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Section 1: 10-Q (10-Q)

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Table of Contents

sts

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2019.

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:
001-32324 (CubeSmart)
000-54462 (CubeSmart, L.P.)

CUBESMART

CUBESMART, L.P.

(Exact Name of Registrant as Specified in its Charter)

Maryland (CubeSmart)
Delaware (CubeSmart, L.P.)

20-1024732
34-1837021

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)

5 Old Lancaster Rd. Malvern, Pennsylvania

19355

(Address of Principal Executive Offices)

(Zip Code)

(610) 535-5000

(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

Common Shares, $0.01 par value per share, of CubeSmart

CUBE

New York Stock Exchange

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

Yes No

CubeSmart, L.P.

Yes 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

Yes No

CubeSmart, L.P.

Yes 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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

CubeSmart:

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

CubeSmart, L.P.:

Large accelerated filer

Accelerated filer

Non-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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).

CubeSmart

Yes No

CubeSmart, L.P.

Yes No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Class

Outstanding at July 24, 2019

Common shares, $0.01 par value per share, of CubeSmart

192,449,603

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EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended June 30, 2019 of CubeSmart (the “Parent Company” or “CubeSmart”) and CubeSmart, L.P. (the “Operating Partnership”). The Parent Company is a Maryland real estate investment trust, or 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 or the Operating Partnership.

The Parent Company is the sole general partner of the Operating Partnership and, as of June 30, 2019, owned a 99.0% interest in the Operating Partnership. The remaining 1.0% 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 quarterly reports on Form 10-Q 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.

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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 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 4 - 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, and 18 U.S.C. §1350.

3

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TABLE OF CONTENTS

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

34

Item 3. Quantitative and Qualitative Disclosures About Market Risk

47

Item 4. Controls and Procedures

48

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

49

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

49

Item 6. Exhibits

50

Filing Format

This combined Form 10-Q is being filed separately by CubeSmart and CubeSmart, L.P.

4

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Forward-Looking Statements

This Quarterly Report on Form 10-Q, 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 Securities Exchange Act of 1934, as amended, or 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 the Parent Company’s and the Operating Partnership’s combined Annual Report on Form 10-K for the year ended December 31, 2018 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 the national and local economic, business, real estate and other market conditions;

the effect of competition from existing and new self-storage properties on our ability to maintain or raise occupancy and rental rates;

the execution of our business plan;

reduced availability and increased costs of external sources of capital;

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 indebtedness;

increases in interest rates and operating costs;

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;

cyber security breaches or a failure of our networks, systems or technology, which could adversely impact our business, customer and employee relationships;

changes in real estate and zoning laws or regulations;

risks related to natural disasters or acts of violence, terrorism, or war that affect the markets in which we operate;

5

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potential environmental and other liabilities;

uninsured losses and the ability to obtain insurance coverage 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 the Parent Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2018 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.

6

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CUBESMART AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

June 30, 

December 31, 

 

   

2019

   

2018

 

(unaudited)

ASSETS

Storage properties

$

4,640,556

$

4,463,455

Less: Accumulated depreciation

 

(905,403)

 

(862,487)

Storage properties, net (including VIE assets of $140,474 and $330,986, respectively)

 

3,735,153

 

3,600,968

Cash and cash equivalents

 

11,103

 

3,764

Restricted cash

 

4,280

 

2,718

Loan procurement costs, net of amortization

 

4,505

 

963

Investment in real estate ventures, at equity

 

86,914

 

95,796

Other assets, net

 

105,514

 

48,763

Total assets

$

3,947,469

$

3,752,972

LIABILITIES AND EQUITY

Unsecured senior notes, net

$

1,489,088

$

1,143,524

Revolving credit facility

 

257,150

 

195,525

Unsecured term loans, net

 

 

299,799

Mortgage loans and notes payable, net

 

106,596

 

108,246

Accounts payable, accrued expenses and other liabilities

 

164,533

 

149,914

Distributions payable

 

62,029

 

60,627

Deferred revenue

 

25,230

 

22,595

Security deposits

 

472

 

