CUBESMART The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this Report. Some of the statements we make in this section are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this Report entitled "Forward-Looking Statements". Certain risk factors may cause actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see the section in this Report entitled "Risk Factors".
Overview
We are an integrated self-storage real estate company, and as such we have in-house capabilities in the operation, design, development, leasing, management and acquisition of self-storage properties.The Parent Company's operations are conducted solely through theOperating Partnership and its subsidiaries.The Parent Company has elected to be taxed as a REIT forU.S. federal income tax purposes. As ofDecember 31, 2021 and 2020, we owned (or partially owned and consolidated) 607 self-storage properties totaling approximately 43.6 million rentable square feet and 543 self-storage properties totaling approximately 38.5 million rentable square feet, respectively. As ofDecember 31, 2021 , we owned stores in theDistrict of Columbia and the following 24 states:Arizona ,California ,Colorado ,Connecticut ,Florida ,Georgia ,Illinois ,Indiana ,Maryland ,Massachusetts ,Minnesota ,Nevada ,New Jersey ,New Mexico , NewYork, North Carolina ,Ohio ,Pennsylvania ,Rhode Island ,South Carolina ,Tennessee ,Texas ,Utah andVirginia . In addition, as ofDecember 31, 2021 , we managed 651 stores for third parties (including 90 stores containing an aggregate of approximately 6.5 million net rentable square feet as part of seven separate unconsolidated real estate ventures), bringing the total number of stores we owned and/or managed to 1,258. As ofDecember 31, 2021 , we managed stores for third parties in theDistrict of Columbia and the following 36 states:Alabama ,Arizona ,California ,Colorado ,Connecticut ,Delaware ,Florida ,Georgia ,Illinois ,Indiana ,Iowa ,Kentucky ,Louisiana ,Maryland ,Massachusetts ,Michigan ,Minnesota ,Mississippi ,Missouri ,Nevada ,New Jersey ,New Mexico , NewYork, North Carolina ,Ohio ,Oklahoma ,Oregon, Pennsylvania ,Rhode Island ,South Carolina ,Tennessee ,Texas ,Vermont ,Virginia ,Washington andWisconsin . We derive revenues principally from rents received from customers who rent cubes at our self-storage properties under month-to-month leases. Therefore, our operating results depend materially on our ability to retain our existing customers and lease our available self-storage cubes to new customers while maintaining and, where possible, increasing our pricing levels. In addition, our operating results depend on the ability of our customers to make required rental payments to us. Our approach to the management and operation of our stores combines centralized marketing, revenue management and other operational support with local operations teams that provide market-level oversight and management. We believe this approach allows us to respond quickly and effectively to changes in local market conditions and maximize revenues by managing rental rates and occupancy levels.
We typically experience seasonal fluctuations in the occupancy levels of our stores, which are generally slightly higher during the summer months due to increased moving activity.
Our results of operations may be sensitive to changes in overall economic conditions that impact consumer spending, including discretionary spending and moving trends, as well as to increased bad debts due to recessionary pressures. Adverse economic conditions affecting disposable consumer income, such as employment levels, business conditions, interest rates, tax rates, fuel and energy costs, and other matters could reduce consumer spending or cause consumers to shift their spending to other products and services. A general reduction in the level of discretionary spending or shifts in consumer discretionary spending could adversely affect our growth and profitability.
We continue our focus on maximizing internal growth opportunities and selectively pursuing targeted acquisitions and developments of self-storage properties.
We have one reportable segment: we own, operate, develop, manage and acquire self-storage properties.
Our self-storage properties are located in major metropolitan and suburban areas and have numerous customers per store. No single customer represents a significant concentration of our revenues. Our stores inNew York ,Florida ,Texas andCalifornia provided approximately 19%, 15%, 9% and 8%, respectively, of total revenues for the year endedDecember 31, 2021 . 34
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Summary of Critical Accounting Policies and Estimates
Set forth below is a summary of the accounting policies and estimates that
management believes are critical to the preparation of the consolidated
financial statements included in this Report. Certain of the accounting policies
used in the preparation of these consolidated financial statements are
particularly important for an understanding of the financial position and
results of operations presented in the historical consolidated financial
statements included in this Report. A summary of significant accounting policies
is also provided in note 2 to our consolidated financial statements. These
policies require the application of judgment and assumptions by management and,
as a result, are subject to a degree of uncertainty. Due to this uncertainty,
actual results could differ materially from estimates calculated and utilized by
management.
Basis of Presentation
The accompanying consolidated financial statements include all of the accounts
of the Company, and its majority-owned and/or controlled subsidiaries. The
portion of these entities not owned by the Company is presented as
noncontrolling interests as of and during the periods presented. All significant
intercompany accounts and transactions have been eliminated in consolidation.
When the Company obtains an economic interest in an entity, the Company
evaluates the entity to determine if the entity is deemed a variable interest
entity ("VIE"), and if the Company is deemed to be the primary beneficiary, in
accordance with authoritative guidance issued by the Financial Accounting
Standards Board ("FASB") on the consolidation of VIEs. To the extent that the
Company (i) has the power to direct the activities of the VIE that most
significantly impact the economic performance of the VIE and (ii) has the
obligation or rights to absorb the VIE's losses or receive its benefits, then
the Company is considered the primary beneficiary. The Company may also consider
additional factors included in the authoritative guidance, such as whether or
not it is the partner in the VIE that is most closely associated with the VIE.
