Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-K

 

x                    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2013

 

OR

 

o                      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)

Commission file number 000-54662 (CubeSmart, L.P.)

 

CUBESMART

CUBESMART, L.P.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland (CubeSmart)

 

20-1024732 (CubeSmart)

Delaware (CubeSmart, L.P.)

 

34-1837021 (CubeSmart, L.P.)

(State or Other Jurisdiction of

 

(IRS Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

5 Old Lancaster Road

 

 

Malvern, Pennsylvania

 

19355

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code (610) 535-5000

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

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

 

New York Stock Exchange

 

7.75% Series A Cumulative Redeemable

 

New York Stock Exchange

Preferred Shares of Beneficial Interest, par value $.01 per share, of CubeSmart

 

 

 

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

Yes x No o

CubeSmart, L.P.

Yes x No o

 

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 £ No x

CubeSmart, L.P.

Yes £ No x

 

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 x No £

CubeSmart, L.P.

Yes x No £

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

 

CubeSmart

Yes x No £

CubeSmart, L.P.

Yes x No £

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

 

CubeSmart

Yes x No £

CubeSmart, L.P.

Yes x No £

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

CubeSmart:

 

 

 

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

 

CubeSmart, L.P.:

 

 

 

Large accelerated filer o

Accelerated filer o

Non-accelerated filer x

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

CubeSmart

Yes o No x

CubeSmart, L.P.

Yes o No x

 

As of June 28, 2013, 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 $2,148,192,535. As of February 25, 2014, the number of common shares of CubeSmart outstanding was 140,289,967.

 

As of June 28, 2013, the last business day of CubeSmart, L.P.’s most recently completed second fiscal quarter, the aggregate market value of the 2,280,730 units of limited partnership (the “Units”) held by non-affiliates of CubeSmart, L.P. was $36,446,065 based upon the last reported sale price of $15.98 per share on the New York Stock Exchange on June 28, 2013 of the common shares of CubeSmart, the sole general partner of CubeSmart, L.P. (For this computation, the market value of all Units beneficially owned by CubeSmart has been excluded.)

 

Documents incorporated by reference:  Portions of the Proxy Statement for the 2014 Annual Meeting of Shareholders of CubeSmart to be filed subsequently with the SEC are incorporated by reference into Part III of this report.

 

 

 



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EXPLANATORY NOTE

 

This report combines the annual reports on Form 10-K for the year ended December 31, 2013 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, and/or the Operating Partnership.

 

The Parent Company is the sole general partner of the Operating Partnership and, as of December 31, 2013, owned a 98.4% interest in the Operating Partnership. The remaining 1.6% interest consists of common units of limited partnership interest issued by the Operating Partnership to third parties in exchange for contributions of facilities 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 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 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 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 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 Exhibit 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.

 

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Table of Contents

 

TABLE OF CONTENTS

 

PART I

 

4

 

 

 

Item 1.

Business

5

 

 

 

Item 1A.

Risk Factors

12

 

 

 

Item 1B.

Unresolved Staff Comments

24

 

 

 

Item 2.

Properties

24

 

 

 

Item 3.

Legal Proceedings

35

 

 

 

Item 4.

Mining Safety Disclosures

35

 

 

 

PART II

 

36

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

36

 

 

 

Item 6.

Selected Financial Data

38

 

 

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

43

 

 

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

58

 

 

 

Item 8.

Financial Statements and Supplementary Data

58

 

 

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

58

 

 

 

Item 9A.

Controls and Procedures

59

 

 

 

Item 9B.

Other Information

60

 

 

 

PART III

 

61

 

 

 

Item 10.

Trustees, Executive Officers and Corporate Governance

61

 

 

 

Item 11.

Executive Compensation

61

 

 

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

61

 

 

 

Item 13.

Certain Relationships and Related Transactions, and Trustee Independence

62

 

 

 

Item 14.

Principal Accountant Fees and Services

62

 

 

 

PART IV

 

63

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

63

 

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Table of Contents

 

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 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 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 the 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:

 

·         national and local economic, business, real estate and other market conditions;

 

·         the competitive environment in which we operate, including our ability to maintain or raise occupancy and rental rates;

 

·         the execution of our business plan;

 

·         the availability 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;

 

·         our ability to maintain our Parent Company’s qualification as a real estate investment trust (“REIT”) for federal income tax purposes;

 

·         acquisition and development risks;

 

·         increases in taxes, fees, and assessments from state and local jurisdictions;

 

·         changes in real estate and zoning laws or regulations;

 

·         risks related to natural disasters;

 

·         potential environmental and other liabilities;

 

·         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.

 

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Table of Contents

 

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 facilities in the United States.

 

As of December 31, 2013, we owned 366 self-storage facilities located in 20 states and in the District of Columbia containing an aggregate of approximately 24.7 million rentable square feet.  As of December 31, 2013, approximately 88.3% of the rentable square footage at our owned facilities was leased to approximately 192,000 customers, and no single customer represented a significant concentration of our revenues.  As of December 31, 2013 we owned facilities in the District of Columbia and the following 20 states:  Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois, Maryland, Massachusetts, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Utah and Virginia.  In addition, as of December 31, 2013, we managed 160 facilities for third parties, bringing the total number of facilities we owned and/or managed to 526.  As of December 31, 2013, we managed facilities in the following 23 states: Alabama, California, Colorado, Connecticut, Florida, Georgia, Illinois, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, and Virginia.

 

Our self-storage facilities 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 facilities offer outside storage areas for vehicles and boats.  Our facilities 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 facilities have an on-site manager during business hours, and 236, or approximately 64%, of our owned facilities have a manager who resides in an apartment at the facility.  Our customers can access their storage cubes during business hours, and some of our facilities provide customers with 24-hour access through computer controlled access systems.  Our goal is to provide customers with the highest standard of facilities and service in the industry. To that end, approximately 78% of our owned facilities include climate controlled cubes.

 

The Parent Company was formed in July 2004 as a Maryland REIT.  The Parent Company owns its assets and conducts its business through its operating partnership, CubeSmart, L.P. (our “Operating Partnership”), and its subsidiaries.  The Parent Company controls the Operating Partnership as its sole general partner and, as of December 31, 2013, owned an approximately 98.4% interest in the Operating Partnership.  The Operating Partnership has been engaged in virtually all aspects of the self-storage business, including the development, acquisition, management, ownership and operation of self-storage facilities.

 

In addition, as of December 31, 2013, we owned an economic interest in one unconsolidated real estate venture that owned 35 self-storage facilities located in Texas (34) and North Carolina (1), containing an aggregate of approximately 2.4 million rentable square feet.

