-in-place rent amount. Operating lease income is included in Rental income within the Company’s consolidated statements of operations. Variable lease income related to the Company’s self-storage lease agreements consists of administrative and late fees charged to customers. For the years ended December 31, 2022, 2021 and 2020, administrative and late fees totaled $
CubeSmart as Lessee
The Company serves as lessee in lease agreements for land, office space, automobiles and certain equipment, which have remaining lease terms of up to
Right-of-use assets represent the Company’s right to use an underlying asset during the lease term and lease liabilities represent the Company’s obligation to make lease payments as specified in the lease. Right-of-use assets and lease liabilities related to the Company’s operating leases are recognized at the lease commencement date based on the present value of the remaining lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available surrounding the Company’s unsecured borrowing rates and implied secured spread at the lease commencement date in determining the present value of lease payments. The right-of-use asset also includes any lease payments made at or before lease commencement less any lease incentives.
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For the years ended December 31, 2022, 2021 and 2020, the Company’s lease cost consists of the following components:
Year Ended December 31, | |||||||||||
| 2022 |
| 2021 |
| 2020 | ||||||
Finance lease cost: | |||||||||||
Amortization of finance lease right-of-use assets | $ | | $ | | $ | | |||||
Interest expense related to finance lease liabilities | | | | ||||||||
Operating lease cost | | | | ||||||||
Short-term lease cost (1) |
| | | | |||||||
Total lease costs | $ | | $ | | $ | | |||||
Cash paid for amounts included in measurement of lease liabilities: | |||||||||||
Operating cash outflows for finance leases | $ | | $ | | $ | — | |||||
Operating cash outflows for operating leases | | | | ||||||||
Total cash outflows for lease liability measurement | $ | | $ | | $ | | |||||
| (1) | Represents automobile leases that have a lease term of |
The following table represents supplemental balance sheet information related to leases as of December 31, 2022 and 2021:
December 31, | |||||||
| 2022 | 2021 | |||||
(dollars in thousands) | |||||||
Finance Leases | |||||||
$ | | $ | | ||||
Lease liabilities included in Lease liabilities - finance leases | $ | | $ | | |||
Operating Leases | |||||||
$ | | $ | | ||||
$ | | $ | | ||||
Weighted Average Lease Term (in years) | |||||||
Finance leases | |||||||
Operating leases | |||||||
Weighted Average Discount Rate | |||||||
Finance leases | | % | | % | |||
Operating leases | | % | | % | |||
The following table represents the future lease liability maturities as of December 31, 2022 (in thousands):
Finance | Operating | |||||
2023 |
| $ | |
| $ | |
2024 |
| |
| | ||
2025 |
| |
| | ||
2026 |
| |
| | ||
2027 |
| |
| | ||
2028 and thereafter |
| |
| | ||
Total lease payments |
| |
| | ||
Less: Imputed interest | ( | ( | ||||
Present value of lease liabilities | $ | | $ | | ||
As of December 31, 2022, the Company has not entered into any lease agreements that are set to commence in the future.
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14. RELATED PARTY TRANSACTIONS
The Company provides management services to certain joint ventures and other related parties. Management agreements provide for fee income to the Company based on a percentage of revenues at the managed stores. Total management fees for unconsolidated real estate ventures or other entities in which the Company held an ownership interest for the years ending December 31, 2022, 2021 and 2020 were $
The management agreements for certain joint ventures, other related parties and third-party stores provide for the reimbursement to the Company for certain expenses incurred to manage the stores. These reimbursements consist of amounts due for management fees, payroll and other store expenses. The amounts due to the Company were $
The HVP V, HVPSE, HVP IV and HHFNE operating agreements provide for acquisition, disposition and other fees payable from HVP V, HVPSE, HVP IV and HHFNE to the Company upon the closing of a property transaction by HVP V, HVPSE, HVP IV and HHFNE, or any of their subsidiaries and completion of certain measures as defined in the operating agreements. During the years ended December 31, 2022, 2021 and 2020, the Company recognized $
In April 2022, the Company began serving as lessor in a ground lease related to land underlying an HVP IV property located in Texas (see note 4). During the year ended December 31, 2022, the Company recognized income associated with this ground lease of $
15. COMMITMENTS AND CONTINGENCIES
Development Commitments
The Company has agreements with developers for the construction of
Litigation
From time to time, the Company is involved in claims which arise in the ordinary course of business. In accordance with applicable accounting guidance, management establishes an accrued liability for claim expenses, insurance retention and litigation costs when those matters present loss contingencies that are both probable and reasonably estimable. In such cases, there may be exposure to loss in excess of those amounts accrued. The estimated loss, if any, is based upon currently available information and is subject to significant judgment, a variety of assumptions and known and unknown uncertainties. In the opinion of management, the Company has made adequate provisions for potential liabilities, arising from any such matters, which are included in Accounts payable, accrued expenses and other liabilities on the Company’s consolidated balance sheets.