When an entity is not deemed to be a VIE, the Company considers the provisions
of additional FASB guidance to determine whether a general partner, or the
general partners as a group, controls a limited partnership or similar entity
when the limited partners have certain rights. The Company consolidates
(i) entities that are VIEs and of which the Company is deemed to be the primary
beneficiary and (ii) entities that are non-VIEs which the Company controls and
in which the limited partners do not have substantive participating rights, or
the ability to dissolve the entity or remove the Company without cause nor
substantive participating rights.
The Company records self-storage properties at cost less accumulated depreciation. Depreciation on the buildings, improvements and equipment is recorded on a straight-line basis over their estimated useful lives, which range from five to 39 years. Expenditures for significant renovations or improvements that extend the useful life of assets are capitalized. Repairs and maintenance costs are expensed as incurred.
When stores are acquired, the purchase price is allocated to the tangible and intangible assets acquired and liabilities assumed based on estimated fair values.
Allocations to land, building and improvements and equipment are recorded based upon their respective fair values as estimated by management. If appropriate, the Company allocates a portion of the purchase price to an intangible asset attributed to the value of in-place leases. This intangible asset is generally amortized to expense over the expected remaining term of the respective leases. Substantially all of the storage leases in place at acquired stores are at market rates, as the majority of the leases are month-to-month contracts. Accordingly, to date, no portion of the purchase price has been allocated to above- or below-market lease intangibles associated with storage leases assumed at acquisition. Above- or below- market lease intangibles associated with assumed leases in which the Company serves as lessee are recorded as an adjustment to the right-of-use asset and reflect the difference between the contractual amounts to be paid pursuant to each in-place lease and management's estimate of fair market lease rates. These amounts are amortized over the term of the lease. To date, no intangible asset has been recorded for the value of customer relationships, because the Company does not have any concentrations of significant customers and the average customer turnover is fairly frequent. Long-lived assets classified as "held for use" are reviewed for impairment when events and circumstances such as declines in occupancy and operating results indicate that there may be an impairment. The carrying value of these long-lived assets is compared to the undiscounted future net operating cash flows, plus a terminal value, attributable to the assets to determine if the store's basis is recoverable. If a store's basis is not considered recoverable, an impairment loss is recorded to the extent the net carrying value of the asset exceeds the fair value. The impairment loss recognized equals the excess of net carrying value over the related fair value of the asset. There were no impairment losses recognized in accordance with these procedures during the years endedDecember 31, 2021 , 2020 and 2019. 35 Table of Contents The Company considers long-lived assets to be "held for sale" upon satisfaction of the following criteria: (a) management commits to a plan to sell an asset (or group of assets), (b) the asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets, (c) an active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated, (d) the sale of the asset is probable and transfer of the asset is expected to be completed within one year, (e) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value and (f) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Typically these criteria are all met when the relevant asset is under contract, significant non-refundable deposits have been made by the potential buyer, the assets are immediately available for transfer and there are no contingencies related to the sale that may prevent the transaction from closing. However, each potential transaction is evaluated based on its separate facts and circumstances. Assets classified as held for sale are reported at the lesser of carrying value or fair value less estimated costs to sell and are not depreciated. The Club Operations that we acquired through our acquisition of LAACO have been classified as held for sale as ofDecember 31, 2021 . There were no stores classified as held for sale as ofDecember 31, 2021 .
Investments in
The Company accounts for its investments in unconsolidated real estate ventures under the equity method of accounting when it is determined that the Company has the ability to exercise significant influence over the venture. Under the equity method, investments in unconsolidated real estate ventures are recorded initially at cost, as investments in real estate entities, and subsequently adjusted for equity in earnings (losses) and cash contributions, less cash distributions and impairments. On a periodic basis, management also assesses whether there are any indicators that the carrying value of the Company's investments in unconsolidated real estate entities may be other than temporarily impaired. An investment is impaired only if the fair value of the investment, as estimated by management, is less than the carrying value of the investment and the decline is other than temporary. To the extent impairment that is other than temporary has occurred, the loss shall be measured as the excess of the carrying amount of the investment over the fair value of the investment, as estimated by management. Fair value is determined through various valuation techniques, including but not limited to, discounted cash flow models, quoted market values and third-party appraisals. There were no impairment losses related to the Company's investments in unconsolidated real estate ventures recognized during the years endedDecember 31, 2021 , 2020 and 2019. Differences between the Company's net investment in unconsolidated real estate ventures and its underlying equity in the net assets of the ventures are primarily a result of the Company acquiring interests in existing unconsolidated real estate ventures. As ofDecember 31, 2021 , the Company's net investment in unconsolidated real estate ventures was greater than its underlying equity in the net assets of the unconsolidated real estate ventures by an aggregate of$33.6 million . There were no such differences as ofDecember 31, 2020 . These differences are amortized over the lives of the self-storage properties owned by the real estate ventures. This amortization is included in equity in earnings of real estate ventures on the Company's consolidated statements of operations.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements affecting our business, see note 2 to the Company's consolidated financial statements.