 

Acquisition and Disposition Activity

 

As of December 31, 2013 and 2012, we owned 366 and 381 facilities, respectively, that contained an aggregate of 24.7 million and 25.5 million rentable square feet with occupancy rates of 88.3% and 84.4%, respectively.

 

A complete listing of, and additional information about, our facilities is included in Item 2 of this Report.  The following is a summary of our 2013, 2012 and 2011 acquisition and disposition activity:

 

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Table of Contents

 

Facility/Portfolio

 

Location

 

Transaction Date

 

Number of
Facilities

 

Purchase / Sale Price
(in thousands)

 

 

 

 

 

 

 

 

 

 

 

2013 Acquisitions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gilbert Asset

 

Gilbert, AZ

 

March 2013

 

1

 

$

6,900

 

Evanston Asset

 

Evanston, IL

 

May 2013

 

1

 

8,300

 

Delray Beach Asset

 

Delray Beach, FL

 

May 2013

 

1

 

7,150

 

Miramar Asset

 

Miramar, FL

 

June 2013

 

1

 

9,000

 

Stoneham Asset

 

Stoneham, MA

 

June 2013

 

1

 

10,600

 

Maryland/New Jersey Assets

 

Multiple locations in MD and NJ

 

June 2013

 

5

 

52,400

 

Staten Island Asset

 

Staten Island, NY

 

July 2013

 

1

 

13,000

 

Lewisville Asset

 

Lewisville, TX

 

August 2013

 

1

 

10,975

 

Chandler Asset

 

Chandler, AZ

 

September 2013

 

1

 

10,500

 

Tempe Asset

 

Tempe, AZ

 

September 2013

 

1

 

4,300

 

Clinton Asset

 

Clinton, MD

 

November 2013

 

1

 

15,375

 

Katy Asset

 

Katy, TX

 

November 2013

 

1

 

9,700

 

Richmond Asset

 

Richmond, TX

 

December 2013

 

1

 

10,497

 

Dallas Asset

 

Dallas, TX

 

December 2013

 

1

 

6,925

 

Elkridge Asset

 

Elkridge, MD

 

December 2013

 

1

 

8,200

 

Fort Lauderdale Asset

 

Fort Lauderdale, FL

 

December 2013

 

1

 

6,000

 

 

 

 

 

 

 

20

 

$

189,822

 

 

 

 

 

 

 

 

 

 

 

2013 Dispositions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Texas/Indiana Assets

 

Multiple locations in TX and IN

 

March 2013

 

5

 

$

11,400

 

Tennessee Assets

 

Multiple locations in TN

 

August 2013

 

8

 

25,000

 

California/Tennessee/Texas Assets

 

Multiple locations in CA, TN and TX

 

October/November 2013

 

22

 

90,000

 

 

 

 

 

 

 

35

 

$

126,400

 

 

 

 

 

 

 

 

 

 

 

2012 Acquisitions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Houston Asset

 

Houston, TX

 

February 2012

 

1

 

$

5,100

 

Dunwoody Asset

 

Dunwoody, GA

 

February 2012

 

1

 

6,900

 

Mansfield Asset

 

Mansfield, TX

 

June 2012

 

1

 

4,970

 

Texas Assets

 

Multiple locations in TX

 

July 2012

 

4

 

18,150

 

Allen Asset

 

Allen, TX

 

July 2012

 

1

 

5,130

 

Norwalk Asset

 

Norwalk, CT

 

July 2012

 

1

 

5,000

 

Storage Deluxe Assets

 

Multiple locations in NY and CT

 

February/April/August 2012

 

6

 

201,910

 

Eisenhower Asset

 

Alexandria, VA

 

August 2012

 

1

 

19,750

 

New Jersey Assets

 

Multiple locations in NJ

 

August 2012

 

2

 

10,750

 

Georgia/Florida Assets

 

Multiple locations in GA and FL

 

August 2012

 

3

 

13,370

 

Peachtree Asset

 

Peachtree City, GA

 

August 2012

 

1

 

3,100

 

HSREV Assets

 

Multiple locations in PA, NY, NJ, VA and FL

 

September 2012

 

9

 

102,000

 

Leetsdale Asset

 

Denver, CO

 

September 2012

 

1

 

10,600

 

Orlando/West Palm Beach Assets

 

Multiple locations in FL

 

November 2012

 

2

 

13,010

 

Exton/Cherry Hill Assets

 

Multiple locations in NJ and PA

 

December 2012

 

2

 

7,800

 

Carrollton Asset

 

Carrollton, TX

 

December 2012

 

1

 

4,800

 

 

 

 

 

 

 

37

 

$

432,340

 

 

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Table of Contents

 

Facility/Portfolio

 

Location

 

Transaction Date

 

Number of
Facilities

 

Purchase / Sale Price
(in thousands)

 

 

 

 

 

 

 

 

 

 

 

2012 Dispositions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Michigan Assets

 

Multiple locations in MI

 

June 2012

 

3

 

$6,362

 

Gulf Coast Assets

 

Multiple locations in LA, AL and MS

 

June 2012

 

5

 

16,800

 

New Mexico Assets

 

Multiple locations in NM

 

August 2012

 

6

 

7,500

 

San Bernardino Asset

 

San Bernardino, CA

 

August 2012

 

1

 

5,000

 

Florida/ Tennessee Assets

 

Multiple locations in FL and TN

 

November 2012

 

3

 

6,550

 

Ohio Assets

 

Multiple locations in OH

 

November 2012

 

8

 

17,750

 

 

 

 

 

 

 

26

 

$59,962

 

 

 

 

 

 

 

 

 

 

 

2011 Acquisitions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Burke Lake Asset

 

Fairfax Station, VA

 

January 2011

 

1

 

$14,000

 

West Dixie Asset

 

Miami, FL

 

April 2011

 

1

 

13,500

 

White Plains Asset

 

White Plains, NY

 

May 2011

 

1

 

23,000

 

Phoenix Asset

 

Phoenix, AZ

 

May 2011

 

1

 

612

 

Houston Asset

 

Houston, TX

 

June 2011

 

1

 

7,600

 

Duluth Asset

 

Duluth, GA

 

July 2011

 

1

 

2,500

 

Atlanta Assets

 

Atlanta, GA

 

July 2011

 

2

 

6,975

 

District Heights Asset

 

District Heights, MD

 

August 2011

 

1

 

10,400

 

Storage Deluxe Assets

 

Multiple locations in NY, CT and PA

 

November 2011

 

