CUBESMART: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-K)
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'soperations are conducted solely through the Operating Partnershipand its subsidiaries. The Parent Companyhas elected to be taxed as a REIT for U.S.federal income tax purposes. As of December 31, 2020and December 31, 2019, we owned 543 self-storage properties totaling approximately 38.5 million rentable square feet and 523 self-storage properties totaling approximately 36.6 million rentable square feet, respectively. As of December 31, 2020, we owned stores in the District of Columbiaand the following 24 states: Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois, Indiana, Maryland, Massachusetts, Minnesota, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utahand Virginia. In addition, as of December 31, 2020, we managed 723 stores for third parties (including 105 stores containing an aggregate of approximately 7.5 million net rentable square feet as part of five separate unconsolidated real estate ventures), bringing the total number of stores we owned and/or managed to 1,266. As of December 31, 2020, we managed stores for third parties in the District of Columbiaand the following 38 states: Alabama, Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washingtonand Wisconsin. We derive revenues principally from rents received from customers who rent cubes at our self-storage properties under month-to-month leases. Therefore, our operating results depend materially on our ability to retain our existing customers and lease our available self-storage cubes to new customers while maintaining and, where possible, increasing our pricing levels. In addition, our operating results depend on the ability of our customers to make required rental payments to us. Our approach to the management and operation of our stores combines centralized marketing, revenue management and other operational support with local operations teams that provide market-level oversight and management. We believe this approach allows us to respond quickly and effectively to changes in local market conditions and maximize revenues by managing rental rates and occupancy levels.
We typically experience seasonal fluctuations in our store occupancy rates, which are typically 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 to focus on maximizing organic growth opportunities and the selective pursuit of targeted acquisitions and developments of self-storage properties.
We have only one industry to present: we own, operate, develop, manage and acquire self-storage properties.
Our self-storage properties are located in major metropolitan and suburban areas and have numerous customers per store. No single customer represents a significant concentration of our revenues. Our stores in
New York, Florida, Texasand Californiaprovided approximately 16%, 15%, 9%, and 8%, respectively, of total revenues for the year ended December 31, 2020.
Summary of critical accounting policies and estimates
Below is a summary of the accounting policies and estimates that management considers essential in the preparation of the consolidated financial statements included in this report. Some of the accounting policies used in the preparation of these consolidated financial statements are particularly important for an understanding of the financial position and the results of operations presented in the
historical consolidated financial statements included in this Report. A summary of significant accounting policies is also provided in the notes to our consolidated financial statements (see note 2 to the 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. 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, control 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. Self-Storage PropertiesThe 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 the stores are acquired, the purchase price is split between the tangible and intangible assets acquired and the liabilities assumed on the basis of estimated fair values.
In allocating the purchase price for an acquisition, the Company determines whether the acquisition includes intangible assets or liabilities. The Company allocates a portion of the purchase price to an intangible asset attributable 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 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 ground 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 ground lease and management's estimate of fair market lease rates. These amounts are amortized over the term of the lease. To date, no intangible asset has been recorded for the value of customer relationships because the Company does not have any concentrations of significant customers and the average customer turnover is fairly frequent. Long-lived assets classified as "held for use" are reviewed for impairment when events and circumstances such as declines in occupancy and operating results indicate that there may be an impairment. The carrying value of these long-lived assets is compared to the undiscounted future net operating cash flows, plus a terminal value, attributable to the assets to determine if the store's basis is recoverable. If a store's basis is not considered recoverable, an impairment loss is recorded to the extent the net carrying value of the asset exceeds the fair value. The impairment loss recognized equals the excess of net carrying value over the related fair value of the asset. There were no impairment losses recognized in accordance with these procedures during the years ended
December 31, 2020, 2019 and 2018. 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 a store (or group of stores), (b) the store is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such stores, (c) an active program to locate a buyer and other actions required to complete the plan to sell the store have been initiated, (d) the sale of the store is probable and transfer of the asset is expected to be completed within one year, (e) the store 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. 35 Table of Contents 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. Stores 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. There were no stores classified as held for sale as of December 31, 2020.