Results of Operations
The following discussion of our results of operations should be read in conjunction with the consolidated financial statements and the accompanying notes thereto. Historical results set forth in the consolidated statements of operations reflect only the existing stores for each period presented and should not be taken as indicative of future operations. We consider our same-store portfolio to consist of only those stores owned and operated on a stabilized basis at the beginning and at the end of the applicable years presented. We consider a store to be stabilized once it has achieved an occupancy rate that we believe, based on our assessment of market-specific data, is representative of similar self-storage assets in the applicable market for a full year measured as of the most recentJanuary 1 and has not been significantly damaged by natural disaster or undergone significant renovation. We believe that same-store results are useful to investors in evaluating our performance because they provide information relating to changes in store-level operating performance without taking into account the effects of acquisitions, developments or dispositions. As ofDecember 31, 2021 , we owned 506 same-store properties and 101 non same-store properties. All of the non same-store properties were 2020 and 2021 acquisitions, dispositions, developed stores, stores with a significant portion of net rentable square footage taken out of service or stores that have not yet reached stabilization as defined above. For analytical presentation, all percentages are calculated using the numbers presented in the financial statements contained in this Report. 36
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The comparability of our results of operations is affected by the timing of
acquisition and disposition activities during the periods reported. As of
The following table summarizes the change in number of owned stores from
2021 2020 2019
Balance - January 1 543 523 493
Stores acquired - 1 1
Stores developed 1 - -
Stores combined (1) (1) - -
Balance - March 31 543 524 494
Stores acquired (2) 2 2 21
Stores developed 2 1 2
Stores combined (3) - - (1)
Balance - June 30 547 527 516
Stores acquired 2 - 2
Stores developed - - 1
Stores sold (4) - -
Balance - September 30 545 527 519
Stores acquired 62 18 5
Stores developed 1 - -
Stores combined (3) - (1) -
Stores sold (1) (1) (1)
Balance -
On
(1) located adjacent to an existing consolidated joint venture store. Given their
proximity to each other, the stores have been combined in our store count, as
well as for operational and reporting purposes.
(2) For the quarter ended
consolidated joint venture in which we hold a 50% interest.
On
AZ and
(3) respectively. In each case, the store acquired is located in near proximity
to an existing wholly-owned store. Given their proximity to each other, each
acquired store has been combined with the existing store in our store count,
as well as for operational and reporting purposes.
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Comparison of the Year Ended
Non Same-Store Other/
Same-Store Property Portfolio Properties Eliminations Total Portfolio
% %
2021 2020 Change Change 2021 2020 2021 2020 2021 2020 Change Change
REVENUES:Rental income$ 631,410 $ 557,201 $
74,209 13.3 %
26,399 24,673 1,726 7.0 % 2,906 1,280 54,300 44,770
83,605 70,723 12,882 18.2 % Property management fee income
- - - 0.0 % - - 31,208 27,445 31,208 27,445 3,763 13.7 %
Total revenues 657,809 581,874 75,935 13.1 % 79,247 25,088 85,508 72,215 822,564 679,177 143,387 21.1 %
OPERATING EXPENSES: Property operating expenses (2) 192,650 184,939
7,711 4.2 % 23,457 9,601 35,997 29,094 252,104 223,634 28,470 12.7 % NET OPERATING INCOME:
465,159 396,935 68,224 17.2 % 55,790 15,487 49,511 43,121 570,460 455,543 114,917 25.2 %
Store count 506 506 101 37 607 543
Total square footage 35,490 35,490 8,105 3,054 43,595 38,544
Period end occupancy 93.3 % 93.3 % 86.2 % 80.5 % 92.0 % 92.3 %
Period average occupancy 94.7 % 92.9 %
Realized annual rent per occupied sq. ft. (3)
Depreciation and amortization
232,049 156,573 75,476 48.2 %
General and administrative 47,809 41,423 6,386 15.4 %
Subtotal 279,858 197,996 81,862 41.3 %
OTHER (EXPENSE) INCOME
Interest:
Interest expense on loans (78,448) (75,890) (2,558) (3.4) % Loan procurement amortization expense
(8,168) (2,674) (5,494) (205.5) % Loss on early extinguishment of debt
(20,328) (18,020) (2,308) (12.8) % Equity in earnings of real estate ventures
25,275 178 25,097 14,099.4 %
Gains from sales of real estate, net
32,698 6,710 25,988 387.3 %
Other (10,818) (240) (10,578) (4,407.5) %
Total other expense (59,789) (89,936) 30,147 33.5 %
NET INCOME
230,813 167,611 63,202 37.7 %
NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
Noncontrolling interests in the
(7,873) (1,825) (6,048) (331.4) % Noncontrolling interests in subsidiaries
542 (165) 707 428.5 %
NET INCOME ATTRIBUTABLE TO THE COMPANY'S COMMON SHAREHOLDERS $
223,482
Protection plan revenue, which prior to 2021 had been included in our (1) same-store and non same-store portfolio results, is now recorded in
other/eliminations. Prior periods have been adjusted for comparability.
For comparability purposes, current year amounts related to the expiration of (2) certain real estate tax abatements have been excluded from the same-store
portfolio results (
(3) Realized annual rent per occupied square foot is computed by dividing rental
income by the weighted average occupied square feet for the period.