16

 

357,310

 

Leesburg Asset

 

Leesburg, VA

 

November 2011

 

1

 

13,000

 

Washington, DC Asset

 

Washington, DC

 

December 2011

 

1

 

18,250

 

 

 

 

 

 

 

27

 

$467,147

 

 

 

 

 

 

 

 

 

 

 

2011 Dispositions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Flagship Assets

 

Multiple locations in IN and OH

 

August 2011

 

18

 

$43,500

 

Portage Asset

 

Portage, MI

 

November 2011

 

1

 

1,700

 

 

 

 

 

 

 

19

 

$45,200

 

 

The comparability of our results of operations is affected by the timing of acquisition and disposition activities during the periods reported.  At December 31, 2013 and 2012, we owned 366 and 381 self-storage facilities and related assets, respectively.  The following table summarizes the change in number of owned self-storage facilities from January 1, 2012 through December 31, 2013:

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Balance - January 1

 

381

 

370

 

Facilities acquired

 

1

 

6

 

Facilities sold

 

(5

)

 

Balance - March 31

 

377

 

376

 

Facilities acquired

 

9

 

2

 

Facilities sold

 

 

(8

)

Balance - June 30

 

386

 

370

 

Facilities acquired

 

4

 

24

 

Facilities sold

 

(8

)

(7

)

Balance - September 30

 

382

 

387

 

Facilities acquired

 

6

 

5

 

Facilities sold

 

(22

)

(11

)

Balance - December 31

 

366

 

381

 

 

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Table of Contents

 

Financing and Investing Activities

 

The following summarizes certain financing and investing activities during the year ended December 31, 2013:

 

·  Facility Acquisitions.  During 2013, we acquired 20 self-storage facilities located throughout the United States for an aggregate purchase price of approximately $189.8 million.  In connection with these acquisitions, we allocated a portion of the purchase price to the intangible value of in-place leases which aggregated to $13.5 million.

 

·  Investment in Unconsolidated Real Estate Venture.  On December 10, 2013, we acquired a 50% ownership interest in 35 self-storage facilities located in Texas (34) and North Carolina (1) through a newly-formed joint venture.  The joint venture paid  $315.7 million for these facilities.  We and our unaffiliated partner in the joint venture each contributed 50% of the capital required to fund the acquisition.  We refer to this joint venture elsewhere in this Report as “HHF.”

 

·  Facility Dispositions.  During 2013, we sold 35 self-storage facilities located throughout the United States for an aggregate sales price of approximately $126.4 million.  In connection with these sales, we recorded gains that totaled $27.4 million.

 

·  Credit Facility and Term Loan Amendments.  On June 18, 2013, through amendments to its current unsecured term loans and revolving credit facility, the Company extended certain maturity dates, reduced pricing and adjusted certain covenants of its bank debt instruments.

 

·  Unsecured Senior Note Issuance.  On December 17, 2013, the Operating Partnership issued $250 million in aggregate principal amount of 4.375% unsecured senior notes due December 15, 2023.

 

·  Term Loan Repayment.  On December 17, 2013, we repaid a $100 million term loan that was scheduled to mature in 2014 under our Credit Facility.

 

·  At-The-Market Equity Programs.  During 2013, under our at-the-market programs, we sold a total of 5.7 million common shares at an average sales price of $17.92 per share, resulting in gross proceeds of $102.1 million under the programs.  We incurred $1.8 million of offering costs in conjunction with the sales. At December 31, 2013, 6.4 million common shares remained available for sale under the program.

 

Business Strategy

 

Our business strategy consists of several elements:

 

·         Maximize cash flow from our facilities — Our operating strategy focuses on maximizing sustainable rents at our facilities while achieving and sustaining occupancy targets.  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 facilities within targeted markets — During 2014, 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 facilities not in targeted markets — During 2014, we intend to continue to opportunistically reduce exposure in slower growth, lower barrier-to-entry markets.  We intend to use proceeds from these transactions to fund acquisitions within target markets.

 

·         Grow our third-party management business — We intend to pursue additional third-party management opportunities in markets where we currently maintain management that can be extended to additional facilities.  We intend 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.

 

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Investment and Market Selection Process

 

We maintain a disciplined and focused process in the acquisition and development of self-storage facilities.  Our investment committee, comprised of our named executive officers and led by Christopher P. Marr, our Chief Executive Officer, oversees our investment process.  Our investment process involves six stages — identification, initial due diligence, economic assessment, investment committee approval (and when required, Board approval), 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 facilities, or where we believe that we can acquire a significant number of facilities efficiently and within a short period of time.  We evaluate both the broader market and the immediate area, typically three miles around the facility, for its ability to support above-average demographic growth.  We seek to increase our presence primarily in areas that we expect will experience growth, including the Northeastern and Middle Atlantic areas of the United States and areas within Georgia, Florida, Texas, Illinois and California and to enter additional markets should suitable opportunities arise.

 

·         Quality of facility — We focus on self-storage facilities that have good visibility 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 facilities, we seek to invest in portfolio acquisitions, including those offering significant potential for increased operating efficiency and the ability to spread our fixed costs across a large base of facilities.

 

Segment

 

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

 

Concentration

 

Our self-storage facilities are located in major metropolitan areas as well as suburban areas and have numerous customers per facility.  No single customer represented a significant concentration of our 2013 revenues.  Our facilities in New York, Florida, Texas and California provided approximately 17%, 15%, 10% and 9%, respectively, of our total 2013 revenues.  Our facilities in New York, Florida, California and Texas provided approximately 16%, 15%, 10% and 10%, respectively, of our total 2012 revenues.

 

Seasonality

 

We typically experience seasonal fluctuations in occupancy levels at our facilities, with the levels 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, 2013, our debt to total 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, preferred shares and units of the Operating Partnership held by third parties and (b) the carrying value of our total indebtedness) was approximately 32.8% compared to approximately 33.4% as of December 31, 2012.  Our ratio of debt to the undepreciated cost of our total assets as of December 31, 2013 was approximately 41.3% compared to approximately 40.9% as of December 31, 2012.  We expect to finance additional investments in self-storage facilities 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 borrowings under the revolving portion of our 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 and issuances of common or preferred units in our Operating Partnership in exchange for contributed facilities or cash and formations of joint ventures.  We also may sell facilities that we no longer view as core assets and reallocate the sales proceeds to fund other acquisitions.

