Edgar Filing: CubeSmart

cube_Current folio_10Q

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended March 31, 2016.

	or

☐	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to .

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

CUBESMART

CUBESMART, L.P.

(Exact Name of Registrant as Specified in its Charter)


Maryland (CubeSmart) Delaware (CubeSmart, L.P.)		20-1024732 34-1837021
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

5 Old Lancaster Road
Malvern, Pennsylvania		19355
(Address of Principal Executive Offices)		(Zip Code)

(610) 535-5000

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


CubeSmart	Yes ☑ No ☐
CubeSmart, L.P.	Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically 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 ☑ No ☐
CubeSmart, L.P.	Yes ☑ No ☐

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


CubeSmart:
Large accelerated filer ☑	Accelerated filer ☐	Non-accelerated filer ☐	Smaller reporting company ☐

CubeSmart, L.P.:
Large accelerated filer ☐	Accelerated filer ☐	Non-accelerated filer ☑	Smaller reporting company ☐

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


CubeSmart	Yes ☐ No ☑
CubeSmart, L.P.	Yes ☐ No ☑

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


Class		Outstanding at April 27, 2016
Common shares, $0.01 par value per share, of CubeSmart		177,522,870

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EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended March 31, 2016 of CubeSmart (the “Parent Company” or “CubeSmart”) and CubeSmart, L.P. (the “Operating Partnership”). The Parent Company is a Maryland real estate investment trust, or REIT, that owns its assets and conducts its operations through the Operating Partnership, a Delaware limited partnership, and subsidiaries of the Operating Partnership. The Parent Company, the Operating Partnership and their consolidated subsidiaries are collectively referred to in this report as the “Company”. In addition, terms such as “we”, “us”, or “our” used in this report may refer to the Company, the Parent Company or the Operating Partnership.

The Parent Company is the sole general partner of the Operating Partnership and, as of March 31, 2016, owned a 98.8% interest in the Operating Partnership. The remaining 1.2% 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 the Operating Partnership) section of the consolidated balance sheets and in the consolidated statements of equity (or capital). Apart from the different equity treatment, the consolidated financial statements of the Parent Company and the Operating Partnership are nearly identical.

The Company believes that combining the quarterly reports on Form 10-Q of the Parent Company and the Operating Partnership into a single report will:

facilitate a better understanding by the investors of the Parent Company and the Operating Partnership by enabling them to view the business as a whole in the same manner as management views and operates the business;

remove duplicative disclosures and provide a more straightforward presentation in light of the fact that a substantial portion of the disclosure applies to both the Parent Company and the Operating Partnership; and

create time and cost efficiencies through the preparation of one combined report instead of two separate reports.

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In order to highlight the differences between the Parent Company and the Operating Partnership, the separate sections in this report for the Parent Company and the Operating Partnership specifically refer to the Parent Company and the Operating Partnership. In the sections that combine disclosures of the Parent Company and the Operating Partnership, this report refers to such disclosures as those of the Company. Although the Operating Partnership is generally the entity that directly or indirectly enters into contracts and real estate ventures and holds assets and debt, reference to the Company is appropriate because the business is one enterprise and the Parent Company operates the business through the Operating Partnership.

As general partner with control of the Operating Partnership, the Parent Company consolidates the Operating Partnership for financial reporting purposes, and the Parent Company does not have significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities of the Parent Company and the Operating Partnership are the same on their respective financial statements. The separate discussions of the Parent Company and the Operating Partnership in this report should be read in conjunction with each other to understand the results of the Company’s operations on a consolidated basis and how management operates the Company.

This report also includes separate Item 4 - Controls and Procedures sections, signature pages and 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


Part I. FINANCIAL INFORMATION
Item 1. Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3. Quantitative and Qualitative Disclosures About Market Risk	46
Item 4. Controls and Procedures	47

Part II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 6. Exhibits	49

Filing Format

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

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Forward-Looking Statements

This Quarterly Report on Form 10-Q, or “this Report”, together with other statements and information publicly disseminated by the Parent Company and the Operating Partnership, contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the “Exchange Act.” Forward-looking statements include statements concerning the Company’s plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions and other information that is not historical information. In some cases, forward-looking statements can be identified by terminology such as “believes”, “expects”, “estimates”, “may”, “will”, “should”, “anticipates”, or “intends” or the negative of such terms or other comparable terminology, or by discussions of strategy. Such statements are based on assumptions and expectations that may not be realized and are inherently subject to risks, uncertainties and other factors, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Although we believe the expectations reflected in these forward-looking statements are based on reasonable assumptions, future events and actual results, performance, transactions or achievements, financial and otherwise, may differ materially from the results, performance, transactions or achievements expressed or implied by the forward-looking statements. As a result, you should not rely on or construe any forward-looking statements in this Report, or which management 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 the Parent Company’s and the Operating Partnership’s combined Annual Report on Form 10-K for the year ended December 31, 2015 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 for federal income tax purposes;

acquisition and development risks;