Revenues
Rental income increased from$581.0 million during the year endedDecember 31, 2020 to$707.8 million for the year endedDecember 31, 2021 , an increase of$126.7 million , or 21.8%. The$74.2 million increase in same-store rental income was due primarily to a 1.8% increase in average occupancy and an increase in rental rates for new and existing customers. Realized annual rent per occupied square foot increased 11.1% for 2021 compared to 2020. The remaining increase was primarily attributable to$52.5 million of additional rental income from the stores acquired or opened in 2020 and 2021 included in our non same-store portfolio. Other property related income increased from$70.7 million during the year endedDecember 31, 2020 to$83.6 million for the year endedDecember 31, 2021 , an increase of$12.9 million , or 18.2%. The$1.7 million increase in same-store other property related income was mainly attributable to increases in fee revenue and merchandise sales. The increase was also due to a$5.7 million increase in customer storage protection plan participation at our owned and managed stores. Property management fee income increased from$27.4 million during the year endedDecember 31, 2020 to$31.2 million for the year endedDecember 31, 2021 , an increase of$3.8 million , or 13.7%. This increase was attributable to an increase in rental income at our managed stores for the year endedDecember 31, 2021 as compared to the year ended December, 31, 2020.
Operating Expenses
Property operating expenses increased from$223.6 million during the year endedDecember 31, 2020 to$252.1 million for the year endedDecember 31, 2021 , an increase of$28.5 million , or 12.7%. The$7.7 million increase in property operating expenses in the same-store portfolio was primarily due to a$3.2 million increase in property taxes and a$2.7 million increase in advertising. The remainder of the increase was primarily attributable to$13.9 million of increased expenses associated with newly acquired or developed stores. Depreciation and amortization increased from$156.6 million during the year endedDecember 31, 2020 to$232.0 million for the year endedDecember 31, 2021 , an increase of$75.5 million , or 48.2%.This increase was primarily attributable to depreciation and amortization associated with newly acquired or developed stores. 38 Table of Contents
General and administrative expenses increased from$41.4 million during the year endedDecember 31, 2020 to$47.8 million for the year endedDecember 31, 2021 , an increase of$6.4 million , or 15.4%. The change was primarily attributable to increased personnel expenses resulting in part from additional employee headcount to support our growth.
Other (expense) income
Interest expense on loans increased from$75.9 million during the year endedDecember 31, 2020 to$78.4 million for the year endedDecember 31, 2021 , an increase of$2.6 million , or 3.4%. The increase was attributable to a higher amount of outstanding debt during 2021 compared to 2020. To fund a portion of our growth, the average outstanding debt balance increased by$312.6 million to$2.35 billion during 2021 as compared to$2.04 billion during 2020. The increase in the average outstanding debt balance was offset by a decrease in the weighted average effective interest rate on our outstanding debt, which was 3.36% and 3.82% for 2021 and 2020, respectively. Loss on early extinguishment of debt was$20.3 million for the year endedDecember 31, 2021 compared to$18.0 million for the year endedDecember 31, 2020 , an increase of$2.3 million . The 2021 amount was related to the early redemption of$300.0 million of outstanding 4.375% senior notes due 2023 (the "2023 Notes"). The 2020 amount was related to the early redemption of$250.0 million of outstanding 4.800% senior notes due 2022 (the "2022 Notes") (see "Liquidity and Capital Resources" below). Equity in earnings of real estate ventures increased from$0.2 million during the year endedDecember 31, 2020 to$25.3 million for the year endedDecember 31, 2021 , an increase of$25.1 million . The increase was mainly due to our portion of the gains associated with HHF's sale of seven stores (see note 5 to our consolidated financial statements). Gains from sales of real estate, net increased from$6.7 million for the year endedDecember 31, 2020 to$32.7 million for the year endedDecember 31, 2021 , an increase of$26.0 million . These gains are determined on a transactional basis and, accordingly, are not comparable across reporting periods. For the year endedDecember 31, 2021 , the component of other (expense) income designated as other includes$15.0 million of transaction-related expenses comprised primarily of severance costs associated with the acquisition of LAACO. There were no such expenses for the year endedDecember 31, 2020 .
Comparison of the Year Ended
Refer to the section entitled "Results of Operations" within Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year endedDecember 31, 2020 for a comparison of the year endedDecember 31, 2020 to the year endedDecember 31, 2019 . Non-GAAP Financial Measures NOI We define net operating income, which we refer to as "NOI", as total continuing revenues less continuing property operating expenses. NOI also can be calculated by adding back to net income (loss): interest expense on loans, loan procurement amortization expense, loss on early extinguishment of debt, acquisition related costs, equity in losses of real estate ventures, other expense, depreciation and amortization expense, general and administrative expense, and deducting from net income (loss): equity in earnings of real estate ventures, gains from sales of real estate, net, other income, gains from remeasurement of investments in real estate ventures and interest income. NOI is not a measure of performance calculated in accordance with GAAP. We use NOI as a measure of operating performance at each of our stores, and for all of our stores in the aggregate. NOI should not be considered as a substitute for operating income, net income, cash flows provided by operating, investing and financing activities, or other income statement or cash flow statement data prepared in accordance with GAAP.