The Company accounts for its investments in unconsolidated real estate ventures under the equity method of accounting when it is determined that the Company has the ability to exercise significant influence over the venture. Under the equity method, investments in unconsolidated real estate ventures are recorded initially at cost, as investments in real estate entities, and subsequently adjusted for equity in earnings (losses) and cash contributions, less cash distributions and impairments. On a periodic basis, management also assesses whether there are any indicators that the carrying value of the Company's investments in unconsolidated real estate entities may be other than temporarily impaired. An investment is impaired only if the fair value of the investment, as estimated by management, is less than the carrying value of the investment and the decline is other than temporary. To the extent impairment that is other than temporary has occurred, the loss shall be measured as the excess of the carrying amount of the investment over the fair value of the investment, as estimated by management. Fair value is determined through various valuation techniques, including but not limited to, discounted cash flow models, quoted market values and third-party appraisals. There were no impairment losses related to the Company's investments in unconsolidated real estate ventures recognized during the years ended
December 31, 2020, 2019 and 2018.
Recent accounting positions
For a discussion of recent accounting positions affecting our activities, see note 2 to the consolidated financial statements.
Results of Operations The following discussion of our results of operations should be read in conjunction with the consolidated financial statements and the accompanying notes thereto. Historical results set forth in the consolidated statements of operations reflect only the existing stores for each period presented and should not be taken as indicative of future operations. We consider our same-store portfolio to consist of only those stores owned and operated on a stabilized basis at the beginning and at the end of the applicable years presented. We consider a store to be stabilized once it has achieved an occupancy rate that we believe, based on our assessment of market-specific data, is representative of similar self-storage assets in the applicable market for a full year measured as of the most recent
January 1and has not been significantly damaged by natural disaster or undergone significant renovation. We believe that same-store results are useful to investors in evaluating our performance because they provide information relating to changes in store-level operating performance without taking into account the effects of acquisitions, developments or dispositions. As of December 31, 2020, we owned 475 same-store properties and 68 non same-store properties. All of the non same-store properties were 2019 and 2020 acquisitions, dispositions, developed stores, stores with a significant portion of net rentable square footage taken out of service or stores that have not yet reached stabilization as defined above. For analytical presentation, all percentages are calculated using the numbers presented in the financial statements contained in this Report.
The comparability of our operating results is affected by the timing of acquisition and disposal activities during the periods presented. From
36 Table of Contents
The following table summarizes the change in the number of stores owned compared to
2020 2019 2018 Balance - January 1 523 493 484 Stores acquired 1 1 1 Balance - March 31 524 494 485 Stores acquired 2 21 1 Stores developed 1 2 - Stores combined (1) - (1) - Balance - June 30 527 516 486 Stores acquired - 2 3 Stores developed - 1 1 Balance - September 30 527 519 490 Stores acquired 18 5 5 Stores combined (1) (1) - - Stores sold (1) (1) (2)
from A to Z and
(1) respectively. In each case, the store acquired is located in the immediate vicinity
to an existing wholly owned store. Given their proximity to each other, each
the acquired store was combined with the existing store in our number of stores,
as well as for operational and reporting purposes. Comparison of the Year Ended