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

risks of investing through joint ventures;

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

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other risks identified in the Parent Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2015 and, from time to time, in other reports that we file with the SEC or in other documents that we publicly disseminate.

Given these uncertainties and the other risks identified elsewhere in this Report, we caution readers not to place undue reliance on forward-looking statements. We undertake no obligation to publicly update or revise these forward-looking statements, whether as a result of new information, future events or otherwise except as may be required by securities laws. Because of the factors referred to above, the future events discussed in or incorporated by reference in this Report may not occur and actual results, performance or achievement could differ materially from that anticipated or implied in the forward-looking statements.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CUBESMART AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	March 31,		December 31,
	2016		2015
	(unaudited)
ASSETS
Storage facilities	$	3,679,665	$	3,467,032
Less: Accumulated depreciation		(622,824)		(594,049)
Storage facilities, net (including VIE assets of $169,141 and $136,274, respectively)		3,056,841		2,872,983
Cash and cash equivalents		2,754		62,869
Restricted cash		2,652		24,600
Loan procurement costs, net of amortization		2,637		2,800
Investment in real estate ventures, at equity		100,477		97,281
Other assets, net		41,326		43,631
Total assets	$	3,206,687	$	3,104,164

LIABILITIES AND EQUITY
Unsecured senior notes, net	$	742,153	$	741,904
Revolving credit facility		54,300		—
Unsecured term loans, net		398,325		398,183
Mortgage loans and notes payable, net		101,716		111,455
Accounts payable, accrued expenses and other liabilities		96,245		85,034
Distributions payable		39,210		38,685
Deferred revenue		18,673		17,519
Security deposits		397		403
Total liabilities		1,451,019		1,393,183

Noncontrolling interests in the Operating Partnership		71,916		66,128

Commitments and contingencies

Equity
7.75% Series A Preferred shares $.01 par value, 3,220,000 shares authorized, 3,100,000 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively		31		31
Common shares $.01 par value, 400,000,000 shares authorized, 177,126,709 and 174,667,870 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively		1,771		1,747
Additional paid-in capital		2,299,527		2,231,181
Accumulated other comprehensive loss		(5,302)		(4,978)
Accumulated deficit		(613,734)		(584,654)
Total CubeSmart shareholders’ equity		1,682,293		1,643,327
Noncontrolling interests in subsidiaries		1,459		1,526
Total equity		1,683,752		1,644,853
Total liabilities and equity	$	3,206,687	$	3,104,164

See accompanying notes to the unaudited consolidated financial statements.

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CUBESMART AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)


	Three Months Ended March 31,
	2016		2015

REVENUES
Rental income	$	104,997	$	91,556
Other property related income		11,763		10,543
Property management fee income		2,111		1,589
Total revenues		118,871		103,688
OPERATING EXPENSES
Property operating expenses		40,219		37,431
Depreciation and amortization		39,356		37,895
General and administrative		8,228		7,173
Acquisition related costs		2,342		510
Total operating expenses		90,145		83,009
OPERATING INCOME		28,726		20,679
OTHER (EXPENSE) INCOME
Interest:
Interest expense on loans		(12,084)		(11,057)
Loan procurement amortization expense		(605)		(546)
Equity in losses of real estate ventures		(512)		(238)
Other		330		(316)
Total other expense		(12,871)		(12,157)
NET INCOME		15,855		8,522
NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
Noncontrolling interests in the Operating Partnership		(172)		(91)
Noncontrolling interest in subsidiaries		67		3
NET INCOME ATTRIBUTABLE TO THE COMPANY		15,750		8,434
Distribution to preferred shareholders		(1,502)		(1,502)
NET INCOME ATTRIBUTABLE TO THE COMPANY’S COMMON SHAREHOLDERS	$	14,248	$	6,932

Basic earnings per share attributable to common shareholders	$	0.08	$	0.04
Diluted earnings per share attributable to common shareholders	$	0.08	$	0.04

Weighted-average basic shares outstanding		175,798		165,502
Weighted-average diluted shares outstanding		177,261		167,165

See accompanying notes to the unaudited consolidated financial statements.