 

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Competition

 

Self-storage facilities compete based on a number of factors, including location, rental rates, security, suitability of the facility’s design to prospective customers’ needs and the manner in which the facility is operated and marketed.  In particular, the number of competing self-storage facilities in a particular market could have a material effect on our occupancy levels, rental rates and on the overall operating performance of our facilities.  We believe that the primary competition for potential customers of any of our self-storage facilities comes from other self-storage facilities within a three-mile radius of that facility.  We believe our facilities are well-positioned within their respective markets and we emphasize customer service, convenience, security and professionalism.

 

Our key competitors include local and regional operators as well as the other public self-storage REITS, including Public Storage, Sovran Self Storage, Inc. and Extra Space Storage Inc.  These companies, some of which operate significantly more facilities 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 facility investments and the payment of higher facility acquisition prices.  This competition may reduce the number of suitable acquisition opportunities available to us, increase the price required to acquire the particular facilities and reduce the demand for self-storage space at our facilities.  Nevertheless, we believe that our experience in operating, managing, acquiring, developing and obtaining financing for self-storage facilities 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 facilities.

 

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 facilities.  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 facilities 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 facilities 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 facilities 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 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 the facilities 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 facilities.  Whenever the environmental assessment for one of our facilities indicates that a facility 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 facility 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.

 

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We are not aware of any environmental cleanup liability that we believe will have a material adverse effect on us.  We cannot assure, 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 facilities, nor have we been notified of a claim for personal injury or property damage by a private party in connection with any of our facilities relating to environmental conditions.

 

We are not aware of any environmental condition with respect to any of our facilities 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 assure, however, that this will continue to be the case.

 

Insurance

 

We carry comprehensive liability, fire, extended coverage and rental loss insurance covering all of the facilities in our portfolio.  We carry environmental insurance coverage on certain facilities 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 riots, war or acts of God, and, in some cases, environmental hazards, because such coverage is not available or is not available at commercially reasonable rates.  Some of our policies, such as those covering losses due to terrorist activities, 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.  We also carry liability insurance to insure against personal injuries that might be sustained at our facilities and director and officer liability insurance.

 

Offices

 

Our principal executive offices are located at 5 Old Lancaster Road, Malvern, PA 19355.  Our telephone number is (610) 535-5000.

 

Employees

 

As of December 31, 2013, we employed 1,442 employees, of whom 194 were corporate executive and administrative personnel and 1,248 were property-level personnel.  We believe that our relations with our employees are good.  Our employees are not unionized.

 

Available Information

 

We file registration statements, proxy statements, our annual report 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 visiting the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549, by calling the SEC at 1-800-SEC-0330 or by accessing the SEC’s website at www.sec.gov.  Our internet website address is www.cubesmart.com.  You also can obtain on our website, free of charge, a copy of our annual report on Form 10-K, the Operating Partnership’s registration statement on Form 10, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we electronically file such reports or amendments with, or furnish them to, the SEC.  Our internet 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 of Trustees — 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 by mail at 5 Old Lancaster Road, Malvern, PA 19355.

 

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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.  A continuation of, or slow recovery from, ongoing adverse economic conditions affecting disposable consumer income, such as employment levels, business conditions, interest rates, tax rates, fuel and energy costs, 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 the economic and financial market problems and the many ways in which they may affect our customers and our business in general.  Nonetheless, continuation or further worsening of these difficult financial and macroeconomic conditions could have a significant adverse effect on our sales, profitability and results of operations.

 

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 facilities, changes to sales taxes or other governmental efforts, including mandating medical insurance for employees, could adversely impact our business and results of operations.

 

Our financial performance is dependent upon the economic and other conditions of the markets in which our facilities 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 facilities in New York, Florida, Texas, California, New Jersey, Illinois, and Connecticut accounted for approximately 17%, 15%, 10%, 9%, 6%, 6% and 4%, respectively, of our total 2013 revenues.  As a result of this geographic concentration of our facilities, 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.

 

We face risks associated with facility acquisitions.

 

We intend to continue to acquire individual and portfolios of self-storage facilities.  These acquisitions 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 facilities may be higher than our estimates;

 

·                  we may be unable to obtain acquisition financing on favorable terms;

 

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·                  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;

 

·                  there is only limited recourse, or no recourse, to the former owners of newly acquired facilities 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 facilities; and claims by local governments, adjoining facility owners, facility owner associations, and easement holders for fees, assessments, taxes on other facility-related changes.  As a result, if a liability were asserted against us based upon ownership of an acquired facility, we might be required to pay significant sums to settle it, which could adversely affect our financial results and cash flow.

 

In addition, we do not always obtain third-party appraisals of acquired facilities (and instead rely on value determinations by our senior management) and the consideration we pay in exchange for those facilities may exceed the value determined by third-party appraisals.

 

We will incur costs and will face integration challenges when we acquire additional facilities.

 

As we acquire or develop additional self-storage facilities, we will be subject to risks associated with integrating and managing new facilities, including customer retention and mortgage default risks. In the case of a large portfolio purchase, we could experience strains in our existing information management capacity.  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 expense acquisition-related costs and amortize in future periods costs for acquired goodwill and other 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 facilities that lack operating history with us will make it more difficult to predict revenue potential.

 

We intend to continue to acquire additional facilities.  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 facility up to the standards established for our intended market position, the performance of the facility may be below expectations.  Acquired facilities may have characteristics or deficiencies affecting their valuation or revenue potential that we have not yet discovered.  We cannot assure that the performance of facilities 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 facilities 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; and

 

·                  complications (including building moratoriums and anti-growth legislation) in obtaining necessary zoning, occupancy and other governmental permits.

 

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 facilities, satisfy our debt obligations and/or make distributions to shareholders.

 

We depend on external sources of capital to fund acquisitions and facility 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 the market’s perception of our growth potential and our current and potential future earnings 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 facilities when strategic opportunities exist, satisfy our debt obligations or make distributions to shareholders that would permit us to qualify as a REIT or avoid paying tax on our REIT taxable income.

 

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Rising operating expenses could reduce our cash flow and funds available for future distributions.

 

Our facilities and any other facilities 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 facilities are subject to increases in operating expenses such as real estate and other taxes, personnel costs including the cost of providing specific medical coverage to our employees, utilities, insurance, administrative expenses and costs for repairs and maintenance.  If operating expenses 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 of Trustees.  Our ability to pay dividends will depend upon, among other factors:

 

·                  the operational and financial performance of our facilities;

 

·                  capital expenditures with respect to existing and newly acquired facilities;

 

·                  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.