16. SHARE-BASED COMPENSATION PLANS
The Company has a share-based compensation plan (the “Plan”) which it utilizes to compensate certain employees and non-employee trustees. The Plan was last amended and restated in 2016. The Plan provides for the grant of share options, share appreciation rights, restricted shares, performance units, which may be denominated in cash or shares, including restricted shares and restricted share units, and other share-based awards, including unrestricted common shares or awards denominated or payable in, or valued in whole or part by reference to, common shares. Share options granted under the Plan may be non-qualified share options or incentive share options.
Upon shareholder approval of the amendment and restatement of the Plan on June 1, 2016,
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December 31, 2022: (i)
The Plan is administered by the Compensation Committee of the Company’s Board of Trustees (the “Compensation Committee”), which is appointed by the Board of Trustees. The Compensation Committee interprets the Plan and, subject to its right to delegate authority to grant awards, determines the terms and provisions of option grants and share awards.
Under the Plan, the Compensation Committee determines the vesting schedule of each award, subject to a
Share Options
The fair values for options granted in 2022, 2021 and 2020 were estimated at the time the options were granted using the Black-Scholes option-pricing model applying the following weighted average assumptions:
Assumptions: |
| 2022 |
| 2021 |
| 2020 |
| |||
Risk-free interest rate |
| % | % | % | ||||||
Expected dividend yield |
| % | % | % | ||||||
Volatility (1) |
| % | % | % | ||||||
Weighted average expected life of the options (2) |
| years | years | years | ||||||
Weighted average grant date fair value of options granted per share | $ | $ | $ | |||||||
Term | years | years | years | |||||||
| (1) | Expected volatility is based upon the Company’s historical daily share prices. |
| (2) | The expected life is based on the contractual term of the options as well as the vesting period. |
In 2022, 2021 and 2020 the Company recognized compensation expense related to options issued to employees and executives of approximately $
The table below summarizes the option activity under the Plan for the year ended December 31, 2022:
Options | Weighted Average Strike Price | Weighted Average Remaining Contractual Term (Years) |
| |||||
Balance at December 31, 2021 |
| | $ | | ||||
Options granted |
| | | |||||
Options exercised |
| ( | | |||||
Balance at December 31, 2022 |
| $ | | |||||
Vested or expected to vest at December 31, 2022 |
| | $ | |
| |||
Exercisable at December 31, 2022 |
| | $ | |
| |||
As of December 31, 2022, the aggregate intrinsic value of options that were exercisable was approximately $
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Restricted Shares & Performance Units
During 2022, 2021 and 2020 the Company granted restricted shares to employees and trustees and also granted performance units to certain executives.