We believe NOI is useful to investors in evaluating our operating performance because:
it is one of the primary measures used by our management and our store managers
? to evaluate the economic productivity of our stores, including our ability to
lease our stores, increase pricing and occupancy and control our property
operating expenses;
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it is widely used in the real estate industry and the self-storage industry to
measure the performance and value of real estate assets without regard to
? various items included in net income that do not relate to or are not
indicative of operating performance, such as depreciation and amortization,
which can vary depending upon accounting methods and the book value of assets; and
it helps our investors to meaningfully compare the results of our operating
? performance from period to period by removing the impact of our capital
structure (primarily interest expense on our outstanding indebtedness) and
depreciation of our basis in our assets from our operating results.
There are material limitations to using a measure such as NOI, including the difficulty associated with comparing results among more than one company and the inability to analyze certain significant items, including depreciation and interest expense, that directly affect our net income. We compensate for these limitations by considering the economic effect of the excluded expense items independently as well as in connection with our analysis of net income. NOI should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP, such as total revenues, operating income and net income.
FFO
Funds from operations ("FFO") is a widely used performance measure for real
estate companies and is provided here as a supplemental measure of operating
performance. The April 2002 National Policy Bulletin of the National Association
of Real Estate Investment Trusts , as amended and restated, defines FFO as net
income (computed in accordance with GAAP), excluding gains (or losses) from
sales of real estate and related impairment charges, plus real estate
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures.
Management uses FFO as a key performance indicator in evaluating the operations
of our stores. Given the nature of our business as a real estate owner and
operator, we consider FFO a key measure of our operating performance that is not
specifically defined by accounting principles generally accepted in the United
States . We believe that FFO is useful to management and investors as a starting
point in measuring our operational performance because FFO excludes various
items included in net income that do not relate to or are not indicative of our
operating performance such as gains (or losses) from sales of real estate, gains
from remeasurement of investments in real estate ventures, impairments of
depreciable assets and depreciation, which can make periodic and peer analyses
of operating performance more difficult. Our computation of FFO may not be
comparable to FFO reported by other REITs or real estate companies.
FFO should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indication of our performance. FFO does not
represent cash generated from operating activities determined in accordance with
GAAP and is not a measure of liquidity or an indicator of our ability to make
cash distributions. We believe that to further understand our performance, FFO
should be compared with our reported net income and considered in addition to
cash flows computed in accordance with GAAP, as presented in our consolidated
financial statements.
FFO, as adjusted
FFO, as adjusted represents FFO as defined above, excluding the effects of
acquisition related costs, gains or losses from early extinguishment of debt,
and non-recurring items, which we believe are not indicative of the Company's
operating results. We present FFO, as adjusted because we believe it is a
helpful measure in understanding our results of operations insofar as we believe
that the items noted above that are included in FFO, but excluded from FFO, as
adjusted are not indicative of our ongoing operating results. We also believe
that the analyst community considers our FFO, as adjusted (or similar measures
using different terminology) when evaluating us. Because other REITs or real
estate companies may not compute FFO, as adjusted in the same manner as we do,
and may use different terminology, our computation of FFO, as adjusted may not
be comparable to FFO, as adjusted reported by other REITs or real estate
companies.
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The following table presents a reconciliation of net income to FFO and FFO, as
adjusted, for the years ended
Year Ended December 31,
2021 2020
Net income attributable to the Company's common shareholders
Add (deduct): Real estate depreciation and amortization: Real property 226,599 152,897 Company's share of unconsolidated real estate ventures 8,510 7,430 Gains from sales of real estate, net (1) (56,181) (6,710) Noncontrolling interests in theOperating Partnership
7,873 1,825
FFO attributable to common shareholders and OP unitholders
Add (deduct): Loss on early repayment of debt (2) 20,884 18,020 Transaction-related expenses (3) 14,986 - Loan forgiveness income (4) (1,546) - Bridge loan fee (5) 4,000 -
FFO, as adjusted, attributable to common shareholders and OP unitholders
$
448,607
Weighted average diluted shares outstanding 205,009 194,943 Weighted average diluted units outstanding 7,117 2,137 Weighted average diluted shares and units outstanding
212,126 197,080
The year ended
(1) real estate, net that are included in the Company's share of equity in
earnings of real estate ventures.
For the year ended
relates to a
unamortized loan procurement costs associated with the Operating
Partnership's redemption, in full, of its 2023 Notes on
(2) well as
equity in earnings of real estate ventures. For the year ended
2020, loss on early extinguishment of debt relates to a
prepayment premium and a
procurement costs associated with the
full, of its 2022 Notes on
Transaction-related expenses include severance expenses (
other transaction expenses (
Ltd., entered into severance agreements with certain employees, including
members of their executive team, prior to our acquisition of
(3) obligation to make these payments post-closing was contemplated in our net
consideration paid in the transaction. In accordance with GAAP, and based on
the specific details of the arrangements with the employees prior to closing,
these costs are considered post-combination compensation expenses. We expect
that an additional
the six months ended
in the component of other income (expense) designated as other.
The Company assumed a Paycheck Protection Program loan in conjunction with
(4) the LAACO transaction. This loan was subsequently forgiven by the Small
Business Administration and the associated income is included in the
component of other income (expense) designated as other.