December 31, 2020to the Year Ended December 31, 2019(dollars in thousands) Non Same-Store Other/ Same-Store Property Portfolio Properties Eliminations Total Portfolio % % 2020 2019 Change Change 2020 2019 2020 2019 2020 2019 Change Change REVENUES:
$ 529,053 $ 522,477$
(2,236) (4.1)% 6,161 3,800 12,328 9,288
70 723 67 558 3,165 4.7% Income from property management fees
- - - 0.0 % - - 27,445 23,953 27,445 23,953 3,492 14.6 % Total revenues 581,287 576,947
4,340 0.8% 58 117 33 727 39 773 33 241 679 177 643 915 35 262 5.5%
OPERATING EXPENSES: Property operating expenses 173,585 169,540
4,045 2.4% 20,955 14,506 29,094 25,693 223,634 209,739 13,895 6.6% NET OPERATING INCOME:
407,702 407,407 295 0.1 % 37,162 19,221 10,679 7,548 455,543 434,176 21,367 4.9 % Store count 475 475 68 48 543 523 Total square footage 33,196 33,196 5,348 3,408 38,544 36,604 Period end occupancy (1) 93.4 % 91.2 % 85.3 % 73.5 % 92.3 % 89.5 % Period average occupancy (2) 93.2 % 92.2 % Realized annual rent per occupied sq. ft. (3)
$ 17.10 $ 17.07Depreciation and amortization
156,573 163,547 (6,974) (4.3) % General and administrative 41,423 38,560 2,863 7.4 % Subtotal 197,996 202,107 (4,111) (2.0) % OTHER (EXPENSE) INCOME Interest: Interest expense on loans
(75,890) (72,525) (3,365) (4.6)% Depreciation expense on loan purchases
(2,674) (2,819) 145 5.1 % Loss on early extinguishment of debt (18,020) - (18,020) - % Equity in earnings of real estate ventures 178 11,122 (10,944) (98.4) % Gains from sale of real estate, net
6,710 1,508 5,202 345.0 % Other (240) 1,416 (1,656) (116.9) % Total other expense (89,936) (61,298) (28,638) (46.7) % NET INCOME 167,611 170,771 (3,160) (1.9) % NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS Noncontrolling interests in the Operating Partnership (1,825) (1,708) (117) (6.9) % Noncontrolling interests in subsidiaries (165) 54 (219) (405.6) % NET INCOME ATTRIBUTABLE TO THE COMPANY'S COMMON SHAREHOLDERS $
(1) Represents occupancy at
(2) Represents the weighted average occupancy rate for the period.
(3) The annual rent realized per square foot occupied is calculated by dividing the rent
income by the weighted average occupied square feet for the period. Revenues Rental income increased from
$552.4 millionin 2019 to $581.0 millionin 2020, an increase of $28.6 million, or 5.2%. The $6.6 millionincrease in same-store rental income was due primarily to a 1.0% increase in average occupancy for
2020 compared to 2019. The 37 Table of Contents remaining increase was primarily attributable to
$22.0 millionof additional rental income from the stores acquired or opened in 2019 and 2020 included in our non same-store portfolio. Other property related income increased from $67.6 millionin 2019 to $70.7 millionin 2020, an increase of $3.2 million, or 4.7%. The $2.2 milliondecrease in same-store other property related income was mainly attributable to a decrease in fee revenue due to the impact of COVID-19. This decrease was offset by a $2.4 millionincrease in other property related income derived from the stores acquired or opened in 2019 and 2020 included in our non same-store portfolio as well as a $3.0 millionincrease in other property related income at our managed stores due to an increase in stores under management (723 stores as of December 31, 2020compared to 649 stores as of December 31, 2019).
Income from property management commissions increased from
Operating Expenses Property operating expenses increased from
$209.7 millionin 2019 to $223.6 millionin 2020, an increase of $13.9 million, or 6.6%. The $4.0 millionincrease in property operating expenses on the same-store portfolio was primarily due to increases in property taxes and advertising costs of $2.1 millionand $3.8 million, respectively, offset by decreases in personnel and maintenance costs of $1.6 millionand $0.4 million, respectively. The remainder of the increase was attributable to $6.4 millionof increased expenses associated with newly acquired or developed stores and $3.4 millionof increased expenses associated with the growth in our third-party management program. Depreciation and amortization decreased from $163.5 millionin 2019 to $156.6 millionin 2020, a decrease of $7.0 million, or 4.3%. This decrease is primarily attributable to fully depreciated and amortized assets associated with acquisitions in prior years.