474

Total liabilities

 

2,105,098

 

1,980,704

Noncontrolling interests in the Operating Partnership

 

62,385

 

55,819

Commitments and contingencies

Equity

Common shares $.01 par value, 400,000,000 shares authorized, 191,626,376 and 187,145,103 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively

 

1,916

 

1,871

Additional paid-in capital

 

2,610,939

 

2,500,751

Accumulated other comprehensive loss

 

(769)

 

(1,029)

Accumulated deficit

 

(838,197)

 

(791,915)

Total CubeSmart shareholders’ equity

 

1,773,889

 

1,709,678

Noncontrolling interests in subsidiaries

 

6,097

 

6,771

Total equity

 

1,779,986

 

1,716,449

Total liabilities and equity

$

3,947,469

$

3,752,972

See accompanying notes to the unaudited consolidated financial statements.

7

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CUBESMART AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

Three Months Ended June 30, 

Six Months Ended June 30, 

 

    

2019

    

2018

    

2019

    

2018

 

REVENUES

Rental income

$

136,027

$

127,843

$

267,619

$

252,004

Other property related income

 

16,922

 

15,047

 

32,597

 

29,294

Property management fee income

 

6,068

 

4,925

 

11,646

 

9,394

Total revenues

 

159,017

 

147,815

 

311,862

 

290,692

OPERATING EXPENSES

Property operating expenses

 

50,120

49,528

101,545

 

98,282

Depreciation and amortization

 

40,663

35,046

79,105

 

70,012

General and administrative

 

9,800

8,341

18,947

 

17,085

Total operating expenses

 

100,583

 

92,915

 

199,597

 

185,379

OTHER (EXPENSE) INCOME

Interest:

Interest expense on loans

 

(18,134)

 

(15,451)

 

(35,651)

 

(30,606)

Loan procurement amortization expense

 

(771)

 

(578)

 

(1,395)

 

(1,157)

Equity in earnings (losses) of real estate ventures

 

10,527

 

(309)

 

10,788

 

(493)

Other

 

(178)

 

189

 

(343)

 

493

Total other expense

 

(8,556)

 

(16,149)

 

(26,601)

 

(31,763)

NET INCOME

 

49,878

 

38,751

 

85,664

 

73,550

NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS

Noncontrolling interests in the Operating Partnership

 

(499)

(426)

(857)

 

(809)

Noncontrolling interest in subsidiaries

 

41

85

111

 

92

NET INCOME ATTRIBUTABLE TO THE COMPANY’S COMMON SHAREHOLDERS

$

49,420

$

38,410

$

84,918

$

72,833

Basic earnings per share attributable to common shareholders

$

0.26

$

0.21

$

0.45

$

0.40

Diluted earnings per share attributable to common shareholders

$

0.26

$

0.21

$

0.45

$

0.40

Weighted average basic shares outstanding

189,667

183,718

188,467

183,000

Weighted average diluted shares outstanding

190,543

184,523

189,286

183,753

See accompanying notes to the unaudited consolidated financial statements.

8

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CUBESMART AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

Three Months Ended June 30, 

Six Months Ended June 30, 

 

   

2019

    

2018

    

2019

    

2018

 

NET INCOME

$

49,878

$

38,751

$

85,664

$

73,550

Other comprehensive income (loss):

Unrealized gains on interest rate swaps

 

 

232

60

Reclassification of realized losses (gains) on interest rate swaps

 

20

 

(279)

30

(60)

OTHER COMPREHENSIVE INCOME (LOSS)

 

20

 

(279)

 

262

 

COMPREHENSIVE INCOME

 

49,898

 

38,472

 

85,926

 

73,550

Comprehensive income attributable to noncontrolling interests in the Operating Partnership

 

(499)

 

(427)

 

(859)

 

(813)

Comprehensive loss attributable to noncontrolling interest in subsidiaries

 

41

 

85

 

111

 

92

COMPREHENSIVE INCOME ATTRIBUTABLE TO THE COMPANY

$

49,440

$

38,130

$

85,178

$

72,829

See accompanying notes to the unaudited consolidated financial statements.