The fair values for restricted share awards made under the Plan were valued at the grant date fair value, which is the market price of the underlying common shares. The shares vest over either a
Performance units represent the right to earn common shares. The performance units were granted in the form of deferred share units with a market condition, entitling the holders thereof to receive common shares at a future date. The performance units are awarded based on the Company’s total return to shareholders with respect to a specified peer group consisting of publicly traded REITs over a
Assumptions: |
| 2022 |
| 2021 |
| 2020 |
| |||
Risk-free interest rate |
| % | % | % | ||||||
Volatility (1) |
| % | % | % | ||||||
| (1) | Expected volatility is based upon the Company’s historical daily share prices. |
During the years ended December 31, 2022, 2021 and 2020, the Company recognized compensation expense related to restricted shares and performance units of approximately $
| Number of Non- |
| |
Vested Restricted |
| ||
Shares and Performance Units |
| ||
Non-Vested at January 1, 2022 |
| | |
Granted |
| | |
Vested |
| ( | |
Forfeited |
| ( | |
Non-Vested at December 31, 2022 |
|
The weighted average fair value of restricted shares and performance units granted during the years ended December 31, 2022, 2021 and 2020 was $
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17. EARNINGS PER SHARE AND UNIT AND SHAREHOLDERS’ EQUITY AND CAPITAL
Earnings per common share and shareholders’ equity
The following is a summary of the elements used in calculating basic and diluted earnings per common share:
For the year ended December 31, | |||||||||||
2022 | 2021 | 2020 | |||||||||
(dollars and shares in thousands, except per share amounts) | |||||||||||
Net income |
| $ | | $ | | $ | | ||||
Noncontrolling interests in the Operating Partnership |
| ( |
| ( |
| ( | |||||
Noncontrolling interest in subsidiaries |
| |
| |
| ( | |||||
Net income attributable to the Company’s common shareholders | $ | | $ | | $ | | |||||
Weighted average basic shares outstanding |
| |
| |
| | |||||
Share options and restricted share units |
| |
| |
| | |||||
Weighted average diluted shares outstanding (1) |
| |
| |
| | |||||
Basic earnings per share attributable to common shareholders | $ | | $ | | $ | | |||||
Diluted earnings per share attributable to common shareholders (2) | $ | | $ | | $ | | |||||
Earnings per common unit and capital
The following is a summary of the elements used in calculating basic and diluted earnings per common unit:
For the year ended December 31, | |||||||||||
2022 | 2021 | 2020 | |||||||||
(dollars and units in thousands, except per unit amounts) | |||||||||||
Net income |
| $ | | $ | | $ | | ||||
Operating Partnership interests of third parties |
| ( |
| ( |
| ( | |||||
Noncontrolling interest in subsidiaries |
| |
| |
| ( | |||||
Net income attributable to common unitholders | $ | | $ | | $ | | |||||
Weighted average basic units outstanding |
| |
| |
| | |||||
Unit options and restricted share units |
| |
| |
| | |||||
Weighted average diluted units outstanding (1) |
| |
| |
| | |||||
Basic earnings per unit attributable to common unitholders | $ | | $ | | $ | | |||||
Diluted earnings per unit attributable to common unitholders (2) | $ | | $ | | $ | | |||||
| (1) | For the years ended December 31, 2022, 2021 and 2020, the Company declared cash dividends per common share/unit of $ |
| (2) | The amounts of anti-dilutive options that were excluded from the computation of diluted earnings per share/unit as the exercise price was higher than the average share price of the Company for the years ended December 31, 2022 and 2020 were |
The OP units and common units have essentially the same economic characteristics as they share equally in the total net income or loss and distributions of the Operating Partnership. An OP unit may be redeemed for cash, or at the Company’s option, common units on a one-for-one basis. The following is a summary of OP and common units outstanding:
As of December 31, | ||||||
2022 | 2021 | 2020 | ||||
Outstanding OP units |
| | | | ||
Outstanding common units | | | | |||