General and administrative expenses increased by
Other (expense) income Interest expense increased from
$72.5 millionin 2019 to $75.9 millionin 2020, an increase of $3.4 million, or 4.6%. The increase was attributable to a higher amount of outstanding debt during 2020 compared to 2019. The average outstanding debt balance increased $182.1 millionto $2,036.5 millionduring 2020 as compared to $1,854.4 millionduring 2019 as the result of borrowings to fund a portion of our growth. The weighted average effective interest rate on our outstanding debt for 2020 and 2019 was 3.82% and 4.06%, respectively.
The loss on early extinguishment of the debt was
Equity in earnings of real estate ventures decreased from
$11.1 millionin 2019 to $0.2 millionin 2020. The change was mainly driven by a prior year gain attributable to HVP III, a real estate venture in which we previously owned a 10% interest. Our $10.7 millionshare of the gain was recorded in connection with HVP III's sale of 50 properties during 2019. Gains from sale of real estate, net were $6.7 millionin 2020 compared to $1.5 millionin 2019, an increase of $5.2 million. These gains are determined on a transactional basis and, accordingly, are not comparable across reporting periods.
The component of other (expense) income designated as other decreased from the income of
Comparison of the completed year
Refer to the section entitled "Results of Operations" within Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended
December 31, 2019for a comparison of the year ended December 31, 2019to the year ended December 31, 2018. 38 Table of Contents 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, loan procurement amortization expense - early repayment 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): gains from sale 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 that the NOI is useful for investors to assess our operational performance because:
this is one of the main metrics used by our management and store managers
? assess the economic productivity of our stores, including our ability to
rent our stores, increase prices and occupancy and control our property
it is widely used in real estate industry and self-storage industry for
measure the performance and value of real estate assets without taking into account
? various items included in net income that do not relate 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 compare the results of our operations in a meaningful way
? performance from one period to another by removing the impact of our capital
structure (mainly interest expense on our outstanding debt) 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 2002National 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. 39 Table of Contents 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.
The following table presents a reconciliation of net income to FFOs and FFOs, as adjusted, for the years ended.
For the year ended
December 31, 20202019
Net income attributable to common shareholders of the Company
Add (deduct): Real estate depreciation and amortization: Real property 152,897 160,485 Company's share of unconsolidated real estate ventures 7,430 7,052 Gains from sale of real estate, net (1) (6,710) (12,175) Noncontrolling interests in the Operating Partnership 1,825 1,708
FFO attributable to ordinary shareholders and PO unit holders
Loss on early extinguishment of debt (2) 18,020 141
FFO, as adjusted, attributable to common shareholders and PO unitholders
$ 339,083 $ 326,328
Weighted average diluted shares outstanding 194,943 191,576 Weighted average diluted units outstanding 2,137 1,886 Weighted average diluted shares and units outstanding 197,080 193,462
The year has ended
(1) real estate, net which are included in the share of the Company’s equity in
earnings of real estate ventures.
For the year ended
(2) relates to a
acquisition costs of unamortized loans associated with operations
Repurchase by the general partnership of its 2022 Notes on
Comparison of the completed year
A comparison of cash flows from operating, investing and financing activities for the years ended
For the year ended December 31, Net cash provided by (used in): 2020 2019
Change (in thousands) Operating activities
$ 351,033 $ 331,768 $ 19,265Investing activities $ (511,441) $ (375,664) $ (135,777)Financing activities $ 108,196$ 95,855 $ 12,341
Cash provided by operating activities for the years ended
December 31, 2020and 2019 was $351.0 millionand $331.8 million, respectively, reflecting an increase of $19.3 million. Our increased cash flow from operating activities was primarily attributable to stores 40
acquired and developed during 2019 and 2020, as well as increased management fees related to the third-party management business resulting from more stores under management (723 stores as of
December 31, 2020compared to 649 stores
December 31, 2019). Cash used in investing activities increased from $375.7 millionfor the year ended December 31, 2019to $511.4 millionfor the year ended December 31, 2020, an increase of $135.8 million. The change was primarily driven by an increase in cash used for acquisitions of storage properties. Cash used during the year ended December 31, 2020included the acquisition of 21 stores and land for an aggregate net purchase price of $415.9 million, net of $154.4 millionof assumed debt and $175.1 millionof OP units issued. Including the acquisition of the remaining interest in HVP III, a previously unconsolidated real estate venture, cash used during the year ended December 31, 2019related to the acquisition of 29 stores for an aggregate net purchase price of $238.3 million, net of $3.6 millionof OP units issued. Additionally, there was a $47.5 milliondecrease in development costs from the year ended December 31, 2019compared to the year ended December 31, 2020resulting from the payment of put liabilities associated with three previously consolidated development joint ventures during the 2019 period.