Relates to a nonrefundable commitment fee to obtain bridge financing in the
event that the Company's
(5) could not be executed, in advance of the LAACO transaction. Upon issuance of
the senior notes, the bridge financing commitment expired and the fee was
fully amortized. The amortization of this fee is included in loan procurement
amortization expense.
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Cash Flows
Comparison of the Year Ended
A comparison of cash flow related to operating, investing and financing
activities for the years ended
Year Ended December 31,
Net cash provided by (used in): 2021 2020 Change
(in thousands)
Operating activities $ 449,185 $ 351,033 $ 98,152
Investing activities $ (1,852,668) $ (511,441) $ (1,341,227)
Financing activities $ 1,410,572 $ 108,196 $ 1,302,376 Cash provided by operating activities increased from$351.0 million for the year endedDecember 31, 2020 to$449.2 million for the year endedDecember 31, 2021 , reflecting an increase of$98.2 million . Our increased cash flow from operating activities was primarily attributable to stores acquired and developed during 2020 and 2021 and increased net operating income levels in the same-store portfolio in the 2021 period as compared to the corresponding 2020 period. Cash used in investing activities increased from$511.4 million for the year endedDecember 31, 2020 to$1,852.7 million for the year endedDecember 31, 2021 , reflecting an increase of$1,341.2 million . The change was primarily driven by the$1,679.0 million of cash used for the acquisition of LAACO in 2021 offset by a decrease in cash used for acquisitions of other storage properties compared to the 2020 period. Excluding the storage properties acquired through the acquisition of LAACO, cash used during the year endedDecember 31, 2021 included the acquisition of nine stores (including the acquisition of a 50% membership interest in a consolidated joint venture that owns a single store) for an aggregate net purchase price of$152.8 million . Cash used during the year endedDecember 31, 2020 included the acquisition of 21 stores for an aggregate net purchase price of$406.4 million , net of$154.4 million of assumed debt and$175.1 million of OP units issued. Additionally, cash distributed from real estate ventures increased from$6.2 million for the year endedDecember 31, 2020 to$66.6 million for the year endedDecember 31, 2021 , an increase of$60.4 million , primarily resulting from the distribution of proceeds received from the seven storage properties sold by our HHF real estate venture (see note 5 to the Company's consolidated financial statements) during 2021. Cash provided by financing activities was$108.2 million for the year endedDecember 31, 2020 compared to$1,410.6 million for the year endedDecember 31, 2021 , reflecting an increase of$1,302.4 million . During the years endedDecember 31, 2021 and 2020, we received net proceeds from unsecured senior notes of$1,043.4 million and$445.8 million , respectively, reflecting an increase of$597.6 million . There was also an increase of$844.9 million in proceeds received from the issuance of common shares during the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 , primarily as a result of our underwritten offering of 15.5 million common shares to partially fund the LAACO acquisition. These cash inflows were offset by$87.3 million of principal payments made on mortgage loans during the year endedDecember 31, 2021 compared to$46.1 million during the year endedDecember 31, 2020 , reflecting an increase of$41.2 million that was primarily attributable to the repayment ofLAACO's outstanding long-term debt at closing.
Comparison of the Year Ended
Refer to the section entitled "Cash Flows" within Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our
Annual Report on Form 10-K for the year ended
Liquidity and Capital Resources
Liquidity Overview
Our cash flow from operations has historically been one of our primary sources
of liquidity used to fund debt service, distributions and capital expenditures.
We derive substantially all of our revenue from customers who lease space at our
stores and fees earned from managing stores. Therefore, our ability to generate
cash from operations is dependent on the rents that we are able to charge and
collect from our customers. We believe that the properties in which we invest,
self-storage properties, are less sensitive than other real estate product types
to near-term economic downturns. However, prolonged economic downturns will
adversely affect our cash flows from operations.
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Table of Contents
In order to qualify as a REIT for federal income tax purposes, the Parent Company is required to distribute at least 90% of its REIT taxable income, excluding capital gains, to its shareholders on an annual basis and must pay federal income tax on undistributed income to the extent it distributes less than 100% of its REIT taxable income. The nature of our business, coupled with the requirement that we distribute a substantial portion of our income on an annual basis, will cause us to have substantial liquidity needs over both the short and long term. Our short-term liquidity needs consist primarily of funds necessary to pay operating expenses associated with our stores, refinancing of certain mortgage indebtedness, interest expense and scheduled principal payments on debt, expected distributions to limited partners and shareholders, capital expenditures and the development of new stores. These funding requirements will vary from year to year, in some cases significantly. In the 2022 fiscal year, we expect recurring capital expenditures to be approximately$10.5 million to$15.5 million , planned capital improvements and store upgrades to be approximately$8.5 million to$13.5 million and costs associated with the development of new stores to be approximately$27.0 million to$37.0 million . Our currently scheduled principal payments on debt are approximately$2.4 million in 2022. Our most restrictive financial covenants limit the amount of additional leverage we can add; however, we believe cash flows from operations, access to equity financing, including through our at-the-market equity program and available borrowings under our Revolver (defined below) provide adequate sources of liquidity to enable us to execute our current business plan and remain in compliance with our covenants. Our liquidity needs beyond 2022 consist primarily of contractual obligations which include repayments of indebtedness at maturity, as well as potential discretionary expenditures such as (i) non-recurring capital expenditures; (ii) redevelopment of operating stores; (iii) acquisitions of additional stores; and (iv) development of new stores. We will have to satisfy the portion of our needs not covered by cash flow from operations through additional borrowings, including borrowings under our Revolver, sales of common or preferred shares of the Parent Company and common or preferred units of theOperating Partnership and/or cash generated through store dispositions and joint venture transactions. We believe that, as a publicly traded REIT, we will have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional debt and the issuance of additional equity. However, we cannot provide any assurance that this will be the case. Our ability to incur additional debt will be dependent on a number of factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions that may be imposed by lenders. In addition, dislocation inthe United States debt markets may significantly reduce the availability and increase the cost of long-term debt capital, including conventional mortgage financing and commercial mortgage-backed securities financing. There can be no assurance that such capital will be readily available in the future. Our ability to access the equity capital markets will be dependent on a number of factors as well, including general market conditions for REITs and market perceptions about us.