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CUBESMART AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)


	Three Months Ended March 31,
	2016		2015

NET INCOME	$	15,855	$	8,522
Other comprehensive (loss) income:
Unrealized losses on interest rate swaps		(1,654)		(2,329)
Reclassification of realized losses on interest rate swaps		1,326		1,565
Unrealized loss on foreign currency translation		-		(337)
OTHER COMPREHENSIVE LOSS		(328)		(1,101)
COMPREHENSIVE INCOME		15,527		7,421
Comprehensive income attributable to noncontrolling interests in the Operating Partnership		(168)		(76)
Comprehensive loss attributable to noncontrolling interest in subsidiaries		67		13
COMPREHENSIVE INCOME ATTRIBUTABLE TO THE COMPANY	$	15,426	$	7,358

See accompanying notes to the unaudited consolidated financial statements.

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CUBESMART AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(in thousands)

(unaudited)


																			Noncontrolling
							Additional		Accumulated Other				Total		Noncontrolling				Interests in the
	Common Shares			Preferred Shares			Paid in		Comprehensive		Accumulated		Shareholders’		Interest in		Total		Operating
	Number	Amount		Number	Amount		Capital		(Loss) Income		Deficit		Equity		Subsidiaries		Equity		Partnership

Balance at December 31, 2015	174,668	$	1,747	3,100	$	31	$	2,231,181	$	(4,978)	$	(584,654)	$	1,643,327	$	1,526	$	1,644,853	$	66,128
Issuance of common shares	2,023		20					62,870						62,890				62,890
Issuance of restricted shares	106		1											1				1
Exercise of stock options	330		3					5,884						5,887				5,887
Amortization of restricted shares								(712)						(712)				(712)
Share compensation expense								304						304				304
Adjustment for noncontrolling interest in the Operating Partnership												(6,073)		(6,073)				(6,073)		6,073
Net income (loss)												15,750		15,750		(67)		15,683		172
Other comprehensive loss, net										(324)				(324)				(324)		(4)
Preferred share distributions												(1,502)		(1,502)				(1,502)
Common share distributions												(37,255)		(37,255)				(37,255)		(453)
Balance at March 31, 2016	177,127	$	1,771	3,100	$	31	$	2,299,527	$	(5,302)	$	(613,734)	$	1,682,293	$	1,459	$	1,683,752	$	71,916

																			Noncontrolling
							Additional		Accumulated Other				Total		Noncontrolling				Interests in the
	Common Shares			Preferred Shares			Paid in		Comprehensive		Accumulated		Shareholders’		Interest in		Total		Operating
	Number	Amount		Number	Amount		Capital		(Loss) Income		Deficit		Equity		Subsidiaries		Equity		Partnership

Balance at December 31, 2014	163,957	$	1,639	3,100	$	31	$	1,974,308	$	(8,759)	$	(519,193)	$	1,448,026	$	1,592	$	1,449,618	$	49,823
Contributions from noncontrolling interests in subsidiaries																178		178
Issuance of common shares	1,210		12					29,429						29,441				29,441
Issuance of restricted shares	126		1											1				1
Conversion from units to shares	3		—					74						74				74		(74)
Exercise of stock options	855		9					8,429						8,438				8,438
Amortization of restricted shares								(789)						(789)				(789)
Share compensation expense								244						244				244
Adjustment for noncontrolling interest in the Operating Partnership												(4,982)		(4,982)				(4,982)		4,982
Net income (loss)												8,434		8,434		(3)		8,431		91
Other comprehensive loss, net										(1,076)				(1,076)		(10)		(1,086)		(15)
Preferred share distributions												(1,502)		(1,502)				(1,502)
Common share distributions												(26,617)		(26,617)				(26,617)		(361)
Balance at March 31, 2015	166,151	$	1,661	3,100	$	31	$	2,011,695	$	(9,835)	$	(543,860)	$	1,459,692	$	1,757	$	1,461,449	$	54,446

See accompanying notes to the unaudited consolidated financial statements.