 

If we are unable to promptly re-let our cubes or if the rates upon such re-letting are significantly lower than expected, then 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 facilities under month-to-month leases.  Any delay in re-letting cubes as vacancies arise would reduce our revenues and harm our operating results.  In addition, lower than expected rental rates upon re-letting could adversely affect our revenues and impede our growth.

 

Facility ownership through joint ventures may limit our ability to act exclusively in our interest.

 

We have in the past co-invested 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 facilities 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.

 

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We face significant competition for customers and for acquisition and development opportunities.

 

Actions by our competitors may decrease or prevent increases of the occupancy and rental rates of our facilities.  We compete with numerous developers, owners and operators of self-storage facilities, including other REITs, some of which own or may in the future own facilities similar to ours in the same submarkets in which our facilities are located and some of which may have greater capital resources.  In addition, due to the relatively low cost of each individual self-storage facility, other developers, owners and operators have the capability to build additional facilities that may compete with our facilities.

 

If our competitors build new facilities that compete with our facilities or offer space at rental rates 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 facilities that we would not have otherwise made.  Any unbudgeted capital improvements we undertake may reduce cash available for distributions to our shareholders.

 

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 facilities.  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 facility 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 facilities are located and, as a result, adversely affect our operating results.

 

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 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 facilities.  We maintain liability insurance with limits that we believe 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.

 

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Potential losses may not be covered by insurance, which could result in the loss of our investment in a facility and the future cash flows from the facility.

 

We carry comprehensive liability, fire, extended coverage and rental loss insurance covering all of the facilities 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 riots, war or acts of God, and, in some cases, flooding and environmental hazards, because such coverage is 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.  If we experience a loss at a facility that is uninsured or that exceeds policy limits, we could lose the capital invested in that facility as well as the anticipated future cash flows from that facility.  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 facility after it has been damaged or destroyed.  In addition, if the damaged facilities are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these facilities were irreparably damaged.

 

Our insurance coverage may not comply with certain loan requirements.

 

Certain of our facilities serve as collateral for our mortgage-backed debt, some of which we assumed in connection with our acquisition of facilities and requires us to maintain insurance at levels and on terms that are not 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 regulations that apply generally to the ownership of real property and the operation of self-storage facilities.  If we fail to comply with those laws, 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 facility 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 facility or to borrow using such facility as collateral.  In addition, in connection with the ownership, operation and management of facilities, 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 facilities.  We carry environmental insurance coverage on certain facilities 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 facilities).  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 facility did not create a material environmental condition not actually known to us or that a material environmental condition does not otherwise exist with respect to any of our facilities.

 

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 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 facilities.  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 facilities 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 facilities 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 facilities 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.

 

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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 have imposed restrictions and requirements on the use of personal information by those collecting such information.  Changes to law or regulations affecting privacy, if applicable to our business, could impose additional costs and liability on us and could limit our use and disclosure of such information.

 

We face system security risks as we depend upon automated processes and the Internet.

 

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 services.  These systems and our systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer worms, viruses 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 may be able to penetrate our network security and misappropriate our confidential information, create system disruptions or cause shutdowns.

 

Terrorist attacks 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 against our facilities, the United States or our interests, may negatively impact our operations and the value of our securities.  Attacks or armed conflicts could negatively impact the demand for self-storage facilities and increase the cost of insurance coverage for our facilities, which could reduce our profitability and cash flow.  Furthermore, any terrorist attacks or armed conflicts could result in increased volatility in or damage to the United States and worldwide financial markets and economy.

 

Risks Related to the Real Estate Industry

 

Our performance and the value of our self-storage facilities are subject to risks associated with our facilities and with the real estate industry.

 

Our rental revenues and 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 facilities 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 facilities 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 rent from customers;

 

·                  increased operating costs, including maintenance, insurance premiums 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 facility;

 

·                  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 or 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 portfolio of facilities consists primarily of self-storage facilities, 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 has been and could be adversely affected by ongoing weakness in the national, regional and local economies, changes in supply of, or demand for, similar or competing self-storage facilities 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 facilities when appropriate.

 

Real estate property investments generally cannot be sold quickly.  Also, the tax laws applicable to REITs require that we hold our facilities for investment, rather than for sale in the ordinary course of business, which may cause us to forgo or defer sales of facilities that otherwise would be in our best interest.  Therefore, we may not be able to dispose of facilities 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 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.  Furthermore, Congress and the IRS might 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.

 

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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 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 the federal alternative minimum tax and possibly increased state and local taxes.  We would not be able to elect to be taxed as a REIT for four years following the 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.

 

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 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 facilities 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 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.

 

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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 the ongoing audits, in some instances there is 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.

 

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 senior notes and the indenture governing the senior notes.

 

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 facilities 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 investors

 

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.

 

Recently, domestic financial markets have experienced extreme 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 for 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; 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 permanent financing on reasonable terms, if at all.

 

The terms and covenants relating to our indebtedness could adversely impact our economic 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 facilities.  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 facilities 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 facilities foreclosed on, could threaten our continued viability.

 

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Our Credit Facility 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 net worth 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.

 

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.  Although we have employment agreements with members of our senior management team, we cannot provide any 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.

 

We are dependent upon our on-site personnel to maximize customer satisfaction; any difficulties we encounter in hiring, training and retaining skilled field personnel may adversely affect our rental revenues.

 

As of December 31, 2013, we had 1,248 property-level personnel involved in the management and operation of our facilities.  The customer service, marketing skills and knowledge of local market demand and competitive dynamics of our facility managers are contributing factors to our ability to maximize our rental income and to achieve the highest sustainable rent levels at each of our facilities.  We compete with various other companies in attracting and retaining qualified and skilled personnel. Competitive pressures 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 harmed.

 

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

 

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·         “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 of Trustees 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 of Trustees, and (2) amend our bylaws or repeal individual bylaws in a manner that provides the Board of Trustees with greater authority.  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.

 

Our shareholders have limited control to prevent us from making any changes to our investment and financing policies.

 

Our Board of Trustees 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 of Trustees 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 of Trustees 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 of Trustees to issue up to 40,000,000 preferred shares, of which 3,100,000 shares have already been issued, 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 of Trustees 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.

 

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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;

 

·                  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 significant fluctuation and may continue to fluctuate or decline.  Between January 1, 2011 and December 31, 2013, the price of our common shares has ranged from a high of $19.48 (on October 18, 2013) to a low of $8.04 (on October 7, 2011).  In the past several years, REIT securities have experienced high levels of volatility and significant declines in value from their historic highs.

 

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. Securities litigation could result in substantial costs and divert our management’s attention and resources from our business.