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Common Shares
On November 19, 2021, the Company closed an underwritten offering of
The Company maintains an at-the-market equity program that enables it to offer and sell up to
For the year ended December 31, | |||||||||
2022 | 2021 | 2020 | |||||||
(dollars and shares in thousands, except per share amounts) | |||||||||
Number of shares sold | | | | ||||||
Average sales price per share | $ | | $ | | $ | | |||
Net proceeds after deducting offering costs | $ | | $ | | $ | | |||
The proceeds from the sales of common shares under the program during the years ended December 31, 2022, 2021 and 2020 were used to fund the acquisition and development of self-storage properties and for general corporate purposes. As of December 31, 2022, 2021 and 2020,
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CUBESMART
SCHEDULE III
REAL ESTATE AND RELATED DEPRECIATION
December 31, 2022
(dollars in thousands)
Gross Carrying Amount at | ||||||||||||||||||||||||||||
Total | Initial Cost | Costs | December 31, 2022 | |||||||||||||||||||||||||
|
| Rentable |
|
|
| Buildings |
| Subsequent |
|
| Buildings |
|
| Accumulated | ||||||||||||||
Number of | Square Feet | & | to | & | Depreciation | |||||||||||||||||||||||
State | Stores | (unaudited) | Encumbrances | Land | Improvements | Acquisition | Land | Improvements | Total | (A) | ||||||||||||||||||
Arizona | | | $ | — | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||
California | | | — | | | | | | | | ||||||||||||||||||
Colorado | | | — | | | | | | | | ||||||||||||||||||
Connecticut | | | — | | | | | | | | ||||||||||||||||||
Florida | | | — | | | | | | | | ||||||||||||||||||
Georgia | | | — | | | | | | | | ||||||||||||||||||
Illinois | | | — | | | | | | | | ||||||||||||||||||
Indiana | | | — | | | | | | | | ||||||||||||||||||
Maryland | | | | | | | | | | | ||||||||||||||||||
Massachusetts | | | — | | | | | | | | ||||||||||||||||||
Minnesota | | | — | | | | | | | | ||||||||||||||||||
Nevada | | | — | | | | | | | | ||||||||||||||||||
New Jersey | | | — | | | | | | | | ||||||||||||||||||
New Mexico | | | — | | | | | | | | ||||||||||||||||||
New York | | | | | | | | | | | ||||||||||||||||||
North Carolina | | | — | | | | | | | | ||||||||||||||||||
Ohio | | | — | | | | | | | | ||||||||||||||||||
Pennsylvania | | | — | | | | | | | | ||||||||||||||||||
Rhode Island | | | — | | | | | | | | ||||||||||||||||||
South Carolina | | | — | | | | | | | | ||||||||||||||||||
Tennessee | | | | | | | | | | | ||||||||||||||||||
Texas | | | — | | | | | | | | ||||||||||||||||||
Utah | | | — | | | | | | | | ||||||||||||||||||
Virginia | | | — | | | | | | | | ||||||||||||||||||
Washington D.C. | | | — | | | | | | | | ||||||||||||||||||
Other Corporate Assets | — | — | — | | | | | | | | ||||||||||||||||||
| | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||||
| (A) | Depreciation on the buildings and improvements is recorded on a straight-line basis over their estimated useful lives, which range from to |
F-43
Activity in storage properties during the period from January 1, 2020 through December 31, 2022 was as follows (in thousands):
| 2022 |
| 2021 |
| 2020 | ||||
Storage properties* | |||||||||
Balance at beginning of year | $ | | $ | | $ | | |||
Acquisitions & improvements |
| |
| |
| | |||
Fully depreciated assets |
| ( |
| ( |
| ( | |||
Dispositions and other |
| ( |
| ( |
| ( | |||
Construction in progress, net |
| ( |
| ( |
| | |||
Right-of-use assets - finance leases | — | — | | ||||||
Balance at end of year | $ | | $ | | $ | | |||
Accumulated depreciation* | |||||||||
Balance at beginning of year | $ | | $ | | $ | | |||
Depreciation expense |
| |
| |
| | |||
Fully depreciated assets |
| ( |
| ( |
| ( | |||
Dispositions and other |
| ( |
| ( |
| ( | |||
Balance at end of year | $ | | $ | | $ | | |||
Storage properties, net | $ | | $ | | $ | | |||
*These amounts include equipment that is housed at the Company’s stores which is excluded from Schedule III above.
As of December 31, 2022, the aggregate cost of Storage properties for federal income tax purposes was approximately $
F-44