9

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CUBESMART AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(in thousands)

(unaudited)

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

Noncontrolling

 

Additional

Accumulated Other

Total

Noncontrolling

Interests in the

 

Common Shares

Paid in

Comprehensive

Accumulated

Shareholders’

Interest in

Total

Operating

 

Number

Amount

Capital

Income (Loss)

Deficit

Equity

Subsidiaries

Equity

Partnership

 

Balance at December 31, 2018

 

187,145

$

1,871

$

2,500,751

$

(1,029)

$

(791,915)

$

1,709,678

$

6,771

$

1,716,449

$

55,819

Contributions from noncontrolling interests in subsidiaries

4,828

 

4,828

Distributions paid to noncontrolling interests in subsidiaries

(66)

(66)

Acquisition of noncontrolling interest in subsidiary

(9,728)

(9,728)

(272)

(10,000)

Issuance of common shares

 

773

8

24,572

 

24,580

 

24,580

Issuance of restricted shares

 

19

 

 

Conversion from units to shares

 

60

1

1,841

 

1,842

 

1,842

 

(1,842)

Exercise of stock options

 

140

1

1,048

 

1,049

 

1,049

Amortization of restricted shares

798

 

798

 

798

Share compensation expense

468

 

468

 

468

Adjustment for noncontrolling interests in the Operating Partnership

(6,681)

 

(6,681)

 

(6,681)

 

6,681

Net income (loss)

35,498

 

35,498

 

(70)

 

35,428

 

358

Other comprehensive income, net

240

240

240

2

Common share distributions ($0.32 per share)

(60,375)

 

(60,375)

 

(60,375)

 

(604)

Balance at March 31, 2019

 

188,137

$

1,881

$

2,519,750

$

(789)

$

(823,473)

$

1,697,369

$

11,191

$

1,708,560

$

60,414

Distributions paid to noncontrolling interests in subsidiaries

(8)

(8)

Acquisition of noncontrolling interest in subsidiary

(22,573)

(22,573)

(5,045)

(27,618)

Issuance of common shares

 

3,353

34

110,487

 

110,521

 

110,521

Issuance of restricted shares

 

31

 

 

Conversion from units to shares

 

20

644

 

644

 

644

 

(644)

Exercise of stock options

 

85

1

961

 

962

 

962

Amortization of restricted shares

1,231

 

1,231

 

1,231

Share compensation expense

439

 

439

 

439

Adjustment for noncontrolling interests in the Operating Partnership

(2,713)

 

(2,713)

 

(2,713)

 

2,713

Net income (loss)

49,420

 

49,420

 

(41)

 

49,379

 

499

Other comprehensive income, net

20

20

20

Common share distributions ($0.32 per share)

(61,431)

 

(61,431)

 

(61,431)

 

(597)

Balance at June 30, 2019

 

191,626

$

1,916

$

2,610,939

$

(769)

$

(838,197)

$

1,773,889

$

6,097

$

1,779,986

$

62,385

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

Noncontrolling

 

Additional

Accumulated Other

Total

Noncontrolling

Interests in the

 

Common Shares

Paid in

Comprehensive

Accumulated

Shareholders’

Interest in

Total

Operating

 

Number

Amount

Capital

Income

Deficit

Equity

Subsidiaries

Equity

Partnership

 

Balance at December 31, 2017

    

182,216

$

1,822

$

2,356,620

$

3

$

(729,311)

$

1,629,134

$

6,236

$

1,635,370

$

54,320

Contributions from noncontrolling interests in subsidiaries

738

 

738

Issuance of common shares

 

(44)

 

(44)

 

(44)

Issuance of restricted shares

 

64

1

 

1

 

1

Issuance of OP units

4,782

Exercise of stock options

 

2

 

2

 

2

Amortization of restricted shares

(242)

 

(242)

 

(242)

Share compensation expense

423

 

423

 

423

Adjustment for noncontrolling interest in the Operating Partnership

1,169

 

1,169

 

1,169

 

(1,169)

Net income (loss)