 

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ITEM 1B.  UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.  PROPERTIES

 

Overview

 

As of December 31, 2013, we owned 366 self-storage facilities that contain approximately 24.7 million rentable square feet and are located in 20 states and the District of Columbia.  The following table sets forth summary information regarding our facilities by state as of December 31, 2013.

 

 

 

 

 

 

 

Total

 

% of Total

 

 

 

 

 

Number of

 

Number of

 

Rentable

 

Rentable

 

 

 

State

 

Facilities

 

Units

 

Square Feet

 

Square Feet

 

Occupancy

 

 

 

 

 

 

 

 

 

 

 

 

 

Florida

 

58

 

41,488

 

4,266,972

 

17.4%

 

91.0%

 

Texas

 

49

 

25,244

 

3,191,131

 

12.9%

 

87.7%

 

California

 

37

 

22,897

 

2,585,788

 

10.5%

 

88.1%

 

New York

 

31

 

35,211

 

2,219,593

 

9.0%

 

86.4%

 

Illinois

 

28

 

14,346

 

1,662,180

 

6.7%

 

90.3%

 

Arizona

 

27

 

13,998

 

1,459,919

 

5.9%

 

84.3%

 

New Jersey

 

23

 

15,268

 

1,560,033

 

6.3%

 

87.6%

 

Connecticut

 

20

 

9,065

 

1,040,489

 

4.2%

 

88.6%

 

Georgia

 

16

 

9,695

 

1,184,811

 

4.8%

 

88.8%

 

Ohio

 

14

 

8,084

 

928,434

 

3.8%

 

89.8%

 

Maryland

 

11

 

8,534

 

923,563

 

3.7%

 

86.6%

 

Virginia

 

9

 

6,717

 

692,935

 

2.8%

 

87.0%

 

Colorado

 

9

 

4,760

 

568,039

 

2.3%

 

87.1%

 

Pennsylvania

 

7

 

4,828

 

513,990

 

2.1%

 

88.0%

 

North Carolina

 

6

 

3,898

 

463,459

 

1.9%

 

88.1%

 

Tennessee

 

5

 

3,270

 

467,159

 

1.9%

 

90.8%

 

Massachusetts

 

5

 

2,968

 

268,554

 

1.1%

 

80.0%

 

Utah

 

4

 

2,199

 

239,623

 

1.0%

 

88.9%

 

New Mexico

 

3

 

1,614

 

181,974

 

0.7%

 

89.7%

 

Washington DC

 

2

 

1,801

 

146,277

 

0.6%

 

86.9%

 

Nevada

 

2

 

891

 

97,182

 

0.4%

 

86.1%

 

Total/Weighted Average

 

366

 

236,776

 

24,662,105

 

100.0%

 

88.3%

 

 

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Our Facilities

 

The following table sets forth additional information with respect to each of our facilities as of December 31, 2013. Our ownership of each facility consists of a fee interest in the facility held by our Operating Partnership, or one of its subsidiaries, except for five of our facilities, which are subject to ground leases.  In addition, small parcels of land at four of our other facilities are subject to ground leases.

 

Facility Location

 

Year
Acquired /
Developed
(1)

 

Year Built

 

Rentable
Square
Feet

 

Occupancy
(2)

 

Units

 

Manager
Apartment
(3)

 

%
Climate
Controlled
(4)

 

Chandler I, AZ

 

2005

 

1985

 

47,520

 

83.6%

 

436

 

Y

 

11.4%

 

Chandler II, AZ

 

2013

 

2008

 

83,859

 

58.3%

 

1,188

 

N

 

100.0%

 

Gilbert, AZ

 

2013

 

2010

 

57,430

 

86.2%

 

454

 

N

 

84.0%

 

Glendale, AZ

 

1998

 

1987

 

56,807

 

87.5%

 

515

 

Y

 

0.0%

 

Green Valley, AZ

 

2005

 

1985

 

25,200

 

82.5%

 

257

 

N

 

0.0%

 

Mesa I, AZ

 

2006

 

1985

 

52,375

 

91.6%

 

484

 

N

 

0.0%

 

Mesa II, AZ

 

2006

 

1981

 

45,461

 

83.3%

 

392

 

Y

 

5.1%

 

Mesa III, AZ

 

2006

 

1986

 

58,264

 

88.0%

 

497

 

Y

 

0.0%

 

Phoenix I, AZ

 

2006

 

1987

 

100,775

 

83.4%

 

746

 

Y

 

0.0%

 

Phoenix II, AZ

 

2006

 

1974

 

83,415

 

88.7%

 

808

 

Y

 

0.0%

 

Scottsdale, AZ

 

1998

 

1995

 

79,825

 

86.9%

 

655

 

Y

 

0.0%

 

Tempe I, AZ

 

2005

 

1975

 

53,890

 

86.5%

 

405

 

Y

 

0.0%

 

Tempe II, AZ

 

2013

 

2007

 

35,125

 

87.0%

 

430

 

N

 

71.5%

 

Tucson I, AZ

 

1998

 

1974

 

59,500

 

82.9%

 

480

 

Y

 

0.0%

 

Tucson II, AZ

 

1998

 

1988

 

43,850

 

87.7%

 

534

 

Y

 

100.0%

 

Tucson III, AZ

 

2005

 

1979

 

49,832

 

86.4%

 

483

 

N

 

0.0%

 

Tucson IV, AZ

 

2005

 

1982

 

48,040

 

86.4%

 

486

 

Y

 

13.5%

 

Tucson V, AZ

 

2005

 

1982

 

45,134

 

79.8%

 

418

 

Y

 

11.7%

 

Tucson VI, AZ

 

2005

 

1982

 

40,814

 

85.3%

 

406

 

Y

 

13.2%

 

Tucson VII, AZ

 

2005

 

1982

 

52,638

 

87.8%

 

591

 

Y

 

6.9%

 

Tucson VIII, AZ

 

2005

 

1979

 

46,550

 

83.5%

 

439

 

Y

 

0.0%

 

Tucson IX, AZ

 

2005

 

1984

 

67,545

 

85.9%

 

599

 

Y

 

6.2%

 

Tucson X, AZ

 

2005

 

1981

 

46,250

 

85.2%

 

412

 

N

 

0.0%

 

Tucson XI, AZ

 

2005

 

1974

 

42,700

 

85.5%

 

409

 

Y

 

0.0%

 

Tucson XII, AZ

 

2005

 

1974

 

42,225

 

85.2%

 

425

 

Y

 

4.0%

 

Tucson XIII, AZ

 

2005

 

1974

 

45,800

 

82.8%

 

496

 

Y

 