Cash provided by financing activities increased from
$95.9 millionfor the year ended December 31, 2019to $108.2 millionfor the year ended December 31, 2020, an increase of $12.3 million. During the years ended December 31, 2020and 2019, we received net proceeds from unsecured senior notes of $445.8 millionand $696.4 million, respectively, reflecting a decrease of $250.6 millionthat was primarily due to the timing and size of each offering. During the year ended December 31, 2020, we made principal payments on our 2022 Notes of $250.0 millionwith no comparable payments during 2019, and, additionally, there was a decrease of $75.6 millionin proceeds received from the issuance of common shares during 2020 compared to 2019, due to fewer common shares sold under our at-the-market equity program in 2020 compared to 2019. During the year ended December 31, 2020, we also made principal payments on mortgage loans of $46.1 millioncompared to $11.7 millionduring the year ended December 31, 2019, reflecting an increase of $34.4 millionthat is primarily attributable to the repayment of three mortgage loans during 2020. These reductions in cash provided by financing activities were offset by a $200.0 millioncash payment made to repay our unsecured term loan in January 2019with no comparable payment in 2020. In addition, net borrowings on the revolving credit facility were $117.8 millionduring the year ended December 31, 2020compared to net payments of $299.5 millionduring the year ended December 31, 2019.
Comparison of the completed year
See the section titled “Cash Flows” in Heading 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. In order to qualify as a REIT for federal income tax purposes, the Parent Company is required to distribute at least 90% of REIT taxable income, excluding capital gains, to its shareholders on an annual basis or pay federal income tax. 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 2021 fiscal year, we expect recurring capital expenditures to be approximately
$11.0 millionto $16.0 million, planned capital improvements and store upgrades to be approximately $10.5 millionto $15.5 millionand costs associated with the development of new stores to be approximately $34.0 millionto $49.0 million. Our currently scheduled principal payments on debt are approximately $46.4 millionin 2021. 41 Table of Contents 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 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 2021 consist primarily of contractual obligations which include repayments of indebtedness at maturity, as well as potential discretionary expenditures such as (i) non-recurring capital expenditures; (ii) redevelopment of operating stores; (iii) acquisitions of additional stores; and (iv) development of new stores. We will have to satisfy the portion of our needs not covered by cash flow from operations through additional borrowings, including borrowings under our Revolver, sales of common or preferred shares of the Parent Company and common or preferred units of the Operating Partnershipand/or cash generated through store dispositions and joint venture transactions. We believe that, as a publicly traded REIT, we will have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional debt and the issuance of additional equity. However, we cannot provide any assurance that this will be the case. Our ability to incur additional debt will be dependent on a number of factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions that may be imposed by lenders. In addition, dislocation in the United Statesdebt 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.