As of
Unsecured Senior Notes
OnNovember 30, 2021 , we issued$550.0 million in aggregate principal amount of unsecured senior notes dueDecember 15, 2028 , which bear interest at a rate of 2.250% per annum (the "2028 Notes") and$500.0 million in aggregate principal amount of unsecured senior notes dueFebruary 15, 2032 , which bear interest at a rate of 2.500% per annum (the "2032 Notes"). The 2028 Notes were priced at 99.515% of the principal amount to yield 2.325% at maturity, and the 2032 Notes were priced at 99.219% of the principal amount to yield 2.587% at maturity. Net proceeds from the offering were used to fund a portion of the purchase price for the acquisition of LAACO. The remaining proceeds from the offerings were used to repay, in full,$300.0 million of outstanding 4.375% senior notes due inDecember 2023 (the "2023 Notes") as well as for working capital and other general corporate purposes. 43 Table of Contents Our unsecured senior notes are summarized as follows (collectively referred to as the "Senior Notes"): December 31, Effective Issuance Maturity Unsecured Senior Notes 2021 2020 Interest Rate Date Date (in thousands)$300M 4.375% Guaranteed Notes due 2023 (1) (2) $ -$ 300,000 4.33 % Various (2) Dec-23$300M 4.000% Guaranteed Notes due 2025 (3) 300,000 300,000 3.99 % Various (3) Nov-25$300M 3.125% Guaranteed Notes due 2026 300,000 300,000 3.18 % Aug-16 Sep-26$550M 2.250% Guaranteed Notes due 2028 550,000 - 2.33 % Nov-21 Dec-28$350M 4.375% Guaranteed Notes due 2029 350,000 350,000 4.46 % Jan-19 Feb-29$350M 3.000% Guaranteed Notes due 2030 350,000 350,000 3.04 % Oct-19 Feb-30$450M 2.000% Guaranteed Notes due 2031 450,000 450,000 2.10 % Oct-20 Feb-31$500M 2.500% Guaranteed Notes due 2032 500,000 - 2.59 % Nov-21 Feb-32 Principal balance outstanding 2,800,000 2,050,000 Less: Discount on issuance of unsecured senior notes, net (13,455) (7,470)
Less: Loan procurement costs, net (18,336) (12,158)
Total unsecured senior notes, net
On
Notes, with a portion of the net proceeds from the 2028 Notes and 2032 Notes
(1) issued on
Notes, we recognized a loss on early debt extinguishment of
which $20.0 million represents a prepayment premium and $0.3 million
represents the write-off of unamortized loan procurement costs.
On April 4, 2017 , the Operating Partnership issued $50.0 million of its
4.375% senior notes due 2023, which are part of the same series as the
million principal amount of the
(2) due
the principal amount to yield 3.495% and 4.501%, respectively, to maturity.
The combined weighted average effective interest rate of the 2023 notes is
4.330%.
On April 4, 2017 , the Operating Partnership issued $50.0 million of its
4.000% senior notes due 2025, which are part of the same series as the
million principal amount of the
(3) due
the principal amount to yield 3.811% and 4.032%, respectively, to maturity.
The combined weighted average effective interest rate of the 2025 notes is
3.994%.
The indenture under which the Senior Notes were issued restricts the ability of theOperating Partnership and its subsidiaries to incur debt unless theOperating Partnership and its consolidated subsidiaries comply with a leverage ratio not to exceed 60% and an interest coverage ratio of more than 1.5:1.0 after giving effect to the incurrence of the debt. The indenture also restricts the ability of theOperating Partnership and its subsidiaries to incur secured debt unless theOperating Partnership and its consolidated subsidiaries comply with a secured debt leverage ratio not to exceed 40% after giving effect to the incurrence of the debt. The indenture also contains other financial and customary covenants, including a covenant not to own unencumbered assets with a value less than 150% of the unsecured indebtedness of theOperating Partnership and its consolidated subsidiaries. As of and for the year endedDecember 31, 2021 , theOperating Partnership was in compliance with all of the financial covenants under the Senior Notes.