0.0%

 

Tucson XIV, AZ

 

2005

 

1976

 

49,095

 

90.3%

 

553

 

Y

 

0.0%

 

Benicia, CA

 

2005

 

1988/93/2005

 

74,770

 

91.2%

 

731

 

Y

 

0.0%

 

Citrus Heights, CA

 

2005

 

1987

 

75,620

 

86.8%

 

677

 

Y

 

0.0%

 

Diamond Bar, CA

 

2005

 

1988

 

102,984

 

90.8%

 

901

 

Y

 

0.0%

 

Escondido, CA

 

2007

 

2002

 

142,645

 

91.0%

 

1,221

 

Y

 

11.6%

 

Fallbrook, CA

 

1997

 

1985/88

 

46,420

 

87.3%

 

445

 

Y

 

0.0%

 

Lancaster, CA

 

2001

 

1987

 

60,675

 

91.4%

 

337

 

Y

 

0.0%

 

Long Beach, CA

 

2006

 

1974

 

125,121

 

88.1%

 

1,351

 

Y

 

0.0%

 

Murrieta, CA

 

2005

 

1996

 

49,855

 

80.9%

 

427

 

Y

 

4.9%

 

North Highlands, CA

 

2005

 

1980

 

57,094

 

84.9%

 

469

 

Y

 

0.0%

 

Orangevale, CA

 

2005

 

1980

 

50,392

 

90.8%

 

525

 

Y

 

0.0%

 

Pleasanton, CA

 

2005

 

2003

 

85,045

 

86.1%

 

693

 

Y

 

0.0%

 

 

25



Table of Contents

 

Facility Location

 

Year
Acquired /
Developed
(1)

 

Year Built

 

Rentable
Square
Feet

 

Occupancy
(2)

 

Units

 

Manager
Apartment
(3)

 

%
Climate
Controlled
(4)

 

Rancho Cordova, CA

 

2005

 

1979

 

53,978

 

82.4%

 

455

 

Y

 

0.0%

 

Rialto I, CA

 

2006

 

1987

 

57,391

 

85.8%

 

437

 

Y

 

0.0%

 

Rialto II, CA

 

1997

 

1980

 

99,783

 

85.0%

 

714

 

Y

 

0.0%

 

Riverside I, CA

 

2006

 

1977

 

67,120

 

86.2%

 

639

 

Y

 

0.0%

 

Riverside II, CA

 

2006

 

1985

 

85,426

 

91.0%

 

810

 

Y

 

5.5%

 

Roseville, CA

 

2005

 

1979

 

59,869

 

86.6%

 

543

 

Y

 

0.0%

 

Sacramento I, CA

 

2005

 

1979

 

50,714

 

86.6%

 

548

 

Y

 

0.0%

 

Sacramento II, CA

 

2005

 

1986

 

61,888

 

88.8%

 

550

 

Y

 

0.0%

 

San Bernardino I, CA

 

1997

 

1987

 

31,070

 

81.2%

 

236

 

N

 

0.0%

 

San Bernardino II, CA

 

1997

 

1991

 

41,546

 

84.4%

 

373

 

Y

 

0.0%

 

San Bernardino III, CA

 

1997

 

1985/92

 

35,416

 

83.1%

 

371

 

N

 

0.0%

 

San Bernardino IV, CA

 

2005

 

2002/04

 

83,057

 

85.6%

 

679

 

Y

 

12.5%

 

San Bernardino V, CA

 

2006

 

1974

 

57,595

 

90.5%

 

468

 

Y

 

7.0%

 

San Bernardino VII, CA

 

2006

 

1978

 

78,729

 

93.5%

 

604

 

Y

 

2.1%

 

San Bernardino VIII, CA

 

2006

 

1977

 

95,604

 

80.5%

 

812

 

Y

 

0.0%

 

San Marcos, CA

 

2005

 

1979

 

37,430

 

92.1%

 

242

 

Y

 

0.0%

 

Santa Ana, CA

 

2006

 

1984

 

63,816

 

89.2%

 

714

 

Y

 

3.9%

 

South Sacramento, CA

 

2005

 

1979

 

52,565

 

82.3%

 

415

 

Y

 

0.0%

 

Spring Valley, CA

 

2006

 

1980

 

55,045

 

88.4%

 

713

 

Y

 

0.0%

 

Temecula I, CA

 

1998

 

1985/2003

 

81,310

 

87.8%

 

691

 

Y

 

45.5%

 

Temecula II, CA

 

2007

 

2003

 

84,318

 

86.7%

 

634

 

Y

 

54.4%

 

Vista I, CA

 

2001

 

1988

 

74,405

 

94.0%

 

622

 

Y

 

0.0%

 

Vista II, CA

 

2005

 

2001/02/03

 

147,941

 

91.8%

 

1,276

 

Y

 

3.8%

 

Walnut, CA

 

2005

 

1987

 

50,708

 

90.3%

 

537

 

Y

 

15.8%

 

West Sacramento, CA

 

2005

 

1984

 

40,015

 

93.7%

 

478

 

Y

 

0.0%

 

Westminster, CA

 

2005

 

1983/98

 

68,428

 

91.9%

 

559

 

Y

 

0.0%

 

Aurora, CO

 

2005

 

1981

 

75,867

 

89.3%

 

617

 

Y

 

0.0%

 

Colorado Springs I, CO

 

2005

 

1986

 

47,975

 

82.1%

 

462

 

Y

 

0.0%

 

Colorado Springs II, CO

 

2006

 

2001

 

62,400

 

78.8%

 

433

 

Y

 

0.0%

 

Denver I, CO

 

2006

 

1997

 

59,200

 

89.7%

 

449

 

Y

 

0.0%

 

Denver II, CO

 

2012

 

2007

 

74,435

 

92.3%

 

675

 

N

 

94.8%

 

Federal Heights, CO

 

2005

 

1980

 

54,770

 

87.7%

 

544

 

Y

 

0.0%

 

Golden, CO

 

2005

 

1985

 

87,800

 

87.0%

 

641

 

Y

 

1.6%

 

Littleton, CO

 

2005

 

1987

 

53,490

 

88.3%

 

442

 

Y

 

0.0%

 

Northglenn, CO

 

2005

 

1980

 

52,102

 

86.9%

 

497

 

Y

 

0.0%

 

Bloomfield, CT

 

1997

 

1987/93/94

 

48,700

 

87.3%

 

440

 

Y

 

8.6%

 

Branford, CT

 

1995

 

1986

 

50,679

 

86.3%

 

434

 

Y

 

3.4%

 