Unsecured Senior Notes
October 6, 2020, we issued $450.0 millionin aggregate principal amount of unsecured senior notes due February 15, 2031, which bear interest at a rate of 2.000% per annum (the "2031 Notes"). The 2031 Notes were priced at 99.074% of the principal amount to yield 2.100% at maturity. Net proceeds from the offering were used to repay, in full, $250.0 millionof outstanding 4.800% senior notes due in July 2022. The remaining proceeds from the offering were used to repay all of the outstanding indebtedness under the revolving portion of our Credit Facility (defined below) and for working capital and other general corporate purposes. Our unsecured senior notes are summarized as follows (collectively referred to as the "Senior Notes"): December 31, Effective Issuance Maturity Unsecured Senior Notes 2020 2019 Interest Rate Date Date (in thousands) $250M4.800% Guaranteed Notes due 2022 (1) $ - $ 250,0004.82 % Jun-12 Jul-22 $300M4.375% Guaranteed Notes due 2023 (2) 300,000 300,000 4.33 % Various (2) Dec-23 $300M4.000% Guaranteed Notes due 2025 (3) 300,000 300,000 3.99 % Various (3) Nov-25 $300M3.125% Guaranteed Notes due 2026 300,000 300,000 3.18 % Aug-16 Sep-26 $350M4.375% Guaranteed Notes due 2029 350,000 350,000 4.46 % Jan-19 Feb-29 $350M3.000% Guaranteed Notes due 2030 350,000 350,000 3.04 % Oct-19 Feb-30 $450M2.000% Guaranteed Notes due 2031 450,000 - 2.10 % Oct-20 Feb-31 Principal balance outstanding 2,050,000 1,850,000 Less: Discount on issuance of unsecured senior notes, net (7,470) (3,860)
Less: Costs of obtaining loans, net (12,158) (10,415) Total senior unsecured notes, net
Notes, with the product of his
(1) Notes, the
early redemption premium and
4.375% senior bonds due 2023, which are part of the same series as the
(2) millions in principal of
$250.0 milliontranches were priced at 105.040% and 98.995%, respectively, of 42 Table of Contents
the principal amount for a yield of 3.495% and 4.501%, respectively, to maturity. the
The combined weighted average effective interest rate of the 2023 Notes is 4.330%.
April 4, 2017, the Operating Partnershipissued $50.0 millionof its
4,000% senior notes due 2025, which are part of the same series as the
million in principal of the
the principal amount for a return of 3.811% and 4.032%, respectively, to maturity.
The combined weighted average effective interest rate on the 2025 Notes is
3.994%. The indenture under which the Senior Notes were issued restricts the ability of the
Operating Partnershipand its subsidiaries to incur debt unless the Operating Partnershipand its consolidated subsidiaries comply with a leverage ratio not to exceed 60% and an interest coverage ratio of more than 1.5:1.0 after giving effect to the incurrence of the debt. The indenture also restricts the ability of the Operating Partnershipand its subsidiaries to incur secured debt unless the Operating Partnershipand its consolidated subsidiaries comply with a secured debt leverage ratio not to exceed 40% after giving effect to the incurrence of the debt. The indenture also contains other financial and customary covenants, including a covenant not to own unencumbered assets with a value less than 150% of the unsecured indebtedness of the Operating Partnershipand its consolidated subsidiaries. As of and for the year ended December 31, 2020, the Operating Partnershipwas in compliance with all of the financial covenants under the Senior Notes.