Revolving Credit Facility and Unsecured Term Loans
OnDecember 9, 2011 , we entered into a credit agreement (the "Credit Facility"). OnJune 19, 2019 , we amended and restated, in its entirety, the Credit Facility (the "Amended and Restated Credit Facility") which, subsequent to the amendment and restatement, is comprised of a$750.0 million unsecured revolving facility (the "Revolver") maturing onJune 19, 2024 . Under the Amended and Restated Credit Facility, pricing on the Revolver is dependent upon our unsecured debt credit ratings. At the Company's current Baa2/BBB level, amounts drawn under the Revolver are priced at 1.10% over LIBOR, inclusive of a facility fee of 0.15%. As ofDecember 31, 2021 , borrowings under the Revolver had an interest rate of 1.20%. Additionally, as ofDecember 31, 2021 ,$539.5 million was available for borrowing under the Revolver. The available balance under the Revolver is reduced by an outstanding letter of credit of$0.6 million . 44 Table of Contents
Under the Amended and Restated Credit Facility, our ability to borrow under the Revolver is subject to ongoing compliance with certain financial covenants which include, among other things, (1) a maximum total indebtedness to total asset value of 60.0%, and (2) a minimum fixed charge coverage ratio of 1.5:1.0. As of and for the year endedDecember 31, 2021 , theOperating Partnership was in compliance with all of its financial covenants. OnJune 20, 2011 , we entered into an unsecured term loan agreement (the "Term Loan Facility"), which was subsequently amended onJune 18, 2013 andAugust 5, 2014 , consisting of, among other things, a$100.0 million unsecured term loan that was scheduled to mature inJanuary 2020 . OnJune 19, 2019 , we used an initial advance at closing of the Amended and Restated Credit Facility to repay all of the outstanding indebtedness under the Term Loan Facility. Unamortized loan procurement costs of$0.1 million were written off in conjunction with the repayment.
Issuance of Common Shares
OnNovember 19, 2021 we closed an underwritten offering of 15.5 million common shares at a public offering price of$51.00 per share, resulting in net proceeds of$765.6 million , after deducting offering costs. We maintain an at-the-market equity program that enables us to offer and sell up to 60.0 million common shares through sales agents pursuant to equity distribution agreements (the "Equity Distribution Agreements"). Our sales activity under the program for the years endedDecember 31, 2021 , 2020 and 2019 is summarized below: For the year ended December 31, 2021 2020 2019
(dollars and shares in thousands, except per share amounts) Number of shares sold
4,982 3,627 5,899
Average sales price per share $ 40.57 $ 33.69 $ 33.64
Net proceeds after deducting offering costs $ 199,977 $ 120,727 $ 196,304
We used proceeds from sales of common shares under the program during the years
ended December 31, 2021 , 2020 and 2019 to fund the acquisition and development
of storage properties and for general corporate purposes. As of December 31,
2021 , 2020 and 2019, 5.9 million common shares, 10.9 million common shares and
4.6 million common shares, respectively, remained available for issuance under
the Equity Distribution Agreements.
Recent Developments
Subsequent to
Other Material Changes in Financial Position
December 31,
2021 2020 Change
(in thousands)
Selected Assets
Storage properties, net $ 6,097,670 $ 4,505,814 $ 1,591,856
Investment in real estate ventures, at
equity 119,751 92,071 27,680
Assets held for sale 49,313 - 49,313
Other assets, net 265,705 170,753 94,952
Selected Liabilities
Unsecured senior notes, net $ 2,768,209 $ 2,030,372 $ 737,837
Revolving credit facility 209,900 117,800 92,100
Mortgage loans and notes payable, net 167,676 216,504 (48,828)
Accounts payable, accrued expenses and other
liabilities 199,985 159,140 40,845
Distributions payable 97,417 68,301 29,116
Noncontrolling interests in the Operating
Partnership $ 108,220 $
249,414
Storage properties, net increased
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Investment in real estate ventures, at equity increased
Assets held for sale increased$49.3 million fromDecember 31, 2020 toDecember 31, 2021 as the result of classifying the Club Operations acquired in the LAACO acquisition as held for sale atDecember 31, 2021 .
Other assets, net increased
Unsecured senior notes, net increased$737.8 million fromDecember 31, 2020 toDecember 31, 2021 as a result of the issuance of the 2028 Notes and 2032 Notes onNovember 30, 2021 offset by the redemption of the 2023 Notes onDecember 23, 2021 .
Revolving credit facility increased
Mortgage loans and notes payable, net decreased$48.8 million fromDecember 31, 2020 toDecember 31, 2021 primarily due to the repayment onMarch 1, 2021 of two mortgage loans totaling$43.9 million .
Accounts payable, accrued expenses and other liabilities increased
Distributions payable increased$29.1 million fromDecember 31, 2020 toDecember 31, 2021 primarily due to an increase in common shares outstanding and an increase in the annualized dividend declared from$1.36 per share to$1.72 per share. Noncontrolling interests in theOperating Partnership decreased$141.2 million fromDecember 31, 2020 toDecember 31, 2021 , primarily due to the redemption of 5.5 million OP Units during the year endedDecember 31, 2021 .
Off-Balance Sheet Arrangements
We do not have off-balance sheet arrangements, financings or other relationships with other unconsolidated entities (other than our co-investment partnerships) or other persons, also known as variable interest entities not previously discussed.
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