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CUBESMART AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Three Months Ended March 31,
	2016		2015
Operating Activities
Net income	$	15,855	$	8,522
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		39,961		38,441
Equity in losses of real estate ventures		512		238
Equity compensation expense		(408)		(545)
Accretion of fair market value adjustment of debt		(236)		(395)
Changes in other operating accounts:
Restricted cash		(233)		(288)
Other assets		808		136
Accounts payable and accrued expenses		5,013		(3,399)
Other liabilities		661		715
Net cash provided by operating activities	$	61,933	$	43,425
Investing Activities
Acquisitions of storage facilities		(158,457)		(41,347)
Additions and improvements to storage facilities		(6,609)		(4,948)
Development costs		(28,273)		(9,155)
Investment in real estate ventures, at equity		(5,498)		—
Cash distributed from real estate ventures		1,791		1,553
Change in restricted cash		162		(31)
Net cash used in investing activities	$	(196,884)	$	(53,928)
Financing Activities
Proceeds from:
Revolving credit facility		301,300		161,900
Principal payments on:
Revolving credit facility		(247,000)		(159,900)
Mortgage loans and notes payable		(9,556)		(1,283)
Loan procurement costs		—		(19)
Proceeds from issuance of common shares, net		62,891		29,442
Exercise of stock options		5,887		8,438
Contributions from noncontrolling interests in subsidiaries		—		178
Distributions paid to common shareholders		(36,730)		(26,274)
Distributions paid to preferred shareholders		(1,502)		(1,502)
Distributions paid to noncontrolling interests in Operating Partnership		(454)		(361)
Net cash provided by financing activities	$	74,836	$	10,619
Change in cash and cash equivalents		(60,115)		116
Cash and cash equivalents at beginning of period		62,869		2,901
Cash and cash equivalents at end of period	$	2,754	$	3,017
Supplemental Cash Flow and Noncash Information
Cash paid for interest, net of interest capitalized	$	10,756	$	12,115
Supplemental disclosure of noncash activities:
Restricted cash - acquisition of storage facilities	$	(22,019)	$	—
Accretion of liability	$	7,886	$	3,619
Derivative valuation adjustment	$	(328)	$	(764)
Foreign currency translation adjustment	$	—	$	(337)
Mortgage loan assumption - acquisitions of storage facilities	$	—	$	2,695

See accompanying notes to the unaudited consolidated financial statements.

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CUBESMART, L.P. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)


	March 31,		December 31,
	2016		2015
	(unaudited)
ASSETS
Storage facilities	$	3,679,665	$	3,467,032
Less: Accumulated depreciation		(622,824)		(594,049)
Storage facilities, net (including VIE assets of $169,141 and $136,274, respectively)		3,056,841		2,872,983
Cash and cash equivalents		2,754		62,869
Restricted cash		2,652		24,600
Loan procurement costs, net of amortization		2,637		2,800
Investment in real estate ventures, at equity		100,477		97,281
Other assets, net		41,326		43,631
Total assets	$	3,206,687	$	3,104,164

LIABILITIES AND CAPITAL
Unsecured senior notes, net	$	742,153	$	741,904
Revolving credit facility		54,300		—
Unsecured term loans, net		398,325		398,183
Mortgage loans and notes payable, net		101,716		111,455
Accounts payable, accrued expenses and other liabilities		96,245		85,034
Distributions payable		39,210		38,685
Deferred revenue		18,673		17,519
Security deposits		397		403
Total liabilities		1,451,019		1,393,183

Limited Partnership interests of third parties		71,916		66,128

Commitments and contingencies

Capital
Operating Partner		1,687,595		1,648,305
Accumulated other comprehensive loss		(5,302)		(4,978)
Total CubeSmart, L.P. capital		1,682,293		1,643,327
Noncontrolling interests in subsidiaries		1,459		1,526
Total capital		1,683,752		1,644,853
Total liabilities and capital	$	3,206,687	$	3,104,164

See accompanying notes to the unaudited consolidated financial statements.

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CUBESMART, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per common unit data)

(unaudited)


	Three Months Ended March 31,
	2016		2015

REVENUES
Rental income	$	104,997	$	91,556
Other property related income		11,763		10,543
Property management fee income		2,111		1,589
Total revenues		118,871		103,688
OPERATING EXPENSES
Property operating expenses		40,219		37,431
Depreciation and amortization		39,356		37,895
General and administrative		8,228		7,173
Acquisition related costs		2,342		510
Total operating expenses		90,145		83,009
OPERATING INCOME		28,726		20,679
OTHER (EXPENSE) INCOME
Interest:
Interest expense on loans		(12,084)		(11,057)
Loan procurement amortization expense		(605)		(546)
Equity in losses of real estate ventures