Bristol, CT

 

2005

 

1989/99

 

47,725

 

84.5%

 

452

 

N

 

29.7%

 

East Windsor, CT

 

2005

 

1986/89

 

46,016

 

93.6%

 

300

 

N

 

0.3%

 

 

26



Table of Contents

 

Facility Location

 

Year
Acquired /
Developed
(1)

 

Year Built

 

Rentable
Square
Feet

 

Occupancy
(2)

 

Units

 

Manager
Apartment
(3)

 

%
Climate
Controlled
(4)

 

Enfield, CT

 

2001

 

1989

 

52,875

 

91.9%

 

369

 

Y

 

0.0%

 

Gales Ferry, CT

 

1995

 

1987/89

 

54,230

 

86.4%

 

601

 

N

 

9.1%

 

Manchester I, CT (6)

 

2002

 

1999/2000/01

 

47,025

 

90.9%

 

447

 

N

 

42.5%

 

Manchester II, CT

 

2005

 

1984

 

52,725

 

91.9%

 

399

 

N

 

0.0%

 

Milford, CT

 

1996

 

1975

 

44,885

 

89.9%

 

375

 

Y

 

6.9%

 

Monroe, CT

 

2005

 

1996/2003

 

58,500

 

86.6%

 

392

 

N

 

0.0%

 

Mystic, CT

 

1996

 

1975/86

 

50,825

 

90.0%

 

560

 

Y

 

4.4%

 

Newington I, CT

 

2005

 

1978/97

 

42,620

 

86.8%

 

248

 

N

 

0.0%

 

Newington II, CT

 

2005

 

1979/81

 

36,140

 

88.8%

 

194

 

N

 

0.0%

 

Norwalk, CT

 

2012

 

2009

 

30,242

 

90.9%

 

347

 

N

 

100.0%

 

Old Saybrook I, CT

 

2005

 

1982/88/2000

 

86,950

 

89.7%

 

720

 

N

 

10.8%

 

Old Saybrook II, CT

 

2005

 

1988/2002

 

26,425

 

91.6%

 

252

 

N

 

71.3%

 

Shelton, CT

 

2011

 

2007

 

78,430

 

83.4%

 

856

 

Y

 

93.9%

 

South Windsor, CT

 

1996

 

1976

 

72,075

 

86.0%

 

546

 

Y

 

2.9%

 

Stamford, CT

 

2005

 

1997

 

28,907

 

91.0%

 

363

 

N

 

38.6%

 

Wilton, CT

 

2012

 

1966

 

84,515

 

90.0%

 

770

 

Y

 

67.0%

 

Washington I, DC

 

2008

 

2002

 

63,085

 

86.5%

 

755

 

Y

 

97.1%

 

Washington II, DC

 

2011

 

1929/98

 

83,192

 

87.2%

 

1,046

 

N

 

99.5%

 

Boca Raton, FL

 

2001

 

1998

 

37,958

 

93.5%

 

605

 

N

 

70.2%

 

Boynton Beach I, FL

 

2001

 

1999

 

61,749

 

91.2%

 

756

 

Y

 

61.7%

 

Boynton Beach II, FL

 

2005

 

2001

 

61,629

 

90.5%

 

578

 

Y

 

88.6%

 

Bradenton I, FL

 

2004

 

1979

 

68,441

 

91.9%

 

581

 

N

 

7.2%

 

Bradenton II, FL

 

2004

 

1996

 

87,988

 

89.4%

 

832

 

Y

 

44.9%

 

Cape Coral, FL

 

2000*

 

2000

 

76,627

 

90.6%

 

852

 

Y

 

90.6%

 

Coconut Creek, FL

 

2012

 

2001

 

78,783

 

94.8%

 

757

 

N

 

53.0%

 

Dania Beach, FL (6)

 

2004

 

1984

 

168,274

 

91.1%

 

1,811

 

N

 

26.4%

 

Dania, FL

 

1996

 

1988

 

58,145

 

93.3%

 

493

 

Y

 

53.7%

 

Davie, FL

 

2001*

 

2001

 

80,985

 

93.1%

 

833

 

Y

 

68.3%

 

Deerfield Beach, FL

 

1998*

 

1998

 

57,230

 

94.3%

 

517

 

Y

 

54.9%

 

Delray Beach I, FL

 

2001

 

1999

 

67,813

 

88.8%

 

816

 

Y

 

45.5%

 

Delray Beach II, FL

 

2013

 

1987

 

75,834

 

88.6%

 

1,180

 

N

 

95.3%

 

Fernandina Beach, FL

 

1996

 

1986

 

113,091

 

89.8%

 

803

 

Y

 

42.1%

 

Ft. Lauderdale I, FL

 

1999

 

1999

 

70,063

 

96.0%

 

696

 

Y

 

54.6%

 

Ft. Lauderdale II, FL

 

2013

 

2007

 

46,096

 

62.8%

 

820

 

N

 

100.0%

 

Ft. Myers, FL

 

1999

 

1998

 

67,562

 

90.1%

 

591

 

Y

 

84.3%

 

Jacksonville I, FL

 

2005

 

2005

 

80,215

 

93.6%

 

706

 

N

 

100.0%

 

Jacksonville II, FL

 

2007

 

2004

 

65,045

 

88.3%

 

659

 

N

 

100.0%

 

Jacksonville III, FL

 

2007

 

2003

 

65,590

 

84.5%

 

675

 

N

 

100.0%

 

Jacksonville IV, FL

 

2007

 

2006

 

77,535

 

91.9%

 

705

 

N

 

100.0%

 

Jacksonville V, FL

 

2007

 

2004

 

82,235

 

85.8%

 

700

 

N

 

80.2%

 

Lake Worth, FL †

 

1998

 

1998/2002

 

161,934

 

94.3%

 

1,355

 

Y

 

74.1%

 

Lakeland, FL

 

1994

 

1988

 

49,079

 

88.4%

 

488

 

Y

 

83.1%

 

Kendall, FL

 

2007

 

2003

 

75,495

 

98.4%

 

703

 

N

 

79.4%

 

Leisure City, FL

 

2012

 

2005

 

56,042

 

89.5%

 

611

 

N

 

69.7%

 

Lutz I, FL

 

2004

 

2000

 

66,795

 

91.3%

 

582

 

Y

 

43.5%

 

Lutz II, FL

 

2004

 

1999

 

69,232

 

90.2%

 

530

 

Y

 

29.7%

 

 

27



Table of Contents

 

Facility Location

 

Year
Acquired /
Developed
(1)

 

Year Built