Revolving credit facility and unsecured term loans
December 9, 2011, we entered into a credit agreement (the "Credit Facility"), which was subsequently amended on April 5, 2012, June 18, 2013and April 22, 2015to provide for, among other things, a $500.0 millionunsecured revolving facility with a maturity date of April 22, 2020. On June 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 millionunsecured revolving credit facility (the "Revolver") maturing on June 19, 2024. Under the Amended and Restated Credit Facility, pricing on the Revolver is dependent upon our unsecured debt credit ratings. At our current Baa2/BBB level, amounts drawn under the Revolver are priced at 1.10% over LIBOR, inclusive of a facility fee of 0.15%. We incurred costs of $3.9 millionin 2019 in connection with amending and restating the Credit Facility and capitalized such costs as a component of Loan procurement costs, net of amortization on the consolidated balance sheets. On January 31, 2019, we used a portion of the net proceeds from the issuance of $350.0 millionof 4.375% Senior Notes due 2029 (the "2029 Notes") to repay all of the outstanding indebtedness under the $200.0 millionunsecured term loan portion of the Credit Facility. As of December 31, 2020, borrowings under the Revolver had an effective weighted average interest rate of 1.24%. Additionally, as of December 31, 2020, $631.6 millionwas available for borrowing under the Revolver. The available balance under the Revolver is reduced by an outstanding letter of credit of $0.6 million. Under the Amended and Restated Credit Facility, our ability to borrow under the Revolver is subject to ongoing compliance with certain financial covenants which include, among other things, (1) a maximum total indebtedness to total asset value of 60.0%, and (2) a minimum fixed charge coverage ratio of 1.5:1.0. As of and for the year ended December 31, 2020, the Operating Partnershipwas in compliance with all of its financial covenants. On June 20, 2011, we entered into an unsecured term loan agreement (the "Term Loan Facility"), which was subsequently amended on June 18, 2013and August 5, 2014, consisting of, among other things, a $100.0 millionunsecured term loan that was scheduled to mature in January 2020. On June 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 unsecured term loan portion of the Term Loan Facility. Unamortized loan procurement costs of $0.1 millionwere written off in conjunction with the repayment Issuance of Common Shares We maintain an at-the-market equity program that enables us to offer and sell up to 60.0 million common shares through sales agents pursuant to equity distribution agreements (the "Equity Distribution Agreements"). Our sales activity under the program for the years ended December 31, 2020, 2019 and
2018 is summarized below: For the year ended December 31, 2020 2019 2018 (dollars and shares in thousands, except per share amounts) Number of shares sold 3,627 5,899 4,291 Average sales price per share $ 33.69 $ 33.64 $ 31.09 Net proceeds after deducting offering costs $ 120,727
$ 131,83543 Table of Contents We used proceeds from sales of common shares under the program during the years ended December 31, 2020, 2019 and 2018 to fund acquisitions of storage properties and for general corporate purposes. As of December 31, 2020, 2019 and 2018, 10.9 million common shares, 4.6 million common shares and 10.5 million common shares, respectively, remained available for issuance under the Equity Distribution Agreements.
Other significant changes in financial position
December 31, 2020 2019 Change (in thousands) Selected Assets Storage properties, net
$ 4,505,814 $ 3,774,485 $ 731,329Other assets, net 170,753 101,443 69,310 Selected Liabilities Unsecured senior notes, net $ 2,030,372 $ 1,835,725 $ 194,647Revolving credit facility 117,800 - 117,800 Mortgage loans and notes payable, net 216,504 96,040 120,464 Lease liabilities - finance leases 65,599
Noncontrolling interests in the Operating Partnership
$ 249,414$ 62,088 $ 187,326
Storage properties, increased net
Other assets, net increased
$69.3 millionfrom December 31, 2019to December 31, 2020, primarily due to the value assigned to the in-place leases at the 21 storage properties acquired during the year and the right-of-use asset associated with the assumption of a ground lease in connection with the acquisition of the Storage Deluxe Assets that was classified as an operating lease.
Unsecured senior notes, net increased
$194.6 millionfrom December 31, 2019to December 31, 2020as a result of the issuance of the 2031 Notes on October 6, 2020offset by the redemption of the 2022 Notes on October 30, 2020. Revolving credit facility increased $117.8 millionfrom December 31, 2019to December 31, 2020primarily as a result of borrowings used to fund the acquisitions of 21 storage properties, additions and improvements to storage properties, and development costs incurred during the year. Mortgage loans and notes payable, net increased $120.5 millionfrom December 31, 2019to December 31, 2020primarily due to the assumption of six mortgage loans, one of which was repaid immediately upon assumption, in connection with the acquisition of a portfolio of eight stores located in the outer boroughs of New York City(the "Storage Deluxe Assets").
Rental debts – finance leases increased
Noncontrolling interests in the
Operating Partnershipincreased $187.3 millionfrom December 31, 2019to December 31, 2020, primarily due to the issuance of OP Units in connection with the acquisition of the Storage Deluxe Assets and the acquisition of the noncontrolling interest in a joint venture that developed a store located in Brooklyn, NY.
Off-balance sheet provisions
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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